Hotel_Management_and_Operations_by_Denney_G_Rutherford,_Michael

381Section 8.3 ᭿ Budgeting and Forecasting: Current Practice in the Lodging Industry

was used for budgetary control, with 90 per- ᭤ FORECASTING
cent reporting that budgets were prepared for TECHNIQUES
all of the hotel’s operations, versus just for se-
lected departments. Next, we asked what level The last part of our questionnaire outlined in
of variance between the budget (original or
revised) and actual performance is permitted a grid presentation seven forecasting tech-
before corrective action is taken. The results niques, ranging from simple to complex (i.e.,
for this question are summarized in Table smoothing-constant method), and five princi-
8.10. About a third of the respondents try to pal hotel revenue-generating departments.
hold food, beverage, and labor costs within We also allowed space so that respondents
the range of 1 to 2 percent of the budgeted could write in other techniques. Respondents
amounts. One-fifth of the respondents hold were then asked to reveal the methods they
“other” budget items within a range of 2 to 3 used for forecasting department revenues
percent. (The median of the responses for (see Table 8.11).
food and beverage costs was about 2 percent,
with the medians for labor and “other” costs From this exercise, we find that some
at about 3 percent.) Compared to responses hoteliers used more than one technique for
to a similar question in a 1996 study, it ap- each department and that the methods used
pears that hotels today are slightly more tol- varied among departments. More than 40 per-
erant in food and beverage cost variances and cent of the restaurant and beverage depart-
slightly less tolerant in allowing labor and ments, for example, appear to favor the use of
other operating costs to deviate from the “number of guests by expected spending per
budget (Schmidgall, Borchgrevink, and Zahl- guest.” While the chief technique applied to
Begnum, 1996). the rooms department was “expected units to
be sold multiplied by the expected average

Table 8.11 Various Departments’ Forecasting Techniques

Techniques Rooms Room Service Restaurant Banquet Beverage
10% 10%
Prior year’s budgeted dollar 10% 8% 9% 25% 41%
amounts multiplied by 1 ϩ X% 7% 28% 46% 26% 21%
Number of guests by expected 73% 27% 27% 22% 5%
spending per guest 27% 6% 4% 19% 16%
Expected units sold by expected 16% 18% 16% 33% 29%
average price per unit 20% 24% 25% 6% 6%
Change in advance bookings 5% 6% 5%
from prior year
Last year’s actual revenues
Last year’s actual revenues
adjusted subjectively
Average of several past years’
revenues multiplied by 1 ϩ X%

Source: R. S. Schmidgall and C. P. Borchgrevink, 1996.

382 Chapter 8 ᭿ Financial Control and Information Management

LITERATURE REVIEW earlier, Lasky noted that budgeting was one
of the factors hoteliers ignored when open-
Accurate budgets are considered essen- ing a hotel. Thus, he wrote, he was personally
involved in rescuing 130 hotels and motels
tial to profitable hotel operation. Yet obtain- from bankruptcy due to this oversight.3
ing reliable data is a problem. Smith and
Lesure state that perhaps the greatest prob- Besides the budget’s role as the business
lem with forecasting and budgeting is the plan for owners and operators, Temling and
number of widely varying forecasts that are Quek discuss the importance of hotels’
regularly published side by side, without budgets to lenders.4 The budget is important
question or support, and in some cases mak- to this group, as it can indicate a lodging
ing all predictions vague.1 Moreover, busi- company’s potential for success. It also lets
ness prejections and financial trends are the officers of financial institutions know
often published without any explanation of about the financial health of the business.
the underlying assumptions. Smith and
Lesure contend that perhaps the way to con- As the lodging industry’s competitive-
struct reliable forecasts and budgets is to ness increases, so does the interest in budg-
build a statistically reliable industrywide eting practices, as indicated by studies that
database that can be regularly updated with appear biennially, on average. In 1995, 122
and compared to new economic and finan- U.S. lodging properties were asked about
cial information. Those numbers can then be their budgeting practices.5 The areas of in-
used to develop a short-term outlook for the vestigation included: budget development
industry as a whole or various geographic processes, budget reforecasting procedures,
and market segments. and budgetary control methods.

Hoteliers’ desire and need for accurate To further investigate the budgeting
budgeting and reliable data are not new. In process, 140 U.S. lodging controllers were
1989, hoteliers reported being generally sat- asked in 1997 about their use of forecasting
isfied with their forecasting accuracy, and yet and budgeting at the department level.6
they desired improvement.2 Just one year

383Section 8.3 ᭿ Budgeting and Forecasting: Current Practice in the Lodging Industry

That study reported that controllers rated 2R. S. Schmidgall and J. D. Ninemeier, “Budget-
“proper staffing” as the main benefit of ing Practices in Lodging and Food Service
preparing forecasts and “strategic planning” Chains: An Analysis and Comparison,” In-
as the main benefit of budgeting. That ternational Journal of Hospitality Manage-
study’s results also showed that a hotel’s size ment, Vol. 8, No. 1 (1989), pp. 35–41.
(as measured by the number of rooms) did
not significantly influence the perception of 3M. Lasky, “An Rx for Hotel Health,” Lodging
the usefulness or the practices of forecasting Hospitality, Vol. 44, No. 6 (May 1988), pp.
and budgeting. 75–77.

Some years earlier, Records and Glen- 4W. P. Temling and P. Quek, “Budget Time,”
nie provided insights to the Boca Raton Re- Lodging Magazine, Vol. 19, No. 3 (Novem-
sort and Club’s budgeting and business ber 1993), pp. 21–22.
forecasting processes.7 Forecasting business
volume and scheduling the required labor to 5C. P. Borchgrevink and R. S. Schmidgall, “Bud-
serve its customer are crucial steps in main- geting Practices of U.S. Lodging Firms,”
taining an operation’s quality. Thus, using a Bottomline, Vol. 10, No. 5 (August–
relatively simple computer network and ba- September 1995), pp. 13–17.
sic software, the Boca Raton Resort and
Club ensured it could control budgets, fore- 6A. L. DeFranco, “The Importance and Use of
casts, and labor schedules. Financial Forecasting and Budgeting at the
Departmental Level in the Hotel Industry
1R. A. Smith and J. D. Lesure, “Don’t Shoot the as Perceived by Hotel Controllers,” Hospi-
Messenger—Forecasting Lodging Perfor- tality Research Journal, Vol. 20, No. 3 (Feb-
mance,” Cornell Hotel and Restaurant Ad- ruary 1997), pp. 99–110.
ministration Quarterly, Vol. 37, No. 1
(February 1996), pp. 80–88. 7H. A. Records and M. F. Glennie, “Service
Management and Quality Assurance: A Sys-
tems Approach,” Cornell Hotel and Restau-
rant Administration Quarterly, Vol. 32, No. 1
(May 1991), pp. 26–35.

384 Chapter 8 ᭿ Financial Control and Information Management

price per unit” (reported by 73 percent of re- tion on one hand and the eight questions on
spondents), the banquet department was the the other. Next, the same procedure was used
high user of “last year’s actual revenues ad- to classify the responses according to sales
justed subjectively” (33 percent). level, and then by profitability. If an effect has
a probability value (p-value) or a significance
᭤ THE EFFECTS OF level of less than 0.05, it is significant. That
AFFILIATION, SALES, means, in general, the effect happens due to
AND PROFITABILITY chance less than 5 percent of the time. As seen
in Table 8.12, two of the practices were af-
To see whether a property’s (1) affiliation, (2) fected by property affiliation, one was af-
fected by sales, and one was affected by
size in terms of sales, and (3) profitability profitability (see those data marked with an
have any effect on its budgeting practices, we asterisk).
used the chi-square statistic. The properties’
budgeting practices were reflected in the an- When the chi-square test was performed
swers to eight questions that asked about the based on annual sales, a significant difference
procedures and methods used to develop op- (p Ͻ 0.05) was found in the preparation of
erations budgets and how those operations long-range operating budgets (Table 8.13).
budgets were used in budgetary control. That is, the higher the sales level a property
enjoyed, the greater the likelihood that the
We first classified the responses according property prepared a long-range operations
to the properties’ affiliation. A chi-square was budget.
then calculated by cross-tabulating the affilia-
Our second set of cross-tabulations deter-
mined whether differences occur between

Table 8.12 Property Characteristics Correlated with Budgetary Practices

Selected Property Characteristics

Budgetary Practices Chain Versus Size Profitability
Independent Operation (sales)

Major reason for having an operations budget 0.009* 0.015* 0.017*
Tentative financial goal set in advance 0.018* 0.562* 0.156*
Base for the tentative financial goal 0.116* 0.292* 0.202*
Long-range operating budgets prepared 0.062* 0.008* 0.067*
Revision of operating budget 0.252* 0.914* 0.675*
Monitoring food costs 0.440* 0.516* 0.398*
Monitoring beverage costs 0.535* 0.342* 0.447*
Monitoring labor costs 0.447* 0.299* 0.416*

*Significance level is less than 0.05.

385Section 8.3 ᭿ Budgeting and Forecasting: Current Practice in the Lodging Industry

Table 8.13 The Effect of Annual Sales creating an operations budget. In addition, it
on Long-Range Planning appears that national chains prepare the
budget to be used for comparison purposes
Annual sales Percentage of respondents more often than do the independents, and
who prepared long-range that the independents prefer to use the oper-
ating budget as a planning tool (compared to
operatons budgets the national chains).

Less than $5 M 28% Second, 65 percent of the chain properties
$5 M to $10 M 28% responding to our questionnaire established
$10 M to $15 M 37% tentative financial goals prior to developing
$15 M to $20 M 48% their operations budgets compared to only 45
Over $20 M 74% percent of the independent properties. This
difference is most likely due to pressure from
Figures in US dollars (millions). chains’ corporate offices on individual prop-
erties to deliver the required “profit” to meet
branded lodging operations and independent the chains’ overall financial objective.
properties (Table 8.12). We noted two statisti-
cal differences, namely (1) the major reason The last step of our research was to test
for having an operations budget and (2) for differences according to profitability. The
whether a tentative financial goal was set in profitability of each respondent was deter-
advance. mined by dividing the net income reported by
each hotel by its total sales. Respondents
First, it appears that national-chain hotels were then divided into four categories ac-
cited different reasons for having an opera- cording to their profitability: less than 11 per-
tions budget than did the independent prop- cent, 11 to 20 percent, 21 to 30 percent, and
erties, as shown in Table 8.14. over 30 percent (Table 8.15). The greater the
respondent’s profit margin, the more likely
Hoteliers affiliated with national chains that a single reason was cited for having an
tend to have more than a single reason for operations budget.

Table 8.14 The Effect of Affiliation on Budget Usefulness

Major reason for having an operations budget

Affiliation Planning Use as a More than
tool standard one reason

Chain property 26% 53% 22%
Independent property 48% 48% 5%

Note: Totals may not add to 100 due to rounding.

386 Chapter 8 ᭿ Financial Control and Information Management

Table 8.15 The Effect of Profit Margin on Budget Usefulness

Major reason for having an operations budget

Affiliation Planning Use as a More than
tool standard one reason

Ͻ 11% 45% 52% 4%
11% to 20% 46% 46% 9%
21% to 30% 36% 44% 20%
Ͼ 30% 10% 60% 30%

Note: Totals may not add to 100 due to rounding.

᭤ SUMMARY AND FUTURE budget and actual performance ranged near 2
RESEARCH to 3 percent. That range is slightly tighter and
smaller than the range measured in a similar
Operations budgeting is an important part of study in 1996 (Schmidgall, Borchgrevink, and
Zahl-Begnum).
U.S. hotels’ financial planning. The majority of
hoteliers set tentative financial goals prior to Respondents’ revenue-forecasting tech-
preparing their operations budgets. The goal niques varied by department within individ-
for the majority of hoteliers is based on either ual hotels. A number of respondents reported
sales or net income. Most hoteliers indicated they used multiple techniques for a single de-
that the major reason they used budgets at all partment. The most commonly used tech-
was as a standard for comparison to actual nique was “expected units sold by expected
performance figures. The second most com- average price per unit.” Other techniques that
mon use was as a planning tool. At the major- were used by more than 20 percent of the re-
ity of hotels, a cooperative effort among spondents included “number of guests by ex-
departments was used to produce the budget. pected spending per guest” and “last year’s
In a clear majority of those hotels, the finan- actual revenues adjusted subjectively.”
cial executives coordinated this process. Less
than half of all respondents prepared long- Our research uncovered several points
term operations budgets, and less than a quar- that deserve attention. First, virtually all ho-
ter of all respondents indicated that their tels use an operations budget and yet less
budgets were revised during the year. than half of the hotels budget beyond one
year at a time. Future researchers might ex-
All but two of the 171 respondents indi- plore the reasons why more hoteliers don’t
cated that their operations budgets were used prepare long-range operations budgets. Sec-
for control purposes. For all departments, the ond, few hoteliers revise their budget during
mean of the allowable deviation between the the year (only about one in four). Budgeting
is not an exact science, so regular adjustments

387Section 8.4 ᭿ As I See It: The Hotel Controller

should be expected and planned. Third, for than less-profitable hotels. Finally, further
most hotels, the largest single cost is labor. Yet study could examine closely the forecasting
our research shows that hotels’ food and bev- techniques actually used by the operating de-
erage costs appear to be more closely con- partments. For example, in our study, the
trolled than are labor costs. technique “last year’s actual revenues ad-
justed subjectively” was rated high, and future
Future research could also focus on spe- research could explore exactly what “subjec-
cific control techniques to monitor hotels’ tive” adjustments are being used.
costs and to determine whether more-
profitable hotels use different techniques

8.4 A S I S E E I T : T H E H O T E L C O N T R O L L E R

Mike Draeger

The controller is the manager with overall re- Do the actual payroll tax deposits equal what
sponsibility of the accounting department. is reported on the IRS form? Accounting af-
This executive is credited with having his or fects almost every aspect of the hotel opera-
her hand on the purse strings, eye on the bot- tion, and the controller is the one looked to
tom line, and ear of the general manager, all when it comes to the proper functioning and
while counting the beans and balancing the conduct of this department.
books. In fulfilling this role, the controller
must know the hotel operations and be famil- The controller is an advisor, meaning he
iar with what goes on in each department. As or she provides information and recommen-
is the same with all other managerial roles, dations to every department in the hotel.
the controller must have many skills that are Regarding giving information, accounting
used daily. generates more reports than any other depart-
ment. Daily reports to management showing
Obviously, the controller is an administra- sales, labor, and purchases are a must in any
tor. He or she supervises the accounting func- business, with comparisons to budget and/or
tions, including payroll, payables, receivables, last year. The financial statements, in-
purchasing, and auditing. The controller wants cluding the balance sheet and income state-
to know that procedures are being followed ment, are periodically produced in accounting.
and deadlines are being met. He or she ques- The controller is expected to be prepared to
tions what is happening in each hotel depart- discuss these types of reports with managers
ment. Is all the money getting to the bank, and owners, and to make sense of all the num-
and is there enough to pay all the vendors and bers and percentages. A hotel holds any num-
staff? That large group function in the ball- ber of meetings where the controller discusses
room is being extended 30-day credit; have the financial or operational results. At these
their references been checked? Are purchase meetings, the controller is a part of the process
orders on file in the receiving department? of generating recommendations and sugges-

