Make Sure The Right Contingency Plans Are In Place

I once met with a hotel owner, not long after taking over management of his group of hotels, to tell him how I planned to reenergize the lackluster and ineffective sales effort I found in place. I told him that I planned to create a new position of Divisional Sales Manager and promote a “sparkplug” I identified at one of the properties. He asked but one question: “What if she gets hit by a truck?” That was my introduction to contingency planning. I had used long-range planning for many years; looking at facility condition, patronage levels, operational trends and market developments to plan when changes should be programmed to an area or an outlet. I had also been involved in succession planning, where a grid was developed to provide theoretical promotions and transfers if a key manager was promoted or left. I was also well-acquainted with emergency or disaster planning. Contingency planning is different.

Most management companies have detailed emergency plans, and well-publicized disasters, from major fires to bomb threats, death or serious injury at the property to power blackouts to earthquakes to hurricanes have put hotel managers to the test. Where they have performed well, and even superbly, it is usually because they were working, like airline pilots do, from a well-prepared plan. These emergency plans provide the framework for development of sound contingency plans. They detail an event that may occur – the “trigger point, “and provide complete action steps to be taken, and by whom. Current economic conditions, along with cuts in airline seat capacity, are leading to 90-day forecasts that show large shortfalls versus budgeted profits for most hotels. Early trigger points have already been reached and most asset managers, and many hotel managers, have already put into effect a part of their contingency plans.

Ideally, contingency plans should be developed during times when business is good. What actions will be taken if volume drops by 10%? By 20%? By 50%? The tragic events of September 11th highlighted the need for such plans – business survival. Precious time (and much money) was lost by those who had not already developed those answers in advance. Sadly, another act of terrorism is possible (many lenders are requiring insurance against this peril), and the effect on hotel business is predictable. Aggressive action is essential to limit losses in NOI. The right contingency plan needs to deal with three major areas at each potential trigger point:

1. What actions can be taken to reduce fixed costs?
2. What operating standards and procedures can be changed to cut variable costs without destroying the loyalty of the regular customer base?
3. What sources of revenue that were earlier overlooked or were thought less desirable can be tapped?

Contingency plans are brutal, of necessity, and for that reason some managers resist developing them. The jobs of assistant department managers seem always to be the first to be cut; it is one of the quickest ways to lower fixed costs. I have seen charts with names and salary amounts at various stages of assumed business decline. The next area to be looked at is standards of service and level of amenities. Cuts here will reduce some of the costs to serve every guest.

The hotel manager must be persuaded to do a “high wire act” to balance the expectations of current customers with what they are paying. These guests may be somewhat different; paying lower rates, than those originally budgeted for. Many times, service levels can be tweaked slightly to cut costs: coverage at the front door and at the bell stand may be a little less, and it may take a little more time for a guest to check in or out. Food and beverage outlet hours of operation may be curtailed to limit staff on duty during periods when there is little customer demand. Those of us who have been through these downturns before have a “laundry list” of best practices garnered from experience. They range from limiting amenities to reducing the amount of bathroom towels to squeezing service contractors and concessionaires to raising/lowering public area temperature set points and cutting slightly the temperature of hot water delivered to guests and the house laundry.

A sound contingency plan will, at some point, revisit areas where the benefit of change was previously considered slight or undesirable. These may include:

• Extra energy conservation measures. If a Green program is not in place, it should be called for
• Outsourcing of departments or services (including valet parking, concierge, laundry, business center, restaurant and coffee shop)
• Closing, temporarily restaurant and lounge outlets and floors of guest rooms
• Leasing or finding different uses for non-revenue producing or low revenue producing areas

The contingency plan should also provide for an updated review of what competitors are charging and for increases in restaurant and banquet menu prices, parking charges, and other guest user fees where warranted to produce revenue not expected when the operating budget was approved.

A good contingency plan will provide actions to be taken if business from a major customer is lost, if a single customer accounts for a large percentage of hotel revenue. Companies go bankrupt, are acquired, move their headquarters and are, themselves subject to the possibility of losing a major part of their business. When occupancy falls, the typical hotel manager strategy is to try to replace profitable business earlier expected with customers who are paying less. This does not necessarily mean rate-cutting, though the industry has a history of succumbing to that course of action and it becomes difficult for a manager who does not wish to cut rates to resist in order to keep market positioning. But the loss of business travelers can sometimes be offset with more government employees, contract business and leisure customers. New packages and special events can be created; preferred corporate programs can be started or made more appealing. Contract business or tour groups can be negotiated.

If group pace falters, because of curtailed attendance or events from corporate and association groups, the lost business can sometimes be replaced with business from more price-sensitive, social, military, etc. organizations; the SMERF’s.

Capital spending should be thoroughly reexamined and potentially curtailed. Since more capital increases the investment base, cuts will preserve part of the rate of return from a reduced NOI. But do not lose sight of the overall investment objectives and exit strategy – see the last post. A period of lower occupancy may provide a window of opportunity to complete renovation or other return on investment projects with the least displacement of revenue. And projects whose ROI rate stays high, after factoring in the changes in business conditions, will quickly pay for themselves and should not be dropped as part of an arbitrary percentage spending reduction.

A hotel owner or his asset manager also need to assure that contingency plans are in place to provide business continuity: How will telephone service be maintained or rerouted to cell phones if regular service goes out? How will current and historical electronic data be backed up and safeguarded? How will staff be communicated with or perhaps housed on property? How will reservations be controlled, check-ins and check-outs tracked and accounts kept without computers? How will records be protected? And on and on.

Insurance is another form of contingency planning. It’s not a secret, and I’m not going to write much about it here. Of course, you do have adequate coverage, and deductibles in line with the risks you can afford to bear — for property damage – liability – business interruption, theft and specialized policies to cover loss from hurricanes, floods, earthquakes, or the like, if you are in an area that has exposure. Just like the case with your personal home and auto insurance policies, a higher deductible will result in a decrease in premium. It then becomes a question of how likely and how frequently you believe a loss is likely to occur, then weighing the insurance premium savings against your willingness and capability to absorb those losses.

Be sure to shop your policies. Even if your management agreement provides for insurance to be obtained by the manager, you should get quotes to provide the required policies directly from at least one hospitality insurance professional. Sometimes, you will find you can get better coverage for less money. Bring the differences to the attention of your Manager and persuade him to change carriers or negotiate. Keep in mind that insurance premiums tend to follow a cycle, escalating after notable national losses until competition leads to reductions. Do not fail to test the market every time your policies come up for renewal, or you may miss a major opportunity for cost savings.

If complete and well-crafted contingency plans are in place, the hotel manager will be able to deal routinely with these anything-but-routine situations, when and if they do occur. Nobody voluntarily participates in a recession. The right contingency plans, quickly and properly put into effect, will assure that your hotel does not do so to the extent of its “fair share.”

About the Author

Jim Burr is a former member of Cayuga Hospitality Consultants.