risk management
...or domestic and foreign travelers. Further discounts are also given on the rack rate depending upon the client. Since differential pricing is followed, it directly suggests that the price is a very critical factor to which the whole clientele is sensitive, also suggesting that both the top and bottom line of the company is dependent on the ARR. Occupancy rate determines the revenue and the reputation of the hotel. This is one variable which, if happens to be below the targeted value incites serious attention from the management, and more often than not resulting in the revision or change of strategies. The ARR and occupancy are the other critical factors that determine profitability. CUSTOMER FOCUS Being in the service industry it is not only important that we give the customers things of right quality, but also make sure that it is something that they really want. Thus in this dynamic scenario of technological changes and fierce competition, the success of the organization depends on how fast it is able to meet the changing needs of the customer. In addition to taking care of changing needs, it also very important for the organization to offer service of the best quality. This would ensure minimization of complaints and thereby increasing customer satisfaction. FACILITIES: For two main kinds of guests (corporate, tourists and cabin crew), the facilities that are offered by the hotel differs a lot. For example a corporate person would invariably look for facilities such as internet connection, conferencing facilities, office facilities etc. While for a normal tourist, these facilities may seem redundant, as for him facilities like swimming pool, gym, restaurants, entertainment, etc. would play a vital role in choice of a hotel. Thus for managers it is very important to have facilities which is requisite for their target segment. The range of facilities provided by a hotel is very important. Airline crew that stays with a hotel usually books an entire floor. This is because the timings and requirements of airline crew are very different from the other customers. LOCATION The hotel should be situated according to the targeted customers needs. There are three broad categories of customers that are being targeted by hotels Airline crew Business Travellers Leisure Travellers. Location is one of the important criterion on which a person chooses a hotel. This holds special importance in cases of corporate people who want the hotel to be in the vicinity of the area where they work. Further for overnight passengers, they prefer the hotel to be nearest to the airport/station. Leisure travellers will demand location close to popular tourist sites and shopping and shopping centers Thus for managers it is very important for them to have their hotel in key areas, else they have to devise strategies to overcome this disadvantage. SUPPLIER: Hotels outsource a great deal of products and services. These have to adhere to the level of quality that the customer associates with the hotel. Supplier management has assumed a great deal of importance in the recent past. BRAND IMAGE Hotels, as any other luxury product/service, depend to a large extent on branding. Brand image of the hotel to a large extent determines the clientele of the hotel and plays an increasingly important role when it comes to competition. Normally, travellers from other countries tend to identify internationally known brands. Therefore, it is imperative that the domestic hoteliers build a brand not only in the domestic but also the international markets. Further for a person to choose hotels it is very important for him to be educated about the hotel. This is mainly done through promotions on magazines, newspapers, websites etc. According to the FHRAI survey on the percentage of hotels using each media. Overall, close to 90 per cent of the hotels use the print media to promote their services. Managers constantly have to keep their brand in tandem with changing times and to the customers liking. Any change in the perception of the brand image of the hotel results in re-devising the objectives and strategies by the management. Apart from this, many international chains prefer to associate themselves with some of the existing players. This is where the smaller players have an opportunity. If they have an efficient hotel, then foreign chains may be interested in a partnership. In the event of such a tie-up, the domestic hotel will gain in terms of brand identity and the foreign partner will gain in terms of getting a good deal more economically. VALUE CHAIN IN THE HOTEL INDUSTRY INBOUND LOGISTICS Here goods are received from a hotels vendor. Hotels outsource a great of products and services such as meats vegetables, horticulture, bakery products, cleaning