388 Chapter 8 ᭿ Financial Control and Information Management

tions to improve operations in areas the re- the manager called the home office and have
ports might point out. Often, a morning oper- deposited into the account the amount equal
ations meeting finds the controller addressing to the checks written in the previous week.
labor costs that are creeping higher than ap- Then the invoices for what had been pur-
propriate given current levels of business, or chased were forwarded to the home office,
the monthly manager’s meeting starts with the which supported the amount of the transfer.
controller giving an overview of last month’s In theory, the account balance never exceeded
financial results and the hotel’s year-to-date $1,000. The bank statements were sent to the
standing. When the owners visit the hotel, they general manager of the restaurant to balance
usually attend a meeting to discuss financial and send completed to the home office.
results and what is being done to ensure prof-
itability expectations are being met. The con- Because I was the new guy, I was given
troller might even be asked to sit in on a the task of balancing the checking account of
specific department’s staff meeting as its one restaurant, which had not been balanced
members brainstorm ways to reduce depart- in over two years. It was well known that this
mental costs. As others digest the information restaurant’s manager, an exceptional people
accounting provides, the controller offers ad- person, wasn’t good with numbers and never
vice and counsel on its significance. found time to balance that puny checking ac-
count. So I went to work ticking off the
The controller is also a technician. He or checks and deposits and trying to make the
she must have a foundation in the debits and account balance to the $1,000 imprest
credits of accounting. Regardless of whether amount. There were several irregularities,
the accounting department is staffed with one and, of course, many documents (cashed
person or two dozen, the controller is prepared checks) were missing. I worked with the bank
to jump in and do the work. A tight labor mar- to recreate copies and research the irregular-
ket and staff turnover sometimes necessitate ities, of which there were many. When all was
that the controller assist in every function. finished, I had discovered the manager had
There are always balance sheet accounts to embezzled over $18,000! This manager had
reconcile, budget variances to explain, and actually been a very astute numbers person
journal entries to post. It takes a lot to keep an and had found ways to divert extra funds into
accounting department functioning. the account and then wrote checks to himself
and others for personal use.
Very early in my accounting career, I be-
gan working in a small accounting department It was a technician who caught him. But
of a regional restaurant chain. Due to state had a technician balanced that checkbook
laws, the restaurants could buy alcoholic bev- monthly and always verified the purchases
erages with cash or check only, and never on through the invoices, it never would have hap-
credit. To facilitate purchasing, the restaurant pened in the first place. Procedures were
general manager was provided an imprest wrong and not enforced, and the climate was
checking account for purchasing alcohol. (An ripe for trouble. A good bookkeeper or ac-
imprest account is one that has a specific countant is primarily a good technician in ac-
amount of money in it, and money replaced counting aspects, and a good controller does
with precise amounts checks are written for.) not lose sight of this ability as his or her ca-
This account had $1,000 in it, and each week reer develops.

389Section 8.4 ᭿ As I See It: The Hotel Controller

Most successful businesses create a finan- shreds, and the GM and I were verbally
cial plan or budget to operate by. The more bloodied, bruised, and beaten at the end of it
honest and detailed this plan is, the better one all. Oh yes, our bottom line increased
can gauge actual performance. Most budgets $350,000, and we did not make budget or our
are prepared annually, with monthly detail bonuses that year. A good manager should al-
breakdowns. The controller is a planner and is ways know what the people above him are
usually the one who prepares the budget—or, looking for and then strive or rather plan to
better yet, coordinates the hotel’s efforts in produce it, and this includes budgeting.
preparing departmental budgets to consoli-
date into one master document. I worked for Additionally, the controller is an educa-
a company that provided major cash incen- tor. All managers have a responsibility to in-
tives for meeting and exceeding the annual struct and train others, and the controller is
budgeted bottom-line numbers. Budgeting no exception. Obviously, the accounting staff
was taken very seriously, and each member of must be proficient in their duties to perform
management had a vested interest in all de- their jobs, and the controller must ensure this
partments’ performance. Budgeting is not is happening. However, to the majority of the
hard to do, but it can be time-consuming. hotel, what accounting does and how they do
it can be quite a mystery. Controllers should
Over the years, I became a detail-oriented demystify the role of accounting. Managers
and effective budgeter, although my first with an understanding of accounting find they
budget review taught me the most. My hotel have more tools to work with in the operation
and I had spent weeks and months preparing of their departments after they have been in-
the next year’s budget. All the numbers had volved in just one year’s budget process. The
been gone over, comparisons completed, and controller can be building public relations for
volumes of expense and revenue backup cat- accounting by using opportunities to develop
alogued and bound in three-ring binders. The others’ financial awareness and expertise.
general manager and I flew 3,000 miles, with
our binders, to present the budget to our area Finally, controllers should be mentors.
and regional vice presidents and receive the They should be involved in the development
company’s stamp of approval. We were sched- of people. The accounting staff should experi-
uled for a five-hour review session, if that ence new challenges to keep them interested.
much time was needed. As the GM and I Cross-training in other accounting or hotel po-
came into the review room, the vice presi- sitions can give staff perspective on areas not
dents were already seated and waiting. They previously understood. This aids staff in devel-
stated that this could be a short and produc- oping their careers and additionally helps
tive meeting. If we would only commit to in- within the department when staff is short.
creasing our bottom line by $200,000, we
could all be out of there in five minutes. No There was a time when this backfired on
way! The GM and I had solid defendable me, though. My accounting department had a
numbers, and we weren’t going to let months staff of 14, and each was cross-trained to per-
of everyone’s hard honest work get blown form at least part of a job besides their own.
away. Needless to say, the review lasted the My general cashier was responsible for count-
entire five hours, our budget was ripped to ing the previous day’s receipts and preparing
the bank deposit. Additionally, she replen-
ished the cash banks used in the restaurants

390 Chapter 8 ᭿ Financial Control and Information Management

and stores and at the front desk. She was re- Often the controller can facilitate a manager’s
sponsible for maintaining a safe in her office accomplishments by being a friend and being
that contained close to $400,000. Sadly, her fa- aware of the manager’s professional develop-
ther passed away and she needed to leave mental needs.
town for a week or so. No problem! We had
someone in accounts receivable that had Mentoring and educating can benefit the
cross-trained in the cashiering position and controller in many ways—maybe, most inter-
was able to step in immediately. The cashier- estingly, his or her personal advancement
ing temp completed her first week without a and compensation. Several hotel companies
hitch. We left work for the weekend feeling all evaluate and offer incentives to the back-
was well. On Monday, my cashiering temp of-the-house departments for criteria previ-
didn’t show up for work. She also didn’t call. ously reserved for more service-oriented or
In fact, I have never seen her since. Over the revenue-producing departments. As a con-
weekend, she had taken advantage of proce- troller of an accounting department, I am
dural flaws and helped herself to $30,000 of measured by the service my department pro-
the hotel’s money and fled. vides to the hotel operation—our internal
customers. Accounting becomes a support de-
When I was able to step back and take a partment and the rest of the operation its
broad look at what had happened, I realized customers. In this way, accounting offers
the problem. The accounting procedures products and services, and it works to satisfy
were such that one person could steal from customers. The manager and even staff can es-
the safe and not be questioned. Not only was tablish quantifiable objectives focused on the
this an opportunity for a dishonest employee, department’s product. These become the cri-
but it placed an honest employee in danger! teria for performance evaluations, bonuses,
One employee had both the combination and and other incentives and rewards.
the key to the safe tumbler. One employee
could go into the accounting offices alone on Current objectives in accounting might
a day when the entire hotel knew the ac- now include:
counting department was closed. One em-
ployee could go into the cashier’s office alone • Working professionally with all other
with a backpack and exit the office, depart- departments.
ment, and the building without anyone ask-
ing to see inside the backpack. A single • Meeting deadlines and issuing timely
employee could be in physical danger if oth- reports.
ers knew all of this and were hard up for
cash. Needless to say, procedures were • Achieving superior results on internal
changed immediately and policy manuals and external audits.
were rewritten with haste.
• Training operational managers in the fi-
The controller should be on the lookout nancial aspects of their departments.
for promising managers who show potential.
Managers enjoy taking a few minutes over • Stocking storerooms at appropriate par
coffee or lunch or even just sitting in the of- levels.
fice to talk about their objectives and goals.
• Keeping the accounting offices neat, or-
derly, and presentable.

• Being willing to answer questions and as-
sist with problems.

391Section 8.5 ᭿ The Hotel Purchasing Function

With this type of product and service atti- hotel, the scenery is always changing, guests
tude, there is no limit to what a department are constantly arriving and departing, restau-
might do for its customers. rants open and close, telephones ring 24 hours
a day. Each day brings new challenges and op-
It is not easy to describe the controller’s portunities, and the controller, as part of this,
job as a daily routine. However, the position must embrace the many facets of the hospi-
does call for skills and traits that are continu- tality industry.
ally in use. Just as with all other aspects of the

8.5 T H E H O T E L P U R C H A S I N G F U N C T I O N

C. Lee Evans

The hotel purchasing function did not change the lowest price. The true definition of pur-
very much from 1970 to 1990. Until the late chasing should be “purchasing the right prod-
1980s, various tax advantages and benefits uct, at the right price, at the right time.”
were the primary reason for the construction
of U.S. hotels. Providing a substantial return The statement sounds extremely simple,
on investment was not expected or required. but when it is applied to the thousands of
items a hotel purchases, it presents a great
In our current economy, expectations of challenge for the purchasing manager. The
hotel profitability have changed. Profitability hotel purchasing function supports virtually
is now required, along with maintaining the every department within the property,
established level of quality. This has brought whether purchasing chemicals for housekeep-
about a new level of interest in the purchasing ing or stewarding, office supplies for market-
function and greater importance placed on ing, computer supplies for accounting, or food
cost savings. and beverage products for the restaurant
outlets.
The financial aspects of the hotel business
changed in the 1990s. Hotels enjoyed the The purchasing manager usually reports
longest boom in revenues and profitability to the hotel controller or the hotel’s financial
over the previous 40 years. control division, but I am convinced this will
change. There is a need for a more opera-
Today, however, in the slump following tional approach to managing the purchasing
the terrorist attacks of 2001, hotel managers function. We need to build a team that is com-
realize that true cost savings generated in the mitted to the common goal of servicing our
purchasing department are dollars that drop customers and maintaining established qual-
directly to the bottom line without associated ity standards. The reporting structure will be-
incremental cost. It is not difficult to generate gin to shift to operations, with the purchasing
arbitrary savings; the true challenge is to manager directly reporting to the general
create cost efficiency utilizing a standard manager or, in larger properties, to the execu-
specification. tive assistant/operations manager. This will
help promote the philosophy of team building
Purchasing for the hotel requires much
more than obtaining three bids and circling

392 Chapter 8 ᭿ Financial Control and Information Management

and support and service customers directly. The purchasing function is changing for
As matters stand now, purchasing is viewed as several reasons. In the past five to seven years,
a support department. the hotel industry has undergone tremendous
consolidation. With this consolidation have
With the increasing importance of the come economies of scale for support areas,
purchasing function, the mission of the pur- which include marketing, accounting, pur-
chasing manager is to procure products and chasing, and reservation systems. Many of to-
services cost-effectively that will meet or ex- day’s hotel companies have centralized the
ceed the customer’s expectation. The purchas- purchasing function to some extent. They ne-
ing manager must continually evaluate gotiate purchasing agreements with produc-
product specifications to incorporate new ers and processors and distribute products
products and technology. Reviewing the spe- and supplies through predetermined distribu-
cific need based on the expectation of the cus- tion channels.
tomer helps product evaluation.

Figure 8.3 Partial Hotel Organization Chart

General Manager

Director of Director of Director of Controller
Marketing Human Food & Beverage
Resources

Sales Director of Purchasing
Manager Catering Manager

Outlet Storeroom
Managers Supervisor

Executive
Chef

Storeroom Beverage
Clerk Clerk

393Section 8.5 ᭿ The Hotel Purchasing Function

᭤ PURCHASING managers within the hotel. These relation-
ORGANIZATION ships should build and demonstrate trust, con-
fidence in judgment, and integrity. Key
The purchasing department can be organized managers include the following:

into three basic areas: • Corporate purchasing manager

• Administrative: This area consists of pric- • Hotel general manager
ing, vendor selection, and the purchase of
nonstocked items. Nonstocked items are • Executive assistant/operations manager
products purchased for immediate use or
held in storage in other departments • Director of food and beverage
throughout the hotel.
• Executive chef
• Receiving: There are two categories of re-
ceiving: (1) hotel goods that are placed in • Director of housekeeping
storage in the purchasing area or are im-
mediately issued to the requesting de- Interaction between the purchasing man-
partment or guest/group; and (2) items ager and all other departments occurs regu-
that have been shipped to a registered larly. Spoken interaction, either by telephone
guest or expected guest/group. or in person, is the most frequent. With the
technological implementation of the Internet
• Issuing: Product issuing falls into two cat- and email, the communication process has be-
egories: (1) consumable food and bever- come more efficient. Communication can be
age supplies consisting of all food items accomplished quickly with large numbers of
and liquor, beer, wine, and mixes to be people.
held in the purchasing department store-
rooms; and (2) office supplies, printed Most day-to-day interactions of the pur-
forms, and linen. This is just a small listing chasing manager involve the following key
of items, depending on the physical layout managers and issues, among others:
of the hotel.
• General manager/executive assistant
The staffing and segregation of duties manager: Issues relating to quality
varies from hotel to hotel depending on the changes and all discussions regarding cap-
property size and physical layout of the back- ital expenditures (defined as equipment
of-the-house areas. A partial organization or renovation purchases exceeding
chart is shown in Figure 8.3. See sidebar, $2,000).
“Sample Job Descriptions.”
• Director of food and beverage: Unre-
᭤ INTERDEPARTMENTAL solved food purchasing issues and infor-
RELATIONSHIPS mation related to wine, liquor, and beer
purchases.
It is essential that the purchasing manager de-
• Executive chef: Issues relating to food
velop close working relationships with key purchases. This area requires close com-
munication with respect to vendor per-
formance, food markets, quality, and
availability information.

