Crowded House 6-1-1999

Meetings & Conventions Bargain Hunting May 1999 Current Issue
May 1999

Are third parties threatening planner-hotelier relationships?

Crowded House

By Maria Lenhart

If their impact on the meetings industry were expressed in decibels, third-party service providers, once rumbling in the background, now are creating a deafening roar. From site-selection firms that do only dates and rates to full-service planning firms that do it all, third parties have altered profoundly the way hotel companies and meeting clients do business.

At the same time, the new prominence of third parties is bringing with it a myriad of controversial issues and troubling questions. Is the proliferation of start-up companies with little experience giving all third parties a bad name? When third parties get paid by hotel commissions, are the client’s best interests affected? Are third-party commissions driving hotel rates even higher? And, perhaps most critical, what does increased reliance on third parties mean for those all-important relationships between in-house planners and hotels?

Although there are no simple answers to any of these questions, one thing is clear: Third parties are here to stay, and their role likely will become more significant. Corporate America, which first embraced outsourcing a decade ago when meeting planning and other in-house operations were scaled back, still finds it an economical way to operate. “We are finding that many of our corporate clients are focusing on business units and expect each unit to produce revenue and be accountable,” says Willy Aroca, regional vice president of HelmsBriscoe, a Scottsdale, Ariz.-based site-selection and meeting planning firm with nearly 50 offices worldwide. “Even though the economy is booming, many of our clients prefer to keep a lean machine and outsource to professionals.”

Other third parties are finding that associations are as eager as corporations to outsource. Michael Burns, director of account management for Twinsburg, Ohio-based third party Conferon, which does the lion’s share of its business with associations, says, “The growth potential for third parties is there because people have changed the way they do business.” According to Burns, Conferon, which offers site selection and full-service meeting planning, has grown association business from 20 percent to 80 percent of its total volume in the past 15 years, and the end is not yet in sight. “Fewer than 10 percent of associations use a third party for their entire meeting, so there is still a large untapped source for business there,” he says. “The potential is enormous.”

Sizing up the new players
Conferon and HelmsBriscoe are among the largest and best-known third-party planning firms, but hundreds of other players are vying for a piece of the action. In recent times, the biggest growth has been in the number of site-selection firms, companies that specialize in finding hotel dates and rates, nearly always on a commission basis. At the same time, some companies that once specialized in catering or event production are branching out into site selection and other planning services.

The proliferation of third parties raises some concerns about the professional and ethical standards of these service providers. “Many more people are looking at ways to cash in,” says David Scypinski, vice presidentindustry relations for Hilton Hotels Corp. in Washington, D.C. “There are many more mom-and-pop operations out there, people without bona fide credentials. A lot of them are going into site selection.”

For established independent meeting planners who have spent years building their reputations, the influx of new players is especially worrisome. “There is a big difference between full-service independent planners and those who just handle site selection,” notes Bonnie Wallsh, president of Bonnie Wallsh Associates, Ltd., in Charlotte, N.C. “I put many hours into building relationships with my clients, and I’m involved in every aspect of the program.” Wallsh, an independent planner for more than 20 years, adds, “I hope they are following professional ethics and standards and are not just an extension of a hotel sales force. If someone has a bad experience with a site-selection firm, it reflects badly on all of us who provide third-party services.”

Raiding hotel sales ranks
The trend concerns hotels for another reason: Many third parties, particularly site-selection firms, are finding a huge pool of candidates among hotel salespeople. At HelmsBriscoe, for example, about 95 percent of the sales associates have a background in hotel sales, according to president Roger Helms.

Hilton’s Scypinski says hotel companies are finding it increasingly difficult to retain sales staff “because so many salespeople are being tempted to get a piece of what’s going on. Many of our best people are going over to the other side.”

According to Burns at Conferon, hotel salespeople often see the switch as an “opportunity to make more money, work fewer hours and have more flexibility. At the same time, more hotel companies are centralizing their operations, and salespeople have to handle more hotels.”

Some former hotel employees are delving into full-service meeting planning. Among them is Pat Berg, former sales director for a large San Francisco hotel, now president of San Carlos, Calif.-based Conference Resources. Berg, who plans meetings for four Silicon Valley firms, says her hotel background was excellent preparation for her new career. “I’m good at negotiating with hotels because I speak their language and know where they’re coming from,” she says.

