Historically, outsourcing has always been seen as a cost-cutting exercise, and slicing out cost is still part of the equation, especially in today's stressed economic climate. But today's strategic partnerships are also about achieving ongoing efficiencies, innovation and improvement to the mutual profit of both partners.
Outsourcing partnerships in the airline sectorhave evolved considerably in the past decade. Airlines of all shapes and sizes are seekingstrategic relationships withpartners who really understand their business, and who can work closely with them to solve the challenges of a fast-changing marketplace.
Whetherfreeing upinternal IT teams to focus on technologicalstrategy, innovation and core business-facing issues, or looking for a technological jump startor helping re-engineer their business model, airlines wantagility and flexibility from their outsourcers.For outsourcers this means investing in innovation and coming up with new services. They are extending product and support provision into taking on the fulfilment and providing software and technology as a service.
So just how close are the relationships between airlines and outsourcers? For top tier airlines with mature partnership models, partners are closely integrated into the technological development of the business. This makes good business sense, as Bill Miller, managing director IT services at Continental Airlines, explains: "When they are integrated the man feels your pain. It's in his long-term interest to show you he can reduce your costs."
Continental's outsourcing partners are not just engaged in the day-to-day work, they are also involved in the planning and budget processes. "We work as an integrated team so the service provider sees and understands the business issues and requirements and can reach inside their organisation to provide solutions," says Miller.
Continental has a structured programme of meetings with its partners at different levels to foster understanding about its business and what it is trying to achieve, so those partners can overlay their knowledge of the industry and technology. "People who treat service providers as vendors deprive themselves of the feedback that would be beneficial to them," observes Miller.
British Airways has a four-tier model for its smart sourcing approach. At the top is BA direct and underneath service management, technology and commodity services, with partners bringing different attributes and roles.BA chief information officer Paul Coby says: "The key differentiator in the modern airline is how you put the technology together and that's what the CIO's role is - to control the technology that's needed to run the basic commodity and the technology that's used to make a difference, to differentiate yourself."
As well as commodity services such as reservations, BA looks to some partners to be involved in application support and development, and to be comfortable with innovative technologies and ways of working. For example, partners who can work in Service-Orientated Architecture. "If you get it right you can add people's service into your architecture and expose them to your customers more quickly," says Coby.
Another innovative approach for BA is agile development, co-locatingIT and business people in multi-disciplineteams to work in short cycles. For instance, the part-miles, part-cash facility within BA's air miles frequent flyer scheme was built in three two-week cycles. "Some cycle teams have got our partners embedded in them - we're miles ahead of the game here possibly, it's quite adventurous in the IT world," says Coby.
Some newer carriers - which do not come with legacy technology baggage - are eyeingstrategic partnerships to helptheir growth ambitions. Etihad executive vice-president information and technology Richard Dawson sees outsourcers as keyto future growth. "Outsourcing gives us an opportunity to plan for our future," he says. "We don't want Etihad to have a large IT department. We would prefer a small core team of very capable people and to work through third parties."Etihad already outsourcescommodity services such as desktop managementand its selection criteria is the potential for strategic partnership "so we get to apoint where the partners are helping you to manage your business".
Etihad also plans to introduce SOA, and outsourcing is a way of accessing specialist skills. "We are looking for partners who might be able to help us, for example build the middleware platform, and if that's successful we will extend the outsourcing," says Dawson.He is looking for partners who can offer continuous improvements, but recognises it is a two-way street. "It's not just their continuous improvement, it must be yours. They might say 'If you did A, we can improve our service by B',so the continuous investment is mutual."
Virgin Blue signed up for remote management of infrastructure for a production system last year. It has moved from internalto externally managed data centres, and is looking for partners for applications support. The aim is to keepa tight focus for its internalIT team. "Internal IT becomes focused where knowledge of Virgin Blue and the airline industry makes a difference," says David Harvey, general manager information technology.
Virgin Blue's approach is selective and aims to establish long-term partnerships that can be built upon. "It's as much about improving the quality of our delivery," adds Harvey. "I don't think it could be cost saving, but it's cost smoothing."
The exception to this outsourcing trend is low-cost carrier Ryanair. True to its cost-paring business model, it focuses on price. "They do not see any strategic partnership or strategic development. They simply look at it from the cost perspective," says Andreas Diederich, managing director of airline sales and marketing outsourcer Airline Industry Consultants. "We have contracted now for Ryanair for more than five years, but it's a pure cost negotiation and targets are given."
In many respects today's leading outsourcers are similar to business advisers. AICleverages its distribution, administration and call centre expertiseto advise airlines. "We also consult with airlines and tell them where they can adjust their IT internally to make processes cheaper and quicker," says Diederich.
International Business Services Group chairman and chief executive VK Mathews takes a similar view, defining the partnership as one "where you help the customers or facilitate business process changes in the client environment.It's helping our customers to redefine and re-engineer their businesses".