• Director of housekeeping: Coordination
and purchase of linens, paper goods

394 Chapter 8 ᭿ Financial Control and Information Management

SAMPLE JOB DESCRIPTIONS FUNCTIONS:

Purchasing Manager 20%: Develop and monitor policies, proce-
dures, and performance objectives for the
POSITION TITLE: Purchasing manager purchasing team.
30%: Solicit competitive price quotation.
DIVISION/DEPARTMENT: Administra- 40%: Supervision of purchasing staff.
tive and general 10%: Miscellaneous duties (O-G ϭ ongoing):

REPORTS TO (TITLE): Controller O-G: Review par stock levels.
O-G: Schedule storeroom hours.
DIRECTLY SUPERVISES: Storeroom su- O-G: Develop employees for supervi-
pervisor, beverage clerk, storeroom clerk sion position.
O-G: Maintain high levels of employee
NO. OF EMPLOYEES SUPERVISED: 3 motivation.
O-G: Insure proper handling of receiv-
BASIC FUNCTION OF POSITION: To ing, storing, and issuing.
support the hotel department with depend- O-G: Assure accurate and timely prepa-
able sources of materials and services; to buy ration of daily records for purchases and
competitively; to control inventories; to de- issues for food and beverage forms.
velop and train personnel; to implement O-G: Visit surveyors and stay abreast of
planning to avoid emergencies; and to im- market trends.
plement and supervise all procedures and
staff in the purchasing department. Storeroom Supervisor

EDUCATION AND EXPERIENCE OR POSITION TITLE: Storeroom supervisor
SKILLS NORMALLY NEEDED: College DIVISION/DEPARTMENT: Purchasing
helpful but not required. Previous buying REPORTS TO (TITLE): Purchasing
experience a must. Food and beverage buy- manager
ing necessary. Accounting background DIRECTLY SUPERVISES: Beverage
needed. Extraordinary organizational skills clerk, storeroom clerk
required. Must display excellent manage- NO. OF EMPLOYEES SUPERVISED: 2
ment skills and a great deal of diplomacy. BASIC FUNCTION OF POSITION: To su-
pervise the storeroom staff and resolve day-
TYPE OF GUIDANCE REQUIRED to-day problems in food and beverage
TO DIRECT THE ACTIVITIES OF THE
POSITION AND MAGNITUDE OF IN-
DEPENDENT DECISION-MAKING RE-
SPONSIBILITY: Must have the ability to
function independently within the parame-
ters established by the controller and other
upper management in the hotel. Has the au-
thority to hire and terminate.

395Section 8.5 ᭿ The Hotel Purchasing Function

storerooms. To assist in the procurement of 2%: Assist purchasing manager in placing
all consumable food and beverage items as- orders.
suring that they are of the right quality and 5%: Prepare weekly food bid sheet.
right quantity. To maintain minimum invest- 5%: Prepare monthly food bid sheet.
ment and reduce unnecessary expenditures 2%: Maintain accurate food and beverage
to maintain high sanitation standards and vendor files.
enforce all hotel policies relating to the food 2%: Assist in monthly inventory.
and beverage storerooms. 2%: Prepare monthly Food Dead Stock list
(raw materials for which there is no finished
EDUCATION AND EXPERIENCE OR product) for chef.
SKILLS NORMALLY NEEDED: College 2%: Prepare monthly Beverage Dead Stock
degree helpful but not required. One to two list for director of food and beverage.
years’ prior food and beverage background 10%: Assign miscellaneous duties (O-G ϭ
required. Must be able to read, write, and ongoing):
speak English fluently. Must have good or-
ganizational skills. O-G: Product quality inspection.
O-G: Communication with the chef.
TYPE OF GUIDANCE REQUIRED TO O-G: Keep abreast of industry trends
DIRECT THE ACTIVITIES OF THE and information.
POSITION AND MAGNITUDE OF IN- O-G: Maintain accurate and organized
DEPENDENT DECISION-MAKING RE- filing system.
SPONSIBILITY: Must have the ability to
act as administrator of the purchasing de- Storeroom Clerk/Beverage Clerk
partment in the absence of the purchasing POSITION TITLE: Storeroom clerk/bever-
manager. Must have the ability to function age clerk
independently within the parameters estab- DIVISION/DEPARTMENT: Purchasing
lished by the purchasing manager. Has the REPORTS TO (TITLE): Storeroom
authority to hire and terminate. supervisor
DIRECTLY SUPERVISES: None
FUNCTIONS: NO. OF EMPLOYEES SUPERVISED:
None
50%: Supervise food and beverage clerks
and provide assistance when necessary. (continues)

5%: Prepare daily food order.

5%: Prepare semiweekly food order.

5%: Maintain perpetual inventory (liquor,
beer, wine).

396 Chapter 8 ᭿ Financial Control and Information Management

SAMPLE JOB DESCRIPTIONS (continued)

BASIC FUNCTION OF POSITION: To re- and rotated; assure proper stock storage lo-
ceive, store, issue, rotate, and secure mer- cation on shelving units.
chandise as outlined in the storeroom 10%: Maintain high standards of sanitation
procedures. To accurately record transac- and inventory organization.
tions and to follow written policies and pro- 10%: Participate in monthly inventory.
cedures relating to purchasing and the food 40%: Insure completion of paperwork in a
and beverage storerooms. timely manner:

EDUCATION AND EXPERIENCE OR A Form (daily record of purchases and
SKILLS NORMALLY NEEDED: Prior ex- issues of food).
perience in food and beverage consumable B Form (daily record of purchase and is-
receiving. Prior storeroom experience in is- sues of beverage).
suing stock, and inventory control. Must Issue recap food.
have math aptitude and be detail oriented. Issue recap beverage.
Perpetual inventory, beverage.
TYPE OF GUIDANCE REQUIRED TO Perpetual inventory, paper.
DIRECT THE ACTIVITIES OF THE Food stock levels.
POSITION AND MAGNITUDE OF IN- Beverage stock levels
DEPENDENT DECISION-MAKING RE- 15%: Miscellaneous:
SPONSIBILITY: Must have the ability to To complete projects in a timely manner.
function independently within the parame-
ters established by the purchasing manager
and storeroom supervisor.

FUNCTIONS:

25%: Responsible for the second thorough
inspection of the product as it is being stored

(toilet paper, facial tissue, paper towels), purchase specifications come into play. Writ-
uniforms, and laundry and cleaning ten specifications must be developed for all
chemicals. key products. These products should be tested
periodically to verify that they meet or exceed
A good purchasing manager bases pur- specifications. Examples of testing: a monthly
chasing decisions on the same criteria as all butcher yield test on specific meat cuts; a
business decisions: data. One cannot be an ex- yearly test of terry linen by an independent
pert on every product available. This is where laboratory.

397Section 8.5 ᭿ The Hotel Purchasing Function

᭤ PURCHASING SOURCES chasing nonconsumable food and beverage
items, obtaining bids, and following up on
There are many sources of information about outstanding purchase orders overdue for
delivery.
producers, processors, and manufacturers.
Technical data are also available. Suppliers The average workweek for the purchas-
are the best source of information. The list- ing manager is 50 to 60 hours and may include
ings in the sidebar “Purchasing Sources” are a weekends. For the most part, normal business
small sample of material available to the pur- hours are 7:00 A.M. to 6:00 P.M., Monday
chasing manager. The latest and greatest through Friday, and 7:00 A.M. to noon on
means of identifying product sources has to Saturday.
be the Internet.

᭤ THE PURCHASING ᭤ CORPORATE DIRECTION
MANAGER’S DAY AND INTERACTION

7:00 A.M. Inspect the quality of food and bev- Corporate direction and control varies with
erage consumables as they are delivered to
the hotel. This includes rejecting incorrect or each hotel company. As a general rule,
inferior products and then contacting the ap- though, hotel companies that manage rather
propriate vendor(s) to rectify issues or deter- than franchise their properties are more in-
mine another source, if necessary. The volved in setting policies and procedures. The
average daily purchase cost could vary from minimum standards of the purchasing man-
$3,000 to $50,000, depending on the size of ager vary by hotel company as well.
the property and level of business.
The corporate purchasing function is still
9:00–11:00 A.M. Attend daily meeting with viewed with skepticism, although not as much
catering department, chef, stewarding, and as in the past. Today, purchasing is nonprofit
banquet departments to review upcoming and established to benefit managed proper-
banquet business. Review the room setup ties. The idea of doing more with less applies
for each scheduled function, menus, and, at the corporate level as well as to the indi-
most important, the guaranteed attendance vidual properties. The most efficient method
numbers. of purchasing systemwide is targeting where
dollars are spent and creating the most cost-
12:00 noon. All food and beverage pur- efficient way to purchase high-volume ex-
chases have been received and issued. Inven- pense items. Corporate hotel purchasing
tory is now taken on all items in storage to offices are currently working to accomplish
determine the next day’s needs. After review- this goal. Examples of items that could be
ing the current levels and calculating banquet considered for systemwide agreements be-
business requirements, select the vendors and tween corporate and property purchasing of-
place orders with suppliers, which may range fices are uniforms, flatware, paper goods,
in number from 1 to 25. laundry supplies, and food products; these,
too, vary by company.
Spend the rest of the afternoon on pur-

398 Chapter 8 ᭿ Financial Control and Information Management

PURCHASING SOURCES The Encyclopedia of Fish Cookery
by A. J. McClane
The Meat Buyers Guide (1988) Holt, Rinehart, and Winston, New York
by National Association of Meat Purveyors
8365-B Greensboro Drive The Advanced Seafood Handbook
McLean, VA 22102 Seafood Business Magazine
(703) 827-5754 P.O. Box 908
Rockland, Maine 04841
Fresh Produce Manual (1989)
by the Produce Marketing Association The Packer 1990
P.O. Box 6036 Produce Availability & Merchandising
Newark, DE 19714-6036 Guide
Vance Publishing
The Food Professional’s Guide 7950 College Blvd.
by Irena Chalmers Overland Park, Kansas 66210
American Showcase, Inc., New York

Quantity Food Purchasing (2d ed.)
Lendal H. Kotschevar
John Wiley and Sons, Inc., New York

᭤ CASE IN POINT in the company. With some prodding directly
at the hotel company’s new owner by one of
The company I worked for out of college and the senior management, we were able to
demonstrate that the days of double dipping
until 1995 had its own in-house profit-driven had to go and that the individual properties
purchasing company. This approach was not would recognize and support a corporate-
unique to this company; many of the large ho- level purchasing function whose only mission
tel companies had their own profit-driven was to generate benefit for the properties. My
purchasing arm, subsidiaries that, from a ho- boss and I succeeded in accomplishing what
tel owner’s standpoint, could be considered was once thought could never be done due to
double dipping, as the owner was already pay- politics.
ing the hotel management company a man-
agement fee. In the late 1980s and early 1990s, ᭤ CONCLUSION
many hotel owners were looking for a greater
return from their management company. I Hotel purchasing must focus on and utilize
had the privilege and opportunities to be in-
volved in the overthrow of the company’s in- resources in the most efficient manner today.
ternal purchasing subsidiary. At that time we In the past, a heavy-handed approach was
had been sold to foreign investors, and they used to resolve issues with suppliers. As we
were looking at every function and subsidiary

399Section 8.6 ᭿ Data Mining for Hotel Firms: Use and Limitations

move toward building partnerships with key linked to each property by PCs. Our hotels
vendors today, a teamwork approach pro- can place orders directly with the supplier
vides an environment to build on the through the network system and receive im-
strengths of both the hotel and the vendor. mediate confirmation from the supplier. This
This is now called supply-chain management. nationwide system allows both our properties
and the corporate office to access pricing,
Another key component in business to- availability, and consumption.
day is communication, both internal and ex-
ternal. One of our national suppliers has the To succeed, we must resist the confines of
capability to link their customer service for our traditional paradigms. We must continu-
placing orders with our domestic properties ally examine the ways we conduct business
through a mainframe computer network and strive for new and innovative approaches.

8.6 D ATA M I N I N G F O R H O T E L F I R M S :
USE AND LIMITATIONS

Vincent P. Magnini, Earl D. Honeycutt Jr., and Sharon K. Hodge

In the hotel industry, knowing your guests— history data, see Paula A. Francese and Leo
where they are from, how much they spend, M. Renaghan, “Database Marketing: Building
and when and on what they spend it—can Customer Profiles.” Cornell Hotel and Restau-
help you formulate marketing strategies and rant Administration Quarterly 31, no. 1 (May
maximize profits. Fueled by the proliferation 1990), pp. 60–63.] From stores of information,
of centralized reservation and property- data mining technology extracts meaningful
management systems, hotel corporations ac- patterns and builds predictive customer-
cumulate large amounts of consumer data. behavior models that aid in decision making
This information can be organized and inte- (Kamrani, Rong, and Gonzalez, 2001,
grated in databases that can then be tapped to 361–377).
guide marketing decisions. However, identify-
ing important variables and relationships lo- Data mining is a largely automated
cated in these consumer-information systems process that uses statistical analyses to sift
can be a daunting task. The relatively new through massive data sets to detect useful,
process known as data mining can be instru- non-obvious, and previously unknown pat-
mental in overcoming such obstacles. [For a terns or data trends (Frawley, Piatetsky-
discussion of the use of compiled data, see Shapiro, and Matheus, 1992, 213–228). The
Robert K. Griffin, “Data Warehousing: The emphasis is on the computer-based explo-
Latest Strategic Weapon for the Lodging In- ration of previously uncharted relationships
dustry?” Cornell Hotel and Restaurant Ad- (i.e., using “machine learning” methods that
ministration Quarterly 39, no. 4 (August 1998), typically require only limited human involve-
pp. 28–35. For a discussion of the use of guest- ment) (Peacock, 1998a). Without data mining,
valuable marketing insights about customers’

