NEW SKILLS FOR A CHANGING LANDSCAPE

Revenue and Asset strategy and maximisation expert, Kostas Trivizas, shares his thoughts on the new financial landscape and the shape of revenue and commercial-core skills for operators and asset managers. He also forecasts the role that new skills will play in the relationship between owner and operator-manager in this new and somewhat unknown world.

Recently, a well-known columnist of the Financial Times ascribed to the 19th century American humorist Josh Billings what he thought might stand as the epitaph for 2008: ‘It’s better to know nothing than to know what ain’t so.’ So ended a year when the unexpected and unimaginable happened, confounding and overwhelming even the most seemingly astute thinkers and risk-takers. The hospitality and travel industry couldn’t escape the economic maelstrom, but neither did most industries.

I grew up and received my early education in modern Greece; an education whose essentials have been rooted in the ancient Greek notions of ‘reason’ and ‘inquiry’.  In the last decade, I observed the rise to the top of executives joining our industry equipped with financial and marketing experience earned within real estate, advisory and fast-moving consumer goods companies. The ability to ‘reason and inquire’ is, I feel, a prerequisite for effective revenue and profit management.  As it happens, it has helped me to understand how commercial skills (skills integral to the administration of revenue and expenses to generate a financial return) have affected the dynamics of the travel and hospitality industry in recent years and, specifically, the relationship between investors-owners and managers-operators.

Apart from the obvious slowdown in demand for travel, you may be wondering how else the current recessionary environment will impact the industry. To me, one area will clearly be affected. We should be asking ourselves what kind of skills the executive or business owner needs to ride the waves of business uncertainty.

Integrating skills

Around the boardrooms of management or franchising companies and inside business units’ meeting rooms, the focus is increasingly on forecasting revenue, controlling costs and expenses, and managing cash flow and dividends. Additionally, at owning companies, debates now centre on portfolio analysis, deleveraging and balance sheet engineering.

It’s obvious to me that financial, marketing strategy and revenue management skills, already on the uptake, will become more integrated. What’s more, they will be increasingly in demand for roles focused on building profitable revenue from operations, as well as investing in, reinventing, or developing new businesses with sustainable revenue streams.

With the increased separation, particularly in the last ten years, of the ‘ownership’ and ‘management’ roles in the hospitality industry - but also in the travel industry – product/channel and revenue management have become critical functions for hospitality and travel managers, while financial and asset management is the domain of private equity groups, owning companies and their representatives (asset managers).

While any company in any industry which manages its own assets (for example, the product inventories of a retail business) more or less controls its pricing and revenue tactics – and hence its cash flow -- in the case of companies whose assets are ‘managed’ or ‘operated’ by a third party, it is that party that exerts great control over the assets’ market positioning and cash generation. Just as there are cash flow implications for a retailer being overstocked in this recessionary time, similarly, there are cash flow implications for a hospitality owner whose assets (i.e. rooms or dinning capacity) are not turned over, i.e. sold fast enough. Yet unlike many other businesses, the marketing and revenue management tactics and skills rest with the operator. This set of skills and intelligence has become a critical success factor and a competitive force among operators.

It should be noted that the separation of ‘management’ and ‘ownership’ is not as pronounced for other business sectors in the travel industry (for example, tour operators, travel agents, airlines and cruise lines) as it is in the hotel sector or the leisure pub/bar sector. Additionally, in recent years travel companies have reduced owned assets and have outsourced more flights and accommodation.

Boardroom debates: ownership versus management challenges

Traditionally, hospitality managers and asset owners have viewed each other with a certain suspicion, some of it driven by the nature of the different skills and interests of each party. Hospitality operators-managers may complain that owners are focusing too much on quick returns from leveraged assets at the expense of long-term sustainable strategies. This is not so surprising given the overall under-estimation, in recent times, of risk on the part of owners and investors. In turn, the latter may feel that hospitality managers care more about building their brands and lack the needed urgency and ability to effectively manage revenue and costs. As a result, budgets and profit forecasts from operations are constantly evaluated and redrawn, with much energy and valuable senior executive time spent in this area.

The truth is that the customer, product and service line forecasts that underpin overall budget and business plans are no longer relevant and must be reworked to incorporate the new economic reality.

