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________________________________________________________________________________________________________________ Professor Bill George and Research Associate Andrew N. McLean prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005, 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

B I L L G E O R G E

A N D R E W N . M c L E A N

Anne Mulcahy: Leading Xerox through the Perfect Storm (A)

The normally confident Anne Mulcahy, chief operating officer of Xerox Corporation, was worried as she prepared to meet with her top management team on Monday, October 23, 2000. She was preparing to announce Xerox’s first annual loss in five years at the quarterly earnings announcement the following day. On a telephonic briefing on October 3, 2000, Mulcahy had forewarned security analysts and investors of the losses, stating candidly that “Xerox’s business model is unsustainable.”

Her remarks had set off a firestorm, causing Xerox stock to plunge 26% that day alone. Ten days later Reuters reported the rumors circulating in Europe that Xerox was preparing to declare bankruptcy. Shortly thereafter, Moody’s and Standard and Poor’s downgraded the company’s debt ratings, further roiling the financial markets and shaking Xerox’s customers and its employees.

Xerox was not only losing money, but facing a major liquidity crisis that threatened its survival. As a result of stiffened competition and a major sales organization realignment, which followed an administrative reorganization, Xerox sales had plunged into a sharp decline. The crisis was compounded by rapidly rising interest expenses and the collapse in the company’s Latin American business amid a series of currency devaluations. As one executive put it, Xerox was facing “the perfect storm.”

With $18 billion in debt, a market capitalization that had dropped to $5 billion, and a string of earnings disappointments, Xerox was in deep trouble. (See Exhibit 1 for company financials.) As the storm was building, Xerox stock had tanked, plunging from $65 per share in 1999 to $27 when Mulcahy became COO in May 2000, and all the way to $6.88 on October 19. As the stock price fell, outside advisors placed increasing pressure on Mulcahy to take the company into bankruptcy and relieve the enormous debt burden and the associated interest expense.

As Mulcahy met with her key executives and outside advisors that afternoon, she was deeply concerned about whether the company she loved so much could stay afloat long enough to avoid bankruptcy and give her time to implement plans to restore the company to its former greatness.

Company History

Xerox was built on the foundation of one of the most successful product launches ever. After a decade of development, Xerox had introduced the model 914 copier in 1959, leasing the refrigerator-

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sized office machine to customers in low-cost long-term agreements, under which Xerox collected a fixed price per page printed. Demand exploded for the new xerograph process, which replaced messy carbons and various wet process duplication methods. Initial sales of $32 million in 1959 grew to $1.1 billion in 1968, and employment increased from 900 to 24,000. By 1970 Xerox enjoyed a 95% share of the plain-paper copier market, with gross margins on key products ranging from 70% to 80%. Xerox joined trademarks like Yo-yo and Hoover as a household name.

Xerox was a model corporate citizen, especially in its hometown of Rochester, NY. Chief executive Joseph C. Wilson set the tone for Xerox’s focus on its customers, values-based leadership and roots in the community. Over time several generations of families came to work for the company. Xerox became a trendsetter in encouraging diversity in its workforce.

Sterling civic values and meticulous corporate controls were matched by heavy investment in R&D. Xerox was a research scientist’s dream job. One of its crown jewels was the renowned Palo Alto Research Center (PARC), established in 1970 when Xerox entered the computer industry. PARC originated many technologies that launched the information revolution: the graphic user interface, computer mouse, Ethernet protocol, first laser printer, bit mapping, advances in information theory, object oriented computer languages, and the idea of “windowing” computer applications.

While PARC’s research was important for company prestige, it had “little connection to the people who dealt with customers on a day-to-day basis,” explained a Xerox executive. “Our operating culture was focused on the next product to be introduced.” Product development was based near Rochester, where engineers worked on ink and paper movement technologies that applied directly to hard documents. Xerox carefully scripted the development of new technologies in a slow but exacting multi-stage process, extending from initial research to model introduction.

Reinvention

Xerox’s overwhelming success bred anti-monopoly pressures. Confronted by several lawsuits, Xerox negotiated a 1975 settlement with the Federal Trade Commission whereby it forfeited its formidable store of patent protections and agreed to license its technology to competitors. The next decade brought dizzying competition as new competitors Canon, Minolta, Ricoh and Sharp aggressively entered the U.S. market. Xerox’s share of U.S. copier installations fell from 80% to an estimated 13% by 1982.

