1. Outsourcing Global Information
Technology Resources

2. 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

3. 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?

4. 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

5. Case Study Team
• Jim Bodine
• Jeff Muckler
• Eric Mendola
• Ron Volans
• Amy Esposito

6. The Industry

8. Industry Evaluation
• Market Analysis
– Trends
– Key Success Factors
– Attractiveness

9. Industry Evaluation
• Environmental Analysis
– Threats
– Opportunities
– Uncertainties

10. Industry Sales
1998 Sales - in millions
1,100 286
1,800 Xerox
Sharp
3,000 Ricoh
Minolta
18,000
Canon

11. – Overview / History
– Image and Positioning
– Objectives
– Core Competencies / Strengths
– Weaknesses

12. – Overview / History
– Image and Positioning
– Objectives
– Core Competencies / Strengths
– Weaknesses

13. – Overview / History
– Image and Positioning
– Objectives
– Core Competencies / Strengths
– Weaknesses

14. – Overview / History
– Image and Positioning
– Objectives
– Core Competencies / Strengths
– Weaknesses

15. – Image and Positioning
– Objectives
– Core Competencies / Strengths
– Weaknesses

16. Competitor Strength Grid
Assets and Competencies Sharp Canon Minolta Rocoh Xerox
Technology
Alliances
Financial Position
Strong Average Weak

17. The Company

18. 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.

19. 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

20. 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

21. 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

22. Background
Corporate Restructuring — 1992
• Decision Making Moved Closer to Customer
• Greater Focus on Core Competencies
• Focus on Core Business
• Focus on Benchmarks
• Workforce Reduction

23. 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

24. 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

25. 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!

26. 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.

27. Regional IM Infrastructure

28. Product Line Focus
(Many different products per circle)

29. Problems Revealed
• Aging applications portfolio
• Proprietary technologies from previous structure
• Large spending for legacy systems
• Autonomous culture allowed for costly duplication

30. IM 2000 - Strategies
• Reduce / Redirect
• Infrastructure Management
• Leverage Worldwide IM Resources
• Business Process Driven Solutions

31. 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

32. IM 2000
External Forces Create
Final Pressures
• Increasingly competitive environment
• Forced to adapt quickly

33. . . . “Top IM managers began to realize
they would not be able to change quickly
enough without outside help.”

34. Outsourcing & Xerox:
What?
Why?
How?

35. 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.

36. 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.

37. What is Outsourced?
Admin
Others 9%
22%
Mkt & Sales
14%
Fin
11%
IT
HR 29%
15%
Admin Mkt & Sales IT HR Fin Others

38. 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.

39. 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

40. 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

41. Basis of Competition
Competitive Advantage
Lower Cost Differentiation
Broad
Target Cost Leadership Differentiation
Competitive
Scope
Narrow Differentiation
Cost Focus
Target Focus

42. 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.

43. 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.

44. Reasons Companies do NOT
Outsource
• Difficult to successfully implement.
• Problems regaining knowledge.
• Differing company strategies.
• Core competency.
• Lack of control.
• Lack of expertise.

45. IT Outsourcing
• Fastest growing area for outsourcing today.
• Executives are currently outsourcing:
– Maintenance / repair
– Training
– Applications development
– Consulting and reengineering
– Mainframe data centers

46. IT Outsourcing
• Executives are considering outsourcing:
– Client / servers
– Networks
– Desktop systems
– End-user support
– Full I/T outsourcing

47. 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.

48. 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

49. Phase I - Fact Gathering
Vendor Benchmarking
Selection
IT
Partner
Outsourcing
Objectives

50. Phase I - Fact Gathering
• Vendor selection team
– Cross-functional representatives
– Establish outsourcing requirements, objectives,
goals, and timeline
– Conduct industry benchmarking

51. Outsourcing Objectives
• Drive down spending on “legacy” system
• Improve quality and cost of IM services
• Focus company’s resources on the primary
mission.

52. 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

53. 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”

54. Outsourcing Process
Phase I - Fact Gathering
Phase II - Request for Proposal and Data Gathering

55. 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

56. Phase II -Data Gathering and
Request for Proposal
Data Gathering
• Research the Vendors
– Financial Stability, potential mergers, takeovers
• Questions and Answers

57. Outsourcing Process
Phase I - Fact Gathering
Phase II - Request for Proposal and Data Gathering
Phase III - Feasibility and Management Approval

58. Phase III - Feasibility and
Management Approval
• Outsourcing feasibility
• Recommendation to Management for
approval to proceed

59. 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

60. Phase IV - Baseline Building and
Evaluation
• Evaluate the vendor responses
– Systematic
– Measurable
– Meets objectives
• Select the vendor for contract negotiation

61. 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

62. 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

63. Phase V -Due Diligence &
Contract Awarded
Outsourcing deals that go bad frequently
suffer from poorly designed contracts -
“Outsource Sense,” InfoWorld, September 1996

64. 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

65. 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

66. Global Complications
• Various Human Resource / Employee Laws
• Degree of Risk
• Political Instability
• Various Asset Transfer Laws

67. Xerox: Outsourcing Partnership
Xerox
Information Technology
System Development
EDS
Tactical
Implementatio
n
Infrastructure
Management
Telecommunications
Mainframe Computer
Desktops
Systems
Local Area Networks

68. 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

69. 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

70. Contract Addendum
• Clarified Terms for Desktop and LAN
Support
• Established Formalized Response Metrics
• Established ‘Managed Rate Change”
• Eliminated Billing Inconsistencies

71. Xerox: Status 1999
EDS Files Suit Against Xerox February
1999

72. 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

73. Conclusion

74. 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

75. Summary - Process
• Process
– Focused
– Management Buy-in
– Benchmarking Utilized
• Implementation
– Underestimated Change in Information
Technology
– Service Specifics Not Addressed

76. 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