DECEMBER 11, 2006
CEO Guide to Technology
Continental's Outsourcing Eye-Opener
Many stereotypes about sending work offshore don't hold true anymore, says the airline's CIO Ron Anderson-Lehman
The skies are anything but friendly for airlines these days, with high fuel costs, the constant threat of terrorism, and accelerating competition from low-cost carriers. Last year was especially rough for Continental as fuel costs skyrocketed in the wake of Hurricanes Katrina and Rita.
When Rita tore through Continental's home state of Texas in September, 2005, the airline suspended service for 36 hours at its largest hub, Houston's Bush Intercontinental Airport, at an estimated cost of $25 million. By the end of the year, the company estimated that for every one dollar increase in the price of a barrel of crude oil, the company's annual fuel expense would increase by approximately $42 million.
Still, Continental (CAL) has weathered the storms better than some rivals. It has remained out of Chapter 11 in recent years and even managed to return to profitability in the two most recent quarters.
That's due in part to a $1.1 billion cost-cutting drive that involves relying on an outside company, EDS (EDS), to handle some of its information technology operations. EDS, an outsourcing partner since 1991, helped Continental trim expenses by sending some of the airline's IT work to offshore centers in Brazil and India.
Now, Continental is in the process of renewing its account with EDS and some of that business is up for grabs. In the process, Continental CIO Ron Anderson-Lehman is taking a closer look at offshoring. Anderson-Lehman joined Continental in 2000 and became CIO in August, 2004. BusinessWeek.com's Rachael King spoke with him about Continental's outsourcing relationship with EDS and Continental's offshoring activities in India and Brazil.
How has Continental taken advantage of the EDS global network of workers?
We started with EDS in 1991, so we've been doing outsourcing work with them for a long time. My perspective on offshore has always been that I'd be interested in pursuing it through EDS, but not directly, because I like the benefits of offshore but I don't like some of the pains of offshore. And using EDS, I figure they deal with those pains.
What are the advantages of offshoring? Is it price or is it specific skills?
It's definitely the price for us.
Essentially, EDS takes on the challenge of operating offshore centers for you?
Yes, and in some cases because EDS had a presence in those countries for 10 to 15 years, they've learned quite a bit in terms of how to run those centers.
Which tasks are handled where?
We primarily are using India for development work [of some operating system software that runs on a mainframe], and we use Brazil for our finance work and a few other centers.
What are the benefits of having technology work done on a global scale? Is there anything besides cost, such as a faster time to market?
I think there are those opportunities, but in terms of what we're doing with EDS, we kind of viewed it as a replacement of the skill set that EDS was already providing us, but just with a less expensive model. In our specific case, I wouldn't say we've done anything to leverage a different skill set or the ability to use those resources around the clock.
You've said that EDS has helped Continental reduce cost to stay competitive, especially in an era when oil prices are high. How has EDS helped?
The offshore specifically is one. There are other things they've done. After September 11, when we first went about what we needed to do in the changed world, we reduced our internal staff. We went to EDS and asked them to lower our account costs so they shrank their staff and our corresponding costs. That's consistent with the model we use with them, which is we treat their employees very much like Continental employees. So when we reduce our employee base, it made sense that they would reduce theirs as well.
How has Continental's relationship with EDS evolved over time?
Continental was one of the original outsourcing companies. I call it outsourcing 1.0, where we signed a deal with EDS, and one day Continental employees went home from work and the next day they came in and they were EDS employees. The model was that the technology group was moved over to EDS, along with systems and the operations of the systems. As a result, the Continental technology group continued with fewer than 10 employees. All we were really doing was managing the relationships with EDS and monitoring that.
Over the course of time, we're much more about 50/50, with 50% of the resources provided by EDS and about 50% done internally at Continental. We choose to use our internal resources on strategic new work and EDS really keeps our existing systems running. They are the feet and hands on the ground in airports around the world for us. Because they have employees around the world they can help support at those airports and we don't necessarily have to have Continental technology employees around the globe.
How did EDS help Continental prepare for Hurricane Rita?
EDS rallied their troops to make them available to us. We had to establish, in some cases, redundant systems in case we needed to close down headquarters. EDS operates our help desks, and they are generally not located where our headquarters are. There are some advantages to having their staff…help in terms of our help desk at several different locations.
Some companies have faced criticism when they take advantage of lower labor costs with offshoring. How has Continental responded to that?
Because they weren't directly Continental employees that were being replaced, it did not have quite the impact that it might have in a normal offshore relationship. If I were replacing Continental employees with those offshore resources, I think it would have more of an impact. As it is, it's really EDS making the transition.
And because of the timing, relative to [another deal EDS had at the time with] US Airways, they needed the resources anyway. They weren't firing resources and replacing them with offshore, they were sort of moving those resources to support the other account and back-filling that with offshore resources.
In the future, do you think Continental will continue to employ a global labor force through EDS?
I think we will continue to leverage technology partners to provide that offshore contingency. I don't think we'll try to do that directly ourselves. But we're currently in the process of renewing our account with EDS and some of this business is up for a general bid, including the opportunity that other partners might help us in that way.
Is there anything you're specifically looking for when you renegotiate those contracts?
It has been a bit of an eye-opener for us. Some of the stereotypes of offshore don't necessarily hold true anymore; the attitude toward language skills, for example, or the attitude toward the working hours. Several of the firms we've talked to specifically hire people to work shifts that match the U.S. working hours. That was a bit of an eye-opener for me because some of my stereotypes about offshore were probably 5 to 10 years old.
Are there other ways in which offshoring is evolving?
I think that offshore and India were sort of synonymous but the concept is going global. As India has increased its offshore business, costs have increased there and some people are looking to Eastern Europe or China or other places to try to find a more inexpensive, skilled base of workers.
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