Emirates' technology solutions arm Mercatorhas a foot in both sides of the outsourcing partnership. It has teamed up with Infosys Technologies to establish an off-shore development centre in India to outsource maintenance and to help it ramp up development project work on an as-needed basis, improving time-to-market of new offerings. At the same time Mercator also provides revenue accounting, cargo operation, customer relationship management and loyalty solutions and hosts other Middle East airlines.
"Emirates' position is it is very happy not to outsource revenue, reservations and departure control because that enables the airline to do more with it in an integrated fashion than if it goes to Amadeus or the like, and that integration is what we're talking about to our existing customers," says Mercator vice-president Duncan Alexander.
A strategic outsourcing partnership can givestart-ups and network carriers a technological jump start. For example, Mercator set up UAE cargo carrier Midex with a new generation cargo systemin fewerthan 70 days. And last autumn SITA unveiled a 10-year joint venture with Tunisair and local partner MEDSOFT.Tunisair's driverfor the IT investment wasimprovingits operating performance whichwould have been difficult under bureaucratic government ownership.
SITA senior vice-president new ventures Norbert Steiger explains that a core Tunisairteam manages interaction with the new IT company, which has flexibility to invest in new technology, be more reactive and, on the staffing side,upscale the know-how in the airline's environment.This 10-year deal contrasts withshort-term contracts, preferred by smart sourcers like BA. But Steiger says: "Most airlines in the emerging markets, especially if you look to tier three orfour markets, these airlines are too small, don't have the critical mass, critical know-how to do select sourcing." It is cheaper and easier for these airlines to team up with one trusted partner."Tier one and two will go more towards select sourcing modes and more short-term contracts, because they can manage in that way and keep the competition going. For Tunisair the main drive to outsource is not to save costs in IT, they want to invest," says Steiger.
The strategic partnership approach is helping other carriersre-engineer their business models. Under a10-year deal, SITA is overhauling Malaysia Airlines'passenger service applications and services, covering reservations, e-commerce, ticketing and departure control, revenue integrity and fares management. It is also providing MAS with business transformation consultancy.
MAS chief executive Idris Jala explains: "One of the criteria when we looked for a partner three years ago was someone who can help MAS to transform the business processes. We emphasised a lot on this for two reasons: one, we wanted a system that delivers a lower cost per transaction than what we had at that time. This brings value in our outsourcing strategy. And two, given the new highway, we want a partner that helps us transform the way we drive to deliver higher revenue from those driving our business processes."
Idris adds that MAS wants its outsourcers to improve, innovate and make their operations more efficient. "The relationship has to evolve....to understanding our shared values and vision. If we share the same values and culture, it is easier to react or realign future direction in accordance with the challenges."
Sanjiv Puri, managing director of ITC Infotech, agrees: "Progressively, people have realised cost saving is just an event and you have to continuously improve operations.Mature outsourcers look at partnerships, collaboration and more proactive involvement in managing the relationship so that value is actually delivered."The greater level of collaboration and engagement is driving the move to total outsourcing, where the partner also handles fulfilment. Puri explains: "For example, one would start by developing a loyalty or CRM solution, the next step someone could be asked to support it, then the infrastructure, so why don't you handle all the transactions that the system does as well?"
This is certainly an area that Mercator is considering: "We are increasing our footprint in the CRM and loyalty space and beginning to consider whether or not people should outsource their loyalty programmes," says Alexander. "I can envisage that we would not only provide reservations and loyalty but run the loyalty side."
Consolidation is also the name of the game. Instead of one partner developing the system and another providing the transactions, increasingly airlines are looking to consolidate their options. "They can leverage the knowledge that it's consolidating to lower the cost of transactions," says Ravi Pandey, UK head of NIIT Technologies.
Back office solutions
Pandey believes partners will progressively be called upon to see what platform solutions they can provide, particularly in the back office. "I expect financial administration to be a huge area challenge, which I expect that airlines will not do in-house, but will outsource," he says.It is only one small step further on this consolidation route to partners providing software as a service. "We looked at non-linear initiatives two years ago when the credit crunch was on the horizon," says Pandey, adding: "We have a maintenance product as a service. We host it and people only pay for it as they use it."
The pay-as-you-go approach is particularly attractive for airlines with legacy applications that are costly to run or no longer support their business model, but who do not want to make huge upfront investments. "What we're offering is don't invest in CAPEX and the platform yourself, we will host and all you buy from us is the service. That's the trend on the business process outsourcing side of things," says Tata Consultancy Services vice-president UK & Ireland AS Lakshminarayana.
IBS Group head of central and eastern Europe Paul Drury adds: "Tier two and three airlines are incurring huge costs to keep these systems running. If you can offer that as a service, rather than asking them for $10 million upfront, it further makes a business case for them. For the types of systems we're replacing, the new monthly costs are relatively insignificant."
Inevitably this trend will demand that outsourcers have much deeper understanding of their airline clients' business. Says Lakshminarayana: "We offer business process outsourcing that's more vertically integrated. We do not offer run-of-the-mill transactions. We have tremendous experience in delivering operations services - revenue accounting, administration of fares it requires a lot of experience in the airline industry."