. Hotel Contracts in the Wake of Commission Cuts | Northstar Meetings Group

Hotel Contracts in the Wake of Commission Cuts

hotel contract

Before this year, in most cases, the standard contract between a third-party meeting/event planner and a client was relatively straightforward: The planner would not charge the client directly. Instead, the hotel booked would pay the planner a 10 percent commission on all hotel rooms used, covering their fee. It had been that way for decades.

But that all changed on Jan. 24, when Marriott International -- which recently acquired Starwood Hotels and Resorts -- announced that it was cutting the commissions it pays planners on room nights booked from 10 percent to 7 percent in its U.S. and Canadian properties. Hilton Hotels & Resorts quickly followed suit. There was a big uproar and a lot of anger, but by the time a third large hotel company, InterContinental Hotel Group (IHG), made the same cut in early May, the reaction had quieted. While some smaller chains and many independent hotels announced loudly in the first few weeks that they would stick to the 10 percent commission -- a number even bumped that up a few points for the remainder of the year to grab business -- there was a growing sense that the old business model of working for clients but getting paid by the suppliers they use is faltering, and the standard contract is on the way out.

"I will lose money when I do a meeting with Marriott, Hilton, or IHG at this point, because it costs me eight points to pay my sales reps and to be on property for the meeting, and I'm only getting paid seven," says David Bruce, managing director of CMP Meeting Services and founder of Meeting Planners Unite, a new association for third-party planners created in the wake of Marriott's initial announcement. "Many other third parties are going to be in the same situation. The margin is very low for most meeting planning companies."

That's why contracts need to change. According to Howard Givner, executive director of the Event Leadership Institute, third-party planners must be clear with clients about the services they are providing and the fees they need in order to provide them.

That means planners will need their contracts to detail the services they are providing and how their fee is to be paid. This will mean more work, and probably a lot of awkward conversations about why previously "free" services now have to be paid for. But ultimately, this can work to the planner's advantage, as clients view the planner as an expert consultant, not a provider of a commodity service.

The New Starting Point
Once third-party planners "establish a baseline price, then how they get paid becomes secondary," says Givner. "If I say to a client, 'For me to provide X services I need $10,000. I can get that in commission from the hotel, or payment from you, or some combination of the two,' then the model is fine. If the commission goes up or down, whether due to hotel policy changes or simply changes due to the guest count, the planner can adjust their fee to the client accordingly."

That is exactly what Karen Brown, chief experiential officer of Members, Inc., an association management and meeting and conference planning firm, is doing. "If our clients insist on a Hilton or Marriott [or IHG] venue, our fees will increase by 30 percent," Brown says. While she hasn't done that yet, it's coming. "We're still working on contracts that fell under the old commission plan," she says, adding, "we have had the conversation with our largest client."

Brown's new contracts will include a provision stating that the client will compensate her firm for anything under the 10 percent commission. But there are other tools available, she says. "Since we're seeing a lot of rebates being offered to groups, we would likely ask for a 3 percent rebate on rooms and 3 percent on the master account in exchange for paying by check," Brown says. "The 3 percent rooms rebate would come back to us in the form of fees," making up for the 10 percent cut.

Still, asking for a fee after being "free" for so long "may be a hard sell," says Jonathan Howe, founding partner and president of Howe & Hutton, Ltd., a firm that represents association and meeting professionals. "I have been telling you for 20 years, you're not going to have to pay me, and now I come back and say you are going to have to pay me for this? The third party never proved the value of their service."

Some planning firms, particularly large ones, have long charged separate fees from the commissions they earn. As a full-service meetings management company, Bishop-McCann offers services other than site selection, including production, speakers, and program management, among others. "We have a general rate card that we negotiate with our ongoing clients," says Nicole McCoy, director of global sourcing, for the Kansas City, MO--based firm. "Obviously, commission plays a role in that. The amount of commission that we anticipate is certainly something we are very transparent with. It is very much a line item."

That transparency is vital for any planner, regardless of whether they are paid via commission, fee, or a combination of the two, warns John S. Foster, CHME, attorney and counselor at law of Foster, Jensen & Gulley, which specializes in working with meeting planners and corporate meeting clients. "I've advised the ones that I've talked to that they be transparent with their clients about how they're getting paid and whether or not they're going to avoid certain hotels."

The Road to Renegotiation
One company sticking with the 10 percent commission is MGM Resorts International, with the largest collection of rooms on the Las Vegas Strip -- one of the few markets in the country where firms like Hilton and Marriott are minor players.

"We definitely are staying with our 10 percent commission," says Michael Dominguez, senior vice president and chief sales officer of MGM. "We look at the overall revenue and what third-party planners bring to the table. When I look at the math and you look at the value of this business, much of the revenue they're bringing in is non-commissionable."

Counting things like A/V, room rental, banquets and other food and beverage costs, among other places that groups spend money within a hotel, Dominguez calculates that with a 10 percent commission on room nights, he's actually paying third-party planners 6 to 6.5 percent of their total spend.

"I am firmly convinced that [third-party clients] are not going to just increase their budgets because their cost is going to go up" to cover that 3 percent commission cut, he says.

"I am convinced they're going to renegotiate food and beverage, they're going to spend less in A/V, in meeting-room rental, and at the end of the day the business is going to look the same," Dominguez predicts.

"I think he is right," says Howe. "It's going to reduce what people spend" with hotels. What this means, he says, is because the commission cuts will lead to spending cuts by the client in non-commissionable areas, hotels are "leaving money on the table."

In terms of renegotiating F&B spending, Foster says that there is not a lot of wiggle room in the food budget as the margins are so low, noting that saving money on F&B would likely require some version of switching "from chateaubriand to hot dogs." And much the same applies to in-house A/V services, as hotels contract with outside A/V providers using revenue-sharing agreements, so giving a commission on the whole cost would be a large cut of the hotel's actual revenue from that source.

But, there are other options. While Foster says hotels are very unlikely to set the precedent of a commission on F&B, A/V, or meeting-room rental fees, third-party A/V providers are another story.

To a certain extent this already happens. Donald Guzauckas, Jr., vice president of Rental and Staging Network, and vice president and general manager of audiovisual production company HB Live, Inc., says third-party A/V companies like his already offer planners discounts from the list price, which can be marked up to full price to the planner's client. "Alternatively, we can bill the end user or association at list price and provide what the traditional discount would have been in the form of a finder's fee," to the planner who brought HB Live that business, he says.

To Givner's mind, what comes next is negotiating the commissions themselves on a case-by-case basis. "Ultimately what I think will, and should, happen is for commissions to vary based on the value of the piece of business to the hotel," he says. So, if a planner brings a hotel a meeting on short notice in the off-season, it would warrant a higher commission -- perhaps 15 percent.

"On the other hand, if they're looking to book a meeting in high season two years out, when the hotel doesn't need it, they might settle on 5 percent," Givner suggests. "If planners want to continue to rely on hotel commissions as their revenue model, then they need to stop thinking in terms of the value they bring to the organizations who host the meetings, and start looking at how the hotels value their business. This is where the disconnect has been in the business model."