- F HARVARD |BUSINESS| SCHOOL 9-303-106 Cathay Pacific: Doing More with Less From his office on the sith floor of Cathay City—Cathiy Pacifi’s state-oFtheart global hesequarers at Hong Kong's new international siqport—acting, General Manager of Intorsation Management Anthony Yeung watched a Cathay 747-40 ake ff fora data location. As be spp his morning colfe, he glance at the December 22 fst of CX Worl, Cathay internal newsletes The caver ior headline was a quotation as wells a digetivefrom bis bens, Cathay Pacific CEO David Turnbull: “Costs Mast Com Down to Compete.” Av Yeung skinned the article the message from Turnbull was succinct lea, al immediate “Our producti great and ue bance set strong, 2002 as beers strange year At the start we exphcte to break even af bes Tt has Be {ough year for some aries but we have done remarkably well.” Tumble that in order for Cathay Pacific to sustain ts profitaity, “we must lower bur costs and liver a premium produc. The challenge ty cut consis never ending, ad a asks to work gether o get them down yeae by The mestage was eystal clear al echo across the organization prtculey in the information technology dvisinn. Yeung sat back and eevied the past 30 years his cater in the Information Management Deparment at Cathiy Pacific. During the past five yess, Cay had autoourced several key IT functions, ant now with 6S of his operating budget wutsde the company. Yeung Wwondevet what the next steps should be, what else shoul be outsoutcd, aha shoul be fctined invhouse. Yeung wondered ‘whether the “Smartsourcing” relationship mith Cathay’s two sae ‘vendors hal pracesed according to plan a how ele he could “to more with les the cost-cutting mandate fom above Hong Kong Origins Hong Kong-based Cathay Pacific Airways was founded in 1446 by American Roy C. Fartll ad Australian Sjeley H. de Kantzow, Initially, Cathay operated two DC passenger fights to Mari Bangkok, Singapore, and Shanghai. In 1948, ane of Hong Kong's largest tracing companies, Butterfield & Swire (ater known asthe Swire Group, acquired 5% shore in he company. Cathay Pact was Hong Kong’ de fet Flagship carer and during the 1960s, business grew at an average rateof 20% a year with Cathay initiating its est route to apaAlong with complete conversion to an allt fect during the 1970s, Cathay Pactc adopted what atthe time wa cullingedge technology neling flight simulators anda computerized seseratson ‘System develope ivhouse, The fest Boving 747 arived in Hong Kong in mid-197%, and by the end ‘ofthe year, Cathay opened routes to Landon and eventually Europe and North Americ. The aistne industry expanded apace With tapid glebal economic growth during the 18 More busine leaves, tourists, and carge flew om Cathay than ever Bfone and the carser expanded its rote map to nelude Amsterdam, Frankfue, Vancouver, Rome, Sin Francisco, Paris and Zuskh Deregulation ‘ofthe arhine industry during the 1880s created 3 highly competitive envionment in Which all nae ares were forced oct costs and improve operational eflceny. Inthe early 1990s, Cathay embasked on a conporate rebranding exercise, anda new "beusin Jogo similar to the Nike “Swoosh emerged. In prt thanks to Hong Kong tational es 9s regional travel alban trade entepot, Cathay continu ko expe. By the mi Hs, Cathay a assembled» comparatively "young het with Acquisitions of new srr amounting fo USS billion, Cathay’ cargo division grew concurrently with rapid growth in psenger services with argo contributing to nearly Ws of Cathay revenue in late 2002. To better the services offered! by both eal ara international competitors, Cathay pride ts inflight serves including cuisine and entertainment afferings as well as premium Marco Pol Club and it AsinNils Frequent Flyer [At the time that Hong Kong relocate its inteational sport fom Kai Tak to Chep Lap Kok ia 168, Cathay simoltaneausty move! into is new USS628 milion sate the-art global headguartoes at Cathay City. The millenium apd the network ea brought Cathay online and fered passengers ‘arety of special services including trip scheduling, online Booking, onbine checkin, aot opecial vices targeting frequent flyers and Marea Polo Club premium customers, By November 2002, Cathay employe 1500 staff and tes around one sillan passengers every month in 77 wie bowtie! aircraft 052 international destination. (ExMbIT ilestates Cathay Posies route map) ‘The Cathay Pacific Group made a profit sttbutable to shareholders of USSSIT milion during 2002, a si-fold inerease ovee USS81 milion in 2001, and had a market capitalization of roughly USL billion in December 2002 (Exhibit 2 shoves sunings fein Cathay Pai’ 200) Anal Report) Turnover increased 87% to USS424 bilan ever 200, «year thal was marked by pprecpitous slawdown in global tavefllosng the September 11, 201 terrorist attack i the United Sates, reflecting a gradual recovery an market conditions. With more people traveling, ear rounded capacity tured to the skis, restoring services temporal