Case Study for Chapter 6

OUTRIGGER HOTELS AND RESORTS

Outrigger History1

On Black Friday, September 13, 1929, Roy C. Kelley arrived in Hawaii with his wife Estelle. An architect by training, Mr. Kelley joined the firm of C.W. Dickey and was responsible for designing many of Honolulu’s landmark buildings, including the main building of the old Halekulani Hotel and the Waikiki Theater on Kalakaua Avenue. Nine years later Kelley set out on his own and opened his architecture firm, building numerous homes, apartment buildings, and hotels on the island of Oahu. In 1963, Kelley took over the land occupied by the old Outrigger Canoe Club and Outrigger Hotels became a reality with the mission of bringing the dream of a vacation in Paradise within the reach of the middle-class traveler. Included in the agreement were leases on three Waikiki lots that later became the Outrigger East, Outrigger West, and Coral Reef hotels. The Outrigger Waikiki Hotel was built on the site of the old canoe club, arguably the prime spot on Waikiki beach, in 1967. Throughout the next two decades, Outrigger Hotels Hawaii, as the company was named, continued its expansion in Waikiki. When in the seventies the zoning authority put a cap on new construction in Waikiki, Outrigger began to expand through acquisition rather than construction, ultimately becoming the largest chain in the State of Hawaii with over 7,000 rooms and a total of 15 properties concentrated in Waikiki (see Exhibit 6.1). Thanks to its clustered configuration, Outrigger Hotels Hawaii was able to maintain a centralized management structure fitting Mr. Kelley’s “management by walking around” style.

In 1989, Outrigger Hotels Hawaii, now under the leadership of Roy Kelley’s son, Dr. Richard Kelley, took over management of The Royal Waikoloan Hotel on the Big Island of Hawaii. When hurricane Iniki, heading for Waikiki in 1992, barely missed Honolulu and ravaged the island of Kauai, it provided further impetus for Outrigger’s geographical diversification strategy to and beyond neighboring islands. The firm, now expanding into management agreements with third-party owners, added properties on Maui and Kauai and ultimately grew to a total of 26 locations in the Hawaiian Islands (see Exhibit 6.2).

In 1996 the firm made its first international foray, opening the Outrigger Marshall Island Resort on Majuro Atoll in the Republic of the Marshall Islands. Through partnerships, joint ventures, acquisitions, and new developments the firm continued to grow internationally, adding properties in Guam, Fiji, Tahiti, Australia, and New Zealand (see Exhibit 6.3).

While growing geographically, Outrigger Hotels Hawaii also began to diversify its product portfolio with the addition of condominium resorts beginning in 1990. Because of its geographical and product diversification, in 1995 Outrigger Hotels Hawaii changed its name to Outrigger Hotels and Resorts, and in 1999 re- branded fifteen of its hotels in Waikiki to launch a new hotel brand called OHANA Hotels of Hawaii. Reflecting on the decision, President and CEO David Carey commented: “We had an identity crisis because the market moved up, we upgraded the on-beach properties where we had higher demand and bought some nice properties in neighboring islands. But we had huge variation in the portfolio —if you stayed at a budget property vs. a beach front property, you’d be very confused as to what an Outrigger was.” In an effort to bank on the name awareness that the Outrigger brand had developed with consumers, the on-beach properties became upscale full-service hotels under the Outrigger brand. The condos, also typically on-beach upscale locations, maintained the Outrigger brand. Conversely, the OHANA brand was positioned to cater to the budget traveler looking for value on off-beach properties. Perry Sorenson, COO, explained the OHANA value proposition: “OHANA hotels are something between a Holiday Inn and a Hampton Inn. No expectation of restaurants, but expectations that you have a friendly staff, that the room is going to be clean, and you will be taken care of. Not a lot of extras, but good value.” Condominiums represented an increasingly important share of the total portfolio of properties (see Exhibit 6.4), even though the firm had sort of stumbled upon the opportunity condominiums offered. Condominiums appealed to the independent traveler who would do much research and planning on his own.

Condominiums were also very complex, non-standard products that travel agents and wholesalers found hard to sell. As Sorenson explained: “The addition of condominium properties was a customer driven initiative. We kept receiving inquiries about condominium vacations and had to direct customers to competitors who also ran hotels. That did not make any sense.”

