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Xerox Corporation: The Document Company1

Xerox revenues had remained flat since 1990, as shown in Figure 1, with losses reaching $1billion in 1992 and $126 million in 1993. Paul Allaire2, Xerox Corporation’s chairman and CEO,was restructuring the company by selling off insurance and other financial services businesses. InJanuary 1993, the company sold The Van Kampen Merritt Companies, Inc., an investmentadvisory firm; Furman Selz Holding Corp., an investment banking and investment managementfirm; Shields Asset Management, Inc., a Furman Selz subsidiary; and Regent Investor Services,Inc., a subsidiary of Shields. The only remaining financial services business was TalegenHoldings, Inc., a property and casualty insurance company, and Xerox Financial Services LifeInsurance Company, a provider of annuity and life insurance products. Allaire expected it to takeseveral years to sell these companies. According to Allaire, "We made good progress onimplementing our strategy to disengage from Financial Services by selling Van Kampen Merrittfor $360 million and Furman Selz for $99 million and by completing the legal restructuring ofCrum and Forster into Talegen Holdings, Inc." Xerox Credit Corporation and the internationalfinancing companies that financed the purchase of Xerox equipment were unaffected by the saleof other financial service activities.

Figure 1: Xerox Financial Results1993 1992 1991 1990

Revenues Business equipment Equipment financing Insurance Total Revenues

$13,5031,098 2,809

$17,410

$13,573 1,108

2,878$15,748

$12,869950

3,299$17,118

$12,692891

3,890$17,473

Net Income Document processing Insurance Continuing operationsNet Income (loss)

$(193) 4

(189)$(126)

$ 562(779)(217)

$(1,020)

$436 2438

$454

$599 11610

$243Assets Business equipment Equipment financing InsuranceTotal Assets

$9,1808,978

15,418$33,576

$8,6348,506

15,476$32,619

$8,0427,136

15,552$30,730

$12,692891

14,298$27,881

Source: 1993 Annual Report

Allaire explained the company's financial performance to shareholders:• In the face of tough global competition, we grew overall reprographics market share, led by a strong

performance at the low-end. • We introduced eight black-and-white copiers, a new series of color copiers, a 92-page-a-minute

highlight color printer and other important additions to our laser printer line, adding to what is alreadythe broadest array of products in the industry.

• We continued to invest heavily in research and development - $883 million in 1993 - and continued tolink that investment to solving the real business problems of our customers.

1 1995 by William R. Boulton, Olan Mills Professor of Strategic Management, Auburn University. This casewas supported by a grant from the Thomas Walter Center for Technology Management. All rights reserved.2 After joining Xerox in 1966, Allaire worked in Xerox’s European joint venture, Rank Xerox, and at corporateheadquarters in Stamford, Connecticut. He became president in 1990 and chairman in 1991.

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• We lowered our selling, general and administrative costs as a percent of revenue by more than a fullpercentage point, a solid step in the right direction.

• Before the impact of special items, income from our Document Processing business increased 10percent.

• We continued our enviable position as the industry benchmark in both customer and employeesatisfaction.

Xerox also sold 8.1 million new shares of Xerox stock through a highly successful equity offeringthat generated $580 million to strengthen its financial position.

Restructuring of Xerox

Allaire had been restructuring the company since assuming the presidency in 1990.For the past three years we’ve been changing the company in most of its critical aspects. We’ve focusedour strategy -- concentrating on the document market. We’ve positioned Xerox as The DocumentCompany. We’ve announced and begun the exit from Financial Services so we can concentrate all ourresources on Document Processing. We’ve radically restructured the company so we can effectivelyimplement our Document Company strategy. Last year we made some significant midcourse correctionsto make our organization design more effective and improve our implementation of that design. And weannounced a major productivity initiative to move us toward our goal of becoming the most productivecompany in our industry.

According to Allaire, the new vision required a new business definition and a new set ofskills for the company.

Our traditional business is light-lens copiers and duplicators, fairly sophisticated electro-opticalmechanical devices. Increasingly, they incorporate many computer systems -- to control for copy quality,for instance--but the guts of the machine are electro-optical and mechanical. These are stand-alonedevices.

