HI Flying - Air Ambulance does frequent patient transportation on Cathay Pacific airlines which flies out of Hong Kong to various destinations in the world.
It provides patient with Business class First class or Stretcher class arrangements with oxygen with basic life saving medical equipments for safe and economical patient transfer.
An Analysis report.
The issue of cost management is one of the main challenges facing organizations because of the profitability targets and expectations. The main issue is to come up with ways of ensuring that the strategies can be measured adequately to determine whether they have succeeded as expected. Yeung needs to assess the possibilities adequately before making a decision in order to ensure that the organization gets the expected benefits. A look at the situation of IT outsourcing in the region and the airline industry shows that many organizations are increasingly relying on external contracts to meet their organizational needs. Cathay Pacific should engage in talks with its smart sourcing partners IBM and Sabre solutions.
The focus of the talks should be on the renegotiation of the contracts in order to introduce efficient benchmarking strategies. Competitive pricing and benchmarking has to be applied to increase the level of savings that the airline gets. The management and maintenance of the airline’s workstations and infrastructure should be given to vendors with clearly spelt contracts on what is expected in terms of the services and competitiveness. Initially, the airline will provide in-house support for the 3200 out port workstations while assessing the effectiveness of the renegotiated contract in order to incorporate the 3200 at a later date. The main limitation of the study is that there is insufficient information regarding the application of IT outsourcing in the airline industry in Asia. It was difficult to find financial data on the state of IT outsourcing in airlines in Asia for comparison.
Introduction to the case study
The focus of the case study is the problem facing Cathay Pacific in its quest to cut costs while delivering premium products. It revolves around the message from the CEO of the company on the need for the company to ensure that its costs are optimized in order to compete efficiently. The company faced a serious problem because it had to cut down coasts year by year without compromising on quality in order to prevent profitability from suffering. The general manager of information management was given the task of ensuring that his department was working in line with the goal of the organization of doing more with less by outsourcing and working with the strategic partners (McFarlan & Young, 2003). The key issue in the case is the strategies that Yeung has to apply for smart-sourcing in order to ensure that the organization gets the best from all aspects. Yeung had been in the organization for the past 30 years during which he had outsourced most of the IT functions to strategic partners. The question was whether the current strategies were effective in producing the expected outcomes and the approaches that had to be applied to improve the effectiveness of the outcomes for all partners.
Cathay Pacific airways is a Hong Kong based carrier that has been in Operations since 1946. Acquisition by the largest trading company in Hong Kong allowed the company to grow and expand into the region becoming the flagship carrier for Hong Kong in the 1960s. The company is highly innovative and applies cost cutting strategies especially regarding its management information systems. It was among the first to incorporate computerized reservation systems and flight simulators. The case study involves the need to develop new measures such as the initiation of a paperless office or other customer loyalty strategies to boost revenues and cost management (McFarlan & Young, 2003). The focus of the case study is on the different strategies that Yeung needs to apply in order to manage the costs associated with the IT department and ensure profitability.
Statement of the problem
The case study involves a very difficult operating environment for airlines and other businesses in Hong Kong and other countries. Yeung, the manager of information management is tasked with the goal of ensuring that the organization is performing well in order to ward off the possibility of losses or going out of business. The main challenge in the situation was that Yeung had already taken significant steps to manage costs in the department such as outsourcing the data center, PC maintenance, and other non core aspects. The fact that the top management of the company felt that the department had to contribute in the doing more with less initiative indicates that Yeung needed to get innovative. Cost cutting and employee productivity are highlighted as highly important aspect for boosting revenues while also considering the enhancement of customer service (Balasubramanian & Padhi, 2005). Yeung needed to determine whether there were more cost effective ways of delivering the same value to the customers at a lower cost.
