Exclusive Interview: The worldwide hotel pipeline now stands at 11,130 projects comprising close to 2 million rooms �" the highest level ever recorded, plus the global hotel development pipeline of the Top 10 international hotel management companies stands at 7,800 projects or 1,247,000 rooms, a whopping US$ 117 billion worth of fixed asset projects.

4Hoteliers spoke with Gert Noordzy (left), Managing Director, and Dr. Oscar Hauptman (right), Principal of Northside Consulting Company Limited, a boutique consulting firm, specializing in Organizational Project Management for the hospitality industry, on the impact of the approval process on the development pipeline and project outcomes.

4Hoteliers: We often hear that a hotel management company has to reach critical size before it starts being selective in choices of owners and developers. At this stage of rapid growth, it should focus on implementation, managing the “project right”. What is wrong with this approach?

Northside Consulting: You are asking when is the right time to start getting "the right projects", while initially being 100% opportunistic and focusing on filling the pipeline, and getting the "projects right". This is risky a risky approach!

4H: But business is never devoid of risk. Why not accept that starting-up in a new market or country is risky by definition?

NCCL: We agree, of course there is initial risk. But what many hospitality executives do not realize is that doing the "wrong projects" tends to do real and often irreversible damage to project outcomes, even with the best project management systems and resources. In other words, the probability of doing the project right is quite low if the project is not right.

4H: I think you better define what you mean by "wrong projects”. For instance, is it about "bad developers or owners"?

NCCL: Good question, but a bad example. Although many hotel management company executives are quick to point blaming fingers at hotel owners, "bad projects" happen mostly because of mismanaging project selection and approval at the development phase of the pipeline. For instance, is the 5-star property right for this isolated and small "Island Paradise"?

Are we going ahead with a hotel trying to attract the same market segment that another 10 hotels are doing exactly the same in a radius of 5 km, and for which the average occupancy is below 50%? Does the owner have the requisite resources for a 300-room 4-star hotel, or maybe it would be more prudent to go ahead with fewer rooms and lower tier property?

4H: Don't you think with such rigid requirements, the potential developers would just go elsewhere and sign with another hotel management company?

NCCL: Well, sometimes the management company should let them. Yes, closing the deal is important to meet corporate growth targets, and there is a signing bonus for the "successful" development executive. But it is not all about closing deals, it is about fitting a round cog into a round hole, not into a square one. There must be a strategic match, with both partners walking into their "marriage" with eyes wide open, with important facts in large font on page 1, not in fine print on page 250 of the management agreement. New hotel projects must be aligned with the strategic objectives of both companies. It is the non-alignment that causes friction and conflicts in the relationship.

Now let us return to a tactical point you alluded to - managing the projects right. During the growth period, it is not that simple. Have you heard about the "curse of success"? This happens when the development pipeline overloads with mediocre, riskier projects, and their project management and technical requirement outgrow the capacity of management company's resources and infrastructure to effectively deliver the development projects to operations.

4H: That sounds bad. Why must it happen?

NCCL: It does not have to happen, but it often does for the simple reason that resources are stretched to the limit for growth, and the results are “kind of” encouraging - many new owners are attracted, there is "buzz" in the media, and the hotel company is lauded for rapid growth. And of course stock markets react favourably to announcements of growth. There is the smell of success!

The internal narrative goes like this: “We are closing deals! The fact is that we do not have any funds for additional human resources, but soon, with the forthcoming management fees, we will cover the gaps and get it right… Soon!” But this is not a philosophical debate about who came first, the chicken or the egg, the resources or the management fees from new projects. With hotel openings, unless resources precede projects, the company is a dead chicken!

4H: I am puzzled here. Are you trying to tell me that there is a connection between "doing projects right" and "doing the right projects"?

NCCL: Absolutely! Let us illustrate with a couple of graphics… Figure 1 demonstrates the feedback loop between the quality of the development pipeline and the propensity of the projects to deliver outcomes.

Figure 01: Project approval process & pipeline cycle �" generic process & cycle

Figure 2 suggests that lax approval processes at the entry into the development pipeline will create major challenges during pre- and post-opening phases of the project for all hotel company stakeholders, especially hotel General Managers, Technical Services, pre-opening and operations support experts.

Figure 02: Project approval process & pipeline cycle �" lax process & vicious cycle

Figure 3 reflects the negative trends of the “Curse of Success”, whereby the proportion of problematic hotels entering the development pipeline starts to increase, until they start to dominate the pipeline, more and more overloading the pre- and post-opening system.

When the proportion of problematic hotels exceeds a certain level, severe damage is caused to the desirability of the hotel brand. One frequent response is flexibility of the standards. It is very hard to recover after this threshold is crossed.

The number of projects in the development pipeline, after reaching a peak (the “Success”), starts to decrease due to the negative word-of-mouth being shared among current and potential owners / developers. Over time, the pipeline “dries up,” as even weaker and riskier potential projects’ initiators do not see the benefit of the management brand (the “Curse”).

Figure 3: Impact of project approval process on development pipeline �" lax process & vicious cycle

In contrast, companies are able to take control of their “Success” by maintaining a disciplined and rigorous project approval process. This results in a Virtuous Cycle, as reflected in Figure 4, and the trends are of positive and sustainable growth, as reflected in Figure 5.

Figure 4: Project approval process & pipeline cycle �" adequate process & virtuous cycle

The proportion of problematic projects, after the earlier “bump”, stabilizes and the development pipeline is populated by higher quality, well-funded and well managed projects.

The development pipeline is supported by well-resourced and managed experts in Technical Services and Project Management, delivering excellent results to both owners / developers and the hotel management company. The positive results are shared and the positive “buzz” attracts more and better applicants to join the brand.

Figure 5: Impact of project approval on development pipeline �" adequate process & virtuous cycle

4H: Thank you, this was quite enlightening. We are wishing you luck in testing these ideas in the hospitality industry in the near future.

Gert Noordzy, Managing Director NCCL, gert.noordzy@northside-consulting.com

Northside Consulting Company Limited (NCCL) is a boutique consulting firm, specializing in new hotel opening processes, and Organizational Project Management for the hospitality industry. Services provided include pre-opening support for new hotel projects, and new hotel opening project performance improvement.

Visit www.northside-consulting.com for further information.