Xerox Corp. is heading into autumn after a busy summer. In addition to launching new hardware and software and tweaking its brand strategy (it bid farewell to the decade-old “The Document Company” tag line last week), Xerox also reported strong second-quarter results that prompted it to raise full-year earnings expectations from 67 to 72 cents per share to 80 to 84 cents per share in late July. The Stamford, Conn., company, under the direction of company Chairman and CEO Anne Mulcahy, is riding that momentum into the second half of the year and homing in on one of Xeroxs most burgeoning businesses: Global Services. eWEEK Executive Editor/News Michael R. Zimmerman caught up with Mulcahy at the companys analyst meeting in New York last week to get her take on services and the industry.
In March you talked about three areas of opportunity for Xerox—production, office and services—and said those three areas represented 70 percent of Xeroxs revenue. Can you break that out and tell us your long-term and short-term goals for each?
Yes. So, $16 billion in total. When we talk about 73 percent of our revenues coming from those areas its the digital businesses of office and production, so its all digital revenues associated with it, both equipment and post-sale. All of our managed services revenues sit within those office and production business segments. If you were to pull them out, our services business would be $3 billion. But we kind of integrate them in because theyre a technology enabled by office and production. So its not a hardware split. Its actually office services, production services and then business innovations services, which is today about a $300 million business but growing. Our last quarter was 36 percent growth. So a very rapidly growing and important area of the business to us that is also becoming the front end for a lot of major client deals as well. Right now our office business represents about $7 billion. Our production business is about $12 billion. And our services has been at about the $3 billion level.
And how do you want to see those go forward?
Weve talked about 5 percent growth levels for the near term for the total business, and thats a combination of relatively modest growth in areas like the office business. Color being a source of growth in both office and production growing at double digits. And services obviously compounding growth thats offsetting the modest growth of the office and production businesses. So services will clearly be the fastest growing part of our business, the innovation services. Colors not far behind in terms of the technology transition as well. So those will be the major driving forces for the growth delivered by the company.
How much of the services push is the result of the overall downturn in IT spending?
I dont think its a cause and effect. Its more of a strategic change in the way we go to market. I dont think weve looked at it and said, “Because theres not a lot of capital spending.” I think weve looked at it and said, “What are the strategic growth opportunities that we can build off our core competencies?” And those really have pointed toward digitizing and colorizing the office; the new business of printing, which is really the whole offset transfer opportunity; and then the innovation services, which are really the document-intensive business process deals that weve talked a lot about this morning. So Id say its strategically pointing at areas of growth that can really lead the portfolio. Certainly we do a lot more with customers on a services-type contract versus a capital acquisition contract because I think that is more and more becoming a customer requirement. So we go to market with them with a services approach versus a buy the equipment first and get the services separately.
So, down the road, do you want services to become a major part of your company, more than the [current] $3 billion [it accounts for]?
And the reason?
Because its meeting customer requirements. Its really what our customers want. They want us to come to them with an integrated offering and solve business problems that need to be services-led instead of technology-led.
But theres an overhead issue as well. Services dont involve things like parts, supplies and products.
Its a great business model. The annuity kind of business model is certainly a powerful one for the business. And yeah, its not as asset-intensive, certainly, as the hardware side of the business. But quite frankly, I think its a great portfolio to have a strong technology component to differentiate you from just any other generic services company.
In 2001 when you turned on Xerox Global Services was it a result of real customer demand or was it a way to consolidate a hodge-podge of services?
I think it was an emerging requirement. Thinking back on it, it was a pretty gutsy move in 2001. (Laughs) Probably not the best time to have invested in an emerging business but we were here for the long term and thats really what we wanted. We wanted to come out of the financial challenges with a very strong strategy and a strong set of businesses that would enable growth on a continuing basis. So Global Services was all about providing new sources of revenue in areas that we had a lot of competency and value to deliver to our clients. And by the way thats the same reason we kept in place all of our R&D investments at the same time. And a lot of that is paying off not just on the technology side but on the services side. I mean the amount of embedded software and differentiated capabilities in the services offerings coming from our research labs is just terrific.
Did you have a tough sell with customers to actually get them around the idea that they needed help with what you refer to as the “problem definition”?
I think in 2001 it really was emerging. I think that whole horizontal space, that document management, was one that really probably wasnt on the radar screen. We could see it. We knew that there was incredible opportunity in the lack of productivity associated with the management of it, but now its a big deal.
We write a lot about how technology streamlines businesses and makes them more efficient and how technology is getting easier and more intuitive. And at the same time, theres a trend where top-tier vendors are pushing services to help exploit this really easy technology. How do you explain this contradiction?