With the evolution of digital technology, however, and its rapid reduction in cost, the light-lens element ina copier can now be replaced with a scanning device that digitizes the information on a page. Onceyou’ve captured that image electronically, you can do all kinds of things with it in addition to just makinga copy.

Take the example of our new digital color copier. Once you scan a document into the copier, you canchange the colors on it. Perhaps it’s an old or damaged document. Well, you can enhance it and clean itup. You can also edit the document and even add photographs. You can merge electronic information --coming from a personal computer or a mainframe or over the network -- with paper information. Andonce it’s complete, you can send your new electronic document to be printed somewhere else. You canstore it electronically as well, so you no longer have to deal with cumbersome paper files. Our traditionalstand-alone copying devices are fast becoming components of complex, digital document systems.

With the merger of paper and digital information, “we need to offer our customers distinctivecapabilities that will have a major impact on the way they do business.” Allaire wanted Xerox tooffer specific solutions to customers' document problems. Xerox new business focus is to managethe document more effectively to improve customer productivity. The document was defined asinformation structured for human comprehension. Documents included the memos, reports, andmanuals used to manage a sales organization. They were the specifications used in procurementand invoices. Published documents, like warranties, operating instructions, and maintenancemanuals were vital in supporting products. In consulting, insurance, law, and education,documents were often the actual products. Xerox research showed that over 90 percent of all

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business process inputs and outputs were documents. Documents were integral to work flows andwere often the work itself. They were the currency of the office, the source of most information. They supported business processes like new product development. Decisions were driven bydocuments. Whether in paper or electronic form, the document was the dynamic organism thatbreathed life into business processes.

Of a corporation's electronic information, over 90 percent was in the form of documents, asopposed to structured databases. Electronic documents now carry information about their originand identity, as well as the code to manipulate or render them. Programs like Microsoft Wordattach a summary box to each file to identify author, title, keywords, version numbers,description, and file statistics. Microsoft’s Windows 95 offers improved document management,offering longer file names and date creation information. In this way, document management wasbecoming the user interface for file management, data access, and data presentations. The cyclingand recycling of documents represents continuous movement, change, re-creation, and use ofknowledge to support a business process.

To improve performance by cutting operating costs, Allaire signed a $3.2 billion, 10-yearcontract with Electronic Data Systems (EDS) in May, 1994, to operate Xerox’s data processing,telecommunications, and computer network services in 19 countries. This was the first globaloutsourcing contract of its kind. EDS won the contract over IBM and Computer SciencesCorporation. The savings expected from the annual $600 million information technology budgetwas estimated at 25%. About 1,700 Xerox information systems workers in those countries wouldtransfer to EDS by the end of 1994. Xerox's management did not see this as an area of corecompetence for the company. Allaire described his vision for Xerox and its improvedperformance:

Our strategic intent is for Xerox, The Document Company, to be the leader in the global documentmarket, providing document services that enhance business productivity. Our direction for 1994 is toimplement our document company strategy by focusing on our vital two: profitable revenue growth andworld class productivity.

We talked about the importance of revenue growth for a number of years but have only achieved lowsingle digits. The plan has not been met. It’s now time to focus on how we significantly exceed this basecase plan. It’s time to focus on absolutes and go for more profitable revenue growth. The market is thereand we have excellent products. Now we must put in place the market actions to achieve growth.

We need to grow share in reprographics with new products, facility management, and growth in the newexpanding markets of China, Eastern Europe, Africa and Latin America. We must provide more coverageand more flexibility in dealing with new and existing customers. And we also need to take full advantageof the market for our new digital products.

In December, we announced a major initiative to improve our productivity. We took a $1.2 billion profitbefore tax charge and indicated we would reduce our manpower level by more than 10,000 over the nextthree years. We must now deliver on this investment. Each initiative is well conceived and documented,but we must ensure we effectively implement each and manage in a manner that we do not let anyinefficiencies creep back.

Now, we’ve had some criticism both from the press and employees that we should not be laying off peoplewhen we are profitable -- or don’t have a profit problem. No one likes layoffs. I certainly don’t. But towait until the problem is evident in your results before addressing it is just plain poor management. We

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know from our benchmarks that the actions are necessary and we know from a variety of studies that theseimprovements are possible.

