Offshore Outsourcing at Worldspan

James O. Nelson Director, Enterprise Technology Solutions Worldspan

Ephraim R. McLean Regents’ Professor and Smith Eminent Scholar’s Chair in IS Georgia State University

Introduction

The outsourcing of computer applications and computer-based activities is not new. Having its roots in IBM’s Service Bureau Corporation (SBC) in the 1930s, the transfer of an internal process or activity to an outside third-party is nearly three- quarters of a century old. It was greatly expanded by Ross Perot and his company, EDS, under the label of “facilities management” in the 1970s. When Kathy Hudson transferred most of Kodak’s computer activities to IBM, DEC, and other companies in the late 1980s, the name given to this undertaking was “outsourcing,” the term that is used to this day.

Following the success of the Kodak outsourcing contract, a number of computing vendors and service providers entered the outsourcing field. However, most of these outsourcing contracts represented merely the transfer of existing corporate IT employees to the outsourcing company or “re-badging” them as it is sometimes called. Often these employees sat at the same desk and did the same work as before; only the source of their paycheck was different.

All of this changed in the mid-1990s, however, largely stimulated by the Y2K frenzy. Lured by the appeal of low-cost IT talent in India and elsewhere, outsourcing vendors began shifting their IT activities from the U.S. to overseas. Thus “offshore outsourcing” came into prominence. The U.S. companies were soon joined by Indian firms like Tata, Wipro, Infosys, and others who launched their own outsourcing operations.

But offshoring is not an unmixed blessing. Companies are beginning to realize that there are indirect costs that must be taken into account. Salaries in India are experiencing rapid escalation, annual staff turnover is over 30 % in some firms, communication across time zones is difficult, and cultural differences must always be taken into account.

All of these factors – both positive and negative – faced Worldspan in 2002 when corporate IT management began to explore ways whereby they could address the cost pressures they were facing. The Company

Worldspan is a leading independent provider of computer services to the airline and travel industry. Its customers include Expedia, Orbitz, Priceline, and Delta Air Lines among others, with 1,860 employees and corporate revenues of $953 million in 2005.

Worldspan’s history dates back to the late 1960s with the development of two airline-sponsored computerized reservation systems (CRS): DATAS II at Delta Air Lines in 1968 and PARS at TWA in 1971. Initially, these two CRSs were for internal use only; but in 1976 TWA began installing PARS in travel agencies, followed by Delta with DATAS II in 1982. In 1986, Northwest Airlines purchased 50 percent of PARS; and in 1990, Delta, Northwest, and TWA agreed to combine DATAS II and PARS to form Worldspan, with headquarters in Atlanta, Georgia. Worldspan’s data center in Atlanta became fully operational in 1993 and its systems unification effort was completed the following year. Worldspan now has operations in six cities on three different continents.

The company currently serves nearly 20,000 travel agencies in over 70 countries worldwide; and last year its computers handled 87.2 billion transactions, with an average of 39.6 million unique reservations on the system at any one time. Its peak processing rate is 5,628 messages per second and it has 119 terabytes of online disk storage. Because computer services are the business at Worldspan rather than supporting the business, the importance of providing accurate, reliable service to its customers is paramount. In addition to providing airline systems, reservations, ticketing, and office automation services to domestic and international travel agencies, Worldspan operates the booking engine for over 50 percent of all Internet-based travel-agency bookings in the world.

Why Outsourcing?

In early 2002, Worldspan, like many companies, was experiencing substantial cost pressures; and they began to explore the possibility of outsourcing some of their software development activities. In particular, offshore outsourcing looked especially attractive to them. Moreover, they soon realized that there are other potential benefits beyond just cost savings. In particular, they anticipated achieving three major benefits through offshore outsourcing, all of which they have now realized:  Acquiring a lower-cost, and yet highly skilled, professional workforce,  Achieving “process uplift,” or improving the capabilities of the in-house professional staff by drawing on the expertise of the outsourcing vendors, and  Gaining staffing flexibility, enabling the ramping up – and down – of the workforce in response to market conditions.

Although lower costs were the initial rationale for offshoring, Worldspan quickly realized they were acquiring the services of highly skilled computer professionals, in many instances equal to the skills of their existing workforce (although not always as experienced), all working for well established and respected vendors in India. Thus they were not making a compromise in quality in order to achieve cost savings.