Last year’s financial alchemy-driven melt down has added to the hospitality managers’ already considerable concerns. Leading news sources, as late as October of last year, reported optimistic views on pricing strength for 2009 from senior hospitality executives, only for these views to be altered a few weeks later. In December 2008, CatererSearch reported that hotels expected to cut their rates by up to 50%!

On the ownership side, in the last eighteen months we’ve observed the abandonment of UK’s first £ 2 billion REIT (Real Estate Investment Trust) and the collapse of GuestInvest, the company that introduced the concept of buy-to-let hotel rooms in the UK. The blame was placed on high valuations and too optimistic rates and revenues, among other things.

Slower trade -- beer sales in the UK are their lowest since 1930 -- and the lack of a re-financing market are pushing pub owning companies (which had aggressively expanded, acquiring units on high valuation multiples) into administration; pub closures are now running at a rate of 35 a week. The splitting of the properties’ ownership from the operating company in what is known as an ‘opco-propco’ structure had been leveraged at better borrowing rates, as property was seen as the main source of growth.

A new era

During the October 2008 British Association of Hospitality Accountants (BAHA) conference, a forum entitled ‘The future of long term funding for the hospitality industry’ highlighted the need for owners to employ asset managers to communicate more effectively with hospitality managers. It pointed to a new era focusing on returns from continuing operations, rather than capital appreciation.

Two key factors involved in asset valuation -- cash flow growth and cost of capital -- are moving in a direction that decreases asset value. Cash flow growth is dropping while cost of capital is increasing, despite relaxed monetary policies. Forecasting and managing the ability of hospitality assets (for example, hotels, restaurants, luxury trains, cruise liners) to drive and sustain profitable revenue is now an unequivocal requirement and a critical success factor for the industry. Asset valuation firmly depends on it, and of course returns on investment. In 2009, this emphasis will render even more significant the strategic and management skills of hospitality and travel managers, who are called to enhance their business brand equity and their owners’ asset returns.

No doubt the boardroom debates will continue, and indeed intensify. As more operators-managers compete to secure management agreements in the face of fewer new developments, expect operators to exhibit much more flexibility and owners to seek out operators that are brand neutral. In addition, more Sales Representation and Distribution companies – as a lighter alternative to franchising- will be in position to gain favour with those owners and operators, who wish to run their own show yet need the resources and benefits of distribution and sales coverage.

The current landscape will also expedite the changes that we’ve seen in recent years with regards to talent selection and promotion. This landscape will offer opportunities for skilled hospitality operators-managers to showcase their abilities and help improve the owner-manager relationship and model, which admittedly has experienced a good dose of innovation as a result of easy debt, an influx of niche development models and more complex transactions.

Will your next CEO be a revenue manager? What to expect.

Financial and commercial skills will gain significance, as management companies -- in both hospitality and travel -- and owners seek General Managers who can understand the language of investment returns and can quickly formulate and adjust business strategies and plans to respond to the volatile business landscape and safeguard brand and asset value.

Similar to the cost yield systems employed now by a leading hotel company to cut costs, expect more strategic business systems and metrics to be used by both management and owners in our industry. These will go beyond revenue management and marginal cost accounting and involve total revenue management, brand price premium, brand RevPar premium, activity and customer segment based costing, customer retention and customer segment profit management. More than ever, managerial accounting and sales and marketing skills will come together, contributing to a new set of commercial skills. At the business unit level, expect Financial Controllers and Sales Directors to understand each other’s language much better and work more synergistically.

At regional or corporate level, ‘business strategy’ executives with a good blend of commercial skills (franchisee development, market planning, distribution and revenue management etc) will be in a position to interact more productively with business unit managers. Traditionally, only hospitality managers with unit general management experience would be promoted to such roles. However, we have already seen hospitality groups installing executives with non-conventional diverse industry experience—also gained outside hospitality -- in these roles. Expect an acceleration of this trend, especially so in businesses where other assets (i.e. spas, golf, boutiques etc) become integral to the concept or brand extensions.

Bob Cross, who the Wall Street Journal has referred to as the guru of revenue management, in his 1997 book aptly titled ‘Revenue Management’ called for the position of Chief Revenue Officer to be responsible for all revenue generating activities. He also predicted that future CEOs of service companies would be revenue officers. Since then, we’ve seen the roles of senior revenue and commercial executives firmly established, and a series of initiatives in the development of business intelligence, distribution platforms and RM programmes for senior executives taking hold.

