Xerox Follows Dell and HP With ACS Purchase

Xerox’s proposed $6.4 billion acquisition of business process outsourcer Affiliated Computer Services is the latest example of a major hardware vendor looking to enlarge its business footprint by increasing its services capabilities.

Xerox’s ACS deal, announced on 28 Sept, comes just over a week after Dell said it is buying Perot Systems for $3.9 billion, and a year after Hewlett-Packard—which already had a formidable services unit—bought EDS for $13.9 billion.

The three deals illustrate a trend of major companies looking to services as a way to add recurring revenue sources and offer customers help at a time when IT environments are growing in their complexity, according to analysts.

For some companies, it’s also a way of keeping up with the competition, the analysts said. HP, with the EDS acquisition, is looking to create a services unit that can rival that of IBM, according to Charles King, an analyst with Pund-IT Research. Dell, which has slowly been building its services business over the past few years, saw Perot Systems as a way to rapidly increase its services capabilities, King said.

For Xerox, ACS offers important BPO capabilities that will enable Xerox’s growing services business to compete with the likes of HP and Dell, said Angele Boyd, an analyst with IDC.

“This is an expansion into an adjacent market that is very strategically important to Xerox,” Boyd said in an interview. “The fit is good.”
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King said for many of these companies the goal is to have a business as consistent as what IBM has created with its IBM Global Services unit. Like most every other business in the IT sector, IGS has seen its revenues slowed by the global recession over the past few quarters, he said.

However, as IT budgets have been cut back and sales of servers and other products have taken a significant hit, IBM’s services business, with its multiyear contracts, “offers a certain amount of flotation when you an iceberg,” King said.

IBM executives reported in July that total global services revenues dropped 12 percent for the second quarter. However, income was up 23 percent, services signings were up 3 percent and strategic outsourcing signings were up 38 percent. In addition, IBM signed 17 services deals greater than $100 million. King described global services as “a rock of stability for IBM.”

In addition, IT continues to become more complex, particularly in the data center, where such technologies as virtualization are seeing rapid adoption. The replacing of hardware complexity with software complexity also is driving the need for software services, he said.

King said it’s unclear how much the trend will grow. Certainly, there are a number of services companies—such as Unisys and CSC (Computer Sciences Corp.)—that could be attractive. The question becomes, Who would buy them? For the most part, those vendors that would make the most sense—such as IBM, HP, Oracle (after its acquisition of Sun Microsystems is complete), Dell and EMC—seem to have services businesses that already are in pretty good shape. In addition, as the stock market continues to move up, so will the price of those companies.

In conference calls with analysts and journalists, executives from both Xerox and ACS said the deal will help Xerox evolve from a printing and document company to a $22 billion juggernaut that can offer a wide range of back-end services on a global scale.

Of that $22 billion, $17 billion will be from recurring revenue, with revenue from services being expected to grow from $3.5 billion in 2008 to $10 billion in 2010. In the second quarter, Xerox reported that its services, outsourcing and rental business generated more than $1.9 billion.

“The lines between business process and document management are blurring,” Xerox CEO Ursula Burns said on 28 Sept.

Customers are looking for technology partners that can not only handle their document management needs, but also offer a range of back-office services to complement what those customers do in the front office, Burns said.

Xerox officials estimate the BPO market at about $150 billion. ACS brings with it contracts with more than 1,700 federal, state, county and local governments, and also has a presence in such sectors as telecommunications, retail, financial services, health care and education. Overall, about 60 percent of ACS’ business is in the commercial sector, with 40 percent in government.

Burns estimated that there is about a 20 percent customer overlap between Xerox and ACS, which gives Xerox about 80 percent of ACS customers that it can now try to sell into.

IDC’s Boyd said adding BPO capabilities to its services lineup makes sense for Xerox, enabling the company to expand what it can offer its customers. Xerox can grow beyond the managed services arena of break/fix, toner replacement and installation, and into an area that includes business workflow services, which is key given that businesses are looking to streamline their business processes to help drive down costs and increase revenues.

“It’s very, very important not only to Xerox, but [to] the industry that Xerox competes in,” Boyd said. Those competitors include HP, Dell—with Perot Systems—and IBM, she said.

The key for Xerox will be executing on the merger. For example, right now Xerox’s direct sales force does not have any experience selling what ACS offers. Training in that area will be crucial to ensuring the deal works out.

“Still, what they bought is terrific because of ACS’ strength in BPO,” Boyd said. “They have a wide portfolio of services.”

The deal with Xerox also will make ACS a more efficient business, according to ACS President and CEO Lynn Blodgett. For example, a major chunk of ACS’ business involves document management, which for ACS is a heavily manual operation. Xerox technology will help ACS automate many of those manual operations, which will help ACS reduce errors and costs, Blodgett said.

Xerox also will give ACS a more international reach. The company has a strong U.S. presence, but not much beyond those borders, Blodgett said.

The deal is expected to close in the first quarter of 2010.