REVENUE MANAGEMENT SYSTEMS: PROMISE AND DELIVERY PART 1 PART 1 – THE VENDOR PERSPECTIVE

The science of revenue management has been quickly and widely adopted by the global hotel industry. At its simplest, that science offers tools (detailed forecasts developed on Excel spreadsheets, copious reports drawn from the PMS) and processes for using them that can be implemented easily and successfully at any hotel property. Disciplined adherence to these manually-completed processes delivers clear benefits to their user properties.

Ultimately, however, revenue management requires the aggregation and consideration of massive amounts of information about past demand and occupancy. The productivity of revenue management efforts corresponds directly to the level of detail collected and evaluated in the revenue management process.

Industry experience has made it clear to hotel operators that manual – which is to say non-computerized – revenue management processes are incapable of dealing with all of the available and relevant data. Manual processes – Excel spreadsheets used by even highly skilled and motivated users – are quickly overwhelmed by the volume. Insufficient data analysis results in less that optimum rate and inventory decisions, and to lost revenue.

So what is the alternative to manually-operated revenue management? It is implementation of a purpose-developed computerized Revenue Management System or “RMS”.

Revenue Management Systems have been available to the hotel industry for nearly two decades but until relatively recently their adoption was very limited, primarily for two reasons:

• Misconceptions that RMSs were of little benefit to hotels with an ADR of less that $100, with annual occupancies of less than 80%, or those operating in the 1-, 2- or 3-star tiers.
• The high cost of acquisition of an RMS, which included the need to purchase both a computer system and an expensive license for the Revenue Management software.

The passage of time has addressed both of these issues. First, Revenue Management Systems have proven their value in all styles of properties and in times of low occupancy as well as high. Second, using the internet as their communication medium, RMS vendors have replaced “system purchase” with “service purchase”. Access for hoteliers to the latest generation revenue management technology is now available for a modest monthly fee, eliminating the need for capital expenditures.

So, use of an RMS is now affordable for virtually any property anywhere in the world. Two questions naturally follow. First, what is the return on investment – the ROI – of upgrading currently-manual revenue management processes in a hotel to new processes shaped around, and dependent on, an RMS? Second, how practical is the migration to use of an RMS?

The ROI answer: RMS vendors’ claims, and mounting anecdotal evidence from hoteliers collectively suggests, that committed, disciplined use of an RMS adds 5-7% to top line revenues.

Fine. There appears to be a reasonably compelling argument for upgrading most hotels’ manual RM programs to one where an RMS is used. RMSs appear to enhance transient (ie: non-negotiated, non-contracted) room revenues. Further, their expanding functionality now enables detailed consideration of the comparative value of group booking opportunities. Further, in the near future RMSs will expand to also support revenue management of non-rooms activities on the property. So, our second question. Is RMS implementation and use as easy as it looks?

IS IT AS EASY AS IT LOOKS?

This two-part article attempts to answer this question from the vantage points of both RMS vendors and hotel staff who are RMS users. Part 1 reports the vendor perspective and is done by seeking their comments – and advice – through four questions.

These questions were offered to all major RMS vendors and replies were received from six organizations: Amadeus/Optims, EasyRMS, IDeaS Revenue Optimization, Maxim RMS, MICROS, and The Rainmaker Group.

Question 1: What specific outcomes do clients expect to achieve when they install an RMS?

The most universal expectation of hotel management when installing a Revenue Management System, not surprisingly is to gain a financial benefit. Most want to increase RevPAR, although one vendor pointed out that some are still focusing on occupancy instead. EasyRMS suggested that owners in particular expect increased revenue performance and increased profitability in comparison to managers, who combine this with a hope for operation efficiencies.

More accurate forecasting is a widely held expectation, to be achieved through a combination of process consistency and more data-based judgments (rather that relying on not-always-accurate intuition).

Time savings due to data consolidation and faster decision distribution (inventory controls, pricing, overbooking etc.) to those electronic distribution systems to which the RMS is integrated or interfaced is a goal. Hoteliers expect that the automation that comes with an RMS will provide relief on already strained resources, either on-property or at the corporate level.

Fast and non-disruptive deployment is a widespread hope. Rainmaker phrased it as a sense that the vendor has a well thought out plan and the resources to execute.

A well-organized archive of highly organized data, analyzed with surgical precision will, hotel managers wish, provide them with greater marketplace insight. They believe that faster and deeper access to information can help them shape sounder strategies, believing that the decision-support functions of an RMS will aid in price-related decision-making throughout the organization.

And implementation of an RMS is positioned by some as an enabler for widespread operational change. Hoteliers often want the system to be a catalyst for a more fine-tuned business process. RMS tool will be the core of a revenue optimization culture.

Question 2: Are there areas where client expectations are sometimes overly optimistic?

While RMSs are not a new technology option for the hotel industry, the collective opinion of those systems’ vendors is that hoteliers’ expectations of the systems remain somewhat simplistic. RMSs are complex systems, capable of substantial positive impact – financially and operationally – but they require preparation, patience and continuing commitment. One vendor said “Client expectation are seldom realistic… they think they are buying a magic box”. Another said that they expect a silver bullet; that all their problems will disappear, replaced by increased revenues and higher occupancies.

