Xerox returns to its “software roots”

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Something old, something new, a lot more colour, and to software stay true…that’s the way it’s going to be for Xerox Corp.

The company is reaching back to its roots even as it switches to digital technology to replace a dying product line.

The Stamford, Conn.-based firm is dumping its old “light lens” equipment for digital systems, and focusing on software development as it moves inexorably towards a colour copy world.

The shift is vital as colour copies generate fives times the revenue of black and white, according to an industry analyst.

“We want to be known as a services and solutions company and to that end we’re developing more software to be embedded in the solutions we offer,” said Anne Mulcahy, chairman and CEO of Xerox.

The company is tapping into an old strength to gain new ground, according to an industry observer.

“From my point of view, they’re tracking back to their software roots,” said Roberta Fox, principal and senior partner at Markham, Ont.-based IT consultancy Fox Group Inc. “They started developing Ethernet technology way back in the mid-1980s.” Fox said the software development was done in Xerox’s North Carolina facility, where the company produced document and image management applications. The work did not gain much publicity because it was done mainly for the U.S. Defense Department.

While Xerox is doing software development at its own facilities, it is outsourcing other key parts of its value chain.

This approach has paid off in spades – judging by the numbers cited by Mulcahy. She said the outsourcing strategy enabled Xerox to cut more than US$3 billion in expenses, with its profits hitting a cool US$978 (on revenues of US$15.7 billion) in 2005.

This year though is a different story. Acknowledging that equipment sales have fallen, Mulcahy said this had more to do with pricing than activity. “What’s happening is we’re transitioning from an old technology to a new technology.” She said sales of their digital units have been growing by three to five per cent.

Xerox still has an inventory of light lens machines but there’s very little of it left, she said. “Until it’s all gone it continues to create a drag in revenues.”

Xerox derives two-thirds of its revenues from products released two years ago. It introduced 49 new products in 2005. This year, the company has so far launched five new colour copiers. Mulcahy did not announce new offerings, but said Xerox was “not slowing down the technology pipeline.”

Any increase in R&D (research and development) is a good thing, said Fox. She said Xerox could be developing new products as well as “pulling out of the lab things it had worked on some time ago.” The analyst said the company’s move away from light lens technology and its decision to harness its software expertise may have be driven by rival Hewlett-Packard (HP) Development Co.’s forays into the large copier market. “Initially Xerox cornered the market in building big copiers. Now HP has a market share equivalent to that of Xerox.”

Fox said service and software development provides an excellent opportunity to counter that since it provides annuity revenue. “Developing services and software licensing delivers ongoing revenue as opposed to hardware which gives you a one time income.”

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