Scott Shanaberger (fourth from left), chief operating officer at Holiday Retirement, and the Edelman Award-winning team celebrate at the Edelman Gala.
Given today’s hyper competitive economy, is there any concept more important to commercial companies than having the right product or service at the right time at the right price? We emphasize price because since the dawn of revenue management (RM) in the airline industry in the 1980s, optimal pricing has been a sweet spot for operations research/management science/analytics, a sweet spot that has grown exponentially in the big data era as new industries discover its power and potential to boost the bottom line.
The holy grail of RM is finding an optimal price point that benefits both companies and consumers. For example, consider the inspiring case of Holiday Retirement, the largest private owner and operator of independent senior living communities in the United States with more than 300 facilities and approximately $1 billion in annual revenue.
Holiday partnered with Atlanta-based firm Prorize to analyze, develop and implement the first RM system in the senior living community industry, creating a revenue gain of $85 million for the first two years of deployment – a 9.3 percent boost on average – with an estimated increase of $304 million for the initial five-year period.
After extensive pilot testing and analysis, Holiday rolled out the system, Senior Living Rent Optimizer (SLRO), to the rest of its properties in August 2014. Beyond the initial five-year period, SLRO is estimated to deliver a sustained annual revenue of $88 million.
The impressive O.R. work combined with the unique application and the incalculable benefits to resident clients in terms of customized care resulted in another benefit for Holiday: the 2017 Franz Edelman Award from INFORMS for outstanding achievement in applied operations research, management science and analytics.
The prestigious Edelman Award, considered the “Super Bowl” of O.R. practice, was presented at an Oscar-like gala held in conjunction with the INFORMS Conference on Business Analytics & Operations Research in April in Las Vegas.
“This recognition is the realization of the hard work and collaboration of many people at both Holiday and Prorize in harnessing the power of operations research to transform our senior living operations and business model,” said Scott Shanaberger, chief operating officer at Holiday Retirement. In accepting the award, Shanaberger indicated Holiday will donate the $15,000 prize money to the Alzheimer’s Foundation of America, a remark that drew loud applause from the packed ballroom at Caesars Palace.
As Holiday officials noted in their Edelman award-winning presentation, an accelerated rise of the aging population is fueling the dramatic growth of a multibillion dollar industry focused on building, owning, operating, buying and selling senior living facilities. These facilities fill a key chasm between living at home and being in a hospital, and range from independent living and assisted living communities to nursing homes.
For senior living facilities to be a successful component in caring for seniors, the communities must be efficiently run and supported by a profitable business model. No process is more foundational to that goal than the way an operator makes pricing decisions.
However, the pricing process of most senior living firms is archaic at best – inconsistent, manual and reactive. These practices create a situation where the local sales staff has frequent requests for exceptions, leading to time spent negotiating prices, first between local and corporate staff, and then between local sales people and residents.
Holiday management recognized its conventional approach to pricing was challenging for everyone and left revenue on the table. That led to Holiday’s partnership with Prorize and the development of the SLRO, a state-of-the-art system that enables a consistent and proactive pricing process across Holiday’s senior properties, while simultaneously providing optimal pricing recommendations for each unit in every one of its communities.
The SLRO represents a reliable and credible method of measuring system performance by live pricing experiments, comparing the results from a set of “pilot” communities that used recommendations from the RM system with results from “control” communities that did not use the system. The results showed that the RM system would provide a revenue benefit to Holiday on an average of 9.3 percent (ranging from 4.1 to 16.2 percent based on different baselines).
SLRO, based on innovative pricing science modules and processes, is a complete, interconnected software package with complex sets of interactions and flows. SLRO considers: how data is processed, the kind of variables derived and calculated at approximate levels, how they coalesce to produce an accurate forecast in a low-volume business, the use of a forecast range versus a single point value, the use of a stochastic optimizer to consider most probable demand scenarios, and how workflow is designed to process pricing recommendations.
Holiday Retirement COO Scott Shanaberger.
The SLRO system gives Holiday control over its corporate pricing process, eliminates inventory devaluation and maximizes long-term revenue. In addition, the system is a cultural difference-maker. It has raised Holiday’s organizational “pricing IQ” and given its sales people the confidence that the listed price is the “right price.”
For the first time, operations research brought revenue management techniques commonly practiced in other industries to the senior living industry and did so with great success. Holiday views this project as its most important initiative to date.
“We couldn’t be more proud of this recognition by INFORMS and our work with Holiday Retirement,” said Ahmet Kuyumcu, co-founder and CEO of Prorize. “Our team worked tirelessly to create a world-class solution for senior living and other rental-revenue industries. The results at Holiday Retirement prove that revenue management is transformational to a company’s bottom line.”
“Prorize dramatically changed our business in ways that have truly impacted our employees, our customers, our communities and our shareholders,” Shanaberger added. “We now have control over our corporate pricing process, eliminating inventory devaluation and maximizing long-term revenue.”
