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How your company can control travel costs.

Establish a firm travel policy, place a travel manager in charge, and install a computer system that streamlines expense reports.

Those watching U.S. business travel last fall saw a softening in this $115 billion industry, but few could have anticipated that a winter war in the Persian Gulf would virtually hold business travel hostage.

But, after staying at home in january and February, business recognized that neither telephones nor teleconferences can take the place of being there. In March, given the pent-up demand, travel finally rebounded, helped by suppliers introducing attractive prices.

A look at the travel industry today reveals that it is driven by deal making, and that the customer who doesn't study prices is paying too much. This is particularly true for corporations, where travel and entertainment together typically represent the third largest controllable expense, just below salaries and data processing.

Missed opportunities

Why, then, are the major savings opportunities in T&E being missed by most companies? In part, it might seem that the overall volatility of the industry makes controlling T&E costs more difficult. After all-- - * Hotels and airlines are plagued by oversupply.

* Some of the oldest and most respected airlines are filing for bankruptcy.

* Airlines lost a total of $4 billion in 1990, even as business travel increased by 21 percent.

* Airline fares should increase 12 percent overall in 1991.

* Airlines make well over 100,000 domestic fare changes a day.

* Hotel chains have segmented their product line, copying airline techniques and making room rates more variable than ever before.

The volatility caused by these conditions, however, can be good for corporations willing to adjust their travel policy. It's just a matter of organization and taking advantage of certain opportunities. To start, let's give some perspective to this $115 billion business travel industry.

Our studies show that the typical company last year spent about $2.4 million on travel, compared to $1 million for that company in 1982. We also know that the typical company spends 41 cents of every T&E dollar on air travel, a company's largest T&E category. (See the figure on page 55.) Given today's fluctuating air fares, no wonder 60 percent of the executives we polled at major corporations told us that better travel management was a "top concern."

Why this concern? it's because firms administer both salaries and data processing-their two largest expenses-quite closely, while treating travel management like the proverbial stepchild. On the organization chart, travel is often way off in a corner, an offshoot of purchasing or personnel. Perhaps booking tickets doesn't seem as important as purchasing machinery. Or perhaps travel is not connected in some minds with generating sales. But knowing it is such an important purchase, how seriously would you take a competitor who overlooked this major cost savings opportunity?

How to save

There are proven ways to manage travel costs. Here is how some of the shrewd companies are capturing savings.

Short term, watch for chances to capture significant discounts, when airlines are pricing erratically. The travel industry is also open to negotiation, and by leveraging travel volumes, companies can capture even better deals.

And, longer term, smart companies break down business travel into three basic functions: reservations, payment, and--everybody's favorite-expense reporting. They see that each step holds vast, longrange cost management possibilities.


Most money is lost or saved at the reservations point because it is here that a company can lose control of its travel purchases. The traveler approaching a travel agency should not be flying blind. There should be a travel policy that covers spending limits, frequent flyer programs, the approval process, reservations procedures, and rules on miscellaneous expenses. While nearly all large companies have such a policy, it's often a vague, dusty document that is neither enforced nor updated, which is unfortunate, because enforcing a travel policy can save a company significant sums of money.

Indeed, we know that a company can expect to save up to 35 percent of its annual T&E costs by adopting and enforcing a formal policy. Your travel agency can help you set up and implement the policy, and then give you exception reports when that policy is broken.

The second failing of many companies at the point of reservation is that they simply use too many travel agencies to book corporate travel. When you scatter your bookings among several agencies, you dilute your purchasing power-meaning your ability to negotiate rates with airlines, car rental companies, and hotels. It is also more difficult to enforce a policy when people are booking through several agencies.

More and more U.S. companies are beginning to see the value of consolidating their travel. Honeywell, for example, was using more than 400 travel agencies several years ago. Today, it is using just two. A few large multinationals are even consolidating their travel business on a worldwide basis.


Company travel can be funded in various ways: multipurpose charge cards, limited-purpose cards, direct billing, employee funding and reimbursement, and-that old standby-cash.

Regardless of how they pay for the bulk of their travel, almost all companies issue cash advances. Most, however, are issuing too many for too large an amount, losing significant sums as a result. They just do not consider the pitfalls.

Cash advances cause negative float, since company funds are spent before the expense is incurred. They are also expensive to administer, costing about $22 each, and require establishing an employee receivables system.

