Having a strong meeting events business helped The Ritz-Carlton maintain profitability and provided property owners with acceptable returns on their investments (typically 10% to 12%, unleveraged). Nevertheless, the expense involved in operating luxury hotels (see Exhibit 3) sometimes strained relations between the management company and the property owners.
During the early 1980s when the hotel industry was growing at a healthy pace, traditional management contracts tended to meet the needs of both owners and operators. However, owners throughout the hotel industry had been agitating for more voice in how their properties were managed. A strong supply of management companies and a sudden decline in hotel demand led to owners gaining leverage in the management contract negotiation process,3 a change that was facilitated by the U.S. real estate crash of the late 1980s. Many property owners lost their investments, some of whom had contracted the services of The Ritz-Carlton.
In fact, had it not been for such difficulties, The Ritz-Carlton might never have been working with Millennium Partners on the new Washington, D.C., multi-use facility. The Ritz-Carlton had previously operated a hotel in that city, but the owner, Saudi Arabian sheik Abdul Aziz bin Ibrahim al-Ibrahim, sued the company in 1995, alleging that The Ritz-Carlton operated for its own profit to the detriment of the property owner’s interest. Mene provided his perspective on the situation:
3 James J. Eyster, “Hotel Management Contracts in the U.S.: The Revolution Continues,” Cornell Hotel and Restaurant Administration Quarterly 38 (3) (June 1997): 14–20.
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The lawsuit involved four hotels located in New York, Washington, Aspen, and Houston, all owned by the same person. It made all the major business publications. Quite frankly, the owner just paid too much for these hotels. Our performance was noble, but he wasn’t going to get his return on investment for a while, and his advisors never told him that. He just paid too much for the hotels and wanted to shift the blame to us. It took a little bit of luck, although we did walk away from him. I don’t want to say the owner relations are adversarial in a typical hotel contract, but they can become strained.
Quality at The Ritz-Carlton
When Patrick Mene joined The Ritz-Carlton in 1990 as the chief quality officer, his primary mission was to integrate and prioritize the values and concepts of the Malcolm Baldrige National Quality Award criteria at all the company’s hotels around the world. But before financial resources could be allocated to operational process improvements, Mene had to convince Horst Schulze, The Ritz-Carlton’s president and COO since 1984 (see Exhibit 4 for a partial organizational chart), of the importance of system and process development. As Mene recalled:
When I got here, human resources was literally the dominant function in this company. And I said, “Let’s take this—we hired the right person. They’re a perfect Lady and Gentleman, they went through orientation. Let’s put them at the front desk. And the desk is too high to work with, and the temperature is too hot, and the computer has the wrong information coming in from another department—they can’t function.”
So for the next few years, Schulze would say to me, “Pat, you always try to take the human element out of it.” And one day I was bold enough to say, “Yeah, you’re right. Because you know what? If there were better people out there, you’d have found them by now. And I’m going to show you that we can have a ham sandwich run a Ritz-Carlton.” Well, the battle lines were drawn.
While The Ritz-Carlton continued to maintain a heavy emphasis on human resources, the total quality management (TQM) philosophy began to permeate the organization. Using the Malcolm Baldrige National Quality Award criteria as a set of guidelines, Schulze and Mene focused on a variety of new activities and measures, including the cost of poor quality, continuous improvement, quality planning, benchmarking, supplier certification, and quality audits. Other programs were designed to meet specific customer needs, such as safety protocols to protect the children of guests, and the Service Quality Indicators (SQIs) were established (see Exhibit 5).
One of the components of the SQIs involved guest-recognition procedures. As an owner, Collins wanted to see that improved for the new Washington, D.C. hotel:
I pushed James [McBride] to hire more people than The Ritz-Carlton staffing plan would lead them to hire in Guest Recognition. I think it’s the single most important thing we can do. If a guest came in, got what they wanted, and were recognized, all of a sudden that creates a sticky relationship. It’s all about organizing your thoughts and creating processes to recognize the person coming in to the hotel.
So after a certain number of visits to one of our Ritz hotels, guests will get a monogrammed pillowcase. It will be in their room so that when they check in, they’ll go to their room and say, “Oh, my pillow’s here. Isn’t that great!” And no one expects it, so the first time, it’s like “Wow!” We’re doing something different from The Ritz-Carlton standard—we’re clearly exceeding the standard. But they don’t force every owner to abide by that higher standard, so
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sometimes there is friction about raising the standard outside of the Ritz program. I want to rethink it, rethink it all from start to finish. And it just drives them crazy.
Even so, the standards The Ritz-Carlton had already established were recognized as outstanding (see Exhibit 6). The company applied for and won the Baldrige Award in 1992, becoming the first organization in the hospitality industry to receive the coveted honor. The extensive feedback report from the Baldrige evaluators identified an additional 75 areas for improvement and, using those suggestions as action guidelines, The Ritz-Carlton applied for and won the award again in 1999, becoming only the second American company to earn the distinction more than once. Schulze expressed his belief in TQM:
Winning this award confirms that quality is not a short-term approach to doing business. Instead, it is a road map that allows us to achieve the highest customer and employee satisfaction in the industry. Continuous improvement is absolutely critical. If managers are not improving something every day, they are on a death path. Companies that are plateauing because of traditional management will die. Period.
