Xerox Follows Dell Lead in Building Up Services

Xerox's proposed $6.4 billion acquisition of business process outsourcer Affiliated Computer Services is the latest example of a major hardware vendor looking to enlarge its business footprint by increasing its services capabilities.

Xerox's ACS deal, announced Sept. 28, comes just over a week after Dell said it is buying Perot Systems for $3.9 billion, and a year after Hewlett-Packard—which already had a formidable services unit—bought EDS for $13.9 billion.

The three deals illustrate a trend of major companies looking to services as a way to add recurring revenue sources and offer customers help at a time when IT environments are growing in their complexity, according to analysts.

For some companies, it's also a way of keeping up with the competition, the analysts said. HP, with the EDS acquisition, is looking to create a services unit that can rival that of IBM, according to Charles King, an analyst with Pund-IT Research. Dell, which has slowly been building its services business over the past few years, saw Perot Systems as a way to rapidly increase its services capabilities, King said.

For Xerox, ACS offers important BPO capabilities that will enable Xerox's growing services business to compete with the likes of HP and Dell, said Angele Boyd, an analyst with IDC.

"This is an expansion into an adjacent market that is very strategically important to Xerox," Boyd said in an interview. "The fit is good."

King said for many of these companies the goal is to have a business as consistent as what IBM has created with its IBM Global Services unit. Like most every other business in the IT sector, IGS has seen its revenues slowed by the global recession over the past few quarters, he said.

However, as IT budgets have been cut back and sales of servers and other products have taken a significant hit, IBM's services business, with its multiyear contracts, "offers a certain amount of flotation when you an iceberg," King said.

IBM executives reported in July that total global services revenues dropped 12 percent for the second quarter. However, income was up 23 percent, services signings were up 3 percent and strategic outsourcing signings were up 38 percent. In addition, IBM signed 17 services deals greater than $100 million. King described global services as "a rock of stability for IBM."

In addition, IT continues to become more complex, particularly in the data center, where such technologies as virtualization are seeing rapid adoption. The replacing of hardware complexity with software complexity also is driving the need for software services, he said.

King said it's unclear how much the trend will grow. Certainly, there are a number of services companies—such as Unisys and CSC (Computer Sciences Corp.)—that could be attractive. The question becomes, Who would buy them? For the most part, those vendors that would make the most sense—such as IBM, HP, Oracle (after its acquisition of Sun Microsystems is complete), Dell and EMC—seem to have services businesses that already are in pretty good shape. In addition, as the stock market continues to move up, so will the price of those companies.