THE JOURNAL OF HOSPITALITY FINANCIAL AND TECHNOLOGY PROFESSIONALS
Winter 2015Volume 30, Number 1
Top 10 Best Practices For a Club CFO
Overview of the USALI 11th Revised Edition
The Value of Strategic Management Accounting
PLUS:
The Decision-making Process
Preparing for U.S. H-1B Visa Filings
The Implicit Costs of Improper Data Security
Profile: Evelyn Adams, 2014 HFTP Paragon Award Winner
The Bottomline 3
THE JOURNAL OFHOSPITALITY FINANCIAL AND
TECHNOLOGY PROFESSIONALS
Volume 30, Number 1
12 Are You Ready For Wearables?Google Glass, Apple Watch and more By Ajay “AJ” Aluri, Ph.D.
14 Top 10 Best Practices For a Club CFOCommon best practices from top performing club financial executives from across the country By Kaeko Shirasu-Bailey, CPA and Philip Newman, CPA
17 Supporting a Multi-national WorkforcePreparing for U.S. H-1B visa filings and understanding visa and green card options for club and hospitality organizations By Keith A. Pabian
20 Accountants: Guardians of Strategy?The value of strategic management accounting in the international hotel industry By Wiarda Witteman and Demian Hodari, Ph.D.
26 The Decision-making ProcessSteps to achieving a comprehensive analysis and producing meaningful data, regardless of the type of decision to be made By Essam A. Mohamed, MSA
30 A Close Look at the USALI 11th Revised Edition, Part IThe new guidelines and operating statements for 2015 By Raymond S. Schmidgall, Ph.D., CPA and Agnes DeFranco, Ed.D., CHE, CHAE
36 The Implicit Costs of Improper SecurityA business impact analysis, supported by cases studies By Ted Harrington
5 Between the LinesLooking Ahead at 2015 — The association continues to grow and develop excellent partnerships, resources and education
6 Q&A from the Research CenterUSALI 11th Revised Edition Overview — A summary of the changes to the latest edition, made effective January 1, 2015
9 HFTP News & NotesProfile: 2014 HFTP Paragon Award Winner, Evelyn Adams
10 Business Across the Globe Focus on Morocco
HFTP® and HITEC® are registered service marks of Hospitality Financial and Technol-ogy Professionals. GUESTROOM 20X is a service mark of Hospitality Financial and Technology Professionals.
Submissions and InquiriesIndividuals interested in submitting an article for publication should contact the editor. The Bottomline is a peer review journal. All materials submitted for publication are reviewed by members of the editorial review board or recognized experts in the field.
The Bottomline (ISSN 0279-1889), the jour-nal of Hospitality Financial and Technology Professionals, Inc., is published bimonthly with two special editions by HFTP®. Copy-right © by Hospitality Financial and Technol-ogy Professionals. All rights are reserved. All opinions expressed herein represent the views of the authors. The Bottomline and HFTP disclaim any responsibility for views expressed or statements made in any articles published. HFTP disclaims any liability with respect to the use of or reliance on any such information. The information contained in this publication is in no way to be construed as a recommendation by HFTP or any industry standard, or as a recommendation of any kind to be adopted or binding upon any member of the hospitality industry. Written consent must be obtained from HFTP before reprinting articles. Subscription fee of $30 for HFTP members is included in the membership fee. HFTP is headquartered at 11709 Boulder Lane, Suite 110, Austin, Texas 78726. Periodicals Postage Paid at Austin, Texas. POSTMASTER: Send address changes to The Bottomline, 11709 Boulder Lane, Suite 110, Austin, Texas 78726, (512) 249-5333.
CONTENTS
F E A T U R E S
D E P A R T M E N T S
W I N T E R • 2 0 1 5
4 Winter 2015
THE BOTTOMLINE STAFF
Frank Wolfe, CAE Executive Vice President/CEO
Eliza R. Selig Editor/Director of Communications
Jennifer Lee Advertising Sales / Director of Marketing
HFTP OFFICERS
PresidentDaniel N. Conti Jr., CHAE, CAM
Wyndham Grand Jupiter at Harbourside Place
Jupiter, Fla.
Vice PresidentArlene Ramirez, CHE, CHAEADR Hospitality Consulting
The Woodlands, Texas
TreasurerLyle Worthington, CHTP
Austin, Texas
Immediate Past PresidentJerry Trieber, CPA, CHAE, CFE, CFF, CGMA
Crescent Hotels and ResortsFairfax, Va.
2014–2015 EDITORIAL PEER REVIEW COUNCIL
Scot Campbell, CHTPCaesars Entertainment
John D. Daum, CPACondon O'Meara McGinty & Donnelly, LLP
Mehmet Erdem, Ph.D., CHTPiHITA
Chris Koepper, CPACliffs Club Partners
Arlene Ramirez, CHAE, CHE, MBAADR Hospitality Consulting
Thomas G. Smith, CHAE
Justin Tallion Texas A&M University
Lyle Worthington, CHTP
George L. Zoglio, CPA Batchelor, Frechette, McCrory, Michael & Co.
11709 Boulder Lane, Suite 110 • Austin, TX 78726–1832
+1 (512) 249-5333 • (800) 646-4387 • Fax +1 (512) 249-1533
www.hftp.org • www.hitec.org
ProLinksProLinksWebinars
HFTP
ProLinks Webinars offer participants a chance to engage and connect virtually with innova-tive thought leaders on the most relevant topics to the hospitality industry. Enjoy presentations from the comfort of your own computer while interacting not only with the speaker, but other attendees from all over the globe.
Get Started
Visit the Membership/ProLinks section of the HFTP web site at www.hftp.org to view the upcoming webinar schedule.
Archived Sessions
ProLinks Webinars are recorded and available to members for viewing on demand. Archived topics include e-commerce, millennial learn-ers, green IT, Wi-Fi and more.
The Bottomline 5
Looking AheAd At 2015The association continues to grow and develop excellent partnerships, resources and education
Daniel N. Conti, Jr., CHAE, CAM is director of finance for the Wyndham Grand Jupiter at Harbourside Place located in Jupiter, Fla. USA.
the year to various conferences and events promoting the mission and goals of HFTP. I will be heading to the Mid-South Atlantic Regional Conference in Richmond, Va. in February and am excited to see how much it has grown since the last time I attended. In March, I will be attending the HFTP Leader-ship Strategy Summit in Irving, Texas. The summit is a gathering of about 55 HFTP leaders who will discuss the association's long-term strategic goals and will be a great opportunity to help us align all of our initiatives as we continue to grow as an association.
Looking ahead, one of my goals is to work side-by-side with HFTP Global staff to create a full and well-attended ProLinks webinar schedule. Ongoing education is one of the cornerstones of personal and professional develop-ment, and I believe we offer some of the world’s best. We are furthering our efforts to spread education globally by offering webinars convenient to time zones in Asia. In early February, Ralph Miller, CA, CBV, CHA, CHAE presented “Highlights of the 11th Revised Edition of the USALI” at 8:00 p.m. Hong Kong time. You can access a recording of this session via the ProLinks archives. To complement the webinar, make sure to read the two articles published in this issue that review the changes made to the 11th revised edi-tion, which became effective on January 1. The first is a quick overview that comes from the HFTP Research Center (page 6), and the other is written by industry experts Raymond Schmidgall, Ph.D., CPA and Agnes DeFranco, Ed.D., CHE, CHAE (page 30).
Another great addition to our webinar schedule is the Chapter Leadership Series. This series will occur throughout the year and give chapter leaders the opportunity to learn about different aspects of running a chapter from membership to social media to management. The Chapter Leadership Series is another example of how we as an executive council and the HFTP Global staff are providing useful resources to supplement the outstanding efforts of our chapter leaders.
The year 2015 is shaping up to be a standout for HFTP and I look forward to meeting as many members as possible throughout my presidency. Wishing everyone a successful year in all pursuits, both personal and professional.
A Letter from the HFTP Global PresidentBetween the Lines
A new year brings new resolutions and goals, but before we get too settled into our routines I think
it is important to look back on the last few months of the association. For me, the handful of months I’ve spent as Global President have been extremely exciting. I am honored to be at the helm of an association that continues to grow and flourish. HFTP’s member-ship retention rate is over 90 percent and I see that as a testament to the de-voted professionals that populate our membership. As I said in my inaugural speech, “We succeed as a team and we fail as a team.” Right now, we are definitely succeeding.
The executive council is busy at work as well, with HFTP Global Vice President Arlene Ramirez, MBA, CHE, CHAE representing HFTP at HOSPACE, a one-day annual con-ference hosted by HOSPA held in early November. I am grateful for the wonderful partnership between HFTP and HOSPA and look forward to a continuing partnership. Lyle Worthing-ton, CHTP and Jerry Trieber, CPA, CHAE, CFE, CFF, CGMA will also be traveling on behalf of the HFTP Global Executive Council throughout
6 Winter 2015
HFTP Research CenterQ&A
Tanya Venegas, MBA, MHM is executive director and HFTP Fellow at the HFTP Americas Research Center. She is a regular contributor to The Bottomline and speaker at HFTP educational events. She can be reached at [email protected].
Anyone working in the lodging segment of the hospitality industry has certainly heard that a new edition of the Uniform System of Accounts for the Lodging Industry (USALI) has been released. There are many changes
to the 11th revised edition which will impact the financial statements of lodg-ing properties. The Financial Management Committee (FMC) of the American Hotel & Lodging Association (AH&LA) is responsible for assessing when a new edition of the USALI is warranted and then editing and updating the publication. The FMC consists of members from all segments of the lodging industry and includes representatives from hotel owners, asset managers, hospitality man-agement companies, brand franchising organizations, independent properties, owner-operated hotels, consultants, benchmark reporting firms, academia and certified public accountants. You can be assured that every facet of the lodg-ing industry had a say in the updating of this very important resource including industry associations. To get further insight on this process, please read "USALI: The New Guidelines and Operating Statements for 2015" on page 30.
Oftentimes, the USALI is referred to as the "Hotel Accountants Bible," because it offers basic guidance on everything accounting for the lodging in-dustry. The primary purpose of this publication is to offer operating statements formatted to provide hotel owners, managers and other interested parties with operational information pertinent to the lodging industry. Historically, the USALI focused on presenting information in accordance to the Generally Accepted Ac-counting Principles (GAAP) in the United States. In the 11th edition, the FMC continued to present information based on U.S. GAAP, but in order to address the globalization of the lodging industry, certain items were adjusted to address issues in a more global manner.
The effective date of the 11th edition of the USALI was January 1, 2015; so, if you haven’t already, you need to start incorporating these changes into your accounting system. Legally, operators are not bound to use the 11th edition, but many organizations have management agreements which require conformity to the “current” edition of the USALI. Due to many of the changes, some perfor-mance measures will change from one year to the next, causing inconsistencies for comparison purposes. For this reason, many of the benchmarking organiza-tions will require their participants to report using the 11th edition.
The following provides a glimpse of the changes and is not meant to be com-prehensive. It would be a good idea for your company to purchase a copy of the 11th revised edition, if you haven’t already. There is a lot of great information in this publication and extended resources that were not available before such as an eText, downloads and online support.
By Tanya Venegas, MBA, MHM
A summary of the changes to the latest edition, made effective January 1, 2015
Uniform SyStem of AccoUntS for the Lodging indUStry:
11th reviSed edition overview
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Summary operating Statement"Rentals and Other Income" has been changed to "Miscellaneous Income"
"Revenue" has been changed to "Operating Revenue"
"Total Revenue" has been changed to "Total Operating Revenue"
"Information and Telecommunications Systems" has been added as an "Undistributed Operating Department"
"Fixed Charges" has been changed to "Non-operating Income and Expenses"
"Net Operating Income" has been changed to "EBITDA" (Earnings Before Interest, Taxes, Depreciation and Amortization)
Two Summary Operating Statement formats have been developed:
• For Operators: | A Replacement Reserve is deducted from EBITDA| The bottom line is "EBITDA less Replacement Reserve"
• For Owners:| Interest, Depreciation, Amortization and Income Taxes are deducted
from EBITDA| The bottom line is "Net Income"
operating SchedulesMultiple Departments
• A new section was added to offer further guidance on gross vs. net basis
• Information was added on how to handle surcharges, service charges and gratuities
• Several changes were made to Labor Costs and Related Expenses:| Management and non-management personnel are presented separately
and then aggregated in salaries and wages| Service Charge Distribution is presented as a cost category within Sala-
ries, Wages, Service Charges, Contracted Labor and Bonuses| Contracted, leased and outsourced labor costs are presented separately
• Cluster services and department-specific reservations expenses were added as accounts
• Administrative telecommunications expenses are now recorded in Infor-mation and Telecommunications Systems
Rooms Department
• Rooms revenue segmentation has been expanded to better reflect current industry standards
• Resort fees are recorded in Miscellaneous Income and are not included in the calculation of the average daily rate
• Further guidance is provided for mixed-ownership lodging facilities
• Package revenue allocations and package breakage were both addressed in further detail
Food and Beverage Department
11th edition chAngeS
The USALI 11th edition is available for purchase at www.ahlei.org. To get the HFTP member discount, enter promo code HFTPC.
