How to innovate: Lessons learned the hard way by Travelocity founder Terry Jones
Terry Jones, founder of Travelocity and current chairman of Kayak, has self-published a book this month: ON Innovation, Turning on Innovation in Your Culture, Teams and Organization.
The book summarizes ideas that he’s presented at speaking engagements to more than 40,000 people in the past few years.
In a wide-ranging interview, Jones spoke with Tnooz from his home near Lake Tahoe about what travel companies need to do to be innovative today.
Jones knows about innovation. He has worked at 10 start-ups, beginning with a travel agency he co-founded in Chicago and later moving on to an information technology company that sold minicomputers to travel agents.
He says he can tell when a startup is, in his words, “little more than a PowerPoint deck that has raised money,” meaning they have no practice in handling budgets, creating business models, or building teams.
Jones’s biggest message is that managers have to create a culture within their companies that embraces a tolerable level of failure.
At first, this sounds like he’s paying the same lip-service to “embracing failure” made by Richard Branson and other entrepreneurs in their autobiographies — without truly embracing failure in practice.
Yet Jones is making a deeper point about innovation than what is found in the usual inspirational speeches. And he uses plenty of examples from his decades in the travel industry to back up his advice.
Sometimes innovation comes too early
Just because a product or service failed before doesn’t mean it will fail again, says Jones. Its time just may not have been right. He points to the example of creating a fare calendar for an online travel agency.
Travelocity was the first online travel agency to create calendar-based shopping. Rather than hunt and peck for specific dates, you could use a calendar to see when the cheapest fares were.
But no one used it. It was way too early. Customers were still getting used to using OTAs in the first place. The tool was, of course, a success later on, which required the company to re-visit its past failure and learn lessons and get it right the second time.
We tried co-browsing, where two people could shop together. But no one used it. Did it fail because we were so interested in the technology and the customer wasn’t ready? Only time will tell.
Another example: Not long after setting up Travelocity in 1996, Jones and his team made a mistake. They put videos on a CD-ROM that showcased colorful video footage of Caribbean resorts, on the theory that the images would inspire people to go to the website and click links to buy. (They used CD-ROM because bandwidth speeds were too limited, and broadcasting online video wasn’t practical.)
The project cost $1 million to produce and for CDs to be shipped to stores, and it was a bomb within a few months. Says Jones:
“I had to go to my boss, the former CFO of American Airlines, and tell him I had lost $1 million. I was pretty terrified.”
The boss, asked, “What did you learn?”
It was an example of being a coach. While he didn’t want me repeatedly losing large sums of money, he made it clear he’d continue to support experimentation, even if the resulting innovation didn’t pay off.
Companies have to change incentives to encourage innovation
The calculation in the head of a typical employee is that if an innovation is successful, at best, he or she will get a small raise, and at worst, he or she may get fired. As a result, a risk-averse culture is the norm.
To break that, the leader has to make clear through actions and words that he or she supports innovation.
Jones likes to quote Kip Tindell, founder of The Container Store, that “Your wake is larger than you imagine.” As a leader moving around the company, your example will be watched closely.
“It doesn’t have to be a monetary incentive, though it could be. It really has to be an effort to break through the layer of middle management and connect with line employees, whose ideas need to be vetted for implementation.”
American Airlines used to have an idea program where ideas were structurally required to be reviewed by multiple departments, because an idea that the accounting department is reluctant to implement might really appeal to marketing or operations or another division, and then those other stakeholders can help lobby to support the idea.
Jones uses an example from his own experience.
At one point, the parent company had an internal debate about keeping or selling Travelocity. Says Jones:
A lot of people internally wanted to get rid of it. They wanted to spend money on their current product and make greater margins that day than Travelocity, which was still finding its way at that point.
So Mike Durham president of Sabre convened a meeting of the minds, so that all sides could get a hearing. I was not allowed to participate. I was scared.
People wanted to sell Travelocity and take the cash to the bottom line for the quarter.
In the end, Travelocity won. Now put aside why that decision may have been made. There are two points: We returned a billion dollars in value to Sabre. They eventually took it public, then bought it back, and it’s made a lot of revenue of the years. All of that would have been lost if it had been shunted off too early.
The other point, more relevant for people today, is that by having the debate, it got everyone on-board. It shut down the critics. They had their chance, and they lost. The company moves on. And holding a debate like that can be a way of getting consensus in any company to cement a plan.
Jones cites an article in the Harvard Business Review recently on the global ratio for innovation, outperforming firms typically allocate about 70% of their innovation resources to core offerings, 20% to adjacent efforts, and 10% to transformational initiatives. That’s a ratio that Wall Street likes.
But for long-term performance, the biggest cumulative returns on innovation investments tended to follow an inverse ratio, with 70% coming from the transformational initiatives, 20% from adjacent, and 10% from core.
Relatedly, Jones points to a Forrester report that recently showed that the biggest source of lucrative ideas is your employees, not your customers or your business partners.
If that’s true, then the question to managers is, “Are you committing time conversing with your employees, not just to managing the business?”
