Procurement Outsourcing: of Etihad Airways - Case Study Example

Procurement and Supply: Etihad Airways as a Case Study Name Institution Table of Contents Executive Summary 3 Introduction 4 Etihad Airways Growth Strategy 5 The Importance of Information Technology in the Airline Industry 6 Etihad Airways Procurement of IT Services 8 Procurement Outsourcing 9 Benefits of Outsourcing IT services 10 Conclusions and Recommendations 12 Bibliography 14 Executive Summary Etihad Airways is one of the fastest growing airlines in the world. The airline ranks second in the United Arab Emirates and the third largest in the Middle East. This report focuses on the move by the airline to outsource its IT services to IBM. IT services have become crucial in the success and growth of airlines today. Due to the pressure mounted on airlines by factors such as high fuel costs, increased regulation of the airline industry and terrorism, reducing operational costs has become important for airlines. Airline managers have identified outsourcing as one of the strategies that can help them to deal with the ever-increasing operational costs. Based on this background, Etihad Airways outsourced its IT services to IBM as a way to improve efficiency in its operations and reducing the cost of IT services and operations. The agreement has ensured that Etihad Airways has access to the latest cloud-based technologies which the airline has applied to its business activities to improve its overall performance. The agreement has also benefited the airline in that it can provide improved mobile services to its passengers while onboard its aircrafts. Such benefits have provided the airline with an opportunity to move closer to achieving its strategic objectives. As seen from the Etihad Airways case study, procurement outsourcing can be beneficial for an organization where proper planning has been done. Before outsourcing, managers should ensure that the activities being outsourced are non-core activities. The internal units of the business should deal with the core competencies of the organization while the other non-core business activities can be outsourced. Managers should also be keen to ensure that the third party handling the outsourced services is experienced and has the necessary expertise to deliver quality services. The services or products supplied by the third party should be capable of improving the production capacity and the performance of the organization. Introduction Etihad Airways is the second largest airline in the United Arab Emirates and the third largest in the Middle East. The airline has its head office in Abu Dhabi. The airline commenced its operations in 2003 and has grown to become an international player in the airline industry. Etihad Airways operates more than 1,000 flights in one week and has over 120 destinations across the globe. In 2015, the total number of passengers who used the airline grew by 22.3% from the figure in 2014 to reach 14.8 million passengers. Such increase in the passengers using the airline has increased its revenues and profits to US$9.02 billion and US$103 million respectively (Holcroft, 2015). Other than the passenger transportation business, the airline also operates other businesses such as Etihad Cargo, which accounts for 20% of the airline’s income and Etihad Holidays. Such operations have continued to boost the airline’s growth and increased its presence across the globe. One of the ways that Etihad Airways has been able to grow its customer base is through its contact centers. The airline has three contact centers in Abu Dhabi, Manchester in the UK and Al Ain in the UAE. The airline uses these contact centers as a way to create lasting impressions on its customers. In 2013 the airline introduced measures to boost its in-flight Wi-Fi, mobile phone connectivity and live television connections as some of the ways to improve the customer experience (Etihad Airways 2013, pg7). The airline has made a great effort in investing in information technology as a way to boost their services as part of improving customer satisfaction. In 2015, the airline entered into a ten-year technology services contract with IBM worth approximately US$700 million. The agreement was meant to enhance the airline’s guest experience and develop world-class IT infrastructure and security for efficiency (Etihad Airways, 2015). The agreement means that IBM will provide access to the latest cloud-based technologies and services to Etihad Airways, its group companies as well as equity partners. IBM will transform the airline’s IT infrastructure to ensure that customers receive better services than before. The agreement also means that the airline will provide enhanced mobile capabilities to its guests and employees by utilizing the IBM’s mobile solutions developed under the partnership between IBM and Apple. The agreement also covers technological innovations meant to develop more personalized travel solutions as a way to ensure that Etihad Airways continues to grow its client base (Etihad Airways, 2015). The agreement is part of the airline’s growth strategy. The agreement ensures that efficiency is improved and the airline can reinforce its position in the competitive airline industry. The focus of this report is to discuss Etihad Airways IT services procurement process focusing on the agreement between the airline and IBM. Etihad Airways Growth Strategy Etihad Airways is the national carrier for the UAE. There are many stakeholders that are interested in the growth and expansion of the airline. The government, for example, is an important stakeholder in the airline due to the fact that it owns the airline. This means that the government is interested in seeing the company grow internationally as part of its vision. The airline has also invested in major regional airlines and also has different partners such as Virgin Airlines. Such partners are key stakeholders in the airline. The employees of the airline are also major stakeholders. Employees as are important