This led to what Worldspan calls process uplift, or the ability to take advantage of the experience and skills of their vendors to improve the internal operations at Worldspan. One example of this is CMMi certification from the Software Engineering Institute (SEI). Worldspan is currently attempting to achieve CMMi certification for their own organization; and they have contracted with one of their vendor partners, who is at CMMi Level Five, to assist them in this effort. This vendor is an authorized CMMi Assessment and Certification Company and they are currently conducting a “gap analysis” of Worldspan’s internal development processes to help them move from Level One to Level Two this fall.

Also, as is true of many organizations, Worldspan, prior to outsourcing, was somewhat insular in their internal processes; they had no basis of comparing their in- house development processes to those of other companies. Outsourcing allowed them to observe the processes of their vendors; and, in certain instances, they found ways to improve they own processes. This cooperation on the part of the vendors to assist with this process uplift is so important to Worldspan that they have it written into the Master Services Agreements with each of their vendors.

An example of one such internal improvement is in “billable hours.” The work of each staff professional is divided into billable hours produced – productive work charged to a specific project – and infrastructure – training, vacations, and other non-billable work. This ratio is a key indicator of the in-house staff productivity. With the opportunity to observe the work patterns of their outsource vendors, Worldspan was able to adopt some of their “best practices” and improve their own internal productivity, thereby increasing the billable hours they could deliver without the need to increase the size of their staff. Before outsourcing, Worldspan was averaging 1,650 billable hours per employee per year. With the assistance of their vendor partners, this was increased to 1,780 hours per year – an increase of 7.9 percent.

Lastly, staffing flexibility is essential, given the extreme economic swings that are occurring in the airline industry which comprises Worldspan’s main business. The ability to expand, or shrink, the size of the vendors’ staff that are committed to Worldspan’s projects, while keeping their internal workforce constant, has proved to be extremely advantageous. The flexibility that this provides would alone justify the outsourcing arrangements that they have undertaken.

A Multi-Vendor Strategy

Initially, Worldspan undertook a small project with IBM in India to gain experience with offshore outsourcing and to tap the global experience of IBM. However, they soon realized that substantial benefits could be obtained by undertaking a multi-vendor strategy. In 2002, they began a pilot project with Tata Consultancy Services (TCS), which concluded successfully two years later and led to a major contract with TCS in 2004. More recently, because of the special expertise of InterGlobe Technologies in airline CRSs, they inked a third outsourcing contract. Their present Master Service Agreements (i.e., their contracts) with these three vendors consist of the following personnel: 37 IBM staffers in Gurgaon and Pune, India; 137 TCS personnel in Chennai and Mumbai, India, with 38 more in Kansas City and Atlanta, and 22 in Montevideo, Uruguay (more about this later); and 48 InterGlobe staff in Gurgaon, India, and 15 more in Kansas City and Atlanta.

This multi-vendor strategy has a number of aspects that have proved to be highly beneficial to Worldspan. They are as follows:  Not placing all the eggs in one basket,  A broader pool of resources upon which to draw,  The natural competition that occurs among the vendors,  The ability to obtain best-of-breed solutions,  Built-in benchmarking, allowing comparisons among vendors,  Through Master Service Agreements, projects can be multi-sourced among vendors, and  With multiple vendors, a “near”shore/offshore strategy can be pursued.

Invariably, problems will arise in any client-vendor relationship; but if there is only one vendor, the client has few options when such problems occur. With multiple vendors, however, if one vendor falters, the work can be shifted to one of the other vendors, as has already happened to Worldspan in one instance. One of their vendors had significantly fallen behind schedule; and after repeated attempts to correct the situation, Worldspan decided to shift the project to one of the other vendors. This was accomplished with a minimum of delay; and, as a side effect, the offending vendor’s performance on its other projects improved markedly. This illustrates the benefit of having a healthy competition among vendors and the value of benchmarking their performance in the awarding of new and follow-on projects. In order to ensure such competition among vendors, the Master Service Agreements are written in such a way as to allow multi-sourcing of individual projects among two or more vendors, further increasing Worldspan’s flexibility in project management.

