Understanding Management Companies: Roles, Functions, and Impact part 2
- 1. How Management Companies Manage Hotels To understand how management companies operate hotels, we begin by looking at their history and growth. These companies play a crucial role in handling contracts with hotel owners, outlining key provisions and their reasons. Finally, explore the opportunities and risks for both owners and management companies when they agree to these contracts.
- 2. Why Management Companies Exist Hotel management companies exist because running a hotel is complex and demanding. Unlike other businesses like offices or malls, hotels operate 24/7 and provide a wide range of specialized services such as food, cleaning, and event hosting. They function like small cities, requiring expertise in operations, guest services, and emergency management. For inexperienced hotel owners, buying a franchise (like Holiday Inn) can provide systems and training but not necessarily experienced managers. Recognizing this gap, some owners hire management companies like Hilton or independent firms to run their hotels professionally. These companies bring expertise in hotel operations, ensuring profitability and quality service delivery. Thus, hotel management companies help owners navigate the complexities of the hospitality industry effectively.
- 3. The Evolution of Management Companies The evolution of hotel management companies has been determined by changes in ownership models and the growing complexity of the hospitality industry. Traditionally, hotels were managed by experienced hoteliers who understood the workings of running a hotel. However, in the latter half of the twentieth century, a new wave of owners emerged—entrepreneurs and real estate developers—who saw hotels primarily as profitable investments rather than operational projects. These new owners often lacked expertise in hotel management and were uninterested in getting it. They had several options for managing their hotels: they could hire professional managers independently or turn to established hotel companies like Hilton. The latter option attracted to many because it allowed them to benefit from the hotel brand's reputation and operational expertise without taking on the financial risks associated with developing hotels from graze. One common arrangement was the lease agreement, where the owner leased the hotel property to a hotel company. Under this setup, the hotel company would manage the entire operation, including staffing, revenue collection, and covering operating costs. In return, the hotel company paid rent to the owner and received a share of the hotel's gross operating profit. This model allowed hotel companies to expand their portfolios rapidly and profitably.
- 4. the industry changed, management contracts became more dominant. Instead of leasing, hotel companies began entering into management contracts where they received a management fee (typically a percentage of revenue or profit) plus an incentive fee based on performance metrics like profitability. This incentivized hotel companies to maximize profits for owners while assuming less financial risk compared to lease agreements. In the United States, independent management companies like Richfield Hospitality (formerly Regal-AIRCOA), founded by Robert M. James in 1971, played a key role in advancing the concept of separating hotel ownership from management. These companies focused solely on managing hotels for owners, facilitating the growth of the industry and setting standards through organizations like the International Council of Hotel and Motel Management Companies. Over the times, the number of independent management companies has expanded significantly, reflecting the broader trend of specialization in the hospitality sector. Today, these companies play a crucial role in helping hotel owners maximize profitability and operational efficiency while navigating the complexities of the global hospitality market.
- 5. Management Contracts • A hotel management contract is a formal agreement between a hotel owner and a management company, where the management company takes responsibility for operating the hotel. This arrangement typically involves the management company receiving a fee for its services. The management company can be a well- known brand like Hyatt or Marriott, or it can be an independent management firm like Interstate Hotels & Resorts. • Firstly, management companies were hired solely to provide services without taking on financial risks or receiving profits. However, over time, this concept changed. Nowadays, some management companies may invest in the hotels they manage, assuming a portion of the financial risk. This investment could involve owning a stake in the property or providing financing. This shift reflects a broader trend where management companies align their interests with those of the owners, enhancing the mutual commitment to the hotel's success.
- 6. • The relationship dynamics between hotel owners and operators have also changed significantly. Competition among management companies, both branded chains and independents, has increased. Owners now play a more active role in managing their investments and negotiating contract terms, especially considering environmental concerns that can complicate hotel development in sensitive areas. • Following the economic downturn of the late 2000s, hotel development slowed, shifting bargaining power to owners who became more careful about assuming financial risks alone. This cautious approach stays even as global hotel development has resumed. Many modern management contracts reflect a trend where management companies are expected to invest in projects, either through ownership stakes or financing arrangements, thereby sharing financial risks and aligning their goals with those of the owners. • In core, contemporary hotel management contracts are increasingly structured to balance risks and rewards between owners and management companies, fostering a collaborative approach to hotel operations and development.
