Stan Lepeak, Managing Director of Research and Lee Ann Moore, Chief Marketing Officer

In an unexpected move, Xerox today announced it is acquiring business and IT process outsourcing firm ACS. Although the market expressed some pessimism on the announcement as Xerox shares fell early in the day, the broader question remains what this means for the outsourcing market, prospective buyers and existing ACS clients. Following is our perspective.

As seen with the HP/EDS and Dell/Perot announcements, it’s clear the competition in the higher-end technology services market has become fierce. Xerox finds itself in a predicament similar to Dell – suffering from an equipment-based revenue model and the desire to move into a more services-based business. While Xerox Global Services (XGS) achieved $3.8 billion in revenue last year, much of that was in commodity services tied to its core copier business. It has made steady progress in building out its higher level “document services” (e.g., tied to product lifecycle management, supply chain, litigation and marketing services) outsourcing business. And, although Xerox and HP are the leading players in this space, it is still a fragmented and immature market segment.

However, in a counter strategy, Xerox and ACS are partnering in an attempt to own the lower-end technology services market in areas such as print/mail, transaction management and other data-heavy processing services, while simultaneously pursuing document services outsourcing. ACS has owned the transaction management and processing space for years, and Xerox plays nicely into helping ACS leverage this capability and client base.

But this acquisition seems to signal a major decrease in the importance of the higher-end IT services business for Xerox/ACS. In fact, the combined company’s IT outsourcing (ITO) business is projected to be only six percent of total new company revenue, compared to approximately a quarter of ACS’ current revenue. Thus, it forces the questions: Can the combined company continue to make investments in high-end ITO as the competitive landscape becomes increasingly intense? Will the new company perhaps place more emphasis on investments in the BPO side of ACS’ business, which is estimated to be 27 percent of the new company’s revenue? And, as XGS has touted its many partners, including EDS and IBM, how does the ACS acquisition complicate those relationships (although the EDS alliance was likely on the way out given the HP acquisition) and the marketplace’s perception of them? We have yet to see how these potential partner conflicts will sort themselves out.

The less-sophisticated IT and data-oriented services market is arguably huge and not one in the sights of IBM, HP, etc. As a result, this acquisition is likely a wise move as it will allow the ACS portion of the business to leverage Xerox’s installed base and R&D mentality. We do not expect any material impact on either ACS or Xerox clients as most of the initial integration appears to be around internal cost reduction and back office synergies.

However, this will place pressure on the largely Indian-based business process and document services firms, and we expect to see further consolidation or business sell-offs in this market.

What does this acquisition mean for ACS and ACS clients? It will be interesting to observe how the Xerox product and engineering culture overlays the no-frills, heads-down work-harder ethic of ACS. And integration of the sales organizations will likely prove especially challenging. Stay tuned for more observations over the coming weeks and months.

Filed under: Market Trends and News, Outsourcing by EquaTerra