suspend fllowing 4/1 Cathay extended now services to ts oe schedule inclaing lth daily Hight fo Tokyo and four edditional fight to Loox. Early System Development While stil predominantly a regional carieg, during the 1970s Cathay developed most of is systems inhouse. Yeung, who started his carer in IT in 1968 right after graduation, joined Cathay Peificin 1970 asa peogeamaer and wrote the frst reservations system oe Cathay called “CARS,” & [program that was eventually sold to other airlines. Yeung an 9 Yeom of systems developers west Eesponsible for writing the cet for Cathay’ propery applications inchaling, acountng systems engineering systems, personnel systems, ara Hight systems as well sta host of other intemal applications. The department started with fewer than 30 systems developers in 1970, aul by the ae 180s had yeowe nt team of 20,Cathay Pacific's Data Genter coordinated fundamental sitine IF functions such as reservation, ticketing, cargo handling, Hight schedaling, passenger checkin, engineering requests fight and sroury cree roster scheduling as well as processing of financial data. Recent years aso sa the futon of Aine Planaing Systems, Customer Information Systeme (CIs), Passenger Revenue Optimization Systems, and’ Human Resource Management Systems (HEMS). Creal business functions lke thee were at the cone of any worlc-clase airline and routed a robust, fasae FT Daring the late 1980s, Cathay’s Data Center was separa int true locations, on in Kowloon, eae the Kai Tak lnterational Aieport, an the her two across the harbor on Hing Keng Island 40 favo separate facilities Together Cathay’s eatire Data Center consist of 10-12 mainrame boxes Ineated in chmatecontraled alts to proect the computers rom Hong. Kong ubiitous humidity and dant particulates Apart from mainframes, the Dala Center fan applicalns ad network spstoms 24 owes day to provide uninterrupted information tothe care’ mission cial In August 1991, a nearby explosion caused 9 fre at Cathay’s Quarry Bay Data Center om Hong Kong sand, thereby interrupting critical Business functioas such as passenger. reservations Aleparure canto englncceing, Hight, and crew operations for over 12 hrs, (Qutty Bay te slesely populated resential neighboehoedt in Hong, Keng located jst acre Vitoria Har fro Kai Tak, then Hong Kons international airport) When operations were taterruptet and ll Data Cooter applications systems were shut down, data had to be Backed up will more thar 100 dala storage tapes physically taster from Quarey Bay #0 Kowloon, Missonecntcal systems sch crow scheduling, departure control, and servation systems were Finally brought back online following the costly haelay interruption. Meanwhile, dhe Quarry Bay Data Center took nealy tw wecks toventualy restore an sume ral operat. The fre provided a stark reminder to Cathay management tht TF touches every element ofthe sid and therefore that arable Taclty with secure stems as imperative. With the existing Data Conter speed oat ia three separate locations avout Hlang Kong and Faner space let for expansion at any of them, TT Operations Management began to consider buikling sable, contialzed, dediated felt for the Data Center. An IM Operations Manager atthe time even ‘qutioed that Cathay would rjuire fourth or even filth aa center facility eet the company’s TT needs ifthe ailine ad continue Wexpand tits cusent pace ‘Moving Mainframes Down Under With Hong Kong then topping the chats as the mest expensive interational lation for office real esate just sind Tokyo, the General Manager of MIS and IT Operations Manager atthe time ‘ssesna alternate focations for Cathay's Data Center. People’s Republic of Chin, Singapore, Thailand, Philippines, Australia, nd Canada were evaluated base on several hey enter ineling (0) sable economic and political climate with both a mature Business environment anal eal framework (2) developed IT infeastructure with well-established computer fiberoptic networks and strong IT vendor presence; (3) competent IT sl ase with ample and atlordable human resources to fulfil the Data Centers staffing news: () availabilty of inexpensive realestate in lation with reliable communication, Wansporation, and power supply infrastructure ant (5) pronanay (Cathay Hong Kong comporate headquarters, with tne Zone clove t that of Hong Keng For Cathay Paci, Australia ultimately proved to be the most attractive option for several seasons, Fr one the local New South Wales government offer! Cathay an exemption from the204% tam the import ofits 10-12 mainframe boxes and other high tech equipment shipped fom ‘ong Kong. The Australian government also guarantee! automatic five resident visas tol Cay [IM sill asked to relocate to Australia, Second, Lind wis fa cheaper in Sydney than Tong, Kong ond sites were available that were Hot located in expensive, ovestrmtded business oe fete reas. Finally TT labor costs were oma par with py levels in Hong Kon not cheaper Apart from location-specitic competitive