400 Chapter 8 ᭿ Financial Control and Information Management

characteristics and purchase patterns may re- potheses instead of merely verifying them,
main largely untapped (Shaw, Subramaniam, though, data mining techniques reveal impor-
Tan, and Welge, 2001, 127–137). By uncover- tant links. For example, Marriott Vacation
ing such previously unknown relationships, Club International reduced the volume of di-
managers have the potential to develop a win- rect mail it needed to reach target sales levels
ning marketing strategy that increases their by correlating response rates to specific vaca-
hotel’s bottom line. tion offerings and specific customer charac-
teristics (Peacock, 1998a).
Hotel managers understand the impor-
tance of adapting to the changing business en- Data mining also offers enormous gains
vironment not only to remain competitive, in terms of performance, speed of use, and
but merely to survive. As a result, technology user friendliness (Le Bret, 1997). While data
has become a large and growing expense for miners must understand statistical principles,
many hotel corporations. Under such a tech- highly specialized statistical knowledge is not
nology framework, data mining is a valuable necessary to study, understand, and improve
competitive tool being adopted by hotel cor- decision-making processes. Data mining helps
porations in an effort to create customer managers to spot trends more quickly.
value. However, given the importance and
complexity of data mining, senior hotel man- Because researchers may ignore the as-
agers report a low level of understanding sumptions and limitations of a theoretical
about data mining’s capabilities, how it works, model, traditional statistical analyses in
and what value this technology contributes customer-satisfaction research are often bi-
(Dev and Olsen, 2000, 41–47). The purpose of ased. Satisfaction research includes measures
this paper is to educate hotel managers about of the importance that customers place on
the benefits and application of data mining on product and services attributes. Typically,
the properties they oversee. these measures are highly correlated, which
can dramatically bias the statistical values
᭤ DATA MINING VERSUS that determine attributes’ importance rank-
STATISTICAL MODELING ings. Also, statistical analyses usually assume
that relationships between independent and
Data mining differs from traditional statisti- dependent variables are linear—which is of-
ten not the case. Therefore, violation of these
cal modeling in a variety of ways. Data mining assumptions can result in biased and mislead-
focuses on machine-driven model building, ing statistical outcomes. Data mining tech-
while statistical modeling stresses theory- niques (e.g., neural networks) overcome these
driven hypothesis testing. Data mining tech- limitations and outperform traditional statis-
niques build models, whereas classical tical analyses in cases where such assump-
statistical tools are supervised by a trained re- tions do not apply (Le Bret, 1997).
searcher who possesses a preconceived no-
tion of what to examine. With statistical a Another considerable advantage over tra-
priori analysis, relevant associations may be ditional statistical models is data mining’s abil-
overlooked. By building dependency hy- ity to easily handle large and complex datasets
(Peacock, 1998a). Data mining techniques are
not hampered by large numbers of predictive
variables, and that feature makes data mining

Section 8.6 ᭿ Data Mining for Hotel Firms: Use and Limitations 401

A DATA MINING TOOLKIT solve prediction and classification problems
or develop sets of decision rules.
• Association rules: Information from
customer-purchase histories is used to for- • Neural networks: Applications that
mulate probabilistic rules for subsequent mimic the processes of the human brain; ca-
purchases. pable of learning from examples (large
training sets of data) to discover patterns in
• Case-based reasoning: Sets of attrib- data; can combine information from many
utes from new problems are compared with predictors and work well even with corre-
attribute sets from previously encountered lated variables, non-linear relationships, and
problems (called cases) to find one or more missing data.
boilerplate examples that provided good
outcomes or solutions. • Query tools: Provide summary meas-
ures such as counts, totals, and averages.
• Decision trees: Automatically con-
structed from data, these yield a sequence of • Regression-type models: Ordinary
step-wise rules; good for identifying impor- least-squares regression, logistic regression,
tant predictor variables, non-linear relation- discriminant analysis; used mostly for confir-
ships, and interactions among variables. mation of models built by “machine-learn-
ing” techniques.
• Descriptive statistics: Averages, varia-
tion, counts, percentages, cross-tabs, simple • Visualization tools: Histograms, box
correlation; used at the beginning of the plots, scatter diagrams; useful for condensing
data mining process to depict structure and large amounts of data into a concise, com-
identify potential problems in data. prehensible picture.—V.P.M., E.D.H., and
S.K.H.
• Genetic algorithms: Use procedures
modeled on evolutionary biology (e.g., se-
lection, mutation, survival of the fittest) to

useful for selecting variables, that is, identify- toolkit. The tools listed in the sidebar “A Data
ing those within a set that are most relevant. Mining Toolkit” almost certainly belong,
The ability to handle large numbers of vari- however.
ables also makes data mining more realistic
than statistical models in representing the Looking at that toolkit, decision trees, as-
complexity of a typical business environment. sociation rules, case-based learning tools, neu-
ral networks, and genetic algorithms are
While many analytical techniques can be categorized as machine-learning methods,
classified as data mining tools, opinion has not while the others can be thought of as
coalesced regarding exactly which techniques machine-assisted aids to support human
should be considered part of the data mining learning (Peacock, 1998a).

402 Chapter 8 ᭿ Financial Control and Information Management

EXAMPLES OF THE USES OF DATA MINING INFORMATION IN
HOTEL MARKETING

• Create direct-mail campaigns. • Define which market segments are
• Plan seasonal promotions. growing most rapidly.
• Plan the timing and placement of ad
campaigns. • Determine the number of rooms to
• Create personalized advertisements. reserve for wholesale customers and busi-
ness travelers.

With data mining techniques, levels of a mation indicates where customers who visit a
priori specification can vary. In some cases, specific hotel live. If the data reveal that the
certain independent variables and dependent Sheraton Fisherman’s Wharf in San Francisco
variables may be specified for examination, experiences a surge in visitors from Fort
while predictor variables in other cases may Lauderdale in April, for instance, hotel mar-
be uncovered only by the data mining tool. keters can increase promotional efforts in
The point remains, though, that in comparison Fort Lauderdale during the late winter
with traditional statistical methods, data min- months (Tischelle and Maselli, 2001, 31–32).
ing techniques invariably are more data The sidebar “Examples of the Uses of Data
driven than they are user driven. Mining Information in Hotel Marketing” lists
examples of how information gleaned from
We have observed that some hotel corpo- data mining can be used in a hotel corpora-
rations are attempting to harness the power tion’s marketing activities.
of information by investing in data mining
technology that exploits consumer informa- ᭤ HARRAH’S DATA MINING
tion. Hilton Corporation uses E.piphany E.4 SUCCESS STORY
software at its Beverly Hills headquarters, for
instance (Stevens, 2001a, 35–38), and Star- In 1997 Harrah’s hotels and casinos intro-
wood Corporation recently invested in Unica
Corp’s Affinium software (Tischelle and duced a trademarked loyalty-card program,
Maselli, 2001, 31–32). Such data mining tech- “Total Rewards,” which tracks customers’
nology allows hotel corporations to predict purchasing activities and provides rewards
consumer-behavior trends, which are poten- that encourage spending at Harrah’s proper-
tially useful for marketing applications. For ties. Rather than build glitzy properties with
example, Starwood’s marketing staff can run eye-popping attractions, Harrah’s pursued a
reports and analysis on customer and occu- customer-service-oriented strategy centered
pancy data stored in a data warehouse that around data mining techniques. Harrah’s
combines customer and transaction informa- used an information system called WINet to
tion from all company properties. Such infor-

Section 8.6 ᭿ Data Mining for Hotel Firms: Use and Limitations 403

link all its properties, allowing the firm to profits. In the first two years of its rewards
collect and share customer information program, Harrah’s saw a $100-million in-
company wide. The process effectively crease in revenue from customers who visited
changed the corporate culture from an every- more than one property (Nickell, 2002). Cur-
property-for-itself mentality to a collabora- rently, Harrah’s ranks first in the industry in
tive, customer-focused enterprise (Levinson, profit growth (Levinson, 2001).
2001).
Because the WINet system can consis-
The WINet system connects and consoli- tently identify which customers will be most
dates customer information from all of the valuable over the long term, data mining is
company’s transaction, slot-machine, hotel- also useful for determining when to avoid of-
management, and reservation systems. Key fering incentives to customers who are not lu-
pieces of information—gender, age, place of crative. Harrah’s estimates that it has saved
residence, and types of casino games played— some $20 million by withdrawing incentives
help predict which customers are most likely from customers who are not likely to return
to become frequent users. Based on this in- (Levinson, 2001).
formation, Harrah’s designs marketing strate-
gies to retain those customers. Customers’ Despite Harrah’s success, some remain
purchasing and gaming patterns are tracked, skeptical of data mining’s customer benefits
too, so that the company can target its cus- and long-term financial payoffs. As an exam-
tomers with the most appropriate incentives. ple, Susan Dobscha, co-author of “Preventing
For example, customers who reside outside the Premature Death of Relationship Mar-
the local area receive complimentary hotel keting,” advises hotels that giant central data-
rooms or transportation, while drive-in cus- bases “are not where customers want a
tomers receive food, entertainment, or cash relationship forged. A customer would proba-
incentives (Nickell, 2002). bly prefer a lower price over, say, having their
beverage choice anticipated” (Mining Hotel
Data mining techniques help to reveal Data, 1998).
data patterns and relationships that can be
used to develop strong models for predicting Another important caveat regarding data
the potential value of each customer. Given mining is that any relationship discovered
that retaining a customer is less costly than at- must be valid to benefit a company’s per-
tracting a new one, building strong relation- formance. When British Columbia Telecom
ships with valued existing customers can tried to reward 100 of its best customers
boost profits. Having information regarding by inviting them to a Vancouver Grizzlies
such things as the customer’s birthday, an- basketball game, for instance, it selected
niversary, and favorite foods and drinks al- customers from the database comprising fre-
lows a hotel to provide excellent, tailored quent 900-number users. After sending invita-
customer service that cements brand loyalty. tions to the printer, the marketing staff
Harrah’s discovered that the 30 percent of its realized that those 900-number users in-
customers who spent between $100 and $500 cluded a large number of sex-line enthusiasts.
per visit accounted for 80 percent of company The company avoided a serious gaffe by re-
revenues and generated nearly 100 percent of fining the criteria to create a list of truly loyal
guests (Press, 1998, 58–61).

404 Chapter 8 ᭿ Financial Control and Information Management

᭤ DATA MINING product purchases are typically used in
APPLICATIONS FOR THE clustering.
HOTEL INDUSTRY
3. Deviation detection uncovers data anom-
The tasks performed by data mining can be alies, such as a sudden increase in pur-
chases by a customer. Information of this
grouped into the following five categories. type can prove useful if a hotel corporation
wants to thank a guest for her or his recent
1. Classification arranges customers into increase in spending or offer a promotion
pre-defined segments that allow the size in appreciation. Marketing managers may
and structure of market groups to be also attempt to draw correlations between
monitored. Also, predictive models can be surges in deviations with uncontrollable
built to classify activities. An illustration business-environment factors that are not
of such a model is one that predicts which represented in the database (e.g., a sharp
segment’s usage rate will experience the increase in gasoline prices).
largest decrease when a particular pro-
motion expires. Classification uses the in- 4. Association entails the detection of con-
formation contained in sets of predictor nections between records, driven by asso-
variables, such as demographic and ciation and sequence discovery. For
lifestyle data, to assign customers to example, a possible detected association
segments. may be that a particular segment’s
average length of stay increases after a
2. Clustering groups customers based on do- specific advertising campaign. Another
main knowledge and the database, but association task could be employed in an
does not rely on predetermined group effort to determine why a specific promo-
definitions. This function is beneficial be- tion was successful in one market, but in-
cause it aids hoteliers in understanding effective elsewhere. Specific information
who are their customers. For example, regarding customer-purchase histories is
clustering may reveal a subgroup within necessary to formulate probabilistic rules
a predetermined segment with homo- pertaining to subsequent purchases.
genous purchasing behavior (e.g., a
subgroup of holiday shoppers within the 5. Forecasting predicts the future value of
transient segment) that can be targeted continuous variables based on patterns
effectively through a specific ad cam- and trends within the data. For instance,
paign. (The idea is that the members of the forecasting function can be used to
the subgroup will increase their number predict the future size of market seg-
of stays or become more loyal.) On the ments. With forecasting one can also use
other hand, clustering may indicate that data trends to project which hotel ameni-
previously determined segments are not ties are of growing importance to con-
parsimonious and should be consolidated sumers and will be key drivers of the
to increase advertising efficiency. Infor- consumer’s future perception of value.
mation such as demographic characteris-
tics, lifestyle descriptors, and actual In the hotel industry, the most common
sources of data are CRSs and PMSs. Some ho-
tel corporations also use information that re-

Section 8.6 ᭿ Data Mining for Hotel Firms: Use and Limitations 405

sides in guest-loyalty-program databases. • Does the provider have experience setting
Hilton, for instance, analyzes data contained up predictive models with marketing ap-
within its trademarked Hilton Honors data- plications? Data mining has applications
base (Stevens, 2001b, 29–30). Another poten- other than marketing. Data mining’s abil-
tially important source of data is the ity to detect patterns in data is used
information provided by guest-satisfaction extensively in criminal justice and anti-
surveys. terrorism efforts to anticipate illegal ac-
tivity, for instance. Wall Street also
᭤ GUIDELINES FOR employs data mining to predict moves in
EFFECTIVE DATA MINING the financial markets. Large global corpo-
rations use data mining to gain efficien-
When properly employed, data mining is a cies in purchasing and production
throughout their networks. Therefore, it is
powerful and valuable marketing tool. How- not enough to have a data mining con-
ever, simply investing in data mining technol- sultant, but one must find a provider that
ogy may not guarantee success. As presented has experience in marketing. Building
below, seven guidelines influence the effec- models to predict consumer behavior is a
tive management of data mining technology. form of data mining that requires specific
expertise. For example, a data miner with
Guideline #1: Match your IT priorities marketing-applications experience would
with an appropriate provider. There is high de- know to replace a zip code with resident
mand for and low supply of data mining ex- characteristics, such as median income
pertise as more companies realize the (Brandel, 2001).
potential value of the information residing
within their databases. To capitalize on this • Does the provider have experience in creat-
demand, a number of second-tier research ing models within the hospitality industry?
firms now provide data mining services Marketing applications of data mining are
(Brandel, 2001, 67–70). However, providers employed across diverse industries. Build-
offer a wide range of skill levels. The most- ing predictive models for a grocery store, a
skilled providers can turn data into useful in- furniture chain, an airline, or a hotel is dif-
formation. Companies that initially set clear ferent in each case. It is beneficial to find a
priorities have a greater chance of reaping provider that has experience in setting up
maximum benefits from data mining projects models in the hotel industry. Such a
than do firms that are unsure of their goals provider would more clearly understand
(Stevens, 2001). Clear priorities include goals hotel-guest-segmentation processes, for
about what the firm would like to achieve example.
through data mining and when it will be
achieved. Without goals and objectives the • Is the provider reputable? Because many
hotel corporation is uncertain about what it is second-tier companies provide mining
shopping for when seeking a data miner. It is services, it is important to check the cre-
also important to communicate these goals to dentials and reputation of the vendor.
prospective providers. When selecting a
provider, ask the following six questions: • Does the provider offer the latest technol-
ogy that is appropriate? Because of the
wide range of products available, it pays

