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Hotel performance measurement: literature review

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 SITCON 2016
QUALITY AS A BASIS FOR TOURISM DESTINATION COMPETITIVENESS

QUALITY AND COMPETITIVENESS IN TOURISM AND HOSPITALITY INDUSTRY

HOTEL PERFORMANCE MEASUREMENT:

LITERATURE REVIEW

Abstract:
Mladen Mitrović1,
Competitive business environment with changing circumstances and numer-
Sandra Janković2, ous stakeholders’ pressures is forcing hotels to make stronger efforts towards
Gordana Ivankovič1 satisfying different customer groups. Performance measurement has become
a very important tool in preparing a business strategy and it helps the hotels to
determine their position on the demanding tourism market. The purpose of
Faculty of Tourism Studies - Turistica,
1
this paper is to determine the development of hotel performance measurement
Portorož, Slovenia practices based on the previous research and literature review. It also provides
Faculty of Tourism and Hospitality
2
an overview of the current research in the field of hotel accounting and seg-
Management, ment reporting. The study provides insights into the problem of performance
Opatija,Croatia measurement and its implementation by hotel management.
Keywords:
performance measurement, accounting, balanced scorecard, USALI,
activity based costing.

INTRODUCTION

Due to an increasingly competitive environment, performance meas-

urement is of vital importance. The model of performance measurement
enables the management to make decisions appropriate for the hotel
industry and enhanced performances of the organisation. Information
needed for decision making lies in the domain of the management ac-
counting system (MAS), which has to be appropriately developed and or-
ganized. Undoubtedly, the MAS differ substantially in the hotel industry
compared to other industries. Hotel enterprises have unique characteris-
tics of their operations, as they bring together many activities that are es-
sential for guest satisfaction (Ivankovič & Jerman, 2011). It is well known
that value is of great importance for guests and employees in the hotel
industry. The choice of performance measurement is nowadays the most
significant challenge in the hotel industry. Nevertheless, exaggerated per-
formance measurement is problematic as hotels want to quantify almost
everything. The present challenge is not to find out what can be measured,
but what should be measured. Performance measurement helps in the im-
plementation of the goal-oriented strategy. It is an element of value-based
Correspondence:
management used to determine the value of the hotel for the owners and
Mladen Mitrović
to meet the interests of other stakeholders. Moreover, performance meas-
e-mail: urement is a critical component of human resources management, as well
[Link]@[Link] as an integral part of management award and promotion.
250
Sitcon 2016
DOI: 10.15308/Sitcon-2016-250-257
submit your manuscript | [Link]
 SITCON 2016
QUALITY AS A BASIS FOR TOURISM DESTINATION COMPETITIVENESS

Strategic management accounting is focused on where measurement is the process of quantification

