Imagine this: You have a meeting to book. You call a property. Space is available. Your job is done.
Think something is missing? Not if you've got a preferred supplier agreement with the hotel in question. An increasing number of companies are negotiating such agreements — which can coverterms and conditions, concessions, even room rates — for the year, for all meetings. Gone is the time wasted shuttling between legal departments and haggling over coffee-break prices for each program.
“We've been able to report cost savings to the company, we've saved so much time, and we're delivering a more consistent product,” says Cyndi Shalhoub, CMP, manager, meeting services, with American Standard in Nashville. Shalhoub negotiated preferred vendor contracts with 13 properties in 11 cities for all of American Standard's small meetings — those with 75 or fewer attendees. The agreements set standard terms and conditions, concessions, and room rates, making the booking process so straightforward that the company's centralized meeting planning team doesn't even touch these events: They're booked through a Small Meetings Desk managed by World Travel/BTI. Meeting sponsors contact the desk, and their events are driven to the preferred properties.
“We haven't made any commitments to volume,” Shalhoub says. “But simply the fact that we would drive business to one property [in a city] was very attractive to the hotels.” (American Standard has contracts with two properties in its headquarters city of Piscataway, N.J., and in its operations center of Minneapolis/St. Paul.) Hotels also were receptive, she says, because “we went in with a realistic rate. We didn't try to beat them up. This is much more of a relationship initiative.”
The agreements will be negotiated annually, and Shalhoub is aware that next time it might be tougher. “Business is definitely picking up for hotels,” she says. “That could be a challenge when we renegotiate. But we are relying on the relationships we're building with suppliers now.”
The preferred vendor agreements were rolled out early this year as one piece of American Standard's meeting-consolidation effort, which Shalhoub was hired to lead in January 2003. The consolidation is part of a huge project at American Standard, acompany that logged $8.6 billion in sales in 2003, to unify the company's formerly decentralized operations, increase the quality of products and processes, and reduce expenses.
“We have implemented a meetings policy in the U.S., which was delivered to all of our businesses by their CFOs,” Shalhoub explains. “All meetings must be registered so we can begin to track our volume.” Also, meetings that cost more than $30,000 must get executive approval. In 2002, the new shared database logged 289 meetings; that number rose to 338 in 2003, and Shalhoub expects the number to be higher again this year. “It takes time for compliance, but the real driver for people to abide by these guidelines has been the financial officers' involvement. They were very supportive from the get-go.”
Indeed, the increasing participation of procurement and purchasing executives in meeting and travel management is a “major catalyst” for the new interest in preferred vendor agreements, says Judi McLaughlin, CMP, director of strategic sourcing at Maritz McGettigan, the meeting and travel giant based in Philadelphia. McLaughlin has helped a number of corporate clients to assess their needs and create a request for proposal for preferred hotel suppliers.
“The weak economy forced companies to focus on expense reduction,” McLaughlin says. “They're looking for areas that haven't managed their spend. Travel is one of the largest controllable expenses within a corporation. There was a lot of success in the 1980s managing transient travel spend. Meetings is the logical extension of that.”
Likewise, preferred supplier agreements are a logical extension of the move toward consolidation of meeting planning and spending. “In many companies, meeting planning is fragmented and decentralized,” McLaughlin says. Over the past few years, large companies have taken steps to consolidate that planning, if not in the hands of one person or department, then in the sourcing and tracking process. “After companies get their arms around their total meeting spending, manage their sourcing, and are able to demonstrate control within their organization, the next step is to narrow the number of suppliers,” she says. “Hotels are a prime target for these initiatives. In many cases, hotel spend accounts for as much as 80 percent of total meeting spend.”
One of McLaughlin's clients went through the consolidation process and found that it had used 29 different properties in Chicago in one year for some 70 meetings. As part of a national preferred hotel program, the company has named 10 preferred hotels in that city.
“The benefits to the company are guaranteed discounts in pricing, overall agreement to standard contracting terms and conditions, increased efficiencies throughout the planning process, and better-quality meetings,” she continues. “And the preferred properties are certain to see a dramatic increase in their market share of this company's business.”
Time Is Money
Agreements that include guaranteed discounts in exchange for the promise of increased bookings have surfaced only in the past couple of years. But standard contracts that simply cover contract terms and conditions, such as, cancellation, and indemnification, have been negotiated between planners and hoteliers for at least a decade. These, too, are reportedly on the upswing.
