The cost of hotel opening delays.
Monday, 24th October 2016
Source : 4Hoteliers.com - Exclusive Interview

Exclusive Interview: Last week, Gert Noordzy, Managing Director of Northside Consulting Company Limited, and author of 'Project Management of Hotel Opening Processes' led a break-out session on 'The cost of hotel opening delays' (and how to stop it!) at HICAP 2016 in Hong Kong.

4Hoteliers caught up with Gert in Macau to learn about the key points on this subject.

How acute is the problem of hotel opening delays? 

Gert Noordzy, Managing Director of Northside ConsultingIt is extremely acute because of the current size of the global hotel development pipeline, and the significant amounts of money that both owners and operators lose as a result. 

We recently completed analyzing the results of a major assessment of close to 700 new hotels openings in China. The results demonstrate that the average delay is 45 weeks, measured from the moment the General Manager starts. In other words, the GM starts not 12, but 23 months before the opening! 

These delays result in an average 35% pre-opening budget overrun. A delay costs hotel owners US$ 15M in missed revenues, and operators US$ 850K in missed management and incentive fees on average. Poorly run projects also impact on scope, brand and quality. 

Can you put this into global perspective?

Worldwide the hotel development pipeline now stands at over 11,000 projects comprising 1.9 million rooms. China and the ASEAN countries have the world’s second and third biggest development pipelines.

The global hotel development pipeline of the Top 10 international hotel management companies stands at 7’800 projects (or 1,247,000 rooms). This represents US$ 117 billion worth of fixed asset projects, and potentially US$ 123 billion in combined owner / operator opportunity cost.

Hotel opening delays keep recurring. Why is that?

The current status quo in new hotel developments is that delays are considered the owners’ problem. Quantitative studies like the above will slowly change this misperception, but why does it currently persist?

Hotel owners lose 18 times more than operators, and therefore have 18 times more incentive to get it right. Hotel operators are experienced and in the best position to help hotel owners, but fail to do so... The situation is not unlike the case of real estate agent’s commission in Freaconomics…

The big white elephant in the room is that the biggest impact is on the owners, who have the biggest vested interest, whereas operators have little or no skin in the game. Invariably, owner and operator interests are not aligned. A developer’s objective is to achieve the highest possible return on investment, an operator’s is to increase the development pipeline, to drive up share prices.

What can hotel owners and developers do?

At present, a new hotel development seems to consist of interdependent, but non-integrated phases, whereby owner-appointed, but separate entities design, open and operate each new hotel. We can compare this to a squadron of airplanes all trying to land at the same time, without a traffic control tower. The outcome is predictable…

To stop the bleeding from hotel opening delays, hotel owners and developers need to get better at managing the delivery of projects, especially integration of phases and stakeholders. The best solution for hotel developers is to appoint a suitably experienced and qualified project manager from the very beginning of the project life cycle for new hotels, to manage all phases and stakeholders, including the hotel operator.

What can hotel operators do?

Hotel operators are in a good position to influence and help hotel owners. The focus should emphasize on-boarding and education. One approach for a hotel company is to set-up a Strategic Project Management Office.

The objective would not be to manage new hotel projects, but rather educate hotel owners, and assist them in setting up a Project Management Office, and provide customizable project management standards, tools and resources.

Fundamentally this is no different from technical services and other contractual professional support hotel companies offer developers of new hotel projects. In fact, some companies even call the hotel management agreement “hotel consulting agreement”.

The return of investment of setting up and running a Strategic PMO is measurable and easily achievable. And of course, a chain that opens 18 hotels loses the same amount as one owner.

In a few sound bites?    

Hotel owners have the most to lose, whereas operators are in the best position to influence. The operator is a service provider, currently not properly managed. Hotel owners need to take action to improve this situation, as they have 18 times more incentive to get aligned, as operators without “skin in the game” will not, as it is less important to them.

This is strictly an exclusive feature, reprints of this article in any shape or form without prior written approval from 4Hoteliers.com is not permitted.

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.

The book 'Project Management of Hotel Opening Processes' is available at Amazon here.

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