406 Chapter 8 ᭿ Financial Control and Information Management

to do your homework. It is crucial to in- have to pay for any changes in “function-
vest in the latest appropriate technology ality” throughout the life of the contract.
because it is extremely expensive and Change-of-character clauses have caused
time consuming to switch products after many disputes because of the ambiguous
one is installed—in no small part because nature of the term “functionality” (Lacity
switching products requires retraining the and Hirschheim, 1995).
IT and marketing staff.
Guideline #2: Build segmentation and pre-
• Does the provider offer a product that has dictive models. Building appropriate segmen-
visual-exploration capabilities? Cutting- tation and predictive models necessitates an
edge data mining software has visual- extensive knowledge of the hotel business.
exploration capabilities, which means that The sidebar “Examples of Hotel-Guest Seg-
data patterns can be viewed as three- ments” provides examples of some of the
dimensional objects that can be rotated or many ways that hotel guests can be seg-
zoomed for detailed analysis. In addition, mented (Kotler, Bowen, and Makens, 1999).
pixel-oriented technology assigns colors Transient hotels, convention hotels, extended-
to data values so that patterns and trends stay hotels, and resort properties all segment
can be examined. Visual exploration is an guests differently. Furthermore, guest seg-
immense aid to managers and marketers mentation is distinctive for most hotel
because it often serves as a preliminary properties. Hilton’s and Marriott’s property-
tool in selecting the appropriate variables management systems segment and code mar-
for data mining tasks (Shaw et al., 2001). kets at the property level, for instance, since
each location has its own particular segments.
• Is the provider willing to provide a custom A given property may serve a set of corporate
contract? Contract negotiations are a crit- clients, a group of government clients, and so-
ical step in initiating a successful data cial clients (e.g., weddings and reunions). The
mining program. The contract should be segment categories contained in the sidebar
as precise as possible and should abstain can be strung into a large set of combinations.
from nebulous clauses discussing partner- Furthermore, a guest could potentially fit into
ship (Lacity and Hirschheim, 1995). several categories, which poses a challenge for
Moreover, the vendor’s standard contract current data mining techniques (Shaw et al.,
should not be used, because the standard 2001). As a consequence, finding a provider
contract does not customarily include that has experience creating models in the ho-
specific performance standards or penalty tel industry is a major benefit. Additionally,
clauses if the vendor falls short of re- even if the provider has hotel experience, it is
quirements. Worse, payment schedules in critical that IT and marketing managers work
standard contracts may favor the vendor closely with the provider to segment the mar-
(Lacity and Hirschheim, 1995). A custom ket and build predictive data mining models.
contract should be written to include
service-level measures and a termination Once a data mining model is built, confir-
clause. The buyer should be particularly matory testing must be conducted to assess its
suspicious of so-called change-of-charac- predictive accuracy. For instance, a model de-
ter clauses, which state that the buyer may signed to predict who will respond to a pro-

Section 8.6 ᭿ Data Mining for Hotel Firms: Use and Limitations 407

EXAMPLES OF HOTEL-GUEST SEGMENTS

Geographic Personality
Nations Behavior
States Occasion of purchase decision
Counties Occasion of use
Cities Benefits sought
User status (e.g., potential, former, first
Demographic time)
Age or life-cycle stage Usage rate
Gender Loyalty status
Income Buyer-readiness stage

Psychographic Source: P. Kotler, J. Bowen, and J. Makens, Mar-
keting for Hospitality and Tourism, 2nd ed. (Up-
Social class per Saddle River, NJ: Prentice-Hall, 1999).
Life-style

motion should be based on a prior offering in that arise only in the sample are used to build
which it is known who did or did not respond. the model, the model may be highly predic-
After the model is constructed, a “holdout” tive of the sample but biased with regard to
group from a previous promotion can be ana- the population (Shaw et al., 2001). This is
lyzed to verify reliability. If the holdout pre- called overfitting the data. To avoid creating a
dictions do not replicate the results of the past biased model, the IT professional must be
promotion, then the model may not be signif- knowledgeable of the analytical procedure
icantly predictive. To further enhance accu- and possess a basic understanding of the hotel
racy, a score can be assigned to the model segment and promotional scenario from
based on the level of agreement between the which the sample was extracted.
holdout group and the entire group. Subse-
quent refined models can then be tested and Guideline #3: Collect data to support the
scored. Another standard approach to model models. Accurate data collection is critical for
validation involves drawing two random sam- successful data mining. The major obstacle to
ples from the data. The first sample is used as effective data mining, however, is inadequate
a calibration sample to build the model, while data gathering and input (Smith, 2001,
the second is used as a holdout sample to 36–37). Data problems lead to a decrease in
evaluate the model built from the calibration the value of any data warehouse, in addition
sample (Peacock, 1998b, 15–25). The valida- to diminishing the value of proposed models
tion process requires a knowledgeable IT (Shaw et al., 2001). Problems with data are
professional, because when data subtleties related to one or more of at least three dif-
ferent shortcomings.

408 Chapter 8 ᭿ Financial Control and Information Management

The first possible difficulty involves miss- Turnover causes coding problems when new
ing or inaccurate data. For example, when oc- employees bring their old labels and fail to
cupation information is available for only 15 use their new employer’s framework.
percent of a data set, it is difficult to create a
profile of customer occupations. Then again, Guideline #4: Select the appropriate tools
it’s a problem if the data file contains occupa- for analysis and prediction. Numerous analyt-
tion information for 90 percent of the popula- ical tools can be employed to transform data
tion, but the accuracy of the information is into useful information. Some of the less-
poor. Hotel corporations can reduce inaccu- common analytical tools used by data mining
racy of this kind by asking guests for their cur- software include regression models, factor
rent occupation. analysis, cluster analysis, structural equation
modeling, and self-organizing maps. On the
A second obstacle is poorly coded data. other hand, the most common statistical
Databases must have standards regarding methods used in data mining applications are
data formats, text case, and redundant codes decision trees, neural networks, and genetic
(Stevens, 2001b). Although some software au- algorithms. As previously mentioned, a deci-
tomatically formats the data properly, most sion tree is a rule-based model constructed of
do not. Problems then occur when data-input nodes (decision points) and branches (con-
sources are added over an extended time and nections between nodes) that reach numer-
no one has ensured that the data entering the ous outcomes based on traveling through two
warehouse is properly formatted. This would or more nodes. A neural network is a nonlin-
occur, for instance, if, when original data min- ear predictive model that resembles a biolog-
ing technology was installed, predictions were ical neural system and has the ability to learn
made based on the reservations system and through training. Last, a genetic algorithm is a
the property-management system, but then a learning-based model founded on the concept
subsequent decision was made to input data of evolution. That is, partial solutions to a sce-
from guest-satisfaction surveys. Problems nario compete with each other, and then the
would transpire when additional data inputs best solutions are used for further problem
are not standard or are coded improperly. For solving (Hair et al., 1998).
example, some models require continuous
and ordinal data, while others demand cate- Most of the statistical methods employ
gorical data fields or binary constructs (Sira- techniques that achieve a desired outcome.
gusa, 2001). Likewise, each methodology has strengths
and weaknesses, and each is appropriate for a
A third potential problem involves using specific scenario. Therefore, the most effec-
homonyms (that is, putting the same label on tive results emanate from data miners who
two or more different data elements) and syn- have the expertise to select the most appro-
onyms (that is, using two different labels for priate statistical method for a given scenario
the same data element) (Chopoorian et al., and the hotel’s intended goals (Siragusa,
2001, 45–51). While it may seem tautological 2001). For instance, a positive attribute of ge-
to advise precluding this occurrence, the most netic algorithms is that they converge on an
common culprit is a new user on the system. optimal solution, but the method is most ap-
It is common for hotel and IT professionals plicable to large databases since arriving at a
to change companies from time to time. valid outcome may require many generations

Section 8.6 ᭿ Data Mining for Hotel Firms: Use and Limitations 409

of competing solutions. Likewise, there are terns in one segment and similarities in
also pros and cons associated with neural net- purchase patterns among other segments
works. They are beneficial in analyzing com- may lead to refinement of the segment,
plex data because of their ability to discover usually by adding a new criterion or di-
unusual trends, but monitoring accuracy is mension. This action can result in the dis-
difficult because many intricate relationships covery of previously undetected segments
are handled invisibly by the methodology with homogenous characteristics.
(Hair et al., 1998).
3. In addition to clustering and classification
Guideline #5: Demand timely output. features of data mining, also use the asso-
Timeliness is critical in making marketing de- ciations and deviation-detection func-
cisions. The length of time required to pro- tions to assess the effects of promotions.
duce output varies widely among data mining Maintain a promotional history table in
packages. Before Hilton Corporation up- the database to use as a learning tool for
graded its data mining technology, for in- future campaigns and models (Siragusa,
stance, the reports that managers requested 2001).
from IT would take three to six weeks to ar-
rive. “By the time they’d get the report, it was Guideline #7: Hire a well-trained staff and
often too late to act on it,” said Joanne Flinn, a knowledgeable IT manager. Information
vice president of leisure marketing. With the technology was initially viewed by the hotel
new technology, managers receive reports in industry as a back-office function that sup-
30 minutes or less (Stevens, 2001b). ports the finance and accounting areas (Cline,
2000). The industry has advanced far beyond
Guideline #6: Refine the process. By its this view during the past decade. In two ses-
nature, data mining involves knowledge that sions sponsored by the International Hotel
evolves over time. Never complete, data and Restaurant Association (IH&RA), one in
mining involves a continuous cycle of inputs Singapore in 1997 and the second in Nice,
and outputs based on models that must be France, in 1998, hotel-industry leaders pon-
modified and refined as conditions change in dered the role of technology. Among the con-
the competitive environment. Flexibility is clusions reached were: “Going forward,
needed to adapt the established models and technology will be the most competitive
processes to changes that occur (Cline, 2000). weapon for any hospitality company. If hospi-
Refinement consists of three actions: tality organizations want to compete success-
fully, they must do so by using technology to
1. Chart progress toward initial goals. Use drive value to both the customer and to the
the forecasting function of data mining to firm” (Olsen and Connolly, 1999, 29). How-
regularly set new goals. ever, implementing such recommendations at
the property level can be a difficult task.
2. Compare and contrast the characteristics
of the clustering output with the attrib- Training is a key to effective implementa-
utes of the classification output. When tion of data mining systems. Productive data
necessary, modify predictive models mining requires two-fold proficiency among
based on changes in the size or structure both IT managers and those who interpret the
of customers’ market segments. For in- outputs.
stance, notable variances in purchase pat-

410 Chapter 8 ᭿ Financial Control and Information Management

The hotel’s IT managers must also be pro- managers should be aware of the following
ficient with the data mining system because four limitations of data mining technology.
the system requires continuous refinement.
Just as market segments, sources of data, and Limitation #1: Data mining analyzes only
property goals change, so must predictive data collected from existing customers. Data
models and analyses be modified and refined. mining software generates information by an-
It is an unsound policy for the IT staff to be alyzing data patterns derived from the com-
totally dependent on the provider’s recom- pany’s reservation, property-management,
mendations for refinement and alterations. and guest-loyalty-program systems. Patterns
Instead, the IT staff and data mining provider thus detected can help predict the actions of
should work together, with their common current guests in the system and of those with
goal being to maximize the technology’s effec- similar needs and wants. Data mining tech-
tiveness. The most effective data mining proj- nology does not, however, provide informa-
ects occur when IT managers and providers tion about market segments not found in the
collaborate and share project information. company’s databases. Moreover, a market
segment that is currently small but is on the
Second, adequate training must be pro- verge of experiencing substantial growth may
vided to all potential users of data mining not be detected by data mining.
outputs. At the corporate level this includes
the marketing staff, operations managers, and Another blind spot is the data in com-
those developing new properties. Users at the petitors’ reservation systems. A key question
property level include general managers, di- in planning a marketing strategy in the hotel
rectors of sales and marketing, and the sales industry is: Who are my competitors’ guests
staff. Users must be instructed about the and where are they coming from? Data min-
available reports and how to properly inter- ing technology is unable to answer those
pret the information. Since the information is questions.
used for decision making, it is important for
users to understand the boundaries and limi- Limitation #2: Databases used in the min-
tations of the information. ing process are often hotel-brand specific. Just
as data mining cannot analyze competitors’
᭤ BOUNDARIES AND markets, it also creates prediction models that
LIMITATIONS are brand specific. Thus, corporations that op-
erate multiple brands often must create a data
Technology must serve managers’ purposes, warehouse and conduct data mining for each
brand. This is also true for the franchisees that
rather than dictate processes (Chudnow, 2001, may have a portfolio comprising, say, six Hol-
28–29). Along that line, data mining cannot iday Inns and four Marriotts.
capture all the information relating to what
drives consumer behavior. Data mining is Brand-specific marketing information is
simply one of a number of research methods useful for the brand’s corporate office to plan
that help predict travelers’ demand trends. marketing programs, which is largely what
Therefore, data mining technology should be franchisees purchase. Conversely, brand-
used in conjunction with other forecasting specific marketing information may not be
and research techniques. With this in mind, helpful if the hotel corporation that fran-
chises numerous brands wants to predict cus-
tomer demand based on a multiple-brand
portfolio.

Section 8.6 ᭿ Data Mining for Hotel Firms: Use and Limitations 411

PSYCHOLOGICAL DETERMINANTS OF DEMAND

Education Sexual opportunity
Escape Social interaction
Family bonding
Prestige Source: P. Kotler, J. Bowen, and J. Makens, Mar-
Relaxation keting for Hospitality and Tourism, 2nd ed. (Up-
Self-discovery per Saddle River, NJ: Prentice-Hall, 1999).

Limitation #3: Data mining may not seg- views and focus groups are both useful meth-
ment travelers by psychographic traits. Seg- ods for gathering information about the
menting consumers based on psychographic needs and wants of hotel guests. The insight
traits, such as personality and lifestyle, can be gained from those techniques is difficult to
useful in the hotel industry. This is because capture in the statistical data mining outputs.
psychology and emotion play significant roles That is why it is important to step back and
in the hotel guest’s decision process. That is, as ask what the hotel guest’s inherent needs are
seen in the sidebar “Psychological Determi- and what the product is really about. This in-
nants of Demand,” a traveler may select a volves conducting in-depth conversations
destination for a variety of psychological rea- with guests. At times, improved insight and
sons (Kotler et al., 1999). One limitation of perspective are gained from talking with
data mining is that common system inputs do three customers for two hours rather than by
not account for psychological factors that in- surveying a thousand customers (Ohmae,
fluence a traveler’s purchase decision. 1999).

