Management companies oversee a hotel’s day-to-day operations, from staffing and HR, providing technological solutions and marketing to risk management and more. A growing number of hotels work with third-party management companies, particularly in the franchise space, but more owner-operators in the independent and economy spaces are seeing the value of this kind of partnership—and a partnership is what it should be, ideally.
Benefits of a Third-Party Management Partnership
Virtually every management company and owner will agree that the relationship should be a balanced partnership. “If it’s just transactional, it’s hard to see that yielding the results for either party. We’re in the trenches together with owners at the end of the day. If it’s not a partnership, if not an alignment of interests and objectives, it is hard to see a path to success,” said Jason Rabidoux, Davidson Hospitality Group’s executive vice president - acquisitions and business development.
He added that management companies have the ability to bring things to the table that are cost-prohibitive for owners to do on their own, from procurement to resources. “I distill it into three pillars: we’re serving our guests, serving and supporting team members, and creating investment value for owners,” he said.
“The overall benefit of hiring a hotel management company is you are typically working with experts in the field; this is what they do every day. They are typically going to see higher levels from a financial perspective; better guest service skills, which translates directly to revenue performance; and an advocate/liaison with the brand to help with brand compliance,” said Liz Dahlager, COO and partner with Mereté Hotel Management, a full-service management company.
“We certainly do see the ownership-manager relationship as a partnership, but with checks and balances,” said Timothy Hodes, managing director at Wheelock Street Capital, a real estate investment firm, whose company works with HEI Hotels. “Going through the process of not only engaging the best qualified manager for your assets but also aligning economic interest ensures the right balance and has proven itself very successful for us as the investor."
Aligning Objectives and Growth Strategies
With a sea of options in the third-party management space, it may be difficult to wade through them all and choose the one that best aligns with the owner’s and manager’s goals and vision for the property.
“There are two important ways to validate a management company’s capabilities: first, through a review of their track record in executing similar business plans, and second, by seeking references from ownership groups with previous experience on similar assets,” said Clark Hanrattie, partner, HEI Hotels and Resorts.
When looking for a company, Hodes said that the most important criteria were not only proven ability, along with the tools and resources to manage like kind hotels, but “…. a clear understanding and appreciation for our objective and business plan to maximize the return on our investment. We look for managers who also think like owners and understand the importance of not only top-line growth and guest satisfaction but also bottom-line profitability.”
One good way to start the process is geographically. “We like to encourage owners to look at market knowledge and proximity to the asset, which has to do with them being on site as often as possible,” said Dahlager.
Proximity was the first criteria for Bruce Hanna when he was looking for a management company, ultimately choosing nearby Mereté Hotel Management, but no means the only one. Hanna, who owns a small development company in Oregon with his sisters, built a Hampton Inn in Roseburg, becoming a franchisee of Hilton. Although the family had been involved in many business industries, including having operated an independent hotel brand, they knew that they needed to find a third-party management company with the requisite experience and one with a strong reputation.
“We wanted someone that cares about employees, that could promote and uplift employees in positions where they can learn to grow within the industry; that was critically important,” said Hanna. He was also looking for a company with the experience to handle the regulatory side of hospitality, along with possessing fiscal acuity.
Though it is not necessary to choose a third-party company that specializes in your type of hotel, Hanrattie added, “It is imperative that owners select the right management company with the proven experience, resources, scale and expertise to maximize the performance of their specific hotel.”
“What you’re really looking for in a management company is not only their capabilities of bringing in top management for the property itself but having a strong, corporate organization that supports those properties,” said Paul Novak with Whitman Peterson, a private investment group; Novak heads up the hospitality investment side of the business. Since 2016, the company has had a partnership with Concord Hospitality to develop hotels.
Both Novak and Dahlager said that a third-party management company should understand the owner’s objectives to make sure that they are on the same page.
“Your goals should be aligned from financial and performance perspectives and be able to sustain this working relationship over a period of time. Something to ask is, ‘do you have the ability to grow with us?’” said Dahlager.
When choosing a management company with which to partner, start by prioritizing the areas of your hotel in which a third-party can make the most difference.
Hospitality America President and CEO Ben Campbell noted that each management company has its own sets of strengths based upon their leadership team, infrastructure and processes. "At Hospitality America, we thrive with owners who have long-term goals for their investments, and we have built our business model to fit these needs. This includes how we recruit top talent, lead them effectively and efficiently, and give them the proper tools to succeed. My belief is that if any owner focuses on these three items, you will find the right management company for you, your investors, and your business."
Staff Management and Training
Hiring and retention is a top priority for hotels, as these took a hit during the pandemic. Because of these lingering workforce challenges, an important question to ask potential management companies is if they have a plan for hiring and professional development training.
Put simply, said Hanrattie, “A manager must have the reputation and scale to attract top talent, and the track record of successfully training, developing, promoting and retaining home-grown talent.”
Because of the people-centric nature of hospitality, it is critical to hire the right people, from the general manager on down.
“You can have the right brand, location, everything is perfect and it could be a newer property or build, and if you’ve hired the wrong GM—you won’t maximize that value,” said Doug Dreher, principal of The Hotel Group and hotel owner, said. “That is where the management company steps in.”
Depending on the size of the asset, Novak believes that a larger management company often will have the advantage, as it more easily can staff properties in-house and are in a good position to mentor and train people to step up into open positions. “Ideally you want to provide opportunities for onsite personnel to grow—not only themselves, but with the company and have opportunities to move up the ladder to more positions with more responsibility. That can’t happen unless you’re a reasonably good sized management company,” he added.
Technology and Innovation
Technology is essential in order to provide the right support. Having a corporate IT team in your corner, perhaps especially when things go awry, is an important criterion.
“A manager must have a robust and fully-integrated technology stack at an attractive cost along with the appropriate security infrastructure to mitigate the risks of data breaches and reputational damage,” said Hanrattie.
Communication with Hotel Owners
Though the ease of having a third party take care of major functions is a huge draw, along with reaping financial gain, perhaps one of the most important elements of a successful partnership is regular and accurate communication. “We have monthly performance reviews, and quarterly review and forecast and industry updates—a newsletter—as well as individual property performance updates. Those are conversations that help us to make sure alignment stays in place for the length of the contract,” said Dahlinger.
Ability to Scale
Scale matters in the hotel business due to expenses being so great. One question to ask in your hotel management company search is whether the company has the volume to help drive down costs from a purchasing power standpoint, said Reardon.
A Branded Hotel
Chances are, if you are the owner of a branded hotel, the choice of management company will usually parallel the company used by others under the same brand. A management company already working with a brand has an understanding not only of the corporate culture but of marketing needs.
But as Reardon said, “You’re only as good as your last report card. You want to get a good look under the hood and how they have done with the brand so far. How typically are they doing market penetration, are they well-versed in that brand, do they know how to move the needle?”
Ultimately, keep in mind that this is a two-way relationship, and it is just as important to the management company to find their perfect partners. “We’re finding ourselves interviewing our future clients and partners as much as they’re interviewing us. It’s that critical. We don’t want to make that mistake either, and we want to make sure this is long term; it is as critical to our business as it is to theirs,” said Reardon.
Checklist to Evaluate a Third-Party Management Company
- Proven track record (ask for references from existing clients and referrals from others)
- Owner-centric
- Thorough and regular communication
- Ability to scale/procure large purchases at a reasonable price
- Invested in the asset’s success
- Understands the brand and the corporate culture
- Goals are aligned
- True partnership versus transactional relationship
- Ability to provide staffing, even in a high turnover situation
This article was originally published in the October edition of Hotel Management magazine. Subscribe here.