advantages, on the whole, Australia had an extensive fiberoptic network iniastructure in place with 2 fastgrowing cohort of TT profesional. Several lange multinational IT vendors such as CSC, EDS, al IBM had established their presence in the Australian market This ensured rapid support delivery lated ina time zone only ti to three ‘howe’ diferent from Hong Kong. Stlney Was also only a mine-hur diet Hight away from Hong, Kong on an existing Cathay direct route. Finally, Australia sas fist Becoming an increasing attractive emigration destination fr Hong Kong resents planning to ether stay oF work abr particulary with the 1997 Bhtsh handovee of Hem Kong to Chiat en many people's mits, they fsring that the Data Center would not be located in hardship lation incest to IM ta who were ask a consider relation, Located in Sydney's Baulkham Hills, Cathay opened its Data Genter in September 1985 with around 25 employees sent fro Hix Keng pat from the USS30 mln cata process fait, Cathay originally had also planned to relocate training fly to Australia but opted to remain Hong Kony aller more easonably priced land was made available bythe Hong Kong government it aly i986 Outsourcing: the First Steps | 1982 Cathay initiate! a companyide strategie review exercise known intemal #5 “Operation Better Shope.” This initiative involved fosibilty studs and stemmect from the reazaton that Cathay could not afford to operate in the same manner as HW fad before. In onder to remain competitive, cost redutions had to take place aero the entire organiza, th mo depart OF division exclude, According to ane Hong Kongsed anal “The company i highly, ech tn highly, vertically integrated He does so many things in-house which it shoul have vatsouree Outsourcing was identified as one crtcal strategie aprons ts culling ests With nonsesegic functions outsourced to contractors with thew ox individual vertical specialization it wos hoped that leaner Cathay could focus an its core aviation competencies The companywide study pointe to the recent outsourcing of Business processes such os 4+ Building Maintenance Litt Maintenance + Renovation + Printing + Transportation + Medica Services|Catay Pac Dang More ith Lan sess For the last to processes, Cathay formerly operated buses for its staf function outsourced to Gotha subsidiy HAS" in 10 Cathay's cline was ako outsourced in’ 1998. Information Technology outsourcing es thus introduced t9 Cathay in conjuction wilh other business process foutourcing intiatives The key distinction se hat in comparison to ater more peripheral business tints IT had asa ben considered static resource, Relecring to the IM slepartments ability Tull demand tor IT acres the company, Yeung acknowledge, “At one point, even in the 1S, realize that we could not doit all ourselves, tat took too much met develep applications = ‘westated to look at what packages were available.” Cathy started purchasing soltwane packages a0 aly as the 1980s, However, aconting to Yeung, “the Cathay-developed systems, ensinvering, faecounting et all an quite welland ence Ure seit to ouch these big sytem.” Dring the late 19806 Yeung’s unit changed its namie frm “Systems Development and Support” to "Systems Delivery” to rele it changing role” No longer would his team be esponible foe swrting conte an developing applictins, but rather delivering IT systems to Cathay Business Uris (Exhibit 3 epics the IM organizational steactur in 199) The IM departanent realized tha cull bo lange ford to spend time aul resources descloping proprictary applications a instead opted fo purchasing packages and deploying open systems sed spplictons actos the organization. By fo longer building and operating the own stems, Cathay opt tha i aul liver syns Tess cont faster, an with reac sk, The decision to outsource Cathay’s networks to SITA was made during the miIOM0s, when establishing global linkages wets an important sep of the ane’ transition trom regional to international carrier. For years, Cathay had purchased services fom SITA, a Genevaebosed nonprofit cooperative organization proving ilegratod tlecommunications aad TT stint the it transport industy around the world, eth the goal acting connections between caress ITA was an aeTonym for “Aine Telecommunications and Information Services” (fom the French ‘Sci inteationale de tlecommunictions aéonautiques"), SITA products coverad range of application, desktop, network, and ntratructare services, systems integration, eutsourcing, and Consulting ta 2002 SITA ad roughly 740 members ant served 80 customers including ifines Srports, tavel reservation systems, an sirreght sompanies (See tp ww stant) Outsourcing was identified 96 9 means to bridge the gap Betwown the IM depactment an the business side ileen-year Cathay veteran Josica Cheung Manager of T Panning and Acchitecture Pointed out that Te would take forever for IN ull the ritemnts of the business side, We hal tosh rom building snd operating to acquiring and managing.” 