Larry Birnbaum
Jun 11, 2023

Value Added? Value for Who?

“I felt exactly how you would feel if you were getting ready to launch and knew you were sitting on top of 2 million parts — all built by the lowest bidder on a government contract.” — Attributed to John Glenn

Value Added? Value for Who?

Larry Birnbaum
Jun 11, 2023
Change | Management

“I felt exactly how you would feel if you were getting ready to launch and knew you were sitting on top of 2 million parts — all built by the lowest bidder on a government contract.” — Attributed to John Glenn

Many believe technology has become a commodity for hotels and there’s a race to the bottom on prices, margins, and service levels. If all the services are the same and all the products are the same and each customer values the goods and services the same way, then yes, commoditization has occurred, and the race based solely on price by the pound is on. That’s not a business most companies want to be in, including hoteliers.

In the early days of computer manufacturing, companies sold directly to large customers as they were the most easily identifiable marketplace that had both defined needs and the money to pay for them. As technology matured and resellers began to appear, the value- added reseller [VAR] came into being to address small and medium sized businesses with specific application requirements like property management systems or, a bit later, high-speed internet access and the like.

Manufacturers would provide VARs with deeper discounts and other incentives to reward loyalty and advance their position in the marketplace. The value in this environment was to the manufacturer and the reseller. As it becomes harder to distinguish value among makers and providers, customers may rightfully view all offerings the same way.

This continuous internal dialogue about value and technology has created efficiencies and reduced costs. It has also erased the profit margins that fueled innovation and sustainable growth. By stifling innovation, the question now becomes: Where is the value to the hotelier and their constituency of guests, owners, brands, and staff? Adam Smith understood this some time ago. He said specialization is the key to sustainable business and customers. Do well what others can’t do and provide the marketplace with needed services.

Commodity Thinking and Risk Taking

Business risks are always managed. The questions are the same: How likely is something to fail and how bad can things get if it does? The inverse thinking is what is the likelihood of success and what benefits will we gain from it?

The risks facing John Glenn and the nascent space program were the highest of all. His life – and those of his fellow crew members – were in the hands of complex systems that had been tested as thoroughly as possible, but not yet put into full operation. Immature systems have a higher likelihood of failure.

To return to the special teams analogy, for a long snapper and kicker, the routine punt or field goal attempt, the likelihood of failure is low. But the consequence for error can be quite high like, say, winning or losing the Super Bowl. [Seriously, listen to the podcast!]

Mature systems may have a lower likelihood of failure but consider all the consequences before taking them for granted. While the hospitality industry isn’t rocket science (or football, for that matter), it’s easy to see how these lessons of repetition and specialization apply.

Before we look at the practical application of these ideas in hospitality, let’s consider likelihood, specifically risk likelihood. You can create your own personal scale of 1 to 5, with 1 being least likely to ever fail and 5 being almost certain to fail at some point. Also think in terms of failure for length of outage, ease of repair/replacement in a 24/7/365 business, availability of staff to repair/replace and the costs to mitigate and reduce risk of failure.

Gauging Risk Magnitude

You can view risk severity the same way. On a scale of 1 to 5, consider 1 negligible and 5 the highest risk level. Risks are more subjective and fluctuate situationally. You can also view risks as higher or lower based on departments and constituency.

With these two ideas in mind, you could create a risk profile matrix that looks something like the one below. Insurance companies and rating agencies use this process in their daily operations – they call it risk magnitude.

Using the risk magnitude lens, it’s easier to visualize the impacts to business certain risks pose. The matrix also lends guidance on ways to move certain risks from higher to lower magnitudes. And it can help with the decision-making process involved in determining acceptable risk levels.

Through redundancy, second sourcing, on-site spares and other tools, you can reduce risk magnitude from red to yellow to green. If you have 99.9% uptime, your system will be down about one 8-hour shift each year. Risk severity will be depend on what’s going on at the time.

For example, most hotels’ property management systems (PMS) are critical to operations. It’s reasonable to assume that, at some point, the PMS will fail. The impact to business will differ based on time of day, length of outage, occupancy, and activity for check in/checkouts. You can mitigate severity through redundancy, training, and instituting manual processes.

The same risk likelihood is true for internet service to meeting and conference spaces. The severity here can be minimal if the space isn’t in use. But the consequences can be catastrophic – financially, reputationally, and operationally – for both the hotel and the service provider when a large group of attendees has its program completely disrupted with no time to recover.

The Importance of SLAs

The methods to lower risk magnitude require situational awareness, technical competence, and reserve resources. These qualities are not commodities. Companies that can legitimately provide these capabilities are specialists. Hoteliers who expect to receive high availability response for critical systems must understand exactly what they’re asking for and the costs associated with mitigating impact to their business.

Most hotels enact service level agreements (SLAs) when signing up with a system or provider. These may provide financial penalties for lack of compliance. They often create adversarial relationships between provider and customer. What do you say to two parties who both agree a required offering is likely to fail at some point and the consequences can be devastating, yet choose to rely on a minimally engineered solution from the lowest bidder who has no demonstrated capabilities to meet a service level agreement (SLA) across its entire business?

The answer to that question for both parties is think about the constituents your hotel serves. What are their requirements? Is the SLA achievable or aspirational? What are the requirements and costs to reduce downtime from 8 hours annually to 8 minutes annually? What are the service level objectives versus the SLA? Agree to what’s required, what’s achievable and how you can realistically achieve it. Recognize the value of these services and the limited number of companies that can actually deliver with an appropriate, sustainable business model.

Future articles in this series will discuss other services that require specialization, generating sustainable growth and required services for the industry.

Service, support, and risk mitigation is one method providers can use to create value for their customers and build a sustainable business model. As more systems move to the cloud, increase in complexity, and have fewer people to manage the growing requirements for availability and security, smart hoteliers are looking for partners who can provide real value, which is rarely the lowest commodity price.

Future articles in this series will discuss other services that require specialization, generating sustainable growth and required services for the industry. Adam Smith long ago recognized that scarcity of human resources is a critical issue to address. Some 250 years before John Glenn he correctly opined, “No complaint ... is more common than that of a scarcity of money.”

So all this time, we’ve faced constraints on human and monetary capital and still seem to be pretty good at high risk high reward objects, like going to the moon – again!

For American sports fans out there, the NFL once thought the same way about the special teams – until it didn’t. Check out this podcast episode for an explanation. Even if you aren’t a sports fan, this episode provides an important lesson on recognizing value and understanding risks and consequences for error. Plus it’s also a fun, smart listen.


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