Xerox stops digging to pause for thought

Stuart Lauchlan Profile picture for user slauchlan October 27, 2015
It's time to stop for a bit of a think over at Xerox as revenues slip amid ongoing restructuring.

Ursula Burns

When you’re in a hole, stop digging.

That’s a notion that often seems to escape some tech firms in their ‘turnaround’ journeys - yes, Yahoo!, that’s you we’re (still) looking at! - but not, it seems, Xerox.

In recent times, the firm has revamped its government healthcare IT business, discontinued products and cut 1780 jobs so far this year. Despite all that, it’s now time to stop and have a think about what’s next after reporting its first net loss since 2010 on revenues down 8% year-on-year.

The firm’s Business Process Outsourcing (BPO) took the biggest hit, down 10% year-on-year. Document Outsourcing revenues were down 3%, while total signings slipped 7% and new business signings by 9%.

Chief Executive Ursula Burns confirms that the company is now reviewing its businss and strategic direction, but rules out a sale of the firm for now:

One of the things that we are not currently considering is the sale of the company, but all other options will be looked at as we progress through this review.

She adds that this latest review is part of an ongoing process:

We consider a range of opportunities regarding new business and the operations and it’s always focused on increasing shareholder value. So, this type of activity, for example, led us to look at ITO and to divest of that and to take a fundamental change in our government healthcare strategy, particularly around health enterprise. So, the structural options that we are looking at, is both portfolio and capital allocation options and it’s at an early stage.

We decided to make it public. We decided, as a group, to make it public. I think that the review process though is an important thing to keep in mind. It is a fairly broad-based review. One of the things that we are not currently considering is the sale of the company, but all other options will be looked at as we progress through this review. We are not going to actually speak a lot about timing of it. We are not going to make a lot more public statements about it. I understand that there is a lot of questions, but we have to kind of go through the process and we have to go through the process before we can say anything more.

Burns can still clearly articulate Xerox’s priorities as a company:

In Services, our goal is to lead an attractive segment of the business services market and throughout the year, we have taken steps to strengthen this business, including acquisitions to build our commercial healthcare offerings and the divestiture of ITO…In Document Technology, our efforts are focused on continuing to lead the market.

Buying your way out of trouble

To bolster Xerox’s services business, the company has relied on a lot of M&A activity. While there’s no expectation at present of any major new purchases this year, Burns leaves the door open to some smaller ones:

It’s one of the integral pieces of the expansion of our Services business. And so we will continue to look for accretive tuck-in acquisitions in Services, particularly around the areas where we see differentiation and strength in transportation and commercial healthcare, these areas. So we will continue to look for M&A in 2016.

We have been trying to do the small tuck-ins and we find some good ones and they come when they come. We compete for them and we win some. You saw iPas and RSA this last quarter and we will continue to try to push on that area.

When we look in that type of M&A, if we find something that’s even more exciting, we are not going to close our eyes to it, but that’s not – we are not looking for massive companies to buy. We are trying to actually stay in the ranges that we have been talking about, little bit bigger than small, but definitely smaller than large.

There’s also a need to beef up the services offering in higher margin sectors, she adds:

We have a heavy concentration and strength in customer care and in call center operations. We have a problem right now with the business mix. It’s one of the challenges that we are working hard to try to overcome as we go forward. As we mix more towards customer care it’s a lower margin business. We are trying to mix up towards higher margin, more innovative solutions while we try to actually innovate in customer care.

So, our M&A strategy is going to be towards these types of areas where the margins are stronger. We want to stay leader in our customer care. We don’t want to walk away from that business. But we just are not selling enough of the higher margin business areas and that’s one of the things that we have to fix and we haven’t quite cracked that nut yet.

So, we are going to continue to acquire in those areas, so that we can actually move away from the more commodity-based customer care implementations.

My take

I applaud the candor of declaring the need for a strategic pause for thought. It’s something other firms would do well to adopt rather than lurching ever onwards.

It’s far from clear what Xerox eventual fate will be - and Burns only says a sale isn't on the agenda currently - but at least it will be one that is arrived at after appropriate consideration.

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