Fit For Strife

In good times as hotel companies expand, most add numerous head office or regional jobs to build their brand and provide service and support to the operations. The increased costs of such additional payroll are barely noted as revenues grow. For many hospitality professionals these corporate and regional jobs are a desirable career opportunity, leading to greater responsibility and personal earnings growth. However, this year many have found that in a recession these jobs are the most vulnerable as companies look for ways to appease analysts and shareholders by cutting their fixed costs. Many regional and corporate jobs are considered a luxury and are not perceived as adding short-term value, or making a positive difference to the bottom line. So many executives are losing their job at a time when the job market is overflowing with other hotel executives looking for work. Seasoned hoteliers know the risks of taking on a pure regional or corporate role and prefer to hang on to the security of a property-level job. This reflects that generally speaking, a property-level job that is accountable for managing a critical operation or generating revenue is likely to be more secure than a regional or corporate responsibility; of course always assuming that the property-level incumbent is hitting the metrics.

Whilst no executive enjoys telling people they no longer have a job, for the surviving executives in the slimmed down company there can be an upside, if their incentives are linked to share price. They can at least hope that the market will react positively to the job cuts and the share price will rise driving up the value of their long-term incentives.

However market reactions are neither always rational nor predictable as business cycles come and go. Periods of recession inevitably bring redundancies and when the upturn comes, typically, companies will rebuild their depleted ranks. What is paradoxical about this cyclic trend is that in a more challenging business climate, such as today’s, any talent engaged in driving and serving the business could actually be the key to gaining a vital competitive advantage. But such talent is inevitably expensive and in challenging times, companies under pressure to cut costs have to make do with smaller and most probably demoralised teams. Ironically, there is also a logical argument for increased manpower in vital areas and extending bigger potential bonuses for those who can gain market share in such competitive times.

For the hotel owner or for a potential owner the brand represents prestige and a system to drive incremental revenue. Whether through sales and marketing capability, technical services competency or training and recruitment facilities; all represent a promise of competitive advantage and product differentiation. Such a capability positions the brand as a preferred employer that will provide career growth, whilst also meeting employment expectations such as job security and financial continuity. Much of what the brand value consists of is provided by the very functional executives and their teams who seem to be too expensive to retain; even though they are providing essential service and support internally and to partners in the system. It will be interesting to see over the next few months how the recent waves of redundancies impact this branding promise?

Most companies will end the year leaner; they will of course put a positive spin on the explanations they communicate to all stakeholders, with assurances that they are now more efficient and even more effective at providing their brand proposition than they were in the past. For many this will imply that what they were doing before was sustaining an unjustifiably high cost structure with functions that were unnecessary or not seen as critical or providing relative value.

Which companies will build back their headcount and fixed costs as revenues inevitably rise again, and which will maintain a streamlined approach using innovations, outsourcing and new ways of using technology to achieve the same goals remains to be seen. Those looking to maintain a more efficient cost structure will have to balance that against the need to provide support functions to sustain and represent the brand value proposition.

The frequent pattern of cyclical downturns and recoveries has been a feature of the Asian hospitality sector and we can expect similar cycles in the future. The growth in the last few years and the developments that remain in the pipeline mean that for key locations in the region the room supply is at an all time high and it will take time for revenues to return to previous high levels. Hotel companies in Asia also face direct competition from serviced apartments, a continuing global economic slowdown and localised political tension which are all contributing to continuing reports of significant decreases in revenue at hotels in the Asia Pacific region. The budgeting process this year must be wholly guesswork and hotel companies remain under pressure to make cost savings and streamline their headcount. With the recent news of further cuts at InterContinental other hotel companies are likely to be under pressure to make further efficiencies.

This time round we might be seeing more than just a cyclical reduction in headcount and costs. In order to return to previous financial highs we will need to see a sustained confidence that will cause the corporate account customer to be recruiting executives and sending them on extensive travel without the constraints on travel expenses and entertainment. The luxury retail and individual travel sector, which relied on the spending power of large disposable incomes, misses the big bank bonuses as much as the bankers.

This may not be a normal cycle and things may not return to the way they were. The situation looks a bit like the corporations are going through what obese human beings go through after a health scare, like a heart attack or a stroke. We may be seeing the institutional equivalent of a permanent change of lifestyle. Picture for a moment, a typical major company as if it were a human being. Not just hotel companies but look at some of the automobile companies as well. The financial performance of Q4 2008 was for most sectors the corporate equivalent of an annual medical check that revealed obesity and dangerously high blood pressure. Despite this warning many companies entered 2009 as if nothing had happened. In the context of our human comparison the companies were obese, unable to jog or run up the stairs, yet still eating the wrong foods and not taking regular exercise. Were some even compensating with frivolous spending on distractions and expensive toys? To be even more mischievous with the analogy, maybe some corporations also needed a new wardrobe, and a change of hairstyle to match their age and stature or to meet more modern demographic expectations.

Now, in the summer of 2009 all corporate excess and gluttony is exposed; companies are like naked sunbathers, flabby abdominals hanging over their neon Speedos for all to see. So I wonder again, is this current round of streamlining and efficiencies a permanent change of corporate lifestyle? Or is it just a fad diet, a tummy tuck, or a month at the gym to get in shape for the swimsuit season? When revenues begin to grow returning confidence in sustained margins, the analysts will be watching like eager personal trainers to see which corporations go back to the old bad habits and rebuild the fat cells that have recently been eliminated; and which companies will stay with the programme, fit and healthy and ready for the next cycle.