stakeholders because it is because of what they do that customers continue using the airline. When the employees provide quality services to the customers, the customer base grows which increases the revenue and profits for the airline. The customers or passengers are also important stakeholders for the airline. The customers create the demand for airline services hence they are the source of revenue and also determine the growth and future of the airline. Other stakeholders include suppliers of different products and services such as the servicing of the aircrafts and suppliers of food and beverage, creditors of the airline, agents, and distributors located in different parts of the world who sell the services of the airline and also the competitors. These stakeholders all have an impact on the growth strategy of the airline. Etihad Airways has set a target of flying 25 million passengers a year by 2020. Such a goal means that the airline must have enough planes to carry such passengers and also increase its destination (Etihad Airways, 2008). In 2015, the airline sought to raise $500 million to expand its fleet of planes. The acquisition of more planes means that the airline can venture into new destinations. In 2016, the airline announced its plans to expand into China and Africa as a way to boost traffic flows. The planned expansion means that the company will increase its destinations across the world which also increases the customer base every year. To achieve these objectives, the airline must improve its service delivery. As a result, the agreement between IBM and Etihad Airways ensures that there is improved efficiency to guarantee the success of the growth strategy of the airline. The Importance of Information Technology in the Airline Industry In the last ten years, the airline industry has been under pressure due to various factors such as oil prices, terrorism, recession, restrictive regulations among others that have led to the increase in operational costs. Traditional airlines have also faced constant pressure from new entrants who have maintained low prices. Due to these pressures, airlines have turned to information technology as a way to promote greater operational efficiencies. Information technology has also been used by airlines as a way to improve their performance and competitiveness in the airline industry. Through the use of technology, the airlines have been able to reduce operational cost while improving operational efficiency. Fuel is among the largest contributors to the high-cost burden in the airline industry as it accounts for approximately 30% of the total operational costs (Cederholm 2014, 1). The development of aircraft technology has led to the manufacture of planes with reduced oil consumption rates. New aircraft such as Boeing-787 and747-8 have reduced the consumption of fuel by double-digit percentages. There are also operations which have improved as a result of the development of technology such as maintenance and engineering operations. The use of innovative technology solutions in maintenance has led to the reduction of the costs of maintaining the aircraft. Airlines have also turned to IT to reinforce e-business operations where they offer customers opportunities of accessing their services online. This means that customers today can buy tickets online. This has led to the increase in sales for airlines through their websites. As more customers choose to book their tickets online, airlines have been able to reduce their labor force hence driving the costs down. The mobile business has also become an important part of the airline industry (McIvor et al. 2015, 42). New technologies such as mobile phone check-in, wireless connectivity on-board aircraft among others have become popular offerings by airlines to passengers. Airlines have also incorporated recent technologies in their contact centers to ensure that they acquire as much data as possible on customers and also ensure that the customer experience is satisfactory as they access their services. These contact centers have become a major focus for airlines due to the need to ensure customer satisfaction in the growing competition in the industry. Due to the increasing costs in the airline industry, airlines have turned to information technology to improve their performance and reduce costs (McIvor et al., 2015). Information technology has, therefore, become an important tool in driving down operational costs, reducing labor costs, improving efficiency and ultimately increasing the profit margins for airlines. Airlines have greatly invested in information technology as a competitive advantage to ensure that they maintain a lead over their competitors. Etihad Airways Procurement of IT Services IT services, as discussed above, have become the key focus for airlines to reduce operational costs, improve efficiency and increase their profitability. As such, many airlines in the industry have increased their investment in information technology as some utilize information technology as a competitive advantage. Different approaches have been used by airlines in the procurement of IT services. Some airlines have established IT departments where the best IT experts have been hired to ensure that technology boosts the airlines’ business. A common approach to dealing with the procurement of IT services for airlines has been to outsource such services. Since 2001, the airline industry has incurred operating losses amounting to approximately US$30 billion due to various factors such as terrorism. This has led to various challenges in the airline industry. As a result, airline management teams are faced with the challenge of devising ways to reduce costs and create more flexible and cost-effective operating models. They have to ensure that their airlines not only survive the difficult times but also thrive more than its competitors. One of the areas that the management teams have found great opportunities is outsourcing (Gluckman, 2013). Outsourcing allows the management