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The X-factor

The choice for the 2008 Chief Executive of the Year marks several firsts. By her own admission Anne Mulcahy did not set out to become a chief executive. Nor was she groomed to become one. Neither did she bargain to face what some have called the turnaround of the century when her predecessor, Paul Allaire, called her into his office one day in 2001 to say that the top job was hers. Allaire himself returned to the company at the request of the board when Xerox dumped Allaire’s chosen successor Rick Thoman. Fortune dubbed her “The Accidental CEO.” One might add “Improbable Turnaround CEO,” since everyone knows turnaround bosses tend to come from the outside. (Former Lee Iacocca point man “Steve” Miller is the archetype.) Mulcahy had worked for Xerox for 24 years at the time of her appointment; she spent 16 of those years in sales and the rest heading HR. The company was so much in her blood she bled copier toner.

Oh yes, Mulcahy is also the first woman CEO to be chosen by her peers for the honor of Chief Executive of the Year. As it happens, her choice for successor as CEO of Xerox is another highly capable alpha woman, Ursula Burns, the company’s president and Mulcahy’s operating partner in the company turnaround. Firsts for Anne Mulcahy seem to be the gift that keeps on giving.

A few members of this year’s selection committee had orchestra seats during Mulcahy’s nail-biting turnaround performance. Office Depot CEO Steve Odland remembers being inspired by a bravura “customer-oriented leader.” Thomson Corp. CEO Richard Harrington, who also serves on Xerox’s board, reckons Mulcahy rescued a com pany “on the verge of bankruptcy and transformed it into a strategically sound company with a future.” New York Life CEO Sy Sternberg says, “we have a vibrant Xerox today due to her efforts.” Jeffrey Sonnenfeld, CEO of the Chief Executive Institute at Yale, thinks of her as a model turnaround leader. “She’s ��tough’ as in visionary and persuasive, not ��tough’ as in abusive and mean-spirited.” Outgoing 2007 Chief Executive of the Year Bob Ulrich of Target points to the degree of difficulty she faced and what he calls the essential element for any leader: courage. “She had the guts to stick with her plan of investing in R&D when everyone was baying for her to give it up,” he says.

Mulcahy joined Target’s board two years before she got onto Xerox’s board and credits that experience as invaluable when everything went pear-shaped at Xerox. It paid off. N.J. Nicholas, Xerox’s longest-serving board director, likes her transparency with the board. “What impresses me,” he says, “is that she uses the board well. Most directors want to help move the ball forward, and she is effective in getting us to do just that with her senior team.” Another director, Maggie Wilderotter, likes Mulcahy’s approach to succession planning.

“She thoroughly reviews the top 30 executive positions and ensures that at least two candidates for each position within the company have been identified,” says the CEO of Citizens Communications. “I was so impressed that we have adopted the same systems at Citizens.”

With the turnaround behind her, Mulcahy and her team have another challenge: sustain growth against strong economic headwinds, and just as important, convince outsiders that the iconic company that entered the English language as a verb isn’t your father’s Xerox anymore. (The company changed its logo in an effort to update its brand identity.) For one, it doesn’t sell stand-alone copiers anymore. The company is a B-to-B enterprise, one that deals with document processes helping clients improve productivity. It’s the No. 1 revenue share company in the world for color digital technology, which is just beginning to emerge.

The company aims to transform the graphic communications business from an offset to a digital world for customized print on demand. It made four acquisitions over the last two years, including Global Imaging, a $1.2 billion independent office equipment distributor that didn’t carry any Xerox product at the time, a move that added 200,000 customers to its portfolio. At the end of 2007, more than half of the equipment going out the door was Xerox. In addition, Xerox looks to grow its $3.8 billion global services business with its acquisition of Amici and Advectis serving to advance this.

“I’m looking for risk takers and people who can quickly assess new market opportunities,” Xerox’s chief strategist Eric Armour remembers Mulcahy telling him when he interviewed for the job in 2007. “Our solid-ink technology, which is at least two years ahead of the market, is an example of what this company can now do with its investment in research.”

Central to Mulcahy’s strategy is the investment in R&D through good times and bad. Through ruthless cuts, led by Burns, some $2.5 billion has been eliminated from its cost base. Together with its partner Fuji Xerox, the company invests $1.5 billion in R&D every year. The benefits from the investment are beginning to show. More than 100 new products have emerged over the last three years. Two-thirds of equipment revenues derive from products launched since 2005. A company that faced a $273 million loss in 2001 now looks to make $1.2 billion on $18 billion in annual revenue in 2008, according to UBS investment estimates.

