Owning and managing a successful and profitable hotel property is no small feat. Dozens of team members including investors, construction firms, furniture vendors, asset managers, property managers, operations staff and many other vendors come together to own and manage something that may not have previously existed.
Once the hotel is either built or purchased, and then forever, a large group of people—asset managers, property managers, operations directors, general managers, maintenance and engineering, marketing team, financial managers and more—come together to focus on the property’s ongoing operations—marketing, occupancy, guest satisfaction, experience and maintenance—as they should.
If you’re an investor or owner, your “revenue and net income language” is likely gross operating profit and net operating income. If you’re an operator, it is likely gross operating profit per available room and earnings before interest, taxes, depreciation and amortization. Either way, the focus is on the same things—revenue and net income.
Indirect Expenses
The property’s ongoing direct operating expenses that tie directly to net income include primarily maintenance, security, landscaping/groundskeeping, staff, housekeeping, customer and concierge services—all aspects of the hotel property that are visible and provide core value to its guests. Management keeps a close eye and ear on these regularly.
There are also many indirect expenses necessary to support the property that are often taken for granted by guests and staff alike and are thus not eyeballed as often by staff, including the property’s telecom and IT, utilities (electricity, gas, water/sewer), waste/recycling, leased copiers/printers, uniforms/linens (actually visible by guests, but often taken for granted), merchant processing, as well as property tax and insurance.
The ongoing management of these hotel properties exerts constant pressure on their owners and operators—marketing, occupancy, guest satisfaction, competition, maintenance, staffing, changing regulations and broader global and local economic forces. As these pressures mount, ownership groups often respond by seeking creative ways to reduce costs and increase margins—such as reducing room amenities (coffee, bottled water, Wi-Fi), decreasing housekeeping frequencies, installing automated staff-less check-in systems, negotiating better pricing for maintenance, property management, HVAC, beds, televisions, furniture as well as hiring less-experienced (i.e., lower-cost) staff and, of course, raising room rates.
With eyes on these visible expenses, hoteliers may pay less attention to those below-the-line but necessary indirect expenses. Management often assumes that the prices and bills provided by vendors and tax assessors are “fixed,” the final word, and cannot be negotiated. The truth is, though, with few exceptions, almost all these expenses are negotiable.
Managing the balance between the risk of being understaffed and increasing net income is the operator’s secret recipe. Taking an extra look at these indirect expenses, however, can often yield a hidden increase in net income without affecting staffing or customer experience.
Smart Negotiations
Smart guests attempt to identify the best room rates via Expedia, Hotels.com, Kayak and others as well as through the hotel’s rewards program. Smart hotel owners and operators should do the same with their “fixed cost” indirect vendors too, but most operators simply accept the quoted rates from their vendors as the final word on price and terms, except for perhaps property tax. Some operators, as hesitant as they may be, might attempt to negotiate the rates offered by their vendors and be quite satisfied to negotiate a 5 to 10 percent discount.
But that is actually what every operator should do—ask for lower rates, perhaps in exchange for longer terms or in exchange for not switching to their competitor. The worst that will happen is that the vendor will say no and the operator is back to where they left off. In many cases though, they will get better rates—5 percent or more discounts—in line with what an operator might achieve through ordinary negotiations.
When negotiating directly with utility vendors, the electricity or gas utility company may not move on rates as easily, especially if it operates in a regulated energy state—but then again, the default tariff selected by the utility company may be an expensive “green” option but it may also have multiple, less expensive “brown” and/or less-green options. If the hotel operates in a deregulated energy state, there may be less expensive energy suppliers to choose from.
Waste and recycling services are almost always negotiable—by as much as 30 to 40 percent or more, unless the property is in a franchised (closed) market, but how would the operator know unless they knew to ask? And what are they going to do about open-market waste negotiations? Negotiate what to where? In closed-markets, the initial reaction is that the rates are the rates are the rates.
While this is mostly true, their property might be getting over-serviced, or might have the wrong bin size for their property or the wrong pickup schedule—providing invoices with cryptic language the average human cannot easily decipher. Over-zealous waste collection vendors contracted with their local municipality are not incentivized to optimize their waste service or make their invoices easier to read. They get compensated by the haul—perhaps more hauls than are needed.
Here is a recent example from an actual waste haul invoice:
30 CY COMPACTOR E & L-PKR 1.00 636.61
30 CY COMP. TIPPING FEE 3.28 59.70 195.82
What this actually says is that their 30 cubic yard compactor base haul fee is $636.61 and that there are 3.28 yards of waste in the compactor at $59.70 per yard. This compactor was picked up at only 11 percent capacity, multiple times per month—which resulted in over-servicing, costing the operator and owner more than necessary—almost each and every month—by almost $10,000 per year.