Key Changes by Section
Summary Operating Statement
Operating Schedules
– Multiple Depts.
– Rooms Dept.
– Food and Beverage Dept.
– Other Operated Depts.
– Miscellaneous Income
– Undistributed Depts.
– Non-operating Income and Expenses
Financial Statements
Financial Ratios and Operating Metrics
Revenue and Expense Guide
8 Winter 2015
• Food and beverage information is presented on the same schedule
• Gift certificate revenues were addressed with enhanced guidance
• The term “cover” was replaced with “customer” to reflect the number of individuals served
Other Operated Departments:
• Telecommunications is no longer an Other Operated Department
Miscellaneous Income
• Resort fees and package breakage are recorded in Miscellaneous Income
• Guidance is provided on the handling of commissions, business interruption insurance, foreign currency exchange, unused or forfeited gift certificates, and interest income
Undistributed Departments
• All system-related technology expenses are consolidated in the Information and Telecommunications Systems De-partment
• Non-guest-related foreign currency exchange income and expenses are addressed in further detail
• The separation of sales and marketing expenses has been eliminated
• Revenue management and catering sales functions are categorized as sales and marketing expenses
• Utility taxes was eliminated as a separate expense category
• Contract Services was added as an expense category on Utilities to incorporate the cost of energy audits
Non-operating Income and Expenses
• The net revenue generated by ownership that is not managed/maintained by the hotel is recorded as Non-Operating Income
• Asset management fees, receiver fees, and owner-directed market studies/audits should be recorded in a new category called Owner Expense
financial StatementsRevenue and expense categories have been added to the Income Statement to reflect changes to the Summary Operating
Statement
A Statement of Comprehensive Income was added
Reference to International Financial Reporting Standards (IFRS) was added
Gift certificates and cards were removed from Other Current Liabilities and made a separate line item
Further guidance was provided on inventories, operating equipment, and pre-opening expenses
financial ratios and operating metricsThe name of this section was changed from “Ratios and Statistics” to “Financial Ratios and Operating Metrics”
Ratios are provided for both operating and undistributed departments
Key ratios are presented for each department
A labor cost schedule is provided to detail labor cost data for each department
Additional utility and waste consumption ratios are provided
revenue and expense guideInformation is provided for both revenues and expenses
The Revenue and Expense Guide is now available in electronic format and is searchable and sortable
HFTP Research CenterQ&A
USALi 11th edition chAngeS (ConTinued)
The Bottomline 9
Profile
whether it be by the name “Miss HFTP” or “Queen of HFTP,” everyone knows Evelyn Adams. The 2014 Paragon Award recipient, Evelyn Adams,
has been a member of HFTP since 1990 and has never looked back.Each year a select committee is charged with choosing an individual who has
made a significant and lasting contribution to both HFTP and the hospitality in-dustry to receive the prestigious Paragon Award. It was evident by the numerous recommendations that Adams received, that there could not be a more deserving individual. Always at the ready to further the purpose and goals of the associa-tion, one peer recalls, “she was everywhere she could be and always [with] the famous words ‘what can I do to help?’” Adams herself will be the first to say that her driving force in her work with HFTP is passion. “I love to give back to the association for all it has given me over the years,” she recounts.
Adams was introduced to the HFTP community and was quickly asked to serve on the charity committee of her chapter — a committee which she has served on or chaired since 1997. From her initial involvement, it was clear to Adams that she had found something very special. Adams has gone on to hold numerous leadership positions including: president of the Gold Coast Chapter, chair of the Annual Charity Committee and board member of the South Florida
nology changing each day, “serving customers/members 24/7, includ-ing holidays” has been her greatest obstacle.
In between her contributions to HFTP and her commitment to Bocaire Country Club, Adams finds enjoyment in travelling and admits that her guilty pleasure is “good food and wine.”
As a mentor to those around her she advocates, “you have to like what you do and focus on your goals — it's not always easy, but the rewards are well worth it.” Adams maintains that her involvement with HFTP has propelled her to new heights which would not have been possible without the inspiration she gains from current and past national HFTP leaders and at the HFTP Global office. “I would tell new members to get involved: volunteer for committees and/or the board, attend educational meetings and conferences. What you get back, is immeasurable.” ■
2014 PARAGON AWARD RECIPIENT
eveLyn AdAmS, QUeen of hftPBy danielle earp
“i have made lifelong, cherished friendships that i would never have made if not involved with HFTP. i attribute all of my continuing education and development to my membership with HFTP and, as a result, advanced very quickly in my profession.”
Chapter. Throughout her years spent with HFTP, Adams’ most memorable mo-ment has been “raising $20,000 in 2010 for the American Cancer Society in memory of my dearest friend, Stephen Doherty, who passed away March 13, 2010 from colon cancer and who was also very involved with HFTP.” Doherty, in fact, was a recipient of the HFTP Paragon Award.
It is clear in speaking with her that HFTP has changed Adams’ life, “I have made lifelong, cherished friendships that I would never have made if not involved with HFTP. I attribute all of my continuing education and development to my membership with HFTP and, as a result, advanced very quickly in my profession.”
Adams was born and raised in Bloomington, Ind., but it was not until her move to Lake Worth, Fla. in 1986 that she began her career in the hospitality industry. Since 2007, Adams has been the director of finance at Bocaire Country Club and finds that the best reward is ensuring her guests’ happiness. She says, “We are in the ’people’ business — making our guests and members enjoy their experience at our properties. When they are happy, we are happy.” As a seasoned professional, Adams is fully aware that there are also challenges that accompany her choice of career. With an ever-evolving list of needs and wants and tech-
10 Winter 2015
As HFTP expands and adds chapters throughout the world, it is interesting to learn about different cultures and conducting business in other countries. HFTP currently has chapters in the following locations outside the United States: Asia, Canada, Caribbean, Hong Kong, India and Switzerland. The following short report gives a basic introduction to the country, business climate and state of the hospitality industry.
Located in the very western part of North Africa in the Maghreb region, Morocco borders the
North Atlantic Ocean and the Medi-terranean Sea. The country is slightly larger than the size of California and is only a convenient two-and-a-half hour plane ride away from Southern Europe. It has an eclectic climate, with close proximity to blue oceans, rugged mountains, high valleys and hot desserts (SMIT).
The first people to reside in Mo-rocco were indigenous nomads known as Berbers. By the seventh century, the Arabs discovered Northern Africa and began spreading the Arabic lan-guage and Islamic religion. After the Arabs took rule, Morocco was under France’s ownership until 1956. In the more recent years, Morocco has received mass protests in response to the political and economic reform, just like some of their other Islamic counterparts (Lonely Planet). In 2011, a new parliamentary form of govern-ment was implemented that created reform.
Sometimes known as the “Arab West,” The Kingdom of Morocco is home to the dominant ethnicity of Arab along with Spanish, African and native Berber (BBC). In addition to its scenic landscapes, one might find rich culture in their imperial cities, local art, exotic foods, cultural infra-
BUSineSS AcroSS the gLoBeFocus on Morocco
structures and luxury shops; all of these make Morocco an attractive location to spend a vacation. Due to its rich Mediterranean soils, phosphate mining has been the dominant industry in Morocco. Among some others are manufacturing, construction and energy. Furthermore, the King has developed a close tie with European countries such as Spain to create a boom in trading and tourism.
Morocco’s Economy and Hospitality Industry Over the years, Morocco like many other Arabic countries, have suffered a pe-riod of financial and political crisis as a result of the 2011 Arab uprisings around
By Kathy Zheng
Kathy Zheng is a graduating senior at the Conrad N. Hilton College of the University of Houston. She can be reached at [email protected].
research center
The Bottomline 11
the globe. Despite these uprisings, Morocco has since paved way for economic prosperity and modernization (Fi-nancial Times). In fact, Morocco was the only Arab country out of many countries that were affected by the Arab upris-ing that qualified for credit funding from the IMF. They have shifted industry sectors to create more jobs in textiles, automotive, aeronautics and tourism (Financial Times).
In 2007, the Moroccan Agency for Tourism Develop-ment (SMIT) was created to implement a tourism strategy through a series of long term goals and projects. Through these efforts, the economy has helped to create jobs and cre-ate a greater emphasis on tourism in the country. Since 2002, travelers entering the country have grown at a fast, but steady rate as shown in the chart below. From 2001 to 2013, tourism investments also increased from 1.5 to 19 percent (SMIT).
Hospitality and Tourism TodayThe Moroccan Agency for Tourism Development (SMIT) has created a vision for the year 2020 to attract more visi-tors and create more jobs. The goal is to increase travelers from 9.3 million people in 2010 to 20 million people in 2020. They hope to be one of the top 20 tourist destinations in 2020 while emphasizing sustainable development in the country. In doing so, they split the country into different sections by region, representing different areas of destina-tion types including: cultural, seaside and natural destina-tion types (SMIT).
Last year, Morocco was declined for an offer to host the 2015 Cup of Nations due to their fear of the Ebola spread. And despite some missed opportunities for improvement, 2014 proved to be a good year for the Moroccan economy. Morocco realized a total of $2 billion in investments. With the start of the New Year, Morocco already has made plans to further advance the tourism industry of Rabat and Casa-blanca as premier global destinations. The Moroccan Agen-cy for Tourism Development has also agreed upon a budget of MAD2.4 billion to develop other rural areas of Morocco (Breaking Travel News). Some other projects in the pipeline include: a convention center in Marrakech, historical and scenic exhibitions in Tangier, and the constellation thematic resorts in Fez and Meknes (Breaking Travel News). All of these plans are set to create over 25,000 opportunities for employment. ■
Sources• Daragahi,Borzou.(December28,2014).Morocco’s
Economy on Track for Growth. Financial Times. Re-trieved on January 4, 2014 from http://www.ft.com/intl/cms/s/0/6cbe6214-86c4-11e4-9c2d-00144feabdc0.html#axzz3Nw6uWDpw
• Morocco.(June20,2014).Central Intelligence Agency. Retrieved January 1, 2014 from https://www.cia.gov/library/publications/the-world-factbook/geos/mo.html
• MoroccoCountryProfile.(14November2014).BBC News. Retrieved on January 2, 2014 from http://www.bbc.com/news/world-africa-14121438
• MoroccoHistory.Lonely Planet. Retrieved on January 2, 2014 from http://www.lonelyplanet.com/morocco/history
• MoroccoOverview.(2014).SMIT. Retrieved on January 4, 2014 from http://www.smit.gov.ma/en/morocco/overview
• Moroccounveilsambitiousplansforglobaldestinations.Breaking Travel News. Retrieved on January 2, 2014 from http://www.breakingtravelnews.com/focus/article/mo-rocco-unveils-ambitious-plans-for-global-destinations/
0
2
4
6
8
10
12
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
travelers to moroccoArrivals Evolution (inmillions)
Source: Moroccan Agency for Tourism Development
4.45 4.765.48 5.84
6.567.41 7.88 8.34
9.28 9.34 9.3710.04
12 Winter 2015
Are you ready for wearable computing? In the mainstream markets, users are already using
mobile phones, tablets and laptops to the fullest in their daily lives. Is there a place for a new computing device?
Wearable is short for wearable computing devices, a new class of miniature technological devices capable of storing and processing data while the user is wearing it on his or her body. Wearables have been around for a few years already, being used by innovators and early adopters, but in 2015, wearables will enter mainstream markets, and a greater majority of early users and pragmatists will have a chance to acclimate to them. As of now, most mainstream users have not experienced wearables for them-selves, or have even seen others using wearables in front of them. This will change very soon, as mainstream users discover them and begin to see them everywhere.
Today's WearablesIn the past, any device that users could wear on the body was consid-ered a wearable computing device. In the digital age, if wearables are not capable of storing data, computing and integrating with other devices in real-time, they cannot be considered a wearable computing device. There are several types of wearables that fit this definition. Updating old ideas of wear-
Are yoU reAdy for weArABLeS?Google Glass, Apple Watch and More
By Ajay “AJ” Aluri, Ph.d.
able wristwatch technology, Apple Watch (expected to be shipped in April 2015) will be a personal wearable device capable of enhancing the use of apps for sharing information, interacting with the world around us and integrating to our phone. In the area of virtual reality experiences and gaming, Oculus will enhance the way people play 3D games using wearables. If augmented reality interests you more, watch out for Meta products, especially Meta Pro which can integrate with your phone, tablet and laptop, and be accessed via a “3D see-through dis-play.” For enterprise-wide wearable use, Atheer Labs wearable devices are evolv-ing in the field of service and construction, health care, warehousing and the oil and gas industries. Finally, in the field of hands-free wearables designed for regular use with simple voice commands, Google Glass has emerged as an early entrant in the wearable market. This January, Google halted sales of Google Glass to work on its next generation; it'll be interesting to see what comes next.
