Xerox Signals for Turnaround

By eweek  |  Posted 2002-10-28

Xerox Signals for Turnaround

Copier and printer giant Xerox Corp. is climbing out from under the microscope of financial scrutiny with a clear focus on the future and growth. With its April settlement with the Securities and Exchange Commission, and its June restatement of revenues, which resulted in a revenue shortfall of about $1.4 billion, behind it, Xerox is moving swiftly to improve productivity and efficiency while keeping the pedal to the metal in research and development. Driving this turnaround is Chairman and CEO Anne Mulcahy, who is simultaneously enthusiastic about her companys perseverance, yet not the least bit complacent. eWEEK Executive Editor Michael R. Zimmerman caught up with Mulcahy at Xeroxs Rochester, N.Y., R&D facility earlier this month to close the loop on the financial issues, get her reactions to competitive threats and much more.

eWEEK: Is it correct to say that the accounting problems the Securities and Exchange Commission had with Xerox werent so much about how you were reporting revenue, but rather, when you were reporting revenue, with regard to leasing?

Mulcahy: Thats an accurate statement. It was timing.

eWEEK: Was there ever an issue of reporting revenue twice with regard to leasing?

Mulcahy: No. There was never any issue with regard to a legitimate dollar of revenue.

eWEEK: Has that been at the core of Xeroxs argument from the beginning?

Mulcahy: We had an accounting methodology that we were using that certainly our accountants had approved, felt strongly about. It was a bundled leasing methodology, and our previous accountants continue to stand by their accounting judgments. But we have settled with the SEC, we have changed our accounting methodology, and were moving forward.

eWEEK: How far out will the revenue shortfall that was a result of your restatement earlier this year extend?

Mulcahy: Its a difficult question to answer because although there is some revenue from the restatement that flow forward, they dont all flow forward. And weve changed our accounting methodology going forward so that were not recognizing as much revenue in the current period. So theres this kind of offsetting approach on the revenue side.

The vast majority of it happens in the first couple of years. Its not a long process at all. And weve restated now so everythings apples to apples in terms of comparisons, so theres no unbalanced comparisons.

eWEEK: Last month the U.S. Attorney General in Connecticut launched an investigation into Xerox as well. Can you give me an update on where that stands now?

Mulcahy: I can in the sense that we dont have a lot to update. The fact is that lots of companies are certainly being investigated by U.S. Attorney offices. They usually dont become public because the thing that drives a public announcement is an indictment, which we have not had.

eWEEK: Is this treading on old turf?

Mulcahy: It totally is. Absolutely. Im not concerned. I dont think this is really focused on the company, and its certainly not focused on anything new.

eWEEK: So the attorney hasnt contacted you or Xerox?

Mulcahy: No.

eWEEK: How did you respond to the news of this latest investigation on a personal level, when here the SEC thing is all taken care of and behind you?

Mulcahy: I wasnt happy (laughs). But youre probably aware that we found out from a Wall Street Journal call, its not something we had previous [knowledge of]. By the way, this might have run its course, and we may never have known simply because the vast majority of these never result in indictment. So this one broke prematurely. I dont think they were very happy about it. We certainly werent happy about it. It would not be unusual after an SEC settlement for the D.A. to look at a companys settlement. But it became a story and a media frenzy for a period of time. And thats frustrating because the company is really doing very well, making a lot of progress, focused on the future and its really not terribly constructive. Everything were focused on is about rebuilding value for the future.

Page Two

: Mulcahy Interview">

eWEEK: Was there ever a point over the last two years when you thought, with regard to the investigations, how much worse can this get?

Mulcahy: (laughs) Every day. I think the frustration is, and its not just my frustration, its the frustration of the entire Xerox team, is that the last two years, weve made commitments we delivered on every single one. Weve done, I think, an amazing turn around of a great company. Weve not missed an expectation. Weve clearly been on a path of rebuilding confidence, preserving shareholder value, saving jobs. And this story just keeps getting retold and retold and retold. Theres not one piece of new news. Its old news. And I think its just the environment that were in that theres more of an appetite to talk about companies that are failing vs. companies that are succeeding. And Im very hopeful that the story might get told about the fact that, yes, this company faced some very serious problems but is not just surviving but succeeding.

eWEEK: What impact has HP/Compaq had on Xerox?

Mulcahy: I cant say that its had a significant impact. I think any major merger or acquisition can be somewhat distracting for a company. And weve done them as well. And clearly were a competitor in the office color printing business. And I think weve strengthened our position over the last couple of quarters, which we feel good about. But theyre a strong competitor, and we dont take them lightly. We do think there was hopefully a window of opportunity that weve capitalized on.

eWEEK: HP is moving aggressively into the multifunctioning printer segment, and theyre not shy about targeting Xerox. Youre in their sights.

Mulcahy: And theyre in our sights. … I think its kind of interesting. For the last five years wed actually been criticized for not focusing on single-function printing and putting our development investment into multifunction. We kind of viewed HPs decision as a validation of all of the investments weve made in multifunction and being the best in class there as absolutely the right decision. Thats the growing area. Black-and-white printing is declining. But multifunction is growing. Thats why HPs trying to go into it.

eWEEK: As far as working with PC companies, is there any interest on Xeroxs part to work with the Dell [Computers] of the world?

