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Maximizing Labor Productivity

By Paul West, April 2010

It may be that the current economic situation will not change as quickly as one would hope, particularly for the hospitality industry. In fact, it could be more necessary than ever to continue adjusting expenses to account for the continued change in revenues. More importantly in an industry where labor is the biggest operating expense, the challenges are still greater than in other industries as productivity is tied more conspicuously to quality of service and consequently, to overall guest satisfaction.

Certainly, while operators continue to adjust rates and struggle with business, one thing that remains is that the labor expense is still the single largest operating expense for hotels and hotel companies. Consequently, with changes in one there should be reciprocally appropriate changes in the other. More simply stated, companies simply cannot continue to operate with the same labor expenses for what should be a longer than expected time period of decreased revenues. 

On the other hand, hotels or hotel companies could choose to remove positions as they think appropriate without proper study and analysis; however, then they could then be opening themselves up to more extreme effects on the guest experience. If the guest experience is disrupted, then guest satisfaction will be lowered and hotels or hotel companies will have initiated the one thing that they absolutely cannot afford to do - and that is to jeopardize the only revenues or potential revenues that may be available. 

By now it should be more obvious that reducing labor costs is not as simple as merely reducing staff counts by a given percentage in order to meet financial expectations. Additionally, cutting the wrong staff in the wrong departments may also result in difficulties that are realized farther down the line. Either approach could impact guest service by placing additional strain on staff or effecting business operations in the future such as by creating a back log in guest comment attention or other necessary follow up on the administrative side.

At a time when watching expenses is crucial because revenues have gone flat, no business can afford to mishandle what revenues are available. Therefore, it is imperative for hotel and company managers to project labor properly and frequently based on productivity indicators such as cost per occupied room, labor cost percentage, cost per guest, hours per occupied room, cost per cover, number of hours/minutes to clean a room, number hours/minutes to serve a room service order, cost per treatment, cost per round of golf, etc. More importantly, these measurements must be made available on a daily basis, since doing so only weekly or monthly may be too late to correct the problem or to avoid the expense. Equally important is that these measurements should be done at the job level and categorized by fixed and variable position - not just by department, to ensure that data is more meaningful.

To understand how much labor is needed to operate any hotel, managers must be able to determine how much work each fixed and variable employee can perform. More specifically, too few employees scheduled on any given day may result in service that is below expectations, while too many employees scheduled will result in higher labor expense for the day and consequently, a reduction in profits. The solution to such a challenge is to know how many employees are required given the estimated number of guests anticipated on any given day. To determine this number of employees, one must have a clear idea of the productivity of each of its employees. 

It is this above scenario that presents the definition of productivity as the amount of work performed by an employee within a fixed period of time.

Measuring this productivity is determined by the productivity ratio, that is:

Output/Input = Productivity Ratio.
In order to utilize this ratio, it is important to understand that there are 5 key employee related factors that affect productivity: 
1. Employee Selection – choosing the correct talent for the appropriate positions so that efficiency levels are optimal prior to the beginning of training.

2. Training – as the old saying goes, practice does not make perfect; perfect practice makes perfect. Providing the proper tools to any staff allows for better execution at the desired service levels. 

3. Supervision – direction from experienced managers is paramount achieving fluency in any operation. Establishing clear goals and objectives for trained employees with checks and balances along the way will produce consistent results. 

4. Scheduling – planning the correct number of staff required for optimal performance during varying levels of occupancy and general traffic throughout restaurants, golf operations, spa facilities, etc. must be done so as to accommodate guest needs without an unnecessary number of staff members on hand. 

5. Desired Service Level – the hospitality industry is supposed to be about taking care of guests first and foremost while delivering an exceptional experience which would in turn have them repeat over and over again. This experience must always be delivered with a conscientious eye towards limiting expenses so as to achieve profitability. 

Conclusion

If it is established through the analysis of productivity that labor costs are too high; it is then important to identify problem areas to take corrective action. If the overall productivity of the labor force does not improve as a result of initial corrective action, then additional or other corrective actions must be taken. For instance, the approach to reducing labor-related expenses for fixed payroll is different from the approach to reducing that of variable payroll. One can decrease variable expenses by increasing productivity, improving the scheduling process, eliminating employees, or reducing wages paid. On the other hand, one decreases fixed expenses by reducing wages paid as a percentage of revenue while also increasing sales volume. In every case however, a hotel operation thrives if productivity improves, wage cost remains low and revenues increase.

Time is limited in many ways today, and more so, when operating beneath the heavy weight of a longer than expected drag in any increased revenues. It is time to take things into one’s own hands and utilize the best tools available to analyze labor data more effectively not only against proper indicators and historical data but also against forecast and budget data. Handling this task manually or with a simple spreadsheet of limited information is no longer enough, and certainly there is no better time than now to work towards enhancing the process so as to maintain profitability for as long as possible during the next few years. Once things begin to go back to what may be more normal, then hotels and hotel companies can continue to reap the benefits of having learned how to operate more efficiently when things were down. This can only make things even better when thing are up again. 



Paul West is a principal at priZem Hospitality Solutions, a provider of hospitality corporate and property financial solutions that cost effectively reduce the budget/forecast preparation cycle; facilitate the daily labor/revenue preparation and reporting process; increase overall operational data accuracy and allow for faster corporate and departmental report distribution. Go online at www.prizem.com, call 646-213-0067 or email sales@prizem.com for more information.
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Also See: Financial Mindset for 2010! / Paul West / June 2009
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