What Stays in Vegas (4 page)

Len Schlesinger was one of the HBS professors who worked closely with Loveman on topics related to the service economy. “He was a first-rate, enormously talented young faculty member who was distinguishing himself in a collection of faculty, all of whom were reputed to be great teachers,” Schlesinger recalled. “From day one, really, he established himself as having a great presence in the classroom and a real ability to master the art of engaging with students in a case discussion.”

At HBS, teachers wield great power. Using the Socratic method, the instructor typically kicks off a discussion by calling on a student, who must outline the day's case study for five to fifteen minutes. This is known as a “cold call.” At HBS, those who impress know they are doing well when the instructor writes down a summary of their insights on the white board. Anyone cold-called who fails to give a good spontaneous presentation risks humiliation.

Scott Howe was one student inspired by Loveman's teachings. A Milwaukee native, he came to Harvard after studying economics at Princeton, where he graduated magna cum laude. From Loveman he learned to focus relentlessly on customers. Many years later he still remembered an assignment in which students had to write two letters to two companies, one with criticisms and one with compliments, both suggesting improvements. “He was by far my favorite professor,” Howe says. “He definitely made an impact on my thinking.” Years later, the student would become CEO of Acxiom, a leading data broker with considerable influence in the universe of personal data.

Loveman enjoyed setting out business problems in case studies. What are the key problems facing a business, what do the data show, what are the possible solutions? Loveman wrote case studies on topics such as American Airlines, Euro Disney, Southwest Airlines, the
Warsaw Marriott, Habitat for Humanity, a hospital company in India, and a Mexican cell phone company.
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He first gained public attention by arguing that computers added little or no boost to workplace productivity in the late 1970s and early 1980s. His 1990 academic paper on the subject, filled with mathematical equations and data tables, concluded that firms would have been better off putting extra money into things other than information technology.
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Over time, others began doubting what he called the “Productivity Paradox,” and the debate faded as computing power advanced.
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In 1994, Loveman coauthored a celebrated article that would become the foundation of much of his work in the years ahead.
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It proposed the radical notion that the lifetime value of any one customer is significantly impacted by his or her overall satisfaction. Take a pizza restaurant: at a dollar or two a slice, it may not seem that important to pay much attention to any one customer, since pizza eaters tend to hop around. But over a lifetime, a customer who professed high satisfaction with a restaurant was worth $8,000. The lifetime value of a loyal Cadillac owner rose to $332,000. And for a corporate purchaser of commercial aircraft, the value jumped into the billions of dollars. Loveman and his coauthors had set out the logic that would propel companies in subsequent years to gather ever more personal data about customers. “The lifetime value of a loyal customer can be astronomical,” the article concluded.

Loveman's transition from academia to casinos happened by chance. Harvard Business School allows faculty to consult for companies one day a week. Loveman started training executives from Harrah's, a company that opened its doors in 1937 as a bingo parlor in Reno, Nevada, and had continued to expand over the years. The sideline proved interesting and far more lucrative than Loveman's $120,000 academic salary.

Casinos provided Loveman with an interesting intellectual puzzle. He was surprised that customers typically showed little loyalty to any one casino company, but instead flitted from place to place. He became convinced that the industry could do better by replacing the gut instinct that often propelled corporate decisions with data analytics. “As
I came to learn more and more about the industry, it struck me that this was a very sophisticated business run by somewhat unsophisticated people,” he concluded in his characteristically blunt style.

In 1995, just after Harrah's lost millions of dollars trying and failing to establish successful operations in New Orleans, Loveman wrote an unsolicited letter of advice to CEO Phil Satre in which he suggested ways to use the customer data that Harrah's was already collecting to build and enhance guest loyalty. In 1998 Satre, a lawyer by training, offered Loveman a full-time position as Harrah's chief operating officer. You can try it out for a year while on academic leave, he told Loveman. If you don't like it, you can always go back.

Many HBS colleagues scoffed at Loveman's decision to accept the offer. Not only did the associate professor leave shortly before he would have gained tenure—a job guarantee for life at the nation's most prestigious business school. Making matters worse, he left to join hands not with a venerable Wall Street firm or prestigious firm on the Fortune 100 list but with an outfit that catered to tastes on the other side of the tracks: gambling.

Because he would oversee marketing, Loveman had a simple mandate: use personal data to understand clients better than the competition. By gathering information on millions of customers, he believed the company could lure repeat business, catering offers and promotions to the different tastes of each person.

Loveman joined the corporate world, an academic without any management experience entering a sector famously wary of outsiders. The northerner had to win over employees at Harrah's headquarters at a mansion on a large estate in Memphis, Tennessee. Many thought he would not last long.

