Covid-19 Crisis Brings TMC Pricing Challenges and Value Out of the Shadows

"No TMC is built to withstand a 95 percent drop in transaction fees," said Gant Travel CEO Patrick Linnihan. When the Covid-19 crisis took hold, he said, "we had to make decisions fast." He cited a "nasty stat" he heard about a mega TMC that cut its monthly burn rate from $166 million prior to Covid-19 to $66 million after. "They were able to take out more than 60 percent immediately. We all had to do it. We had to become machines so we could bounce back when travel returns. It's better to beg [clients] for forgiveness and give them a self-service portal than not to be a company when this is over."

As a result, corporate buyers may find pricing models changing as they move forward with their TMC partners—even before their current contracts expire. 

Coronavirus Didn't Create the Pricing Issues

When Travel and Transport CEO Kevin O'Malley first worked for the company in 1994, the TMC still was giving rebates to corporate clients. After airlines first capped agent commissions in 1995, he said, the company spent three years redesigning the pricing model. 

"We went to management-fee arrangements," he said, which typically were structured as a percentage of the client company's air spend. As buyers and TMCs realized there was no incentive for agents to be cost-conscious in this environment, clients shifted toward a cost-plus model. That is, they paid for the headcount necessary to serve their needs, plus a transaction fee. For larger accounts, these agreements often passed back a portion of the supplier income. "The agencies were trying to de-risk the model," he said.

About a decade ago, procurement executives started to push to a fully loaded model. "They didn't want the income back because they didn't want to deal with allocating that, etc.," said O'Malley. "They just wanted a fully loaded fee." The problem for TMCs was to figure out the definition of a transaction. "One of the things that stopped being included was voids and cancellations," said O'Malley. "All the [financial] risk was shifted to the TMC. That's what got us in real trouble in March and April."

What Works After Covid?

Each of these pricing models between TMCs and customers still exist to a certain degree, but some proved more durable than others during the crisis. 

"We went through a period where we were experiencing extraordinary demand, but because of the limited number of new transactions, we were experiencing very limited revenue. High demand and low revenue is not a great balance. I do think [the transaction-fee model] needs to be looked at," said American Express Global Business Travel CEO Paul Abbott in May at the ITM virtual conference.

Abbott called out the cost-plus structure as a model that promotes stability. "Clients pay direct expenses plus a fee for overhead and profit. Those models worked very well through this crisis and aligned our views with the client," said Abbott. 

The cost-plus proposition has weaknesses, though. "It's too complex for smaller or midsize clients, [who may need] some kind of subscription-fee model, where you pay to access the network and there's a lower fee that is transaction-based. That will require conversations with clients. Clients will need to be sure the price and the value equation is right," Abbott said. 

BCD Travel EVP of global sales Jorge Cruz echoed Abbott. He told BTN that the Atlanta-based mega agency in May has seen a spike in requests for a subscription-fee model.

"The subscription-fee model builds more customer intimacy," said Cruz. "I am paying X per month, and that's unlimited use for online [booking], calls to traditional agents and service. It [also] eases expense reporting for travelers, so it's not just about how [the TMC] gets compensated." But the latter will be key.

Cruz said BCD hadn't determined how a subscription model would be structured. "Maybe it's three levels: good, better, best. At the end of the day, we think it's simpler and more appealing to the end user … but we need to include all these services that haven't been measured in the transaction environments." 

Linnihan questioned the subscription model, despite the allure of simplicity. "We have a minority of our clients on a subscription model. We were looking to move more in that direction, but we got tripped up [with Covid]," he said. "We have people coming back to us asking, 'Now that we aren't traveling, can we stop paying the subscription pricing?' It's really hard to win."

O'Malley agreed with Linnihan, especially for large accounts that require additional resources. "There's been a huge desire to follow a [software-as-a-service model] or fixed monthly fee. But there has to be a variable component with minimum guarantees. … You can't go hire four people for an account and hope that the volume comes."

