Transaction fees and Hidden costsAmidst the current furore around agency marks-ups of airline tickets, I think this would be an opportune moment to depart from my normal position of promoting procurement excellence to express astonishment and bemusement at the sometimes illogical and indefensible behavior of my Procurement brethren.

To those who have been living under a rock, a number of examples have emerged of TMCs ‘marking up’ air fares to customers, whilst claiming to offer transparency to clients and passing back all commissions and supplier overrides. Seems to be a cut and dried example of dishonesty bordering on fraud you might think? Well, perhaps not.

Read on and you discover that Procurement departments in the buying organization had negotiated (and the supplier agreed to) a transaction fee for their services of low single digits; far below the cost by which its possible to deliver a fully fledged travel service and maintain a profit. In some instances, ‘peppercorn fees’ of $1 or below were in place.

Leaving the argument that the markups are a means of recompensing the TMC for negotiating the deals for a second, and purely focusing on the cost of providing the service, Procurement practitioners of mid to large sized companies, particular those in the public sector with armies of Procurement qualified staff, frankly only have themselves to blame. Rather than cry ‘fraud’ they should perhaps take a look a little closer to home.

If correctly applied, a simple procurement tactic, known as ‘should cost’, most likely covered by junior procurement practitioners on their first day of training, teaches that attempting to buy something for less than its possible to produce it for is asking for trouble. ‘Should cost’ (the clue is in the name) is an exercise to understand the component costs of a product or service. Add on a reasonable level of profit and voila, that is the least you could possibly pay for a product or service, especially if you are expecting that fee to be the only income stream for that supplier. This is a pretty simple task for those companies with dedicated TMC resource, which speaks to the majority of mid to large organisations.

A buyer who ‘succeeds’ in achieving transaction fees at far less than this amount should be not be surprised then, that TMC’s mark up fares, potentially creating a hidden TMC agenda, which may or may not be in the interests of the buyer.

Rather than cut TMC fees, Procurement Practitioners of any stature would, if anything, look to increase the price given to a TMC in return for greater transparency and assistance in driving reductions across the travel category, known as ‘co destiny’ in Procurement circles, again another basic procurement principle. This in turn delivers savings through principles of Total Cost of Ownership (day 3 of junior Procurement school – you get the idea…).

Being blunt, buyers get the suppliers they deserve and Procurement folks who adopt sharp practices of negotiating fees far below what Should Cost says is possible, deserve little sympathy. TMCs conversely, should be better at articulating their value in ways that resonate with Procurement professionals. Additionally, if they want to achieve their goal of not being commoditized and being recognised as professional services partners, they should be confident enough in their value proposition to charge prices which are sustainable, profitable and serve just one master, their corporate customer.