Hotel matters - Issue No 4 - November 2007

© The Hotel Solutions Partnership Ltd 2007

Contents

Are management agreements encumbrances?
Risk assessment
Pride – a deadly sin for leaders?
The guest is tomorrow's interior designer
On average

Are management agreements encumbrances?

Contributed by legal associate Douglas Wignall

Hotel owners negotiating management agreements will invariably find a provision in the operator's standard form of management agreement restricting the sale of the hotel unless the management agreement is also transferred to the purchaser. This means that the owner cannot sell his property unencumbered or with vacant possession.

Prior to agreeing such a provision, owners should consider the effects of this both on the marketability of the hotel and also its value.

In many countries, this restriction can be registered on the title document of the hotel. The main implications of this restriction are as follows.

• It is unlikely that the hotel will be bought by a competitor of the operator. Once upon a time it was clear who competitors are and will be but with the recent metamorphosis of e.g. Blackstone from the industry's favourite investor to a competitor, can anyone with any certainty anticipate what companies will be the competitors of the brand at the moment in the future that the hotel is to be sold.
• The hotel will not be bought by a purchaser who wishes to change the use of the property e.g. for residential use or as a hospital since this will also trigger a higher exit expectation from the seller who will be burdened with a penalty charge payable to the operator.

Location is frequently a key factor in considering the importance of this restriction. If, for example, the hotel is located in developing country, a restriction on the sale of the hotel unencumbered is likely to be less significant. Indeed, the attachment of a brand to the hotel may well add value to it, particularly if there are few branded hotels in the locality. If, however, the hotel is located in the centre of a large international city, the encumbrance of a management agreement is far more likely to be a liability to a seller.

Most operators will be prepared to negotiate on this issue but the extent to which an operator will be prepared to compromise will, as usual, depend on the negotiating strength of the owner. Most international operators are unlikely to allow owners to sell the hotel free of the management agreement during the operating term without compensation to the operator and, typically, the compensation is a multiple of the management fees received by the operator for the previous year with the multiple decreasing as the residue of the operating term decreases.

Hotel owners should consider whether a long-term management agreement is likely to add value to their hotels. If not, negotiate a right of sale unencumbered. Hotel operators should consider whether seeking such a charge on the owner is in the interests of the brand in respect of the owner / developer concerned and /or in the location under consideration.

Risk assessment

Contributed by principal Ian Graham

Whether you are at the point of lending funds to a senior vice president who is developing a mixed-use facility including a branded hotel, considering launching one of your hotel brands in an emerging economy such as Brazil, proposing to develop a spa in your hotel in Brighton, evaluating your hotel management company's proposals for the deployment of capital from the replacement reserve relating to an airport hotel in Greece, you will be taking account of risk.

Some risks arise from the external environment, others arise internally from the business itself and the business model adopted. Whether driven internally or externally, the nature of risk can be strategic, financial, operational or hazard.

Looking only at hazard risk assessment, one thinks of risks that arise from natural events, misuse of intellectual property, suppliers, environment, contracts, fire and life safety, and hygiene.

In the first place, one needs to identify the risks – anything that can cause harm. And then consider the risk; the chance high or low, that someone can be harmed by this hazard together with an assessment of how serious such harm could be. When you work in a hotel all day, sometimes it's easy to overlook some hazards. There is nothing that beats walking the property to look and assess what can reasonably be expected to happen. Employees have a role to play in supplementing this assessment with their own experiences and thoughts. Look into the night manager's log book and the engineer's work logs to see what has happened to the plant that you may not be aware of. Remember to think about long-term risk as well as more immediate safety hazards.

Having identified the hazards, you need to evaluate who might be harmed and how. You don't need to identify people but you do need to identify groups of people (staff, customers, suppliers, neighbours, sub-contractors, shareholders, etc.). Next in a hazard risk assessment comes the evaluation of risks and the determination of the precautions to be taken. You can never prevent all risk so the goal must be to install reasonably practical solutions. Look at what you are already doing to reduce risk, what controls you have in place and how processes are organised. Best practice and benchmarking internally and externally are good sources of ideas as to how to proceed.

