accounting and financial management developments in the international hospitality industry

Accounting and FinancialManagement

To Samantha and Lillian

Accounting andFinancial

ManagementDevelopments in the international

hospitality industry

Edited byPeter Harris

and Marco Mongiello

AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORDPARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO

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Contents

Foreword vii

Preface ix

Editors xi

Contributors xii

Part 1: Performance Management 11 Performance measurement in independent hotels 3

Mine Haktanir2 Productivity in the restaurant industry: how to measure

productivity and improve process management 22 Pekka Heikkil and Timo Saranp

3 Performance measurement in the internationalhospitality industry 46Helen Atkinson

4 Budgetary practice within hospitality 71Tracy Jones

5 Benchmarking: measuring financial success in thehotel industry 87Agnes Lee DeFranco

6 Developing a benchmarking methodology for thehotel industry 105Peter Harris and Marco Mongiello

Part 2: Information Management 1357 The profit planning framework: applying marginal

accounting techniques to hospitality services 137Peter Harris

8 Cross-border reporting for performance evaluation 151Ian Graham

v

9 Cost analysis in the hotel industry: an ABC customerfocused approach and the case of joint revenues 165Paolo Collini

10 Customer profitability accounting in the context of hotels 188Vira Krakhmal

11 Room rate pricing: a resource-advantage perspective 211Jean-Pierre I. van der Rest

12 The relevance of restaurant accounting systems 240Tommy D. Andersson

13 Accounting for the environment: reflecting environmental information in accounting systems 262Rebecca Hawkins

14 Hotel unit financial management: does it have a future? 282Cathy Burgess

Part 3: Asset Management 29915 Hotel asset management: will a North American

phenomenon expand internationally? 301Paul Beals

16 Hotel asset management: European principles and practice 326Geoff Parkinson

17 A management accounting perspective on hotel outsourcing 341Dawne Lamminmaki

18 Sale and leaseback transactions in the hospitality industry 362Charles Whittaker

19 Hospitality firm risk determinants and value enhancement 383Zheng Gu

20 Investment appraisal issues arising in hotels governed by a management contract 400Chris Guilding

21 Autonomy and control in managing network organizations: the case of multinational hotel companies 423Marco Mongiello and Peter Harris

22 Career directions in financial management in the hospitality industry 446Howard Field

Index 463

vi

Contents

Foreword

As a senior executive of a fast growing hotel company in Europe,Middle East and Africa, with hotel operations in some fifty coun-tries, I know how difficult it is to find the time to keep track ofnew research and development in the areas of accounting andfinancial management within our industry.

Accounting and Financial Management: Developments in theInternational Hospitality Industry edited by Peter Harris and MarcoMongiello is an effective and indispensable reference that helpsme and others like me keep abreast of research and developmentin our industry. In addition, I believe this book is of invaluableimportance to those studying at different levels of education,accountants in the hospitality business and advisors to the hospi-tality industry.

This book is not only made attractive by the range of interna-tional authors and the combination of well-written chapters, butalso by the demonstration of how accounting and financial man-agement interrelates and contributes to the broad spectrum ofbusiness activities. Written by industry mavens who have drawnon their practical experience from different areas of the hospital-ity industry and academic researchers, these chapters are recom-mended reading for anyone interested in the hospitality industry.

Part One of the book deals with performance measurement andincludes six interesting chapters about various aspects of per-formance measurement in the hospitality industry. This section isloaded with useful information including benchmarking andmeasuring productivity in the restaurant industry. In my view,the hospitality business is well structured for benchmarking and

vii

for measuring financial success at all levels of operation. Part Oneof the book is a true goldmine of knowledge for those seekingadvice on performance management and plenty of references forthose wanting more information.

The focus of Part Two of the book is information management,a highly relevant subject for all of us. Most of us struggle with theUniform System of Accounts and have been doing so for a verylong time. This section of the book offers several solutions toovercome some of the fundamental weaknesses in the UniformSystem and complements the accounting standard/chart ofaccounts in a meaningful and manageable way. Implementingsome of these solutions in our operations is a must if we want tomanage our organizations efficiently and effectively. For instance,drawing on the expertise of Peter Harris, we ourselves at RezidorSAS Hospitality have engaged with marginal analysis and imple-mented The Profit Planning Framework in our organization, anindispensable tool that helps us understand the behaviour offixed and variable costs in operations.

Asset Management is the theme of Part Three of the bookwhich emphasizes a number of longer-term issues and tech-niques. The chapters in this section vary from sale and leasebacktransactions, to investment appraisals and to career developmentfor finance professionals in the industry. This information ishighly pertinent and important to our business and for our pro-fessional growth.

The insight of the editors, Professor Peter Harris and Dr MarcoMongiello, together with the other contributors, makes this booka significant contribution that will influence the way we developaccounting and financial management in the hospitality industryin the future.

Knut KleivenDeputy President & Chief Financial Officer

Rezidor SAS Hospitality

viii

Foreword

Preface

The main purpose of this book is to present new and interestingresearch and developments in the field of accounting and finan-cial management as they relate to the work of managing enter-prises and organizations in the international hospitality industry.Although the focus is on hotels, the content can readily be inter-preted in a broader context. Many hospitality organizations con-tain hotel services components such as the provision of rooms,food and beverage facilities and, therefore, the examples and illus-trations can be related to restaurants, licensed house management,hospital and university services, clubs and so on.

The content comprises state-of-the-art contributions from awide range of academics and practitioners engaged in hospitalityactivities around the globe including researchers, university lec-turers, practising accountants, professional consultants and sen-ior managers and executives associated with the internationalhospitality industry in the UK and abroad. The material is drawnfrom their work and experience and relates directly to the man-agement of hospitality undertakings.

Most books written for the hospitality industry tend to concen-trate on accounting and financial management techniques in atheoretical context. In contrast, this work presents new findingsand developments drawn from a combination of live fieldwork,practical experience and academic research. In this context it isanticipated the readership will include: practising managers andfinancial controllers in hospitality organizations, professionalaccountants and consultants, postgraduate candidates research-ing for PhDs and studying for masters degrees in hospitality and

ix

tourism management, and final year undergraduate students ofhospitality management who elect to take an accounting andfinance option.

Notwithstanding the classification or grouping of the materialpresented here, the range of topics brings together a rich fund ofknowledge and experience from contributors who operate inter-nationally throughout the world, including Europe, North Americaand Australasia. Without their generosity and commitment to thesharing and dissemination of information a book of this kindwould not be possible; a debt of gratitude is owed to them all. We are so proud to have them associated with this publication.

Acknowledgement is also due to a number of our colleaguesfor their support and tolerance throughout the preparation of themanuscript. Finally, thanks go to Sally North, Tim Goodfellowand Francesca Ford of Elsevier/Butterworth-Heinemann who, asusual, have been patient, considerate and supportive throughout.

Our single wish is that the reader finds this book to be of practical use.

Peter Harris and Marco MongielloAugust, 2005

x

Preface

Editors

Peter Harris is professor of accounting and financial managementat Oxford Brookes University. He graduated from the Universityof Strathclyde and holds the HCIMA professional qualificationand the Certified Diploma in Accounting and Finance. He trainedand held managerial positions in the hospitality industry. ProfessorHarris is the author of numerous books and articles on appliedaccounting and is past Visiting Professor at the Institut de Man-agement Hotelier International (Cornell University-ESSEC) Paris.Through his research into cost behaviour, profit planning tech-niques and performance measurement he undertakes consultancyassignments and conducts seminars in the UK and abroad for anumber of leading national and international hotel organizations.He was recently presented with the British Association of HospitalityAccountants Lifetime Achievement Award for his contribution tohospitality accounting education.

