INTERNATIONAL LODGING OF AMERICA

Irvin Fisher, Controller of International Lodging of America (ILA), was discussing the effects of growth and competition on ILA’s need for a new internal accounting system. He noted that in recent years ILA had been actively acquiring new businesses and launching new services. Because of the diversity of the new accounting systems across the various businesses, he had difficulty obtaining relevant and comparable measures of facility or customer profitability. There was also significant variation in other performance measures being used by managers across the company. Fisher felt that the accounting and performance measurement systems needed to be standardized. Moreover, he felt that because of the competitive environment, the accounting system would need to identify value-added and non-value-added activities so that costs could be reduced or eliminated.

Company Background

International Lodging was founded in 1868 in Manchester, England, as a restaurant. In 1874, International Lodging expanded into catering, and entered the lodging industry in 1958. Today, International Lodging is one of Great Britain's largest companies in the food service industry as well as in the lodging industry. International Lodging's operations have expanded to 27 different countries.

International Lodging began operations in the North American lodging industry with the purchase of a hotel in 1981. By 1999, ILA Inc. (owned 100% by International Lodging) represented approximately one third of International Lodging’s total operations. ILA employs 6,500 people at over 300 operating sites in 33 states across the US. These 300 operating sites are grouped among four subsidiaries: Rekant Company, BF Enterprises, Allen Entertainment, and ILA South. For each subsidiary, ILA had followed a growth strategy of acquiring add-on businesses that would immediately improve the company’s returns. Acquisitions were current lines of businesses as well as businesses/services in which the division did not currently operate. The major lines of businesses included hotels, motels, catering, casinos, car rental, and movie theatres (see Exhibit 1).

Management Structure

ILA, headquartered in Birmingham, Alabama, operates independently of International Lodging in Britain. The CEO of ILA is responsible for all operations in the United States. Presidents of the four main subsidiaries report directly to the CEO. The Presidents have well defined authority, with flexibility to run their businesses.

Reengineering ILA

Because of ILA’s growth through acquisition strategy, there was minimal consistency across ILA’s operating sites. Many aspects of the business held opportunities for standardizing terminology and practices associated with operational planning, scheduling, pricing policies and billing procedures. Information systems were not fully integrated, and consequently did not allow for a single company-wide view of information. Operations at the different sites were being guided by different methods of analysis. Furthermore, while various regions operated in the same lines of business, there was no system in place which provided explanation as to why one region performed better than the other. Given these conditions, internal benchmarking was another way to achieve improvement. While ILA had experienced increased profits and profit margins in recent quarters, the competition, coupled with continued growth of existing businesses and growth through acquisitions, signaled senior management of the need for more improved and consistent business practices in each level of the organization.

Responding to this need for wide sweeping change, Project Sweep, a reengineering project, was born. The project’s mission was to improve ILA’s performance through improved processes, new information systems, and organizational change. The project was structured around the core processes of ILA, with a team assembled to represent each core process: Booking Through Cash (BTC), Planning, Budgeting and Reporting (PBR), Purchase Order Through Payment (POP), Asset Maintenance (AM), and Sales and Marketing (SAM). Exhibit 2 describes these processes. To aid in preparing the organization for change and implementation of the new processes, a Change Management Team was also created.

The first phase of the project, Preparing for Change, required each core team to outline the processes currently being performed throughout the company. During the second phase, Visioning, each core team documented a series of ‘ideal’ operating processes and tools which would aid in carrying out the main objectives of the company. Following the two month Visioning session, Project Sweep entered the Design phase. During this time, project members' ideal processes were designed and detailed for implementation. The Design phase included approximately six weeks of training for team members on the information system chosen as most suitable to the designed processes. The fourth phase was Pilot Implementation at a chosen subsidiary. Following the pilot, a full scale roll out of the new processes and systems was planned. All four phases would take one and one-half years.

