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The Future of Hospitality Applications

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March 01, 2003
Managed | Services
Sally Kelly - skelly@bearingpoint.net
Donald G.Gallagher- dgallagher@bearingpoint.net

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© 2003 Hospitality Upgrade. No reproduction without written permission.

Calendar year 2002 was not a good year for the hospitality industry and, unfortunately, 2003 does not look much better. While occupancy has risen since Sept. 11, average daily rates are depressed and, due to systemic changes in distribution, may not return to pre-Sept. 11 levels. According to Smith Travel Research, occupancy declined 2.1 percent and room rates fell 2.8 percent over the first nine months of 2002 in the United States alone (see Smith Travel Research Third Quarter 2002 U.S. Lodging Industry Results at www.wwstar.com). The question is: What can hotel owners, franchisees and their brand management companies do about it?

There are two basic strategies. First, increase occupancy, targeting guests who are less rate-sensitive and more likely to spend both on the room rate and on hotel amenities. Second, take cost out of the operations, concentrating on reducing back-office operational costs that will allow the operator to focus on service — the key differentiator for companies in the hospitality market today.

This insight is hardly novel, however, in tough economic times the traditional focus of cost take for the hospitality industry has been the reduction of service personnel. Today, given the advances in technology, there is a real opportunity present in the market that enables companies to re-focus the vast majority of their information technology spend, concentrating less on “keeping the lights on” and the maintenance of many aging, custom systems, and more on hospitality’s core competency, which is service delivery, using customized off-the-shelf technology to provide the customer experience.

Large brand management companies and/or their franchisees spend hundreds of millions of dollars on information technology tending to the care and feeding of 20-year-old reservation systems, property management systems and their associated interfaces, often with mixed results. The resulting products have been bolted together over many years to meet the changing demands of business, but provide little or bad information.

While this is the life of large brand management companies, smaller operators are at the mercy of tier two software players (the little guys), the local technology consultant and a small but dedicated technology staff that is hard pressed to provide the basic levels of support to deliver the same basic technology product as their larger brethren.

It is time for hotel executives to re-evaluate information technology operating costs and capital expense, and focus again on service delivery. Which applications are critical for the hotel to differentiate itself and attract the right type of guest in sufficient numbers to its properties, and what is simply routine operational spend?

Most hotel companies would point to their central reservation, property management and sales and catering systems – the core hospitality applications – as those applications that allow them to differentiate themselves. In most hotel companies these systems account for the majority of IT spending. The question to be considered is: Are these systems strategic to the business? While these systems are critical to your business operations, ultimately they will not put more heads on beds or entice guests to spend more dollars at your property. The services that these systems provide are commodity services, needed by all, strategic to none. And as is the case with all commodities, the objective should be to obtain the desired level of quality at the lowest price.

In the near future these core applications will be available as a service, paid for on a usage basis. First, it means there will be no capital expenditure. You open a new property, or change a property flag, and you connect to the service. You de-flag a property; you disconnect from the service. There will be no hardware to buy, operate or maintain; what hardware is needed will be provided by the service. Second, there will be no confusing “named user” or “per seat” license fees, application maintenance fees or never-ending costs to upgrade before your software version goes out of maintenance.

Third, there will be no large staff of highly skilled, hard to find, technologists on your payroll; they are included in the service. Fourth and most important, there will be no fixed cost to absorb when occupancy goes temporarily south; you will pay only for what you use.

The environment described will not be delivered by the ASP model of the recent past. Nor will it be outsourcing as we know it today. It will be a service more like your mobile phone or your home cable service. The company that provides this service will be able to deliver functional capability for core hospitality applications at a price well below the in-house model. The provider of this service will aggregate intellectual property (e.g. PMS software, CRS software), hold the licenses and develop a common, flexible user interface for the off-the-shelf product that will reflect functionality that will be specific to a particular brand and/or level of service (e.g. full service, limited service). In short, the same user interface will be available for the select-service hotel that is available for the full-service convention property even though functionality will differ by property type. This flexibility will allow hotel owners with diverse portfolios to leverage staff between properties.

It will be up to hotel executives to decide whether to move to this new service model and the estimated effect that it may have on their IT costs, reducing them by as much as 20 percent, or continue down the path of ever escalating technology costs for services that do not add demonstrable strategic value. The hotel executives that understand they are in the business of serving guests will readily make the transition to this service model for commodity applications. Those hotel executives that continue to believe that IT is one of their core competencies, most likely will continue to struggle.

Soon we should be able to drive costs out of our operations by doing what we do best, which is guest service, and letting the professional technologists provide our commodity applications. What are we going to do with that estimated 20 percent reduction in operating costs? We are going to invest some of it in applications that increase occupancy by targeting guests who are less sensitive to rates and more likely to spend on hotel amenities. This is where our internal information technology spend should be focused.

Donald G. Gallagher is a managing director responsible for BearingPoint’s Hospitality practice. He has more than 30 years of information technology experience in manufacturing, financial services, technology and hospitality. Sally Kelly is a senior manager in BearingPoint’s Capital Markets Group. Her specialty area is the identification and development of technology solutions for the hospitality industry, with special emphasis in the areas of business process improvement, needs analysis and definition. They can be reached at dgallagher@bearingpoint.net or skelly@bearingpoint.net respectively.

© 2003 Siegel Communications, Inc. May not be reproduced for any reason.

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