HR Magazine, May 2001: HR Woes at Xerox

Vol. 46, No. 5

A once high-flying high-tech giant, Xerox's stock and reputation have plummeted. HR Issues are partly to blame.

Xerox Chairman Paul Allaire had run out of patience. It was early May 2000—13 months since Allaire had hired Richard Thoman to serve as Xerox’s president, chief operating officer (COO) and eventual CEO.

Over that period, the company had lost a staggering $20 billion in market value.

A year ago this month, Allaire summoned Thoman to his office and fired him.

For Thoman, it had been a short, strange trip. Back in 1998, Allaire had actively recruited him from IBM, where he was second in command to Big Blue’s Lou Gerstner. At the time, Thoman seemed an ideal fit. He had been IBM’s chief financial officer, with additional responsibilities for IBM’s $25 billion global financing business, as well as worldwide manufacturing and procurement. Prior to that, he had been senior vice president and general manager of IBM’s Personal Systems Group, where he led the turnaround of the PC Company, one of IBM’s most troubled operating units.

Thoman also had been the president and CEO of Nabisco International, president and CEO of American Express International, and chairman and co-chief executive officer of American Express Travel Related Services Co.

Thoman was brainy—he holds a doctorate in economics and three master’s degrees—but also practical, a tested leader at the highest levels. He knew marketing, fiscal affairs, manufacturing.

What’s more, IBM’s resurgence under Gerstner, with Thoman as his No. 2 man, was a much-admired case study, proving that a huge technology company could re-invent itself to meet the challenges of the digital world.

But now Thoman was history. And, in an odd twist, Allaire announced he would serve as CEO—the position he held when he hired Thoman to succeed him—for two more years, despite the fact that, at age 62, he was past Xerox’s mandatory retirement age for executives.

Allaire also promoted 24-year Xerox veteran Anne M. Mulcahy to president and chief operating officer, putting her next in line for the top job. Mulcahy’s rise through the ranks at Xerox included a three-year stint as vice president of HR (1992-95). She also logged one year as senior vice president (1998), with overall corporate responsibility for HR as well as communications, quality and integrated marketing.

Together, Allaire and Mulcahy rushed to engineer a turnaround. Allaire provided his renowned fiscal acumen; Mulcahy provided leadership and communication. But the company has yet to return to Wall Street’s good graces.

In fact, things have gotten worse.

Xerox’s losses for 2000 totaled $384 million. By January 2001, its stock had dropped 72 percent over a one-year period, and the company was fending off daily rumors that it would sink into bankruptcy before it could cut costs and unload unproductive assets. A GE Capital line of credit—to the tune of $435 million—helped stave off disaster.

What happened to Xerox—once a solid bet on Wall Street and a longtime resident on the list of great places to work? The company seems to have become a corporate basket case—virtually overnight.

But corporate giants like Xerox, which has more than 90,000 employees, do not suddenly reverse themselves—no matter how good or bad their CEOs may be. Like huge ocean liners, it takes time to turn a large company around—or run it aground.

Indeed, current and former Xerox executives, and others in the know, say that while Thoman’s tenure as CEO had its failings, Xerox’s problems—many of which have their roots in HR—began long before he signed on.

HR Paper Tiger

In its heyday, Xerox dominated the copier world, holding a near-monopoly over its products and selling them through an elite sales force. And the Xerox culture—and the dedicated “Xeroids” it produced—represented an ideal that was the envy of the corporate world.

That positive culture was the offspring of legendary Xerox chairman Joseph C. Wilson and his successor David Kearns. Wilson—who in 1946 was named president of Haloid, the predecessor company to Xerox—captured the spirit of the company and its people in its early years, and counted on HR to develop and maintain a positive corporate culture.

“Wilson brought in progressive HR people schooled in HR at outstanding institutions,” says Ken Larson, a former HR executive at Xerox, now vice president and chief administrative officer at the Candle Corp., an international high-tech company based in El Segundo, Calif. “They helped him build a very people-oriented tradition that became famous for its training, development and sales selection policies.”