“We have a lot of those in place, and we're encouraging a lot more,” says Steve Armitage, senior vice president, sales, at Hilton Hotels Corp. He offers a quick history of the phenomenon: “The tougher business got, the more exposure to attrition, the more concern about safety and terrorism, the more we saw cost containment affecting decisions, the more protection customers wanted in contracts. So buyers and sellers started spending a lot more time working through contract clauses. That slowed down the business process. What had taken a couple of hours now took a couple of weeks.
“But in today's environment, speed is critical,” he continues. “So we agree on a contract, advise hotels that this is the contract to be used, and it saves us both time and money.”
Working efficiently with suppliers is what drove the creation of the Microsoft Vendor Program, or MSVP, at the software giant in 1995. A supplier becomes part of the MSVP once all the legal hurdles are cleared. Microsoft added individual hotels to the MSVP in 2002, initially for transient business, and later, in some cases, for meetings. In July 2003, the company named its first hotel brand, Ritz-Carlton, to the MSVP for group business. “It's easier to partner with someone who does business with Microsoft often,” explains Christopher Dyer, contracts manager for the events team at Microsoft in Redmond, Wash. “The biggest hangup had been that we couldn't commit to a property until we sent the contract to legal, which could take months.” But when a supplier becomes a preferred vendor, “you negotiate up front once, and it's done.”
Over a period of months, Microsoft and Ritz-Carlton worked out standard contract terms and conditions for meetings; concessions and room rates are still negotiated with individual properties when programs are booked. All of Ritz-Carlton's domestic city properties are included in the deal: If one of those hotels has space, it has to accept a Microsoft meeting under the terms and conditions that have been agreed upon.
As with any hotel in the MSVP, the arrangement does not guarantee Ritz-Carlton a specific amount of Microsoft business.
Microsoft also recently negotiated guaranteed discounts on food and beverage and meeting space with “a handful” of venues in the Puget Sound area, Dyer says, and other hotels and hotel brands will be added to the MSVP. “The possibilities are limitless. We'll start getting more properties in cities we use. We could end up with hundreds.”
You'd think hoteliers would jump at the chance to be named preferred suppliers. But signing a preferred vendor agreement that includes guaranteed discounts is “a leap of faith,” says Christie Hicks, senior vice president, global sales, for Starwood Hotels, because there's little recourse for hotels when promised business isn't booked. “We do it really carefully and not very often,” she says.
When it works, it can be huge. After Hicks signed a preferred supplier agreement with a large company two years ago, Starwood moved from fourth place to first place in its share of that company's meeting business. In return, the company got guaranteed discounts on F&B and AV, attrition allowances, the ability to replace canceled business with other business from the company, and, in Hicks' phrase, “additional complimentaries.”
Likewise, when Hilton signed a preferred supplier agreement three years ago, the deal called for the client to narrow its global hotel partners from 15 companies to four, according to Hilton's Steve Armitage. “Now, in our class, we're No. 1,” he says.
At Marriott, John Fenton, regional director of sales in Philadelphia, worked out his first preferred supplier agreement — including terms and conditions and concessions — with a company in 2003. “Implementing the agreement internally was a huge challenge,” says Fenton, who used Marriott's internal Web site to get the message out to the field. “That got them to see the value of this and got a little momentum behind it,” he explains. “And Marriott hopefully will see significant market share increase as a result of all our work.”
That work can be tough. “It's a painful process,” says Starwood's Hicks. “The first one took 10 months to negotiate.” While the chain has 20 preferred agreements in place that cover terms and conditions, Starwood has signed only four preferred agreements that spell out specific discounts — and all of those have come within the past two years. In exchange for the discounts, the client companies have agreed to meet revenue goals. If the goal is surpassed, the company may be eligible for an override. If the company is falling short of the goal, the agreement can be terminated.
In all four cases, she points out, the companies are primarily booking short-term business. That benefits Starwood by filling occupancy gaps and benefits the client company by streamlining the already shortened booking process.
The agreements are valid chain-wide, across all of Starwood's brands; however, individual properties decide whether to accept a particular meeting. “But if the property says yes,” Hicks explains, “they agree to it all.”
