@surrogate-key , based on your clarification, I would lean towards option 1.
Since the xyz code is a participant identifier that can be changed through a qualitative decision, I would continue capturing the value as Embedded Data at the beginning of the survey flow. This ensures that each response keeps the xyz value that was associated with the participant at the time of submission.
If the project team later updates the participant's xyz value in XM Directory, future survey distributions will use the updated value for new responses, while previously collected responses will remain unchanged.
For point #2, you are correct that Qualtrics does not currently provide an out-of-the-box export option to combine historical survey responses with the current contact directory attributes at the time of export. The standard exports will contain the Embedded Data captured with each response.
However, this can be achieved through a custom integration using the Qualtrics API:
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Export the survey responses
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Retrieve the latest contact attributes from XM Directory
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Join the datasets using the contact identifier
This is a good use case for API-based data enrichment. I will add similar scenarios to our Qualtrics API Toolkit Chrome Extension for the XM Community.