Human Resources at The Ritz-Carlton
The way The Ritz-Carlton viewed its employees was a distinguishing hallmark of the organization. According to Leonardo Inghilleri, the corporate vice president of human resources:
We respect our employees. The issue of respect is a philosophical issue that is driven by our leadership. You have to have a passion for people. If you have an accounting approach to human resources, then you’re bound to fail. If you look at an employee and say, “He’s a full- time equivalent, he’s an FTE; he is eight hours of labor,” I think that’s immoral. An employee is a human being who doesn’t only fulfill a function but should also have a purpose. So a successful business is one that is capable of enlisting an employee not only for his muscles and his labor, but also for his brain, his heart, and his soul.
In hotels that were up and running for at least a year, The Ritz-Carlton’s annual turnover rate was only 20%, compared with the hotel industry average of 100%, while new hotels experienced turnover rates between 20% and 25% during the first 60 days. Inghilleri believed that it was his company’s deep respect for its employees that led to their satisfaction with and commitment to the organization. The Ritz-Carlton was so intent on treating their employees well that a “Day 21” event was held as a process check three weeks after any new hire’s start date. During that session, the company assessed the degree to which it had lived up to the promises it made to its employees during orientation and initial training.
One of those promises included opportunities for career advancement, which were abundant at The Ritz-Carlton. Corporatewide, 25% of the organization’s managerial workforce began their careers at The Ritz-Carlton as hourly employees, such as dishwasher, housekeeper, and restaurant server, or as hourly supervisors. For example, Kate Monahan advanced from reservations manager to general manager: “Fourteen years ago, I set out to find a job—but what I began was a career. Along the way, The Ritz-Carlton has nurtured and maximized my talent.”4 Similarly, Alex Garza began as a line cook and eventually became an executive sous chef. As Garza stated:
4 As quoted in The Mystique: The Ritz-Carlton Hotel Company, L.L.C. Employee Newsletter, Winter 2000.
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The Ritz Carlton has been a kind and generous employer. I have always been treated fairly and as a gentleman, with the utmost respect for my talents. Because this organization cared about my career path and my goals from the outset, and because it has demonstrated respect for my talents along the way, I have been able to grow. At The Ritz-Carlton, opportunities for advancement are everywhere. It’s up to you how far you want to go.5
Through the extensive formal and informal training offered by The Ritz-Carlton (see Exhibit 7), employees were prepared to fulfill their current obligations and to accept positions of greater responsibility and accountability in the future. Employees with advancement ambitions were encouraged to cross-train and learn about as many different aspects of the organization as possible.
Performance at The Ritz-Carlton was not only assessed against the established Service Quality Indicators but also managed by the employees themselves. As Inghilleri explained:
We have created an environment where there is no fear of retribution, an environment where employees understand that their responsibility is not only to fulfill functions but also to have a purpose. One of their purposes is to improve the system. When you have a good person and you create a good environment for that person, he or she doesn’t come to work to do a bad job—they come to work to do a good job. So it doesn’t make sense for us to punish people if something goes wrong.
We verify whether the problem is a lack of resources or a lack of training, and then we address the problem accordingly. Our employees are taught from the very beginning that there is nothing more exciting than fixing a mistake or defect. They want to see the defects, they want to find out what they are, because once that’s known, they can be corrected. We’ve never had a problem with people hiding mistakes, because it’s just not the culture of the company.
In addition to employees monitoring their own performance, individuals were recognized for outstanding work in a variety of ways, including small awards given within departments, as well as larger rewards that occurred at the hotel level. For instance, each year every hotel identified members of a “Five-Star Team,” each of whom received five complimentary nights at a Ritz-Carlton hotel of their choice, $500 to spend, and round-trip airfare for two.
The Ritz-Carlton Hotel-Opening Process
According to one manager at The Ritz-Carlton, “Running an ongoing operation is a very different thing from opening a new hotel. They are actually two different core competencies.” The processes and focus of activity for creating new hotels were two-pronged: one dealing with the development of the site itself, the other involving the human resources processes necessary to get the hotel up and running. The entire hotel development process was assessed against Performance Quality Indicators (PQIs; see Exhibit 8), the 10 defects identified by The Ritz-Carlton as most likely to lead to problems with both quality and financial performance. Mene noted that while developing a hotel was “a very complex, cross-departmental, cross-functional, cross-company process in general, the PQI represents the key pitfalls.”
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Many decisions had to be made when The Ritz-Carlton set out to open any new hotel, including site selection, concept/new-product development, feasibility studies, and management contract negotiation. When explaining the importance of site selection, Mene succinctly stated, “I mean, let’s just put it this way. What if we build a 300-room hotel where there’s no hotel needed at all? You’re dead. It’s done. It’s over.” The new Washington, D.C., location was desirable because of its proximity to several sites of interest, such as the White House and Capitol Hill, Embassy Row, and the Foggy Bottom Historic District; Washington’s status as a global destination; and the potentially strong clientele base of foreign diplomats and local residents.
Feasibility studies were conducted that identified the primary target customers, as well as their wants, needs, and expectations. Then financial evaluations determined the cost to the developer and the price charged to the customers—two key issues for consideration prior to moving ahead. All of this activity was carried out in a time-pressured environment. As Mene noted: “Late feasibility studies are deadly, because the developers may be talking to our foremost competitor and they may be faster with the feasibility study than us. We’re really in competition here.” Once a contract had been signed, construction on the new property began, with both The Ritz-Carlton and the owners participating in decisions regarding the development.