value added for guests, market share and long-term and action leads to performance.”
strategic budgets or long-term accepted strategy. Since With the growth in international travel and the-
the effectiveness of a company depends on its capa- refore, increasing demand on hospitality businesses,
bility to achieve the goals, its performance cannot be performance measurement in the hospitality industry
left to chance, but has to be planned. For a successful has gained particular importance as a tool for effective
future performance, directed business operations sho- decision-making (Haktanir, 2006).
uld be performed. To that end, management has to be
PM has been used in the hospitality industry for
in possession of high-quality information, which is in
a long time as an important component of the deci-
the domain of budgeting. Continuous budgets provide
sion making process. It offers hotel management the
information about deviations between planned and re-
possibility to make decisions that could ensure the best
alized categories. (Ivankovič & Jerman, 2011)
possible results, taking into account the special charac-
Uyar and Bilgin (2011) state that organizations use teristics of the hotel business (Ivankovič et al, 2010).
budgets for various reasons. Some of the most promi- Although there are several reasons for using the per-
nent benefits of budgeting are forecasting the future, formance measures (to indicate the level of effort, to
assisting in profit maximization, performance evaluati- monitor activities in units, continuous improvement,
on, pricing decisions etc. All together with USALI, Ba- motivating employees etc.), overall, it is considered to
lanced Scorecard, Activity Based Costing and Revenue be an integral part of the management processes, which
Management in function of benchmarking, budgeting means it identifies the areas of poor performance or op-
represents a comprehensive process of Performance portunities so that better plans can be developed (Hak-
Measurement. tanir, 2006). Traditional performance measurement has
been strongly oriented to financial performance. This ap-
HOTEL PERFORMANCE MEASUREMENT proach has numerous weaknesses such as short-termism,
lack of balance and strategic focus, customers approach,
The business environment in the hotel industry is performing of competition etc. (Atkinson and Brander
characterized by fierce competition and constantly chan- Brown 2001; Haktanir 2006; Atkinson, 2006; Ivankovič
ging circumstances. Each hotel is in direct or indirect et al. 2010), and was strongly criticized for providing a
competition with every other hotel. Strong competition limited perspective on the performance of the company.
forces management to try to get closer to their guests As hotel industry is a people-oriented industry, non fi-
wishes, since it is the only way to achieve success (Ivan- nancial indicators of PM are also important. They are
kovič et al., 2009). Therefore, it’s no wonder that hotel valuable supplements to financial measures as they are
management is more and more committed to establis- expected to supply information that would improve the
hing Performance Measurement (PM) System in order financial outcome and support and monitor the strate-
to show, in the best possible way, which weaknesses are gic initiatives (Haktanir, 2006). Atkinson and Brander
observed in the business and where the improvement Brown (2001) emphasize the increasing recognition
could be made to be able to satisfy the needs of all sta- within the hotel industry of the importance and value
keholders. of people, employees as well as guests. Therefore, the
PM as a tool of management accounting in the de- economic and financial success of a hotel depends on
cision-making process became popular in the 1990s by the attitude and behavior of employees, development of
both practitioners and academics (Haktanir, 2006; At- new products and services, as well as customer satisfac-
kinson, 2006; Kaplan, 1994; Neely et al., 2000). Pnevma- tion. Hotel General and Department Managers must rec-
tikoudi and Stavrinoudis (2016) notice that many aut- ognize equal importance to the goals of all stakeholders
hors consider that the concept of performance is of great and not only of their shareholders. The achievement of
significance for the business strategy of a company, its objectives of all stakeholders (guests, employees, strate-
competitive position, and long-term economic sustai- gic partners, community etc.) can be measured by both
nability. They also state that “performance and its me- financial and non-financial measures (Ivankovič et al.,
asurement are the key success factors for every tourism 2010).
enterprise.” As stated by Bourne et al. (2003), there was There are a lot of authors who have been examining
a lack of definitions about PM. In his paper, Haktanir the importance, implementation and improvement of
(2006) proposed the following definition from Neely the PM process. The overview of their papers is given
et al (1995):“PM is the process of quantifying actions, in Table 1.
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Table 1. Overview of previous research in the field of hotel Performance Measurement

Original title and year
Author Purpose and contribution of the paper
of publication
Classification of hotel
The paper provides an overview of PM indicators used by researchers
performance measure-
Pnevmatikoudi, K., and their classification. The main purpose of the article is to provide
ment indicators pre-
Stavrinoudis, T. both researchers and hotel management with better understanding of
sented in international
the indicators, and also to have an effect on their efficient use.
scientific research (2016)

This paper analyzes literature in order to provide answers on how the

Hotel performance: state success of a hotel business is measured and what factors determine
Sainaghi, R.
of the art (2010) performances. The analysis shows the growing importance of the BSC
as a satisfactory PM system.

Intangible resources in The purpose of this research was to increase the understanding and
performance measure- importance of intangible resources for the hotel industry and to empha-
Zigan, K.,
ment systems of the size the need for development and applying PM systems that include
Zeglat, D. hotel this type of resources as well as the need for hotel managers to apply
Industry (2010) them in their organizations.

Framework for perfor-

Ivankovič, G., mance measurement The research was carried out on the sample of Slovenian hotels with
Janković, S., in hospitality industry over 100 rooms. The results show that most hotels have poor economic
Peršić, M. – case study Slovenia performance, which is the result of inadequately developed PM system.
(2010)

In this paper, the author investigates PM practice of independent hotels

in Northern Cyprus. He divides these hotels into two groups, remotely
Performance measure- owned and owned managed. The findings indicate that PM in inde-
Haktanir, M. ment in independent pendent hotels is influenced by various factors. For example, the degree
hotels (2006) of owner’s involvement in business process restrict the flow of infor-
mation and limit the involvement of managers and employees, which
affects the way management operates and PM takes place.

Performance measure- This article provides an insight into PM in hospitality industry accord-
ment in the internation- ing to previous literature, reviews the weaknesses of traditional PM
Atkinson, H.
al hospitality industry and proposes areas for future research. It emphasizes the importance
(2006) of combining financial measures with non-financial measures.

