The Shift in Hotel Management: The Growing Influence of Third-Party Operators

Over the past two decades, major branded hotel operators have significantly transformed, shifting their focus from traditional hotel management to brand development and distribution strategies. This pivotal change has made franchising increasingly attractive to business owners, who now benefit from the powerful brand names, intellectual property, operational support, and sophisticated reservation systems offered by franchisors. As a result, the demand for third-party hotel management firms has surged dramatically. 

In the current hotel management landscape, two primary types of management companies dominate; branded operators and third-party operators (TPOs). By collaborating with branded operators, hotel investors gain the advantage of a renowned brand coupled with experienced management all under one comprehensive agreement.  

TPOs, on the other hand, operate independently of hotel ownership and franchise agreements, allowing them to manage a wide variety of properties, from boutique hotels to luxurious resorts, based on their unique resources and expertise. Unlike their branded counterparts, TPOs are projected to continue experiencing robust growth. Since 2012, the number of hotels managed by TPOs has surged by 40%, with forecasts suggesting an additional 5% growth by 2025. 

Why Third-Party Hotel Management is Gaining Popularity

Flexible Terms

One of the most significant factors driving the popularity of third-party hotel management agreements is the flexibility they offer. TPOs prioritize profitability while providing owners and investors with shorter contract options ranging from annual agreements for property turnaround to 5 and 10 year terms. In stark contrast, brand-managed properties often require lengthy commitments that typically span 20 to 30 years. 

Streamlined Contract Termination

Third-party operators present owner-friendly contract termination options, allowing easier exits with lower associated costs. This flexibility enhances liquidity during ownership transitions, making these properties more appealing to potential investors. 

Enhanced Management Structures

TPOs maintain direct involvement in hotel operations, effectively reducing layers of management that often complicate communication between contracts and on-site teams. The same team that develops annual budgets also supervises performance, resulting in improved reliability in financial projections and heightened accountability compared to branded operators. 

Greater Owner Engagement

Branded management agreements often impose restrictive limitations on owners, particularly regarding staffing decisions. Owners frequently find themselves unable to adjust payroll without aligning with management's proposed annual budgets, leading to frustration. In contrast, TPO agreements typically foster regular interactions, allowing owners to discuss staffing strategies openly and propose changes when necessary. 

Minimized Brand Position Challenges

Changes in brand standards imposed by brand-managed hotels can lead to additional costs and operational constraints for owners. TPOs prioritize hotel owners' interests over rigid brand compliance, focusing on strategies to enhance profitability rather than merely strengthening brand equity. TPOs are also more likely to challenge costly brand standards, while brand operators typically adhere to them without question. 

Transparent Fees Structures

When it comes to fee structures with third-party operators (TPOs), agreements usually encompass both a base fee and an incentive fee. The base fee is typically calculated as a percentage of the hotel's total revenue, ranging from 1% to 4% for TPOs, which is generally lower than the 3% to 5% range commonly seen in brand-managed hotels. In addition to the base fee, TPOs frequently include incentive fees that range from 5% to 8% based on gross operating profit (GOP) or adjusted GOP (AGOP). In contrast, branded properties usually have higher incentive fees, which can range from 6% to 10%. This structure not only reflects the costs associated with each management style but also highlights the competitive edge that TPOs offer in terms of overall financial performance.

A Focus on Value

While both TPOs and brand managers aim to maximize revenue and profitability, TPOs align more closely with the interests and value of the owner's investment. This alignment empowers TPOs to broaden their services, advocating for owners during brand contract negotiations and offering comprehensive asset management, hotel development, design, construction, project management, and repositioning services, all while collaborating with a diverse range of stakeholders. 

Operational Benefits

The independence of third-party operators (TPOs) offers them a significant edge in the hospitality market. Unconstrained by strict brand standards, TPOs can respond swiftly to changing micro and macroeconomic conditions. This flexibility allows them to create tailored solutions, such as customized revenue strategies, rather than relying on standardized pricing models dictated by brands.

Additionally, while properties managed by brands often encounter restrictions due to specific supply agreements and leasing contracts requiring brand endorsement, TPOs can negotiate contracts that are more competitively priced. This approach not only helps owners reduce operational costs but also circumvents the common issue of inflated service charges that frequently arise in brand-managed settings.

In Conclusion

In a rapidly evolving hospitality industry, third-party hotel management firms are proving to be a preferred choice for many hotel owners and investors. With their flexible terms, increased owner engagement, and focus on profitability, TPOs provide an attractive alternative to traditional branded management options, positioning themselves and their partners for future success amid a shifting landscape.