services, and security. Inbound logistics would consist of collecting goods from different vendors and moving them to the appropriate location in a hotel. OPERATIONS This is where goods are manufactured or services are provided. Operations could include preparation of dishes, checking in hotel guests, cleaning etc. OUTBOUND LOGISTICS Once goods are prepared they need to be delivered to the customers. Apart from delivery of food and beverage to in house guests, outbound logistics are more relevant for catering services undertaken by hotels. MARKETING AND SALES In customer orientated service industry, this stage is of crucial importance. The organization prepares the offering to meet the needs of targeted customers. This area focuses strongly upon marketing communications and the promotions mix. Hotels have strong sales teams for business clients. SERVICE This includes all areas of service such as guest system tracking system (GSTS), restaurant satisfaction tracking systems (RSTS) etc. hotels have guest relation officers, which are assigned to the business clients. It is their responsibility to ensure Support Activities. PROCUREMENT This function is responsible for all purchasing of goods, services and materials. The aim is to secure the lowest possible price for purchases of the highest possible quality. They will be responsible for outsourcing (components or operations that would normally be done in-house are done by other organizations), and e-Purchasing. Hotels outsource a great deal of products and services such as security, cleaning, bakery products etc. TECHNOLOGY DEVELOPMENT Technology is an important source of competitive advantage. Hotels use computer aided technologies for room bookings, maintaining customer profiles, supplies management etc. HUMAN RESOURCE MANAGEMENT (HRM) The hospitality industry being part of the services sector lays huge importance on human resources. Employees are an expensive and vital resource. Recruitment, selection, training in hotel standard operating procedures (SOP's) constitutes a large part of hotel operations, and rewards and remuneration. FIRM INFRASTRUCTURE This activity includes and is driven by corporate or strategic planning. It includes the Management Information System (MIS), and other mechanisms for planning and control such as the accounting department. INTRODUCTION TO JP GROUP The Jaypee group is a well diversified infrastructural industrial group of India with a turnover of over Rs.3000 crore (USD 650 million) that commenced its operations in 1972 as a partnership firm then known as Jaiprakash Associates. Three decades later with growth and diversification the group is now engaged in the businesses of Engineering and Construction, Cement, Hydropower, Hospitality, Golf Resorts, Information Technology, Expressways and Highways. With a professional management team and a competent technical cadre the group employs a total workforce of over 25000. To harness the inherent strength of available human resources and materials, the capacity to learn from success and more importantly to ensure growth with a human face has been the guiding philosophy of the group. INTRODUCTION TO JP VASANT CONTINENTAL Jaypee Vasant Continental, New Delhi, a 123 room hotel, was added to the product portfolio in 1982. It is located in the up market Vasant Vihar area, strategically close to the airport. KEY RISKS IDENTIFIED INDUSTRY LEVEL RISKS We first examine the risks that the entire hotel industry faces. This is the industry level risk faced by all players. In this the key risks that have been identified are ECONOMIC CONDITION RISK: Liberalization has brought home a new class of MNCs, which has increased the number of corporate travellers visiting India. Other than metros, developing cities have also come into the limelight and hence there has been an increase in demand for hotels in various places. This trend has enthused many hoteliers to set up corporate hotels. These hotels largely cater to the needs of business travellers. In the recent years the Indian hotel industry is overly reliant on business travelers with over 80% of the premium segment consisting of business travellers. This over reliance on this segment creates the risk of downturn during a downturn in business activity. INTER INDUSTRY LINKAGE RISK: The fortunes of the hotel industry are closely linked with the state of tourism sector and the aviation industry. In countries where tourism has been actively promoted, the hotel industry is known to have done well. Visas on arrival are one such way of promoting tourism, which has a tremendous impact on hotels. This close linkage with the tourist activity creates risk in areas where tourist activity is little or on the fall. Any adverse regulation for the tourism sector creates risk for the hotel