Unprepared for price competition, Xerox was unable to adapt to smaller margins and appeared to be headed for insolvency in the early 1980s. In response, new CEO David T. Kearns introduced several companywide initiatives in the areas of benchmarking, employee involvement, and quality to help Xerox build a competitive position. Kearns rallied employees under the moniker of Team Xerox and Leadership Through Quality, and they responded enthusiastically. Between 1984 and 1993 Xerox improved its share of low-end copiers from 8% to 18%, as mid- and high-end share rose from 26% to 35%.1 As its copier businesses rebounded, Xerox diversified, launching a computer business competing directly with IBM. It also acquired insurance and finance arms.

Despite improvements in market share, profit growth stalled in the early 1990s. Amid the networked office and digital computer printing revolution, Xerox’s entire product line consisted of stand-alone, analog machines. In manufacturing, employment levels were fixed by union contracts and production was vertically integrated down to plastics molding and screw turning, making it difficult for Xerox to compete on cost. Named Kearns’s successor in 1992, CEO Paul Allaire was determined to spread a sense of urgency throughout the company. Allaire created three geographically defined sales organizations selling products from nine product divisions organized

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around market segments. Each division assumed “end-to-end” responsibility for a set of products and service and had its own manufacturing, income statement and balance sheet. Allaire eliminated 10,000 jobs across the company, modernized Xerox core technologies, and divested the insurance business.

Over the next five years, the nine divisions were reduced to four, and companywide management of manufacturing was reinstated. But while the organization was fine-tuned, Xerox urgently needed a new strategy. Beginning in the 1990s, Xerox sales had accelerated as installed leases began to be replaced with purchased machines. “This created incredible sales revenue,” explained a senior executive, “as we spent five years selling off our lease base. By 1997 we’d run out of steam on the conversions. A lot of the skills required to build new revenues – market development, attracting customers, and training salespeople – weren’t in the company.”

New Strategy … and a New Leader

In 1997, Allaire announced that Xerox’s digital systems revolution had achieved critical mass. He again reorganized the company, this time into four business divisions. Production printing and retail channels businesses were new business forays, each targeted at a new market with new competitors, and all used new technologies in networking, color ink and digital processing. Xerox took direct aim at H-P with its desktop printer business.

On the threshold of a new digital era, investor expectations for Xerox ran high. To spark profit growth, the Xerox board turned to an outsider as Allaire’s successor. Richard Thoman, then CFO at IBM, was appointed president of Xerox in 1997 to undertake a sales and process reorganization and shake up the slow, cumbersome bureaucracy critics called ‘Burox.’ “Everyone knew we needed the new strategy and a greater sense of urgency in our culture,” explained a senior Xerox executive, “but no one had the intestinal fortitude to do it.” A protégé of Lou Gerstner, with experience in IBM’s storied turnaround, Thoman was greeted with optimism by investors. His track record in IBM’s transformation from hardware to services reflected Xerox’s aspirations.

Thoman’s election as president put him in line to become CEO when Allaire retired in 1999. “We were going to be something fundamentally different from our history – a systems and IT company,” explained Xerox veteran Ursula Burns. Working with a team of senior Xerox executives and key senior hires from IBM and elsewhere, Thoman oversaw the implementation of further reorganizations. Four geographically oriented customer administration centers which handled billing and collections were consolidated into three customer business centers organized by business segment. Customer-facing order entry personnel from more than 30 geographic customer business units were moved to the three customer business centers to capture advantages of scale. Later, in 2000, geography-based sales team members were reassigned to sell Xerox’s solutions tailor-fitted for industry groups, and another layer of senior management was added.

Thoman attempted to build a service business through a series of acquisitions and continued to buy out partners’ stakes in overseas joint ventures, looking to buy Fuji’s share of Fuji Xerox. Xerox expected to pay for major business investments in color and ink technology, desktop machines, production printing, and services with cost savings from process streamlining in sales, fulfillment, and billing. The stock market responded enthusiastically. Investors bid Xerox stock up from $30 per share in 1997 to over $60 when Thoman was officially elected CEO in April, 1999.

