As a global hospitality consultancy, HVS is oftentimes asked to comment on emerging technologies that are potentially applicable to hotel and resort operations – both from the perspective of hoteliers who want to learn further about opportunities for the modernization of their assets, and vendors who are keen to expand their hospitality product and service offerings. These technologies are especially prevalent in building equipment, given an expanding focus on sustainable development and operation.
Regardless of the nature of the technology or whether HVS is approached by a hotelier or a vendor, our response to these sorts of inquiries is consistent: we contend there are certain common due diligence issues that are essential to validating any technology, product or service for its potential effectiveness in a hospitality context.
As such, we have prepared this article that covers six fundamental issues that should be discussed between hoteliers (owners, operators, and developers) and vendors as an early component of the procurement process. While this approach can be applied to any product or service, it is especially relevant for emerging sustainable technologies with larger capital requirements such as alternative energy plants, building automation and energy management systems, large-scale laundry systems, motor and drive retrofits, waste plants, and other back of the house equipment.
When hoteliers and vendors communicate early on to identify and discuss these essential due diligence issues, it enables both parties to rapidly and efficiently hone in on whether a technology or product makes sense in a particular context. By considering these issues ahead of actual procurement, hoteliers also mitigate the possibility of ending up with nonperforming equipment that becomes a recurring maintenance issue or actually results in less sustainable performance than conventional technology (via increased resource consumption, operational costs, or environmental impact).
Where is the technology operational today?
The greatest indication of the viability of a new or emerging technology is its performance in a real-world operational context. If the technology is already deployed in hotels, the first step in the due diligence process should be to speak with owners or operators of facilities who are already using it, in order to ascertain its performance and cost-effectiveness. Alternatively, the technology may be deployed in a context that is analogous to hospitality, such as in commercial real estate, which can still provide an effective indication of its relevance and applicability to a hospitality setting.
Owners should be cognizant of the fact that a relatively new installation (within 1 – 2 years) may not provide an adequate indication of the longer term performance and operations & maintenance (O&M) costs, both of which factor into the overall return on investment. For emerging technologies that have not yet been tested in the context of hospitality or commercial real estate, the hotel owner is assuming some of the risk and liability of mechanical breakdowns, suboptimal performance, permitting delays, and other unknowns if they elect to proceed with installation of the technology on a ‘beta’ or ‘pilot’ approach. As such, these initial projects are oftentimes provided by vendors at a significantly reduced cost in exchange for the opportunity to test the technology out in a practical application context.
If the project is significant in terms of scope and investment, it may be advisable to bring in a neutral third party to evaluate the technology from a technical perspective. This evaluation could be provided by either an independent consultant or engineering firm; this individual or company should have an extensive resume of expertise in either the design or operation of the technology in an applied context.
What are the operational requirements and constraints?
Subsequent to identification of the fundamental principles of the technology, it is helpful to have a clear understanding of installation requirements (e.g. space requirements, integration with existing building systems, etc.) and operational protocols (e.g. standard operating procedures, equipment scheduling, staffing requirements, etc). This information is typically best conveyed via product cut sheets and technical specifications from the vendor, although it is oftentimes helpful to engage in detailed conversations with the actual operators of the equipment in other facilities to ascertain their first-hand reactions to the technology.
It is essential to identify any issues that may adversely impact the guest experience. These issues can originate in design (technology does not perform according to aesthetic requirements or brand standards), operations (equipment efficiency or downtime), or externalities associated with operations (secondary, unintended impacts such as noise, vibration, odors, air quality issues, etc). These issues are usually best identified by visiting one or more properties with the technology in-place. For larger capital projects, the cost of travel to inspect a system or product first-hand is typically negligible compared to the longer-term cost of having to replace a system that functions with unintended impacts.
The hotel representative should ask for details regarding the anticipated maintenance regime and also review service records (if available) for existing installations to understand common maintenance issues and costs. The expected service life of the installation should also be understood. For example, when considering a lamp replacement, the hotelier should understand the potential for lumen degradation and color shift over time – providing an indication of the typical service life of the technology as compared to that of more conventional products.
What is the feasibility of securing approvals and permits?
