Continental Airlines: Outsourcing IT To

Continental Airlines: Outsourcing IT to Support Business Transformation Teaching Note

Continental Airlines entered into a ten-year outsourcing agreement with EDS during the time when Continental Airlines was suffering financial setbacks and bankruptcy. This agreement was initially designed to provide expertise to Continental in an area that was not a core competency, and to also help cut costs for the airline. However, Continental successfully turned their business around in the mid-1990s, and this case discusses the implications this has for the relationship between Continental and EDS. While this relationship had worked well initially, there were some strains developing by the mid-1990s, and this case focuses on where Continental should go with their relationship with EDS.

For some background on Continental Airlines during this time of transition that goes beyond what is available in the case, see Greg Brenneman’s article in Harvard Business Review, “Right Away and All at Once: How We Saved Continental,” September/October, 1998.

While this case focuses on Wejman and her dilemma on where Continental should go in the future with their agreement with EDS, there are also a number of other discussion questions you can use in class to help students understand the nature of outsourcing and its impact on an organization’s ability to use IT competitively.

Discussion Questions

1. Why is it necessary to have top management support for the implementation of technology innovations?

In this case, it’s obvious that top management support is important in all aspects of the business. Wejman noted in the case that the management team of Continental viewed new technologies as a means of continuing the progress that Continental had made.

Neils Christensen and Keri Pearlson prepared this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation.

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2. What do top managers need to know about IT in order to run their business?

Senior managers must know what technology can do and what the impact of that technology can be on their organization. Many of the innovations and changes in operations that Continental’s management team embarked on required IT support, and without that IT support, those changes likely would not have been successful.

3. What are the advantages to a firm like Continental Airlines of outsourcing there IT operations? What are the disadvantages?

Continental outsourced for two primary reasons: to save money and to allow the management team to focus on their core competencies. Continental Airlines was in serious financial trouble when they negotiated the outsourcing agreement with EDS, and this agreement provided some breathing room for the firm (though not enough to keep it out of bankruptcy). Firms that outsource any part of their organization frequently cite the second reason. Most firms have areas that are not central to their business, and the management team is not necessarily knowledgeable enough to effectively manage those areas. Thus, we frequently see firms outsourcing functions like food service in their dining facilities, grounds keeping, house keeping, and building and vehicle maintenance. IT services in a firm is another area that many firms consider outsourcing to experts so that the internal management can focus on what they are good at.

In terms of disadvantages, whenever you outsource a part of your firm, you lose some control. You must put in place some way of monitoring compliance by both parties to the contract. In the case of a long-term contract in the IT field, technologies and users needs are going to change rapidly, so the contract must be written with enough flexibility to assure that the firm’s needs are met as well at the end of the contract as they are at the beginning. Another disadvantage is that while you have given control over your IT to experts, those experts do not necessarily have the best interests of your firm in mind – after all, they work for someone else, not your firm. At best, they have mixed loyalties.

4. Why must long-term outsourcing contracts be flexible?

In the IT field, technologies change very rapidly. In addition, the business changes which frequently require changes in technologies. A good example of this from the case is the shift in technologies from mainframe to client-server, and if the case were written today, the shift would be to web-based applications. Both the technologies and the business needs have changed. If the contract is not flexible enough, the firm will be stuck with inadequate support on the newer technologies to enable it to exploit them for business advantage.

Continental Airlines Teaching Note Page 2 5. What options does a firm face at the end of a long-term outsourcing agreement? Could Continental easily end this contract and bring their IT function back in-house?

In theory, a firm has at least three options at the end of an outsourcing contract: renew the contract, outsource to a new vendor, or bring the operations back in-house. The easiest of these three would be to renew the contract, since at the end of a ten-year contract like Continental has with EDS separating the Continental IT operations from EDS would be very difficult. The case acknowledges that the contract has built into it mechanisms for termination, but it also notes that it would require a year or more to effect such a separation. Thus, selecting another vendor or bringing the operations back in-house would be very difficult (for an example of a firm faced with trying to bring operations back in-house, see the General Motors case by Keri Pearlson in this casebook).

6. If a firm’s entire IT department is outsourced, is there still a need for an internal IT department? If so, what would their role be?

In general, the internal IT department would be responsible for monitoring the relationship with the outsourcing provider, and providing IT consulting expertise within the firm. Wejman headed the IT department at Continental, and was responsible for IT strategy within the context of the business objectives as set by the top management team. She was also the advocate for technology within the firm. Finally, she was responsible for coordinating Continental’s relationship with EDS.

7. How can a firm coordinate their internal IT and outsource provider’s operations?

Continental provided coordination between their internal IT staff and the EDS staff in a number of ways. First, the located key people from both firms in a common location, so that interaction between them could be face-to-face. They utilized a number of communication channels, both formal and informal. The formal mechanisms included project review meetings, joint committees, and monthly close meetings. Each of these are described in the case.

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