This post originally appeared on Inc.com, where Rocketrip's Dan Ruch has a regular column on travel, technology, and entrepreneurship
More than $1.2 trillion will be spent globally on business travel this year. That's a lot (roughly equivalent to the GDP of Australia). Is it too much? There's reason to think it is, and by several hundred billion at that.
In essence, the business travel industry is more than a trillion dollars of "other people's money" being spent. Anytime the person making a purchase isn't the one paying, there's a problem of misaligned incentives.
Business travel is a classic example. It's not that employees try to spend a lot on their business trips, just that they don't have a reason not to. If someone's going to be reimbursed anyway, it's unlikely they'll go out of their way to save a few bucks. Even when employees comply with their company's travel policy, they tend to spend at the upper limit of their allowance: no one's volunteering to fly coach when they could fly business class instead.
These missed savings opportunities add up. Small potatoes? Hardly. At a typical organization, employee overspending eats up a fifth to a third of total travel and expense (T&E) budget. According to a survey by J.P. Morgan, T&E is the second largest operating expense on the balance sheet after payroll.
No doubt about it, business travel overspending is a huge problem. But increasingly, it looks like one that can be solved.
Carrots, Sticks, and Travel Costs
Traditionally, companies had two options for how to respond to high travel expenses. They could accept employee overspending as the price of doing business. Or, they could attempt to cut costs with tight spending limits and restrictive travel policies. The first option hurt the bottom line, while the second increased employee dissatisfaction and turnover.
However, there's a new paradigm emerging in corporate travel management, one that relies on carrots instead of sticks. Rather than punishing those employees who overspend on their trips, many businesses are choosing to reward the ones who save.
Cutting costs without upsetting employees sounds both attractive and unrealistic. Indeed, several products that promised to let businesses "have their cake and eat it too" have turned out to be half-baked.
Many of these attempts fell under the umbrella of enterprise gamification, the application of game playing elements to business processes in order to influence employee decision-making. Points, badges, and other types of recognition act as rewards, which in theory can motivate employees to undertake a desired action, such as booking an affordable flight or hotel.
But this theory has run up against the realities of human nature. Business travelers are nothing if not human. They act out of self-interest, and understandably prioritize their own comfort and convenience when booking a trip. The digital high-fives offered by gamification don't adequately compensate employees for going out of their way to save.
Aligning Employer and Employee Interests
To reduce spending, a rewards-based solution must be grounded in a pragmatic recognition of what employees actually value. In practice, this means giving employees a material incentive to spend less.
Conventional wisdom holds that you shouldn't have to pay employees to save the company money - they should be doing it anyway, right? Perhaps it's not surprising that one of the first companies to question this conventional wisdom is one of the most innovative of our time.
Google created a template for modern travel management with its Trips program. Google employees get a budget before every one of their trips, and if they come in under budget, they earn credits to redeem on future travel upgrades. Googlers are motivated to save today so they can splurge tomorrow.
The system works well for several reasons. It's egalitarian, since employees keep part of what they save the company. It's empowering, since Google gives travelers the flexibility to consider a wide range of options that fit in their budgets. Finally, it's usefully quantitative, since employees get a clear-cut estimate of what's reasonable to spend on a given trip.
The New Normal for Travel and Expense Management
Not for the first time, Google turned out to be onto something. Giving employees a compelling reason to consider the cost of their trips leads to more responsible spending. It's either the most radical or the most obvious concept in corporate travel management.
In any case, that central recognition has created widespread interest in travel incentive programs from organizations of all sizes and industries. There are now a number of commercially available solutions that motivate a company's employees to save on their trips.
Some, such as TripActions and TravelPerk, are designed for small and medium businesses that don't have a formal travel management system in place. Upside, a recently-announced startup that will offer travelers gift cards in exchange for flexibility with their flight and hotel choice, uses a direct-to-consumer model.
Rocketrip helps businesses reduce their travel costs by giving employees algorithmically generated trip budgets and letting them keep half of what they save. It's incredible to see how far travel incentive programs have come since Rocketrip started. Only a few years ago, industry insiders thought of this as a niche solution that would only work for a certain type of company (e.g. tech startups with young employees and relatively simple travel needs). But today, the greatest growth is among Fortune 500 companies looking to bring an extra level of cost-savings and spend analytics to their travel management programs.
There are a few reasons travel incentives have reached the mainstream only now.
One is technology. Motivating an employee to save on a trip requires a baseline estimate of what that trip is expected to cost, which in turn requires analyzing huge amounts of data on available prices and historical traveler behavior. Only recently could these calculations be made accurately and in real-time as a business traveler plans his trip.
Another is changing travel habits. Decades of experience with online booking, combined with the ubiquity of low-cost airlines, Airbnb, and Uber, means travelers are more comfortable than ever when it comes to finding affordable options that fit their needs. That's increasingly true for business travel as well as for leisure travel.
Cost-effective business travel isn't yet the norm. But it's no longer an oxymoron, and that sign of progress could be worth billions for companies the world over.