Dr Marco Mongiello is principal lecturer in financial and man-agement accounting at the University of Westminster. He is a mem-ber of the Italian Institute of Chartered Accountants and obtaineda PhD at Venice Ca Foscari University with a thesis on performancemeasurement in the service sector. He has been teaching and research-ing at Venice Ca Foscari and Oxford Brookes Universities and iscurrently leading the finance subject area at the Harrow BusinessSchool, University of Westminster; his research domain being man-agement accounting and management accounting applied to thehospitality and tourism fields. Dr Mongiello also carries out edi-torial activities and consultancy assignments internationally.

xi

xii

Contributors

Tommy Andersson is professor of tourism management at Gothen-burg University. He previously served as programme director atthe European Tourism Research Institute in Sweden for 4 yearsand before that as professor in management accounting at BodoGraduate School of Business in Norway. Dr Anderssons interestin tourism economics started in 1995. He then undertook an eco-nomic impact analysis of a Bruce Springsteen rock event. At thesame time Dr Andersson started to teach hospitality accounting.Today he is programme director of a master programme in tourismand hospitality management taught at the School of Business,Economics and Law at Gothenburg University and is also respon-sible for a module in managerial economics. His main researchinterests are economic impact analysis, event management, man-agement accounting in restaurants, and cost-benefit analysis. Hehas published books and journal articles and is on the editorialboard for academic journals in tourism and hospitality.

Helen Atkinson is a principal lecturer at the school of service management in the University of Brighton. She has a backgroundin hospitality management and is a qualified managementaccountant with CIMA. She has lectured, researched and pub-lished in the area of hospitality accounting since 1989 and is currently on the education committee of BAHA (the BritishAssociation of Hospitality Accountants). Her research interestsinclude: strategic management accounting, performance manage-ment, strategy implementation in the hospitality and service indus-tries, and approaches to budgeting in hotels. Journal publications

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Contributors

include: Atkinson H and Brander Brown J (2001) RethinkingPerformance Measures: Assessing Progress in UK Hotels, Interna-tional Journal of Contemporary Hospitality Management, 13(3): 128135,Brander Brown J and Atkinson H (2001) Budgeting in the informa-tion age: a fresh approach, International Journal of ContemporaryHospitality Management, 13(3): 136143.

Paul Beals, PhD, is visiting professor at Frances IMHI-ESSECBusiness School, where he is responsible for MBA courses infinance and hotel real estate. For more than 25 years, Bealss aca-demic research and consulting have been concentrated in hotelindustry development and financing, asset management, andmanagement contracts. He has taught hospitality financial man-agement and real estate finance at Cornell University, BostonUniversity, University of Denver, and Switzerlands Glion HotelSchool. Bealss writings, primarily in the area of hotel finance andinvestments, have appeared in The Cornell Quarterly, Journal ofReal Estate Finance, Real Estate Review, Journal of Hospitality FinancialManagement, Journal of Retail and Leisure Property, LHtel Revue,and Le Monde. Beals is the lead editor of Hotel Asset Management:Principles and Practices. A member of Phi Beta Kappa and theCornell Hotel Society, Beals earned masters and doctorate degreesfrom Cornell University.

Cathy Burgess qualified in hospitality management at LeedsPolytechnic (now Leeds Metropolitan University) and then spentthirteen years in various operational and financial managementpositions within the hotel and catering industry. Her later appoint-ments were as a financial controller with Marriott Corporationand Thistle Hotels. In 1989 she was appointed senior lecturer inaccounting at Oxford Brookes University, teaching financial man-agement to degree and masters level students, and gained herMPhil in 1993. She maintains close links with industry throughresearch and consultancy and as a council member and member-ship officer of the British Association of Hospitality Accountants,for which she has been elected an honorary fellow. Her currentresearch interests include the role and professional developmentof the hospitality financial manager.

Paolo Collini is full professor of management accounting andstrategic management at the University of Trento (Italy). From 1993to 1998 he was assistant professor in management at the Universityof Venezia (Italy). He holds an MBA from Boston University and aPhD in management and economics from University of Venezia.He is a certified public accountant. Professor Collinis main researchinterests focus on cost management and control with a strong

attention to the relationship between decision-making and costinformation in complex organizations. He is the author of booksand articles in the field of management control and accounting. He is associate dean of the Faculty of Economics at the Universityof Trento and member of the scientific committee of CUOABusiness School.

Professor Agnes Lee DeFranco began her teaching career in 1988,specializing in hospitality accounting, finance, cost control, andpurchasing courses. Her formal education includes a Bachelor ofScience in hotel and restaurant management, a Master in BusinessAdministration with a concentration in finance, and a Doctoratein education in higher education administration. She has been arecipient of both teaching and research awards and is active in anumber of local, state, national and international organizations. Shecurrently serves as the vice president of the Hospitality Financialand Technology Professionals. She is active with I-CHRIE in theirfinance committee and future fund committee and was their treas-urer from 1999 to 2002. From 1999 to 2003, she also carried anadministrative role as the associate dean and subsequently theinterim dean of the Conrad N. Hilton College. Her research areasare hospitality finance, cost control, accounting, and cultural anddiversity issues.

Howard Field, chartered accountant, fellow of Hotel & CateringInternational Management Association, honorary fellow of BritishAssociation of Hospitality Accountants (founder member andserved on the council and on various committees), honorary Fellowof Hotel Controllers Association (Hong Kong), visiting fellow atOxford Brookes University, founded FM Recruitment in 1985, specializing in financial, IT and purchasing management, and pro-fessional consultancy appointments within the hospitality sector.He is non-executive director of Airport Hotels General Partner,Arena4Finance, and Hotel Investment Advisors. Prior career spansunit, divisional and corporate financial management positions withUK and international hotel groups and in professional consultancy.

Ian Graham is managing director of The Hotel Solutions Partner-ship Ltd, a consultancy that works with international hotel com-panies to unlock strategic advantage. Ian was formerly a directorin the travel, tourism and leisure practice of Andersen/Deloitte &Touche. Prior to joining Andersen/Deloitte & Touche in 1999, Ianheld a variety of senior executive positions in the hotel industryin the Europe, Middle East and Africa region, principally withBass Hotels & Resorts and prior to that with ITT Sheraton. Ian isa graduate of the University of Surreys department of hotel and

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Contributors

catering management. He is a fellow of the Institute of CharteredAccountants of England and Wales, and a member of the Interna-tional Society of Hospitality Consultants. He has been a visitingfellow at Oxford Brookes University for eight years and is a non-executive director of the leading hospitality charity SpringboardUK Ltd.

Professor Zheng Gu holds a BS degree in economics, an MA inapplied economics and a PhD in finance. He teaches hospitalityfinance and quantitative methods at both graduate and under-graduate levels. His research and consultancy focus on financialmanagement and operations analysis for the hospitality andtourism industries. Professor Gu was the president of theAssociation of Hospitality Financial Education (AHFME) in theUSA from 1999 to 2000. He is the editor of UNLV Journal ofHospitality, Tourism and Leisure Science (HTL Science) and guest edi-tor, associate editor, consulting editor or editorial board memberof six other hospitality/tourism research journals. Professor Guhas more than 100 articles published in academic and professionaljournals. He has served as editor, section editor, author, co-author,or chapter author of many books. Dr Gu has received numerousawards for his research achievements in hospitality management.

Professor Chris Guilding works with Griffith Universitys depart-ment of tourism, leisure, hotel and sport management and is alsodirector of Griffiths Service Industry Research Centre. He is a mem-ber of the Chartered Institute of Management Accountants and hastaught accounting and finance in universities in Australia, Canada,England and New Zealand. Chris has more than 30 publicationsand papers in refereed journals that include: Journal of Hospitality &Tourism Research; Tourism Management; Accounting, Organizationsand Society; Business Horizons; British Journal of Management andJournal of Marketing Management. In recent years, he has developeda specific interest in accounting for tourism and hospitality issues.In 2002 his book Financial Management for Hospitality Decision Makerswas published by Butterworth-Heinemann. In 2005 he acted aschairperson for the Strata and Community title in Australia for the21st Century conference.

Mine Haktanir is a lecturer in accounting and financial manage-ment in the School of tourism and hospitality management atEastern Mediterranean University, Turkish Republic of NorthernCyprus. She completed her PhD in performance measurement inindependent hotels at Oxford Brookes University. She teachesmanagement accounting and financial management courses bothat undergraduate and postgraduate levels within the school. She

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Contributors

is the programme coordinator of the Masters degree in tourismmanagement and has responsibilities in coordinating the curricu-lar activities of the school. She was the assistant director of theschool and has experience in managing the university restaurantfor a number of years. Her research interests include understand-ing the performance measurement practices in small service busi-nesses and in independent hotels. She has attended both localand international conferences and published articles on hospital-ity performance measurement.