Complexity Will Push Pricing Higher

O'Malley is betting that some variation of the cost-plus model will prevail. Like Abbott, he considers it a durable model that ensures continuity for the buyer and the TMC even in a crisis. The transaction fee model, on the other hand, not only puts financial risk on the TMC but also puts the risk of service abandonment on the corporate client—consider the "begging forgiveness" scenario Linnihan described.

The Covid-19 crisis was so dire, however, that several buyers speaking to BTN said even their dedicated agents and account managers were at risk of being furloughed or losing their jobs. 

"When we realized people were going out the door very fast, we grabbed our top agent," one travel buyer told BTN confidentially. "We kept her and a couple of our other resources, who were doing specific projects for us." Paccar global travel, expense and corporate card manager Nari Narvani echoed that experience. "We kept one of our VIP agents," she said. "The short-term cost was worth it for the agent's work on unused ticket waiver tracking. The savings we brought in from that one audit was significant." 

One major buyer was taken aback by this idea. "It didn't occur to me that my dedicated resources might actually be at risk if my agency had furloughs," she said, though her agency was among the few not forced to adjust headcount drastically during the height of the Covid-19 travel crisis. 

Linnihan said the investment required to ensure resource continuity at the TMC will be significant and will have to account for all the complexities converging on the TMC in the wake of Covid-19. Aside from dedicated agents, he predicted "an offering will emerge for a Covid-proof account manager. How much are you willing to pay?" He ballparked a price of $200,000 until a certain volume threshold kicks in. 

Cruz said TMCs threw revenue generation out the window during Covid to focus on what they needed to do right in that moment. It revealed a lot about TMC value moving forward.

"TMCs have a role in building traveler confidence," said Cruz, pointing to the increased duty of care and data services that will need to be added to workflows and to previously simple bookings. "We will be the control point to say, 'the airline is safe' or 'the hotel is safe' or 'here's what you can expect.' We have to upskill [employees] and curate information to give to the agent to give to the traveler." 

To that end, he said, handle time will go up as agents confirm numerous points they historically haven't. "There's value to that, and our operating costs will go up," he emphasized, adding that new pricing solutions will be tied to the level of engagement required by the client as well as the profile and complexity of the travel program. How focused is the program on high-touch service, for example? How it is it configured in terms of allocating costs? Internal complexity will add to agency pricing models.

GBT's Abbott said new TMC economic structures still were nascent, but "we'll see more complexity and more uncertainty on demand. We are going to have to have an economic model that reflects that." 

Negotiating & Renegotiating Contract Terms  

Festive Road managing partner Caroline Strachan said TMCs in her circle are looking to win new accounts as the path forward for devising new pricing models. Festive Road has asked several TMC executives whether, as a consultancy, the firm should slow down serious active request-for-proposal inquiries. "Only one came back to say they wanted to pause," said Strachan. "New sales and the future of new agreements and fresh thinking is actually the light at the end of the tunnel for the TMC community."  

For buyers, the idea of negotiating and signing agreements for new duty-of-care and data services that are, at this point, unproven could be a stumbling block. Some such buyers have paused RFPs to see how TMCs will retool their services. However, some companies who planned to go out to bid recognized the high performance of their current TMC partner during Covid-19 and have suspended the traditional search in favor of staying with their current partners. 

But TMCs are hungry for business, and some buyers are in a bad position with partners struggling to stay alive. One consultant told BTN he estimated 50 percent of TMCs would fail on account of Covid-19 financial woes. Clients currently with such agencies will be forced to find a new partner or make a different program model choice altogether. As a result, the upcoming RFP season could be busy and certainly will offer some green field for creative negotiations. 

Some TMCs may not wait for new contracts, and currently contracted buyers have said they are open to getting creative now to support their TMC partners through the tough times. They will have to be able to justify proposed amendments to senior management, however, and strong-arming tactics won't be welcomed. 

One BCD client told BTN on condition of anonymity the mega TMC had gone a step too far in amending their existing agreement. 

