Jim Gee is a conservative fellow. He’s paid to be, after all. As director of counter fraud services for PKF (UK) LLP, his job is to assess the facts as is and provide reasonable, sensible and actionable means to address them.
So when Gee drops a number like £2 billion (that’s roughly US$3.2 billion for you yanks)—particularly as they related to losses—you’ll have to excuse me if my ears perk up.
The number in question refers to the estimated losses in the U.K. hotel sector each year due to fraud as reported in “The Resilience to Fraud of the UK Hotel Sector,” which Gee penned with Dr. Mark Button and Graham Brooks. And again, that’s a conservative estimate that assumes the average hotel is averagely protected. In reality, the total cost to the sector could be much, much higher. But, says Gee, “We think it’s right to be conservative.”
By fraud, Gee refers to both the generic stuff (e.g. payroll, procurement of goods and services) as well as specific risks and issues (e.g. credit card transactions). The means of tracking it all has grown increasingly sophisticated in the past decade, so much so that many companies can now report fraud as something like another line item on their balance sheets. Hence, the ability to attribute a monetary amount.
But while £2 billion is certainly eye-catching, Gee was more concerned about the contributing factors behind it—specifically, why does the U.K. hotel sector lose so much money to fraud? And, perhaps more importantly, what can they do to prevent it?
To find these answers, Gee and his co-authors queried 26 hotel companies with 29 questions about the effectiveness of their arrangements to counter fraud.
Some of the findings were good:
• 88% of respondents indicated that they had adopted a “zero tolerance” approach;
• 85% indicated that they had arrangements in place to ensure that suspected frauds were promptly reported; and
• 69% had reports concerning fraud discussed at board level.
Others (gulp) were not so good:
• Only 30% sought to estimate the cost of fraud or used losses estimates to make judgments about how much to invest in countering fraud;
• only 23% reviewed the effectiveness of counter-fraud work;
• only 35% ensured that counter-fraud staff regularly refreshed their skills;
• 88% stated that they had a zero-tolerance approach but only 38% monitored the development of anti-fraud cultures (potentially a worrying contrast between
• rhetoric and reality); and
• less than 40% deployed analytical intelligence techniques to detect fraud.
My original goal was to contact some of the major U.K.-based companies and discuss what they had done (or were working to do) to address some of these problems. But not surprisingly, no one wanted to talk.
Luckily, Gee was willing to share his 1-2-3 recipe for success:
Step 1: Create the culture
The best way to reduce costs is to have a strong, anti-fraud culture where customers and employees understand that fraud is unacceptable and know their role in helping to protect their company.
Step 2: Deal out deterrents
If potential fraudsters understand the sanctions should they get caught, they’re far less likely to engage in the activity in the first place.
Step 3: Indentify issues
It’s not enough to catch and prosecute the individual; hotel managers also must identify the system weakness (or fraud “opportunity”) so he or she can patch up any gaps and prevent future instances.
Perhaps the biggest issue, however, is awareness. Gee is conservative, but that doesn’t mean I have to be: £2 BILLION POUNDS IS A BIG DEAL! … especially at a time when hotels are crunched for cash as it is. PKF’s report is NECESSARY and, surprisingly, quick reading. Even if you’re not in the U.K., it highlights an important topic that EVERY HOTELIER should make themselves familiar with.
The British Hospitality Association’s spokesman, Miles Quest, was a bit more reserved, though the message is more or less the same.
“It’s a wakeup call,” he told me via email. “As the report shows, fraud is little-talked-about and rarely publicly acknowledged, however, it’s committed and clearly represents a cost to the industry and to individual operators in particular. In too many cases that cost is largely unknown. However, PKF’s estimate of £2 billion annually is a significant sum. Operators, who can ill afford such a negative drain on their revenues need to be more aware of the need to combat fraud and, more important, put in place measures to prevent it.”
Now on to the usual goodies …
Stat of the week I
907.2%: Percent increase year-over-year of rooms revenue in Indianapolis during the Friday and Saturday of Super Bowl weekend. That’s just one of many impressive numbers for the Midwest market, as reported by STR. Average daily rate was up 338.1% to US$294.55 and occupancy was up 130.5% to 95.5%.
Stat of the week II
100: Number of Duchess of Cambridge masks (i.e. Kate Middleton) left in a Travelodge hotel in London. The masks were just one in a handful of peculiar items left behind at the brand’s hotels during 2011. Others include: a Roborovski hamster called Fredrick; keys to a Ferrari 458 Italia; a magician’s box of tricks; and a suitcase of designer dog outfits and matching collars.
The most commonly left behind item? Phone and laptop chargers.
Quote of the week
“The OTA commission of 20% to 25% is directly tied to the travel-agency commission of 10%. Two to three years from now I don’t believe the major hotel brands will be paying more than 5% travel-agency commission if not abolishing it outright, similar to what the airlines did. This will further erode the OTA commissions to a paltry 10% to 15% tops.”
—Max Starkov of Hospitality eBusiness Strategies, discussing the results of the Distribution Channel Analysis in “Distribution experts dissect study findings.”
Comment of the week
“LOW loan-to-value (cross-collateralized) loans to REIT's (sic) and big hedge funds are truly un-impressive. When these banks start making non-recourse one-off (single) hotel loans to NON-institutional borrowers, then they can say that they are ‘back in the market’. Until then, this is all flash, and no substance. They arent (sic) TRULY back in the market, just fooling some less-experienced media-types...”
—Commenter “Bob S.” in response to a report on Wells Fargo lending activity in the hotel sector.
Ouch, Bob S., although you do bring up a good point. I think the bigger issue, though, is the mere fact that lenders like Wells Fargo are lending at all—to anyone. Is there still progress to be made? Certainly. But for now, I think the industry as a whole will take debt financing when it can get it.
Email Patrick Mayock or find him on Twitter.
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