Management Contract

What is MANAGEMENT CONTRACT?

Agreement, for coordinating and overseeing a contract, is made between

investors or owners of a project, and the hired management company.
Computing management fees and the conditions and duration of the
agreement is spelled out with any contributing methods.
A management contract is an agreement between a hotel owner and hotel
management company under which, for a fee, the management company
operates the hotel.
A management contract is a written agreement between the owner of a
business and a third-party management company. The details of the
agreement are spelled out in the contract and can include the amount of
control given to the management company, the terms of payment and the
reasons under which the contract may be terminated. There are pros and
cons to management contracts and their uses.

In a management agreement, the chain basically provides the same services as a

franchise agreement, such as brand, reservation system etc., but on top of this,
there is an agency agreement, meaning the brand operates the hotel, making all
the day-to-day decisions on behalf of the owner. The group names a general
manager, who will generally come from its own system, or will hire and train one for
the specific hotel; he or she will hire the staff, and will control costs and revenue,
food costs, apply brand standards, and generally supervise the management of the
hotel. The General Manager reports to the Regional Director, who in turn reports to
the Regional Vice President, and there are daily and monthly reports. However the
bank account and local management company still belong to the owner. While input
from the owner is welcome, interference in the day to day running of the operation
is not allowed, otherwise it is no longer a management agreement. In other words,
there is only one captain on the boat. Sometimes what may seem to an owner in
the short term to be a wrong decision is often a good one in the longer term. So he
has to put his trust in the management. At the beginning of each financial year, a
budget is prepared and presented to the owner. It presents the projected revenue
and operating costs, and once the cost structure is established, the manager must
stick to the budget.

The different between a franchise and a management agreement is also in terms of

fees. In a franchise agreement fees are collected on a room revenue basis, and in
the management agreement, fees are collected on a total revenue basis and on the
bottom-line.

Of course a franchise agreement will cost less for an owner less than a management
agreement. But at the same time they will receive fewer services, because a
franchise agreement will focus on the top line and provide sales services, as well as
purchasing and advice on operation, but mainly it provides sales tools, a brand, a
reservation system, a network, international advertising and exposure for the hotel
operator. Lets take the example of a less mature European market, lets say
Romania A private individual has a piece of land in Bucharest, and wants to build
a hotel on it, but he doesnt know how to run a hotel. So he will ask for a
management agreement, because it would not make sense for him to set up his
own management company for just one hotel, as it would be costly, and difficult to
find the right people locally. So the needs and objectives are not the same.
Depending on the needs in different markets, different services are adapted to
those needs. Its not a choice of saying we will only manage, or we will only lease
or we will only franchise its also what the market wants.

LEASE AGREEMENT

This is almost like ownership. The hotel group basically rents a building and runs the
entire operation. It is run with the groups staff and bank account, and they simply
pay rent every year. In the management contract, the gross operating profit and net
profit of the hotel belong to the owner, less a fee for the operator; and a franchise
is, as mentioned above, similar in many ways. A lease agreement is therefore very
close to an ownership. The only difference in an ownership is that the hotel
company pays interest to the bank, and in a lease agreement, they pay rent to an
owner ( and they cannot sell it).

Lease agreements are not particularly popular among big operators, because they
are quite risky and costly. Ownership and leasing are an asset heavy way to
develop. It is the profitable, but at the same time the riskiest model. The reason it is
not so popular is that hotel companies cannot develop a large number of properties
with lease agreements, otherwise the balance sheet becomes too heavy and/or
risky. In the last financial crisis, companies that were heavily leveraged with leases
and ownership were almost on the edge of bankruptcy, because they had huge
losses, and had to keep paying the rent. As an operating company, most groups
attempt to have a balanced portfolio with the right amount of lease agreements, the
right amount of ownership, the right amount of management and the right amount
of franchise agreements. If they play it right, business will be sustainable in case of
bad times, and profitable in good times.

