Top managers should recognize their own weak spots and make up for them by hiring strong, capable people who are encouraged to take risks, Michelle Peluso — CEO of the online travel booking service, Travelocity — said during a recent Musser-Schoemaker Leadership lecture at Wharton.

“I make sure our organization is filled with people smarter than I am who are willing to call a spade a spade,” said Peluso. “I despise ‘yes’ men. I despise that mentality. I really, truly do not want to be the smartest person in the room.”

Peluso, who ranked 4th in the Wall Street Journal’s list of 50 Women to Watch in November 2004, graduated from Wharton and earned a master’s degree in philosophy, politics and economics at Oxford University. She began her business career as a consultant at the Boston Consulting Group and was a White House Fellow before founding, with a group of friends, an Internet travel company called Site59 in 1998. BCG backed the start-up.

Site59 did well up until Sept. 11, 2001, when travel fell off sharply following the terrorist attacks in New York and Washington, D.C. Revenue dropped 70%. Worse, said Peluso, the company’s offices were just blocks from the World Trade Center, giving employees a first-hand view of the tragedy.

The company was able to rebuild and in March 2002, was acquired for $43 million by Travelocity, the first entrant — it was founded in 1996 by Sabre Holdings Corp. of Southlake, Tex. — into what would soon become a more crowded field. In 2004, Travelocity had revenues of $503 million and a 20% market share of the Internet travel business. Expedia has an estimated 40% market share.

Growing the Brand

When it comes to making travel plans, 54% of American consumers turn first to an online service, such as Travelocity, Expedia or Orbitz, according to Nielsen/NetRatings. Another 37% go directly to airline and hotel sites, while the remaining 9% begin to plan trips with travel-search firms, such as Kayak and SideStep, which match itineraries with travel deals, then direct shoppers to the websites of agents and suppliers. About one third of America’s $200 billion travel market will be booked online this year, according to The Economist.

When Peluso joined Travelocity, the company was losing ground to rival Expedia because Travelocity relied too heavily on airline travel and outsourced its hotel booking service to a competitor, “Expedia had diversified into more product lines, including hotels, and Travelocity had outsourced hotels and packages to our competitor, who was making all the reservations while we made just a small commission,” Peluso said.

That was not the only problem. In the go-go days of Internet fever, Travelocity had overpaid for access to AOL and Yahoo portals. “We were paying millions and at the same time performance was decreasing,” she noted.

Peluso was hired to solve the problem as senior vice president for product strategy and distribution, a job that had been offered to others. “Literally, nobody would take it,” she said. “We had a few issues, but what captured my imagination was the enormous potential to innovate in the space and grow the brand…. We had been the first in the online space and we had the customer base. Despite the lumps we were taking, if we could change the business model, we had the opportunity to build. The future would be much more glorious than the recent past.”

Travelocity renegotiated its third-party agreements, upgraded its technology platforms and took costs out of operations. It launched an advertising campaign featuring a traveling garden gnome and offered travelers satisfaction guarantees and a “bill of rights.” Finally, it increased its presence in Europe by acquiring, a London-based Internet travel site.

In December 2003, Peluso was promoted to president and CEO of Travelocity, which went from losing $55 million in 2003 to making $13 million in 2004. She credits determination and passion throughout the company. “We’re passionate about being better than the next boy — or girl. When you look at our recent successes, it’s because we want it and we want it badly.”

A willingness to take on risk is critical for organizations, but also individuals, she said. “Risk-taking is an easy concept to talk about, but it is much harder to execute. Many leaders mandate ‘Let’s take risks.’ But they forget that taking risks implies failure.”

Fear of failure can be paralyzing for employees who don’t want to look like a fool, or lose their job, if they take on a risky venture that goes bad, said Peluso. So managers need to build a culture that cushions that fear. Travelocity recently botched the execution of an improvement to the site and Peluso said she was stunned to receive a note from a junior employee in the San Francisco office taking the blame. She made him the company’s ‘hero of the week’ in a company-wide e-mail. “I was blown away,” said Peluso. “To me, the mistake was understandable. It was complex. What was extraordinary was we have a culture that allows people to say, ‘It was my fault and here’s what I’ll do differently next time.'”

Individuals also need to take on risk in their own lives and careers, she suggested. Staying at an unsatisfying job because it pays well, or remaining in a familiar city, can be seductive, but in the long run it limits potential. “Being a leader is about being able to crawl out of a comfortable shell and take on a new one.” Peluso also advised potential leaders to “check your ego at the door….Complacency and arrogance are opiates that crush real innovation.”

Weekly E-mails

She outlined some strategies she uses to keep her far-flung staff of 5,000 employees motivated. First, she communicates regularly through a weekly e-mail and has promised employees she will respond to e-mail within 24 hours, even if she is on vacation or traveling. “Small things matter a lot,” said Peluso. “Being responsive to employee e-mail is something that spreads.”

She also spends a lot of time on the road visiting offices around the world. When she is not traveling, she eats in the company cafeteria to remain in touch with staff. Finally, Peluso said, Travelocity’s top managers keep a close eye on junior employees who show leadership potential. “I can name 25 junior people who we believe are the next generation.”

Peluso gets feedback on her own performance from other top executives at the company and the Travelocity board, as well as public praise and criticism in the press. “There are always articles saying ‘this is working or this is not,'” said Peluso, adding that she tries to ignore external applause and knocks. “You can’t let it go to your head or be swayed either way. When there is criticism, there is almost always a thread of truth — which is important to internalize — but you can’t get obsessed with it.”

The most difficult task for an entrepreneurial leader, Peluso said, is to dig deep inside and face up to your weaknesses. “You have to be in touch with yourself and know what you are good at and what you are not. We all come from an environment where we are used to being successful, but you have to continue being critical of yourself.” It’s a process, she acknowledged, that “is emotionally draining.”