Relocation Industry: The Current Scenario
The economic slowdown has had a huge impact on the entire relocation industry. The companies looking to relocate their employees are yet to recover completely. The companies are still looking at better ways to manage their relocation costs and the associated risks.
As a result of this endeavor of the companies and the relocation service providers, there has been a lot of debate recently on the type of relocation policies which will be most suited for the current market scenario. The major focus of all these discussions has been the fixed fee programs and how they compare to the traditional cost plus models.
So now the question remains, whether a fixed fee home sale program is a better option in comparison to the traditional cost plus model. Before, we move on to answer this question; it is good to understand both the models at first.
Cost Plus Model: Under a traditional model, relocation companies provide all their services on a cost plus basis, and any loss on the home sale along with the holding costs incurred while the home is “in inventory” are borne by the customer
Fixed Fee Model: All the services are provided to the customers for a fixed-fee, which is set as a pre-defined percentage of the price paid to the transferees to acquire their home, also known as acquisition cost.
Cost-Plus Model: The Discrepancies
The following are the inherent discrepancies of a traditional Cost Plus Model:
A) Mark Up charges
Relocation service providers are continuously looking at new sources of revenue to off-set their low pricing, rebates offered to their clients as well as revenue sharing or other bonuses. All of this would come at a cost that they will need to offset in other subsidiary services. These include, the broker referral fees that the relocation service provider earns and rebates from other 3rd party vendors such as temporary housing service providers, appraisers, home inspectors, van line operators, spouse employment service providers and so on.
These fees may be charged in the form of short paid invoices, preferred network charges and based on percentage of anticipated volumes. On top of this, the relocation companies might get some rebates because of their volume purchase for other clients, from these third party vendors. All of these benefits are usually not passed on to their customers. So overall it’s a win-win situation for the relocation vendors.
B) Carrying Cost on Inventory Properties
The issue of loss of home sale arises when the company has paid a higher price to purchase a property in comparison to the net price offered to sell a property. Companies usually realize a major loss on an inventory home sale process because they have failed to determine the value of the property in the initial home appraisal process. In some cases the entire program costs end up getting doubled, just because of the carrying costs alone. The reason for these high carrying costs includes, the interest charges on the property that are paid to the relocation companies for keeping the house in inventory. This cost is paid to maintain the property before its sold and for performing activities like mortgage payments, associated dues, snow/leaf/debris removals, other utility costs etc.
The only way to potentially reduce these costs is to sell the house as quickly as possible. But due to the intrinsic nature of this model, the relocation companies have no accrued benefits to sell the house in inventory at the earliest and hence they can deliberately delay the entire process as a result.
In Comparison: The Fixed Fee Model
A fixed fee program shifts the entire risk of home sale services to the relocation management company. This mitigates the risks associated with the loss of home sale as well as inventory management.
Under this program, the relocation service provider will charge only one all-inclusive, fixed fee in lieu of billing actual home sale costs directly to the client. All costs associated with acquiring, carrying and reselling all properties are the sole responsibility of the service provider.
The service provider charges one flat fee for all the service, which will be a percentage of the sales price. The client company, in this case is never billed for real estate commissions, closing costs, loss on resale, repairs, carrying costs or any other direct costs.
All of this in a way leads to stabilizing costs, reducing the risk and streamlining paperwork for all the re-locations that happen for the client.
The above comparison, points to a clear fact that the Fixed Fee Model offers better transparency. This helps the clients save costs on their relocation process. It won’t be much of a surprise now if going forward, clients start expecting better reporting structures and policies from their relocation service providers. The growing impact of technology will also have a major role to play in this changing dynamics in the industry. So it’s up to the Relocation Companies now, as to how they can adapt to these changing dynamics and come up with more transparent programs for their clients. This will not only increase their own efficiency but also go a long way in enhancing their long term relationships with their clients.
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