The Cow in the Ditch: How Anne Mulcahy Rescued Xerox

Anne Mulcahy, chairman and chief executive of Xerox, calls pressure from Wall Street for short-term performance “a huge problem” that may be hurting public companies in the long run.

“It’s one of the most dysfunctional things going on in the marketplace today,” she said during a Wharton leadership lecture presentation last week that was followed by an interview with Knowledge at Wharton. “I applaud companies that have pulled back from setting earnings expectations and are trying to reshape the rules of the road. If I could take Xerox private, I’d do it yesterday.”

Mulcahy certainly isn’t the first corporate chief to complain about Wall Street’s shortsightedness. But her comments resonate because, in turning around the famed copier maker, she endured a level of pressure that few corporate bosses ever face. Xerox flirted with bankruptcy, was advised to seek court protection from creditors and probably would have but for Mulcahy’s adamant opposition. 

And Mulcahy has shown that, despite her misgivings, she can deliver results in a hurry. Under her leadership, Xerox moved from losing $273 million in 2000 to earning $91 million in 2003. By last year, the company’s profits had reached $859 million on sales of $15.7 billion. At the same time, its stock has risen, returning 75% over the last five years, compared with a loss of 6% for the Dow Jones Total Stock Market Index.

Even so, Mulcahy stressed that she and executives who head other public companies need relief from Wall Street’s harping on the next quarter’s results. “I talk with a lot of CEOs, and quietly to each other, we say, ‘I’d love to say that I just don’t care and I’m just focused on the long term, but the pressure is extraordinary,'” she said. “I hope the next generation of leaders can reshape the way we interact with the financial community.”

Mulcahy, whom Fortune this month named the second most powerful woman in business, nearly didn’t have the chance to muse on Wall Street’s impatience. When she became Xerox’s chief executive in 2000, her company didn’t look like it would live long enough to deliver any kind of profits again, whether quarterly or annual.

At the nadir of its troubles, Xerox’s cash reserve dwindled to nearly $100 million — almost nothing for a firm of its size — while its debt ballooned to almost $19 billion. At the same time, it discovered accounting improprieties in its Mexican subsidiary, setting off a Securities and Exchange Commission investigation. Customers and employees began to fall away. And all this occurred against the backdrop of a weakening economy. “It was alarming how fast things began to unravel in late 1999 and 2000,” she said. “We thought we had coined the term ‘Perfect Storm.'”

Xerox was, of course, a storied name in American business. It is one of those rare companies whose brand became so ubiquitous that it has entered the language as a verb: For years, you didn’t photocopy a document. You Xeroxed it. But as with other storied American companies — such as IBM in the early 1990s and, lately, General Motors — decades of dominance led to complacency.

Mulcahy, for her part, knew the company about as well as anyone. She had spent nearly her entire career there, joining in 1976 as a sales representative after a stint in banking. “I loved the fact that sales performance was black and white and you got rewarded and recognized in a very quantitative way,” she said. She had gradually worked her way up, even serving as the head of human resources, and never expected to become boss. “I spent my first 18 years just coming up through the operational ranks.”

Her tenure in HR led to other executive jobs — head of developing markets, chief of the corporate staff and president of the desktop division, among them. “When I was asked to become president and then CEO [of the company], I have to tell you that it was a huge surprise, but I was more prepared than I realized.” She had learned just about every nuance of Xerox. If she hadn’t filled a crucial post, she had at least worked closely with someone who did.

Soon after becoming boss, she undertook a listening tour, seeking insights from employees, customers and industry experts on where Xerox had erred. Employees said that they needed clearer goals. Customers said Xerox had lost its responsiveness. Tech gurus said it was investing randomly, rather than focusing on a few markets where it could dominate.

Mulcahy also had to lobby 58 banks — all of them had to agree — to renew the company’s revolving line of credit. Without it, Xerox was headed for bankruptcy. She jawboned the bankers and managed to persuade all but two. The holdouts wouldn’t budge. “So I said, ‘Who’s the most influential person in banking?’ To me that was Sandy Weill of Citigroup.”

Mulcahy called to ask if he would meet with her. He agreed, and she went to explain her predicament. “While I sat there, he picked up the phone and called both banks.” She got her loan. A cold call to Warren Buffett didn’t work as well. Buffett took the call and invited her to dinner in his hometown of Omaha. She flew to Nebraska, aiming to sound him out on investing in Xerox. Her chance came over dinner. When she finished her pitch, Buffett replied, “You know, I never invest in technology companies.” But in the end, Mulcahy said, “he turned out to be a great friend and a great advisor and I have often quoted many of the pearls of wisdom he has given me. So [it was] not a wasted effort.”