BOT Concept

Buildoperatetransfer (BOT) or buildownoperatetransfer (BOOT) is a form of

project financing, wherein a private entity receives a concession from the private or
public sector to finance, design, construct, and operate a facility stated in the
concession contract. This enables the project proponent to recover its investment,
operating and maintenance expenses in the project.

Due to the long-term nature of the arrangement, the fees are usually raised during
the concession period. The rate of increase is often tied to a combination of internal
and external variables, allowing the proponent to reach a satisfactory internal rate
of return for its investment.

Examples of countries using BOT are Thailand, Turkey, Taiwan, Bahrain, Saudi
Arabia, Israel, India, Iran, Croatia, Japan, China, Vietnam, Malaysia, Philippines,
Egypt, Myanmar and a few US states (California, Florida, Indiana, Texas, and
Virginia). However, in some countries, such as Canada, Australia, New Zealand and
Nepal, the term used is buildownoperatetransfer (BOOT). Traditionally, such
projects provide for the infrastructure to be transferred to the government at the
end of the concession period. In Australia, primarily for reasons related to the
borrowing powers of states, the transfer obligation may be omitted. For the Alice
Springs Darwin section of the AdelaideDarwin railway the lease period is 50
years, see AustralAsia Rail Corporation. The first BOT was for the China Hotel, built
in 1979 by the Hong Kong listed conglomerate Hopewell Holdings Ltd (controlled by
Sir Gordon Wu).

What is a 'Build-Operate-Transfer Contract'

A type of arrangement in which the private sector builds an infrastructure

project, operates it and eventually transfers ownership of the project to the
government. In many instances, the government becomes the firm's only
customer and promises to purchase at least a predetermined amount of the
project's output. This ensures that the firm recoups its initial investment in a
reasonable time span.

An agreement between a private company and a governmental body. The

agreement commits the private company to build and operate a facility such as a power plant - for a period of time then transfer ownership to the
government. In some cases, an actual transfer does not take place; rather the
government will act as primary customer.

This type of arrangement is used typically in complicated long-term projects as seen

in power plants and water treatment facilities. In some arrangements, the
government does not assume ownership of the project. In those cases, the company

continues running the facility and the government acts as both the consumer and
regulator.

Outsourcing
In business, outsourcing involves the contracting out of a business process to
another party (compare business process outsourcing). The concept "outsourcing"
came from American Glossary 'outside resourcing' and it dates back to at least
1981. Outsourcing sometimes involves transferring employees and assets from one
firm to another, but not always. Outsourcing is also the practice of handing over
control of public services to for-profit corporations.

Outsourcing includes both foreign and domestic contracting, and sometimes

includes offshoring (relocating a business function to a distant country) or
Nearshoring (transferring a business process to a nearby country). Financial savings
from lower international labor rates can provide a major motivation for outsourcing
or offshoring.

The opposite of outsourcing, insourcing, entails bringing processes handled by thirdparty firms in-house, and is sometimes accomplished via vertical integration.
However, a business can provide a contract service to another business without
necessarily insourcing that business process.

Overview
Two organizations may enter into a contractual agreement involving an exchange of
services and payments. Outsourcing is said to help firms to perform well in their
core competencies and mitigate shortage of skill or expertise in the areas where
they want to outsource.

In the early 21st century, businesses increasingly outsourced to suppliers outside

their own country, sometimes referred to as offshoring or offshore outsourcing.
Several related terms have emerged to refer to various aspects of the complex
relationship between economic organizations or networks, such as nearshoring,
crowdsourcing, multisourcing and strategic outsourcing.

Outsourcing can offer greater budget flexibility and control. Outsourcing lets
organizations pay for only the services they need, when they need them. It also
reduces the need to hire and train specialized staff, brings in fresh engineering
expertise, and reduces capital and operating expenses.