Productivity will not go away as a challenge. We need to use our quality strategy to engage all our peoplein making this company the most productive it can be. Remember, we focus on productivity not just toreduce cost but to improve our effectiveness -- be it time to market or customer satisfaction. We need tobe more productive to be more competitive and to have the resources to invest in areas of profitablerevenue growth.

Externally, we will begin to deliver to the marketplace Xerox document services in the form of products,system, solutions and support. We will do this through a series of major product announcements,technology initiatives and partnering agreements that will demonstrate to customers how Xerox productsand services can help them improve their productivity. We will advance the digital revolution with newnetwork document services -- a platform that will serve as a framework that will be modular and open.

You will see significant partnerships and alliances that will provide us with the tools to effectively harnessand act upon the enormous volume of information contained in documents that reside across sharednetwork environments. You will see the beginning of our rollout of products for robust network printing,multi-functional systems and more color -- all making their way to the market through added channels. You will see a new class of open, intelligent multi-functional systems that address ready markets andsignal new markets for our document machines and document software.

Internally, we will launch document learning programs that will help our people do -- for The DocumentCompany’s documents and processes -- what we are recommending to our customers. These programswill help us understand, internalize and deliver The Document Company message.

The Document Processing Market

Extensive research and analysis suggested that the North American and Western Europeanmarkets for document processing products and services exceeded $150 billion in 1993. It wasestimated that Japan and the Pacific Rim accounted for another $50 billion. The potential marketfor digital publishing was expected to reach $5 billion by 1997, capturing about 20 percent of theeligible offset market which was defined as run lengths of 5,000 or less.

Color copier sales in 1993 topped 9,000 units in the U.S. Over 60 percent were digitallyconnected to host systems in order to provide color copies in a network environment. This providedspecial advantage in the printing industry by providing proofs to clients before final offset-pressversions are completed for printing or advertising customers. Customers also wanted to be able tosend files to printing professionals either through modems or on some kind of disc-based digitalmedium that the printer could use when printing out data. Color laser printers were expected to enterthis market in 1994 and 1995. Compared to the price of full color copiers with digital interfaces, thecolor laser printers selling for under $10,000 were more affordable to a wider range of users. According to BIS Strategic Decisions, an industry consulting firm, sales of color laser printers wouldgrow from 650 units in 1993 to 40,000 units in 1998.

Changing Market ConditionsFigures 2 shows the seven market segments, including personal copiers (PCs), and the product

features and prices for each segment. Figure 3 shows the market shares of major competitors bysegment in 1993. Competition was changing. The growing complexity of the business environmentwas creating firms that were both cooperative and competitive, depending on the business.

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Besides Canon entering the digital document market, printing and computer companies likeHewlett-Packard and IBM had also entered the document processing business. The merging oftechnologies into systems provided opportunities for mergers and alliances between firms toobtain needed capabilities.

Figure 2: Dataquest Copier Product Segment DefinitionDataquestSegment

MulticopySpeed (ppm)

Machine Form/Platen

Paper Feed Average MonthlyCopy volume

Average RetailPrice

MachineDescription

PC

1

2

3

4

5

6

Up to 12

Up to 20

21-30

31-44

45-69

70-90

91 & above

Tabletop/ moving orstationary platen

Tabletop/ moving orstationary platen

Tabletop/ stationaryplaten

Tabletop or console/stationary platen

Console or tabletop/stationary platenConsole/ stationaryplatenConsole/ stationaryplaten

Single cassette

Single or dualcassette

Dual or triplecassettes or trays

Dual or triplecassettes or trays

Dual or triplecassettes or traysDual or triplecassettes or traysDual or tripletrays

400

1,700

6,000

11,600

18,500

55,000

158,000

$1,103

$3,066

$5,104

$7,257

$16,113

$18,000-80000

$78,000-235,000

Minimally featured; easy to install;superior reliability; compact; light-weight;user serviceablePossible features; reduction, enlargement,zoom, sheet bypass, optional input/outputdevicesPossible features; reduction, enlargement,zoom, optional input/ output devices, LCC