As the firm learned over time, condominiums were very different than traditional hotel and resort operations. While management agreements with condominiums varied substantially, unit owners typically had the option to join a pool of units that Outrigger was responsible for marketing and managing. Owners typically received 55% of the gross income the units generated and Outrigger funded its operations with the remainder. Beyond labor costs, the primary expenses included the costs of marketing and selling the properties, front desk and housekeeping operations, and in-unit maintenance. Maintenance of the common areas, defined as anything from the unit’s inside wall paint outward, was the responsibility of the AOAO (the owners association) and was funded through annual dues. This state of affairs was simpler in the Australian condominiums— referred to as strata title properties. There, the management company had to buy and control the lobby area, and the contracts were generally 25 years in length and required standardization of revenue splits. This approach created simplicity and clarity that made it more efficient for the management company to operate. Because condos were rarely built as business ventures, but rather were designed as primary or vacation homes for the tenants, they offered little office or staging space for management companies to operate in. They also lacked many of the typical hotel services and departments such as food and beverage, room service, laundry, and daily maid service. Working with a relatively unsophisticated and widespread ownership base, with some condominiums having almost one owner (i.e., one contract) per unit, presented significant challenges. Jim Hill, Regional Director—Maui, summarized the challenge: “The thing that is hardest to do in condos is to change anything. You’ll sit in a board meeting with the association and they’ll say no, no, no, when the next property over offers a more appealing layout and better amenities. But that same person will ask you in another meeting why isn’t the revenue higher?”

These difficulties notwithstanding, Outrigger found the condo business appealing when it made its first foray into it in the early 1990s, because it provided a means for expansion through management contracts without the need to acquire expensive properties. Condo products varied widely, ranging from

studios to two bedroom apartments, and did not have all the services typically associated with a hotel, like room service, on-property restaurants, and retail shops.

Outrigger had grown to a sizable firm, encompassing about 3,600 employees (of which about 230 were at corporate), a portfolio of properties exceeding U.S. $1.4 billion,2 and approximate revenues of US $45 million.

The Hotels and Resorts Industry

As the new millennium dawned, the global lodging industry was estimated to exceed $295 billion in sales, about 11% of the world’s economic output, and employed more than 250 million workers (see Table 6.1 for performance indicators).3 The leisure travel segment accounted for about 45% of total volume.

With respect to the Hawaiian market, which was Outrigger’s traditional stronghold, recent figures showed performance levels above the average of the global industry (see Table 6.2). Being quite isolated from any large population pool, Hawaii was a classic destination market with an exclusive fly-in customer base. The major feeders were U.S. westbound traffic and Japanese eastbound traffic. These markets were thought to yield very high return rates—estimated by some to be around 50% westbound and over 65% eastbound. This trend made for a very location-savvy customer base. Peculiar to this market was also the trend of multi-island stays, with guests visiting more than one destination during the same trip.

Because the Hawaii and Pacific Rim markets were exclusive destination markets, the use of packages—including air and accommodations—was pervasive. Historically, packages were assembled and sold by wholesalers and tour operators who purchased both air and hotel rooms in bulk and re-marketed them to the traveling public. With the widespread adoption of the Internet, a new type of package was emerging under the leadership of large online travel agencies: dynamic packages. A dynamic package was one that enabled the guest to choose air, hotel, car rental, and even activities, ticket them independently, and then price them out as a bundle. Dynamic packages were appealing to suppliers because the price of each item was not disclosed, making price comparison difficult and alleviating commoditization fears. They were appealing to perspective travelers because they increased choice and fostered flexibility. Finally, they appealed to online travel agents because they built upon their value proposition—customer choice—and had the potential to improve their margins.

As a mature destination, Hawaii had been entered by many of the larger branded hospitality and resort companies. The largest hospitality firms, such as Marriott International, Hilton Hotels and Resorts, and Starwood, had a significant presence with eight, five, and eleven properties respectively. But the largest operators in Hawaii were geographically- and leisure-focused players such as Outrigger, ASTON Hotels & Resorts Hawaii (with twenty-eight properties), and Marc Resorts Hawaii (with eleven properties).

Outriggers Organization

Outrigger Hotels and Resorts was a management company wholly owned by a holding corporation called Outrigger Enterprises. Reflecting its real estate development roots, Outrigger Enterprises also owned a real estate ownership company called Outrigger Properties (Exhibit 6.5).

W. David P. Carey III, President and Chief Executive Officer David Carey joined Outrigger Enterprises, Inc. as executive vice president and general counsel in 1986, and was named president of the company in 1988, and chief executive officer in 1994. After graduation in 1982, Carey moved to Honolulu and was an attorney specializing in corporate and real estate law at Carlsmith Wichman Case Mukai and Ichiki, where Outrigger Hotels was one of his major clients. Carey is a member of numerous business and community organizations, including the Hawaii Tourism Authority, Hawaii Hotel Association, and others. Carey has a B.S. in electrical engineering from Stanford University, a J.D., cum laude, and an M.B.A., with distinction, from the Santa Clara University. He was a member of the Beta Gamma Sigma Honor Society.

