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Analysis: IT Services a Double-Edged Sword for Xerox

The century-old company joins the likes of HP this year with its decision to separate its hardware and services units.

The marquee tech-business story last year was Dell Inc.'s planned acquisition of EMC Corp. for $67 billion. For industry watchers, that deal was a textbook example of how many of the tech world's old guard are increasingly resorting to acquisitions to buttress their traditional offerings and remain profitable.

However, other companies have gone in the opposite direction, drastically re-organizing their internal structures -- essentially splitting themselves -- instead of looking outward. Examples from just the past two years include datacenter company IO, Hewlett-Packard Corp., Symantec Corp. and Computer Sciences Corp. More recently, another major tech brand has followed suit: Xerox Corp.

In a decision announced in late January, the 110-year-old Xerox said it plans to split into two publicly traded entities by the end of 2016. The $11 billion Document Technology unit will inherit Xerox's legacy copier and printer business, while the $7 billion Business Process Outsourcing unit will handle Xerox's IT services arm, which it acquired in 2010 when it bought Affiliated Computer Services (ACS) Inc. The move is expected to save Xerox an estimated $2.4 billion over the next three years.

In explaining its decision to split, Xerox echoed the rationales of HP, Symantec and others: In a nutshell, the current technology landscape requires companies to be more nimble.

"Today's market realities require greater agility and flexibility, the ability to innovate and adapt technology to address clients' fast-evolving needs, and a more focused and efficient approach to operations and capital allocation," Xerox said in its statement announcing the split. "As a result, it has become increasingly clear that the Document Technology and BPO businesses serve distinct client needs, have different growth drivers, and require customized operating models and capital structures."

"There are certainly opportunities when you can bring together complementary solutions, whether it's pairing hardware with services or hardware with software. But there are also challenges."

Tim Herbert, Senior Vice President, Research and Market Intelligence, CompTIA

As CompTIA's Tim Herbert points out, there's a parallelism at work in the Xerox split that serves as a cautionary tale for IT companies considering expansion through acquisition: A lot of the factors that Xerox identified as reasons for the split were the same ones that drove the company to buy ACS, the IT services company that Xerox tried to marry with its legacy hardware business back in 2010 -- and that it is now spinning off.

"There are a lot of challenges, and the devil is in the details on the execution side," says Herbert, who is the senior vice president of research and market intelligence at CompTIA.

There are many reasons for IT companies, especially those focused on hardware, to at least explore building out complementary services arms. According to CompTIA's recent "Industry Outlook 2016" report (available here with registration), worldwide IT services revenue will grow by 7 percent this year, outstripping the overall IT industry, which is projected to grow by just under 5 percent. IT services also tend to bring in more recurring revenue and higher margins than commodity hardware. On paper, IT services make a solid business case.

However, delivering on that promise is another matter. "There's often a higher cost of delivery" with IT services, Herbert says, pointing to onsite customer meetings as one example. Also, especially in the case of companies like Xerox, adding IT services that revolve around the cloud effectively eliminates -- or at least sidelines -- the hardware sides of their businesses.

The Xerox split is a case study in the "strategic challenges in business transformation," according to Herbert.

"You see many vendors that are pushing their channel partners to become solution providers and to add complementary services to some of their traditional [offerings]. But at the same time, there often isn't the acknowledgment of just how difficult that is," he says. "There are certainly opportunities when you can bring together complementary solutions, whether it's pairing hardware with services or hardware with software. But there are also challenges, and hopefully this will serve as a reminder."

About the Author

Gladys Rama is the senior site producer for Redmondmag.com, RCPmag.com and MCPmag.com.

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