A time-tested tool used in understanding ᭤ CONCLUSION AND
hospitality demand trends is Stanley Plog’s MANAGERIAL
psychographic scale (Plog, 2001, 13–24). IMPLICATIONS
Many key drivers of demand identified by
Plog, such as personality distribution among Data mining technology can be a useful tool
travelers (e.g., dependables, venturers, and
centrics), are not common inputs into data for hotel corporations that want to under-
mining systems. Hotels can acquire this infor- stand and predict guest behavior. Based on
mation from customer surveys. information derived from data mining, hotels
can make well-informed marketing deci-
Limitation #4: Data mining does not pro- sions—including who should be contacted, to
vide information about consumers’ thought whom to offer incentives (or not), and what
processes. It is important to engage con- type of relationship to establish.
sumers in research to better understand their
thinking. Information generated by data min- Data mining is currently used by a num-
ing does not account for the fact that approx- ber of industries, including hotels, restaurants,
imately 80 percent of human communication
is nonverbal (Zaltman, 1997, 424–437). Inter-

412 Chapter 8 ᭿ Financial Control and Information Management

auto manufacturers, movie-rental chains, and mining system is a complex and time-
coffee purveyors. Firms adopt data mining consuming process.
to understand the data captured by scanner
terminals, customer-survey responses, reser- We advise hospitality managers to adopt
vation records, and property-management a data mining system and strategy if they have
transactions. This information can be melded not done so. Guidelines presented in this pa-
into a single data set that is mined for nuggets per—including how to select and manage the
of information by data mining experts who data mining provider—offer guidance for im-
are familiar with the hotel industry. plementing a viable data mining strategy.
Since data mining is in its initial stages in the
However, data mining is no guarantee of hotel industry, early adopters may be able to
marketing success. Hotels must first ensure secure a faster return on investment than will
that existing data are managed—and that re- property managers who lag in their decisions.
quires investments in hardware and software Hotel corporations must also share data
systems, data mining programs, communica- among properties and divisions to gain a
tions equipment, and skilled personnel. Affil- richer and broader knowledge of the current
iated properties must also understand that customer base. Management must ensure that
data mining can increase business and profits hotel employees use the data-management
for the entire company and should not be system to interact with customers even
viewed as a threat to one location. As seen in though it is more time consuming than a
the Harrah’s example, implementing a data transactional approach.

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SUGGESTED READINGS

Books Damitio, James W., and Raymond S. Schmidgall.
1990. “Internal Auditing Practices of Major
Jagels, Martin G., and Michael M. Coltman. 2003. Lodging Chains.” Hospitality Research Journal
Hospitality Management Accounting, 8th ed. 14(2):255–268.
New York: John Wiley and Sons.
Dubé, Laurette, Cathy A. Enz, Leo M. Renaghan,
Schmidgall, R.S. 1997. Hospitality Industry Man- and Judy Siguaw. 1999. “Best Practices in the
agerial Accounting, 4th ed. East Lansing, MI: U.S. Lodging Industry—Overview, Methods,
Educational Institute of the American Hotel and Champions.” Cornell Hotel and Restau-
and Motel Association. rant Administration Quarterly 40(4):14–27.

Articles Schmidgall, R. S., C. P. Borchgrevink, and O.H.
Zahl-Begnum. 1996. “Operations Budgeting
Borchgrevink, C.P., and R.S. Schmidgall. 1995. Practices of Lodging Firms in the U.S. and
“Budgeting Practices of U.S. Lodging Firms.” Scandinavia.” International Journal of Hospi-
Bottomline 10(5):13–17. tality Management 15(2):189–203.

Cichy, Ronald F., and Raymond S. Schmidgall.
1996. “Leadership Qualities of Financial Exec-
utives.” Cornell Hotel and Restaurant Admin-
istration Quarterly 37(2):56–62.

SOURCE NOTES

Chapter 8.2, “The Lodging Chief Financial Execu- Chapter 8.5, “The Hotel Purchasing Function,” by
tive,” by Raymond S. Schmidgall. C. Lee Evans.

Chapter 8.3, “Budgeting and Forecasting: Current Chapter 8.6, “Data Mining for Hotel Firms: Use
Practice in the Lodging Industry,” by Ray- and Limitations,” by Vincent P. Magnini, Earl
mond S. Schmidgall and Agnes L. DeFranco, is D. Honeycutt, Jr., and Sharon K. Hodge, is
reprinted from the December 1998 issue of reprinted from the April 2003 issue of Cornell
Cornell Hotel and Restaurant Administration Hotel and Restaurant Administration Quar-
Quarterly. © Cornell University. Used by per- terly. © Cornell University. Used by permis-
mission. All rights reserved. sion. All rights reserved.

Chapter 8.4, “As I See It: The Hotel Controller,” by
Mike Draeger.

chapter nine

HUMAN RESOURCES
POLICY MANAGEMENT

9.1 I N T R O D U C T I O N

In the third edition, this section on human re- about it, but no one does anything about it.
sources (HR) became a different creature This is a problem faced by a good many man-
than it had been in previous editions. It used agers. If an HR department is to be effective
to be called “The Management and Processes in dealing with the people they recruit, hire,
of Human Resources” and included several and train, they need a strategic view of the fu-
how-to articles. I now believe the reader will ture and strategies to achieve that view.
be better served by contemplating broad
strategic policy considerations. It has been said we should be very inter-
ested in the future, for that is where we are
Part of this shift in focus grew out of re- going to spend the rest of our lives. It has also
cent research that strongly suggests the future been said, “Predicting is difficult, especially
health of any organization will be based on about the future” (Berra, quoted in Woods,
human resources—that is, of course, if HR is 1999). That was the premise of the lead article
called upon by top management for advice on in this section of the third edition, by Bob
legally and functionally delivering hotel ser- Woods. Now a professor in the Harrah Col-
vices. A well-managed hotel HR department lege of Hotel Administration at the Univer-
will be a competitive advantage. sity of Nevada, Las Vegas, Woods suggested
that for this edition he convene a select panel
Among observers and participants on the of his colleagues at UNLV and, using a varia-
hotel management scene are those who com- tion of a predictive model, discuss the future
pare human resources, formerly personnel based on what these researchers and teachers
management, to the weather: Everyone talks
415

416 Chapter 9 ᭿ Human Resources Policy Management

know about present and foreseeable trends. vise their internal customers (department
Their wide-ranging and instructive discussion heads and the GM) how to employ the best
of the future challenges to HR is presented in people without running afoul of the ever-
9.2. increasing regulatory and liability environ-
ment. See also the essay by Melissa Dallas in
Perhaps the most insidious and pervasive Section 5.
human resource challenge the above-
mentioned group addressed was turnover. For Reinforcing the importance of consider-
whatever reasons, lots of employees leave ho- ing the HR function in a strategic light rather
tel companies, and whenever they do, it is ex- than an enabling one is the article included
pensive—not only to the hotel but also to the here by Tracey and Nathan. They argue that
employees. That is why Riegel’s presentation because human capital considerations are
of a conceptual model of turnover is an im- top-of-mind in research and trade publica-
portant inclusion here. This material updates tions, leadership still fails to consider HR
research he and two colleagues did among when making strategic plans and that many
foodservice employees, but the conceptual firms are still mired in archaic policies and
model holds equally well for hotel employees. practices that threaten business activities in
It is included here because in many ways the the business and regulatory environment.
strategic concepts of legal environment, HR They argue their position cogently and with
professionalism, and management respect are vigor; see if you agree with them.
avenues to control or reduce turnover.
There is no lack of research and commen-
In a series of guest lectures in my class at tary in hospitality publications, both academic
Washington State University, Jim Treadway, and trade, that deal with human resources.
formerly president of Westin Hotels and Re- Many of the articles and essays in this book
sorts—North America and currently presi- could be and should be looked at with an eye
dent and CEO of MTM Management L.L.C., toward their implications for the manage-
outlined how he sees the job of hotel general ment of human resources in a hotel. Perhaps
manager. Among the components of his “job second only to marketing, human resources is
description” is “to keep the owners out of the most written-about topic in not only the
jail,” by which he means the GM must man- academic but also the trade press. Readers
age the business without incurring legal trou- are encouraged to find publications that offer
ble and must avoid all possible risk of liability. solid, practical, objective, and legally valid ad-
The essay by Murrmann and Becker on the vice for aid in determining their individual
legal environment discusses the realms of risk model of how a human resources philosophy
facing hotels and their human resources de- and its resultant practices should be designed.
partments. Increasingly, hotels are finding A good place to start is the list of suggested
themselves at legal risk for hiring “high-risk readings and references at the end of the
employees.” The most professional HR de- chapter.
partments are aware of and prepared to ad-

417Section 9.2 ᭿ Driving Hospitality into the Future

9.2 D R I V I N G H O S P I TA L I T Y I N T O T H E
FUTURE1

Christian Hardigree, Ellis Norman, Gail Sammons, Vince Eade, William Werner,
Robert H. Woods2 and Cheri Young

It has been five years since the publication of ence in a wide range of areas and were asked
“Predicting Is Difficult, Especially About the to lend their expertise to predicting the future
Future: The Future of Human Resources in of HR in the hospitality industry. What fol-
Hospitality Management,” the journal article lows is an edited transcript of a lengthy dis-
used in the third edition of this book (Woods, cussion among these seven professors on this
1999). As Yogi Berra would say, since then, subject. We start with a discussion of the im-
the future has changed. Indeed, the future has pact of unions in the hospitality HR future
changed, and it is time to attempt to forecast and range widely from there.
it once again.
Note: This chapter has seven authors.
Time flies. Ten years ago, decoding the hu- Each is identified by name, and quotes are as-
man genome was a pipe dream (Mack, 2005). sociated with each throughout. For instance,
Five years ago, terrorism was something that the first quote is from William (Bill) Werner,
people outside the United States had to worry the second from Cheri Young, and so on. Top-
about. As Mack noted, “Imagine if you could ics are presented in random order.
have understood the potential for such monu-
mental changes before they happened” Werner: One of the big issues human re-
(Mack, 2005). The value of predicting the fu- sources managers will have to think about in
ture is evidenced by the fact that major cor- the future is whether health care is or is not a
porations spend millions of dollars annually natural right of every employee. Recently there
on studying the big picture, or macroenviron- was a merger between the hotel employees
mental analysis, as most strategic planners call union and the restaurant employees union.
it. Futurists, those who predict the future, of- The resulting merger is a union of about
ten call this a six-sector analysis, but it’s the 500,000 members. One of the big discussions
same thing. A six-sector analysis uses trends between these unions has been about even
and forecasts in technology, economics, envi- trying to merge with more unions and to fol-
ronment, society, demography, and govern- low the current corporate pattern of merger
ment to predict the future. One can easily and acquisition. Employers are going to have
imagine the changes that have occurred in to find a way to find a middle ground with the
these six sectors since 1999. union stance that employees pay nothing for
health care benefits, no matter what other
In this article, we use what might be called bargaining positions the unions might as-
a seven-person analysis—that is, the insight of sume. Eventually, this is something with which
seven experienced professors from the Uni- every employer is going to have to come to
versity of Nevada—Las Vegas to predict the terms. Health care among union workers
future. These seven professors have experi- has become an expected normal benefit of

418 Chapter 9 ᭿ Human Resources Policy Management

employment, but the cost is rising so fast, ba- Eade: In the 1940s, unions represented
sically out of control, and employers are going about 30 percent of the workers in the United
to have to come to terms with this. States. According to the Bureau of Labor Sta-
tistics, today unions represent about 12–14
Young: Only 8.2 percent of the private percent of workers in all industries.
sector employees are unionized in the United
States. Union membership has steadily de- Norman: According to statistics recently
clined from its peak decades ago and is at an released, unions now represent only about 12.9
all-time low. One question to ask of the future percent of the workers in the United States.
is whether this trend will continue. Mergers
among unions may be able to counter that de- Eade: While unions have been declining,
cline, or the decline in union membership may cooperation between unions and hospitality
continue. organizations may not be headed in the same
direction. There might be more cooperation
Werner: The political power of unions is in the future. There is significant evidence of
the one thing that they still have to hang on this here in Las Vegas, where one can find sev-
to, and their political strength in Washington eral models of training and development co-
particularly really is the one thing that unions operation between organizations and unions.
are still able to claim, despite their declining Such mutually beneficial developments might
membership. Even if unions do not increase hinder the growth of union membership in
membership, they are likely to be able to hold the future, or it might result in more growth.
on to what they have through amalgamation At any rate, such cooperation might mean
and mergers. The question is, will unions be there are fewer, not more, union organizing
able to turn declining membership into in- efforts in the future.
creasing membership? The only way to do
this is through union organizing efforts. Werner: These cooperative efforts are in-
Therefore, we are likely to see more of such teresting. The largest hotel and restaurant
efforts in the future. Unions are not likely to workers’ unions have recently noted that they
continue to decline without a fight, and that actually have a dual agenda—that is, working
fight comes through organizing efforts. This cooperatively with organizations that are
means human resources departments and good to their employees and fighting like
managers are more likely to need to address dogs with those which are not. In 2004, for in-
union issues in the future than they have in stance, we saw the demise of the Golden
many years. Because unions have steadily de- Horseshoe hotel and casino in Las Vegas. This
clined, many human resources managers may demise began with a culinary union strike 11
not ever have had to address this issue in the years ago over health benefits. The union kept
past. Since hospitality organizations (and hos- up their efforts for 11 years! When unions are
pitality human resources professionals) today pushed to the wall, they will fight.
have little experience with unions because
they have not played a major role in recent The interesting part about the mergers we
years, they are likely to have to devote time are seeing, however, is that unions with differ-
and money to learning how to address such ent special skills are merging. In hospitality,
needs in the future. we have seen the merger of a union with spe-
cial skills in organizing with one that has spe-
cial skills in striking employers.

