How Greyhound Lines Re-engineered Itself Right into a Deep Hole

Tomsho, R. 1994. How Greyhound Lines re-engineered itself right into a deep hole. Wall Street Journal (October 20): A1,A6.

How Greyhound Lines Re-Engineered Itself Right Into a Deep Hole
A New Team Spent Lavishly On Offices, Consultants, Sold Stock Just in Time: Computer System From Hell

DALLAS - In early 1993, Thomas Thompson tried to issue a warning to his superiors at Greyhound Lines Inc.

Mr. Thompson was the vice president in charge of developing "Trips," a computerized reservation system that Greyhound executives were promoting as the key to the huge bus company's future. The executives had promised investors, lenders and securities analysts that Trips would be launched nationwide in time for the 1993 summer travel season.

Mr. Thompson had doubts. A recent test run in four Texas cities had been a flop, and, despite months of tinkering, Trips couldn't guarantee anyone a bus seat. At an executive meeting in February 1993, Mr. Thompson reported the problems and argued for a more gradual rollout.

But J. Michael Doyle, Greyhound's chief financial officer, quickly rejected that proposal, according to Mr. Thompson and several other employees. As Mr. Thompson recalls, Mr. Doyle declared, "We made these commitments, and, by God, we're going to live up to them." He ruled out any further discussion.

Looking back, Mr. Thompson J. Michael Doyle says, "I should have quit or just said that I couldn't do it." Instead, most copies of his report were destroyed, and any mention of it was purged from many Greyhound agendas, calendars and computer files, several people say.

Mr. Doyle says he "absolutely" never ordered or knew of the destruction of any Trips-related documents. "I don't believe I ever cut anybody off," he said in an interview yesterday, adding that any decision about when to introduce Trips was based on advice from Mr. Thompson's group. "Ultimately, it was a group decision," he said.

That April, Mr. Doyle and other Greyhound executives flew to London, Paris and New York to promote a $90 million stock offering based largely on the promise of Trips. The malfunctioning system was indeed rolled out that summer.

Greyhound is still reeling from the resulting high-speed blowout. Since then, Greyhound's bonds have sunk to junk status and its stock has plunged to a close of $2.1875 a share on the American Stock Exchange yesterday from a May 1993 high of $22.75 -- a drop of nearly $300 million.

But two investors who didn't lose out were Mr. Doyle and Frank Schmieder, then Greyhound's chief executive. Weeks before announcing the devastating consequences of the Trips failure, the two men sold a lot of Greyhound stock. at profits of hundreds of thousands of dollars.

Citing pending shareholder litigation, Mr. Schmieder declined to be interviewed. "I'd like to be able to comment on it, but I couldn't," he said.

During the three-year reign of Messrs. Schmieder and Doyle at America's largest bus company. the two executives alienated employees, damaged relations with customers and misled investors, while spending corporate funds heavily on new offices, first-class travel and perks for themselves and other officials.

Yet, for a remarkably long time, the two men won uncritical praise from securities analysts and investors. That praise partly reflected a knee-jerk tendency these days to applaud anything resembling "reengineering." When Messrs. Schmieder and Doyle announced plans to build a computerized reservation system, analysts cheered-without questioning its feasibility or whether the bus industry needed it. When the two men sold off buses, shed middle management and announced plans to squeeze productivity from a shrinking work force. analysts cheered - ignoring the impact on customer service.

Because analysts don't ride buses, only Greyhound's blue-collar passengers noticed what the two executives had wrought - a shrinking fleet stretched between dismal terminals and manned by disgruntled workers. "They re-engineered that business to hell," grumbles Chriss Street, a major Greyhound bondholder.

Admittedly, Greyhound had been dogged by turmoil for years. Increased automobile ownership and the discount airlines have reduced the bus industry's share of interstate travel to an estimated 6% from 30% in 1960. Greyhound has staggered through a 1987 leveraged buyout from Dial Corp., two violent strikes and reorganization under federal bankruptcy law.

In October 1991, the company emerged from Chapter 11 in the hands of Mr. Schmieder, a lanky, 52-year-old former merchant banker who had joined Greyhound two years earlier. While headquarters employees knew him as an intelligent though volatile boss, union leaders saw him as an affable negotiator who occasionally rode the bus and ate in terminal lunchrooms. The creditors who had appointed him chief executive were more impressed by his cost-cutting fervor.