Large cash advances also discourage prompt expense reporting. An employee with a large advance has little incentive to file his report. Note, however, that new IRS regulations state that cash advances not settled within a few months can now be viewed as taxable income.

Of course, carrying travel money is a necessity, for expenses such as cab fares will always be paid in cash. But smart companies are reducing their employees' dependence on the cash advance. The easiest method is to introduce a multipurpose corporate card. Up to 95 percent of all travel expenses can be charged on these cards, which also provide a wide array of management information about travel expenses.

This information can be a great help in vendor negotiations, policy compliance, budgeting, and tracking.

Our studies show that nearly all employees take more cash than they need while traveling. We recommend placing limits of $25 per day, and not more than $250 for any entire domestic trip. When you set the limit this low, many employees won't even bother to request a cash advance, while others will be more likely to use one of the preferred methods described above.

Expense reporting

If anything is labor-intensive, cumbersome, and prone to human error, it is expense reporting. And, since each report costs between $10 and $20 to process, it can also be costly.

Expense reports are usually a headache for both the company and the employee. Companies routinely have problems with incomplete documents, late reports, and auditing, while employees complain about the time it takes to be reimbursed.

Obviously, this area of travel management is ripe for change. That change is automation, which greatly reduces administrative costs and hassles, while improving compliance to travel policy. An automated system will work through either an on-line process or a paper process. The employee or a secretary completes a pre-formatted expense report on a computer screen or on a short paper form that is used to input the information. This on-line report is then merged with charges made to the corporate card as well as with any cash advance.

The system audits the report, checking for conformance to expense guidelines, timeliness of the report, travel policy exceptions, per-diem compliance, and so on. It will automatically flag any items that require further explanation by the traveler.

The report is then transferred electronically to the proper authority for approval. Once approved, it is reconciled automatically with the company's accounting system. The traveler then receives either a request for the balance due or is issued a check.

The future of expense reporting lies in automation. The few companies that have tried it have found it extremely effective. (See the chart on page 56 for a rundown of the effectiveness of different features of automated expense reporting.) Simplicity is the key. You don't want an automated process that makes the job more complicated or more costly.

Anticipated results

What kind of savings can a travel management program bring to a company? We estimate that a corporation that already has a sophisticated approach to travel can save an additional 5 to 15 percent by pursuing some more sophisticated cost-savings strategies.

For argument's sake, if your organization spends $10 million annually in business travel, a 10-percent savings would add $1 million directly to the bottom line. Assuming an average 5-percent return on sales, your company would have to generate an additional $20 million in sales to achieve the same result.

In summary, you can begin reducing your T&E by following these six simple steps:

* Establish a formal travel policy.

* Consolidate travel arrangements through fewer agencies.

* Appoint a travel manager.

* Adopt a corporate card program.

* Reduce cash advances.

* Streamline expense reporting.

The main objective is to lower business costs, while at the same time providing for the comfort of the business traveler. It is not in the corporation's interest to stipulate "low-rent" hotels and budget restaurants for its employees. A comprehensive travel program will, in fact, offer benefits to the traveler that will make his or her trip not only more pleasurable but more productive for the company.

How much can a company save by enforcing a formal travel policy?
Cost descriptions steve Arnold
Airfare-roundtrip $958 $1,512
(NewYork to San Francisco)
Hotel 548 780
(double, 4 nights)
Transportation to/from hotel 50 159
Meals 176 200
Total $1,732 $2,651

How much can a company save by enforcing a formal travel policy.? Let's look at the "traveling twins," Steve and Arnold. They take the same flight, stay at the same hotel, and eat the same meals. Steve follows the company's travel policy; Arnold does not.

Steve books the lowest business air fare through the travel agency. Arnold's secretary calls the airline the day before, and he pays full coach. Steve books the Westin

St. Francis through the agency and gets a better deal than Arnold, who pays the lowest double rate quoted by the hotel. Steve takes a cab from the airport, while Arnold rents a car that sits in the parking garage for four days. Finally, Steve uses his corporate card on meal expenses, while Arnold takes a cash advance and files his expense report accompanied by hotel tabs. It should be no surprise that their company spent $919 more on Arnold.b.
COPYRIGHT 1991 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:includes related article; Management Strategy
Author:Ballou, Roger
Publication:Financial Executive
Date:Nov 1, 1991
Previous Article:You owe your company a good workout.
Next Article:Just vote "no." (Technicallly speaking)

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