Abstract:

In 1999, the revenues of Xerox Corp (Xerox), the world's largest photocopier maker, began to fall, and in 2000 it reported a loss of $273 million. Xerox also lost $20 billion in stock market value (from April 1999 to May 2000). Xerox cited many reasons for its bad performance including the huge reorganization effort initiated by the then CEO, Richard Thoman. In May 2000, he was replaced by his predecessor Paul Allaire, and Anne Mulcahy (Mulcahy) was made COO. Xerox revealed a Turnaround Programme in December 2000, which included cutting $1 billion in costs, and raising up to $4 billion through the sale of assets, exiting non-core businesses and lay-offs. Subsequently, in August 2001, Mulcahy was made CEO. Xerox continued to report losses in 2001, but it returned to profit in 2002 and continued to report profits in 2003. The case examines the events that led to the decline of Xerox, and in particular how major reorganization strategies can affect a company.

Issues:
Turnaround of Xerox, Change Management, Leadership, Outsourcing

Xerox Makes A Turnaround

Xerox Corp. (Xerox), the world's largest photocopier manufacturer had been in trouble since the late 1990s. Between April 1999, when G. Richard Thoman (Thoman) became CEO, and May 2000, Xerox lost $20 billion in stock market value. When Thoman warned that there would be a decline in earnings for the third quarter of 1999, Xerox's share price fell to $32.5 on October 8, 1999 from a high of $64 in May 1999. On December 10, 1999, when Thoman said that earnings would decline further in the fourth-quarter, Xerox's share price dropped sharply again, falling to one-third of May 1999's level. Earnings did in fact fall in the last two quarters of 1999, and they continued to fall in the first and second quarters of 2000 too. After this, the company slipped into the red, posting quarterly losses of $167 million and $198 million in the third and fourth quarters of 2000. On December 5, 2000, the stock price fell to $4.69. Xerox blamed the huge salesforce reorganization, a weak economy in Brazil and customers' Y2K fears for the downward turn. But analysts believed that internal issues such as bad debt provisions and accounting irregularities in its Mexico operations were more to blame than the external factors, for Xerox's bad performance. On May 11, 2000, Thoman stepped down as CEO and Paul Allaire (Allaire), who was his predecessor and the Chairman, took over again. Also in May 2000, Anne Mulcahy (Mulcahy) who was the President of Xerox's General Market Operations was made Chief operating officer (COO) and president. Together, Mulcahy and Allaire announced a turnaround strategy which included cutting $1 billion in costs and raising upto $4 billion through the sale of assets.

In 2001, Mulcahy became the CEO. In 2002, Mulcahy became the chairperson of Xerox (while continuing as CEO). Palo Alto Research Center (PARC) was also incorporated as a wholly owned subsidiary of Xerox. At the end of fiscal 2002, Xerox announced its first profits after two years of heavy losses. The company made a net income of $91 million from total revenues of about $15.85 billion (Refer Exhibit I for annual income statement). The restructuring efforts of the company also pared down the workforce, at the end of 2002, the company had 67,800 employees worldwide compared to 98,000 in 1999. Xerox continued to make profits in 2003 as well, it reported a net income of $360 million from revenues of $15.7 billion (Refer Exhibit-II for annual income statement)

Background Note
1906 was an important year in the history of Xerox. In that year, the Haloid Company (Haloid), which later commercialized the process of photocopying, was set up. It was also the year in which Chester. F. Carlson (Carlson), the inventor of photocopier was born. Carlson was a patent attorney and part-time researcher and inventor. His job at the patent office in New York required him to make a large number of copies of important patents. Carlson, who was arthritic, found this a painful and tedious process. This prompted him to conduct experiments in the area of photoconductivity, through which multiple copies could be made with minimal effort. Carlson experimented with 'electrophotography' in his kitchen and in 1938, applied for a patent for the process. He made the first "photocopy" using a zinc plate covered with sulfur. The words "10-22-38 Astoria" were written on a microscope slide, which was placed on top of more sulfur and under a bright light. After the slide was removed, a mirror image of the words remained. Carlson tried to sell his invention to some companies, but because the process was still rather underdeveloped, he failed. Besides, at that time, multiple copies were made using carbon paper, and people did not feel any dire need for an electronic machine. Between 1939 and 1944, Carlson was turned away by more than 20 companies, including IBM and General Electric, who did not believe that there was a significant market for copiers. In 1944, the Battelle Memorial Institute, a non-profit organization in Columbus, Ohio, contracted with Carlson to refine his new process (Carlson was the patent attorney for a client of Battelle, and sent a copy of the patent for the company to review).

Over the next few years, the institute conducted experiments to improve the process of electro-photography. In 1947, Haloid approached Battelle to obtain a license to develop and market a copying machine based on this technology. Haloid felt that the word electro-photography was too complicated and did not have good recall value. After consulting a professor of classical languages in Ohio State University, Haloid and

Carlson changed the name of the process to 'xerography', derived from Greek words which meant 'dry-writing'. Haloid decided to call the new copier machines 'Xerox' and in 1948, the word Xerox was trademarked. In 1949, the first xerographic copier called 'Model A' was introduced in the market. The copier was reasonably successful..

What Went Wrong?

Thoman joined Xerox in June 1997 as COO and president. He was an advocate of the digital revolution and supported the then CEO, Allaire, in his efforts to strengthen Xerox's position in the digital segment. They both believed that Xerox should not just sell products but offer customers complete document solutions. In order to do that, Xerox needed to change the way its salesforce operated. From the early 1990s onwards, Allaire took several initiatives to change the way Xerox made sales. One major initiative was the creation of the Xerox Channels Group (Group) in 1997, which was closely monitored by Thoman. Upto this point, Xerox sales teams had been highly successful through their direct sales approach and had focused primarily on large corporate clients, while ignoring the small and midsize networked office market..

Turnaround Strategy
Even before the reorganization plan was revealed to the public, Allaire and Mulcahy spent a lot of time traveling in the US and overseas to meet and talk with as many Xerox employees as possible and prepare them for the changes that were going to happen. They held meetings, teleconferences and even large town meetings to help employees understand the situation Xerox was in, what the leadership planned to do and how that would affect them. According to Mulcahy, keeping the communication lines open with employees and maintaining high visibility built employee confidence in her leadership and ability to execute the turnaround strategy. Mulcahy said, "It was pretty wearing, but if people understand your leadership style and you earn credibility, you get permission to take a lot of actions. When you're in a situation like ours, that confidence dramatically affects your ability to pull off change". Mulcahy started sending out a regular memo called 'Turnaround Talk' to keep employees informed about the changes taking place in the company..