Most vendors, especially the larger ones, will claim that they have all the resources that are needed for any project. In reality, some companies are better at some things than others and their skill sets reflect this expertise. By using multiple vendors, Worldspan has been able to tap into these specialized skills, drawing on a broader pool of resources. For instance, as discussed above, Worldspan entered into a contract with InterGlobe Technologies in order to tap its special expertise with airline reservation systems.

Nearshoring

The last item in the list above introduces a concept that Worldspan has found quite valuable to them, that of “near”shoring. As discussed above, the first decision that companies must make is whether or not to outsource at all; and, if so, how much and will it be onsite – re-badging – or offsite? If it is to be offsite, will it be onshore or offshore? This has typically been the choice pattern. In the case of Worldspan, they currently split their work as follows: Onsite  Technical leaders,  Business analysts,  System design, and  Project management. Offsite  Application development,  Testing,  Maintenance,  Technical support, and  Business process support.

The next step was the decision to go offshore to India to take advantage of the cost/quality opportunities. But, in the case of TCS, this vendor had locations all over the world, not just in India. In particular, they have established centers in a number of western hemisphere locations, including Montevideo, Uruguay, and Kansas City. This provided Worldspan with the opportunity to leverage their already-existing relationship with TCS and establish a “near”shore presence in these two locations. The Uruguayan center offers a number of advantages:  Business hours are the same as in Atlanta,  Geographical diversification,  A follow-the-sun development cycle,  Reduced costs through a better staffing mix,  A Spanish language site to support Spanish-speaking customers, and  Fewer immigration and visa processing problems.

Having a development center in Uruguay in the same time zone as Worldspan’s headquarters in Atlanta offers a distinct advantage over their outsource vendors in India, which are ten hours out of phase with Atlanta. On the other hand, this allows a follow-the-sun development cycle, where TCS in Chennai, India, can work on a project during the day; pass it onto their center in Montevideo, Uruguay, where they work on it during their day; and then they pass it back to Chennai, to start another day – effectively creating a ‘round-the-clock development cycle. Also, this geographical diversification provides some protection from possible disruptions in any one site. Lastly, because of the lighter demand on the U.S. Consular Service in Uruguay for visas and permits to work in the U.S. – as compared to the huge demand for them in India, often causing delays of months or even years – these documents can be obtained in a relatively short period of time, adding to the attractiveness of Uruguay.

Risk Mitigation Another aspect of Worldspan’s outsourcing strategy is its attention to risk mitigation (see the table below). Two key aspects of this risk mitigation strategy are governance and measurement. Worldspan has created a Global Resource Office (GRO) charged with overseeing the Master Service Agreements, the Statements of Work, and the Service Level Agreements that are in place with each of their vendors. This GRO produces the metrics, benchmarks, time management reports, dashboards, and for so forth that are central to Worldspan’s staying on top of their outsourcing relationships.

Risk Mitigation Strategies

7X24 development  Share work among existing centers around the world  Establish some services nearshore Productivity enhancements  Use comprehensive metrics in the Statements of Work (SOW)  Have senior-level project leaders onsite  Shift time-and-material contracts to fixed- price contracts Cultural Integration  Promote Indian-American cultural awareness and sensitivity  Conduct subject-matter-expert (SME) training onsite Billing and Invoicing  Have vendors enter their time directly into the Worldspan reporting system  Approve these time reports weekly  Reconcile these time reports against vendor invoices monthly Knowledge Acquisition  Introduce a technical “Knowledge Portal” for the sharing of information  Establish benchmarks for vendors for acceptable levels of turnover Security  List all vendor personnel in the corporate directory  Have dedicated secure-entry centers

Some of these risk mitigation strategies, such as 7X24 development, have already been discussed above, as have some of the efforts that have been undertaken to improve productivity. Having senior-level project leaders onsite has been particularly helpful in accomplishing Worldspan’s process uplift initiatives, as has been the establishment of the technical “Knowledge Portal” for the sharing of best practices. The cultural issues, sometimes troublesome in some offshore outsourcing arrangements, have been faced head-on, with personnel from both sides visiting their opposite numbers, eating their food, partaking in their festivals and events, and thereby developing an awareness and sensitivity of each other’s cultures, Another issue, often the subject of disagreement, is service billing. Worldspan has addressed this by having all of their vendors post their time reports directly into Worldspan’s system, where they are approved on a weekly basis and reconciled with invoices on a monthly basis.

