Mr. Miller

Revenue Management

Prevent Major Losses in Your Minor Operating Departments

By Joshua Miller, Principal, Niche Advisors

The core focus of most hotels is the sales of rooms and food and beverage. These two areas are where the majority of hotel revenue comes from, and thus where the management team places its emphasis. Strategic planning, revenue management, capital projects, and most importantly managerial staffing levels are all set up to oversee these areas so that their performance is maximized. However; nearly all hotels run other "small businesses" within their properties. These minor operating departments rarely get the same level of strategic oversight and as a result, there are nearly always opportunities to make financial improvements. These improvements can be large or small in terms of overall property EBIDTA, but as a percentage of sales or profit, they are nearly always significant.

Most hotel management principles focus on enhancing revenue and improving efficiency. An assumption that many hoteliers make inaccurately is that all of the revenue they earn actually makes it to the P&L. Most hotels experience revenue slippage due to problems with error and theft. In the major divisions, revenue control practices are put in place to safeguard against these issues. As an example of error prevention, every front desk goes through a nightly process of verifying that all guests are going to be charged the correct rate. Imagine the repercussions if a Front Office Manager did not follow through on this process and agents inadvertently deleted or modified the rate of a guest or group of guests. At one hotel we worked with, the reservations department entered a group's rate as $22.50 instead of $225.00. The group was pre-registered so that they could issue keys at their registration area. As a result, no one saw the rate error initially. If there was no reconciliation process in place, this 100 room group could have been charged $2,250 instead of $22,500 per night.

Revenue control practices are also used to prevent theft in operations which collect cash. The most common application for these principles in the traditional hotel environment is in the hotel's bar. In the past, bartenders could easily reuse manual checks for common drinks to provide the customer a seamless transaction while simultaneously embezzling the revenue. Modern point of sale technologies make this more difficult, but bartenders can still reuse receipts from customers who don't ask for them, or simply fail to ring the transaction up at all. This is why nearly all hotels have extensive controls on the distribution of liquor bottles and why inventory is taken regularly.

Other areas of the hotel which are not part of the hotel's core duties do not get this same attention. Consider the example of a hotel's parking operation. For those hotels which charge for parking, revenues can vary from as low as several hundred thousand to as much as $5-10 million depending on the size and scope of the property, market conditions, etc. Because hoteliers are not typically interested in managing parking, these operations are often outsourced to professional management companies. However, our experience is that despite their expertise, these companies do not always ensure revenue capture either. It is common for us to find anywhere from 10% to as much as 50% or more of parking revenue go uncollected or stolen, even under the management of a professional parking company. Imagine if the same Front Office Manager from above had to notify the GM that they failed to charge 25% of the customers in the hotel for their room. While this seems outrageous, it is common in parking. For one client we worked with, we automated their self parking facility and implemented tight revenue controls on the valet operation and within two years, improved revenue from $2.3 million to $3.4 million, a 50% improvement.

The communications/telecom/PBX department is another entity that often gets overlooked. Since the advent of cell phones, telephone revenues have been steadily decreasing, often resulting in the department operating at a loss. However; just because this trend continues does not mean that revenue controls are not critical. We worked with a property that had a policy of authorizing front desk agents to adjust off up to ten dollars in phone calls at any point if they needed to resolve a complaint. After an audit, we discovered that the vast majority of these rebates were coming from the same agent and ultimately determined that she had been making adjustments on every cash-paying customer who used the phones. In addition to theft, we often find leakage in the posting and collection of high speed internet fees and phone set up fees for meeting rooms. Many hotels are now beginning to offer this service for free, but for those which do not, there is often a major disconnect between the Conference Manager speaking with the client, the technician doing the work, and the accounting department doing the billing. This is especially true of last minute changes.

Another area we often find issues with is any outsourced or leased minor operating department, or the oversight of any other outside contracts in general. Many hotels lease or otherwise outsource the management of their gift shop, business center, in room entertainment, public area cleaning, security, etc. While large hotels might have a leasing manager or at least someone in an accounting department which directly oversees these leases, smaller hotels do not have such oversight and many of the non-revenue agreements are left to the operating managers in their respective departments. These managers are rarely involved in the contract negotiation and therefore rarely educated in the contract terms. Most operating managers never even see a copy of the agreement.

This can lead to many revenue or expense control issues. On the revenue generating contracts, the most common example is in regards to incentive rent. Consider a gift shop or business center lease which includes additional percentage rent to be paid after reaching a certain revenue threshold. Too often, we see these leases made on a long term basis and then not reviewed for many years. At the beginning of the lease, the incentive threshold seems high, but over time as prices and volume increases, the threshold becomes more attainable. Turnover occurs and no one remembers the extra rent. We have walked into scenarios where the vendor is required to pay tens of thousands of dollars in back rent as a result of no one keeping track. For small operators such as gift shops, this is not always something they can afford to pay, causing termination and other legal repercussions.

On the non-revenue generating outsourcing agreements, it is crucial that someone is managing these relationships to ensure the hotel is getting the full value of its fee payments. A common example in this area is in the execution of public area cleaning agreements. Many hotels outsource this function, so that the vendor brings overnight staff to clean all of the areas which the hotel's housekeeping staff does not service during the day. These agreements are usually arranged by an Executive Housekeeper or Rooms Division Manager based on anticipated cleaning needs and the number of shifts which need to be staffed accordingly. Often the fees for these agreements are set on a flat monthly amount or else a man hour rate which is marked up to provide the vendor's profit. In either case, it is crucial that the hotel is getting the full staffing that it paid for. We have found numerous properties which might contract for eight people to work per night when only four are actually staffed. Since no one ever sees these people besides the overnight team who is unaware of the contract number, no one would ever know. Perhaps the hotel only needs four shifts, but in this case, they should only be paying for four.

These are just some examples of how revenue control in the minor operating departments. What should be done about it? If you have income auditors on staff in your accounting department, send them out to meet with your operations team to look for gaps in the control system. Make sure these meetings focus not only on theft, but on error. We often find that while much less controversial, the dollar amount of loss is usually much larger on posting error issues. As a GM, you will need to foster these meetings to ensure that the operating team does not see it as a "witch hunt," but rather an opportunity for all parties to increase income. If you have a corporate internal audit team, reach out to them and encourage discussions on the minor departments for their next visit. You can avoid a bad audit if you bring an issue to light in advance rather than waiting for it to be discovered. If you are not able to identify improvements on your own, consider retaining an expert who can do so through a property wide review. These consultants are usually successful and are often willing to work on an impact basis.

Joshua Miller is Principal and Managing Director of Niche Advisors, a consulting firm specializing in ancillary areas of the industry. Mr. Miller has completed hundreds of assignments for hotels and resorts of all brands, service levels, and market segments. Mr. Miller developed his acumen at Mirage Casino Resort, Hyatt Hotels and Destination Hotels. Mr. Miller was the Rooms Executive for the Hotel del Coronado where he increased parking revenue by 50% in an 18 month period without the benefit of new technology. Mr. Miller earned a BS from Cornell's School of Hotel Administration. Mr. Miller can be contacted at 619-254-4245 or joshua.miller@nicheadvisors.com Extended Bio...

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