It sounds apocalyptic but its nowhere near that. Following Dell’s acquisition of Perot Systems, Norwalk-based Xerox announced it is buying Affiliated Computer Services (ACS) for US$6.4 billion. Xerox is best known for its copier business and more resently repositioned itself (a little) as a document management company – much the same ways as its traditional competitors like Canon and Ricoh.

According to the Xerox press release, the acquisition will create a US$22 billion “global enterprise for documnet technology and business process outsourcing”. This deal puts Xerox in the US$150 billion BPO map.

ACS is one of those American companies that outsources a large chunk of its operations to outside the US, having started this model outsourcing to Mexico and Ghana in the early years – according to the Wall Street Journal. It gets majority of its business in the US though, particularly in the US healthcare sector where it claims it did about US$1 billion (out of US$6.5 billion). ACS reports that 40% of its revenue comes from government contracts.

The debate around the merits of this acquisition will run for sometime with industry observers watching how Xerox integrates the much larger ACS into the fold and train its own sales organization to sell BPO services. Expect to see a scramble among back-office BPO players to reposition themselves against a much larger, albeit less focused, Xerox/ACS.

Phil Fersht, a research director at AMR Research, wrote on his blog that the challenge for the combined entity is “a new throng of competitors in this space: Cognizant, Genpact, Infosys, TCS et al., and not solely the incumbents such as Accenture, Capgemini and IBM. The combined Xerox-ACS business will have a short-term potential to consolidate a commanding position in back-office BPO areas such as document management, call center, payroll, benefits admin and accounts payable.”

Robert Brown, an analyst with Gartner, believes this acquisition is about combining Xerox’ technologies, brand and global reach to ACS’ BPO leadership. The fact that ACS has strong penetrayion into the US healthcare industry is a tangetial piece to the rationale.” He concedes that healthcare BPO services will remain strong for the coming years.

What is the impact of this deal to Asia Pacific? Not much at least in the short term according to TJ Singh, Gartner research director for BPO. “It’s important to note that in Asia, Xerox operates through their JV with Fuji (FujiXerox). Currently Fuji Xerox has BPO assets in Asia Pacific, especially in Australia whilst ACS uses the region primarily as an offshore service delivery location. In the near term, the focus of this merger will be on North America and EMEA but over the medium to long term we should see greater engagement in Asia Pacific as the new entity streamlines its (BPO) sales, marketing and operations with FujiXerox and explores new opportunities.”

What he means is that incumbent BPOs in Asia can relax… for now. But when the BPO-armed Xerox comes to town, then the weeping and grinding of teeth can begin.

What can we expect after this? More M&As in the outsourcing front. Companies worth considering include CSC (USA), CGI (Canada), WNS (India) and Patni (India).

The New York Times quotes Rod Bourgeois, an analyst at Bernstein Research as saying “the merger trend isn’t over, but you are running out of companies that are small enough to reasonably acquire and yet large enough to make a difference”.

Gartner senior vice president of Research, Pete Sondergaard, notes that the outsourcing trend will continue not because labor costs are high but because technology is getting too complex to manage cost-effectively. Operating expenses are up, fix asset costs are coming down.