Outsourcing Implications Mixed From ACS-Xerox Deal

Xerox’s acquisition of ACS means opportunity for learning outsourcing, but to what degree and for whom is not yet clear.

Last week, Xerox Corp. announced an agreement to acquire business process outsourcing firm Affiliated Computer Services (ACS) in a cash and stock transaction valued at $6.4 billion.

Under the terms of the deal, which won’t be finalized until the first quarter of 2010, ACS will operate as an independent organization and will initially be branded as ACS, a Xerox Company. Richard Klingshirn, executive managing director of the learning services group at ACS, said the deal has his learning outsourcing department poised for growth.

“We will benefit tremendously from a larger global footprint and an expanded client base, i.e., a new sales channel, for our services,” he said. “There’s no question in my mind that this business that I run today — the learning outsourcing business — is going to become stronger.”

Klingshirn said businesses shopping for outsourcing services are looking for providers with deep experience and financial stability, and industry consolidation has left few major players able to deliver in learning outsourcing.

“Go to the top 20 training outsourcers and you see names you recognize, like ACS and General Physics and Raytheon, but then you see a whole bunch that you don’t recognize,” he said. “With all due respect to my colleagues in the industry, there are an awful lot of very, very small companies that I don’t believe have the size, scale and financial stability to deliver on the global training needs that we’re seeing come to market today. Our clients are looking for someone who [has] a global footprint, critical mass and centers around the globe, primarily Europe, Asia-Pacific and North America.”

Industry analyst Josh Bersin, president and CEO of consulting firm Bersin & Associates, said the learning outsourcing component is only a minor factor in the overall deal.

“ACS struggled with its learning outsourcing business,” Bersin said. “They have a big relationship with Ernst & Young, which is really the core of their learning outsourcing, and they built a technology platform and a set of services around that, and they’ve sold a few more major contracts, but not a lot of them.

“So I don’t see it as so much of a consolidation in terms of learning; I think it’s just a transaction that happened for many reasons other than that.”

The upside for the ACS learning outsourcing business is access to Xerox’s sophisticated internal training operation, Bersin said.

“They are actually quite focused on it for their own sales and service operation,” he said. “So the ACS learning group could potentially work with that group, and they could end up evolving their strategy and make it even more sophisticated.”

Bersin said the learning outsourcing industry is centered on complex deals that undergo a great deal of scrutiny driven by one of several reasons for the company considering outsourcing.

“Either they’re going through a massive cost-cutting program and they just need to reduce expenses, or they are fed up with the leadership of training and they think it can be done much better [outside the company], or they’re going through a business transformation and they need the learning function to be significantly more strategic,” Bersin said.

“If you look at Accenture and IBM, and to some degree Hewitt, who have done deals in the millions and sometimes in the multiple tens of millions of dollars, the companies who have outsourced [to] them have rigorously evaluated the offerings of outsourcers and their capabilities.”

ACS’s Klingshirn is bullish on the learning outsourcing industry and said business activity began picking up in spring 2009 after last year’s economic free fall.

“The mood is changing and people are looking at this training outsource business and saying ‘You know, there’s a real opportunity here,’ and I believe we’re well positioned to benefit from it,” Klingshirn said.

While the opportunities may be increasing, Bersin said large, complex deals are still infrequent.

“Most companies have cut their budgets for training in general and consolidated their training departments, and they are outsourcing more and more, but they’re outsourcing it to companies that do a lot of content development and content delivery, not just administration,” he said. “So companies like General Physics [and] RWD are doing very well. But in terms of outsourcing the whole function, those projects are hard to find right now.”

The Xerox deal does present an opportunity for ACS to grow its footprint, however.

“Xerox has done a really good job of building a printing and distribution services business,” Bersin said “So they might be able to go back to training departments and say, ‘Not only do we have this learning outsourcing business that can run the operation for you, but we can also do print media content distribution in a very extensive way,’ which is a major part of training.”