Keeping Your Options Open
While limiting suppliers clearly increases your efficiency and your buying power, it just as clearly decreases your choices. Because when you call them “preferred,” hotel companies want you to mean it. “There are third parties that have preferred agreements with everyone,” says Starwood's Hicks. “My questions is, ‘Who do you prefer the most?’”
Sharon Marsh, CMP, manager, corporate meeting services, at PeopleSoft in Pleasanton, Calif., says her company has preferred hotel agreements in place for transient travel, but adds, “I don't think we'll ever limit ourselves in the meetings arena. There are too many properties that aren't part of a major chain.” That said, she points out, “I still work with the chains' national sales offices to track what we spend so that when it's time to negotiate, we can say, ‘This is how much business we've given you. What can you do for us?’”
There's also the fact that in some cases you might be giving up the chance to do better negotiating for a specific meeting, given the many factors that affect individual events. Microsoft, for example, will continue to negotiate room rates separately for each of its events, even at the local properties at which it has negotiated guaranteed concessions. “Standard room rates work for transient travel,” notes Christopher Dyer, “but with groups, we have the advantage of negotiating better deals depending on the market conditions and time of year.”
American Standard's Cyndi Shalhoub made a different calculation: “We reviewed the high and low room rates paid within each city where we do business across all suppliers,” she explains. “We then averaged rates and targeted what we felt was an achievable rate reduction of 10 percent based on our analysis. Negotiating a rate for the year rather than each time we schedule a meeting enables us to deliver guaranteed savings for our company.”
Fred Shea, vice president of sales at Hyatt Hotels Corp., recognizes that kind of analysis. “More and more we're seeing purchasing departments controlling things, and they like consistency of pricing,” he says. “Group pricing is dynamic, but nothing drives purchasing crazy like fluctuation. They would rather have an average rate. That's tougher to do on the group side because each piece of business is different, and each date at a hotel is different. So we deal with consistency in every other part of the contract.”
Hyatt created a standard contract in June 2002 that it often uses as a starting point with companies for negotiating terms and conditions that are valid for all meetings at Hyatt properties. “It makes all the sense in the world,” Shea says. “But some customers want too much, and we have to back off. The more you layer in, the more difficult it becomes. There are conditions that we're not willing to force on all of our hotels.” Still, he says, “they're great when you can put them together.”
You Have to Give to Get
If you want guaranteed discounts as part of a preferred supplier agreement with Starwood, here's what Christie Hicks, senior vice president, global sales, will ask you to agree to:
- Revenue and market share increases.
- Name Starwood the only preferred chain in the “big-hotel-company space,” as she calls it; i.e., hotel companies with properties from limited service to luxury.
- Buy through national sales offices. “If we're negotiating centrally, we want them to buy centrally,” Hicks says.
- Send quarterly reports to Starwood on your meetings' locations.
- Termination of the agreement if the pace is off and it's clear that your company won't meet its revenue threshold.
The Bidders' Conference: Showing Your Cards
So you want to add hotel companies to your preferred supplier program? They might need some convincing. “The bidders' conference is our best-practice recommendation on how to engage hoteliers at the start of the process,” says Judi McLaughlin, CMP, director of strategic sourcing at Maritz McGettigan in Philadelphia.
You'll create a formal RFP to send to all potential partners, of course. But before it goes, McLaughlin advises inviting all bidders to sit down together to hear your objectives and plans for controlling or influencing site selection companywide. “The bidders' conference is an opportunity for the corporation to communicate its goals around a preferred hotel initiative, provide an overview of its meetings, and its expectations for the program,” McLaughlin says. “The meeting is typically conducted by the corporate contact — in many cases, procurement executives [who are] responsible for meeting spend.”
In McLaughlin's experience, the response from hoteliers is positive. “It gives them an opportunity to hear about the organization's goals and objectives directly. Typically hoteliers will ask questions about what they've heard. This works well, so that all chains hear exactly the same message.”
Steve Armitage, senior vice president, sales, at Hilton, offers some advice from the hotel side: “Always approach it as an open discussion, so there is a mutual understanding of each other's objectives. It should never be a take-it-or-leave-it discussion,” he says. “I don't know of many one-sided agreements that lasted for long. Preferred agreements can be very successful for each partner as long as there is a commitment to each other's success.”