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There’s NOI in Team – SIB Whitepaper

NOI - Hotel Industry White Paper

Let’s face it, no one ever dreams of being a great role player. In the backyard as a kid, you were probably Mickey Mantle, not Clete Boyer; or Walter Payton, not Willie Gault; or Michael Jordan, not John Paxson.

But as we grow older, and decidedly less athletic, we tend to develop a unique understanding; that there is a sense of pride, even occasional glory, in doing the dirty work.

And since granny shots don’t pay the bills, we develop other strengths in the hope that we can carve out a good living for ourselves.

If you’re reading this, then it’s safe to say that you have done alright with asset management through the years. Perhaps there is no one who better understands an adaptation of one of the oldest sports clichés:
There’s NOI in team.

Think about it.

Chances are you didn’t get here by accident. You also probably didn’t get here alone. You know very well the importance of managing margins and of surrounding yourself with good people.

So, as the hospitality industry ushers in a predictable era of decelerating revenue increases, you understand that increasing net operating income (NOI) is the only surefire way to fight a flatlining RevPAR and enhance asset values.

But even the best players can’t win it all by themselves.

The harsh reality is that there are hidden expenses within all property management operating costs that can be reduced if organizations could only put the right people on the sidelines.

Well-run businesses are susceptible to a litany of unnecessary costs resulting from factors like over service, local and regional expenses not covered by GPOs (Group Purchasing Organizations like Avendra, IHG Group Purchasing and Hilton Supply Management), and poor pricing relative to what’s available in the market.

The latter is understandably a point of pride for most companies since the ability to leverage negotiations is a valuable, admirable skill. Unfortunately, even the best negotiators can fall short for the simple fact that they don’t have a data sample large or diverse enough to make informed decisions at the level necessary to achieve a bottom-dollar price for the services rendered.

Sure, there are many that know a great deal about the hotel business. However, the same vendors that install phones in hotels install them in airports or shopping malls or sports arenas. At the end of the day, costs are still costs. Comparing them only to your industry is akin to anointing Kobe or LeBron as the greatest basketball players of all time, yet only comparing them to those playing basketball today.

Furthermore, organizations often view negotiated discounts and GPO pricing as one in the same. That can be a dangerous mistake. Plenty of good companies take their eye off the ball, assuming that everything they need is covered under their GPO. But understanding what isn’t covered by a GPO is just as important as knowing what is. On top of that, it’s imperative that companies carefully audit vendors to ensure that they are being billed according to GPO pricing. If no one is reviewing each invoice, in detail, for billing accuracy, then leakage is inevitable. And it can be costly. In the vast majority of cases, vendors aren’t trying to make mistakes; they just happen. And if you aren’t aware of where to look for them, then you’re setting yourself up for failure.

Misconceptions about the general awareness of costs can be, well, costly. Companies routinely lose hundreds of thousands, if not millions, of dollars due to decentralization and turnover, each of which tends to bury the impact of long-executed agreements with vendors.

Sometimes it’s just plain price, as was the case for a brand name New York hotel that was being significantly overcharged for medical waste – 90 percent more. A fresh look at the rate structure left the property with tens of thousands in annual savings with no change to their normal business.

Other times, it’s execution. The price may be right, but you would be surprised how often vendors have trouble taking a new agreement live. That was costing a bank in the Carolinas (with only about 20 locations) more than a few hundred thousand dollars, until it was discovered that the rates it negotiated were never implemented. Then there is human error, like the kind that caused a global healthcare firm millions over a three-year period, all resulting from erroneous invoices.

While the issues above might sound implausible to most executives, they paint a vivid reality that money is needlessly seeping through the cracks of even the most well-equipped, well-intended organizations.

Without the help of an outside team of experts, internal administrative tasks are getting left unattended inadvertently and unbeknownst to ownership.

Paying for things like recycling when the city picks it up for free, or over-service (Why pay for 20 phone lines when you only need five?) represent costs that add up, yet easily can be avoided.

That’s why the stigma surrounding third-party experts is so dangerous for property owners. Often, it is assumed that good business relationships alleviate any cause for concern. Frankly, it’s blissful ignorance. In none of the examples above was it the intention of the company to waste money. Likewise, the vendors in these (and many other) instances were not purposely egregious, evidenced by how quickly each atoned for its mistake and issued credits or restructured deals.

Ownership groups stand to gain significantly by hiring outside resources. Specialized third parties provide skilled and experienced personnel for a fraction of the cost of in-house human capital. Rather than replacing people in current roles, good third parties align with your team and earn their pay solely based on measurable ROI. Think of them as project managers for projects you don’t have time to manage.

Reputable third parties will freely assess your specific situation and show you exactly what you’re paying today. With access to enormous data sets, they provide unparalleled insight into whether category-specific rates are market appropriate. These data sets span a wide spectrum. By not focusing exclusively on any one industry, they possess comprehensive market knowledge and truly enable clients to know what, for example, the fast-food restaurant across the street and the hospital down the road are paying the same vendors that your properties utilize.

And since the best ones are generally only paid based on demonstrated improvements to your bottom line, they are good players to have on your team.