October, 18, 2017
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Uses For The Contribution Factor
Rule

By the Hotel Management Team
By the Management Company or Chain
By an Owner, REIT, Pension Fund, or Financial Institution
By Potential Buyers of Hotels or Companies
By Chains to Evaluate Performance from Various Divisions
Job Applicants
When Interviewing

Let's continue to use the previous example:

By the Hotel Management Team
The hotel management team and GM would need to sit down and identify how they planned to achieve the projected GOP of $4,900,000. If there were some unusual group bookings already on the books the projection may be able to stand. If that is not the case and the hotel is just setting the budget and annual projections they may want to reduce the projected GOP to a number that is closer to their expected Contribution. Or the team can discuss ways to re-assign people on the team to increase their expected contribution to match the projected GOP. Ultimately the GM can make decisions on how to re-align the management team to achieve the projections. As a last recourse the GM, team, or company can evaluate whether they can bleed the property enough to make the numbers and what the longer term effect will be. If the GM's hands are tied, the GM would know to look for a new job because the chances of surviving this one are slim to none.

GM's can use The Contribution Factor to check on their Departments when budgets are being put together and monthly to check on performance.

By the Management Company or Chain
If the hotel came up with the projected GOP of $4,900,000 then Corporate Management needs to ask the hotel some tough questions on how the numbers are going to be achieved. Or talk to the GM about who can be transferred into or out of the hotel to make the projected numbers work. Going through this analysis both the hotel and Company or Chain would need to keep in mind Premise number 3 to hold their planned and unplanned management turnover under 30%. When management turnover exceeds 30% profits typically are reduced.

By an Owner, REIT, Pension Fund, or Financial Institution
Owners, et al can use The Contribution Factor as a quick tool to get a realistic expectation from their asset. If the numbers don't match they also know to ask tough questions. REIT's, etc. can use this to get an overall measure of the expected contribution from their portfolio so they know what to put in reports to shareholders, press releases, on their own internet sites, etc. Forcing a hotel or management company to exceed 30% management turnover will only improve profits if the property is bled in one or more ways. Remember the adage: "Don't throw away what you want most for what you want now!"

By Potential Buyers of Hotels or Companies
Asking innocent questions to get the length of time each member of management has been in their position and then getting the overall payroll and fringe benefit budget allows a potential buyer to quickly determine if the projected profitability is really realistic or just pie in the sky.

By Chains to Evaluate Performance from Various Divisions
The Contribution Factor also allows quick comparisons of Divisions of a conglomerate, or comparison between regions in a chain. If a Division or Region has a higher than normal management turnover ratio anticipate lower profits or take immediate corrective steps. The Contribution Factor can allow an apples to apples comparison without getting into personalities.

Job Applicants
As stated earlier job seekers can use The Contribution Factor to evaluate whether or not the profits expected of them are realistic or not. Once a job applicant is getting close to receiving a job offer they can ask innocent questions about how long each member of their new management team have been in their positions. Then a simple look at the budgeted salaries for the Department, and an innocent question on what percentage of payroll, fringe benefits are, gives the job applicant all they need to run a quick computation so they can compare a "realistic" profit projection to the budget. That lets the job applicant determine whether the new job can make them a super star or a chump. If the numbers don't work the applicant can either ask some questions or simply turn the position down.

When Interviewing
Potential employers can learn a great deal about applicants by asking them questions on how much they personally impacted GOP in their current job in the last 12 months. By the time potential employers get to a phone or an in-person interview they will have seen the applicant's resume and know how long the person has been in their current position. The interviewer will also know the salary for the applicant and how much of a bonus the applicant earned. Then simply use a factor of 20% for fringe benefits. (Which in the hotel industry is probably being very generous.)

If the applicant is making $70,000, earned a $15,000 bonus, and has benefits of about $14,000, for a total of $99,000 then you have your start point. If the applicant has been in their current position for 2 years they should be contributing roughly $297,000 to GOP. Ask probing questions to find out how much the applicant personally is contributing. It may take several questions. Most managers contribute to GOP in a variety of ways. Mentally tally them up. If the applicant can't give at least some quantitative answers, odds are the applicant won't make any money for you either. Move on to the next interview or phone call.

Conclusion

The Contribution Factor is not the ultimate answer in evaluating hotels, companies, or people but it does an excellent job of identifing trends and whether people understand their role in achieving profits. Try it. It has been accurate within plus or minus 5% for over 200 hotels. One hotel with an 84% occupancy and high ADR exceeded it by 12%, that's the largest variance we have seen. We have used it for budget, rooms only properties, all-suite properties, hotels with limited F&B, full service hotels and resorts, conference centers and luxury hotels.

KEEP CONTRIBUTING!

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