The scale of the implementation process is sometimes underestimated. Some expect that the new RMS will fit into all their current processes and procedures without any changes to the processes or the RMS.  In particular, they hope that some work-arounds, rules-of-thumb, or over-rides will continue to be valid and should be used within the RMS.

Another vendor cautioned that new RMS users expect that they can “Set and Forget”.  Most RMSs, the vendor reminds, require maintenance to keep consistency between the data being used in the RMS and the business practices generating the data.

Vastly improved forecast accuracy is a common expectation – sometimes to the point of expecting 100% accuracy at all time. Often paired with this is the hope that results will be easy to measure. While several vendors indicated that RMSs should be sophisticated enough to be able to measure and report the increased revenue that they provide, they cautioned that it is difficult to know what a revenue manager would have done in the absence of the system and the market and competitive landscape change over time, so measuring an increase or decrease from a previous time period may not be accurate.

One vendor cautioned against underestimating the time to implement interfaces between the RMS and the hotel’s property management system and/or their casino management system while MICROS pointed to an expectation that existing staff, with existing skills, can extract full benefit from an RMS. They suggested that fully usable inputs to an RMS require sophisticated analytical capabilities and good communication and data gathering skills to maintain properly. Hotels that expect to reap the benefits of a sophisticated system without adding competent resources, one vendor stated “will be disappointed”.

The words of caution were not all negative however. Rainmaker responded to this question in part, with this observation “In terms of the revenue lift from the system, clients always underestimate this as well and are pleasantly surprised”.

Question 3: What situations/events/lack of action prevent RMSs from meeting their full potential when installed in a hotel?

The RMS vendors were remarkably united in their identification of issues that undermine the likelihood of successful, continuing contribution by their respective systems. Most frequently identified was the danger of a lack of continued support from Management. Revenue Management, one proposed, will work if the GM believes in its usefulness and will stop immediately when the GM believes otherwise. They supplied the example of a best-in-class hotel that was doing over 12% revenue increase – measured by simulation tools – which dropped to less than 1% before being discontinued when a new GM came in.

Failure to alter business processes to mesh with RMS processes was mentioned. It is essential that conflicts with existing practices need to be identified upfront and promptly handled (e.g. if group sales commissions are entirely based on room night and revenue production but do not account for displacement cost which show the ‘quality’ of the revenue and profit). Although ‘better’ decisions will be available, it is unlikely that they will be followed.

Another threat to successful integration of the RMS into property operations was described as “over control”, otherwise phrased as too-frequent manual intervention in RMS procedures, especially overrides to the rate and availability controls.

The complex nature of interfaces to revenue management systems requires close attention. This essential activity, as vendor pointed out, is often overlooked by customers who expect software to run flawlessly. Effective interfacing, they suggested, is curtailed by mismatched group codes, room types, reservation statuses, group statuses and miscounting of shares and walk-ins can cause the revenue management system to have an inaccurate picture of demand.

Interestingly, the single word “distractions” was cited as a threat to success. The complexity of the RMS implementation process and the need for both widespread understanding of the theories and buy-in to the revenue management processes is vulnerable, and can be derailed by unexpected (or unexpectedly large) operational events.

Finally, the related issues of recruiting, training and turnover were repeated mentioned by vendors. As one vendor said, professional revenue managers in many parts of the world are fairly difficult to find. Hotel needs both a senior champion and a competent ‘daily practitioner’ responsible for the ongoing use of the system. RMS technology provides a wealth of information and opportunities for improvement – these can only be fully exploited if the right team members are in place to use them. Once those team members are present, thorough training – and annual retraining – are imperative.

Question 4: What are the most important client actions to ensure successful functioning of an RMS?

• The vendors’ comments reflected their collective experience, challenges and successes:

• Get buy-in early from senior level management or it will not work.
• Fully integrate revenue management processes into not only transient guest management but also the activities of group sales, contract/wholesale, and web/extranet management.
• Compile sufficient, and sufficiently detailed, “clean” data — at the transactional level. For optimal operation an RMS requires not just synopses, but each reservation, cancellation, no-show, or other change. This granularity of detail enables the most detailed forecasting available and results in the most accurate price and availability controls. Continually enter new special events data.
• Develop a roadmap with goals spread overtime – the opportunities that an RMS delivers will not materialize overnight.
• Hire sufficient, competent revenue management staff; involve them in the selection and introduction of the system.
• Never underestimate the time it takes to configure existing systems such as the PMS to interface with the RMS. Partner early and closely with IT.
• Identify those who are naturally going to resist and sell it to them first.
• Train as many people as possible on the concepts, and those who are closest to revenue management, on the application. The more people that buy into the system and the revenue management process, the better the decisions will be as a collective team.
• Communications, to prepare the organization for the impending changes, generate enthusiasm and quick adoption, and reinforce the best practices and results.
• Performance measurement – measuring – and praising- forecast accuracies to boost morale and trust of the system.
• Provide incentives to affected personnel, they deserve recognition for their participation.
• Commitment – there are always ups and downs and it is important to keep momentum and a good attitude to get through the initial impact of changes and to see through to the improvements.
• Don’t use the system just to get by. Make use of all of its functionalit

The RMS vendor community has supplied insightful and time-proven advice. In Part Two of this article, property and corporate level Revenue Managers will give us their perspective on these issues.