Ask yourself if you can get rid of the hazard risk completely. If not, how can you control the risk so that harm is unlikely. When controlling risk, try a less risky option, prevent access to the risk, organise processes to reduce exposure to the risk, issue protective equipment, provide welfare facilities. It need not cost a lot.

Now write down what you have done. Demonstrate that you have made a proper check, asked who might be affected, dealt with the significant hazards, implemented reasonable precautions and left residual risk low, and involved your staff.

Finally, come back to the matter regularly. Business and risk do not stand still. Beware of risks that bite back.

Pride – a deadly sin for leaders?

Contributed by lead associate Rosemary Jackson

Pride, and excessive belief in one's own abilities, is traditionally thought of as the first of the seven deadly sins. And in business it can be VERY destructive. Excessive pride risks disregarding the competitor, the product, the shareholders - and, in particular, the customer.

British Airways prided itself on being the 'world's favourite airline'. Pride got in the way of BA understanding the new customer propositions offered by Ryanair and Easyjet, both of which are very valuable businesses.

According to the Concise Oxford Dictionary, 'proud' comes from the late Old English word 'prud', which probably derived from the Old French 'prude' meaning brave/valiant (11th century).

The line is fine between someone being brave, valiant and being arrogant. Many of us will know the phrase 'pride goes before a fall' as a paraphrase of a passage from the book of Proverbs, in the Hebrew and Christian Bible, but the concept is repeated in all the world's major religions. In Hinduism, Ravana, an evil king who was killed by Rama, avatar of Vishnu, exhibited the sins of pride and lust. In Islam, arrogance is also forbidden; Muhammad said: "He in whose heart there is as much as a grain of arrogance will not enter paradise". In Taoism, pride and greed are human errors.

So how do effective business leaders use pride positively?

The first thing is to articulate a vision for the business that allows followers to be proud to stake their futures to a goal that is congruent with their own goals. Clive Woodward said that England won the Rugby World Cup in 2003 because the team – the team on the field, on the side of the field and even the lawyers and other back office team members – did a hundred things one per cent better than everyone else. Woodward had set the highest of goals and the team had staked their individual futures to a goal which together they achieved.

Effective leaders believe in themselves and in the attainment of their vision. They are self-confident and this confidence is born of pride of a positive not negative flavour. Gandhi was brave, valiant and ultimately self-sacrificing in his vision of an equal society; this vision provided the moral underpinning for the non-violent behaviour and actions of his many followers.

Richard Branson is visibly proud of the business he runs and of its people. In his many and varied daring PR stunts, he shows courage; in his business relationships with BA, he has positioned himself as valiant David taking on Goliath. People can associate with him and, therefore, support his stand. As a business leader, he aligns himself with his staff and, as a result, they are willing to follow his vision and leadership. He has always said publicly that, if you treat staff well, customers will be well taken care of, so his commitment to his people is evident. Almost the first thing he did after the recent Cumbria train crash was to thank the driver of the train for his bravery.

Prêt-à-Manger team members are proud of every element of the experience they provide their customers because, in large part, their company leaders are proud to lead what at one level is a simple sandwich-making business.

So pride is not necessarily a deadly sin of leadership; the most highly-effective leaders proudly reach out to people through their vision, their humanity and their courage to take on almost impossible challenges.

The guest is tomorrow's interior designer

Contributed by lead associate Mike Wrigley

If modern man is defined by anything, it is by his use – or some would say abuse - of technology. As hotel guests, business and leisure travellers alike come to us with ever-increasing expectations, it is difficult for hoteliers to know how to react or, indeed, what to provide.

So it is useful to have emerging technologies, applicable to the guestroom, showcased in one place – first at HITEC organised by HFTP (Hospitality and Finance Technology Professionals) in Orlando and later at the BAHA (British Association of Hospitality Accountants) conference and exhibition in London.

The 'Guestroom 2010' project is in its second year. The experiences and exposures permitted technologists and others to escape the day-to-day core demands of front- and back-office systems, telecoms, infrastructure, connectivity, etc., to reflect upon what some of the technologies on display might preface strategically.