The authors analyze different performance measurement system design

Implementing perfor- processes published in the literature and create the framework for com-
mance measurement paring the alternative approaches. There are many companies interested
Bourne, M.,
systems: in implementation of BSC, but the attempts are usually not successful.
Neely, A. a literature review The purpose of the paper is to contribute to better understanding of the
(2003) factors which influence the success or failure of performance measure-
ment initiatives by reviewing the literature.

There is a growing interest from hotel managers to change the way of

measuring the business performance. Anyway, there is a difference
Performance manage-
between managers’ opinions on what determines their success and
ment and measurement
Avelini Holjevac, I., what they in fact measure, and the difference in understanding be-
in the hotel industry
Maškarin, H. tween managers in different functions of the importance of particular
– Case study of Croatia
indicators to overall success. The research was conducted on a sample
(2003)
of Croatian hotels and different function managers. Conceptual frame-
work for measuring performance is provided.

The authors explore the attitudes of UK hotels using PM. They are very
traditional, focused on short term, and that can lead to overlooking
Rethinking performance
some important issues. The impression is that hotels measure wrong
Atkinson, H., measures: assessing
things. Potential developments are given, and the development of a
Brander Brown, J. progress in UK hotels
balanced range of performance measures is one of the most important.
(2001)
Identification of Critical Success Factors (CSF) could also be crucial
for hotels PM.
Source: Author’s research