Research aims and objectives
The main aim of the research is to assess the situation facing Cathay Pacific Airline in its quest to retain profitability in its operations. The airline has to determine the best way of providing information management and support for all operations while lowering costs. A critical aspect of the project is to assess the benefits achieved from the smart sourcing contract with IBM and Sabre Airline solutions. The organization needs to develop efficient frameworks for assessing the outcomes of the contract and determining whether the achieved outcomes are sufficient for success. The long term role of the system delivery group has to be assessed and determined in order to highlight the relevant changes in its structure and operations for effectiveness.
The specific objectives of the paper are:
- To assess the current operation of the outsourcing contracts and determine whether they have provided the required success level.
- To assess the viable alternatives for the company going forward such as the potential outcomes of providing in-house support for airline's outport workstations.
- Assess the desirability and cost effectiveness of switching to a utility model of pay per use for the workstations used in the department instead of owning them.
- Determine the right pace and time to increase the level of outsourced IT operations in order to deliver the best results for the company.
The rest of the report involves the critical aspects of the case study including a brief of the case study, which is chapter 2. Chapter two will present the summary of the case and define the problems facing the organization. Chapter 3 includes the statement of the problem as well as the plan of analysis. The focus of the chapter is to present relevant literature for the assessment of models, theories or concepts that are critical in analyzing the case study. Chapter 4 will analyze the gathered information and the current position of the organization from the models and other aspects described in the previous chapter. Chapter 5 will indicate the proposed solutions to the problem and the recommendations that will produce the best outcomes for the airline.
Chapter 2: Case Brief
The focus of the case is the problem facing the airline Cathay Pacific in terms of seeking ways of enhancing operational cost effectiveness. The management of Cathay Pacific has been startled by the changes taking place in the airline industry and the fate of some of their competitors. As a result, the management developed a new mandate where all departments are required to come up with ways of ensuring that they do more with less. Yeung, who is the management of information management has been in the company for 30 years and feels that the recent changes in operations of the IT department have not been assessed efficiently. Cathay Pacific started off with an in-house IT department that addressed the initial needs in relation to automation of reservations and other areas of operation. The airline was among the earliest ones in the region to incorporate IT in their operations for higher profitability and better cost management. The returns from the investment were significant and it became apparent that IT could benefit many areas of the airline (Balasubramanian & Padhi, 2005).
The changes in the industry and the need to ensure the effectiveness of the system and its safety resulted in its relocation to Australia. The strategy resulted in more efficient operation of the information management department because the company got a good deal in terms of government support. Feasibility studies indicated that the company could benefit heavily from outsourcing the IT operations. Changes in the industry and need to be innovative required the company to change the focus and role of the IT department from developer to follower through acquisition of best practices that would improve outcomes (Mol, Rob, & Beije, 2005). The company decided to engage strategic partners such as IBM and Sabre solutions for applications and infrastructure support. The outsourcing of its data center in Australia was the main aspect of the contract with IBM. The airline relied on different strategies such as governance to ensure that costs were maintained within acceptable levels. With the increasing pressure from the managers to cut costs further, Yeung needed to understand the benefits that the company had achieved from the strategic partnerships with IBM and Saber Solutions. The company had experienced significant challenges because of the culture contrast when integrating with IBM (McFarlan & Young, 2003). As a result, Yeung felt that the proposals for additional outsourcing required a more in depth assessment before engaging.
The analysis conducted by Yeung indicated that most airlines considered IT investment as a way of cutting costs, but it required initial long term commitment for the benefits to be achieved. The return on investment for the airline had declined considerably over the past decade and there was a need to better manage costs. A critical aspect was the need to determine whether the outcome of the current operations with IBM can be considered successful. This was considered essential in determining the next step because the airline was considering different approaches to outsourcing that would be applied for maximum benefits. Yeung has to address the current state of the contracts that have been entered with other companies before making the decision. There are different levels of outsourcing that can be employed by organizations based on their operations and other factors (Perez, Wen, & Mahatanankoon, 2004).
