Operational Benchmarking for Hotels in Practice

Do you remember back in school when you learned about homographs? You remember, of course, those are words that have the same spelling as another word but have a different sound and meaning. What does this have to do with operational benchmarking? Is spelling important? Well, yes and no, spelling is always important, but when implementing operational benchmarking as part of the finance culture of the organization, it is important to understand what is significant in terms of your operation.

In the last article, horizontal analysis was mentioned. When using this benchmarking tool, is a positive variance always good and a negative variance always bad? Well, it depends. What amount should the variance be before it needs to be addressed? Sometimes, a variance can be the same, but depending on the account, it can have different implications.

Let’s use Credit Card Commissions as an example. Most hotels will have this expense, and it can be significant. Found in the Undistributed Departments, these types of costs are interrelated to events that can occur in the Operating Departments but cannot be specifically attributed to one single department. Hence, the reason these are called undistributed. Understanding the operational structure of your hotel and the competitive set is essential in benchmarking these costs.

In our example, we will use a screenshot from a HotStats report for the data representing the Month of December 20X1. All costs are reflected on a per occupied room basis (POR), and information is provided for the current year (20X1), prior year (20X0), and a variance.

Looking at our hotel, 0.62 POR was spent on Credit Card Commissions versus 8.89 POR in the prior year. From an internal benchmarking standpoint, this is something that requires review. Causes for this could be a significant shift in business from transient to group. Groups typically do not pay with credit cards (or we should encourage them not to), but it is typical of transient business. When looking at the index, our hotel is spending significantly less than the competition in this line item (index of 506.5% compared to 100%). However, the hotel overspent compared to the competition in the prior year, with an index of 80.5%. Suppose there was a significant shift to group business. In that case, one area that the hotel may want to look at to understand how this shift has affected profitability is the Commissions and Fees—Group line item in the Rooms Department to see if there are any significant increases. While there may have been savings in credit card commission, there could be increased costs in the form of commissions to obtain this group business, which will affect profitability.

Since the majority of hotels use The Uniform System of Accounts for the Lodging Industry (USALI™) for financial reporting, using reports from an organization like HotStats provides an apples-to-apples comparison. In addition, the USALI™ also provides definitions for most of the key performance indicators (KPIs) used in operational benchmarking. And even if you’re not currently using the USALI in your own operation the great thing about the HotStats platform is that it seamlessly maps your accounts to a USALI format.

You may have heard that a 12th edition of the USALI™ is just around the corner. Will that change how we benchmark? Absolutely not, if anything, several new metrics will come our way to provide you with more tools to manage your operation.

Just keep in mind that tapping into the vast reservoir of resources offered by Hospitality Financial and Technology Professionals (HFTP) can provide invaluable assistance to professionals in the hospitality industry seeking mastery in operational benchmarking. Specifically, the Hospitality Benchmarking course covers key performance indicators, competitive set selection, and the effective application of benchmarking tools, equipping hospitality professionals with the skills to leverage this analytical approach in reviewing hotel operations. For more course information, visit the HFTP Academy and explore the certificates offered.

Guest Contributor: Arlene Ramirez, President and Founder of Ascend brings over two decades of expertise in hospitality industry finance, operations, and development. Currently pursuing a doctoral degree in Instructional Systems Design and Technology at Sam Houston State University, Arlene’s leadership extends to roles as a Global Past President of Hospitality Financial and Technology Professionals (HFTP) and positions at the Association for Educational Communications and Technology (AECT). She is widely recognized for her contributions as an author and speaker across hospitality and educational platforms.