Why Hotels Should Consider Outsourcing
By Derek Olsen Senior Vice President, CHMWarnick | October 2017
This article was co-authored by Sean Kreiman, Manager, CHMWarnick
As the industry sits at the top of the hotel cycle, one of increasing supply, rising labor costs, peak occupancy, marginal rate growth, and growing customer acquisition costs, hoteliers and asset managers need to evaluate all cost containment opportunities to improve profits and enhance asset values. As is evident when reviewing the large amount of expense attributable to the Contract Services lines in most hotel P&Ls, many hotels are already outsourcing various components of their operations, including public area cleaning, maintenance, pest control, and landscaping, to name a few. While these functions may be considered routine, there are more profitable (yet riskier) areas of the operation that can be outsourced, particularly those related to labor, which currently accounts for more than 50% of a hotel's total operating expenses.
Outsourcing by Department
The most profitable department in most hotels (typically between 70-80% of Revenue), has additional opportunity to enhance margins through the outsourcing of key functions including housekeeping, laundry, and reservations. However, this department also comes with the most challenge given the high-levels of guest interaction. A lack of control in this area of the operation can most adversely impact the entire operation. It is important to consider a hotel's market and positioning when considering making changes to any of these Rooms Department functions.
- Food and Beverage
As is evident in the select-service development trend, some investors have elected to eliminate the Food and Beverage function completely. However, if operated efficiently, strong Food and Beverage programming will induce demand, while contributing to the overall profitability of a hotel - just look at the trend of boutique, lifestyle hotels that feature multiple (oftentimes, concurrently operated) operations. While Cost of Goods Sold can be monitored and contained fairly easily through thoughtful menu engineering, labor is a challenge that requires savvy operators. Consequently, outsourcing specific aspects, or the entire operation itself, can be a profitable decision for Owners, who will still benefit from the induced demand that high-performing outlets can have on a hotel's ADR and overall operation.
Many of the functions included in this section of a hotel operation, such as golf, spa, and parking, come with tight margins, and are often considered "guest amenities" with operators resorting to running these departments as cost centers. This should not be the case as shrewd operators can hedge profitability by employing third-party managers for many of these functions. However, integrating the third-party into the operation, maintaining close communication, and continuously challenging these operators are key to achieving revenue and profit targets. It is important to understand that these operators are not always as sophisticated as hoteliers, who need to sell their complete inventory 365 days per year. Third-party operators should be met with quarterly (at a minimum) and asked to attend portions of annual budget meetings, and submit their plans for the following year. It is imperative that all assumptions be tested for reasonableness when relying on their figures for the overall budget.