Hotel Topics Hotels in the New E-conomy - E-business - Evaluating the Return on Investment

By Ted Horner, E Horner & Associates Pty Ltd

Technology is one of the most important capital expenditure items a hotel currently faces. However, the benefits of hotel technology are often exaggerated by the vendors and when you talk to hotels that have recently installed new systems, many of their expectations have not been met. In his capacity as a specialist advisor to some of the leading hotel owners, Ted Horner explores the question "will the new technology provide a return on investment"?

The selection of the new technology must be framed within an E-business strategy that considers the tactical implications of what the hotel does and how it does it. It is only then that the real measurement of return on investment can be achieved. At the core of this E-business, strategy should be the guest. Investments in new technology should:

• increase guest satisfaction and loyalty;
• enhance revenue;
• increase productivity;
• provide a competitive advantage.

The main problem with the above concepts is that it is often very difficult to prove whether the new technology actually achieves these objectives. As one hotel owner was cited as saying "there is no wrong or right way with technology - ask three different technology suppliers to give you a solution to your problem and you get three different answers". Unfortunately the hospitality industry has not invested heavily in technology nor is it the best user of technology.

We lag well behind other sectors namely finance, retail and transportation. Part of the problem is that hotel owners ie. those who fund the expenditure, are not sold on the benefits. In addition, operators have not excelled in presenting a sound business case as to why an upgrade or complete replacement of technology is required. In today's competitive world, the technology dollar has to compete with all other areas of a hotel for a percentage of the capital expenditure budget. Owners of hotels today are scrutinising technology capital expenditure requests by operators far more than ever before and in many instances, requests for increased expenditure are being denied. As one owner quoted recently "hotel managers think that technology is a panacea for all their problems which it is clearly not".

If you combine this lack of knowledge of the benefits of technology with the fact that all too often new systems have not met expectations, then you begin to realise why many owners are not convinced about the ROI case for new technology investments. There is a need for specialist IT advisers to work with owners when an investment in technology is about to be made to ensure the following is achieved:

• Cost justification for the investment in technology; Clearly defined technology requirements with technical specifications drawn-up in the form of a Request for Proposal (RFP), the basis of a future relationship between vendor and client with potential contractual remedies;
• Compilation of a list of suitable vendors who are invited to submit proposals;
• Comprehensive and accurate evaluation of all vendors' submissions with a ranking based on their level of compliance to the RFP;
• Use of the IT adviser's leverage in the marketplace to obtain the most competitive price;
• Extensive reference checking of the chosen supplier using the IT adviser's own contacts in the industry to validate their capacity to perform;
• Full scrutiny of the vendor's contracts to ensure that clauses not in the best interests of the client are removed and non-performance or late delivery is addressed in the form of financial penalties.

The process of selecting the right technology is a large undertaking, however it is not as complex as some people would make out. That being said, a systematic approach is required to ensure the most suitable technology is chosen. To help ensure you are on the road to achieving the best return on investment from a new technology system, the following guide outlines the key factors to be considered during the Evaluation / Selection, Contract Negotiation and Project Management stages.

The following ratios are a guide to the weight each function should have in the overall decision process. The following are points to consider and questions to ask the vendor.

1. How long has the vendor been in business? Can they support remote sites? What are the response times for problems?
2. How quickly was the problem fixed (not how quickly did they respond to the telephone call)? If you have a support issue and it is not solved, perhaps next quarter's payment should incur a penalty. Talk to vendors about carrying over credits if you haven't made any support calls. Maybe you could get a percentage put aside for on-going training. Is the vendor willing to enter into a Service Level Assurance Agreement?
3. What other sites has the vendor worked on that are comparable to my own? If you are a 100-room hotel, you don't want to talk to a 500-room hotel as a reference site and if your site is remote talk to someone in a similar situation. Ask for a contact name within those organisations ie. FO manager or senior manager. If the property is large talk to the IT Manager. Ask these people if they know of any other sites created by the vendor, as poor sites can be left off a reference list and these are the ones you really need to talk to. Reference check the performance of the vendor and if you identify any problems,incorporate them as issues for negotiation. Know about the problem before, not after.

Preparation should involve

• Goals of Negotiation - having identified the vendor of choice, you need to know the issues before you talk to them. Knowledge is power: the more informed you are in your decision making process the better. If during reference checking, items such as an interface at another site is not working, ask them for proof the problem is fixed. Address these issues in writing.
• Know in advance items you are willing to concede. Remember when you are negotiating you need to achieve a win win. You are forming a relationship with this vendor and you need them for support and if you "flog them to death" on price, they will need to find ways to recuperate these losses.
• Negotiate costs last.
• Negotiate a payment schedule for maximum final payment, outlining contingent and defect liabilities. Retain 10% of the total payment for a period of 90 days or more after installation is complete. Bank guarantee is usually the most appropriate method. Payment can be linked to delivery or performance. Don't make the amount too small as it will not provide an incentive for completion and they might write it off.

The contract should include

• Detailed system configuration - a list the hardware etc. so you have something to go back to if items are missing.
• Implementation schedule - a time line, particularly if it is a new property, is essential. Get a commitment in writing, including dates for delivery, installation, training, going live etc and ensure these dates suit you as well as the vendor.
• Remedies for missed targets - get the vendor to commit to a penalty for missed delivery, installation etc. deadlines. They will need to be more realistic in the delivery schedule if there is a penalty.
• Training commitments - the reality is if you cut training dollars the vendor may need to return and it can be more expensive to fly to your site again for added training. Some training allowances can seem excessive but if you don't use them up front, you could use them later for retraining.
• Expected levels of system performance - get vendors to qualify system with expected response times of the system.
• Listing of documentation to be provided.
• Software and hardware warranties.
• Prime contractual responsibility - this is the other big issue today. Once you purchase everything from one vendor, now if you buy pieces of the system from different vendors, who is responsible for the problem? Project management becomes important and companies that specialise in this area are coming to the forefront.

Package should include

• Preparation of realistic implementation plans.
• Training schedules and performance testing.
• 'Milestones' for performance - have a list of what you have to do, so that if there is any slippage these are monitored. Make sure the resources are ready in-house as soon as the vendor is ready.
• Acceptance testing - make sure that you get the system thoroughly tested before you make the final payment. If there is a specification list, make sure they have delivered on each criteria.
• Define recovery procedures - have you checked the back-ups are working? We are so dependent on computers, the very procedures you think are in place may not have been tested.
• Maintenance and support services - for hotels the normal warranty of a 24 hour response time is not sufficient. Upgrade to a 2-3 hour response time, especially for critical components. Get response times in writing.

Taking a structured and informed approach to the selection of technology is critical. Hotels that provide valuable applications that generate revenue and draw the guest back for added service and on-line convenience will mitigate the risks of technology. However, any such investment must be framed within a sound E-business strategy to ensure it achieves a measurable return on investment.

Ted Horner,Managing Director,E Horner & Associates Pty Ltd
Widely respected as Australia's leading hospitality technology consultant and publisher of the respected Horner Technology (HT) Report, his expertise is in high demand. Over the last 11 years he has consulted to many international hotel chains and more recently some of the nation's largest hotel owners. Mr Horner is a regular speaker at Hospitality Technology conferences throughout the world and is the founder and promoter of Australasian Hospitality Technology Conference & Exhibition.