Inside Xerox, the changes were not going as well as hoped:

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• The sales reorganization so disrupted customer relationships that revenue and profits suffered. Sales team members lost client relationships they had cultivated over the years. Many of them took advantage of the strong job market and left the company.

• Xerox customers not only lost their sales contact, but also began experiencing increased billing issues due, in part, to the customer administration changes and more complicated pricing plans. With the two strong customer ties to Xerox broken, competitors exploited the opening for new business and stole market share from Xerox.

• As the Xerox sales team scrambled to find new business, it cut prices sharply and wound up closing fewer and fewer profitable contracts.

The extent of the crisis was not apparent to management until the second half of 1999, when declining results caused Xerox to miss its earnings targets in both the third and fourth quarters. Xerox stock declined sharply from its high of $60 to $20 per share in early 2000, before a brief rally brought it back to $27.

Just as Xerox was confronting these problems in its core business, the company encountered external profit challenges. Among them, Xerox’s domination in production printing ended with the entry of foreign-rival Heidelberg, and competition from Canon and Ricoh began to heat up as well. Second, the global financial crisis that began in Asia in 1998 spread to Latin America in the second half of 1998, where currency devaluation in Brazil put a hole in a particularly profitable operation for Xerox. Third, the market began shifting toward products with lower margins.

After confirming through September of 1999 in-line earnings expectations for the third quarter of 1999, Xerox stunned investors by warning of a steep reduction in expected earnings in early October. (See Exhibit 2 for quarterly results.) With the share price in freefall and revenue and profits shrinking, morale was in disarray, and massive defections were plaguing the sales organization. At the same time, internal auditors found misclassified revenues and spiraling doubtful accounts in Xerox Mexico, triggering sweeping dismissals and a notice to the Securities and Exchange Commission. The SEC began inquiries across the company, suspicious that practices uncovered in Mexico were more widespread.

The sudden change in Xerox’s prospects was a shock. The management team was shaken by the sudden downturn, and began to lose confidence in Xerox’s direction. As a result, several senior executives made plans to leave. As news of this disarray filtered back to Allaire, he took steps to stabilize senior management, trying to prevent the damaging defection of old Xerox hands.

Changing Leadership…Again

Allaire decided to replace Thoman, canvassing the Board regarding another leadership change. Having just elected Thoman CEO, the board did not have an obvious successor. Allaire suggested Anne Mulcahy, president of the General Markets Organization division (GMO). As Mulcahy was preparing for a business trip to Japan on May 11, 2000, Allaire dropped by her office. “He came in and he said, ‘Hey, sit down,’” Mulcahy recalled:

Paul said, ‘I don’t think you ought to go to Japan today.’ He asked me to be COO and his successor and indicated the board had approved it. I asked him for a day. I knew I would do it, but I wanted to go home and chat with my family to make sure they understood the consequences and I had their support.

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That evening Mulcahy talked over the opportunity with her family. “Having worked for 35 years for Xerox, my husband has the same passion for the company as I do,” she said. “He said, ‘You go do what you have to do.’ Our two sons were somewhat enlightened in the topic of women leaders, so they were excited. Their support solidified my resolve and gave me energy for the task. I don’t think I would have been able to do this job without that support.”

The next day, Allaire secured Thoman’s resignation and resumed the position of chief executive as the board elected Mulcahy president and chief operating officer. “I was certainly not focused on having this happen,” Mulcahy said. “It was a little like going to war, in terms of knowing that this was the right thing for the company and there was a lot at stake. This was a job that would dramatically change my life, requiring every ounce of energy that I had. I never expected to be CEO, nor was I groomed to be CEO. It was a total surprise to everyone, including me.”2

My biggest fear was that perhaps I was sitting on the deck of the Titanic and I’d get to drive it to the bottom of the ocean—not exactly a moment to be proud of. Nothing spooked me so much as waking up in the middle of the night and thinking about 96,000 employees and retirees and what would happen if this thing went south. Entire families work for Xerox.3

The Making of Anne Mulcahy

It had been clear to senior management that a change was in the air, but Mulcahy’s appointment came as a surprise. She had been running a business far removed from the challenges of the reorganization. “I wasn’t surprised that there was a change,” said Mulcahy. “I was surprised they came after me because I never expressed an aspiration to be there. I didn’t know the board at all, so it wasn’t exactly a vote of confidence. I was the only option left to them.”