Joe Durocher, Senior Vice President and Chief Information Officer Joe Durocher first joined Outrigger in 1986 as Vice President of Information Systems. During his tenure, he was instrumental in the installation and maintenance of the company’s Stellex reservations and front desk computer system. After 10 years with Outrigger, Durocher left the company to join Hilton Hotels Corporation as SVP & CIO, where he was

responsible for data processing and related strategies for all of Hilton’s non- gaming hotels, amounting to well over 300 properties with over 110,000 rooms worldwide. While with Hilton, Durocher was instrumental in the replacement of Hilton’s Hiltron central reservation system with Hilstar, a new state of the art central reservations system. Durocher rejoined Outrigger Enterprises in 2000. Born and raised in Hawaii, Durocher received his B.S. in Electrical Engineering and MBA from the University of Hawaii. He is a Certified Systems Professional (CSP) and Certified Data Processing Professional (CDP). Durocher is also a member of the Beta Gamma Sigma honor society.

Perry Sorenson, Chief Operating Officer In his position as a chief operating officer Perry Sorenson is responsible for all aspects of hotel operations as well as Outrigger’s current expansion across the Pacific. He joined Outrigger as executive vice president in 1991. Sorenson’s career spans over 20 years in the hospitality industry. He was previously EVP and COO for Embassy Suites, Inc., the world’s largest all- suite hotel chain. Sorenson directed the rapid growth of Embassy Suites operations as it expanded from five to 105 hotels in five years. Prior to joining Embassy Suites, Sorenson was vice president of operations for Holiday Inns Inc., where he was the recipient of the Holiday Inn Corporation Chairman’s Award for Service Excellence. He has also held management positions with Radisson Hotel Corp. and Rockresorts, Inc. He is currently a member of the Native Hawaiian Tourism & Hospitality Association and sits on the board of various other community and industry organizations. Sorenson received his BA in psychology and MBA from the University of Utah.

Outrigger Properties wrote and managed real estate contracts with third-party owners and supervised the owned assets (accounting for about a third of all properties in the Outrigger portfolio), as well as the development of new properties. The firm also monitored the real estate market for optimal times to invest in available properties or sell assets in the portfolio and raise needed capital. Outrigger Properties managed leasing contracts with the many independent retailers occupying food and beverage outlets—rarely run internally by Outrigger—and shops within the hotels and resorts in its portfolio. Sorenson explained the tradeoffs associated with this decision: “We are the third largest retail landlord in Hawaii, with about 300,000 square feet of retail space, so we have access to the best restaurant operators. Leasing restaurants allows us to focus our energies on hospitality and [the] profitability of the rest of the hotel, but of course you lose some control when you outsource. It takes a hotel mentality to do room service very well for example.”

Outrigger Hotels and Resorts, the operating arm of Outrigger Enterprises, was responsible for the writing of new management contracts, as well as overseeing property renovations, and operations of the managed hotels, resorts, and condos. Outrigger Properties generally negotiated a base and a percentage of revenue with tenants; revenues from leased space were assigned to the hosting property’s own P&L. Room revenue made up the bulk of each property’s revenue, with rental income as low as 5% in hotels with little retail space and as high as 20% in some of the most appealing locations. Other more marginal revenue lines were parking, in-room entertainment, telecommunications, and kids’ clubs operations.

Outrigger Hotels and Resorts had historically maintained a highly centralized

organizational structure. As the firm grew in size and geographical distribution a more traditional structure emerged, but, reflecting its roots, Outrigger Hotels and Resorts remained consolidated where possible. For example, the two beach-front Outrigger Hotels on Waikiki beach were managed as one. As Chuck Shishido, OHANA Hotels VP of operations and a 33-year veteran of the company, explained: “We have centralized services—accounting, IT, finance, engineering, purchasing, and special projects—that support all the properties on Oahu, as well as indirectly the neighboring islands. There is also one executive housekeeper in charge of all properties. We run the OHANA Hotels like a 4,200 room distributed hotel. It is very efficient.”

Since each property in the Outrigger family had its own P&L, these shared services were charged back to them based on room count, revenue, or usage, depending on the service. As the firm expanded internationally it became more decentralized, with resorts in the Pacific Rim working much more like independent operations and organized like traditional resorts. Recognizing the significant advantages offered by its centralized structure, Outrigger was looking at the possibility of better integrating its international resorts. However, distance presented new challenges—1,800 miles separated its southernmost Australian property from its northernmost property alone. Sorenson explained: “We need a reservation solution for Australia, a real-time coordination with a central reservation service. They are operated as individual hotels; the central 800 number today is just switched to the correct hotel. A centralized system would offer tremendous value because we get drive-in business and substantial potential cross-property traffic.”