industry as well. The aviation industry is another industry, which is closely linked with hotel industry. A boost in the aviation sector improves the prospects for the hotel industry as well. Seasonal discounts and holiday packages that are offered increase the hotel industry business. INFRASTRUCTURAL DEVELOPMENT: A country that has poor Infrastructural facilities is unlikely to attract business or tourist visitors. Such an environment is not to the growth and expansion of the hotel industry. Lack of government expenditure on transport and other facilities creates a risk for hotels. REGULATORY RISK This industry has regulatory restrictions on construction, project approval, serving of alcohol, taxes etc. Apart from these direct regulatory restrictions there are other regulations in other sectors, which affect the hotel industry. Regulations on foreign exchange, tourism promotion, and aviation also deeply affect hotels and create risk UNPREDICTABLE EVENTS Events like acts of terror, natural disastrous, epidemics, wars and political -economic instability create huge risks for the entire hotel industry. Under any of the above scenarios the hotel industry undergoes a slump. COMPANY LEVEL RISKS These are the risk, which affects Jaypee Vasant Continental Hotel in particular which is located in Vasant Vihar, Delhi. These risks can be divided into strategic and management risks: STRATEGIC RISKS MARKET DYNAMIC RISKS: Demand growth is driven by two key factors. Firstly, the performance of domestic economies drives the occupancy and profitability of domestic hotel markets. Secondly, the volume of international guests, which is dependent in large part on the cost of transport, attitudes to travel and global economic performance, drives the occupancy and profitability of the international hotel market. This dependence of demand on economic trends creates a market risk for hotels. Jaypee Vasant Continental is largely targeting business clients and is thus faced with a greater of market dynamics. On the supply side consolidation has been playing a big role. Hotels with big brand image have been able to expand their network. This creates a risk for smaller hotels with smaller presence. Jaypee Vasanth Continental is not in the league as the Taj or the Oberois group. It does not have that large a network or that big a brand image. COMPETITION RISK: The hotel is subject to intense competition, both for guests and for the acquisition of new management and for exclusive suppliers. This competition risk is further accentuated by the fragmented nature of the industry. Competition for guests arises primarily from luxury hotel chains operated by larger hotel located in the surroundings (Grand Hyatt, Qutab etc). Competition is based on brand name recognition, location, room rates and quality of service and accommodations. Demographic, geographic and other changes in specific market conditions could materially and adversely affect the convenience or desirability of the locales in which the hotel is located. Vasant Continental competes for management opportunities with other hotel operators. Here huge expenses are incurred to train and retain the staff. BRAND / REPUTATION RISK: The Jaypee brand is not as strong or eminent as those of the Taj and Oberoi groups. This is especially a risk since it competes with them for the business client base. Any mismanaged operation or dissatisfied client causes loss of loyalty and loss of other potential customers and word of mouth is very strong in this industry. BUSINESS RELATIONS A large part of a hotels operations require it to maintain good business relation with a large number of external parties such as corporates, travel agencies, transport companies, other hotels, suppliers, airlines, regulatory authorities etc. these are very sensitive issues and mismanaging them can cause sufficient loss of potential revenue. REGULATORY RISK: A hotel is subject large number of regulatory restrictions on construction, alcohol, food and beverage, tax etc in the case of construction the hotel is required to adhere to municipal norms which allow only 25% of the area to be covered. It is important to ensure that a hotel is not flouting any of these norms. In the absence of this the hotel would invite legal risks. LOCATION RISK: Location is the most important factor in a hotels success. Vasant Continental is located at a prime location which is in the proximity of the airports, the embassies and all prime markets. But, the hotel faces the risk of losing its customers to the next door Basant Lok Market (Priya Cinema) which hosts major eating joints who provide quality food and reasonable prices as compared to the restaurants of the hotel. This pulls down the food and beverage earnings of the hotel. ORGANIZATION STRUCTURE RISK: The