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Cathay Pacific: Doing More With Less Group Members: Anindhitta Chandriana Annisa Nurrachman Arya Perdana Ronaldy Polla

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Cathay Pacific: Doing More With Less

Group Members:Anindhitta Chandriana

Annisa NurrachmanArya PerdanaRonaldy Polla

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• Cathay Pacific Airways was founded in 1946 and based in Hong-Kong

• Cathay operates as Hong Kong’s de facto flagship carrier• Cathay’s initial routes were to Manila, Bangkok, Singapore,

and Shanghai with DC-3 passenger flights• Cathay added new route to Japan in 1960s• David Turnbull (CEO) Anthony Yeung (General Manager of

Information Management Division):– “To sustain Cathay Pacific’s profitability, the costs must

be lower and deliver a premium product”• Yeung responsible for Cathay’s proprietary applications:

accounting systems, engineering systems, personnel systems, and flight systems, other internal applications

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– The conversion to an all-jet fleet– Adopted cutting-edge technology, Flight

simulators and a computerized reservation system (Cathay’s first reservation system was called “CPARS”)

– Boeing 747 arrived to serve new routes to London, Europe, and North America

Cathay Pacific Eventsin 1970s

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– Get more business travelers, tourists, and cargo flew on Cathay

– Route map was expanded to Amsterdam, Frankfurt, Vancouver, Rome, San Francisco, Paris, and Zurich

– Highly competitive environment had forced to costs-cutting and operational efficiency

– Cathay’s Data Center was separated into 3 locations: Kowloon (near Kai Tak International Airport), two others across the harbor on Hong Kong island

Cathay Pacific Eventsin 1980s

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– Cathay’s global headquarters moved into new place at Cathay City as Hong Kong international airport was relocated from Kai Tak to Chep Lak Kok

– Cathay offered variety of special services: trip scheduling, online booking, online check-in, and services for Frequent Flyer and Marco Polo customers

– A fire at Cathay’s Quarry Bay (Hong Kong island) Data Center interrupting critical business operations for over 12 hours, all applications systems shut down

– Back up data and transferred it from Quarry Bay to Kowloon– Quarry Bay Data Center back to normal operations within two

weeks– British Handover of Hong Kong to China– Cathay opened its Data Center at Sydney’s Baulkham Hills in

Sept, 1995

Cathay Pacific Eventsin 1990s

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– Cathay’s cargo contributing 30% of Cathay’s revenue

– Cathay employed 15,000 staff and flew around one million passengers every month in 77 wide-bodied aircraft to 62 international destinations

– To provide better services, Cathay upgraded its inflight services: cuisine, entertainment offerings, premium Marco Polo Club, AsiaMiles Frequent Flyer services

Cathay Pacific EventsIn 2002

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• Cathay was continuously expanding & IT system was very critical for every airline’s element, so:– Critical reliable facility with secure systems for its IT

system is needed– Building another reliable, centralized, and dedicated

facility for new Data Center– Data Center coordinated the core airline IT functions

that required a robust and failsafe IT infrastructure– Data Center ran applications and network systems 24

hours / day

Cathay Expansion & Imperative IT System

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– Hong Kong is one of the most expensive office location:

– Import tax-free of shipment from Hong Kong into Australia

– Guaranteed automatic free resident visas to all Cathay Information Management staff assigned to Australia

– Far cheaper land price in Sydney

– Not expensive, overcrowded business or residential areas

– IT labor costs at the same levels in that of Hong Kong

– An extensive fiber-optic network infrastructure

– Fast-growing IT professionals– The presence of large

multinational IT vendors (CSC, EDS, and IBM) in Australian market get rapid support delivery

– Australia become increasingly attractive emigration destination for Hong Kong residents

Data Center’s Alternative Locationin Australia (Several Considerations)

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• During the latest five years, Cathay had outsourced several key IT functions

• The first steps of recent outsourcing of business processes:– Building Maintenance– Lift Maintenance– Renovation– Printing– Transportation– Medical Services

IT Outsource

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1994-1995: Additional Steps• Mid-1994: New GM of IM to conduct a strategic review of

Cathay’s IT systems• Three operation principles of IM’s new IT ideology were:1. Assume the position of quick follower2. Acquire and manage rather than develop and operate3. Adopt a vendor strategy of fewer but more strategic

suppliers, to identify key strategic suppliers• Monitor and follow industry practices in the adoption of new

technology• Focus to acquisitions of software packages and managing IT

resources as strategic commodities

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1997-1998: Tough Times for Cathay

• 1997: Hong Kong’s handover (British to PRC) change of local government

• East Asian Economic Crisis recession and affected the airlines industry

• Cathay had ordered 13 new aircraft during prosperous time• Jan 1998: Cost cutting 1,000 employees were made

redundant • The move of Hong Kong’s international airport Cathay

relocated to Cathay City (US $ 628 million)• 1998: Announcing US $ 69 million deficit

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SmartsourcingInfrastructure

(IBM Global Services)• Provide system and asset

management in addition to standard technical and business recovery services

• 1994: IBM Global Travel and Transportation Industry Solutions Unit

Airline Application (Sabre Airline Solutions)

• AiraCX: Airline Planning Airline Operations Revenue Management Crew Schedule Pattern

Management

The smartsourcing contract was signed in April 1997, retroactive to January 1, 1997 consisted of

Relationship (the intent, goals, guiding priciples) and Framework Agreements (precise term for doing business,

skill levels, fee structure).