The Outrigger Customers and Competition

Outrigger’s original mission was to bring the opportunity for a vacation in paradise within the reach of middle-class families. As the firm began to diversify its portfolio, the profile of its customers and the competition changed as well. The typical Outrigger guest was often a multigenerational customer with a sense of loyalty to the Outrigger family (about 25% of guests were returning to Outrigger) and an annual income exceeding $75k. Outrigger guests were almost exclusively leisure travelers, with some mixing business and travel (e.g., attending a conference and extending the stay for some leisure time with the family afterwards). This customer base created seasonality, with winter and summer being the high seasons when properties like the Outrigger Waikiki on the Beach reached an ADR of $260 and an overall occupancy around 90%. Group business was limited, with some overflow from the conference center

looking for meeting space for break-out events. Solomon profiled Outrigger’s customer base: “Our customers are independent-minded and look for an experience that is more regional and attuned to the destination, but still within their comfort zone. They may stay with big brands in their road warrior capacity, but that’s not what they are looking for in a tropical destination.”

rands as Marriott International, Hilton Hotels and Resorts, and Starwood Hotels and Resorts—the latter having a big Sheraton presence in Waikiki. These brands enjoyed name recognition, significant brand awareness amongst the traveling public, a flow of customers redeeming points, available capital, and availability of programs for employees such as discounted travel beyond Hawaii and the Pacific region. In response, Outrigger leveraged some of the premier locations in the markets it competed in, like the Outrigger Waikiki on the Beach, strong name recognition and long-term relationships with the travel distribution network, a strategic focus on vacation destinations, a deep local knowledge and community ties, and good employee relations. Kimberly Agas, VP of Operations for Outrigger’s Waikiki Beachfront Hotels and a 20-year veteran with the company, explained: “Our employees are trusted to help the guests have a wonderful stay, and have the flexibility to act on their initiative. The teams of employees include our partners in the retail, restaurants and activities. We are concerned with the holistic experience, an all encompassing experience. In much of our unionized competition everyone has a narrow job [description] and outside of that they will refer you to a colleague, out of respect, because of contract restrictions, or because that’s how they look at it: ‘this is all I have to do.’”

The typical OHANA guest was a value-minded and Hawaii-savvy leisure traveler with income below $100k a year. Typically, OHANA guests had visited Hawaii multiple times, stayed longer than average, and visited more often. Business travel was mainly composed of military and corporations with operations on multiple islands. Groups accounted for less that 10% of OHANA’s overall traffic. Shishido explained: “We have about 50% return guests. Your first trip you want a beach front hotel, the atmosphere, the ambiance—you want the full Hawaii experience. When you come more often, you still want the experience, but you look for more value and instead of spending $250-$300 a night for a beachfront you can stay longer off-beach for $70-$80 a night.”

otels typically achieved an ADR around $66 and approximate occupancy levels of 75% over the year. A number of small regional chains (such as Marc Resorts and Castle Resorts) and many off-beach independent hotels existed in the Waikiki market. But Outrigger’s senior management thought that OHANA hotels had no direct competition. Solomon explained: “There is no quality branded

competitor for OHANA. Because of the real estate costs and lack of efficiencies, competitors like Holiday Inn, Cendant, and Choice can’t build and operate their product at their price point here.

There are many independent no-name products.” Pricing for off-beach properties was much harder to manage because of the commodity nature of the hotels not enjoying a premium location, even though wholesalers concerned about their own brand and customer satisfaction were more willing to carry the OHANA brand over independents because Outrigger backed OHANA’s quality promise. OHANA was the largest operator in Waikiki and the largest Hawaii owned operator.

Two types of customers were typically staying at the condominiums. On the lower side of the $90k to $160k income brackets were families visiting during school breaks and looking to control expenses and control their vacation experience. They valued the full kitchen—a standard in every unit—and the two bedrooms and two baths. This was substantiated by the fact that condos had four times as many reservations coming from the Internet direct and tended to recover faster after a soft economy. On the upper side of the spectrum were ‘newlyweds’ and ‘nearly dead’ couples who liked the privacy and space afforded by a condo. As Hill explained: “On the upper end of the scale people like the convenience to have a full size refrigerator and kitchen amenities but they may never cook. If they want to cook the kitchen is available, but chances are they’ll never use it. That’s why, against conventional wisdom, the new trend is to put restaurants with more resort services in condominium properties.”

While high degrees of variability existed between properties, returning guests to the same property ranged typically between 20% to 40%. With its expanding portfolio, Outrigger believed it enjoyed significant cross-property traffic as well, but it had little hard data on this. Condominiums enjoyed almost no branded competition. Instead, because of the need to convince individual owners to join the pool of Outrigger managed units, the firm competed with small local management companies and individual owners’ beliefs that they could do a better job alone. This idiosyncrasy of condominium operations amounted to having two customers—the unit owners and the guests—who, unaware of the workings of condo operations, were looking for the same level of service they would receive at a resort.

