RESTRUCTURING: Xerox is recovering but its future under company boss Anne Mulcahy depends on success of its new business strategy Simon London reports

The history of Xerox should be compulsory reading for every MBA student. A company with a coherent strategy and excellent products is pushed close to bankruptcy by its inability to get things done - and is redeemed by honest, inspirational, no-nonsense leadership.

The main protagonist is Ms Anne Mulcahy, the sparky former Xerox saleswoman who, in May 2000, found herself charged with saving the copier and printer group when she was named president and chief operating officer.

"Being Xerox CEO [a post she took on last summer\] was not where I was headed. I ran a part of the Xerox business I was quite happy with. I like to say that I was drafted into the war," she says at the group's headquarters in Stamford, Connecticut.

It was a war that Xerox was losing on every front. A failed reorganisation of the North American salesforce had alienated customers. A botched consolidation of administrative centres meant that billing and revenue collection were out of control.

Meanwhile, growth markets such as Brazil and Thailand had soured, accounting problems had surfaced in Mexico, competition was intensifying and the balance sheet was overloaded with debt.

So, what had gone wrong? How could a company that until 1999 seemed to be doing everything right suddenly find itself drifting towards the bankruptcy courts?

"We took on a ton of changes in the core fundamentals of the business that were not implemented in a way that you would characterise as successful," says Ms Mulcahy.

The architect of that change was then chief executive Mr Rick Thoman, who had been recruited from IBM in 1997, initially as president, to remake Xerox. His vision was that Xerox would be more than just a copier company. It would sell "solutions" based on document workflow to big corporate customers.

The salesforce reorganisation was supposed to achieve this by creating specialists in specific industries. Consolidating the back-office centres - from 30 down to three - was meant to create a cost base competitive with the best information technology companies.

Both moves backfired. In May 2000, as the business started to unravel, the board demanded Mr Thoman's resignation. The directors singled out Ms Mulcahy, a 25-year Xerox veteran and the consummate insider, to turn the company around.

Her first move was to embark on a 90-day mission, talking to customers and employees.

Her turnaround plan, announced in October 2000, was simple but brutal: Xerox would cut its overheads by $1 billion (€1.14 billion), close unprofitable businesses and raise money from asset sales to pay down debt.

Investors were sceptical. The share price continued to sink. Xerox had a long history of announcing plans and failing to fulfil them.

But Ms Mulcahy had three clear advantages over Mr Thoman. First, the crisis was immediate and real.

"The crisis was pretty critical," she admits. "I wouldn't be here \. The management team I put in place wouldn't be here. I used it, certainly, as a vehicle to get things done that wouldn't have been possible in times of business as usual."

Second, she knew other Xerox managers well enough to hand-pick a new team. All but two of the management have been appointed to their current posts by Ms Mulcahy. All were promoted from within.

Ms Mulcahy's third big asset was her status as an insider.

"In the eyes of Xerox people she had earned the right to change the company," says Mr David Nadler, chairman of Mercer Delta, a consulting firm and a long-time Xerox watcher.

It is an observation that contradicts one of the sacred tenets of modern management: when a company is in trouble or needs a radical overhaul, call for an outsider.

Ms Mulcahy recalls speaking with one customer, the chief executive of a large corporation that was also undergoing substantial change, while on her 90-day mission in the summer of 2000.

"He told me that the enemy of change is corporate culture. You have to break the culture to make the kind of progress you need to make, otherwise you'll totally fail. I come from a different perspective. I am the culture of the company. I've been with Xerox for 25 years. It is a culture that needs to be challenged and changed but your ability to change depends on your ability to have the culture follow you."

But while Ms Mulcahy may have worked for years under Xerox bureaucracy, her style is not bureaucratic or excessively analytical.

"The structure is pretty much the same. We have the same operations and strategy committees. What has changed is the way she runs them," says Mr Hector Motroni, Xerox's chief staff officer, responsible for human resources and legal affairs.

Ms Mulcahy describes an operations committee meeting: "We were discussing customer satisfaction, an area where I think we should be doing better . . . The functional experts did a very nice job of presenting the process. We were all nodding and suddenly I had this feeling that this was the Xerox of the past. We were all going to go into conference rooms, we were all going to agree, we've taken the subject on - and this baby isn't going anywhere!

"I just sat there and said: 'Time out. If I were putting my money on the table right now, right out of my wallet, would I bet that any of this is going to make a hoot of difference in terms of results?' The answer is that I wouldn't put a dime on the table. It looks good . . . but at the end of the day we are not confronting the tough issues. I can't let us sit here and lull ourselves into that kind of discussion any more."

So far, the Mulcahy medicine appears to have been effective. Nearly 19,000 jobs have been cut. Costs have been reduced by $1.2 billion. Whole divisions - including the small office/home office business that she had helped start in 1998 - have been closed. Assets sold include half its stake in Fuji-Xerox - the company's long-standing joint venture in Asia with Fuji Photo Film of Japan - and parts of its customer financing business, the largest slice of which is now in the hands of GE Capital. In the fourth quarter of 2001, Xerox returned to profit at an operating level.

There are still issues outstanding before the turnaround can be declared an unqualified success. The company has been without a chief financial officer since the retirement in December of Mr Barry Romeril. Prompted by the Mexican scandal, the senior US regulator the Securities and Exchange Commission is still investigating the way Xerox recognises revenue arising from certain equipment leases. A $7 billion revolving credit facility must be refinanced this autumn.

But a measure of stability has been restored. The next test is whether Ms Mulcahy and her team can position Xerox for long-term growth.

Curiously, key elements of Mr Thoman's strategy remain: Xerox will bring down operating costs in office products such as copiers and multi-function copier, printer and fax machines, where it competes against Hewlett-Packard, Canon and Ricoh; it will continue to innovate in high-end "production printing" where its main competitor is Heidelberg of Germany; and it will go for growth in services and solutions, where it is competing with IBM, Accenture and IT consulting firms.

Whether this strategy is credible is uncertain. Xerox's ability to run a consulting practice, as opposed to a well-oiled sales machine, remains untested.

Moreover, each of these businesses - mass-market products, high-end machines, solutions - requires a distinctive management approach.

However, the fact that such discussions are taking place at all is testament to the success of the salvage operation conducted over the past 18 months.

Could an outsider have done it? "Yes," says Ms Mulcahy: "The question is whether you can carry people with you and I don't think that is something that belongs only to insiders. It can be done very well by outsiders as well. But if you are going to hire externally it has to be someone who has not only the strategic or intellectual capacity but also the leadership capacity to carry things through."