THE COST-BENEFIT RATIO OF PURCHASING IT INFRASTRUCTURE IN HOTELS
The hospitality industry began to utilize information technology (IT) more than three decades ago well before many other industries (Berchiolly, 1997 & Hensdill, 1998 as cited in Heart, Pliskin, Schechtmen & Reichel, 2001). According to Laudon & Laudon (2010), IT infrastructure is defining as the shared technology resources that provide the platform for the firm’s specific information system application. IT infrastructure is including investment in hardware, software and services that shared to the entire business unit in the firm or organization. Cost for implementation the IT infrastructure is very expensive and higher based on the services that includes during the investments. For example, investments in infrastructure account for between 25 and 35 percent of information technology expenditures in large firms (Weil et al. 2002 as cited in Laudon & Laudon, 2010).
Cost benefit ratio or profitability index will define as contrast of the present value of an investment decision or project with its initial cost (Business Dictionary.com, 2011). In other word, it defines as a ratio of whether or not how much profit will result from an investment. In this situation, the cost benefit ratio of purchasing IT infrastructure in hotel means the comparison of future profit that will get after purchase the IT infrastructure with preliminary cost of purchase itself. This ratio will calculated by taking the net present value of IT infrastructure and dividing by the original cost of purchasing the IT infrastructure. If the ratio is greater than one, it indicates that the purchase decision for the IT infrastructure in hotel is a viable or practical to the organization.
The hospitality industry is one of the fastest growing industries worldwide. In the US alone, according to the US Department of Commerce, the number of non-American tourists increased by 23% from 39.4 million in 1990 to 48.5 million in 1999, while revenues from these tourists grew by 64% from $58.3 billion in 1990 to $95.6 billion in 1999 (Heart, Pliskin, Schechtmen & Reichel, 2001). It is generally understood, however, that without advanced IT infrastructures any industry’s ability to compete globally could be jeopardized and in danger. It is also becomes a question whether hotels are equipped with the appropriate IT infrastructures required for eBusiness and eCommerce competition in global markets or not.
Nowadays, the implementation of IT infrastructure in hotels is very important. The IT infrastructure has advantages and disadvantages to the hotel. It is depend on the how the hotel organization manage the IT infrastructure itself. The advantage that hotel will get are improve performances of hotel services and increase the revenue of the hotel itself. The performance of hotel services will improve by using IT because all the management and operation tasks will be done using the IT infrastructure. For example, during reservation or check-in process of hotel guest is done using the specific software such as Fidelio or Opera. The hotel revenue also will increase when IT infrastructure is implement in the hotel using promotion that are done by sales and marketing department in the website. Hotel guest will make online reservation for check-in to the hotel. This will lead to the increase in sales revenue of hotel rooms.
However, the disadvantages of IT infrastructure is cost that need for the investment and controlling is quite expensive. The hotel organizations should calculate the cost-benefit ratio first before purchase the IT infrastructure to ensure that they will get benefits from the investment. The calculation that need to be consider are cost for instituting and maintaining control systems of the IT and benefits or saving that hotel derived by purchasing the infrastructure. The hotel organization also need to know about the actual cost of owning technology resources including the original cost of acquiring and installing hardware and software and ongoing administration costs for upgrades, maintenance, technical support, training and even utility and real estate costs for running and housing the technology (Laudon & Laudon, 2010).
According to the cost-benefit ratio, hotel organization will make its own decision whether or not they purchase their own IT infrastructure or rent them from external provider. If too much is spent on infrastructure, it lies redundant and constitutes a drag on hotel financial performance. If too little spent, important business services cannot be delivered and the hotel’s competitors that spent the right amount will outperform the under-investing hotel. Thus, hotel will identify on how much should the hotel spend on IT infrastructure using six questions from competitive forces model for IT infrastructure investment.
The first point is market demand for hotel services. The hotel should make an inventory of the services that it currently provides to the customers, suppliers and employees. Do some research or survey to each group and identify if the service that provide meeting the needs of each group or not. For example, is there any complaint received from customers, employees and suppliers about the hotel services such as slow response to customer’s queries regarding prices, difficulty for finding the right information about jobs and difficulties of discovering hotel production requirements. All the information about the market demand is important to the hotel for establish their own business strategy.