Making new friends
Hotel salespeople, who always have courted corporate and association clients, increasingly are wooing site-selection firms. “Third parties, especially the big firms like HelmsBriscoe, are emerging as a major force in the industry, and they have a huge amount of influence,” says Maria Dempsey, director of sales and marketingNorth America for Pan Pacific Hotels & Resorts in San Francisco. “They generate at least 25 percent of our group business, and our regional sales offices spend a lot of time cultivating these relationships.”

Although he has mixed feelings about their role, Hilton’s Scypinski agrees that “when you form a relationship with a Conferon or HelmsBriscoe, there’s a lot of incremental revenue to be derived.”

So eager are hotel companies to partner with large site-selection firms that some are signing preferred-status agreements, under which they pledge to pay half of the hotel commission to the third party at the time the booking is made. HelmsBriscoe, for example, has such deals with Hilton, Inter-Continental, Crowne Plaza, Wyndham, Doubletree and Radisson. In return, HelmsBriscoe’s hotel partners are invited to the company’s annual conference, where they can set up promotional booths and network with HelmsBriscoe associates, says company spokesperson Carolyn Bryson.

The clincher: Preferred-status agreements give hotels a better chance of being selected as a meeting site. Although this may raise conflict-of-interest questions, site-selection decisions never are made at the expense of the client, claims Bryson: “Only if all the hotels being considered are equal does the hotel with ‘preferred’ status have an advantage. And we always let the client know about the situation. The agreements are not secret.”

Commission quandary
Not surprisingly, a growing number of group hotel blocks are being booked on commission. While independent planners who provide a full range of services usually charge management fees, most site-selection firms rely on a 10 percent commission from hotels as their sole source of payment.

Site-selection firms are quick to note that clients receive the help they need in securing hotel space and pay nothing for the services rendered. The reasoning works for Dawn Hardecky, project manager for American Management Solutions in Fremont, Calif., who often turns to site-selection firms when planning meetings for association clients. “If I went to a meeting planner, it would be much more expensive, and I don’t feel the expertise would be any greater,” she says.

But if a hotel is paying a 10 percent commission to a third party, will it make up for this cost by charging a higher room rate? Site-selection firms claim the volume of business they do gives them negotiating clout that more than offsets commission charges. “The rates we negotiate are nearly always better than what our clients could negotiate, regardless of the commission involved,” says Conferon’s Burns.

But Hilton’s Scypinski says no one should assume commissions do not affect rates. “It’s not always true that a third party can negotiate a better rate than the client can directly,” he says. “The hotel is looking at the bottom line. We want to derive as much revenue from that transaction as we can.”

Scypinski says commissions are most likely to drive rates up during peak season or when hotel rooms are in high demand. “We may charge more for a commissionable rate because we know we can get the business from someone else,” he says. “If it’s low season, then it may be worth it to pay the 10 percent and not adjust the rate.”

The volume of business the hotel does with the third party also might affect whether a commissionable rate will be higher. “Commissions may have a slight impact on the rate if we’re working with a small third party who may just bring in a one-time piece of business,” says Pan Pacific’s Dempsey. “However, if it’s with someone who brings us multiple meetings each year, there will be no impact.”

In whose best interest?
Third-party commissions also raise the issues of professionalism and ethics. “If you charge a fee, the client has more confidence that you are looking out for their best interest,” says Conference Resources’ Berg. “With a commission, there may be doubt.”

Howard Feiretag, an instructor in the hospitality department at Virginia Polytechnic Institute in Blackburn, Va., adds, “What troubles me about commissions is that a hotel could be perfect for a meeting but may be bypassed by the third party if the hotel refuses to pay a commission.”

Some planners say commissions are not objectionable if they are passed along to the client to lower the overall meeting tab. “If the commission can be subtracted from the fee, that’s OK,” says Serena Leiser, director of meetings for the American Association of Orthodontists in St. Louis. Given a choice, however, she prefers working with third parties that do not accept commissions. “I’d rather pay a service fee because it’s more up front and makes me feel more comfortable,” she says. “I want to pay for what is being done for me. I don’t want the hotel to pay for it.”

