The X-factor; Xerox CEO Anne Mulcahy has learned a lot about the power of culture. Now she and her team need to show that the turnaround has a second act

Chief Executive, The,  June, 2008  by J.P. Donlon

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The choice for the 2008 Chief Executive of the Year marks several firsts. By her own admission Anne Mulcahy did not set out to become a chief executive. Nor was she groomed to become one. Neither did she bargain to face what some have called the turnaround of the century when her predecessor, Paul Allaire, called her into his office one day in 2001 to say that the top job was hers. Allaire himself returned to the company at the request of the board when Xerox dumped Allaire's chosen successor Rick Thoman. Fortune dubbed her "The Accidental CEO." One might add "Improbable Tumaround CEO," since everyone knows tumaround bosses tend to come from the outside. (Former Lee lacocca point man "Steve" Miller is the archetype.) Mulcahy had worked for Xerox for 24 years at the time of her appointment; she spent 16 of those years in sales and the rest heading HR. The company was so much in her blood she bled copier toner.

Oh yes, Mulcahy is also the first woman CEO to be chosen by her peers for the honor of Chief Executive of the Year. As it happens, her choice for successor as CEO of Xerox is another highly capable alpha women, Ursula Burns, the company's president and Mulcahy's operating partner in the company tumaround. Firsts for Anne Mulcahy seem to be the gift that keeps on giving.

A few members of this year's selection committee had orchestra seats during Mulcahy's nail-biting turnaround performance. Office Depot CEO Steve Odland remembers being inspired by a bravura "customer-oriented leader." Thomson Corp. CEO Richard Harrington, who also serves on Xerox's board, reckons Mulcahy rescued a company "on the verge of bankruptcy and transformed it into a strategically sound company with a future." New York Life CEO Sy Sternberg says, "we have a vibrant Xerox today due to her efforts." Jeffrey Sonnenfeld, CEO of the Chief Executive Institute at Yale, thinks of her as a model turnaround leader. "She's 'tough' as in visionary and persuasive, not 'tough' as in abusive and meanspirited." Outgoing 2007 Chief Executive of the Year Bob Ulrich of Target points to the degree of difficulty she faced and what he calls the essential element for any leader: courage. "She had the guts to stick with her plan of investing in RO D when everyone was baying for her to give it up," he says.

Mulcahy joined Target's board two years before she got onto Xerox's board and credits that experience as invaluable when everything went pear-shaped at Xerox. It paid off. N.J. Nicholas, Xerox's longest-serving board director, likes her transparency with the board. "What impresses me," he says, "is that she uses the board well. Most directors want to help move the ball forward, and she is effective in getting us to do just that with her senior team." Another director, Maggie Wilderotter, likes Mulcahy's approach to succession planning. "She thoroughly reviews the top 30 executive positions and ensures that atleast two candidates for each position within the company have been identified," says the CEO of Citizens Communications. "I was so impressed that we have adopted the same systems at Citizens."

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With the turnaround behind her, Mulcahy and her team have another challenge: sustain growth against strong economic headwinds, and just as important, convince outsiders that the iconic company that entered the English language as a verb isn't your father's Xerox anymore. (The company changed its logo in an effort to update its brand identity.) For one, it doesn't sell stand-alone copiers anymore. The company is a B-to-B enterprise, one that deals with document processes helping clients improve productivity. It's the NO. 1 revenue share company in the world for color digital technology, which is just beginning to emerge.

The company aims to transform the graphic communications business from an offset to a digital world for customized print on demand. It made four acquisitions over the last two years, including Global Imaging, a $1.2 billion independent office equipment distributor that didn't carry any Xerox product at the time, a move that added 200,000 customers to its portfolio. At the end of 2007, more than half of the equipment going out the door was Xerox. In addition, Xerox looks to grow its $3.8 billion global services business with its acquisition of Amici and Advectis serving to advance this.

"I'm looking for risk takers and people who can quickly assess new market opportunities," Xerox's chief strategist Eric Armour remembers Mulcahy telling him when he interviewed for the job in 2007. "Our solid-ink technology, which is at least two years ahead of the market, is an example of what this company can now do with its investment in research."

Central to Mulcahy's strategy is the investment in R&D through good times and bad. Through ruthless cuts, led by COO Burns, some $2.5 billion has been eliminated from its cost base. Together with its partner Fuji Xerox, the company invests $1.5 billion in R&D every year. The benefits from the investment are beginning to show. More than 100 new products have emerged over the last three years. Two-thirds of equipment revenues derive from products launched since 2005. A company that faced a $273 million loss in 2001 now looks to make $1.2 billion on $18 billion in annual revenue in 2008, according to UBS investment estimates.