CATHAY PACIFIC: DOING MORE WITH LESS

CATHAY PACIFIC CHARACTERISTICS

Mid-tier airline 15,000 staff, 77 wide body aircraft Old airline 50 years history Vulnerable to cost cutting airlines Global everywhere except China Lost landing rights in 1984 Geographically next to largest market but cannot access Excellent reputation for service Historically profitable

Joined OneWorld alliance, increasing USA flights 30%

2

IT AT CATHAY PACIFIC: 1970S

Standalone development and operations activity Strategic value, attracted best IT staff Homegrown reservation system sufficiently good that Cathay sold to other Asian airlines Large computing center, 10-12 mainframes running 24/7 Independent with large no. of developers Fun place to work IT building leading-edge systems, valued in company (still there as legacy today)

IT AT CATHAY PACIFIC: MID/LATE 1980S

From develop/operate to acquire and manage IT no longer used to differentiate SITA handle complex telecom needs globally Telecom is often first IT area to be outsourced Began move from design and coding to acquiring packages and deploying Department name changes from systems development and support to systems delivery Emphasis on faster, cheaper, lower risk installations Less exciting employer for young tech staff Operations expanded to three data centers Issues of control intensified with 1991 fire in data center Mid-size player and IT not sustainable competitive advantage IT more of a necessity Challenge to be quick follower instead
4

IT AT CATHAY PACIFIC: 1990S

Continued trend from 80s Already outsourcing other core functions such as medical clinics, elevator repair for many years Outsourcing part of culture but not for key strategic activities 1995 moved data center to Sydney, Australia

2/3 of IT spending now 4000 miles from Hong Kong headquarters Similar timezone Seems to have maintained service levels Save significant costs Australia stable, lower land and tax costs RISKS? Distance, communication, vulnerability Seems to have worked? Should they move again????

Strong financial, infrastructure, strong IT skills

Cost pressures

IBM / Sabre preferred vendor

Commitment to Sabre software aligned with leading airline software provider Smartsourcing 2000, desktop infrastructure outsourced to IBM for $50 million, five year Continued migration from homegrown to package software.

2001 AND BEYOND

300 people in IT organization Legacy systems support Systems delivery 200 people decentralized to users and responsible for package management Weakened IT heritage 100 people work in planning and architecture, selecting and evaluating packages for long term 3200 outport stations in 47 parts of world where IBM doesnt operate Providing hand-holding to ten most senior people in company and their assistants! HP manages website

SWOT

Strengths

Dynamic team, providing highest quality service Commitment to Hong Kong & its people Affiliation with oneworld alliance Invests heavily on loyalty program Smartsourcing contract with IBM & SABRE
Couldnt leverage much on its smarsourcing deal compared to IBM Lacked competitive supplier pricing information 1st annual loss in 1998 since its inception Loosing market with intense competition Adherence to its original structure has become inefficient

Weaknesses

SWOT

Opportunities

Won awards, hence can gain more confidence of customers Can outsource the non-strategic legacy system also and focus more on cutting cost

Threats

More competition from no-frills airlines Political ramification similar to handling over of Hong Kong to China.

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.

Cathay's IT business strategy operated under three principles.

Assume the position of quick follower Acquire and manage rather than develop and operate. Adopt a vendor strategy of fewer but more strategic suppliers and identify key suppliers

SMARTSOURCING

Infrastructure

IBM Global Services

SABRE Airline Solution Relationship Agreement
Not legally binding Intent, goals, and guiding principles of Smartsourcing contract

Airline Applications

Contract

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

Data Center Outsourcing

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

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

GOVERNANCE
Several

governance processes built into Data Center as well as Smartsourcing contracts

Data center

Weekly operational meetings between Cathay and IBM Formal monthly meetings 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

Smartsourcing

Vendor Relationship

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

DESKTOP OUTSOURCING

Outsourced to IBM in 2001

Number of PCs had grown dramatically over past 5 years

$50 million dollar five-year contract Viewed as logical next step as Cathay's business is not in PC management 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

ROAD AHEAD
Outsource their 20+ year old legacy system Par-per-use for workstations and software Enter growing market like China, India

THANK YOU