'Partner Or Perish'

The latest shot in the war over this emerging channel comes this week, as the Stamford, Conn.-based company launches a line of color multifunction printers targeted at the midmarket. It's all part of a strategy that Xerox Chairman and CEO Anne Mulcahy describes in three words: "Partner or perish."

To address the converging channels of office automation solution providers and traditional IT players, Mulcahy last year merged all of Xerox's North American sales channels into one organization. In doing so, the $15.7 billion company followed others in this space that have tweaked or refined their channels over the past two years, including Ricoh, Samsung, Brother International, Oki Data and HP. Mulcahy even acknowledged that Xerox's recent history of accounting controversies and other missteps that almost sent it into bankruptcy has been a real help in the process.

"I think one of the things that comes out of coming through the kind of crisis that Xerox has is that you are absolutely a humbler company," Mulcahy told CRN in an exclusive interview. "And we've gone through a process of being, I think, pretty transparent in terms of saying, 'We don't do everything well. We're going to work with the best-in-class. We're going to provide that value to our customers by identifying partners who, quite frankly, do certain parts of the value tree better than we do.' "

It appears that Mulcahy's attempt to instill in partners a sense of Xerox's new faith in the channel is having some success. Several Xerox solution providers, when asked about the company's strategy, volunteered that they also provide HP solutions but have begun to favor Xerox.

"They hold up well competitively," said Michael Kilhoffer, sales manager at QLC Technologies, Philadelphia. In fact, Kilhoffer said QLC, which also partners with HP, Lexmark International, Brother and others, has seen Xerox become extremely competitive in providing profit margin. "Margins on hardware are better with Xerox than with HP," he said.

Al McGorry, president of Capital DataCorp, Sacramento, Calif., is also an HP and Xerox partner on both sales and service. He said that while his company does a greater volume of business with HP, he'd prefer it were different.

"We have a good working relationship with Xerox," McGorry said, noting he receives more personal contact, less conflict and higher margin from the company. "If I had my druthers, I would lean more toward the Xerox side of things than the HP side of things."

Xerox executives hope an expanding and converged product line will keep channel executives like McGorry thinking that way.

Xerox is expected to launch a new color multifunction printer later this week in San Francisco " a device using the company's patented solid ink color cartridges and aimed largely at the mid-market. The new technology would play into the company's strategy to grow its sales of color devices as well as its presence in a segment of the market Xerox executives acknowledge the channel is more adept at selling into

"As we look at our business, our best penetration is with major enterprises," Mulcahy told CRN. "We've done a better job at medium-size customers based on a lot of the work that we've done with our channels, and are less of a participant in some of the small-business areas. But that's why we believe that a strong channel engagement strategy is a growth opportunity based upon getting better penetration into small and medium-size customers.

"So, we look at it as an opportunity. We've been doing a lot of the groundwork to have developed credibility and relationships and consistency with the channel over the last few years with the kinds of products and incentives and relationships that we're building. But we think there's a lot more opportunity that we can take advantage of if we're focused on really being a good partner and providing the best possible technology for the small- and medium-size customer."

Last October, Mulcahy's shakeup of Xerox's channel organizations began rippling throughout its partner base. Both its direct and channel sales were joined into one organization, led by Xerox North America President James Firestone. The company also ordered that Xerox's inside sales representatives be compensated about equally for sales through solution providers as they are for sales directly to customers. Like CEOs of other companies such as IBM, EMC and even Dell, Mulcahy realizes that Xerox will need to grow its services, software and nonhardware businesses to keep pace in a competitive market where customers need solutions and not just products. (Mulcahy calls it a "big 'I,' little 't'" approach to Information Technology.) To that end, the company has begun investing more of its resources in services and software—such as its DocuShare offering—and will focus on partners that can provide that level of touch to the market.

Mulcahy said Xerox wants to partner with solution providers "that actually can deliver and really provide those services on a little bit higher value scale than just providing hardware, so clearly we can cover all of the opportunities and geographies out there. So where we can work with solution providers that can really use the software and hardware to provide a richer list of customer, we would love to ensure that we're partnering very aggressively with those folks."

Xerox still has its challenges in the channel, though. Since last year, some of its partners have complained it has not properly managed its networks of dealers, agents and resellers to prevent a melee of competition in some geographies. In fact, one Xerox partner last week said the competition is so rampant in some quarters that his company received a telemarketing call from another Xerox partner looking to sell him Xerox equipment. "They said, 'We notice you have a lot of Xerox machines and we're interested in selling more,' " said the solution provider, who spoke on condition of anonymity.

