The Issue: Putting the 'R' Back in R&D

One of CEO Anne Mulcahy's first moves when she arrived at Xerox was to provide the freedom—and funds—needed to let innovation happen

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Anne Mulcahy sits comfortably in her chair at the 92nd Street Y in New York City talking about Xerox's new logo. "You sort of have to transform your business before you feel that you can change the logo and the image of the company and the way people see it," she tells the audience. The new logo, a globe with the company name in lowercase letters running across it, is a reflection of the transformation Xerox (XRX) has undergone with Mulcahy at the helm.

Chief Executive Officer and Chairman Mulcahy is often heard saying that every play has two acts. Her arrival on the scene represents the intermission, when makeup is fixed and the performer—Xerox—reappears in the second half, rejuvenated and refreshed. There was a time when Xerox's first act looked like it might be its last. When Mulcahy was handed the reins in August, 2001, Xerox was more than $17 billion in debt and holding less than $155 million in available cash. Its stock price had plunged from nearly 70 in early 1999 to under 5. Lost market share, a Securities & Exchange Commission accounting investigation, and near-bankruptcy were just a few of its many problems. The company was in free fall.

Listening to the Innovators

Surprisingly, Xerox chose an untested CEO to save itself. When Mulcahy was named CEO-elect, Xerox's stock dropped an additional 15%. As she took over during Xerox's darkest hour, the media referred to her as the "accidental" CEO. Even Mulcahy had to agree that Xerox's business model was unsustainable.

The company, desperately seeking a quick fix, brought in Richard Thoman of IBM (IBM) as president and chief operating officer in late 1999. Thoman, who was eventually named CEO, employed methods that were direct and brief. He was focused on services and divided the company into different business units. But with workers spread out and things moving at a rapid pace, much got lost in translation, and Thoman was forced to leave the company after less than a year and a half.

Enter Mulcahy, who, like Thoman, was given the titles of COO and president before being named CEO. A veteran field sales representative who'd been with the company since 1976, she took a much different approach than Thoman's. She took her time, asked questions, and reopened lines of communication among different groups in the organization. One of the first things she did was to revamp the research and development process after meeting with the company's top researchers. After hearing from them that innovation springs from experimentation and accident more than from process, she realized that the emphasis needed to be on research, not development.

Making "Terrible Choices"

"You've got to work at creating a great research environment and you have to be able to let go and monetize things that really aren't going to be core to your business," she says. "You have to believe in the fact that you're going to spend a lot of money on a lot of stuff that doesn't materialize, and you have to really make that leap of faith to say that's where innovation comes from."

Transforming Xerox also meant letting go of personnel and businesses. "The tough problem is always the fundamental business strategy of the company," Mulcahy says. "The financial navigation was tough, but not nearly as complex as the business side of it." She admits that there were "terrible choices" that had to be made and she insisted that "you actually had to go and deliver the news." She believes that the honesty and openness is what made the choices palatable, even to those people who lost their jobs. "They trusted we were trying to save the company," she says.

Under Mulcahy's stewardship, Xerox has become a profitable enterprise, thanks in no small part to the new businesses the company has entered, such as content management and document technologies. Revenues for 2007 were $17.2 billion.

Mulcahy views the logo as symbolic of the turnaround that she has executed. "One of my concerns is that logos shouldn't get in front of the business realities," she told the audience at the 92nd Street Y.

Paula Lehman is an editorial assistant for BusinessWeek in New York.