Kearns, who succeeded Wilson, is credited with laying the groundwork that helped extend Xerox’s glory days into the 1990s.

Douglas “Max” Reid, the chief HR exec under Kearns, recalls him as “an outstanding leader with the highest of ethical values—very approachable, hard-driving—a great leader from the HR point of view.

“People came first,” Reid explains. “There was never any question as senior HR people that people would be treated with respect at all times. We had to make hard decisions, but always treated people fairly and generously. Compensation was designed to be fully competitive. We paid well, attracted quality people and rewarded people well.”

The time and attention spent on HR issues paid big dividends when it was time to circle the wagons. Under Kearns, the company faced a bruising attack in the low-end copier market from Japanese manufacturers Canon and Ricoh. To fight back, Kearns engineered Japanese-style quality programs and pared manufacturing costs.

“In the mid-1980s, Kearns bought into the total quality movement,” observes Lawrence Matteson, executive professor of business administration at the University of Rochester’s Simon School of Business. “It became the battle cry around which he organized the firm and toughened it.”

The close-knit Xeroid culture rallied around him, delivering a stunning comeback that veterans still remember proudly.

By comparison, the layoffs and cost-cutting measures being taken by Xerox today have discouraged—not galvanized—employees. This may be one of the long-term results of an erosion of corporate culture that apparently began on Allaire’s watch.

When Allaire replaced Kearns as CEO in 1990, Reid—Xerox’s top HR executive, who had worked in the company’s HR department for 27 years—opted to leave the organization. (He joined Colgate Palmolive as VP for HR, where he served until 1999.

He currently serves as senior VP for HR at PanAmSat in Greenwich, Conn.)

To replace Reid, Allaire hired William F. Buehler from AT&T, who had less than two years of HR experience during his 30-year career. His primary experience at AT&T was in sales and marketing.

The move signaled Allaire’s intent to use the HR slot as a developmental assignment for future line managers. “There are few assignments—HR and CFO are good examples—where you can give a promising executive a broad picture of the company,” says Matteson.

“It was a good track for Bill,” says Patricia Nazemetz, Xerox’s current vice president of HR in Stamford. She adds that “he only ran the function for about a year before he was promoted.”

But for many of Reid’s career HR team—who sensed that Buehler’s appointment diminished HR’s influence—a year was long enough. According to Larson, who left in 1992, Buehler was affable and earnest, but many HR professionals at Xerox believed he lacked the HR background and intense interest in the field they thought the job required.

Shortly after Buehler arrived, a number of HR executives who had been involved in the nourishment of the culture followed Reid’s example and left the company.

“It was clear under Buehler that HR’s role had diminished organizationally,” says Fred Nichols, who retired in November after 27 years at Xerox, 22 in HR. “They became discouraged and decided to move on.”

Those who stayed saw HR’s role and value shrivel. “An aura of fear has descended on the HR operations, making it difficult for HR to come forward,” says Nichols. “Earlier in my career, you would lay your body down on the tracks for certain principles. Today it’s not being done for anything big. HR has shifted away from being the ombudsman and voice for the employees to being the implementer of management’s policies. The culture that flourished under Doug Reid until 1990—the culture that fostered employee involvement—is disappearing. When I talk to colleagues still there in influential positions, there’s a sense of disenfranchisement.”

Promotional Flaws

Like Nichols, Larson experienced fundamental problems in the HR department nearly a decade ago. And it appears that those problems continue into the present day.

In the early ’90s, Larson served as Xerox’s senior HR executive on the “CEO’s Advanced Marketing Organization Task Force,” which was tasked with grooming and developing new talent. The Xerox succession planning process looked great on paper, he recalls, but was flawed in practice.

“We would gather background and assessment information on all senior managers and sit down with the president and review their potential. The good thing was there was a lot of knowledge shared about the strengths of the executives. But the way people really got promoted was by politicizing with each other. There was always an in-crowd and out-crowd.”

That gap between policy and practice was also evident to Frank Pacetta, a top-performing former Xerox salesman and author of Stop Whining and Start Winning (Harper Collins, 2000). Pacetta says Xerox’s written personnel policies are as good as any around but are not followed consistently. “They’ll mail the processes to you in a nanosecond,” he says. “But they don’t stick by them.”

