Atos acquires Xerox’s ITO business – better times ahead for outsourcing

Atos agreed to purchase Xerox’s IT Outsourcing business in the middle of December last year for $1.05B with an additional $50M for certain assets in a deal which should close in the first half of this year. I thought it would be fun to look at the consequences from a business and geographic point of view.

Xerox’s ITO business had revenues of around $1.5B in 2014, 9.8k employees including 4.5k in the US and 3.8k in global delivery countries such as India, the Philippines and Mexico, 18 data centers and supports 350k desktops and 28k servers for its customers. It claims to be the first North American organisation to achieve ISO/IEC 20000 certification.

This is not the first partnership for the 2 companies – Atos already uses Xerox managed print, HR and financial services, while Xerox uses Atos for ITO work in Europe. It will help Xerox focus on its managed print services and other activities which provide stronger revenue growth than ITO, while allowing Atos to expand its operations in the US three fold.

Xerox entered the ITO business in September 2009 by acquiring Affiliated Computer Services (ACS) for $6.4B – a year and a half before Atos bought Siemens IT Solutions in July 2011. Both moves increased revenues significantly at the time, although Atos has done better in the recent past partially through buying Bull.

The deal is interesting for a couple of reasons. In particular:

• Outsourcing has been sluggish for all vendors from a revenue growth point of view, with the business peaking in 2011.
• Profitability has been weak in recent years
• Traditional outsourcing looks very old fashioned in comparison with cloud and other Op Ex models

It may be surprising, but I think Outsourcing is going to become much more profitable as the business is modernised and through economies of scale created by the creation of larger suppliers (as illustrated by Atos and Xerox). My forecast for revenues and net profits is shown in the Figure.

The key to success in the future will be the flexibility to support customer business (especially in workplace, as opposed to desktop, outsourcing) and improving agility to provide solutions rapidly through virtualisation techniques and new software. This will result in an improvement in profitability from around 9% in 2014 to 20% in 2019. If I’m right it would look as if Atos is making a smart move here.