The management of Cathay Pacific also had to consider the state of the airline industry in China in light of the changes taking place. This was considered critical in order to select strategies that would respond effectively to the environmental aspects. The dilemma facing Yeung is the decision whether support for the out port workstations should be maintained in-house. Another critical issue was to determine how the contract complexities could be addressed in order to eliminate the challenges that the airline faced in working with its partners. Another important alternative for consideration was the use of a utility model for the workstations where payment would be based on use. There was also the remote possibility that the company could outsource its entire IT operations to an outside organization. The approach had been applied by other airlines such as Finnair and it was not clear how it would work out for Cathay Pacific.
The issue of cost management is one of the main challenges facing organizations because of the profitability targets and expectations. Managers have to ensure that their operations are efficient in terms of generating a return for the shareholders. For large organizations, the issue of cost management cuts across departments and managers has to ensure that they all work together (Perez, Wen & Mahatanankoon, 2004). One of the most significant aspects of profitability is to increase the productivity of all resources including employees and funds. A key strategy for enhancing productivity in an organization is to focus on the core areas of the business and give peripheral services to other organizations that are specialized in such areas. The case of Cathay Pacific is interesting because most of its IT is already outsourced. The main issue here is to come up with ways of ensuring that the strategies can be measured adequately to determine whether they have succeeded as expected. The level of outsourcing undertaken in an organization can influence the benefits derived and the effect it has on operations. As a result, Yeung needs to assess the possibilities adequately before making a decision in order to ensure that the organization gets the expected benefits.
Plan of analysis
The analysis was conducted using a secondary analysis of data and information from case study and other internet sources. The focus of the case study is to gather information from academic and professional literature on the application of outsourcing regarding it and other aspects of businesses. The review will involve assessment of the situation facing the airline by evaluating what is provided in the case study. In order to conduct an effective analysis, the evaluation will be based on the existing secondary literature on process outsourcing as well as the IT management. The focus of the analysis is to seek parallels between the expected operations or best practices as they could be applied in the case of Cathay Pacific.
Statement of the problems in the case
The main issue in the case is the application of governance structures in the management of outsourcing operations. Cathay Pacific was among the earliest adopters of electronic processing, customer reservation, and other airline services in the region. The adoption aided in improving the operational efficiency of the airline and producing significant savings (Kediaa & Mukherjee, 2008). The outcomes for the airline were beneficial with almost all aspects of its efficiency and profitability being linked to information technology. In order to enhance the benefits and responsiveness of the department of information technology to the needs of the organization, it was outsourced to strategic partners. The involvement of Sabre Solutions for workspace and desktop management increased the effectiveness of the department and allowed the airline to focus on its core area of operation in providing airline services.
The airline also outsourced the management of its data center in Australia, which increased the ability of the center to address organizational needs. As indicated in the case study, the data center allowed IBM to increase its operations in the airline industry as well as other areas. As a result, it is unclear whether the airline got the expected benefits through the cost reductions and profitability growth. Since the airline seeks to increase the cost reduction benefits from all areas, it is unclear whether the IT department can increase the proportion of information management that is outsourced to increase operational efficiency and savings (McFarlan & Young, 2003). This case study involves assessment of the case study and available literature to determine the future of the IT department in order to fit the mandate of doing more with less.
Relevant literature review-Identify resources/ techniques helpful for analyzing the case study.
Many studies have been conducted on the application of process outsourcing in organizations as a way of increasing efficiency and cost effectiveness. The most significant question in offshore outsourcing is how to outsource profitably. This has interested outsourcing practitioners from a research standpoint because of the many cases of success and failure. The performance concerns in IT outsourcing and the effects on firm performance have been identified in literature as key issues that require further examination (Mol et al., 2004). A fundamental issue in outsourcing performance is the question of how to evaluate success in outsourcing (Harland & Lamming, 2005). Performance can be assessed against different criteria, and it is essential to determine which ones are most relevant. According to a study by MGI, Balasubramanian and Padhi (2005) argued that the highest level of performance and satisfaction were reported by clients that focused their outsourcing performance metrics on a small number of goals. Most clients rely on a collection of detailed and mostly cost-focused metrics for the assessment. The metrics fail to frame the organization’s strategic objectives or achieve sustained performance enhancement. Successful client-partner relationships are moving away from legacy reporting systems that reinforce the micro-management of the staff augmentation model.
