Communications of the ACM

Communications of the ACM

Maximizing the Value of Internet-Based Corporate Travel Reservation Systems

By Alina M. Chircu, Robert J. Kauffman, Doug Keskey
Communications of the ACM, November 2001, Vol. 44 No. 11, Pages 57-63
10.1145/384150.384162
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A major problem firms face when they invest in information technology is ensuring the systems they build and deploy will actually pay off. In our experience, it is not unusual for IT departments to engage in costly and lengthy development efforts only to find out, after completing the work, that the technology has not been very well accepted by its intended users [3, 4]. Often, the initial expectations of the managers who have developed the value proposition and strategic plan for the system are wrong, too. It is quite natural for IT investors to look at industry estimates for the stock of IT capital needed to run a business (for example, by referencing the annual IT investment surveys of the International Data Corporation published in InformationWeek magazine). The problem is that senior managers and investors often develop expectations about the likely payoffs of their IT investments without taking into consideration a number of crucial specifics: their firm's organization, other supporting resources simultaneously available to ensure smooth implementation and user acceptance, and related processes likely to have a considerable impact on the extent to which the estimates are realized [4].

In the case of IT investments, it is always difficult to combine hard, tangible benefits (such as cost savings) with soft, intangible benefits (such as improvements in competitive position, increased customer relationship strength, changes in power in the firm's distribution and supply channels, and more). Most senior managers of IT also recognize their investments are likely to pay off in different ways—and with different tangible value—for different stakeholders.

Some stakeholders are likely to find it is relatively easy to assess quantifiable impacts, such as the displacement of expensive staff members or greater transactional throughput or productivity. Others, however, may obtain only a small portion of the tangible benefits. Still others may gain from even more difficult to measure intangible benefits, though they may not be able to formally measure them. In this mix, various approaches are needed to assess the "true" value of an IT investment. However, few IT investors actually have the time or the motivation to look at things so carefully.

Thus, an effective IT value assessment toolkit for senior managers requires methodologies and perspectives that emphasize understanding the actual or realized value achieved relative to the potential value upon which the justification was based. It must emphasize how to think through the likelihood that potential value will be realized in terms of straightforward and readily understood and applied concepts.

Here, we will explore some of the ways we recommend senior managers and investors in IT should begin to think about "rightsizing" their estimates of the potential value of an investment in a system. We argue the most effective way to develop such an understanding is to come to grips with the limits to value of the system in the organizational, business process, and market context in which it has been deployed. Our perspective here is built upon these important concepts; we apply our limits to value framework to the case of Internet-based corporate travel reservation systems. This is an interesting application area because travel reservation systems were among the first systems successfully implemented on the Internet. Today, travel industry sites such as Travelocity or Microsoft Expedia are almost household names among Internet users: they have created online services for retail customers and leisure travelers that have changed the structure of the industry and put pressure on travel agency profits.

Interestingly, however, most knowledgeable industry observers have recognized that online reservations do not have the same appeal for business travelers, despite numerous efforts firms make to implement Internet-based corporate reservation systems and encourage their employees to use them [6]. In fact, in an ongoing corporate travel field study we have conducted, we learned that some of the best efforts to automate the corporate travel reservation-making business process are often blunted by:

• Difficulties in efficiently integrating the Internet-based booking processes, such as enforcement of corporate travel policies, with the traditional travel agency processes so that reliability, transaction throughput, and perceived quality of system performance are acceptable;
• User difficulties with booking itineraries involving any significant complexity (for example, multiple destinations, international travel, travel involving mixed air carrier arrangements);
• Traveler expectations that using an Internet-based corporate travel booking tool will consistently and significantly be cheaper and take less time than dealing with a human travel agent; and,
• Underestimation of the difficulty of achieving behavioral changes through the organization such that travelers modify how they arrange their travel.

We will offer recommendations for practitioners that emphasize how to overcome the constraints and maximize the value of investments in this kind of technology.

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Defining Limits to Value for IT Investments

To prevent erroneous estimates for IT investment value, managers need to identify from the start what is the maximum value they can obtain, and what factors can diminish or erode that value. For this estimation we recommend managers apply a limits to value framework [3] (see Figure 1). This framework emphasizes the idea that firms cannot benefit from their IT investments without also acquiring co-specialized assets [1, 11]. For example, investing in an expensive decision support system (DSS) will not yield the expected benefits unless additional investments in dedicated DSS human capital (through training or hiring of experts) are made [4]. On the other hand, the DSS human capital will not be valuable without the actual system in place. This makes DSS human capital a co-specialized asset. The elements of this framework will be described in detail here.¹

IT value flows. For any type of investment in IT, there are a number of sources of value that are general, and can be applied to any company in any industry. At the process level, IT is generally associated with increased productivity and process efficiencies. At the market (or industry) level, IT is associated with improved competitive advantage and enhanced relationships with the firm's partners in the market. Another important value flow is based on how often the solution is adopted in the market, and how readily supported and understood it is by potential customers and users. This enables new organizational adopters to benefit from all the implementation, adoption, and usage knowledge accumulated over time by previous adopters and by the technology providers.