Joining Xerox

While long recognized as high potential within Xerox, Mulcahy had followed a circuitous path to the ranks of senior management. Growing up with four brothers in suburban Long Island, Mulcahy attended Catholic schools and graduated in 1974 from Marymount College with a joint major in English and Journalism. (See Exhibit 3 for her account of her early family life.)

After working initially at Chase Manhattan, Mulcahy said, “I came to Xerox because I needed a job. Not with aspirations, that’s for sure. I started out in sales and literally hounded the streets for the first ten years of my career,” she recalled. “There were only a handful of women sales reps at that time. I remember taking these little puddle-jumpers up to Presque Isle, Maine, to call on the paper mills. This was baptism by fire.” Despite Mulcahy’s lack of sales experience, Xerox had recognized her competitive instinct. “She would go and dig in the bowels of a territory to find things,” recalled Tom Horn, her Boston sales manager.4

By the early 1980s, Mulcahy was promoted to management, charged with organizing a sales team that included older and more experienced employees. She had married Joe Mulcahy, who was also a Xerox sales executive, and started a family. “A lot of what drove my career was actually work and family balance,” she explained. “We both wanted to play out our careers, yet still raise our kids in one place. We’d figure this out without one person’s career taking priority over the other. This was difficult because in a company like Xerox, relocation was part of the game.”

Joe ran Xerox’s major account organization until 1988, which required extensive global travel, while Anne stayed in positions not requiring travel. Later their roles were reversed. “We made a

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deal that one of us would always be home with the kids,” said Mulcahy. “It’s hard on the person traveling, but at least you don’t have to worry about what’s happening at home.”

From their home base outside New York City, Mulcahy commuted to Boston, Hartford, Rochester, and corporate headquarters in Stamford, Connecticut. Said Mulcahy, “Xerox tried hard to make this work for me. They were respectful of my decision to keep my roots around my family.”

Mulcahy’s sales management experience developed her skills in building teams. “The key to managing a sales team is the ability to set goals and motivate your team,” she said. “People have to feel good about getting out of bed every day. It’s a tough job. You can learn a lot by thinking about the business from the customer’s perspective every day.”

Moving to Corporate

As greater responsibilities came Mulcahy’s way, she was eventually promoted to vice president for human resources in 1992 during the 1990s restructuring. Mulcahy found she had a passion and flair for the job, and it enabled her to refine her communications skills. “When there are tough messages to deliver,” she said, “it’s important to communicate the good and the bad. Respect people by delivering the truth. Help them work through their choices. This is where I learned how to make tough choices, but still value people.”

When her former boss, Barry Rand, became vice president for worldwide operations in 1996, he took Mulcahy with him as his deputy. “I made a point of traveling everywhere and getting to know the operations and the people who led them,” she said. “When you work in North America, you think it defines the company. I learned just how rich and talented our international operations were.”

In 1997 Mulcahy became chief staff officer, reporting directly to CEO Allaire. “I’d known Paul throughout my career,” said Mulcahy, “He had been helpful in making sure opportunities were there for me.” Mulcahy had impressed Allaire with her range of experience and decisiveness. “I liked the way she handled things in a forthright manner, stepping up to the issue and deciding what to do and saying, ‘Let’s just go do it,’” commented Allaire.5

While the chief staff officer job was a development experience, with responsibility for functions ranging from human resources to strategy, Mulcahy was not deeply interested in the role. Consequently, she leapt at the opportunity to run GMO, Xerox’s new venture in web and retail sales, as a key member of Thoman’s executive team.

On to General Management

In leading GMO, Mulcahy had her first opportunity to run her own business. She launched a small office and home office (SOHO) venture in desktop printing that competed with industry leader Hewlett-Packard. The challenge was exhilarating. “I loved starting a new business from scratch, building the organization, and choosing people to staff it.”

