Information Technology Outsourcing Cathay Pacific: Doing More With Less (HBS Case)

1. Information Technology OutsourcingCathay Pacific: Doing More With Less (HBS Case) Charanpreet Singh Praxis Business School

2. Agenda • What areas of IT can be outsourced? • Reasons behind IT Outsourcing • A look at recent mega deals • Best Practices in Outsourcing • Long term concerns of outsourcing • Recent Trends • On-Demand Computing Model • Outsourcing to India and other nations

3. CIO, or… Company Is Outsourcing Career Is Over

4. What can be outsourced?List of activities • Packaged Software • Package implementation • Package maintenance • • Data Center Operations • • Applications Development • • Help Desk Support • Call Center Operations • • IT Strategic Planning • Business Continuity • Web Access • Web enabled applications • Web servers & Web Sites Physical Infrastructure Mainframes & Servers Telecom Infrastructure PCs & Workstations Software as a service

5. Determinants of IT Outsourcing Why do companies outsource their IT function? Organize the reasons into a few major categories Team Assignment

6. Determinants of IT Outsourcing Financial Reasons Cost Pressure Liquidity Needs Strategic Reasons Simplify Management Agenda Standardization Flexibility Environmental Reasons Competent set of global alternatives Access to specialized focused skills Success stories Team Assignment

7. Financial Reasons • Cost pressures • Low growth prospects • Intense competition • Downsizing & company wide cost-cutting • Belief that the vendor can provide the same services at lower cost Discussion Point How can the vendor perform the same services cheaper?

8. Liquidity Needs • High Debt • Low Cash Reserves • Lack of capital for investments • Low (financial) risk tolerance • Impending acquisition or sale • Vendor makes an initial payment to • acquire the firm’s computing assets Discussion Point What are the long term implications of this initial cash payment by the vendor?

9. Strategic Reasons • Simplify Management Agenda • Focus on core competence and sell-off non-core assets • IT is viewed as essential but non-core • Downsizing & company wide cost-cutting efforts • IT is viewed as a commodity service best left to a large outside provider! • Eliminate need to recruit and retain competent IT staff Discussion Point Can “focus on the core” be a valid argument for IT outsourcing? Core

10. Internal IT Factors • Remove an internal irritant • Get expertise not available internally • “Rein in the PCs” • Provide superior infrastructure • Career Path for IT employees • Formalize decision process because of charge-backmechanisms involved in dealing with vendor Let the vendor manage what we cannot manage internally Discussion Point Can the vendor manage what we cannot manage ourselves?

11. Recent drivers behind outsourcingStandardized Infrastructure • Standardized infrastructure makes outsourcing easier • Many Fortune 1000 companies have standardized their back office on ERP systems – vendors have expertise available to maintain such systems for multiple clients • A drive in the 1990s to standardize and rationalize technology in most companies has also led to a common IT architecture across the organization. Commonality reduces support costs but is easier to outsource

12. Recent drivers behind outsourcingCost Issues Research indicates that high growth firms that drove IT spending in the last decade also decrease IT spending significantly as their free cash flow decreases High growth firms invest 9% of every additional dollar earned on information technology ....but they also slash IT spending when cash is tight High Growth Firms IT Budget / Revenue 1.6% Low Growth Firms 7% 10% Free Cash Flow / Revenue • As companies cut back on IT spending, they look to vendors to provide the same services at lower costs • Many companies have been burnt by excessive spending on packaged software implementations and are aggressively looking for alternatives Source: Mitra S., Information Technology as an enabler of growth: An empirical assessment,” Working paper, Georgia Tech

13. Recent drivers behind outsourcingFlexibility IBM’s on-demand-computing utility has several smaller clients who see flexibility as the primary benefit, in addition to cost savings Towers Perrin hired IBM to host an exclusive e-procurement system for the New York based Management consulting company. The company expects to save 25-35% and also get the ability to grow the platform as its business grows, Dal-Tile International tapped IBM to manage and host an internet based EDI system. The company estimates it would have cost them 5-10 times more to do it in-house and have less flexibility in adding capacity as needed. “…CPU costs scale up and down on a monthly basis to accommodate growth and contraction in an economic fashion.” American Express Corporation

14. A Recent Upswing in Mega Outsourcing Deals….Well established brands reap the benefits Banking Group JP Morgan Chase has awarded a seven year IT outsourcing contract worth $ 5 Billion to IBM. Under the terms of the agreement, JP Morgan Chase will transfer around 4000 employees and contractors, some resources and a number of systems to IBM in 2003 (January 2003) American Express Signs $ 4B IT Services deal with IBM. Pay as you go contract includes the transfer of 2000 IT workers and assets to IBM (February 2002) Deutsche Bank and IBM have announced the signing of a strategic outsourcing agreement in which Deutsche Bank will outsource its computer centers to IBM. The contract is valued at EUR 2.5 Billion over a 10 year period (December 2002)