The Performance Management Team

Issues involving management of the new processes naturally evolved during the initial stages of process redesign. There was a consensus among top management that there was a need to have more relevant measures of performance, improved methods of decision making, and the ability to internally benchmark across the organization. Irvin Fisher had been the champion of nonfinancial performance measures in recent years, and realized the reengineering project represented an excellent opportunity to standardize measures across the organization. Subsequently, the Performance Management Team (PMT), with Fisher as team leader, was created and added to Project Sweep to assist the company in managing the new processes. A team was quickly assembled consisting of two outside consultants from the CPA firm that served as ILA's auditor and two internal employees. Fisher retained his full time position at ILA headquarters in addition to acting as the PMT’s leader. The internal members of the team, Neil Hoffman and Bonnie Baseman, resigned from their current positions at ILA to become full-time members of PMT. Hoffman had been an accountant at a Big Blue Motel and Baseman was brought in from the Rekant Company, where she had been a financial analyst.

Following various seminars and benchmarking visits, the PMT decided that activity-based management was the most appropriate approach for process management, including decision making and performance measurement. This decision led to the initial Performance Management Team charter: to help managers define measures, and to accurately and consistently track financial and non-financial data for purposes of continuous improvement of business processes. The team distinguished between the performance evaluation and decision making techniques within activity-based management. The result was a framework for continuous improvement using a twofold approach: performance measurement and activity-based costing.

Performance Measurement

In researching the use of performance measures throughout the company, the PMT identified specific areas for targeted improvement. For example, consistency in measures was needed. A single measure, such as injuries per year, was sometimes computed differently among facilities. Furthermore, facilities were largely judged on financial measures, without regard to nonfinancial data. To obtain a set of comprehensive and consistent performance measures, the team first set out to determine critical success factors which would aid in guiding the organization towards both near term and long term success. The team chose a “balanced scorecard” approach, which captures short-term, long-term, financial and nonfinancial indicators. After researching the performance evaluation literature, and considering the ILA values of "customer focus, people support, and relentless improvement", the performance categories, or critical success factors, chosen were: Customer Satisfaction, Employee Support, Innovation, and Shareholder Value.

To ensure that managers of all business processes would strive for these same critical success factors, the next step was to operationalize the factors by developing specific measures for each level of the organization (ILA-wide, regional, division, and individual site). For example, ‘number of customer complaints per quarter’ was deemed a measure which supported the customer satisfaction success factor and was to be measured and tracked across all sites. Individual site measures would then be totaled and averaged to produce a ‘number of customer complaints measure’ for each division. Following the same methodology, regional and ILA-wide measures would be computed (see Exhibit 3a).

To further emphasize common goals across the company, and consistent with the newly designed organization-wide core processes, the team decided to extend the performance measurement to the functional levels within each process. As an example, for the Employee Support critical success factor within the Sales and Marketing process, performance measures such as ‘hours of continued training/education per year’ and ‘turnover’ would be measured at certain of the following functional levels across the organization: Regional Sales Manager, Sales Manager, Sales Associate, Hourly Sales Associate. However, the choice of measures for each level is dependent on relevance and control at that level. Consequently, a measure at the Sales Associate level may be defined differently, or not at all, at the Regional Sales Manager level. As shown in Exhibit 3b, ‘hours of continued training/education per year’ is tracked at the Regional Sales Manager level, but not at the Hourly Sales Associate level.

Additional factors, termed input and in-process measures, inherently correlated with measures to be tracked company-wide, were also envisioned to help guide the sites toward the ILA-wide goals. For example, an individual site may choose to measure ‘average check-in time’ as a means to improve waiting times for customers and, in turn, improve ‘number of customer complaints per quarter’. However, these measures were to be decided upon and tracked by the individual sites and relevant work teams.

The PMT did not construct these measures in isolation. In addition to the core process team members, representatives outside Project Sweep from each line of business and region were consulted before arriving at performance measures. These representatives were called upon for three primary reasons: (1) to ensure that measures chosen were relevant to the critical success factors, (2) to assess the feasibility of standardizing the measures across the company, and (3) to promote acceptance of the performance measurement system.

Activity-Based Costing

Many decisions at the site level throughout ILA had previously been based on limited cost data or by “rules of thumb”. Activity-based costing (ABC) was proposed by the team to provide management with a tool by which to identify ongoing improvement opportunities and to improve decision making. Two views of costs were to be provided through the ABC framework:

Process Views of Data

- Cost of Total Process

- Cost per Output of Activity

Cost Views of Data

- Facility Profitability

- Customer Profitability

- Geographical Profitability

Process views of data were representative of the activities performed in each core process. The cost view of data represented a method in which to better understand which facilities, customers, and geographical regions were most profitable. These different types of cost views come from roll-ups of activity costs that comprise processes.

