Lessons from the Fall of Xerox

The downfall of Xerox is a tale of technological change, management failure, and board irresponsibility. Some $38 billion in shareholder wealth has been destroyed in less than two years. The tragic fall of this icon presents important lessons for every company trying to find its way in the new Information Economy. The most important? If you bring in a change agent, allow the person to make changes. These may or may not succeed, but anything less will lead to disaster (page 82).

Xerox, like IBM, Hewlett-Packard, General Electric, Siemens, and dozens of other corporations around the world, is struggling to make the transition from selling high-tech boxes to selling high-tech solutions and services. It finds itself losing market share to Japanese rivals in its old business, yet is unable to find a profitable place in the Net-centric digital world. For some time, Xerox has clearly needed a new vision.

Enter G. Richard Thoman, a disciple of Louis V. Gerstner, who left IBM in 1997 to become president and chief operating officer at Xerox. Brought in by then-CEO Paul A. Allaire to succeed him, Thoman was expected to do at Xerox what Gerstner did at IBM. Xerox would change from a seller of copiers to a consultant on how to use digital documents more effectively. Gerstner succeeded. But Thoman was fired 13 months after being made chief executive in 1999.

What happened? For starters, Allaire never left, breaking one of the cardinal rules of succession. When Thoman became CEO, Allaire moved on to chairman. He continued to control the board of directors and sat in on key management meetings with Thoman, leaving managers to wonder who was really in charge. Thoman, for his part, made a major blunder in not insisting on a free hand as CEO when he took over.

Thoman couldn't even get his arms around Xerox's finances. In 1999, the company lost $1 billion, or 13% of its net worth, because of foreign currency losses, mostly in Brazil. Recently, it fired 13 workers accused of accounting manipulation at its Mexican unit. Thoman says he wanted to replace the chief financial officer, but says he was told the board wouldn't agree. If true, the board stepped totally out of line.

The board itself is guilty of poor governance. For a high-tech company, there are few Silicon Valley types sitting on it. There are clearly too many insiders. The CFO was made a member right after Thoman was named CEO, as was the head of sales. Seven directors, including Allaire, sit on five other boards. Vernon E. Jordan Jr., whose law firm was retained by Xerox in 1999, sits on 11 boards, leaving him little time to really understand Xerox. Few directors, aside from Allaire, own much Xerox stock.

Thoman is hardly blameless. He apparently lacked the people skills to foster change. But he did have a vision that might have worked for Xerox. Now the task will fall to someone else, once chairman Allaire moves on.

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