Xerox's profitable services growth hinges on analytics and acquisitions
T E C H N O L O G Y B U S I N E S S R ES E AR C H , I N C .
TBR EVENT PERSPECTIVE
Xerox’s profitable services growth
hinges on analytics and acquisitions
Xerox 2013 Investor Conference
New York; Nov. 12, 2013
Jennifer Hamel, Professional Services Practice Research Analyst
Joseph Walent (email@example.com), Professional Services Practice Analyst
Despite Xerox’s incremental efforts to increase services revenues through acquisitions and reduce operating costs
through portfolio adjustments and headcount restructuring, the firm generated lower-than-expected sales and
margin growth so far in 2013. The company continues to face headwinds such as minimal inorganic revenue
contribution, unexpectedly high implementation costs for healthcare platforms and an over-concentration of labor
costs in expensive regions (namely the U.S.). At its 2013 Investor Conference, Xerox laid out a five-plank strategy to
expand services revenues and margins in 2014, including focusing portfolio investments on the firm’s core verticals
such as healthcare, transportation, and customer care and increasing leverage of low-cost labor resources and
analytics to deliver higher-margin services. This plan positions Xerox to transform itself into a services-led business;
however, given the gradual pace at which the firm tackled acquisitions and headcount shifting in 2013, shorterterm initiatives such as its partnership with Cognizant to leverage the India-centric firm’s low-cost systems
integration and development resources will play a much larger role in improving profitability in 2014.
CEO Ursula Burns kicked off Xerox’s 2013 Investor Conference with an overview of the company’s value
proposition and where the firm sees opportunities to differentiate itself in evolving markets such as healthcare,
transportation, education, graphic communications, enterprise IT and customer care. As part of the firm’s overall
corporate strategy to derive two-thirds of its revenue from services by 2017, Xerox emphasizes its ability to drive
clients’ business outcomes, including operational efficiency and revenue generation, through analytics-enabled
solutions to win new business and expand client wallet share. Xerox continues to refine its operating model by
shifting headcount from high-cost to low-cost locations and leveraging partners to improve margins in systems
implementation engagements. In 3Q13, following the costly implementations of the firm’s Health Insurance
Exchange (HIX) and Medicaid Management Information System (MMIS) platforms, Xerox partnered with
Cognizant, an established systems integrator with a larger low-cost resource pool, to minimize the operational risk
of large-scale implementations and maintain competitive pricing.
President of Xerox Technology Armando Zagalo de Lima outlined the firm’s 2014 outlook for its Document
Technology and Document Outsourcing businesses. Although Xerox expects continued revenue contraction in its
printer business, the firm continues to enhance its Managed Print Services portfolio with services, analytics and
automation capabilities to add value in document outsourcing relationships.
Lynn Blodgett, president of Xerox Services, unveiled a five-plank plan to accelerate services revenue and profit
Portfolio Management: Xerox will adjust its portfolio mix by divesting or revamping lower-margin
business units and targeting acquisitions to expand the firm’s capabilities and market presence in key
verticals such as healthcare.
Global Growth: The firm will leverage its transferable capabilities in transportation, customer care and
F&A to broaden its reach in Europe, and expand into emerging geographies such as Asia and Brazil.
Cost Transformation: Xerox will continue to shift headcount from high-cost to low-cost locations, with the
goal of reducing the share of labor expenses from onshore high-cost regions from 90% to 75% by 2017.
Operational Excellence: Through a wide array of initiatives covering cost recovery, process improvement,
management training and quality assurance, Xerox aims to centralize and standardize its operating model
to improve consistency across its organization.
Analytics: The firm will look to add value in customer care, healthcare and transportation engagements by
mining the data it collects through BPO services to deliver revenue-generating business insights to
Blodgett emphasized the importance of the healthcare vertical to Xerox’s services growth strategy, noting the
firm’s investments in recent years that enable it to address the evolving BPO and ITO needs of government, payer,
provider and employers.
