Andersen

Is an ASP Property Management System
in your future?
A new technology may revolutionize the way hotels operate

Property Management Systems (PMS) have traditionally been an integral component of Customer Relationship Management (CRM) and guest service integration. However, a new technology, ASP, is on the forefront of revolutionizing the way hotels operate. In the hotel industry, PMS systems have historically accounted for a substantial capital expenditure. Fortunately, a new breed of technology is emerging—web-based PMS’ or ASP (Application Service Providers)—and it has many PMS vendors scrambling to incorporate this new technology into their PMS offerings.

As the technology vendors in the hospitality industry move closer to the introduction of next generation Property Management System offerings, it would be useful to briefly review the options currently available to hotel operators for PMS solutions. These options have remained relatively constant over the past several years with regard to technology platforms and PMS systems that were available to hotels.

Historically, the primary obstacle a hotel encountered in either acquiring or upgrading its PMS systems has been the combined capital costs associated with the hardware platform to host the system and the licensing and training costs of the PMS application itself. These costs have particularly been a factor for hotels in the limited-service and mid-range hotel segments.

Since the mid-1980s, the typical hotel’s PMS solution has been based upon an entirely local property approach. At the property level, this has meant an on-site local server or host computer with client workstations deployed throughout the property for use in each of the individual hotel departments (also referred to as a thin client model).

From a cost standpoint, each hotel had to bear the total cost associated with creating the environment for the PMS system, even though the PMS solution was a widely replicated system across the chain or within a management company.

Besides the costs of initial acquisition and installation, there are also the ongoing annual costs of maintaining the solution once it is in place.

And finally there has been the cost of upgrades to the PMS application. While some of these costs, typically the PMS application version updates, have been provided to the hotel as part of their annual PMS software support fees, others are incremental expenses that the individual hotel has had to incur on their own.

The hotel owner/operator during this time had a variety of vendors with PMS product offerings to fulfill the requirements of his or her individual property’s needs. These offerings ranged from those that have been developed with scaled functionality for the smaller or limited-service hotels to full-function relatively complex systems for the large and full-service hotels. The challenge for chains with multiple brands and for hotel management companies with a variety of hotel brands and segment types in their portfolio has been to find a PMS solution that could be deployed across all their locations. As many have found, the unique requirements of full-service and limited-service hotels have made it impractical to deploy a common PMS solution throughout their organizations.

With the advent of web-based applications for a variety of business operations in general, hotel operators and technology vendors have been pursuing a means to leverage this new technology for the hotel industry. Hotel operators are driving this transition as they search for ways to reduce their capital costs and ongoing expenditures associated with the PMS solutions. Technology vendors are looking to meet these objectives for their existing customer base, and to expand their customer base to new hotels that previously could not fund the cost of PMS systems.

A new model: The ASP PMS

Application Service Providers (ASP) are not new by any means. They are, however, being applied to a wider spectrum of applications across all industries and internal networks. And the hospitality industry is no exception. In 1999, the ASP market totaled $1 billion. By 2004, the ASP market is expected to rocket to $25.3 billion.

The typical ASP model below depicts general principles of the relationships among the client, vendor and ASP. A software vendor will "lease" its software to a client or property that accesses the software via the Internet. Having software located on a server that is remotely located is called hosting. Often the vendor will outsource the hosting service to an Application Service Provider (ASP) who is primarily responsible for the server and database management. The ASP model has become widely used for a number of reasons, including cost, efficiency and convenience. More recently, however, the hospitality industry has begun to develop PMS’ that are created using the ASP model. Vendors refer to these PMS’ as web-based, or ASP PMS’. A PMS that is web-based is accessed via the Internet; however, the system does not have to be structured using an ASP. The server could be located within the hotel property or at a corporate operations facility and still be accessed via the Internet.

In contrast to the traditional local property implementation approach to PMS, the ASP model dictates that the file server and database are remotely located from the property. For instance, the PMS vendor, or a contracted third party ASP, hosts and maintains management and upkeep of the server and database. The property will access the software by using an Internet browser (usually MS Internet Explorer 5.0) to log onto the ASP’s web site. After obtaining authorization via a log-on name and password, the property has access to the functionality of a PMS. Reservations, check-ins, checkouts, posting and folio transactions are all processed through the web site.

Currently, many PMS vendors are opting to outsource the hosting function rather than provide the service themselves. Some ASP companies, called Vertical Application Service Providers (VASP), specialize in hosting hospitality applications. VASPs offer expertise for hosting and database management because that is their core competency. However, vendors are usually flexible and can adapt to the solutions that are best suited to a client’s needs. Many of the larger PMS vendors are developing their own ASP hosting capabilities, thereby providing their clients with an integrated, single source for their PMS system needs.

The majority of the leading PMS vendors have an ASP model product in beta testing or under development. Several vendors have ASP PMSs installed in a number of hotels. In these cases, vendors are "leasing" the software, providing upgrades and support and outsourcing the hosting to an ASP.