One of the earliest strategies of IT outsourcing in organizations involved enterprise resource planning. These systems were initially adopted because they promised significant coordination and decision support integration. Different studies on ERP outsourcing have shown that for each dollar spent in the purchase of ERP systems, an expenditure of $10 can be expected for consultancy (Perez, Wen & Mahatanankoon, 2004). The choice to outsource IT is a modification of make versus buy decisions where an organization may invest in the activity of supporting the IT infrastructure or contract it out (Lehrer, 2006). The considerations and aspects regarding outsourcing are numerous and varied, but they may be determined by skill requirements, quality, privacy of the information, and strategic direction of the organization. Factors like the quality of services as opposed to labor arbitrage have emerged as being highly significant in outsourcing decisions (Kediaa & Mukherjee, 2008). Anecdotal support from Deloitte (2005) revealed that 30% of staff felt that their outsourcing partners had not met expectations. Diverse factors facilitate the ability of organizations to outsource their IT functions. These include core competencies, efficient stakeholder management, cost reduction, exploitation of social exchanges and vendor resources, as well as completeness of contracts.
Sources of data
The critical sources of data in the analysis include the information provided in the case study. The focus of the analysis is to highlight the issues facing Cathay Pacific by assessing the outcomes that it has achieved from its operations and alliance with IBM. The case study acts as the main source of information, but it will be supported by the findings reported in other studies on IT outsourcing in order to indicate the benefits achieved. The use of empirical and academic literature will play a significant role in addressing the challenges facing Cathay Airlines and the benefits that it has achieved from its operations.
Chapter 4: Analysis & Findings
The focus of the analysis was to assess the potential benefits that the organization can get from increased involvement in outsourcing. The contractual agreement between Cathay Airlines and IBM was assessed using benchmarking as a way of ensuring that cost discipline was achieved. The prices of the services offered by IBM to Cathay Pacific were assessed continuously and compared to the market levels to ensure that they were competitive. The data center operations were efficient in ensuring that the airline gained competitiveness and cost savings. The vendor relationships between the parties were significantly influenced by the lack of competitive pricing because they did not use RPFs. The main benefit that Cathay Pacific had gained from the airlines was the budget savings of 10-15% in its IT costs (McFarlan & Young, 2003).
The main reason for the outsourcing of IT operations across industries is to cut costs and ensure that the organization is getting specialized and professional services. As a result, the contract has to be managed using efficient strategies and frameworks that assess the benefits derived from the contract against the loss of strategic resources. From the case study, it is clear that the airline relies heavily on its IT infrastructure for operational success and efficiency. There was a need for the management to ensure that efficient management approaches are applied for assessing and benchmarking operations in order to provide the expected benefits. Yeung wondered whether the cost saving of 10-15% was sufficient to be considered a success for the company from its strategic partnerships with IBM and Sabre solutions (McFarlan & Young, 2003). The main issue is that the benchmarking strategies seem to be inefficient because they are not based on market information and prices. Cathay Pacific has to generate a more efficient strategy for assessing the prices of the services offered by IBM and renegotiate the contract in order to assess all aspects according to the market conditions through comparison with quotes from other providers. An assessment of the current position indicates that the contract was not considered adequately and there was no way of determining whether the benefits accrued to IBM were transferred to Cathay Pacific.
A look at the situation of IT outsourcing in the region and the airline industry shows that many organizations are increasingly relying on external contracts to meet their organizational needs. The examples of airlines such as Korean Air and Japan Airlines indicate that the business case for outsourcing has been realized across the industry (Kediaa & Mukherjee, 2008). The main issue in the case of Cathay Pacific is to determine the best way of ensuring that the contract is well structured in order to benefit all parties. The outsourcing contract also has to be organized to enable evaluation of the prices and costs in line with other providers and markets in order to get the best outcomes for all parties. A critical aspect of the decision is to engage in efficient analysis of the build or purchase decision by comparing the costs and the potential loss of the strategic resource. The management needs to ensure that the legal structure and operational aspects of the outsourcing contract do not result in loss of strategic benefits (Mol, Rob, & Beije, 2005).