Potential value vs. realized value. While the IT value flows refer to built-in features of the technology that, under optimal conditions, will all generate value, managers have to realize that not all this value can be captured. In a perfect world, everything will go as planned; in the real world, hardly anything ever does. We recommend a two-step process to sort out how best to think about this problem:

• Step One—Valuation. The valuation process helps managers answer the following question: How will the value flows for an IT investment look in the real world, for my organization? The answer lies in understanding how value flows, which are general, apply to a specific industry and a specific organization to generate potential value. Potential value is the maximum that can be realized by the firm, in view of the overall environment in which the IT investment is made.
• Step Two—Conversion. The conversion process corresponds to the implementation phase and the subsequent use of the system. This process transforms potential value into realized value—most often diminishing it. The resulting value can only by assessed after implementation occurs.

Limits to value. Clearly, managers are interested in maximizing the realized value. To do so, they have to plan ahead and identify what limits this realized value: value barriers that can occur during the assessment of the potential benefits of the IT investment (valuation barriers) and determine the maximum value that can be obtained, as well as during the actual IT implementation (conversion barriers):

• Valuation barriers. During the IT valuation process, managers need to consider how specific organizational and industry characteristics generate barriers for realizing the full value potential. Organizational barriers are created by firm processes developed over time and are difficult to change, and have established costs in human capital and past IT investments. Industry barriers occur when a specific industry or business process emphasizes the utilization of existing standards, which may favor certain technologies over others.
• Conversion barriers. Many times, managers will only take into account the potential value estimate for a system, and ignore the difficulties of the IT implementation that create conversion barriers. Resource barriers are generated by a lack of co-specialized resources such as human capital and new organizational processes (for example, no or limited investment in user training and system usability engineering). Knowledge barriers occur when knowledge about the IT implementation and the related efforts for putting co-specialized resources in place is not fully available, either though in-house development or outsourcing. Usage barriers are due to unfavorable perceptions about the usefulness and the usability of the system, and the responsibilities associated with its use, which may result in hesitation on the part of users to adopt the IT.

Identifying and overcoming limits to value. Valuation and conversion barriers both create limits to value for IT investments. If the costs and requirements for successful implementation are not considered, lower than expected amounts of realized value will be observed, together with delays in implementation and budget overruns.

As a result, managers should first understand what the barriers are, and then identify ways of overcoming them. Although this limits to value analysis can create an additional cognitive burden for the organization and delay the implementation decision, it will ensure the success of the implementation, and the realized benefits will outweigh the costs of such an analysis [3].

Valuation and conversion barriers are interdependent, and should be analyzed together. Decisions made during IT valuation affect how well the implementation will proceed. Consequently, requirements of the conversion process affect the assessment of potential value during valuation. Consider our earlier example of an investment in a DSS application that requires specialized human capital. This resource barrier occurs during conversion, but corresponds to an organizational barrier that can be identified and overcome much earlier and easier during valuation. Indeed, only if additional investments to acquire this missing resource are approved during valuation (that is, the organizational barrier is removed), then this conversion barrier will not occur, and all the potential value will be realized.

Limits to value, investment decision, and investment success. In light of the kinds of barriers that are identified and the additional investments necessary to remove them, the IT investment might not be profitable for the firm to make. A natural candidate for evaluating the appropriateness of IT investments (which are a particular type of irreversible investments under uncertainty) is real options pricing theory [2]. Such an approach is ideal for projects embedding future growth opportunities or the right to delay investment. We believe our limits to value framework can be used within real options analysis to elicit the firm- and industry-specific investment risk based on the valuation and conversion barriers we identify. With this estimate of variability of the option value, managers can then determine the timing (as well as the expected realized value) of the investment, and decide whether to proceed with the implementation.

However, we note our framework is much more than a tool for option pricing analysis. Its most important application is to guide the maximization of realized value once the investment decision (both in terms of investment timing and scope) has been made. The framework can also explain, on a post-implementation basis, why firms do not realize all potential value.

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Do Internet-based Reservation Systems in Corporate Travel Pay Off?