Telecom vendors are happy to charge the highest prices they can to unwitting customers. Furthermore, the rate tariffs and regulations that govern telecom providers are confusing enough that neither the client nor, in many cases, the vendor fully understands. This results in errors and overcharges that can add up to as much as 5 percent or more with clients being eligible for refunds more than 25 percent of the time.
Studies have shown that typical business IT spend averages 20 to 50 times that of their telecom spend. Why is that? Unbeknownst to the CIO, prices creep and there can be massive “shadow spend” through duplicate software licenses, unused licenses and unsanctioned software spend. Average savings via consolidation and license and terms renegotiation can often recapture as much as 30 percent or more of this overspend.
Is the hotel leasing or did it purchase its copiers? What about the maintenance package it purchased with the copiers? Does it include toner, parts and labor? For how long? Did management run a request for proposal or just make two phone calls to two copier resellers in town? How does this price compare to the copier vendor’s cost? A hotel group with 10 locations likely has three or more copiers per location or 30 total copiers—possibly spending as much as $700,000 over five years for those copiers. It is deceiving at only $1,166 per month per location, but it adds up quickly. A mere 20 percent reduction in price, closer to the vendor’s cost, would save the group $140,000 or more.
Nearly all of the hotel’s revenue comes through merchant credit card processing—rooms, dining, business meetings—with a mix between personal credit cards and business credit cards—transacted either at point of sale (card-present) or via a partner website or over the phone (card-not-present). But did you know that business credit card and card-not-present transactions may be subject to increased processing fees? A hotel group probably thinks it has the best merchant processing fees available—it may or may not—but how do these fees compare to the hotel up the street?
What merchant processing rate is the hotel charged for its business clients for large event rooms or for meetings or dining? Isn’t it the same rate as their consumers’ rate? Probably not. Do these business client charges affect their consumer purchase rate? Probably so. Does the average hotel even know how much its total monthly credit card fee is or is that even well-listed on its merchant processing invoices? Probably not.
You would think that with so many beds and linens used each day, a hotel operator would have experience with negotiating the best rates on their leased linens, but studies show that despite this experience, nearly all of these hotels are overpaying for their uniforms and linens by nearly 30 percent or more. A recent conversation with a 23-location hotel group exposed the fact to them—both their COO and CFO—that neither of them knew how many uniform/linen vendors they used or what their annual expense was for their uniforms and linens. It was all managed separately at each location without the benefit of a master service agreement with negotiated best pricing and terms for the group.
The property and casualty insurance for the property, while probably at the proper coverage levels, might be over-billed. Insurance companies are in the business of making money for their investors rather than providing their clients with inexpensive coverage. Most insurance brokers also probably earn more money by selling more coverage—as a percentage of premiums, but what if operators negotiated these rates down and brokers were incentivized to save their clients money rather than to sell expensive insurance?
Property tax is based on a percentage of an ever-increasing assessment of the local municipality’s [biased] value of the property. Many times, hotel ownership groups and their operators lack the understanding that the underlying assessed values may be appealed, thus lowering the tax liability, but they lack staff with skills and understanding to take on the appeal, or they ask their business attorney to handle the appeal. That’s a good start, but does staff or the attorney have the deep comps (comparables) and assessment experience to file such an appeal, and will it be accurate? Likely not, thus leaving more money on the table.
Finding Solutions
The rub here is that hotel operators likely do not have anyone on staff who is an expert in telecom, IT, utilities, waste, uniforms/linens, leased copiers, insurance or property tax negotiations—to say nothing of the amount of time their team does not have available for this task.
No doubt they know the bond rating for their insurance company and the names of their insurance broker’s children, but do they know what percent of their premium their broker is earning for a few minutes of work each year on an inflated policy? How much does it cost their waste vendor to haul their waste? How many different electricity rates are available for their property? Are they overpaying by 30 percent on their uniforms and 500-thread count linens, 20 percent or more on the copiers and do they even know what they are paying for all of their telecom components and IT software?
Who remembers their cost accounting class from their MBA program? Business success stems from knowing and managing costs. The same is true for waste pickups and the rest. A hotel’s waste vendor may be charging them $1,500 per month for each of their 10 locations. That's a bargain compared to hauling the waste themselves, but what is that hotel across the street being charged for basically the same service? Is $1,200 a fair number? How about $400? How much are they paying for their insurance? They should go ahead and ask for price reductions. They may get some. They may not. Even if they do get a price reduction, their prices may start to creep back up without them even realizing it—regardless of what their contract says.