Back in Stamford, Conn., where Xerox is based, Mulcahy and her team hammered out a plan that first focused on cash generation, since the company needed cash to survive. They then wrung out cost — employment has dropped under her from about 80,000 to 58,000 — streamlined the corporate structure and zeroed in on markets where Xerox had a competitive advantage and thus opportunities for profitable growth.

Mulcahy even ditched an ink-jet printer division that she had started. “We were a follower, not the leader there,” she said. “And it was clear we weren’t going to catch up. There are areas where it’s great to be a fast follower, but it’s hard to pinpoint them in technology. You have to have differentiation.”

A restructuring, of course, demands more than just corporate triage. Laying off employees, shuttering plants and chopping perks only carry a company so far. When a firm overspends, it’s often because it has lost its way. The company plows money into old businesses because they have worked in the past, not because they have promise. And it spends money on a smattering of new ones because it’s groping for direction, not trying to diversify.

Mulcahy found a compass to help her guide Xerox from a piece of corn-pone advice from a Texas customer. He told her that she was “like the farmer whose cow was stuck in the ditch,” she recalled. “I was like, ‘Oh, really. How so?’ And he said that the farmer had to get the cow out of the ditch, had to understand how the cow got in and had to make changes so she never got stuck there again.

“Every day I think about that advice and our journey and about where we are,” she said. “Do we really understand where we are, how we got there and how not to make the same mistakes in the future?”

Good Ideas, Poor Execution

In Mulcahy’s analysis, the mistakes that put Xerox in its ditch included a series of half-baked reorganizations.  They left employees unsure of their roles and skeptical about the company’s direction. “During the 1990s, we had lots of consultants on organizational effectiveness. We sliced and diced the business into industries, product lines and geographies, you name it. It looked good on paper but fell apart in implementation. I found myself in a job where I couldn’t look anybody in the eye and feel clear accountability for anything. I had to bring in a team of 10 people to make a business decision.

“So I decided we were going to do all of our [profit and loss statements] on a geographic basis. Is it appropriate in this day to have geographic P&Ls? I don’t know, but I’ll trade off organizational design for clarity and accountability any day of the week. I took out a lot of layers and think it was instrumental in improving performance.”

In its prior efforts at reforming itself, Xerox also had tried to centralize administration and reorganize its sales force. Once again, the ideas sounded good in theory, but were poorly executed. “We threw the whole sales force up in the air and didn’t think about what that would cost us in terms of customer relationships, continuity and trust. Everybody in the field knew it was stupid, but nobody said anything.”

The employees’ unwillingness to speak up underscores something that has become a tenet of Mulcahy’s management philosophy: Executives must create a workplace where workers feel secure in giving honest, constructive feedback. They have to know that they won’t be penalized for speaking up and that their bosses take their suggestions seriously. “And you can never depend on filtering information up through the company,” she added. “You have to talk to frontline employees.”

That helps an executive get buy-in from her people, something she needs to succeed. “It’s good to have a plan that’s roughly right and implement with a degree of precision,” she said. “But the bottom line is that it’s all about getting your people aligned around a common set of objectives. At Xerox, that was the difference between success and failure.”

Under Mulcahy, Xerox is a document-management company: It focuses on technologies like scanning, imaging and content management and search. It has long been known as an innovator, and it remains committed to research and development.

Even during the worst of the financial difficulties, Mulcahy spared her researchers from cuts. Still, she expected them to work smarter. She charged her research centers — Xerox has four in North America and Europe — with devising ways to generate higher returns on their work. One new approach was marketing Xerox’s research capabilities to other companies. Its Palo Alto, Calif., center, for example, receives funding from biotechnology companies and collaborates with them. “So we have partners who write out checks to have research done,” she noted.

Protecting research and development allowed Xerox to roll out a wealth of new offerings as its financial health improved. Today, about three-quarters of the company’s revenue comes from products and services introduced in the last two years. “Our customers are voting with their checkbooks,” Mulcahy pointed out. “We’re growing share, and we’re growing top-line revenue.” Last year was the first in which sales had grown since 2000.

Over that time, Mulcahy and her team also managed to halve the company’s debt and double its equity. Profits are increasing, and Xerox is throwing off a healthy amount of cash. “Most important, we’ve rebuilt our credibility in the marketplace,” she added.

Officially, Mulcahy’s Wharton talk was on leadership and she fielded several questions about the topic — what it means, how she would describe her style. She argued that too many aspiring leaders obsess over other people’s ideas of what a leader should be. “It’s most important to play to your strengths and not to conform to someone else’s image of leadership,” she said. “It allows you to have integrity of style and consistency of character.