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					Outsourcing Global Information
    Technology Resources
Outsourcing relationships fail for many
reasons. Chief among them are unrealistic
expectations; lack of a formal bid process;
so-called relational contracts that assume
the vendor will act as a strategic partner but
that fail to spell out the details; and failing
to manage the relationship once the contract
has been signed - “Divorce Your Outsourcer,”
Computerworld, August 1996
       Questions to Consider
• Was Information Management (IM) a Core
  Competency for Xerox?
• Was the IM Outsourcing an Appropriate
  Decision?
• Does Outsourcing Give Xerox a
  Competitive Advantage?
• Was the Outsourcing Process Taken By
  Xerox Appropriate?
                        Key Definitions
CIM:                           Corporate Information Management

Legacy System:                 Transaction Processing System
                               Originally Designed for a Specific
                               Task

Proprietary System:            System Designed for a Specific Task
                               by an Internal IM Organization

Emerging Technology:           On-line publishing, digital video, image
(as it relates to this case)   communication over the internet, digital
                               copying and printing
           Case Study Team
•   Jim Bodine
•   Jeff Muckler
•   Eric Mendola
•   Ron Volans
•   Amy Esposito
The Industry
         Industry Evaluation
• Market Analysis
  – Trends
  – Key Success Factors
  – Attractiveness
         Industry Evaluation
• Environmental Analysis
  – Threats
  – Opportunities
  – Uncertainties
             Industry Sales

           1998 Sales - in millions

           1,100   286
   1,800                              Xerox
                                      Sharp
3,000                                 Ricoh
                                      Minolta
                         18,000
                                      Canon
–   Overview / History
–   Image and Positioning
–   Objectives
–   Core Competencies / Strengths
–   Weaknesses
–   Overview / History
–   Image and Positioning
–   Objectives
–   Core Competencies / Strengths
–   Weaknesses
–   Overview / History
–   Image and Positioning
–   Objectives
–   Core Competencies / Strengths
–   Weaknesses
–   Overview / History
–   Image and Positioning
–   Objectives
–   Core Competencies / Strengths
–   Weaknesses
–   Image and Positioning
–   Objectives
–   Core Competencies / Strengths
–   Weaknesses
              Competitor Strength Grid
Assets and Competencies          Sharp   Canon   Minolta   Rocoh   Xerox

Technology

Alliances

Financial Position




  Strong      Average     Weak
The Company
     Company Background
        Description

A global enterprise addressing the
worldwide document processing market
which develops, markets, services, and
finances a complete range of products and
services designed to make offices around
the world more productive.
               Background
                 History

•   1959 - Model 914 Copier Introduced
•   1970 - Literal Monopoly on the Market
•   1975 - FTC Settlement Occurs
•   1976-1982 - Share Decreases to 13%
•   1980 - Focus on Leadership Through Quality
Xerox Introductions & Market Share
 120

 100

  80
                                                                              New
  60                                                                          Product        New Product &
  40
                                                                              New
                                                                                                 Copier
  20                                                                          Copier
                                                                              Introduct
                                                                                              Introductions
   0                                                                          ions
       1961-64 1965-68 1969-72 1973-76 1977-80 1981-84 1985-88 1989-92



                                                                         35
                                                                         30
                                                                         25
                                                                         20                       Low-End Copiers


                                        Market Share                     15
                                                                         10
                                                                                                  Mid/High End
                                                                                                  Copiers
                                                                          5
                                                                          0
                                                                              1984        1993
    Yet, Net Income is Declining
   $800
   $600
   $400
   $200
     $0
  ($200)
                                                     Net Income
  ($400)
  ($600)
  ($800)
($1,000)
($1,200)
           1993 1992 1991 1990 1989 1988 1987 1986
             Background
    Corporate Restructuring — 1992
•   Decision Making Moved Closer to Customer
•   Greater Focus on Core Competencies
•   Focus on Core Business
•   Focus on Benchmarks
•   Workforce Reduction
     Information Management
• 1970s - CIM Established
• 1987 - General Services Division Established

  Mission of CIM was now to . . . “develop the
  IT strategy for Xerox and ensure that it was
  implemented in all the business units.”