That fervor was shared by his 46-year-old chief lieutenant, Mr. Doyle, who had come to Greyhound in 1987 from a finance post at Philips Petroleum Co. A brusque, compact, numbers-oriented executive, Mr. Doyle sometimes was intimidating, some subordinates complain.

Although neither man had much transportation experience, they hammered together a reorganization plan that called for relentless cutting-cutting of workers, cutting of routes and services and cutting of the bus fleet, to 2,400 from 3,700 before the reorganization.

All that cutting - combined with a plan to computerize everything from passenger reservations to fleet scheduling - won so much approval on Wall Street that within a month of Greyhound's emergence from Chapter 11, its newly issued stock was trading at S13.50 a share, compared with the $4 to $7.50 expected by its own advisers.

But the cutbacks quickly hurt customer service. In an atmosphere where headquarters employees searched vacant offices for supplies and where some drivers said they had to break speed limits to meet the new schedules, ridership began to slide in 1992. Yet industry analysts remained bullish as cost-cutting led to a year-end profit of $11 million - Greyhound's first since 1989-on revenue of $682 million.

New Offices

Meanwhile, Greyhound headquarters looked less and less like a business whose average customer earned less than $17,000 a year. Before the Schmieder days, Greyhound occupied a downtown high-rise near the bus terminal, and its spartan interior was adorned with bus memorabilia.

But Mr. Schmieder warehoused most of the memorabilia, moved into a sleek building near a tony suburban mall and hired an interior-design firm, whose bills ran as high as $90,000 a month. Besides $50,000 worth of fixtures, there was money for custom-built cabinets. a $6,200 entertainment center for Mr. Doyle's office and $4,500 for two upholstered desk chairs for Mr. Schmieder's. "I had $10,000 to decorate my office," marvels Jose Oller, Greyhound's former senior vice president for marketing. "The money spent there was unbelievable."

There was money for a $50,000 donation to the Dallas Museum of Art and season tickets for the Texas Rangers, the Dallas Cowboys and the Washington Redskins.

And while a new corporate travel policy, issued by Mr. Doyle, ordered employees to make "efficient and economical travel arrangements," he and other executives took limousines to airports, flew first class, stayed in Ritz Carltons and met at $295-a-night resorts. In July 1992, Greyhound's executives, directors and their wives spent four days at West Virginia's luxurious Greenbrier.

"Depending on where I would go, I stayed in what the company viewed as an appropriate hotel," says Mr. Doyle, adding that he used frequent-flier stickers to upgrade to first-class seats. Company records indicate, however, that Mr. Doyle and others frequently charged the company for the cost of those upgrades.

Many Consultants

Consultants of all stripes turned up. A San Francisco investor-relations concern was paid a $5,000 monthly retainer, a Dallas executive-search firm got twice that much, and the bills from Bain & Co. ran as high as $175,000 a month. (Ted Beneski, a vice president at Bain, says the Boston consulting firm "identified the strategy and the implementation necessary to drive the stock from $6 to $22.")

Also to launch the new era, Greyhound hired Meridian Institute, a Crested Butte, Colo., consulting firm that specialized in breaking down corporate communications barriers. Its fees ranged from $375 an hour, plus expenses, for one-on-one sessions with Greyhound executives, to $60,000 for a pair of "Breakthrough" seminars in Los Angeles and Atlanta. Meridian didn't respond to a request for comment.

At the seminars, hundreds of Greyhound employees at a time were locked away in a motel for several days of role-playing games. One of the games was "Circle of Truth," wherein small groups of managers discussed their perceptions about one another. "I looked at Breakthrough as my booster shot to ward off cynicism," says Ralph Borland, a longtime Greyhound executive, who afterward felt so upbeat about Greyhound's future that he went out and bought a new car.

Few rank-and-file terminal employees were invited to the sessions, however, and even lower-level headquarters workers scoffed at some of the lofty calls for teamwork and customer service that soon appeared in the company newsletter. Such workers were more impressed by the constant turmoil and firings.

Between 1991 and 1993, Mr. Schmieder's salary rose 57% to $526,000, and Mr. Doyle's nearly 65% to $264,000. But they couldn't seem to decide who else should help run the company.

