IT BENCHMARKING at PROPERTY LEVEL for Europe, Africa & Middle East (EAME) Dr. Prof. Hilary C.

MURPHY

With acknowledgements to:

IT BENCHMARKING at PROPERTY LEVEL for Europe, Africa & Middle East (EAME)
Dr Prof Hilary C. Murphy This report contains information for owners, GMs and IT managers, at property, regional and corporate level on comparative IT spending. Over 400 properties responded to this independent study (265 used for this report) and it contains key metrics and analyses resulting from the data supplied from midscale and upscale properties throughout EAME. This is the first report of its kind and the main emphasis will be to provide a view of IT expenditure and provide comparative data that , mapped over time, will reveal a productive analysis of IT expenditure of (and for) the hotel industry in EAME.

With special thanks for funding and support of the project to: Carson Booth, Starwood Hotels & Resorts and with appreciation for the collaborative efforts of: Finn Schultz, Rezidor/ Radisson SAS Floor Bleeker, Jumeirah Group Riko Van Santen, Golden Tulip Hotels John Rawcliffe, MacDonalds Hotel Group Nick Price, The Mandarin Oriental Hotel Group Joe Cilia, Corinthia Hotel Group

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Dr Prof Hilary Murphy-Lausanne Hospitality Research

Table of Contents

Charts and Graphs Executive summary Design of the Research Implications and Constraints Overview of Data and Charts Conclusions and Comments Section 1: The Demographic Descriptions of properties Section 2: EAME Regions Average Total IT Spending Section 3: Breakdown of Total IT Spending Section 4: IT YIELD Section 5: IT VALUE Section 6: Allocation of IT Spend About the author

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Charts and graphs

Chart 1 Chart 2 Chart 3 Chart 4 Chart 5 Chart 6 Chart 7 Market Breakdown of Respondents Ownership of Respondents in EAME Breakdown of EAME Properties by Hotel Type of Service Level Average IT Property Level Spend by Region Regional - Average IT Spend per Room in 2007 IT Spend as a % of GOR, GOP, EBITDA and Operating Expense Total Revenue Yield to Annual IT Spend by EAME Region in 2007 Chart 8 Chart 9 Chart 10 GOP Yield to Annual IT Spend by EAME Region in 2007 EBITDA Yield to Annual IT Spend by EAME Region in 2007 IT Value Chart (Annual IT Spending as a % of GOR versus Operating Margin) in 2007-ALL REGIONS Chart 10a IT Value Chart (Annual IT Spending as a % of GOR versus Margin in 2007) in EAME- North West Europe Chart Chart 10b IT Value Chart (Annual IT Spending as a % of GOR versus Operating Margin in 2007) in EAME- Central & Eastern Europe Chart 10c IT Value Chart (Annual IT Spending as a % of GOR versus Operating Margin in 2007) in EAME- Middle East Chart 10d IT Value Chart (Annual IT Spending as a % of GOR versus Operating Margin in EAME- Mediterranean in 2007) Chart 11 Breakdown of Annual IT Spending in 2007

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Dr Prof Hilary Murphy-Lausanne Hospitality Research

IT BENCHMARKING AT PROPERTY LEVEL-EAME

Author: Dr Prof Hilary Catherine Murphy
Publication date: 15th September 2008

Executive Summary This report analyses and interprets the data from an independent survey of EAME properties, proposes IT benchmark figures at regional and property level and provides an overall view and directional indicators of EAME IT spending. A review of these properties reveals that ADR varies widely between regions, with mid-scale properties having an average of 117.41 euros and up-scale of 124.18 euros. Occupancy for both mid-scale and up-scale is approximately 66% and the average size of property is 230 rooms. Some key results that focus on all regions and properties (e.g. averages, ranges) are highlighted below in this executive summary, with brief reference/benchmark to existing, generic IT benchmark reports. Though the majority of properties reporting are upscale (4-5 star), some breakdowns are included in this summary that compare midscale and upscale properties. Average property IT spend is 135,527 Euros. The highest regional average is E A M E Middle East at 164,966 Euros per property. A breakdown of total IT spending reveals CAPEX (IT) at 33% and OPEX (IT) at 67%. This compares to the Gartner figures of CAPEX 29% and OPEX 71% for EAME in 2007 & 2008. The average reported CAPEX (IT) spend per room is 187 euros and average reported OPEX (IT) spend per room is 378 euros. Highest reported CAPEX (IT) per room is in E A M E - Mediterranean at 323 euros per room. Highest OPEX(IT) is also E A M E Mediterranean at 610 euros per room In terms of IT SPEND (measured by total IT/GOR), the overall average is 0.92% (for up-scale properties this is 0.87%, and mid-scale 1.07%). This is relatively low when compared with the 2.0% reported by Gartner in 2007 & 2008 for Hospitality and Travel and also to EMEA figures (all business sectors) of 4.4% in 2007, 4.3% projected for 2008. Overall average IT SPEND (measured by OPEX/GOR) is 0.61%, (0.58% for up-scale properties and 0.71% for mid-scale), lower than figures reported by Computer Economic (*all business sectors) at 1.8% for 2007. IT as % of operating expense varies between regions from 1.24%1.67%- this is again lower than the Gartner figure of 2.6% for the Hospitality & Travel sector and 7.2% for the EAME region. IT Yield (measured by total GOP /IT) has an overall average of 36.01 euros, the highest yielding region is E A M E Middle East at 82.41