Do what you do best and outsource the rest has become an internationally
recognized business tagline first coined and developed in the 1990s by the
legendary management consultant Peter Drucker. The slogan was primarily used
to advocate outsourcing as a viable business strategy. It has been said that Mr.
Drucker began explaining the concept of Outsourcing as early as 1989 in his Wall
Street Journal (WSJ) article entitled Sell the Mailroom.

From Druckers perspective, a company should only seek to subcontract in those

areas in which it demonstrated no special ability.[14] The business strategy outlined
by his slogan recommended that companies should take advantage of a specialist
providers knowledge and economies of scale to improve performance and achieve
the service needed.

In 2009 by way of recognition, Peter Drucker posthumously received a significant

honor, when he was inducted into the Outsourcing Hall of Fame for his outstanding
work in the field.[16]

Reasons for outsourcing[edit]

Companies primarily outsource to reduce certain costs such as peripheral or
"non-core" business expenses,[17] high taxes, high energy costs, excessive
government regulation/mandates, production and/or labor costs. The incentive to
outsource may be greater for U.S. companies due to unusually high corporate taxes
and mandated benefits, like social security, Medicare, and safety protection (OSHA
regulations).[18] At the same time, it appears U.S. companies do not outsource to
reduce executive or managerial costs. For instance, executive pay in the United
States in 2007 was more than 400 times more than average workersa gap 20
times bigger than it was in 1965.[19] In 2011, twenty-six of the largest US
corporations paid more to CEO's than they paid in federal taxes.[20]

What is 'Outsourcing'
Outsourcing is a practice used by different companies to reduce costs by
transferring portions of work to outside suppliers rather than completing it
internally.

Outsourcing is an effective cost-saving strategy when used properly. It is sometimes

more affordable to purchase a good from companies with than it is to produce the
good internally.

BREAKING DOWN 'Outsourcing'

An example of a manufacturing company outsourcing is Dell buying some of its
computer components from another manufacturer to save on production costs.
Alternatively, businesses may decide to outsource bookkeeping duties to
independent accounting firms, as it may be cheaper than retaining an in-house
accountant.

In addition to cost savings, companies can employ an outsourcing strategy to focus

on core aspects of a business. Outsourcing noncore activities can improve
efficiency, streamlining and productivity because another entity performs these
smaller tasks better than the firm itself. This strategy may also lead to faster
turnaround times, increased competitiveness within an industry and the cutting of
overall operational costs. Businesses can reduce labor costs significantly by
outsourcing certain tasks, while companies may simultaneously have access to
technology without investing large amounts of money to own the technology.

Many businesses find outsourcing the functions of human resources, such as payroll
and health insurance, saves enormous amounts of time, effort and energy. HR is one
of the noncore functions of a firm; other companies may have experts to help with
this aspect of human capital. As many as 16% of companies outsource some kind of
task that deals directly with human resources.

Disadvantages
Outsourcing also has several disadvantages. Signing contracts with other
companies may take time and extra effort from a firm's legal team. Security threats
occur if another party has access to a company's confidential information and then
the party suffers a data breach. A lack of communication between the company and
the outsourced provider may occur, which could delay the completion of projects.

Statistics and Surveys

Companies typically save around 15% due to cost reductions brought about from
outsourcing. A 2014 study from Datamark, Inc. claims one client saved 31% over

one year when outsourcing one aspect of its business process. Over three years, the
cost savings rose to 33%.

Deloitte's 2014 global outsourcing survey interviewed respondents from over 22

industry sectors and 30 countries. The consulting firm found 69% of companies
surveyed were more likely to outsource in some way due to cloud computing
technology. As much as 66% of companies wanted to outsource certain business
processes as a service. Up to 53% of survey respondents outsourced their IT
functions in 2014, while 26% of firms that did not outsource anything at the time
planned to do so sometime in the future.

Read more: Outsourcing Definition | Investopedia

http://www.investopedia.com/terms/o/outsourcing.asp#ixzz4FxfUEAFe
Follow us: Investopedia on Facebook