Funding and Payback
Real Estate Report
Published peridocially for professionals in the real estate and hospitality industry by KPMG LLP
One thing that is well understood in the hospitality industry is the art of the deal to buy or build a new hotel. From assessing the feasibility, to negotiating the purchase, to getting investment approval, to arranging financing or funding; these are all things fairly well understood by most hospitality executives. Unfortunately, the same is not true about technology investments. Frequently hospitality executives struggle to understand the merits of making multi-million dollar technology investments.
They want to ask the same questions about the business rationale, cost, time frame, funding, and payback that they would for most hotel deals, and sometimes they do, but unfortunately they seldom get sufficient answers to establish the comfort zone they need to make the major technology investment decision.
What is the business rationale for making the technology investment? This is one of the most important questions to ask. There is plenty of technology already in use in most hotels today. Investing in new technologies for the sake of having the latest up-to-date systems, just doesn’t seem to cut it in the minds of most industry executives, nor does trying to rationalize a major technology investment solely on the basis of reducing ongoing maintenance costs of the old systems. A more compelling business case is to identify and quantify a number of major tangible benefits that can result from making the investment, along with the detriments from not making the investment.
Take for example a pro-posed, top-tier sales force automation (SFA) solution. In addition to just measuring the potential productivity gains from implementing the solution, a number of other tangible benefits should also be identified and quantified, such as market share increases expected against the top 20 global accounts and the benefit of being able to wean out unprofitable accounts. Key detriments should also be identified and quantified associated with maintaining the status quo. For the SFA solution, this might include lost market share for key accounts to competitors that have already invested in a comparable new solution or lost business due to the awkward manual processes of handing off qualified business leads throughout the organization. Multiple tangible benefits and detriments, when presented together, make for a much more compelling business rationale for the technology investment.
COSTS AND TIME FRAME
Costs and time frame are two of the most pressing issues that cause the greatest anxiety among business executives pertaining to major technology investments. The fear is the “run-away project” that takes three times as long to implement and double or triple the costs to complete than was budgeted. Like a hotel development project, all costs “fully loaded” need to be considered. In the case of a technology project, “fully loaded” means, in addition to the direct costs of software and external consulting resources, the costs associated with many other not so obvious items, such as required upgrades to the enterprise technology infrastructure, software enhancements to legacy applications, costs of the development and production environment, costs associated with interfaces to other business applications, rollout and training, and the internal staffing costs of implementing and supporting the solution, which are often overlooked. Time frame is also a critical consideration. Realistic scheduling and availability of resources needs to be well thought out. All major factors that have a reasonable potential to derail the timeline need to be addressed upfront.
There are a number of ways to control time and costs of major technology projects. These include:
FUNDING AND PAYBACK
There are a multitude of ways to fund technology projects and measure pay-back on investment. For every major IT project, an attempt should be made to quantify all direct and indirect financial impacts associated with the project in terms of potential increases or decreases in revenues and costs over a reasonable time frame — usually three to five years. Frequently the biggest payback is not from implementing the new solution itself, but from re-engineering antiquated business processes around the solution.
An example of this would be the elimination of most of the antiquated paper-oriented workflow in the purchasing and payables area, as well as at the same time moving to a “purchasing card” solution while implementing the purchasing and payables modules of a new ERP solution.
Funding of IT projects is generally a big challenge, particularly for major hotel companies with large franchisee networks. Only a small portion of the increases in franchisee revenues associated with a new technology solution come back to the hotel company by way of the annual percentage franchise and royalty fee — in some cases less than five percent of the actual incremental revenue.
There are a number of other ways to directly fund major technology projects, most of which apply to both internal and external IT customers:
Direct user fees — allows users the benefit of paying for only
what they need or use.
Co-opetition — forming technology cooperatives with industry peers to better absorb the one-time cost for developing next generation business applications.
Software Rentals/ASPs — to preserve cash flow, many software vendors are now offering the option to customers to license their soft-ware on the basis of a monthly licensing or rental arrangement. This arrangement can also be obtained on a monthly rental basis from third-party application service providers, along with the hosting infra-structure and applications support. The drawback is the high imputed financing costs of the software, sometimes as high as 25 percent annually.
Vendor partnering — joint venture with software vendors and integration partners to develop and implement solutions for substantially reduced prices in exchange for rights to re-market the solution broadly to others in the industry.
Transaction-based fees — charging users a per transaction fee similar to current practices for reservations services and e-procurement services.
One-time user surcharges — charging a one-time surcharge or special assessment to users of the solution. This is particularly more palatable for users and franchisees in regard to new technology solutions that haven’t been offered before with demonstrable high-value financial benefits to the users.
Evaluating a major technology investment in many regards resembles the
process used by hotel executives for evaluating hotel investments. The
business case must be there, funding must be identified, and the payback
on investment needs to be determined in a manner that can be easily understood
by hotel executives.
KPMG Consulting, LLC
Francis J. Nardozza, Managing Director
National Hospitality Industry Director
Tel. 305 913 2642
Fax. 305 381 6529
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