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

with Lesswith LessAlexander J. CzisnyAlexander J. Czisny

Keith KoneckeKeith KoneckePatrick Appiah-KubiPatrick Appiah-Kubi

OutlineOutline• Introduction about companyIntroduction about company

• Business strategy and reasons for outsourcingsBusiness strategy and reasons for outsourcings

• Outsourcing and AlliancesOutsourcing and Alliances

• Obstacles and RisksObstacles and Risks

• In-house as of 2002In-house as of 2002

• ConclusionConclusion

       

Introduction about the companyIntroduction about the company• Who are they and what do Who are they and what do

they dothey doo Cathay pacific is a Hong-Cathay pacific is a Hong-

Kong-based International Kong-based International Airline company founded Airline company founded in 1946 by Roy C. Farrell in 1946 by Roy C. Farrell and Sydney H. de and Sydney H. de Kantzow.Kantzow.

o Their business line is the Their business line is the travel industry.travel industry.

o They now operate to 105 They now operate to 105 destinations worldwide.destinations worldwide.

o They also operate to 30 They also operate to 30 countries currently.countries currently.

• TThey initially operated two hey initially operated two DC-3 passenger flights to DC-3 passenger flights to Manila,  Bangkok, Manila,  Bangkok, Singapore and Shanghai.Singapore and Shanghai.

• Operates under structured Operates under structured hierarchical governance hierarchical governance modelmodel

Source: http://www.cathaypacific.comSource: http://www.cathaypacific.com

Mission StatementMission Statement

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

Early  System  Development Early  System  Development • Initially, Cathay developed and managed most of its Initially, Cathay developed and managed most of its

systems in-house.systems in-house.o Accounting systemsAccounting systemso Engineering systemsEngineering systemso Personnel systemsPersonnel systemso Flight systemsFlight systemso Airline planning systemsAirline planning systemso Customer information systemsCustomer information systemso Passenger revenue optimization systemsPassenger revenue optimization systemso Human resource management systemsHuman resource management systems

• Cathay operated three data centers consisting of Cathay operated three data centers consisting of about 12 mainframes at three different locations.about 12 mainframes at three different locations.

Early System Development Cont.Early System Development Cont.•   Fundamental Airline IT functions were coordinated Fundamental Airline IT functions were coordinated

through Cathay's data centers.through Cathay's data centers.o ReservationReservationo TicketingTicketingo Cargo handlingCargo handlingo Flight schedulingFlight schedulingo Passenger check-inPassenger check-ino Engineering requestEngineering requesto Flight and ground crew roster schedulingFlight and ground crew roster schedulingo Financial system processingFinancial system processing

Factors affecting early systems developmentFactors affecting early systems development

• An explosion near one of Cathay's data centers An explosion near one of Cathay's data centers caused  fire at the center and interrupted critical airline caused  fire at the center and interrupted critical airline operations such as;operations such as;o Passenger reservation.Passenger reservation.o Departure and arrival control.Departure and arrival control.o Engineering.Engineering.o Flight and crew operations.Flight and crew operations.

• Data had to be backed up with more that 100 tapes Data had to be backed up with more that 100 tapes and transfered to the other location.and transfered to the other location.

• This problem cost Cathay a lot of money.This problem cost Cathay a lot of money.• IT management began thinking of getting a reliable IT management began thinking of getting a reliable

centralized facility with secured systems to handle all centralized facility with secured systems to handle all critical IT operations.critical IT operations.

Business strategy and reasons for Business strategy and reasons for outsourcingsoutsourcingsReasons for outsourcingReasons for outsourcing• Cathay initiated a company wide strategic review Cathay initiated a company wide strategic review

exercise dubbed "Operation Better Shape".exercise dubbed "Operation Better Shape".

• Outsourcing was one critical strategy of cutting cost.Outsourcing was one critical strategy of cutting cost.

• Outsourcing will help deliver systems faster.Outsourcing will help deliver systems faster.