Dr Rebecca Hawkins is a freelance consultant offering specialisttourism and consultancy services to the tourism sector. She is alsocurrently the research and consultancy fellow within the depart-ment of hospitality, leisure and tourism management at OxfordBrookes University. During her career, Rebecca has written manyof the reports that have formed the response of the tourism sectorto sustainable development issues. These include the WTTC, WTOand Earth Council interpretation of Agenda 21 into an action planfor the sector, the analysis by WWF of the effectiveness of tourismcertification schemes, an assessment of the data required to bench-mark the sustainable development credentials of hotels and highereducation institutions and the development of tourism strategiesfor a range of international organizations. Rebecca is currently a principal of the hospitable climates energy management pro-gramme, and advisor to the Considerate Hoteliers Association, akey consultant on a programme to improve the amount of glassrecycled from hospitality businesses in the UK. She is also workingwith TravelWatch on a project funded by the Travel Foundation toassess the relative local economic benefits of different types ofaccommodation in the Eastern Caribbean.

Pekka Heikkil has been lecturer in business accounting atHaaga Institute Polytechnic for 12 years. He was recognized as Certified HTM-Auditor (Finland) in 1993 and has completedCertification in managerial accounting and finance in the Schoolof hotel administration in Cornell University, New York (1997).Before the position in Haaga Institute he has worked perma-nently in Ernst & Young auditing in northern Finland where mostof the customers were local tourism operators. Currently he per-forms consulting and auditing in addition to teaching work. He isalso writing (with Timo Saranp) a guide book of businessaccounting for the Finnish Hotel and Restaurant Association.

Tracy Jones is principal lecturer in accounting in the Department ofHospitality, Leisure and Sports Management at Cheltenham andGloucestershire University, UK. She worked in various sectors

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Contributors

of the hospitality industry before joining Oxford Polytechnic(now Oxford Brookes University) to complete the HCIMA pro-fessional qualification, being awarded the Greene Belfield-SmithAward for achieving the highest marks nationally in the financialmanagement examination. She remained at Oxford, completing aBSc (Hons) in hotel and catering management and an MPhil forher research into the financial and operating needs of managersin hotel companies. Her main teaching areas are finance andaccounting within the hospitality programmes and she is cur-rently in the process of researching hotel budgeting practices inthe UK for a PhD. She has published her work in a number ofjournals and books.

Vira Krakhmal obtained a Bachelors degree in business and eco-nomics from Kiev State University, Ukraine and a Masters degreein international hotel and tourism management at Oxford BrookesUniversity. Since graduating, she has gained wide experience work-ing as a research analyst at HVS International, a hotel valuation con-sultancy. Vira is currently completing her PhD research project inthe area of customer profitability analysis in hotels, the findings ofwhich are planned to be disseminated to the industry in the form ofa BAHA Recommended Practice Guide. The project involved her work-ing closely with a number of major international hotel groups thatparticipated in, and sponsored, the project.

Dawne Lamminmaki is a lecturer in accounting at the GraduateSchool of Management at Griffith University. Dawne is a member ofthe Certified Management Accountants of Canada and has workedand studied in Canada, England, New Zealand and Australia. Shehas been in academia for over ten years, seven of which were withthe school of accounting and finance at Griffith University. Dawnesresearch interests are in the area of management accounting, andshe has conducted research in the areas of capital budgeting, tradecredit management, management accounting systems, and out-sourcing. More recently, her research interests have been in the areaof hospitality. In September 2003 she graduated with her PhDwhich looked at outsourcing in the hotel industry. Publications inrefereed journals include: International Journal of ContemporaryHospitality Management, Journal of Business Finance & Accounting,Australian Accounting Review, International Journal of Accounting andPacific Accounting Review.

For over 30 years, Geoff Parkinson has specialized in the interna-tional hotel markets of the UK, Europe and the Middle East. Prior toestablishing HiA, he was the managing director of a number ofinternational hospitality consulting firms including Horwath UK,

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Contributors

BDO, Christie Consulting and Hospitality Consulting International.Working for and with many of the worlds leading hotel operatinggroups, investors and financial institutions, he has advised onacquisitions and disposals, formulated and implemented expan-sion and repositioning strategies, researched, benchmarked andimplemented profit improvement plans, carried out operationalreviews, competitive market assessments, feasibility and invest-ment viability studies. He has a particular expertise in the negoti-ation of key commercial clauses within operational leases andmanagement agreements. HiA works as the owners representativeand hotel asset managers for major investors providing hotel sectorexperience and knowledge and ensuring their relationship withhotel operators is equitable and to the owners advantage.

Timo Saranp has worked in the restaurant business as anentrepreneur and a manager for 15 years. He has built up a cater-ing chain based on an idea of a partial entrepreneurship and own-ership. He sold the company to ISS Finland (part of the ISS Group,Denmark) at the beginning of 2004. While working as a restau-rant entrepreneur he has also been conducting lecturing and con-sulting business in the hospitality industry and in the municipalsector. He has also participated in writing two books in account-ing for the restaurant business, one being an official guide book ofbusiness accounting for the Finnish hotel and restaurant industry currently under preparation with Pekka Heikkil. Mr Saranp ispreparing his doctoral thesis on the subject of entrepreneurshipin municipal services.

Jean-Pierre van der Rest is lecturer in business economics andstrategic marketing at Leiden University, The Netherlands. Hereceived his Bachelor in Business Administration in hotel admin-istration from the Maastricht hotel management school, and hisMA in managerial economics from the University of Durham.Prior to joining Leiden University in 2002, he was lecturer in busi-ness administration at The Hague University of professional edu-cation. He has been a visiting lecturer in finance at the InternationalHotel Management Institute Switzerland, and the Maastrichthotel management school. He has written two book chapters on pricing, a number of entries for the Elsevier Butterworth-Heinemann International Encyclopedia of Hospitality Management,and contributed several articles to professional journals. He spe-cializes in theoretical and applied pricing theory. His teachinginterests include management accounting, strategic marketingand business methodology.

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Contributors

Charles Whittaker began his career in the hospitality industry asController of the 400-room Lisbon Sheraton in Portugal and thenwas promoted to vice-president and divisional controller forEurope, Africa and Middle East, based in Brussels. He later heldthe post of director of finance and development with ScottsHospitality, a major franchisee of Holiday Inn and Marriott.Charles subsequently worked for Hilton International as financedirector for 40 hotels in Europe. In the above roles his responsi-bilities included accounting, finance, IT and legal matters and thenegotiation, acquisition, disposal and construction of major hotelsin the UK and overseas. Academically, Charles is a fellow of theInstitute of Chartered Accountants, holds an honours degree ineconomics from Sheffield University, a first class honours degreein Arts from the Open University, and an MA in English Studieswith distinction at Oxford Brookes University.

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P A R T 1

PerformanceManagement

This part of the book opens with two reviews of performancemeasurement literature and practices in the hospitality industry;the first refers to the independent hotels, chapter 1, and the secondembraces the broader range of productivity measures, chapter 2.The first two chapters serve as an introduction to the core topic ofperformance management, which is subsequently addressed in astrategic perspective and with reference to traditional and moreinnovative performance management techniques. The strategicperspective is presented in chapter 3, where an extensive literaturereview comprises contributions from the generic and the hospital-ity industry literature. Evidence of the use of budgeting as a tradi-tional technique of performance management is then provided inchapter 4, while the last two chapters introduce theoretical reflec-tions on benchmarking in the hospitality industry, chapter 5, andpropose an innovative performance management methodology,corroborated by first evidence of application, chapter 6.

1 Performance measurement in independent hotels

2 Productivity in the restaurant industry: how to measure pro-ductivity and improve process management

3 Performance management in the international hospitalityindustry

4 Budgetary practice within hospitality

5 Benchmarking: measuring financial success in the hotel industry

6 Developing a benchmarking methodology for the hotel industry

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C H A P T E R 1

Performancemeasurement

in independenthotels

Mine Haktanir

IntroductionPerformance measurement is an important com-ponent of decision-making processes. As the overallobjective of all forms of organization is to providesatisfaction for their stakeholders, developing appro-priate performance measures and interpreting theoutcomes are vital issues. With the growth in inter-national travel and therefore, increasing demand inhospitality businesses, performance measurement in the hospitality industry has gained particularimportance as a tool for effective decision-making.

