Benchmarking for success at IHG

Intercontinental Hotels Group is responsible for some 4,300 properties in more than 100 countries, which burdens it with significant logistical challenges -- challenges that it conquers through a combination of technology, local knowledge and global banking partners.

Richard Solomons, IHG's chief financial officer, manages the company's $1.8 billion in revenue. He said one of his team's biggest headaches is moving so-called trapped cash -- capital that cannot be pulled out of a particular corporate entity or country, often because of structural or regulatory issues -- to a centralised account.

But trapped cash is a fact of life at any global businesses, an activity Solomons leaves largely to his treasury team. Instead, he has been focused on a multi-billion dollar programme to extract cash from the company to return to shareholders and reinvest in IHG's brands.

Since 2003, when IHG demerged from Six Continents, the company has sold some $5 billion worth of assets, mostly hotel properties. The proceeds from those sales were returned to shareholders, and the elimination of a large portfolio of self-owned hotels allowed IHG's management to focus on its core business of operating hotels under its Intercontinental, Holiday Inn, and five other brands. This has earned it the description: "an asset-light hotel brand operator", in a recent Citi research report.

"What we've done is go back to our roots of basically branding and operating hotels for third-party owners," said Solomons. "This is where we feel our expertise lies." As part of this homecoming, the company re-engineered its cash management to become more efficient.

Extracting cash

According to Solomons, this process involved maximising banking relationships (which it has with global financial houses such as Citi, HSBC and J.P. Morgan), implementing a new cash management system and communicating throughout the company that it needed to focus on "minimising [daily] cash balances" and using IHG's scale to make the liquidity work for them.

"The big change is actually thinking about [cash] solutions from the top down," he explained. "What our treasury team has been doing is thinking about what's right for the group as a whole -- how we maximise the cash and minimise trapped cash."

Rethinking its cash management strategy alone was not enough for IHG. During the past 18 months, the company has had to respond to a global decline in demand and make a significant reinvestment in its Holiday Inn brand. In fact, Solomons visited Hong Kong to discuss the group's refresh of the venerable brand, a nearly $1.1 billion project (property owners shouldered the bulk of this cost) that involved updates to all 3,300 Holiday Inns worldwide. Additionally, IHG is opening more than one hotel a day and has some 200,000 new rooms in the pipeline.

Benchmarking has been used to pull cash out of the business to fund these reinvestment and expansion projects. "When you run as many hotels as we do, you can benchmark very effectively," said Solomons. "We have quite a sophisticated financial reporting database with both financial and operations numbers. An individual hotel controller can go into the system and pull-out the four or five most comparable hotels in the world and look at specific cost and financial parameters to see where they are."

He explained that from these reports, controllers can see exactly how much cash they should keep overnight in their hotel and how much should be pooled into group accounts.

Solomons referenced IHG's self-owned properties as an example of benchmarking. "We own the Intercontinentals in Hong Kong, New York, London, Paris and Boston, and we took those big five and we did a very specific benchmarking exercise right through the P&L [profit and loss account]," he said. "What we've seen is some significant savings of multiple hundreds-of-thousands-of-dollars pulled out of each of the hotels simply through looking at best practices across the properties."