Xerox's profitable services growth hinges on analytics and acquisitions


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Xerox's profitable services growth hinges on analytics and acquisitions

  1. 1. TBR 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 Authors: Jennifer Hamel, Professional Services Practice Research Analyst Joseph Walent (, Professional Services Practice Analyst TBR Perspective 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. Event Overview 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
  2. 2. TBR 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 expansion: 1. 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. 2. 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. 3. 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. 4. 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. 5. 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 customers. 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
  3. 3. TBR 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 goals. 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 consumer-oriented healthcare 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 employees. 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
  4. 4. TBR more control over healthcare costs, and will prove to be a growth avenue for Buck Consultants. Another HRfocused consultancy, Mercer, reported strong interest for internal or private benefit exchanges since it took its solution to market this past year. Xerox’s planned introduction of a similar type offering will round out its extensive healthcare IT services portfolio, diversifying its reach and providing access points to international healthcare insurance opportunities. Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis. TBR has been empowering corporate decision makers since 1996. For more information please visit ©2013 Technology Business Research Inc. This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. The information contained in this report and all other TBR products is not and should not be construed to be investment advice. TBR does not make any recommendations or provide any advice regarding the value, purchase, sale or retention of securities. This report is copyright-protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.