1994-1995: Additional Steps [ny mid-1994, a new General Manager of IM sos appointed witha mandate from then Managing Dinetor David Turnbull to conduct 9 strategie review of Cathay’ IT systems. The mew CM hed extensive experience with otsourcing from his previous tenuge at regan cartier during which time he established a joint ventare betwen the airline and sla IT company. A thse o five-year business plan was established outlining the strategie components of Cathay's IT strategy, which Is summarized in Exhibit“Thre operating principles of IMs new IT ideology were 1. Assume the positon of quick follower. 2. Acquizeand mange rather than develop and operate 3. Adopt a vendor strategy of ewer but more strategic suppliers, and to Menlify key srategic supplies Rather than expend limited IM resources on developing proprietary applications, Cathay decided instead to mentor and follow industry practices in the adoption of new technology stead 0! teams ‘of programmers spending. years. writing code for Cathay applications sich se reservlions, engineering, revenue accounting, and so on the IM tea shite focus fo acquisitions of soteane packages and: managing IT resoutces as strategic commodities, (Exhibits 3 an 6 ilkestate major pplication systems at Cathay Pacific) Filly. dhe department clsted to narww its choice of TE vendors down to a carefully chen strategic fo, 9 procure $0 Finalizing stage eulsourln, alliances tha Cathay was then inthe proce of evan 1997-1998: Tough Times for Cathay 197 an 1998 hod boon pastiulary diticult trast years forthe carver. For one, Hon Kong’s 1997 handover trom British administation to PRC rule baouht about a change of local government, significant for Cathay given thatthe Hong Kong government cone all fai igh Within days ofthe handover the fee Hoot the That bat precptated regional currency uphenval leading to what would eventually become known a the "Est Asian Econuente Crisis” The region became mined in recession and affected the sine industry especially har, particularly Cathay’s Icrative shorthaul routs such as apan to Hong Kang, ln early 1W7, roughly 29% of te asin’ _goss earings had come from the Japanese inbound market but by 1098, tars arrivals rom Japan, ‘roped oy ta 7% ‘To make matters worse, during more prosperous tins the alsline ha andere 13 new air ‘whch it was contractually committed to purchase on schedule, not transactinn the dirine woul typically choose during a downturn, In order to cul costs, early 1M4 employees out a lal tat oF 1.500 were made redundant in January 1998, Repackaging of pay and perks were annenunced for ‘ther Cathay employees and pilots threaten to strike In tandem withthe mave of tons Kong's international airport in 1988 from Kal Tak to Chep Lap Kok, Cathay relocate ts entre operations to Cathay City, a USS628 milion state-of-the-art Fact, constittiny yet another expense for the ailne Announcing 2 USS69 milion deficit in 198, Cathay’s fist annual loss in over A years, Chana PoterSutch std, “198 will stand out as ane of the most dificult years inthe history of Cathay Peciti."* Apart from contingency cost-cuting measures such a ayo and leasing or selling older aircraft ‘outsourcing nonsrategic Business functions was believed to contribute to the alin’ ability to posta 5281 milion profit the fallowing year in 199 despite contin decline nthe ae travel art ha Meat‘Smartsourcing Dubbed by senior management ss “Smartsourcing.” 9 decision was made to seni strategie supplier that would be able to fll the company’s burgeoning IT aces. Smarsourcing 3s implemented in 1997 during austere times when the company faced immense pressure to eu costs Githay had previously oulsourand ils network to SITA, anh management. felt thot further ‘outsourcing of TT Rinctions wae an important way to move fom fixed eos to vacable cost As Yeung ‘oted, "Outsourcing was not mew to Cathay, yas ust inthe pores becoming mor epi.” Smartsourcng took place on two fonts: Ineastucture and airline applications. Sine no single supplier was able to fail both of these news ond there was no single “ofthese” slutan valable to fit the aicine’s needs, a sere eas mounted Tor an optimal combination of supplins “sombining the best ofeach vendors solutions and technology. The canton was thal each ster Thad to have a proven track rcond for managing IT infettustur, projet management ating: specie applications, service delivery and customer service The Cathay search yielded thee distinet Brings including Lufthansa Systems, EOS, and AT&T as wll ax thn or four smaller supplier Utimately the decison was mage to partner with IBM Global Services for infrastructure an Sabre Airline Solutions fr appliations Following extensive contract negotiations that lasted vera. year, tripartite elation was establish! which Young describes “we help them as well as them Pepin ws” IBM ast bin. test proce to the relationship; Sabre Aislin Solutions would Bring ts application portfolio; an Chay would bring fo ben its