America's Best Leaders: Anne Mulcahy, Xerox CEO

In reforming a troubled company, she had the courage to say "no" to Wall Street.

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Anne Mulcahy

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Shortly after Anne Mulcahy took over the helm at Xerox in 2000, with the company facing possible bankruptcy, she had a blunt message for shareholders. "Xerox's business model is unsustainable," she said. Expenses were too high, and the profit margins were simply too low to return to profitability.

Wanting easy answers for complex problems, shareholders dumped Xerox shares, driving its stock price down 26 percent the next day. Looking back on that dark time, Mulcahy says she could have been more tactful. "I thought it was far more credible to acknowledge that the company was broken and dramatic actions had to be taken. Lesson learned."

After 25 years at the company, Mulcahy knew Xerox intimately, but even she was unprepared for the depth of its financial crisis. Taking over from CEO Richard Thoman, an IBM recruit who lasted only 13 months in the top job, Mulcahy acknowledged her lack of financial expertise—most of her time at Xerox was in sales and upper management. She quickly enlisted the treasurer's office to tutor her in the fine points of finance before meetings with the company's bankers.

Her advisers urged her to declare bankruptcy in order to clear off Xerox's $18 billion in debt, but Mulcahy resisted, telling them, "Bankruptcy is never a win." In fact, she concluded, using bankruptcy to escape from debt could make it much harder for Xerox to be a serious high-tech player in the future. Instead, she chose a much more difficult and risky goal—"restoring Xerox to a great company once again."

To gain support from Xerox's leadership team, she met personally with the top 100 executives. She let them know how dire the situation was and asked them if they were prepared to commit. A full 98 of the 100 executives decided to stay, and the bulk of them are still with the company today.

Having spent her entire career at Xerox—she joined the company's sales force shortly after graduating from college—Mulcahy believed deeply in Xerox's values and its proud heritage of inventing plain paper copying. But she knew the company had grown sluggish and fat. Xerox had stayed with its traditional business model while competitors like Ricoh and Canon captured huge chunks of its market share by being more innovative, more agile, and more aggressive.

As CEO, Mulcahy did not become paralyzed trying to assuage angry shareholders. Instead, she headed out to the field, where her first priority was to win over Xerox's customers by focusing on their complaints. She told her demoralized troops, "I will fly anywhere to save any customer for Xerox."

On her visits, she got lots of advice. One major customer, worried about the company's bloated bureaucracy, told her, "You've got to kill the Xerox culture." Never lacking in loyalty to Xerox, she shot back, "I am the culture."

Meanwhile, the drumbeats for bankruptcy steadily increased as the company reported significant losses, used up its entire $7 billion line of credit, and watched its credit ratings decline sharply. Making matters worse, the company was facing a massive investigation by the Securities and Exchange Commission of its billing and accounting practices.

Mulcahy didn't blink. She refused to cut back on research and development or field sales, despite shareholder petitions to shut down all R&D. Instead, she attacked Xerox's bloated infrastructure, sold off pieces of Fuji Xerox, the company's crown jewel, and farmed out manufacturing to Flextronics. She reached a painful settlement with the SEC. Along the way, she had to eliminate 28,000 jobs and billions in expenses, but she saved the company. Looking back, Mulcahy says, "There were many near-death moments when we weren't sure the company could get through the crisis. In those days we would do anything—and I mean anything—to avoid bankruptcy."

Today, she feels a well-earned pride in staying true to her values and the company's, rather than capitulating to Wall Street and the bankers. She has paid off the company's entire debt (except for financed purchases), rebuilt its product line and technology base, and installed a new management team.