• $500 Million IT Budget
      Information Management
     IT Strategy Consulting Firm
           Finds Problems
• No coordination of money spent each year
• No Corporate-Wide Management of IM
  Investment Priorities
• A Peripheral Player in IT Management
• Narrowly Focused IM Talent Pool
• Senior Managers Stingy With IT Infrastructure
• Redundant / Overlapping Efforts
• No Staff Development Mechanisms
            Centralizing IM
   Wallington Presents at President’s
    Council Meeting — April, 1993


• $670 Million spent on IM in 1992 —

• Forecast to grow to $1 Billion by 2000 —

• . . . Amounts to 3.7% of total revenues!
 IM 2000 Reengineering Project
          Mid-1993

• Identification of IM problem areas
• Strategies to address those problem areas
• Projects implemented to fix problem areas

  Goal: Move IM to a new information
  systems infrastructure.
Regional IM Infrastructure
      Product Line Focus
(Many different products per circle)
              Problems Revealed
•   Aging applications portfolio
•   Proprietary technologies from previous structure
•   Large spending for legacy systems
•   Autonomous culture allowed for costly duplication
          IM 2000 - Strategies

•   Reduce / Redirect
•   Infrastructure Management
•   Leverage Worldwide IM Resources
•   Business Process Driven Solutions
               IM 2000
      Internal Obstacles Remain
• Conflict between IM problems and IM customers -
  the business divisions
• Little discipline of both time and money
• Internal costs of $55 million for hardware
• Viewed as an “expense center’ by top executives
             IM 2000
      External Forces Create
         Final Pressures

• Increasingly competitive environment
• Forced to adapt quickly
. . . “Top IM managers began to realize
they would not be able to change quickly
enough without outside help.”
Outsourcing & Xerox:
       What?
       Why?
       How?
        What was and What is
           Outsourcing
• Outsourcing was looked upon as the
  business strategy associated with
  downsizing

• Outsourcing now is looked upon as
  utilizing the best expertise in local laws and
  business customs.
        What is Outsourcing?
• Is the strategic use of outside resources to
  perform activities traditionally handled by
  internal staff and resources.
• Mgmt strategy by which and organization
  outsources major, non-core functions to
  specialized, efficient services providers.
• Wholesale restructuring of the corporation
  around core competencies and outside
  relationships.
 What is Outsourced?
                                    Admin
   Others                            9%
    22%
                                                   Mkt & Sales
                                                      14%




 Fin
11%



                                                 IT
        HR                                      29%
       15%
        Admin   Mkt & Sales   IT   HR   Fin   Others
 Industry Trends in Outsourcing
• According to the Outsourcing Institute, 80%
  of Fortune 500 companies outsourced some
  or all of their information management
  function in 1997.
• These services accounted for 42 billion
  dollars in1996, a number expected to grow
  exponentially in the next decade.
             Porter’s Five Forces
                     Threat of
                    new entrants




Bargaining           Competition      Bargaining
 power of           among existing     power of
 suppliers              firms        existing firms




                       Threat of
                       substitute
                       products
         Reason for Five Forces
• Basis of competition
• Focus on core competency
• Create a competitive advantage
  –   Build barriers to entry
  –   Build switching costs
  –   Change the basis of competition
  –   Balance power in supplier relationships
                    Basis of Competition
                              Competitive Advantage

                        Lower Cost           Differentiation


               Broad
               Target   Cost Leadership     Differentiation
Competitive
  Scope

