Finance & DevelopmentMarket ReportsControlling Telecommunications Costs: Rise in Telecom-Related Expenses

Controlling Telecommunications Costs: Rise in Telecom-Related Expenses

To gain a better understanding of telecommunication expenditures at U.S. hotels, CBRE analyzed the costs of phone and internet service within the information and telecommunications systems department (IT department) of nearly 3,000 hotels that participated in our annual Trends in the Hotel Industry survey. Although telecom accounts for a small percentage of expenses, data during 2015 through 2019 revealed a significant upward trend in telecom-related expenditures. At the same time, the data also revealed a steep decline in revenue generation from charges for phone calls and internet access.

To achieve more efficient hotel operations and survive the changing landscape, hotel owners and operators are finding new ways to control telecom costs.

A Rising Cost

In 2015, the 11th edition of the Uniform System of Accounts for the Lodging Industry established the IT department to provide greater transparency to the ever-growing expenses associated with the increased use of technology in hotel operations. The service costs associated with phones and internet for administrative needs among staff and complimentary guest phone calls and internet access are recorded in this department.

From 2015 through 2019, total operating expenses (i.e., operated department plus undistributed expenses before deductions for management fees and non-operating expenses) increased at a compound average annual growth rate (CAGR) of 2.2 percent at the properties in our study sample. During this same period, the hotels’ cost for telecom service increased at a CAGR of 9.7 percent. Individually, the cost of phone service rose by a CAGR of 5.7 percent, while the cost of internet service increased at an average annual pace of 16.1 percent. The 9.7 percent combined CAGR for telecommunications cost is more than three times the CAGR for any other individual hotel department cost during the same five-year period.

Telecom costs increased at a greater pace than total operating costs across all chain scale categories except luxury hotels. At these high-end properties, telecom costs rose at a CAGR of 1.1 percent, compared to 1.5 percent for all operating expenses.

Telecom costs increased the most in the upper-midscale (CAGR of 21.5 percent) and upscale (CAGR of 13.9 percent) chain scales. Expanded offerings of complimentary phone and internet at the select-service properties that operate within these two segments contributed to the increased cost.

What to Do

In the current landscape, hotel owners and operators are pursuing strategies to simultaneously eliminate unnecessary spending and increase revenues while meeting guests’ evolving expectations. To control telecom costs and remain competitive, owners and operators are taking three primary approaches. To manage costs more efficiently, organizations within the industry are undergoing IT audits and consolidating telecom vendors across portfolios. At the same time, competitive organizations are recognizing the need to upgrade certain technologies.

While a small, yet vital, expense to the overall operations, the first step is to understand an operator’s technology status through an IT audit and evaluation. This is designed to detail an organization’s current technology landscape, how it performs, and what additional needs exist. From there, focusing on vendor consolidation, as hotel portfolios are geographically dispersed, can save costs and time. These first two methods typically identify combined savings of approximately 20 to 30 percent.

Finally, deploying the appropriate technology can create an environment of “better, faster, and cheaper.” Pricing in the industry continues to compress, meaning that even recent contracts may be subject to savings. For example, owners may be able to upgrade a Dedicated Internet Access (DIA) to current market pricing—saving 20 percent while improving the speed capabilities by 200 to 300 percent.

Telecom doesn’t limit itself to a specific type of provider or operator. The emphasis of connectivity within the hotel industry is unquestionably going to grow in the coming years, ultimately placing headwinds on balance sheets. Owners and operators across all segments of the industry are tasked with better managing and creating efficiencies with their property portfolios. Additionally, as portfolios become larger through acquisition across the globe, being able to limit disruption and deploy the best technology becomes even more important.

The Need to Watch

During the 2020 industry recession, hotel operators did a commendable job of cutting expenses to offset the severe revenue declines. Hotel owners will look for their operators to perpetuate these cost controls into the future. In light of decreasing telecom revenue, finding ways to save telecom costs will contribute to the continuation of efficient hotel operations.

Robert Mandelbaum and Michael Kane
Robert Mandelbaum and Michael Kane
Robert Mandelbaum is director of research information services for CBRE Hotels Research. Michael Kane is business operations manager in the Denver office of CBRE.