The first step taken in constructing the ABC system was educating the core process teams on the concept and benefits of ABC. The process teams each met with the PMT to develop the Activity Dictionary for the processes. These meetings began with outlining the major activities (subprocesses) within each process. Once the subprocesses were defined, the activities to be performed within each subprocess were outlined. The Activity Dictionary was designed as a ‘broad guideline’. Because it was not the intention to detail each step of a process, the basic approach followed a five percent rule: if an activity would take less than five percent of the total subprocess time, it was not included (see Exhibit 4 for examples of activities in the SAM process).

Eventually, costs were to be traced from the general ledger to these activities as dictated through an Activity Map, serving as the directions for cost assignment to the activities (see Exhibit 5). Some costs were to be directly traced to activities while labor and much of the overhead would be allocated based on time spent performing the activities or by other cost drivers as discovered through an interviewing process. This approach was to give management better information by viewing costs as a result of the activities that are consuming resources. Management would also have the ability to internally benchmark across sites. Because processes were being standardized, a motel in Las Vegas could benchmark activities (and the associated costs) with a motel in Florida. The data captured by the ABC system would allow management at each location to examine every cost component (activity) of the process. However, the ABC system was meant not to replace the traditional accounting systems necessary for external reporting, but instead it would serve for internal use in cost control and decision making.

Post-Implementation Vision

Upon completion of implementation, the Performance Management Team was to evolve into an ongoing “Performance Management Group” as part of the ILA organization. The original charge of the Performance Management Group (PMG) was to serve as ‘partners’ responsible for facilitating the use of the activity management tools throughout the organization to drive continuous improvement. This objective was subsequently expanded to include internal audit responsibilities. In carrying out the objectives, a PMG representative was envisioned as periodically visiting various operating sites. Included in these site visits would be meetings with local leaders and teams to develop and implement site-specific improvement plans for improving benchmarking positions among its peers and recommendations relating to internal controls. Each site was to have five days of PMG visits a year: one three-day visit and two one-day visits. During these visits, the activity dictionaries would also be reviewed and updated as needed (see Exhibit 6).

Unforeseen Developments

Irvin Fisher was reflecting on the events of the last two hours. He had just left a meeting in which he was offered the position of Director of Data Center Operations in Houston, a newly approved center which had resulted from the Project’s vision of centralized data operations. The position represented an excellent opportunity and he had nearly accepted the position on the spot. He realized that upon his acceptance, he would leave Project Sweep for Houston immediately. Consequently, the status and direction of the Performance Management Team would need to be evaluated. The team had just ended the Visioning phase, and detailed scheduling of PMT objectives for the Design and Implementation phases had begun.

At the moment, the PMT’s morale was low. The small team was realizing that its timetable for implementation at sites was longer than that of the Project as a whole. In contrast to the other core process teams, the PMT would require interviewing people at each site to enable cost assignment to the activities now contained in the activity dictionary. Additional time was also needed by the PMT to educate site managers and supervisors about the fundamental shift in cost management to management of activities. Also of great concern was an inherent time lag needed from the rest of the project because interviewing could not take place prior to the new process implementation. Otherwise, cost assignment would be based on estimates for activities never performed. Conducting interviews after only a slight time lag was viewed as risky due to possible quick movement along the learning curve for the new processes. Subsequent movement would quickly outdate the activity dictionary.

Fisher was to announce his decision about the new position in two days. He had already made his decision and was looking forward to moving back to Houston where he once lived. What weighed on his mind was the on-going feasibility of the Performance Management Team objectives and the need to resolve the problems of ABC implementation. He immediately began his evaluation of PMT’s future direction.

DISCUSSION QUESTIONS

(1) Comment on the personnel chosen for the PMT.

(2) Do ABC and nonfinancial performance measures act independently? What are the costs of implementing and maintaining both of these

activity-base management techniques?

(3) Comment on the feasibility of implementing ABC in a reengineering environment. Within this discussion, consider resources needed by ILA for

implementation throughout the organization.

(4) Comment on the planned responsibilities of the post-implementation Performance Management Group.