Dr Prof Hilary Murphy-Lausanne Hospitality Research

euros. The figure for IT Yield (measured by total EBITDA / IT), has an overall average of 10.01 euros with the highest yielding region E A M E Middle East at 34.60 euros The measure of IT Value, here expressed as a scatter plot of operating margin (i.e. GOP as % of Total revenue) and IT Spend (as % of Total Revenue), shows the relationship between level of IT investment and operating margin with (approx) 1% of IT investment related to 3045 % of operating margin, this compares to Gartner (2008) data for Hospitality & Travel which is 2% of IT Investment relating to 10 % operating margin. At regional level, only the Central European region has a consistent picture of IT value. The distribution of IT allocation gives breakdowns here of ranges of hardware spend from 11.04- 33.27% , software & license fees 22.48- 34.70% and corporate fees of 4.80- 14.00% (excluding AFIO at 0.04%). This compares with EAME figures from Gartner at 17% hardware, 21% software, 25 % outsourcing and Computer Economics (US) figures at hardware 39% and software at 42%.The highest regional average for IT consulting expenditure is E A M E North-West at 6.78% of total IT spend and significantly lower in other regions .e.g. Middle East region at 1.69%. The average length of service of IT personnel is 5.3 years. This, however, only relates to <50% of the properties reporting, as many properties indicated that IT service not on-site, is outsourced to 3rd parties or is a shared resource (and therefore difficult to determine at property level). Other issues in terms of IT projects and costs that concern reporting properties are; costs to support in-room IT, IT- related training costs, costs of periphery/ consumable items, phone and data communication costs- which consume 6-10% of budget. Furthermore, the IT department is not always considered a cost centre, making revenues/ costs difficult to allocate. It is clear at all the levels (EAME, REGIONAL & PROPERTY) of analyses that have been completed to date that the level of IT spending is much lower than averages reported in other sectors (and reports) and that there is wide variations between EAME regions. Detailed charts that further illustrate regional data are on pages 10-26 of this report. The most significant outcome of this research report is the possibility to track these metrics over time, on an annual basis, to build predictive models and provide the hotel industry with a set of key IT metrics to appraise IT performance.

Design of the Research This survey was designed in collaboration with CIOs of the major European hotel companies and with reference to existing IT benchmark reports (particularly the 5

Dr Prof Hilary Murphy-Lausanne Hospitality Research

Gartner Report, 2008 and Info-Tech Report, 2007) which are mainly aimed at ALL sectors but, in this first instance, serve in this report as a point of comparison (due to lack of existing, reliable, available, generic annual benchmarking specific for the hotel sector). After an extended period of consultation and refinement with industry experts, the main survey was launched online during May- June 2008. Data validation was performed through normalizing the data, validating with authoritative sources and supplementing with other publicly available financial and market reports. The survey itself had three main dimensions; demographic data about the property which described the property, financial data which provided annual figures from 2007 financial reporting and IT expenditure/usage data which revealed CAPEX and OPEX spend and distribution of IT spend. Though this particular report features IT benchmark figures, broken down by EAME region, other dimensions in the survey were measured, e.g. number of intelligent computing devices (also reported by Gartner,2008 & Info-Tech,2007) and retained in-room revenues, however, not all results are published in this report. The final data set comprises over 8500 data points and further analysis is anticipated. Simplicity and shared meaning on terminology was deemed critical to promote completion and cooperation from a representative sample of hotels. Though every effort has been made to include all comparable data, this has not always been possible; therefore when too few data comparison points are available or relevant, they are omitted.