CFO Kathy Mikells capped off the conference by delivering Xerox’s revenue and margin guidance for 2014. The firm
expects to generate mid-single-digit year-to-year sales expansion in its services business, with operating margin in
the 10% to 11% range, primarily driven by the ramp up of new signings and planned acquisitions that will offset
pressure from nonrenewed contracts and price discounts.
Impact and Opportunities
Xerox’s Next Generation MPS offerings will enable the firm to expand client wallet share by
integrating ITO and BPO capabilities into document management services
Xerox continues to counteract declines in its printer business by creating differentiated solutions that leverage
consulting and implementation services and cloud, mobility and analytics technologies to help clients transition to
digitized document management systems. The firm followed up its 1Q13 launch of the Xerox ConnectKey software
platform, which integrates with the firm’s multifunction printers to provide cloud-based document management
and back-office process automation services, with ITO capabilities such as security and printer management and
BPO solutions such as content management and workflow automation to round out its Next Generation Managed
Print Services (MPS) portfolio. Although Xerox performed all of these functions on an individual client basis, at the
2013 Investor Conference, the firm outlined its vision to productize Next Generation MPS as a suite of horizontal
and industry-specific solutions that streamline document-related operations, reduce overhead costs and improve
business outcomes such as compliance and customer satisfaction.
TBR believes the Next Generation MPS offerings enhance Xerox’s ability to cross-sell BPO and ITO services to its
MPS clients by bridging the gap between technology and outsourcing services. Xerox’s holistic approach to
managing document infrastructure and back-office processes in addition to providing software-enabled printers
positions the firm to generate long-term recurring revenue streams despite falling printer sales. Higher-value
capabilities such as security, mobility, analytics and automation will also advance the firm’s margin expansion
Acquisitions are central to Xerox’s international expansion strategy, but a sluggish M&A pace
and an intense competitive environment will hinder near-term growth in emerging markets
Burns acknowledged the challenges Xerox faces to broaden its international services revenues during a roundtable
of industry analysts following the conference. For example, although the firm’s U.S.-centric transaction processing
services could be easily transferred to serve transportation and customer care clients in India, Xerox struggles to
compete for deals without an established presence or proven capabilities in the local market. As part of its global
expansion strategy, the firm will target acquisitions that complement its BPO and ITO capabilities and provide
access to clients in high-growth emerging markets in APAC and LATAM. Xerox earmarked up to $500 million for
acquisitions in 2014, having spent less than $300 million per year in 2012 and year-to-date 2013.
TBR believes Xerox accurately pinpointed its international expansion problem, but given the firm’s lackluster
acquisitions activity so far in 2013, we do not anticipate Xerox will make any significant headway in emerging
markets in 2014. Global MNC competitors such as Accenture and IBM, and India-centric vendors such as TCS and
Wipro have broader global brand recognition and ongoing investments in cloud, analytics and mobility capabilities
targeted at growing IT modernization demand in developing regions. Although Xerox’s careful approach to
acquisitions will minimize its risk of a bad fit in the long term, we believe the firm’s modest M&A budget will result
in missed opportunities that could boost international revenue in the near term, such as a purchase of an Indiabased IT services provider on a similar scale to that of ACS.
A well-rounded solutions portfolio will enable Xerox to take advantage of the industry shift to
TBR believes Xerox’s broad industry expertise and analytics-enabled solutions position the firm to address the next
phase of healthcare demand, which will emphasize individual patient health outcomes over fee-for-service
payment models. Despite the elevated startup costs associated with implementing MMIS and HIX platforms, which
weighed on margins in 3Q13, the firm will expand its position in the U.S. government healthcare market by
delivering BPO services to assist state governments with managing increased enrollment of eligible individuals. The
firm also leverages analytics solutions to enable payers to detect fraud, waste and abuse, and to help providers
manage patient care. Through its HR-oriented consulting arm, Buck Consultants, Xerox offers employer-based
private health insurance exchange solutions such as RightOpt to provide consumer-focused insurance options for
We expect the firm’s private exchange solutions will provide Xerox opportunity for further engagement with large
enterprises looking for ways to balance rising insurance expenses with growing demand among employees for