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CATHAY PACIFIC: DOING

MOREWITH LESS

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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%

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IT AT CATHAY PACIFIC: 1970S

Standalone development and operations activity

Strategic value, attracted best IT staff

Homegrown reservation system sufficiently goodthat Cathay sold to other Asian airlines

Large computing center, 10-12 mainframes running24/7

Independent with large no. of developers

Fun place to work

IT building leading-edge systems, valued incompany (still there as legacy today)

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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

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IT AT CATHAY PACIFIC: 1990S

Continued trend from 80s

Already outsourcing other core functions such as medical clinics, elevatorrepair 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

Strong financial, infrastructure, strong IT skills RISKS? Distance, communication, vulnerability Seems to have worked? Should they move again????

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.

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2001 ANDBEYOND

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 whereIBM doesnt operate Providing hand-holding to ten most senior people

in company and their assistants! HP manages website

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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

Weaknesses

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

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SWOT

Opportunities

Won awards, hence can gain more confidence ofcustomers

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 HongKong to China.

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REASONSFOROUTSOURCING

Cathay initiated a company wide strategic review exercisedubbed "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 threeprinciples.

Assume the position of quick follower Acquire and manage rather than develop and operate.

Adopt a vendor strategy of fewer but more strategicsuppliers and identify key suppliers

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SMARTSOURCING

Infrastructure

IBM Global Services

Airline Applications

SABRE Airline Solution

Contract

Relationship Agreement

Not legally binding

Intent, goals, and guiding principles of Smartsourcing 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

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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

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OBSTACLESAND RISKS - DATACENTER

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 codeo Manage the supplierso Ask questions

Used benchmarking to ensure outsourcing charges were competitive

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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

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

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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

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DESKTOPOUTSOURCING

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

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ROADAHEAD

Outsource their 20+ year old legacy system

Par-per-use for workstations and software

Enter growing market like China, India

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THANK YOU