An Image Problem At Xerox

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No wonder Wall Street has lost confidence in "the document company," as it rechristened itself a few years ago. Over the past 18 months, its stock has dropped from a high of $63 to as low as $6 (it closed up a bit, to nearly $9, on Friday); its market value has collapsed almost $40 billion to a piddling $5.6 billion. Xerox has cut its quarterly dividends 75%, to 5. As it's not currently welcome in the bond market, where its credit rating has sunk to near junk-bond status, Xerox had to tap a $7 billion revolving credit line, setting off rumors that it might be on the verge of bankruptcy. (Xerox says there is no liquidity crisis.)

This week, when Allaire and Mulcahy, a well-liked 24-year veteran of the company, formally disclose the damage, they'll do their best to put that speculation to rest and chart a turnaround strategy. Saddled with $17 billion in debt, Xerox is a bloated company that needs to trim the fat--and fast--to compete with the Japanese and rivals in Silicon Valley. Besides getting rid of the credit division and Xerox PARC, options include bailing on its Japanese joint venture with Fuji.

That won't solve the company's revenue problems. Xerox has cut bundling deals with Compaq and Dell to push its fledgling line of ink-jet printers, and it is spending $200 million on its biggest advertising blitz ever. But it's having a tough time taking on H-P in the hot personal and small-business space. "They're never going to beat [them]," says Frank Pacetta, vice president of sales at SingleSource IT and a 20-year Xerox veteran.

Nor will cutbacks address problems at the other end of the spectrum. For much of the past decade, even in the digital segment, Xerox has virtually owned the upper end of the market with its DocuTech line of copiers and high-speed printers--tanklike, six-figure machines that can spit out up to 180 pages a minute and are sold primarily to governments, universities, commercial printers and large corporations. Servicing and supporting those machines has been the company's real cash cow. In the past year, however, Canon, IBM and German printer Heidelberger--which, ironically, purchased its technology from Xerox's old Rochester, N.Y., brother-in-arms, Kodak--have come up with a product to rival Xerox's. Though these upstart machines don't have as many bells and whistles, they're more than adequate for companies that increasingly prefer slimmed-down, more open technology that works better with all sorts of software programs. They have also handed customers some valuable bargaining leverage in dealing with Xerox.

"The actual printing engine is becoming more and more of a commodity," says Ross Waddell, vice president of purchasing at copy giant Kinko's, which, while still Xerox's largest commercial customer, has diversified its equipment base by signing a multimillion-dollar deal with IBM to manage a complex network of high-speed Heidelberger copiers.

Xerox recognizes this, and part of Thoman's mandate was, in fact, to turn the company from a seller of boxes to a seller of services, a so-called solutions provider like IBM that would help bewildered companies manage their document flow. That is easier said than done. Apart from the challenge of taking on established powerhouses like IBM and EDS, Xerox has had to deal with a perception problem. "Xerox, as a brand, is so associated with copying that it's almost like Kleenex trying to sell paper towels," notes Charlie Corr, a group director at Cap Ventures. The difference is that people, and companies, will keep buying lots of tissues. But before long, there won't be anything for those plain old copiers to copy.