• Outsourcing will help deliver system at reduced risk.Outsourcing will help deliver system at reduced risk.

Business Strategy relative to outsourcingBusiness Strategy relative to outsourcing• Cathay's IT business strategy operated under three Cathay's IT business strategy operated under three

principles.principles.o Assume the position of quick followerAssume the position of quick followero Acquire and manage rather than develop and Acquire and manage rather than develop and

operate.operate.o Adopt a vendor strategy of fewer but more Adopt a vendor strategy of fewer but more

strategic suppliers  and identify key suppliersstrategic suppliers  and identify key suppliers

exhibit 4, Applegate, pp. 481

Position on the strategic grid Position on the strategic grid

figure 9.1, Applegate, pp. 445

Outsourcing and AlliancesOutsourcing and Alliances• "Smartsourcing""Smartsourcing"  

o InfrastructureInfrastructure IBM Global ServicesIBM Global Services

o Airline ApplicationsAirline Applications SABRE Airline SolutionSABRE Airline Solution

  o "Tripartite" Relationship"Tripartite" Relationship

IBMIBM Best practiceBest practice

SABRESABRE Application portfolioApplication portfolio

CathayCathay International expertiseInternational expertise

Outsourcing and AlliancesOutsourcing and Alliances• "Smartsourcing""Smartsourcing"  

o Two vendors not exclusive suppliersTwo vendors not exclusive suppliers  

Received preferential consideration over other Received preferential consideration over other vendors due to internal IM proceduresvendors due to internal IM procedures

   Special approval required from IM for alternate Special approval required from IM for alternate

vendorsvendors Special proposal detailing why other vendor's Special proposal detailing why other vendor's

services were essential required by IMservices were essential required by IM

Outsourcing and AlliancesOutsourcing and Alliances• "Smartsourcing""Smartsourcing"  

o ContractContract  

Relationship AgreementRelationship Agreement Not legally bindingNot legally binding Intent, goals, and guiding principles of Intent, goals, and guiding principles of

Smartsourcing contractSmartsourcing contract  

Framework AgreementFramework Agreement Contractually bindingContractually binding Precise terms for doing business, skill levels, Precise terms for doing business, skill levels,

and inflation adjusted and index linked fee and inflation adjusted and index linked fee structurestructure

Outsourcing and AlliancesOutsourcing and Alliances• Data Center OutsourcingData Center Outsourcing  

oOutsourced Australian data center to IBMOutsourced Australian data center to IBM  

Met with resistance from IM departmentMet with resistance from IM department IM Operations manager resignedIM Operations manager resigned 30%-40% of Sydney staff recently 30%-40% of Sydney staff recently moved from Hong Kongmoved from Hong Kong

   IBM agreed to absorb Cathay staffIBM agreed to absorb Cathay staff

      

Outsourcing and AlliancesOutsourcing and Alliances  • Contract ManagementContract Management

o Cathay imposed three conditions on IBMCathay imposed three conditions on IBM Offer fee structure 10%-15% below in-house Offer fee structure 10%-15% below in-house

base costbase cost Provide "as good or better" services than in-Provide "as good or better" services than in-

househouse All Cathay IT staff in Sydney facility absorbed by All Cathay IT staff in Sydney facility absorbed by

IBMIBMo Solid legal contract before entering outsourcing Solid legal contract before entering outsourcing

deal essentialdeal essential Retain legal advisors during processRetain legal advisors during process Involve supplier managers, purchasing, finance, Involve supplier managers, purchasing, finance,

technical staff, and human resourcestechnical staff, and human resources Contractual flexibilityContractual flexibility

    

Outsourcing and AlliancesOutsourcing and Alliances• GovernanceGovernance

o Several governance processes built into Data Center as Several governance processes built into Data Center as well as Smartsourcing contractswell as Smartsourcing contracts Data centerData center

Weekly operational meetings between Cathay and Weekly operational meetings between Cathay and IBMIBM

