Hotel managers, often alongside their asset managers, have engaged in many initiatives to improve operating efficiencies and reduce costs in recent years. With emphasis on revenue growth and maintaining assets in competitive condition, areas such as the administrative and general department have become an area of focus for savings because roughly 50 percent of the operating expenses of a hotel operation are labor or labor-related.
While complexing and centralizing services have provided labor-expense reductions at the hotel level, they often are offset by increased corporate-office support costs and centralized fee allocations (often untraceable with no control). So, while it appears wages and full-time equivalents are lowered, the net impact financially often has been difficult to evaluate due to the complexity and blending of management company billables. Likewise, areas such as onsite financial leadership, support and control often have been reduced, impacting the ability to be proactive in managing rather than reactive to manage the increased work flow.
This type of cost-savings initiative has been highly impactful in hotel-level accounting departments, many of which have been restructured with reduced staffing. As a result, the industry has rapidly diminished the bench strength of these departments, creating a hole for the next generation of hotel financial leaders. With increasingly more functions handled centrally by a third-party or off-shore services, the hotel’s finance leader—commonly referred to as the director of finance—is no longer involved in many of the accounting and finance activities, which has resulted in the downgrading of the accounting expertise of the DOF. Without a staff base for grooming future development of experienced DOFs, how will the industry fill future finance leadership roles?
If the role of the DOF continues to devolve with less visibility into the entire operation and reduced responsibilities, there are several potential consequences, none of them good:
- They may lose their position within the hotel executive leadership team and/or end up with reduced skills in providing strategic and tactical financial leadership;
- The hotel will lose essential separation of duties and internal control checks and balances;
- It could have a ripple effect resulting in less-experienced individuals on hotel accounting teams as financial talent inevitability departs from the hospitality industry; and
- Without on-the-job training and upward mobility, the industry could be faced with a lack of experienced finance professionals to backfill DOF roles.
Because the DOF is an essential position within hotels, owners need to consistently evaluate the role, its responsibilities and its effectiveness, while also challenging management companies to maintain a focus on developing future financial leaders. As recently reported by CBRE, more than 59 percent of hotels showed an increase in operating revenues, while only 52.3 percent attained growth in profits in 2017—the lowest levels since 2009.
If revenues continue to grow at a slower pace than increasing costs, the DOF becomes even more essential to protect the asset and drive initiatives for profit awareness while maintaining his/her fiduciary responsibility of improving the value of the asset. In addition to responsibility for hotel performance overall, the DOF also typically provides support to less-experienced managers across the various departments in understanding how to manage labor and respective departmental costs. The erosion of the skill and responsibilities of the DOF will have a ripple effect throughout the operation.
Owners need to have someone in their court and on their team, like an asset manager, to continue to apply pressure and institute a more sophisticated degree of financial discipline. It’s necessary to keep the operating team focused on the bottom line and managing risk, as well as balancing control, particularly when all performance and fees are tied to topline results. Management companies should maintain a finance-leadership presence within their hotels and ensure individuals are developed and tracked to fill future needs.
Art Burger is SVP of CHMWarnick, a national hotel asset-management and owner-advisory services firm. He may be contacted at [email protected].