And it's clear that the company is still wearing some scars from a series of missteps and scandals that first surfaced in May 2000. When Xerox failed to meet Wall Street earnings expectations early that year, a cascade of doubt began to rain on then-CEO Richard Thoman.

Xerox's board forced his resignation in the midst of a companywide reorganization. Next, the U.S. Securities and Exchange Commission found a series of accounting irregularities at the company. Xerox was forced to settle allegations with the SEC, and several of its former executives—including Thoman and former Chairman and CEO Paul Allaire—were named in individual securities charges. Eventually, those executives all settled with the SEC for an aggregate of $22 million in fines.

Mulcahy was left personally unscathed by the debacle, emerging with many admirers within the company and on Wall Street. But the genial, Rockville Centre, N.Y., native and onetime college journalism major took the reins of the company at perhaps the lowest point in its history. She had her work cut out for her. Xerox shares reached their low point in late 2002, trading at about $5 per share after riding a dot-com crest of about $60. Its shares have about tripled in value since that nadir and were trading at just less than $15 per share last week.

Still, it won't necessarily be easy for Xerox to sustain its momentum. The document technology space has become very crowded over the past two years, with companies including Oki Data, Sharp, Ricoh, Samsung, Canon, Kyocera Mita, Lexmark and the 800-pound gorilla, HP, all fighting it out as the market for higher-margin color imaging technology becomes mature. None of them are shying away from the fight, least of all Xerox.

Right now, Mulcahy said, about 25 percent of Xerox revenue is from color products, a number that she said represents only about 6 percent of pages served by the company. With a sort of document technology equivalent of Moore's Law taking hold—better performance at less cost—neither Mulcahy nor the rest want to get caught on the wrong side of that growth. "The whole intent is to kind of provide now—which we think is a big value proposition—the benefits of multifunction efficiency, coupled with what has traditionally been a printer platform," Mulcahy said. "It provides a price point and a value proposition that does not have a lot of trade-offs in the marketplace."

Unlike several years ago, when Xerox was dealing with its troubles and HP was getting ready to spread its wings, the roles have been reversed. Last month, HP, Palo Alto, Calif., ousted its chairman and CEO, Carly Fiorina, after the company began to disappoint Wall Street. At the time, HP executives publicly suggested they would need to get more aggressive in pricing its printer products to maintain its market-share lead.

Mulcahy appears unmoved by that threat. "HP understands the dynamics of this business model, and should they get really aggressive on pricing, they have a lot more to lose than we do," Mulcahy said, though she was quick to discount the potential of a price war. "I think we can count on some degree of rationality in terms of the business segment pricing," she said.

Besides, she said, Xerox's office document business, led by the former Tektronix printer organization in Wilsonville, Ore., has managed a nimble, price-aggressive product line itself. And that product line has relied on the solution provider channel since before it became part of Xerox five years ago.

For its part, HP has denied taking any pricing action yet and has refused to elaborate on the pricing statement made last month. And Mulcahy isn't the only one questioning whether HP can pull it off. Stewart Krentzman, CEO of Oki Data, Mount Laurel, N.J., told CRN he doubted price actions would be a winning strategy for HP or its channel.

"If there is a price war, [the] key is will HP protect the channel against their inevitable reduced dollar profit margins or are they expecting the channel to sacrifice margin in their price war?" Krentzman asked.

One area where Xerox executives promise their channel partners they won't see a margin squeeze is from Xerox's own direct sales—an area where some vendors, for example, price products sold over their Web sites lower than products sold through the channel.

Capital DataCorp's McGorry observed that while both HP and Xerox have storefronts on the Web, Xerox not only doesn't take business from him but refers prospects his way. "We get a lot of referrals from their site to us." Not only that, McGorry said, but Xerox's products provide him with a higher margin on hardware.

Said George Sokoloff, president of CompuCare, a San Rafael, Calif.-based solution provider that also partners with Xerox, HP and others: "I would prefer Xerox over HP when you go to the higher end, higher than the consumer market, that is. We have a little more communication, verbal communication, from them than I have with HP."

So, later this week when Xerox brings its new color products to market, the company and its solution providers appear ready to join forces and look past that recent, troublesome history. Mulcahy knows what's at stake if they don't. And, as she might say, "Perish the thought."