How Tech Is Tied To Operational Risk

The lessons of Southwest Airlines
Leaders should be asking key questions to evaluate whether their enterprises are positioned to navigate ongoing volatility and avoid the sort of operational disaster that Southwest Airlines suffered.

“We have plans to invest in tools and technology and processes, but there will be immediate work to understand what lessons are learned here and how we keep this from ever happening again because it cannot happen again,” said Southwest Airlines CEO Bob Jordan, who took the helm in February 2022, in his message to staff on Friday, January 4. By that point, after a disastrous two weeks of delayed and canceled flights, Jordan grasped that at risk was more than near term-revenue. It was the company’s cherished reputation. Restoring reputation, then and now, hinges on getting technology in place and in working order.

The last thing any executive wants is a catastrophic operational failure during a peak season. Unfortunately, that’s exactly what executives at Southwest Airlines experienced. During extreme weather, Southwest canceled 16,000 flights between December 19-28, far exceeding any other airlines’ operational impacts.

Southwest’s operational collapse provides Boards and executives everywhere an opportunity to evaluate whether their firms have the priorities, systems, and culture in place to navigate volatility and disruptions. Some experts note that Southwest’s point-to-point operating model was problematic during the extreme weather conditions compared to the model other major airlines used. Nonetheless, the company’s leadership identified Southwest’s technology as the key contributor to the calamity.

Casey A. Murray, president of the Southwest Airlines Pilots Association, squarely blamed “IT and infrastructure from the 1990s.” According to Helane Becker, an aviation analyst with Cowen, “Southwest has always been a laggard when it comes to technology.” Long before the inclement weather, Southwest Airlines CEO Bob Jordan stated on November 30, “We’re behind. As we’ve grown, we’ve outrun our tools. If you’re in an airport, there’s a lot of paper, just turning an aircraft.”

Undoubtedly many more details about this failure will surface over the next several months. Tech issues are often blamed when businesses experience operational disasters. But industry watchers, advocates, and academics (like me) know there are culture, process and leadership issues that also play a crucial role. Boards and executives should be asking key questions to evaluate whether their enterprises are positioned to navigate ongoing volatility based on what we can discern from Southwest Airlines’ operational disaster.

Are you investing enough in operational digital transformation to balance risk and agility?

According to Fast Company, Southwest Airlines invested $800 million in a technology overhaul, with only $300 million dedicated to new technology for operations in 2017. This is a minimal investment given that Southwest Airlines was a $33-$38 billion market capitalization airline in 2017. Additionally, from 2017-2019, Southwest received $7 billion in pandemic aid and performed $5.6 billion in stock buybacks, announcing that it will pay a $428 million a year quarterly dividend to shareholders starting Jan. 31. Clearly, the focus is more on financial management than operational excellence.

To avoid this scenario, business leaders should ask: Are we investing enough in the digital transformation of operations? Does our enterprise lag behind competitors? What risks do our legacy systems pose for operations and reputation, given increasing customer expectations?

While senior executives and CIOs must consider the reality of a recession as they set their digital transformation priorities, underinvesting will negatively affect customers, employees, and reputation. These risks have significant financial repercussions. If the risk and potential financial implications do not sway the executive committee or board, a potential drop in stock price and reputational decline in an increasingly competitive landscape should.

What is the communications protocol during a crisis, and what tools will be used?

According to CEO Jordan, “Someone needs to call them or chase them down in the airport and tell them” because the airline had no automated way to contact crew members.

In the current environment of unified messaging and automation, all major enterprises should have technologies and automated procedures to reach employees during a crisis. The immediate and critical communication of operational changes is essential for navigating disruption. During an emergency, firms should have explicit well-practiced procedures supported by multiple technologies to reach employees. This is critical for ensuring their safety and providing protocols to support operations.

One key question is: Are the call centers scalable to support a massive influx of calls during a crisis?

While the plight of customers impacted by a crisis is paramount, executives must also consider the well-being of employees as well.  Murray reported that pilots and crew waited hours to speak to staff about reassignments and even slept in airports next to passengers.

How quickly can we change operations and realign to current conditions during a crisis?

Looking beyond operations, do leaders and employees have the tools they need to realign operations? Has the company deployed collaboration tools, real-time reporting dashboards, and predictive modeling to aid in decision-making? How often do teams schedule tabletop exercises to play out scenarios? Has the company invested in a digital twin to facilitate operational changes and support crisis decision-making?

All airlines, including Southwest, rely on scheduling software to route pilots, crew, planes, and other equipment. However, when things went wrong at a significant scale, Southwest relied on manual operations, which is too limited, given the complexity and magnitude of the disruption. Brian Brown, president of Transport Workers Union Local 550, noted, “It requires a lot more human intervention and human eyesight or brainpower and can only handle so much.”

Does your organization have the capability and strategic posture to support custom software development?

Developing and maintaining proprietary software and customizations requires a significant long-term investment. It entails an ongoing commitment to talent development and product development disciplines that may not align with the company’s strategic goals. Deciding to purchase or maintain legacy systems requires careful decision-making regarding long-term capability investment and a life-cycle approach to internal software development.

SkySolver is the customized, off-the-shelf software that Southwest uses for crew assignments. It was developed decades ago, was customized for the airline, and then required ongoing maintenance. SkySolver was the system largely responsible for Southwest’s delays in restoring operations.

A disaster should not drive legacy modernizations for complex operational systems. In fact, in addition to operational risk, legacy systems often engender cyber security risks. Taking a risk-based approach to enterprise architecture helps drive these considerations to the forefront for systematic decision-making aligned with strategy to optimize risk. If decisions regarding legacy system upgrades are made during or after a crisis, the urgency can drive costly architectural mistakes and chronic underinvestment. A risk optimization approach would help ensure appropriate investment in scalability and security.

Executives and boards should ask: Is our corporate strategy a fit for investing in the capabilities required for agile software development? What are the fundamentals of cloud operations, and what does the company need to support the oversight of these partners?

Many executives do not understand the total cost of ownership when it comes to software development. Often they mistakenly believe that moving to the cloud is simple, and they do not understand how to evaluate or manage the complexities and risks.

Are we learning from our own failures as well as those that our competitors and we have made?

Often, organizations manage to recover from a crisis but only adjust or fix immediate problems. The executives do not ask the broader, more strategic questions to make truly competitive holistic improvements. In 2021, Southwest canceled over 1,800 flights over a weekend. The pilots’ union attributed this to management’s “poor planning.” Learning from this event could have saved millions for Southwest in 2022.

Looking ahead at the following year, the problems facing Southwest are far from over. The company hired an outside consulting firm to overhaul its customer scheduling system, and Southwest pilots are justifiably angry and considering a vote on whether to authorize union leaders to call for a strike. Customers are feeling burned, and many are turning to the competition. The critical issue is whether the executives will learn from this crisis and ask broader questions regarding their investments in the digital transformation of their operations. In the meantime, the company will also have to work triple time to repair its reputation. For Southwest, like all companies, trust is not given—it is earned.

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