Xerox runs off a new blueprint

In the four years since she was appointed chief executive of Xerox, Anne Mulcahy has cut costs, closed business units, repaired the balance sheet, settled an accounting investigation, outsourced operations, refreshed product lines and rethought strategy, writes Simon London . Now comes the hard part.

“They can’t ease up on the cost cutting, but what they have really got to do now is grow the top line,” says Jack Kelly, analyst at Goldman Sachs in New York.

It is a measure of Ms Mulcahy’s achievement so far that growth is even on the agenda. In 2001 and 2002, against a background of mounting debt, falling sales and an investigation by the Securities and Exchange Commission, the question was whether Xerox would survive.

It is a measurealso a measure of her down-to-earth directness that the growth question is tackled head-on: “We’ve got to show that we can get deliver on the top line as well as the bottom line,” she says. “This is a defining moment for the company.”

The consensus among Wall Street analysts is that strategy mapped out by Ms Mulcahy and her team could, in principle, deliver all the growth required. This three-pronged approach involves hasteningspeeding up the shift from black and white to colour copying; pushing hard into the graphics and printing industries with a new breed of high-end
digital presses; and persuading big corporate customers to buy not only copiers and printers but also software and services.

The unanswered question is whether Xerox can pull it off. The crisis of 2001 and 2002 was in many ways the culmination of a comedy of errors. Investors still wince at the memory of the botched sales force reorganisation that hastened the exit of then-CEO Rick Thoman. Don’t even mention the dysfunctional billing and debt collection system that, in late 2001, exacerbated an already precarious financial position.

The good news is that Ms Mulcahy knows the troubled history as well as anyone. She joined Xerox in 1975 as a sales rep and worked her way up through the managerial ranks. Her husband is a retired Xerox employee. Her; her older brother is part of the senior executive team.

She also knows – and has set out to change – the bureaucratic corporate culture that allowed problems to fester until it was too late for anything but drastic action.

Ms Mulcahy’s direct personal style is itself a force for change. Her elevation to the top job was a signal that Xerox would have to shed its lingering stuffiness if it was to survive. The new CEO soon found a weapon that would ram the point home: Six Sigma, the process improvement technique pioneered by Motorola and popularised by General Electric (see below).

She explains: “I went after Six Sigma because I wanted to embed productivity improvement in the company in a way that would prevent problems building up over time. If you really get it going in your company it massively reduces the chance that you will discover problems that require dramatic restructuring.”

So far, it appears to be working. Thanks in part to productivity improvements yielded by Six Sigma, Xerox has been able to regain market share while also maintaining its investment in research and keeping earnings on a rising trend. Neither has the company slipped on any serious operational banana skins.

But Ms Mulcahy and her team know they are entering a crucial – and potentially dangerous – phase. The growth strategy demands organisational changes of the type that Xerox has stumbled upon in the past. Importantly, the services strategy will make new demands on a sales force that, until now, has focused on selling mostly hardware.

Xerox is hardly the first big company to make the transition from products to “solutions”. General Electric and International Business Machines, its near neighbours north of New York City, in the 1990s made similar journeys in the 1990s. More than half of IBM’s revenue comes from IT-related services.

But the fact that it has been done before does not make it any easier. The immediate task of making it happen at Xerox falls to Jim Firestone, former strategy chief and now head of the North American business.

“We need to integrate services into the discussion from day one with our biggest clients,” he says.

At first glance, the management issue seems trivial. Xerox’s small services sales team, numbering 200-300, must be integrated into the larger 2,500-strong army of account managers and product specialists. Crucial to this process are the “major account managers” who look after relationships with Xerox’s 300 largest corporate customers. They must be educated in the art and science of selling services: everything from analysis of document flow through organisations to outsourcing of document imaging, archiving and retrieval. This is a very different proposition to selling copiers and printers.

But while the number of people is tiny as a proportion of the total workforce (Xerox employs 58,000 worldwide), on their shoulders rests many of the company’s most important client relationships. Ineffective – or disaffected – account managers could cause more than a blip in quarterly revenues and earnings.

“When we did this in the past we did this in a way that caused a lot of disruption for the customer. This time we don’t anticipate that many account managers will change roles. The emphasis is on stable account relationships,” says Mr Firestone, whose style is as measured as Ms Mulcahy’s is direct.

Yet Judging the pace of change correctly is crucial. Move too quickly and relationships are jeopardized. Proceed too slowly and competitors move in. Hewlett-Packard is counting on its printing and imaging division to drive growth and already boasts a large services division. Ikon Office Systems, which distributes Canon, Ricoh and HP equipment, is another formidable competitor – and, incidentally, another proponent of Six Sigma.

“The services-solutions arena is getting more crowded,” observes Mr Kelly at Goldman Sachs.

Against this background, Xerox has reached the
point where it must press ahead with organisational changes and trust to careful planning. Even the cautious Mr Firestone concedes:
“This set of changes is in many ways the most fundamental we have made in changing the nature of Xerox.”

ADVENTURES IN SIX SIGMA: HOW THE TECHNIQUE HELPED XEROX

Like many other US companies, Xerox was introduced to Six Sigma through its interactions with General Electric. The financial services to biotechnology conglomerate adopted the metrics-mad process improvement technique in the mid-1990s. Thanks to its size and influence, it has served as an effective missionary.

Anne Mulcahy’s conversion came as she was negotiating the outsourcing of Xerox’s troubled billing and collections operation to GE Capital. She recalls: “I remember sitting there and watching the discipline with which [the GE team] defined the problem, scoped the problem and attacked it from a Six Sigma perspective. I remember feeling for the first time that the problem would be fixed.”

The precise definition of Six Sigma quality is an error rate of 3.4 per million. More important than the exact number, however, is an approach to problem solving that emphasizes small teams, measurement and economic return.

Quality improvement techniques were by no means new to Xerox. In the 1980s, it was one of the first US companies to adopt Total Quality Management (TQM) as it fought to turn back the tide of Japanese competition.

As an up-and-coming manager, Ms Mulcahy experienced TQM first hand. “The financial metrics were not as precise with TQM,” she recalls. “Six Sigma is very rigid and very disciplined by comparison. Every project is managed with economic profit metrics. There is none of the squishy stuff.”

The “squishy stuff” is the emphasis in TQM on consensus building that, while part of an earnest desire to replicate the best of Japanese management, did not always play well at US companies.

Ms Mulcahy is also at pains to point out that Xerox practises Lean Six Sigma, a variation that asks managers to think not only how processes can be improved but also how waste can be reduced: “Lean is an important nuance. The leaning process begins with taking out waste, working out where value gets added and where it does not. For big companies, this is very important.”

While companies generally adopt Six Sigma to improve efficiency, converts insist that there are other benefits. The introduction of a company-wide approach to project management is reckoned to break down barriers between departments, and make it easier to work with suppliers and customers. Ms Mulcahy says: “The reality of our business is that in order to compete you have to find ways to deliver 8, 9, 10 per cent productivity improvements every single year. You only get there if you have a systemic approach.”