Formal monthly meetingsFormal monthly meetings SmartsourcingSmartsourcing

Quarterly review boardQuarterly review board Chaired by IM's director with managers from business Chaired by IM's director with managers from business

sideside Assessed overall status of IT operations and projects Assessed overall status of IT operations and projects

on a regular basis with IBM and SABREon a regular basis with IBM and SABRE High-level semiannual Management Review BoardHigh-level semiannual Management Review Board Cathay's CEO and executives from IBM and SABRECathay's CEO and executives from IBM and SABRE

    

Outsourcing and AlliancesOutsourcing and Alliances• BenchmarkingBenchmarking

o Provisions established in contract to benchmark IBM Provisions established in contract to benchmark IBM charges against market prices for same servicescharges against market prices for same services

o Ensured outsourcing charges remained competitive on Ensured outsourcing charges remained competitive on an ongoing basisan ongoing basis

• Vendor Relationship Vendor Relationship o Cathay and IBM did not share financial dataCathay and IBM did not share financial data

Neither side able to assess dealNeither side able to assess deal Worries of distrustWorries of distrust

Pricing obtained after decision to buyPricing obtained after decision to buy Other vendors would know Cathay purchasing from Other vendors would know Cathay purchasing from

IBM; IBM would know Cathay hadn't approached IBM; IBM would know Cathay hadn't approached other vendorsother vendors

Cathay developed pricing parameters based on data Cathay developed pricing parameters based on data collected from conferences, research, and advisory firmcollected from conferences, research, and advisory firm

Hoped to instill cost discipline in contractHoped to instill cost discipline in contract

  

Outsourcing and AlliancesOutsourcing and Alliances• Desktop OutsourcingDesktop Outsourcing

o Outsourced to IBM in 2001Outsourced to IBM in 2001 Number of PCs had grown dramatically over past Number of PCs had grown dramatically over past

5 years5 yearso $50 million dollar five-year contract$50 million dollar five-year contracto Viewed as logical next step as Cathay's business Viewed as logical next step as Cathay's business

is not in PC managementis not in PC managemento Desktop outsourcing proved most difficultDesktop outsourcing proved most difficult

Comprised of two elementsComprised of two elements Hardware - Cathay assetsHardware - Cathay assets Software - Licensed to CathaySoftware - Licensed to Cathay

Difficult to manage dynamic desktop environment Difficult to manage dynamic desktop environment changes and manage supplierchanges and manage supplier

Cathay staff not absorbed by IBM like in Data Cathay staff not absorbed by IBM like in Data Center contractCenter contract

Led to redundanciesLed to redundancies    

Obstacles and Risks  - Obstacles and Risks  - SmartsourcingSmartsourcing• 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 infrastructureo SABRE Airline Solutions for applications

Obstacles and Risks  - Data center Obstacles and Risks  - Data center OutsourcingOutsourcing• Spent more then 6 months negotiating a contract with IBMSpent more then 6 months negotiating a contract with IBM• Operations people had "deep-seated emotional and Operations people had "deep-seated emotional and

psychological ties to Cathay"psychological ties to Cathay"• IBM agreed to absorb all of the Cathay Data Center StaffIBM agreed to absorb all of the Cathay Data Center Staff• Transition to another roleTransition to another role

o No longer need to write codeNo longer need to write codeo Manage the suppliersManage the supplierso Ask questionsAsk questions

• Used benchmarking to ensure outsourcing charges were Used benchmarking to ensure outsourcing charges were competitivecompetitive

• 1 Smartsourcing vendor was chosen 1 Smartsourcing vendor was chosen • Only after the decision to buy did Cathay asked a vendor for a Only after the decision to buy did Cathay asked a vendor for a

pricepriceo Good - get what you wantGood - get what you wanto Bad - competitive priceBad - competitive price

Obstacles and Risks  - Desktop Obstacles and Risks  - Desktop outsourcingoutsourcing• Outsource nonstrategic resourcesOutsource nonstrategic resources

oOutsource items that are not the Outsource items that are not the companies core competencycompanies core competencyFocus efforts else wareFocus efforts else ware

