Chapter 7 Contract Management Operators The organization that manages lodging or foodservice operations for owners are called operators The Process Usually an investment company Buys the real estate Then builds a lodging or restaurant property on the land Then hires a different company operator to run the property Operator has the appropriate expertise to run it correctly The agreement between owners and operators is a contract thus this segment of the industry is called Contract Services Management There are two types of operators o 1 Chain operators o 1 Independent contractors Chain operators Chain operators are affiliated with major hotel chains Examples Marriott Starwood Hilton There have been many mergers between chain brands which has created mega brands Therefore this group of major chains is becoming smaller each year Independent Contractors Independent contractors are not affiliated with any specific brand They purchase brands and locations based on their assessment for compatibility with their objectives Hotel Contract Management The concept of separating ownership and operation of a lodging property came with the expansive growth of the hotel industry in the 1970s and 1980s Investors could buy land all over the country and not worry about the challenges of running a lodging company Also successful management companies were able to grow their brand names and expand into new markets without huge capital expenditures Win win situation for both parties The Contract Parties There are 3 parties involved in hotel management contracts 1 Operators 2 Lenders 3 Owners Operators desire an increase in both market presence and market share maintaining control over the day to day management decisions and long term stability The most significant recent change in contract negotiation is the increased involvement of lenders and an increase in power of owners Lenders are interested in Generating a rate of return Protecting the investment Owners are interested in Generating cash flow Ensuring their investment grows in value The increase in of hotel operators has given owners bargaining power over the operators The Contract timing One key provision in contracts today is operator loan and equity contributions All contracts include a length of a contract Chain operators Initial 8 10 years Renewals one or two 3 5 year renewals Independent contractor Initial 1 3 years Renewals one or two 2 year renewals Owners want shorter terms Operators like longer terms for stability The Contract Fees Management fees Paid to the operators Basic management fees have decreased in recent years Incentive fees are more challenging to achieve Basic management fees of full service hotels average Chain operators 2 25 of gross revenues without operator equity contribution 2 50 of gross revenues with operator equity contribution Independent contractors 1 5 of gross revenues without operator equity contribution 2 5 of gross revenues with operator equity contribution The Contract Incentive Fees Incentive fees are based on cash flow after debt service or return on equity In the past operator incentives were determined by gross operating profit This shift indicates that owners expect operators to contribute to the bottom line profit not just the revenue The Contract Reimbursable An important area in the contract is the operator system reimbursable expenses Owners pay these fees Systems are provided by the operator s corporation Property benefits from use of systems Chain operators Expenses range 2 to 4 of the gross revenue Independent operators Expenses range 0 to 1 of the gross revenue The Contract Performance Standards Usually performance is evaluated each year Measures include year to year growth based on the initial 3 5 year gross operating profit projection Grace period Hotel first opens 1 2 years where performance criteria can be changed New operator in existing property 6 months If the operator does not meet the performance criteria they are usually required to pay the owner the difference Owners usually include options for terminating the contract based upon continued poor performance The Contract Termination Specific conditions upon which a contract can be terminated for the operator and the owner is a crucial part of the contract Owners must pay the operators a termination fee Chain operators 2 4 times the management fee Independent contractors 0 5 2 times the management fee The Contract The final component of the contract is the degree of input the owner has in decision making related to running the hotel Owners are beginning to negotiate The right to have input on the annual budget Input in hiring the executive staff Executive staff are Operator employees With all contracts each provision is negotiated Choosing a hotel management company If the owner has other hotel properties look at performance of the current contracted companies If no other hotel properties Owners should try to determine Accessibility of Operator s senior management Overall integrity of Operators Measure the marketing strength and penetration of the operator Listen to feedback from clients with existing management contracts Contract Food Service Management Initially called institutional foodservice Most contracts were with Hospitals Industrial plants Correctional facilities Focus was on quantity of food not quality Today this segment is on site foodservice management The quality of food and service rivals that of top restaurants Foodservice is provided on site at schools businesses etc This segment is 230 billion of the 800 billion global foodservice industry The players Contractor the company that provides foodservice Host the organization that hires the contractor Client the person within the host organization that is responsible for monitoring the contractor s performance Self operated organizations the host organization decides to operate their own foodservice On Site Foodservice Management Companies Sodexho Alliance Largest on site foodservice management company Based in France 19 billion in revenue expected Operates in 80 countries Employs 332 000 people Compass Group The next largest on site foodservice management company Based in Britain 10 billion in revenue expected for 2007 Operates in 70 countries Over 400 000 employees On Site Foodservice Management Companies ARAMARK Services Inc The third largest on site foodservice management company Based in the U S 11 6 billion in revenue in 2006 Operates in 18 countries Employs 240 000
View Full Document
Unlocking...