Dr Prof Hilary Murphy-Lausanne Hospitality Research

Implications and Constraints This report and data presented should be considered as one source of comparative metrics, others e.g. parsing the data by management style, property size could also be considered. The stated levels of spending are actual as opposed to projected and that 2007 reported financial, market and IT data have been reported and should be considered as historical data that describes not explains. This report should be considered in the light of internal information available and specific market conditions at regional and property level. The increasingly evolving model of hotel ownership and, particularly the increase in the management contract style of management within EAME has consequent impact on capital expenditure (CAPEX) and operating expenditure (OPEX) that are reflected in this data set where the contract management model prevails. There is a general ( all sector) move towards allocation of IT spend from CAPEX to OPEX (Gartner, 2008) and particularly in EAME regions, partially attributable to increased leasing/renting of both hardware and software or to the IT investment cycle. Though some inferences and relationships can be offered, other factors; particularly occupancy rates, local IT costs, high ADRs in regions such as the Middle East, significant contribution to GOR from other revenue streams e.g. F&B, SPA (that may have relatively associated low technology costs) must be considered when interpreting the data. The latter half of 2007 saw the beginning of the economic downturn in the economies in EAME, which has now evolved into stagflation and possible recession with consequent impact on both the regional and property budgets. Though the Gartner (and also Info-Tech & Computer Economics) statistics are used (albeit lightly) as a source of comparative data, their reporting companies have higher IT budgets ($3 million) and GOR ($0.1bn) than most hotel property level budgets. The (Gartner) EAME respondents constitute 502 (out of total 1794), of which only 1% were from the Hospitality & Travel sector (5 in total?), which further emphasises the need for EAME Hotel property level benchmark data. The age of the property and/ or stage of renovation, recency of change of ownership and management cycle will all (in)+directly impact on IT investment and expenditure.

Dr Prof Hilary Murphy-Lausanne Hospitality Research

Overview of Data and Charts

The statistics gathered are broken down into the following for ease of comprehension and presentation, SECTIONS:

Section 1: The Demographic Descriptions of properties Section 2: EAME Regions Average Total IT Spending Section 3: Breakdown of Total IT Spending Section 4: IT YIELD Section 5: IT VALUE Section 6: Allocation of IT Spend

One of the first key considerations was to first define what comprises IT spend. For this survey, and therefore for consequent longitudinal surveys, it is clearly defined as horizontal technologies used throughout property, including operational (PMS) telephony, in room, not including marketing e.g CRS, hosting. Additionally, there are over 20 currencies of financial reporting in EAME, consequently, UBS conversion rates were used for consistency and all currency data in this report are in euros. Needless to say, some reporting hotels reported interesting data and where outliers distorted the statistics, they were omitted. This project was devised to help IT managers compare at property and regional level with that of their competitive set Although the response was a statistically valid size, presumptions and inferences about the data and analysis must be carefully considered in the context of the property, hotel ownership and region. Moreover, regardless of the efforts to validate the data supplied by properties, the statistics produced are dependent on the quality of the data reported. For most hotel companies the major financial reporting is annual and should be within standard corporate and financial procedures, however, figures may be allocated, adjusted and reported in a variety of ways, including interpretation of CAPEX and OPEX.

Dr Prof Hilary Murphy-Lausanne Hospitality Research

Conclusions and Comments

These benchmark figures provide an overall view and directional indicators of EAME IT spending at property level, but are only the first step in building a useful model of return on investment. It is clear at all the levels (EAME, REGIONAL & PROPERTY) of analysis that have been completed to date that the level of IT spending is much lower than averages reported in other sectors (and reports) and that there is wide variations between EAME regions. Caution must be exercised in using the benchmark figures, e.g. in the case of IT (OPEX) as a % of gross revenue, in terms of allocation of IT or other business resources as IT statistics alone do not measure IT efficiency or efficacy (or indeed ROI) nor are they a measure of success, as other determinants and extraneous factors should be considered. These benchmarks may help to guide decision-making in allocation of scarce IT resources, particularly in the current economic conditions. However, an understanding of the business value, IT capacity and the maturity of deployment of IT at property level are critical factors for exploiting these benchmark figures. Furthermore, tracking the key metrics on an annual basis will provide a more valuable tool for strategic IT deployment.