Current Xerox HR chief Nazemetz doesn’t see a gap between practice and policy. Nazemetz is responsible for succession planning for all executive positions except the CEO, which is controlled by the Board of Directors, and says the process is orderly and equitable. The company, she points out, looks for three or four prime candidates for any of the senior-level jobs that may open up.

Larson, however, says his contacts at Xerox continue to complain of a gap between policy and practice.

And observers like Jim W. Lundy—director of research at Gartner Group, a Stamford, Conn.-based leader in high-tech market research and analysis—agree that things don’t appear to have changed in the ensuing decade.

“If you look at people who go on to be stars, it’s shocking,” says Lundy, who worked at Xerox for 15 years—most recently as group manager of product marketing in the Office Document Products Group. “Sales force selection is based more on favoritism than ability. A lot of promotions are made by whom you like, rather than who is capable.”

Lundy was with Xerox while Mulcahy and Allaire were at the helm and still maintains contact with many employees. “There are still people who get ahead because they’re good,” he says, “but the number of people who move up based on favoritism is disturbing. It destroys morale.”

(For more on succession planning at Xerox, see "He Said, She Said.")

Bleeding Talent

Today, Xerox remains highly regarded for its diversity programs and sales training. But progressive policies on which the company built its reputation have lost their vigor, and top-flight executives have left for greener pastures, according to a corporate headhunter and Larson, both of whom have recruited people away from Xerox.

“Over the years, they’ve hyped their HR organization,” says Lundy, “but it ain’t a pretty picture. They have a history of good people leaving.”

And attracting new employees has gotten more difficult.

Under Reid, the company was known for its ability to land the best candidates and maintain them by paying top dollar. But by the time Nichols left last fall, priorities had changed.

“Our pay philosophy used to be that we aimed to pay recruits in the top 10 percent,” says Nichols. “Under Anne [Mulcahy, Xerox’s current president], that changed to paying at average for the industry. That’s a major cultural shift. Human capital is no longer valued as before. Today’s model is based on doing just enough to be competitive. There’s no longer the desire to hire people for the long term.”

A Lack of Urgency

“We seek people who are willing to accept risk, willing to try new ideas and have new ideas of their own...who are not afraid to change what they are doing from one day to the next, and from one year to the next...who welcome new people and new positions. If you are that sort of person, Xerox is for you.”

Those are the words of Xerox’s former chairman, Wilson. Xerox still uses them in its recruiting materials. But the culture that Wilson described started to disintegrate years ago.

When Larson left Xerox in 1992, he joined a Southern California office of the accounting and consulting firm Deloitte & Touche as VP of HR. “I thought it would be the same as at Xerox, but it was a culture shock,” he says. “Everyone was out there trying to increase their revenues. At Xerox, unless there’s a crisis in the organization, as long as the stock prices are acceptable, it doesn’t move very fast.”

Former CEO Thoman says that in the Xerox culture, everyone worries about keeping people—especially the sales force—happy. But happiness in a failing company is an oxymoron. “When a company’s business model no longer works, you can never make people happy,” he says. “Success breeds happiness.”

Decisive and Disastrous

Seen against the backdrop of HR issues affecting Xerox, Thoman’s tenure comes into sharper relief.

When Thoman joined Xerox, he was amazed to discover lapses in fiscal controls and the absence of critical metrics and predictors. Among them: the company was not measuring income per employee, and it failed to hedge against currency fluctuations in Brazil, jeopardizing huge amounts of Xerox cash tied up in Brazilian currency. Thoman also learned that Xerox’s new digital product lines were only about half as profitable as the analog products they replaced.

He quickly became convinced that, unbeknownst to most company insiders and Wall Street, Xerox was headed for a monumental train wreck—barring swift, decisive action.

He took several dramatic steps, including reorganizing Xerox’s sales force and making extensive personnel cuts.

Critics say Thoman took on too much, too soon.

