ADVICE FOR HOTEL OWNERS
How to weigh the pros, cons of choosing a third-party operator
The developer of a hotel must invariably choose whether to operate the hotel as well or to employ a third-party operator. Certainly, there are savings to be gained from a do-it-yourself approach; however, the time, energy, and complexity of hotel management should not be taken lightly.
In other asset types, the financial risk is transferred at a single point, such as in residential properties, or at specific points in medium- to long-term contracts in the case of offices. In contrast, a hotel asset returns the investment over time, requiring the management of multiple one-day contracts and the running of day-today operations with a vigilance unique to this asset type.
Inability to master the unique challenges of running a hotel could affect its cash flow and physical condition, and the overall financial success of the business. Below are several considerations that need to be taken into account when one is deciding whether to use an operator.
Global distribution and cost-effective management: The obvious benefit of engaging an operator is its experience, expertise and dedication to driving revenue while controlling costs for the benefit of the developer.
Depending on their size, operators bring the advantage of regional or global distribution systems, market-familiar brands and trademarks, awareness of the latest sales and marketing trends, and have the ability to tap pools of regional and global guests loyal to the brand. When paired with an appropriate owner-operator contract, professional management should in theory be incentivised to drive bottom-line cash flow.
Singular dedication to management: Operators are hired specifically to manage with their own brand equity at stake, which makes their commitment to the hotel even stronger. For a developer-operator, many competing priorities may potentially steal away time and dedication that hotel operation requires.
Self-operating developers can ill-afford to take a vacation and are the first people to get a call when things go awry. An operator will be able to free the owners from such distractions, allowing them to engage in other business endeavours.
Human resources pool: Branded operators will have the advantage of a vetted database of experienced candidates, particularly during times of staff turnover, to aid in lock-step replacement of management personnel. Owner-operated hotels have difficulty competing in this are.
In turn, hired management have access to underlying support staff with whom they have worked successfully in the past. This is a critical consideration as the time and energy required to manage turnover is a major concern that cannot be understated.
Further, regional and internationally branded operators will, in most cases, have the budget and incentive packages to draw and retain staff. Such packages may include stipends, travel and housing allowances, benefits afforded to staff members such as children’s schooling, and freeof-charge training programmes. These factors make it difficult for independent hotels to retain well-qualified staff over prolonged periods.
Development assistance: Operators will often offer paid guidance during the development phase if they are selected to operate the developer’s hotel, mutually benefiting both developer and operator by aligning the design to the brand.
Forms of assistance may include design guidance, technical assistance, pre-opening staffing and setup such as systems, collateral and amenities and, in certain cases, financial facilitation in terms of providing contacts to a set of banks the operator has previously worked with.
Bank financing: To limit financial risk, banks often prefer to offer credit to developers who will be selecting large and established operators, all else being equal. There are several reasons for this. First, operators generally have greater and deeper experience in managing hotels, minimising the risk of the business encountering difficulties.
Second, during the request-for-proposal (RFP) process, operators vet the property with their own feasibility studies for profitably, which serves as a second assurance check to a bank’s independent analyses. Most established brands have created good working relationships with the banks.
Does this mean that third-party hotel management is the way to go?
Even as there are many advantages to procuring a branded professional operator to manage a hotel development, it is important to “manage the manager” so that the developer can be assured that the operator is running the property as efficiently as possible and as agreed.
Nonetheless, from a savings standpoint, it may potentially be more cost-effective to selfrun a hotel; however, this has to be weighed against the investment in time and effort spent by the developer. The developer must be certain that he has the capability to manage all aspects of running a hotel while still having the time to effectively pursue other opportunities.
Among the things to consider when choosing an operator is that the brand agreement offers the developer less flexibility in operations, and the ability to sell without management attached is sometimes preferred by potential buyers.
Ultimately, it is advisable that the developer either has or can acquire appropriate experience in hotel management. A hotel developer must assess whether they have the time and commitment to run the hotel on their own and if they do choose that approach, they should start with a smaller property to gain experience.
Lastly, they should have a deep network of external hotel management personnel to shore up the workforce in the event of inevitable staff departures.
If a developer cannot or chooses not to meet these requirements, a professional third-party manager may be more suited to handle the hotel development.