Accounting information systems provide formalmeans of gathering data to support and coordinatethe decision-making of businesses in light of overallorganizational goals. Although profitability is themost commonly used basis for defining success, othermeasures, including cost, revenue and asset and liabil-ity accounts, are utilized. The comparison of budgetedand actual results is recognized as forming the basisfor evaluating overall performance and helping to

monitor and control operations. In hospitality businesses, ratios,which facilitate benchmarking, are commonly used.

However, these traditional performance measures have beenheavily criticized for encouraging short termism, lacking stra-tegic focus, discouraging continuous improvement and for notbeing externally focused. In an attempt to overcome these criticisms,performance measurement frameworks have been developed, pri-marily to encourage a more balanced view. For example, Lynchand Cross (1991) described a pyramid of measures which integratesperformance through the hierarchy of the organization. Fitzgeraldet al. (1991) distinguished between the results and their determi-nants. Kaplan and Norton (1992) use the four perspectives of thebalanced scorecard (BSC).

Although a number of studies (see Bolton, 1971; Stanworth andGray, 1991; Jarvis et al., 2000; Marriott and Marriott, 2000) haveexplored the way performance measurement is perceived andemployed in independently owned businesses, there appears to beinsufficient detailed research into actual performance measurementpractices of such organizations. When hotel businesses are consid-ered, independently owned and managed hotels are considered asthe traditional model of hotel operations and understanding theoperational characteristics of hotel provision begins with them(Jones and Lockwood, 1989). They are a dominant feature of thehotel industry in many countries and the majority of establishmentsare independently owned and operated (Morrison, 1998). In con-trast to this, they have received limited attention from researchers(Shaw and Willams, 1994; Main, 1995) where group hotels havebeen the core of research in the management control and perform-ance measurement literature. With increasing pressure from cus-tomer expectations and growing competition, independent hotelsmust start to develop effective performance measurement systemsin a strategic context. In particular, they require accurate informa-tion in terms of sales and costs for an effective decision-makingmechanism (Adams, 1997). Objective financial data are not publiclyavailable and access to performance data is severely restricted forindependent, privately held companies (Jogaratnam et al., 1999).Therefore, this chapter largely focuses on the research that has beencarried out on performance measurement in independent hotels.

Defining performance measurementThe term performance measurement has been in existence for along time as an important component of the decision-makingprocess, yet it only gained popularity in 1990s, particularly in thedevelopment of new management accounting techniques.

Accounting and Financial Management

4

Among the many definitions, one suggests performance measure-ment is . . . the process of quantifying actions, where measurementis the process of quantification and action leads to performance(Neely et al., 1995:80). There is a range of reasons for utilizing per-formance measures, including:

to indicate where more or less effort is required to monitor activities in units and/or divisions and through time

for diagnosing problems and taking corrective actions

to carry out planning, monitoring and control functions.Performance measures provide a realistic basis from which toconstruct plans

to facilitate continuous improvement in key areas and to pro-mote behaviour in ways that would help sustain competitiveadvantage

to support improvements in resource allocation and betterdecision-making

to specify responsibilities and to reinforce the accountability of employees and managers and, in particular, to detect ineffi-ciencies with the help of management accounting information

to provide regular information for staff appraisal, motivationand rewarding. Performance measurement is perceived as onemeans of motivating people towards achieving organizationalgoals.

Although there are several reasons for utilization of performancemeasures, overall it is considered to be an integral part of themanagement processes, to identify areas of poor performance oropportunities so that better plans can be developed.

Financial measures of performanceInformation regarding end results of operations is provided byfinancial performance measures and there is evidence that, inmany countries, financial performance measures are of primaryimportance. Accounting information systems provide a formalmeans of gathering data to support and coordinate the decision-making of businesses in light of overall organizational goals. Theyprovide quantitative and common yardsticks to evaluate achieve-ment relative to a plan or to compare parts of the company(Emmanuel et al., 1990:222).

5

Performance measurement in independent hotels

Profitability is the most commonly used basis for defining success, such that it is used in the lead tables of performances in Business Week, Management Today and similar journals. Profitsometimes is an absolute measure but more often is a ratio, such asearning per share, return on investment or return on shareholdersfunds, and is presented as a comparison with other companiesover a period of time. Traditionally, businesses have relied uponaccounting information, such as cost, revenue and asset and liabil-ity accounts, in order to explain the cause and effect relationshipthat determines the financial outcome of the operations. In recentyears, responsibility accounting that provides financial informa-tion and forms the basis for the performance measurement andmanagement control system in many organizations is recognizedas a key to management control systems.

Budgets have consistently proved to be an important financialtool to represent a standard for effectiveness and efficiency meas-ures. Performance reports are a common means of providing thekey financial budgeted and actual information for each responsibil-ity centre in order to control the organizations operations effect-ively. This comparison of budgeted and actual results is recognizedas forming the basis for evaluating overall performance, helpingcontrol future operations and providing incentives for motivatingthe staff. The roles of budgets in organizations are diverse:

1 a system of authorization

2 a forecasting and planning tool

3 a means of communication and coordination

4 a motivational device

5 a means of performance evaluation and control

6 a basis for decision-making (Emmanuel et al., 1990).

Although financial performance measures provide objective resultsand are mainly utilized as a rewarding and motivational tool, therehas been increasing recognition that the implementation of financialperformance measures on their own were seen to provide a limitedperspective on the performance of a company. The main short-comings are:

Short termism, in particular of profitability measures, is deter-mined as a handicap for businesses. Measures of share/equity,asset return, bottom line profit and residual income emphasizea short-termist approach. However, marketing/sales ratio andprofit sales margin would emphasize a longer-term approach.

6


The past information provided relative to ongoing operations isinappropriate in the dynamic business environment. Measuresthat are flexible and that can assist managers to make decisionsfor the current operations are highly important. It also encour-ages managers to keep minimum variance from the standardrather than continual motivation for improvement.

Results, rather than ongoing managerial efforts, are reflectedwith financial measures. Better performance measures arerequired to cope with the emerging managerial techniquessuch as total quality management.

Lack of strategic focus and failure to provide data on quality,responsiveness and flexibility.

Failure to provide information on the external factors, such aswhat customers want and how the competitors are performing.

Operational measures of performanceAlthough financial measures of performance are of primaryimportance for the success of businesses, they can produce betterperformance information when used in conjunction with non-financial measures. They are valuable supplements to financialmeasures as they are expected to supply information that wouldimprove the financial outcome and support and monitor thestrategic initiatives.

New, non-financial measures are needed in order to cope withthe changing operational environment, which primarily includesquality, just-in-time delivery and increase in product ranges.These new measures must be flexible, directly related to the strat-egy, non-financial, easily understood and highly responsive tothe daily production situation. In addition, performance meas-urement systems require non-financial measures at operationallevels, particularly to be used as a tool for motivating employees.It is also noted that . . . day to day control of the manufacturingand distribution operations are better handled with non-financialmeasures (Maskell, 1989:33).

The financial systems were normally used as a feedback mech-anism to report the outcomes and their variance with the planned once the financial goals were met, some other criteria becameimportant. Other systems that dealt with more critical or uncer-tain areas of performance, for instance customer satisfaction,cycle time improvement and quality, were used in a more inter-active fashion by management.

Operational measures were used in service businesses to a largeextent, such that the service quality, flexibility, resource utilization

7


and innovation were the operational determinants of the competi-tiveness and financial performance outcomes in Fitzgerald et al.s(1991) performance measurement framework for service busi-nesses. Empirical work in certain businesses has resulted in eitherdominance of financial outcome measures rather than the meansof achieving these outcomes, or more interest in operationalmeasures, resulting in an imbalance between the two dimensions.

