What owners need to know about shared service fees
 
What owners need to know about shared service fees
02 JULY 2019 7:22 AM

Before jumping into centralized and shared service programs, here are some things owners should keep in mind.

Hotel management companies continually introduce new initiatives intended to improve efficiencies and increase market share.

While some shared and centralized services programs can provide labor expense reductions at the hotel level, these benefits are frequently offset by increased corporate support costs and fee allocations, making the net impact difficult to fully evaluate. Rarely do management companies provide sufficient detail or analysis of the cost versus benefit of new programs that are introduced, and related fees are extremely difficult to track. Further, these initiatives can result in additional hidden hotel workload, which results in greater pressure at the hotel level to execute the new programs, along with covering existing responsibilities with less staff support.

When new initiatives are rolled out, most hotel management agreements (HMAs) specify that the owner is required to engage in brand programs to maintain compliance. Most HMAs require the operator to maintain costs within the annual approved budget. In order for new or modified services to be considered, the owner must be provided with details of the new initiatives, so the owner can challenge, if necessary, during the annual budgeting process.

What should owners do to ensure that brand/management-mandated programs are aligned with their investment objectives? Start by asking the following questions:

  • Which services do I need and why?
  • Which services are mandatory vs. optional and what is the process for opting out, if necessary?
  • What is the expected ROI and how will I receive proof that this new program will produce more value?
  • Is my share of the cost appropriate and what is the basis for calculating?
  • What documentation will be provided in support of the shared cost?
  • Why are these costs not covered by management or other existing fees?

Hotel management companies must provide details about the proposed services, highlighting not only current year objectives and benefits but also the annual cost. It is reasonable for an owner to request details on alternatives should they elect not to participate. While an owner can realize some potential benefit as a beta test site, this option should be avoided unless the management company offers zero-cost options.

Once the program begins, owners should require monthly updates on the performance of the program compared to original goals and targets from not only the management company but also the property team. Management companies should be challenged early on during a new program to confirm the program is producing the expected results, and request modifications in program costs, if necessary.

The total cost of shared and centralized service programs is generally allocated to hotels based on a variety of factors. Owners should be assured that their allocation of costs is fair and appropriate based on the level of participation, type of hotel, and the detailed calculation of the allocation.

As new programs often incur unexpected costs, management companies should formulate mitigation plans to lower costs in the same manner that hotels must maintain profit expectations when initiatives don’t achieve expectations.

Management companies can be resistant on providing transparency and detailed support for corporate and shared programs costs. Program costs need to be challenged to ensure that the owner is not being charged for items that could be carried as overheads of the management company. Management companies need to provide copies of all support and invoices, which should be reviewed monthly by hotel management.

Should this program be part of management company overhead or part of existing services fees? This is a challenging area as management companies continue to identify areas to increase their own revenue streams and the separation between overhead and billbacks becomes more difficult to analyze. The best approach is to challenge the management company to prove these costs are not normal overheads.

Besides the management company responsibility of controlling costs, hotel management needs to monitor these costs as part of their fiduciary responsibility. While corporate billables can become a sensitive challenge, owners need an advocate in their court, like an asset manager, to keep the operating team focused on driving profits and asset value.

Art Burger (CHAE+) is a senior vice president at CHMWarnick, the preeminent 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 is advising 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 nine offices nationwide, including locations in Boston, Phoenix, Chicago, Fort Lauderdale, Honolulu, Los Angeles, New York, 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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