Supply Chain, A Critical Link
When sourcing relocation services, many companies underestimate the importance of the supply chain in the RFP evaluation process. In this post I will explore why the supply chain is so important and how it may impact pricing, reporting, service delivery and corporate risk exposure.
To use or not to use, all or some of the RMC’s Supply Chain
This is a common question that companies should ask as they enter into an RFP. The Relocation Management Company (RMC) will have a professionally sourced and managed supply chain in place at the time of the RFP. In today’s environment of connected ecosystems, a sophisticated RMC will also have API connections with their key supply chain partners. These connections enable two-way, real time reporting and data exchange including service updates, transaction and response speed, data privacy and integrity. Also, the RMC can leverage their purchasing power with their key suppliers to achieve pricing advantages and performance guarantees that a solo corporate contract may not be able to achieve. So there are benefits to be realized by using the RMC’s supply chain; however, there is also value for the corporation to maintain some of their own relationships. Corporations that maintain some of their preferred supplier relationships have a perception of better service results and value-added services from those engagements. They also cite consistency of supplier services in the event the core RMC supplier is changed. With benefits to each approach, what should a corporate buyer consider in taking their relocation management contract out to bid?
- 1. What relationships do we already have in place? Asking the corporate mobility team which suppliers they are already using is the first step. Most commonly, a company will have a standing relationship with an immigration firm and one or more tax partners. These relationships remain in place regardless of the RMC selected because they have broader implications to the company beyond the mobility program. But what about moving/removal companies, temporary housing firms, destination services providers, estate agents and real estate professionals? Do these relationships exist and should they be retained?
- 2. How is the relationship structured? Does the company have a contract in place with the supplier or is this more of a hand-shake agreement? Oftentimes we find a company may have “directed suppliers” where the mobility team has asked or directed their RMC to use a specific supplier for a specific service category in a specific location; in these instances, a formal supplier contract may or may not be in place. Many RMC’s have a multi-tier performance management policy in such an engagement, and they often do not vet the client-directed supplier at all and pass all responsibility back to the client. In such an instance, it is unclear who should be responsible for vetting the directed supplier, the RMC or the company.
- 3. Will utilizing our own suppliers increase costs? Possibly. It’s still common practice in the industry that most RMC’s will take a commission or mark-up from any supplier service they touch. There are pros and cons to this approach which are explored below. But this should be decided and explicitly disclosed in the RFP process otherwise it may trigger a renegotiation later.
- 4. What will we lose if we direct our own suppliers? As mentioned above, the increasing use of API’s connects the supply chain with the RMC closer and closer every day. While API’s make it easy to plug and play, some smaller service providers may be using older technology tools that lack this capability. What is this loss of connectivity worth to the organization?
Supply Chain Commissions, Mark-ups and Referral Fees
Over the past 30 years, the relocation management industry has been squeezed on management fees as companies look for ways to lower their costs. As an example, in the late 1980’s/early 1990’s a homeowner relocation would likely have had a service/management fee of $4,000-$5,000. Today those fees are likely close to zero. Considering that companies will pay $3,000 or more for a 2-day cultural orientation, there is a real imbalance when they are paying an RMC significantly less for an international assignment where the service delivery window is much longer.
The relocation industry took a cue from other industries and started looking for ways to earn revenues legally from the supply chain through commissions, referral fees and mark-ups. The theory/benefit behind this approach is that the commissions paid from the supply chain allowed the RMC to reduce their service fees while still earning a respectable profit margin. It has the added benefit of self-adjusting the revenue earned based on the complexity of the relocation or assignment – the more complex the relocation or assignment, the more supply chain services are generally involved and therefore the more revenue is collected from supply chain commissions. This model aligned the revenue recognized with the work expended by the RMC and enabled RMC’s to solve another client complaint – nickel and dime pricing schedules. With this approach, the RMC could move to a more fee pricing model. However, in getting what they asked for (lower management fees), client corporations also lost transparency.
When the RMC receives a commission from the supply chain, the cost of the supplier’s service goes up. With the exception of real estate commissions which have operated with broker-to-broker referrals since the 1970’s, every other service purchased by an RMC will go up to reflect the requirement for the to pay the RMC a commission. The RMC will argue, and rightly so, that their volume enables them to negotiate pricing that, even with the commission factored in, is lower than the company could get on their own. This argument has merit and based on the size of the program and the value of the client to the supplier in their market this may or may not be true.
In addition, and often not mentioned, the increased cost is also likely to be taxable for U.S. residents so tax gross-up and equalization costs will increase because of that commission. Consider this example: many RMC’s will collect between $8-$18 per day as a commission from a temporary housing provider. If the base rate of a furnished apartment offered by the temporary housing firm is $200 per day in Santa Clara, California ($6,000 per month), and the RMC requires a $10/day commission, the rate is now $210 per day or $6,300 per month. Temporary housing is a taxable benefit in the U.S. and since it’s being paid in California with a high state income tax, the tax gross-up on that $6,300 doubles the cost. So that commission cost the company an additional $600 for that 30-day stay and the RMC only received $300. The other $300 was wasted on taxes. From a cost standpoint, it would be better to pay the RMC an additional non-taxable service fee appropriate to the work they invested. This same example holds true for nearly all other supply chain costs including the transportation and storage of household goods.
