Key Takeaways
- Southwest Airlines faces financial liabilities for mass cancellations of flights over the holiday season that stemmed from a system failure.
- The losses Southwest faces far outweigh the cost of upgrading its systems.
- Procurement professionals should take notice of this and other industries’ woes and prioritize digital transformation.
What happened to Southwest Airlines?
Between December 22 and December 30, technical difficulties forced Southwest Airlines to cancel approximately 15,000 flights during the holiday flying season. Such a public disaster during one of the most heavily-traveled times of year has irreparably damaged the airline’s reputation and led to huge financial losses, which the airline has estimated may total $825 million. For reference, the airline earned $827 million in net income during the past twelve months.
But unlike some other disasters, this crisis was foreseeable. On November 14, the airline’s pilots association president, Captain Casey Murray, warned that the airline was “one IT router failure away from a complete meltdown,” and pointed to Thanksgiving, Christmas, and the New Year as times when the system could collapse. Captain Mike Santoro, the association’s vice president, told CNN that employees had been raising concerns over the airline’s aging technology all the way back in 2015.
Business experts tend to agree with the captain’s assessment. “For years, the IT research and advisory firm Gartner has admonished executives that, regardless of their industry, that they are or must become a technology company. Each year this becomes increasingly germane and urgent,” Doug Laney wrote in Forbes. To succeed in an increasingly digital world, experts have told organizations that they must embrace digital transformation.
While cost reduction is important, you should also consider the risks of underinvesting in digital innovation. Unreliable software can lead to severe business interruptions whose costs dwarf the cost of upgrades. Henry Harteveldt of the Atmosphere Research Group estimated that modernizing Southwest’s software would cost roughly $50 million to $100 million, which is far less than the estimated $825 million in losses Southwest now faces. Procurement professionals should take notice of this and other industries’ woes and prioritize digital transformation.
How did underinvesting in technology cause Southwest's crisis?
This episode was in large part due to Southwest Airlines not investing enough in digital innovation. The airline’s crew assignment software, SkySolver, dates back to the 1990s and was nearing its end of life at the time of the meltdown.
Winter Storm Elliott, which lasted from December 21 to December 26, led to a wave of cancellations and delays during some of the busiest travel days of the year. Southwest’s aging system couldn’t keep up with these cancellations and delays. The result was predictable: the system broke down. With the system inoperable, Southwest staff had to locate and match crew members to flights using the telephone—much slower and far less efficient than sophisticated software designed to handle such matters. As a result, many flights were cancelled due to the lack of crew members.
Although other airlines were also impacted by the winter storm, they were not as affected as Southwest. On December 26, Southwest accounted for roughly 54% of all cancellations among flights that had been scheduled to leave the next day. To make matters worse, Southwest hadn’t integrated its reservation system with that used by most of the other airlines, which meant that passengers on cancelled Southwest flights could not be rebooked on flights from other airlines.
These passengers were left stranded at the airport and were forced to book flights from other airlines at sky-high rates. Passengers who couldn’t find flights on other airlines had to scramble for hotel rooms and ended up paying room rates that were much higher than usual. Some customers ended up spending thousands of dollars. To make matters even worse, Southwest may even have to compensate these customers because their flights were cancelled due to Southwest’s technical difficulties rather than the bad weather.
While the losses—including not just the money to compensate passengers but also lost revenue from those cancelled flights—are considerable, the long-term damage to the company’s reputation, which they’d built over decades, is perhaps the largest loss they’ve suffered.
It wouldn’t surprise anyone if previously-loyal Southwest passengers avoided the airline in the future.
What lessons can procurement learn from Southwest's mistakes?
But what does this all mean for procurement?
Procurement leaders who act now may be able to help their organizations avoid similar events. Moreover, while digital transformation may help organizations avoid losses, it can also help organizations capitalize on new opportunities. Procurement leaders can draw two lessons from this episode.
Consider the risk of underinvesting in technology.
To make better purchasing decisions, you should assess the risks of underinvesting in technology. You may need to develop new metrics to measure these risks. For example, you can estimate potential losses by considering how often a system crashes and calculating how much the organization would lose if such a crash led to a sharp decline (say 50%) in daily revenue for 10 business days. But don’t worry—you don’t have to do this by yourself. Internal and external experts can help you understand these risks. Once you’ve estimated the losses you could face as a result of technical issues, you’ll be in a better position to determine whether to invest in digital transformation.
Seek feedback from across the organization.
The Southwest Airlines episode also illustrates the importance of listening to employees and involving people from across the organization when considering digital transformation. Employees should be asked whether there are any technologies that would help them do their jobs better. Customers and suppliers should be asked whether there are any points of friction when interacting with the organization that might have technical solutions.
Southwest Airlines was an extreme case. Employees were practically screaming about the risks of underinvesting in technology, but even organizations with savvier and more attentive managers may be able to learn something from their employees and customers.
How should your procurement department invest in digital solutions?
Procurement departments can play an important role in their organization’s digital transformation.
First, procurement departments should err on the side of supporting software upgrades. Important software upgrades should not be postponed simply for cost reasons because the cost of postponing upgrades to mission-critical systems often outweighs the benefits. If the IT department believes an upgrade is needed, procurement departments should not stand in the way.
Furthermore, technology can also be used to enhance procurement and supply chain management. For example, reverse auction platforms allow buyers to solicit multiple bids for a product or service from qualified vendors who will then compete with one another for the order, driving the price down.
Finally, procurement departments should exercise due diligence when choosing suppliers. Buyers can vet suppliers on their technology preparedness by using ProcurementIQ’s RFP templates and incorporating technology integration questions into the RFP process.
Final Thoughts
- This episode shows that investing in digital transformation now can pay dividends in the form of losses avoided later.
- Henry Harteveldt has estimated that fixing Southwest’s software systems would have cost roughly $50 million to $100 million.
- Compare this with the $825 million in losses Southwest Airlines has projected it now faces as a result of the flight cancellations.
- Spending $100 million on upgrades could have helped Southwest avoid $825 million in losses, yielding a 725.0% return on investment.
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