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Assessing Outsourcing Options

Hoteliers Have Lots To Consider When It Comes To Operating Certain Businesses

Tuesday, December 04, 2018
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By Roland Leiser

When does it "make sense" for a hotel owner or management firm to use its own staff for a property’s ancillary operations as opposed to outsourcing them to third-parties?

The question was posed by consultant Robin Zeidel of Zeidel & Associates during Georgetown University's Hotel and Lodging Law Summit and a panel on outsourcing the operation of gyms, spas, restaurants, bars, valet parking and security. The industry has gone beyond independently-run gift shops to embrace what a panelist called “new and different” podcast studios in hotel lobbies. The session took earlier this fall at the school’s Law Center in Washington, DC.

Moderated by Zeidel, panelists included Joshua Babbitt, SVP and general counsel of the Sydell Group, a hotel developer and manager; Ellen Brown, EVP of investments and asset management for Fulcrum Hospitality, which has 65 hotels; and Rob Keddie, counsel at LDV Hospitality with 25 restaurants.

Responding to Zeidel, Sydell’s Babbitt said that running a gym is no place for a manager without expertise, and a hotel-run valet parking lot can pose liability issues if an accident occurs. The decision boils down to "core competency" and risk.

Whether to contract with third-parties for certain F&B services "is a labor decision," according to Fulcrum’s Brown. She added, "if you have a non-union state for F&B in a city or urban area, you want to maintain that non-union status."

As Sydell’s Babbitt remarked, “we might have two different F&B partners and a podcast studio, all operating in the same space." At the same time, the hotel must assure that guests can charge anything “to their room” from purchases anywhere on the property.

Turning to arrangements between the parties, Zeidel asked the panelists whether they should be an operating or licensing agreement or be similar to a mini-hotel management agreement. When a hotel enters into complex F&B deals, for example, it could be dealing with multiple dining options, such as room services, banquets and catering.

LDV's Keddie said he prefers to make a deal "as simple as possible." He further explained his business model in a tongue and cheek fashion. “Give us a big bag of money and we will give you good food and drinks,” he said.

On a serious note, he said "a deal is a good deal" when it can be put in a drawer and never reviewed unless employees aren't showing up or failing to do their job. Contracts, Sydell's Babbitt emphasized, should define "who gets paid and in what order."

Meanwhile, from an owner's viewpoint, Fulcrum's Brown responded that "we like to have a lot of control" over F&B services. "It's an important part of our marketing and public relations," she added, explaining clearly the owner must have a way to terminate or change the contract if the relationship isn't working.

Babbitt voiced a similar concern. His firm negotiates deals which carry a "certain (performance) threshold." If the vendor "is not quite failing, but not quite doing well enough, we have the right to change the contract." Keddie called it a challenge to "to find the right mid-point in a termination threshold."

In negotiating with bar and restaurant operators, Brown requires that references to the F&B service in the press must include the hotel's name so that "we are jointly being promoted." Similarly, Keddie requires approval of any reference to the property, which might be posted on a web site.

“If a press release is issued, the owner/third-party contract should specify who will clear it, including the quotes and use of certain words," said Babbitt.

When LDV's Keddie negotiates on behalf of one of his restaurants, he said he needs to know the property's minimum occupancy as the restaurant's success depends on a "profitable, well-run hotel.” Similarly, said Babbitt, resort guests will account for most of the F&B sales at the property, but if it can't attract enough guests, the F&B vendor could argue that it can't keep its part of deal. However, Babbitt explained that his clients’ business model focuses on urban locations that are part of the community and derive a large portion of non-guest revenue.

Turning to celebrity chefs, the panelists expressed a range of opinions. Babbitt questioned their value, and added that the chefs must be on premises for “a certain number of hours” for the hotel to gain any benefit from the publicity. On the other hand, said Keddie, "we’ve gotten away from celebrity chefs.” Moderator Zeidel stressed that hoteliers "need to publicize the relationship and exploit it."

Fulcrum's Brown told of a famous chef who suddenly decided to move out unaware that "he was giving up rights to his name." The incident triggered a "significant impact" on the hotel's valuation. With such personalities, the hotel wants them to be on the premises for the guests to see them.

Babbitt, meanwhile, underscored why it's important to negotiate a termination clause if, for example, the chef was found to have been convicted of a felony. Even if the hotel determines the chef "is not what we want in the way of an image, we will pre-negotiate a break-up fee" to avoid legal issues.


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