Outsourcing's odd couple: Xerox & ACS, one year post-merger

It's been just over a year since Xerox officially acquired business process outsourcer ACS for $6.4 billion. But as students of successful mergers understand, the real work of integration -- combining the technology, processes and cultures of the two organizations -- has only just begun.

The question that looms largest is whether or not the conjoined companies can deliver on the premise -- and promise -- of their union. In the case of Xerox-ACS, according to its own recent marketing campaigns, that means changing "the way you see our company -- and possibly your own." By combining Xerox's strengths in document technology with ACS's expertise in managing and automating work processes, the company says it has created a new class of business services provider.

CIO.com spoke to Xerox CIO John McDermott and the head of ACS's IT outsourcing unit Kevin Kyser about the challenges of integrating a products company with a service provider, the role of IT services in the merged company, and ACS's newest -- and least profitable -- outsourcing customer, Xerox.

CIO.com: Industry watchers tend to view the Xerox-ACS partnership as the odd couple of technology mergers. It's harder to see how the two companies might complement each other than it is with a Dell-Perot or HP-EDS match-up. How do you explain the value of the partnership?

John E. McDermott, Xerox CIO: We get reports from CIOs and other customers that Xerox has fundamentally changed the impression of its brand from a brand associated with great printing and some document management services to company that can manage document intensive processes across a wide spectrum. And that's what pointed us toward ACS. ACS had found an important and profitable segment of the outsourcing marketplace that is document intensive. We see that in traditional BPO areas like HR. We see it in legal and mortgage and health records.

How do you explain the value of the partnership in terms of IT outsourcing?

Kevin Kyser, COO of ACS's Information Technology Outsourcing group: There's great synergy between the two companies in IT outsourcing. That's where the ACS business started, and that's where we've continued to grow in tough economic times. But now we can help companies run their entire business more efficiently -- not just IT. That's going to be a great differentiator in the marketplace -- thinking through the big issues with our customers that we didn't have the bandwidth or processes for before.

In the world of IT services, Xerox is famous for inking one of the first single-source outsourcing mega-deals. Recently, you shifted to a multi-vendor approach. Now that you've acquired ACS, will the pendulum swing back in the single-source direction?

McDermott: I now have the opportunity to insource [some IT services] and become [ACS's] largest and best customer. Years ago, Xerox made the largest EDS deal of that time. It was a monolithic arrangement, and only a thin veneer of IT talent remained within Xerox. Over time, we rebalanced that and moved key knowledge back into Xerox. As we began to manage more discretely by tower or application area, that led to the notion that we could get partners with more specific expertise at a lower cost by multi-sourcing. Four years ago, we started down that path with considerable success in reducing costs and improving service levels. That required us to put in place vendor management capabilities to make sure problems that needed to be coordinated could be effectively done. That provided a good backdrop to bring in the ACS services and get rid of some of the others.

Will ACS eventually become Xerox's only outsourcing provider?

McDermott: I make Kevin compete for his incremental business here. We have every intent to move more services to ACS and we have already committed ourselves to replacing EDS with ACS. EDS is now part of HP, so that relationship has become a little awkward for us.

There are some areas -- new systems within our SAP/Oracle footprint -- where our relationships with other parties will remain important to us. But ACS has good capabilities in development in .NET, Java and other Internet technologies and my intent is to use that a lot more.

The transition of IT services from HP to ACS will not be complete until the end of the year. How are you handling that uncomfortable situation, where you're biggest supplier became your biggest competitor when HP acquired EDS?

McDermott: This is the one and only plug I will give to our competitors [at HP]: the local guys on the ground have delivered with the highest level of professionalism. A few of those professionals, as happens in all [outsourcing] transitions, will join the Xerox group. The people at the absolute top will move on to other opportunities. They managed this transition in a way that you'd typically only see in a ramp-up of a relationship, not a ramp down.

It's one thing to run an internally facing IT shop, but another thing to serve external clients' distinct IT outsourcing needs, too. Is Xerox assuming a thought leadership role with ACS's CIO clients?

Kyser: I've only been in my role as COO for ITO for 120 days -- I was the CFO as we were going through the transaction -- so I have a view of not just ITO but the BPO business as well. We were excited about the transaction because of the innovation and R&D that Xerox has inside of their business. That's something we could not afford prior to this. We really struggled with innovation, spending our nights doing R&D.

Now we're exposing ACS clients to that R&D through what we call "dream sessions." We ask clients to tell us what keeps them up at night, and with the significant capabilities that exist inside Xerox and ACS, we figure out how we can create solutions.

How have you applied Xerox's product innovation processes to services?

Kyser: We sell services, but we use software and products to deliver them. Our services are buoyed by the proprietary technology behind them. We have seen some early successes around imaging and photo capture that have really been eye opening. It's totally different from what we've focused on in past, and we're getting good early reviews.

McDermott: Take an area common both to Xeros pre-ACS and ACS pre-Xerox -- the question of how you take information embedded in paper documents and put it in digital form. Xerox has extraordinary capabilities in this area. We not only can do key-wording, but we can parse that document, summarize it, put metadata headers on it, do automatic routing. A BPO health records offering from ACS [for example] would see enormous benefits from the translation of physical documents to electronic documents.

How does having an IT services company in the family benefit your Xerox IT group -- beyond getting IT services at a discount?

McDermott: It's great to be working with a sister company that has an externally facing IT organization. IT outsourcing is a fiercely competitive marketplace. In order to have a profitable business and a good margin, you have to be on top of your game in terms of infrastructure.

One place we've applied ACS's very productive thinking is in the acceleration of our data center virtualization. It's also helping us develop ideas about how to create more cost effective and productive network topologies. My guys are good at this, but they didn't do it for a living. They have lots of other responsibilities. Now I have get access to people who do this for a living.

John, you've made clear the benefits of having an IT outsourcing company in the fold. But as a CIO, isn't it annoying to be surrounded by IT know-it-alls?

McDermott: There are a couple of guys in ACS with some sharp elbows that make their points of view known. But I think we've come to appreciate that.

Kyser: I think there's more of a personal downside for me. If I don't deliver, I know I'm going to get a call from John. There' a spotlight on us, and I know I have to provide John with better services than he's experienced from any other outsourcer.

How would you describe ACS and Xerox's distinct corporate cultures? Have you been able to bring them together?

Kyser: We [at ACS] have a hustle culture that says we're not going to stop, even after whistle blows. Xerox brings good rigor around processes.

McDermott: A good example is the transition of services from HP-EDS to ACS. Xerox has a mature vendor management transition process. And ACS had come to agree that they were good methodologies. But they told us we ought to knock a couple of months off of the plan. As a ten-year employee of Xerox, that's the kind of change of pace I've long wanted as company. And people who have been here longer than me look at this as positive rejuvenation of the traditional Xerox corporate culture. On the ACS side, some of the discipline we have, including in the IT area, is appreciated as a way to bring more predictability to the complex transactions ACS has to manage every day with their customers.

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