"I understand they aren't making any revenue on transaction fees," the buyer said. "Right now, it's a lot of questions and service—and they want to start charging us for that, like canceling a … meeting, which we actually did cancel in April. They now want to bill us for that but also go retroactive to bill us for all actions taken in April. Going forward, they want to continue [charging these new types of fees] until we hit a certain threshold of transactions as we return to traveling."

According to the buyer, the proposal is with the company's legal team to determine what can be done. "We want to keep [BCD] as a good partner, and we want to find a way to work with them. It may not be that we give them exactly what they are asking, but maybe we pay a flat monthly fee to cover those costs. We are frustrated that they want to go retro and then send the invoice 10 minutes later. … We didn't budget for this type of charge and it changes what we have always told travelers about calling the TMC with questions. Now, I have to say, 'don't call.' "

BCD's Cruz said he was not aware of such tactics. 

"I'm on the sales, marketing and retention side of the house, not commercial ownership. I do sit on the global executive team and have exposure to everything being done. We are on a looking-forward plan. We are looking at what the future is going to hold and what the service expectation is. I don't know of any situation where we're going back and saying, 'Hey, those 300 contacts that resulted in no transactions, you owe me X bucks per transaction. Here's your bill.' "

Cruz added the TMC had engaged existing clients in conversations about low transaction volumes and how the agency would need to modify its agent base and potentially change program management. "It was done in conjunction [with clients] and not an edict that said, 'this is what you are going to do and how much you owe me,' " he said. "And to clarify, the majority of these conversations where we had to adjust commercial terms were [specific] to the pandemic … and are what I consider to be short-term [as transaction volume recovers]."

None of the TMCs BTN spoke to—Altour, BCD, Gant and Travel and Transport—said they would look to claw back charges for services rendered during the crisis that fell outside of contract terms at the time. But some thought about it. 

"We debated long and hard. We spent five or six weeks paying overtime and doing hundreds of thousands of cancellations and we got paid nothing. Should we go back and charge the customer? We chose not to," said O'Malley.

Altour chief revenue officer Gabe Rizzi said, "We have to focus on the value we create," noting his company was looking at expanded duty of care and virtual meetings platforms to expand revenue streams. Gant's Linnihan has turned to a microservices play, introducing an unused ticket waiver tracker that he is promoting to all buyers in the industry on a per-waiver fee. 

By no means, however, is this list of providers exhaustive, and every TMC will determine its own strategies to recoup costs or initiate new fees. 

TMC Value Proposition Poised to Surge 

Most buyers BTN spoke to said "all options were on the table" when engaging with their travel management companies. Covid-19 has crystallized the objectives of travel management around duty of care, and buyers clearly understand there is cost associated with the increased focus in this area. 

Will Tate, managing partner of GoldSpring Consulting, said the Covid-19 crisis highlighted all the reasons corporate clients rely on their travel management companies—the trusted agents they employ, a one-stop call for services, bypassing the six-hour hold times with airlines to service direct bookings, the ability to tap deep industry relationships to solve problems, among others. While TMC response and data may not have been perfect in all circumstances, he predicted the future needs precipitated by the crisis will drive companies closer to their providers. 

"I would maintain that buyers need TMCs more than ever," Tate said. "Travelers will be back on the road. There will be more rules, more booking tool configuration. You [will] have lots of policy changes implemented, unused tickets, lots of pre-trip approval. I believe client companies will be willing to pay for these services in a more complex environment."

BCD's Cruz agreed and went further to project that safety and security concerns will drive renewed interest in the travel program from corporate executive leadership, human resources and business travelers themselves. 

Cruz cited a recent survey BCD conducted among buyers. "The No. 1 [objective of the travel program now among survey respondents] is duty of care," he said. "It's always been important, but now it's more important. The No. 2 priority is traveler well-being and satisfaction. That's a change. And when you look at that, it invites additional players to the table. The priorities of those newly engaged stakeholders will also drive the fee model."