Completely out-of-control is how John "Bo" Boedecker describes the state of the information technology budgets of some its prospective client airlines. According to Boedecker, Sabre's president, worldwide sales, this can amount to 30-40% annual growth in an IT budget in some cases: "We say to them, that we will stop that growth, we'll put a stake in the sand and say we will do it for this amount per annum."
As a company which has been aggressively pursuing an ambition to dominate as the airline industry's leading IT outsourcer, it knows the outsourcing arguments and motivations only too well. "Seven to eight times out of 10," airlines are expecting operational efficiency or cost savings, and they get it, says Boedecker. The "couple of clients who have paid more for their IT", he argues, had such small IT budgets that the rewards for their businesses have been "astronomical".
Boedecker says Sabre will eliminate the "headache"of glueing together contracts and suppliers as well as the problems of attracting, training and retaining in-house professional IT staff and the associated business discontinuities. "We will provide the technology experts and even the business experts to work with them in their environment."
What Sabre is selling - New Breed Outsourcing - is an all-in comprehensive IT outsourcing deal, providing as many of the individual components as it can itself, while seeking "the best of breed" partners to fill the real or perceived gaps in its expertise. The company may have some work to do to replace its image as a major computer reservation system and on-line travel provider, owned by American Airlines, to a global supplier of IT solutions. It has long worked with network provider SITA and has developed its own increasingly popular applications, but other pieces of the IT jigsaw are lacking.
"Sabre is going to require more certified business partners in the area of desktop services, for example, and we are in the process of developing those relationships," says Boedecker. The company has not always been able to choose its partners. Cathay Pacific, for example, largely demanded a partnership with IBM. The company accepts such joint outsourcing arrangements, or "Smart-sourcing" agreements, as an unavoidable reality of pleasing the customer, but makes its clear that they are largely a function of the client's choice rather than what Sabre has to offer. "We are not moving fast in establishing relationships with EDS and IBM. We generally compete but then we must partner seamlessly with the client when they choose a mixed solution. But our preference is to do it all."
Expanding list
Over the last couple of years, Sabre has forged ahead in outsourcing, a business which accounted for over 40%of the group's $2.3 billion revenues in 1998. The bulk has been from its "total" outsourcing deals. That began with sister company American Airlines, but now includes US Airways, Canadian Airlines, Aerolineas Argentinas, Cathay Pacific, Gulf Air and Pakistan International Airlines. For a majority of these airlines, Sabre "is the primary source of IT services", says Boedecker.
There are some IT activities that Sabre does not perform for these clients, such as the sensitive yield management and customer loyalty applications, which the company will either "migrate" - manage on behalf of the airline - or, as often happens, leave out of the contract altogether. "If we started out after 100% of a clients' IT we may end up with 85-90%," says Boedecker. "But primarily we own their spend and we compete each year for the new spend."
Once a deal to handle budgets which can range from a few million up to $500 million annually is clinched, Sabre's appointed "account executive", in conjunction with the airline information and finance chiefs, and the leaders of the functional business units, then "converts a contract into a partnership".
The contract may start with traditional criteria such as response times or network availability, but these are "imbedded" into a broader agreement which takes into account the airline's growth. Boedecker says that Sabre needs to outline the conditions it needs, including "the moral authority" to implement its solutions, change processes and even suggest business benefits that can be delivered.
Because of the level of involvement and the large upfront costs which are involved, Sabre pushes for them to last 20 years, although airlines resist this and it often settles for 10 years. What airlines get in return for long term commitment is stability. "They know five years out that they can add a route to a network, get it designed, running and implemented and receive the same efficiency as they would if we were competing with another vendor," says Boedecker.
Having entrusted Sabre to do the long-term managing and planning of IT, airlines will benefit from a "much more predictable cost structure over the years," says Boedecker. Beyond costs, however, airlines "are looking at revenue improvements."
"The traditional yield revenue management system that will drive another 2-3 points of direct profit is enhanced in an outsourcing relationship because it is closely integrated with the reservation system and with the pricing. The gearing effect is going up," he says.
Source: Airline Business