On average, a condominium with mostly two bedroom units would achieve ADRs around $175, while properties with mostly studio and one bedroom units would settle around $140. Outrigger operated a Central Reservation Office (CRO) in Denver, Colorado with anywhere from 40 to 70 reservationists (FTEs), mainly depending on the

volume of business. A corporate marketing staff of 12 people, allocated about 6% of revenue, was responsible for managing the brand and for going to market. An additional 2% of revenue was used to fund reservation and other distribution costs. Reservations were centralized for all properties in Hawaii. Outrigger Hotels had a staff of two or three people at each property to follow through (e.g. to reconcile inconsistencies, create rooming lists, and identify VIPs). For the OHANA hotels this was done as a shared service. Beyond Hawaii reservations were only taken at each property.

Outrigger executives believed that distribution was a cornerstone of its success, with about 50% of the business coming from wholesalers (classified as anything that is on a contract basis) who often sold Outrigger products as part of a package. Consumer direct (via voice or the Web), travel agents, government and military, and corporate clients made up the difference. For international properties the source of business percentage from wholesalers was close to 80% and almost all reservations were faxed to the property. But the lines were blurring with the increasing prominence of online travel agents (e.g., Expedia) and the advent of dynamic packages. Solomon explained: “We strive to make distribution as broad as possible, and for each pipeline (voice, Web direct, GDS, fax) we want to make it as efficient and user friendly as possible. The customer is in control; more than half of those who transact in the wholesale channel can pick the hotel.”

Outrigger Strategy

At the heart of Outrigger Hotels and Resorts’ strategy was a drive to position its properties in places where people could enjoy a vacation experience leveraging Outriggers’ own core competencies. The firm was very careful not to create a cookie cutter approach, but instead to deliver an experience that was respectful of the culture and the special characteristics of the localities in which it operated

—a “sense of place” as the firm called it. As Carey put it: “Our business is really about being a ‘window’ to an experience, not the experience itself. We are the enabler through which people can engage in the leisure experience they desire. We don’t try to export Hawaii when we go elsewhere, but we do honor the same values in the places we operate hotels and resorts.”

The firm was embarking in a $315M renovation of the heart of Waikiki that required the leveling of five existing OHANA hotels—almost 2,000 rooms—that required significant investment in asset maintenance. In this area the firm planned to create about 500 rooms—a substantial reduction in room count—with a sizeable retail component. The firm’s real estate ownership in the area totaled 7.9 contiguous acres and, with its biggest real estate investment being in Waikiki, a renewal of the area had benefits beyond the creation of new hotels and retail space. This bold project limited the firm’s ability to expand in the short term, but Outrigger remained committed to growth and expansion once the renovation was completed. Carey explained the rationale for the firm’s growth strategy: “Given our key competencies, expanding to Guam, the Pacific, and Australia was a source-customer or distribution-driven growth strategy. It leveraged both markets where the customers knew us because they had experienced our hotels before and [markets] where we had relationships with global distribution channels.”

Outrigger’s senior management felt that its key competencies resifded in providing hospitality to guests visiting their properties and successfully marketing those properties through leisure distribution channels, which before the widespread adoption of the Internet by consumers had accounted for over 80% of travel to Hawaii and other fly-in leisure destinations. To complement these basic competencies, Outrigger felt it had developed a superior capability to manage in a multicultural environment, including multicultural and multilingual employees and guests. Outrigger had its roots in the economy segment of the market, but the firm’s executives believed that it was not feasible to compete on price alone and had begun to focus on service delivery as well to build customer preference. Aided by a turnover rate in the single digits in the tight Hawaii labor market, and an average of 25 years of employee tenure with the company, it implemented a value-based management system that called for upward evaluation of managers and a focus on helping employees understand the principles behind Outrigger’s service delivery strategy. As a testament to the firm’s ability to fulfill its employees’ needs, Outrigger had managed to be a mostly non-union shop in the heavily unionized Hawaii labor market. Carey summarized the firm’s positioning: “We operate properties that have good locations, we have a strong travel distribution network, and our employees really provide hospitality from the heart. That creates a differentiated product making price less important.”