hotel's planning, finance and marketing is done centrally at the Jaypee head quarters. But, operations are decentralized. There is a risk of the group not charting viable plans for the hotel, and thus risking the performance of the hotel MANAGEMENT RISKS CONTRACT RISK: A hotel enters into long term contracts with a number of parties such as vendors, airlines, corporates, transport agencies etc. It is important that these contracts are carefully drafted with all terms and conditions clearly specified. In the absence of a well drafted contract there is a risk of breach of agreement or legal action. LIABILITY RISK: The hotel is responsible for the safety of it customers and employees. Any loss to them on their premises shall effect the reputation of the hotel. Thus the hotel faces liability risk in case of baggage loss, delay in transportation facilities, delay in delivery of goods and services etc. FUNDING RISKS: The hotels obtain its working capital funds needs from the banks. The hotel needs these funds from time to time for its renovation, supply management etc. At present the firm has spent 30 crore over past three months for renovation. The firm has to have adequate earnings and repayment capability. Otherwise it faces the loss of faith of its bankers. FOREX RISKS: A hotel earns huge sums of revenue in foreign exchange. Rupee depreciation yields extra profits with tax shield. Withdrawal/ dilution of tax concessions on foreign exchange earnings can adversely affect the profitability. Thus we see that foreign exchange rate movements can benefit or adversely affect the hotels. The extent of this risk depends on how much the hotel relies on foreign clients. Vasant Continental relies on them to large extent. Shown below are the earnings from foreign exchange in the hotel industry in India. INTEREST RATE RISKS Since hotels expand with funds borrowed from banks and other sources interest rate fluctuation affect them. An increase in interest rate would increase the interest component in expenditures and thus creates risk which needs to be effectively managed. CREDIT RISK: The hotel undertakes a large amount of credit risks with its suppliers, its corporate clients and with its tie ups with other hotels. This risk also arises In the case of business travellers who pay their bills either through cheque or credit cards. OPERATIONS RISK: These risks arise due to the day to day activities carried in the hotel. It is important to ensure that operations are carried out in desired manner and according to procedures. They are the most critical in the service industry where there is close interaction with the customer. CAPACITY RISK: The hotel follows a practice of booking rooms at 120% of its original number of rooms. It usually expects cancellations to the extent of 20-25%. But over booking can pose a risk for the hotel in case there are not any cancellations .The Hotel cannot accommodate guests more than its capacity. At the same time underutilization of the capacity can also risk the hotel's earnings. HUMAN RESOURCES RISK: Being a service industry HR plays a very crucial role in the hotels. It is important to mange your staff well. Else it is not uncommon to find staff moving to another hotel. This creates the risk of trained employees leaving the hotel and joining competitors. In Vasant Continental, the labour union is very strong, and supports the employees who have passed the retirement age, and are not ready to leave the organization. Thus, heavy pay packets have to be paid to retain the efficient employees. (Currently the firm is paying Rs.30 Lac approx. on the salaries of the employees.). DAMAGE RISK: The hotel's premises and other property are subject to the risk of damage. Destruction of the property or the goods by the guests, employee or outsiders can be a huge expense to the hotel. INVENTORY RISK: Hotels handle large quantities of perishable and non perishable goods such as meats vegetables, horticulture etc. there has to be proper inventory management to ensure the correct quantity is ordered. This is done to avoid wastage and shortages. Vasant Continental maintains a three days stock for perishable items. OBSOLESCENCE RISK: The hotel needs to constantly update and renovate its interiors so as to keep up with the world standards. Renovation has to be done so as to create a new atmosphere periodically. The hotel needs to take care of its interiors else it will experience the risk of Obsolescence. Besides, the hotel is required to constantly update its plant, machinery and equipment as they are subject to ageing and soon become obsolete due to emerging new technologies. QUALITY RISK: All service industries face this risk. In Vasant Continental quality risk is a major operational risk. Quality Risk is applicable in all areas such