Google Glass at HITECThe attendees at HITEC 2015 were given a demonstration of Google Glass and later were asked to complete a research survey to get a picture of how they saw wearables, and whether they planned to use them in the future, especially Google Glass. Here are a few insights gleaned from the responses provided by the 180 survey respondents after the Glass demonstration:
tech trends
Ajay “AJ” Aluri, Ph.D. is an assistant professor, hospitality and tourism management at West Virginia University in Morgantown, W.V. He can be reached at [email protected].
GoogleGlassdemonstrationatHITEC2014inLosAngeles(authorpicturedcenter).
The Bottomline 13
• A significant majority of respondents (93 percent) were familiar with Google Glass before participating in the demonstration and research study.
• Of these respondents, 6 percent had already owned or used Google Glass.
• Price played a role in the decision to adopt wearable technology. A significant number of respondents (53 percent) said they would be willing to purchase a Glass device if it was priced below $499; 35 percent said they were willing to pay between $500–$999; and only 12 percent of respondents said they would be willing to pay more than $1,000.
• Using Glass voice commands, users can access many different apps, allowing them to Google search, take pictures, record a video, send a message to other users, make a call, get directions, translate, etc. When asked which Glass apps they would most likely use, a sig-nificant majority (89 percent) said they wanted to use it to get directions or use maps. Other popular choices include taking pictures (81 percent), placing and receiv-ing calls (70 percent), recording videos (68 percent), performing Google searches (67 percent), sending and receiving messages (67 percent) and translating a lan-guage (65 percent).
• One of the biggest concerns about using wearables is battery life. In regard to the battery life of Glass when used continuously with video capability, a significant majority of respondents (38 percent) said they wanted it to have at least eight or more hours of battery life; 36 percent said they were okay with a battery life of five to seven hours; 23 percent said that they would expect two to four hours of battery life; and only 3 percent said they were okay with a battery life of two hours or less.
• A significant majority of respondents were not shy about using wearables if giving the opportunity; in fact, 92 percent said they would use them or try them out.
• Finally, if a commercial version of Glass were available, a significant majority (74 percent) of respondents said they would definitely buy it.
Wearables in HospitalityWhen it comes to the use of new technology, the hospital-ity industry is usually one of the first ones to be impacted. This is because early explorers use this new technology in their daily lives when visiting restaurants and hotels, and during their travel. Meanwhile, the hospitality industry is just beginning to recognize how this new technology trend will impact consumer behavior. In fact, the hospitality industry is approximately three years behind mainstream technology trends. For instance, the emergence of Web 2.0 or social web, made social media channels a mainstream trend, starting around 2009. However, it took three years for the major part of the hospitality industry to use social media channels. According to Smith Travel Research (STR) Lodging Industry Outlook (2014), currently 93 percent of
hotels are using social media channels; however, only 55 percent of them have employed someone to manage their social media. Furthermore, 38 percent of them have not employed someone to manage their social media or have not experienced the influence of social media marketing on their hotels, and 7 percent still need to be convinced that we are in the era of Web 2.0, i.e. social web. Are we prepared for the new benefits and challenges of wearables?
In fact, why should the hospitality industry be ready for wearables? Whether you are a hospitality industry profes-sional, an academic or a consumer, very soon you will be seeing people using wearable technology in your business, your educational institution, your travel destination, or even closer to home, where you live and shop. Whether it’s an Apple Watch, Google Glass or some other afford-able or affluent wearable device, 2015 will see this new trend of wearables. In fact, wearables will pave the way for Web 3.0, an intelligent or semantic web. In Web 3.0, users will be able to integrate multiple devices and access them together, to effectively and efficiently search and browse the Web. For instance, wearables will be able to send you a notification through voice command reminding you of a meeting in the next hour, and calculating from your current location that you will have to start that direction in the next five minutes (based on its analysis of your location, the destination of your meeting and current traffic), and will ask you if it should notify Uber to get you to the meeting on time. Using hands-free technology and simple voice commands, you will find that wearables can enhance your quality of life. However, this does underscore the need for a Super Wi-Fi infrastructure (Wi-Fi that is accessible any-where and everywhere) among regional businesses, to allow for the wider use of wearables and shape the future of Web.
In any case, wearables are here. The question is not about when they will arrive, but how we can measure their influence on the daily use of technology, and its impact on businesses. We now know that the majority of users fully intend to use wearables, and significant number of them are willing to buy them if they are available in the com-mercial market, as soon as the price, battery life and app integration with their other devices meets their standards and needs. In this digital age, consumers are using multiple devices, and they will likely be happy to integrate them into one wearable device. We need to be studying how to reach the non-explorers, or reluctant technology adopters, and understand who these people are, and their concerns about using wearables. In the business world, we need to be learning best practices for using wearables, both from the business enterprise perspective, and from the perspective of our customers. Obviously, issues of privacy and security are very important to consider in coming days, so that we can foster a safe, ethical and more ideal use of wearables in tomorrow’s world. Optimistically, the hospitality industry should be proactive, striving to lead this technological trend and be prepared for wearables and the future of the web. ■
tech trends
14 Winter 2015
KaekoShirasu-Bailey,CPA([email protected])isaseniormanagerwithMcGladrey’snationalclubpracticegroupandisbasedinSanFrancisco,Calif.PhilipNewman([email protected])isaleaderofMcGladrey’snationalprivateclubpractice,based in Fort Lauderdale, Fla., and works exclusively with private clubs across the country.
“If a business were a car then the business owner would be the driver ... and as the car travels down the highway at 60 mph,
the controller function is like the rear view mirror show-ing the driver where he has been. The CFO function is
like the windshield and headlights, showing the driver where he is going and helping him to prepare to turn, slow down, speed up, etc. The purpose of the control-ler is to produce timely and accurate monthly finan-cial statements. The purpose of the CFO is to help prepare and execute the strategic financial plan.” — Duane Tolan, TolanCFO
The 2014 HFTP Florida Regional Conference brought many hospitality finance professionals together in Estero, Fla. this past July. While the
conference offered many varied programs, one of the best attended sessions involved a panel discussion of
chief financial officers (CFO) from three of the state’s many country clubs. The panelists shared their experiences
and suggestions on how club controllers can make the move into the CFO role. The session proved extremely relevant
since there has been a definite trend in recent years, where the performance expectations for the accounting and finance function
in clubs have increased significantly. As professionals who spend thousands of hours each year in club boardrooms and with club lead-
ership, we will share in this article the 10 most common best practices that we regularly encounter from top performing club financial executives
across the country.
Attend board meetings — the whole meeting.Some CFOs are only invited to attend a portion of the board meetings, in order to present the financial results for the month. But what about the financial impact of the decisions made during the rest of the meeting? For instance, new membership programs — if a CFO is notified of the program after the fact, they may not have the opportunity to let the board know that when dollar credits or incentives are involved, the club may have to issue
toP 10 BeSt PrActiceS for A cLUB cfo
club finance
By Kaeko Shirasu-Bailey, CPAand Philip newman, CPA
The Bottomline 15
members 1099s for incentives of a certain magnitude. This knowledge may impact the amount of incentives the club may want to give or how it should be timed. If you are being told that your participation at board meetings is not required — ask why.
Participate in policy setting discussions to improve the management of financial information and perfor-mance of the club. Successful CFOs are looking for opportunities to improve the policies of the club, not just waiting for the general manager or the board to tell them what policy needs to be in place or changed. For example, it’s surprising to see how many clubs do not have a formal written capitalization pol-icy or a purchase order policy. These policies not only help streamline the process, but also prevent unwritten, informal policies from getting changed every time the club has a new board. Consistency in practice is a very important part of financial record keeping.
Analyze, don’t just report.What do you include in your internal financial package? Do you provide the department heads with weekly/daily flash reports? Providing the departmental income statement
and the balance sheet on a monthly basis does not provide enough meaningful information in order for management to make good decisions. The top CFOs in the industry are pro-viding management with daily flash reports so that opera-tions can react quickly to any deviations from their forecast.
Tailor your message to your audience.While analyzing and reporting Key Performance Indicators (KPIs) and ratios are important, it’s also important to know what information to provide to whom. Department heads and the general manager need more detailed information on a timely basis, while you probably do not want to inun-date the board with the same level of detail. The general manager probably wants to see the information you will be providing the board with beforehand so that they can be prepared to answer any questions (and so should you).
Commit to lifelong learning.Whether you’re a CHAE, CPA or a CA, staying current on accounting issues and knowing how to research is impor-tant. For instance, have you evaluated how the new revenue recognition standard will impact your club’s reporting of initiation fees? What will your financials look like when all leases eventually became capital? How might that affect
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club finance
16 Winter 2015
debt covenants your club currently is subject to? While your auditors will tell you the correct recording during the audit, the top CFOs are thinking about these things as they come up and even if they don’t have the answers them-selves, they will contact their auditors in advance so that they can record the transactions correctly upfront, rather than having an audit adjustment. Whether it is as simple as committing to attending local, regional and national HFTP events or studying for another designation so you can bring even greater value to your position at your club, being satis-fied with the status quo is arguably a career risk that is not worth taking in today’s financial climate.
Lean on your auditors.If you only see/talk to them once or twice a year, you are buying a commodity; talk to them regularly and you are buying a business advisor. This can only help with our pre-vious point on lifelong learning. Hopefully your audit firm has significant expertise and experience in your industry and can help your understanding of developments in the finance field, but also in the club industry generally. Ask for their guidance on how to deal with treasurers or finance committees, or even general managers. Your auditors should be able to tell you what each of those individuals or bodies is typically looking for in a club CFO, and how you can work on delivering that.
Become a transaction advisory specialist.Embed yourself into the discussion concerning new debt, leases or membership initiatives so you can provide informed guidance on how entering into these various transactions can impact your financials. Don’t wait for the document to be handed to you; or if you do, at least read the documents — all of them. As the club CFO, you need to have the final, signed versions of all significant agree-ments. Don’t wait for the auditors to ask for them as part of the yearend audit — there very well could be items in those documents that require, at a minimum footnote disclosure in your annual financial statements, or possibly a significant accounting entry. Deferred compensation agreements and derivative agreements embedded in loan documents are two of the best examples of arrangements a club CFO should be proactively monitoring at his/her property.
Learn the soft skills.Quite frequently we hear frustrations from club CFOs of how they struggle to connect with others at their club — be it department heads, the general manager or perhaps committee members and board members. The best CFOs understand how to connect with each of these stakeholders. Since board and committee members can often change fre-quently, how do you handle the different personality traits? While part of this best practice overlaps our previous point of tailoring your message for your audience, this skill deals
more with how you share information with different parties, not necessarily what information you share. Some GMs or treasurers are detail oriented and want the whole backstory to your message; others just want the punchline. Think back on our lifelong learning point — have you ever attended a session on how to deal with different personalities? Our firm requires this type of training before allowing anyone to become a career advisor to another employee. There are many types of this training being offered, with DiSCprofile being just one example, but it would seem to make great sense — how can you expect to maximize your communi-cations with others at your club if you don’t understand and appreciate how they communicate and operate.
Embrace the club’s strategic plan and play your part in its formulation.We will keep this point brief since so much has been writ-ten in club industry literature about strategic planning. As professionals who often become involved in the process at many clubs, it is still frightening to us how many clubs go deep into the strategic planning process without involv-ing the finance professionals at their club. If your club is going through the process, or is thinking about it, ask to be involved. If you don’t want to be involved, you can’t really complain if, when the process is complete, the club charts a path that you don’t think makes sense. Take ownership of your future as the CFO of your club — seek to play an ac-tive role in strategy development and you will increase your value to your GM and your board.
Think beyond your department and your club. We began this article with a reference to the 2014 HFTP Florida Regional Conference. One of the overarching themes of the conference education was helping finance individuals understand how the various components of their club operations really worked. With speakers ranging from golf course superintendants, to membership recruitment specialists, the attendees got a peek behind the curtain at many significant club disciplines. So ask yourself, do you really know what’s involved in managing the various facets of your club? Have you visited the department heads at their departments? Do you stay on top of related industry thinking: restaurant, golf, hotels? What business books or periodicals do you read to stay current on best practices?
Train your team so you can trust them.Yes, we know we said we had 10 points to share, but we understand the reality is that you can’t accomplish all of the above if you can’t rise above the trench of the daily pro-cessing. Train and empower your team so you can delegate more duties. If they can’t be trained then you need to do what the CFO in any business would do — make the busi-ness case to your GM/board for upgrading the talent so you can be the CFO the club needs. ■
club finance
The Bottomline 17
it is unavoidable; every year, we receive the dreaded phone call. It comes in early April: a new client
calls very excited about sponsoring a foreign national (one who is not a U.S. Citizen or U.S. Permanent Resident) who is a current or potential em-ployee. I have to explain that the client called two weeks too late and there is little that can be done for the next 18 months. The client then has to tell its employee that he or she is likely going to have to return home or is unlikely to be able to be hired.
Why does this scenario play out ev-ery year? It is due to the annual H-1B visa filing deadline.
The BasicsFirst, let’s understand the basics. An H-1B visa petition is available to an employer if it is sponsoring an employee who has, at a minimum, a bachelor’s degree or the foreign equivalent and will be working for the employer in a job that requires, at a minimum, a bachelor’s degree or the equivalent. Importantly, experi-ence can be accepted in lieu of a degree. H-1B visas are year-round visas that are granted for up to three years initially.
