Companies & Industries

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

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.

Since 2001, with CEO Anne Mulcahy pulling the strings, Xerox's reputation has enjoyed a successful turnaround

The last decade has seen many of the world's leading companies descend from their once lofty positions. More than three-quarters (79%) of the world's No.1 most admired companies have toppled from the top spot in their respective industries over the last five years, according to research done by Weber Shandwick. In 2001, the famed Xerox (XRX) corporation was among those.

Today, however, Xerox's reputation recovery has been hailed as an unqualified success. In fact, in 2007 Xerox announced it was reinstating its dividend, which it had done away with in 2001. Xerox now boasts a sterling reputation that's as good as, if not better than, the proud one of years past. The turnaround is largely due to the colossal efforts of its Chairman and Chief Executive Anne Mulcahy.

First Critical Steps

How did this first-time CEO turn the company around? Her first order of business was to earn credibility for herself and Xerox by showing early signs of progress. This she accomplished by focusing on financial stability, which she achieved by quickly selling unprofitable business units and accelerating retirements.

Then Mulcahy took several critical steps to begin refurbishing Xerox's tarnished reputation. She was brutally honest about problems; she asked for help; she listened carefully to friends and foes; she communicated tirelessly; she established clear priorities, including strengthening research and development; she built her team; and she made firm, tough calls.

Mulcahy spent the first 90 days on the road traveling to offices. Although she had 31 years with the company, the new CEO did not act as if she knew it all, but listened to anyone with a perspective on how the company needed to change.

Having taken these steps, Mulcahy then focused the organization on three main goals—reducing $1 billion in costs, selling $2 billion in assets, and concentrating on the core business.

The Second Act

Seven years later, the Xerox turnaround is undeniable. As Mulcahy said: "In many ways, the curtain has closed on the Xerox turnaround. But we are keenly aware that most great plays have two acts." While the curtain goes up on Xerox's second act, the document company's reputation is mended—but only for the time being. Mulcahy wisely points out that reputation restoration is never complete. When done correctly, restoring reputation is always a work in progress. Reputations are always vulnerable to change. A company must always strive to meet ever higher standards, always protecting its reputation.

According to Mulcahy, Xerox must be more than good enough: "We constantly remind ourselves that the enemy of great is good."

By taking the right steps—taking the heat, sharing the pain, identifying the root cause, righting the culture, and minimizing risk—Xerox's recovery was not only possible but indeed likely. Restoring reputation, however, is not a 1-2-3 fix. It might have taken much longer had its recovery not been so expertly managed.

Becoming Newly Reputable

According to Weber Shandwick research, reputation recovery takes approximately four years to go from poor to good and another several years to go from good to great. Xerox did not recover its reputation immediately or even soon afterward. As Mulcahy said: "A silver lining, however, often graces even the darkest of storm clouds." This is what Mulcahy discovered when she began cleaning house at Xerox. In a period of crisis she was free to challenge long-held assumptions and impose substantive transformations that under more positive circumstances would never have been possible or tolerated.

While business leaders are unlikely to invite a crisis so they can start afresh, nearly all confirm that losing reputation provides a once-in-a-lifetime opportunity to make things better. Obviously, reputation loss is to be avoided, but should it occur, the follow-up effort to recover it constitutes a universally recognized opportunity to initiate sorely needed change.

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

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