              Narrow                         Differentiation
                          Cost Focus
               Target                        Focus
   Need for Outsourcing is driven
       less by cost than…..
• Rapid access to new
  technologies and skill
  sets.
• Better responsiveness
  to changing conditions.
• Faster IT cycle times.
       Top Reasons Companies
             Outsource
• Reduce and control operating costs.
• Gain access to world class capabilities.
• Resources are not available.
• Allows you to free up resources (people and
  capital) to work on your core business (i.e.. focus).
• Improves capacity and quality.
• Makes new business possible.
     Reasons Companies do NOT
             Outsource
•   Difficult to successfully implement.
•   Problems regaining knowledge.
•   Differing company strategies.
•   Core competency.
•   Lack of control.
•   Lack of expertise.
                IT Outsourcing
• Fastest growing area for outsourcing today.
• Executives are currently outsourcing:
  –   Maintenance / repair
  –   Training
  –   Applications development
  –   Consulting and reengineering
  –   Mainframe data centers
               IT Outsourcing
• Executives are considering outsourcing:
  –   Client / servers
  –   Networks
  –   Desktop systems
  –   End-user support
  –   Full I/T outsourcing
        Outsourcing at Xerox
• Outsourcing versus integration.
• Create win:win relationship.
• Share values to create a true partnership.
• Develop “spirit of the contract” for senior
  management to and understand.
• Create infrastructure to support companies
  strategic direction in the 90’s.
      Outsourcing Process
             Phase I - Fact Gathering


Phase II - Request for Proposal and Data Gathering


Phase III - Feasibility and Management Approval


   Phase IV - Baseline Building and Evaluation


 Phase V - Due Diligence and Contract Awarded
Phase I - Fact Gathering

 Vendor                    Benchmarking
 Selection
                 IT
               Partner




             Outsourcing
             Objectives
      Phase I - Fact Gathering
• Vendor selection team
  – Cross-functional representatives
  – Establish outsourcing requirements, objectives,
    goals, and timeline
  – Conduct industry benchmarking
      Outsourcing Objectives
• Drive down spending on “legacy” system
• Improve quality and cost of IM services
• Focus company’s resources on the primary
  mission.
               Xerox Benchmarking
•   Outsourcing Strategies
•   Outsourcing Processes
•   Vendor references
•   Human resource impact
Companies
• Salomon Brothers   • AT&T
• General Motors     • Kodak
• Equifax            • Sun Microsystems
• First Boston       • McDonnell Douglas
                            Vendor Selection
Qualifications                                                  Financial
• Global Presence                                               • Translation of productivity
• Capability to manage                                          savings to Xerox
“globally”                                                      •Flexibility in meeting Xerox
• Experienced in large scale                                    financial requirements
outsourcing                     “Soft” Criteria                 •Experience in
•“Core” strengths in various    • “Congruence” with             “engineering” financial
frameworks                      positive Xerox environment      environment
•Mgmt processes and strengths   • Provide benchmark for
                                desired Xerox cultural traits


Human Resources                                                  Technical Solutions
• Treatment of Xerox                                             • Productivity Commitment
employees                                                        • Support for existing Xerox
•Human resource values                                           diverse environment
                                                                 •Capability to “migrate”
      Outsourcing Process
             Phase I - Fact Gathering


Phase II - Request for Proposal and Data Gathering
   Phase II -Data Gathering and
      Request for Proposal
Prepare a Request for a Proposal
   Be structured in a way that will allow assessments and
    comparisons to be done in meaningful way
   Define requirements in complete and measurable terms
   Describe the type of relationship you are looking for
   Explain the problems that you are trying to solve
   Ask specific questions about corporate culture
   Present the current costs to the organization
   Specify a service level
   Phase II -Data Gathering and
      Request for Proposal
Data Gathering
• Research the Vendors
  – Financial Stability, potential mergers, takeovers
• Questions and Answers
      Outsourcing Process
             Phase I - Fact Gathering


Phase II - Request for Proposal and Data Gathering


Phase III - Feasibility and Management Approval
    Phase III - Feasibility and
     Management Approval
• Outsourcing feasibility
• Recommendation to Management for
  approval to proceed
      Outsourcing Process
             Phase I - Fact Gathering


