In a move competitors call "gutsy" and planners call "bold," Ritz-Carlton has cut commission payments to third-party site-selection firms to 3 percent.
The proliferation of intermediaries earning 10 percent commissions to bring meeting clients to meeting properties prompted Ritz-Carlton to make the change. Ritz will continue to pay 10 percent commissions to full-service meeting planning companies, which it defines as those that "conduct on-site inspections, event planning, on-site meeting management, and are responsible for ensuring payment."
JoAnn Kurtz-Ahlers, Ritz-Carlton's vice president, sales and business development, says of the move, "We looked at all the areas and ways we pay commissions, the value of each channel, and how much business we get from each." The creation of two commission levels, she says, reflects Ritz-Carlton's judgment of the value of the services provided.
The move sparked speculation across the industry about whether others would follow suit and, particularly, if Marriott, which owns Ritz-Carlton, was sending out the high-end brand as "the scout to the battlefield and waiting to see if it comes back riddled with arrows," in the colorful analogy of one hotel company vice president.
At this point, "Marriott will not make any bold moves like Ritz-Carlton," says Mark Sherwin, Marriott's vice president, segments, products, and promotions. "It would be difficult for us to even enforce compliance, and we will not implement any policy that we cannot enforce consistently." Only 64 percent of Marriott's 500 full-service hotels are corporate-managed.
Four Seasons, a hotel company closer in size and market positioning to Ritz-Carlton, is not following suit. "We will pay up to 10 percent to all qualified third parties, including site-selection companies, with full disclosure to the end user," says Tom Hubler, vice president of sales, North America.
Making a Monster Dave Scypinski, vice president, industry relations at Starwood, takes the historical view. "In the late '80s and early '90s, when things looked bad for hotels, they were so happy to get business that they created the precedent that plagues them now--giving 10 percent for leads. We made our bed at that point," he says. "Now Ritz is trying to extricate itself from the problem we created."
While it will be instructive to observe the impact of the Ritz-Carlton move, Scypinski notes, "it will not be suggestive of what would happen if Marriott or Starwood or Hilton did it. On a larger scale, it would require more diligence. At a company like Starwood, with such a diverse portfolio, we have to be much more cautious."
Indeed, Roger Helms, president and CEO of site-sourcing company HelmsBriscoe, the fastest growing of the fast-growing segment, says Ritz-Carlton represents "less than 1 percent" of the nearly 10,000 meetings HB associates booked in 2000. Helms stands by his company's initial value proposition: "It's the way clients want to buy. They want our procurement power. We purchase better than the full-service companies do, because we do more meetings."
Helms points out that even full-service companies often do only site selection. In those cases, says Ritz's Kurtz-Ahlers, the firms will be entitled to a 3 percent commission. The policy, she explains, is service-based rather than company-based.
Among the newest "10-percenters" are Internet-based site-sourcing companies such as EventSource, which would be affected by the Ritz-Carlton decision. EventSource President and CEO Ed Sarraille emphasizes that "online" doesn't necessarily indicate a lack of service. In fact, he says, EventSource brings benefits to both the occasional planner and to hotels that "have neither the bandwidth or thedollars to reach that occasional planner." Still, EventSource is looking at changing its revenue model, at least with its new online meeting tracking tool, Compass (see page 14). Hotels may pay a "transaction fee" rather than a commission.
Value Judgments Steve Armitage, vice president/managing director at Hilton Hotels Corp., splits the "10-percenters" into more than two categories. At one extreme, in his view, are the full-service meeting planning companies; at the other are the Web sites offering hotel databases and electronic RFPs. In between are at least two other categories: firms retained by clients to do site selection and, and "pure site-selection" firms that simply present site options. A range of commissions might be allocated to these intermediaries, Armitage suggests. And even within a category, he adds, some firms may offer more value than others. For example, Hilton may value more highly a piece of business from a third party that is "established, has a big account base, knows our product, works with us on selling that product, and can get us market share."
Hilton is actively working on the commission issue, Armitage says, with an eye toward "recognizing where our customers see value."
Ty Helms, vice president of sales at Hyatt Hotels Corp., believes the Ritz announcement will have little real effect. At Hyatt, decisions are made at the property level about whether or not to accept a piece of business and how much to pay for it. "We factor in all the costs and revenues involved and make the best business decision," he says.
"The issue has always been a lightning rod," says Marriott's Sherwin. "Ultimately, the people who continue to create value to both sides of the transaction don't have anything to worry about."