Can new CEO Rick Thoman turn its digital dreams into reality?

Picture a revolution led by the ink-stained guys who come to fix the office copier. Instead of yanking out jammed paper, they've become systems experts who build a digital highway that lets you scan documents in Brazil, weave them into customized booklets in New York, and print on demand in London--with software to alter American spelling. Where they once hauled toner, the white shirts now sell industry-specific "solutions" that change the way you shuttle information. Still spitting out a mishmash of black-and-white documents? Stand aside while they turn that mess into a colorful showpiece that's automatically tailored to each customer. And don't kick the new copier. It's your high-speed color printer, scanner, and fax machine, too.

Sounds like a scene more suited to Bill Gates than the Copier Guy. But this is the game plan of G. Richard Thoman, president of Xerox Corp., whose appointment as chief executive could come within days. Recruited two years ago from IBM to accelerate Xerox' transition to digital technology, Thoman, 54, has already turned the company into a ferocious aggressor in the document war--shooting out new products, pushing its wares onto store shelves in record numbers, and elbowing into Hewlett-Packard Co.'s printing turf.

If Thoman has brought much-needed urgency to the company, his real challenge is yet to come: turning into reality Xerox' oft-stated--and oft-missed--goal of becoming a key player in the digitalized office. A longtime protege of IBM Chairman and CEO Louis V. Gerstner Jr., Thoman's vision goes beyond chasing every piece of paper streaming out of the electronic office. He's positioning Xerox to capitalize on one of the biggest paradoxes of the Information Age: Rather than creating the much-ballyhooed "paperless office," technology has created ever more demand for documents--and far more sophisticated ones at that. Thoman figures no company is better positioned to build a market out of that burgeoning, if ill-defined, need than Xerox.

To succeed, the soft-spoken but tough executive will have to pull off the same trick at Xerox that his mentor managed at Big Blue: refocusing a company long known for selling high-end gear into a fast-moving provider of high-tech services. Indeed, Thoman wants to transform the very nature of Xerox' relationship with corporate customers around the world. Instead of just pushing products, Thoman wants Xerox to be a partner. He aims to build digital networks linking Xerox wonders to PCs and servers, putting to work a recently acquired army of systems specialists. And to boost its slice of higher-margin outsourcing, Thomas wants to run far-flung printing and copying operations for customers for a fee.

At the same time, Thoman is intent on pushing Xerox products into new markets at the far edge of the Info Age. One of the hottest is customized printing, where companies are using Xerox products to individualize their communications with customers as never before. Xerox recently set up a system for one Danish manufacturer that lets it make 250 variations of a product manual on the spot and drop them into boxes on an assembly line as needed. And for a book wholesaler in Germany, Xerox systems are already being used to print paperback reorders on demand. If the business takes off, the long-term implications for such paper-heavy industries as publishing or catalogs are enormous. When book titles can be digitalized and ordered up by stores on demand, for example, the savings in inventory alone could shift the economics of the business. "We're positioning ourselves around knowledge," says Thoman, "and the document is the DNA of knowledge."

BOLD PUSH. Such lofty language is heard often from the worldly ex-consultant. Thoman reels off references to H.L. Mencken or Herbert Hoover the way most CEOs cite golf scores. He has three master's degrees and a PhD in international economics, and he speaks fluent French, honed during four years in Paris with McKinsey & Co. As a college student, Thoman wanted to become a diplomat. "No one would be surprised to see him as Secretary of State," says McGill University classmate Frank Slover. Away from the office, though, Thoman has an unwonkish fondness for motorcycles and fast cars.

Thoman's high-concept rhetoric can be tough to process. But so far, it hasn't clouded his ability to project a more sophisticated image for Xerox. Thoman seems to be getting through--using ad campaigns, speeches, and glad-handing at high-tech events such as Comdex, the computer trade show. "We're getting a lot more calls where clients are evaluating Xerox than a year ago," says James W. Lundy, a research director at GartnerGroup Inc.

Still, it's a pretty bold push for a company so synonymous with copying that its name has become a verb. And it remains a tough sell. Xerox, after all, is less famous for forging cutting-edge technology than for letting it slip away. Xerox created the mouse and many other components of the modern PC, only to let others run away with the revolution. The company ignored the threat posed by Japanese copiers and new office printers to the point where, by the 1980s, even its then-CEO David T. Kearns wondered if Xerox would survive.

