Artificial Intelligence, Fuzzy Logic and Return on Investment: Twisted Esoteric Technology Terminology

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April 01, 2002
Safety & Security
Elizabeth Lauer Ivey -

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© 2002 Hospitality Upgrade. No reproduction without written permission.

Now more than ever, those responsible for technology purchases are being asked to demonstrate a supportable return on investment (ROI). Most hospitality IT organizations have had to develop their own models for this purpose, although some vendors are providing the most rudimentary forms of ROI calculators on their Web sites. Defining the inputs and measurable impacts of a potential new technology is often more difficult than some would expect. Yet the ROI calculation becomes even more difficult to support when artificial intelligence and fuzzy logic come into play, and the value of intangibles is clearly overlooked.

Artificial Intelligence
In its truest form, artificial intelligence (AI) is the area of computer science focused on creating machines that can engage in behavior considered intelligent by humans. The ability to create intelligent machines has intrigued humans since ancient times, and today with the advent of the computer and decades of research into AI programming techniques, the concept of “smart machines” is becoming a reality. Researchers are creating systems which can mimic human thought, understand speech, beat the best human chess player and countless other feats never before possible. But this article isn’t about that kind of technology. It’s about hospitality technology and the industry’s frequent use of fabricated and questionable intelligence.

Business Intelligence?
Not to be confused with artificial intelligence is business intelligence — the process of turning data into strategically and tactically usable information. In many cases hotels and hotel companies can rely on their own data collection methods and reporting tools to tell them what is important to their guests, including what technology is important to guests, their operations, their business strategy and ultimately, their technology investment decisions. Our industry may have fallen prey to something akin to “artificial business intelligence,” whereby hotels and hospitality companies more often rely on those outside of their industry to innovate for them and then tell what technology they need to buy. This kind of artificial intelligence, coupled with a substantial amount of fuzzy logic and lack of regard for the value of intangibles, can certainly skew the return on investment calculation.

Fuzzy Logic
Fuzzy logic is an approach to computing based on degrees of truth rather than the usual true or false (one or zero) Boolean logic on which modern computers and applications are based. Fuzzy logic seems closer to the way our brains work. We aggregate data and form a number of partial truths, which we aggregate further into higher truths, which in turn, when certain thresholds are exceeded, cause certain further results such as motor reaction (like the signing of a technology purchase order). In the more familiar realm of hospitality technology, fuzzy logic is demonstrated in the following scenario.

An upscale hotel houses a wine cellar with over $1.5 million in premium inventory. The restaurant and banquet servers ring alcohol purchases as open items and can only account for about 35 percent of sales by label. The IT manager has been asked repeatedly by the F&B manager to help better account for beverage sales. The controller asserts that the property cannot afford the purchase of a $20,000 food and beverage inventory management system, one that is well integrated with the POS and banquet management software. Essentially, the hotel cannot justify spending less than 2 percent of the cost of the total inventory to monitor consumption, prevent theft and better manage purchasing cycles. Yet 65 percent of the current usage patterns are unknown. It doesn’t take a statistician to see that if you cannot accurately account for the sales (outlet, server, sales price, etc.) of 65 percent of your premium beverage inventory, your annual variance greatly exceeds the less than 2 percent of inventory value that the enhanced system will cost.

An individual closest to the source of such fuzzy logic has made the following analogy: You have $1.5 million in small bills sitting in one or two rooms at your property. Would you invest $20,000 to install a video surveillance and ensure controlled, electronic access to the rooms? Would you hire a round the clock security service at $16/hour for a total annual salary cost of at least $140,000? You probably would if you had an innate mistrust of technology and the savings in labor that can often be easily demonstrated. Regardless, you would spend the money to protect the asset, reduce your liability and the likelihood of theft.

“Vintage” Cost Control
Let’s go back to the wine cellar. If you accepted your controller’s response (“No, nada, not on your life.”) to the request for an inventory management system, the F&B manager might address the problem by retraining a multi-departmental wait staff of 60 persons to better account for their alcohol sales using the existing POS technology. Last time I worked as a restaurant and banquet server, we were on the clock for this kind of training, so the solution is still not free. How much do you really want to tell your employees about the lack of control and accountability your current system or procedure exercises over such pricey and alluring inventory? To some employees this might be an invitation to beat the system if they haven’t discovered how. The bottom line is that those employees are not the ones to hold accountable for your premium wine inventory. If you look at the cost of the inventory control solution relative to the cost of the inventory it is designed to protect, it’s not exactly higher math.

Take a look at some of the ROI models used by decision-makers when considering high-speed Internet access. Most of them use inputs such as projected usage rate, hotel occupancy, revenue per connection and the costs of the installation. With today’s usage statistics, the ROI outcome is often upward of five years. In one particular case, an upscale hotel catering to the high end of the meeting market calculated an ROI of nearly seven years if they did not build the price of the access into the room rate. What this model clearly did not account for was the fact that they could begin losing some of their annual meetings and repeat guests to properties that were offering the service.

Even if a large group has been coming to your property for the last seven years, the day will come when they go elsewhere. Let’s say in year nine that very large, very lucrative group goes elsewhere, and so do half a dozen other smaller events because the hotel still hasn’t made the case to their ownership that high-speed Internet access is a good investment. A $30,000 to $50,000 investment would be justifiable if a hotel wants to retain their most lucrative business (events that bring in $500,000+ in room revenues and catering revenues). Once again, if you look at the cost of the new technology vs. the cost of ONE potentially lost piece of business, it is a fuzzy fraction. The ROI only demonstrates that very simple economics can be complicated by a special brand of artificial intelligence compounded by fuzzy logic.

The key to survival in the hotel industry right now is exceeding guest expectations and true differentiation. Hotels and hotel companies whose technology strategy is simply “keeping up with the Joneses” or “waiting for the next best thing” will continue to decline in profitability and competitive stature. Likewise, hotel operators and organizations that rely on purely numerical calculations of ROI without considering the value of intangibles — such as customer perception, increased competition for the commercial and group market segment, and the advantages of true product differentiation with superior service — will eventually become case studies in failure at hotel schools.

Elizabeth Lauer Ivey is a senior technology strategist with HVS Technology Strategies, a division of HVS International. HVS International is the largest hospitality-specific consulting firm offering services to hotel owners, operators and financial institutions. She can be reached at (303) 443-3933 or

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