The regulatory regime surrounding deployment of a new technology or product can range widely - from simple exemption from permitting requirements (for example, lighting or plumbing fixture retrofits in some municipalities) to the requirement for comprehensive approvals and permits at multiple levels of regulatory authority (for example, installation of an onsite power generation system). It is therefore important to identify the regulatory regime under which a technology, product, or service falls to properly scope project timeframes and soft costs.
If the technology is new in a certain municipality and has not previously been permitted for use in a commercial building context, the owner and/or vendor should consider conducting an informal consultation with the relevant regulatory authorities to discuss the technology and receive preliminary feedback regarding the likelihood of securing the appropriate approvals and permits. This meeting is typically referred to as a pre-application consultation and is routinely conducted as an early component of the regulatory permitting process. Based on the level of investment required and the importance of the project to the organization, the hotel’s ownership or management may desire to participate in this meeting (in addition to the vendor and/or any retained consultants) so they can learn first-hand regarding the anticipated permitting regime, timeframe, and costs.
In addition to any construction or operations permits required, the hotelier should also understand any vendor licensures that demonstrate professional competency in the design, sale, and operation of the technology (e.g. business licensure, engineering accreditation, membership in relevant trade organizations, etc.), as well as adherence to relevant certifications and standards for the technology itself (e.g. Underwriter’s Laboratory, International Organization for Standardization, etc).
What levels of financial performance are modeled, and are these costs and returns verifiable through actual performance?
Most vendors of environmental technologies provide calculations regarding anticipated system performance and cost savings / ROI. Hotel representatives should ask for detail regarding the calculations, any assumptions included (e.g. commodity rates), and whether the calculations are theoretical in nature or based on actual system performance. Whenever possible, it is preferable to speak with an owner with the technology already installed to understand how the system performs with regard to initial financial projections. If the technology is intended to replace or augment an existing utility (e.g. energy, water, waste hauling), the financial evaluation should include a sensitivity analysis based on anticipated future variations in commodity rates to provide a reasonable range of anticipated returns.
If the financial analysis assumes that the hotelier and/or vendor will secure various incentives from a utility or governmental agency (e.g. subsidies, rebates, tax credits and abatements, etc.), it is essential to confirm that the incentive programs are 1) valid for the specific technology proposed; and 2) funded at the time when the technology will be installed and operated. It should be noted that incentives and subsidies are oftentimes advertised without an adequate allocation of funding.
What are the environmental outcomes associated with installation and operation of the technology?
If environmental and/or sustainability issues are an important consideration associated with the technology or product (from an ownership or brand compliance perspective), some level of environmental due diligence should be conducted relating to the potential reduction in resource consumption and/or waste generation associated with implementation of the technology.
From an ownership perspective, it may also be prudent to perform a high-level alternatives analysis to understand the highest and best use of working capital. For example, if a hotel’s carbon footprint is an immediately pressing issue (perhaps in terms of securing MICE business), the technology could be compared with other uses of capital to ascertain which investment will result in the greatest reduction in emission levels - and therefore be most attractive to potential customers.
How does the vendor structure its relationship with the client?
The contractual relationship between the vendor and hotelier can be structured in many different fashions based on the scale of the transaction and potential cost savings associated with operation of the technology. While most transactions are straight purchase agreements, alternative relationship structures such as performance contracting, power purchase agreements, and equipment leasing are also being utilized with increasing frequency.
The hotelier should inquire how the vendor typically structures its relationship with clients, as well as review any purchase or service contracts. The specific details of the agreements (e.g. term, performance stipulations, termination clauses, financing provisions, etc.) can then be evaluated against ownership objectives to determine if the technology is viable from an investment horizon perspective. This is also an opportunity to understand the warranty for the technology or service, and to discuss with other customers the extent to which the vendor stands behind their product.
Although a technology may be identified as ‘sustainable,’ hoteliers should apply the same due diligence as with any other procurement decision, including consideration of technical merit, operational impacts and constraints, regulatory and brand requirements, and economic impact. Additionally, since these technologies are intended to minimize or reduce a hotel’s resource consumption footprint, it is prudent to evaluate the anticipated environmental benefits associated with the technology in comparison with other uses of capital which could potentially provide a greater environmental and/or financial return.