“Systems” with standard features ofreduction/enlargement, zoom, feeder,sorter, and LCCHighly featured

Highly featured with finishing,input/output devices, magnificationLarge units with numerous peripherals andspecial features

Source: Dataquest (April 1994)

Xerox believed that documents would play a central role in business, government andeducational organizations far into the future and that efficient processing of documents offeredsignificant opportunities for productivity improvements. The white-collar, office-service sector ofthe economy represented three-quarters of U.S. GNP, showing minimal office productivity. Mostproductivity improvements had been in the factory. Xerox believed that white-collar productivitywas limited because technology had focused on individuals, not organizations and processes, andpeople lacked the required knowledge.

Price pressure forced leading manufacturers and distributors to consolidate activities. Forexample, the National Office Machine Dealers Association and the Local Area Network DealersAssociation merged in 1993 to become the Business Technology Association. Of the 4,200 dealersregistered in 1993, BIS expects about 3,000 dealers in 1997 will deal with both color and digitaldocument creation and processing. Vendors are also striving to offer document management systemsthat function as part of a comprehensive office workflow system. The biggest weakness in copiers wastheir slowness to conform to digital technology. Digital technology for creating, storing, transmittingand printing documents is becoming an integral part of the U.S. workplace. Workers are increasinglytransmitting work from their homes by telecommunications. Mobile workers operating outside themain office are growing. Printer vendors who rapidly responded to this demand have placed increasedpressure on copier makers. In fact, printers accounted for over 40% of low volume copying.

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Figure 3: U.S. Plain Paper Copier Sale Estimates by Competitor and Segment (1993)

(000 units) PersonalCopiers

1 2 3 4 5 6 TotalMarket Share(%)

CanonA.B. DickEastman KodakGestetnerKonicaLanierMinoltaMitaMonroeOceOlympiaPanasonicPitney BowesRicohRoyalSanyoSavinSelexSharpSilver ReedSwintecToshibaXerox Total

889.0

25.3

21.8

24.1

8.0--

341.92.26.2

-253.3

1,571.8

343.712.6

25.2156.3164.2135.8205.819.5

20.244.642.198.315.06.4

53.311.9

363.5

114.8371.1

2,204.3

201.716.0

10.162.966.6

119.070.43.3

2.120.529.540.03.22.5

64.99.6

101.0

35.7231.9

1,090.8

86.28.5

6.755.447.437.659.812.2

2.07.6

22.739.32.70.1

40.57.3

46.9

27.6104.0614.6

106.07.7

48.45.3

38.818.422.675.68.9

23.50.7

12.827.761.91.3

40.64.9

65.3

22.6130.1723.1

33.21.2

73.60.88.39.42.19.71.60.6

0.21.8

11.50.1

3.12.15.9

0.43.0

168.6

11.8

0.1

1.5

68.782.1

1,659.746.0

133.848.2

321.7306.1317.1446.645.525.625.0

107.5123.7275.122.317.0

202.435.7

924.52.26.2

210.11,162.16,455.2

25.70.72.10.75.04.74.96.90.70.40.41.71.94.30.30.33.10.614.30.00.13.118.0

100%Source: Dataquest (April 1994)

U.S. copier sales for 1993 totaled 6.5 million units. Since the early 1990s, U.S. corporations hadreorganized to more effectively process their business documents for improved productivity andprofitability. As owners delayed replacement of older copiers, new copier sales slackened. BISestimated that U.S. sales of used copiers reached 200,000 units in 1993. Corporations were nowfocusing on all aspects of communications including document creation and duplication. While copiersprovided the foundation of such systems in the past, pressure for price and performance improvementshad intensified in order to compete with new technologies. End users were very price sensitive sincealternative products, like network printers, proved more cost effective than copiers.

Xerox’s Document Processing Business

Xerox’s target markets were believed to represent about half of the document processingmarkets. Xerox's worldwide document processing revenues were $14.2 billion in 1993, of which51 percent were generated in the U.S., 31 percent in Europe, and 18 percent in the remainder ofthe world (excluding revenues of Fuji Xerox in Japan). International operations accounted for 48percent of document processing revenues. Rank Xerox Companies, owned 80 percent by Xerox,accounted for approximately $970 million. The company had joint ventures in India and China formarketing and manufacturing. In 1993, the company’s operations in three locations in Chinatotaled $100 million and held a 40 percent market share. Xerox Credit Corporation generally

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carried out the financing of equipment in the U.S. and internationally by several foreign financingsubsidiaries and divisions.