Beyond maintenance of the product under capital constraints, at the operational level three dimensions were deemed fundamental for success: providing guests with a rewarding experience and a sense of place, enabling employees to reach their potential and being an integral part of the community. These dimensions were reflected in the firm’s Management Incentive Plan (MIP), structured along three dimensions: Operating Cash Flow, guest satisfaction surveys (using reports produced by the independent research firm Leisure Trends), and employee satisfaction. Beyond these critical success factors within the firm’s control, Outrigger was wedded to the success of its destination markets given the proliferation of competing choices for consumers’ entertainment budgets. Moreover, the firm was dependent on airlines. As leisure decisions became more and more impulse- driven it became more difficult for travelers to find available seats at suitable times and prices. Carey summarized these challenges: “If Hawaii does well, so do we. I spend a lot of time working with local tourism authorities to improve the appeal of the destinations we operate in. But airlines can be a bottleneck. We may not have available lift at times when we need it. If the airlines are full or they have decided in their yield model that they are going to only sell their top fares, there is nothing we can do. From purely the hotels’ perspective, the best thing for us is an airline price war to Hawaii.”

The major carriers, those driving the most traffic into Hawaii and the Pacific region, were under constant financial pressures. The events of September 11th 2001 and the recession that had hit the United States had depressed airline travel and had negatively impacted Outrigger’s own financial performance. While the firm had been able to recover from these setbacks and was seeing high occupancies, terrorist threats and alerts remained a significant concern.

Outrigger IT Infrastructure

Joe Durocher, the CIO of Outrigger Enterprises, was hired by David Carey in 1986. Durocher recalled his early days with the firm: “Mr. Roy Kelly was a hands-on manager. He once told me he hated two things: computers and vice presidents. As the VP of IT, I had two strikes against me. Yet, in 1986 I was brought in to overhaul Outrigger’s IT infrastructure and we built Stellex—our integrated CRS/PMS. At the time all our properties were in Waikiki, within one square mile of each other.” Stellex, introduced in 1987, was a COBOL application running on a Tandem NonStop platform and a proprietary Enscribe database management system that

guaranteed complete redundancy and 24 x 365 uptime. In 1992 Outrigger introduced Stellex 2.0, its first major update to Stellex, which ran on a Sun Microsystems UNIX platform and provided revenue management functionality and reservation center support. Because of its unique need for substantial wholesale interaction, Outrigger engaged Opus to build their revenue management module for Stellex 2.0. Outrigger retained control of the source code and over the years made substantial enhancements, mainly to manage wholesale relationships. The firm felt that its centralized IT infrastructure was a source of competitive advantage. Durocher discussed the trade-offs associated with centralized IT: “Decentralizing IT would decrease our capabilities while increasing overall costs. But centralized IT creates friction at times. When a hotel is sold for example, the IT allocation may increase for other properties.”

Stellex provided the anchor to which all other operational systems, including telephone switches, call accounting, and in-room entertainment, connected. All of the properties in the Hawaiian Islands had access to Outrigger’s centralized IT systems, served from the Honolulu-based data center, through the firm’s proprietary Wide Area Network (Exhibit 6.6).

Stellex, for example, was accessed using an ASP model by all the properties in the Hawaiian Islands, the firm’s Denver-based CRO, and the Portland-based Web servers, greatly simplifying the achievement of single image inventory, disaster recovery, and overall IT management. This enabled the properties to operate with PCs (as few as 12 in a typical 500-room property) and networking equipment. The Point of Sales (POS) systems were not centralized, since Outrigger leased retail and restaurant space. This state of affairs generated some friction at times, as Alan White, VP of Property Technology, explained: “We offer to interface their POS to Stellex and pay for interfaces to automate room charges. But many of those POS are old and can’t interface, they must be upgraded first. Restaurants have to write a manual charge voucher and walk it to the front desk for input. It’s not a popular or efficient way to do it.”

Due to the need for local support, the high telecommunication costs, and the

reliability of international networks deemed unacceptable, Outrigger had yet to extend this centralized model to its operations in Australia and the Pacific. The properties in Australia and New Zealand, all condominiums, used a highly specialized PMS particularly well suited for strata title properties and their special tax code requirements. Durocher explained: “None of the properties in Hawaii has a server on property. In the outer regions we have standalone PMS’s and on-property reservations. We don’t even try to keep Stellex in sync, they just open and close. If a date is getting full, they issue a stop-sell. Reservations that are taken centrally are automatically e-mailed.”

Outrigger’s IT function comprised a staff of twenty-six full time employees, including four data entry operators and three developers housed in a separate limited liability company designed to help Outrigger take advantage of tax incentives offered by the state of Hawaii. One corporate IT professional supported the Australian properties’ application needs. Hardware support was contracted out to local vendors. The function was organized along user needs rather than traditional departmental lines (e.g., data entry, application development, support). Alan White, VP of Property Technology, led the group in charge of creating and supporting IT solutions for the hotels. JoAnn Okawa, Director of Corporate Systems, led the group in charge of creating and supporting IT solutions for the firm’s back-office needs (e.g., general accounting, HR, payroll, purchasing). Bob Owens, Director of System Operations, and his group managed the data center and supported the other two groups. They also performed advisory work for the international properties that had local MIS managers in charge of procuring and managing technology solutions locally. This organization enabled operations personnel to unequivocally ask the Property Technology group for support, while administrative personnel referred to the Corporate Information Service group.