The second point is hotel business strategy. The business strategy is a detailed plan for achieving success in business (Oxford Advanced Learner's Dictionary, 2010). Every organization has to figure out what it wants to achieve and then how it is going to make it happen, with its products, services, customers and operations. For example, the hotel should analyze five-year business strategy or future strategy of the hotel and try to assess what new services and capabilities will be required to achieve strategic goal. The hotel establish their own goal which is to gain more profit every year after invest in the IT technology. The hotel provides better quality of services to ensure that customer is satisfied and return to buying their services or products.
The third point is the hotel information technology (IT) strategy, infrastructure and cost. The hotel must examine information technology plans for the next five years and assess its alignment with the hotel business plans. For example, the hotel plan that in future they want to upgrade the IT technology for improve their performance in giving service to the customer. So, the hotel should do the budget about the cost that includes in the upgrading process. The total IT infrastructure costs also must be determined in order to perform a total cost of ownership analysis. There are nine infrastructure components in total cost of ownership which are hardware and software acquisition, installation, training, support, maintenance, infrastructure, downtime and space and energy. If the hotel has no IT strategy, they need to devise one that takes into account the hotel’s five-year strategy.
The fourth point is information technology assessment. The hotel should avoid them from behind the technology curve or at the bleeding edge of information technology. This is because an organization not desirable to spend resources on advanced technologies that are still experimental, often offensive and sometimes unreliable. The hotel needs to spend on technologies that have well established standards. The IT vendors also should be well chosen because they are competing on cost, not design and they are multiple suppliers.
The fifth point is competitor hotel services. The hotel organization should try to assess what technology services competitors’ offer to their customers, suppliers, and employees. They should know the new services or techniques that used in the competitor organization. Try to compare with our own services and establish quantitative and qualitative measures. If our hotel’s service levels fall short, our hotel is at a competitive advantage. The hotels must looking for the solution for improve our hotel service levels if it fall in long period of time. The quick solution from problem that occurs will help our hotel develop and improve the performance.
The last point in purchasing decision for IT infrastructure is the competitor of hotel IT infrastructure investments. Hotel should benchmark their expenditures for IT infrastructure against our competitors. Many companies are quite public about their innovative expenditures on IT. If competing firms try to keep IT expenditures secret, the hotel may be able to find IT investment information in public companies’ SEC From 10-K annual reports to the federal government when those expenditures impact a firm’s financial result. The hotel did not to spend as much as their competitors but perhaps it is discovered much less expensive ways of providing services and its can lead to a cost advantage.
As a conclusion, hotel business nowadays has its own challenge which is the business growth rapidly. There are many new hotel was develop in order to cater the demand of customer for lodging accommodation and food and beverage services. The existing of new hotel will lead the management of the hotel to do an aggressive business strategy for attract customer to come to their hotel. Therefore, the technology-based business model is one of the solutions of this problem. Hotel organization needs to invest in IT infrastructure for formulating their business strategy. They must used IT for update the information about the hotel, services and product that are provide in the hotel, doing the promotion, sales marketing, managing the operation of hotel and communicate with the customer, supplier and workers in the hotel itself.
The IT investment that hotel make must give benefits to them. They should not purchase the IT assets if it will make them suffer the higher cost or expenses without giving any advantages to them. The top level management of the hotel must evaluate the cost-benefit ratio before make decision to buy the IT technologies. All the important factors in making purchasing decision must be considered to avoid any loss to the hotel organization. But, if the hotel spends far less in the IT investment than their competitors, they will experience commensurate poor performance and losing market share in the business.
Besides that, the hotel also will take another solution besides purchasing the IT infrastructure which is rent them from external provider. This solution will help the small hotel for operating their services without need to invest more money for purchase the IT assets. It also gives an opportunity to the small company for implement the use of IT in their organization. Rent from the external provider is also one of the good solutions. Lastly, the solution guidelines include using a competitive forces model to determine how much to spend on IT infrastructure and where to make strategic infrastructure investments, and establishing the total cost of ownership of information technology assets.
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