“Boil the frog slowly”
Cannabilizing a core business to capture a growth market can be difficult. In such situations, Jones likes to quote Ronald Shaich, CEO, Panera Bread:
“In so many large companies, they let their ‘delivery muscle’—in effect, how they get work done—completely outweigh the ‘discovery muscle’ of trying to innovate and find new ways of doing things.”
Jones says this is a good summary of a common problem, which is getting companies to embrace change. One solution is to develop a team within a team. For the founding of Travelocity, he set up shop in a separate building from the parent company.
American’s IT department was too expensive, their purchasing department too slow, and their advertising and PR de-partments really didn’t “grok” the Internet customer. So in these cases we just spun away from the mother ship and did things on our own.
But that wasn’t enough to insulate the division from threats. Here’s an excerpt from his book:
When we started its predecessor, EAASY SABRE, we knew travel agents would be concerned about an online booking product. So, our first iteration of the system allowed customers to make a reservation, but they had to send it to a travel agent to issue the ticket.
Since AOL and others were paying SABRE for providing the system, we even paid the agents a small incentive ($5) to service the booking (in addition to the commission that the airlines paid them for ticketing).
This worked for a while. But the agents really didn’t grab on to the system. The bookings showed up in an obscure electronic file they never looked at. And as they didn’t know these new customers and were busy on the phone with existing business, many times they just ignored the online reservations. Unfortunately, those online bookings expired, and were cancelled, as they weren’t ticketed. Customers were understandably upset.
When we started Travelocity and moved to the Internet, we knew the problem would be even bigger, so we created our own travel agency and gave the customer the choice of booking with us or with their local agent. The travel agent trade press thundered against us, but agents still were mostly unconcerned. Finally, in the interest of providing the best possible service, we eliminated the travel agency option and only issued tickets ourselves.
In retrospect, this “boil the frog slowly” process was an effective way to assuage the fear. If we’d started out eliminating the agents from the beginning, we would have had a big problem on our hands, and they would have fought us every step of the way.
Even six or seven years of the service bumping along, its existence was still threatened from stakeholders within the parent company.
The sales department said that travel agents want to kill us. They had woken up to the idea that we’re automating their customers directly and that we were, in essence, “selling bullets to the enemy.” In short, the sales team for Sabre wanted to kill the project.
President of Sabre Max D. Hopper said, No, this is probably the direction that the industry is going to go. He continued to back the project, which eventually became Travelocity as we know it today.
The controversial sale of AA’s expertise
Jones says the same thing could be said about how American Airlines invented yield management. The proposal came to sell the technology behind it to the outside world. The marketing department was very opposed. Lots of people internally were opposed.
AA’s head, Bob Crandall said, “Someone’s going to sell this stuff; why not us?”
It takes a strong leader to support innovation like that.
In many ways, innovating can be about changing the business plan slightly, such as by changing pricing, customer service, the method of selling, or the line-up of products. You don’t have to be “an ideas guy.” But you certainly have to do more than merely talk.
While speaking with Jones, we asked him for his views on some of the pressing issues facing travel companies today.
I don’t think anyone’s cracked social travel yet. But social makes tremendous sense for travel. The number one source of recommendations for travel is still people you know. But the question is how you monetize it.
There have also been lots of experiments, too, in trying to find out information about people’s background, interests, and personality and make tailored suggestions for vacations. I spent years at Travelocity and never figured it out. But eventually someone will figure it out.
Coming from his background of having worked at both a GDS and a major online travel agency, Jones has particular insight into the ongoing debate about whether GDSs are adding value or whether the airline ticket distribution system would be enhanced without them.
“I want to know how well the airlines are doing at selling the ancillaries and other products on their own websites. Are you really kicking it?
Airlines want to sell insurance, luggage fees, extra roomy seats, and cross sell miles, and upgrades.
There is an argument that the debate between airlines and GDSs is about control and money. It never ends.
Journalists have been predicting the doom of GDSs for 15 years at least. It is nowhere in sight, though.
Certainly a large number of travelers, about 60%, do self-service for air, and a huge number of the agents in the US went out of business. It’s been tough for GDSs to see many of customers go away, though the dollar value of the remaining business travel contracts tends to be higher on average than the leisure travel business served by OTAs.
GDSs remain pretty profitable private businesses. They’re not growing dramatically but most of them are profitable and they’re innovating enough to keep their customers happy.
I think the only thing that would really change things if the airlines decided they wanted to handle business travel differently, that’s where the transactions are.
The airlines would have to decide, together, let’s create a platform, let’s agree on the standards, and let’s do business differently.
In a long time of trying, airlines haven’t been able to come up with an alternative. And if you haven’t been able to come up with an alternative, the current situation must be working.
Of course, they just may not have had the energy. It hasn’t helped that the airlines have been distracted by bankruptcy concerns and merger concerns.”
Terry Jones’s book ON Innovation is a gem. Countering a management-book tradition in which empty slogans too often take the place of actual thinking, Jones returns our attention to hard won insights learned from creating 10 startups and working for some of corporate America’s best mentors, and he does so with a light hand and a wry sense of humor. You’ll come away from this book enriched, even if you just only dip into it in 10-minute snatches now and again. It’s available for Kindle, iPad, Nook, and paperback.
NB: I updated this text after publication to correct the names of two Sabre officials whom I misidentified when transcribing the tapes.—Sean