Another challenge is comparing the supply chain cost for each RMC and then imposing governance to ensure those costs are maintained. I recently encountered an example in an RFP where a company asked for 10 relocation scenarios and requested accurate quotes on the supply chain services for each scenario. One of the bidders had transportation of household goods quotes that were much lower than all the other bidders across the board. The procurement representative tried to understand the difference in the quotes but could not reconcile them. They engaged an outside expert in transportation pricing who was able to determine that the bidder in question did not quote full door-to-door costs. Since the company asked for “transportation costs” in each scenario, that bidder only included the transportation costs and excluded the packing, packing materials, loading, fuel surcharge, unpacking and other ancillary costs that should have been included in a door-to-door move quote. When confronted, the bidder explained they had excluded those costs because they were not specifically requested.
As a result, while move scenarios are still a very good way to compare supply chain costs and service fees, they have to be very detailed and you must allow the bidders to ask ample questions to present an accurate estimate of costs. To do a move scenario, we recommend using actual moves that your company has experienced. Then as questions come up you can refer to your real-life scenario to answer the questions. Note that some costs will vary such as airfares, lodging and temporary housing since they are based on supply and demand at the time of the exact move, so providing the timeframe is important. For example, to quote a 30-day stay in furnished housing the RFP should state: 30 days beginning June 1st (it should be within 30-45 days of the RFP release since firm temp housing rates cannot be accurately quoted much over 30 days in the future), in a 1 bedroom unit with once-per-week maid service within a 5-mile radius of location X. When it comes to ultimately contracting for services, locking down the rates and language on commissions from the supply chain will provide additional assurance.
Transparency is another huge frustration that corporations are experiencing with their RMC’s today. Contract agreements with RMC’s do not always stipulate supply chain pricing. If rates or commissions are not specified in the contract, RMC’s can arbitrarily increase their commissions. For example, if an RMC priced an engagement assuming a 5% commission on the transportation of household goods but that client was not meeting their expected margin and there was nothing in the contract to stipulate the commission or discount level, the RMC could arbitrarily change the commission rate to 6% or 7%. In most cases, the client does not notice or comment. In addition, some RMC’s go through great lengths to hide these commissions. Some RMC’s are known to re-issue a new invoice for a supplier service on their own letterhead so there’s no easy way to trace back the charges. As a result, if you agree to allow supply chain commissions because the lower fee and simplified pricing provides better optics for your organization, then the contract should disclose and lock these commissions down.
As mentioned earlier, RMC’s have different standards of service when a corporate client utilizes their own suppliers. For contracted suppliers such as tax and immigration firms, there is generally little risk exposure to the RMC and the client since the client would have done their own vetting and contracting process and would hold the RMC harmless from errors, omissions and negligence from those suppliers. The real issue is when the client has done no due diligence but still wants to use a specified supplier.
For example, let’s say ABC Company is a company that uses Best Relo for their outsourced relocation management administration. ABC asks Best Relo to use A-OK Corporate Housing in a particular area where ABC has a high volume of relocation activity. Best Relo, like many RMC’s, may feel like they have protected themselves in their contract with ABC. Since A-OK is a directed supplier, many RMC’s do absolutely no vetting of the supplier and rest on the fact that they were instructed by their client to use them. ABC, conversely, feels protected because Best Relo is the one ordering, managing, and paying for the service. Assume then there is a CO2 leak in one of the units and it causes long term medical issues for one of ABC’s employee’s children who was staying in the A-OK apartment as part of the company-sponsored relocation. ABC, Best Relo and A-OK may all be at risk for compensatory and punitive damages. All will likely have exposure because basic commercial duty of care and supplier vetting was not completed on A-OK. Best Relo will point to ABC because ABC instructed them to use that supplier and the deeper pockets are the ones typically hit hardest.
Companies need to carefully consider the value of their supplier relationships. If you feel maintaining that relationship is important, you must either complete the vetting and contracting process with that supplier or insist that your RMC complete a full vetting and supplier assessment themselves. If that supplier does not pass the supplier assessment, or deficiencies are found, then the company can make an informed decision on how to move forward.
The supply chain is a significant part of an outsourced or co-sourced global relocation management engagement. Between 50%-75% of the total costs of the mobility program will likely be paid toward supply chain services and those costs must be considered in a comprehensive RFP evaluation. Time should be spent upfront to determine the supply chain approach that best fits the organization. Identifying company policy and practice about directed suppliers, supplier commissions and risk should all be defined and agreed to prior to issuing the RFP. Too many times corporations enter an RFP without firm decisions in this area and instead ask what options are available ‘with and without’ and ‘if this or that’, without fully considering the cost, impact on service delivery, technology loss and risk exposure to the organization.
For specific examples of some core supply chain categories including real estate commissions, shipment of household goods, temporary living, destination services and more, please send me an email me request for the full article.
VP, Client Development - BGRS