at Controlling Payroll Costs / Deloitte
|September 2004 - In August of this year, The London Development Agency
(LDA) announced plans to invest £3.5m to create world-class hospitality
service staff in London. With attention focused on the employment aspects
of the industry, we review some of the major changes that have occurred
within the capital.
Drawing on the results of the annual HotelBenchmark Profitability Survey by Deloitte, we have analysed the profitability performance of over 60 hotels in London over a four year period, to establish how spending on payroll has changed since the industry peak of 2000.
Payroll costs fall
As would be expected hoteliers have sought to control payroll costs over the last four years as demand levels have declined. As a result absolute payroll has fallen by nearly £650 per available room from £12,551 in 2000 to £11,904 in 2003. With occupancy levels falling nearly ten percent between 2000 and 2001 total payroll expenses contracted by 2.4 percent. Another 2.4 percent contraction in payroll was reported in 2002 with a further 0.5 percent reduction in 2003. This is encouraging given the fact that during this time both the minimum wage and national insurance contributions have increased. Clearly hoteliers are being proactive at managing this significant cost element of the business.
Whilst in absolute terms there has been a reduction in the level of spending on payroll over the last four years, payroll as a percentage of revenue has increased from 24.5 percent in 2000 to 27.8 percent in 2003. This is predominantly due to the fact that payroll is not entirely a variable cost and therefore despite declining revenues payroll cannot be cut in the same ratio. The chart below outlines the percentage of payroll to revenue by department.
The chart clearly illustrates that the rooms department has the lowest
payroll ratio at about 15 percent, whilst payroll levels in the food and
beverage department are around 38 percent. With the inclusion of all other
payroll costs, this leaves total payroll accounting for around 28 percent
Over recent years the industry has re-structured Front Office teams, with some traditional roles being eliminated and responsibilities reassigned. Food and beverage departments have also been restructured as operators look to rein in costs. Consequently, a recent UK salary survey by recruitment consultants Berkeley-Scott noted that market conditions, changes in ownership and departmental restructuring are only having a marginal effect on salaries, and “there still appears to be sufficient slack in the market to avoid any major salary increases.”
In an attempt to control labour costs, a number of companies have engaged in more creative methods instead of simply reducing the number of people employed. The most obvious method is the introduction of ‘clustering’ or the creation of area management roles for functional activities such as finance and revenue management. In some instances, clustering has been extended to General Management positions. However, far from being a simple method of cost-rationalisation, such methods may initiate a fundamental redesign of the organisation.
Clustering tends to be prevalent in companies with groups of hotels in close proximity to each other. For example following the decision of Travelodge to split the management of its hotel and Little Chef businesses last year, the role of general manager has been replaced with a cluster manager who looks after up to five units. At a national or international level, shared-service centres (such as that operated by Marriott International in the USA) or outsourcing also provide further opportunities to rationalise costs and make better use of resources.
Technology in the drive for efficiency
Looking outside of London and the UK, a number of companies including Hilton and Starwood are experimenting with service technologies – notably self check-in kiosks, which enable guests to dispense with the need to check-in via the front desk. Furthermore, such kiosks also have the functionality to provide hotel and local area information, additional room keys and folio information. Radisson Hotels & Resorts recently announced their intention to take remote check-in one stage further and allow guests to ‘check-in’ via the internet 24-hours prior to arrival.
In addition to meeting the needs of external customers, service enhancements may also be achieved by targeting the ‘internal’ customers – the staff themselves. E-learning solutions are one such method of deploying training and development programmes, particularly to employees located in far-flung areas of the world.
As a labour-intensive industry, the level of business activity will always play a significant role in labour-planning for hotels. However, as recent years have shown, there may need to be a re-think of traditional organisational structures at a hotel or company level in order to both minimise payroll expenses and provide for a more efficient, service-focused industry without compromising quality.
Notes: All analysis in UK £.
The HotelBenchmark Survey contains the largest independent source of hotel performance data outside of North America and tracks the performance of over 6,000 hotels and 1.2 million rooms every month.
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|Also See:||Meyer Jabara Hotels Promotes 3 General Managers; Reflects Cluster Management Strategy / September 2003|
|Hotel Chains Hoping Self Serve Kiosks Gain Widespread Acceptance; Potential to Cut Labor Costs Over the Long Run / March 2004|
|The UK Hotel Industry Strongest in Europe; RevPAR in the UK Up 10% Over Same Period in 2003 / Deloitte / July 2004|