• Desktop infrastructure outsourcing was the Desktop infrastructure outsourcing was the most difficultmost difficultoHardware had to be managed and "owned" Hardware had to be managed and "owned"

by IBMby IBMoSoftware licenses were part of CathaySoftware licenses were part of CathayoRelatively new for cooperationsRelatively new for cooperations

• Desktop outsourcing led to redundanciesDesktop outsourcing led to redundancies

In-house (2002) - What could be In-house (2002) - What could be outsourced?outsourced?• Software packagesSoftware packages• Outpost Workstations in offices and hotels for crewsOutpost Workstations in offices and hotels for crews

o Not improve service levels or salesNot improve service levels or sales• Support to 10 directors and their sectariesSupport to 10 directors and their sectaries

o Extraordinary quality of serviceExtraordinary quality of service• Web hosting to Hewlett-PackardWeb hosting to Hewlett-Packard• CHANGES IN OUTSOURCINGCHANGES IN OUTSOURCING

o Best practice purchasing processesBest practice purchasing processes Look for goods and services at lower costsLook for goods and services at lower costs Smartsourcing partners still had prioritySmartsourcing partners still had priority

Smartsourcing partners would have to prove Smartsourcing partners would have to prove themselves rather than being automatically themselves rather than being automatically considered for businessconsidered for business

In-house (2002) - Which should In-house (2002) - Which should remain in-house? remain in-house? • Legacy systemsLegacy systems

o Developed or acquired over 30 yearsDeveloped or acquired over 30 yearso Remain in-house until phased out in 2007-2008Remain in-house until phased out in 2007-2008o No longer develop systems unless they had toNo longer develop systems unless they had too Acquire and manage systemsAcquire and manage systems

• Systems deliverySystems deliveryo Handled the carrier's applicationsHandled the carrier's applications

Large range of functionsLarge range of functions Business case preparation, coding where Business case preparation, coding where

appropriate, system implementation, appropriate, system implementation, engineering...engineering...

• Largest overhead for IM in terms of personnel Largest overhead for IM in terms of personnel resourcesresources

Conclusion - The road AheadConclusion - The road Ahead

• Boosting revenueBoosting revenueoNo longer sent out fancy cardsNo longer sent out fancy cardsoEmphasis placed on improving staff Emphasis placed on improving staff

productivity and cost-cuttingproductivity and cost-cuttingoWhy?  the long run - competitorsWhy?  the long run - competitors

• 5 years IBM served 50 to 60 clients out 5 years IBM served 50 to 60 clients out of the Baulkham Hills Data Centerof the Baulkham Hills Data Center

• Cathay expanded air travel while others Cathay expanded air travel while others where failingwhere failing

Conclusion - What's Next? Conclusion - What's Next?

• Systems delivery groupSystems delivery groupoMore cost effective model to deliver More cost effective model to deliver

same services?same services?• Support for 3,200 outpost workstationsSupport for 3,200 outpost workstations• Pay-per-use for workstations and Pay-per-use for workstations and

softwaresoftwareoNot owning the systemsNot owning the systems

Conclusion - Was the strategy Conclusion - Was the strategy successful? successful? • Forced to buy planes and loose moneyForced to buy planes and loose money• Evaluate the way they manage their own vender's Evaluate the way they manage their own vender's

more carefulymore carefuly• How should contracts be renegotiated and How should contracts be renegotiated and

restructured?restructured?• How can smartsourcing alliances be managed more How can smartsourcing alliances be managed more

effectively?effectively?• 30 million dollar Australian facility sold to third party30 million dollar Australian facility sold to third party• Cathy's employees have migrated up the IBM ranksCathy's employees have migrated up the IBM ranks• Was IBM's relationship as beneficial to Cathay as Was IBM's relationship as beneficial to Cathay as

IBM?IBM?