Xerox: Outsourcing Global Information Technology Resources

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Xerox Outsourcing Global Information Technology
Resources
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Situation Analysis 1994

• Xerox is a technology-driven leading edge company
• Some would say a surprising candidate for
  outsourcing
• Global reach into 130 countries
• Intense competitive and financial pressures
• Has sustained heavy losses during the previous 2
  years
• Sold off non-core businesses

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Situation Analysis 1994

• Totally reorganized its global divisional
  structure
• Xerox is skilled at working with partners in many
  aspects of its operations
• Outside benchmarking is used extensively at Xerox
• Summary
• Xerox is a financially stressed company going
  thru a transition

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Situation Analysis History

• Historically an extremely successful company
• Based to some extent on a monopolistic position
  in the plain paper copier market
• Invented xerography in 1950s
• Brought first product to market in 1959 32M in
  sales (900 employees)

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Situation Analysis History

• 1.1B in sales 1968 (24,000 employees)
• 1970
• Gross margins 70-80 !
• Phenomenal growth attracted federal lawsuits
• Unfair monopoly

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Situation Analysis History

• 1975 Xerox settles with the FTC
• Forfeits some patent protections
• Forced to license technology
• 1976 1982
• Market share of US market goes from 80 to 13
  (ouch!)
• Massive influx of competitors
• Canon, Minolta, Ricoh, and Sharp
• Xerox began to compete on quality and improve
  internal performance

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Situation Analysis Restructuring

• Nine divisions along market segments and three
  customer operations along geographic lines
• Each Xerox division had end to end responsibility
  for a set of products and services related to a
  particular market segment
• Divested financial and insurance operations

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Situation Analysis IT Organization

• Centrally managed
• 2,100 employees, 670M budget
• Seem as a support function rather than a
  leading-edge differentiator
• Expense center
• Highly dissatisfied senior users

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Situation Analysis IT Organization

• Massive legacy systems built to support the old
  structure as opposed to the new one
• Maintenance of these highly inflexible systems
  consumes most of IT development resources
• Units users are undisciplined and very
  unsympathetic to the challenges faced by IT

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Situation Analysis IT Organization

• New systems must be configured to include
  architectural flexibility to support future as
  yet unspecified reorganizations.
• Xerox 2000 initiative seem as the solution
• Involves a total rebuild of everything to a
  client/server model with global module sharing.

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Situation Analysis IT Organization

• IT at Xerox is perceived as under-performing and
  inefficient n a company that is under
  extraordinary stress

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Situation Analysis Outsourcing with EDS

• Why
• Outsider can bring needed financial discipline
• Outsiders are more efficient
• Speed up consolidation
• Provide immediate funds thru the recapture of
  170 M from asset sales
• Xerox can get access to much broader how to
  knowledge
• Outsiders can be more up to date on technology
• In-house group can concentrate on IM 2000

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The Deal

• 3.2B over 10 years
• Transferred 170M in assets
• Outsourcing legacy systems, keeping IM 2000 and
  new tech in house
• 700 workers

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Partnership

• Concerned that EDS make money on the arrangement
• Concerned that employees well taken care of
• Emphasis on cultural fit
• In the end Xerox went with EDS which has a very
  different culture
• Ten year contract critical to let economics
  work out
• 70 of IT expenditure in first year and only 30
  in the second year
• Divorce agreement

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Process

• Frequent meetings
• Detailed discussions on sharing objectives
• Intense information management briefing to ensure
  Xerox staff is on top of what is going on
• Summaries for Xerox senior management
• EDS set up a separate unit exclusively to
  interface with Xerox
• Flexibility to rework pricing

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Complexity of Global Outsourcing

• Different HR laws
• Flexibility to handle pricing in high inflation
  countries
• Differences in telecom
• Legal issues tied to asset transfers
• IP issues

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Final Thoughts

• It takes a lot of time (years) to negotiate and
  effectively execute this form of partnership
• Managing the details is key.
• Small issues become major problems if not
  carefully managed
• Global outsourcing contracts much more complex
  than domestic ones
• Necessity for long-term relationship

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Questions

• Name three significant risks that Xerox faces in
  outsourcing the bulk of its IT systems to EDS
• Of the three risks you listed above, pick the one
  with the greatest potential for negative impact
  and describe how Xerox can attempt to mitigate
  that risk.