Protecting Hotel Cash Flows By Balancing Personnel Costs With Revenues
By:
Mark C. Lynn and
George A. Bertram
In the four months since the
events of September 11, it has become increasingly apparent that the
hospitality industry has been severely impacted by the current downturn in
travel. Unfortunately, there is no manual that provides management with a
step-by-step approach describing the actions that should be taken to
reduce costs and preserve the financial integrity of either an individual
hotel operation or a corporate organization when business plummets by 50%
overnight, resulting in a severe overhead imbalance.
Historically, during business down cycles,
payroll expense is the first place considered for immediate cost reductions
in response to newly diminished revenues. This has held true over the past
few months, as individual hotels and hotel organizations have moved rapidly
to eliminate thousands of jobs both at the corporate and property levels to
conserve cash. The ongoing challenge facing management is in determining how
long the downturn will last. The length of the down cycle has a direct
bearing on management’s commitment to retain employees in anticipation of an
upswing in demand. Senior management must continually evaluate their
operation to determine which services and amenities are integral to the
hotel’s intrinsic value and which services can be eliminated without
severely damaging the hotel’s hard-earned reputation and market position.
Many organizations are implementing
voluntary leaves of absence as a way to reduce costs. Both management and
hourly employees are being encouraged (and in some cases compensated) to
take a leave of absence, with the expectation of returning when business
improves.
While layoffs may be necessary to shore up
profits or minimize losses in the current environment, management teams are
also using the current economic challenges as a catalyst to objectively
evaluate consolidating job functions and operating departments, both in the
short and long term. Organizations and individual hotels are forced by the
economic realities of the market to do more with less and management is
aggressively exploring alternatives to the traditional approach to staffing.
Many general managers have urged or dictated that department heads reduce
work days and in some cases have required salaried managers to temporarily
reduce their work week from five to four days a week, thereby reducing
management payroll by 20%. Many hotels are mandating an across-the-board pay
cut for all managers and some hourly employees. Consolidating entire
departments through the cross-utilization of employees and job descriptions
is also an important consideration.
The downturn has impacted all
niches of the industry. “Boutique hotels have been especially hit during
these hard times,” remarks Chip Conley, CEO of Joie de Vivre Hospitality
located in San Francisco. “Because these operations were operated very lean
even during peak demand periods, we have less options to reduce costs
today.” At most hotels under Joie de Vivre Hospitality’s management, front
desk associates frequently work as telephone operators and perform
reservations functions in an effort to reduce costs.
In situations where
substantial staff reductions have taken place, the general manager and
remaining management staff have frequently become “player coaches,” assuming
additional responsibilities and job functions. One of the most critical
challenges facing management is how to maintain a hotel’s service levels
with far fewer employees. “In this environment, it is important to retain
your highest-performing employees,” explains Thomas Gurtner, vice- president
and general manager of the Four Seasons, Boston. “We have made every effort
to retain key management personnel. If at all possible, we don’t want to
lose talent that fully understands the culture and mission of the company
and our goal to protect the guest experience during these challenging times.
We are however requiring managers to roll up their sleeves and pick up the
slack in areas of the operation where temporary or permanent staff
reductions have occurred.”
The elimination of job functions and
departments through outsourcing to specialists or consultants is also
occurring. Departments or functions that are being outsourced include:
housekeeping (in smaller properties), in-house laundry, security,
maintenance, valet (clothes and parking), accounting, human resources,
training, catering (in smaller properties), and sales and marketing
functions and public relations. Managers are finding that relationships with
specialty companies and individuals with specific talents can be tailored to
meet specific needs. Consultants generally require reasonable retainers
that are coupled with project-specific fees and hourly rates, resulting in
quantifiable reductions in overhead.
While management teams
continue to take aggressive actions to reduce costs, hotel demand at some
point will recover and management will need skilled employees. The
continuing challenge for management is to try to evaluate how long market
demand will be soft and what the recovery will look like when it appears,
realizing that there are significant costs associated with the rehiring
process. Recent industry data indicate that the cost of recruiting,
selecting, and hiring new employees constitutes roughly 30 percent of an
employee’s annual salary. Given the high cost of the rehiring process, if
economic conditions appear to be improving, additional layoffs may need to
be postponed as long as possible; thus, the property will be well situated
for the upturn when it occurs.
To illustrate the impact
effective payroll cost reductions have on a hotel’s cashflow, we have
prepared the following analysis of three operating scenarios.
Scenario one assumes a typical, 279-room
full-service hotel operating at an occupancy level of 70% with a $125
average rate in 2000. With the recent economic decline coupled with the
events of September 11th, we assume that this hypothetical full-service
hotel’s occupancy has declined 10 points in occupancy and lost roundly $2.00
in average rate.
Using this decline in occupancy and
average rate for scenario two, we input the data into the HVS International
fixed and variable cost model. This model calculates customary variable cost
reductions that occur as a result of decreased occupancy and average rate.
Scenario three uses the same cost
reductions calculated in scenario two, but takes into consideration
additional property-specific, creative cost initiatives, that include the
following actions:
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Rooms expenses were decreased by roundly
10% through extensive consolidation of job descriptions and
responsibilities in the housekeeping and front office departments. Front
office management personnel were assigned to specific shifts and
housekeeping inspector positions were absorbed by the Executive
Housekeeper and Assistant Housekeeper. Further, houseperson duties were
assigned to front office bell positions.
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Food and beverage costs were reduced by
5% through a consolidation of management and culinary staff.
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Administrative and general payroll costs
were reduced by 10% by outsourcing the security, accounting, and human
resources departments and;
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Marketing costs were reduced by 3%
through the engagement of an outside public relations firm. |
By applying these cost-saving initiatives
under scenario three, the subject hotel would realize an expense savings of
approximately $300,000, or roughly 9% in net income, as compared to scenario
two. Obviously, these savings could not be transferred to every property, as
management structures and other property-specific initiatives would be
required to be effective.
However, we do recommend that prudent
hotel owners and operators explore these initiatives and others to maximize
cash flow and asset value in today’s challenging economic environment.
Click on the chart to view a larger version
While it is impossible to predict the
future or forecast when hotel demand will return to pre-September 11th
levels, management teams are closely watching industry bellwethers in an
effort to make prudent decisions regarding layoffs and firings, hoping that
the recovery will be sooner rather than later
Mark C. Lynn
George A. Bertram
Suite 620
116 New Montgomery Street
San Francisco, CA 94105
415-896-0868
415-896-0516 FAX
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this story to an associate
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