Dr Prof Hilary Murphy-Lausanne Hospitality Research

Section 1: The Demographic Description of Respondent Properties

The European, Africa & Middle East (EAME) market is broken down into 5 key markets as follows. Market Breakdown-EAME E A M E AFIO (Africa & Indian Ocean) e.g. South Africa, Senegal, Tunisia, Algeria, Cameroon, Egypt, Morocco, Seychelles Island E A M E North-West Europe e.g. Belgium, France, Netherlands, Switzerland, UK, Denmark, Sweden, Ireland E A M E Central & Eastern Europe e.g. Austria, Germany, Hungary, Greece, Poland, Turkey, Czech Republic E A M E Mediterranean e.g. Italy, Croatia, Israel, Spain, Portugal, Malta E A M E Middle East e.g. UAE, Saudi Arabia, Yemen, Qatar, Syria

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Chart 1- Market Breakdown of Respondents (265 in total)

Market Breakdown of Respondents (265 in Total) - EAME Region -

25.66% 17.36%

10.94%

37.36%

8.68%

E A M E - A F I O (Af rica & Indian Ocean) E A M E - Mediterranean

E A M E - North-West Europe E A M E - Middle East

E A M E - Central & Eastern Europe

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Chart 2- Ownership of Respondents in EAME (265 in Total)

Ownership (Management) of Respondents (265 in Total) - EAME Region 2.26% 11.70% 4.15% 14.72%

67.17%

Management Contract

Franchise

Owner / Operator

JV-Non-Consol (Managed)

Leased / Rented

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Chart 3: Breakdown of EAME Properties by Hotel Type of Service Level

Respondents by Hotel Type of Service Level (265 in Total) - EAME Region -

36.98%

5.28%

57.74%

Luxury / Upscale (5 stars)

Mid-Scale (3-4 stars)

Other e.g.: Spa, Boutique, Resort

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Section 2: EAME Regions Average Total IT Spending

Chart 4: Average IT Property Level Spend by Region

AveragePropertyLevelITSpendin2007 EAMERegions

180000 164,966.37 160000 156,360.9531

140000 129,257.04 120000 120,229.1837 128,866.13

100000

80000

60000

40000

20000

0 EAME AFIO (Africa&Indian Ocean) EAME NorthWest EAME Central& Europe EasternEurope EAME Mediterranean EAME Middle East

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Chart 5: Regional - Average IT Spend per Room in 2007

Section 3: Breakdown of Total IT Spending

Regional Averages (2007): Annual IT Total, OPEX and CAPEX Spend per Room EAME Region
1000.00
920.03

900.00

Regional Averages per Room in

800.00 700.00
610.07

600.00 500.00
413.89

544.04 487.19 499.92

400.00 300.00 200.00 100.00 0.00 E A M E - A F I O (Af rica & Indian Ocean)
280.27

349.75

353.85

323.44 280.95

184.40 133.62 132.70

169.58

E A M E - North-West Europe

E A M E - Central & Eastern Europe EAME Regional Divisions

E A M E - Mediterranean

E A M E - Middle East

Total IT Spend per Room

OPEX Spend per Room

CAPEX Spend per Room

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Chart 6: IT Spend as a % of GOR, GOP, EBITDA and Operating Expense (2007) - EAME

IT Spend as a % of 2007 GOR, GOP, EBITDA and Operating Expense EAME Region
25.00%

20.00%

19.48%

15.00%

10.43% 10.00%

10.62% 8.12%

5.00% 2.19% 0.95% 0.00% E A M E - A F I O (Af rica & Indian Ocean) E A M E - North-West Europe E A M E - Central & Eastern Europe E A M E - Mediterranean E A M E - Middle East 1.67% 2.54% 0.96% 1.54% 1.09% 3.20% 1.67% 0.98% 3.06% 1.43% 2.89% 1.21% 0.61% 1.24%

IT Spending as a % of GOR IT Spending as a % of EBITDA

IT Spending as a % of GOP IT Spending as a % of Operating Expense

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Section 4: IT YIELD

Chart 7: Total Revenue Yield to Annual IT Spend by EAME Region in 2007

GOR YIELD to Annual IT Spend in 2007 EAME Region

E A M E - Middle East

163.35

EAME Regional Divisions

E A M E - Mediterranean

102.52

E A M E - Central & Eastern Europe

92.07

E A M E - North-West Europe

104.05

E A M E - A F I O (Africa & Indian Ocean)

105.38

20

40

60

80

100

120

140

160

180

For every EURO spent on IT GOR Yield to Annual IT Spend in 2007

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Chart 8: GOP Yield to Annual IT Spend by EAME Region in 2007

GOP YIELD to Annual IT Spend in 2007 EAME Region

E A M E - Middle East

82.41

EAME Regional Divisions

E A M E - Mediterranean

32.63

E A M E - Central & Eastern Europe

31.27

E A M E - North-West Europe

39.32

E A M E - A F I O (Africa & Indian Ocean)