Performance measurement in the hospitality industryThe Uniform Systems of Accounts for the Lodging Industry (1996) isthe commonly practised method of recording and analysingaccounting data in hospitality businesses. The characteristics ofthe industry play an important role in utilizing an appropriateapproach to accounting and performance measurement. For thisreason, the key features of hospitality businesses are reviewed byHarris (1999) to include fixed capacity, perishability, erraticdemand, product range, real-time activity, labour intensity, loca-tion, size, production and consumption, capital intensity and coststructure. It is suggested that the business orientation and theindustry context of the business is a key determinant of develop-ing effective accounting, control and performance measurementmethods (Kotas, 1975).

The results of financial statements have significance if they arecompared with some form of yardstick. The main source of infor-mation for comparison comes from two sources: internal per-formance, which is past results and budget performance, andexternal performance, which is inter-company results and indus-try studies. There is a considerable degree of consensus amongmanagers in hospitality organizations and academic writers alikethat the budgetary control process is a valuable control and man-agement tool in hospitality businesses. Ratios, which facilitatebenchmarking, are the most commonly used measures in hospi-tality businesses in order to monitor and control operations. Thisinformation is compared and measured against goals to indicatewhere problems and successes are. Andrew and Schmidgall(1993:58) state that by tracking a selected set of ratios, hospitalitymanagers are able to maintain a fairly accurate perception of theeffectiveness and efficiency of their operations.

The monthly occupancy percentage, the cost of labour percent-age and the cost of food sold percentage were the three most com-monly used measures in hospitality businesses, however, differentgroups of users assign different values to the ratios. The mainusers of ratios are the management, the owners and the creditors.They all rate different measures to be important such that themanagement uses operating ratios more than others, the owners

8


consider profitability ratios extensively and the creditors utilizesolvency ratios for making decisions. It is believed that the resultsreflected their natural interest in the business. In another study, itwas identified that guest satisfaction measures are the key indica-tors used at operational levels of hotels and financial measures areutilized at the senior management levels (Haktanir and Harris,2005). In addition to the above common measures, cash flowanalysis is important, in particular, its relationship to three majoractivities of the business: operations, investment and finance.

A Chartered Institute of Management Accountants (CIMA)study, carried out by Collier and Gregory (1995), exhibited inter-esting findings for both financial and non-financial measures ofperformance. Return on investment, which is believed to be thefavourite measure in manufacturing businesses, is used onlywhen new investments are undertaken. The most common way ofmeasuring performance is through a comparison of actual withbudgeted figures. From the six hotel companies studied, the com-mon performance measures used can be listed as room yield, hotelprofit contribution, occupancy rates and labour costs to turnover.Although the importance of measures of quality was well under-stood, a number of different ways of measuring it were captured,such as guest questionnaires, mystery guests and quality stand-ard forms. Rewarding, referred to as a bonus system, is used intwo-thirds of the cases studied where the budgeted versus actualresults were the basis of the entire system. Overall, hotel per-formance measurement is not only criticized for its high relianceon quantitative measures, but also for its short-termist approach,its focus on efficiency rather than effectiveness measures and itshigh consideration of internal rather than external analysis.

Although both operational and financial measures are con-sidered in hospitality businesses, in parallel to the developmentsin generic management accounting, it is stressed that there is highdependence on financial measures, which can lead to lack of bal-ance and strategic focus. Geller (1985a) provided a list of the mostcommonly used performance measures by US hotel companies,which indicates the majority to be operational measures. A simi-lar study carried out in the UK by Brander Brown et al. (1996)revealed that the users of performance measures consider bothfinancial and operational measures to a high extent but, in con-trast to Geller (1985a,b), they found a high reliance on financialmeasures, which may imply an unbalanced managerial focus.Further to this, Brander Brown and McDonnell (1995) reportedthe results of a pilot study designed to apply the BSC approach tothe hotel sector. They suggest that the specific nature and value ofany BSC would be contingent upon its level (unit or corporatelevel), context of application (department or functional area) and

9


the time period/prevailing circumstances during which it is to beused. In addition, the empirical research of Brander Brown andHarris (1998) yielded evidence that achieving a balance of per-formance information, in terms of type, financial-operation dimen-sions and the links between key performance areas are necessaryfor the design of appropriate performance management systems infull-service hotels. It was also emphasized that effective communi-cation of performance information at all levels, therefore produ-cing and communicating clear and understandable performanceinformation, is a core element of the performance managementsystem.

Performance measurement in independent hotelsA recently completed research project (Haktanir, 2004) providesinteresting insights into the complex nature of performance meas-urement in independent hotels. It investigates performance meas-urement practices in the real-life context of independent hotels inorder to develop a framework for use in these businesses.

A grounded theory approach was undertaken and a multiplecase study approach was adopted. This research strategy facili-tated the development of a rich understanding of the perform-ance measurement practices, through in-depth study of the issuein its own context. The following aspects were developed regard-ing the case selection of the research:

The hotels were selected from the population independenthotels in Northern Cyprus. Statistically, individually ownedand managed hotels are some 45 per cent of the total hotel busi-nesses. In addition, a large part of the partnerships, which are48 per cent of the overall figure, are believed to be independ-ently owned and managed properties. (The figures are obtainedfrom the Ministry of State and Deputy Prime Ministry of theTurkish Republic of Northern Cyprus. The information was atabular listing of properties rather than statistical presentations.The researcher processed the obtained data to come up with thepercentage share of each ownership type.) An examination ofthe hotel industry indicates that independent hotels dominatethe hotel industry in Northern Cyprus and, therefore, thisresearch into the performance measurement practices of inde-pendent hotels covers a relevant group within the industry.

The selected cases represent two groups within the independenthotel category: remotely owned (where the owner is not involvedin the management of the business) and owner-managed (wherethe owner and the manager is the same person) hotels.

10


The property features that are believed to be important for theresearch are listed below: the size of the hotel needs to be above 100 room capacity so

that the appropriate information and reservation systemswould be available

the four or five star hotels were decided upon to be in thesampling group so that there is a certain level of service anddifferent facilities available to study

almost all hotels in Northern Cyprus are holiday and resorttype, therefore, studying the resort hotel group is both eas-ily accessible and more representative.

Eventually, six cases were selected for this research. They arelisted in chronological order in Table 1.1.

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Case Stars Ownership Room Room & Catering Main type type bed no. type contact

Case I: 5 Remotely Hotel & 392 rooms BB, half, GMMediterranean owned bungalow 912 bed fullHotelCase II: 4 Remotely Hotel 108 rooms BB, half, GMPalm Hotel owned 216 bed fullCase III: 4 Owner Hotel & 133 room BB, half, F&B Hotel Aqua managed bungalow 72 full, Self- manager

bungalow catering515 bed

Case IV: 4 Owner Hotel 110 room BB, half, F&B Beach Hotel managed 222 bed full managerCase V: 4 Owner Bungalow 105 BB, half, Mother River Hotel managed bungalow full, Self- of GM

290 bed cateringCase VI: 5 Remotely Hotel 192 room BB, half, FO Chance Hotel owned 392 bed full manager

BB: Bed and breakfast, GM: general manager, F&B: food and beverage, FO: front office.

Table 1.1

Information about the participant cases

Data were collected from owners, general managers, departmentmanagers and employees by using an in-depth semi-structuredinterviewing method. In addition, observation and documentation

methods of data collection were utilized in order to triangulate thefindings and to gain a deeper insight into the real-life processesof the case studies. The informants from each case and the datacollection method utilized are shown in Table 1.2.

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Informant Case Case Case Case Case Case I II III IV V VI

Staff front office I, D, O I, D, O (2) I, D, O (2) I, D, O I, D, O (2) I, D, O (2)Staff cost accounting I I, O I IStaff F&B service I (2) IStaff administrative I, D (2)Front office manager I I, D I, O I, D I, D, O IHousekeeping I, D I I, O I I ImanagerPersonnel manager I I, D IAccounting manager I, D I, D I, D I, D I, D I, DGuest relations I, D, O I, D, O I, DmanagerFood & beverage I I, D, O I, D, O I (2)1 I, O I, DmanagerAssistant GM I, D2GM I, D, O I, DGM/owner I, D, O I IRegional I I Iexecutive/owner

Source: Adapted from individual case reports. I: interview, D: documentation, O: observation(2): two informants from the same unit.1The organizational structure of Case IV did not have one food and beverage manager,instead, two separate units of kitchen and food and beverage service. Both of these persons were informants.

