Xerox is one of the largest companies in the document processing products and services industry. Xerox held a virtual monopoly in the plain-paper copier market until the Federal Trade Commission intervened. In 1975 Xerox was forced to forfeit patent protection and had to license to competitors. Xerox’s markets share dipped from 80% in 1976 to 13% in 1982. In order to become more competitive, Xerox began to use benchmarking, Leadership through Quality and employee involvement initiatives. These initiatives helped grow Xerox’s market share back to 18% in the low end copier business and 35% in the mid-to-high end. Despite the improvements in market share the financial performance of the company declined. Therefore in 1992 a major reorganization was planned, Xerox would change from a geographic organization to a market segment organization.
Xerox corporate information management (CIM) unit was established in the early 1970s. In 1987, CIM was moved to the General Services Division and was given the task to “Provide the overall information technology leadership to the company.” The leader of the CIM group quickly realized the task was not possible without significant organizational change. After bringing in consultants to review the Information Management at Xerox, the director of CIM realized the Xerox IM infrastructure could not support the company’s strategic direction. To address the IM problems, CIM started a new initiative, “IM 2000”. The goal of IM 2000 was to move Xerox to a new information systems infrastructure.
The problems found with Information Management at Xerox
•     Aging application portfolio built on proprietary technologies
•     Large cost associated with keeping legacy system running
•     Duplicate work caused by corporate culture – autonomy
The IM 2000 design team recommended the following four strategies
1.     Reduce/Redirect
     Reduce overall costs by reining in the expense of legacy system. Use savings to fund new applications and infrastructure.
2.     Infrastructure Management
     Move to a industry standard infrastructure that would be managed centrally – a client server environment.
3.     Leverage worldwide IM resources
     Create library of shareable core modules.
4.     Business process-driven solutions
     The current legacy system was to be replaced by solutions supporting new Xerox business process.
Xerox’s earlier quality initiatives had created a corporate culture used to having a partner relationship with suppliers. Because of this, management suggested IM should look at outsourcing as an alternative.
Typical Reasons for Outsourcing
•     Concerns about Cost and Quality
o     Vendors save money by
     Running much leaner overhead structures than their customers
     More aggressive use of low cost labor pools (India)
     Staff must keep up to date on newest IT practices
     Purchasing Power
     More efficient use of capacity
     Better Control over software licenses
     More aggressive management of service and response time to meet corporate standards.
     Outsourcing is their only business and their success is measured by customer satisfaction
     The ability to run with a leaner management structure
     The ability to access higher levels of IT skills.
     Creative and more realistic structure of leases
•     Breakdown in IT performance
o     Failure to meet service standards – could be impression
o     The need to rapidly retool backward or obsolete IT structures
•     Intense Vendor Pressures
o     Large visibility and aggressive sales force enable vendors to “sell” the value of their services
•     Simplified General Management Agenda
o     Allows management to focus on its competitive differentiates as long as IT is not a core competency
•     Financial factors
o     Liquidate the IT assets
     Up-front capitol paid by vendor
o     Turn fixed cost business to variable cost
o     Hard dollar expenditure
     Users must use discipline which can be lacking with soft-dollar allocations
o     Allows firms looking to sell to get value for an asset unlikely to be recognized
•     Corporate Culture
o     Allows consolidation of services even if the internal IT department lacks power to do so.
•     Internal Irritant
o     Remove tension in the organization
Xerox Explicit Reasons for Outsourcing
•     Conflict between IM and Division leaders
o     Business Division did not understand problems faced by IM. Division would overload IM with tasks and complain about how inefficient IM was.
•     Funding constraints - $55 million just for hardware
•     Viewed as expense center – no value added
•     Extremely competitive business environment
•     The need to adapt IM 2000 quickly
Five factors dictate whether outsourcing benefits outweigh the risks; Position on the Strategic Grid, Development Portfolio, Organizational Learning, A Firm’s Position in the Market and Current IT Organization. Xerox’s decision to outsource can be evaluated on these criteria to determine if management did the proper due diligence before making their decision
The Positions on the Strategic Grid can be broken down into four quadrants
Factory – uninterrupted service oriented information resource management
Outsourcing presumption: Yes unless company is well huge and well managed     Strategic information resource management
Outsourcing Presumption: Mixed

Support-oriented information resource management
Outsourcing Presumption: Yes     Turnaround information resource management
Outsourcing Presumption: Mixed

Xerox falls into the factory quadrant. This quadrant presumption is to outsource unless the company is huge and well managed. Xerox would fall into the huge category but not the well managed.