Many Executives Fired

"There were never-ending meetings about who was going to get fired," says Mr. Oller, who was hired for his marketing job in June 1992 and forced out just before that Christmas. His successor, David Swift, lasted a year. So did Phillip W. Taff, an old friend of Mr. Schmieder's named executive vice president in April 1993.

In the field, old-line regional executives were also being sacked as Greyhound staffed more and more of its terminals with part-time workers and "customer-service associates," who, whether they swept floors or sold tickets, were paid about $6 an hour with little or no chance for a raise.

Greyhound reasoned that "if people stayed around too long, they would get too sour and cynical," says Mr. Borland, the vice president for customer satisfaction.

At some terminals, turnover approached 100%, annually, and 30% or more wasn't unusual. In survey after survey, employee discourtesy was cited again and again as a major problem. Customer-service executives were sometimes shocked to find terminal workers making fun of customers and ignoring them. On a visit to the Dallas terminal, Mr. Oller found lost baggage being piled up, unprotected, in a corner.

Yet even as executive spending rose, ridership faltered and customer service deteriorated, analysts spoke as if a turnaround was a sure thing. One reason for the optimism was Trips, the reservation system that Greyhound had been promising investors since its Chapter 11 days.

Trips was indeed pivotal, albeit not to Greyhound passengers, who were accustomed to arriving at the terminal, buying a ticket and catching the next bus. Even if the system didn't produce a single extra rider, Greyhound was desperate for something that would enable it to continue covering the nation with a much smaller stable of buses and drivers—down by more than half since the late 1980s.

"It was probably the first piece that had to get into place before we could do other things," Mr. Doyle says. "It was the foundation."

A Need for Efficiency

In the past, Greyhound had allocated its buses and drivers with the aid of operating data that was months old. Now, operating on paper-thin margins, it could no longer afford to dispatch nearly empty vehicles or to have hundreds of extra buses and drivers on call to meet surges in demand. It also needed quick, reliable ridership data to determine where to cut prices to respond to competition and fill seats.

"Nobody could argue that we didn't have to do something and do it quickly," says Mr. Thompson, Greyhound's senior vice president for network planning and operations. Mr. Thompson recently resigned, effective last Friday.

But almost from the start, the Trips project that he headed was driven more by promises and projections than technical or workplace realities.

There was the sheer complexity of creating a bus-oriented system. An airline passenger flying from Baltimore to Los Angeles might make one stop; the same passenger on a bus might make 10 or more, with a slightly different group of people filling the seats on each leg of the journey. Greyhound technicians estimated that they would need a system capable of managing as many as 1,800 vehicle stops a day, more than 10 times those of the average airline. Moreover, the system would have to be simple enough to be used in terminals where turnover was soaring and few employees had more than a high school education.

Greyhound gave the 40 or so people developing its system a $6 million start-up budget and a little more than a year -- in contrast to American Airlines where a small army of technicians has spent three decades and several hundred million perfecting the AMR Corp. unit's Sabre reservation system. "Every bone in my body knew that we were starting a very difficult undertaking," Mr. Thompson says.

It was much worse than that.

Software Disaster

The original software, developed by an outside company, was a disaster. Learning to use it required 40 hours of training, and it greeted ticket clerks with a disorganized, multiscreen barrage of options for getting passengers between any two points. Because its data bank didn't include all Greyhound destinations, clerks sometimes had to haul out old log books and plot journeys by hand.

When Greyhound tested the system in Houston, Dallas, San Antonio and Austin over the 1992 holiday season, the time needed to issue a ticket doubled -- when the cantankerous new system didn't crash. "It was rugged, it was ragged," admits Mr. Thompson, who decided that he had to totally redesign the Trips software and try to scale back or delay the summer rollout.

Instead of introducing it at the nation's 220 largest Greyhound terminals during the busiest time of the year, his team drew up alternatives. Mr. Thompson favored one that called for switching Trips on along the busy Northeast corridor in the spring of 1993, working the bugs out there through the summer and waiting until November to add more sites.

Mr. Thompson presented his report at a February 1993 executive meeting, but Mr. Doyle allowed no discussion, according to persons who were there or heard about it. More than anything else, Mr. Doyle was concerned about keeping the company's commitments to the financial community to have the system operating by mid-1993, according to Mr. Thompson and several other former executives.

