Mastery of Hotel & Resort Operational Auditing: How to Do It Right

Developed for Hotel Executive – now shared here on RLAGlobal.com.
Reprinted from the Hotel Business Review with permission from HotelExecutive.com 

https://www.hotelexecutive.com/business_review/8520/mastery-of-hotel-resort-operational-auditing-how-to-do-it-right

Written by Roger Allen, Group CEO, RLA Global

Hotel and resort owners often have difficulties in understanding the operational performance of their property without being on site every day. Audits can help overcome this challenge, as they can provide a clear picture of the results, efficiency and hidden growth opportunities of the asset.

Most audits just end up sitting on a shelf, delivering little to no value, partially because they merely focus on compliance checklists. Effective and well-executed audits diagnose performance barriers, reveal real revenue opportunities and can be ultimately used as investment roadmaps that deliver ROI.

Property owners must select the right methodology for their audit to be valuable. This requires an understanding of what to assess, how to connect on-the-ground operations with brand standards and positioning, and how to translate findings into action steps and investment decisions that drive measurable returns.

Another key consideration is that audit findings tend to remain purely theoretical if they are not clearly linked to specific financial targets or KPIs, such as RevPAR, TRevPAR growth, GOP margin improvement, ADR index and market penetration index (MPI), departmental profitability and overall flow-through – that is, the share of incremental hotel revenue that converts into gross operating profit (GOP).

What Effective Hotel Audits Actually Assess

The best audits examine potential weaknesses in hotel and resort operations in the following three distinctive dimensions: brand integrity, operational efficiency and revenue performance. These areas usually need to be looked at in connection with each other to better identify future investment priorities.

Brand Integrity

Brand Integrity checks should aim to assess whether actual operations align with brand positioning and market promise. Gaps in brand integrity are often indicated by ADR underperformance compared with the competitor set, low online reputation scores (Net Promoter Score or Guest Satisfaction Survey results) or guest satisfaction ratings (ReviewPro or TrustYou indices) that are below brand average. Weaknesses can also appear in rate discounting trends and the brand contribution index (BCI). A brand that cannot justify its rate positioning inevitably competes on price.

Operational Efficiency Assessment

Operational efficiency assessment should include evaluating the execution of standard operating procedure (SOP), process efficiency, staff capabilities and interdepartmental coordination. Operational inefficiencies often surface in relatively high labour costs compared to total revenue, rooms productivity (the number of rooms per housekeeper per shift), the variance of F&B cost of sales, payroll flow-through, departmental GOP margins and maintenance costs per available room. Operational excellence should support GOP margin growth and improved flow-through from incremental revenue.

Revenue Performance Evaluation

Revenue performance evaluation should look into where revenue leaks, efficiency suffers and guest experience breaks down. To identify where revenue capture deviates from market potential, the audit should assess the RevPAR penetration index (RPI), the alignment of occupancy with ADR strategy and channel mix contribution (the balance of OTA and direct bookings). It should also examine TrevPAR, GOPPAR, upsell conversion rates for room categories, F&B or spa services, and ancillary revenue per occupied room.

Establishing Pre-Audit Foundations is Key

Property owners should lay down certain foundations before carrying out the audit. This groundwork involves gathering essential context in terms of property fundamentals, performance metrics, competitive positioning as well as already known challenges. It is also important to establish an assessment framework that identifies critical standards and define clear objectives linked to business decisions.

Needless to say, generic questions lead to generic findings. It is imperative that the objectives defined explicitly target measurable outcomes, such as increasing the RevPAR index above 100, lifting the GOP margin by 3-5 percentage points, enhancing flow-through from incremental revenue, reducing the ratio of labour costs or boosting TrevPAR contribution from non-room hotel or resort departments.

Primary Components of Audit Methodologies

Although there is no cookie-cutter solution, methodologies normally have four components or focus areas: the physical asset, operational execution, service delivery and commercial performance.

Physical Asset Evaluation

Physical asset evaluation basically means examining the condition and maintenance needs of the property. It should quantify capital expenditure (capex) per key compared with brand standards, maintenance costs per available room and the impact of asset quality on ADR premium potential. Another part of this component is revenue sensitivity analysis, which, among others, can look at ADR lift scenarios after a renovation. Hotel and resort owners should be aware that not all physical defects are equal and they should prioritize investment by revenue impact and asset valuation implications.