Vendors view the ASP model as the future of the PMS due to its many advantages. They expect it to revolutionize the way hotels and hotel companies view property management systems.

The ASP PMS model reduces the substantial initial capital investment for hardware, software, training and installation. Traditionally, PMS application software costs hotels an average of $150-$250 per room, plus the purchase or lease of the hardware to support the PMS at the property. With an ASP model, the costs for a hotel may be a T-1 line or other comparable high-speed Internet access, an initial software startup flat fee (around $200-$500), an annual support/upgrade fee (provided through the vendor) and any local property peripheral hardware requirements. It is not necessary for the property to have or invest in highly advanced computer hardware. The hardware need only be capable of connecting to the Internet at a speed the hotel deems reasonable. A major advantage is the elimination of the fileserver and its associated operating system costs, and the ability to utilize less costly client peripheral hardware configurations.

Another big advantage: easier installation. Today, most current PMS products require up to several weeks of on-site training. However, many web-based PMS vendors require no on-site installation. Training is conducted through web tutorials or with a computer-based training (CBT) model. Other vendors send trainers to the property, but only for a limited period of time that is typically no more than four days.

After the initial purchase, properties subscribe or rent the hosting service from the ASP vendor. The pricing structure is commonly a per-transaction fee resulting in a fee per checkout or per occupied room night. This fee is typically targeted at a level of $1.00 per transaction, often with a maximum daily total. Licensing fees and other software costs are eliminated since the vendor still maintains ownership of the software. The property is responsible for the on-site peripheral hardware equipment and Internet connection. However, some ASP providers will provide a turnkey solution with the peripheral equipment and Internet connection included. This can be advantageous as it can provide the property an opportunity to migrate to new technology as the leasing agreements for these components expire. If the property has purchased the on-site components, there is the tendency to try to extend the life cycle of the equipment, rather than invest in new technologies.

Alternative pricing models include a structure that is based only on revenue producing transactions so properties only pay on those transactions that produce revenue for the hotel. Another alternate is a flat monthly fee that is negotiated between the PMS vendor and the client property’s management. If the property exceeds forecasted occupancies for a particular month, there is no penalty fee owed to the PMS provider; instead the property would reduce the cost per room of operating the PMS for that month. Another advantage of the ASP model is that it reduces the need to have an IT department or have extensive knowledge of technology, networks and databases on property. The ASP PMS’ solutions currently being offered are targeted at small or limited-service hotels. This comes as welcome news in this segment that historically has not had the capital resources to fund IT departments or a high-end PMS. The transactional fee model and the significantly reduced hardware requirements of the ASP PMS gives smaller hotels the opportunity to have a PMS.

The ASP model also offers a new opportunity to a hotel chain or management company. By adopting an ASP PMS strategy, the hotel chain, or management company, at the corporate level can provide centralized hosting of the database and server thereby spreading these costs across multiple properties. This, in turn, can provide additional savings by reducing or eliminating the need for IT knowledge and capabilities at the property level. The consolidation of the properties’ data into a centralized database also provides corporate management the opportunity to deploy Customer Relationship Management (CRM) tools and extract customized reporting from the database to view enterprise-wide progress.

In the past, limited-service hotels or second-tier full-service hotels were limited to the quality of PMS by how much they could afford to invest in one. With ASP PMS, the model is changing, giving smaller hotels access to high-end PMS products. Leaders in PMS applications are hoping to gain market share and support fees from new clients that typically would not have purchased their systems in the past.

ASP models may allow a property to switch PMS software with relative ease and with less of a financial impact than they can with the current property-based generation of PMS solutions. New PMS products are being developed every year and the current products are continuously being improved. In the future, if a hotel is dissatisfied with their vendor or current PMS product, they will have a much lower cost associated with switching to another PMS provider or product. This gives the property more control over their PMS capabilities and business strategy and promotes healthy competition between vendors to create a superior product.

Finally, the ASP model will provide PMS vendors with the opportunity to control the distribution of software version updates. The current client/server products require that each individual property go through a software update process, but with the ASP model a single copy of the application will be able to support multiple properties. Therefore, instead of updating each individual property’s fileserver, only one fileserver needs be updated. This not only reduces update costs for the vendor and the hotel but insures a higher level of software support knowledge since there is the ability to control the number of software version levels in use at any time. This ability to maintain consistency in product version distribution will also allow the PMS vendors to make better utilization of their development resources, thereby accelerating the product development cycle to the benefit of the hotels.

The majority of PMS vendors view the ASP model as the future of PMS technology. However, there are many challenges to overcome before ASP PMS’ can be implemented in every hotel.

The most obvious hurdle for the ASP model is the issue of security. As a result of remotely hosting the property’s server and database, an certain amount of control is relinquished with regard to confidential and pertinent financial and guest data. Any loss or compromising of these assets represents a danger to a property’s information and has the potential to be devastating to the hotel. To combat security issues, PMS vendors often contract third-party providers for the hosting services. As opposed to traditional software vendors, ASPs have the infrastructure and procedures to provide a reliable and secure environment. Firewalls, data backup procedures, UPS’ and redundant hardware platforms are some of the methods used to address security threats and data access reliability.