Xerox is a different company in other ways, too. Annuity services represented 60 percent of revenues when Mulcahy became CEO. Today this figure has climbed to 72 percent. Eight years ago Xerox was nowhere on color. Today, 40 percent of its revenues come from color. As recently as two years ago 47 percent of revenues came from outside the U.S. Today it’s over 50 percent and will reach 60 percent by 2009. The transformation also means the company is going up against more formidable rivals such as HP, which, with its recent deal to acquire EDS, means that the Mulcahy- Burns led team will need to put their skates on to stay competitive.

At first, the Long Island-raised Mulcahy, who has three brothers (one of whom joined Xerox before she did) and New Yorker Burns would seem an unusual pairing. The Columbia-educated Burns sees herself as process-oriented, as one might expect of an engineer, and much less patient than Mulcahy.

“She is a superb motivator who can push people to step up their game without demoralizing them in the process,” says Burns, who declares it’s a talent she would like to acquire herself. Recently, Chief Executive’s J.P. Donlon caught up with Anne Mulcahy at Xerox’s new Norwalk, Conn., home. (It jettisoned its tony headquarters in North Stamford eight months ago.)

When did you know that you turned the corner at Xerox?

There wasn’t a specific event or moment in time, but clearly the company’s return to profitability was evident when customers indicated that they were willing to stick with [us], with the understanding that frankly, we had a lot to prove. We had to prove that we could be responsive and that our technology was not either disadvantaged or me-too. We needed customer relationships that were more value-oriented than transaction-oriented. By 2005, when customers recognized that we were building relationships, our story in their eyes started to change and that clearly was an important milestone for us because we knew we could sustain the future.

Source: The Applied Finance Group

Source: Great Numbers!

It must have been fairly daunting as a freshly minted CEO to find oneself, toward the end of 2001, leading a company with $19 billion in debt and only $100 million in cash, not all of it readily available.

It was. It was terrifying. But at the same time there were a lot of good things in the company, such as the people who worked here and the talent we had in R&D. There were a lot of assets in the company, but our ability to exploit this was dependent on how quickly we could fix the balance sheet. It was that or face bankruptcy.

In such extreme circumstances- with very little training-how does one teach oneself to be CEO?

You make sure that you’re a fast learner. Fortunately we had people within our company that I could ask for help. In fact, I became really good at asking for help. I had to. During the accounting scandal and restatement time, we didn’t have a CFO, so I was also acting CFO of the company. I had a financial team that basically  ensured I was up to speed. We spent lots of nights, lots of weekends, just making sure that I had what I needed to represent the company in a way that was credible. In the end the culture saved us. Because we’re not hierarchical, when you ask for help people step up to the plate and support you. But it didn’t stop inside the company. I asked for a lot of help outside of the company too, including board members such as Ralph Larsen, Vernon Jordan and Hilmar Kopper.

Xerox At a Glance


 Martket Cap*



Cash Flow** 












































What sort of help did they give you?

Well, No. 1, they stayed with me. These are people that are highly regarded, with reputations to consider. It would have been understandable for them to jump ship and decide they didn’t want to hang in there, but they did.

Did they have faith in you or the company or a bit of both?

It was a bit of both. As time went on, confidence in senior management grew. The risks [perceived by] some on the board who [chose to leave] didn’t materialize. One of the big lessons [I learned] that I always tell people who are on boards is that you’re needed most when companies have challenges. That’s the moment of truth for board members.

In retrospect, what was your darkest moment?

I was returning from Japan, having visited with Fuji Xerox, when the story about the government’s settlement was announced. [The SEC had investigated Xerox for irregular accounting practices.] You can imagine how terrible this was. I remember thinking how our people would feel reading this story. The memory of Enron and World- Com was still fresh in people’s minds, and we were being compared to both. I remember reading those stories and thinking this has to be the worst moment, because if it’s not [laughter], I’m not sure that we can survive it!

But the story doesn’t end there. I came back to the office around 8 p.m. and the phone rang. Stupidly, I picked up the phone. It could have been The Wall Street Journal, but instead it was [former Xerox CEO] David Kearns. He’s screaming on the phone to me saying, “Did you read everything today?” I said “yep” and he says, “Do you believe it?” I said, “no,” and he says, “Well, remember that, because you guys are going to do great. You’re going to turn the place around. And then when they write all the good stuff, don’t believe that either.” [Laughter]

The pressure on you to cut R&D was enormous. Even major customers were advising you to do this. How were you able to resist these pressures and hold firm?

Cutting R&D would have certainly given us some short-term gains, but it would have resulted in a very ugly, long-term story. I was a long-term Xerox person, not a turnaround CEO. So for me, this was all about having a company that people could retire from, having a company that their kids could come and work at, having a company that actually would have pride some day in terms of its accomplishments. Without a pipeline of innovation, it would have been short-term gain, long-term drought. There was certainly something to be said for short-term survival. We were pretty ruthless on restructuring costs in the company. So it wasn’t like we weren’t tough, because we had to be. But we knew that the R&D investment would be the source of sustainability in the future. I’m a huge believer in research, and I worry a lot about the fact that this country’s not doing enough from a research perspective right now. Investing upstream allows you to reap differentiated benefits downstream.