The best solution for Cathay Pacific is to renegotiate the contract in a way that addresses the challenges of the previous one such as the development of efficient metrics for comparing costs and prices charged. The airline needs to make sure that the operations of its IT department are efficiently organized in line with their strategic relevance. The focus and aim of the approach was to make sure that the airline was getting cost savings from its smart sourcing partnership with IBM and Sabre Solutions. The fact that other organizations are also engaging in increased outsourcing indicates that it has to be considered in order to ensure that Cathay Pacific remains competitive in relation to others.
The most viable option for the company is to incorporate efficient strategies for its formulation of the outsourcing contracts. The focus of the renegotiation should involve coming up with ways of benchmarking the services efficiently in order to get the best prices in the market. The current strategies have resulted in savings of about 15% for the airline in its IT budget. Considering the inefficiency of the contracts, the savings could be more because of better governance and consideration of the going rates in the market (Mol, Rob, & Beije, 2005). The best fit solution for the airline from the options is to outsource the management and maintenance of its workstations and infrastructure. The approach would require alteration to a utility model for the ownership of the workstations. It would be unwise to outsource the entire IT operations of the company because of its strategic relevance. The management and maintenance of the workstations and infrastructure would be outsourced to third parties leaving the systems delivery department to deal with integration of the applications and other programs that were mission critical to the airline.
Cathay Pacific should engage in talks with its smart sourcing partners IBM and Sabre solutions. The focus of the talks should be on the renegotiation of the contracts in order to introduce efficient benchmarking strategies. The partners have to come up with ways of managing the contracts more efficiently through competitive pricing and benchmarking that increase the level of savings that the Airline expected from the contracts.
The management and maintenance of the airline’s workstations and infrastructure should be given to vendors with clearly spelt contracts on what is expected in terms of the services and competitiveness. The focus of the approach would be to ensure that the maintenance of computer infrastructure is given to professional organizations that are vertically specialized. The relevance of the approach would be to ensure that there is adequate understanding of the performance of the support and maintenance of the workstations before engaging the out ports in the outsourcing contracts for further benefits. Initially, the airline will provide in-house support for the 3200 out port workstations while assessing the effectiveness of the renegotiated contract in order to incorporate the 3200 at a later date.
The main limitation of the study is that there is insufficient information regarding the application of IT outsourcing in the airline industry in Asia. It was difficult to find financial data on the state of IT outsourcing in airlines in Asia for comparison. As a result, most of the conclusions were based on other regions. There is a need for additional research on the application of IT outsourcing in airlines in order to highlight the benefits achieved and the financial outcomes for comparison.
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Harland, K. & Lamming, W. (2005). Outsourcing: assessing the risks and benefits for organisations, sectors and nations. International Journal of Operations & Production Management, 25(9).
Kediaa, B. L. & Mukherjee, D. (2008). Understanding offshoring: A research framework based on disintegration, location and externalization advantages, Journal of World Business, 44 (3), 250-61.
Lehrer, M. (2006). Two types of organizational modularity: SAP. ERP architecture and the German tipping point in the make/buy decision for IT services’, Knowledge Intensive Business Services: Organizational Forms and National Institutions, pp. 187-204.
Mol, M. J., Rob, J.M. & Beije, P. R. (2005). Antecedents and performance consequences of international outsourcing. International Business Review, 14, 599-617.
Perez, R. G., Wen, H. J. & Mahatanankoon, P. (2004). Systems development project team management: a resource‐based view', Human Systems Management, 23 93), 169-77.
Air Ambulance - Commercial flight wing of HI Flying - Air Ambulance International.