ACS's IT Outsourcing Business Could Get Lost at Xerox

CIO — When its acquisition of Affiliated Computer Services (ACS) closes early next year, Xerox will see its services revenue triple, from $3.5 billion in 2008 to an estimated $10 billion in 2010. That should give the $22 billion company a big boost—a $17 billion boost in fact, in the form recurring revenue, according to CEO Ursula Burns.

But as Xerox's services business balloons, ACS's IT outsourcing organization could get lost in the shuffle.

IT outsourcing was already a less significant piece of the pie at ACS, which is best known for its business process outsourcing (BPO) offerings. It accounted for about a quarter of the Dallas-based provider's annual revenue. When ACS is integrated into the Xerox fold, its IT services business will become just a sliver of the combined company's overall offering: It's projected to account for about six percent of the merged company's revenue.

"This acquisition seems to signal a major decrease in the importance of the higher-end IT services business for Xerox/ACS," says Stan Lepeak, managing director of research for outsourcing consultancy Equaterra. "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's business?"

[ For more on the implications of the Xerox ACS deal, see IT Outsourcing: Many Mergers Ahead. ]

Indeed, the clearest synergies between Xerox and ACS are in business process services, which will account for more than a quarter of the merged entity's revenues. "Xerox brings a stellar document BPO business and a growing procurement BPO competency to add to ACS's human resource, finance and accounting, and call center arms," says Phil Fersht, an independent outsourcing analyst and author of the Horses for Sources blog. "Currently the only real benefits to (ACS's) IT services customers are these added BPO competencies."

Gartner Research Vice President Dane Anderson says it's unclear what Xerox will do with ACS's IT outsourcing business. "It will take time for (Xerox) to decide what to do with it," he says.

Meanwhile, Xerox executives say the IT outsourcing portion of the ACS buy is integral to expanding the company's BPO offerings. "The lines between document outsourcing, BPO and ITO are blurring," says Paul Hartley, Xerox's vice president of corporate business strategy. "In fact, a robust IT infrastructure is paramount if it is to serve as the backbone of a BPO operation."

Hartley says the company's existing customers need an IT outsourcing provider to support their applications and networks. "Xerox's managed print customers and ACS ITO customers around the globe will now have access to a unified IT outsourcing strategy, where one provider is able to manage the total environment, reducing costs, improving processes and managing information more efficiently."

Of course, Hartley's statement assumes that customers want to consolidate lower-end business process outsourcing and higher-end IT services with a single provider.

Outsourcing customers still have plenty of other options, particularly when it comes to commoditized BPO or IT services, and it's not clear that there will be any impetus for the merged company to invest in higher-end IT services. "Xerox needs to make a quick move to push a utility delivery model, based on common processes and standards, with compelling industry alignment," Fersht recently wrote on his blog. "Continuing to push old-world BPO, where the customer shifts existing processes with limited transformation, is not a recipe for success."

If Xerox is committed to maintaining or growing ACS's IT services business long-term, its best bet—interestingly—may be another acquisition in the mid-tier IT services category.

"If this combined entity were to merge with a strong IT services provider and develop a coherent IT-BPO strategy, then we really have something to talk about," Fersht says.