Through a massive quality overhaul led by Kearns and CEO Paul A. Allaire, who succeeded him in 1990, Xerox staged a dramatic comeback. The company grabbed its copier franchise back and jumped into the digital world. Last year, Xerox, based in Stamford, Conn., had record operating profits of $2.7 billion, up 18% from 1997--compared with a loss of $402 million five years ago. Although revenue growth has been slower, 1998 sales rose 7%, to $19.4 billion--among Xerox' strongest gains in the '90s.

"AGGRESSIVE." Thoman's job is to take Xerox to the next level. Xerox today is far healthier and much more stable than in the early '80s, but stability is not what the Xerox board or its shareholders have in mind. Even though worries about its key Brazilian market have sent shares down 16% in recent months, the stock is still up 45%, at 52, since Thoman was hired in June, 1997. "Paul did a great job with the turnaround, but Xerox isn't a turnaround anymore," says Erick Lucera of Independence Investment Associates Inc., which has 1 million Xerox shares. "We needed someone a little more aggressive and growth-oriented."

Strong growth will come only if Thoman can catapult Xerox into the front lines of office technology, on a par with Microsoft Corp. or Electronic Data Systems Corp. Last year, more than half of the copiers Xerox sold were digital--meaning that they record documents as data bits, not photographic images. Trouble is, Xerox had long billed itself as "digital" without delivering all the technology. And even when it did, Xerox didn't change the way customers used its products. Sure, when its copiers are hooked up to an office network, computer users can manipulate images and spit them out. But the wave of new desktop printers do much the same, and they're smaller and cheaper. And even today, only half of new Xerox digital copiers are linked to networks.

That's why Thoman has his work cut out proving that a copier company has any natural edge in moving documents around an office network. The most obvious advantages that copiers offer over desktop printers are lower costs and greater speed and flexibility. But with a printer from HP or Canon Inc. sitting beside a computer--and with the Xerox copier down the hall--the instinct is to print multiple documents from the desk.

JUICIER. Therefore, Thoman must push Xerox further into a world where customers turn to it for more than a "box." In the office that Thoman has in mind, clients don't just buy the next copier or printer from Xerox. They also let Xerox hook its copier into an office network and use its software to reshape the way the network channels information. And if Thoman is really lucky, Xerox will be asked to manage the whole printing process--turning an equipment sale into a much more juicy service contract. Such outsourcing grew 35% for Xerox last year, to $2.7 billion, or 14% of revenues.

The message has begun to seep through to customers. "They've become creative--and now look at our business the way we do," says Celeste A. Presto, an assistant vice-president at Citibank. Not only is the bank letting Xerox design and turn some mailings into colorful brochures, but it also is starting to link computers to Xerox centers so employees can order copy jobs from their desk. The result: fewer Xerox machines on site but more spent on services.

That's only the beginning of the outsourcing business Thoman hopes to build. Take, for instance, Health Now NY Inc., a Buffalo insurer that brought in Xerox to transform its eclectic kit of information for new members into a customized color book. Xerox not only set up the collating and printing equipment, but its specialists also reviewed the papers, reorganized them, designed the book, and highlighted key information. Then it stepped in to manage the printing of customized booklets that can instantly note benefits changes. "A lot of companies can print, but nobody else was as far along in handling the information," says Health Now CEO Thomas P. Hartnett. "We consider them more of a strategic partner than a company that sells equipment."

It's no slam dunk, though, that the new digital Xerox machines can be seamlessly sown into existing networks. For all the company's smooth marketing talk, Xerox machines aren't always on the best of terms with their office mates. Some customers gripe that Xerox' connection technology is too closed. One embarrassing example: Raymond K. Neff, who did Xerox radio commercials as the vice-president for information services at Case Western Reserve University in Cleveland, is tossing Xerox copiers off the campus in favor of Canon. "Xerox said they didn't have anything that could speak to our Apples," says Neff.

Thoman says those issues are being addressed but acknowledges that hurdles remain. At least Xerox isn't alone. "The entire industry has had a challenge in doing connectivity," says Lester E. Anderson of Ricoh Corp. "Having these machines speak effectively to a network is not always so easy."

