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Commentary & Analysis

Annual Xerox Corporate Consultant Briefing

by Cary Sherburne,

By WhatTheyThink Staff
Published: June 30, 2003

by Cary Sherburne, contributing analyst condensed by Noel Ward, Executive Editor June 30, 2003 -- Chairman and CEO Anne Mulcahy kicked off the event, reviewing the company's progress from a financial and organizational perspective, reiterating that Xerox has returned to profitability, the company is focused on growth, strengthening its governance, and staying the course on key investments. Throughout the two-day event, presentations focused on the theme of "A New Way to Work: Helping People Find Better Ways to Do Great Work." As an industry-watcher who has observed Xerox from both inside and outside for many years, this presentation was the first time I have seen a crisp articulation of strategy that is consistent across organizational boundaries. The company has identified five core competencies that are relevant to the three elements of its business: Production, Office and Services. The chart below was used throughout the session to demonstrate the linkages: Xerox also claims to be leading with a services strategy, which it sees as a 5% growth opportunity, a growth rate that would have looked meager just a few years ago, but which looks pretty good in today's market. While a services strategy is important-and clearly what customers are increasingly demanding-it is a tough balancing act for an equipment manufacturer. Execution, and "staying the course", will be key for Xerox' future success; sliding "back to boxes" if equipment revenues suffer a decline will be the temptation. Meanwhile, Xerox had a $3 billion cash balance at the end of the first quarter of 2003 after ten straight quarters of good cash generation, and continues, as Mulcahy put it, "relentless pursuit of cost management." Following the model that enabled its turnaround after its near extinction in the late 1970s, Xerox has now thrown its organizational self into Six Sigma with a vengeance-taking it even a step further with what the company calls Lean Six Sigma. According to www.isixsigma.com, an information portal for Six Sigma, Total Quality Management and other strategies: Six Sigma is a rigorous and disciplined methodology that uses data and statistical analysis to measure and improve a company's operational performance by identifying and eliminating "defects" in manufacturing and service-related processes. Commonly defined as 3.4 defects per million opportunities, the goal of Six Sigma is to increase profits by eliminating variability, defects and waste that undermine customer loyalty. In its implementation, Xerox has gone one step further, building on Six Sigma with Lean Manufacturing concepts. Lean manufacturing focuses on eliminating all waste in manufacturing processes. Xerox has 200 different Lean Six Sigma projects underway, attacking waste and inefficiency at all levels. A third of these projects specifically target customer-facing processes and growing revenue, while half are aimed at improving productivity. Mulcahy said Six Sigma is increasingly a requirement in large bids, stating that Xerox recently won a contract with Bank of America valued at $50 million in which Lean Six Sigma was the key competitive differentiator. Bullish Strategy Mulcahy said, "We are bullish about the business, but humble about keeping our eyes on the marketplace. We have learned from our mistakes and we are now well positioned for growth." Jim Firestone, President of the Corporate Operations Group, followed Mulcahy with a discussion of growth dynamics. He pointed out that the 1990s were all about wiring the enterprise to accommodate internal and external resources, and remote workers. He also said, "Technology has been about extending the hours we work, and we have exhausted that avenue. Now we have to change the way work is done." Firestone lamented the limited investment in digital technology occurring within the graphic arts industry, and suggested that this lack of investment could drive enterprises to bring an increased amount of work back in-house at the expense of graphic arts service providers. This poses an interesting conundrum for Xerox: With its channel arrangements with Enovation and Kodak Polychrome Graphics targeted at the graphic arts industry and operating in partnership with the Xerox sales force, there is significant opportunity for channel conflict with Xerox sales representatives working hard to convince enterprises (the customers of the graphic arts service providers!) to bring work in-house, while at the same time working with channel partners to convince graphic arts establishments to make big investments in digital. It will be interesting to observe how this actually unfolds. Production Systems Group Headed by Xerox veteran Gil Hatch, the theme of the Production Systems Group is "Delivering the Promise of the New Business of Printing." This organization is responsible for black & white and color production printing devices, including the company's continuous feed offerings. Hatch indicated the production color business is not yet profitable due to the heavy investments that