Rewarding Decisions vs Rewarding Outcomes

In a previous blog post, we discussed Drop, Win and Hold %, and why they fall short as effective KPIs to evaluate table games performance.

Drop, Win and Hold% are good in measuring the financial health of a table games operation, but they lack transparency into the quality of decisions made to arrive at the financial outcome.

A bad decision could lead to a great outcome. For example, does buying a lottery ticket that wins a jackpot make buying lottery tickets a great decision? Good decisions could also lead to an undesirable outcome in the short run. Warren Buffet has built his empire by following simple fundamental investment principles to measure and reward good decisions.

Tables games revenues are no different from investing, with short-term uncertainty in the financial outcomes. Perhaps not as exaggerated as the lottery ticket example, but good and ill-informed decisions made by management can easily be masked by short-term fluctuations of revenue.

We’ll illustrate with a fictitious example.

Casino Hippopotamus

Table games revenues are flat for a number of years at this property, while competitors are growing. The board decides to bring in a new management team and sets a 20% EBITDA growth budget for the 2019 to catch up to the market.

The Decision

The new management decides is to slash table open hours by 17% to meet the EBITDA growth budget.

The Outcome

After a full quarter of the cost-cutting initiatives, here’s the Casino Hippopotamus’ P&L statement:

Operational KPIs

Analysis

With a staggering 27% increase in EBITDA, the new management believes they are on the right track to hit the 20% budget while still growing revenues.

Should the shareholders be satisfied with the new management’s decisions? After all, they grew EBITDA by 27% and are well on their way to meet budget for the year.

The answer: it depends. Was a 17% reduction in operating costs the right number? What if they were understaffed and they actually needed to add 5% in additional labor to improve top-line revenues?

Layering in 5 New Operational KPIs

Digging a little deeper into the management team’s decisions, let’s look at these five additional operational KPIs (or levers) that the management team can control. These KPIs directly influence table games revenues and management has full control over them. More detail on the levers can be found on this and this blog post.

Operational KPIs

Table Capacity - no change in the number of tables on the floor

Table Open Hours - open hours were 17% lower than the previous year

Weighted House Edge - no change in the game types or game rules

Weighted Average Table Minimum - limits were reduced by 32%

Average Table Occupancy - net impact of fewer open hours and lower limits resulted in 31% higher occupancy

Every savvy table games operator knows what this means for the property in the long run. Reducing open hours and table minimums, without offsetting the house edge, will result in lower revenues and Hold %.

It turned out that the revenue was boosted by a single high limit player who lost $1.1M that quarter, and when the results are segmented by Mass and VIP, then they don’t look as stellar. Furthermore, when segmented by Game, Blackjack games revenues are on a much steeper decline compared to other games.

Conclusion

In this fictitious scenario, which frequently happens in table games operations around the globe, the new management played lucky and their lottery ticket decision paid off. Unfortunately for that team, the full financial impact of their decision will be felt in the longer run. The new management may continue to blame the weather for a bad quarter, and take credit for a new promotion if results are good.

As executives, we need to measure, evaluate, and reward good decisions. The five KPIs outlined in this post are a great start to truly understand the impact of the decisions that the management can control.

Of course, there are many more KPIs as operators get more sophisticated such as game pace, under-capacity hours, under-spread hours, over-spread hours, under-priced hours and over-priced hours. We will delve deeper into this in a future blog post.

Our suggestion is to strike a healthy balance between rewarding the financial goals (outcomes) and the decisions (controllable levers) to motivate management to make the right long-term operational decisions that will result in EBITDA growth.