One on one
Economics aside, some worry the real cost of third-party involvement will be weaker bonds between in-house planners and hotels. “Third parties are a valuable source of business for us, yet I hate to think that this is replacing the primary relationship between the planner and hotel,” says Alison Kneubel, director of sales and marketing for the Resort at Summerlin in Las Vegas. “If a planner relies on third parties, it’s inevitable that primary relationships will suffer.”

Dempsey observes that while hotel sales managers are working much more frequently with third parties in site selection, they are able to cultivate relationships with in-house planners. “Once the site-selection process is over, we are then able to deal directly with the corporate meeting planner,” she says. “So these relationships are not entirely eroded, even when a third party is involved.”

Will the quality of the meeting be affected if in-house planners give up some one-on-one contact with hotels? Yes, says Feiretag, who spent more than two decades in both meeting planning and hotel sales. Although many organizations have no choice but to outsource, Feiretag believes site selection is one responsibility in-house planners should not give up. “Site selection is the most critical aspect of the meeting,” he says. “You need to get the feel of the place and check out the attitude of the people at the hotel. A third party, particularly if it’s a computer-driven site-selection firm, is not going to do this.”

Get it in writing The growing role of third parties is raising a new set of legal implications, say lawyers who specialize in meetings and hospitality issues.

Following are some key points contracts should address, according to Jonathan Howe, senior partner with Howe & Hutton, Ltd., in Chicago and Washington, D.C., and Atlanta-based John Foster, partner in Foster, Jensen & Gulley, LLC.

Responsibilities of the third party. What is the scope of services to be provided by the third party (i.e., site selection alone, handling the entire meeting or something in between)?

Responsibilities of the client. What information will the client provide to the third party, and which aspects of the meeting will the client handle, such as music licensing or speaker selection?

Authority and discretion of the third party. How much authority will the third party have to function on the client’s behalf? Can he sign vendor contracts?

Channels of communication. To whom at the client organization will the third party report?

Compensation. How and when will the third party be paid? If the third party is working on commission from the hotel, how will payment be handled if the client terminates the agreement?

Ownership of the product. If the third party designs or creates something for the meeting, does the client or the third party own it? Can she reuse products or creative ideas for other meetings?

Insurance and indemnification. Who will be held liable for mistakes made by the third party that result in a lawsuit? Clients should ask third parties for proof of adequate insurance coverage.

M.L.

Who’s paying whom?

Third parties might be the meetings industry’s topic du jour, but a closely related issue, disclosure, is a strong runner-up.

The matter pertains to fees also known as commissions, rebates and kickbacks suppliers earn from business they bring other suppliers. Hotels, for example, often pay commissions (generally 10 percent) to third parties that book rooms for their clients’ programs.

Meanwhile, hotels that recommend in-house or preferred suppliers, including A/V firms and destination management companies, may receive cuts of the business when planners use those suppliers’ services.

Paying commissions is a long-established industry practice, but the disclosure issue is newly at the fore for two reasons: First, more third parties are booking meetings than ever before. Second, according to Sequim, Wash.-based independent planner Sharon DelaBarre, hotels are doing so well they are getting greedy, and competition among their suppliers is so intense that some are willing to pay hotels hefty kickbacks, in some cases as much as 50 percent.

When commissions are not disclosed, the third party can “double-dip,” collecting a fee from the client and a commission from the hotel, which, though not illegal, does not pass the ethics “smell test,” according to Atlanta-based attorney John Foster, partner in Foster, Jensen & Gulley, LLC. Also, if the possibility of a hidden commission exists, the planner is less able to trust that the third party obtained the best hotel rate or priced its services fairly.

To prevent this, says Foster, the contract between a planner and a third party who is earning commissions should state that the third party agrees to disclose all forms of payment. When third parties are compensated on a fee basis, the contract should state, “XYZ company agrees the fee is full compensation, and it will not seek commissions from the hotels or any side agreements.”

Foster also advises planners to send a letter to the hotel that is selected, stating that XYZ is working for them on a fee basis and is not to receive a commission.

Is there any recourse for a planner who finds out a third party did not disclose a commission? “The only way it’s enforceable is if it’s proven that [there was] a breach of fiduciary interest, such as a hotel’s inflating room rates to jack up a third party’s commission,” says Foster.

LISA GRIMALDI

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