45.60

10

20

30

40

50

60

70

80

90

For every EURO spent on IT GOP Yield to Annual IT Spend in 2007

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Chart 9: EBITDA Yield to Annual IT Spend by EAME Region in 2007

EBITDA YIELD to Annual IT Spend in 2007 EAME Region

E A M E - Middle East

34.60

EAME Regional Divisions

E A M E - Mediterranean

12.31

E A M E - Central & Eastern Europe

9.41

E A M E - North-West Europe

9.59

E A M E - A F I O (Africa & Indian Ocean)

5.13

10

15

20

25

30

35

40

For every EURO spent on IT EBITDA Yield to Annual IT Spend

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Section 5: IT VALUE

Chart 10: IT Value Chart (Annual IT Spending as a % of GOR versus Operating Margin in 2007) in EAME

IT "Value" Chart - EAME Region in 2007 (Annual IT Spending as a % of GOR versus Operating Margin)
12.00% 11.00% 10.00% 9.00%

IT spend as a % of GOR

8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0.00% 10.00% 20.00% 30.00% 40.00% Operating Margin 50.00% 60.00% 70.00%

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Chart 10a: IT Value Chart (Annual IT Spending as a % of GOR versus Operating Margin in 2007) in EAME- North West Europe

IT "Value" Chart - North-West Europe in 2007 (Annual IT Spend as a % of GOR and Operating Margin)
12.00%

10.00%
IT Spend as a % of GOR

8.00%

6.00%

4.00%

2.00%

0.00% 0.00% 10.00% 20.00% 30.00% 40.00% Operating Margin 50.00% 60.00% 70.00%

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Chart 10b: IT Value Chart (Annual IT Spending as a % of GOR versus Operating Margin in 2007) in EAME- Central & Eastern Europe

IT "Value" Chart - Central & Eastern Europe in 2007 (Annual IT Spend as a % of GOR and Operating Margin)
10.00% 9.00% 8.00%
IT Spend as a % of GOR

7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0.00% 10.00% 20.00% 30.00% 40.00% Operating Margin 50.00% 60.00% 70.00%

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Chart 10c: IT Value Chart (Annual IT Spending as a % of GOR versus Operating Margin in 2007) in EAME- Middle East

IT "Value" Chart - Middle East Region (Annual IT Spend as a % of GOR versus Operating Margin)
9.00%

8.00%

7.00%

Annual IT Spend as a % of GOR

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%

Operating Margin

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Chart 10d: IT Value Chart (Annual IT Spending as a % of GOR versus Operating Margin in 2007) in EAME- Mediterranean

IT "Value" Chart - Mediterranean Europe in 2007 (Annual IT Spend as a % of GOR and Operating Margin)
4.50% 4.00% 3.50%

IT Spend as a % of GOR

3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%

Operating Margin

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Chart 11: Breakdown of Annual IT Spending in 2007

Section 6: Allocation of IT Spend

BreakdownofAnnualITSpendingin2007 EAMERegion
40.00 34.70% 33.27% 29.72% 27.43% 25.80% 25.00 25.02% 23.34% 22.48% 20.10% 18.15% 15.82% 15.00 11.04% 10.00 6.78%6.57% 5.00 0.04% 0.04% E A M E - A F I O (Af rica & Indian Ocean) 1.71% E A M E - North-West Europe 4.80% 3.85% 0.81% E A M E - Central & Eastern Europe 1.93% 0.56% E A M E - Mediterranean 1.69% 1.34% E A M E - Middle East 14.00% 12.73% 12.69% 12.66% 33.19% 35.00

Distribution of IT Spending as a %

33.42%

30.00

20.00

0.00

Hardware and Maintenance IT Consulting Expenditures

Sof tware and License Fees Corporate / Central Fee (if applicable)

IT related Training Budget Other (describe in f inal question)

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About the author of this report: Prof. Dr. Hilary C Murphy, PhD, MCIM, MPhil, dip BITS, BA, teaches and researches at Ecole Hotelire de Lausanne (EHL) in the strategic deployment of technology and e-marketing. Over the past 14 years she has researched and published articles on these subjects in trade magazines and in international academic journals and also delivered key papers at international conferences.

References
Gartner (2008) IT Spending and Staffing Report, authors: Michael Smith, Barbara Gomonski, John P. Roberts, Robert D Souza Info-Tech (2007) Special Report: Critical Budget & Staffing Trends for 2007-2008, Authors:John Sloan Computer Economics (2007) IT Spending Staffing and Technology Trends 2007/ 2008

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