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As stated, successful PM required a comprehen- manager is assigned responsibility for the items of rev-
sive approach with both financial and non financial enues and costs under their control, and for deviations
measures to be included. The most popular measure- between budgeted goals and actual results (Peršić et al.,
ment tool which covers different aspects of business is 2012).
Balanced Scorecard developed by Kaplan and Norton The information needed for decision making falls
(1992). It provides a multifaceted view of an organiza- within the domain of the segment reporting system,
tion business performance (Atkinson & Brander Brown, which has to be appropriately developed and organized.
2001; Atkinson, 2006). BSC includes four different per- Undoubtedly, the use of the segment reporting system
spectives: Customer perspective, financial perspective, in the hospitality industry differs substantially from its
Internal Business perspective and Learning and Growth use in the manufacturing industry. Operations of hotel
Perspective. The important feature of the scorecard is enterprises have some unique characteristics due to the
the clear link between the corporate strategy and meas- various activities involved, essential for guest satisfac-
ures throughout the organization. By focusing on the tion, which is reflected in a full range of manufacturing,
four perspectives, managers can articulate their core vi- service and retail operations found within it.
sion, strategy and goals before translating them into spe- The basic accounting system in hospitality industry
cific measures, targets and initiatives (Atkinson, 2006). is Uniform System of Accounts for the Lodging Industry
BSC gives hotel management information from dif- (USALI). USALI has had a long tradition since its first
ferent perspectives, which is important for company’s version was established in 1926 by the Hotel Associa-
business, but it has one more core function. It also mini- tion of New York City. The purpose was the attempt of
mizes the potential of information overload by limiting creation and definition of one unique standard for in-
the number of individual measures included (Brander ternal reporting in Hospitality Industry, according to
Brown & McDonnell, 1995). According to this, Atkin- the growing interest in benchmarking between hotels.
son and Brander Brown (2001) state that the selection It represented the first successful organized effort to es-
of number of performance measures is a comprehensive tablish a uniform responsibility accounting system for
strategic appraisal process which should lead to the clear the hotel industry and one of the first such efforts in any
identification of an organization’s strategic objectives industry (Janković et al., CPA 2012).
and their related key success factors, and consequently Guilding (2014) quotes the following significant
should enable management to develop the appropriate benefits of using this system:
and effective balance of measures. ◆ it represents an “off the shelf” accounting system
Nowadays, companies are faced with changes in the that can be adopted by any business in the hotel
business environment. Relevant sustainability and social industry,
responsibility information should be prepared and dis- ◆ the system can be viewed as “state of the art” as
closed in a statement according to the new EU financial it benefits from the accumulated experience of
Directive 2014/95/EU, which has to contain nonfinan- the parties that have contributed to the system’s
cial and bio-diversity information, and are responsible development over many years,
for large undertakings and groups. To provide relevant ◆ by promoting consistent account classification
information in accordance with the EU Directive as well schemes as well as consistent presentation of
as the need of strategic management Sustainability Bal- performance reports, it facilitates comparison
anced Scorecard method (SBSC) is used. SBSC is an up- across hotels,
graded principle of BSC method and focuses on ecology, ◆ it represents a common point of reference for
as the fifth perspective. hotels within the same hotel group.
USALI represents an essential framework for the
SEGMENT REPORTING IN HOTELS introduction of responsibility accounting information
systems in hotels, in other words, for defining the moni-
The basic idea behind responsibility accounting in- toring and reporting of all types of revenue and costs by
formation systems is that each manager’s performance individual departments (Janković & Poldrugovac, 2015).
should be judged by how well they manage the items It enables the evaluation of the performance of de-
under their control. Segment reporting in responsibility partmental managers based on revenues and costs with-
accounting personalizes the accounting information, by in their control. The departmental statements of income
looking at costs and revenues from a personal control provide some of the most important internal sources of
standpoint. For management in hotel enterprises, each information for hotel managers (Janković et al., 2012).
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Since the publication of its first edition in 1926, According to Janković et al. (2012), ABC is a meth-
USALI has had 11 revised editions with the latest one odology that measures cost and performance of activi-
published in 2014. With an almost 90-years long tra- ties, resources and cost objects, where resources are as-
dition, it is not surprising that USALI was constantly signed to activities, then activities are assigned to cost
improved and changed, in order to be more understand- objects based on their use. ABC method is also useful in
able to users. The 11th revised edition, which contains calculation of customer profitability. Customers differ
five sections, was analyzed by Schmidgall and DeFranco in their consumption of resources and level of profit-
(2015), and they pointed out to several changes com- ability. When using ABC, firms first identify cost pools:
pared to the 10th edition. Some of them are: categories of activities performed within the organiza-
◆ In the first section, operating statements, aimed tion (e.g. procurement). For all cost pools, cost drivers
at providing information for internal users, there are identified – units in which the resource consump-
are several differences. The 11th edition provides tion of the cost pools can be expressed (number of pur-
two Operating Statements, one for the operators chase orders). Costs are then allocated to cost objects
and one for the owners. The next is additional (e.g. products) based on the extent to which these ob-
schedule “Information and Telecommunications jects require certain activities (measured in cost driver
Systems” which is shown in the undistributed units) (van Raaij et al., 2003). It is concluded that ABC
operating expense (UOE) section of the sum- provides better insights into customer profitability than
mary operating statement. The schedule “Rentals the traditional costing systems.
and Other Income” is renamed as “Miscellane- Pavlatos and Paggios (2009) list numerous benefits
ous Income”. of ABC adoption in their paper. Those are: more accu-
◆ The second section is Financial Statements, which rate cost information for product costing, improved cost
is aimed at external users (bankers, potential in- control, cost reduction, more accurate allocation of in-
vestors). The main innovation in this section is direct costs, improved insight into cost causation, iden-
the Statement of Comprehensive Income which tification of activity costs, improvement of operational
reflects changes in U.S. GAAP. efficiency, more accurate cost information for pricing,
◆ The third section Ratios and Statistics changed help in preparing of relevant budgets. The authors also
its name to Financial Ratios and Operating Met- state the suggestion of Kaplan and Cooper that service
rics. The recommended labor cost schedule is in- companies are ideal candidates for ABC implementa-
cluded for each department, since they are the tion even more than manufacturing companies because
biggest expense line item in the hotel business. most of the costs in service organizations are fixed and
◆ The fourth section also changed its name from direct.
Expense Dictionary to Revenue and Expense In general, ABC method helps hotel managers to de-
Guide. It provides more sophisticated classifica- termine which services to provide, which customers are
tion by individual items, departments/schedules profitable, whether its product mix needs changing, and
and accounting names. where it should direct its market focus and points out to
◆ The last fifth section is completely new (10th edi- opportunities for cost reduction (Janković et al., 2012).
tion has only four), and is called Gross Versus
There are numerous scientific papers that cover the
Net reporting. It shows the treatment of sur-
topic of segment reporting in hotel industry. They are
charges, service changes, and gratuities.
shown in Table 2.
Generally, the authors conclude that the new 11th
edition is more user-friendly and provides new guid-
ance in a number of important areas. In support of this CONCLUSION
assertion is the fact that the entire book of the 11th re-
vised edition is available in electronic form, which is a There is abundant theoretical and empirical litera-
considerable advantage compared to previous editions. ture dealing with the topic of the Performance Measure-
Although USALI provides a lot of important in- ment in hotels. Those papers provide both theoretical
formation, it is still considered insufficient. For the background and practical research. The review of rel-
revenue decision makers, it is important to know the evant literature provides the findings that measuring of
overall cost of profit or cost centre. As USALI does not the hotel performance is a very comprehensive process.
allocate the hotel overhead costs, it should be used only Some of the core components of Performance Meas-
with supplementation of Activity Based Costing (ABC) urement are presented (with their latest versions) in Fig.
method. 1. An important thing is that, if hotel managers want
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Table 2. Overview of previous research in the field of hotel Segment reporting

Original title and year
Author Purpose and contribution of the paper
of publication
Classification of hotel The paper provides an overview of PM indicators used by researchers
Pnevmatikoudi, K., performance Measure- and their classification. The main purpose of the article is to provide
ment indicators pre-
Stavrinoudis, T. sented in international both researchers and hotel management with better understanding of
scientific research (2016) the indicators, and also to have an effect on their efficient use.

