Tough cuts to control cash burn

Hoteliers burned a lot of midnight oil during the COVID-19 lockdown looking for ways to trim fat from their operations. Now, with hotels reopening and capital draining out to cover labor, supplies and other services, they’re going to have to brace for deeper cost cuts to give them a healthy enough balance sheet to survive a slow and difficult recovery.

The obvious work has already been done: limiting everything from menus (it’s mostly a grab’n’go model now) to services to hours of operation, shifting staffs to flex hours and prioritizing multi-tasking; “complexing” key executive positions when a management company’s hotels are in close proximity, expanding the use of technology, cutting back on amenities, eliminating extras such as in-room bottled water and expanding labor-saving technology. But, in many cases, it’s going to take more to balance the books. Outsourcing is back on the table.

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Getty Images

The first areas to consider include human resources, accounting and marketing. “Over the last 10 years, there’s been a lot of bloating,” says Davy Parsons, senior manager BKD CPAs & Advisors. “By outsourcing, you can take advantage of economies of scale and scale up or down as revenue grows or shrinks. That’s hard to do with administrative staff, especially at the executive level.”

Operators can customize the model farther by creating a hybrid that leverages fewer but more senior internal staff and allocates labor-intensive functions or specific assignments to the external consultant. Fees can be hourly or on contract, depending on the budget and scope of work.

“I’ve long believed the internal HR department isn’t necessary,” says James Berkeley, managing director, Ellice Consulting. “There are a lot of options to outsource this function to experts. This single shift could take out 20% of the costs and not impact the customer experience.”

Marketing is another strong candidate for a hand-off and for spending controls. But whether hoteliers are doing this in-house or externally, this isn’t the time to go big. Although it may be tempting to launch a mass-marketed campaign, the payoff isn’t there yet, says Tom Luersen, president, CoralTree Hospitality. Rather than blanketing the traveling public with our message, he suggests keeping costs and results in line by using targeted digital messaging and leveraging social media platforms to reach a first-wave market of transient/leisure guests and the drive-to market.

Outsourcing doesn’t have to be all or nothing. Look for options that slot in only when needed—like event catering. “Until banquet and catering events on a more consistent basis, partner with local restaurants to cater events,” says Kim Gauthier, senior vice president, hotelAVE. “Hotels in the primary business of selling guest rooms can provide great quality and service to the guests without losing money in F&B.”

Ovolo Group, Hong Kong, obviated the labor, inventory and related costs of remounting a full-blown high-end restaurant (not to mention the challenges of social distancing in making numbers work) with its Restaurant in Room program. Guests can enjoy a three- or five-course meal catered by a local restaurant in the privacy of a serviced apartment starting at $150. Available Wednesday through Saturday, the initiative comes with a revenue-boosting bonus of an offer to stay the night for an additional $40 as an add-on to the five-course meal or $60 with the three-course option. “Discounts aren’t very successful in the current situation,” says Dave Baswal, CFO, Ovolo Group. “What’s working is finding ways to reinvent and repackage your product to meet current needs.”

The addendum is to identify ways to do that without adding overhead for supplies or labor or tacking on permanent administrative burdens. Pop-ups have come to the rescue, even before COVID-19. Now, they’re getting more sophisticated and more targeted. New kinds of demand-driven collaborations can build out the appeal of special events within a framework of manageable pre-planning. For example, with so many concert and festival goers barred from large performance, hotel companies such as CoralTree Hospitality are monetizing outdoor spaces and pool decks with socially distanced live music performances. “Live music helps guests feel they have on-site options, but it’s also a draw for locals,” Luersen says.

The acid test for the DIY-versus-do-it-for-you decision is whether the role is customer-facing, Parsons says. That’s not always so clear. “Security may seem like an obvious target for outsourcing. But think about what that interaction looks like to the guest,” he says. “The same applies to valet services. A lot of guests have had problems. Before you sign on with a third party, think about whether you’ll lose control of the customer experience.”