Evaluating Hotel Management Software ROI and TCO Perspective

30th Oct 2009

NB: This is an article written By: Alok Agrahari 

The growth in the Indian economy and the hotel industry has resulted in a clutter of new Hotel Management software companies vying to increase their footprint in the Indian market. This has not only started a price and promise war amongst the new entrants, but has also been creating immense doubt and confusion in the minds of the IT Managers and decision makers in order to differentiate between many. Besides this, the assumption that the value of a Hotel Management Software is obvious and can be rarely defined either in abstract or practical terms fuels the confusion further.

 The calculation of Total Cost of Ownership (TCO) and Return on Investment (ROI) comes as a handy solution to combat this — a two-pronged approach, as both these parameters are quantifiable and therefore accurate. The ROI analysis determines the financial significance of the software and the speed of payback. Once you have a good business case with regard to ROI, conducting a TCO analysis helps to conclude the analysis. A thorough TCO analysis will pinpoint where the differences are in solution costs, over a multi-year timeframe. This two-pronged approach ensures that you will not only get a good return, but that you ultimately will work with the most cost-effective solution.

Let us first look at ROI and how it can impact returns, because the expected return on investment provides the cost justification and motivation for investing in hotel management software. There are quantifiable as well as intangible benefits associated with such an investment decision. The quantifiable benefits have a bottom-line impact on profitability, asset turnover and a potential effect on stock value. A critical evaluation of the software is required to ascertain whether the software has the necessary features andfunctionality to achieve broadly the benefits mentioned below:

Improved Customer Service & Sales

Improved accounting controls

Inventory reduction

Material cost reduction

Labor cost reduction

And then, whether the software can also assist in calculating the financial ratios: Two related to liquidity and one to Operations performance.

-* Inventory turnover (Cost of Sales/Inventory): A low inventory turnover can indicate possible overstocking and obsolescence, while high turnover indicates better liquidity and superior materials management and merchandising.

-* Days of Receivables (365 * 1/ (Sales/Receivables) : This ratio expresses the average time in days that receivables are outstanding. It is a measure of the management of credit and collections. Generally, the greater the number of days outstanding, the greater the probability of delinquencies in accounts receivable. The lower the number of days, the greater the cash availability.

-* Return on Assets (Profit before Taxes/Total Assets): This ratio measures the effectiveness of management in employing the resources available to it.

The evaluation can also be done on the basis of the below mentioned industry standards on percentage benefit. For instance, is there significant reduction in the communication cost between departments and division? If yes, then, is it close to 25% as per the industry standards? Is the software capable of reducing the stationery cost by 50%?

Please note that the figures in the chart below are indicative for 50 user license and may vary from hotel to hotel. Taking a cue from the chart, hotels can prepare their own chart based on what parameters they would like to focus on considering their current and future requirement, goals and visions, and objectives.

The next calculation is Total Cost of Ownership (TCO) – a commonly used calculation designed to help businesses assess the direct and indirect costs associated with information technology purchases. By doing a TCO analysis, one can make more informed purchase decisions.

When evaluating the TCO of software, one should not restrict the calculation to the initial cost of purchase, but should also calculate the cost of managing the software to its complete life and should incorporate the following points in their calculations.

1- Cost of initial deployment and employee training.

2- On-going fees for maintenance, software updates and upgrades as well as help-desk support.

3- Costs associated with downtime

4- Cost associated with the business process re-engineering.

In calculation of the TCO some of the parameters are untold and unexpressed. For Ex: – Does the software under consideration have a good user base in the market? What would be the cost of hiring and training an employee on the new software? How soon can a position be filled with trained personnel, if an employee quits?

An estimate from Meta Group says from the 63 companies surveyed – including small, medium and large companies in a range of industries – the average TCO was $15 million (the highest was $300 million and lowest was $400,000). This means that one might end up paying over 20 times if the TCO is not calculated right!

Hence a lower TCO and higher ROI are the defining criteria for the right software choice, which emphasizes that not only the quantifiable benefits but also the intangible need is to be considered before making IT investment decision for your hotel.

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