international particularly Asian expertise Cathay made ile to the {ovo vealrs that they were not excsive suppliers; however intemal IM mechanisms ensured that TM and Sabre Alcs Solutions receive! protnential consideration over other vendors Purchasing IT services from vendors other than thew too Smartesutcing partners eulred spacial approval fe IM If the services or solutions «fan alsrnate vendor were Requested special proposal hod to be submited ad approved detailing why that particular vendor's services wore deve ese Sibre Alrfine Solutions was a provider of sotwane applications and services forthe acne industry. ls aviation inlusryspectic solutions included airline planning, fevers mangement, fight operations, reservations hesting inventory management, and departure contol (See i//wwwssabreirinesoltions.com} Through the Smarking. lationship, Cathay Pace adopt 3 complete suite of Sabre Ailine Solutions, code-named "AiaCX,” covering the Ares o Aine planning aline operations, revente management, and crew schedule perm mangement, TBM Global Services was the one ofthe world's largest information tchnolgy services providers providing integrated service, handware, and software solutions al ws the fate growing division OF TBM with 13000 staff awed in 10 itfrent counties, (See hp / www ibmcom servic) Intaly IBM Global Services was to manage Cathay’s IBM and Unisys mainframes, prove systems and asset management in addition to standard chs and business recovery serves ln [4 TOM ‘tablished its Global Tavel and Transporation Industry Solutions Unit to target IT service business ‘oppuctuites within the travel and taneport industry that ila sries, hotels and railways (See hep /wweweibm.omn/ travel) Aer over a year of negotiation, the Smartsourcing contact with IBM and Sabre Aine Solutions was signed in Apri 197, retroactive to Januae’ 1 1997. The agreeaent consisted of bo part, the Relationship and Framework Agreements. Signed by all theee parties, the Relationship -Agivement was not legally binding, apd covered the istent goals, and guiding principles ofthe Smarteourcing contract By contrat the Framework Agreement was contractually binding and outlined the precise tex for doing busines, kl level, a foe structure that wa inflation -adstd and indestinked,FE Data Center Outsourcing, Not long after Cathay’s migration of its Data Center to Australia, Yeung spent mone than six montis in sytney negotiating a coatract to outer Cathay's Data Center to IBM, Aer the contract was signe on Deceiver 24,197 an announced, nitaly the IBM contact met with resistance fom Within the IM Department. Even though in theory the move an TT-facused organization such ws TBM might have seemet appealing to techaical sal, many operations people who had worked st Cathay for over 15 years rot want to leave, citing “deep-seated emotional and psycho es tw Cathay.” Inthe wake af the Data Center outsourcing controversy, IM Operations Manager Esther Hui resign. OF the 60 Cathay staff in place atthe Sydney Data Center, 4% to 40% fal recently moved to Sydney from Hong Kong. As hey coniion af Ht contract with Cathay, TON aged to also alo the Cathay Data Center staf which was acta problem fr IBM whan Business as then Sal groin, But what proved mont difficult to many IMC sal members was thei fansiton to another role According to Anthony Yeung, “People know things, do things but aww hey dont need fo know the technology indepth, but athe just enough to ask questions. No loner was it necessary 4 wie cae and doit ourselves, ov we only nes to be skills enough to manage the suppliers, to understand the value of TF to the busines Thi can make technical people Ke uneasy’ ad unl Contract Management Cathay Pacifi's outsourcing contact with IBM for the Data Center tok efecto January t, 1988 and was negotiated over a period of ane yea, with Cathay imposing these key conditions: Fst BME had to offer a fe structure that was 10% to 15% below inchoute base cost. Furthermore, IBM hl to provide “as good or beter” services than existing ia-htse capability Finally inorder for Cathay to ngne to outsource its Data Center, all of ts TT staff employes inthe laity woul have to be absorbed by IBM. A great deal of time went ito negotiating the outsouscing contract, thereby ‘bviatng the need for subsequent smenclments a he contre Acconing to Petor Nutall, Cathay consultant on FT peject management, it was “essential to tablish a slid egal contact with a supplier before entering into any outsourcing deal” The ‘contract, Nuttall indicate, “could be the he to Success fired thereon was ness fo retain legal advisers and involve supplier managers, purchasing, finance, ad technic stat a ell os human resources in the negotiation process Nuttall cautioned, "Tey te antcpate inthe contrat anything that might happen.” eluding contractual Heibility to eliminate services that were no longer requited o that were not pefocmed wll Govemance and Benchmarking Benchmarking was one mechanism use 4 establish