Phase II - Request for Proposal and Data Gathering


Phase III - Feasibility and Management Approval


   Phase IV - Baseline Building and Evaluation
Phase IV - Baseline Building and
           Evaluation
• Evaluate the vendor responses
  – Systematic
  – Measurable
  – Meets objectives
• Select the vendor for contract negotiation
       Lessons Learned - Xerox
•   “What you want” is essential
•   Clear objectives are key
•   Cross functional team is a necessity
•   A good contract requires a lot of data
      Outsourcing Process
             Phase I - Fact Gathering


Phase II - Request for Proposal and Data Gathering


Phase III - Feasibility and Management Approval


   Phase IV - Baseline Building and Evaluation


 Phase V - Due Diligence and Contract Awarded
    Phase V -Due Diligence &
       Contract Awarded

Outsourcing deals that go bad frequently
suffer from poorly designed contracts -
“Outsource Sense,” InfoWorld, September 1996
    Managing the Outsourcing
         Relationship
• Create a Shared Vision
• Include Effective Performance Measures
• Use Performance Incentives and Penalties
• Establish Clear Communication
  Mechanisms
• Develop a Clear Contingency Plan and Exit
  Strategy
• Manage People Issues
    Negotiate a Sound Contract
• Terms of the         • Disclaimers
  Agreement            • Bankruptcy
• Minimum Service        Contingency
  Levels               • Force Majeure
• Ownership &          • Performance Measures
  Confidentiality of   • Anticipate Change
  Data
• Warranty
• Incentives
         Global Complications
•   Various Human Resource / Employee Laws
•   Degree of Risk
•   Political Instability
•   Various Asset Transfer Laws
 Xerox: Outsourcing Partnership
       Xerox


Information Technology
  System Development
                                           EDS



                            Tactical
                         Implementation

                                          Infrastructure
                                           Management
                                     Telecommunications
                Mainframe Computer
                                                           Desktops
                      Systems
                                     Local Area Networks
      Xerox: Status in June 1994
•   Xerox/EDS Core Teams Created
•   Massive Internal PR Campaign Initiated
•   Switch Incentives Offered
•   Assured Confidentiality
•   Divorce Issues Addressed
•   Annual Price Benchmarking
•   Single Global Contract
•   Key Global Players Added to Team
        Xerox: Status 1996/1997
• Xerox “Satisfaction at the Low End and Dropping”
• 2000 Employees Transferred to EDS / 700 Remain
• After 2.5 Years 15% of Proprietary System Replaced
  (Global View)
• 600 Novell LANs installed
• 1000’s Desktops and Printers Replaced
• 12 Person Xerox Team Established to Manage
• Contract Amended in Sept 1996
        Contract Addendum
• Clarified Terms for Desktop and LAN
  Support
• Established Formalized Response Metrics
• Established ‘Managed Rate Change”
• Eliminated Billing Inconsistencies
       Xerox: Status 1999



EDS Files Suit Against Xerox February
                 1999
           Differing Views
    EDS Literature        Xerox Testimonials
• Collaborative       •   Technology Transition
• Value Transition        Painful
  Employees           •   Standard Architecture
• Communication Key       not as Complete as
                          Proprietary Systems
                      •   Spent More Time Co-
                          Managing Than
                          Expected
                      •   More Costly
Conclusion
               Summary - Decision
  Printing, Publishing &
Electronic Media Industry:
Competitive Environment
          Technologically Focused

                    Emerging Technology:
                   Xerox Core Competency

                             Information Management
                               Not Core Competency

                                      Outsource Non-Core
                                         Competency
            Summary - Process
• Process
  – Focused
  – Management Buy-in
  – Benchmarking Utilized
• Implementation
  – Underestimated Change in Information
    Technology
  – Service Specifics Not Addressed
             Recommendations
• Outsource Non-Core Competency Functions
• Write Air-Tight Service Level Agreements for
  Every Strategic Business Unit & Every Platform
• Define Graduated Levels of Performance and
  Penalties Based on Customer Satisfaction
• Don’t Compromise Service Levels with Price
  Negotiation

				
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