In 2009 and beyond, CEOs are in need of Commercial and Revenue executives who are in tune with product-operations, who can coach general managers and who can understand the business landscape well enough to articulate and predict which markets, customer segments, products, services, and/or execution strategies will deliver the most profitable growth

Clear metrics to weather the storm

Expect more training and development for business units’ revenue managers, as their skills and pay currently do not reflect what is expected of them.
Expect unit-based sales and marketing directors to be much more focused on sales productivity -- while regional roles will be responsible for more units --and less on marketing, as the latter becomes more analytical, strategic and handled by regional or corporate marketers and strategists. The success of Domino’s Pizza UK, which remains unchallenged by the current recession, is attributed largely to its advertising know-how and investment, and to a very good knowledge of its customers and their purchasing habits. Significant therefore that in a report published by Deloitte in January 2009 called ‘Weathering the Economic Storm’, the authors claim that ‘because marketing requires mastery of both soft and hard skills, marketing can be one of the most difficult areas of analysis and decision-making for hospitality companies’.

Although a good number of marketing problems lend themselves well to quantitative analysis, hospitality companies have not traditionally incorporated mathematical constructs to monitor progress toward achieving revenue growth. However, hard times call for both accountability and clear metrics. Karl Kalcher, managing director of MindFolio, a marketing strategy firm, in a new ‘Industry Perspective’ published by Cornell's Center for Hospitality Research, advocates the undertaking of research similar to the customer-choice analysis developed by Daniel McFadden, winner of the Nobel Prize for Economics.

Overall, marketing experimentation is accelerating along with the need for new metrics and accountability, as communications cost barriers continue to plunge. New media has redefined the business of making powerful connections with customers, but these connections in travel and hospitality are validated at the service delivery level. Product-service delivery is an extension of marketing strategy and is critical.

Who will be winners in a new era?

Hospitality and travel managers as well as owners should be optimistic with the increased focus on customer segment, product and channel profitability. For example, we increasingly see travel companies’ short haul products revised or eliminated due to pressure on margins. Such managerial accounting focus will help increase the inherent value of a hospitality/travel business. Expect this focus and language to replace some of the finance-intensive lingo and theory of the past half century. The capital asset pricing model, optimal capital structures, off balance sheet vehicles and the rest were all aimed, one way or another, at maximising the risk that corporations and investment portfolios could stand without breaking down.

We are entering a new era. In the UK, budget hotel chains tout £25 rooms and Wetherspoons Pubs is expected to have sparked a price war with the recent 99p pint. Hospitality establishments find themselves having to frequently analyse and respond to pricing and promotional tactics and to rethink strategy. For this month only, the Little Bay, a London restaurant is doing away with bills and inviting customers to decide what to pay. In Singapore, ahead of the opening of Accor’s Ibis hotel on February 12, customers can log onto the hotel's website during designated sales periods and name their price for available rooms!

While excellence in execution is as necessary now as it’s ever been, it is no longer sufficient; strategy and resource allocation must assume far greater importance. Operators and owners must rethink where to place their bets with a full understanding of how returns and risk have shifted; no one should assert today ‘that our strategy is fine, we just need to execute better’. This is an era wherein the owners-investors who emerge triumphant will be those that can show that they are more than just financial engineers, and prove that their model for owning and running hospitality and travel companies is superior to those of quoted markets or family-owned enterprises.

They will need insightful and commercially astute revenue, operations (General Managers) and asset managers to enhance the inherent value of their assets. They will need diverse and inquisitive boards to question paradigms, and capable and innovative management, franchising and sales representation companies that keep up with the times and are able to optimise performance capabilities without losing sight of the most important person in any business: the customer and her loyalty.

Anthony Fitzsimmons, Chairman of Reputability, a reputation and crisis strategy company, in recent letter to the FT, said that ‘articulate, intelligent, analytical and independent thinkers with the habit of looking at the world from unconventional angles are uncommon among non-executive directors. Perhaps it is thought that they will ask difficult questions. Perceptive questions may be difficult to answer, but answering them might have saved the many companies from their current predicament.’

Advice for the not-so-feint hearted

My advice to both the aspiring hospitality and travel executive and the readers of Leader is to keep reasoning and inquiring in your roles. Search out and obtain cross-functional leadership experiences. Keep enhancing existing and acquiring new strategy-revenue-financial-centric skills that will allow you to better communicate at all levels and help you to make or influence needed changes in your business units or divisions.