Preparing for u.S. H-1B visa filings and understanding visa and green card options for club and hospitality organizations
The H-1B Lottery on April 1st Because the H-1B visa is the most common type of visa in the United States, Congress limits the amount of H-1B visas it issues annually in its attempts to protect U.S. jobs. Therefore, every year, 85,000 H-1B visas are available, with 20,000 of those visas only available to companies sponsoring employees hold-ing, at a minimum, master’s degrees from U.S. institutions. If the government receives more H-1B visa petitions than it is allowed to approve under its Con-gressional mandate, it conducts a random lottery every year to determine which petitions to review. Those not selected in the lottery are returned to the employer without ever getting in front of an immigration officer.
The first day that H-1B visa petitions are accepted for the annual lottery is April 1 and the visas, if approved, take effect on October 1. In recent years, the H-1B visa allotment has been exceeded on the first day that the government begins accepting petitions. Therefore, employers that do not file petitions on
Keith A. Pabian is an immigration attorney at Pabian Law, LLC. He has developed a unique niche in representing organizations in the club and hospital-ity industries across the nation in visa and immigration matters. He can be reached at [email protected]. This article was prepared for educational purposes only.
SUPPorting A mULti-nAtionAL workforce
By Keith A. Pabian
human resources
18 Winter 2015
April 1 have been unable to sponsor their employees and must wait a full calendar year to re-apply.
So when should you start working on the H-1B visa process? We start talking to clients in January with the aim of starting the process in early February. January is a great time to figure out if anyone on your staff or any potential hires might need visa sponsorship and to initiate the pro-cess. Do not wait to start the process beyond February 15th or you risk not being able to file the petition in time for the annual filing deadline.
The H-1B TrapTo make matters worse, the H-1B cap affects thousands of students who have been studying in the United States. Following their graduation, foreign national students often receive one year of work authorization to work for any employer in a job related to their field. This is called Optional Practical Training (OPT).
Now for the trap: OPT usually runs from the date of the student’s gradu-ation for the next 12 months. There-fore, if the student graduated in May
2014, her OPT would likely expire in May 2015. However, as previously discussed, the H-1B visa petition must be mailed to the government no later than March 31. Therefore, employers need to be careful to start the H-1B visa process no later than mid-February even though their recent college graduate employees may still have months of work authorization remaining.
Qualifying for an H-1B VisaWhat positions qualify for H-1B visas based on being able to prove that, at a minimum, a Bachelor’s degree or foreign equivalent is required? First, managerial positions generally qualify. Therefore, dining room man-ager or operations manager are two viable H-1B visa positions. Addition-ally, if an argument can be made that it is common in the industry that other employers require certain positions to hold Bachelor’s degrees, it can be successfully argued that the position meets the H-1B visa requirements.
For example, let’s pretend that you are the controller at a club in Martha’s Vineyard, Mass. You are interested
in sponsoring a spa director for an H-1B visa. The spa director received a bachelor’s degree from the University of Florida. To the government, spa directors may not be a position that requires a bachelor’s degrees for entry into the position. However, we can show in the H-1B visa petition that in the club and hospitality industries, it is common for employers to require, at a minimum, a bachelor’s degree for spa directors. Making this argument would lead to a great and viable H-1B visa petition.
H-1B visa alternativesWhat visa options are available to employers when the H-1B visa is no longer an option? The first and poten-tially best option — especially for the club and hospitality industries — is the H-2B visa.
The H-2B seasonal visa is avail-able for up to 10 months in duration and can be applied for annually. We help those in the hospitality and club industries to define their seasons of need — meaning what periods are the H-2B visa workers needed and what are the busiest months of the year for these organizations. Once the H-2B visa process is implemented, it can be a very straightforward visa route for organizations year after year.
H-2B visas have become very popular and prevalent in the club and hospitality industry. Clients are find-ing that a more experienced and pro-fessional international workforce can be achieved using the H-2B seasonal visa. Employers can bring back the same employee year after year on the H-2B visa, allowing for less training, more familiarity between the em-ployer, employee and the employer’s customers/patrons, and less stress in wondering if the employee will be a good staff member.
This translates into the H-2B visa being a safety net for the H-1B visa as, even if you file the H-1B visa properly at the right time of year, there is no guarantee that it will be selected in the annual lottery. Having
LEADING LESSONSApplying for a Work Visa in the united States• Start H-1B visa petitions no later than February 15 every
year to allow for April 1 filing in time for the lottery.
• Conduct an annual visa review in January of every year to make sure you understand your visa needs.
• Don’tfallintotheH-1Btrap:determiningifrecentcollege grads are working at your organization and if they are foreign nationals.
• H-2B visa petitions are a great option to allow a person to remain in the United States if not selected in the H-1B visa lottery.
• Green card petitions should be considered after a visa is secured.
human resources
The Bottomline 19
an H-2B visa program in place allows employers to bring back employees year-after-year while continuing to sponsor them for H-1B visa status. Once the H-1B visa is approved, the employee can change from H-2B seasonal visa status to H-1B year-round visa status.
The biggest challenge surrounding the H-2B visa pro-cess is ensuring that there is enough time to go through the application process. We always advise clients to start the process five months prior to the date that they need their H-2B visa workers. Therefore, if your organization is inter-ested in learning more about the H-2B visa process, it is worth starting the discussions as early as possible to ensure that there is enough time to go through the process.
Other alternatives to the H-1B visa are much more fact-specific. For example, what is the employee’s nationality? Is your organization privately owned, and if so, what are the nationalities of the owners? Does your organization have affiliated entities outside the United States, and has the em-ployee ever worked at any of those organizations? Answers to these questions will quickly determine what, if any, other alternatives there are to the H-1B visa.
Finally on the visa front, always remember the O-1 visa, which is available to those that have “extraordinary ability.” While this may sound like a high bar to meet, for high-level employees at your organization, chefs and others that have been in the spotlight publicly or in their industries, this is a visa option to explore.
Green Card OptionsCongratulations! You have now made it through the H-1B visa lottery or found a different visa option that is allow-ing you to employ your foreign national employee. Your foreign national employee now approaches you about green card sponsorship. What is a green card and what does spon-sorship mean for your organization?
A “green card” is the slang term for U.S. Lawful Perma-nent Residency. A green card allows a person to live perma-nently in the United States while working for any employer.
In my opinion, green card petitions should generally only be considered after a visa is secured. Applying for a green card does not provide lawful status to a person until the very last stage of the process. Therefore, it is critical that the em-ployer ensures that the employee maintains valid visa status while the green card petition progresses.
ConclusionBecause of the major risk of losing employees if H-1B visas are not timely filed, a January review of your employ-ees, their nationalities, and their visa situations is a must. Being proactive in the visa process will allow your orga-nization to have a diverse, multicultural and professional workforce with much less stress of worrying about looming deadlines. ■
HFTP International
Hospitality TechnologyHall of FameNominations OpenAs technology gains greater and greater importance in our industry, it is important to recognize those individuals whose hard work and creative thinking has helped establish the developments we take advantage of today.
Nominate a deserving individual to join a group of prestigious inductees. Since1989,36 individuals have received this award as a reflection of their contributions to the hospitality industry.
Find details at www.hftp.org or contact [email protected]
Nomination deadline:April 13, 2015
human resources
20 Winter 2015
the business world is rapidly changing in new and unpredict-able ways. One thing which has
persisted, however, is the need for firms to have reliable and valuable ac-counting information. Businesses have traditionally focused their information gathering, processing and analysis on internal, firm-specific information. In-creasingly, however, they require more and better information about their position vis-à-vis their customers and competitors. Strategic Management Accounting (SMA) helps analyze such externally-oriented accounting information and guides decision-makers. SMA has a strategic focus and is future-oriented, and researchers have begun to suggest that it may, in combination with the right business strategy, improve firm performance.
Previous research has suggested that SMA techniques may be more valuable for firms operating in highly competitive industries, since they require more accurate information on their business environment in order to better guide their decision-making. The hotel industry is a prime example of such an industry. Besides intense competitiveness, it is characterized by profit instability caused by external factors such as fluctuating demand, oversupply and product perishability.
WiardaWittemanisanassociateinauditandadvisoryatDeloitteSwitzerland([email protected]).DemianHodari,Ph.D.isaprofessorofstrategicmanagementatEcolehôtelièredeLausanne([email protected]).
In spite of an apparent need for better competitive and customer informa-tion, and the potentially large benefit that SMA can provide, there has been little research about SMA in the hotel industry. Thanks to HFTP, and with the help of 80 of its members who completed our 15-minute online survey, we were able to investigate if undertaking SMA is a worthwhile pursuit for hotels. A short intro-duction to SMA precedes our presentation and discussion of the research findings.
SMA — What Is It?SMA is comprised of a variety of accounting techniques which can help manag-ers to improve their decision-making. These techniques can be divided into the following categories, each of which serves a different purpose:• Competitor accounting • Customer accounting• Planning control and measurement • Strategic costing• Strategic decision-making
Some of the most commonly used techniques falling in the different catego-ries are described in Exhibit 1 (page 21).
AccoUntAntS: gUArdiAnS of StrAtegy? The value of strategic management accounting in the international hotel industry
By Wiarda Witteman and demian Hodari, Ph.d.
Strategic Planning
22 Winter 2015
techniques, managers obtain precise and valuable information, which should enable them to make difficult decisions with more confidence and success. Resources can be allocated much more effectively, which can consequently help reduce costs and improve business performance.
The Right Information?Different firms require different types of information to guide their decision making. For example, a hotel which is subject to heavy competition is likely to set its strategy with competitors’ ac-tions, customer expectations and other environmental factors in mind. A hotel which is subject to less competition, however, may find a strategy focused on internal efficiency and lowering expenses more valuable, and may thus base its decisions mainly on internal information. Depending on the strat-egy of a firm, information needs vary.
Previous research has demonstrated that the above often holds true, and has confirmed that firm performance can be enhanced through a strong fit between an organization’s strategy and its accounting system. This is because different competitive strategies require different types of accounting informa-tion, and not every system can provide the distinct information a company needs. SMA is an example of one such system, providing strategic, external and long-term accounting information to decision makers. As such, SMA seems to be especially suited to firms, and in particular hotels, which are subject to a challenging external envi-ronment (i.e. the relevant physical and social factors outside the boundaries of the business, such as competitors and customer expectations, which af-fect a company’s decisions and ability to function).
SMA in the Hotel Industry: Worth the Effort?This is why we set out to further investigate the value SMA could bring to hotels, especially to those with an externally-oriented strategy. We expected that these hotels may benefit
eXhiBit 1. commonly Used SmA techniques
TECHNIQUE DESCRIPTION
Attribute Costing The costing of specific product attributes that appealtocustomers(e.g.:operatingperformancevariables; reliability, warranty arrangements; and aftersalesservice).
Benchmarking The comparison of company performance to an ideal standard.
Competitive Position Monitoring
The analysis of competitor positions within the industry by assessing and monitoring trends in competitor sales, market share, volume, unit costs and return on sales. This information provides a basisfortheassessmentofacompetitor’smarketstrategy.
Competitor Cost Assessment
The provision of regularly scheduled updated estimates of competitor costs.
Competitor Performance Appraisal
Thenumericalanalysisofacompetitor’spublishedstatements as part of an assessment of a competi-tor’skeysourcesofcompetitiveadvantage.
Customer Profitability Analysis
The calculation of profit earned from a specific customer or customer segment. The calculation is based on costs and sales that can be traced to a particular customer or customer segment.
Integrated Performance Measurement
A measurement system which focuses typically on acquiring performance knowledge based on customer requirements and may encompass non-financial measures. This measure involves departments monitoring those factors which are critical to securing customer satisfaction.
Strategic Costing The use of cost data based on strategic and mar-keting information to develop and identify superior strategies to produce a sustainable competitive advantage.
By making use of company, competitor and customer information, applying SMA techniques to process the information and obtain insight-ful analyses, managers may better understand the potential consequences which can arise from distinct business strategies. For example, information on competitors’ fixed and variable costs, market share and resource al-
location can help managers to decide upon their own hotel’s pricing strat-egy. Likewise, knowing the costs and benefits of competitors’ investments (e.g. a new payroll system) may help a hotel to make better decisions on simi-lar investments. Please see Exhibit 2 (page 23) for many other commonly cited reasons to use SMA in the hotel industry. Due to the various SMA
Strategic Planning
The Bottomline 23
eXhiBit 3. Strategic choice
Market Orientation Referstoacompany’sabilitytogenerate,shareandrespondtoexternalinformation, which in turn helps managers to better understand their business environment. Being strongly market-oriented is, according to previousresearch,thebestwayabusinesscananticipatecustomers’continuously changing needs and thus achieve superior customer value. Customers will recognize the superior value, which in turn is expected to improve firm performance.
Differentiation Strategy A hotel pursuing this strategy can achieve its competitive advantage by positioning itself as unique in the market. As such, customer loyalty will increase, resulting in lower price sensitivity. A hotel can then increase prices and enjoys higher margins, leading to above-average returns in the industry.