of the airlines to conduct self-examination and identify the core enterprise of the airline and focus on such business by exploiting its value drivers. Once the airline has identified its core business, the management can go ahead and outsource various non-core operations such as customer service call centers, human resources administration, finance, and accounting as well as information technology (Gluckman, 2013). Other than Etihad Airways, Emirates Airways, one of the largest airlines in the world, has also outsourced its IT services to IBM as a way to reduce the cost of IT services while guaranteeing quality services since the providers of the service are experts in offering IT services (Shah, 2016). One of the emerging patterns in the outsourcing of IT services is the fact that such agreements reveal great investment by airlines in IT services hence raising the question whether outsourcing leads to cost reduction. One of the ways that airlines use in managing the IT budget is by aligning IT services with the airline’s growth strategy (Shimamoto, 2016). The reason airlines have decided to outsource IT services is that they need to get quality services that will stimulate their growth and expansion. As discussed above, information technology has become an important part of reducing operational costs, increasing operational efficiency and increasing the profitability of airlines. As a result, it would be more costly for airlines to establish well-equipped IT departments that will lead them in innovations and producing the right technology to give them an edge over their competitors (Shimamoto, 2016). As a result, outsourcing has risen as a cheaper way of ensuring that airlines have access to the best technological systems and systems to boost their business. Procurement Outsourcing The move by airlines to outsource the provision of IT services brings about the concept of procurement outsourcing in procurement and supply chain management. The Chartered Institute of Purchasing and Supply defines procurement as a business management function that involves identifying, sourcing, accessing and managing external resources needed by an organization to achieve its strategic objectives (CIPS Australia, 2013). Procurement Outsourcing refers to the process of transferring certain procurement activities to a third party with the objective of reducing overall costs or ensuring that a company or business only focuses on its core business or competencies. Non-core competencies of an organization fall under the indirect spend category in procurement. The indirect spend products or services are difficult to control or manage because the management is more focused on dealing and controlling direct spend products and services. Despite such difficulty, it is necessary for the management team to enforce tight control on the indirect spend materials due to the need to increase the savings of the business or company. One of the ways that the management can ensure such tight control over the cost of indirect spend materials is through procurement outsourcing (CIPS Australia, 2013). The management contracts a third party to the source, provide and manage indirect spend materials such as IT services. A business will, therefore, be willing to outsource certain activities or services which, though not forming part of the core competence of the organization, are nevertheless important for the business. This explains the move by Etihad Airways and other airlines to outsource IT services. IT services do not form part of the core competence of Etihad Airways. They are, however, important in making sure that the core competencies of the airline are performed in an efficient manner. The airline chose to outsource the service as a way to reduce the cost of the services and also ensure that it gets quality services despite the reduction in cost. Benefits of Outsourcing IT services The purpose of outsourcing is not only restricted to transferring non-core business activities to a third party provider. Outsourcing requires proper planning to ensure that the third party provider possesses the core competence and expertise in the activity being outsourced. It is important to note that a company outsources because there is an organization that can provide better and quality services than the company itself and also at a lower cost. It is not always that outsourcing will be done to reduce operational costs. It can also be done as a way to provide a strategic focus for the organization by increasing efficiency (IT World Limited 2006, 5). The move by Etihad Airways to outsource IT services has led to several benefits that relate to the productivity and efficiency of the airline. The outsourcing of IT services by Etihad Airways has led to outcomes that could not be achieved by an IT unit or department in the airline. IBM has been in the IT industry for many years which shows expertise. The agreement between IBM and Etihad Airways includes providing access to the recent cloud services which can be used by Etihad and its partners. The outcome of the outsourcing deal is such that Etihad would not have attained such efficiencies and progress through setting up its IT unit. Further, the cost of accessing the IT services has been reduced. This is because other than the cloud services, Etihad can now provide efficient mobile services to its passengers by benefiting from the partnership between IBM and Apple. To achieve such results on its own would have been more expensive for the airline and would have taken more time to actualize (Aalders, 2004). The outsourcing deal has provided a faster and less costly way for the airline to improve its efficiency. The improvement of the airline’s businesses processes is another benefit for the outsourcing deal. The agreement between the two organizations has ensured that Etihad can access the recent technology developed by IBM for use in its operations. As a result, the businesses processes of the airline can now be done more effectively and efficiently leading to