2Assistant GM was the acting GM at the time of the case study. The researcher was alsoinformed that the assistant GM has been with the hotel for very many years and he wouldgive better information about the inquired issues.

Table 1.2

The informants and the data collection methods

An inductive data analysis approach was employed in order toallow the theory to emerge from the data. Primarily, within caseanalysis of each case was carried out. In the second level of analy-sis, owner-managed independent hotels and the remotely-ownedindependent hotels are compared in separate groups. Each of thetwo groups had three case hotels, where, in the next level ofanalysis, all the six cases were compared and contrasted.

The analysis process resulted in the development of a numberof categories:

Business dynamics (explores the decision-making mechanism,core elements of the business, and the information flow). Thiscategory has emerged as the central category

Overall performance aspects (explores the kind of performancemeasures used, the reasons for utilizing them, the way they areconducted for the hotel in general, and for the departmentsspecifically)

Employee measures of performance (incorporates all employeerelated issues with employee performance measurement)

Customer satisfaction measures (explores the type of perform-ance measures utilized and explains how they are incorporatedto overall activities and decision-making)

Financial measures (reflects on the type, form and the wayfinancial measures are utilized in relation to performancemeasurement practices)

Innovation activities (explores and identifies the new activ-ities and their importance for the businesss performance measurement).

FindingsWhen the owner-managed case hotels (three hotels) were analysed,the following key issues emerged:

There is a strong family involvement in all three hotels. Thishas several key consequences on management; one of them isfamily privacy concerning the use of financial information, thislimits the sharing of such information. The other is the forma-tion of an accounting system that satisfies the requirements ofthe owners. The accounting system is primarily based on cashinformation, which is one of the most important concerns ofgeneral managers and founders. In addition, sales informationof revenue generating points and the profit figures are otherimportant elements of the accounting systems. Therefore, thefinancial information and the accounting system are designedto satisfy the requirements of the owners and this informationis not shared with non-family members. In addition to limita-tions of the receipt of financial information, there are also limi-tations involving access to computerized systems once again,the family member department managers generally have morechances of accessing the system and reaching information. Thefamily members, together with the founder and the general

13


manager, are the final decision-makers, particularly for morestrategic issues like investments.

Family involvement has consequences in terms of manage-ment and operational control as well. The personal presence ofmanagers and the general manager is a key type of performancemeasurement used for different purposes, including employeeperformance, guest satisfaction and operational success meas-urement. The control through personal presence is felt more inone of the hotels where the management team comprises ofsiblings. The efficacy of their we are always present (food andbeverage manager, River Hotel) personal control system isdemonstrated by the fact that they use the least amount of fig-ures for cost control of the three case study hotels.

Additionally, the families other businesses and occupationsare effective in determining their management styles and con-trol. Family members are influenced by their founder and otherfamily members in establishing their management style. It wasnoted in the River Hotel that rent-a-car is a department of thehotel this is due to the fact that the familys original occupa-tion was car rentals and they still have a reasonable size of busi-ness operating alongside the hotel business. In order for thefamily to control and combine the two businesses, they operatethe rent-a-car business under the same roof. Similarly, the BeachHotel has established their cost system according to the otherbusinesses of the owner. The two restaurants the family ownsspecialize in kebabs which use beef and lamb, and it was rec-ognized that the cost report of the hotel is named as the meatusage report. This indicates that systems and information usedfrom them are affected by the other occupations of the family.

Another significant point is the extended role of front officedepartments it is more than the front office notion of hoteliers.It acts as a guest information and relations point in order toreach the widely accepted aim of guest satisfaction in all hotels.Further to this, in the River Hotel, the housekeeping depart-ment also reports to front office, which extends the responsibil-ities of the department even more. One reason for doing this isfor the better understanding of the guests requirements fromthe rooms and thus to provide better service in return.

As a result of an overall analysis of the remotely-owned casehotels, the following key issues are concluded:

All the owners of the remotely-owned case hotels live inTurkey. Owners of the Mediterranean and Chance Hotels are

14


Turkish and have no relationship in Northern Cyprus. In con-trast, the owner of the Palm Hotel is a Turkish Cypriot. The twoTurkish owners are involved in businesses in tourism, trans-portation and leisure industry and their key reason for havingsuch investments in Northern Cyprus is to develop their alreadyexisting businesses outside the boundaries of Turkey. However,the Palm Hotel owner has a metal plant in Turkey and has noother hospitality or tourism involvement. His primary aim wasto invest in his home country. As a result of this, the owner ofthe Palm Hotel visits the hotel more frequently, whereas theothers are mostly remote to the property. This has a further impli-cation such that the owner of the Palm Hotel has more informalmeans of measuring the hotel performance. He receives infor-mation from the family in Northern Cyprus who visits hishotel and has personal observation of the business during hisvisits to Northern Cyprus.

The key people in these hotels are the general managers.Financial information is supplied and decisions made by theowners and the general managers. The financial informationdissemination is limited and the monthly performance reportsare supplied to the owners and the general managers only. Thedepartment managers can reach the information they need,however, this depends on the capability of the computerizedsystem and the access they have. For instance, the access iswider in the Chance Hotel as each department is responsible forreaching its own budget targets. However, in the Palm Hotel,only the food and beverage department manager receivessome financial information in the form of cost reports.

The accounting system is primarily based on the principlesof generally accepted uniform systems of accounts for hotels.The key information comes from the monthly and annual finan-cial performance reports that include profit and loss statement,food and beverage cost statement, itemized sales statement andoccupancy statement. The computerized information systemsenable managers to reach primarily the revenue and occupancyfigures.

One of the consequences of owners being remote to the businessis the formality regarding information flow. The general managerand owner base their communication and performance measure-ment on reporting. In addition, the department managers andthe general manager have scheduled meetings and formaldecision-making. They also have daily one-to-one communica-tion for operational follow up. When examining the depart-ments, it is noted that they are generally informal, having largereliance on personal observations and guest communications.

15


The guest relations departments also play important liaisonroles in order to facilitate simultaneous decision-making.

Other businesses of the owner are effective in determining themanagement styles and the control in the hotels. For instance,the accounting department of the Chance Hotel was one of thelargest departments in the hotel, and the largest accountingdepartment compared to the other case hotels. The reason forthis is the presence of a sizable casino operation as part of rou-tine hotel operations. Further to this, some of the managers ofthe Mediterranean Hotel were transferred from the ownersother hotel property in Turkey. Additionally, the hotel is usedto support the operations of the airline company, therefore, it isnot surprising that good pricing and selling strategies were theprimary concern of the managers.

The guest relations department plays an important role in termsof performance measurement of the hotels. They supply guest-related information both in verbal and written forms so thatemployee and departmental performances can be determined.For instance, the guest comment card results are the key indica-tors of employee performances and the employee of the monthrewards are given as a result of their evaluations. However, it isimportant to note that the front office departments also have guestrelation roles besides their front office functions.

EvaluationAs a result of the comparison between all case hotels in the formof owner-managed to remotely-owned hotels, four key assertionsare made. First, the management of these hotels should recognizethe importance of the owners involvement in the management ofthe hotel. The four main aspects developed are:

1 the quality of life, provision of job opportunities to family mem-bers and good status aims of owner-managers as opposed to theprofit maximization aim of remotely-owned businesses

2 the owner-centred structure of owner-managed hotels in oppos-ition to the formal structure of remotely-owned ones

3 the verbal and face-to-face management style of owner-managersas opposed to the more formal, report-based, management styleof remotely-owned businesses

4 owner-managers reliance on basic computerized systems withlimited access, in contrast to generally accepted computerizedsystems with wider access and use in the remotely-owned ones.

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Secondly, independent hotels relate their management and oper-ations to other significant external and internal factors including:

1 proximity to the seaside influences the atmosphere, formalityand kind of activities

2 high seasonal demand variations have significant influence onemployee policies resulting in short-term perspectives for theindependent hotels

3 the front office department is the centre of communication,coordination of functions and guest requests, where it plays acrucial role in building the desired hotel image

4 operational alternatives and investments for better operationalresults are commonly practiced in independent hotels; theirmeasurement generally occurring in their results, primarily inthe form of revenue generation of such activities.