Mulcahy: We partner with lots of companies, and were open to partnering. We distribute printers through Dell today, so were already a partner there. We work with EDS as a services partner. Weve got lots of partners in the marketplace, and we continue to build those relationships. We go to market in multiple ways, and well continue to expand those.

eWEEK: Do you have any interest in expanding your relationship with Dell to include more products and or services?

Mulcahy: Well, certainly, its been speculated, that we among others have been in discussions with Dell. And if its right for Xerox and right for Dell, then theres possibilities there.

eWEEK: Are there actual talks going on?

Mulcahy: Thats probably something they would have to confirm before we confirmed. Id probably choose not to confirm that.

eWEEK: In addition to the $1.3 billion costs you reduced since 2000, you recently announced plans to cut costs by an additional $1 billion. Wheres that going to come from?

Mulcahy: We believe theres opportunities for efficiency that will make us a better company and also cut costs. We have big opportunities in our back-office operations from reducing our bad debt and becoming more efficient in terms of our back-office administration, and were working with GE Capial in North America in a partner arrangement to do that. So thats an area that we think has a lot of opportunity. It doesnt necessarily cut heads, but it cuts costs big time.

Another area is were expanding our tele-Web capabilities. So things like being able to do things over the Web that currently require travel, things like service activities, meter read activities, all sorts of activities that we can do over the Web with a lot less cost than a kind of feet on the street approach. Our selling channel: Were using tele-Web very much both in assisting our direct sales channel as well as selling end-to-end. So thats a huge opportunity for us costwise.

We think theres productivity to be gained across the business. One of the things were deploying is a six-sigma approach. Weve used it in our manufacturing environment in the past very successfully, and were using it on other tough business problems now and training black belts within Xerox to address a lot of the issues that we think will take cost out of the business. Take waste out, therefore take cost out.

Things like facilities. Every aspect of the business that you can think of we want to be a benchmark and best in class.

Page Three

: Mulcahy Interview">

eWEEK: Was there a time at the end of the last cost reduction period when you said, "You know what, we got a billion three out of this …"

Mulcahy: Isnt that enough?

eWEEK: Yes, or was there a point when you said, "We couldve done a lot more?"

Mulcahy: I think one of the things we discovered along the way is that, I think productivity is a never-ending goal for companies that are in competitive situations. So I dont think you can say youre done. I think you have to constantly look for what that next level of productivity that can be delivered. I think sometimes it gets addressed with systems enhancements, sometimes its optimization of certain parts of the company, sometimes its outsourcing. Weve done outsourcing of manufacturing, of back-office operations where we can get a better bang for our buck.

So I think theres a lot of paths you could go, but you have to look at every single part of your value chain and just stay tough-minded on making sure they are best in class from a cost perspective. And if theyre not, that is where you have to focus your energies to make sure that you find the savings. I dont think you can say, "Im done," but I believe weve done a lot of the heavy lifting in the company and that were not in crisis mode as it relates to those kinds of actions. This is more now opportunistic.

eWEEK: I think people equate crisis mode with work force reductions as well.

Mulcahy: Absolutely. And this is not all about work force reductions. That doesnt mean that we wont, you know, certainly take work force reductions where theyre appropriate. But the fact is there are other ways to become more efficient and more productive.

eWEEK: Would any work force reductions be on the same scale as they have been over the last two years?

Mulcahy: I dont think were anticipating that, and I dont think were communicating that. Were really saying this is business as usual, were going to continue to look for opportunities where they are available and be aggressive and get ahead of this curve. And if the economy doesnt improve in the short term, I think wed like to be prepared to continue to deliver really good bottom-line results despite the fact of a weak economy.

eWEEK: Bill and ½ with Fuji Xerox in 2001; by end of 2002 about the same. What about 2003 investment?

Mulcahy: We have a commitment to maintain R&D spend at between 5 and 6 percent of revenues. Like every other part of our business, revenue is kind of a defining characteristic for what you spend. So were not looking to decline the ratios of R&D spend at all. And [we] certainly hope that well deliver on the revenue expectations.

eWEEK: So theres no intention to decrease the amount of investment?

Mulcahy: Not dramatically. I think whats pervasive though is that when you move off one big project you can come down in R&D spend based upon the fact that you completed a huge technical project and you may be ramping up someplace else, but it could create fluctuations in R&D spend that are not indicative of cost cutting; its just that youre supporting the appropriate programs with the right resources.

eWEEK: With regard to "incorporation" of PARC, youve brought on Jim Gibbons as the groups new independent director. But do you have partners yet that have signed on?

Mulcahy: One of the things that we wanted to do was to actually get someone like Jim on board to actually sponsor the negotiations. We do have a lot of interest, and its complicated in terms of percentage of equity, intellectual property ownership, a whole set of things. So were going to have Jim be the architect for driving a lot of those partnership discussions.

eWEEK: So theres no one on board yet?

Mulcahy: No.

eWEEK: As far as Jims employment goes, Im not sure whats meant by independent director. Is he not being paid by Xerox?

Mulcahy: Its a sponsored position. But Xerox will have a board that will act as independent directors.

eWEEK: Services, launched a year ago. Is the revenue goal still to be about half of Xerox revenues by 2006?

Mulcahy: Yes, thats an integrated technology and solutions, the technology plus the services. It includes hardware.

eWEEK: So that revenue will include product sales?

Mulcahy: It will, where our services include hardware that was intended to be included in that. I think that was kind of an unofficial projection, but its roughly right.

Rocket Fuel