419Section 9.2 ᭿ Driving Hospitality into the Future

To me, this means that unions are likely to Norman: There are already hotels that
start going after companies which have been outsource all of their food and beverage op-
traditionally non-union in the past. erations, not to foreign countries but outside
the organization nevertheless. This is a differ-
Young: It is my understanding that at one ent type of outsourcing, but an important one
time unions fought against open immigration to unions, as non-union companies are pro-
laws because they believed that immigrants viding the food and beverage operations. This
would take jobs from union workers. How- means a net loss in jobs for unions.
ever, in recent years some unions have
adopted a policy of welcoming immigrants. Eade: The point is that in the future these
For instance, UNITE here in Las Vegas is will be life-and-death issues for unions. We
largely made up of recently immigrated Lati- tend to look at issues such as this from the or-
nos and Asians. The rapid population growth ganizational viewpoint. From that perspec-
of these two ethnic groups would seem to in- tive, such developments might be relatively
dicate that some unions are likely to be able small issues. However, for unions they are
to exert more pressure on hospitality organi- life-or-death issues.
zations in the future.
Werner: The bottom line is that unions in
Woods: Much of the future on this topic the hospitality industry will be forced to at-
might be attributed to the outcome of current tempt to increase membership. Some hospi-
political efforts to extend amnesty to illegal im- tality unions today have almost as many
migrants already in the United States. If this is retirees as members as they have currently
done, are we not more likely to see an increase employed workers. Some unions seem to have
in hospitality industry union membership? taken the position today that they can get
more new members by attempting to de-
Werner: This does seem likely, doesn’t it? crease the workload of employees. For exam-
Eade: Many recent immigrants working ple, would union efforts to reduce the
in the hospitality industry have jobs in de- workload of housekeepers from an average of
partments such as housekeeping in hotels. Be- 16 rooms cleaned daily to an average of 12
cause of this, some form of amnesty for illegal rooms lead to increased membership, or
aliens certainly seems like it might affect how would attempting to maintain health care
hospitality human resources managers work benefits for members be better for increasing
with employees in such departments. membership? The unions deal with strategic
It seems to me that one of the big issues in issues such as this all of the time; they are al-
the future for hospitality unions will be out- ways trying to predict what will be important
sourcing of jobs. in the future for their members. It may be that
Young: Yes, I read recently where some more immediately tangible efforts such as re-
California hotels were sending their laundry ducing workloads would lead to more new
to Mexico, having it washed and shipped members than benefit extensions.
back, thus outsourcing jobs. When we think of
outsourcing we typically think of this happen- Sammons: An issue that concerns unions
ing in manufacturing sector jobs, but this ex- in the casino industry is the rapid and contin-
ample indicates how it might happen in uing development of casinos on Native Amer-
service industries as well. ican land. My understanding is that National

420 Chapter 9 ᭿ Human Resources Policy Management

Labor Relations Laws do not apply to such faced in such an environment are new for
locations because they are on Native Ameri- most managers.
can land. Interestingly, unions fought against
Native American casinos because they be- Hardigree: Such issues are not limited to
lieved that such organizations would take Native American casinos. For instance, I did
away union jobs. Now that this fight is lost some work on employee training in St. Croix,
and these casinos are growing rapidly, unions U.S. Virgin Islands. In the island culture, as
would like to be able to organize their work- many people know, time is not as important as
ers. Politics breeds strange bedfellows, doesn’t it is here on the mainland. One of the training
it? issues that I faced was training employees
that they had to show up for work at a specific
Hardigree: Actually, some of the casinos time. In some cases I found properties that
that are being built on Native American land were not opening on time simply because
may have to adhere to NLRB (National La- their workforce had not showed up yet. Peo-
bor Relations Board) requirements. For in- ple unfamiliar with human resources in the is-
stance, they do not if they are wholly owned lands will have to learn how to address such
tribal entities, but they do if they are a part- issues in the future.
nership with a gaming organization such as
Harrah’s or MGM. Woods: The responsibility of human re-
sources departments and managers to address
Actually, I want to make sure that there’s the culture of their workforce seems to be a
a difference between what laws apply to a pervasive issue. This is as true in the United
wholly owned tribal entity versus a partner- States today as it is in foreign countries. There
ship with a Caesar’s or a Harrah’s or some- are many hospitality properties in which the
thing like that. Because if there is that employees are predominantly from another
partnership, they do have a requirement to culture and even speak another language. I
adhere to the NLRB. This also applies if the remember a few years ago talking to a general
manager is employed by a non–Native Amer- manager from a hotel in Toronto who said
ican organization. that there were 60 different languages spoken
by employees in his hotel. This is certainly a
This is significant to unions because 5 of problem that hospitality companies did not
the 25 top-grossing casinos in the United have to address 20 years ago.
States are tribal facilities, but some of them
are partnerships with nontribal companies. Norman: I agree, we sometimes forget to
think about the impact of subcultures here in
Young: This brings up a related issue be- the United States. Some employees from
cause the human resources skills needed to other cultures do things a certain way before
manage in Native American casinos may be they eat and before they work and they don’t
somewhat different than the HR skills show up when you want them to for various
needed in other sectors of the industry. Hu- reasons. A question for human resources in
man resources professionals would have to the future is whether or not the organization
understand the importance of tribal cultural can prescribe strict rules and absolutes as they
and work ethic issues, for instance. These casi- have in the past. First you have to understand
nos are providing jobs to some Native Amer- the way things work within the subculture,
icans who have not worked in years, for then you can attempt to effect policies that
instance. The HR challenges that might be

421Section 9.2 ᭿ Driving Hospitality into the Future

apply. This means that human resources will employees. However, in the future managers
become more complicated in the future. This will also need to know how to motivate em-
becomes an issue of addressing the diversity ployees from culturally diverse backgrounds
of all employees, not simply those who are as well. This means that managers and HR
obviously from another country. In the past professionals will need expertise in areas that
employers have been able to say simply, “This they are not today prepared to deliver. This, of
is the rule for everyone.” In the future this course, will mean training in these (and per-
may not be so easy to do, as it has become in- haps other) areas will become more impor-
cumbent on organizations to think about the tant in the future. Whether this means
individual diversity of its employees, too. hospitality organizations will have to spend
more time and money on training in the fu-
Hardigree: This is the issue in many ture is not clear, but it certainly seems that is
“English-only” cases. English-only refers to the case.
organizations that prohibit employees from
speaking their native language while at work. Werner: When I was in grade school, we
To managers this might seem logical—that is, used to hear a lot about America as the melt-
employees speaking a different language ing pot of the world. The American ideal then
might be threatening simply because you seemed to be that anyone could come to this
don’t know what they are talking about. country and start over. However, the signifi-
Whether or not the same rules will be applied cant thing about that phrase is that it meant
for everyone in such cases might lead to sig- that those people would be gradually melted
nificant HR issues in the future as well. into the mix and everyone would come out
the same. We thought then about a “typical
Woods: I recently read an article from a American.” There is much more appreciation
futurist who believes that the clash of cultures today for diversity, and that has been a signif-
in organizations—that is, the clash between icant change in American society during my
the cultures of so-called native (or American) lifetime. Today there is more emphasis on di-
employees and managers and foreign cul- versity and less on assimilation through melt-
tures—could easily destabilize organizations ing peoples together.
in the future.
Corporate cultures appear to have em-
Young: It seems obvious that, in the fu- phasized the melting pot approach for many
ture, hospitality managers will certainly need years. Everyone wanted to create a corporate
to be more culturally sensitive and flexible culture and assimilate everyone into that one
than they have in the past. Hospitality organ- culture. Now we see the reverse of that at
izations will be challenged to get the most out work. In the future we may see people believ-
of their human capital but within the parame- ing that the best approach is to forget corpo-
ters of the cultural values of their employees. rate culture. Instead we may see people
This brings up some interesting challenges. thinking of corporations simply as legal enti-
For instance, our notions about motivation ties without personality. If so, the emphasis
are based on our model, the American model then will be on employee personalities, not
of motivation. Some might call this the white corporate personalities.
Anglo-Saxon motivation model because this
is who it has applied to in the past. Much has Young: I disagree on that because I think
been written about motivation with this set of organizations do have a personality. We call it

422 Chapter 9 ᭿ Human Resources Policy Management

corporate culture and it ends up being a social organizational approaches to diversity and
organization. There’s a whole social system in cultural awareness, or even on how employ-
there and how people relate and get their ees are motivated to work. It is a big chal-
needs met and power and politics and you lenge for HR.
name it. Looking at culture as something you
created as a corporate control mechanism Norman: What is interesting to me is that
might have been prevalent at one time but in some organizations training seems to focus
not today or in the future. I believe that we on do’s and don’ts pretty exclusively. At-
have finally acknowledged this as a myth, that tempts to match the employee with the orga-
we have finally come to realize that we actu- nizational culture are not as prevalent as
ally do have all these subcultures in organiza- trying to make employees behave in organi-
tions. Today we should think not of a melting zationally specific ways. For instance, I re-
pot but of a soup or stew. Now we see all these cently worked with an organization on casino
identifiable pieces floating around in the stew. card-dealer training. In this instance, the or-
Now and in the future HR people will have to ganization was spending quite a lot of time
peer into that soup and figure out how to training dealers in technical skills that they will
make things work for all the ingredients. seldom use. For example, dealers are taught
how to perform card tricks like fancy shuffling
Norman: For instance, in Native Ameri- and things like that. They will never use these
can and Latino cultures, family is more im- skills in most cases, but this is the emphasis in
portant than it is in what has been known as training. In comparison, orientation for these
the mainstream culture in the past. Family is groups consists primarily of a discussion of
the number-one priority in these and other what actions will get you fired. In effect, there
cultures. Family is more important than work. is no effort to attempt to identify the person
The impact of this on work-based motivation with the property and its values.
practices in the future will be interesting to
see. In the traditional theory of motivation we In the casino industry, most managers
have understood that certain practices by em- came up the old way, the “hard way,” as they
ployers will lead to improved work perfor- describe it. This means that they started as an
mance by employees. This is not necessarily employee, worked their way up to supervisor
true for all cultures. and then to manager. These people have good
technical skills; that is likely why they were
Young: The same thing could be said promoted. However, they may never have
about Generation X. Much has been written had any experience or training in interper-
about the failure of Generation X to put work sonal skills—that is, managing people. Yet,
first in their lives. Quality of life appears to be how the human capital of the organization
more important to this group than to past will be managed and motivated will likely de-
generations. Quality of life is a priority over termine the company’s future success. The
work in some cases. This group wants to be- HR department of the future will likely have
lieve that quality of life is more important to address more managerial training than it
than some work-related issues. has in the past.

Woods: This all seems to tie together for Woods: For several years we have been
HR in the future, doesn’t it? Whether or not seeing and reading about the lack of em-
employees will be unionized might depend on ployee and managerial loyalty in organiza-

423Section 9.2 ᭿ Driving Hospitality into the Future

tions. Most predictions are that people will Woods: When you combine this move-
bounce from company to company in the fu- ment between jobs with retirement issues for
ture. In the past, of course, managers and em- baby boomers, the problem becomes exacer-
ployees worked for one organization most of bated. The baby boom population is starting
their lives. Predictions are that people will to retire now and will retire in greater num-
probably follow a pattern of working for one bers in the future. HR people will need to de-
organization for five or six years, then moving cide how to address that issue in the future as
on to another. In some cases these people will well. This means not only how to address re-
move from one industry to another, taking tirement issues for managers and employees
time off between the two to retrain. Since but also how to address replacing that
most current employees and managers pro- worker. Will it lead to downsized organiza-
duce at higher levels than new employees and tions, which cannot find enough employees in
managers, this becomes an issue of how to the future, or will the employees simply
make work interesting enough for people to change dramatically as we have discussed ear-
stay. Getting people not to quit then will be- lier—that is, will workers from other cultures
come a focus of HR in the future. predominate? It seems that organizations will
have to make a decision about which direc-
I’m glad you brought up managers, Ellis. I tion to go and, either way, more training will
think the human resources department of the be required. It could also lead to increased
future will spend more time on managerial job design changes, too. Will we change how
human resource issues that aren’t employee work is done to accomplish it with fewer peo-
human resource issues because of the chang- ple, or will we simply employ a different type
ing nature of the managerial workforce. All of worker?
the predictions are, and we see this already,
that people will not stay in the same job their Young: I know of one 82-year-old cocktail
entire career. They will probably follow a pat- server at a hotel. Think of the problems asso-
tern of working five or six years in one organ- ciated with working with this type of work-
ization, then may take a sabbatical for six force when you are accustomed to working
months and retrain for another career or re- with a young workforce.
train for another year. So, I think what we’ll
see is more people moving from career to ca- Norman: In the past, we read predictions
reer to career—maybe not in the same indus- about how baby boomers were going to have
try—and that poses interesting problems for such a huge impact on leisure and hospitality
the human resources department. industries, and we have certainly seen this.
More and more people are taking advantage
Hardigree: And this might mean that HR of leisure activities today than in the past, and
personnel will be training older and older this has certainly helped to increase revenues
workers and managers in the future. It might for hospitality companies. However, there are
become more common for HR people to have also indications that baby boomers will not
to know how to recruit, hire, and train employ- necessarily opt to retire for many reasons,
ees and managers who are older in the future from personal to economic. One characteris-
as a result.As these people bounce from career tic of the baby boomer population is the
to career, they will need additional training at active lifestyle of its members. Some people
ages we are just not used to training. are working out more, exercising more, and

424 Chapter 9 ᭿ Human Resources Policy Management

working later into life. The rapid changes in shove it will be greatly influenced by the im-
medical care and life expectancy are affecting pact of unemployment issues. That approach
this too, of course. Some people simply work is okay with low unemployment, but what
longer because they live longer. happens with high unemployment? You can’t
jump from job to job as easily when unem-
Woods: This might certainly mean that el- ployment is 10 to 12 percent.
dercare issues will become more prevalent for
HR, too. We think of eldercare today as how In the future, HR people may need to
to address the issues of older citizens, but adapt to their organization rather than vice
these people may also be employees. HR will versa. I think of this like coaching basketball.
have to deal not only with how to address the There are coaches who are very well known
challenges employees face from taking care for their strategy, and they create a program
of both elderly parents and children, but also and then they find people to put in it. Then
the issue of how to make work accessible and there are other coaches that take whatever
meaningful for a more elderly population. talent they have and make the most of it. I
think that continues to be just different man-
Hardigree: HR already has to address the agerial skills and techniques. It will be inter-
issue of younger workers who believe they esting to see which type of manager, or coach,
are ready for management, or managers who prevails in the future. One would think that
want to move up but can’t because the baby those who can adapt will succeed more.
boom population is blocking their path. Baby
boomers are not leaving these positions as Norman: I recently read a book about go-
quickly as predicted, and as the next genera- ing from good to best. According to this, the
tion is coming of age they feel they are enti- enemy of best is good. It reminded me of
tled to move up—but those positions are not Steve Wynn, the casino icon in Las Vegas. You
opening up. I think this also contributes to ask Steve Wynn if he’s got a mission state-
people moving back and going into different ment; he doesn’t have one. What he does do is
careers and reeducating themselves as they get the right people on the bus to begin with.
move. This also leads to disgruntled managers His approach is to find the best possible peo-
and employees, some of whom have come to ple and go with that instead of attempting to
think of older employees as roadblocks to force everyone into one mold.
their own careers.
Young: Some people see human capital as
Young: The impact of baby boomers on an asset worth investing in because they be-
retirement issues is still four or five years lieve that the employee is capable of generat-
away, but not long. What will happen when ing revenues in the future. One thing that
this population attains retirement age will organizations must surely do in the future is
certainly impact hospitality. develop ways of accounting for the value or
worth of employees on the balance sheet. Be-
Werner: This issue of moving from job to cause people in organizations make indirect
job and career to career will depend on the contributions, most companies do not do this
rate of unemployment prevalent at the time. today. The HR people have stomped their
People who once enjoyed the opportunities feet up and down and said nobody thinks that
associated with jumping from job to job and we’re important, nobody thinks we’re impor-
telling their employers to take this job and

