An Image Problem At Xerox

Pity the poor copier. long the undisputed king of office equipment, the mighty Xerox machine has of late become more like an adding machine, an ancient workhorse being shunted aside by smaller, cheaper and better gadgets--in the case of Xerox, a sexy array of PCs, printers and scanners. For any office drone who has ever cursed a paper misfeed or the dreaded ADD TONER warning, the end of the copier's reign is welcome. But it has put Xerox, the $19 billion-a-year imaging pioneer, in quite a jam.

Like AT&T;, with its shrinking long-distance business, and any number of one-technology companies before it, Xerox is caught in what business gurus call a paradigm shift. And it is desperately trying to figure a way out. As white collars increasingly rely on e-mail and download documents from the Net, fewer copies are being made each year, and sales of machines are nearly flat. At the same time, traditional analog copiers are being replaced by souped-up, hybrid digital devices plugged into a computer network and capable of copying, printing and scanning. At the high-tech, high-output end of the copier business, in a segment Xerox once had all to it- self, competitors have finally caught up. To make matters worse, the company's immensely proud, even arrogant corporate culture rebelled at management's latest attempt to reorganize--a revolt that cost the CEO his job and left big customers feeling neglected. The end result: the company's profits and its stock price are in free fall.

This week that rebellion will be crushed--along with thousands of jobs--as Xerox is expected to announce its latest massive restructuring. Last week the company was reportedly considering selling its debt-ridden financing operation, which lends money to prospective customers, to GE Capital. It has also discussed selling Xerox PARC, its research center in Silicon Valley, a source of great innovation--from the computer mouse to the graphical user interface and laser printer--but, thanks to the missteps of top brass, not a source of much income.

In many respects, Xerox has actually done a fair job of adapting to the changing environment: more than half its revenues now come from digital products, its color machines are wildly popular, and it is well positioned to be a leader in on-demand, custom publishing. But a slew of newly aggressive players, from Canon and Ricoh to Hewlett-Packard, have done better, steadily encroaching on its once exclusive, very lucrative turf. From 1997 to 1999, Xerox's estimated share of the $1.3 billion-a-year, high-end, black-and-white production copier market in the U.S., where the real money is made, dropped from the near monopoly level of 75% to 45%, according to Cap Ventures, a document consulting firm in Norwell, Mass. "This transition has played to our strengths," says Dennis Amorosano, a marketing director at Canon, which has used its networking savvy--as well as lower manufacturing and overhead costs that make its machines 10% to 30% cheaper--to steal some of Xerox's business.

The bungled realignment of Xerox's vaunted sales organization--once the gold standard for corporate America--only worsened the firm's bad situation. Like most traditional sales forces, Xerox's was organized geographically, right down to the street level. But Xerox decided it needed the majority of its 15,000 U.S. direct-sales reps to focus on specific industries, such as banking, graphic arts or the public sector, rather than geographic regions.

While the strategy is sound, the execution was anything but. Without sufficient training, copier sales reps were suddenly attempting to speak a foreign language, about sophisticated computer networks. As they tried to get up to speed on their new assignments, they quickly became demoralized, turf wars ensued, and accounts were lost in the shuffle, leaving them all too vulnerable. A concurrent reorganization of the company's byzantine back-office operations, which caused customer bills and orders to pile up, only added to the chaos. As Daniel Kunstler, senior analyst at JP Morgan, puts it, "If the person you want to date stops returning your calls, you might try to find someone else to date, or get very lonely." Some of Xerox's most talented reps, including field generals in the U.S. and Europe, have fled. At its worst, the turnover rate has reached 40%, and key positions are still vacant.

The botched reorganization derailed CEO Rick Thoman. An IBM and American Express executive and a Lou Gerstner protege, Thoman was brought in as CEO last year to turn Xerox into a high-tech dynamo. His sin was not his strategy but his sense of urgency. Thoman believed Xerox had to move fast, but the troops were not ready. "There's a fine touch between knowing what to do and when to do it," an insider says of Thoman's leadership. Thoman was replaced by former Xerox chief Paul Allaire.

Three weeks ago, Xerox issued its fourth profit warning in little over a year, telling already wary investors that sagging sales and high costs would cause its first quarterly loss in a decade and a half. Allaire and president and COO Anne Mulcahy, his recently anointed heir apparent, who were unavailable for comment last week, candidly admitted to analysts that the company has an "unsustainable business model."