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Technology Budgeting — Coping with Change

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October 25, 2016
Technology | Investments
Ron Strecker - rstrecker@ajshotels.com
DanPhillips- dphillips@dare2i.com

It’s fall.  And for many reading this article, that means you’re involved in some aspect of budgeting.

Most people are focused on just the operating budget, but others are also involved in capital budgeting.  (As you’ll read later, a better description for Capital Budgets moving forward might be Project Budgets.)  If your job is in finance or technology, then you are obviously knee-deep in both budgets.

For most hotel companies, preparing the operating budget consists of monthly revenues and expenses that follow the detailed format contained in the Uniform System of Accounts for the Lodging Industry, 11th Revised Edition (the purple book).  When this edition came out in 2014 it introduced a new department called, “Information and Telecommunications Systems” (I&TS) and demoted the status of the legacy telephone department to the category of “Minor Operated Departments.”

These two changes were game changers for accounting that required additional general ledger accounts, financial design modifications, and a real treasure hunt to bring all of the expenses from other departments into a single location.  Prior to the change you would find software support fees or technology purchases in various operating departments and a big concentration of costs in Administrative and General.  Nearly all of the expense associated with telephone service now goes to the new I&TS department.  The only expense charged to the demoted telephone revenue department is the calculated cost of local and long distance associated with the measly amount of guest phone revenue we see today.

The new detailed list of expenses for the I&TS department breaks down into four primary categories.  Labor Costs and Other Expenses are two categories common to every other department. The Cost of Services category picks up the costs for telephone trunks (if you still use them), along with your monthly ISP billings and cell phones.  The final category is Systems Expenses, which that includes detail for costs by operating department.

This change acknowledges how important technology has become to this industry, just as it has in virtually all industries.  It also highlights how much technology is costing businesses today. Bringing all of these costs to one department has advantages and disadvantages.  The primary advantage comes from having all these costs in one location on the financial statement, categorized into logical buckets.  One might also call this a disadvantage because now the total technology spend becomes a target for questions from general managers or owners.

One other change occurred in 2014 that may have also created turmoil in your organization.  If you work in an environment that is owner-operated, and you have an accounting office that is focused on GAAP, then you may have heard the term “repair regs” used in meetings about capital budgets.  If your company does not deal with the IRS, or does not follow GAAP, then this topic may not be relevant.  Basically, the repair regulations have clouded the use of capital budgets as an appropriate phrase.  Project budgeting might be a more appropriate phrase to use in the future.  Seek further information from your controller.

Accuracy counts with all types of projections.  Inaccuracy in operating budget assumptions show every month on the P&L. Inaccuracy with the estimated cost of a significant project can put other projects at risk for funding.  Since 2014, technology is one area where the final resting place for an expense from normal operations or from major projects can be a moving target.  Working closely with the accounting team is one of the best ways to assure there is a common understanding about where these costs will show up.

Before and After

Let’s go through a few brief examples of how technology budgeting has become more complex.  This complexity didn’t come about in 2014; it has evolved just as technology has evolved.

Software licenses and the associated maintenance contracts for support and upgrades are pretty simple to explain.  In the old days, one of the single biggest expenses on the purchase of a new PMS or POS was the upfront cost of a software license.  This cost, along with equipment could be capitalized and amortized over a defined number of years.  The annual contract for software support was treated as an operating expense.

Around 20 years ago an alternative approach came along that could be considered a pre-cursor to today’s cloud environment. The applications server provider (ASP) approach allowed the hotel to pay a monthly fee per terminal for software that was hosted by the vendor.  This monthly operating expense replaced the capitalized software license and the annual support fees.  When an item is capitalized, the monthly expense shows on the income statement as depreciation, which is below gross operating profit (GOP).  Moving a chunk of expense from depreciation to an operating expense line that would now impact GOP was very unpopular with general managers and adoption was slow.

In today’s cloud environment, we sometimes refer to a vendorhosted application as a software subscription.  Subscriptions of any kind are an obvious operating expense, but this also means that you are now paying for each individual license, and keeping control on the number of licenses in use becomes its own nightmare.  The old method of purchasing an enterprise license would sometimes come with unlimited users.  Different vendors will have different ways of calculating the monthly expenses.

Add all of these technology-based fees to traditional hotel operating expenses and one can see the ADR being chewed up quickly.  It would be very easy for a GM to add on to each of these applications, such as adding a new module to the PMS, or a contact center to the voice platform, or even adding a new sales and catering package, by simply adding another small fee per room per month.  Careful considerations must be made when budgeting with these new business models.

Hardware budgeting is a little easier, though there are many different options available today.  As more applications become cloud-based companies no longer need to invest in multiple onsite servers.  And since the application is accessed through a Web browser, the useful life of a desktop PC can be extended.  In the old days when a new whiz-bang application was installed, the specs required for the individual desktop looked like it was for an engineer’s CAD station.

Many companies have policies that dictate a minimum value for any tangible asset to be capitalized.  Let’s say that number is $1,500 for an individual asset.  In the late ‘80s an IBM PC-AT could easily cost nearly $3,000 and would obviously be capitalized under this policy.  Today, most desktops and many laptops fall below $1,500 and are charged directly to operations.  This can be a critical point of discussion when putting your operating budget together if you plan on doing a large turnover of existing desktops in one year.

Leasing equipment has been around for decades, most commonly with telephone switches.  It has also been common for companies to set up perpetual leases for desktop computers that include a monthly fee for the maintenance of the equipment.  These arrangements often include a cyclical upgrade every 3 to 5 years.  Here’s the catch. Telephone switch leases tend to be capital leases, while desktop computer leases are more commonly referred to as operating leases.  Here’s another opportunity for you to sit down with your controller and understand the differences.

There continues to be discussion on refresh policies for technology.  Comparisons of replacing staff computers versus replacing guestroom chairs are fodder for another article.  However, when once a hotel was laden with numerous, large box servers humming along in the basement, today much of those systems are hosted in the cloud with very little onsite equipment.  How are budgets to be constructed to account for these refreshes?  Hosted contracts imply that the vendor will maintain and upgrade its equipment.  But, how should refreshing technology onsite be accounted?

An answer to these questions might be a projectsbased budgeting plan.  Hotel managers will need to plan projects to upgrade current system or add new applications or modify current procedures to incorporate new vendor solutions.  These projects most likely will have a mix of both small capital costs with fee-based operating expenses.  This means that project spending will hit various places in the budgets.  Proposing a project to hotel ownership will need to include a business plan, showing all related costs both upfront and in the future against all of the benefits forecasted.  Just as technology continues to change, those changes are forcing hotel owners and hotel managers to adapt to discussing budgeting for technology in all new ways.  Just try explaining XaaS to your hotel owner!

Here's the bottom line for all the technology leaders in the industry:

Your role as the lead geek now includes the requirement to become more educated in the ways of hotel accounting.  Your approach to projects is no longer (I a simple capital budget conversation.  And when the restaurant manager wants to add five more tablet terminals to service the pool area at $120 per terminal per month, it is the I&TS budget that gets hit.

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