Case 3-1, Cathay Pacific: Doing More with Less

Alexander J. Czisny Keith Konecke Patrick Appiah-Kubi

Outline
Introduction about company

Business strategy and reasons for outsourcings

Outsourcing and Alliances Obstacles and Risks In-house as of 2002 Conclusion

Introduction about the company

Who are they and what do they do o Cathay pacific is a HongKong-based International Airline company founded in 1946 by Roy C. Farrell and Sydney H. de Kantzow. o Their business line is the travel industry. o They now operate to 105 destinations worldwide. o They also operate to 30 countries currently.

They initially operated two

DC-3 passenger flights to Manila, Bangkok, Singapore and Shanghai. Operates under structured hierarchical governance model

Source: http://www.cathaypacific.com

Mission Statement
The company's vision is to become the most admired airline in the world. By; Ensuring that safety comes first Providing Service Straight From the Heart Encouraging product leadership Delivering superior financial returns Providing rewarding career opportunities

Early System Development

Initially, Cathay developed and managed most of its systems in-house. o Accounting systems o Engineering systems o Personnel systems o Flight systems o Airline planning systems o Customer information systems o Passenger revenue optimization systems o Human resource management systems Cathay operated three data centers consisting of about 12 mainframes at three different locations.

Early System Development Cont.

Fundamental Airline IT functions were coordinated through Cathay's data centers. o Reservation o Ticketing o Cargo handling o Flight scheduling o Passenger check-in o Engineering request o Flight and ground crew roster scheduling o Financial system processing

Factors affecting early systems development

An explosion near one of Cathay's data centers caused fire at the center and interrupted critical airline operations such as; o Passenger reservation. o Departure and arrival control. o Engineering. o Flight and crew operations. Data had to be backed up with more that 100 tapes and transfered to the other location. This problem cost Cathay a lot of money. IT management began thinking of getting a reliable centralized facility with secured systems to handle all critical IT operations.

Business strategy and reasons for outsourcings

Reasons for outsourcing Cathay initiated a company wide strategic review exercise dubbed "Operation Better Shape".
Outsourcing was one critical strategy of cutting cost. Outsourcing will help deliver systems faster. Outsourcing will help deliver system at reduced risk.

Business Strategy relative to outsourcing Cathay's IT business strategy operated under three principles. o Assume the position of quick follower o Acquire and manage rather than develop and operate. o Adopt a vendor strategy of fewer but more strategic suppliers and identify key suppliers

exhibit 4, Applegate, pp. 481

Position on the strategic grid

figure 9.1, Applegate, pp. 445

Outsourcing and Alliances

"Smartsourcing"

Infrastructure IBM Global Services o Airline Applications SABRE Airline Solution

o o

"Tripartite" Relationship IBM Best practice SABRE Application portfolio Cathay International expertise

Outsourcing and Alliances

"Smartsourcing"
o

Two vendors not exclusive suppliers

Received preferential consideration over other vendors due to internal IM procedures Special approval required from IM for alternate vendors Special proposal detailing why other vendor's services were essential required by IM

Outsourcing and Alliances

"Smartsourcing"
o

Contract
Relationship Agreement Not legally binding Intent, goals, and guiding principles of Smartsourcing contract Framework Agreement Contractually binding Precise terms for doing business, skill levels, and inflation adjusted and index linked fee structure

Outsourcing and Alliances

Data Center Outsourcing
o Outsourced Australian

data center to IBM

Met with resistance from IM department IM Operations manager resigned 30%-40% of Sydney staff recently moved from Hong Kong
IBM agreed to absorb Cathay staff

Outsourcing and Alliances

Contract Management o Cathay imposed three conditions on IBM Offer fee structure 10%-15% below in-house base cost Provide "as good or better" services than inhouse All Cathay IT staff in Sydney facility absorbed by IBM o Solid legal contract before entering outsourcing deal essential Retain legal advisors during process Involve supplier managers, purchasing, finance, technical staff, and human resources Contractual flexibility

