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 initially operated two
they do
o Cathay pacific is a Hong- DC-3 passenger flights to
Kong-based International Manila, Bangkok,
Airline company founded Singapore and Shanghai.
in 1946 by Roy C. Farrell • Operates under structured
and Sydney H. de hierarchical governance
Kantzow. model
o Their business line is the
travel industry.
o They now operate to 105
destinations worldwide.
o They also operate to 30
countries currently.
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"

o 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 in-
house
 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?