With many markets seeing a softening as they come down from the “Covid Travel Boom”, operators are having to address softer RevPar numbers and increasingly difficult flowthrough. More hotel managers are realizing the need to reduce hotel operating costs. However, given the talent challenges experienced over the past several years, few hoteliers are willing to cut staffing levels or to consider downgrading pay or benefits. That means they need to turn more attention toward all their other operating expenses—expenses that the hospitality industry has historically overlooked for a multitude of both legitimate and not-so-legitimate reasons.
While hoteliers know they should challenge expenses like bank fees and credit card processing fees, waste removal charges, payroll processing, and telecom, they often find the work time-consuming and beyond their primary focus on guest experience and staff retention. If you are looking to drive efficiencies today, it’s imperative to dive in and tackle these spend areas that are notoriously hard to manage and prone to consistent price creep. The good news is, many of the reasons for failing to evaluate or address these costs in the past are based on common misconceptions.
Here, we debunk the myths surrounding these costs so hoteliers can better understand their true savings potential and start turning once overlooked line items into new opportunities for profitability and competitive advantage.
Myth 1: Non-labor costs aren’t worth the time and effort to manage.
It’s true that in the service-oriented hospitality industry, labor is and always will be the largest cost by a significant margin. Nevertheless, all the other operating costs and business services—utilities, waste and recycling, bank fees, payroll processing, laundry, and elevator maintenance, to name just a few particularly troublesome spend areas—can add up to nearly a third of the overall budget. The average hotel chain operator has the opportunity to reduce these bills by 21% to 24%, which can lead to hundreds of thousands of dollars in savings that could significantly boost profitability or be reinvested in talent or the guest experience.
Myth 2: Current business service contracts and pricing are already optimized.
Few hotel managers are initially excited about the idea of having their business service contracts put under the microscope and audited. Afterall, somebody on the finance or operating team put time and effort into negotiating pricing and terms with vendors, and calling that work into question can understandably be sensitive territory.
The truth is, it is impossible for hotel managers or operators to understand best-in-market pricing without extensive industry benchmarking data that simply isn’t available or feasibly attainable. Further, hotel managers and their teams, whose primary focus should be on the guests and their experience, are certainly not expected to be experts in every spend category or to know the ins and outs of where costs may be inflated or where opportunities for further negotiation and savings exist. Finally, even if service contracts are ideal when they are first put into place, circumstances change constantly. It’s smart to regularly validate costs and to look for new savings opportunities, especially when there are no upfront costs or commitment involved in doing so.
Myth 3: Making changes to business service contracts will disrupt the business.
No hotel manager wants to risk missing a trash pickup day, having an elevator go down, losing the internet connection, or running out of clean linens. So even if the costs for these services are high or increasing, many decision makers are willing to pay a premium to avoid making changes to vendors, services levels, or operating processes that could lead to problems for the hotel staff or negatively impact the guest experience.
In many cases, hotels can unlock significant savings without making any changes at all to their vendors or service levels. Instead, the savings come from correcting billing errors or optimizing pricing structures, which have absolutely zero impact on the guests. Sometimes, it’s about rightsizing services or eliminating services that the hotel no longer needs or isn’t using. Often, there are additional savings and value to be had by enforcing contract compliance, and this can actually improve or enhance some services while reducing costs at the same time.
Myth 4: Pursuing savings will hurt vendor relationships.
Hotel managers tend to be loyal to their current vendors, especially those they’ve worked with for a long time. They are concerned that any cost-cutting efforts could jeopardize what they view as mutually beneficial relationships.
In fact, the reverse is often true. When the hotel management or operating teams demonstrate more interest in their service contracts and show that they are paying close attention to the details, vendors often follow suit and put more time and effort into contract compliance. Indeed, some vendors will respond with a renewed and improved commitment to the level of service they deliver.
For example, when one real estate investment fund completed a cost review for six hotel properties within its portfolio, it uncovered significant opportunities for annual savings in its phone and internet, payroll processing, and food costs. In all three spend areas, the fund managers secured savings, maintained their service levels, and saw the savings strategies seamlessly implemented, all while preserving and extending the valued relationships with their existing vendor partners.
Myth 5: The GPO is already doing all the cost optimization work that needs to be done.
Group purchasing organizations are fantastic at controlling costs for the items and services they handle. However, there are always spend categories that fall outside of the scope of a GPO and end up flying under the radar without proactive oversight. Many services contracts are ripe for significant savings simply because nobody has the time or data to proactively identify savings opportunities. Some GPOs may lack the benchmarking data to understand local or regional best-in-market pricing. This means many hoteliers are leaving their vendors a big tip without even realizing they are doing it.
Myth 6: Controlling operating costs takes too much time hotel managers don’t have to spare.
This represents the most legitimate excuse in the bunch. Hotels are short staffed and general managers should focus their time and talents on what they do best—taking care of guests and retaining a great staff. It’s also true that the accounts payable department does not have the bandwidth to scrutinize every line item on every business service invoice. And they certainly don’t have the benchmarking data or insider knowledge into every spend category industry to know where the best cost savings opportunities are hiding between those lines.
Fortunately, they don’t need to. Instead, hotel operators and finance leaders often need and appreciate a cost reduction service provider that can do the work for them at no upfront cost. Through this approach, hotel operators can find savings and realize them quickly with very little time and effort from management and staff.
The truth is, significant savings are easier to realize than you think.
For one reason or another, most hotels significantly overpay their vendors for a variety of business services. But there’s no real reason why that can’t stop right now. Hotels that want to streamline their costs and keep more of their profits can do so without changing vendors, service levels, or operational processes and without investing significant time, effort, or money upfront. To learn more about the all gain and no pain way to prevent overspending on hotel operations, give SIB a call today.