(5) Prepare a recommendation suitable for Project Sweep management as to the future direction of the Performance Management Team.

Exhibit 1

ILA Subsidiaries

International Lodging of America

BF Enterprises Rekant Company Allen Entertainment ILA South

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BF Auto Rental Rekant Inn Colony Casinos Big Blue Motel

LT Inn Horizon Motel Allen Catering Sleep Inn

RH Motel Jumbo Casinos Sun Theaters Grand Catering

Star Theatres

Exhibit 2

Core Processes and Change Management Teams

CORE PROCESS TEAMS

PURCHASE ORDER THROUGH PAYMENT (POP)

all processes related to purchasing and payments

BOOKING THROUGH CASH (BTC)

all processes related to bookings and revenue receipt

SALES AND MARKETING (SAM)

all processes related to selling and marketing

ASSET MAINTENANCE (AM)

all processes related to maintaining capital assets and facilities

PLANNING, BUDGETING, AND REPORTING (PBR)

all processes relative to financial planning, budgeting, and reporting of internal and external data

SUPPORT TEAM

CHANGE MANAGEMENT

this team serves as a facilitator of acceptance and introduction of process redesign throughout the organization

Exhibit 3a

Example of Roll-Up of Measures

LINE OF BUSINESS: Hotel

MEASURE: % OF CUSTOMER COMPLAINTS per Month [ # of customer complaints / # of occupied rooms]

Rekant Company - 2321/19,822 (11.71%) ILA South - 2120/20,680 (10.25%)

Division 1 - 859/7409 (11.6%) Division 1 - 841/7441 (11.3%)

Division 3 - 909/6542 (13.9%) Division 3 - 787/8302 (9.5%)

Division 2 - 553/5871 (9.42%) Division2 - 492/4937 (9.97%)

site 1- 63/845 (7.46%) site 1 - 156/1442 (10.8%)

site 2 - 160/1522 (10.5%) site 2 - 81/683 (11.8%)

site 3 - 143/1250 (11.44%) site 3 - 75/1013 (7.4%)

site 4 - 93/910 (10.2%) site 4 - 79/955 (8.3%)

site 5 - 94/1344 (6.99%) site 5 - 101/844 (11.9%)

Rekant Company ILA South

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Division 1 Division 2 Division 3 Division 1 Division 2 Division 3

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site 1 site 2 site 3 site 4 site 5 site 1 site 2 site 3 site 4 site 5

ILA Wide Measure = # of complaints at all subsidiaries / # of occupied rooms

Exhibit 3b

Example of Functional Level Measures

Sales and Marketing: Employee Support

Regional Sales Sales Manager Sales Associate Hourly Sales

Manager Associate

• Hours of continued • Turnover of sales • Hours of • Hours overtime

training/education associates continued training per employee

• Hours of continued

training/education

Note: Measures are not added through each level. Instead, these measures are to be used as a benchmark against prior year performance and as a basis to compare similar levels across locations.

Exhibit 4

SAM Process Activities

SALES AND MARKETING

Understand Planning Service Market Evaluation

Markets and ---> and ---> Development ---> and ---> and

Customers Strategy Sell Management

• Customer • Marketing • New services • Sales won • Account manager

surveys plans designed/developed (revenue) performance reviews

Subprocess completed

Outputs • Complete • Sales

market forecasts

assessments

• Assess • Develop •Develop • Contact • Assess bid

Subprocess markets marketing internal existing performance

Activities plan services customers

• Develop/ • Account • Integrate • Provide • Evaluate

maintain plan newly quotes sales force

customer acquired

profiles • Conduct services • Process • Manage

targeting reservations performance

• Competitor analyses • Integrate new appraisals/

analysis technologies • Track/ compensation

• Develop into organization investigate

• Conduct pricing reservation • Coach account

benchmarking methodology status managers

and strategy

• Process • Review

• Develop adjustments expenditures

demand

forecast • Staffing • Track promotional

effectiveness

• Approve

pricing

• Identify leads

• Develop promotions

• Develop community

relations

• Attend trade shows

• Training

• Document administrative

duties

Exhibit 5

Development of Activity-Based Costs

SAM SAM

Relevant General Ledger Accounts Activity Based Costs

Account #

Account

($000s)

Activity

($000s)

201

204

865

870

830

500