What next for the agency model?
By Alan Newton, co-founder & COO, Eventopedia
Following on from Marriott’s commission reduction last month ‘Why Marriott's New Agency Commission Has Been A Long Time Coming’, Hilton recently followed suit, reducing group sales commission rates from 10% to 7% for hotels in the US and Canada.
It remains difficult to predict exactly how the future unfolds despite Marriott being joined by Hilton. After all, Accor Hotels suggested they ‘had no plans’ to follow suit… “The easy answer is no change,” said Chris Cahill, CEO of AccorHotels’ luxury brands, responding to questions from Skift. However, that doesn’t exactly rule it out completely in the future, and this move is likely to be a step change by Marriott and Hilton towards something broader and more drastic. Though, it remains to be seen how the industry, as a whole, would swallow that.
Tip of the Iceberg
The move by Marriott, and now Hilton, is just the tip of the iceberg. As indicated in my previous article, I’m surprised this strategy hasn’t occurred earlier. It may suggest Marriott and Hilton consider: the right conditions now exist to make such a bold move (increasing confidence in their own distribution channels?); enough is enough in terms of rising distribution costs and lower margins; a combination of both.
Hilton followed Marriott with similar rationale, recognising the importance of the role of intermediaries, whilst unapologetically pointing the spotlight on the increasing cost of distribution.
Writing in Hotelsmag, Chad Crandell, managing director and CEO at CHMWarnick identifies the size of the problem and the proverbial double edged sword impacting profitability, citing “staggering increases in group commissions in 2017” coupled with minimal increases in group rates and incremental revenue. Not to overload this blog with proverbs, but “it is the last straw that breaks the camel’s back”.
Hilton’s statement also alluded to the commission cut easing operation costs and allowing owners more freedom to invest further in “products and offerings that enhance the guest experience.” And who can argue with that, right? After all, we’re all here to please the customer and agents want to select the hotels that offer their customers the best experiences and value. Clever Hilton PR team, clever [wink]!
It’s worth reiterating something I’ve outlined previously… Agencies provide a huge amount of value and they aren’t going anywhere. Indeed, historical evidence – which we’ll come back to – suggests they’ll gain in strength, but there will inevitably be some short-term casualties. This is, of course, no solace to the smaller agencies whose very survival is at stake. It could be argued that the only winners are the big guys, after all, they have the size and scale to swallow a shift in the industry paradigm, at least in the short-term.
Agencies have increasingly been suffering – and for too long – from a ‘race to the bottom’. As corporate procurement departments increasingly expect agencies – already operating on low margins – to rebate part of their commissions, the industry agency model can’t be anything other than a race to the bottom. I’ve worked for agencies, I’ve consulted for agencies and worked on industry association boards with competitor agencies, I can say with confidence that this model is damaging the industry and undermining value. Ultimately, everyone suffers, including the corporate client. When you have to do more for less, but it’s on such tight margins, innovation and creativity is stifled. Yet, corporate clients demand both.
So, what’s the answer?
It’s time to broaden the conversation and include corporate clients. After all, they’re a large part of this complicated equation. And, as the evidence shows, it is complicated.
Event planning is complex. Event professionals don’t need telling this. They live it day in day out, giving blood, sweat and – yes – tears for their profession. We’ve all heard the derogatory remarks about “party planners” from those external to the industry, entirely ignorant to the breadth of the events industry and to the complexities and nuances involved with the event management process. Event planning is an art, which requires specialist expertise, investment and a huge dollop of creativity. The value intrinsic to the services must now be recognised and rewarded accordingly and this means a shift in the industry paradigm if commission is likely to disappear.
Ultimately, the answer is about recognising value, where said value is derived, and who chiefly benefits from that value. All roads point to the corporate client, but the reality is not as simple as switching to a chargeable service, as many corporates don’t currently buy into it. For agents, it probably feels a little like Hobson’s choice.
Surviving a Megatrend
If we cast our minds back a decade or more, we increasingly started to see the emergence of full-service agencies, with experiential and creative event agencies joining up with hotel booking agents to provide a breadth of core services demanded by corporates.
It’s no coincidence that this coincided with procurement becoming increasingly involved in the travel and meetings purchasing decisions within their organisations. For better or worse, this was the beginning of an industry professionalisation process and megatrend that - a little while later - I mused would eventually see the Travel Management Companies (TMCs) - with their global scale - turning towards meetings & events, and - eventually - acquiring the best in the space. We would begin to see a split in the type of agencies, with the mid-sized possibly finding it increasingly difficult to compete against the global giants, and the emergence of a cluster of smaller-sized niche players, predominantly focussed on tailored services and personalisation. Today’s landscape doesn’t look quite like this, yet, but it does appear to be taking shape.
Outsourcing expertise is nothing new and is not confined to the creative sectors, but the procurement approach to the creative sector often seeks to commoditise a service that – largely – does not and should not conform to an equation focussed chiefly on price. As identified earlier, just such an approach leads to a ‘race to the bottom’, invariably stifling creativity, innovation, and the ability for smaller operators, focussed on niche and tailored services, to survive.
What does history tell us…?
On 9 February 1995, U.S. airlines first capped travel agency commissions, before later cutting them entirely. The rest of the industry would follow suit. This led some industry oracles to suggest that the end was nigh for the travel agent. More than twenty years on, these prophecies of doom couldn’t have been wider of the mark. Indeed, travel agencies embraced Darwinism, adapting to change, surviving and – indeed – thriving. The industry underwent an accelerated professionalisation process creating nimble, dynamic, and robust ‘business-focussed’ agencies. The transition, as with any transitional process, was not by any means as smooth as it may sound.
Human capital, innovation and creativity will be at the fore of the new industry paradigm, enabled by advances in technology. Thick data and personalisation (to the client organisation, as well as to the individual) will emerge as fundamental tools by which human capital will shape ‘competitive advantage’. Agencies may conflate the creative event management solutions with professional consultancy to provide a true ‘strategic meetings management’ service. I have a long-held belief that much of what is currently referred to as ‘strategic meetings management’ is tactical rather than strategic (Are You Applying Tactical or Strategic Meetings Management?). As with any professional service, a premium should be paid and paid by the client procuring the service.
As for hotels and venues, we may still witness the birth of a hybrid model, as hotels and venues will continue to benefit from agency services, but payments from the supply side may be focussed on rewarding performance around what is most important to their business – operational efficiency and higher business conversion via intermediation. Businesses focussed on working in a collaborative tripartite system will be those that reap the rewards. If commissions are to follow in the footsteps of the travel industry and such a transformative change does transpire, I expect it could realistically take between 2-4 years to take shape.