Cost Leadership Strategy A hotel pursuing this strategy can achieve a competitive advantage as its cost structure is lower, thereby allowing the hotel to either pass on the savings via lower prices to customers, or by reinvesting some of the additional earnings in the hotel and its departments. This can also lead to above-average returns in the industry.
1. Interested in the details of the statistical analy-sis? Please don’t hesitate to contact the authors.
more from SMA than hotels pursuing an internally-focused strategy.
Whereas the first group may rely on external analysis due to fierce compe-tition and rapidly changing customer expectations, we assumed that the sec-ond group would be likely to use inter-nal analysis to deal with specific inter-nal problems, such as low efficiency, turnover or cash flow problems. The first group of hotels would be able to benefit from SMA techniques when doing external analysis, resulting in better information and improved fi-nancial performance as a consequence. The second group would, we thought, require more traditional cost and/or management accounting information to deal with their internal issues.
Strategic ChoicesThus, in order to examine whether SMA shows a better fit with some strategies more than with others, we took three different common strate-gies that previous research has shown hotels to often pursue: a market-orien-tated strategy, product/service differ-entiation and cost leadership. Not only are all of those strategies said to lead to competitive advantages and im-prove financial performance on their own, we also believed that a combina-tion of these strategies and SMA could result in superior performance. A short review of the three strategies can be found in Exhibit 3 (right).
The following three questions thus guided our research quest: • Does SMA help market-oriented
hotels to improve their financial performance?
• Does SMA help hotels which fol-low a differentiation strategy to im-prove their financial performance?
• Does SMA help hotels which follow a cost leadership strategy to improve their financial performance?
We used advanced statistical regression techniques to test these relationships1.
eXhiBit 2. most commonly cited reasons to Use SmA Onascalefrom1(leastcommon)to5(mostcommon)
0 1 2 3 4 5
1. Strategy development
2. Performance measurement
3.Sensitization(raiseawareness)
4.Legitimation(highlightfeasibilityand/ormeritsofdecisionstaken)
5. Investment appraisal
6. Budget allocation
7. Justification of department's existence
4.1
4.0
3.7
3.3
3.2
3.2
3.0
Strategic Planning
24 Winter 2015
The RespondentsAmongst the 80 respondents who completed the questionnaire, the majority were hotel general manag-ers (24 percent), followed by financial controllers (19 percent), financial directors (18 percent) and accounting managers (8 percent). Hotels had, on average, 353 rooms and 220 employ-ees, and were located mainly in the United States, but also in various other countries (e.g. Canada, Switzerland, Holland, etc.). Further characteristics of the sample are illustrated at left.
Results: Market OrientationAccording to the study's findings, a market orientation helps hotels to im-prove financial performance. Indeed, as is often argued, managers should look beyond the organization, as it is in the external environment where the business is challenged and profits are made. More importantly for our study, the findings confirm an even stronger relationship between market orienta-tion and performance when hotels made use of SMA techniques. This can be explained as the information needs of market-oriented firms are often mainly externally-focused. SMA practices are likely to be very use-ful when analyzing the information, leading to more reliable and valuable information, which ultimately allows those hotels to generate greater profits.
Results: Differentiation StrategyOur research confirmed previous stud-ies in that we found that a differentia-tion strategy helps hotels to improve financial performance. More interest-ingly, we also found that if these same hotels make use of SMA, they outper-form their rivals even further. These findings were in line with our expecta-tions, as hotels pursuing a differentia-tion strategy are more likely to focus on the external environment, which is dynamic and constantly changing, in order to differentiate and remain per-ceived as unique. Their focus is thus externally and future-oriented, and so is their need for information which SMA helps provide them with.
Location of Hotels
Category of Hotels
eXhiBit 4. respondent demographics
Airport, 4%
Urban,39%
Resort,18%
Small metro/town,
Suburban, 15%
Other, 7%
Interstate, 1%
Luxury, 15%
Economy, 2%
Midscale, 16%Upper midscale,
Upscale, 23%
Upper upscale, 20%
Hotel Operator
Management Co., 71%
Independently
Strategic Planning
The Bottomline 25
suited to the hotel strategy may al-ready help to gather valuable strategic information. Furthermore, regardless of the fact that information collection can be expensive, most customer and competitor information actually seems to be readily available in the hotel in-dustry and less costly to collect than in other industries. As turned out during the study, hotel managers often tour competitors' hotel properties and are involved in both formal and informal networks to collect information (see Exhibit 5 above for an overview of the most popular sources of SMA infor-mation as determined in our study as well as the Decision-making strategy article). Trade organizations such as HFTP, hospitality magazines, owner conferences and information provided by the corporate offices of chains and affiliations are considered as very helpful. Furthermore, information varying from simple room occupancy information to payroll and produc-tivity ratios, information on fixed and variable costs, and even parts of
financial statements are frequently exchanged amongst hotel managers.
ConclusionTo sum up, this study found that mar-ket orientation and a commitment to a specific competitive strategy improve hotel performance. More importantly, it found that when the hotel's strategy and orientation are externally rather than internally-focused (i.e. a market-oriented or differentiation strategy versus a cost leadership strategy), SMA strengthens this relationship. The mediating role of SMA appears to be dependent on the context, however, and is, besides strategy and degree of market orientation, largely influenced by other internal and external fac-tors such as organizational culture, competitive intensity of the industry, perceived environmental uncertainty and rapidly evolving customer needs. This challenging environment makes the need for information, and ana-lytical techniques such as SMA, ever more important. ■
Results: Cost Leadership StrategyIn spite of a positive relationship between a cost leadership strategy and financial performance, SMA does not help hotels following a cost leadership strategy to further improve perfor-mance. Hotels pursuing a cost leader-ship strategy are generally focused on reducing costs and improving operational efficiency, and information needs are thus more internally-fo-cused. Their reduced need to analyze the external business environment could explain the reduced value of SMA to such firms.
Costs Versus BenefitsIn spite of the positive relationships shown in this study with performance, SMA adoption across industries remains limited. This is partly caused by the fact that managers often do not fully understand SMA, and suspect that its techniques are too difficult or time consuming to implement. They further assume that high costs are associated to a fully-integrated SMA system, but forget that many of its techniques are relatively easy to imple-ment. Meanwhile, implementing SMA requires a new company mindset in which a long-term rather than a short-term focus is required. As this may not coincide with the pressure to gener-ate immediate profits, it may be seen as negatively impacting a manager’s performance measurement scores.
In spite of this resistance to change, implementing SMA in the hotel in-dustry may bring significant benefits, as has been shown in this study, and managers should thus not be discour-aged by its seemingly high costs of implementation. SMA can be a power-ful tool for information analysis, and, as mentioned before, be of especially high value to firms whose competitive advantages are based on outmaneuver-ing the competition.
SMA: Worth a TryIn spite of what is commonly thought, certain SMA techniques are relatively easy to implement and require little investment. Selecting a few techniques
eXhiBit 5. Popular Sources of SmA information Onascalefrom1(leastcommon)to5(mostcommon)
0 1 2 3 4 5
1.Thirdpartydata(e.g.STR)
2. Customers
3. Trade journals and/or business magazines
4. Informal networks
5. Employees
6. Suppliers
7. Competitors' former employees
8. Competitors' employees
4.3
3.5
3.4
3.3
3.1
2.7
2.5
2.4
Strategic Planning
26 Winter 2015
Producing complete, accurate and timely financial statements and improving the internal con-
trol over the operation are the main tasks of the financial controller. With today’s technology, such tasks are much easier to manage and gives the financial controller the time to be the “analyst.” One who will now be in a position to produce many different and meaningful financial data for all decision-makers, owners and opera-tors who constantly rely on financial reports, detailed enough to analyze and understand the operational results. Such material will consequently en-able them to take corrective, produc-tive and more profitable actions.
For the operational and financial data to be meaningful, it must be tai-lored for or “made-to-fit” the decision to be made and the decision-maker. Therefore, the controller/analyst should think of the operational and financial data as a deck of cards that can be shuffled and displayed in many different ways to present only the relevant facts that the decision-makers are looking for.
The purpose of this article is to outline step-by-step the process of tailoring the available operational and financial data to serve a specific pur-pose and to present the decision-maker with only the relevant data to be able to take the right course of action.
the deciSion-mAking ProceSS
Essam A. Mohamed, MSA is director of finance Westmont Hospitality Group Canada based in Ontario. He can be reached at [email protected].
By essam A. Mohamed, MSA
Steps to achieving a comprehensive analysis and producing meaningful data, regardless of the type of decision to be made
financial management
The Bottomline 27
The “decision making process” can be defined as “the process of identifying the available alternatives and the relevant factors that should be considered, quantified and analyzed, to choose the most intelligent course of action under the existing circumstances.”
Should we buy the hotel’s sign, lease or rent it? Is it better to do the laundry in-house or outsource it? Is it better to lease out the restaurant facility or keep managing it? Is it more profitable to operate as an independent or to operate under a reputable flag? Is it more efficient to run our own transportation department or outsource the service? Is it more profitable to convert suites to double double rooms or vice-versa?
These are just some of the types of decisions that hotel operators face from time to time and to do so, they need to be supplied with meaningful data that can help them under-stand the available options (alternatives); compare only the relevant factors to reach an intelligent conclusion.
In the decision making process, the decision to be made will only be as good as the analysis conducted. The relevancy of the data is vital, its accuracy is a must and its objectivity is essential. The clarity of the data is key and the way it is communicated to the decision-maker will make all the difference. Following is a description of the deci-sion making process or the basic steps that should be taken by the analyst to achieve a comprehensive analysis and produce meaningful data, regardless of the type of decision to be made.
STEP 1: Understand the Type of Decision to be MadeBefore the analyst gets into tailoring the data he/she must clearly understand the issue at hand. What do we need to achieve at the end of the day, which is going to be the desti-nation in mind during the entire process.
Also, knowing the people who will make the decision is very important because it is part of the process. The whole exercise will be presented to them; therefore, getting to know them, their philosophy, style, goals and how much they understand the subject matter is essential.
If the analyst happened to be an outsider, he/she must take the time to get familiar with the operation first, by conducting a complete tour of the operation to get familiar with its layout, facilities and equipment. That could help in understanding either some of the limitations imposed on the operation or some of the reasons for its success. Take the time to visit and tour the competition; it will make your recommendations more meaningful and achievable.
STEP 2: Identify All Available AlternativesAn alternative is an option or choice, and the analyst must capture all available alternatives or the analysis will be incomplete. For example, let’s assume that the decision to be made is to choose between the hotel to run its own transportation department or to outsource the service. In this scenario, a few questions should be considered, such
as, are we going to buy, lease or rent the vehicles? Are we going to employ the drivers or contract them? Are we going to share the expenses and the service with a sister opera-tion, a competitor or will we operate alone. Each answer is a separate option or an alternative.
STEP 3: Eliminate the Unacceptable and Unachievable AlternativesNot every available alternative will be considered. Some of them, for one reason or another, will be discarded leaving only those acceptable and achievable to be considered un-der the circumstances. Alternatives might not be acceptable for financial reasons, legal issues, moral concerns and/or practicality. It is equally important to mention the alterna-tives that were on the table and ignored and the reasons for excluding them in the executive summary.
STEP 4: Account for All Relevant FactorsIf the decision to be made is to select or hire a financial controller from among a few applicants, then accounting degree, knowledge and experience are considered relevant factors. On the other hand, being a faithful husband, loving father and a nice neighbor, although they are good quali-ties, are irrelevant and should not be given any merits or be considered in the hiring process.
Back to the transportation decision mentioned in Step 2, the cost of the vehicle, the monthly repair and maintenance, cost of fuel and the driver hourly pay rate are some of the relevant factors that should be identified in this decision; whereas, the increase in room revenue from offering such service to the guest is irrelevant. Such revenue becomes relevant only if the decision is to choose between offering the service or not. To sum it up, it is the subject matter and the alternatives that will determine what makes the data relevant or not. Simply put, if the value of the factor is constant under all alternatives, then the factor is irrelevant and vice-versa.
Step 1: Understand the type of decision to be madeStep 2: Identify all available alternativesStep 3: Eliminate the unacceptable and
unachievable alternativesStep 4: Account for all relevant factorsStep 5: Eliminate the unquantifiable factorsStep 6: Select the proper analysis periodStep 7: Quantify the relevant factors and prepare
comparativesStep 8: Create your own toolsStep 9: Rank the alternatives and draw a conclusionStep 10: Prepare the executive summary
Steps to making financial decisions
financial management
28 Winter 2015
STEP 5: Eliminate the Unquantifiable FactorsSome of the relevant factors, once quantified, could become immaterial, relatively speaking while others could be very important in the decision-making process, yet cannot be quantified for comparison purpose. For practical rea-sons, these types of factors should be eliminated from the comparison. However, it is equally important to mention the relevant factors that were ignored and the reasons for excluding them in the executive summary.