Thirdly, it is suggested that the management of independent hotelsshould understand and recognize the importance of guest satisfac-tion and its measurement for their businesses. This would requirethem to identify the elements of the service industry, includingprimarily the simultaneity feature that consequently leads to highguest interface and high reliance on measurement through guestfeedback. In addition, the organizational culture primarily com-municated through the owner is a powerful determinant of theextent of one-to-one guest relations at all levels of managementand the resulting repeat business.

Lastly, independent hotels develop a range of performancemeasures in three categories:

1 overall measures of performance due to the totality of pro-cesses (thus service-production-facility), non-financial measuresfor handling day-to-day operations, primarily occupancy andoccupancy related information, and on-the-spot service measure-ment are utilized

2 employee measures of performance due to the service fea-ture of independent hotels, service quality measures interactwith employee performance measures, simultaneous measure-ment of inputs and outputs is required and dependence onqualitative measures (verbal feedback and observation) is iden-tified. In addition, the seasonal demand changes of the hotelindustry in general and in Cyprus, in particular, cause difficultyin formalizing staff policies and lead to a high reliance onon-the-job training

17


3 financial measures of performance although there is morereliance and more tendency to use financial measures in hospi-tality businesses, the extent of access and communication offinancial information at different levels is limited; this is mainlydue to the owners perception of such information as beingconfidential to family members. Monitoring cash flow indica-tors at owner and general manager level, and measuring finan-cial success of operations by sales and occupancy informationis the accepted practice.

ConclusionThe findings indicated that performance measurement in the context of independent hotels is influenced by various organiza-tional factors. For instance, the degree of owners involvement inthe operations and management of business is determined to bean important factor affecting the way management operates and performance measurement takes place. It is identified thatwhen owners are involved in the management of businesses theyrestrict the flow of information and, in so doing, limit the involve-ment of managers and employees. In the case of an owners directinvolvement in management, the kind of information and infor-mation dissemination is limited by the owner. The extent ofacceptance and usage of uniform accounting systems is largelyinfluenced by the involvement of the owner. In addition, infor-mation to decision-makers is limited by cash flow and revenuerelated information. It is also apparent that owners require moreflexible control systems as they establish business structuresaround themselves and their family members. This leads to thedevelopment of measures based on personal observation and,therefore, greater reliance on informal business processes.

The kind of business and the kind of services/products the busi-ness provides is another significant determinant of the perform-ance measurement methods. For instance, utilization of overallmeasures of performance in order to acquire an overview of thehotel performance is a common practice in independent hotels.The issue of the total hotel product has been discussed by Harris(1999) who highlighted the complex nature of operating a hotel in terms of the total experience customers receive. Therefore,although the hotel information and accounting systems rely on anumber of revenue and support centre departments (see UniformSystem of Accounts for the Lodging Industry, 1996), designing thecontrol systems of hotels with the use of such accounting informa-tion may prove insufficient. The total guest experience impliesthat the consequences of any mistake at any point during a guest

18


stay in the hotel can become a substantial overall issue and thus,the control and measurement of discrete parts (i.e. departments)of the business can only assist management to a limited degree. Ineffect, the financial information from the accounting systems ofhotels requires to be supplemented by qualitative operationalmeasures, such as on the spot (simultaneous) service and guestsatisfaction measurement, in order to present a more comprehen-sive view of the hotel performance.

Department managers utilize employee measures and guest-related measures to a larger extent in their evaluation of depart-mental success. It is identified in the same research that one-to-oneguest satisfaction feedback and repeat business figures are ofprime importance to decision-makers. The simultaneity feature ofservice encounter at the hotels is the key reason for having such areliance on one-to-one guest information. Management by per-sonal presence facilitates direct interaction of managers both withstaff and guests at every level of the business. This brings informa-tion through observation and verbal communication and therefore,action can be taken in real-time. In addition, having a guest rela-tions department can also support the management by passingtimely guest-related information.

ReferencesAdam, D. (1997) Management Accounting for the Hospitality Industry:

A Strategic Approach. Cassell, London.Andrew, W.P. and Schmidgall, R.S. (1993) Financial Management for

the Hospitality Industry. Educational Institute of American Hoteland Motel Association, East Lansing.

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Brander Brown, J. and McDonnell, B. (1995) The balanced score-card: short term guest or long term resident? InternationalJournal of Contemporary Hospitality Management, 7 (2/3), 711.

Brander Brown, J., McDonnell, B. and Lang, L. (1996) Performancemeasurement in UK hotel organisations: towards a balancedscorecard? Paper presented at the Council on Hotel, Restaurant andInstitutional Education 50th Annual Conference, Washington, DC.

Collier, P. and Gregory, A. (1995) Management Accounting in HotelGroups. CIMA, London.

Emmanuel, C., Otley, D. and Merchant, K. (1990) Accounting forManagement Control. Chapman and Hall, London.

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Fitzgerald, L., Johnston, R., Brignall, S., Silvestro, R. and Voss, C.(1991) Performance Measurement in Service Businesses. CIMA,London.

Geller, A.N. (1985a) Tracing the critical success factors for hotelcompanies. The Cornell HRA Quarterly, February, 7681.

Geller, A.N. (1985b) The current state of hotel information system.The Cornell HRA Quarterly, May, 1417.

Haktanir, M. (2004) Performance measurement in small servicebusinesses: an investigation of independent hotels. UnpublishedPhD Thesis, Oxford Brookes University.

Haktanir, M. and Harris, P.J. (2005) Performance measurementpractice in an independent hotel context: a case study approach.International Journal of Contemporary Hospitality Management, 17 (1), 3950.

Harris, P.J. (1999) Profit Planning, 2nd edn. Butterworth-Heinemann,Oxford.

Jarvis, R., Curran, J., Kitching, J. and Lightfoot, G. (2000) The useof quantitative and qualitative criteria in the measurement ofperformance in small firms. Journal of Small Business andEnterprise Development, 7 (2), 123134.

Jogaratnam, G., Tse, E.C. and Olsen, M.D. (1999) Matching strategywith performance. Cornell Hotel and Restaurant AdministrativeQuarterly, August, 9195.

Jones, P. and Lockwood, A. (1989) The Management of HotelOperations: An Innovative Approach to the Study of Hotel Manage-ment. Cassell, London.

Kaplan, R.S. and Norton, D.P. (1992) The balanced scorecard:measures that drive performance. Harvard Business Review,JanuaryFebruary, 7179.

Kotas, R. (1975) Market Orientation in Hotel and Catering Industry.Surrey University Press, London.

Lynch, R.L. and Cross, K.F. (1991) Measure Up! Yardsticks forContinuous Improvement. Basil Blackwell, Oxford.

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Marriott, N. and Marriott, P. (2000) Professional accountants andthe development of a management accounting service for thesmall firm: barriers and possibilities. Management AccountingResearch, 11 (4), 475492.

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Shaw, G. and Willams, A.M. (1994) Critical Issues in Tourism: ACritical Perspective. Blackwell Publishers, Oxford.

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C H A P T E R 2

Productivity inthe restaurantindustry: how

to measureproductivity

and improveprocess

management

Pekka Heikkil and Timo Saranp

23

Productivity in the restaurant industry

IntroductionProfitability as a precondition of management work

A restaurant business is as much an economic unit as any otherenterprise. In managing the operations of a business, its variousunits and/or departments, information on the profitability of theoperations is needed. The most important elements in profitabil-ity are economy and productivity. The results of these factors aremonitored with the help of various key figures. Calculating thekey figures requires numerical information on the operations.

The systematic processing of the information cannot succeedwithout knowledge of the most important concepts and methodsin accountancy. Besides the basics in accountancy, a functionalcontrol system is needed so that the key figure information can beeasily, punctually and correctly delivered to those who need it fordecision-making. Information thus produced is best suited to servethe planning, supervision and management needs of businessoperations.