Mr. Doyle says that he doesn't recall such an incident and that, well into the spring, he gave the Trips team opportunities to stop the rollout. "They said that we ought to press on," he asserts, adding that, throughout June and July" we were hearing that progress was being made and problems were being resolved."

The Promise Renewed

But several Trips executives and workers say they were discouraged from raising issues about the system. In April, Greyhound renewed the promise of a summer rollout when, hoping to buy 300 new buses, it filed with the Securities and Exchange Commission an offering of four million common shares. The prospectus pledged that Trips would improve customer service, make ticket buying more convenient and allow customers to reserve space on specific trips.

Some Greyhound executives were incredulous. A few wondered just how many of its low-income passengers would have credit cards or even telephones to make use of the system. But their concerns were drowned out by financial necessity and the perception, one former executive says, "that the messenger got shot."

Moreover, with Wall Street already anticipating Trips, others recall getting variations of the same basic message from management. "My clear impression," one executive says, "was that as long as we could have some form of reservation system -- as long as we could just book one reservation somewhere -- then by some means, we would be living up to our obligations."

With the software still being overhauled, the Trips team installed the cumbersome package -- the one that failed in the Texas tests -- at 14 more terminals and warned employees there to expect trouble. When Greyhound finally got the new software installed at 50 locations in May, computer terminals in those places began to freeze up unpredictably.

The Trips team grappled with a slew of problems through the early summer as it continued installing Trips computers in bus terminals, untangling software snafus and expanding its computer hardware. Meantime, Mr. Thompson was told that, at the same time it was rolling out Trips, Greyhound would be changing its long-distance phone-service provider and launching a nationwide toll-free number, something new to the company.

That June, Trips technicians were in an office discussing whether there still might be a way to delay the introduction when Mr. Doyle walked in and said it was not to be discussed. "We sat in stunned silence for a while,: one Trips worker recalls.

Stock Action

With the formal introduction at hand and spring ridership up slightly, Greyhound stock was trading at more than $20 a share by June 1993, up from about $12 at the beginning of the year. The board was told that Trips was ready to go. On July 27, Greyhound's shares rose 4.5% after it announced higher second-quarter earnings and ridership, along with a new discount-fare program. In most markets, the outlook for ridership was "generally positive," Mr. Doyle told The Wall Street Journal. Also on that day, with little fanfare. the company activated the telephone information system designed to serve the 220 terminals hooked up to Trips.

"We didn't know what was going to happen," a former executive says. "We were just sitting there waiting for it to crash." And it did.

The combination of terminal agents selling tickets and more than 400 telephone operators in Omaha, Neb., taking reservations was far more than the Trips computers could handle. "It was like turning on a spigot to get a drink and getting a fire hose," Mr. Thompson says.

Historically, Greyhound's phone calls averaged 60,000 a day. The toll-free line, installed only a month earlier, received an estimated 800,000 calls, although that didn't necessarily indicate overwhelming customer response. Greyhound's own surveys showed that callers had to try up to a dozen times to get through on the new line, which recorded each attempt as a separate call. The busy signals stemmed from trouble with the system's switching mechanism and the slow-moving Trips software. The time Greyhound operators were spending on the average call abruptly increased to 150 seconds from 109.

The Trips computers back in Dallas were so swamped that, on some days, they took as long as 45 seconds to respond to a single keystroke and five minutes to print a ticket. The system crashed so often in some locations that agents were writing tickets manually.

Frustrated Passengers

Passengers arriving at some terminals were told to stand in line to have their tickets reissued by the computers. For days, passengers missed connections, were separated from their luggage and left to sleep in terminals overnight. Lines in the Port Authority building in New York grew so long that regional lines' agents began calling in empty buses and luring away frustrated Greyhound customers.

Trips technicians scrambled round the clock to try to shore up the system. By early September, Greyhound had pulled the plug on Trips west of the Mississippi River and, for at least one weekend, told the Omaha phone center not to take any reservations.

But publicly, Greyhound didn't say a word, and in an era when most analysts, investors and journalists travel by plane, Greyhound's massive gridlock never made a headline. And while unknowing investors were about to take a beating, some Greyhound executives began exercising stock options and selling shares.