Outsourcing and Alliances

Governance o Several governance processes built into Data Center as well as Smartsourcing contracts Data center Weekly operational meetings between Cathay and IBM Formal monthly meetings Smartsourcing Quarterly review board Chaired by IM's director with managers from business side Assessed overall status of IT operations and projects on a regular basis with IBM and SABRE High-level semiannual Management Review Board Cathay's CEO and executives from IBM and SABRE

Outsourcing and Alliances

Benchmarking o Provisions established in contract to benchmark IBM charges against market prices for same services o Ensured outsourcing charges remained competitive on an ongoing basis Vendor Relationship o Cathay and IBM did not share financial data Neither side able to assess deal Worries of distrust Pricing obtained after decision to buy Other vendors would know Cathay purchasing from IBM; IBM would know Cathay hadn't approached other vendors Cathay developed pricing parameters based on data collected from conferences, research, and advisory firm Hoped to instill cost discipline in contract

Outsourcing and Alliances

Desktop Outsourcing o Outsourced to IBM in 2001 Number of PCs had grown dramatically over past 5 years o $50 million dollar five-year contract o Viewed as logical next step as Cathay's business is not in PC management o Desktop outsourcing proved most difficult Comprised of two elements Hardware - Cathay assets Software - Licensed to Cathay Difficult to manage dynamic desktop environment changes and manage supplier Cathay staff not absorbed by IBM like in Data Center contract

Obstacles and Risks Smartsourcing Identify strategic suppliers that would be able to
fulfill the company's burgeoning IT needs No single "off-the-shelf" solution available o Combination of suppliers combining the best of each vendor's solutions and technology Each supplier had to have a proven track record for managing IT Cathay decided to outsource to: o IBM Global Services for infrastructure o SABRE Airline Solutions for applications

Obstacles and Risks - Data center Outsourcing

Spent more then 6 months negotiating a contract with IBM Operations people had "deep-seated emotional and psychological ties to Cathay" IBM agreed to absorb all of the Cathay Data Center Staff Transition to another role o No longer need to write code o Manage the suppliers o Ask questions Used benchmarking to ensure outsourcing charges were competitive 1 Smartsourcing vendor was chosen Only after the decision to buy did Cathay asked a vendor for a price o Good - get what you want o Bad - competitive price

Obstacles and Risks - Desktop outsourcing

Outsource nonstrategic resources o Outsource items that are not the companies core competency Focus efforts else ware Desktop infrastructure outsourcing was the most difficult o Hardware had to be managed and "owned" by IBM o Software licenses were part of Cathay o Relatively new for cooperations Desktop outsourcing led to redundancies

In-house (2002) - What could be outsourced?

Software packages Outpost Workstations in offices and hotels for crews o Not improve service levels or sales Support to 10 directors and their sectaries o Extraordinary quality of service Web hosting to Hewlett-Packard CHANGES IN OUTSOURCING o Best practice purchasing processes Look for goods and services at lower costs Smartsourcing partners still had priority Smartsourcing partners would have to prove themselves rather than being automatically considered for business

In-house (2002) - Which should remain in-house?

Legacy systems o Developed or acquired over 30 years o Remain in-house until phased out in 2007-2008 o No longer develop systems unless they had to o Acquire and manage systems Systems delivery o Handled the carrier's applications Large range of functions Business case preparation, coding where appropriate, system implementation, engineering... Largest overhead for IM in terms of personnel resources

Conclusion - The road Ahead

Boosting revenue
o No longer sent out fancy cards o Emphasis placed on improving

staff

productivity and cost-cutting o Why? the long run - competitors 5 years IBM served 50 to 60 clients out of the Baulkham Hills Data Center Cathay expanded air travel while others where failing

Conclusion - What's Next?

Systems delivery group

cost effective model to deliver same services? Support for 3,200 outpost workstations Pay-per-use for workstations and software o Not owning the systems

o More

Conclusion - Was the strategy successful?

Forced to buy planes and loose money Evaluate the way they manage their own vender's more carefuly How should contracts be renegotiated and restructured? How can smartsourcing alliances be managed more effectively? 30 million dollar Australian facility sold to third party Cathy's employees have migrated up the IBM ranks Was IBM's relationship as beneficial to Cathay as IBM?