The latest decisions made by Xerox seem to miss out on the importance of the MIF.
(Editor’s note: This is the second in a series of articles written by The Cannata Report team on the latest developments taking place with Xerox and Xerox Business Solutions (XBS), the former Global Imaging Systems (GIS).)
Our first article, in the Xerox series, clearly defines the question of what is going to happen to Xerox. We all know Carl Icahn’s history of buying and then selling companies in pieces. It seems to have worked well for him and his partners as well as his fellow investors in the past.
Over the years, we have approached questions like this by looking through the prism of the dealer. Many of us thought that the most profitable piece of Xerox was Global Imaging Systems (GIS). Based on the latest news out of Xerox, GIS has been integrated into XBS. For all intents and purposes, Global does not exist anymore.
Two years ago, prior to the break up, Xerox reported a total revenue of $17 billion of which is a little less than $11 billion was the imaging piece. The balance was on the services side of the business.
GIS produced $2 billion in revenues and was responsible for 50% of the profit. The new leaders of Xerox did not see that as much of an accomplishment. Thanks to our sources GIS was not allowed to acquire in 2018. Despite that edict, GIS still grew organically last year and was a healthy distribution organization for Xerox.
The Icahn strategy is to cut overhead to increase profit. When you have an organization that has some 500 vice presidents, eliminating some of those positions is an easy way to begin. You clean out some dead-wood but also remove some important people. Some of those terminated were viewed internally as net contributors. These cuts also included those at core companies who were asked to reduce their number of vice presidents, starting with the highest paid.
Internally, we are aware of two highly qualified people in the corporate communication and production print segments of the business whose positions were cut. It is safe to assume there have been others. I suspect but have yet to determine if the same is true in the enterprise segment of Xerox’s business. If that were true, at least it would make the cuts consistent.
The technique of cutting the fat is a short-term solution to reduce overhead and gain profitability. In an industry where the benchmark for customer retention can be as high as 95%, skillful customer service and technical proficiency are essential.
Dealers pay a great deal of attention to the MIF (machines in field) because those machines generate large supplies and service revenue. Fully 50% of a dealer’s revenue comes from those two areas and provides most of the profit. This requires capable supervision and management.
Anyone who understands anything about this business knows full well the value of an imaging business is in the MIF. You must protect that MIF or you will lose it quicker than you thought possible.
By terminating key employees, some of whom are responsible for that MIF, Xerox is weakening customer retention. Compounding the strategy of terminating the high-priced employees, those making these decisions are reducing the prices of the machines to the dealers at a level that is below the transferred price of XBS (formerly Global and XBS).
They are turning inventory to dollars in the quickest manner possible by pushing the product out through dealers. Our understanding is that dealers have access to most of Xerox’s current products. As a result, dealers are well equipped to service almost all Xerox machines. As an accredited service supplier, how long do you think before the dealers begin an aggressive strategy to replace Xerox machines sold by the former GIS.
After studying dealer behavior and marketing strategies for 40 years we predict those Xerox dealers who are selling Xerox will use the following approach when selling to a Xerox customer.
We can replace your existing Xerox machine with a new Xerox machine. The important thing to consider is we (the independent dealer) can guarantee you service for decades as opposed to months. Everybody knows that Xerox will be sold. Do you want to take a chance that the new owners will be able to quickly take hold and stop the bleeding that the previous owners inflicted on their customers solely to inflate the stock price? And by the way, Mr. Customer, we carry two other lines with excellent capabilities should the transfer of ownership blow up because of contractual issues with the major supplier of those machines, Fujifilm.
We have seen this happen so many times even under the best of circumstances. For example, MT Business in Mansfield, Ohio was Ricoh’s largest dealer. They were dedicated and we estimate their sales were in the $75 million range. Once GIS took over, some of MT’s leading sales people left and were either riding out their non-competes or moved to another region so they could sell Ricoh. MT Business ended up losing the relationships its former reps had with their customers.
In our opinion, MT Business’s current sales revenue is close to half of what it was when it sold to GIS. That is not all that unusual even with a well-managed company such as GIS, which knows how to protect the MIF, converted its Ricoh MIF to Xerox. The important thing was that GIS understood the challenges of competitors who would now be selling Ricoh machines. Those competitors had a strategy and talent to deal with that challenge.
That talent at XBS (formerly GIS) has been eroded. We personally know of two core company presidents that have been terminated, making those locations weaker. A basic philosophy of GIS was having the previous owner continue to work for the company. Those former owners made it possible to maintain continuity, calling on existing customers and assuring them there would no change in the level of service there were accustomed to in the past during the transition of ownership.
Standard in these terminations, former employees are required to sign a non-disparagement clause, which prevents them from talking on the record. Given our experience covering situations similar to this during the past 40 years, enables us to forecast how we see this playing out.
Here is my prediction: Xerox or whatever is left of it will be sold. If it will be carved up, the supply and service revenue alone from the MIF is an enticing piece. I surmise that an erosion of its machine population has already begun.
The patent portfolio is another interesting piece. Without looking at the year end report I can predict that Research and Development will be in for its share of the cuts to improve profitability. If we are correct, that will also diminish Xerox’s value.
Another consideration of any sale of Xerox is the lawsuit with Fujifilm. My guess is that a settlement is in the wind and Fujifilm will, in the end, become the new owners of Xerox.
That said, whoever buys any part of Xerox that includes the MIF will face enormous challenges from competitors. To independent dealers who have taken on Xerox, good for you because we see you winning in this scenario all day long.
Post Script: There are former highly competent Xerox employees available on the street. We recently received a résumé that was an eye opener. That person will probably not be on the job market long. Dealers with significant resources may well begin to look at these people exiting Xerox for potential employment.
Read the first installment in the series.
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