Tue, Jun 04, 2002 page19

• Critics grudgingly give Xerox chief some respect

  • NY TIMES NEWS SERVICE
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  Anne M. Mulcahy did some radical things on Memorial Day weekend. She saw her son Kevin in a track meet. She had a facial. She invited friends over for dinner. In between, she recalls, she "just hung out."

  Nothing radical in that? Consider that it was the first time in two years that Mulcahy, chief of Xerox Corp, had spent a full weekend without working.

  Indeed, since May 2000, when Xerox ousted G. Richard Thoman as chief executive and named Mulcahy, then in her 24th year with the company, as president, she has been like a mother glued to the bedside of a child in intensive care, often in the office as early as 6am, rarely out before 7pm, and continuing to make phone calls from home.

  "Even I've been amazed at the sheer level of activity she's maintained," said Thomas J. Dolan, a longtime Xerox executive and her older brother.

  But the devotion has paid off. It landed her the chief executive's job in August 2001, and the chairwoman's job five months later. And it helped pull Xerox back from the brink of bankruptcy.

  Mulcahy, 49, negotiated the settlement of a long investigation of Xerox's accounting methods by the Securities and Exchange Commission. She sold longtime Xerox businesses, including the ink-jet printer business she had nurtured. She introduced products and services that analysts say may finally nudge Xerox's stagnant revenue higher. She presided over the resignation last year of Barry D. Romeril as chief financial officer. Last week, she and the board announced his replacement, Lawrence A. Zimmerman, an IBM veteran.

  The upshot is that Xerox, while still weak, is off the critical list, and Mulcahy can ease up. "I'm almost embarrassed to admit it, but yes, this job and my life, they're both getting to be more fun," she said, chatting last week in her office here. "We've got a lot more to do, but finally, we're not in crisis."

  Xerox certainly still ails. It must fight off attacks by Canon and Ricoh in its market for superfast commercial printers, and find a way to chip at Hewlett-Packard's dominance in slower, cheaper printers. It must fight IBM and other computer makers for a share of the lucrative market for electronic data services. It must still find a company to buy equity in Xerox PARC, the Palo Alto research center that Xerox can no longer afford to maintain itself. In the next month or so, it must provide the SEC with restated numbers from past years and assure shareholders that it has come up with more acceptable accounting methods for future ones.

  All told, Xerox has yet to find a good way to accomplish those three most basic of business tasks: increasing sales, turning a profit and getting the stock price up. "When it comes to executing growth strategies, Xerox is just not firing on all cylinders yet," said James W. Lundy, a former Xerox executive now a vice president of Gartner Inc., a technology research firm.

  Still, even Lundy, who once said that only a transfusion of fresh blood could save Xerox, is acknowledging that maybe, just maybe, Mulcahy wasn't so wrong for the top job after all. "I'll give her a B-plus, maybe even an A-minus, for engineering one great turnaround," he said.

  Competitors, too, offer newfound respect. "Anne has gotten Xerox out of some really tough financial situations," said Jim Ivy, the president of the Ricoh Office Products Group.

  Admiration

  Mulcahy is even gleaning admiration from such unlikely sources as creditors and labor leaders. "Anne has had to satisfy a huge number of constituencies, and she has proved personable, decisive and a real team player," said Denis J. Nayden, chairman of GE Capital, which has lent Xerox money and is taking over Xerox's own customer financing operations.

  Gary Bonadonna, director of the Rochester joint board of the Union of Needletrades, Industrial and Textile Employees, which represents Xerox workers, is also complimentary, though Mulcahy has cut Xerox's employee roster by 22,000, to 74,600. "She was always fair and direct, but she has become even more so," he said. "She makes hard decisions quickly and never looks back."

  Still, the applause stops way short of a standing ovation. Lundy, for one, faults her for fighting the SEC instead of just agreeing to restate earnings, and for not jettisoning all executives who might have been responsible for Xerox's accounting problems. "I worry, will her concept of loyalty stop her from pulling the trigger on weak performers in the future, too?" he asked.

  Nor is Ivy at Ricoh particularly cowed by a restrengthened Xerox. "I've got a massive sales army out there, and it is wooing Xerox customers," he said. "Anne and her people have not re-earned customer trust."

  Perhaps not surprisingly, Wall Street has yet to re-embrace Xerox. Its stock, which hit a high of almost US$64 in May 1999, trades mostly in single digits these days, and is now at US$8.97.

  "Management still can't say, `We've been through a tough time, we've fixed things, we're OK,"' said Jonathan Rosenzweig, an analyst at Salomon Smith Barney.

  Actually, Mulcahy agrees. "Xerox has survived, and I own that," she said. "But I won't declare victory until Xerox is again great."

  In one sense, though, she can declare a personal, if not professional, victory. Despite brickbats from shareholders and conflicting advice from colleagues and friends, Mulcahy has spent the last two years doing things her way. That became patently clear last week, when she spent two hours -- time she would have hated to take away from work a few months ago -- regaling a visitor with tales of the past and foreshadowings of the future, taking occasional swigs of bottled water and breaking out into frequent grins.

