The client

A state-owned corporation owning and operating a number of commercial and hospitality real estate assets on behalf of one of the states of Malaysia.

What did Hotel Solutions Partnership achieve for the client?

There was no-one in the client’s organisation (essentially a civil service) that had any expertise in the operation of hotels.

Consequently, the client needed independent guidance on those factors to be considered when employing a hotel operator and how to distinguish the respondent’s relative strengths in relation to those assets. HSP was able to clearly indicate and justify its recommendations, based on the client’s objectives and capacity to invest, in an unbiased and independent set of reports.

Consultants

Gabrielle Gambina, David Williams

Background

The client owns, amongst other assets, a prestigious 424 room city centre hotel and an adjoining convention centre in the State’s capital city, together with a Malaysian East coast island resort consisting of 121 villas and extensive leisure facilities.

The city centre assets were originally operated under a management contract by a company with an international reputation. Following the termination of that contract, the state corporation directly supervised the operation of all the assets and, due to the lack of managerial expertise, the fabric of the assets and the profitability of the businesses deteriorated significantly.

The state corporation realised that they needed to re-employ a hotel operator or dispose of the assets. The client separately approached a number of operators including, amongst others: Cristal, Dusit, InterContinental, Starwood, Swiss-BelHotel and Wyndham as potential hotel operating business partners and required Hotel Solutions Partnership (HSP):

• to guide the process of operator selection by educating the board members on the features of hotel management agreements (HMAs) and alternative contractual arrangements,
• to review the operator proposals
• to recommend a short list of operators by devising a scored ranking exercise
• to interview the shortlisted operators and make a final recommendation of operator
• to provide commercial support through the contracting phase, if required.

Project scope

In the first phase of the scope of work our consultants visited the properties.

Discussions were held with the management of each business to understand the way they were being operated, marketing conditions, profitability, operational challenges and maintenance issues.

A board meeting was convened for the consultants to attend for briefing on the board’s objectives and investment capacity. In return, to help the board members understanding of hotel operations, HSP outlined the main features of HMAs and other alternative arrangements for operating the properties e.g.:

• Management company with brand
• Management company – white label / existing branding
• Franchise
• Lease – fixed or turnover based
• Self-management and branding

For each alternative the relative merits of the arrangements were outlined together with the likely outcomes in terms of investment required and potential for improvement of profitability. HSP then went on to describe the raison d’être for the criteria they would use for ranking the submissions from operators. (Furthermore the consultants gave feedback on some of the serious operational and maintenance deficiencies that they had observed from visiting the properties).

In phase two, RFP responses were received from 8 operators.

The criteria used in ranking each operator relative to each other, were as follows:

• Tolerance for alternative operational structures
• Brand positioning (Global/ South East Asia/ Malaysia)
• Hotel company presence in region
• Knowledge of local market
• Similar operations (city centre hotels, convention centre management and resorts)
• Strength of sales network and systems delivery
• Head office services effectiveness and breadth
• Cost of brand:
  a. Fees
  b. Capital expenditure required to meet brand standards
  c. Termination criteria
• Quality of response to the Brief

This assessment was presented to the board committee which clearly showed that the leading brands were the most capable to operate the businesses. However, the capital expenditure requirements to meet their brand standards were considered unacceptably high by the board. It was decided to interview the second tier operators (whose capex requirements were more moderate) with a view to making a final recommendation.

This resulted in a hotel operator (based in Abu Dhabi and with a track record of operating hotels in Islamic countries) being recommended to the client.