Travel/Hospitality IT Outsourcing Picks Up After Flat Growth | Article

hotel doorHistorically, the outsourcing of IT services and development of software applications have been flat in the travel industry. And even though the outsourcing of many back office and customer call center services has kept pace with other industries, when it comes to processes that directly produce revenue for the few large global distribution systems (GDS) such as Cendant Travel Distribution Services (TDS), Sabre Holdings and IAC, these firms have been very slow to embrace outsourcing partnerships.

Recently though, that has begun to change, according to Norman L. Rose, an analyst and principal of Travel Technology Consulting, which focuses on emerging technologies and how they impact business practices in the travel industry.

“This is such a consumer-oriented business,” says Rose. “Because only a few companies control so much of the market, they have relied on either internal development of their own applications and software or bought their competitors whenever those smaller firms came up with a better mousetrap they wished to employ in their consumer offerings. And they don’t share with each other either.”

But in the past year, a profound shift in thinking has established a beachhead for potential tech outsourcers to the travel providers.

New IT and Software Outsourcing Players

In August 2004, Cendant TDS and IBS Software Development Services entered into an alliance to jointly develop and market new software technology to replace less flexible, more expensive legacy passenger database management systems and improve airlines’ efficiencies, profitability, service quality, and ability to respond more quickly to market changes.

IBS is responsible for product development and technical support. Cendant TDS is responsible for product management, sales, marketing, and customer relationships.

Developed primarily for the airlines themselves, the product, dubbed “iRes,” manages passenger reservations, check-in, baggage control, inventory control, fares, ticketing, and flight control. But the nature of its development and distribution is a marked departure from the proprietary behavior throughout the value chain that has been indicative of all GDS business models.

“The real story here is how Cendant went outside its core development group to leapfrog the competition by outsourcing. This runs counter to the proprietary behavior of the buyers in the travel technology industry,” says Rose.

Another company that is making headway according to Rose is Tata Consultancy Services of India. It has developed consumer software applications for Expedia and other online travel companies. “They’re becoming architects behind the applications instead of responding to specific buyer marching orders like a supplier would,” he observes. “Much of their software development focus is primarily on the booking and transaction side.”

According to Rose, IBS and Tata symbolize the emerging breed of travel-based IT and software firm that is assuming the more traditional outsourcing provider role of architect and development partner, and not simply a task performer or supplier.

Another recent outsourcing venture involves European travel giant TUI AG’s expanding its IT outsourcing to WiPro Infotech, its second such deal with the Indian tech giant since November 2004. These new relationships, all having begun in the past year, bear witness to Rose’s assertions of a shift in GDS thinking that, by outsourcing IT and software development to partners, they don’t need to own the whole cow in order to benefit from the milk.

“Foreign providers are probably more adept at this because they position themselves as development partners rather than simply service providers for hire,” adds Rose.

Areas of Opportunity

The online travel market is expected to more than double in the next five years, according to Forrester Research. In 2004 online travel sales were around $50 billion. By 2010 revenues are expected to hit $119 billion. Outsourcing partnerships are certain to bring better products to market, which will play a key role in this continued growth.

The fact that new IT and application products better address heightened consumer demand for “faster and better” underscores the opportunity for these “nimble and quick” outsourcing providers. In fact, Rose cites many in the travel industry are feeling this greater consumer demand to bring better products to market; he says this is what is inspiring the migration toward more outsourcing.

The search for new meta-search engine applications is one driver. “Meta-apps” are independently developed software programs that access a lot of diverse (in different forms) travel databases, such as Expedia, Orbitz, Travelocity, etc., to get the information that offers dynamic travel packages to retail Web customers as well as comparative travel shopping.

“Dynamic packaging enables customers to develop detailed profiles on their end to match the seller’s database inventory and return information more suited to that customer profile,” says Rose. Many systems still lack that true dynamism. So this is an area of great opportunity for software development outsourcers.

“Most consumers are overwhelmed by a product set over multiple choices,” explains Steve Hafner, chief executive of Kayak Software. “If you think the cereal display at your local grocery store is confusing, think about all the flight options between New York and L.A.”

This is why America Online has partnered with Kayak to develop its dynamic, meta-driven, co-branded site that was unveiled in March 2005. Kayak also operates a stand-alone site is available online and offers its processes to other travel sites.

Jeffrey DaKorte, vice president of AOL Travel, says before the partnership, AOL relied on Sabre’s Travelocity to power AOL’s travel site. But that didn’t satisfy all AOL users or the Web market AOL wished to penetrate. That led to the Kayak partnership.

“This is one of the strongest revenue categories within AOL. But it only serves a portion of our membership,” says DaKorte, who further lamented the fact that his company’s bargain shoppers were leaving AOL to find deals on the Web. “We tried to understand what was it about this group of folks that was preventing them from booking through our existing service. We learned they wanted better service and more vertical offerings.”

Cendant began a shift in outsourcing dynamic packaging in mid-2004 with its joint venture outsourcing relationship with IBM to bring better service-oriented offerings (SOAs) to market. SOAs are collections of processes that rely on reusable standard interfaces to integrate data applications both inside a company and externally with its customers and suppliers.

Cendent uses them to systematically consolidate the functionalities and data retrieval processes of its multiple travel Web sites. The SOA’s flexibility enables Cendant to react to the many changes in managing diverse and fluid travel data by turning these diverse functionalities into a single component; the software creates an environment where multiple travel Web sites can access the same low-cost, consumer travel-shopping services; which allows Cendant to save money.

“By implementing an SOA we see dramatic cost savings through a reduction in development and operating costs,” says Robert Wiseman, Chief Technology Officer of Cendant TDS. Bryan Harwood, Cendant’s Director of Platform Architecture adds, “Standardization of the architecture allows us to consolidate resources, thus producing the cost savings.”

Since most of their revenue comes directly from customer transactions, how do these retailers that rely on getting the best data to them keep growing an e-commerce business efficiently? “Cutting down the wait time for the customer is key. So is refining the avalanche of data to present to the consumer,” observes Rose.

“IT and software outsourcing providers that can compress that time and set a better standard for getting the information to the customer are the ones that will quickly succeed,” concludes Rose.

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