Continental Airlines: Outsourcing IT to

Support Business Transformation

Teaching Note

Continental Airlines entered into a ten-year outsourcing agreement with EDS during the time
when Continental Airlines was suffering financial setbacks and bankruptcy. This agreement was
initially designed to provide expertise to Continental in an area that was not a core competency,
and to also help cut costs for the airline. However, Continental successfully turned their business
around in the mid-1990s, and this case discusses the implications this has for the relationship
between Continental and EDS. While this relationship had worked well initially, there were some
strains developing by the mid-1990s, and this case focuses on where Continental should go with
their relationship with EDS.

For some background on Continental Airlines during this time of transition that goes beyond
what is available in the case, see Greg Brennemans article in Harvard Business Review, Right
Away and All at Once: How We Saved Continental, September/October, 1998.

While this case focuses on Wejman and her dilemma on where Continental should go in the
future with their agreement with EDS, there are also a number of other discussion questions you
can use in class to help students understand the nature of outsourcing and its impact on an
organizations ability to use IT competitively.

Discussion Questions

1. Why is it necessary to have top management support for the implementation of

technology innovations?

In this case, its obvious that top management support is important in all aspects of the
business. Wejman noted in the case that the management team of Continental viewed new
technologies as a means of continuing the progress that Continental had made.
Furthermore, top management must approve investments in IT. Continentals investment

Neils Christensen and Keri Pearlson prepared this case solely to provide material for class discussion. The authors
do not intend to illustrate either effective or ineffective handling of a managerial situation.

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 of $2.5 million on an e-mail system is an example of an expenditure that could not have
been made without the support of top management.

2. What do top managers need to know about IT in order to run their business?

Senior managers must know what technology can do and what the impact of that
technology can be on their organization. Many of the innovations and changes in
operations that Continentals management team embarked on required IT support, and
without that IT support, those changes likely would not have been successful.

3. What are the advantages to a firm like Continental Airlines of outsourcing there IT
operations? What are the disadvantages?

Continental outsourced for two primary reasons: to save money and to allow the
management team to focus on their core competencies. Continental Airlines was in
serious financial trouble when they negotiated the outsourcing agreement with EDS, and
this agreement provided some breathing room for the firm (though not enough to keep it
out of bankruptcy). Firms that outsource any part of their organization frequently cite the
second reason. Most firms have areas that are not central to their business, and the
management team is not necessarily knowledgeable enough to effectively manage those
areas. Thus, we frequently see firms outsourcing functions like food service in their
dining facilities, grounds keeping, house keeping, and building and vehicle maintenance.
IT services in a firm is another area that many firms consider outsourcing to experts so
that the internal management can focus on what they are good at.

In terms of disadvantages, whenever you outsource a part of your firm, you lose some
control. You must put in place some way of monitoring compliance by both parties to the
contract. In the case of a long-term contract in the IT field, technologies and users needs
are going to change rapidly, so the contract must be written with enough flexibility to
assure that the firms needs are met as well at the end of the contract as they are at the
beginning. Another disadvantage is that while you have given control over your IT to
experts, those experts do not necessarily have the best interests of your firm in mind
after all, they work for someone else, not your firm. At best, they have mixed loyalties.

4. Why must long-term outsourcing contracts be flexible?

In the IT field, technologies change very rapidly. In addition, the business changes which
frequently require changes in technologies. A good example of this from the case is the
shift in technologies from mainframe to client-server, and if the case were written today,
the shift would be to web-based applications. Both the technologies and the business
needs have changed. If the contract is not flexible enough, the firm will be stuck with
inadequate support on the newer technologies to enable it to exploit them for business
advantage.

5. What options does a firm face at the end of a long-term outsourcing agreement? Could
Continental easily end this contract and bring their IT function back in-house?

Continental Airlines Teaching Note Page 2

 In theory, a firm has at least three options at the end of an outsourcing contract: renew the
contract, outsource to a new vendor, or bring the operations back in-house. The easiest of
these three would be to renew the contract, since at the end of a ten-year contract like
Continental has with EDS separating the Continental IT operations from EDS would be
very difficult. The case acknowledges that the contract has built into it mechanisms for
termination, but it also notes that it would require a year or more to effect such a
separation. Thus, selecting another vendor or bringing the operations back in-house
would be very difficult (for an example of a firm faced with trying to bring operations
back in-house, see the General Motors case by Keri Pearlson in this casebook).

6. If a firms entire IT department is outsourced, is there still a need for an internal IT

department? If so, what would their role be?

In general, the internal IT department would be responsible for monitoring the

relationship with the outsourcing provider, and providing IT consulting expertise within
the firm. Wejman headed the IT department at Continental, and was responsible for IT
strategy within the context of the business objectives as set by the top management team.
She was also the advocate for technology within the firm. Finally, she was responsible for
coordinating Continentals relationship with EDS.

7. How can a firm coordinate their internal IT and outsource providers operations?

Continental provided coordination between their internal IT staff and the EDS staff in a
number of ways. First, the located key people from both firms in a common location, so
that interaction between them could be face-to-face. They utilized a number of
communication channels, both formal and informal. The formal mechanisms included
project review meetings, joint committees, and monthly close meetings. Each of these are
described in the case.

Continental Airlines Teaching Note Page 3