cost discipline in the contract. Ore concern was that vendors ran profit enters al might pressure Cathay to purchase more services than were actually necessary. Ava way to ensure that the aatourcing charges were competitive om a ongoing, bass provisions were established in the contract to Benshanask IBM changes aint market prices oF the same serices, Stemi ger, “Otc Ca Wig Fine EnisAcconding to Sydney-based Dennis Wood, Manager of Contacts and Service Managentent Periodic benchmarking was nov altendy ante the thie stay. Renchmacking hs teh a powerful took” Furthermore, based on his units examination of ther local Businesses, Wood felt ‘Sonfen that "in tems f TT Caf aes ahead of ther Avian organizations” There were several governance processes built into the Data Center outsourcing ant Smartzourcing contacts, Weekly operational meetings ook pce bstween Cathay an IBM ae wells ‘more formal monthly mstings tht were presided ver by Woo. For the Smartsoarcing cfr IMs Director chaized a quacteey eviews bord with manages from the busines ide, Together with TM and Sabre Avine Solutions management, dhe parties assessed the overall status of IT operations and projets on regula basis Finally, Cathay’s CEO and executives of equal seniority fom bath TBM and sabre Airine Solutions chai 9 high-kvel semianndst Management Review Bose Vendor Relationship Cathay Pacific and IBM didnot share nancial data with ea other an asa result of not iting 2 rsom and sharing spreadsheets, either sie was able to assess whether arnt theater wae ota, f good! deal Several managers felt that Smorsourcing.ciminated commercial ens ane Competition from the purchasing process nd inerelore expressed canes at expenalities cold be fxcesive Although the IM dtr was to opt foe "ewer axl more strategic supplier” wx senior Int manager questioned at tines why a Smarooorcing vendor was chosen even though the suppliers proposal was not necessarily the bust on the table. Manager of Purchasing for HT Davi Hammond Fel tha instittonalizing trust wets no teva feat given these dillerences aad suid thing ese than “establishing exten! surcens factors, mutual objectives, tust in eaeh others competence an mutual dependency” To estimate cost, Cathay didnot sue RFPS nor elicit bids fom other vendors. Inston, asconing to one manager “Only ater the cision to buy was already aiade dl we ask the vendor fora price Hammon fel that Cathay wast able to request pricing information frm EDS sin EDS ae neve that Cathay would likely purchase Foe IBM anyway the other hand, since TBM wa aa that Cathay had! noe approached ether vendors it theelore knew that Cathay lacked competitive supplier pricing information to benchmark ayainet. Cognizant ofthese actors, Hammond cso how tension could be inextuce to what was othenwise “tensions relationship,” ang that “ose books were recipe for dstust.” Cathay insted developed pricing parameters based on materia collected fom IT conferences 3s swell as from research and advisory Irn Cares, In. as.a means of fixing cont with TBM These Internally developed “hurdles” presented a suerogate form of competitive pressure and tae hope that these would ulate nail cost isspine in the contrat Culture Contrast A key aspect of managing the vendor relationship was the role that culture played, Cathay was an Asian company and aecistomed to operiting in am environment where eelatinshps, uth business land personal. were perceived iferenty than inthe United States, Moreover, in cont to Cathay, where extreme senivity existed within the IM cepartment and twas no snus to have people in the sive nit for well ver 10 years, IBM ws an organization that tate persannl every foo three yon,Desktop Outsourcing In the first significant eutsourcing initiative pursued since Smartsourcng had been contac, Cathay outsource ts desktop PC environment to IBM in 2001. Five years before, PC tribution steperdet on cach staf members level of security acess and consequently, some had PCs while others did not. contrast wth 187, by 2072 aly every Cathay statt member operated thelr own individual desktop PC and each had acces to hentia applications an emai on a sanded intranet interface called “Intra” As part ofits continuing effort to outsource nonstategie IT sexources, Cathay chose IBM to maintain and manage its desktop PC and workstation infastusture aa in February 200 concluded 2 USS60 millon contract lasting five years. A Cathay Paci officer noted: "This arrangement is ratural nex step inoue ecatonship ith TBM and pas in place @ major component of supper for vu TF inastructure. We have worked closely wih TUM for the pn four years and their experience in TT outsourcing solutions wil enable us to deliver superior levels of service an support to ur customers and stat" According to essica Cheung, in his asthe arangement to outsource “commas” esounces was straightforward “If its something we can aff, should outeoure.espectaly if fro our «ote competency Te kas seategic the component the ease