Impact Policies Are Overdue For Overhaul

Impact Policies Are Overdue For Overhaul

Reprinted from Advanstar
Hotel & Motel Management Magazine
October 1994
By Jeff Wilder
Wilder Group, L.L.C.

No document has more potential for severe financial consequences for a hotel owner than an impact study. Yet there is a distinct lack of testing procedures by which to accurately measure impact.

For years I've been reading articles on the impact issue in the trade press and other, more academic publications. As I've read, I could almost see the writer stroking his chin as he explains how impact is measured, or analyzes concepts such as segmentation and mitigation in order to season the stew.

Well, there'll be not chin stroking here. This column was motivated by an incident that directly affected my pocketbook. The incident involved the damaging consequences of shoddy consultant work and the use of biased processes that cried out for correction. Unfortunately, such practices - all too common in the lodging industry today - are almost never attacked.

Impact studies are useful for two reasons: to assist the expansion of franchise systems, and to prevent a torrent of license lawsuits that would keep franchisors in court forever.

Franchisors continue to moderate even more modest impact-threshold levels in order to mollify existing franchisees who correctly see the issue as both a moral and financial one. After all, a franchisor's impact policy probably tells more about its corporate soul than any activity in which it engages.

An Inexact Art

The inexact art of impact-study writing is usually defended by somewhat elitist arguments that initially can throw the franchisee off guard. It's instructive to note that impact studiers are often people who never have raised a nickel of their own money in a hotel investment. It seems fair, then, to question whether these studiers really should be entrusted with determining the real-world economic consequences of the impact they attempt to measure.

I'd like to share a few observations on impact procedures that come from personal experience:

Who's the client?

The impact-determination system is currently set up as a Faustian gamble, with the existing licensee allowed to object only if he risks paying for a study to prove an unacceptable level impact. If the existing franchisee objects to the affiliation of a sister product in his market, he puts up the money, in escrow, for an impact study. However, it's the franchisor who pays the studier; it is the franchisor to whom the report is sent. The report writer clearly recognizes the chain as the de facto client.

Usually, the report is presented in final form and the existing franchisee often has no opportunity to review and comment on the accuracy of its findings. The report is presumed to be infallible.

The Cost

Generally, impact studies cost $3,000 to $4,500. Many franchisees complain about the cost; some even give up their right to object rather than risk losing and having to pay. Of course, the real problem is that in order to induce their use by licensees, the chains have driven down the cost to the point that the studier may well not devote adequate time to doing a thorough job. The adverse economic consequences of inadequately researched studies can be devastating.

In my situation, the arguments disproving impact were so weak, the conclusions so naive, that it would have made for humorous reading were it not so potentially damaging.

What's being measured, and for how long?

Some franchisors use gross rooms-income impact - will your income be affected by more than, say, 5 percent for five years? Others use only occupancy - will business be impacted by more than three occupancy points per year for five years? But I've yet to hear anyone ask to review an existing franchisee's profit-and-loss statement as part of the decision-making process regarding impact.

Most of us, by the way, have little idea what next year will bring, let alone five years down the road. So the idea that someone could accurately measure impact differentials that far into the future seems fraught with uncertainty and prone to inaccuracy.

Accurate mathematical models

Rigorously tested mathematical constructs must be developed in order to measure true impact. Glibly written speculative musings drawn from unconfirmable data simply will not do - especially when the results are financially devastating.

Here's a case in point: A few years ago, a nearby hotel applied for a franchise with a company whose flag my hotel flew. We had just earned the chain's top guest-satisfaction ranking for the region. An impact study was ordered. The studier concluded that since our hotel had such great guest acceptance, it followed that our guests would remain loyal, impact would be minimal, and that the new franchise should be granted. It was the quintessential good news/bad news scenario - and a real bunch of horsefeathers! I objected to the conjectural conclusions of the study; the potential franchisee withdrew the application.

Ombudsman philosophy

I believe that a neutral ombudsman should hear complaints about study results. Perhaps a board of regional franchisees might be the ultimate decision-maker. It is clear to me that existing franchisees deserve the right of impartial appeal - especially considering the large amounts of money that are often at stake.

Without objective report-writing standards and a neutral appeal process, an existing franchisee may well see his property value eroded by the combination of unscientific impact reports and overtly expansionist franchisors.

Remedies

The most available remedy for correcting an adverse impact decision is to try to convince the franchisor that study results are inaccurate, and hope that you're dealing with fair-minded, empathetic businesspeople. Other remedies include legal action to challenge the study, requesting release from your franchise agreement, and contacting your national franchisee organization.

Still other solutions involve negotiating upfront protective measures with the franchisor (such as territorial exclusivity); lowered impact threshold levels; more comprehensive definitions of impact; incorporating a review of profit-and-loss statements into the process; and/or reserving the right to freely exit the system. All are viable points of negotiation.

The time will soon come when every franchisees, and their bankers, may well demand these enhanced levels of protection. In all probability, impact studies will the fall into disfavor, their usefulness effectively neutered.

Until that time, however, remember this: If you don't take a stand against unfair treatment, you have only yourself to blame.