425Section 9.2 ᭿ Driving Hospitality into the Future

tant. The problem is that HR has not been pendent contractor status with employees,
able to equate human capital to dollars, so the and that seems worse. We seem to be moving
people making decisions today in organiza- toward the independent contractor type of
tions cannot relate. HR people are finally fig- relationship between organizations and
uring out that if they compute human capital employees.
in financial terms, they will get more. One
mission of HR in the future is to learn how to Woods: I read recently that the half-life of
do this better. an engineer’s knowledge is now six months.
This means that college freshmen will have to
Eade: Work performance will be a more renew their knowledge base five or six times
important term in the future. The human per- during their college careers. Just think how
formance of people can make a difference in this might affect the workplace. I wonder
organizations, and HR is finally figuring that how true this is for hospitality management
out. Organizations need a department of hu- education?
man performance that spends all of its time
assessing performance and figuring out how Young: Another issue for hospitality is
to do things better. This is not just perfor- how women are treated. Housekeeping is a
mance for the bottom line but performance female ghetto in many organizations. Let’s get
for and by people. a woman to be the director of rooms or the
CEO or the VP of finance.
Some organizations are doing this
through training programs such as how to Norman: In the 1980s, the executive
manage your household, or parenting skills, housekeeper reported not to the GM or the
or how to plan retirement. It comes down to executive committee but to a person three or
organizations showing that they care about four rungs below. We have made progress, but
employees. They have to show that they are it’s slow.
attempting to improve performance in all ar-
eas, not just in the bottom line. These are Hardigree: We still use lots of sexist terms
likely the organizations that will attract and in hospitality. We also have jobs reserved for
keep the best people in the future. one gender or another. For instance, we still
use cocktail waitresses in most properties, and
Young: Organizations need to assess and too often they are still hired on the basis of
define the benefits of such programs. They height and weight. Not everyone is five foot
need to answer the question of why they nine and 125 pounds, and hospitality needs to
should train people in parenting skills, for in- address that in the future. Many customers to-
stance. The answer is in empowerment. As day want to see a diversity of employees in
people learn how to better manage their lives, places they frequent, partially because they,
they gain a sense of control over their envi- too, are diverse. Customers like to see em-
ronment, and that helps them to perform bet- ployees who look and act like they do.
ter. Hopefully these same employees will
make the connection between what the or- Christian: From an Asian standpoint, am I
ganization is doing for them and commitment discriminating against Asians because I re-
or loyalty to the organization. quire all my dancers to be five foot nine or
taller?
Eade: It’s either this or move to inde-
Young: Now are there lawsuits coming up
about this?

426 Chapter 9 ᭿ Human Resources Policy Management

Christian: I’ve seen a few claims. I don’t afraid of is using gender discrimination to
know if they’ve resulted in full-blown litiga- bootstrap a sexual orientation claim.
tion. Cosmetic practices, such as use of terms
like cocktail models to avoid the gender- Young: The whole issue of whether or not
specific term waitress, just do not do the to extend benefits to gay partners really raises
trick. the larger issue of who should receive bene-
fits. What do you do about two heterosexuals
Werner: The average hospitality discrimi- who have lived together for 15 years? Many
nation case results in a judgment of only about people today are living together and having
$7,500. As a result, many companies are not children outside marriage. They are going to
too concerned about this issue. Most cus- start screaming for benefits as well, and this
tomers believe that the awards are much may be a significant issue in hospitality.
higher. This is an example of a fundamental
philosophy that needs to change in hospitality. Woods: We may find that the more we
disenfranchise people, the more viable they
Eade: This issue of segmenting women for become as a political entity. I expect this to
certain types of jobs, even specific shifts, happen within hospitality due to the large
needs to change to satisfy the customer base. number of gays and lesbians employed there.
For years companies got away with saying
that women could be security guards, but not Sammons: One of the cultural issues we
at night . . . and things like that. In fact, one are likely to deal with in the future is the
case that did go to court resulted in a win by growth of spirituality in the workplace. I don’t
the company, which said they were only think- mean just religious spirituality, but all kinds.
ing about the safety of the female guard in As more and more people serve in overseas
question. Today we have female soldiers dy- positions, they are likely to bring back new
ing in war, and this has forced some compa- and different kinds of spirituality to their
nies to rethink their position on such issues. workplace.

Hardigree: In some cases, changes in this Woods: I read the same thing in a futurist
type of issue must wait for the courts to catch publication recently. Many futurists believe
up. For instance, in one case a man with dis- that organizations will be forced to address
abilities wanted to do a job that the company the spirituality of their employees soon.
thought was too dangerous for him. He sued,
and the company won. The court believed the Sammons: One issue I see being more im-
company was only trying to protect the em- portant in the future is that of training. I mean
ployee from himself. who and what we train. Some companies are
outsourcing training; others are keeping it in-
I strongly believe that one of the changes side their companies. Organizations will de-
we will see in the future is more acceptability cide which approach they want to pursue. The
of sexual orientation issues. Today, there are objective for most companies will be how to
only about 12 states that protect employees acquire needed training at the lowest cost.
based on sexual orientation. Some of these Sometimes this can be done through third
may actually repeal their laws on this issue, parties.
sensing that the public mood has changed.
The public mood may or may not have Woods: An issue for hospitality will be
changed, but what companies need to be what happens to the HR department if you
outsource some aspects. Does the department
become more or less fundamental to the com-

427Section 9.2 ᭿ Driving Hospitality into the Future

pany, and, if it becomes less fundamental, who ganizations learned that the training from
in the corporation will look after the rights outsiders didn’t really stick with employees
and issues of employees that we have been until they, themselves, understood the
talking about? processes.

Would companies hire human capital Young: What if we think about the out-
agents, or would they simply ignore employ- sourcing of the entire HR program? I don’t
ees more than they do today? think that’s a fantasy; it could be a reality. It
kind of follows along the lines that we don’t
Sammons: In some organizations, HR has see HR as strategically critical to the organi-
been included on the executive committee zation because HR hasn’t been at the execu-
and is respected as an important strategic tive committee table for that long. What if
partner in the company. Others see HR as hospitality companies outsource the entire
functional only and not part of strategic de- HR department? I see that as being a bad
velopment. Which method a company em- thing because we know that human capital or
ploys will likely have a major impact on how human performance and the ability to get the
their employees view the relationship. Hence, most out of your employees is one of the only
it may drastically affect the performance of sustainable competitive advantages out there.
employees and companies. If it’s true that HR has a sustainable compet-
itive advantage, then typically you’re going to
Hardigree: I wonder what impact out- want to do it in-house because you do not
sourced training may have in the future. Few want it replicated. Unfortunately, I don’t be-
employees view training programs as some- lieve many hospitality executives agree with
thing that they want to do today; perhaps that us on this issue. While we see it as bad in the
is because of how the training is approached. long term, they see it as good in the short run.
What happens in the future when you have an They also can always bring HR back in-house.
outsider come in and attempt to conduct We can probably expect those companies on
training sessions? My guess is that some em- the top, the really great companies in our
ployees will resent this and others simply industry, to never outsource HR because
won’t care. they believe it is too important. Others will
outsource.
Sammons: Some outsourced training may
be acceptable and other types may not be. For Sammons: Outsourced HR has grown
instance, we have outsourced food processing from a $2.5 billion industry in 2002 to what is
in hospitality for years. At one time, of course, expected to be over $15 billion in 2005. How-
most food processing occurred on site. Today ever, I agree that what we are likely to see are
we commonly see packaged products. Train- outsourcing of some processes, not whole HR
ing in how to handle this type of product departments.
might be acceptable to employees because
the processing is done outside, while training Young: Some processes do not have
on other issues may not be acceptable. Some- strategic advantage. For instance, everyone
times the cutting edge of technology is out- does fire safety training, and it is pretty much
side the corporation, of course, and the same in most companies. This type of HR
organizations need to take advantage of that. training does not increase strategic advantage
This occurred back in the 1980s when point- and could, and perhaps should, be outsourced
of-sale technology arrived in hospitality. Or-

428 Chapter 9 ᭿ Human Resources Policy Management

in the future so that HR departments can con- more amenable to computerized and Internet
centrate on more important issues. training than others.

Sammons: The issue is money. Outsourc- Another issue of interest to HR in the fu-
ing saves money. If it didn’t, third-party com- ture might be how part-time workers are
panies would not exist. used. We now have on-call boards in most
hospitality organizations for most revenue-
Werner: I think the future of outsourcing producing positions. We are likely to see that
can be anticipated. Ten years ago we didn’t expand to security issues because of the in-
have this word in our vocabulary. Today we all creased criminal and terrorist threat.
use it.
Eade: How to address the needs of part-
Eade: However, we have always out- timers and on-call personnel will be a big is-
sourced jobs. We called it subcontracting for sue in the future, and we have not even talked
many years, now outsourcing. It is the same about it. What do you do about those on-call
thing. In the 1970s, many hospitality compa- steady extras working for you, building loy-
nies subcontracted many parts of their HR alty? The question for organizations will be
departments. Then they mostly brought the how to keep them on board. This is only one
processes back in-house, so it’s back to the fu- of the many issues that may be important in
ture for hospitality. the future.

Young: Hospitality owners today are ex- ᭤ CONCLUSION
pecting more. They expect every department
to make money. Food and beverage was, at Some people say the best way to predict the
one time, viewed as a service, an amenity for
guests. This is no longer true. Today every de- future is to look at the past. Others believe
partment has to make money or it will be out- that paying attention to the past simply re-
sourced or closed. Hotels learned a long time stricts one’s thinking about the future. No one
ago how to turn a food and beverage opera- really knows.
tion space into retail shops because they
make more money. Mean, lean, and flexible, “The future” does not spring on us all of a
that’s what owners expect today. sudden. Instead, it takes its time and eases
over us. Today’s trends predict tomorrow’s
Sammons: How people are trained has an events. The problem is knowing which trends
impact on outsourcing. In 2001, for example, are important and will affect the future and
using a lead instructor in a classroom-like en- which are not. One cannot track all trends,
vironment completed 77 percent of training. and even if you could, this would not neces-
Two years later this had dropped to 69 per- sarily help predict the future. Some trends be-
cent of training. We are replacing people-led come future events and some do not.
training with Internet and computer training Sometimes the trends are obvious and some-
because it is more cost-effective. We may times they are not. Thus, predicting is difficult,
never see the day in hospitality where less especially about the future. The past is easier
than 50 percent of training is done through to predict.
some means other than instructor-led, but it is
likely to be close that percentage. It may well What we have done in this chapter is at-
depend on the age of the employees and man- tempt to analyze the current trends and
agers being trained. Some age groups are

429Section 9.3 ᭿ The Causes and Consequences of Turnover in the Hospitality Industry

events we see in hospitality human resources ject. Remember, the past is history; the future
and use them to predict the future. We hope is a mystery; today is a gift. That is why we call
you enjoyed reading our thoughts on this sub- today the “present.”

CHAPTER 9 ᭿ ENDNOTES

1. The title is based on a quote from Marshall 2. Corresponding author, Harrah College of Ho-
McLuhan, “We drive into the future using tel Administration, UNLV.
only our rearview mirror.”

9.3 T H E C A U S E S A N D C O N S E Q U E N C E S
OF TURNOVER IN THE HOSPITALITY
INDUSTRY

Carl D. Riegel

Turnover is and has been a pervasive problem continue to attract, in large measure, a tran-
for the hospitality industry. Substantial anec- sient workforce—that is, employees will view
dotal evidence suggests that turnover rates working in the industry as something to do
can reach as high as 200 or 300 percent in while they prepare to do something else or
rank-and-file positions, and management while they wait for “something better” to
turnover, at least at the operations level, can come along. Unfortunately, at the time of this
approach 100 percent in some organizations. writing, “something better” can easily be
While the importance of turnover as a prob- found by talented people who are not happy
lem for our industry was somewhat obscured working in the industry. Finally, despite un-
by the recession of the early and mid-1990s, it precedented efforts to change its image, the
has moved to the forefront with the advent of industry is frequently perceived as the em-
unprecedented full employment. ployer of last resort rather than the much-
touted employer of choice. Although this
A low unemployment rate presents a perception is probably not deserved, it acts to
three-pronged challenge for the industry. make the current labor shortage much worse
First, the number of workers in traditional for the hospitality industry than for many
target markets for hospitality is decreasing. other fields of employment.
This is likely to remain this way for some
years to come. Second, unless the industry can For service industries like hospitality,
present opportunities for meaningful ad- turnover is a serious problem. It makes an ex-
vancement in pay and responsibility, it will isting workforce shortage worse, and in some

430 Chapter 9 ᭿ Human Resources Policy Management

cases it can be argued that turnover is a symp- 4. Costs associated with the temporary dis-
tom of an insidious organizational disease. ruption of the work force
More important, however, is that recent re-
search has established a strong link between 5. Nonquantifiable costs due to diminished
employee satisfaction and overall profitabil- image, customer loyalties to previous em-
ity. In this article we examine the concept of ployees, and so forth
turnover in detail—what it is and why we
should care. Next, we examine what many be- Some hospitality firms take the view that
lieve to be the causes of turnover, and we then turnover is not necessarily undesirable be-
turn our attention to emerging areas of con- cause performance and longevity have an in-
cern about the real costs of employee verse U-shaped relationship. As Figure 9.1
turnover. Finally, we examine what some re- suggests, performance increases over the
searchers believe will help stem excessive short to the intermediate term but decreases
turnover. or stagnates over the long term—that is, the
longer employees stay, the less likely they are
᭤ WHAT IS TURNOVER, to demonstrate increases in performance.
AND WHY SHOULD WE More importantly, the longer they stay, the
BE CONCERNED? more they cost in raises and increased bene-
fits. Firms adopting this tenure/performance
In general, turnover refers to either voluntary position are concerned primarily with the dis-
tribution of tenure throughout the organiza-
or involuntary separation from organizations tion and more likely to concentrate on
(Bluedorn, 1982). Involuntary separations appropriate rates of turnover rather than re-
(firings) can be a problem if they occur duced rates of turnover. For many firms hold-
frequently, but the focus of this article is pri- ing this philosophy, turnover control
marily on voluntary separation from organi- strategies may be viewed as not worth the ef-
zations—that is, the process by which people fort when pay raises are combined with antic-
quit their jobs.
Figure 9.1 Tenure/Performance
Historically, hospitality organizations Philosophy
have perceived turnover in two ways. First,
many companies are concerned that turnover Performance
costs the organization money and, because of
that, unacceptable levels should be avoided. Tenure
Turnover costs money for a variety of reasons,
including: Source: Adapted from Staw.

1. The actual costs related to separation

2. The cost of replacing employees, such as
advertising, interviewing, and moving
expenses

3. Learning curve inefficiencies by new
employees