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Here's the problem: Outsourcers that don't innovate.
More precisely, it's a particular kind of innovation that's hard to come by. When companies hire an IT or business process outsourcer, they tend to get a lower-cost way of doing what the company had been doing. That outsourcer generally finds a bit more efficient way to do a task, and that's valuable, to be sure. However, the innovation outsourcers rarely deliver is the kind that reinvents a process entirely, doing a job at some sliver of the cost or in a way that changes what a company can do.
That's because it's extraordinarily hard. And it's that kind of innovation that Xerox must deliver now that it owns ACS, a major business process outsourcing provider that Xerox bought this month for $6.4 billion.
The idea behind the deal is that ACS, as a BPO vendor, shuffles a whole lot of documents, both digital and paper, with 77,000 employees who process medical bills, student loan records, and credit card applications for other companies or government agencies. Xerox makes some of the most advanced equipment to automate document handling, plus has a global salesforce and customer ties to the world's biggest companies. Bring them together, the thinking goes, and they'll solve problems in new ways.
Consider the EZpass toll collection system, an automated system in the northeast U.S. that uses an electronic tag in a person's car to know when to charge a toll. ACS processes transactions for EZpass, including looking through photos the system takes of cars that don't pay, and looking for other irregularities. "Today, they do that with people," says Xerox President Jim Firestone. Xerox has "technology that can look at the photo and look at the license plate without a person involved." So he suspects there's a way to automate more of that effort, and offer new services.
It's entirely logical, which only begs the question -- why couldn't ACS just buy and use that kind of technology without being acquired?
Lynn Blodgett, the ACS CEO who now leads the unit as part of Xerox, sums up why a BPO provider isn't going to deliver a lot of breakthrough technology innovations. "We're kind of grass roots problem solvers," Blodgett says. ACS didn't have the deep research and development budget to chase "what-if" technology scenarios that might solve a problem, "and we never could because our business model couldn't support it. We just don't have the money."
Xerox, on the other hand, spent $840 million on research and development last year, or about 5.5% of revenue. ACS, before being acquired, didn't even have an R&D line item in its financials. Firestone notes that the "heritage" of BPO has been in process expertise and labor management, not tech innovation.
On the flip side, Blodgett says Xerox needs to take more of its advanced R&D and apply "an intellectual concept to solving a business problem." That's where ACS can help: "We will bring to Xerox almost an endless supply of business problems."
The deal closed early this month. Now all that's left is the incredibly difficult, hugely risky execution of the merger.
Xerox's stock price has been gaining but has yet to fully recover from the 15% beating it took last September when CEO Ursula Burns announced the ACS deal. Together, the companies would've had about $22 billion in revenue last year. Xerox has more than doubled its employees with the deal, to about 130,000 people, a bit over half of whom are in the U.S.
Right now, combined Xerox and ACS teams are brainstorming ways that Xerox technology could make tasks that ACS is working on easier. Firestone speaks with a sense of urgency about getting results from those efforts. "If you don't affect change early, people just go back to how they always have done things, and it becomes more difficult," he says.
This isn't one of those takeovers that depend on banging two like businesses together and wringing out a lot of cost savings, which is hard enough. It's more complicated, relying on a cross-sharing of knowledge and on creating a new culture of problem solving. That's a towering challenge. If the combined companies pull it off, though, it just might bring something new to business process outsourcing.
Chris Murphy is editor of InformationWeek.
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