Many hoteliers fear that if communication between the remote server and the property is severed, the web-based PMS will be non-functional. In some cases that would be true; however, vendors are devising a variety of methods to address failure of primary communication networks. These include alternate back-up communication networks that automatically activate when a failure is detected in the primary network, and/or having a partial copy of the current database resident on a basic server at the property. In the case of a communication failure, the property’s server will be able to provide real time data for a predetermined number of days, thereby insuring that the normal operation of the system continues uninterrupted for a reasonable period of time to restore the communication network. Vendors suggest that properties install two high-speed lines, preferably from separate providers, one for normal use and the other for backup.

For franchised properties, the potential of a hotel chain-provided ASP PMS system might erect new barriers to mobility with regard to brand affiliation. Since the PMS servers and database fall under the franchiser’s control, a decision to reflag a property may come with higher technology costs than today. Replacement of the PMS system will no longer be an option for the franchisee, but a necessity that must be addressed immediately upon rebranding. Additionally, the issue of ownership of guest data, current, future and historical, would need to be resolved.

Another disadvantage: the added layer of support infrastructure that a hotel needs to address in the service contracts with both the PMS vendor and the ASP vendor, if the ASP is a separate company. The hotel needs to clarify within the various contracts numerous requirements including, but not limited to, service level measurements, escalation procedures and responsibilities, service termination terms, and hardware and software upgrade rights and limitations.

The category of limited-service hotels includes the mid-priced segment without F&B, economy, and the budget segments. This category stands to initially benefit most from the emergence of web-based PMS and ASP model. With low startup fees and per-transaction cost, an ASP PMS is a more affordable and efficient way of conducting front office operations. While the same cost savings are applicable to mid-size and full-service properties, the first ASP PMS products to reach the marketplace are primarily scaled in functionality and performance to meet the requirements of the limited-service segment.

PMS vendors hope to capitalize on the growth of limited service properties. At present, the ASP model is the most efficient way to reach the segment due to the cost structure of acquiring PMS technology, either for the first-time buyer or for a property needing to upgrade or replace an existing PMS system.

As a result of the new technology and lack of experience with ASP products, vendors are opting for an ASP PMS that is limited in its functionality and less advanced than many of the current Unix or Windows-based PMS systems. The vendors’ first goal is to increase the efficiency of smaller hotels and prove that an ASP is indeed a technological breakthrough in PMS technology. In the future, vendors anticipate developing systems that are more robust and meet the functionality needs of full-service and larger properties.

There are a handful of vendors who are preparing their legacy systems to be transformed into ASP models. These systems will be full-function PMS’ and are anticipated for commercial launch within the next few months. In addition, there are functional back office systems as well with payroll, accounts receivable, general ledger and owners’ accounting incorporated in an ASP model.

A feature of particular interest, especially to hotel chains and management companies, of the ASP model is the ability to streamline the PMS application update process. Instead of needing to orchestrate a large update distribution program for each new version or bug fix release of the PMS product, the version update need only be applied at a single point on a centrally hosted system. The new revision or fix is then effective immediately. This advantage will also help reduce operational costs of supporting the ASP PMS for the PMS vendor and customer since manpower resources for distribution and installation across multiple sites will no longer be required. Help Desk activity should also be simplified as there will be only a single version of the product in the field to support.

As the ASP model for delivering technology to the property grows, the ASP model can be expected to incorporate a wide variety of functions that today are handled via both centralized and decentralized technologies. This can be expected to include back of the house functions such as payroll, human resource information systems (HRIS), general ledger and purchasing, and additional front of the house functions including sales & catering, point-of-sale, and activity scheduling. Automation and outsourcing of these functions will have a dramatic impact on hotel operations. For example, the shift to paperless HR and payroll functions would dramatically decrease the number of necessary man-hours to perform those functions. The ability to apply the ASP model to each of these functions will allow similar types of capital expenditures to be reduced at the property, while simultaneously insuring consistent technology is available to all users.

Historically, database structures have been stored within the application at the property level, restricting the ability to interface data in a central location. The ASP model would eliminate the need for these databases, enabling the integration of a company's data across multiple locations.

It appears that PMS vendors strongly support the ASP model. However, the web-based PMS is far from being widespread and may not be the complete solution for any property. It does, however, offer the opportunity for a paradigm shift in how the PMS requirements for the hotel industry can be delivered utilizing the Internet as a cost containment vehicle, and integrating with the wider trend of web-based technology services delivery.

Bruce Landes is an experienced manager in the Hospitality and Leisure Business Consulting Practice and is located in the Phoenix office. Shannon deWit is a consultant in the Hospitality and Leisure Business Consulting practice based in Los Angeles

Contact:

Josie Coombs
Managing Editor
Hotelbenchmark.com
josie.coombs@uk.arthurandersen.com

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