Can Xerox Be A Services Company?

Last week, Xerox invited the industry analysts in for a look at its new vision.  The financially troubled company has been working hard to clean up its balance sheet and get its eye on the future.  Mainly, under the sharp eyes and hard work of CEO Anne Mulcahy and a mixed team of old and new Xeroids that seems to be working.  There are still some loans to renegotiate, but the company has reduced its expenses and increased revenue and cash flow and management is in a mood of guarded optimism.

The trick for Xerox now will be to:

1. continue to maintain (or even grow) its market share in the very mature copier market  
   
   

2. while trying to use its expertise in how companies create and manage documents to position itself as a specialty services company as it moves ahead.

I think it would be fair to say that the plan is plausible but the difficulties – and the proof – will all be in the execution.

Here, Xerox’s track record is mixed.  On the one hand, Xerox can indeed provide superb service in its areas of expertise.  Its huge field force of copier and printer service reps are well trained and well managed and use modern tools, including Xerox’s pioneering Knowledge Management software, Eureka, which was first proven for this application, allowing experienced customer engineers to share their expertise and saving the company time and money.  Its acquisition of XConnect led Xerox into the area of providing first network design and implementation and then system integration assignments; this has been a successful and growing business.

Xerox has had less success in the past with software-based products, often finding it difficult to successfully bring them to market – or to gain adequate market share.  (There’s a lot of ancient history here, but think Xerox Star, and many smaller Xerox software products in areas like scanning and optical character recognition as well as spin offs and investments in a host of areas.)

But, more recently, Xerox has done better by focusing on areas where it has recognized expertise.  Its Docushare software for managing documents on the Internet (or within a corporate intranet) has a following.

Its Document Management services business, based in Hot Springs, Arkansas is already outgrowing its new buildings, expected to last for three to five years. Here, Xerox inputs paper documents via various scanning,  digitizing, and indexing technologies, stores or returns the underlying documents (which might be car rental agreements, blueprints for contract bids, or nearly anything), and places the digitized information directly onto its clients’ IT systems, often in less than 24 hours after receipt.

Xerox wants to use its Document Management and Work Flow/Business Process experience as well as its successful execution of these very focused services to both grow these businesses and to expand outward into other, related service-based businesses.  For example:

	Xerox would like to provide an array of hosted IT offerings to its customers, not just the document management and printing related services it offers today.  This will require acquiring new skill sets, calling on new parts of the customer organization, and working hard to gain credibility in a very competitive market with lots of big players (including IBM, many of the biggest ASPs, who have moved to this business, and perhaps some telcos).  We’d rate this as ambitious, but possible, if Xerox moves carefully, focusing on one or a few markets or skill categories at a time, and being careful not to outrun its capabilities.
	Xerox wants to move much more aggressively into the Services business, providing a variety of business process-related services and often working with partners with specialized skills.  Here they have been hiring experienced staff, to add to those acquired via XConnect. Offering solutions in vertical industries is a key strategy.  Xerox has seen some success here, particularly in document-related assignments (but much more broadly in Europe) and we think they can be successful across a set of carefully selected markets.
	In Knowledge Management, Xerox would like to take the products and research (and their internal experience in using them) and move them out to customers.  They have successfully installed a version of Eureka in a European customer, supporting customer call centers, and it is likely that they will be able to do more here.  They are more likely to be constrained by the need to establish ROI calculations (which is possible for Eureka-style projects), now demanded by customers to justify funding for KM projects, than by lack of expertise or profile. The KM market is still getting started and Xerox could play an interesting role.

Xerox, of course, is not giving up its core business of selling copiers, printers, and supplies (and managing them for customers who choose to use their output rather than own and run them).  Its iGen 3 Color Printer, which Xerox expects to use to compete with short run offset color, will ship later this year – and reservations for the first shipments are brisk, even at its $250K+ price.  New models of less expensive (and even inexpensive) color printers and black-and-white printers, in various technologies, and multi-function printers (copy/scan/print) are frequently added to the product line.

But this part of its business is highly competitive, particularly at the low-end, so maintaining profitability is tough. No one argues any more that the “paperless office” is about to appear, but with the rise of email and the web, there is less need for copying and printing, so the absolute growth available to ink-on-paper companies does diminish over the long run, although Xerox hopes to maintain growth (at the expense of competitors) by increasing its market share.

This means that services is increasingly important and that Xerox needs to succeed in this business and learn how to succeed, eventually, at high volumes.  If it can turn its household name brand from meaning “photocopy” to meaning “expertise about all things related to business content” it may just be able to do that.  

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