STEP 6: Select the Proper Analysis Period Due to the fact that some expenses and/or income can be a one-time occurrence, others could be due only in subsequent periods and the flow of cash could be modest in the early periods and strong in later periods, comparing alternatives over a short period of time can be misleading. Therefore, the length of the analysis period should be carefully selected to cover all such possibilities. Again the period to be selected depends on the type of decision to be made. The more mate-rial the decision is, the longer the period should be. In some cases the analysis might cover five years or more.
STEP 7: Quantify the Relevant Factors and Prepare ComparativesOnce the acceptable and achievable alternatives are identi-fied and the material and quantifiable relevant factors are accounted for, the analyst needs to quantify each factor un-der all alternatives using the proper tool or technique, in a comparative format. There are a lot of tools and techniques available for the analyst to choose from. It is important to remember that the proper tool or technique depends on the type of decision to be made.
The Statement of Income, Operating Statements, Bal-ance Sheet and Statement of Cash Flow recommended by Uniform System of Accounts for Lodging Industry (USALI) and widely used by hotel operators, are basic tools. Such tools become more meaningful when compared against budget (goals), prior years (trends), competitors (efficiency) and/or industry average (Benchmark).
Unfortunately, these tools do not satisfy all users, because they are tailored to serve mainly those who are interested in the big picture, not to mention that the operat-ing statement does not measure the total performance of the operating department, also known as profit centers or revenue department, because it separates the operating ex-penses into “distributed” and “undistributed” and does not include the undistributed operating expenses in calculating the departmental profit or loss.
Distributed expenses are the types incurred by and that are relatively easy to trace directly to a particular profit center, whereas the undistributed operating expenses, to a certain degree, are the types that are uncontrollable from the profit center point-of-view. Usually, undistributed ex-penses are pooled by the nature of the expense such as ad-ministrative, marketing, repair and maintenance and energy
in separate departments usually called service or support departments, also referred to as cost centers.
Accordingly, when the analyst uses the operating state-ment in a comparison scenario he/she should keep in mind that the traceability of the expense is a subjective matter, meaning, the accuracy of the data, in part not in total, could be questionable. Therefore, to measure the total perfor-mance of the profit centers the analyst must not ignore the undistributed operating expenses. Zooming OUT on the operational and financial data by allocating such expenses to the profit centers, might be the proper tool to use to make the data more meaningful.
Sometimes the proper tool is Zooming IN on the opera-tional and financial data. For example, zooming in on the Food & Beverage department and treating each outlet as a standalone profit center and allocate all related cost, labor and expenses to that outlet, can be very informative and more valuable than looking at the total food and beverage picture.
Another important tool that can be very informative is to display the operational and financial results per occupied and/or available room in a comparative scenario. It is a perfect tool to measure and compare the operator’s perfor-mance, regardless of the differences between one opera-tion and another. Also analyses such as Payback Periods, Break-even and Net Present Value, are useful and valuable tools in making certain decisions. Ratio Analysis is another great tool the analyst can use to interpret the data and help the decision-maker understand the results.
STEP 8: Create Your Own ToolsSometimes hotel operators face decisions to be made that are repetitive in nature, and using a predetermined tool, like a simple formula or equation can be very helpful and speed up the decision-making process. Using predetermined and preapproved formulas will not only ensure consistency, but also accuracy among the users. See the examples (tools) to use on page 29.
STEP 9: Rank the Alternatives and Draw a ConclusionHelping the decision-makers understand the data by rank-ing the alternatives and drawing a conclusion is part of the analysis process. If the data is relevant, objective and ac-curate it should be supportive to the recommendation.
STEP 10: Prepare the Executive SummaryMost decision-makers do not have the time to read pages of analysis, indexes and spreadsheets; they prefer a brief, called the executive summary that gives the background, the goal, outlines the alternatives, describes the process, the scope of work and summarizes the recommendation.
To conclude, tailoring the available operational and fi-nancial data to produce only what is relevant to a particular decision to be made and the decision-maker is becoming an important role that is expected of today’s controllers. It is an art that we need to not only learn, but also command. ■
financial management
The Bottomline 29
create your own tools
Example 1. Volume Discounts Generally speaking, discounting the rates will not create new demand on rooms, yet we all do it to keep our customers or to steal customers from the competition; but the most acceptable reason to discount the rate is to appreciate the purchas-ing power of the client. A large account expects a volume discount and, to a certain degree, the larger the volume the lower the rate will be, especially if the volume is to be produced in a short period of time, such as a few days which is more common with groups. So the question is: how do we go about figuring out the discounted rate in a simple and justifiable way?
The following equation can be an easy and quick tool in the hand of the decision-maker to calculate the discounted rates to be negotiated:
Discounted Rate = {RackRate–(Volume x Discount Factor)}>Minimum RateD={R–(VxF)}>M
The “minimum rate” is what the hotel considers the floor limit, where the discounted rate cannot go lower than that, and reasonable enough to cover all variable expenses associated with selling and serv-ing the room.
ABC is a corporate account that promised to deliver 1,000 room nights a year, and asks for a special or discounted rate. Accordingly, it will be priced or quoted as follows:
ABC Discounted Rate = {$200–(1,000x5%)}>$90=$150
A pre-determined discount formula definitely makes it easier for the hotel to explain to the client and for the client to understand taking into consid-erationthebrand’srestrictions,ifapplicable,andassuming no negative impact on the main business feeders. Now all that the sales team needs from the decision-maker is a periodic memo determining what the discount factor is going to be: 6 percent, 4 percent, etc.
Example 2. Rate ReductionThe revenue manager has an opportunity to in-crease occupancy only if he/she compromises on the rate that is currently at $200. Using the following equation by the revenue managers will make their lives much easier.
Discount = Current Rate(Future Occupancy % – CurrentOccupancy%)/Future Occupancy % D=R(F–C)/F
$200(55–50)/55=$18.18perroomIn other words, the reduced rate should be greaterthan$181.82
The above equation gives the revenue manager, in seconds, the amount of dollars to let go in the rate($18.18)togettheadditionalbusinesswithoutnegatively impacting the total revenue. We also have to keep in mind that increasing the occupancy by 5 percent will have a negative impact on operat-ing expenses and that it should be calculated and factored in as well. We can either use the number of rooms or the occupancy percentage, because in this relationship the number of rooms available is irrelevant.
Example 3. Banquet Room CompThe decision-maker wants to empower the banquet sales team to make the trade-off decision of how muchfoodandbeverage(F&B)theclienthastopurchase to wave the banquet room rental and to ensure consistency and accuracy. To assist, the decision-maker created a tool for the team to use.
No. of Meals Required = Banquet Room Rental / (CheckAvg.xF&BProfitability%)M=B/(CxP)
1,000/($40x0.32)=78mealsIn this example, to wave the Banquet Room Rental, the client must purchase more than 78meals.
Simple tools can be created to speed up the decision-making process to ensure consistency and to improve accuracy when it comes to small and/or repetitive decisions that need to be made.
financial management
30 Winter 2015
industry reference
with the new edition of the Uni-form System of Accounts for the
Lodging Industry (USALI) just taking effect on January 1, 2015, many hotels are looking at the new report-ing guidelines. It is a new book, with a database online and updated FAQs all ready to go. However, it may also be useful to busy professionals to have an article and also the Q&A from The HFTP Research Center (page 6) in this issue of The Bottomline to summarize some of the major changes and also take a quick look back in time to ap-preciate the evolution of this system of accounts which has served us so well and which will also be celebrating its 90th birthday next year.
The Foundation: Brief HistoryAccountants are known to be orga-nized, they follow rules and regula-tions well, and prefer order, transpar-ency and comparability — all the qualities that match the principles of the U.S. Generally Accepted Ac-counting Principles (GAAP). Hotel accountants are no exception. In fact, they took the lead by publishing the first edition of the Uniform System of Accounts for Hotels in 1926. The Uniform System turned out to be a seminal piece and so useful that clubs,
restaurants, and in the last decade, the spa segment of the hospitality industry, all now have their own uniform systems. The individuals, proprietors and accoun-tants who were responsible for the first edition also had the foresight to form the Hotel Accountants Association of New York City, which later became the found-ing chapter of HFTP.
Over the years, from the second to the current 11th revised edition, the Uniform System strives and ensures to incorporate the changes of the lodging in-dustry and the needs of the users. At one time, the Uniform System was split into two uniform systems, one for hotels and the other for small hotels and motels. The two were reunited in 1996 in the 9th revised edition, and the word “hotel” was replaced by “lodging” to include operations of all scales.
As stressed in the preface of the 11th revised edition, the publication stays true to the original intent of the Uniform System, to provide hotel owners, operators and other parties standardized operating statements and pertinent information within the unique setting of the hotel industry. While users are encouraged to delete irrelevant line items and add more details and develop
A cLoSe Look At the USALi 11th reviSed edition
Part i: the new guidelines and operating Statements for 2015By Raymond S. Schmidgall, Ph.d., CPA and Agnes deFranco, ed.d., CHe, CHAe
Raymond S. Schmidgall, Ph.D., CPA is the Hilton Hotels Professor at The School of Hospitality Business, Michigan State University. Agnes DeFranco, Ed.D., CHE, CHAE is a professor and Conrad N. Hilton Distinguished Chair at the Conrad N. Hilton College of Hotel and Restaurant Management, University of Houston.SheisalsoanHFTPGlobalPastPresidentandaprojectleaderfortheHFTPGlobalHospitalityAccountingCommonPractices(GHACP).DeFranco(2009)andSchmidgall(2002)arebothrecipientsoftheHFTPParagonAward.
The Bottomline 31
sub-schedules as needed, tying them back to the operating statements, us-ers are not to substitute nor add new line items so as to maintain consis-tency and comparability.
The Builders: Financial Manage-ment Committee of the AH&LAThe first edition builders represent three important groups, with nine indi-viduals forming the proprietor’s com-mittee, 12 forming the accountants’ committee and two representing the New York State Society of CPAs and the American Institute of Accountants. Fast forward to almost 90 years later, the Financial Management Committee (FMC) of the American Hotel & Lodg-ing Association (AH&LA) is charged with the responsibility of maintaining the relevancy of the Uniform System and make appropriate changes to the document when needed.
The composition of the committee has also changed over the years, with the membership reflecting the land-scape of the current lodging industry. Therefore, the current membership of the FMC includes academia, asset managers, brand franchising organizations, benchmark reporting firms, certified public accountants, consultants, hospitality management companies, hotel owners, independent proprietors and owner-operated hotels. In addition, industry trade associations worldwide also lend their expertise in developing the proper protocols.
The New Skyscraper: Major ContentsThe 11th edition is presented in five main parts: Operating Statements, Financial Statements, Financial Ratios and Operating Metrics, Revenue and Expense Guide, and Gross vs. Net Re-porting. While this article concentrates on the Operating Statements, it may be appropriate to briefly address the other four sections.
While the operating statements are mainly for internal users such as operators and owners, the financial statements are mainly for external users such as creditors, bankers,
industry reference
stockholders and the like. The state-ments included in this section are the Balance Sheet, Statement of Income, Statement of Comprehensive Income, Statement of Owners’ Equity, State-ment of Cash Flows and the Notes to the Financial Statements. Regular users of the Uniform System would easily detect the new statement of Statement of Comprehensive Income, created to supplement the Income Statement. In addition, further guid-ance of the treatment of inventories, operating equipment and pre-opening expenses can also be found.
Ratios are quick indicators for operators and owners to assess the financial viability of the hotel. While this section is not totally new, more detailed and practical information is included in the 11th revised edition. For example, sample ratios are pre-sented for both the operated depart-ments and undistributed departments, with a recommended schedule of ra-tios that hotels should consider. Since labor cost is one of the prime costs, a recommended labor cost schedule is also included for each department.
As for the Revenue and Expense Guide, the major advantage of the 11th revised edition is that this is now available in electronic form.
Each Uniform System comes with an access code which can be logged on to the AH&LA Educational Institute to access this database, sort, search and even download the information. As a member of HFTP, you also have the access to the Global Hospital-ity Accounting Common Practices (GHACP) database where you can again access the USALI 11th revised edition and compare it to the 10th revised edition and other common practices in other regions of the world (access at www.ghacp.org). However, it is viewable only. Therefore, the best of both worlds is to be an HFTP mem-ber where you can access the GHACP site and also have a hard copy of the 11th revised edition handy.
Finally, the last part of the Uniform System examines gross versus net reporting, including the treatment of surcharges, service charges and gra-tuities. Due to how management con-tracts and other legal documents are specified, it is prudent for all to follow the same way in the calculation of both gross and net amounts. And, with the relatively new legislation in the U.S. regarding certain tips as service charges and that service charges are to be included as income and are taxable, this is an important section for all.
for further reviewMore details on the 11th edition are ahead.
the Bottomline, Spring 2015Part II will detail the new guidance on metrics, especially labor metrics as they affect all areas of a hotel.
the Bottomline, Summer 2015Part III will detail the new section of Gross v. Net
Access the 11th editionThe USALI 11th edition is available for purchase at www.ahlei.org. To get the HFTP member discount, enter promo code HFTPC.