The IT function at Outrigger was designated a cost center. Its operations were funded through allocations to the business units and to each property using four different methods. A charge, based on room count, was assessed for use of property technology. The same mechanism was used to account for use of administrative systems. Group sales software (i.e., Newmarket’s Delphi) was charged based on each property’s meeting space. Finally, any ad-hoc solution (e.g., the writing of a specialized report) was charged directly to the requesting unit. Traditional metrics to measure success (e.g., on-time and on-budget project delivery) were used, and the IT function had recently introduced service level agreements. Durocher explained the rationale for the decision: “Service level agreements enable the management of expectations, increase accountability, and offer choice to user-managers. If you feel you are paying too much, you can reduce your allocation accepting less service. Or you can request more service

and we’ll adjust your charge. Of course, we still get some of the ‘I want more service but I don’t want to pay for it.’”

Beyond maintaining and upgrading Stellex, Outrigger’s IT professionals engaged in minimal application development—mainly writing customized reports, and configuring and interfacing off-the-shelf applications. Outrigger had implemented JD Edwards ERP as the cornerstone of its back-office operations in 1990, years before the ERP craze swept the business world. JD Edwards ran on an IBM AS 400—a very mature and stable platform. The use of outsourcing was limited to the Web site, developed and hosted by a third party in Portland, Oregon. Yet, in order to maintain the integration of direct channels, Stellex served as the Web site’s booking engine through an XML interface that Outrigger’s IT group used as the proof of concept for the interfaces with wholesalers—a key initiative for Outrigger. Durocher explained: “With many wholesalers we have real-time electronic interfaces—they can check availability and we get their reservations instantaneously. Without the interface, if they create a reservation six or three months out, we don’t see it until reporting time, ten days out, when we receive a fax and manually input it. It is virtually impossible to revenue manage like that. Many big brands have great revenue management systems, but don’t have real-time wholesaler data. Moreover, we can write wholesale contracts brand-wide.”

Outrigger felt that its electronic interfaces afforded it a competitive advantage and preferential treatment from interface-enabled wholesalers, a relationship that proved particularly important during slow periods or a soft economy. Electronic interfaces generated substantial efficiencies, including automatic billing and invoicing without human handling, lowering estimated costs to $0.75 from an estimated $10 for manually handled ones. But not all wholesalers were able or interested in automating reservation processing. This was particularly true for small operations or those for whom Hawaii and the Pacific represented a small percentage of business. Solomon summarized the challenge: “The industry is a mess from a connectivity standpoint. We are fortunate that we have the in-house expertise and the recognition from senior management of how important this is. Even the big companies often don’t understand the conditions for success. The dirty little secret of the travel industry is that the fax machine still rules.” White added: “I spend 30–40 hours a week working with wholesalers on interfaces. There are many legacy systems out there; the fax is state of the art. We have made great progress with the more advance wholesalers or those that upgraded recently.”

Outrigger found the Open Travel Alliance (OTA) XML standards, specifying common message format and common content, of great help. But being able to

pick the right partner, and avoid costly failures, remained the major challenge. While Outrigger felt it had been successful to date, with an estimated 33% of total reservations received electronically through the various channels, it still handled more than half a million faxes a year—about eight hundred a day from its largest wholesaler alone before its recent migration to the electronic interface. The firm had recently acquired business intelligence software, a data mart, and analytical tools from E.piphany running on a Windows 2000 platform. The data mart held detailed data for three years, enabling analysis down to the individual guest folio. Data were consolidated afterwards, enabling only aggregate analyses. While E.piphany was a recent purchase, Outrigger had been disciplined in collecting data for some time. White explained: “We had 10 years of high quality data from Stellex; we are very rigid about data capture standardization like room category, naming conventions, request codes, [and] what goes where. For example, postal and country codes are mandatory fields. Our employees’ long tenure helps, and peer pressure is a great asset—nobody wants to be the one that ruins the value of these reports for all.”