To bolster its abilities, Thoman is beefing up in technology. Last May, Xerox paid $413 million for XLConnect--now named Xerox Connect. The move added 1,500 network and systems specialists who design office networks and integrate copiers and printers with computers and other gear. The primary aim is to link Xerox products with computers and other network software, but they're not limited to that. The result: Xerox is starting to move onto the turf of the likes of Andersen Consulting and Pitney Bowes Inc.

With connectivity crucial, Thoman is teaming up with big software names. In May, Xerox expects to announce a Microsoft link that marries Windows software with Xerox technology to make it easier to move documents from its copiers onto the Net. That follows a linkup with Lotus last year that integrates Xerox and Lotus software: Now, documents scanned into a copier can instantly be sent to E-mail or files.

FRESH BOUNDARIES. Just as important, Thoman is shaking up the way Xerox sells itself. Borrowing a page from the IBM playbook, in January Thoman tore up the old Xerox sales structure in an attempt to turn its box salesmen into consultants who sell whole systems. Most salespeople no longer manage a few key clients sorted by geography but rather are part of "industry-solutions groups" specializing in, say, government agencies or graphic-arts companies. For New York sales rep Diane Bergmanson, that means lunching with the info-tech folks instead of just the purchasing types. Her financial-services team includes product designers and software specialists. "To be a partner, we had to get more deeply into our customers' business," she says.

Xerox is hardly the first company to extol value-added services, of course. And not everyone loves the new pitch. Not only do Bergmanson and her colleagues have to learn to sell customized networks and newfangled machines, they also suddenly face internal turf fights as Xerox opens the doors to new distribution channels. That has sent some veterans running for the exits.

It has caused grumbling among customers, too. Reared on decades of doting service from their personal Xerox rep, some clients don't want to hear about solutions teams. George Chen, a senior manager of purchasing at Philips Electronics North America Corp., was distraught to have Bergmanson, a trusted problem solver, pulled off his account. "By severing relationships like that, they put themselves at risk at a time when we're making decisions as well," says Chen, whose company is currently evaluating its own supplier network.

Moreover, it's no surprise that competitors see Thoman's Master-of-the-Digital-Universe talk as mere rhetoric from a company that is stuck in a dying corner of the office. They acknowledge that Xerox has long grabbed high-volume business with its nine-year-old DocuTech line of massive production printers that can chug out customized books or several thousand sheets an hour. But the company was late in cracking the low-end market, with almost no presence in desktop printers, where most office work emerges. "Fundamentally, they're a copier company, and they still think that way," argues Carolyn M. Ticknor, general manager and vice-president of HP's LaserJet Solutions Group.

In fact, Xerox has yet to muscle its way onto much of HP's printer turf. Only 11.8% of Xerox' revenues last year came from office printers, compared with 50% from office copiers. Through hubris or ignorance, Xerox missed the booming market for personal printers and copiers that HP and Canon built. Now, Xerox is racing to catch up. This month, the company will unveil several more machines that can copy, print, scan, and fax, priced around $500. But rivals Canon, Ricoh, and Konica are going digital, too, and are keeping prices low on machines that often beat Xerox' offerings.

What's more, Canon and others are moving into high-speed copiers, a market Xerox has largely had to itself. That threatens the fat margins on its DocuTech and DocuPrint machines, which can carry $450,000 price tags. At the same time, offset printers are trying to grab a share of the copier business. In March, Heidelberger Druckmaschinen of Germany said it was taking over Eastman Kodak Co.'s copier line. But Xerox is racing to bolster its own offerings. It agreed recently to buy France's SET Electronique, whose printers can shoot out 500 pages a minute. More important, SET's machines plug into a wide variety of computers and printers, including those from IBM and Siemens.

SOFT CULTURE. Considering the competitive swamp Xerox faces, it's easy to see why Thoman quickly became the company's top candidate to succeed Allaire, who will stay on as chairman. Allaire refocused Xerox on its core business, but he and the board concluded the company needed a tech-savvy outsider to make the move to digital pay off. Thoman rose through the ranks under Gerstner, first at McKinsey, then at American Express and RJR Nabisco. When Gerstner took the top job at IBM, he handed Thoman the task of resuscitating the company's ailing PC line. At that point, IBM was losing $1 billion a year on PCs because of poor quality, slow time to market, and too many models. Thoman slashed the line from 190 to 65, chopped inventory, and revamped internal systems so that IBM managers got up-to-date sales data. By 1995, PCs were in the black.