In addition, as an HFTP member, you have the access to the Global Hospitality Accounting Common Practices(GHACP)databasewhere you can access the USALI 11th revised edition and compare it to the 10th revised edition and other common practices in other regionsoftheworld(accessatwww.ghacp.org).
32 Winter 2015
exhibit 1. Summary operating Statement (for operators)Period of: Current Period Year-to-Date
ActualForecast/
Budget Prior Year ActualForecast/
Budget Prior YearRooms Available
Rooms Sold
Occupancy
ADR
Rooms RevPAR
Total RevPAR
Period of: Current Period Year-to-Date
ActualForecast/
Budget Prior Year ActualForecast/
Budget Prior Year$ % $ % $ % $ % $ % $ %
Operating Revenue
Rooms
Food and Beverage
Other Operated Depts.
Miscellaneous Income
Total Operating Revenue
Departmental Expenses
Rooms
Food and Beverage
Other Operated Depts.
Total Departmental Expenses
Total Departmental Profit
Undistributed Operating Expenses
Admin. and General Info and Telecommunications Systems
Sales and Marketing
Property Oper. and Maintenance
Utilities
Total Undistributed Expenses
Gross Operating Profit
Management Fees
Income Before Non-operating Income and Expenses
Non-operating Income and Expenses
Income
Rent
Property and Other Taxes
Insurance
Other Total Non-operating Income and Expenses
Earnings Before Interest, Taxes, Depreciation and Amortization
Replacement Reserve
EBITDA Less Replacement Reserve
Notes:• ForacompleteStatementofIncome,refertoPartII.• Allrevenuesandexpensesshouldbeshownasapercentageoftotaloperatingrevenue,exceptdepartmental
expenses, which should be shown as a percentage of their respective departmental revenue.
Internal and External StatementsThe newly revised USALI contains statements for internal and external us-ers. The financial statements primarily for external users (bankers, creditors, etc.) are contained in Part II of the book and comply with U.S. GAAP. The statements with internal interest consist of operating statements for both operators (Exhibit 1, right) and owners see Exhibit 2, page 33). In addition, 14 supporting schedules are provided, as well as sub-schedules. On the face of the operating statement, operating rev-enue and related departmental expenses are shown for rooms, food and bever-age, and other operated departments. The related schedules provide the details. For example, Exhibit 3 (page 34) is the rooms schedule from USALI.
Comparing and Contrasting Two Operating StatementsExhibits 1 and 2 are the two operating statements as previously mentioned. Both statements are the same from the metrics at the top of the statements through EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Thereafter, the state-ments differ. For statements for opera-tors, replacement reserve is subtracted to equal EBITDA less replacement re-serve. The replacement reserve reflects the cash transfer for the accounting period to the restricted cash as required by the management contract.
The operating statement for owners has several items subtracted after EBITDA prior to determining net income. These include interest expense, depreciation, amortization and income taxes.
Thus, the two statements are the same for operating revenues, depart-ment expense, undistributed operat-ing expenses, gross operating profit, management fees, and non-operating income and expenses.
Discussion of the Operating StatementsThe 11th revised edition provides an operating statement for owners while the 10th revised edition provided an
industry reference
The Bottomline 33
exhibit 2. Summary operating Statement (for owners)Period of: Current Period Year-to-Date
ActualForecast/
Budget Prior Year ActualForecast/
Budget Prior YearRooms Available
Rooms Sold
Occupancy
ADR
Rooms RevPAR
Total RevPAR
Period of: Current Period Year-to-Date
ActualForecast/
Budget Prior Year ActualForecast/
Budget Prior Year$ % $ % $ % $ % $ % $ %
Operating Revenue
Rooms
Food and Beverage
Other Operated Departments
Miscellaneous Income
Total Operating Revenue
Departmental Expenses
Rooms
Food and Beverage
Other Operated Departments
Total Departmental Expenses
Total Departmental Profit
Undistributed Operating Expenses
Administrative and General
Information and Telecommunications Systems
Sales and Marketing
Property Operation and Maintenance
Utilities
Total Undistributed Expenses
Gross Operating Profit
Management Fees
Income Before Non-operating Income and Expenses
Non-operating Income and Expenses
Income
Rent
Property and Other Taxes
Insurance
Other
Total Non-operating Income and Expenses
Earnings Before Interest, Taxes, Depreciation and Amortization
Interest, Depreciation and Amortization
Interest
Depreciation
Amortization
Total Interest, Depreciation and Amortization
Income Before Income Taxes
Income Taxes
Net Income
industry reference
operating statement only for opera-tors. Thus, the guidance for owners should be helpful in understanding the operations of their lodging operations through net income.
New to the operating statements in the 11th revised edition is the met-rics at the top of the statement which includes rooms available, rooms sold, occupancy, ADR, Rooms RevPAR and Total RevPAR. How each of these are determined is discussed in the financial ratios and operating metrics section of the book. Owners’ represen-tatives on the FMC strongly encour-aged the placement of this information on the operating statement to provide the statement reader with the major metrics at a glance.
The miscellaneous income line as part of the total operating revenue replaces the rental and other income line of the 10th revised edition. The supporting schedules for this line item are somewhat different. The miscel-laneous income schedule for the 11th revised edition shows net revenue from renting mixed ownership units, package breakage, other breakage, and resort fees not included on the rentals and other income schedule for the 10th revised edition. In addition, descrip-tions of some schedule line items differ in the 11th revised edition from the 10th revised edition. For example, interest earned from capital reserve accounts and any restricted funds accounts should be reported as non-operating income and expenses rather than miscellaneous income. Such guidance was not provided in the 10th revised edition. This mention of inter-est earned is meant only to show that there are changes beyond the simple line items on the operating statement.
The total revenue line on the 10th revised edition has been changed to total operating revenues. Any ratio that historically was measured as a percent of total revenue is no longer compati-ble with the 11th revised edition ratios, measured as a percent of total operat-ing revenue. This could be significant for any hotel with a large amount of non-operating income.
34 Winter 2015
exhibit 3. rooms — Schedule 1Period of: Current Period Year-to-Date
ActualForecast/
BudgetPrior Year Actual
Forecast/Budget
Prior Year
$ % $ % $ %
REVENUE
Transient Rooms Revenue
Retail
Discount
Negotiated
Qualified
Wholesales
Total Transient Rooms Revenue
Group Rooms Revenue
Corporate
Association/Convention
Government
Tour/Wholesalers
SMERF
Total Group Rooms Revenue
Contract Rooms Revenue
Other Rooms Revenue
Less: Allowances
Total Rooms Revenue
EXPENSES
Labor Costs and Related Expenses
Salaries, Wages, Service Charges, Contracted Labor and Bonuses
Salaries and Wages
Management
Non-management
ComplimentaryF&B
Front Office
Guest Services
Housekeeping
Laundry
Reservations
Transportation
Subtotal: Salaries and Wages
Service Charge Distribution
Contracted, Leased and Outsourced Labor Bonuses and Incentives
Total Salaries, Wages, Service Charges, Contracted Labor and Bonuses
industry reference
The 10th revised edition’s operating schedule included four undistributed operating expenses (UOE), namely Administrative and General, Sales and Marketing, Property Operations and Maintenance, and Utilities. With the 11th revised edition, a fifth line, information and telecommunications systems department, has been added as an UOE. This department has been created to consolidate all system-re-lated technology expenses. In the 10th revised edition schedules telecommu-nications and information were shown in various schedules. For example, two line items on the administrative and general schedule in the 10th revised edition related to this new department were information systems and tele-communications. These now will be shown as a separate department.
The section titled fixed charges in the 10th revised edition has been changed to non-operating income and expenses. This newly titled section also includes new items not addressed in the 10th revised edition. Income generated by ownership that is not managed by the hotel operators is recorded as non-operating income. Examples of this income include cost recovery income, interest income (mentioned previously) and income generated from antennas and bill-boards on the hotel building.
Other expenses included in this section but not included in the fixed charges section of the 10th revised edition are: cost recovery expenses, gain/loss on (disposal) fixed assets, owner expenses, and unrealized foreign exchange gains or losses. By placing these revenues and other expenses after gross operating profit on the operating statement, management fees will be impacted less as the incentive portion of management fees is often based on GOP. The thinking of FMC members is that management fees should not be impacted by revenues and expenses that the operators do not control.
Without question there are many changes to supporting schedules. The rooms schedule is shown in Exhibit 3. Some examples of the changes include
The Bottomline 35
Payroll-related Expenses
Payroll Taxes
Supplemental Pay
Employee Benefits
Total Payroll-Related Expenses
Total Labor Costs and Related Expenses
Other Expenses
Cleaning Supplies
Cluster Services
Commissions
Commissions and Fees – Group
ComplimentaryF&B
Complimentary In-Room/ Media Entertainment
Complimentary Services and Gifts
Contract Services
Corporate Office Reimbursables
Decorations
Dues and Subscriptions
Entertainment – In-house
Equipment Rental
Guest Relocation
Guest Supplies
Guest Transportation
Laundry and Dry Cleaning
Licenses and Permits
Linen
Miscellaneous
Operating Supplies
Postage and Overnight Delivery Charges
Printing and Stationery
Reservations
Royalty Fees
Training
Travel – Meals and Entertainment
Travel – Other
Uniform Costs
Uniform Laundry
Total Other Expenses
Total Expenses
Departmental Profit
Exhibit 3 continued: Expenses
industry reference
the expansion of this revenue section schedule to reflect greater detail and definitions and to align with indus-try practices. Resort fees have been moved to Miscellaneous Income from the Rooms department as mentioned previously. Some other changes in-clude additional information regarding labor costs and related expenses:• The aggregated salaries and wages
of management and non-manage-ment personnel are presented on the department schedule.
• Service Charge Distribution is presented as a distinct cost category within Salaries, Wages, Service Charges, Contracted Labor and Bonuses. It has been moved from Payroll-related Expenses: Supple-mental Pay.
• Contracted, leased and outsourced labor costs are presented indepen-dently.
These detailed changes in labor costs and related expenses is shown in other schedules other than rooms as well.
Conclusion The 11th revised edition is 353 pages long, which is an expansion of 78 pages from the 10th revised edition so clearly the 11th revised edition is a major expansion for the prior edition. This article focuses primarily on the operating statements and is not intend-ed to provide all-inclusive coverage of the many changes. Interested readers are strongly encouraged to obtain a copy of the 11th revised edition and study it with care. ■
Acknowledgement The authors would like to thank John Baldante, retired managing partner of PKF; Robert Mandelbaum, director of research information services of PKF; and Ralph Miller, president of Innte-grated Hospitality Management Ltd. and past HFTP Global President for their input. All three gentlemen were members of the Financial Manage-ment Committee of the AH&LA when the 11th edition was produced.
for progressive enterprises, secu-rity has evolved from an IT issue to a central business issue, as
most companies today are responsible for protecting some form of digital asset, such as credit cards, customer data, business strategy and intellectual property. As with all business con-cerns, cost management is of primary importance. With security however, the true cost does not lie in a typical budget line item expenditure; rather it stems from asset compromise (whose costs range from litigation, to fines, to lost revenue, to incident response). Proper hardening techniques are much smaller expenditures in relation to breach response costs, and are effec-tive in dramatically reducing likeli-hood of a successful attack.
The challenge for many companies is to understand which hardening ef-forts are most effective. Studies1 show that as many as 89 percent of CIOs express confidence in the effective-ness of their security practices, yet those practices often fail to account for evolved, modern adversaries. The black market2 for stolen digital assets has matured, and sophisticated adver-saries with financial motivations are incentivized to attack large companies who possess high value digital assets. Even when these adversaries are un-successful, incident response costs are
the imPLicit coStS of imProPer SecUrity
significant — but when they are successful, the resulting damages skyrocket to staggering and potentially crippling heights.
Contained herein is an analysis of the different cost drivers, as well as discus-sion of approaches to minimize exposure.
Case Study: Incident ResponseOVERVIEW AND FINANCIAL IMPACT. Our firm, Independent Security Evalua-tors (ISE), was recently engaged to investigate a security breach for a company that was the victim of a sophisticated, targeted attack. The victim company in question is a government contractor specializing in aerospace technology for the U.S. Department of Defense. What makes this case compelling is that the victim actually caught and stopped the attack before any assets were exfiltrated, yet saw
TedHarrington([email protected])isanexecutivepartnerwithIndependentSecurityEvaluators,wherehedrivesthoughtleader-ship initiatives for the organization of security researchers and consultants. He is a thought leader, presenting at high-profile conferences in a range of industries including hospitality; media and entertainment; finance and others.
A business impact analysis, supported by cases studies
By Ted Harrington
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The Bottomline 37
indirect damages incur immediate costs of over $578,000, plus an additional $517,000/year in additional spending moving forward.
ATTACK ANATOMY. A threat actor (later determined to be an advanced persistent threat, a sophisticated adversary commonly referred to as APT) had responded to a job post-ing by the accounting department of the victim company, with an attached resumé that contained malware. The attack was both targeted (it addressed the victim individual by name, in response to a legitimate job posting by the company) and sophisticated (it delivered malware through spearfishing, and later attempted to phone home to a com-mand and control server in an obfuscated, hidden way).
