A Common Sense Review Process for Capital Investments | By Dr. John Hogan, CHE CHA MHS

"The best investment is in the tools of one's own trade."

Benjamin Franklin

(1706-1790 American Statesman, Scientist, Philosopher, Printer, Writer and Inventor.)

Benjamin Franklin was known for many things in his professional life, but he is often credited with his logical and sometimes frugal approaches to business and spending money. His Poor Richard's Almanac¹ is chiefly remembered for being a repository of Franklin's aphorisms and proverbs, many of which counseled thrift and courtesy, with a dash of cynicism.

In this time of global uncertainty, there is a hesitancy to spend capital dollars without having a clear sense of the timing of the ROI (return on investment). That concern is reasonable, but it may also cause some hoteliers to delay needed updates or improvements at a time when lower occupancy allows for both availability of space and potentially lower costs from those providing the products or physical improvements. This delay could also allow new competitors to more quickly enter markets when the cycle does improve if existing hotels are not competitive or not meeting the current needs of evolving clientele.

Capital projects are generally defined by both a certain financial amount and government regulations relating to depreciation tables. These projects are usually completed for one of three reasons:

1. To improve the profit potential (sometimes called Profit Improvement Plans)
2. To comply with brand standards or requirements (if appropriate)
3. To introduce significant physical additions or improvements, such as adding a new wing, spa, meeting space, retail, etc.

In my career, I have seen capital requests handled by owners and management companies in many ways. Some of these were organized and logical, while others tended to be biased and not necessarily based on probable business logic but more on what some of us might view as quirky. While capitalism allows ownership to make whatever decision they want, it can be frustrating for those of us in the field.

The following is offered as a guide to considering capital projects.

Goal

1. To provide an objective opinion on large capital projects prior to final decisions
2. To identify and evaluate key assumptions that are part of the projects
3. To improve the quality of capital project requests

Process

1. Create an assessment team to evaluate all capital projects/requests. The assessment team should have a representative group of three to five people, representing marketing, engineering, finance and operations (F&B or other major centers). They select a team leader and they are given at least four weeks to evaluate all capital projects/requests after the capital expenditure request process has been introduced to hotels. Ideally, this team will NOT have senior executives or those directly involved in the proposed project on it.

2. Verify and evaluate the key assumptions offered by the person or hotel requesting the capital funds.The assessment team should review the key assumptions, including the cost estimates, markets to be served, competitive activity and positioning, consistency within the company programs and the financial projections that provide the ROI timelines. Strategies and risk should be part of the justification and discussions with those requesting the capital funds.

3. Give feedback to the person or hotel requesting the capital funds of any perceived challenges or inconsistencies, allowing them to revise their request.The assessment team should evaluate all the assumptions and determine if there are problems or challenges in the requested projects, meeting with the person or hotel requesting the capital funds if needed. There may be changes in the request after this discussion, which will likely improve the quality of the request.

4. Prepare a report describing and evaluating the key assumptions.The assessment team should put together a brief report, identifying what the team felt were the key assumptions and the team's opinions on the appropriateness of the request. Ideally, major disagreements should be highlighted but the report should NOT recommend approval or disapproval of the requests. The goal is to have in depth analysis and discussion, but to recognize it is the responsibility of the owner, their representative or senior management to make the final decision.

5. Review the final report with the person or hotel management staff requesting the capital funds, and then delivers it to senior management for action. The assessment team leader should review the final report with the person or hotel requesting the capital funds. The report should then be sent to senior management as far ahead of the decision deadline as possible to allow their consideration.

Assembling an assessment team once a year for evaluating capital fund requests and projects involves more people and allows for better analysis and discussion. By not making recommendations, the team is not responsible for seemingly stepping on the "toes" of senior management or ownership but this team can play a major role in analysis.

Feel free to share an idea for a column at info@hoganhospitality.com anytime or contact me regarding consulting, customized workshops, speaking engagements … And remember – we all need a regular dose of common sense.

John Hogan is a successful hospitality executive, educator, author and consultant and is a frequent keynote speaker and seminar leader at many hospitality industry events. He is Co-Founder of a consortium (www.HospitalityEducators.com) of successful corporate and academic professionals delivering focused and affordable counsel in solving specific challenges facing hospitality today. www.HospitalityEducators.com is a membership site offering a wide range of information, forms, best practices and ideas that are designed to help individual hoteliers and hospitality businesses improve their market penetration, deliver service excellence and increase their profitability. Individuals wishing to contribute materials may send them Kathleen@HospitalityEducators.com. Special introductory pricing is in effect for a limited time that also includes a complimentary copy of LESSONS FROM THE FIELD- A COMMON SENSE APPROACH TO EFFECTIVE HOTEL SALES.

Consulting Expertise and Research Interest
1. Sales Management and training
2. Turn-around and revenue management
3. Professional Development for the Organization and the Individual
4. Customer Service
5. Making Cultural Diversity Real
6. Developing Academic Hospitality programs
7. Medical Lodging Consultants

If you need assistance in any of these areas or simply an independent review or opinion on a hospitality challenge, contact me directly for a prompt response and very personalized attention.

www.HoganHospitality.com
Your Hospitality Resource for Hotel Owners, Innkeepers, Managers and Associations