as food, service, laundry etc. Failure to comply meet and exceed the expected quality standards will harm the earnings of the hotel. FIRE RISK: Hotels face risk of fire mainly from their kitchen operation and from the huge generators a hotel operates. This can cause substantial damage to a hotel and would require huge expenditure on renovation. Thus this is a major risk for the hotel. SYSTEMS FAILURE RISK: This refers to the risk of losses from computer system failures such as computer malfunction, failures and fraud. The hotel has all the departments connected to intranet and all the operations such as hotel bookings, telephone calls, supplies management etc are online. Since everything is computerized, data is at risk in case there is a systems failure INFRASTRUCTURE UTILITY RISK: This risk arises from the various utility services provided at the hotel such as Swimming Pool, Clubs/Sauna, parking area, security vaults. Any material or physical damage to the customer on account of use of these services is a risk to the hotel. FRAUD RISK This pertains to the risk of fraud and embezzlement on part of the employees which can cause significant financial and reputation risk. EXOGENEOUS RISKS: These risks are external to the hotel, but do affect the firm. 1. Natural disaster risk: All organizations including hotels are affected by earthquakes, floods etc. They can cost lives of guests, employees and property of the hotel. 2. Acts of war/terror: Events such as wars, terrorist attacks, hostage situation etc are a threat to a hotel. 3. Development of surrounding: An unplanned development of the surrounding area of a hotel by the government poses a risk for the hotel as the location becomes unfavorable for attracting clients. RISK MAPPING Shown below is a risk map for Vasant Continental hotel. It shows how the hotel should manage its risks keeping in mind their significance and frequency. SIGNIFICANCE FREQUENCY DE RISKING For the hotel industry the following insurance policies are available to hedge their risks BURGLARY INSURANCE (BUSINESS PREMISES) This insurance policy is suitable for every individual who is exposed to the risk of burglary or is liable for goods held in trust/ commission. This insurance policy provides protection to the insured party's assets and property, such as Property contained in business premises, stocks owned or held in trust or commission. Premises. Cash, valuables, securities (locked in a safe or cash box or strong cupboard). Risks covered This insurance policy covers all contingencies arising out of actual loss/ damage to the insured property caused by burglary/ housebreaking as well damages caused to the premises by the burglars during burglary or attempts at burglary. COMPACT INSURANCE This insurance policy is ideal for all offices, hotels, hospitals/ nursing homes and educational establishments. However, this policy cannot cover any of the risks faced by manufacturing concerns, godowns, warehouses or cinema theatres either. Yet, it covers risks incidental to their operation like basic functions of purchase and sales. Risks covered This insurance policy consists of the following 10 basic sections building and contents against Fire & Allied perils. contents against Fire and allied perils. insureds Legal Liability as Tenant. contents against Burglary & House-breaking. mechanical & electrical appliances against breakdown. electronic appliances, Laptop Computer, Cellular Phone against all risks. money against accident or misfortune. covers Personal Accident to employees. pecuniary loss caused by infidelity/dishonesty of employees. legal liability of the insured against third parties and employees. fixed glass/ sanitary fittings against accidental breakage. Neon Sign/ Glow Sign/ Hoarding against accidental external means. DIAMANTAIRES INSURANCE This policy is essential for all diamantaires, keeping in mind the specific requirements of their trade. Risks covered Covers loss or damage to property contained within the premises where the insured's property is deposited against the risks of fire, explosion, riot or strike, malicious damage, burglary, housebreaking, theft, robbery and hold-up risks only. Covers loss or damage to property insured while in the custody of the insured's partners and/ or employees. Property insured, excluding cash and currency notes in transit within India by air-freight or local couriers. Loss or damage to furniture, fixtures and fittings from fire, explosion, lightning, riot or strike, malicious damage, robbery and hold-up risks only. ELECTRONIC EQUIPMENT INSURANCE This insurance policy is ideal for any individual or corporate organisations that employ the use of electronic equipment for purposes of business or pleasure. Risks covered This insurance policy protects the insured