While some airlines proclaim the benefits of IT restructuring, others have found the experience unsatisfactory. The measurable results depend upon some key factors, in particular the need for clear-cut objectives and an understanding of the limitations.
Many airlines are captivated by the prospect of cutting IT capital investment and operational costs and shedding the constraints of in-house IT service, while enjoying contractual guarantees from one or more external service providers.
The review process often begins when senior airline executives, frustrated by the speed, quality or cost of IT services ask: 'If others can do it, why can't our in-house staff deliver?'. Yet the same executives are reluctant to place essential IT services in the hands of third parties, fearing change and a critical loss of continuity.
Most deals with outside vendors come with large financial sweeteners, span up to 10 years and can improve both cash flow and the balance sheet in one go.
Sometimes the real motivation behind outsourcing is to obviate employment protection and labour relation issues, faced particularly by European carriers. By outsourcing a particular function, the airline can remove the internal IT personnel from its payroll, thereby reducing social charges.
There are a variety of reasons for an airline to take the decision to outsource. While financial considerations are of primary importance, senior management balances these against other complex issues. For example will the deal provide the airline with expertise not found within its ranks? Will the outsourcing partner provide advanced technologies? Will a third party vendor help in the commercialisation of the airline's products to other airlines? Will the deal shield them from the risks of future software development?
Once the decision has been taken, a carrier can determine exactly which IT functions it can restructure or outsource. The functions fall into three broad areas. The first area includes operational processes such as peripheral equipment installation, maintenance and tracking. The second area is applications development & maintenance, which encompasses the broad spectrum of bespoke sub-systems - for example reservations, crew-scheduling, maintenance & engineering, payroll. The last area is the full management of the IT infrastructure itself, in effect a full service bureau concept.
Proposals to restructure airline IT services vary considerably, ranging from outsourcing a sub-set of functions such as frequent flyer programme administration or payroll, to managing the total operation which encompasses reservations, maintenance and engineering, crew and aircraft scheduling and route planning.
While some airlines have adopted the approach of full scale outsourcing, many airlines have implemented partial IT outsourcing. More-over, as management focuses on these issues, airlines are looking at multiple variations of outsourcing and cooperative concepts, including technology agreements, core business ventures, product swaps or the sale of software licences.
Various structural options exist to reorganise IT departments. The first alternative is to reorganise IT operations into a profit centre or subsidiary company, competing both for in-house and third-party business. Examples of profit centres include: Air France, Swissair and SAS Data. Examples of subsidiaries include Qantas with Qantek and British Airways with Speedwing. The rationale is to unleash an entrepreneurial spirit in the IT organisation and to project an arm's-length structure to enhance marketing opportunities for the sale of software and services among other, often competing airlines.
The second concept is a joint venture where an internal department's capabilities are combined with those of an outside entity other than a computing company. A combination of assets which may include hardware, software and other intellectual property rights, data centre plant and personnel, is transferred to a jointly held separate company. There are at least two variations of this concept. The first involves the co-opting of one or more airlines to commercialise airline software products and systems such as the recent creation of Mercator by Swissair and Emirates to develop solutions and explore the marketing opportunities enhanced by their cross-cultural and cross-geographical link.
The second involves the arrangement by multiple airlines to benefit from economies of scale or scope. SITA is one such example. 'SITA provides network, data transfer and telecommunications services in the interest of the airlines and the worldwide travelling public,' explains Carl Chafee, director of outsourcing at SITA. Originally SITA was a 'not for profit' company and has expanded its presence to 210 countries and territories. In this case of global telecommunications infrastructure, no single airline alone could have undertaken such a financial commitment or risk.
The third solution is closest to the traditional IT 'outsourcing model' with the airline contracting a computer company such as EDS, CAP Gemini Sogeti, or IBM to manage its IT operations.
Within this alternative there are various degrees of outsourcing, for example EDS' participation with Lufthansa in Lufthansa Technik; AT&T and Delta Air Line's creation of Transquest; and Air Canada's link-up with IBM's subsidiary Advantis.
Lufthansa Technik is a 75:25 venture between Lufthansa and EDS which supplies the carrier with all its information technology resources. This joint venture involved moving 1,080 people from Lufthansa's various IT departments to the new company. Key to this deal was the inclusion of a large portfolio of airline application systems, industry expertise and the physical assets of the IT infrastructure.
Transquest is a 50:50 joint venture between US communications giant AT&T and Delta that handles all of Delta's computing and communications requirements except for reservations. Of Delta's 1,500 employees, 1,100 were moved to Transquest, while 150 stayed to act as internal auditors.
The initial agreement was to deliver $2.8 billion in technology products and services to Delta during a 10- year period at cost. Trans-quest must sell services to third parties to make a profit. This is divided evenly, but AT&T also receives a management fee.