One risk factor that all companies doing business with Indian outsourcing firms face is turnover. Given the rapidly escalating demand for services and the limited supply of qualified professionals in India, salaries are being bid up and people are switching jobs for more money. Turnover rates of 30 percent per year are not uncommon. To protect themselves against this, Worldspan has written into each of its Master Service Agreements with its vendors that personnel assigned to their projects cannot be reassigned without the approval of Worldspan. Naturally, if personnel leave the vendor’s employment, Worldspan cannot control this; but, if the level of such turnover on their projects become excessive (as defined in the MSA), the vendor is obligated to pay a penalty to Worldspan. Thus the vendors have a decided incentive to keep their employees happy so that they do not leave.

On governance, Worldspan has gone to great lengths, with the assistance of an outside law firm that specializes in outsourcing contracts, to craft detailed Master Service Agreements, Statements of Work, and Service Level Agreements with each their vendors. By having such agreements in place, with deliverables, timely responses, and staff augmentations clearly spelled out, the areas of dispute have been greatly reduced.

Another related effort in governance is the move from time-and-material costing to fixed price contracts. The first step in this is staff augmentation, where the vendor “augments” the Worldspan staff by doing application development and testing on systems designed by Worldspan. The next step is out-tasking, where a much larger percentage of the work is tasked to the vendor, from detailed design through to the delivery schedule, including TQM, training, and project management. The final step on the road to totally fixed priced contracts is what Worldspan calls portfolio. Here only the system architecture and acceptance testing and implementation are performed by Worldspan; all the other steps are the responsibility of the vendor, thus vastly simplifying the governance issue.

Keys to Success

Worldspan has identified a number of factors that have contributed to its outsourcing success; although it is still a “work in progress,” and they are still learning. Many of these critical success factors have already been discussed above; they are summarized here. Multi-vendor strategy. The decision early in their outsourcing efforts to pursue a multi-vendor strategy has been a key success factor for Worldspan. For the many reasons outlined above, this has reduced their risk exposure, leveraged the natural competition among their outsourcing vendors, and provided a much broader talent base than any one firm could have provided

Process uplift. By being open to new ideas and tapping the expertise of their vendor partners, Worldspan has been able to learn from them and improve their own internal staff productivity.

Governance. Through the creation of the Global Resource Office, Worldspan has a central, but adaptive, sourcing office. This office, coupled with the senior-level project leaders who are onsite, the frequent visits to vendor sites around the world, and the constant monitoring and fine-tuning of the relationships, has allowed Worldspan to exercise careful control over its outsourcing activities.

Measurement. It goes without saying that none of the above would be possible to manage and maintain without comprehensive measurements. Fourteen major reports for management are produced on an on-line basis, backed up by more detailed reports for technical managers.

Culture, mutual respect, and trust. “Partnership” is probably an over-used and mis-used word, but it aptly describes the relationships that Worldspan has built with its vendor partners. This cultural understanding and trust goes a long way in easing the many differences that naturally arise.

Legal guidance. When Worldspan began negotiating their first outsourcing contract, they were quite inexperienced and thereby at a distinct disadvantage in dealing with the outsourcing vendor, that had considerable experience in such negotiations. Worldspan therefore retained the services of a law firm that had extensive experience in outsourcing contracts, and this proved invaluable. However, they made sure that the resultant contract was business-driven, not driven by the lawyers.

Top-level support. Although last, this factor is by far the most important of all these listed Executive support at the “C” level was crucial, especially in the beginning, where it was clear that costs would climb before the savings would kick in. Also, the formation of an executive steering committee helped clear the way for the road blocks that inevitably occur.

The Results

Worldspan began its offshore outsourcing in 2002, with the first major contract let in 2004; thus they have less than two years of experience. Yet, according to Ron Richards, Worldspan’s Corporate Director of Internal Auditing, measurable gains have already begun to be realized. Using Worldspan’s internal productivity metric of “billable hours produced,” the combined output of the in-house staff and their outsourcing partners has improved by 7.9% in the last year, with a corresponding cost saving of nearly 25%. As more experience is gained, these numbers will be refined.