Patrice Luoma, who follows HR issues at Xerox and serves as associate professor of management at Quinnipiac University in Hamden, Conn., says the combination of initiatives was doomed to fail. “You look at these actions and say ‘If you’re a CEO, how could you not know something like that wouldn’t work out?’”

Lundy agrees that Thoman’s eyes were bigger than his priorities. “When Thoman’s appointment was announced, we said his key challenge was motivating the middle managers, encouraging them to support him and his new vision for Xerox,” he says. “But he fired too many bullets too fast. He was moving at a different pace than the company. When he realized it, it was too late.”

Reorganizing Sales

Thoman’s decision to reorganize Xerox’s vaunted sales force led to catastrophe—and a great deal of media attention.

For years, copier salespeople had sold machines to individual customers within assigned geographical regions. But with the transition from analog to digital equipment—a change IBM also made on Thoman’s watch—he saw the desirability of selling “digital solutions” rather than individual copying machines.

Under this model, sales staff would focus on industrywide assignments instead of geographical territories. Rather than selling photocopiers in Ohio or Utah, for example, salespeople would focus nationally on customers in a specific industry, such as the auto industry.

As a result, salespeople who once received lucrative commissions for closing a deal on a single copier would have to accept delayed gratification, returning to clients time and again to sell digital solutions. The flow of commissions might slow in the beginning, but it could build up handsomely after the initial sale.

Thoman says he approved the sales reorganization only after it was endorsed by a committee of senior executives. He called for a one-year transition period for training and relocation, and decreed that the 300 top performers would not be affected by the change.

The transition year was a mess. In the middle, Thoman reassigned the executive carrying it out. Later, he discovered his instructions regarding the top-tier salespeople were not followed— all were reassigned.

When the plan became operational in January 2000, it created chaos. “Reps lost their accounts and customers started voting with their pocketbooks,” Lundy says. “They didn’t think about the interests of their customers. Customers jumped ship and salespeople left at twice the regular rate. It’s ugly, and they still haven’t recovered.”

“I question the advantage of the reorganization strategy,” says David Giroux, an analyst with T. Rowe Price in Baltimore. “When they changed the sales force organization, things suffered. Most people still want to buy boxes, not solutions.”

The University of Rochester’s Matteson suggests that training may have been an issue in the sales reorganization. “The salespeople successfully sold boxes to the central reproduction departments of firms. Now you tell them, ‘Your new job is relationship management. Boxes are only the beginning. Try to find ways to sell long-term solutions.’ The person says, ‘I’ve been selling boxes for 15 years and I’m good.’ Some leave; others try to make the transition and they’re not very good at it.”

The real issue, Thoman says, was accountability and performance. At Xerox, he says, too many mediocre people were protected. Managers put the interests of the sales force ahead of the company, neglecting competitive realities to prop up sales commissions.

Morale and Layoffs

When Thoman took over at Xerox he saw a company headed for disaster, one that had become bloated over the years and needed to be pared down to reduce costs. So he cut jobs in two waves; first about 12,000, then another 4,500.

He knew the cuts would be painful, but he wasn’t prepared for the uproar. As the CEO for IBM’s PC Company, he had been through an even bigger downsizing. But morale at IBM remained high among the survivors as they saw the company stabilize. “They understood that their jobs and the future of the company depended on it,” he says.

The difference is that at IBM, workers saw the light at the end of the tunnel, says Larson. “You can lay people off if the survivors think it will be a better world in the future. If all they see is hopelessness, morale will collapse.”

Fast forward to today: As Thoman drifts off on a $13 million platinum parachute, Allaire and Mulcahy say they are sticking with his plan to reorganize sales. “The reorganization wasn’t executed very well, but we’re going ahead with it,” Mulcahy says.

In addition, Xerox is taking steps apparently aimed at reinvigorating its HR function.

Mulcahy says she’s put in more incentive-based compensation and begun to chip away at the sales force attrition rate, which had ballooned to twice the industry average during the reorganization fiasco. “A lot of my efforts have been focused on sales force retention, working hard to stabilize and bring down the attrition rate,” she says. “One of the first things we did was put in retention programs to keep key people.”