- 8. Contract Provisions • Hotel management contracts are crucial agreements for hotel owners, operators, and lenders who finance the project. These contracts outline specific terms that all parties agree upon. While the basic provisions are similar across contracts, details can vary significantly. • Operating Term: This specifies how long the initial contract lasts and options for renewal. Operators usually prefer longer terms for stability, allowing time to recover investments in training and brand standards. Owners often prefer shorter terms for flexibility, especially if they want to change operators before renewal. Lenders prefer stable contract terms that match the loan repayment period. • Fee Structure: This outlines what fees the owner pays the operator for managing the hotel. It's a critical part of the contract affecting both parties' profits. Fees can include technical assistance for design, pre-opening management fees for preparations before opening, and ongoing management fees based on revenue. Chain operators charge more due to their recognized brand names. • Reporting Requirements: This defines the reports the operator must provide to the owner regularly. Reports cover budgets, financial statements, marketing plans, and operational updates. This transparency helps both parties monitor the hotel's performance. • Approvals: Decisions about hotel operations or changes often require approval from both parties. Owners typically approve key hires and major decisions like marketing strategies. Lenders may also have a say in strategic decisions to protect their investment.
- 9. • Performance Clauses: These allow the owner to terminate the contract if the operator doesn't meet agreed-upon standards. Common benchmarks include revenue per room compared to similar hotels. The contract sets an implementation period during which these standards must be achieved. • Termination: This clause allows either party to end the contract under specific conditions, such as non-performance, bankruptcy, or property sale. Some contracts allow termination without cause, but this usually involves a penalty fee paid by the owner. • Operator Investment: Operators may invest in the hotel to show commitment. This can be cash, waived fees, or services. The contract specifies how this investment is used and its terms, such as loan details and interest rates. • Operating Expenses: The contract states which operational costs the operator can charge back to the owner. These include centralized advertising, reservation systems, and other corporate services used for hotel management. • Other Provisions: Additional clauses cover various aspects like non-compete agreements, ownership transfers, exclusive working relationships for future projects, handling property damage, and setting aside reserves for equipment replacement.
- 10. Advantages and Disadvantages • Management contracts have advantages and disadvantages for each of the parties involved. • Advantages: • Expertise and Reputation: When a hotel owner hires a management company, they gain access to the company's knowledge and good reputation in the hotel industry. This expertise can improve how efficiently the hotel operates and how satisfied guests are with their experience. • Operational Efficiency: The management company takes on the everyday tasks of running the hotel. This includes hiring staff, handling marketing efforts to attract guests, and managing purchases for the hotel. This releases up the owner from these responsibilities. • Cost Control: Experienced management companies have effective ways to manage expenses. By controlling costs like staffing and supplies, they can help the hotel make more money and become more financially successful. • Brand and Market Access: Many management companies operate under well-known hotel brands or have strong marketing skills. This can bring more guests to the hotel because people trust and recognize these brands. • Training and Development: Management companies often provide training programs for hotel staff. This can improve how well employees serve guests and make them more likely to stay working at the hotel.
- 11. • Disadvantages: • Loss of Control: When a management company is in charge, the hotel owner might have less say in how the hotel is run day-to-day. The management company follows its own rules and policies, which might not always match what the owner wants. • Management Fees: Owners have to pay fees to the management company for its services. These fees usually take a percentage of the hotel's revenue or profits, which means less money for the owner. • Financial Risk: Even though the management company runs the hotel, the owner still has to take financial risks. If the hotel doesn't make enough money or loses money, the owner is the one who has to cover those costs. • Contract Terms: The contract between the owner and the management company sets rules for how long the company will manage the hotel and when the contract can be ended. These terms might limit what changes the owner can make to how the hotel is managed. • Reputation and Guest Satisfaction: If the management company doesn't perform well or has a bad reputation, it can hurt how guests see the hotel. This might lead to fewer guests coming to stay, which could affect the hotel's success.
- 12. Summary Hotels are unique properties that operate like small communities, needing people with specific hotel management skills to run them. In the latter half of the 20th century, inexperienced owners like investors and real estate developers started buying hotels. They realized the best way to manage these hotels was to bring in experienced hotel operators. They did this by either (1) leasing the hotel to them, where the operator paid rent but kept all profits, or (2) signing a management contract, where the operator didn't pay rent but received a fee to cover costs plus a share of the profits. A management contract is a written agreement between a hotel owner and a management company (operator). The owner hires the operator to fully manage the property. The operator could be a well-known hotel chain or an independent company. Management contracts are still changing for several reasons. Many new hotel owners only want short-term involvement. Hotel development has slowed because of changes in taxes, business conditions, and concerns about the environment. Owners are now less willing to take all the financial risks alone; operators are sharing some risks.
- 13. Important parts of a management contract include how long it lasts, how fees are paid, reporting rules, what decisions need approval, how well the hotel performs, how the contract can end, how much the operator invests, and what operating costs are. From the owner's view, hiring a management company means they don't have to manage the hotel themselves. They get experienced managers and systems to run the hotel. However, the owner still pays bills even if the management company is in charge, and management fees reduce profits. Management companies benefit because they can grow without using a lot of their own money, which lowers their financial risk. But if owners are hard to work with or don't have enough money, it can hurt the management company's reputation and stop them from making profits they earned. Also, owners can fire a management company even if the hotel is making money and the company helped build the business.