Some found him intimidating. Peppering his conversation with words such as “stochastic,” “vitiate,” and “encumbrance,” or talking about “elasticities of demand,” did not win over the traditional casino crowd. Even Satre, his greatest supporter, joked that he needed a dictionary to understand Loveman's presentations. One executive, John Boushy, felt confident enough to prod him from time to time: “Gary, I know you know what that word means, but could you tell the rest of
us?” To this day Loveman crams so many $20 words into a sentence that he may pause, realize that his listener may need some help, and add, “Let me decode that a little bit.”

Loveman found it hard to abandon the university lectern in the style of his presentations. One member of the Harrah's board of directors was Walter Salmon. A former HBS student who had earned a master's degree and a PhD, Salmon had joined the faculty there in 1956. In a long career, he had served on many corporate boards as an expert on consumer marketing. Even years later, he remembered Loveman's premiere performance before the board. The chief operating officer treated the group—his ultimate bosses—as though commanding a class at his beck and call. “If you asked him a question, you got an academic response,” Salmon says, implying “that the board member was one step above an idiot, or one step below an idiot.”
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Several board members approached Satre after Loveman's debut meeting to demand that Satre have a stern talk with his protégé. “He almost got fired,” says Satre.
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“The reaction was that Gary was being too professor-like with the board and lecturing them in his first presentation, and it outraged a couple of board members.” The board members were not the first to grumble about Loveman's arrival. At the Harrah's annual meeting, one shareholder complained about the business school outsider. Some employees wrote the CEO privately, asking why he had turned to someone without any casino experience.

Loveman realized he had a lot to learn. In the corporate world, he had to not only possess insights but implement them. Early on he did not always appreciate how much work it took to turn a plan into reality: “I had never managed anything. I really had not had any managerial duties. Oh, there was all sorts of stumbling. I was good at certain things and challenged in others.”

Loveman pushed his managers hard. He welcomed differences of opinion, but his wrath came down on those who did not embrace his data-focused approach. David Norton, a former senior vice president who was one of Harrah's top data officials, remembers Loveman growing irritated if property managers were losing money and not focusing sufficiently on data to solve the problem. “He'd pound his fist on the
table and say, ‘What the hell is going on here!'” Norton recalled. “If we couldn't get the bottom-up compliance, his force of personality would really make people feel badly for not coming through.”

Gary Loveman at Caesars Palace in Las Vegas.

Source: Caesars Entertainment.

Some years after Harrah's bought the Las Vegas Rio Hotel and Casino for $518 million in 1998, Loveman grew displeased with the property's financial results.
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He met with the hotel's general manager and some top aides, who gave presentations on their operations.

“Don't we need to be thinking about this business differently?” Loveman asked.

An hour into the meeting, he had had enough. “Guys, look, I haven't heard anything that makes any sense here. The problem is ill defined, the analytics is completely absent, and all you guys are talking about is sort of magical, you know, fairy dust stuff.”

The hotel casino's manager was quite proud of the style and flair of the property, which had been designed by a legendary Strip architect. He felt his hotel was something special. He puffed up his chest a bit and set his eyes on his new boss: “Gary, you just don't understand: we're the Rio, you know, and all we've got to do is get the panache back in the Rio.”

A look of stunned disbelief seized Loveman's face. Within a few weeks the Rio's longtime general manager was gone.
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Loveman learned from his off-pitch initial board presentation and changed his tone. The former academic diffused tensions with biting humor, including self-deprecating jokes, and slowly won over members of the team. He communicated effectively and clearly, and he wowed people with his knowledge. But he never became an easygoing, backslapping kind of executive. He was not the type to ask random visitors about the wife and kids or wander through hotel lobbies to greet guests. “I don't think there are very many customers who ever said, ‘Gee, I really love Gary Loveman,'” says Satre.

In his heart, Loveman remained simply a numbers guy, a math nerd. He had traded the classroom for the corporate boardroom and was earning money beyond the wildest dreams of most academics. Yet he still thought like a professor. Following the logic of his famous 1994 article, he focused on building long-term customer loyalty. Nothing spelled success better than customers coming through Harrah's doors again and again.

The Elevator Pitch

At every turn, Loveman sought to use data, whether about an individual client or a large group of clients, to gain an edge. One day in the early 2000s, inside a wood-paneled elevator at Harrah's Hotel and Casino on Las Vegas's fabled Strip, an older couple were grumbling to each other. They liked playing slot machines, but their luck had apparently run out.

“I hate Las Vegas,” the man said to the woman.

Loveman, who happened to be in the elevator with them, grew curious and decided to strike up a conversation. He learned that the couple were avid gamblers from Philadelphia who usually played at Harrah's in Atlantic City. When he asked them why they hated Las Vegas, the man answered, “The slot machines here are so goddamn tight! We never win any money!”

As Loveman replayed the Philadelphia couple's conversation in his mind, he experienced a “eureka” moment. When it came to slot machine odds, the couple had no idea what they were talking about. In
fact, no gambler could tell if a slot machine was loose or tight—with especially good or poor odds—and data could prove his point.