property, which is the electronic equipment from. Location perils and natural calamities. Electrical or mechanical breakdown. Faults in design, materials, manufacturing or assembly. Damage due to moisture or humidity. Damage due to negligent operation or carelessness of employees. Riot, strike or malicious damage. Theft, burglary or housebreaking. FIDELITY GUARANTEE INSURANCE This insurance policy protects the employer from risks presented by any of his employees such as fraud, dishonesty, embezzlement during the course of employment. In industries where secrecy and confidentiality of operations is vital for a company's success, this policy will ensure the concealment of business procedures from other competitors who may be successful in poaching their rivals' employees. Risks covered This insurance policy insures the employer from risks faced owing to his employees such as Fraud or obtaining advantage through unfair means. Dishonesty or breach of trust. Forgery or illegal alteration. Embezzlement or misappropriation of money or goods. Larceny or dishonest means of possession. Default or failure to perform specific duties. FIRE INSURANCE This policy offers protection against loss or damage of property/ materials caused by fire. The insurance should be taken for a maximum amount of its current value after considering factors of wear and tear as well as depreciation Risks covered Fire, lightning, explosion/ implosion, Riot, strike, malicious, terrorist damage, impact, aircraft damage, Flood, storm, tempest, subsidence, landslide, earthquake, fire, shock. OFFICE UMBRELLA POLICY Under the twelve odd sections of this insurance policy, all assets and liabilities of a modern working environment such as the building, inclusive of its fixtures and fittings, boundary walls and fences, contents stored within the office premises including employees' personal effects, damages that might be caused by tenants, professional instruments, money in transit or locked in safe, fixed glass and sanitary fittings, employees' fidelity, electronic equipment, data carrying material as well as portable computers and cell phones can be insured. Risks covered Fire and allied perils. Theft or attempted theft through forcible or violent means. Robbery or dacoity. Accidents or misfortune or breakage. Fraud or dishonesty committed by employees CONTRACTOR'S PLANT & MACHINERY INSURANCE This insurance policy is ideal for all owners of plants and machinery since it protects them from all major risks and contingencies that may arise and cause unforeseen losses and damages to their property. Risks covered The insurance policy suitably indemnifies the insured owner of the plant and machinery against any unforeseen or sudden physical damage to their property, unless the risk is specifically excluded in the policy. PLATE GLASS INSURANCE This insurance policy provides cover for all types of plate glass installed within premises - ornamental, lettered, embossed or stained. Risks covered This insurance policy offers protection to the insured party against loss or damages owing to accidental breakage of the plate glass installed. WORKMEN'S COMPENSATION INSURANCE Risks covered This insurance policy is necessary for every employer since it indemnifies him against his legal liability as an "employer" towards accidental or fatal injuries sustained by his work men during work. DE RISKING STRATEGIES The following strategies have been adopted by Jaypee Vasant Continental. TIE UPS WITH OTHER HOTELS FOR ROOMS In peak seasons the hotel usually overbooks rooms to the extent of 120%.This is because they have experienced a cancellation rate of 20%. However in case these cancellations do not take place, the hotel runs the risk of turning away a customer who had booked a room. To mitigate this risk they are presently into tie up with hotel Siddarth and Hyatt. In the absence of rooms, visitors are transferred there. HR POLICIES The hotel conducts extensive training of staff the various operations of the hotel. This is done to ensure work is conducted according to the procedures laid down. The staff is given good incentives and there are staff welfare practices in place to ensure the employees do not leave the hotel. This exploits the HR strength in the hotel to its advantage. PERIODIC RENOVATION Vasant Continental has a policy of changing interiors every 3 years. This keeps up the quality of the accommodation provided, replaced partially or fully damaged property. FIRE POLICIES All staff of the hotel is extensively in fire drills and to manage such situations. Apart from that standard fir fighting equipment such as smoke detectors, sprinklers are fixed. The hotel adheres to the regulatory norms on fire exits etc. GUEST SATISFACTION The hotel maintains a guest satisfaction tracking system wh...