     The Development Portfolio factor would also suggest outsourcing is a viable solution for Xerox. Most of Xerox IT functions can be described as high-structure projects therefore the benefit of going to outsourcing could realize itself in
•     Lower cost due to the a vendors access to high quality low cost labor pools in countries such as India
•     Specialized staff with leading edge technical skills
The Organizational Learning Factor and Xerox’s position in the market also leads to outsourcing. Xerox has not been able to transform the IT structure because of a lack of support among the division leaders. A vendor would be more apt to get the attention and resources need for a complete transformation. Xerox has serious challenges in modernizing itself from the legacy systems it uses. The outsourcing vendor could not afford to keep the old system running; therefore they will force a change to a modern system. The vendor will have the expertise in transitioning the company to the new system so most issues can be avoided.
The Current IT Organization factor does not lead to outsourcing as the logical choice. The IT unit is not stand alone and has not developed the fundamental integrating and control mechanisms necessary for an outsourcing contract. Even though one of the five factors is not fulfilled, the other four shows such a strong bias towards outsourcing that Xerox made the right decision.
Once the decision to outsource had been made Xerox needed to find a partner. The first step in the process was Fact Gathering which included literature search and request for information. The second phase was Request for Proposal and Data Gathering. Only two vendors and one vendor team formally responded to the request. The complexity of the project caused most companies to drop out. The third phase, Feasibility and Management Approval, was passed leading to phase four, Baseline Building and Evaluation. The criteria Xerox used to evaluate the proposal were:
     Vendor Qualifications
•     Global Presence
•     Capability to” Manage Globally
•     Experience in large scale outsourcing
•     Core strengths in various frameworks
•     Desire to create a different outsourcing environment
•     Management Process and strengths
Human Resources
•     Treatment of Xerox Employees
•     Human Resource Values
Technical Solutions
•     Overall productivity commitment: percent and credibility
•     Support for existing Xerox divers environments
•     Capability to help migrate
Financial
•     Translation of productivity savings to Xerox
•     Flexibility in meeting Xerox Financial requirements
•     Experience in “engineering” financial environments
“Soft” Criteria
•     “Congruence” with positive Xerox cultural traits
•     Provide benchmark for desired Xerox cultural traits
After review of the criteria one vendor was eliminated. The choice between the other two came down to a large global company with the right cost structure verse a smaller company with the right “cultural match”. The final phase, Due Diligence and Contract Awarded had Xerox chose the company with the right “reach” and hoped the cultural issues would be an advantage to initiate change. Xerox took a large risk by choosing a company, EDS, with a different business culture. Sometimes a difference in culture can cause a relationship to strain and eventually fail, especially over a ten year period.
The next step for Xerox was to structure the outsourcing relationship. Xerox needed to create a shared vision, to do this they formed a team consisting of three Xerox employees and three EDS employees. Once trust was established, the strategic relationship could develop. The two contractual issues that presented the biggest challenge were divorce issues and pricing issues. Pricing issues were solved by using benchmark mechanisms. Divorce concerns were not adequately resolved. Xerox took a huge risk in not having a formal exit strategy. Xerox should have negotiated the right to hire EDS employees working at Xerox if the relationship failed. Putting so much faith in one vendor without a backup plan could cause a company to commit business suicide. The final issue, Global Complexities, was solved by bringing in a new team member with international experience and making sure EDS would be compensated fairly.
The implementation of the contract ran smoothly because of the partnership which was developed between the two companies. The outstanding issues were, the structure of the organization, the IM operating process, the management process and the human resource management issues. The outsourcing decision looked good at this time but after doing further research some serious issues arose.
1996-1997
•     Xerox Satisfaction was at the low end and dropping
•     2000 employees transferred to EDS, 700 remain
•     After 2.5 years 15% of proprietary software replaced
•     600 Novell LAN’s installed
•     1000 desktop replaced
•     12 person Xerox management team established
•     Contract Amended in 1996
o     Clarified Desktop and LAN Support
o     Established formal response metrics
o     Established “Management Rate Change”
o     Eliminated Billing Inconsistencies
In 1999 EDS sued Xerox over stopped payments of $200 million dollars. The issue was billing disputes between the companies. The relationship seems to have weathered the storm and a new contract was signed to the year 2010. The lawsuit shows there were major issue in the relationship between the two companies. Profits for EDS were lower than originally projected, therefore to make a profitable arrangement EDS cut back on services. These cutbacks eventually led to a malfunction of Xerox billing system which grounded the company to a halt. Xerox expected a company to clean up a mess they could not solve but did not cooperate fully. Both companies decided the pain of working without each other was greater than the pain of working together so they have made the partnership work. If EDS had walked out, Xerox could have been destroyed. The other vendor might have been a better choice due to the business culture issues that developed, but outsourcing IT services was the right decision.