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
"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
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
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
o More 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
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?