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Data Center Outsourcing

• Jan 1, 1998 Outsource Cathay’s Data Center to IBM• Data Center Outsourcing controversy: IM Operations Manager (Esther Hui) resigned • 90 Cathay staff at Sydney Data Center 30%-40% had

moved from Hong Kong to Sydney• IBM agreed to absorb all of the Data Center sfaff• Staff role transition

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Contract Management• 3 key condition imposed by Cathay IBM had to offer a fee

structure that was 10%-15% below in-house base cost; IBM had to provide “as good or better” services than existing in-house capability; all of IT staff employed in the facility would have to be absorbed by IBM

• Solid legal contract important to anticipate anything might happen

1. Governance and Benchmarking Benchmarking to establish cost discipline in the contract Several governance processes built into the Data Center

outsourcing & Smartsourcing contracts. Weekly & monthly meeting (Cathay-IBM); Quarterly &

semiannual mgmt review board (Smartsourcing-Cathay)

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Contract Management (Cont.)1. Vendor Relationship Cathay-IBM did not share financial data Establishing critical success factors, mutual objectives, trust

in each other’s competence, mutual dependency Cathay did not elicit bids, lack of competitive suppliers

Cathay did not approached other vendor (IBM only)1. Culture Contrast Cathay Asian company:

- to operation in an environment where relationships (business & personal) were perceived differently- extreme seniority existed within IM department

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Desktop Outsourcing

• In 2001 Desktop outsourced to IBM• Every staff operated their own desktop and

had access to IntraCX• In Feb 2001 IBM maintain and manage the

desktop with US$50 million contract for 5 years

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Desktop Outsourcing

• Cathay’s IT primary components that had been outsource : Data center, Network & Desktop

• Desktop is the most difficult because comprised of 2 elements : hardware & software

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Information Management Dept. in 2002

• Appointmentof an Acting CIO• Legacy System• System Delivery• Packages• Outport Workstation• VIP Support• Web Hosting

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Appointmentof an Acting CIO

• In 2001 Anthony Yeung began Acting General Manager of IM

• Cathay’s investment in IT resources focus on strategic exploitation of IT cost reduction

• Cathay still retained significant portion of its IT resources in-house : IT planning & architecture, internally developd legacy system, project management and system implementation & support of 3200 “outport” workstations

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Legacy System

• By late 2002 the entire suite of mainframe legacy application had been developed over the previous 20-30 years

• Remained critical to Cathay’s operation• Should using ASP model and move to the open

system based application• Support and maintain the system using in house

resources• Don’t develop own system and customize unless

there was a special need from Cathay

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System Delivery• End 2002 IM employed 300 staff of which 200 belonged

system delivery and hendled carrier’s application• System delivery provide systems support for 8 major business

area• System delivery encompassed a wide range of function• System delivery staff sat together with cathay unit• Each system manager had direct line into department that

they served• 100 staff of IM were engaged in IT planning and architecture

work and interfacing between supplier and Cathay employee• 200 employees of system delivery constituted the largest

overhead for IM in term of personnel resources

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Packages

• For replacing old in-house legacy systems, IM procured a number of package

• IM avoid package customization unless it absolutely necessary

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Outport Workstation

• Supporting 3200 workstation wasn’t at all straightforward

• Coverage 47 outports around the world with scattered offices presented formidable logistical challenges

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VIP Support

• Support to 10 Cathay directors as their secretaries

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Web Hosting

• IM conducted a review of the Smartsourcing arrangement

• In 2002 IM’s purchasing unit began implementing best practice purchasing processes

• August 2002 chose HP as outsource Web-hosting

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The Road Ahead

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The Road Ahead• The Global airline industry faced a $ 9 billion

loss in 2002.

• Yeung wondered how Cathay would be able to expand in an increasingly competitive marketplace.

• Things had changed

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Ways IM trim expenses

• Cut costs and increase operating efficiency.

• Yeung consider the potential competition that local equivalents.

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Smartsourcing @ the Midpoint

• The Multi-million deals with IBM and Sabre Airline

China’s Aviation• China’s Aviation industry was the

fastest growing in the world.

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What’s Next

• Cathay outsourced most of the noncompetitive, nonstrategic aspects.

• Yeung wondered how the grup would change

• Yeung consider the desirability of not owning the desktop hardware.

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• Cathay Pacific appointed airline industry veteran Edward Nicol as Director of IM on January first 2003.

• Yeung was appointed GM of IM.

• Both appointments provided an indication of the importance

• Remained to be seen what impact this orgasnizational change in the future of IT direction

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