more production and quality service delivery. One of the important benefits associated with the outsourcing of services is the delivery quality service (Aalders, 2004). In this case, IBM is a different economic entity with a need to make profits for the sake of its shareholders. As a result, IBM as the service provider will strive to deliver quality services. There is also a guarantee of quality in output due to the fact that IBM as the service provider has staff with a higher level of skill and education than those in the Etihad’s IT department. The service provider also ensures quality in planning and budgeting of the provision of the service to ensure that the costs of providing the service do not damage its revenues. The outsourcing of IT services by Etihad also helps the airline to stay ahead of the competition or to keep pace. One of the IT related challenges facing many companies and businesses is the lack of the capacity and capability of their internal IT departments or units. The benefit of outsourcing is that the outsourcer, such as IBM, can provide the required resources reasonably quickly (Aalders, 2004). This has helped Etihad to acquire new systems and support business activities in a way that would have been impossible if the airline was relying on its internal IT unit. The availability of the resources and their application in the business activities of the airline helps it remain competitive. Conclusions and Recommendations Procurement outsourcing has emerged as an important tool for businesses and organizations to source for certain services and products from third parties in a way that reduces the cost of procuring such services and ensures efficiency in the organization. There are different challenges facing the airline industry today such as terrorism and the high cost of fuel. These challenges have driven costs upwards making it difficult for airlines to remain profitable. Such challenges have led to the need for the management teams in these airlines to deal with these challenges by reducing operational costs to ensure that the airlines remain in business and maintain their competitive positions. The outsourcing of indirect spend services and materials has emerged as a sure way to revive the airlines. For Etihad Airways, outsourcing IT services to IBM has improved its efficiency and its performance. The outsourcing deal between Etihad Airways and IBM has ensured that Etihad has access to the most recent technology to employ in its business activities. It has also made IBM IT resources available to the airline hence aiding in promoting better performance. Such resources could not have been available if the airline was relying on its internal IT unit. There are different benefits that arise from procurement outsourcing such reduced cost of operations and increased efficiency. These benefits have helped Etihad Airways to move closer to achieving its strategic goals. Despite the great benefits associated with procurement outsourcing, there is also potential for failure where a company fails to plan before outsourcing. There are different strategies that companies, whether in the airline industry or not, should apply to ensure that procurement outsourcing achieves the intended outcomes. First, business managers should realize that outsourcing is done for the non-core competencies of the business. This means that the core business of the organization should not be outsourced since that is the primary business of the organization and is the responsibility of the internal unit. Business managers must first conduct an assessment and determine the non-core competencies which can be outsourced. The selection of the right third party to provide the outsourced services is also a key component in ensuring the success of procurement outsourcing. Business managers must look for a third party with the experience and expertise in providing the services required. Such measures will ensure the success of procurement outsourcing for businesses. Bibliography Aalders, R. (2004). IT Outsourcing: Making it work. Available: http://www.fujitsu.com/downloads/WWW2/whitepaper_IT-outsourcing.pdf [Accessed 4 January 2017]. Cederholm, T. (2014). Must know: The role of technology in the airline industry. Available: http://marketrealist.com/2014/09/must-know-the-role-of-technology-in-the-airline-industry/ [Accessed 4 January 2017]. Chartered Institute of Purchasing and Supply (2013). The definitions of procurement and supply chain management. Chartered Institute of Purchasing and Supply, Australia. Etihad Airways (2008). Etihad Airways facts and figures. Etihad Media Center. Etihad Airways (2013). 2013 annual report. Available: http://resources.etihadairways.com/etihadairways/images/E_Book/HTML/AnnualReport2013_English/assets/common/downloads/Annual%20Report%202013%20English.pdf [Accessed 4 January 2017]. Etihad Airways (2015), Etihad Airways signs US 700 million technology services cloud collaboration with IBM to transform global operations. Available: http://www.etihad.com/en-us/about-us/etihad-news/archive/2015/etihad-airways-signs-us-700-million-technology-services-cloud-collaboration-with-ibm-to-transform-global-operations/ [Accessed 4 January 2017]. Gluckman, H. (2013). Airline outsourcing. Technology, Retail and Enterprise Businesses, Information Services Group. Holcroft, A. (2015). Case study-Etihad Airways. British Telecommunications Plc. IT World Limited (2006). IT outsourcing: A BuyIT supply chain guideline. BuyIT Best Practice Network. McIvor, R., O’Reilly, D. and Ponsonby, S. (2015). The impact of internet technologies on the airline industry: Current strategies and future developments. Strategic Change, Vol. 12(3), 31-47. Shah, S. (2016). Emirates signs 10-year $300m IT services deal with IBM. Available: http://www.computing.co.uk/ctg/news/2460669/emirates-signs-10-year-usd300m-it-services-deal-with-ibm [Accessed 4 January 2017]. Shimamoto, D. (2016). A strategic approach to IT budgeting. American Institute of Certified Public Accountants. Read More