  What emerged was a portrait of an executive who is equal parts hard-nosed chief and sensitive mom, a leader much more in keeping with the much-nuanced Captain Kathryn Janeway of the starship Voyager than with the two-dimensional, tender-but-macho James T. Kirk of the starship Enterprise. She can spout copious facts and figures, yet she usually acts from the gut. She would rather make a quick decision, even a wrong one, than waffle.

  That decisiveness can backfire. There was the time Mulcahy withheld funds to develop a medium-speed copier, leaving a gap in the Xerox product line that competitors readily filled. Or that day in October 2000 when, against the advice of colleagues, she publicly called the Xerox business model unsustainable. The stock plunged almost 26 percent in one day. "I figured being honest would make us credible," she said. "I made a roaring mistake."

  Clearly, she insists on marching to rhythms that sometimes she alone hears. Many colleagues advised her to let Xerox lawyers and financial staff members deal with the SEC, particularly because the accounting at issue took place before she was named president. But she personally negotiated the settlement. "Maybe it didn't happen on my watch, but I'm the most senior spokesman, the one who can make a commitment about what we will do from now on," she said.

  The agency slapped Xerox with a US$10 million fine -- the largest ever levied by the SEC on a corporation in a financial fraud case. But Mulcahy says she has no regrets. "I would always have wondered whether things would have gone better if I had been involved," she said.

  Ever since Romeril resigned in December (it was his decision, she says), shareholders had prodded Mulcahy to hire a replacement. "Anne was bearing the CFO's responsibilities herself, and that was distracting her," Rosenzweig said. Mulcahy refused to waver from her decision to wait until Xerox had settled the SEC investigation, so that she could devote full time to the search. Xerox announced the settlement in April; Zimmerman said he was first approached by executive recruiters a few weeks later.

  In January, Mulcahy told Xerox employees that, as a token of appreciation for sticking with the company through bad times, they could all take their birthdays off. "The union was up in arms because I didn't check with them first, but my reaction was, `I don't care, get a life,"' she said. "These people were overworked and challenged, and it was a gesture, a way of saying thanks." (Bonadonna laughed when the comment was repeated to him. "We weren't really mad -- I mean, why shoot a gift horse?" he said. "But she did kind of forget that we do have a collective bargaining agreement.")

  As part of the SEC settlement, Xerox must restate several years' worth of revenue and earnings. Mulcahy has been calling her financial people several times a day, asking questions and egging them on to finish. Before Memorial Day she did an about-face and told them to take the weekend off. "I heard the strain in their voices, and I knew I had to ease up," she said. "If that means pushing out the deadline for a day or two, so be it."

  A better picture

  Mulcahy is in a better position to cut her people some slack than she has been in a while. Although it still reports net losses, Xerox is enjoying operating profits. Its revenue is flat but no longer plunging. It has hired new auditors and is almost done renegotiating the revolving line of credit that expires in October. And the SEC is off its back, although the agency continues to investigate some former Xerox executives.

  Xerox must now change the way it accounts for equipment leasing revenue and restate its numbers from 1997 through 2000 -- all of which sounds onerous, except that the restatements will push some sales and earnings from the late 1990s into last year and this one, making Xerox's recovery look more robust than it is.

  The company has also cleaned house. In addition to cutting the 22,000 jobs, it has divested itself of many businesses that were draining cash. It has farmed out functions that it felt others could handle more efficiently. Flextronics International, a Singapore-based contract manufacturer, for example, now does much of Xerox's manufacturing. A new joint venture with GE Capital, called Xerox Capital Services, will handle customer administration for Xerox and provide financing for customers buying Xerox equipment.

  Xerox has introduced a fast, high-priced commercial printer that many analysts say will probably sell well. It is filling in gaps in its portfolio of office copiers and printers and is strengthening offerings of high-margin services, like maintaining customers' electronic archives.

  And it has fixed organizational glitches. In 1999, it reshaped its sales force, making representatives responsible for specific industries, not territories. A result was a mass exodus of disaffected sales representatives. Xerox also consolidated its customer administration offices, wreaking havoc with billing procedures and infuriating customers.

  Today, Xerox people who sell high-priced copiers are still assigned to specific industries, but sales representatives for less-expensive office machines are back to pounding familiar beats. Xerox Capital Services is combing out the tangles in accounts receivable -- and teaching Xerox people the complexities of Six Sigma, a statistical method of eliminating waste and errors that has saved General Electric billions of dollars. In fact, Nayden of GE Capital said, the joint venture already has "15 Six Sigma quality projects to work on."

  Competitors are still eating away at Xerox's market share, but Xerox is using price cuts and promotions to bite back. Last week, it ran full-page newspaper ads offering US$99 monthly leases for office copiers that it had been renting for at least US$150.

  Without much fanfare, Xerox has reduced the size of the words "The Document Company" in its logo, aiming to shift its image away from copying and printing to the storage and management of data. In October, it formed Xerox Global Services, made Dolan, Mulcahy's brother, its president and charged him with creating and selling packages of document processing and storage services, many of which Xerox used to provide free to equipment customers. Mulcahy exempted that fledgling unit from Xerox's hiring freeze, and Dolan said he has already hired about five senior executives and 25 field people. "We're going to provide half of Xerox's revenues by 2006," he predicted.

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