ATTACK OUTCOME. The attack payload and delivery mechanisms were very effective: The qualifications of the fictitious job applicant were fabricated to perfectly suit the needs of the open job position; thus the resumé was distributed internally, maximizing damage by delivering the attack payload whenever someone opened the malicious at-tachment. Upon investigation, it was determined that while the attack had been successful in infecting several machines within the victim company’s secure perimeter, it appeared that no assets had yet been exfiltrated.
REACTIONARY EXPENDITURES. Although no damages were directly related to data compromise, indirect expen-ditures were nevertheless incurred. Costs break down into two categories.I. Response Costs — $578,000:
• Consulting fees for investigation — $122,000.• Resource investment by victim company’s person-
nel to respond to findings from the investigation. Heavy involvement from executive leadership and C-suite contributed notably to cost ramifications — $240,000.
• Estimated lost opportunity costs, as victim’s customer scaled back engagement for an extended period while the incident was investigated and remediated — $216,000.
II. Forward-looking Costs — Additional $517,000/year:• Additional security personnel in-house —
$138,000/year.• Expanded consulting contracts — $165,000/year.• New, replaced or upgraded equipment and systems —
$214,000/year.
COMPARISON: PREVENTATIVE HARDENING. Prior to the incident the victim company relied heavily on automated scanning, deployed outdated systems, was understaffed in the security department and had not properly engaged out-side resources to harden systems. Proper spending in these categories would have incurred an additional estimated $550,000 over 24 months, after which the company would have greatly reduced the likelihood of a successful attack and been better prepared to respond to this attack.
SUMMARY, PROJECTED SAVINGS AND LESSONS LEARNED. The entire $550,000 expenditure to be properly secure prior to an incident is surpassed by the $578,000 response costs alone, plus the extra $517,000/year required for the additional services and equipment. In our estima-tion, had this company properly invested the appropriate security spending prior to the incident, they could have saved at least $1.2 million over five years, all while being more secure.
It is worth noting that these cost ramifications stem from an incident that did not result in stolen assets. Compro-mised assets would have exponentially multiplied the costs and damages, although the cost to properly defend those assets does not change either way.
Case Study: Target BreachOVERVIEW AND FINANCIAL IMPACT. During the winter holiday shopping season in Q4 of 2013, cyber thieves broke into Target’s network environment and stole approximately 40 million credit card numbers.
An important aspect to consider of any attack is adver-sary motivation. In the case of Target, the potential upside for the adversary is massive. The total black market value for these stolen credit cards is estimated at between $800 million to $4 billion3, based on the batch sale of credit card numbers — and this figure does not even include the yet-unknown scope of fraudulent purchases in the second-ary black market resulting from the use of that stolen card information. This lucrative effort for the thieves is one that will undoubtedly embolden other criminals to pursue similar gains.
For Target the downside is still unfolding. As of August 5, 2014 — a span of roughly eight months since the begin-ning of the breach — response costs already sit at $236 million4. Furthermore, during the crucial two month holi-day following the breach, profit fell 46 percent5, or $441 million6, as compared to the same period from the previous year. In the immediate aftermath of the breach, over 90 lawsuits were filed against Target, including a class-action lawsuit with 117 plaintiffs, with some suits even naming Target’s security vendor7 as defendants. Experts project le-gal damages to total between $1.4 billion and $2.2 billion8. If it turns out that Target is found to be in noncompliance of Payment Card Industry (PCI) standards, Target will be liable for $90 a cardholder, or $3.6 billion9.
Over the period of November 27, 2013 to February 1, 2014, Target’s share price plummeted10 12.1 percent (from $64.41 down to $56.64), which represented an overall market cap loss of nearly $5 billion (from $40.71 billion down to $35.80 billion). According to investment analysis11, nearly every key investor metric at Target was down in Q4 2013, causing performance to fall short of projections: transaction count decreased 5.5 percent (a rate surpassing even the 4.8 percent decline at the peak of the 2008 finan-cial crisis), sales decreased 3.8 percent, and sales at stores
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38 Winter 2015
open at least a year fell 2.5 percent. Note that these damage estimates focus solely on the theft of credit card data and do not include any cost analysis of the potential financial ramifications Target could face for the additional theft of over 70 million personal credentials.
ATTACK ANATOMY. Target was the victim of a sophis-ticated, targeted attack that required high levels of skill, motivation and resources to accomplish. Utilizing a spear-phishing e-mail campaign, attackers obtained the creden-tials of a trusted Target vendor, which they then used to remotely access Target’s network environment. From there, they took advantage of improperly segmented networks to jump into the payment environment, install malware on the point of sale machines, and use the malware to extract decrypted credit card information from system memory.
ATTACK OUTCOME. Over the 18 day period spanning No-vember 27 and December 15, 2013, the thieves obtained over 40 million credit card numbers and an additional 70 million records containing customer information.
SUMMARY AND LESSONS LEARNED. The financial ram-ifications for Target are staggering, coming from all fronts: new security expenditures, legal damages, fines, income decline and customer exodus. Yet the entire attack stemmed from a fairly straightforward and solvable problem: defense against modern attacks requires hardening systems against attack vectors that originate from within trusted boundaries. Target was breached via a trusted vendor.
Properly securing a digital supply chain, especially a complex one typical of large enterprises such as Target, is no easy task, but it is possible to dramatically reduce dam-age and decrease the likelihood of attack success. Harden-ing applications, infrastructures and the supply chain for Target is an effort that we estimate would cost in the low single digit millions — but in exchange would have saved what has already cost over $61 million in response costs, plus $441 million in lost Q4 income, plus further yet-un-known billions in possible punitive damages.
Case Study: White Box vs. Black BoxOVERVIEW. To improve the security posture of digital sys-tems, progressive organizations engage third party security experts to calculate risk and provide hardening guidance. Although there are many different types of evaluations, the two most relevant to most industry use-cases are the white box vulnerability assessment and the black box penetra-tion test. The most suitable and effective approach is the white box assessment; however, confusion about different security methodologies has led many IT executives to com-monly request the notably ineffective approach of black box penetration testing. Most executives may be surprised to discover that this approach undermines the very risk as-sessment objectives they seek to achieve, while costing the same as, or more than, white box vulnerability assessments.
The objective of a white box vulnerability assessment is to determine the full scope of exposures that exist — quite simply, a vulnerability assessment is a risk assessment. Unlike a penetration test, a vulnerability assessment seeks to identify all ways in which asset compromise might be possible. It considers assets, threats, workflow, whole sys-tem configuration and internal defenses, as well as future developments of the infrastructure or application. The threats addressed go beyond the drive-by adversary, and consider the more likely adversaries who would be inter-ested in compromising high-value digital assets: targeted attacks, insider threats, advanced persistent threats and the accidental (perhaps inevitable) security breach.
By contrast, the goal of a penetration test is simply to determine if defenses can be breached. In terms of risk as-sessment, it provides primarily a binary risk rating: can be breached or cannot be breached.
Beyond definition and primary objective, these engage-ments typically differ in other notable ways. Penetration tests often rely heavily on automated tools, only leverage known vulnerabilities, and seek to identify low-hanging fruit. Vulnerability assessments use these same tools as part of the process, but incorporate the results into a custom evaluation, and seek to identify all potential vulnerabilities, not just those that can be found through automation.
THE TEST. A major chipset manufacturer recently engaged ISE to assess the security of their newest secure chipset. The customer wanted ISE to perform a black box penetration test, which ISE did not believe would be appro-
data Security
white Box vs. Black Box evaluations
WHITE BOX vulnerability assessments are designed to determine the full scope of exposures that exist, seeking to identify all ways in which asset compromise might be possible.
BLACK BOX penetration tests determine if defenses can be breached. In terms of risk assessment, they provides primarily a binary risk rating: can be breached or cannot be breached.
CASE STUDY: CHIPSET MANUFACTURER
Black Box White BoxProject Duration 2 months 2 months
Resource Investment 200 hours 200 hours
Critical Issues Identified4 potential, 1 confirmed
11 confirmed
Other Issues Identified 0 10 confirmed
Mitigation Strategies None 21+
Risk Calculation Accuracy Low High
Project Completeness Unknown Complete
Cost Per Issue $55,000 $2,475
Cost Per SolutionUnknown,
$55,00$2,475
The Bottomline 39
priate given the circumstances (notably that the customer was the creator of the target technology), favoring instead the far more valuable and effective white box approach. Af-ter many rounds of dialogue, the parties struck a compro-mise, agreeing to perform a black box penetration test first, followed by a white box vulnerability assessment. This provided a valuable case study to compare the financial and resource implications of the contrasting approaches.
FINDINGS. The overall investigation was split into equal allocations of resources, first in a two month session of black box penetration testing followed by a two month session of white box vulnerability assessment. In the black box session, four potential issues were identified, of which only one was confirmed. No mitigation strategies were delivered, as we did not have knowledge about system architecture in order to intelligently suggest improvements. We were able to articulate only low confidence in project completeness, and were wholly unable to deliver a valid risk calculation.
In the white box session, we identified and confirmed 11 critical issues, followed by another 10 severe issues. We were able to devise at least one mitigation strategy for each of the 21 confirmed vulnerabilities. We had high confi-dence in project completeness and the risk calculation was of very high accuracy.
Both the black box and white box sessions were allocat-ed the same resources, but the output of the white box por-tion was significantly more effective and valuable. Break-ing the financial resource investment down to a per-issue value, this black box penetration test was found to require 22.2 times more resource investment, costing a staggering $55,000/issue identified, as compared to a mere $2,475/is-sue identified in the white box session that followed.
PRICING ANALYSIS. It is not straightforward to articu-late which approach is more or less expensive, as pricing for both can be scaled up or down. The key difference lies in how each is scaled and the impact that has on risk cal-culation. The cost for white box vulnerability assessment is related to system scope and project completion. In order to modulate pricing, evaluation components are added or omitted from scope. Although removing a component from an evaluation creates a blind spot, the blind spot is known and thus can be accounted for in the risk calculation.
By contrast, pricing for black box penetration testing is driven by effort input, irrespective of system scope or proj-ect completion. To modulate pricing, effort input is simply increased or decreased. However, blind spots in the evalua-tion remain largely unknown, and thus any risk calculation does not account for said blind spots and cannot make a risk determination with high confidence.
EFFECTIVENESS ANALYSIS. The results of a white box security assessment are of much higher value than that of a black box security assessment. When the system is fully understood by those performing the assessment, high confidence in the completeness of the job can be measured,
data Security
assuring (or not) that most or all vulnerabilities have been identified, valid mitigation strategies have been recom-mended, and an accurate calculation of exposure risk has been delivered. By contrast, the results of a black box penetration test are of very low value: whether the security of the entire system has been addressed is unclear (if any issues are found it does not mean that all issues have been found, and conversely, if no issues are found, it does not mean the system is secure), effective mitigation strate-gies may be difficult or even harmful to recommend, and very little can be determined about exposure risk.
In this case study, the white box approach uncovered substantially more security vulnerabilities, articulated valid mitigation strategies, and with high confidence calculated risk. In summation, the black box approach was an ineffec-tive use of time. ■
Sources1. Key Findings from the Global State of Information
Security Survey 2014, Price Waterhouse Coopers. www.pwc.com/us/en/cfodirect/issues/risk-management/glob-al-state-information-security-survey-2014.jhtml
2. Lillian Ablon, Martin C. Libicki, Andrea A. Golay. RAND National Security Research Division. Markets for Cybercrime Tools and Stolen Data. http://www.rand.org/content/dam/rand/pubs/research_reports/RR600/RR610/RAND_RR610.pdf
3. Krebs, Brian. Krebs on Security. www.krebsonsecurity.com.
4. Circa. Target data breach expenses reach $146 million. cir.ca/news/target-stores-hacking-investigation
5. Ziobro, Paul. Wall Street Journal. Target Earnings Slide 46% After Data Breach. www.wsj.com/news/articles/SB10001424052702304255604579406694182132568
6. CBS News. Data-breach Costs Take Toll on Target Profit. www.cbsnews.com/news/data-breach-costs-take-toll-on-target-profit/
7. Pletz, John. Crain's Chicago Business. Chicago's Trust-wave Sued Over Target Data Breach. www.chicagobusi-ness.com/article/20140325/BLOGS11/140329865
8. Vomhof, John Jr. Minneapolis / St. Paul Business Journal. Target's Data Breach Fraud Cost Could Top $1 Billion: Analyst. www.bizjournals.com/twincities/news/2014/01/31/targets-breach-costs-billion-dollars.html
9. Harjala, Brenda. Super Money. Target Faces Potential $3.6 Billion Liability Over Credit Card Breach. www.supermoney.com/2013/12/target-faces-potential-3-6-bil-lion-liability-credit-card-breach/#.UriH-2RDtdE
10. http://www.ycharts.com11. Skariachan, Dhanya; Finkle, Jim. Reuters. Target
Shares Recover After Reassurance on Data Breach Impact. www.reuters.com/article/2014/02/26/us-target-results-idUSBREA1P0WC20140226.
