June 1998 The high-flying SABRE Group, boosted by a series of successful applications of OR-based decision support systems, bodly refutes the notion that operations research is a dying profession. By Thomas M. Cook Editor's note: The author, senior vice president of The SABRE Group, delivered the keynote address at the CORS/INFORMS meeting in Montreal. Following is the text of that presentation. Seven years ago when I was president of TIMS, I had the pleasure to speak at this conference. I'm surprised I have been invited back so soon. Because I expected to see a lot of old friends and colleagues in this audience that were also in Nashville in 1991, I got out my old notes to make sure I didn't say the same things. In that speech, I made several points that I still believe are true. First, there is huge latent demand for OR-based solutions. Second, the lack of communication and cooperation between practitioners and academicians seriously impairs our ability to discover and satisfy this latent demand. Third, academics need to spend more time in the real world getting dirty working on real problems with real data rather than taking the easy road to tenure and promotion by publishing papers that interest only fellow researchers and have little practical value. Recently, I heard a story that is particularly relevant to the issue of OR in the business world. A president of an OR-based solutions company was having a staff meeting. Out of nowhere, an angel appeared in the middle of the conference table. The angel looked at the president and said, "I have some good news and bad news. The bad news is that you will die in the next week. The good news is that you will be going to heaven. "More good news is that heaven has become a very customer-centric organization and you have your choice of three things for eternity. The first is that you can be incredibly handsome, the second is that you can be infinitely wise, and the third is that you can have all the money that you can imagine." The president thought about the choices, looked around the table at his OR peers, and, perhaps under a little pressure from his group, said, "I choose infinite wisdom." The president's staff all nodded their approval. The angel said, "The last piece of good news is that you can have your wish effective immediately, before you die. Good luck." And then the angel disappeared. The president's staff all stared at the president, eager to see the expected serene, content smile of infinite wisdom. However, the president's face changed to a pained grimace. The staff member sitting closest to the president asked, "What is it boss, what does it feel like to be infinitely wise?" The president answered, "I should have taken the money." That, my friends, is the problem ­ intellect and wisdom alone are not always enough! Fourth, I indicated what I thought practitioners should do to be more successful and finally characterized AI and expert systems as a niche tool of limited value that was getting a disproportionate share of R&D dollars in the late 1980s and early Œ90s. Today, I would like to explore the hypothesis that operations research is a dying discipline. Many have pointed to a reduced demand for OR talent coming out of graduate schools, the elimination of OR in the core MBA curriculum, and reduced attendance at national meetings as evidence that our profession is in the winter of its life cycle. I categorically reject that hypothesis based on many data points that refute the notion that ours is a dying discipline. I will present three data points that support this position ­ first, the existence and success of companies like I2 Technologies, Manugistics and The SABRE Group; second, the market demand for yield management as a way to increase revenue; and third, the use of OR to solve the very complex airline scheduling problem. Company History Let me first give you a chronology of the evolution of The SABRE Group, and explain the absolutely critical role our profession has played in the growth of a $2 billion annual revenue company with a market capitalization value of over $4 billion. When I joined American Airlines in 1982, there was no SABRE Group. There was an internal IT organization named DP&CS and an OR group called the OR department. I joined as the director of OR. During the next five years, the OR department evolved from a small, 12-person group working on relatively unimportant and isoteric problems to a group of 75 OR professionals building models for important decision-support systems, and performing strategic studies to support senior management decision-making at American Airlines. In 1988, we formed AA Decision Technologies, or AADT, as a wholly owned subsidiary of AMR, the parent company of American Airlines, and began selling our services externally, in addition to our work for American Airlines. During the next five years AADT grew from 75 people to almost 600 people. By 1993, although our American Airlines' business had grown, 80 percent of AADT's revenue was external to AMR. In 1993, The SABRE Group was formed within AMR. The original SABRE Group consisted of four primary organizations ­ SABRE Computer Services, SABRE Development Services, SABRE Travel Information Network and AMR Information Services. SABRE Travel Information Network was the $1 billion travel distribution business focused exclusively on travel agencies. SABRE Computer Services provided the data center, communications network, and desktop support for American Airlines and the travel distribution business. SABRE Development Services provided all applications development, and AMR Information Services marketed SABRE and American Airlines legacy systems externally. In 1993 I proposed to Bob Crandall (recently retired chairman and CEO of AMR, see accompanying story) that AADT join The SABRE Group, and that we merge SABRE Development Services, AMR Information Services and AADT into one organization, which became known as SABRE Decision Technologies. He liked the idea, and we took on the arduous task of transforming an internal application development group into a market focused group and merge the three different cultures into one culture that could win. In 1996, The SABRE Group was created as a legal entity. Eighteen percent of the stock was sold to the public, with 82 