In the process, Thoman helped shift the rigid IBM culture to one more attuned to fast-moving tech markets. "Rick helped me transform the management process at IBM to one that was more open, more collegial, and yet more demanding of an analytical, market-focused approach," Gerstner says. Thoman's strategic vision and success with the numbers got him promoted to chief financial officer in 1995--and set him up for his first CEO post.

In their initial discussions with Thoman, Xerox directors came away feeling that he had a strong grasp of the company's problems, but also of where digital technology could take it. "Within an hour of meeting Rick, I thought, `This is the guy,"' says director N.J. Nicholas Jr. "I loved his questions, and he approached the issues with a clarity and quickness that I found dazzling."

Thoman wasn't dazzled at first. He liked the brand but not Xerox' reputation for being slow to market. But as he talked with Allaire, Thoman became convinced that Xerox was a work in progress. And from the moment he joined, Thoman has shifted things into overdrive. In an age of blunt and often blistering corporate leaders, Thoman comes across as soft-spoken. But impressions can mislead. "When you first meet Rick, you might think that his style is soft or easy," says Gerstner. "But people who have worked with...Rick quickly learn that's not the case. He demands results."

"YOU CAN'T HIDE." Alan R. Monahan, a senior vice-president at Xerox Corporate Strategic Services, describes an early meeting with Thoman to discuss spending on such things as pens and plane tickets. Staff figured they were in for a shave; some guessed they might have to cut $100 million from the $6 billion budget. But Thoman stunned them by asking for a $1 billion chop within three years. "A guy who was never sick for one day in 30 years suddenly fell sick for the next month," Monahan recalls. Monahan expects to hit the target by 2001--a year late. "He'd say, `How's purchasing?' every time I saw him after that. You can't hide."

Thoman came to Xerox knowing there was still a lot of fat to cut. Last year, the company said it would trim European operations and chop 9,000 jobs worldwide, saving $1 billion by 2001. Partly through smarter purchasing, Xerox cut the cost of each product 10% last year. Xerox turned inventory over 3.4 times, vs. 5.0 for HP. Closing the gap could save another $1 billion a year. Says Thoman: "I've brought a real sense of urgency and a healthy paranoia."

He also sees a big chance to solve one of the worst knocks on Xerox: that it takes too long to get products out the door. Each year, Thoman has ratcheted up product introductions--from about 40 in 1996, to 80 in 1997 and 95 in 1998. Last year's new equipment ranged from Xerox' cheeky HP-compatible toner cartridges--which spawned a lawsuit from its rival--to a faster version of its DocuTech. Says Mark R. Hill, manager of Xerox' document-portals business unit: "I don't think I've been in a meeting where he hasn't mentioned the word `speed."'

While Xerox techies sweat the details, Thoman is busy selling the big picture. On any business day, he can be found wooing big-name customers such as John J. Mack, president of Morgan Stanley Dean Witter, over lunch. Thoman attends ad strategy sessions and was intimately involved in the launch of Xerox' new $200 million U.S. ad campaign. The highbrow TV spots feature a Greek chorus that peeks down on a world where Xerox solutions save companies and consumers from the perils of daily life. In one, employees fret about a colleague's lost knowledge at his funeral, not knowing he used Xerox to scan key documents into the system.

Pretty subtle for prime time. But Thoman knows Xerox has some explaining to do if it's going to vault into a more complex world. Last fall, Thoman and John Seely Brown, chief scientist of Xerox' Palo Alto Research Center, landed the company's first keynote slot at Comdex. Brown was ad-libbing during a dry run and got to talking about the complex mathematics of Internet storms. The Xeroids, as he calls marketing types at Xerox, were horrified. Don't talk about such thick subjects in front of a general audience, they admonished him. Thoman stepped in. "Not everything we do makes sense in the simplest terms," he told them. Brown kept the mathematics in his speech. "Rick is of the Digital Age, more than old Xerox ever could have been," Brown says. "He thinks more in the Silicon Valley style than classical Xeroids do."

Silicon Valley? Not yet. While Xerox may be promoting a lot of high-tech dreams, it is still climbing out of the office corner. But as Thoman moves into the CEO suite, he's already starting to burn a new image for the copier company.

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