By now, you may be thinking that the returns are not worth the investment—and you may be right if you do it all yourself.
Who does your accounting, files your taxes, represents you in court, runs your social media? It’s likely a financial analyst, a tax preparer, an attorney and a social media agency—all experts in their fields and able to perform the required work effectively and efficiently. The same is true for these indirect vendor overcharges.
Hotel operators may at times be hesitant to engage outside consultants, often believing they have the necessary expertise to negotiate vendor contracts or feeling concerned about how such collaboration may reflect on their current vendor agreements. In truth, most hotel operators are doing an exceptional job with the resources and information available to them. However, it’s not reasonable to expect them to have the same specialized insights as a dedicated cost reduction consultant.
For example, dedicated cost reduction consultants often: a) have spent over a decade working within specific vendor categories; b) are deeply familiar with which contractual details have the most financial impact; c) are skilled and experienced in forensic audits; d) maintain robust benchmarking data to evaluate costs; and e) operate with direct financial incentives to drive cost savings.
Some operators take advantage of one of several hotel group purchasing organizations. Certainly, this sounds like a great idea. The GPO vets the various service vendors in the area for quality and service level and negotiates a discounted rate for the hotel—or do they really? Participation terms with a GPO vary, with some requiring a membership fee to join—flat or a percentage of spend. Other GPOs offer free membership to their hotel members and get compensated on the back end by the vendors based on the volume of goods and services purchased by hotel membership. So, when considering membership fees or the vendor’s rate padding necessary to compensate the GPO, are either of these models really all that much less expensive than going to the vendor directly and negotiating the 5 percent already mentioned? Certainly, but it is probably not the bargain you might expect.
By the Numbers
Let’s now do some math. If each of a hotel group’s properties is spending $20,000 per month on telecom, IT, utilities, waste, uniforms/linens, copiers and printers, insurance and property tax (it’s probably much more)—or $240,000 per year, negotiating with its vendors and municipality might save the property perhaps 5 percent, which equates to $12,000 per year saved. If the group has 10 properties, that is $120,000 cash straight to its bottom line.
The savings, while modest, matter very much.
There may still be considerably more money being left on the table, however. Money that should be yours. Considering finding yourself a cost reduction consultant with expertise in these industries—telecom, IT, utilities, waste, uniforms/linens, copiers/printers, insurance, property tax and more. The consultant will work on your behalf to perform forensic audits of your invoices, to renegotiate rates, terms and conditions in your favor and will work to reduce your vendors’ rates 10 percent, 20 percent, 30 percent and sometimes as much as 75 percent from where they were.
The most experienced cost reduction firms are able to achieve 30-40 percent average cost reduction across a business's indirect vendor spends—for as many as 95 percent of their clients. Further, the industry standard fee structure is a contingency fee. Their fees are contingent upon finding savings. There is no fee if they cannot reduce the spends with your current vendors and they share in the savings found if they do. There really is no risk, no service interruption, nor burden on your staff.
Is your hotel one of the 5 percent that has all its vendor rates at cost-level or are even some of your vendor rates in the 95 percent part of the market that are overcharged?
Let’s go back to that example from before of the hotel spending $20,000 per month or $240,000 per year on this group of expenses. A 30 percent reduction results in a $72,000 annual increase in net income for that location and perhaps a $720,000 increase for a group of 10 hotel properties—every year—all without a change of service quality, pickup schedule, insurance bond rating or broker.
Now, the savings achieved by a specialized cost reduction effort is dramatically larger. How many rooms would need to be booked to increase your hotel group’s net margin by $720,000? Probably more than is even possible.
The direct impact on valuation is the game changer. That $720,000 annual increase in net margin for the 10-property portfolio at a mere 10x valuation multiple makes the portfolio valuation increase by $7.2 million—all for a one-time cost reduction effort.
Stop overpaying. Every day you delay is money left on the table. Partner with a cost reduction expert to uncover and recover 30 to 40 percent in indirect vendor overspend—and put that money back where it belongs — your bottom line.
Larry Levine is with P3 Cost Analysts and brings more than 35 years of experience across technology, home care and cost-reduction consulting. His background spans leadership roles at major technology companies, ownership of a home care business and operation of a cost-reduction consultancy serving clients nationwide. Working with organizations ranging from small businesses to Fortune 100 companies, he helps clients identify cost-saving opportunities, improve profitability and develop strategies for long-term growth across industries including hospitality, restaurants, healthcare, manufacturing, automotive and real estate.