Air Canada's deal with IBM is a more classic case of outsourcing. The carrier turned over its internal IT together with Galileo Canada's network and hosting requirements to Advantis, an existing IBM subsidiary. The $800 million, 7-year deal involved the transfer of 697 permanent and 256 contract Air Canada employees to Advantis.
The motivation behind the deals done by Lufthansa and Delta was to market jointly existing software, software development and maintenance, hardware implementation, data centre operation and multihosting services to others. For Air Canada it enabled management to focus on the core operation of running the airline.
Airlines examining IT departments and the necessity of restructuring should review a variety of considerations, including the potential cost versus the benefits.
Can an external IT vendor provide better value, along with financial sweeteners and reduced operating costs?
Outsourcing models in other industries suggest an external vendor should provide similar or superior service to the airline for approximately 60 per cent of the cost of the internal operation. Twenty per cent of savings accrue to the airline, while the remaining 20 per cent represents the vendor's profit, sales, cost and overhead. At issue is the need for qualified proof of better value, enhanced service levels and cost savings.
Can the external vendor contribute expertise that is not to be found in the airline internal IT department?
For general skills such as project management the answer is usually yes. But this may not apply to the more specialist disciplines required in the airline IT environment. If specialised programmers such as those involved in transaction processing facilities leave during restructuring, then the cost may outweigh the benefit.
An external vendor can help an airline leap-frog technology to improve time to market.
As the pace of IT innovation increases and costs escalate, the airline community divides into IT technology 'have and have-nots'. IT has, in fact, become a competitive weapon. 'Many smaller airlines will not have the funds available for internal investment. An external vendor should at least contribute the latest technology and have the motivation for maintaining it at the highest level of performance,' says Chris West, manager technical services-marketing at British Midland.
The cost of remaining current is not a new phenomenon. Medium-sized airlines sometimes attract innovative developers by agreeing to be test sites for new systems and technologies, then acting as the launch customer.
Setting up a co-operative arms-length sales organisation allows an airline to develop new markets for its products and services.
This was a key factor in the creation of Mercator, the IT joint venture between Emirates and Swissair, says Tim Rickets, Mercator's business development manager. Emirates' geographical position and its historical and cultural links enhance Mercator's access to Middle East markets for Swissair systems.
Sharing risks and development costs.
This point is aptly illustrated by the creation of the European computer reservation systems. In recognition of financial resource limitations, European airlines created the Amadeus and Galileo consortia, which then serviced each individual airline's global distribution requirement. The risk of going it alone was minimised to each of the associated national carriers.
Will the use of an external vendor free management to concentrate on the core business?
In theory, when an external IT vendor provides fixed price services, airline management is able to focus on core business activities.
In practice however, while the overall cost to an airline may be reduced, the job roles of retained airline IT employees may change. IT outsourcing requires 'policing' and contract verification, such that the burden of IT service management may increase, warned Lisa Fournel, chief information officer, Air Canada, at an Iata outsourcing conference.
Dislodging the status-quo
Many airline marketing executives believe their IT departments to be unresponsive, inflexible, and unable to perform on time and to budget. Moving IT outside the core airline structure is seen by some as a means to both ignite an entrepreneurial spirit and to create a better working relationship.
In contrast the long-term duration of outsourcing agreements may lead to a malaise when the contractor's enthusiasm wanes.
No two airlines face the same problems. And no universal arguments for re-structuring exist, since each airline needs to balance its IT reorganisation against internal and external strategic considerations:
1 Outsourcing may narrow an airline's flexibility to create alliances that include passenger servicing, codesharing, freight, frequent flyer programmes and other service elements, if revamped systems differ from established airline IT conventions, or from those of their proposed partner.
2 Data security and commercial integrity are major concerns for all airlines in any outsourcing transaction. While vendors claim that their systems are secure, the onus to maintain vigilance will always remain with the airline.
3 Retention of intellectual property rights (and re-sale rights) is not new to either the software or to the airline industry. Mishaps can best be avoided by well-crafted contractual arrangements.
4 The assurance of backup is vital to continuity of operation in the event of failure or an even greater catastrophe.
5 The correct valuation of all the assets that are contributed by each party to the joint venture is crucial. In particular, the value of goodwill and reputation within the industry, if the purpose of the venture is to commercialise the airline's products, needs to be commonly agreed. Under- or over-valuation may exacerbate elements of dissatisfaction once an agreement is implemented.
The true opportunities and risks presented by subsidiary creation, joint venture formation and outsourcing are often misunderstood and underestimated. Some airlines that have outsourced all or some elements of their IT operations become disenchanted after the initial honeymoon period. Often this dissatisfaction can be directly attributed to inadequate contract provisions and service level agreements.
Nevertheless, the same senior airline executives who express mild dissatisfaction with outsourcing arrangements also value them for a difficult to measure ancillary benefit - the time to focus on other matters. One thing is certain, the practical, contractual and technical complexities of IT restructuring are not trivial.
Source: Airline Business
