Lexmark’s Sale and Xerox’s Split – Do Advanced Services Really Work as a Business Model?

Xerox has a long history with services, including in the early 60’s when they pioneered the pay for use model with per page pricing. In fact, this was so successful, a government decree several years later required Xerox to shift to a transactional sales model! But by the late 1990’s Xerox had started a significant shift back again under Ursula Burns with Xerox reaching a level of servitization (yes – that is a real word) where over 60% of their revenue came from services. In fact, a few years ago, Ursula Burns (former CEO of Xerox) set a goal of reach 70% services by 2017. Now, we are seeing Xerox sell broken into two companies. The Xerox Corporation and Conduent which is largely composed of the former ACS services organization. Xerox had tried to implement a strategy where they used the ACS services business (which was primarily people outsourcing, a business that is very difficult to scale) to capture a bigger share of the total corporate business. For example, the concept was an HR group would be outsourced to Xerox and then Xerox would use that outsourced HR business to capture more of the outsourcing/MPS, imaging, and services businesses across the corporation.

Lexmark began its journey into MPS in the early 2000’s, with a focus on protecting their printer fleets by winning MPS contracts. Lexmark leveraged their strong vertical relationships (often focused around a specific line of business like pharmacies) to extend MPS contracts to capture the entire corporate fleet. This was accelerated further as they spent $2B (USD) to buy software companies with the idea they would capture the workflow in addition to the imaging fleets. Lexmark was often cited as being one of the most progressive firms in terms of going after advanced MPS engagements associated with workflow and software. At the end of November, Lexmark’s story entered a new phase with the completion of their acquisition by APEX, a remanufacturing holding firm.

So here we have two leading firms, Xerox and Lexmark, that both appear to have ‘failed’ to have realized the full potential of their servitization efforts with Xerox being split up and Lexmark being sold to one of the very firms it so actively sued a few years earlier over supplies remanufacturing IP issues. Is this a sign that servitization doesn’t work? That Xerox and Lexmark were changing the wrong goal?

I would argue no.  Xerox was a case of a very good execution of a bad strategy, while Lexmark was a great strategy that was poorly executed. So what went wrong? Xerox counted on being able to make ACS’s business scalable with technology.  The problem is that Xerox never moved beyond people outsourcing in the ACS business, and that simply isn’t very scalable. It becomes a business where the client is just pushing for continual cost reductions in what is already a relatively lower margin business model.

Lexmark basically ran its software business and its legacy imaging / MPS business as two separated businesses. They only did a few deals where there was one sales force and one contract that drove both software and MPS/ imaging.  The company kept two management structures in place and two different sales teams in place. And then they were surprised when they never were able to create a unified selling process.

There was also a fatal flaw in both Lexmark and Xerox’s strategy. Neither firm ever acquired a strong consulting organization to actually drive their advanced MPS into the clients organization. If you look at IBM, Accenture, or any other firm that is a major player in using technology to drive business process and workflow change (which is what true advanced MPS/ADS is) has acquired or built significant consulting capabilities. IBM bought PWC.  HP bought EDS (some could argue how successful this was). In order to drive technology that will change how people work – you need consultants that can examine the existing processes, identify the best technologies and processes, and then help the customer actually implement them.  This isn’t something that someone who has been ‘pushing boxes’ is going to transition into. This requires a completely different skills set that is really lacking in both organizations.

So, what is the lesson to be learned?  First – even the best strategy will fail if it is executed poorly.  Execution is just as important as strategy. However, great execution of a bad strategy is also doomed to failure.  You can’t execute your way out of a bad strategy. And finally, if you don’t have the consultative capabilities to engage customers in advanced services, your ability to drive revenue out of advanced services is going to be severely limited.

I firmly believe in the services business model.  Firms in our industry are achieving great success with it.  Firms in other industries (Rolls Royce Jet Engines is a great example) are making significant gains in turning their businesses into being services led. Did you know that GE Industrial group gets over 50% of their revenue from services?

This is a business model whose time has come – but it takes a good strategy, good execution, and the right skills.

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