Value Engineering Labor: Cost Management in a Growing Economy
By Mark Heymann Chairman & CEO, Unifocus | December 20, 2015
Gaining control over labor costs – the largest single recurring expense for hotels – is essential to a healthy bottom line. In 2014, labor costs accounted for 31.5 percent of total revenue and 44 percent of total expenses, according to PKF Hospitality Research. A look at labor hours versus occupancy in the same study shows that total hours worked rose less than one percent while occupancy grew three percent – a sign that hotel managers are indeed paying attention to controlling labor costs. Or are they?
One might conclude that the small increase in labor can be partially credited to lessons learned in the midst of the 2008 economic crisis, when hoteliers had no choice but to take a hard look at costs and make tough choices, and therefore cuts -- from lowering thermostats to closing down wings to adjusting service levels. But as rates and occupancy have rebounded, and salaries and payroll-related expenses continue to rise, it is still crucial that managers understand the real impact of a change in volume on the cost of doing business.
In certain cases, that impact on costs of volume increases is minimal. Take the example of a 150-room hotel that has been averaging 70 percent occupancy, or 105 occupied rooms per day. A three-percent increase in occupancy would mean three additional rooms a day – a volume that would require less than a one percent increase in labor and would therefore have very little impact on cost. This is because the majority of labor in the hotel industry, from front desk to public space cleaning staff, is variable but on a step function basis. In other words, modest increases in guest volume won't measurably affect the number of service hours that management must pay to have the work completed.
One function that would be affected is housekeeping, one of the few areas of a hotel in which there is a linear relationship between occupied rooms and labor hours needed, as each of those three additional rooms in the example will require cleaning. But cleaning three more rooms per day would only increase labor needs by about one to 1.5 hours – a minimal impact for a 150-room hotel. The effect might differ based on the size of the hotel, but this simple example shows that in many cases, it can be acceptable to maintain the same level of labor for a modest increase in occupancy.
Productivity and Volume
While on the surface the PKF information looks positive, hotel managers need to be vigilant about productivity as rates and occupancy rise. Generally, as volumes increase an organization will improve productivity. This is due to the step-function nature of many labor categories and the fact that most categories combine fixed and variable work. As volumes increase, the fixed work is spread over more units, thereby improving ratios. For example, say a department has 20 hours of fixed work and uses one quarter hour of work per volume unit. At 100 units, the hours would be 45 (20 fixed plus 25 variable) -- a ratio of .450 hours per unit. At a volume of 160 units, the hours needed would be 65, yielding a ratio of .406. Clearly, the department is more productive at the higher volume.