Our analysis of 20 implementation processes for leading Internet-based reservation systems at major U.S. corporations provides evidence that implementation of such systems cannot be successful unless firms consider their limits to value. Forrester Research estimates that by 2003 online bookings will exceed 30% of all U.S. corporate travel spending. Online bookings are performed by a company's employees using the specific Internet-based travel reservation system the company has implemented, instead of calling the designated corporate travel agency. By automating the reservation process (with the exception of ticketing), these systems promise to lower the booking costs [10, 12], or even provide lower prices through better searches [5, 10]. One often overlooked cost saving from online reservations is the reduction in after-hours call services, which are priced at higher rates than normal business hours services. Since an online system is always available, the traveler has the opportunity to use the system rather than initiate a premium-priced call to the agency. Finally, migration of travelers' inquiries about schedules, fares, and itineraries from phone calls to the online booking system can reduce agency phone call volume. This eventually can lead to a reduction in the number of travel agents required to handle those calls.

The promise of significant reservation cost and ticket cost savings has generated interest among many corporations, which have decided to invest in Internet-based reservation systems. A survey of the largest 100 corporate travel spenders indicates 32% have already adopted online reservation systems, while the remainder are or intend to evaluate such systems [7] (see Figure 2).

Internet-based booking systems have existed for approximately five years. Based on industry reports, we estimate the top five Internet-based reservation systems had more than 1,000 corporate installations in different stages of implementation in 1999. However, the same reports mention just few companies have achieved significant (40% to 90%) adoption levels [7, 8], while the vast majority of companies are still experiencing lower than 20% adoption [12]. Even when adoption rates are high, changes and cancellations still require interaction with human travel agents, which suggests traditional travel agents bring process knowledge to the booking process few travelers have and that the online booking tool cannot fully replicate.

Although it is clear that online booking benefits exist, in many cases the savings estimates are usually too optimistic, even for those companies with successful implementations [7]. In other cases, companies are unable to finish implementing their projects. Our analysis of 20 implementation processes has determined that companies ignore important valuation barriers and fail to plan accordingly for overcoming conversion barriers that can impede or even stop the implementation (see Figure 3).

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One thing companies discover when they decide to implement online reservation systems is that their travel agencies also need to incorporate online reservation information into their systems and thus be able to provide integrated phone service, low-fare searches, ticketing, and reporting.

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This phenomenon seems to occur not only in our sample, but for the majority of corporations that try to implement online booking systems. Industry experts recognize the difficulty of the implementation process, and the need for additional resources, are rarely correctly estimated prior to implementation. According to Andy Tellers of NCR Corp., who manages the company's $35 million annual air volume and the full rollout of an online booking tool: "I wish they [the online booking tool vendors] had said more about the time and the people we would need to implement this" [9].

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Learning from Implementation

We identified some of the limits to value in our analysis of 20 Internet-based reservation systems implementation processes that managers need to consider in order to maximize the value of these systems. Many companies arrive in the implementation stage without realizing the integration of an online booking system with the travel agency and the computerized reservation system, where the data for fares and schedules resides, is an extremely complex process. Usually, the travel agency works together with the online booking tool vendor and the adopting company to identify and resolve problems. However, some essential features of the online booking tool, such as its ability to display negotiated rates for air, car, and hotel reservations, have proved particularly difficult to implement. Ensuring synchronization between online profiles and agency profiles for each traveler has also been an unexpected but serious challenge.

As with other technologies, users do not immediately adopt online booking systems. Behavioral change in the presence of new technologies does not happen without the right system, the right problem, and the right incentives in place to make people alter the way they work. However, managers are too quick to forget this when setting adoption targets during the valuation process. User surveys regarding intentions to adopt or use other IT applications should not be used blindly as proxies for adoption estimates.

Even several years after the "first wave" of online booking tool implementations, adoption levels for most companies (at 20% or less) are still lower than predicted levels² (see Figure 4). Obviously, this is not enough to realize benefits projected, for example, at a 50% adoption level. Moreover, adoption has to reach 30% to, in some cases, 60% before savings can be realized [7, 10]. The high usage levels reported by some online booking system vendors [8] are usually for small companies or companies that mandate the use of the system for most trips. For example, VeriFone Inc., has reached 60% voluntary adoption for its $5 million annual U.S. air volume and 1,500 travelers [5, 8]. At Motorola Asia, mandating online bookings has led to a 90% adoption level [9] for a $4 million annual air travel volume and 7,800 total travelers [10].

Mandating online reservations, however, is impractical or impossible to implement at large firms that can potentially reap the greatest benefits. Managing problems due to mandating is difficult even for small companies, who are suddenly faced with system set-up problems, tool performance problems, and training requests. Moreover, mandating might not fit a company's culture or be supported by the company's current online access infrastructure [10].