Reliable gathering, registering and processing of informationare all essential for successful information use. In the backgroundthere needs to be a strong knowledge of the field, through which itis possible to form a sufficient understanding of the revenues andcosts that should be taken into account. While planning the oper-ations, it is important to be aware of all the various costs and rev-enues that are involved and what is the relationship between themin successful business operations. In other words, familiarity withthe types of income and costs and also with the income statementand balance sheet structure is essential in order to be able to assessthe various aspects of productivity. Deficiency in these skillsmakes it difficult, if not impossible, to plan and run profitableoperations. As a result, learning is achieved through trial and error,with potentially severe consequences to the business.

Control of the productivity of a restaurant business requiresknowledge of the laws of business in the field. Cause-and-effectrelationships must be grasped between the decisions, actual busi-ness events and result reports. It is also important to understandthe economic nature of all decisions, since all of them have theirown impact on the results of the business operations.

Special characteristics of the restaurant industry fromthe point of view of productive and profitable operations

In order to achieve economically successful operations manage-ment must be fully familiar with all the factors that influence theprofitability of their business. Regarding profitability goals, the

significance of management cannot be neglected. Very often man-agement skills are the deciding factor in whether or not the setgoals are achieved. In part, management skills are about an abil-ity to understand the special characteristics of practical businessoperations and profit logic in the field. This understanding helpsin keeping the elements of profitability in check. This implies thatit is very difficult to manage a business with no knowledge of thefield in question. General management skills are also necessary,but there are many practical examples to support the view that asound knowledge of the field furthers the achievement of goalssignificantly.

From the point of view of management (and profitability con-trol), the following special characteristics of the restaurant busi-ness emerge as the most important.

Intensive competitionAs a result of easy access to the market, competition is harsh inthe restaurant industry. There are a large number of companies ofvarious sizes and the significance of price competition is empha-sized. However, price competition by itself rarely guarantees eco-nomic success. Long-term success is better guaranteed by thecareful creation of a quality image. Through a quality image of asuitable level, a business can price its products more profitablythan can the competitors.

Low net profit percentageBecause of tight price competition, the net profit percentage (netprofit/turnover 100) is low. Compared to many other indus-tries, the net profit percentage is extremely low regardless of ahigh gross profit percentage. Therefore the control of profitabilityrequires very precise cost control.

According to statistical work done on financial statements, theaverage net profit percentage of restaurant businesses in Finlandin 2002 was about 4 per cent. This means that for each 10 eurosproduct (including the 22 per cent value added tax), the companyis left with a 33 cents pure profit. The average net profit percent-age in food restaurants is even lower about 1.2 per cent of theturnover. Because of the low average profit margin, even thesmallest error in, for example, catering for a single event mightcost the company all the profit from the function. Extra costs mayarise from careless processing of raw materials or the man-hoursof the event being incorrectly planned. To eliminate these mis-takes, service businesses must make their processes as efficient asthey possibly can. The challenge for management of identifying

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low average profit margins is best grasped if the separatelydefined expenses are compared to the separate average profit of asingle function and not to total turnover. This proves that thereare simply no insignificant costs.

Long opening hours, seasonal variations in levels of salesIn service industry companies the work force is a major factor inboth profitability and quality control. In the cost structure of arestaurant business this is visible in the large share of labour costsin the turnover. The control of labour costs requires strict controlof the relationship between sales and man-hours, in other wordsefficiency in the use of labour. In addition, salary levels must remainwithin set limits. Long opening hours create pressure for growthin staff expenses and in order to succeed in controlling its coststructure a business must succeed in focusing the hours workedas carefully as possible in accordance with the high and low seasons in sales.

Many services in the restaurant industry are on offer virtuallyall day, every day of the year. In the companies operations thereare periods of both low and high sales. Staffing expenses must befocused so that during high season there is a sufficient amount ofstaff to satisfy demand and during low season there is only theamount of staff necessary to maintain a basic level of services.

The structure and variety in product group-related sales cre-ates its own pressure on staffing expenses. The larger the share offood sales of total sales, the larger the labour costs (both in prepar-ation and serving).

Because labour costs play such a significant role in restaurantmanagement, making the shift schedule is one of the most import-ant factors in profitability control. How and when a given task is done must be considered very carefully. Costs planning can be made more efficient by calculating the price of each shiftschedule in advance. This is achieved by the simple operation of multiplying the number of the hours in the shift schedule bythe average work hour costs (the hourly wages plus additionalexpenses).

The problem in achieving the correct use of staff is significantwhen the product (i.e. service) cannot be kept on the shelf. Stockingcan, however, in some situations, help in optimizing the use of thework force. It is for example possible to prepare for the activitiesand sales of the following day during less busy hours. It is also notnecessarily cheaper to buy pre-processed raw materials if there isstaff on duty in any case and can thus make use of the work hoursby doing preparatory work. Besides all the above mentioned man-agement tasks, the significance of staff know-how and satisfaction

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at work must always be borne in mind, all of which does not makethe disposition of labour any easier to manage.

Customers on-going interest in the quality of the productCustomers have an on-going interest in how the representativesof the business behave and this creates pressure for quality con-trol, product development and marketing and thus on staff, man-agement and leadership. Customers expect the company toconsider health, hygiene, nutrition and environmental issues intheir operations. This will inevitably show in the costs and createadditional pressure for cost control. It is imperative to establish abalance between quality and costs and to remember that neithertoo high nor too low quality will bring the best economic results.

Continuous need for investmentAccess to the restaurant business is in many cases easy, since thenecessary investments are relatively low. Sometimes a businessinvests in preparation and serving facilities (in addition to equip-ment, machinery and other expenses) and must also take care ofthese investments. In addition to depreciation, annual mainten-ance costs consume their own share of the profits. In order to control these costs it is necessary to optimize the timing of invest-ments and maintenance. If, for example, maintenance is alwayssimply postponed, costs will end up being much higher.

Imagined purchase benefit and the importance of controlling the use of raw materials

How can this possibly cost so much? You buy your materials andequipment wholesale for much cheaper than we ordinary con-sumers. Does this customer comment on the price of raw mater-ials strike a familiar chord? It is not, however, the truth in all cases.On the shelves of the retail shop the same raw materials are oftenmuch less expensive than when bought from the wholesaler. Thisis due to, for example, special offers and large purchasing volumein the shops. In order to counter this, the restaurant must be ableto make the best possible use of the raw materials and to have aslittle waste as possible.

For many products, the level of raw material costs is small in rela-tion to the labour costs. Fetching or ordering the raw materials fromthe wholesaler, preparing the product, serving and other tasks in theoperation of a restaurant amount to the largest share of the pricethat the customer pays for the product. As the second largest costelement, the use of raw materials must be taken seriously.

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Constant need for renewalThe fast changes in society constantly create potential new experi-ences for customers. Products and trends change quickly. Expecta-tions grow and in a restaurant business, this creates pressure.Customers expect new products and services all the time. To keepup with new developments, a restaurant must constantly presentfresh ideas. From the point of view of profitability control the aimis contrary: the fewer the products, the easier it is to operate effi-ciently. The balance exists somewhere in between these twoextremes. On the one hand, there must be a sufficient number ofproducts and they must be renewed sufficiently quickly in order tokeep the customers interested but, on the other hand, the pacemust not be too quick and there must not be too many products ifprofitable operation is to be sustained. By using internal account-ing, the profitability of various products and product groups mustbe carefully followed so that the situation can be controlled.

The importance of cost centre managementAll the above presented aspects of management have an impacton how much managerial input is needed in hospitality serviceproduction. Naturally, a low level of organization and low workand business management costs are the goal. This area of busi-ness management requires balanced planning. The amount ofmanagement input must be in correct relation to the number ofstaff and the quality and profit goals set for the produced service.

A low net profit percentage implies that reaching the budgetedcosts and profits requires a very precise control of the variouscosts and the whole process. Anyone who has worked in restaur-ant management knows that a single operational unit cannot suc-ceed without a good manager. Not underestimating the importanceof the principles of teamwork in creating a motivating workatmosphere, it is not enough without strong (not authoritarian!)leadership to reach economic goals.

Productivity planning, monitoring and controlThe elements of profitability

Business must always be efficient, economical and profitable. Theprofitability of a business must be planned at separate levels ofoperation as well as for the whole financial year. With the help offinancial reports, the achievement of the objectives must be evalu-ated. Possible deviations betwee

accounting and financial management developments in the international hospitality industry

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