Mulcahy and her team spent the next two years developing channels and products in areas in which Xerox had traditionally been weak. In late 1999, Xerox acquired Tektronix’s color imaging division for $925 million. Learning from Xerox’s history on prior acquisitions, Mulcahy integrated Xerox’s printer business into Tektronix, headquartered the unified business in Tektronix’s Oregon location and commuted to Oregon several times a month. In this general management role, Mulcahy reported directly to Thoman, but was removed from the core business. “Historically, Xerox is an integrated, single brand company,” Mulcahy explained: “In running GMO, with a different

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headquarters, sales model and operational challenges, I was isolated and didn’t have a clear view of the main business.”

Leading Xerox

When Mulcahy became COO in May, 2000, Xerox stock was in freefall, having dropped from $63 per share to $27 in the previous year (see Exhibit 4). She became part of the new office of the chief executive, working with Allaire, CFO Romeril, and outgoing vice chairman Bill Buehler. Mulcahy took charge of internal business, including operations, solutions and worldwide business services (see Exhibit 5 for management directives in the announcement), and Allaire made it clear inside and outside the company that the CEO’s job was hers to lose.

Sizing up the Challenge

Mulcahy’s first goal was to assemble her team. She met personally with 100 top executives to see if they would stay with the company despite the challenges ahead. “At Anne’s first meeting as COO,” recalled former head of marketing Diane McGarry, “it was obvious a couple of people weren’t happy and weren’t staying. Hours later both of those folks were replaced.” “I knew there would be people who certainly wouldn’t be supportive of me,” said Mulcahy:

So I confronted a couple of them and said, “Hey, no games. Let’s just talk. You can’t be thrilled. If you choose to stay, either we’re totally in synch or when you go it won’t be pleasant, because I have no appetite for managing right now. This has got to be about the company.” Two people who ran big operating companies came forward and said they would prefer to leave.

Those who stayed did so for various reasons: some were personally invested in the company, others relished the challenge, and other stayed because Mulcahy appealed to their character. Ursula Burns, president of worldwide business services, said she was loyal to the company that had given her so much. “I have been to almost every country in the world,” explained Burns. “I have a wonderful life and great friends, more than I ever imagined. It all came from a partnership between me and this company. What do you say when times are tough? ‘Thank you very much, I’ll see you later?’ That’s not what my mother taught me.”6

After the initial conversations with Mulcahy, the team came together quickly and members were heartened by the number of their colleagues who stayed on. “We had a dinner in the conference room off the cafeteria,” said Burns, “and we all looked around, pleased at how many stayed, and said okay, fine, we’re in this together. Let’s go. What do we have to do to survive?”

Mulcahy then embarked on extensive fact-finding tours in the business, visiting employee operations and major customers. “When I came in,” Mulcahy later explained, “Paul had a very clear agenda. He was coming back, but not for long. He wanted to position the company so that we had a chance going forward. He kept the title of CEO but gave me the experience immediately of having accountability.”

Allaire did not formally separate his responsibilities from Mulcahy’s, and asked her to participate in every ongoing decision. As Mulcahy noted, “I couldn’t sit back and say, ‘Oh, well, I don’t have to deal with that.’ In fact, the only thing that I didn’t do, which was intentional, was deal with the SEC for that first year as the investigation sparked by irregularities in Mexico ground on. That was because I hadn’t been a part of any of the issues.”

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Mulcahy’s goal was to fully understand the challenges facing Xerox. “When I took over as COO, I was amazed at just how unaware everyone was of the seriousness of the issues,” she explained:

No one understood, and I mean no one. Maybe you see it and you don’t acknowledge how serious it is. It was shocking for the Xerox executive team to find out how dismal the outlook was. Speaking for myself, I did a billion dollar acquisition one year before the company almost went bankrupt. I had no idea of our financial condition. Fortunately, it was a success.

Leading the Team

Mulcahy’s leadership contrasted sharply with her predecessors. She made people publicly accountable for their results and set realistic expectations, despite the tremendous pressures the company was under. “You can’t wish your way to good performance,” said Mulcahy. “If you set the bar someplace that buys you ninety days of external esteem, then you will get killed. Boy, is it ugly.”

She also encouraged senior managers to engage each other directly. “We talk about everything,” said Burns. “Anne is really clear: ‘Make sure you get it.’” Mulcahy did not take the lead in every discussion, playing what Burns described as a more orchestrating role. “Anne sits in the room and she’ll listen and watch,” Burns explained. “When she jumps in, it’s because we need to be pulled together or because something unsaid needs to be said. Sh

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