percent retained by AMR. In 1997 we decided to reorganize The SABRE Group and merge SABRE Computer Services, the operational arm of TSG, and SABRE Decision Technologies, creating a comprehensive information technology solutions division named SABRE Technology Solutions. Today, this new organization employs 8,000 professionals and will earn more than $1 billion in revenue this year. As we plan for The SABRE Group's future, it is clear that the SABRE Technology Solutions division is the growth engine for the entire company. Our strategy is to become a major IT outsourcing company exploiting our knowledge of the travel and transportation industry and our portfolio of solutions. What differentiates us from our competition ­ IBM, EDS, CSC and others ­ is our ability to add significant value through the application of our OR-based decision support systems. Our competition attacks the IT spending of their clients; while savings can total 20 percent to 30 percent of the IT budget, the IT budget is only 3 percent on average of total spending. Therefore, our competitors' value proposition is an overall saving of less than 1 percent of operating expenses. SABRE's proposition is much more compelling. Not only do we offer the traditional 20 to 30 percent savings in IT spending, we also attack the remaining 97 percent of spending by applying OR-based systems to their operational problems. Generating incremental revenue through implementation of model-based systems in areas of pricing, yield management and scheduling provides even more potential value to a prospective client. The point is that our discipline has been critical in creating a company worth over $4 billion, and is the key to our strategy of growing that company aggressively in the future . Earlier I said I was going to discuss a few specific data points that refute the notion that OR is a dying profession. Actually, there are many data points, not the least of which are the Edelman finalists every year. Yield Management The second data point that refutes the notion that OR is dying is yield management. In 1991, we won the Edelman Prize for yield management at American Airlines. For those of you who don't know what yield management is, let me briefly explain the problem. American Airlines and American Eagle operate over 4,000 flights per day and start taking reservations 330 days prior to departure. Each market has multiple fare classes with an inventory of seats the airline is willing to sell at a particular price, at any point in time. The job of yield management is to forecast demand by inventory bucket, and optimize the decision of whether or not to sell at a price the customer is willing to pay now or wait for higher-value, late-arriving demand. It's the classic decision of whether to take a bird in the hand or go for two in the bush. Yield management tries to optimize this decision process by using sophisticated forecasting and optimization techniques to determine how much to overbook each individual flight, and how to allocate the seats amongst the hierarchy of inventory buckets. We have estimated that the yield management system at American Airlines generates almost $1 billion in annual incremental revenue. To put this in perspective, 1997 was the only year in its history that American Airlines has had operating earnings approaching $1 billion. What is even more exciting is that virtually every airline of any consequence has realized that they cannot compete effectively without a yield management system. In other words, they can't live without OR! In addition to revolutionizing how airlines manage the revenue side of their business, OR-based yield management systems are becoming increasingly important to cruise lines, hotels, passenger rail companies, broadcasting networks and other organizations that need to book perishable inventory in advance. We are currently working with Club Med, Hyatt Hotels, the French National Railroad (SNCF), AMTRAK and Royal Caribbean Cruise Line; and even the U.S. Navy is applying yield management to their unique environment. The Navy engagement illustrates how robust the concepts of yield management are. Several years ago people from the Navy met me at one of these meetings and informed me that they had a yield management problem and wanted SABRE to help solve the problem. Tom Blanco described the Navy's training problem to me ­ perishable inventory of training slots or classroom seats that needed to be booked in advance, and the desire to overbook classes to accommodate late cancellations and hold back some inventory to save for late-arriving, high-value demand ­ a classic yield management problem solved by OR. Airline Scheduling The third and final data point that leads me to reject the hypothesis that ours is a dying profession is how our discipline is revolutionizing airline scheduling practices. Last year we won the Edelman prize with The French National Railroad ­ SNCF ­ for applying OR to scheduling the TGV (the French high-speed train network). I think we will have another strong Edelman Prize contender when we find time to enter our airline scheduling solution in the competition. Scheduling an airline, especially a large airline, is an extremely complex problem with thousands of constraints and millions of variables. Developing a high-quality schedule capable of attaching incremental revenue and market share is strategically critical to an airline's success. Although we have been working on the airline scheduling problem for well over 15 years, it has only been in the last six or eight years that OR has made a truly significant contribution to airline scheduling practices. It started at American Airlines when I assigned a small group of OR people to the Capacity Planning department to determine the feasibility of designing and implementing the next generation scheduling system. Taking a chapter out of Gene Woolsey's book, I wanted these guys to learn how to schedule the airline before thinking about the next generation system. It took at least six months before they started thinking about what the system should do and could do. A few of the basic decision variables of the airline scheduling problem are: • Where to fly (markets)? • How often to serve a market (frequency)? • Over what hub to serve a particular market (for example, American Airlines has two east-west hubs, DFW & ORD)? • What time of day to fly (customer preference)? • What type of aircraft to assign to each route (for example, American Airlines and American Eagle have several dozen different aircraft types, all with different capacities, ranges and other operating characteristics)? • What flights to designate as through-flights, etc.? It was clear that the problem would need to be decomposed if we were going to be successful. To make a long story short, the system that was designed and implemented was a model-based system that relies on sophisticated forecasting models and optimization models that optimize decisions like aircraft assignment, aircraft routing and through-flight assignment. The system has been benchmarked at American Airlines to contribute hundreds of millions of dollars to the bottom line each year. Because of the power of the forecasting and optimization imbedded in the system, SABRE has been successful selling the system to airlines like United, Delta, Northwest, US Air, Lufthansa, Swissair, Air France, Air New Zealand and many other airlines around the world. OR Challenges Because of the leverage created by model-based systems, we are continuing to invest millions of dollars in research annually. These examples are only a small subset of the success stories within our profession. No other discipline offers the potential we have to offer. Why, then, haven't we conquered the world? Let me first say what I don't believe the answer is: • There is no shortage of complex problems that are amenable to a modeling approach. •There is no shortage of OR talent. •There is no real competition from AI or expert systems. •There is no lack of computing power. •Lack of data is becoming less and less of a constraint. •There is no lack of good algorithms or modeling techniques. •If we are willing to earn it, there is no lack of senior management support. So what do we as OR professionals have to do to be more successful and enhance our collective contribution to society? Let me suggest that the single most important thing an academic can do is to get out of academia. This departure from the university could be for a day, a week, a summer, a sabbatical, or possible career change like I did 18 years ago. The key is that an OR professor has a lot to contribute to the solution of real problems in the real world, but unless he or she is willing to make a significant investment in time and energy, it won't happen. I get a lot of calls from academics looking for problems and data that they and their graduate students can take back to the lab and create a solution. These efforts almost always fail because the academics involved rarely spend the time necessary to really understand the problem, and/or work with end users to ensure the solution is implemented. If you look at the most successful academicians in our profession, almost every one has made the investment in the real world that I am advocating. Tom Magnanti, John Little, Ellis Johnson, Art Geoffrion, Dick Larson, Yossi Sheffi and Karla Hoffman are just a few of the people that combined their academic careers with large contributions to the practice of OR. I would encourage all of the professors in the audience to follow their example. OR Learnings For the practitioners in the audience or those professors that venture into the real world, let me offer some things I've learned over the past 20 years, often times the hard way, that you might use to be more successful. • Learn to take the broad view of OR. Rather than only dealing with optimization problems, be an end-to-end problem solver. Your impact within the organization will increase, because it's not just the tools you have to offer, it's your approach to problem solving. • Learn to listen. Be sure to allocate enough time up front to understand what the problem really is before you try to solve it. • Be selective about the projects you pursue. Be sure it's a project that's important to the organization, and one that you can do. • Earn the respect of senior management. Since most key decision-makers had to work their way up the ladder, our degrees won't automatically bring us respect. We have to earn it the same way they did, through small successes. • Learn to communicate. It isn't a real solution unless we can communicate it to others, and motivate them to use it. • Learn to "package" or market your product, solution or deliverable. Make sure the recommendations are well thought out, well written, and backed up with the proper data. If you're delivering a model or system, be sure to include good user manuals, good help screens, good user interface and so on. Package your deliverables so others can easily understand how these solutions will impact the organization positively. A little "glitz" will go a long way. • At the same time, don't over-promise. Be able to deliver what you promise, when you promise it and on budget. • Be willing to accept a suboptimal solution. Since we are talking about real-world solutions, remember that getting part of the solution implemented is better than a brilliant theoretical solution with no execution. • Finally, retain control of your project and be willing to follow-through on it. A lot of OR projects fail because the OR professional thinks the problem is solved by formulating the model on paper or building the prototype. But I've learned the hard way that the problem is not solved until the solution is being properly used by the end-user. It is essential that you follow-through. In summary, I think our profession is not dying — it is alive and well. We are capable of making a much larger contribution and achieving greater personal success if we can learn from our most successful colleagues, and make the investment of time and energy to sell our unique approach to solving problems and delivering on our promises. Table of Contents OR/MS Today Home Page OR/MS Today copyright © 1998 by the Institute for Operations Research and the Management Sciences. All rights reserved. Lionheart Publishing, Inc. 506 Roswell Street, Suite 220, Marietta, GA 30060, USA Phone: 770-431-0867 | Fax: 770-432-6969 E-mail: lpi@lionhrtpub.com URL: http://www.lionhrtpub.com Web Site © Copyright 1998 by Lionheart Publishing, Inc. All rights reserved.