Measuring and managing total impact: Strengthening business decisions for business leaders - Hospitality & leisure scenario

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Build an ‘impact aware eco-friendly’ hotel or stick with the traditional hotel business model?

A hotel group has the option of building and operating a new hotel on a Greenfield site on a Caribbean island. In our hypothetical example, we examine the economic, tax, environmental and social impacts on the island, as well as the financial performance of the two options.

Option 1 involves building an eco-friendly hotel that incorporates the latest environmental technology, sources local fresh produce and has a focus on training and employing people from the local community.

Option 2 involves building a more traditional hotel that uses no significantly advanced environmental technology, imports a large proportion of its fresh produce and brings in skilled labour in preference to local training programmes.

Overview of the Options

Option 1: Build an impact aware eco-friendly hotel

Upside:

  • Lower energy and water consumption
  • More efficient waste management system
  • Sources fresh produce locally
  • Trains and employs local people

Downside:

  • New technologies require higher investment

 

Option 2: Build a hotel using traditional technology and design

Upside:

  • Lower upfront costs

Downside:

  • Traditional hotel which won’t appeal to eco-tourism market
  • Imports fresh produce
  • Less development in local skills

Summary output of TIMM Analysis

TIMM can be used to value both the financial performance and the wider social, tax, economic and environmental implications of each option. The TIMM wheel provides a simplified analysis of the results of the TIMM analysis for the two options. The inner circle shows the Financial Performance in terms of total upfront capital costs and ongoing expenditure, and overall net present value (NPV) for the hotel. Each bar represents a positive (green) or negative (red) impact. The different impacts can be compared and aggregated, and the trade-offs between the two options identified and explored.

Financial performance:

  • Incorporating the latest environmental technology in Option 1 would involve higher construction costs than in Option 2. However, the savings on energy, water and waste management bills would lead to lower operating costs.
  • The training programmes associated with Option 1 will also incur additional costs. However it is assumed they will also lead to improved skills in, and engagement with, the local community.
  • As a result of both of these effects, in our hypothetical example both options have the same NPV over the life of the hotels, but with different cash-flow profiles.

 

Environment:

  • Both options would lead to environmental impacts because they involve the conversion of a Greenfield site into a hotel. As both options involve the same size hotel, the land use impacts associated with the construction of the hotels will be the same.
  • The environmental technologies incorporated in Option 1 include a range of technologies which significantly reduce the amount of electricity and natural gas purchased by the hotel, which will in turn lead to lower quantities of GHG and other air emissions released.
  • Option 1 also involves an innovative water management system that recycles as much water as possible within the hotel to reduce the impacts of water use.
  • In the operation phase, Option 1 will involve purchasing as much domestically grown fresh produce as possible. This will increase the demand on the island’s agricultural sector and will have higher environmental impacts, especially land use, than Option 2 where the majority of fresh produce is imported.
  • Option 2, however, relies on importing and therefore transporting fresh produce by sea and air resulting in higher associated GHG emissions.
  • Option 1 has a more effective onsite waste collection and segregation process and has established relationships with a waste recycling operation, which means a higher proportion of the hotel’s waste is recycled.

Trade-off: Option 1 reduces the overall impact on the environment, but requires a change in land use to grow local produce that the local community might not welcome.

 

Economic:

  • The more expensive technologies involved in the construction of Option 1 lead to higher investment impacts.
  • Also, Option 1 will be seen as a cutting edge hotel and is likely to build a strong brand in the ecotourism market and therefore have more positive intangible impacts.
  • During the construction phase, Option 1 will involve higher payroll impacts via more staff to build in the technologies.
  • In the operational phase, both hotels will employ the same amount of staff, but the employment of migrant staff in Option 2 will reduce the overall total payroll impacts due to wages leaving the local economy in the form of remittance of earnings overseas.
  • In Option 1, the purchase of domestically grown food produce will increase the use of other local suppliers. So increasing the indirect and induced benefits to the local economy.

Trade-off: Are the higher up-front investment costs justified to avoid the higher environmental impacts of Option 2?

 

Tax:

  • Due to lower spending on electricity and natural gas Option 1 will result in lower production and environmental taxes.
  • Option 2 involves importing a higher proportion of fresh produce, therefore higher import tax impacts.

Trade-off: Although the change of land use is higher in Option 1 to grow fresh produce locally, import taxes and GHGs emissions are higher in Option 2 if they’re imported.

 

Social:

  • Option 1 involves training of local community to improve skills, boosting both livelihoods and education impacts.
  • The employment and greater involvement of the local population will also lead to improved livelihoods and more community empowerment.
  • Greater community cohesion will be achieved with a hotel that demonstrates it cares about the environment and community that it operates in.
  • Both hotels will have a negative visual amenity impact as they are being built on a previously unused Greenfield site.

Trade-off: The community relations with Option 1 are better as the operator is more aware of and addressing the hotel’s impact, but at the cost of a higher payroll and investment.

 

Summary

In this hypothetical example, in the absence of total impact thinking, the decision would have been made largely using financial analysis, focussing in on the willingness to pay higher investment costs. TIMM brings a new perspective. Using TIMM to put a value on the qualitative overlays, the total impact of each decision is clear and the many trade-offs between Options A and B can be identified in a holistic manner:

  • Option 1 offers higher profits, but with higher upfront costs and payroll, and requires more significant change in land use because of the locally produced food.
  • Option 2 requires lower upfront costs but makes a much greater negative impact on the environment and is less appealing for the local community.

TIMM may not be able to provide the empirical answer, but it gives management significantly more insight into how hotel operations impact external stakeholders so that decision making can be undertaken on a more informed basis. These external impacts affect the hotel's ability to obtain and maintain its "social licence to operate", which is vital to its success over the long term investment horizon. Quantifying external costs and benefits is the first step towards understanding the resulting internal costs and benefits for the business, for example, in terms of brand value, reputation.

 

Contact us

Tom Beagent

Director, Impact Strategy and Analytics

Tel: +44 (0)20 7212 3493

Will Evison

Director

Tel: +44 (0)7718 864854

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