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How to handle management contracts effectively
July 12 2012

A new environment means management contracts are changing, but they should be used to keep relationships between the parties focused on the issues that matter over the long term.

  • Management contracts have seen different terms in approval rights, incentive-fee structures, distribution waterfalls, key money and performance tests in the past few years.
  • Every hotel cut costs early in the downturn, and now every GM is working hard to contain costs.
  • GMs need to spend less time auditing and writing reports and more time selling and interacting with customers.
By Christian Salaman
HNN columnist

Last quarter I wrote about the market shift and lessons learned when purchasing hotels. Obviously the market shift also influenced hotel operations. I see it every day, whether negotiating renewed online-travel agency agreements, advising on privacy issues or managing a dispute. I often notice some of the biggest differences in management contracts. Not surprisingly, the new environment means different terms than what we saw a few years ago. This is especially evident in owner-approval rights, incentive-fee structures, distribution waterfalls, key money and performance tests.

But how are old management contracts being treated? And what lessons can be learned so that future management contracts reflect the latest (and lasting) trends in hotel operations?

In searching for answers, I surveyed some of those who would know best: GMs. I contacted all types of GMs—from GMs at branded, full-service, large boxes to GMs at independent, small boutiques. I also sought a mix to see whether any difference existed for GMs at hotels owned by private companies as compared to real-estate investment trusts and other public players. And, naturally, I promised the GMs anonymity.

Not surprisingly, cost containment was the biggest recurring theme. Every hotel cut costs early in the downturn, and now every GM is working hard to contain costs. GMs of hotels owned by public companies are under the most intense pressure because this issue often is driven by “corporate” goals as opposed to the hotel’s particular circumstances.

When I asked about the cost theme and how the larger picture could be handled more effectively, the feedback from the GMs became more interesting:

  • Time management. GMs and their executive committees need to spend less time auditing and writing reports and more time selling and interacting with customers. GMs mentioned spending between 20% and 30% of their time on auditing and writing reports.
  • Micro perspective. Ownership and corporate management need to consider the specific situation as opposed to using “one-size-fits-all” approaches. One GM stated, “It’s a whole lot easier to ensure a 65% flow through to profit with an (average daily rate) of $200 than an ADR of $120.”
  • The top line. Everyone needs to focus on the top line. GMs want to drive improvement through building business and consistently commented that expenses can be cut only so much. Revenue is more than the market’s demand—it also is beating your competitive set and grabbing a larger share of that market demand.
  • Look abroad. GMs need to import best practices from other countries and cultures. GMs recognize that the world is a lot smaller these days, and they want to find ways to learn and integrate lessons faster.
  • Revisit incentive plans. All constituencies need to revisit incentive plans for all levels within the hotel. GMs recognize that financial goals are primary, but there should be more ability to reward excellence in service.

Each one of these concepts resonated with me. I already am thinking about how to revise the “old” management contract provisions related to budgets, reports, technology, employees and the like. And the GMs all supported that process. As one GM stated: “Both sides should be using these documents, not ignoring them when times are good and pulling them out to support arguments when times are tough.”
Sometimes the management contract will give more leverage to one side or the other. That result is fine and will always be the case. However, the management contract should be used to start the relationship between the parties and keep them focused on the issues that matter over the long haul. Management contracts are not discrete events like a hotel purchase agreement. Rather, they belong imbedded within the context of the complex relationships that are part of running the complex business that is a hotel.

Christian A. Salaman has extensive experience representing owners and operators of hotels and resorts, as well as lenders, asset managers, receivers and others in the hospitality industry, in connection with deals and operational issues. He is a partner at the international law firm of Pillsbury, where he co-leads its Travel, Leisure & Hospitality industry team. He can be reached at Christian thanks Dennis Moses of Columbia River Capital Advisors for helping him survey a number of general managers.

The opinions expressed in this column do not necessarily reflect the opinions of or its parent company, Smith Travel Research and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

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