According to Nazemetz, the “splits” that salespeople receive based on their total estimated income (salary plus commissions) have been changed to increase the payments they receive up front. And their overall pay has been upped in recognition that the new type of selling requires additional skills.

“Sales attrition is down to the rate it was before the reorganization,” says Nazemetz. “We have all our sales territories covered.”

Financial incentives also are being offered to key people outside of sales, and the number of people leaving has slowed, in part because of the economy, says Nazemetz. “Until a few months ago, there was a talent shortage and a lot of people were leaving for opportunities in dot-com companies,” Nazemetz says. “We’ve seen the trend reversing. The number of people actively looking to leave has abated to some degree.”

As the vultures hover, Xerox endeavors to take progressive steps. Beginning in June, the company will deliver the bulk of its training and education via e-learning. “It’s more practical and less expensive than our on-site training,” Nazemetz says. “It will allow people the flexibility to learn when and where they choose.”

Technology also is permitting Xerox to expand employee benefits. Under HR’s paperless system, the former one-size-fits-all benefits package has been replaced with flexible options that employees can choose online.

Meanwhile, Mulcahy says she and Allaire are on the move constantly, working to rebuild morale and confidence. “We’ve touched base with thousands of people, giving them confidence and telling them why we want them to stay. People have to understand it’s essential that we reshape our business and that we become more efficient. It’s all about having our employees look you in the eye, telling them what you expect, giving them an opportunity to ask their questions and give their feedback. The feedback is useful to me. It influences how I think about the business.”

Thoman says he, too, tried to communicate with employees during his tenure. “I did a number of traditional things—such as talking to customers, going to sales meetings and meeting with employees all over the company. I also initiated new types of communications—including opening a web site, reading hundreds of e-mails that went to that site and often responding to individuals. We also did quarterly voice-mails to all employees. I received credit while I was doing it, but that all seemingly vanished when I went out the door.”

He adds: “No matter how much you communicate, people will say you don’t do enough. I worked very hard to listen and communicate.”

Mulcahy says her 20-plus years with the company give her a credibility Thoman didn’t enjoy. “I know the people and have relationships all over the world,” she says. “It gives me an advantage of being able to communicate and them believing it is credible.”

Tomorrow?

Are the changes being made at Xerox enough to pull the high-tech giant out of its steep dive? Will these efforts to energize the HR function be enough to improve employee loyalty and retention?

One thing is clear: The company is facing a serious challenge. As it scrambles to eliminate red ink, the downsizing, consolidating and cost cutting will continue. Even basic amenities are being slashed.

Critics say employee retention and morale are being slashed as well.

“Instead of rallying the employees, they’re failing to get their support,” says Luoma. “Would you stay, especially with the job market as it is? I wouldn’t.”

She adds that “there are a lot of people sticking around who aren’t that competent. So you’re left with people who you probably would rather not have there.”

And anticipation of dramatic layoffs won’t help the company retain top talent, says Matteson. “Management-driven involuntary downsizing focuses on cutting off poorer performers—and in some cases it makes the good players feel empowered,” he says. “But inevitably, the better performers tend to explore their options and leave, narrowing the remaining pool to those who either don’t have the skills or confidence or see the costs of moving as too high.”

A prominent executive recruiter—and former Xerox staffer—says his phone is ringing off the hook with people looking to move on. “People who have had great loyalty over the years can no longer hang in there,” he says.

Yet, Mulcahy remains optimistic. She says the combination of herself and Allaire is just what the doctor ordered. “Paul and I make a great team. We have confidence in each other and support of the board. I have a leadership team that’s signed up, is loyal and is participating in the turnaround.”

Mulcahy’s reputation for competence, fairness and charisma is endorsed by executives—current and past—who have worked with her. She may well need all those talents, and more, given the steep uphill battle she faces. >

Indeed, this is not your father’s Xerox. “In the ’70s and ’80s when Xerox had a monopoly on its business and a chair who was dedicated to HR,” says Larson, “it was easy to look good. It’s a different story when things go south.”

Robert J. Grossman, a contributing editor of HR Magazine, is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.