Operator-owner relationships: When is it time to move on?

If it is true that the relationship between hotel owners and operators should be viewed more as a marriage than a business relationship, then it appears that divorce rates are currently on the rise. When facing strong market conditions, these partnerships are easy to manage, but in difficult times, those that were built on weak foundations are often tested. If finances become an issue and goodwill is cast aside, owners can find themselves questioning what hotel operators ever brought to the table in the first place and start looking to see if better deals can be had elsewhere.

The full implications of prematurely terminating management contracts are not always fully appreciated by hotel owners. There are often associated costs that may not be immediately obvious. If the operator has not failed their performance test, these penalties could take the form of a fixed dollar amount, a set number of years’ worth of management fees, compensation for lost operator fees for the remainder of the term or even an unspecified amount deemed ‘fair’ by the operator.

When legal costs are also taken into consideration, there is a significant financial hurdle to overcome before the process can even be started in earnest.

Add to this, the fact that hotel operators are extremely hesitant to entertain owners with an existing management contract in place on the grounds of “tortious interference,” often the decision has to be made before discussions can even begin with a new operator. Once this initial step has been navigated and a new operator can be secured, there will be further cost implications. Assuming that the building is in a general state of repair, if a flexible or ‘takeover’ brand is adopted, the cost of conversion would be limited to a handful of cost items, the most significant of which would likely be IT costs.

However with prototypical brands, these costs can extend to structural changes and the development of required ancillary facilities.

Once both the legal and cost implications have been taken into consideration, the final question is whether or not a new operator would better suit the needs of the hotel owner. Often better terms are not the sole motivator for this change – after all, when confronted with a potential dismissal, most operators would rather renegotiate than lose a deal – it may instead be a breakdown in the relationship itself. Where the motivation is financial, beyond the heads of terms, what is important is the generally competency of the operator. For example, a barometer of this may be the ability of a particular operator to drive direct bookings. Where one operator may have 60 percent OTA bookings with a blended negotiated rate 5 percent higher than another that has 25 percent OTA bookings, there would be a 300 percent difference in cost before anything else is taken into consideration.

The decision to change an operator is often made in haste and without sufficient consideration for what the wider ramifications may be.

More often than not, the associated cost and potential revenue upside are suboptimal when compared to engaging the existing operator in an open and collaborative fashion. However if not possible, once the decision has been made, there are financial, legal and practical considerations to tackle before action can be taken, and owners must make sure that there is an economic – rather than emotional – rationale to go in a different direction. Where ‘soft brands’ are pursued, which typically have lower conversions costs, hotel owners must be absolutely confident that the machines that drive these brands are robust enough to surpass current performance.