Interview with ACS CEO Lynn Blodgett

Every year, the IAOP makes ten predictions for the coming year. One of the top 10 predictions for 2010 was for the continuation of outsourcing merger and acquisition activity. On February 8, 2010 Xerox completed its $6.4 billion acquisition of Affiliated Computer Services (ACS), making it one of the largest purchases in recent history. To get an insiders view, IAOP’s Matt Shocklee recently sat down with Lynn Blodgett, President and CEO of ACS.

Matt Shocklee:            In 2009 the outsourcing industry responded to the global economic slowdown with a surge in mergers and acquisitions with, of course, your merger activity with Xerox, Dell-Perot Systems and Oracle-Sun as well. As you look to 2010, how do you see the climate and the appetite for continued activity in M&A in the outsourcing industry?

Lynn Blodgett:            I think that the climate is good.  The fact that the financial markets have loosened up the way they have is going to be a huge driver, obviously, to M&A activity.  And I also think that customers are looking more and more at end-to-end providers.  It goes through cycles, and sometimes people are looking for what they perceive as best in class, and other times they are looking at the value of having one provider to provide end-to-end, and I think that still is a very strong preference on the part of customers.  So that will drive acquisition activity as larger providers try to fill out their portfolio.  I also think that there will be pressure on smaller companies, and it depends on their niche.  If you’re in a real small niche, maybe this won’t be the case.  But if you’re a niche provider in a relatively competitive area, I think there is going to be more and more pressure to consolidate.  So I think you’re going to continue to see it.

Matt Shocklee:            As you look to the experiences you’ve had in guiding your organization through the M&A activity with Xerox, what should customers of ACS see that might be different or unique as you prepare the new ACS for 2010?

Lynn Blodgett:            The main thing is we want to make sure that they don’t see anything that is negative; we don’t want anyone to feel like – I think the biggest concern people have is, “Is this going to affect my direct team?  Am I going to lose some of the people that I have grown to be reliant upon and that I like working with, and so on.  Is this merger going to cause any of that to change?”  And as we’ve looked at our integration plan, one of the things we’ve tried very diligently to avoid is anything that would disrupt service at the individual client level.  So in terms of the existing team and existing interface, we’re not expecting to change any of that.  What we hope to change, on a positive note, will be the fact that we will have more resources.  Xerox obviously has a large research capability – they spend about a billion dollars a year in R&D, so we expect we will be able to bring some of that to bear in helping to solve some of our clients’ problems.  So increased innovation; we also are confident that the global capability – global footprint of Xerox – will be an advantage.  We have a lot of customers, a lot of U.S.-based companies that have a global reach that need more resources in Asia-Pac or in Europe or whatever, and this will allow us to better serve them.  We don’t want to change anything that’s good, and try to bring a couple of nice additions such as I’ve described.

Matt Shocklee:            You mentioned the potential impact on the smaller to medium size services firms with continued M&A activity; As you know, there are emerging destination markets and competition in the outsourcing industry whether it be traditionally India or emerging new markets like China and Africa. What impact do you see M&A activity  having on those markets.

Lynn Blodgett:            Well, I think that if you look at our company as an example, we’ve done more M&A activity outside of the United States in the last two years than we’ve done inside the U.S., and I’m speaking independent of the major M&A activity of Xerox. ACS as a standalone company has done more outside than we have inside, which is the first time in our history that that’s occurred.  So clearly we’re looking at M&A as a mechanism to expand our footprint.  We acquired a great company in Argentina; another great one in Jamaica. The challenge that you have, especially when you talk about markets like China or India – those countries tended to demand a much higher multiple than buying something in Jamaica. That may seem like a simple thing, but that definitely influences what people are able to do in terms of M&A.  We’re not going to go into China and make an acquisition that’s highly diluted, for example.  And most of the startups and relatively small niche players in India and China tend to have a pretty high premium – or want a pretty high premium on their property.  So that will influence us. We’ve never made an acquisition in India. , While others have, and others have been successful, but for us, the price tag’s just too high.  And it was the same thing when we were initially doing M&A in Europe; there was a long period of time when we just felt we couldn’t do anything because the multiples were so high. Some of those have moderated a little bit, so it makes M&A a little easier. 

Matt Shocklee:            You don’t get many opportunities to live through and lead organizations through large complex deals like the recent Xerox/ACS merger. Now that you’re coming out of the merger, what are the key lessons learned that you can extract from this.

Lynn Blodgett:            I think there are a lot, obviously, and it is an exciting opportunity to go through, and I’m really proud of our team.  We just reported our last quarter and had good results, and I think that was a testament to the focus that our team was able to maintain in terms of continuing to deliver services.  I think it’s very easy to get star struck and start thinking so much about what the future’s going to be like, and how great it’s going to be, etc etc. Then you can lose focus on the task at hand which is to take care of your customers and stick to your knitting, which is what we’ve tried to preach to our people.  So I think one lesson learned is that you have to focus and probably spend more effort in maintaining focus than I would have thought at the beginning.  It requires effort in order to keep people pulling the same way.  I think the other lesson that I’ve learned is that they’re complicated – they’re more complicated than I  knew.  There’s an awful lot of detail to a transaction like this. I’ve never done one like this before, and I don’t know if there are a lot of people that have. [There was so much detail]  we put a team together that had subject matter experts from all aspects of the legal side of things and the finance, operations, integrations, branding – there’s a lot.  So the detail that’s involved in a transaction of this magnitude is something that was a little bit surprising to me. The lesson learned is don’t take that for granted – you better have the people on the team that can take those details and digest them.

Matt Shocklee:            As we look to the future of the global economy, the forecasters that we talk to are still a little uncertain about 2010, and whether this is going to be the come out year for the U.S. and/or the broader economy in general.  What’s your sense? ?And what role do you think the outsourcing industry will play in the overall global recovery?

Lynn Blodgett:            I think everybody wants it to be better.  They are tired of it being as difficult as it’s been. I’m not so sure that it’s a lot better – I don’t think it’s getting any worse, but I haven’t seen any significant pick-up in volumes and those kinds of things.  And we do a lot of transactional work and so we’re able to watch things like driver miles for example, which is a great bell-weather for the base economy, because that gets to employment.  If driver miles go down, sometimes that means that it’s because people are unemployed – they don’t drive as much.  We look at number of insurance claims processed, and transactions in the shipping area, and so on.  Looking at those metrics, again, I don’t see anything that would say it’s getting any worse, but there hasn’t been a significant pick-up.  So I think people need to continue to play it safe. Now’s not the time, in my opinion, to be doing a lot. I think people need to keep their belts tight, and if people do that, they’re going to be in better shape than if have premature optimism and do things they shouldn’t. There’s been an awful lot of discipline implemented in the business world over the last 18 months, and I think people need to continue to maintain that.  As far as the outsourcing industry, I think that the fact that the economy has been in as difficult a position as it’s been in is good for the outsourcing business.  I expect that will continue, and I actually think people, as you go through these difficult times, more people have been more focused on cost, and that opens up more opportunity. As people have successful outsourcing relationships which may have started because people, out of necessity, did outsourcing, I think the tendency will be for people to outsource more.  We’re looking at our existing base as one of the best sources of new revenue, because they have had a positive experience, they know they need to save money, and they have a trusted supplier. 

Matt:            Lynn, thank you very much for sharing your insights today, and congratulations on your recent successful merger with Xerox.  We wish you all the best in 2010 and we look forward to seeing you at another IAOP event in the near future.

Lynn:            Thanks Matt, we really appreciate it.  And good luck to you.