My advice to those among you who are CEOs and senior level executives of management companies – especially in talent selection -- or who are business unit General Managers, is to make room and create comfort in your boards and in your companies and business units for talent and skills that will question paradigms, systems and procedures that may be stifling the ability to profitably grow the brand and maximise revenue and profit. The better to keep owners satisfied.

The same advice applies to owners, or private equity investors. Make room for individuals and teams that possess modern, revenue-centric asset management, strategy and valuation skills, who can ask the right questions and implement win-win strategies with the management companies, striking a balance and knowing when and how to recommend investment or divestment. Expect a proliferation of web-based business intelligence tools (i.e. in asset management) that will enhance the analysis of productivity.

For sure there will be divestment and restructuring and for sure there will be plenty of belt tightening in operations. However, as with any bulging bear there is a bull awakening. Similarly, there are opportunities in our industry for both management and owners to reap fantastic returns from investments in distressed and undervalued assets - valuations in some sectors are already attractive - but also in systems and experts that will implement sound turn around strategies.

Challenge the status quo – new opportunities

Finally, I encourage the changes in management thinking that will be needed to allow space for the talent and skills discussed above. Certainly we are bound by precedent, and many of us have a vested interest in the management status quo. But if we were able to invent the modern industrial organisation, for sure we can reinvent it. The last decade brought us branding innovation and proliferation; for a taste, check the Six Senses Group. Expect brands such as UK’s Village Hotels Dakota, CitizenM of the Netherlands and IHG’s Indigo, to continue the branding trend in the upcoming decade.

Twenty years ago, no one would have believed you had you predicted that some of the finest hotel restaurants in the last ten years would be outsourced and run by celebrity chefs, or that such celebrity restaurateurs would also be victims of this recession. Today, when we are called to further enhance productivity and customer segment profitability, the smart outsourcing of more non-core areas – e.g. opening and closing product availability at various channels, more accounting functions, and the procurement of goods -- presents a new found opportunity. The opportunity is further supported by service providers’ developing global capabilities to perform more complex hospitality operations and processes.

Dynamic packaging, for the travel industry but also for the hotel industry, is such a great opportunity to reduce distribution costs and enhance customer loyalty. Most on-line travel agents and, increasingly, hotels offer links for customers to book flights and other activities after they have booked a hotel on the site, but their supply sources are more commercially-driven than customer-driven and many are still not dynamically packaging the content. Expect enhanced interactivity that will incorporate more choices and will advance ‘total revenue management’.

In general, e-commerce in the Middle East, Africa and even in parts of Asia lags considerably behind the US and Europe. It is hard to advance the benefits of revenue and profit management around the globe when most resorts still receive bookings from tour operators and agents by fax or e-mail. For smaller business and tourism destinations around the world to benefit not only from dynamic packaging but also from other e-commerce, considerable organisational and leadership changes as well as innovation and technological advances must occur.

For these changes to happen quickly and spread across the globe, we need to continue to innovate across our industry. Howard Schulz, the CEO of Starbucks, in a recent interview with the FT, declared that enhancing the service experience is key, and that things that were never part of the company’s DNA now ought to be.

Reason and inquiry at all levels of business will help hospitality and travel companies facilitate the needed leadership and organisational development that will allow them to survive and come out as winners in this new era. Start by putting customer benefits, as measured by willingness to pay, at the heart of your drive to create a business model that is fully adapted to the age of frugality. The upside is there to be taken.

If not, Josh Billings will prove a smart man.

Kostas Trivizas is a Commercial Strategist, Operations-Product & Asset Management Executive in the hospitality and travel industry. He has been a distinguished speaker and panelist in various hospitality-travel conferences and has written for the Journal of Revenue Management. He received his Bachelors in Hospitality Management at Florida International University and his Masters education at Cornell University’s School of Hotel Administration. He has held senior Operations roles at unit and regional level internationally for hotel brands (Hilton, Le Meridien, Sofitel) as well as corporate roles in Sales, Distribution and Revenue Management with Luxury Hotel brands (Peninsula Group, Savoy Group), Distribution Marketing Technology and Start up Interactive Travel-Tour Operating, firms (SynXis, IXeo). He is the founder of the Aeolus Hospitality Group and a director and partner of Hospitality Advance International (www.hospitalityadvance.com) an advisory, project and asset management firm. You can contact Kostas at kkt25@cornell.edu.