It turns out that usage levels seem to have nothing to do with how technology-savvy the travelers are. Instead, the key to successful adoption is changing the travelers' perceptions regarding online booking tool benefits. An incentives program (for example, free tickets or frequent flyer miles) can also drive up the number of online reservations. Most importantly, high adoption levels require customized training and communication programs that must both precede (to ensure business process change readiness) and extend well beyond implementation (to ensure the required capabilities and features are properly utilized).

Despite the optimistic predictions, not all types of travel are appropriate for online booking. When the trip is extremely complex (involving multiple stopovers or international travel, for example), a travel agent is likely to handle the reservation process much more efficiently. Few infrequent travelers can acquire process-specific expertise regarding ever-changing fare rules, schedules, and travel supplier options available for each particular route that is not yet captured by the online systems. Frequent travelers on well-known routes, on the other hand, will be better able to take advantage of the online booking capabilities with less cognitive effort.

One thing companies discover when they decide to implement online reservation systems is that, besides their own process reengineering to support online booking, their travel agencies also need to incorporate online reservation information into their systems and thus be able to provide integrated phone service, low-fare searches, ticketing, and reporting. Commitment of time, resources, and expertise from the company itself, its travel agency, and its online reservation system vendor is essential for ensuring a smooth implementation.

However, companies need to realize that a number of system and process integration issues limit the usability of online reservation systems. For example, many such systems prevent travelers from booking trips just prior to travel. Rarely can an online tool be used to arrange travel for the current day. It is not that the tool is technically unable to do this. Instead, other requirements, such as a travel policy that requires travel preapproval or the necessity of an agent quality-checking the reservation prior to ticketing, prevent this from happening. Other limitations relate to how online reservations are fulfilled. If tickets, either paper or electronic, are issued right away, modification and cancellations of travel plans cannot usually be done online. Finally, still other limitations are due to the fact that some online booking tools are geared toward arranging travel for one traveler at a time. This makes group travel somewhat cumbersome, if not impossible, to arrange using current versions of the tools.

When assessing the value of online booking systems, most companies do not realize the implementation of such systems takes time, and that the subsequent adoption process is lengthy as well. Many companies spend at least a year going through pilot tests, solving technical problems, ensuring information is correctly entered in the system, and rolling out the system to its intended users. Even after implementation is completed, low adoption levels can also delay the realization of full benefits, as the example in Figure 4 shows.

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Conclusion

We have presented a novel perspective on evaluating IT investments and applied it to Internet-based corporate travel reservation systems. Our research suggests that, in order to maximize the value of IT investments, managers need to understand potential value first, and then, through additional analysis, identify the ways in which realized value is blocked for the organization. We have structured this argument in terms of the core concept of limits to value. We identify two categories of limits to value:

• Valuation barriers help senior managers to understand what value flows made possible by a technological innovation or a systems solution can be realized under the optimal conditions for implementation, and tone down overly optimistic estimates.
• Conversion barriers point out the resources and knowledge that need to be built or acquired in order to make the most out of the IT investment. In addition, attention should be paid to user adoption, without which the benefits of investment cannot be realized.

The analysis framework we have presented in this article, combined with our experience with companies that have utilized Internet-based corporate travel reservation systems, enable us to propose a number of recommendations for managers.

Recognize that successful IT implementations most often require additional co-specialized investments. This will enable an accurate estimation of the implementation costs, and appropriate planning for building or acquiring the requisite resources.

Analyze the limitations of your own industry and organization in delivering potential value. This is intended to help determine whether IT vendors' or other companies' predictions are too optimistic and need to be adjusted. Instead of relying on marketing hype, managers need to build company and industry-specific estimates.

Identify and estimate conversion and valuation barriers together. As we have seen, a commitment to overcome conversion barriers should positively influence a firm's potential value estimate for implementing a system. Why? Because by doing the analysis, it sets up the conditions for creating more long-term value due to the elimination of some of the barriers, although the firm must bear increased analysis costs in the short run.

Expect short-term costs, and only long-term benefits. Managers also need to remember that implementation of most complex IT applications is a lengthy process, and that adoption by users does not happen immediately. Managers should establish realistic schedules for the realization of benefits, and recognize that significant short-term costs are incurred to achieve long-term benefits.

The existing academic research we used to build our framework as well as evidence from practice regarding IT investments suggest our perspective is likely to apply to a wide range of IT investments. We believe organizations using our limits to value framework and recommendations will be able to determine what IT investments are justified and plan accordingly for their successful implementation.

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The Digital Library is published by the Association for Computing Machinery. Copyright © 2001 ACM, Inc.

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