Throughout their competition presentation, members of the Edelman-winning team often referred to the “Holiday touch” – the human side of the business and the company’s dedication to the aging population it serves.
“When you go into our communities and you talk about the Holiday touch, it means we offer a lot more than just a place for people to live,” Shanaberger said moments after accepting the award. “We care for our residents. We feed them three meals a day. We provide light housekeeping, transportation and in our assisted living communities, we provide care, med management and memory care. That’s when I got emotional on stage.
“Memory care is the most intensive service that we can provide to our residents. They’re not really residents at that point to me. They are fragile human beings, and sometimes when people move into our communities, we’re all they have. We are their family, we are their community. We take it very seriously.”
When asked about the Edelman-winning work, Shanaberger said the benefits “aren’t just for the company; it’s for our residents as well. It’s a mutually beneficial situation. It’s not about just increasing rate. Sometimes it’s about decreasing rate. What is the best way we can offer the best care at the right price for the residents? A lot of companies get greedy; they want high occupancy and rate. You can’t get both. That’s what revenue management is all about. This isn’t about charging the most. It’s about what is the right price given the current economic environment for each resident.”
As for winning the Edelman, Shanaberger said it was a “huge honor,” adding that “many years of hard work went into this and it’s definitely paid off, not just in the award but in terms of how it’s complemented our business.”
So what does Shanaberger think about the power of operations research now that his company has won the Edelman? “Honestly, full disclosure, I did not know what operations research was until we started doing all of this, but I’ve been a part of it for years. I just didn’t know it was O.R. I certainly have a greater appreciation for it today.”
The Edelman Award is a nearly yearlong competition that begins with a call for nominations, followed by a vetting and verification process. Once the nominations are culled to six finalists, the competition culminates each spring with presentations before a panel of judges at the INFORMS Conference on Business Analytics and Operations Research. After listening to the presentations and questioning the presenters during a series of sessions, the judges confer behind closed doors to select a winner. Their decision is announced in dramatic fashion by the president of INFORMS, in this case Brian Denton, at the Edelman Gala that same evening.
So what put Holiday over the top in a highly competitive and diverse field of Edelman finalists (see sidebar)?
“They were precise. They knew exactly what they were doing. They had a goal that was very, very valuable to an industry concerned with an aging population that is growing at a rapid rate,” said Leon Schwartz, a longtime member of INFORMS who’s been involved in many Edelman competitions over the years. “Along came O.R. and gave them revenue management to not only raise their own revenues, but it was also able to help them take better care of individuals, older people, the way they should be taken care of.
“Their presentation was terrific. Everything was data-driven. They ran a well-engineered pilot test to see how effective it was before they implemented the solution system-wide. Everything was done to benefit both the company and the residents.”
Edelman Committee chairwoman Anne Robinson, executive director of Global Supply Chain Strategy, Analytics and Systems at Verizon, called the Holiday’s winning work a “game-changer.” “This had all the dimensions of the classic Edelman winner – the impact, the C-level support, transportability. In addition, it had the novelty of the application. It was a bit of a Cinderella story, but certainly a well-deserving recipient of the prize.
“This is more than revenue management,” Robinson continued. “In reality, it was about taking the cost piece out of the conversation and allowing their retirement facilities to start having discussions about what are the amenities that mean the most to the person potentially impacted. It was a game-changer between the potential client and the sales force. Instead of being about dollars and cents, it was really about what’s important as the client considers retirement complexes and the various amenities.”
Summing up the judging process, Robinson said, “It was an interesting night. We had a very diverse set of applicants this year, and all of the finalists were outstanding. It was a very difficult decision. It took us a lot of time to come up with our decision, but I’m super pleased with where we landed.”
Master of Ceremonies Mike Trick.
Needless to say, Arnie Greenland, who coached the Holiday team along with Jeff Alden in preparation for the competition and the presentation, agreed with the judges’ assessment. “This was a great team that worked really hard and had a great message,” Greenland said. “The core of their message was it was a new area for operations research, an area that wasn’t historically understanding and ready for these kinds of tools and methods. It was a very complicated change management challenge in addition to the analytic challenge, and they pulled it all together.”
Asked to expand on the team’s winning message, Greenland said it was clear from the presentation and the goal of the O.R. work that Holiday was dedicated to the senior community it serves. “It’s not just about optimizing revenue; it’s about making the right decisions and taking a lot of the pain out of a really difficult time in people’s lives when they go through transitions,” Greenland said.
Mike Trick of Carnegie Mellon University, a past president of INFORMS and a past chair of the Edelman Award Committee, put in a masterful performance as master of ceremonies for this year’s Edelman Gala. Asked to sum up the evening, including the Edelman and a handful of other awards presented at the gala, Trick said, “It’s been great, just seeing all these schools and companies doing such fantastic stuff, and it’s really the tip of the iceberg. There are many amazing projects out there, and then we get to see the very best. That part is really fun, along with seeing more than 800 people in the audience. It really does show the ongoing growth of our field and all the excitement, particularly around analytics.”