Operational Execution Assessment

Operational execution assessment involves checking the adherence with SOP, finding process bottlenecks and staff capability gaps as well as diagnosing root causes. Indicators to evaluate include payroll as a percentage of total revenue, the profit margin of the rooms department, F&B and Spa GOP margin, productivity benchmarks per outlet and flow-through percentage from revenue growth to GOP. The goal is to connect operational inefficiencies directly with GOP erosion.

Service Delivery Checks

Service delivery checks aim to diagnose friction points in the guest journey and break-down points in guest experience. They should analyze in detail the effect of review score drivers on ADR, complaint frequency patterns, guest satisfaction in comparison with repeat guest ratio as well as the impact of guest experience gaps on Net Promoter Score and pricing power. One potential result to surface in this analysis is that inconsistencies in service delivery tend to directly suppress ADR resilience.

Commercial Performance Evaluation

Commercial performance evaluation should help identify revenue leakage, measure the effectiveness of upselling practices and reveal cost inefficiencies. It should examine RevPAR index trends compared to the competitor set, the average rate index (ARI), the impact of OTA commissions on net ADR, the ratio of direct bookings, conversion rates for upselling programmes, F&B and spa revenue per occupied room and GOPPAR in comparison with market benchmarks. It is important to note here that commercial performance is measurable, and deviations can reveal structural issues.

Adaptation to Property Type and Lifecycle

Owners need to take into account other factors when choosing methodology. Audits need to be adapted to the type of the property to clearly reflect the specific characteristics of the asset. For example, audit techniques should focus on efficiency for hotels with limited amenities and may need to have a more comprehensive departmental approach for properties with a wider range of amenities.

Similarly, auditing resorts should take into consideration their diverse facilities and the fact that resort guests normally stay for at least several days. More attention should be paid to sophisticated service evaluation for luxury assets and special expertise for spa, wellness and wellbeing properties.

Audits should be also tailored to the current phase of the property’s lifecycle. Maybe it goes without saying that assessments should include different fundamental points and elements for recently opened hotels or resorts, mature properties or those assets that are currently being repositioned.

Translating Findings to Investment Strategy

What makes audit findings really valuable is that they resonate with reality, have clear financial connections and are actionable within constraints. When executed properly, they provide a guideline for necessary investments that also includes various elements of support for related business decisions, such as specific recommendations, timelines, project ownerships and success metrics.

Indicators owners should be able to see with more clarity for their investments or projects include potential RevPAR and TRevPAR uplift, GOP margin expansion, the improvement of flow-through, an increase in asset valuation based on stabilized EBITDA multiple, as well as the payback period, or capex recovery timeline.

Audit results aid owners in prioritizing capex based on urgency, possible quick wins, guest impact, revenue implications and ROI potential. Investment prioritization must always reflect financial return, not cosmetic correction.

How to Ensure and Measure Implementation

Naturally, hotel and resort audits will probably not generate any benefits or drive any change, if their implementation is not ensured, measured and followed up on. There is a number of reasons why an auditing process may fail, ranging from the lack of clear objectives or generic recommendations to too many priorities and no timelines or follow-through.

To avoid these mistakes, owners should set up a well-defined implementation structure. This should start with a post-audit presentation to secure commitment and ownership. Phased action plans should be drawn up to comply with audit findings and carry out recommendations. Progress should be regularly checked and measured – ROI can be measured by calculating RevPAR, TRevPAR and GOP growth, revenue capture and cost reduction as well as assessing guest satisfaction.

Owners don’t need to go it alone on ensuring implementation, they can rely on assistance from consultants who usually have an important ongoing role in this follow-up phase.

To Sum Up and Reiterate

Owners should find a suitable evaluation approach and proper audit techniques tailored to the specific property for the assessment to work well. They should also position the overall exercise as the basis of GOP uplift and an investment plan that delivers ROI and tie eventual findings to specific financial goals. Making sure that audit recommendations are implemented and measured are also key for success.

Again, owners can’t afford risking costly and largely pointless audits. A well-planned audit should highlight weaknesses and suggest possible solutions, quick-wins with related necessary investments if they necessary, as well as point out low-hanging fruits in revenue generation, efficiency improvements and unlock new ways to increase profit margins.