IS Assessment

Outrigger’s senior executives found technology to be a great asset to enable communication, as Outrigger’s operations spanned 11 time zones, and felt confident that the IT function was enabling the firm to compete effectively. Carey indicated: “We think that our IT capability in the leisure travel space exceeds the major chains and we have an ability to implement things very quickly. [That’s] the advantage of being small.” The IT function was thought to be able to operate more efficiently than the competition, often offering the same level of service with one or no property- level IS professionals when the competition needed three to six. Outrigger also felt that its size enabled it to move faster than the competition. Bob Owns, Director of Systems/Operations, explained: “We don’t do anything slow here. Major systems in other firms take a year to plan, a year in committees that assign responsibilities, and two or three years to build. A year is a really along time here to develop and implement anything. But we are not a huge company, and capital is a constraint, so we are always challenged to get way ahead of the curve, speculate, and build with a forward thinking mentality. You don’t get bored here.” As the firm was expanding aggressively, and had yet to find an integrated solution for its international properties, some questioned the viability of reinvesting in Stellex. Its rapid geographical and product growth notwithstanding, the IS group felt that its legacy technology—specifically its mature ERP, integrated PMS/CRS, and electronic interfaces with distribution partners—was serving the firm well. White explained: “Stellex is 18 years old. So three years ago we developed the business case for PMS and CRS functionalities. We could not find anything better, with one exception—Stellex is a green screen application that needs a windows GUI.”

The firm was prompted to re-evaluate the role of Stellex after a failed attempt

to migrate to a more modern platform thought to simplify connectivity with the other off-the-shelf computer systems in the portfolio. After testing in two properties over an eight month period the project was aborted, principally blaming the difficulty in effectively managing wholesale relationships and billing manually with the new PMS. Outrigger engaged in limited formal technology training and relied mainly on on-the-job training when it came to software applications. While this created difficulties for people who were hired from outside the firm, Sorenson explained: “Our people have been working with Stellex so long that they have effective workarounds when necessary, and we have very low employee turnover. If someone new comes in we have many experienced employees to help them; this makes training easier.”

As guests became used to ever increasing technology choices and availability both at home and on the road, even resorts focused on the leisure traveler felt the pressure to provide it to guests—whether they used it or not. But for a mid-size company like Outrigger, chasing the technology curve could be dangerous. Agas articulated the challenge: “Our guests say: ‘I do wireless at home, why can’t I do it here?’ As a company we use our buying power to do what’s best for the company. But as two beachfront properties with guests paying the highest ADR and expecting more, sometimes we are held back when it gets to technology as we explore what is best for all.”

The Future

Outrigger’s senior management felt that the firm could leverage its hospitality and marketing expertise, as well as big brand name recognition, by entering into management agreements with third party owners and large brands. While it remained committed to growing and strengthening the Outrigger family of brands, it also had plans to engage in this type of partnership. Another important trend affecting Outrigger’s future strategy was the rapidly changing hospitality distribution landscape and the role of the retail travel agent. Travel agents had historically provided significant amounts of information, counseling, and reassurance to leisure travelers, but more and more consumers were now turning to the Internet for this information. This presented Outrigger with the challenge of populating the new electronic world. The emergence of powerful online agencies (e.g., Expedia, Orbitz) was creating significant opportunities and threats. Carey captured them: “We have grown up with wholesalers; we know how to yield manage the merchant model. The major

chains are not yet embracing the capabilities of the internet. They look at Internet bookings through third party providers as a threat. We see it as just another wholesaler; we know how to revenue manage the merchant model. We all must recognize the consumer’s desire to shop before they buy. The single web site solution will not work in my opinion.”

This was particularly true with wholesalers using electronic interfaces. With these partners, Outrigger was able to open and close rates dynamically. Yet, questions remained as to the long term effects that powerful online intermediaries were having on customer loyalty and brand preference. As some senior managers put it: “Whose customer is it, Expedia’s or ours?” For a company with relatively small scale and a niche positioning, the commoditization threat could be quite dangerous. Durocher summarized the challenge: “In the days of Mr. Kelley and Dr. Kelley, Waikiki was running at 98% occupancy annually. Get the reservations in accurately was the main concern. That world has changed, now we compete in mature destinations.”

With the increasing competition in its key markets, Outrigger felt that strengthening electronic relationships with distributors, improving its trademark hospitality and customer service, better managing inventory yield, and better integrating its international properties were crucial stepping-stones to the firm’s continued success. The right information systems strategy was crucial to enabling these goals.

Discussion Questions

1. . What is Outrigger Hotels and Resorts’ strategic position? What are its strengths and weaknesses? What are the firm’s Critical Success Factors (CSF)?

2. How well are current IS resources serving the needs of Outrigger Hotels and Resorts?

3. What should be, in your opinion, the role of the IS function at Outrigger Hotels and Resorts?

4. Can you articulate both the IS vision and guidelines for the firm?

5. Based on your proposed IS plan for Outrigger Hotels and Resorts, what strategic initiatives would you propose?

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