As shown in Figure 4, Xerox sales in the black-and-white copying was still strong and wasexpected to continue growing at a rate approximating real economic growth in North Americaand Western Europe, and at a faster pace in developing countries. The remaining marketsegments, including digital publishing, electronic printing, and color copying and printing, wereexpected to grow at higher rates. The need for economical, high-quality color printing andcopying was accelerating with the increasing creation and use of color originals in the office. Digital publishing was replacing older, traditional offset printing as customers looked forimproved productivity, faster turnaround, and the ability to print documents on demand. Theneed for efficient, high-speed printing of multiple-page documents, at the point of use, rather thanthe point of creation would drive future electronic printing growth. This growth would drivedocument production from offset printing to digital publishing, increasing customer requirementsfor network and distributed printing, and accelerating demand for color documents.

Figure 4: Xerox’s Revenues by Major Product Category(in $ billions) 1993 1992 1991Black-and-white copiersDigital productsOther productsPaperForeign currency translationTotal revenues

$9.82.91.70.8

( 0.6)$14.6

$9.72.51.70.8

( - )$14.7

$9.61.91.70.8

( 0.2)$13.8

Xerox had the dominant position in high-volume data center markets since 1977 and waspositioned to move into distributed printing markets from desktop and host computers. Itmaintained the broadest product line in the business, ranging from simple copiers and faxmachines costing $300 to high-speed printers capable of printing, collating and binding bookscosting $300,000. In spite of its rapid introduction of digital machines, 80% of Xerox’ documentprocessing business came from analog machines. Xerox’s competitive advantages were in itscutting-edge technologies, dedication to customer satisfaction, broad and competitive productline, large and highly skilled direct sales and service forces, total quality management, and thespeed, creativity and accountability of its business divisions. Xerox black-and-white copier growthwas based on its strong relationships with major accounts expanded sales coverage throughindirect channels, imaginative marketing programs, expanded facilities management business, andits commanding position in developing countries.

Xerox's document processing activities encompass developing, manufacturing, marketing,servicing and financing a complete range of document processing products and services designedto make offices around the world more productive. Although the document processing industrywas highly competitive, Xerox management felt that the company's strengths and values were in thedocument. In positioning Xerox for the future, management addressed the full range of copiermarkets. The change in business direction caused internal strains between traditional “tonerheads” that came from the traditional copier business and the “computer nerds” that were leadingthe move into digital document processing. There was also internal competition for resources

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directed to printer-related technology versus other document management products. Thecompany’s diversified line of document processing products included:

• Copiers and duplicators: the mainstay of the business.• Laser printing systems: an outgrowth of pioneering technology.• DocuTech publishing series: high-end multifunction printing/duplicating.• Document processing systems: desktop and network software.• Xerox imaging systems: scanning and image processing.• Telecopier facsimile terminals: multifunction devices mostly for business.• Xerox voice message exchange: voice mail for standard telephones.• Electronic typewriters: super-typewriters.• Engineering systems: printers, plotters and related software for drawings.• Xerox business services: outsourcing copying, printing, scanning and faxing.• Xerox supplies: paper, toner and printing office supplies.• Team Xerox: consulting.

Black and white copying. The North American and Western European markets for blackand white copying were $30 billion in 1993. Xerox had a strong position with major accountsthat demand a consistently high level of service worldwide. Marketing initiatives targeted 11major associations like the American Medical Association, which represents over two millionpotential customers. The number of independent agents handling Xerox has also been increased. Future growth will be based on maintaining a broad, competitive product line which addresseschanging customer requirements, offering a consistently high level of service, building newmarketing initiatives from its strong relationship with major accounts, and expanding salescoverage through indirect channels.