have been required. A key element of the production strategy is a new workflow umbrella, announced at On Demand and branded as FreeFlow digital workflow collection. With this offering, Xerox begins to bring together the various workflow elements within its portfolio in a modular collection, from prepress through finishing. For the first time, Xerox is providing APIs for the DocuSP controller to its partners EFI and Creo to enable, for example, exception page programming from the partner controller. This is a first for Xerox, having operated within a primarily proprietary framework historically. Xerox plans to leverage Creo solutions and presence in the commercial print and service bureau/data center environments, and EFI in the in-plant print/CRD, quick/franchise printer and creative services arenas, with both partners contributing to Xerox' ability to gain greater market penetration. Hatch maintains that continued success for Xerox in the production environment still requires significant investment but believes that the investments will pay off, saying, "Market entry barriers are high; you need a big will and a big wallet." One of the investments Xerox is making is in the building of a digital imaging center in Western New York that will consist of a show floor with both Xerox and competitive equipment, integrated with FreeFlow. The company aims to open this facility within the next year. In the production environment, Xerox sees the cost of color continuing to decline, projecting the average cost of color in the 41+ ppm segment, including the iGen3, to decline to a nickel by 2006. Xerox is evaluating a number of pricing and bundling strategies in the production environment for increased go-to-market flexibility. In 2002, Production Systems accounted for 29% of Xerox revenues. Global Services This is an area of Xerox' business that has undergone significant organizational and strategic transformation. Accounting for $3.6 billion in revenue in 2002 and headed by Tom Dolan, Xerox Global Services consolidates seven discrete organizations in an attempt to gain operational economies of scale. The focus of the organization is the document, and as Dolan says, "not necessarily the printed document." He admits that the establishment of a services-centric business is a challenge that represents a significant cultural shift from a product-based to a professional services model. The Global Services organization has been distilled down to five discrete practice areas with its go-to-market strategy depicted in the figure below. The five Business Innovation Services practices operate in partnership with Xerox Account Managers, and cross-compensation strategies are in place to foster cooperation. "In Global Services, our people are our product," says Dolan. He admits Global Services is behind in its revenue plan year-to-date due to the economy and to the impact of organizational change, but is anticipating full-year growth as billing rates and utilization are beginning to improve. Still, services revenues, which are accounted for within the Office and Production operations, represented 25% of Xerox's 2002 revenues. The Brand Xerox is placing renewed focus on its brand. After several years of deemphasizing the name Xerox in favor of The Document Company, the company redesigned its logo to place more emphasis on Xerox. In 1999, according to a Harris Interactive survey, Xerox was the seventh most respected brand in the U.S., behind Johnson & Johnson, Coca Cola, Hewlett Packard and others. As its financial woes began to unfold, it dropped to Number 21 in 2000 and Number 31 in 2001. As the turnaround gained momentum, the brand respectability began to climb again, ranking Number 21 in 2002. Xerox's global brand equity is valued at $6 billion-compared to that of Coca Cola at $60 billion and HP's at $14 billion. The multimillion dollar U.S. advertising campaign and the process of eliminating widely divergent internal and individual product logos are signs of the investment Xerox is making in reestablishing the brand. The company is also undertaking licensing initiatives to increase the presence of the brand in small offices; for example, in partnership with ProView, Xerox will be marketing a Xerox-branded LCD flat screen monitor. Summary The 2003 Corporate Consultant Briefing was marked by consistent cross-organizational messaging, and a high level of enthusiasm and professionalism. The strategic shift to leading with services and the emphasis on an aligned portfolio of workflow offerings, combined with an aggressive product roll-out strategy, position the company for growth. Embedding Lean Six Sigma into the culture is driving its cost structure down-and the unifying impact of Lean Six Sigma within a corporation cannot be underestimated. The key to the future of Xerox as a viable, vital, growth company lies in its ability to execute these strategies effectively, a sentiment that was echoed by almost every presenter during the session. After stumbling badly for the second time in its history, Xerox is poised to return to a position of strength-and the world is clearly watching to see what the outcome will be.



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