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MCI Thought Leader: The Death of the Citywide – Reality and Illusion

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With our first MCI Thought Leader interview on group commissions, we explored the history of third-party intermediation, including how 10 percent came to be the default commission rate for group bookings, why Marriott cut its rate to 7 percent, closely followed by Hilton and IHG, and where things might go from here for citywide events. Within this context, “citywide” is an industry term for a mega event with large room blocks that primarily uses a city’s convention center while hotels mostly provide guest rooms without meeting space.

In this latest MCI Thought Leader interview, Richard Torriani — the MCI Group’s Chief Operating Officer for the Americas — explains the impact on the citywide business model for group commissions, especially the new 7-percent rate, which he thinks offers the illusion of cost savings to hotels but doesn’t match the reality of the business model.

How does the reduction in the group-commission rate affect a company like MCI?

For me, the primary consideration is that while I’m sure that the hotels did lots of cost-benefit analysis when deciding on changing the remuneration model around commissions, they didn’t really consult with the overall industry. For whatever reason, they decided to do that in a vacuum, and because of that, we’re now faced with a situation where all intermediaries — regardless of their place in the value chain — are treated equally.

For the citywide model, that means that we’ve lost 30 percent of revenues. But we still have all the work that we used to have to do, including sourcing, contracting, marketing, selling, service center, managing the finances, paying deposits, managing individual transactions, providing rooming lists, providing updated rooming lists and change request to hotels and to groups, and handling the call center for our delegates up until the moment that they check out. So basically, we have a 30-percent reduction in revenue but a zero-percent reduction in work.

If the hotel chains think that anybody in the citywide housing market is running at 30-percent profitability, then they might be interested in a nice little bridge for sale. The reality is that we all operate at low margins, and both the housing companies and the associations simply cannot afford to finance and operate this service for delegates and groups in the future. At 7 percent, the housing bureau — the citywide model — is dead unless there are changes.

What might some of those changes be?

One, housing bureau companies like us could be more efficient, sure. At the same time, we’ve been pursuing efficiency for the last 20 years. We have more technology than ever before to manage this process, but it’s still a very labor-intensive system. A percentage of that gap might be closed with some efficiencies as long as people switch to more self-service —right now delegates email, call, or message our call centers to modify or cancel their hotel reservations, — but with that high level of service availability it’s really difficult to see how we get to 30-percent greater efficiency without significantly impacting quality perceptions.

With our objective and the hotel’s objective to offer superlative service to delegates who want to book an individual hotel, they need to get as good as or better than if they’re going to an OTA or directly to the hotel. We’ve got to see if we can reduce services to delegates and still be competitive in a purely transparent marketplace. We know from our own research that 86 percent of delegates that don’t book with a housing bureau book through an OTA and not through the hotel direct channel. This means that the 7-percent commission model is simply an illusion of costs savings, as the most likely alternative is for delegates to book through OTAs that charge significantly higher levels of commission.

It could be helpful to everybody to consider the efficiency of the entire value chain. We spend an inordinate amount of time contracting hotels. It’s ridiculous, because it should simply be a question of asking for an allotment and a rate and then signing. In reality we spend most of our time negotiating the contract, which serves very little value and just adds frustration and enormous barriers. On our side, it’s a lack of efficiency, but on the hotel side it’s a lack of efficiency also, because wouldn’t it be better for everybody if their salespeople were out selling new business rather than spending time contracting business? For instance, the use of global contract templates would significantly facilitate that, so that we’re not spending time discussing the force majeure clause when generally speaking that clause should be pretty standard in this industry. Even within a specific hotel chain, we see radical differences from hotel to hotel. Standardization and removal of barriers would help, but that is not enough to close the 30-percent gap. We can get a couple percentage points of efficiency, but it’s still not getting us to absorbing the 30-percent deficit of revenue we presently have.

So it’s not just about everyone becoming more efficient?

I think we have to look at who’s providing what services, partially as a differentiation from the sourcing-only guys. The sourcing guys get the same commission as a housing bureau, but they usually don’t do the contracting, and they don’t provide any of those other services we talked about either. If the hotels are giving 7 percent to both of us, shouldn’t it make sense that we should charge the hotels for the additional work that we’re doing— and which, by the way, would be work they would have to do if we weren’t doing it? Maybe the new model is that we should charge the hotels for our services?

What else might work?

Well, a third different model to close the gap is to charge the delegate— to say, “Well, delegate, you are reserving through us, and because of that, you need to pay a handling fee for all the work that we’re doing in the name of the hotel.” If you think about it in reference to travel agents, in essence that’s where their model ended up. Travel agents began to charge for booking, and people would pay to book a ticket, and they offered some level of service against those fees. You could dial a 24-hour help center in case you had issues during your flight, etc.

Now we’re essentially in competition with OTAs, and OTAs are not charging handling fees for their services. In fact, they are in essence charging the hotels a higher commission than what we get. They’re getting significantly higher than 7 percent, even from large hotel groups. The notion of OTAs getting a higher commission is already a de facto recognition of the fact that they are considered to be offering a service to the hotels — marketing and distribution — and the hotels have agreed to pay for that. One of the things that has to change in contracting going forward is the recognition that the world has changed in the last 10 or 15 years around transparency and distribution.

But to what extent are OTAs a factor when it comes to group business?

It’s always in comparison to what individual travelers have available to them. The huge volume of OTAs has changed the purchasing behavior of people and the immediacy of their needs. People only reserve their rooms days or maybe weeks in advance. We know that; the hotels know that. Why are we holding associations to a corporate-style contract — locked in weeks, months, years in advance — when we don’t do the same thing for individual travelers? Because individual travelers would not accept that. I mean, the industry just made a big deal in transient bookings about maybe moving to a 48-hour hold rather than a 24-hour hold, clearly rigid group contracts with huge attrition risks that kick in hundreds of days in advance no longer reflect the reality of the market, yet hotels are very reluctant to move away from that found money.

The hotels claim risk mitigation for that: “It’s because I gave you 100 rooms out of my 200 rooms.” But if they hadn’t sold it to a group, they would still have had to sell it, and they would still have had to sell it in that window that people are buying— 30 days or less before check-in. Hotels’ group contracts have to properly reflect the buying behavior of individuals, because if they don’t, why be part of a group at all in the future? What’s your benefit for being part of a group if you’re held to stricter conditions, potentially higher rates, and non-refundable conditions?

Hotels ask us for transparency, yet transparency has to be a two-way street. Transparency from the hotels means much more communication on cancellation fees and their justification based on modern sales pipelines and distribution. And on the housing bureau side, I think it’s more communication on sales pace — being much more open with hotels, for them to see whether their rooms are selling or not, more communication on potentially adapting rates to make them all sellable, or even potentially the possibility of some level of surge pricing when there is massive demand.

What happens if nothing changes?

I think the citywide housing market is dead if things don’t change. I don’t see how any company can operate at 7 percent going forward without these sorts of changes. The most likely outcome is an unbundling of all the groups that are in the citywide category.

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