Imagining a world without budgets for owners, operators
 
Imagining a world without budgets for owners, operators
02 MAY 2019 7:33 AM

Many of the issues that cause conflict between hotel owners and operators can be linked to the budget process. What would happen if budgets went away?

Most are familiar with the philosophy of “gaining control by letting go,” which I have practiced with some degree of success within my own life and throughout my career.

I’ve been pondering the applicability of this concept within the hotel industry, and specifically in the area of operating budgets, having recently gone through the annual review process. Could practicing the art of surrender with the annual budgeting process be a peaceful transition toward improving alignment between owner and operator? I’m not suggesting owners take a passive stance, but rather consider the possibility of an alternative approach.

For as long as I can remember, the period between October and December has been consumed by analyses, discussions, negotiations, prognostications and corporate brand guidance toward preparing and approving budgets for the year ahead.

Now, one might argue this process sets the stage for performance expectations and more importantly achieving them. However, some of the very issues that serve to limit performance potential and misalign interests between owners and operators can be linked back to the budget itself.

While it is unlikely that the industry will rewrite history and change course on this annual rite of passage, it is interesting to explore those areas that could serve to liberate owners and their operators, realign goals and optimize performance absence an attachment to a specific “predicted” outcome—namely, the budget.

Alignment
Now, a shrewd owner will ask: How would eliminating the operating budget help to align goals? Well, what happens right after the budget is approved? Most go into a file while we divert our attention to forecast and year-over-year growth.

While a budget is a useful tool for setting goals and objectives, it is static. Similarly, the limitations of most forecasts today are that they only go out 90 days, failing to acknowledge notable trends that can and will impact the balance of the year.

What if we eliminated the hundreds of hours spent on the budget each year and instead focused on a rolling 18-month forecast? This could easily be clipped for the January to December period if one requires a budget for other purposes (e.g. lender, etc.).

With a rolling forecast, owners and operators will be looking forward and course-correcting along the way. Operators would not be held accountable to static metrics but rather optimal performance and flow-through based on what is possible. It would eliminate owner suspicions about sandbagging budgets to make it easier for managers to earn bonuses or protect the management contract from performance failures, which certainly can impact the relationship, particularly coming into a new year.

Mindfulness
Mindfulness is the basic human ability to be fully present, aware of where we are and what we’re doing, and not be overly reactive or overwhelmed by what is going on around us. So much of the budget is predetermined—between group bookings, special corporate that is negotiated around the same time that budgets are developed—that the budget is essentially wrong the minute it is finalized.

Being mindful also keeps the team focused on the market. Annual corporate directives may have no bearing on local market realities. The budget process focuses the team on corporate guidance as opposed to local trends. Forecasts tend to be market-driven, while budgets can be a distraction from market realities—both positive and negative.

Nimbleness
Key performance indicators are constantly changing, especially as new innovations are brought to the industry, so targets should never be static. Budgets impose static metrics that can limit potential and support an operating culture that is more reactive than proactive. By perpetuating an underlying assumption that “budget is the best potential outcome,” the team will continue to operate within a bandwidth of mediocrity.

If conditions change that give way to opportunities, the budget is rendered irrelevant; if conditions change for the worse, the team can become demotivated for the balance of the year because the target is unrealistic. It’s a lot harder to sandbag a forecast, and by keeping the team focused on and accountable for what “could/should be” utilizing best-in-class KPIs as a guide, you omit the trap of benchmarking off of prescribed growth that is often not relevant.

Freedom
The average budget process takes our asset management team hundreds of hours to review and analyze. Imagine how many hours the operating team spends on developing and revising the budget over the course of three-plus months! What would you do if you could reclaim that time? How does the effort detract from daily operating tasks and, more importantly, what might asset performance look like if that time could be applied to more meaningful, strategic activities, including competitive positioning, finding opportunities to eliminate waste, cultivating a more strategic thought process, growing market share … the opportunities are endless!

Soul searching
While I am a proponent of meditative breathing, owners probably should not hold their breath while waiting for the demise of budgets or the process anytime soon. However, opportunities do exist to drive a philosophy that transcends the budget, and open minds to what can be realized on the bottom line when you free yourself and the team from the limitations of the annual budget ritual.

Craig A. Mason is EVP, Asset Management of CHMWarnick, the leading provider of hotel asset management and owner advisory services. The company asset manages more than 70 hotels comprising approximately 29,000 rooms valued at roughly $15 billion, and currently advises on development projects valued at over $2 billion. CHMWarnick’s hotel owner advisory services include asset management, hotel planning and development, acquisition due diligence, owner-entity accounting, management/operator selection and negotiation, capital planning and disposition strategy. CHMWarnick has ten offices nationwide, including locations in Boston, Chicago, Fort Lauderdale, Honolulu, Los Angeles, Minneapolis, New York, Phoenix, San Francisco and Washington, D.C. For more information, contact 978.522.7000 or visit www.CHMWarnick.com. For the latest company news, follow CHMWarnick on Twitter @CHMWarnick and LinkedIn.

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