Anne Mulcahy: She's Here to Fix the Xerox

Can Anne Mulcahy pull off an IBM-style makeover?

If Anne M. Mulcahy ever does manage to save Xerox Corp. (XRX ), then surely June 14 will look like a turning point. Mulcahy, president and CEO-in-waiting, flew from headquarters in Stamford, Conn., to Rochester, N.Y., the home of Xerox' big operations, to deliver devastating news. The company was killing its entire line of desktop inkjet printers--a one-year-old business that employed 1,500 people worldwide and had been championed by Mulcahy herself. The division would not turn a profit for at least two years, though, and Xerox needed cash now. "In a year of tough decisions, this one was toughest," Mulcahy says.

Tough hardly does justice to the year. Xerox' directors suddenly promoted Mulcahy to president in May, 2000, after ousting G. Richard Thoman, who lasted all of 13 months, and reinstalling Chairman Paul A. Allaire as CEO. The company was close to foundering after years of weak sales and high costs; employees were as disgruntled as customers. Then things went from bad to worse: In October, Xerox reported its first quarterly loss in 16 years. Debt was piling up. And the Securities & Exchange Commission began investigating whether Xerox used accounting tricks to boost income.

Little in Mulcahy's past experience as vice-president for human resources and chief staff officer to Allaire had tested her in this kind of crisis management. But she has impressed Xerox' directors as a decisive leader. People close to Mulcahy, 48, expect she'll soon be named CEO. "It's a huge jump from senior executive to the chief executive slot," says Xerox director Ralph Larsen, who heads Johnson & Johnson. But, he adds, "she has the strategic mind and toughness to serve as CEO." (On July 26, Mulcahy was named CEO of Xerox.)

BOXED IN. No doubt this will be a closely watched handover. After all, it was Allaire's botched succession planning that brought Xerox to the low place it is today. Not only must Mulcahy continue to shore up morale after Thoman's disastrous sales-force reorganization, she also has to cut $1 billion from annual costs. And that's just to get Xerox to the point where she can make some real changes. Mulcahy believes--as do most analysts--that Xerox shouldn't be content just selling copiers, or "boxes" in company lingo. It has to focus on "solutions" that let corporations scan, store, and print digital documents tailored to their needs. But the old guard is still resistant. To succeed, she'll have to do away with more than the inkjet printers.

Some people don't think she's up to it. Skeptics say Mulcahy belongs to the old guard herself, a veteran Xeroid who started 25 years ago selling copiers. They regard her as part of a past that weighs heavily on Xerox: a culture paralyzed by politics and earlier success. Moreover, Xerox is family to Mulcahy: Her husband is a retired sales manager, and her brother Thomas J. Dolan is head of the Global Solutions Group. "The good news or the bad news is she has the soul of Xerox. The risk is, maybe she's too close to it," says a consultant and Xerox adviser. Mulcahy, though, says she's ready to shake up the culture: "There needs to be far more innovation and receptivity to new ideas. I have very little time for endless debate and consensus."

Today, she has reestablished some sense of trust between employees and management. No one talks about bankruptcy anymore, and Xerox' operations are mending steadily. Operating losses in the first quarter--typically Xerox' toughest--were far narrower than expected. Second-quarter losses contained no similar surprise, coming in as forecast. Still, the company faces enormous troubles, even if it returns to profitability in the second half, as it promises. Its bonds are rated junk by Moody's Investors Service, and it is still struggling to conserve cash and pay down its huge debt--a $7 billion loan is due next year.

CHEERLEADER. Mulcahy, who spoke briefly with BusinessWeek, is a hugely popular manager with years of experience dealing with customers. But she hasn't been involved in product development, and she doesn't have Allaire's financial expertise. What got her the job of president--and the chance to prove herself ready to be CEO--was her smart decision-making as head of Xerox' $6 billion division for small office equipment. She put together one of Xerox' biggest acquisitions, the $925 million purchase of Tektronix Inc.'s (TEK ) color-printing division, now a source of fast-growing revenues. As important, she proved fiercely protective of Tektronix' autonomy and even adopted some of its business practices. "The people who felt the most change were from Xerox, who said, `Wait, I thought we acquired them,"' says Gerald K. Perkel, a Tektronix veteran who is now a Xerox senior vice-president.

As president, Mulcahy has been chief cheerleader in a company where executives usually keep to themselves. During her first three months, she crisscrossed the country, holding nearly two dozen meetings with employees. She even promised to fly anywhere, anytime to help salespeople close tough deals.

Then, when Xerox' financial situation worsened last September, the company was forced to take drastic action. With Allaire fixated on repairing the balance sheet, Mulcahy focused on operations, promising to slash $1 billion from Xerox' annual costs. She's more than halfway there. Some 8,600 middle managers and factory workers have been let go; she tries to make the announcements in person. And she said she'll reduce high manufacturing costs, which have put Xerox at a decided disadvantage to competitors such as Canon Inc. (CAJ ), by $200 million. Xerox has not disclosed how close it is to that goal. Indeed, only three years ago it tried to cut $1 billion, but never got there.

Meanwhile, Mulcahy spreads her message with a regular memo called "Turnaround Talk," which alternates between enthusiasm ("Together We Can Do It!") and pragmatism ("When we shut off the bottled water, it's not because we want to be mean-spirited. It's because all these little expenses...can spell the difference between losing money and turning a profit").

Mulcahy has raised the energy level at Xerox. A big Bruce Springsteen fan, she's also a real gym rat. Mulcahy grew up in a Long Island (N.Y.) household with four brothers; her father was an editor in a publishing firm, and her mother took care of the kids. Now her mom looks after her two teenage sons when she is away, which is often, since Mulcahy is usually on the road three days a week. She doesn't mind traveling, even to hear criticism from employees. But they better be prepared to hear some back. "She doesn't sugarcoat it," says Perkel.

Today the company bills Mulcahy as "the future of Xerox." To her, at least, that means a Xerox that looks more like IBM (IBM ), offering services to help businesses manage their vast cache of documents. Paul A. Ricci, chairman of software maker ScanSoft Inc. (table ) and a former Xerox exec, says Mulcahy's push toward an IBM model makes sense: "What Anne's doing is smart, which is to compete in the places where Xerox is strong." That is, in large corporations.

Of course, this isn't the first time Xerox has attempted an IBM-like makeover. Thoman couldn't manage it, despite the fact he learned from the master at IBM, Louis V. Gerstner Jr. And the company has been trying to transform itself for two decades. So why would Mulcahy succeed? "It's the Nixon-in-China phenomenon," says David A. Nadler, chairman of Mercer Delta Consulting. "No one doubts her motives." Thoman, after all, was an outsider. Plus, Xerox has never been in as dire a condition as it is now.

So maybe it will take a Xeroid to dispose of the toxic parts of the company's culture that have made it so resistant to change. "There's an all-out battle going on between boxes and solutions," says James W. Lundy, a Gartner Group Inc. consultant and ex-Xeroid. Mulcahy is blunt about wanting her salespeople to learn to sell services, too. "It's the ability to walk and chew gum," she says. "We can't be [just] the giant copier company." Ditto that.

By Pamela L. Moore in New York

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