Digital Products. In 1990, Xerox introduced DocuTech machines, which cost up to$300,000 each. The DocuTech scanned paper documents and converted them into the 1’s and 0’sof digital code. Once in digital form, the coded text or pictures were easily stored, modified,printed or sent over computer networks. DocuTech sales, reaching $1 billion in 1993, wereprojected at $1.5 billion in 1994. More recent product introductions included digital printers,copiers and scanners. The Document Services Platform, using Xerox software, linked its machinesover computer networks, allowing them to communicate with each other and with the machinesmade by other companies. DocuTech prints high-resolution (600 dots per inch) pages on bothsides of a sheet of paper at up to 135 pages per minute. The in-line finisher stables completedsets or finishes booklets with covers and thermal-adhesive bindings. Because the finisheddocument can be stored as a digital document, hard copy documents can be updated easily andprinted on demand, or only as required, thus avoiding the long production runs and high storageand obsolescence costs associated with offset printing.

Xerox's digital products fall into three broad categories: digital publishing, electronicprinting, and color printing and copying. Digital publishing technology is increasingly replacingolder, traditional offset printing as customers seek improved productivity and cost savings, fasterturnaround of document preparation, and the ability to print documents "on demand." Xerox’splanned to introduce its next generation digital DocuPrint line by late 1994 with the DocuPrint6135 black-and-white model rated at 135 pages a minute (ppm) and 600 dot-per-inch and costing$307,000. As electronics costs continue to decline and the technology improves, Xerox estimates

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that the potential industry market for digital publishing will reach $5 billion by 1997, capturingabout 20 percent of the eligible offset market, which is defined as run lengths of 5,000 or less.

The effort to substitute digital documents for printing plates is an attack on the printing “ondemand” market for which Xerox estimates the worldwide market is $93 billion a year. Instead ofcopying a page at a time, new machines developed by Xerox and others received data filesdescribing many pages over telephone lines, then printed, collated, and bound documents the sizeof books at speeds up to 135 ppm. The company offered a black-and-white plus one color, singlepass printer at 92 ppm. These faster, more reliable printers print collated multiple sets on bothsides of the paper, insert covers and tabs, and staple or bind; but without the labor-intensive stepsof printing an original and manually preparing the documents on high-speed printers. In addition,documents can be printed on these printers from remote data center computers, enabling theefficiencies of distributing electronically and then printing, rather than printing paper documentsand then distributing them. Growth was driven by the increase in personal computers andworkstations on networks, accelerating growth in the demand for distributed printing, and rapidlydeclining electronics costs. The electronic printing market in North American and WesternEurope was approximately $20 billion in 1993. The market is composed of high-end host-connected printers and low-end desktop printers. Xerox expects significant future growth forrobust, fully featured printers serving multiple users on networks. In 1994, the company plannedto introduce workgroup printers, mid-range network printers and workgroup color printers, andthen begin to deliver multifunction machines. Systems costing under $1000 were expected to beintroduced in mid year.

Color printing and copying markets in North America and Europe were estimated at $4billion in 1993 and were expected to grow to $15 billion in 1996. The use of color documentswas increasing because of their effectiveness in communicating information. The vast majority ofindustry shipments of workstations and personal computers have color monitors, creating theneed for economical, convenient, reliable, high-quality printing and copying. Xerox entered thedigital color market in 1991 with the introduction of the Xerox 5775 and 4700 full color digitalcopiers at 7.5 ppm (30 ppm in black-and-white). In 1993, the company introduced the MajestiKfull color copier series at 6 ppm (36 ppm in black-and-white) with benchmark copy quality andprice/performance. It had replaced Canon models in Xerox Copy Centers.

Xerox and Novell planned enhanced network printing capabilities for final documentassembly such as server-based printing. No paper document could match that. Future documentswill become a book of pointers to text objects, data objects, images, fonts, and so on. Newdocuments will also be multidimensional, automatically routed with workflow software and built-in intelligence. Such documents, termed “virtual” documents, exist only when requested andviewed.

Non-equipment Revenues Revenues from supplies, paper, service, rentals, facilitiesmanagement, and income from customer financing represented 65 percent of total revenues andwere less volatile than equipment revenues. Growth in these revenues was a function of thecompany’s installed population of equipment, usage and pricing. Most customers’ equipment wasserviced and supplied by Xerox. Rental revenues had declined as customers purchased their own

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equipment using Xerox financing options. Approximately 80 percent of U.S. equipment sales and70 percent of European equipment sales were financed through the company.