Uniform System of Ac-

counts for the Lodging As stated in the title, the authors analyzed the 11th edition of USALI
Schmidgall, S., R., Industry, 11th Revised published in 2014. In the first part of the article, they remind of impor-
DeFranco, A. edition: The New Guide- tance and evolution of USALI. The second part provides innovations
lines for the Lodging and differences between the 11th and 10th edition.
Industry (2015)
In this paper ,the author analyzed the evolution of the USALI from
the first to 10th edition (in that moment 11th edition was in prepara-
Evolution of the Uniform tion). Over the years, USALI had undergone many changes in order to
System of Accounts for
Schmidgall, S., R. the lodging industry
be more understandable to management. Besides the content, USALI
(2014) was changed in terms of terminology (profit and loss statement became
income statement in 5thedition, Departmental Statements of Income
became Operating Statements in 10th edition etc.)
The authors conduct research on Hotel GrahaCakra, in order to compare
The Application of Time TDABC method with the initial cost calculation method used by the
Basuki, B., Driven Activity-Based hotel. TDABC represents a new approach of measuring costs developed
DwiputriRiedian- Costing in the Hospitality
Industry: An exploratory after the problems of ABC implementation appeared, simpler and more
syaf, M.
Case Study (2014) suitable for a service company such as a hotel. In the research, they used
Room Division as the main source of the hotel’s revenue as a cost object.
There is a notable difference between the customers and their profitabil-
ity. To keep the most profitable customers satisfied, managers must take
Customer Profitability into account the relevant revenue and costs, to determine the customer
Janković, S., Approach: Measurement segments that generate the greatest profit contribution. Calculating the
Peršić, M., and Research Directions
in the Hospitality Indus- customer profitability is possible only with the usage of ABC method.
Zanini-Gavranić, T.
try (2012) The empirical research was carried out in Croatian hotels and the aim
was to examine the use of strategic – oriented accounting in the Croatian
hotel industry.
In this paper, the authors examine the usage of segment reporting
Implementation of seg- standards in Croatian hospitality industry with comparation to four
Peršić, M., ment reporting standards previous surveys. The results show an increasing implementation of
Janković, S., in the hospitality indus- USALI methodology and a growing trend of segment reporting usage
Poldurgovac, K. try – a comparative study and preparation by middle and low management, which should result
(2012) in better authority and responsibility of managers to improve the overall
profitability of the hospitality industry.
Implementation of
time-driven activity- The purpose of this research was to examine the importance of the adop-
based costing system and tion of TDABC costing system in hospitality industry and to analyze
Hajiha, Z.,
customer profitability different customer groups. Iranian Hotel Parsian was used for the case
Safari Alishah, S. analysis in the hospitality study. The results showed that TDABC provides more accurate data on
industry: evidence from cost and customer profitability than the traditional system.
Iran (2011)
This article provides a very comprehensive review and analysis of ac-
Accounting research in counting related articles published in Cornell Hospitality Quarterly
Hesford, J. W., the Cornell Quarterly: A journal. Most of the articles are descriptive, and there is a lack of ac-
Potter, G review with suggestions counting research in recent years. The conclusion is that authors have
for future research (2010) contributed to understanding most accounting topics, including budget-
ing, costing and performance measurement.
In the article, the authors conduct research about practical considera-
Activity-Based Costing in tions, adoption and use of ABC in hospitality industry. They also did
Pavlatos, O., the Hospitality Industry: a survey of 85 Greek hotels. 20 of them reported that they had imple-
Paggios, I. Evidence From Greece mented ABC system, which shows increasing adoption rate in Greece
(2009) hotels in recent years. Most of the ABC non adopters (86.1%) do not
intend to adopt ABC in the future.
Source: Author’s research

255
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Figure 1. Components of Hotel Performance Measurement (Source: Author’s research)

to have useful information from Performance Measure- REFERENCES

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