'Guestroom 2010' demonstrates a different approach to the living areas compared with today's hotel rooms. Reflecting the concerns of frequent travellers whose private bathroom space is 'invaded' by passing hotel staff such as bellboys and room service, a new design features a bathroom at the back of the room. So-called 'privacy glass' creates an exterior window which changes from a clear to a cloudy translucent barrier in just 100 milliseconds at the touch of a switch by the guest. This technology alone allows interior designers of bedrooms a completely new freedom. Add to this a technology that enables guests to choose their own digitised art work at the touch of a button and the interior designer that is latent in each guest is released.

Some of the more interesting products include the use of robots and RFID (radio frequency identification). We've seen robots in use for a decade or more in manufacturing. Now we are beginning to see robots designed for use in hotels hotels to sweep, wash and dry floors - and even vacuuming around furniture, along walls and avoiding the stairs. RFID is used in one product to alert room service of empty food trays in the hallway. Isn't it one of the worst experiences to walk past the remains of other guests' meals in the corridor on the way to your room? RFID is also harnessed in the latest generation of door-locking systems to allow remote check-in/proximity access using encrypted SMS messages to mobile phones.

The buzz nowadays is that a hotel stay is an experience rather than simply a selection of products and services. I wasn't surprised to see included in 'Guestroom 2010' a projector that allows in-room movies to be projected to a scale of a large-screen home theatre, together with digital audio systems that allow iPod music playback, AM/FM radio and video all in a true surround-sound environment - and all within a guest's bedroom.

Now we see technology offering the opportunity for an enriched guest-room experience. Perhaps, though, the trick is not to get carried away with the pizzazz of it all.

We must not lose sight of the guest's 'quality of service' reality which includes:

• thriving on being recognised and greeted by hotel staff much more than a welcome message on the IP phone
• preferring helpful order takers and timely delivery of room service rather than a 'work out how to order it yourself from the TV or phone' approach
• a loathing of prohibitive charges for WiFi access (isn't WiFi a reliable, cheap utility in your home?)
• being irritated by a slow, understaffed and curt checkout

Any of the above will undo the 'wow' factors that many of the latest technological innovations provide.

For more information, visit www.guestroom2010.org or www.hitec.org

On average

Contributed by principal Ian Graham

Isn't it odd that, in this industry, key performance indicators are AVERAGE occupancy, AVERAGE room rate, AVERAGE RevPAR? After all, with the average human having slightly less than two legs (think about it!), we all know the limitations of using average as a general descriptor.

So why do we pay homage to the surveys that tell us average occupancy in this market is 70%, that average rate in that city is €100, that average GOP is 35%?

If we wish to avoid falling into the majority of the non-thinking, we need to recognise what the average is, and what it is not.

Take these three hotels, all trading at 70% average occupancy.

Hotel	Monday	Tuesday	Wednesday	Thursday	Friday	Saturday	Sunday
Hotel A	60%	90%	95%	95%	60%	50%	40%
Hotel B	65%	55%	55%	60%	65%	95%	95%
Hotel C	70%	70%	70%	70%	70%	70%	70%

The use of average may be a useful tool in some circumstances, but it can be downright misleading in many cases. We can't tell which of these three hotels is performing best, but we can tell they are different, and the use of an average occupancy, as used by most internal and external analysts, will disguise the differences. And, in hiding these differences, neither internal management nor external analysts will be informed - far less the business's executive team charged with improving occupancy levels from a host of different and competing channels and markets, some branded some unbranded.

Take another example – we are told the average guest takes breakfast. Great. In fact, breakfast is taken in this hotel by about 60% of guests. So the problem is that a large minority do not take breakfast and the dashboard may not reveal this opportunity / failure. If our data is restricted to averages, we risk failing to ask what can be done to market and sell the breakfast offer to the current group of non-breakfasting guests and what can be done to up-sell the breakfast experience to those currently buying into the offer.

We know of course that average is not the same as mean. The mean ('mu' in statistics) is the midpoint in a distribution of results. What we need to start to understand is the 'spread-outness' of the results in a statistical distribution. This is called standard deviation ('sigma'). Together, mu and sigma are the two characteristics of a normal distribution. Very little of the data read day in, day out, by internal or external hotel analysts uses even such relatively simplistic approaches to statistical analysis.

If nothing else, remember there is no such person as the average guest. Nor, we suggest, is there such a thing as an average hotel consultant.