15. A Recent Upswing in Mega Outsourcing Deals….Well established brands reap the benefits P&G is expected today to announce an outsourcing deal with with Electronic Data Systems of Plano, Texas. The Wall Street Journal reported that EDS is the winner of a long term contract to manage P&G IT resources for $ 8 billion. (September 2002) Note: P&G later withdrew from the exclusive arrangement Bank of Canada is outsourcing the IT and business operations needed to support its retail debt program known as Canada Savings Bonds. EDS Canada bagged the $ 271 million contract that stretches over 9.5 years. Bank of Canada which employs 1700, will transfer 500 employees to EDS (October 2001) MCI Worldcom has signed a 10 year IT outsourcing contract with EDS worth between $5 - $ 7 Billion for most of its IT operations, applications development and maintenance (February 1999)

16. Long Term Concerns 1. Possibility of weak management 2. Inexperienced vendor staff 3 Business Uncertainty 4. Outdated Tech Skills of Vendor 5. Endemic Uncertainty in IT 6. Hidden Costs 7 Lack of Organizational Learning 8. Loss of Innovative capacity 9. Dangers of an Eternal Triangle 10. Technological Indivisibility 11. Cost not quality focus

17. Long Term Concerns • Management Issues • Possibility of weak management • Lack of Organizational Learning • Loss of Innovative capacity • Cost not quality focus • Vendor Issues • Inexperienced vendor staff • Outdated Tech Skills of Vendor • Dangers of an Eternal Triangle • Technological Indivisibility • Business Issues • Business Uncertainty • Hidden Costs

18. Recent Trends • IBM’s On Demand , HP’s Utility Datacenter & similar offerings • Offshore Outsourcing

19. On Demand Computing: The Need… • Poor Infrastructure Efficiency & Utilization • Difficult to Scale Infrastructure Costs Effectively • Unpredictable Application Demand • Proliferation of Applications • IT Cost Measurement & Management is difficult • Need to refocus resources on their core businesses

20. Utility Computing Features Enables shared infrastructure Instantly and dynamically scales up or down based on usage Delivers controllable response time Support broad class of applications Provides usage measurement and control system Uniform application deployment and provisioning On-Demand ComputingThe Vendor Viewpoint • Service-centric computing - Scalable, cost-effective information technology capabilities will need to be provisioned as a service, delivered as a service, metered and managed as a service, and purchased as a service Instead of buying computers, you pay for the work you do on them

21. Weeks Just in Time Hand- On Hands- Free Proprietary Commodity Massive Minimal Very Rigid With Ease Burden Commodity BenefitsThe Vendor Viewpoint Present Day On Demand Computing • Cost Effective • Increased Flexibility • Availability • Change in Capacity • Manageability • Increased Security Response to Demand Management Technology Over Provisioning Scalability Infrastructure Changes Customers can quickly ramp up or down with their technology needs and can usually receive extra CPU or storage within days of their request. Improves Business Agility significantly

22. Major Players • IBM : On-Demand Computing • Plan to invest $ 10 Billion in next 10 Years • HP : Utility Data Center • Sun Microsystems: N1 Initiatives by Leaders • The Virtual Data Center— Pooling resources to make them seem like one big machine - Sun Microsystems • Autonomic Computing— A term from IBM referring to self-healing networks and systems. • Adaptive Infrastructure— HP's take on autonomic computing. • Grid Computing— Dozens to hundreds of individual systems (PCs, workstations, servers) connected via LAN or WAN to solve computer or data-intensive problems, now evolving from scientific uses to more practical business applications.

23. Offshore Outsourcing IT Outsourcing in India • Industry Overview • Industry Size, Major Players, Services Offered, Growth Rates, Country Comparisons • Industry Trends & Outlook • Factors affecting the future of the industry Source: NASSCOM (National Association of Software Services Company) in India. The numbers may contain an obvious bias because of the source. Interpret the numbers with caution.

24. Indian IT Market: 1997 - 2002 IT includes hardware, networking, peripherals, domestic and export market for software and services and IT enabled services Software & Services Export includes IT Enabled Services (Business Process Outsourcing) Source: NASSCOM

25. Indian IT Software & Services Export SEGMENT GROWTH RATES The IT sector is vital to the Indian Economy Source: NASSCOM

26. The trend towards offshore outsourcingOffshore Service Offerings Spectrum What are the drivers behind this trend?

27. Type of Work US $ Billion Service Lines Verticals Percentage Banking, Financial services 35%Manufacturing 12%Telecom Equipment 12%Government 1%Retail 4%Utilities 2%Transportation 1%Telecom 3%Healthcare 3%Other 27% Software & Services 4.95IT Consulting 0.05Custom Development 2.65Packaged Software 0.30Application Outsourcing 1.75 IT Enabled Services 1.49 R&D Services 1.21Product Dev & Des 0.30Embedded s/w 0.91 Source: NASSCOM

28. Country Competitiveness Source: NASSCOM (India)

29. Thank you