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Anne Mulcahy Has Xerox by the Horns

Anne Mulcahy likes to tell the story of the business acquaintance who compared her to a farmer with a cow stuck in a ditch. The cow, of course, was copying and printing giant Xerox, of which Mulcahy became CEO in August, 2001. It was no doubt the toughest assignment in her 27 years at the company: As she took charge, Xerox (XRX) was experiencing its second consecutive year of steep losses amid rising rumors of bankruptcy. Mulcahy's job was to pull Xerox out of that ditch -- and keep it out.

Mulcahy became the first woman CEO in Xerox's history, thanks in large part to her performance as its first female president and chief operating officer, a job she got in the fall of 2000 after a succession of men had failed. She soon ordered a Xerox-wide restructuring that cut annual expenses by $1.7 billion and sold $2.3 billion worth of non-core assets to reduce the outfit's long-term debt to $9.2 billion, from $15.6 billion in 2000. "She showed that her cost-cutting could yield better-than-expected results," says Ben Reitzes, an executive director in the technology group at UBS Warburg, which expects to do investment banking for Xerox.

CUSTOMER CONNECTION. Mulcahy, 50, also cleaned up Xerox's embarrassing accounting problems -- the Securities & Exchange Commission had accused it of bending its numbers to meet the Street's expectations. And she boosted employee morale, logging 100,000 miles visiting Xerox locations in her first year as CEO.

More important, Mulcahy, who in 2002 was rewarded with the additional title of chairman, soothed the nerves of Xerox's customers. Last year, she met with 50 CEOs of client companies. Responding to their feedback, she has lowered prices. She has also introduced new products and services that offer customers higher productivity at a lower cost. "She understands how customers think," says David MacDonald, a former senior Xerox executive. Adds MacDonald, now president of Canadian tech reseller Softchoice (SO.TO). "Anne brought a reality check to the leadership of Xerox."

As a result, Xerox returned to full-year profitability in 2002, generating $1.9 billion in operating cash flow and $91 million in net income on $15.8 billion in sales. Its market share in many products is up. For instance, it now holds 70% of the high-volume monochrome printer market, up two points from a year ago, estimates Julianne Mehegan, senior consultant at imaging consultancy Lyra Research in Newtonville, Mass. Xerox is also gaining share in products that analysts think are more important to its future, such as combination devices that do digital color copying and printing.

In the restructuring's aftermath, a new Xerox has emerged: One with more stable management, better integrity, and a stronger customer focus. "She has created a much better organization," says MacDonald.

COMPANY INSIDER. That Mulcahy would succeed wasn't clear at the get-go. The CEO's job was at the top of "a pretty shaky ladder," says Andy Slawetsky, a vice-president with office-automation market researcher Industry Analysts and a former Xerox sales rep, "but it appears that what she has done has worked."

And that shouldn't come as a complete surprise: After so many years at Xerox, Mulcahy knows it inside out -- well enough to cut fat without damaging too much muscle. She began her career there as a sales representative in 1976, soon after earning her bachelor's degree in English and journalism from Marymount College in Tarrytown, N.Y., and rose through the ranks in sales and human resources. She was a natural fit for the top job in one other respect: Her husband is a retired Xerox sales manager, and her brother, Thomas J. Dolan, is head of its Global Services Group.

It also helped that Mulcahy "is extremely focused and decisive," says Sheila Wellington, the president of Catalyst, a nonprofit group that works for the advancement of women in business and on whose board Mulcahy serves. Mulcahy says she developed that quality starting at home, where she was encouraged by her parents to compete equally with her four brothers.

OPEN TO CRITICISM. Such an upbringing also taught her not only to handle criticism but to listen to it -- an ability that has helped her make difficult decisions. "People around you want to please," she recently told a business audience in Chicago. "That's where honest critics can play an important role. Encourage them to tell it like it is." (The risk in that, of course, is losing the argument to Mulcahy, who often has her own strong views.)

Most important, though, is staying in sync with customers and employees. "I believe strongly that my success as a leader is driven by my commitment to understanding and meeting customers' requirements, as well as developing and nurturing a motivated and proud workforce," says Mulcahy. "With the right amount of focus, the two combined have the potential to drive exceptional results."

Which brings to mind Mulcahy's next challenge: Reigniting Xerox's growth. Its 2002 revenues were 19% below those of 1998, its peak sales year. In an effort to reverse that trend, and despite the weak economy, Mulcahy has continued to invest $1 billion annually in research and development. "We remain well-positioned from both technological and competitive perspectives to exploit opportunities in key growth markets," she says. Still, Mulcahy, who's known for skipping the elevator in favor of the stairs, has plenty more work to do before Xerox can be all that she wants it to be.

NEW TERRITORY. She's betting big on expanding into services -- everything from helping companies better manage their document flows to setting up computer networks. But before Xerox can become an all-in-one consulting shop, such as IBM (IBM), "it has got to learn a lot of new things," says Mehegan. For example, she adds, "it's tough for a company to change its image" -- although that will certainly be easier to do with investors and lenders no longer pounding Xerox with criticism. Over the past year, the outfit's stock has risen 20%, to around $10.50 a share.

The job of reshaping of Xerox has brought with it many sacrifices for Mulcahy: Acquaintances report that she laughs when asked if she has any hobbies. Wellington notes that the CEO only has time for work and her family, including her two teenage sons. That's the kind of effort it takes to pull a $15 billion cow out of a ditch -- and then try to make it run. By Olga Kharif in Portland, Ore.

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