it to tours becuse generally the Supply is move mature ems lke MIPS” ate mre of 4 comma nn we can always buy these CCathay’s business notin desktop PC management therefore we should cus aur efforts elsewhere fad outaource ts” However ot of all thre primary components of Cathay’ information feshnolgy that had been stsourced~ data center, network, and desktop infostracture—Cheun fel hat te later hol ben the most dificult Foe one, desktop outsourcing was comprised of lve elements, howate whit went Cathay assets, and soltvarey which was licensed Cathay, nol IBWML. Furthermore, desklop ‘outsourcing, was relatively new and had only started ining aeseptance within recent yeare According to Cheung, thene were foo many changes in the dynamic desktop environment al was leu to manage thse changes well as manage the supplier Finally, in marked cantrast with the previous Data Center cuntrat uncer which IBM abe all of Cathay’s displaced IT stall, desktop outsourcing. hal 10 redundancies, sending. shakers ‘heoughat the IM depoetment Information Management Department in 2002 Appointment of on Acting CIO In 2001, Cathay’s C10 let, ana long-time Systems Delivery IT veteran Anthony Yeung picked up the mantle and began his tenure ab Acting General Manager of IM. (Exhibit 7 depts the ‘organizational strucune of Cathay’s IM Department in December 2002) The IT steategy that bis predecessor had set in motion ws stil in placeUnlike most caries after the tum of the centr, Cathay’ investment in IT resources ha focused on 'tratezie exploitation of information technology as well a cost reduction, Commenting resources made available fo corpevate to the indivitual business units with IM acting asthe eusteaan, Anthony Yeung pointed out: “There an intentional decison fom ive adja resourees thie forces priontization an makes us do with what we are given. This means that oy essential tasks 4g dane; some worthoile tasks may not have the appropriate teources to get cone, Dut emething is ined eeemed necessary, tis posible to subi a separate case requesting tem poray nh ty ty Shag an Bog eosole of mandatory transit point between Talvan and mainland China, 1 was estimated hat Cathay “Served anywhere fom Ide to 15% of tol profi from ts Taiwan route. Alo, with vastly improved Tr infastractare in china compares with seven years cacier when Cathay first launched ts Data Comer in Silvey as well as on affordable cohort wf talented (T engineers in the PRC. what Spportuntin, if any, should Cathay be evaluating? Moreover, with Chinese caries closely REniming nn even emulating Cathay's IT system, should Cathay consider offering FT services to tipad-coming Chinese airlines, and ifs, should seme partners be ientfied? Wilh unprecedented eutucturing of China's aflins taking place, major PRC carder searches for foreign static partners Cathay alten had a cse relationship with China Eastern that operated [42 agra and Ferice 386 PRC voutes while two ote caries, China National Aviation Coan China Souther, Fad comparable aumberso sical and operted 307 and 66 routes, respectively." ‘What Next? By Devember 202, Cathay had already outsourced most of the noncompetitive, nonstate aspocts fits resources but Yeung wondened to himself whether or not Cathay ha yore a fa 98 TRRie Currently nna 684 of ns FT uadget was ouside of the company, with early a third of {tattevoted to Cathay’snetvor, a third to the data center, and another thin a cesktop outsourcing following he recent contact wi IDM, Yeung contemplated what ought 0 be the langteem cole of hisSystems Delivery grasp, Young’ bawick before assuming the ok of Acting GM of TM Systems Delivery atillemployc! 200 oot of Is MBs, Yeung wondeeet how this group woul change and lather there wer’ more cstefiective mel to delve te same services that Systems Delivery Citrently provided. Yeung considered the decison to retain in-house support for Cathay’s 3.200 fouport worksintons, and whether # would be eventually possible to resolve the contractual Complexes of fencing 9 eontetective ngreemeat to outsource FT support for these lotions ‘Mortaver, Yeung ae corskcered the desiabiity of at owning the desktop hardware and soltware nt instead siting to. uflty” shod of payeperuse for these workstations. As outsoureng Jgrinal incensed qceeptance in Asi, competing fegional carriers had also turned to extemal EEMtngement of If operations an like Yeung their owen IT departments also examined ays of Fediacing IT buds, Moce drastically, Yeung contemplated the business case of going the way of Finnair or Air Canada -in sther words, outsourcing Cathay’s entire TT operation, To someone who had joined Cathay as 2 young programmer snd wrote cote forthe airlne’s fist ceservaion systems over X0 Jorn fu thts wed ave been inconceivable fick when he Rist started working at Cathay. But, I Renatitwene eo happen, before moving IT infsstructare ene outside ofthe company. according {Toone senior manager IM would have to “clean aur oven house fist and