Issue: Getting Along with Suppliers

The online travel agencies that formed Expedia had dreadful relations with hotel chains. How Expedia changed that is instructive

More than burgeoning Internet technologies helped online travel agencies rise to prominence in the early part of this decade. In the post-9/11 travel slump, hotels were looking for a place to unload their empty rooms at a great price. And it was in that environment that InterActive Corp. Chairman Barry Diller acquired, along with fellow travel discounters and Hotwire.

But by 2005, the travel industry was back in full swing, and hotels were less apt to offer such deals. In an effort to let the rest of IAC's business get out from under the "shadow of travel," as he said in an employee memo, Diller responded by spinning the travel sites off as a separate business.

The newly public company, Expedia (EXPE), got started without the best relations with its suppliers. " in particular had taken a relatively aggressive stance with hotel suppliers during this time," says Paul Brown, president of Expedia North America, who joined the company just after the spinoff. Expedia adopted some of these practices, too. If the hotel companies didn't pay higher margins, they wouldn't get equal treatment on the site itself. That left "extremely strained supplier relationships," Brown recalls.

Schizoid Brands

In addition, because the new company had been pieced together from different brands in different regions, it had as many as 15 different groups that worked externally with suppliers. Each group looked out for itself, negotiating deals or contracts that fit the needs of that unit. "If you were a big global hotel chain, you would see 15 different Expedias," Brown remembers. "From a global perspective, it looked quite schizophrenic."

By the end of 2005, several suppliers threatened to quit. "You're acting the same way you were in the post-9/11 period," Brown remembers some hotel chains saying. "We'd rather take the risk of losing some revenue vs. continuing to do business with you."

At the same time, investors were paying extra attention to the suppliers' woes. "They were hearing a lot of noise in the supply landscape," says Brown. That, of course, prompted Brown and other senior management to take action. "We stood back and said, this is not a sustainable position, long-term, for us. We have to have access to great supply and the best product. If we don't have good inventory and great prices on our shelves, our consumer proposition will erode over time."

But what to do? The current structure had its advantages: The separate staffs were easy to hold accountable, and they allowed the individual businesses to be more flexible. If each business was autonomous, for instance, a contract with one hotel chain could be different in Spain than in the rest of the world, which helped make Expedia nimbler. "There were concerns about reducing that flexibility," Brown recalls.

Advantageous Overview

Still, the positives of forming a central group to smoothe out relationships with suppliers outweighed the negatives. A single entity allowed Expedia to present one face to hotel chains that complained about having to "deal with 15 Expedias," Brown says. It also gave the travel company an overall view of each hotel chain's total business. As a result, Brown says, "we would not be surprised if a particular issue in one region bubbled up and became a big issue globally."

To make the new central "partner services group" work, Brown and his team had to spend a lot of time physically meeting with Expedia country heads, account managers, and hotel representatives in different markets to allay concerns. Brown brought in new experts in hotel and airline metrics who could help set up a standard system across the company. And he began holding everyone in different parts of the business to the same performance standards.

Three years later, Brown says, supplier relationships have evolved from a sore spot to a core strength. The issue comes up less frequently among investors. Some 11,000 new merchant hotels have been added to Expedia's inventory. And, Brown says, its price competitiveness is particularly strong. "We have the broadest selection and the best inventory," he says. "That wouldn't happen if we didn't have the right types of relationships with our suppliers.""

Empathy—appreciating someone else's point of view—is as crucial to relations with suppliers as with customers and employees

What we've learned from our research on the "Empathy Engine," a series of articles about how companies organize around empathy to create long-term value, is about the value of empathy in the business setting. We think of empathy as the ability to step into another's shoes and see and act on situations from another's point of view.

Typically, we think about empathy in terms of a company and its customers, or a company and its employees. But Expedia used empathy to think about its relationships with suppliers. It's unusual to have empathetic relationships with suppliers; for most companies, such relationships are built on contracts and service-level agreements. But we think is it's highly important to have long-term relationships with your business-to-business partners, given that they are responsible for so much of your business.

Clearly, Expedia was facing a difficult situation in 2005. It was dealing with a macro travel environment that was difficult for its business model, it was increasing its reach globally, and its relationships with suppliers were strained. What the company did to overcome these problems was to stay sharply focused on building relationships that created long-term value, both for Expedia and, hopefully, for its partners.

One thing Expedia did was think about matters from the supplier's point of view, recognizing that Expedia could deliver to its customers only by forming long-term relationships with suppliers—suppliers that would give it the inventory and the prices it wanted. The company did this, as Paul discusses, by moving from 15 Expedias to one Expedia.

Importance of a Name

Second, the company made an organizational change and formed Partner Services Group. By making such a formal change, which included giving up some profit-and-loss transparency, Expedia really made a statement about its commitment. Further, by naming the combined unit the Partner Services Group instead of the "suppliers" group, the company communicated a philosophy of how it wanted to work with its suppliers. Of course, all companies making a change like this should make sure to follow up such a philosophy with management practices.

In addition to looking at the situation from the supplier's point of view, Expedia looked at it from the employee's point of view. It recognized that some of its employees were nervous about this change and feared that centralization would take some flexibility away from them. So they went out and talked to the business owners, asking them about their concerns and discussing the changes with them. Companies that go outside the organization and talk about change are in a stronger position to drive behavioral change.

It will be interesting to see what Expedia and other companies do with new sources of information. I personally have seen companies work with their partners to create real innovations—innovations in business models that go beyond operational improvements, once they're willing to embrace the fact that they're partners.

If you're a company with a partner that a critical part of your supply chain or your value chain, it's important that you treat these partners empathetically—in a way that you would do with your own employees and as you strive to do with your own customers.

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