One of the refreshing trends in the industry is that I … dont see any more of those [requests for proposals] for a thousand low-priced [products]—you know, “Give us your lowest price on [this].” Our clients are beginning to understand that point technologies really arent the answer to making their organizations more productive. So theyre figuring it out. I think were able to respond now with, “Its a combination. Its a set of skills and capabilities offered by our consultants.” … But theres no question that clients are there. They want help. But they understand its a problem.
You touched on point technologies. How much of your products are shipping as point purchases, and how many are going out as part of a bigger solution?
The vast majority of our enterprise, big-client deals right now are being delivered as solutions that really entertain workflow, or asset management, or device management, or document management. Even in a market like graphics arts, which used to be a point product market, technologies like iGen3 only get sold if theres a workflow solution, if theres an understanding of the applications, services often to do data management so that customized collaterals can be designed and produced. Its not a point product or hardware sell anymore. Were actually going to market together with graphics partners who need to help educate the marketplace on what it takes to really fulfill with customized color and what that space is all about now.
Youre expanding the Hot Springs, Ark., center. Do you have further plans to expand this capability?
Do you mean geographically?
Were already in the U.K. [and Xerox recently opened another facility outside Rochester, N.Y.] We believe this will be one of the fastest growing segments of our services group, and theres no question well have to expand the capabilities.
Solutions and partnerships are becoming recurring themes. Is this trend being driven by growth goals or customer demand?
Open architectures are so critically important to playing in the solutions space that youve got to work with the people that are working with your clients already. The list of partners we have in our services space is mind-boggling right now. And our workflow space in terms of software partners, you know we have three tiers of partners we work with at different levels in the workflow space. But I do think its the ability to walk into a client location and immediately be able to fit with existing workflows. Thats one of the biggest advantages we have right now, being able to really deliver the solution in a way thats somewhat seamless to the customer.
You mentioned an acquisition strategy today. What areas of interest are there for Xerox?
Well, first of all, its important we clarify that we talked about partnerships, alliances and acquisitions as extending our reach. Our No. 1 priority is our services business for extending our reach. We have an opportunity both from filling out our service offerings or extending our geographic reach to look at potential arrangements that could help us grow inorganically a little bit quicker than we could grow organically.
Can you get more granular?
I think the answer is no, we cant get more granular. I think what were doing is were saying it wont be something that would be incompatible or really put us into a new space. It would be to build on our existing capabilities today that would help us scale and develop additional presence in areas that we think we can really lead in the marketplace.
Is it fair to say the new branding strategy that touts “Technology, Document Management and Consulting Services” opens up the possibility for other complementary products from Xerox? PARC [Palo Alto Research Center] does a lot of things.
I think it does. I think we know our space. And we have a respect for building on the competencies of the company. So well stay within the perimeters of the document management space. But, for example, today were licensing consumer products like the 17-inch flat screen or the projectors. … Were not going to spend a dollar of R&D on them, but if its a great product and the Xerox brands can make some money on it, well go for it.
Speaking of billions of dollars, in 2001 you talked about cutting $1 billion out of cost and you did it. In 2002 you did it again. Where do you stand now halfway through 2004 from a cost perspective?
Were about $2.5 billion out of the cost space, from 2001, so were not really focused as much on hardcore cost reduction. But were relentlessly focused on competitiveness and productivity.
Is that because you reached the wall?
Well, the wall certainly in terms of the blunt instruments. I think what were really focused on now is deploying the Lean Six Sigma for productivity purposes. Not only is it the lead behind the tools and competency we use with our clients, but its also internally the single biggest productivity enabler we have in the company. Lean Six Sigma is driving all sorts of productivity in the company. Well be well over $100 million this year just on the economic profit from the projects that have been initiated this year. …
Youre at about 60,000 employees today. No plans to lower that number by the end of the year?
No. I think were a responsive kind of organization now, that where we see problems we address them, where we see opportunities … we hired, I think, over a thousand people last quarter. Were hiring, were also finding productive opportunities where we can reduce headcount, so this is really an ongoing mission to hire where we need resources, and were hiring in services.
Who do you view as Xeroxs top competitor today?
HP. They clearly have ambitions to play in spaces that certainly face off with the Xerox competencies, like services. And even their attempt to acquire Indigo in the production color space, although I think weve been quite successful in our face-offs, but theyre tough, and theyre out there. And we see them more and more frequently, and were very focused on maintaining the best-in-class value proposition to certainly win in those face-offs.