Is Private Management Always the Solution?

For the past fifty years almost all of the Convention Centers, Arenas and many of the Performing Arts Centers, in this country, have been built and are owned by some unit of local government. The days are long past when a private entrepreneur could build a major public assembly facility and expect to make a return on his or her investment. Given the cost of purpose-built facilities, only government or maybe the rare sports team owner can afford this type of investment. From the early 1960’s the mind set of many local governments was, “ we can build the facility and even if we have to subsidize the cost of operating the building we can expect to see great indirect benefits through the collection of taxes on delegate spending or the spending of sports fans who will flock to our new facility”.

For many years this type of return was a real possibility, if the facility was built in a city that was attractive enough to draw convention delegates or large enough to support a major franchise.

Unfortunately, starting as early as the 1980’s, the economy began to falter on a fairly regular basis and too many city’s had jumped into the “let’s build a major venue” game. The combination of fluctuating economic conditions and over- building has caused many cities to see little or no return on their investment. Government owners who are now, often facing greater priorities such as police or fire coverage, have started to look at ways to reduce or eliminate the on-going cost of operating that Arena or Convention Center. Many have turned to Private Management as the solution, but is this always the best choice?

Private management firms are very skilled at convincing government owners, who are facing difficult budget issues, that they can operate the facility cheaper, better and more profitably than it can be run by the owner.  Unfortunately, this is not always the case. Private management firms are not always an “easy fix” solution to what is normally a much more complicated problem.

Let me say right up front that private management companies are not bad. In some instances I think they are the right way to go for some cities. I do believe, however, that to make an informed decision it is important to understand how private management companies work and what might be available as alternative solutions.

Management companies typically require a contract where they are paid a fixed fee for their services as the operator as well as an incentive fee if they meet certain specified performance benchmarks. The private manager bills the City for all of the cost of operating the facility as well as for the management fee. In many instances this arrangement can add as much as ten to fifteen percent to the overall cost of operating the facility. For the owner to see an improvement in their financial position the private manager must save substantial amounts on operating costs, or produce substantially more event business for the facility. Unfortunately this is difficult to do, even for a very capable private operator. If costs of operation are cut to dramatically the guest experience can suffer and this often means less revenue, not more. Because there are so many facilities out there it is difficult to bring new business to a non- major market. The same thing is true for conventions groups. They have many choices for destinations and not having the ability to provide extraordinary service or value pricing can make matters far worse. There are some instances where private management has increased revenue or reduced operating expenses to the point that the owner actually sees a reduction in their overall cost. Unfortunately, these examples are not as prevalent as you might expect.

Private management companies are very useful in circumstances where the city has no experience in operating a public assembly facility and they are ready to open a newly constructed building. The private manager can bring experienced personnel and knowledge to the owner which can avoid many complications and dramatically reduce the learning curve on operations… Private management also works well when extreme costs are associated with facility operation such as overreaching union wage agreements or work restrictions. If the private manager is allowed to circumvent these conditions it is possible to see major shifts in operating costs. Shifting operation of a problem facility is also a way of moving a political hot potato. It may not solve the problem but it changes the focus.

Often an underlying problem with facilities is that before they were built promises were made to the citizenry that were not possible to achieve. Unfortunately some consultants just don’t know how to say “This is a bad idea” to a group that is convinced that a new Arena or Convention Center is just the thing for their City. There are numerous examples of facilities being built that just don’t have a chance to deliver on the promise. In some cases the event projections are overly optimistic for a venue that may be in a third tier market or in the case of convention centers it may just be that the city is not an attractive destination to visit or there may be a lack of easy transportation to the destination.

It is not unusual that a government owner does not want to acknowledge that they may have made a costly mistake. In other cases the problem may just be that governmental red tape is bogging down the operation to the point that it cannot operate as a business. Sometimes it is as simple as the manager of the facility is just not doing a good job.

If these conditions exist, it may be better to re-think how the facility is operated. By turning the operation over to an authority or some other autonomous or semi-autonomous entity, it is very likely that great improvements can be made in cost reduction and revenue production without having to pay a higher cost for to private management.

A good first step is to have a qualified and experienced operational assessment firm audit the operations of the facility and provide the owner with recommendations. Management of public assembly facilities is often anathema to government organizations. The successful operation of a public assembly facility is a business and must be managed accordingly.

Private management is not a panacea for a poor performing facility. There is more than one possible solution. All the possibilities should be researched, before a course of action is determined. Before you make a decision, seek qualified advice from an experienced facility operator with a solid track record of successful operation. Be prepared to accept that the reality that changes must be made to correct or mitigate the problem. Let your advisor help you through the decision making process. Private management may be your solution, if so let your advisor assist you through the procurement process to assure that you are well positioned to see results.

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