We did get tough on it though. [Xerox president] Ursula Burns, who managed that process during that period of time, did a great job of focusing on the productivity of the pipeline. During the 1990s, we introduced a handful of products over the decade and none were wildly successful. She shaped R&D activity in ways where we started to see extraordinary gains in a relatively short period of time-100 products over the last three years. That’s like one every 11 days. Two-thirds of our equipment revenues today come from products we’ve introduced in the last two years. It’s tough to beat the productivity of that pipeline. We became disciplined about the process. We killed stuff. We took a Six Sigma approach, so that the dollars were spent very differently than they had in the past.

Every CEO wants to get a better return on the R&D spend. What do you do to achieve this?

First, don’t do everything. Sometimes companies that are R&D intensive get caught up in having to do everything. We decided to work with partners whenever possible. We started to use our Fuji Xerox partner more intelligently. We looked at our manufacturing and concluded that we’re not good at manufacturing for high volume products. We outsourced all of that to Flextronics. We sought to work with best-in-class partners. Easy to say. Tough to do.

Second, make tough choices about what you are truly good at. The test is, can you kill stuff? Can you decide when stuff isn’t going to hunt and when you’re going to move on and invest and go deep on the things that actually have market relevance? We killed a lot of stuff, including our SOHO [small-office home-office] business, which was the consumer business. It turns out that that was a wise decision, since that’s the toughest area for people to make money in now. The exit was painful, but it allowed us to put our money on things like the graphic arts marketplace and transforming that marketplace to color with new technologies that have capabilities that would differentiate us from our competitors.

Third, be disciplined. We rely on a set of time-to-market processes and Six Sigma approaches that allow us to assess and measure every step of the way to make sure that we don’t have the kinds of lapses that we had in the past. This is where having a strong culture comes into play. Had I followed the accepted wisdom of taking a meat ax to R&D I might have just as well said goodbye to the culture that proved the salvation of the company. Not having an exodus of our best people made a big difference.

What in your current pipeline best represents the new Xerox?

We have a production color publisher called iGen3 that is revolutionary. It’s changing the way the graphic arts marketplace operates as it transitions from offset to digital technology. In addition to the quality of color, you don’t have to have large quantities. The real beauty of digital is personalization. With digital, every single page can be personalized with relevant messages to end-users.

The second area is also in color from a technology perspective, but it’s a new technology that’s proprietary to Xerox. It’s called solid ink [as opposed to liquid inkjet]. It’s a new kind of consumable that provides very high quality and very low cost with extremely positive environmental implications-no need for toners and the waste these cartridges represent. We have it in low-end printers today, and we’re bringing it up-market to the high-end where a lot of color pages are done. So apart from the fact that it’s very high quality and environmentally sound, it will produce color at prices close to black and white.

The third thing isn’t necessarily a hardware or a software technology; it’s our services offerings. This now represents one of our fastest growth areas. It’s our ability to take documents from different sources-hard copy, structured data, unstructured data from various sources such as emails-and comprehend them in a storage architecture so that they can be searched for litigation purposes.

Is this intelligent redaction?

That’s part of it. It’s a platform that allows us to provide advantaged litigation support. Something that would have taken God knows how many man-hours now can be done using a software process that was developed in our research centers. Using natural language search allows you to do things like tag phrases with certain context and then to search them out within multiple types of document domains and redact or highlight not just names but context that for security purposes can’t be translated. So, what might have taken months to produce, [such as] redacted documents for legal process, can now be done in hours. This is where research becomes important.

Is this technique something that Google, Yahoo or LexisNexis have?

No. Interestingly enough one of the spinoffs from PARC (Palo Alto Research Center) is a stand-alone company called Powerset that’s licensed the technology from PARC for natural language search that is looking to be a competitor of Google in the future. Remember what I said about research: You don’t always have to own it yourself. You can license it. You can do spinoffs.

Another example is a software technology that optimizes storage in ways that can reduce energy capacity in data centers by 30 percent. Much storage optimization manages the hardware. This approach manages across a server base. When this becomes commercialized it will represent another licensing opportunity that the company would be able to use. These are extensions of research that really aren’t core to our business, but which can be monetized in different ways-something we would not have done before.

Given Xerox’s shift to services, how do you plan to keep your edge?

Cost is important on the services side, but innovation is even better. If you can help clients by making them more productive, you’re in a better position. We have software for infrastructure and document management that optimizes costs around things like help desks, consumables, ordering and all of the elements that people spend a fortune on. Through this kind of optimization, such costs can be reduced by 30 percent, which is a really big deal for companies that are looking to reduce costs. So, it’s not about the price of a printer; it’s about optimizing the entire infrastructure.

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