Greyhound stock was still trading at $21.75 a share on Aug. 4, 1993, when Mr. Doyle sold 15,000 shares that he had purchased with options two months earlier for $9.81 a share; his indicated profit was $179,000. Also in June, he had exercised options to buy and sell 22,642 Greyhound shares on similar terms.

Mr. Doyle says that at the time he was advised by Greyhound lawyers and his personal attorney that his stock transactions were "perfectly OK." He adds that he has lost money on about 12,000 Greyhound shares that he purchased around that time and still owns.

In the first two weeks of August 1993, Mr. Schmieder exercised options and sold 13,600 Greyhound shares for an indicated profit of $155,000; he currently holds about 25,000 shares, based on figures from CDA/Investnet. During the same period, two other Greyhound vice presidents sold a total of 21,300 shares, at a profit.

A Surprise for Wall Street

On Sept. 23, nearly two months after the Trips troubles began, Greyhound stunned Wall Street by announcing that ridership had plunged 12% in August and that 1993 earnings would trail expectations. Greyhound stock tumbled 24%, to $11.75 a share, in a single day.

In its press release that day, Greyhound made no mention of Trips and blamed the fall in ridership on an uncertain economy. In an interview at the time, however, Mr. Schmieder acknowledged that Trips needed more capacity.

At about the same time, Mr. Thompson was relieved of his Trips duties. They fell to another vice president, who was forced to resign in January 1994.

These days, Greyhound faces an uncertain future. Many executives acknowledge that, by introducing the troubled reservation system at the busiest time of the year, they drove away existing passengers instead of attracting new ones.

The company did it again this May when, in an urgent bid to increase ridership, it offered travelers the chance to go anywhere for $68 or less with a three-day advance purchase. While customers responded in droves, the Trips system again went down. Meantime, buses and drivers were in short supply in many cities, and some terminals were so swamped with frustrated passengers that they simply stopped selling tickets. "People couldn't get on the bus; we just had masses of people all over the country," one former Greyhound executive says.

Meanwhile, Greyhound's regional rivals continued to pick off its customers. In the first half of 1994, its operating revenue plunged 12.6%, according to Interstate Commerce Commission figures. During the same period, the nation's nine largest regional carriers increased operating revenues 2.2%. For the six months, Greyhound reported a net loss of $61.4 million, or $4.19 a share, compared with year-earlier net income of $499,000, or four cents a share, after a $690,000 loss from an accounting range.

Amid mounting losses and pressure from its largest shareholder, the Canadian investment firm of Connor, Clark & Co., Greyhound announced in July that it would largely abandon its long-haul business and concentrate on shorter trips. "We are going to fish where the fish are." Mr. Schmieder says.

Three weeks later, he was forced to resign. Mr. Doyle has also resigned. Now running the company as interim chief executive officer is Thomas G. Plaskett, the former head of Pan Am Corp. Greyhound says it expects to name a new CEO within two weeks.

Stockholder Suits

Messrs. Doyle and Schmieder, along with the company, have been named co-defendants in two stockholder lawsuits filed in Dallas federal court. The suits allege that Greyhound's recent public announcements have been inaccurate and misleading, especially with regard to the Trips problems. The company says it will defend itself vigorously, but so far it hasn’t filed any response to the allegations.

Amid missed debt payments. Restructuring talks with lenders and mounting layoffs and defections, sorting out the troubles with Trips has fallen to Bradley Harslem, a former American Airlines reservations executive hired last January as vice president and chief information officer.

The revamped system now is up and operating at 248 locations. although it is just beginning to produce ridership data for planning purposes and still can't assure a passenger of a seat on a given bus. And while training time has been reduced to 16 hours from 40, even Mr. Harslem sometimes has trouble manipulating the stillcumbersome Trips software in the quiet confines of his own office.

Hoping to better understand the company, Mr. Harslem sometimes rides a Greyhound bus to its downtown Dallas computer center from his home in suburban Arlington. In August, he bought a ticket one morning, only to find that the next bus to Dallas was so full that it couldn't legally accept another standing passenger. Terminal workers told Mr. Harslem, who hadn't identified himself, to get on board anyway.

And so the executive now entrusted with the key to Greyhound's future rode into Dallas sitting on the floor.