Mr. Kistner

Reservations / Online Pricing / Booking Engines

The Reality of Hotel Direct Connects

By Mike Kistner, President, Chief Executive Officer & Chairman of the Board, Pegasus Solutions

Hotels need distributions channels – a simple and seemingly obvious statement that encompasses one of the most important aspects of selling and merchandising a hotel’s products. How to reach consumers in the most efficient, cost-effective way and stay ahead of the proliferation of distribution opportunities and their ever-increasing demands for information?

Twenty years ago, The Hotel Industry Switch Company, also known as THISCO was created at the direction of 16 hotel companies. The hotel companies operated in a world of seven global distribution systems (GDS) and were taxed with having to maintain direct connections to the GDS. Hotels wanted lower development costs, simpler maintenance and the ease of one place to conduct and convey their business. Accordingly, THISCO was formed, and electronic distribution as we know it was introduced. This historic move was made to avoid a total of 112 direct connects across 16 companies.

Imagine that conundrum today. Yes, the seven GDS have consolidated to four, but they have been compounded with hundreds, even thousands of online distribution points. In the last 20 years, the Web has emerged as a major force in the way hotels are sold, redefining electronic distribution to include both GDS and alternative distribution systems (ADS), also known as online channels. The GDS consists today of mostly business travel bookings, while the ADS has emerged as a mostly leisure channel where aggressive shopping and bargain hunting prevail.

Managing electronic channels effectively has never been so important. Looked at from the perspective of the distribution channels, there’s a wealth of descriptive content, images and real-time availability information available. The challenge of the distributors is to get hold of the information when they need it, quickly and efficiently. As the rapid pace of technology evolution and adoption continues around the world, consumers expect access to comprehensive information from every entry point, whether that is browsing and online travel agency (OTA) Web site, using a mobile application or through social media.

On the supplier side of the pictures, hotels must be able to consistently merchandise and distribute their products through the widest community of channels, while at the same time retaining control and minimizing the impact on their technology infrastructure and resources.

If managing 112 direct connects with this information was overwhelming more than 20 years ago, which more simply means that seven direct connects were challenging then for major hotel chains with resources, then what does that mean today? In our case alone, we connect around 65 hotel chains and suppliers to about 110 distributors directly, including the GDS, making the total of distribution points approximately 114. That translates to 7410 direct connects that would need to be made (and maintained) to conduct the same amount of business we manage as a transactional intermediary.

Also keep in mind that the total amount of business doesn’t just refer to actual bookings made. The total amount of business conducted through direct connects, a transactional intermediary, or some combination of the two actually includes all rate and availability shopping requests for a hotel made through a specific distribution point. We’ve seen as many as six billion shopping and booking transactions in a single month. Managing electronic channels effectively has never been so important.

In January 2011, trade and general news headlines were aflame with news of moves by some airlines to cut the middle man in an effort to gather more information about who was buying tickets and to sell more revenue-driving extras. Direct access to passengers can mean more targeted online marketing opportunities, and the opportunity to enhance the customer experience à la shopping on Amazon. Hearing the news, hoteliers perked their ears.

Do hotels need direct connects? The term “direct connect” implies that the demand touch point will have a direct electronic connection into a hotel’s inventory and rates, either through the central reservation system (CRS) or the property management system (PMS). However, given the volume and variety of demand touch points in today’s market, a strategy of exclusively direct connects is not only expensive, but also incredibly inefficient.

Instead, the discussion the industry should have is about dis-intermediation. More than a decade ago at HEDNA in New Orleans, industry pundits discussed this concept in terms of placing suppliers and purchasers in direct contact with each other to facilitate business. The idea was to have a more direct relationship with guests, which has been realized in other ways as brands have utilized websites and social media to talk to the customer directly.

For growing brands like Fairmont, Raffles and Swissôtel, intermediaries like tour operators and agencies help make selling rooms more affordable than going into a new market. Awareness advertising in Brazil, for example, would cost a fortune. Doing business in China, which is a growing market for Fairmont, Raffles and Swissôtel, would require conducting business, in-person and technologically, in Mandarin. Languages and business methods change when selling internationally, which again requires the help of proven intermediaries.

On the supplier side of the picture, hotels must be able to consistently merchandise and distribute their products through the widest community of channels, while at the same time retaining control and minimizing the impact on technology infrastructure and resources.

When hotels and GDSs began their first electronic conversations more than 20 years ago, it quickly became obvious that effort was being wasted in replicating the same connections between suppliers and distributors multiple times over. Transactional intermediaries were established with the objective of improving efficiency and adding value. THISCO acted as the singular electronic linkage point between hotels and distribution channels.

Acting as the single interface for the hotel connecting it to business-driving demand touch points, transactional intermediaries eliminate duplication of efforts and resources. Working without a transactional intermediary means that a book, modify and cancel that yields no revenue could cost $25 in labor. With an electronic distribution intermediary, the same scenario costs the hotel nothing.

In the next 20 years, the role of the intermediary will be even more crucial in facilitating the distribution process and adding value, especially as Google and MetaSearch engines continue to develop innovative ways for guests to shop for and purchase travel. The volume of reservations from Internet and GDS channels continuing to grow. And now, Google has added a new channel to the equation by adding average price and availability to search results in Google Maps.

Managing electronic channels effectively has never been so important. Rather than crying “direct connect” because American Airlines grabbed some headlines early this year, hotels should be relying on the intermediaries that add value, asking:

1. Does the intermediary actively facilitate multiple distribution business models supported through a variety of channel types?
2. Is the overall cost of operation lower with the intermediary in the picture than without?
3. Will the technology provide the right combination of speed, flexibility, and future-proofing built around industry standards?

It’s important to highlight the fact that this is not simply a question of technology. Some assume that in a highly connected world, a hotel need only deploy a few connections using XML then sit back and watch the transactions flow. In reality, the demands of Internet shopping can create millions, even billions of transactions – an experience that is sometimes compared to trying to drink from a fire hose. Those “easily deployed” XML connections start to look expensive and difficult to support when the system on the receiving end cannot cope with the workload.

For many hotels it is becoming obvious that they need strategic electronic distribution. The market will naturally move towards the solutions that offer the most compelling combination of scope, flexibility and cost-effectiveness, eliminating those intermediaries that fail to add value in the supply chain. In reality, that doesn’t translate into an environment of hotel direct connects.

Mike Kistner is Chairman, President and Chief Executive of Pegasus Solutions. He joined Pegasus from Best Western, where he was CIO and SVP of distribution. Mr. Kistner holds a BS from Northern State University, Aberdeen, S.D., and a MS in Information Systems from Colorado State University. He is the past Chairman and current member of the e-commerce committee of the AH&LA. From 2000 to 2005, he served as Chairman of the Open Travel Alliance (OTA) and has been recognized as one of the leading CIOs in the hospitality industry. Mr. Kistner can be contacted at 480-624-6450 or mike.kistner@pegs.com Extended Bio...

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