How do I establish a hospitality business — Part 3

The third article in a series of the same name, each written some years apart and each still just as relevant today as when they were first written. Examines the tendency of business owners to over-capitalise the physical side of their business, to the detriment of the human side. See also: How do I establish a hospitality business — Part 1 and Part 2

Invest your hard earned money where it counts the most

Invest your hard earned money where it counts the most

It’s funny where some managers try to save money. We often have to deal with people with a reluctance to allocate financial resources to areas critical to business success, and a history of spending on things that aren’t.

For example, it’s common to find restaurants and hotels where they have spent squillions on the decor and surroundings, and very little on recruiting and training their staff. I’ve written on this subject in the past. The issue here is straight forward — Where should you spend your money to get the greatest return on investment?

What will make my business successful?

Customer perceptions in a food and beverage business are created in the following proportions: 40% by human interaction (service and selling skills), 40% by product delivery (quality, creativity and ‘trendiness’), and 20% by the decor and surroundings. In other words, 80% of any customer transaction is the result of human interaction and human performance, while a very small part of the perception is gained by the physical surroundings.

If you spend $100, 000 on your surroundings, how many drinks and meals do you have to sell to recoup this money? Bear in mind that you have to pay it back from the profit on food and beverage sales, not the total revenue. You may have to sell $300,000 worth of product to be back at square one. I do recognise that your business must be presentable, but I question whether it needs to be as sumptuous or over the top. Some of the most successful hospitality businesses I deal with are fairly basic in presentation.

I believe that a large proportion of hospitality operators fall into the trap of overcapitalising their buildings and interiors, while seriously undercapitalising their ability to deliver competent human interaction and product delivery. I can understand why this happens — an accountant can show building improvements on a balance sheet as a paper asset, but you can’t show recruitment or training as anything but a cost on a profit and loss statement. You can walk into a bank and get finance for building improvements quite easily — ‘Certainly, how much would you like?’ — try asking for finance to recruit or train your staff, your bank manager will go all funny around the eyes.

Recruitment is your key skill

Make sure your key staff are as skilled as possible.

Make sure your key staff are as skilled as possible.

Take the recruitment of a key staff member as an example — say a Chef or Head Waiter—what effect would a 20% better skilled, more stable person in these positions have on your business? A good Chef could save you hundreds of thousands of dollars in food costs and kitchen wages while delivering better quality food; a poor Chef can ruin your life. A good Head Waiter could increase your income up to 30% by ensuring better service and selling skills, a poor one may create Faulty Towers. It costs a fair bit to find good staff, but the return on investment is very fast if you do it right.

We’re playing with international telephone numbers here — very big bucks indeed. I find the whole issue very frustrating because my staff and I often have to battle to get business owners who think nothing of spending $500 on a chair to spend $2,000 on effective recruitment advertising for a key position. It’s not unusual to get a brief to find a superstar and be told they only want to spend $100. If you were a superstar looking for a job would you respond to a tiny, obscure ad? I know that I need at least 30 qualified applicants before I’m likely to find that superstar. If I only attract five applicants, I’m snookered before I start.

You get what you pay for

Training is an investment; not a cost
You get what you pay for. You actually have to purchase quality job applicants; they generally cost about $50 each (divide the cost of an ad by the number of quality applicants it attracts). So, to get 30 applicants you may have to spend $1,500 or more. Then you have to screen and interview the applicants which can often add a further $3,000 (or more) to the cost, so we end up with a total recruitment cost of $5,000. Remember the old adage: ‘pay peanuts, get monkeys’ — it’s as true for recruitment as it is for salaries.

Invest where it counts

Similar misplaced austerity affects staff training. Training is a process, not an event. It takes time and money, and it requires the expense be allocated up-front before any benefits can be enjoyed. As the American restaurant guru, Jim Sullivan, is fond of saying: ‘If you worry about the cost of training staff and having them leave, consider the cost of not training them and having them stay’.

It’s helpful to draw a clear distinction between operating cost and investment, it may help you make the right decisions. I define an operating cost as any expenditure with no foreseeable return or more than a two year return, while an investment is anything with less than a two year return. Providing your physical surroundings are adequate, I suggest you invest in your staff before you invest any more in your building and surroundings. After all, your staff are your prime assets — they are responsible for 80% of your customers’ perceptions of your business.

This whole subject causes us much wailing and gnashing of teeth — not just because we’re in the training business and would like to see you throwing money at us, but because we see a reluctance to invest in the human side of your business as a strategic flaw that will most likely catch up with you. If you don’t spend on recruitment and training, you’ll end up spending twice as much on marketing and advertising.