evaluate the way we manage our vendors more carefull.” In other weds, despite mounting cost pressures, Cathay would hive fo consider ways of managing te strategie Smarsourcing alliance partners as well as the ‘outsoureing process more carefully before farther commitments were made and contacts sigoed. Nevertheless Yeung muse with outsourcing already in place, the sue was more one of pace and when: not if farther outsourcing should take place On Januney 1, 2003, Cathay Pacific appointed aline industry veteran Edveard Nicolas Digetor of IM positon equivalent to that of CIO and reporting diretiy to Cathay’s CEO, David Turball riginaly necking for Cathay’ pane company Joh Site & Sons, Nicol stated his carer with {Cathay Paci in 1973, During hs Tong ene oth Cathay, he served as Country Manager for a tnumber of Asian and Mile East outpots, thea became General Manager for Soke and RevenueManagement and theo subsequently GM of light Services. Iv recent years, before returning as Catay’s ew C10, Nicol was appointed to run various aviation companies either wholly of poaly ‘owned by Cathay, ating in the eapacty of either Director or CEO, One month following Nicos appointment, on February | 2008 Anthony Yeung was appointed General Manager of IM.” Both appointments provid st indction of te inportac thik Cathay itlached to IT asa strategie resource of the company. According to Yeung, ITM were a company unto set, “Nicos roe woul! be CEO whereae my role would be that e¥ COO. For Is mele Cathay hat only an Acting General Manager but seithin the space of a month, both 2 Director ana GM of 1M were appointed. It remained to be seem shat impact this onganiatonal cturige woul ltimately Rave oa Cathay’ future I cretion, <<Exhibit Cathay Paste Route Map Routes and Destinations We think that ou ft owing neiok of regan and words destinations Speaks for esl, +0 destinations woroniso {Operates to 3 counties a terres a network wth one patners wth connections to 135 countnes and oe 570 dastnatons 18 destinsuone Chine hough ov asacised ane, Crayonso biie2 Easing Cay Psi: Anu Rpt Con Bly Set AcwuntInformation Management edExhibit4 Cathay Pacific Inormation Technology Statgy 1. Focus the us of inornuton teclooloies on Proving information to Cathay Paciic managers ant! staff to enhance their effectiveness in serving customers and managing he business. {Coating lei for the business by making location, me and structure transparent. Supporting or enabling strategic business iniatives designe! to capitalize on Cathay Pacifica s2ngraphical location in the “Heat of Avia, Aggressively pursuing stati ntatives consistent with ths focus, shifting a significant portion ofthe resources tear ii attainment 2. Assume a positon of being a quick folloeer with industry practices in the adaptation of information teclegy, taking seectiveteadership only for clear and compelling. seatee lene A Prowite information tecinokagy capitis by Deploying (and consolidating) 1/T resources close to the activities they are supporting and _talully devolving their management othe busines, Fecusing a small core of 1/T resources on ensuring that computing across Cathay i performed efficiently and efectvel. ‘Strengthening I/T managerial oversight across the company Optimally utilizing external 1/7 resources, known as Smartsourcing, for ungue competencies nd for mitigating invest requirementsExhibit 5 Major In-house QIKRES reservation keypad CUPID pas into COINS pa revenve opi 4 FACTS crew control hay Applications Systems Major Applications CUPAC departe control SCS servi CS customer info AirOps ops control "7 BAGLE Misht plan CAFES aic-ground comm BASIS safety information " & \ Ultramain MA THOC tech doe CUBIC carso (Cargo Viekd Mt PoopleCX hntan resourses CAPITAL revenue accounting ae-Business Applictions e-Business Applications Daal Downloadable Timetable 4 Avant Lg A asia wites Check inNow gif 7N\ i A Carty Prerrc ire Poaie EE oe eo ‘ gona. zu)l ox XCHANGE CKasents.comExhibit Cathay Paci I Evolution Chrono 1967-1966 1901-1999 1985 ‘Api 1957 24 December 1997 01 January 198 ay 1998: 2000 February 201 20 2002 smi 2001 November 2002: 01 January 2009, 01 February 2009 Cathay Pacte engages SITAin he provion of net servcas ‘Operation Ba Shape done etsoucing as key cost uting measure lan Fel ins 28 General Manager, Intonation Managerrent Divison Asta Data Conteris opetaton ‘Smarsourcing contact wih BM and Sabre Alte Solitons signed: rroactve touanvany 1 1367 Data Center Otsourng contact with BM sano Data Center Ouzoucng contract takes elect ‘Cathay Cty Campus Network outsourced to SITA “Vey Desk and “Sener Fam” operations sourced oN Foleo C10 crated: GAM promatd to Dvoctomit HKG Desktop iastucire conract talized, covered e-mal systems, Novel, Snpor: PC maintenance, Hop Desk PeoplecX launch, People system ‘an ids eaves Cathay, tony Young assumes rol of Acting OM, kt Stl of Cathy Pacie-oaned Data Conon Austala dard Nec appointed Destro M ‘Aethony Young appetite as General Manage tM