New Product DevelopmentsXerox’s business strategy was to provide products and services that simplified and

enhanced document-related processes and communications. Xerox's corporate vision was to “sellvalue to the customer through a much better understanding of the document and the document role asa fundamental way in which people communicate with each other and process.” According to Allaire,documents were a part of the fabric that integrates every enterprise’s people, processes, andtechnology.

Xerox’ business is providing our customers with document services that enhance their business productivity. Document services range from the heritage of our copiers and duplicators to supporting an enterprise-widebusiness reengineering effort through consulting and applying effective, electronic document solutions.

Richard Barton, president of Xerox’s U.S. Customer Operations, also explained:We no longer want to be thought of as a company that sells products in boxes. We are in the process oftransformation. We’re getting away from training sales reps to ‘see a box’ as an opportunity to ‘sell a better box.’ Our goal is for sales reps to now look for an opportunity to help customers craft better results for their business.

Xerox was uniquely positioned to help customers make office productivity gains because ofits understanding of the document and its capabilities in document technology. Xerox wasdismantling the walls that separated paper documents from electronic documents. Xerox’s goalwas to connect its printers, software, service, training and imaging capabilities (digitizing informationby scanning documents and visual into computers) with other vendors’ computer systems. The newXerox saw itself as a system and service company that integrates technologies designed to improve theefficiencies of offices. Xerox document technology allowed customers to take information fromany source - a piece of paper, a computer, a desktop - shape it into new forms, and send it acrossthe hall or around the world at a speed and quality level that no competitor could match.

Research and DevelopmentXerox R&D programs are directed at new product and capability development in support of

the its document processing strategy. The company spends $883 million in 1993 and $922 millionin 1992 on R&D. Efforts were also coordinated with Fuji Xerox R&D activities which accountedfor another $500 million. Corporate scientists were involved in formulation of corporate strategyand key business decisions. They met regularly with customers and divisions to ensure theyunderstand customer requirements. These projects were intended to insure that Xerox offeringswork with those of other vendors. Over 50 percent of engineering and development expenses,around $500 million, were now spent on research into digital technology. To broaden thepotential market for its document centered computing initiatives, Xerox formed alliances withMicrosoft, Novell, Sun Microsystems, E.D.S., Lotus, I.B.M., and Hewlett-Packard.

Paul Ricci, division president, ran Xerox's Advanced Office Document Services (AODS). He had been a researcher at Xerox’s Palo Alto Research Center (PARC) in the late 1970s andlater moved into marketing at Xerox’s systems business. In 1987, he left Xerox in frustration towork as vice president of marketing for Natural language, Inc. in Silicon Valley. He came backto head up this new business division:

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We may be a small business at the moment, but we are right at the center of Xerox’s new strategicdirection. Creating this division is one instance of the way we are trying to re-create the company.

The AODS mission was to build a successful new business by creating capabilities that customercould use to retrieve, manipulate, file, and analyze documents more productively. The divisionhad some new software for image recognition, analysis, and manipulation from PARC thatprovided the basis of this new start up. It had no established markets, but hoped to exploitXerox/s distribution channels and established relationships with customers.

One new product developed by Xerox is called PaperWorks. It is a $250 software packagethat allows users to access their personal computers from any fax machine in the world. Usingspecial paper forms, and individual can instruct his computer system to store, retrieve, anddistribute files without having to be at the computer itself. This software provides a bridgebetween paper and electronic information. Security information can be encoded to prevent checkfraud, or a black-and-white page could be transformed into a full-color image through suchcoding.

PaperWorks first took shape in the late 1980s at Xerox’s PARC labs. Research onadvanced image processing had given birth to a variety of new technologies, including one knownas “glyphs” - a technique similar to bar coding that uses small marks to encode information onpaper that can be read by computer. The product development team worked with customers todevelopment the product, which became the basis for establishing AODS. An office for“advanced technology and market development,” located in Xerox’s corporate research andtechnology organization, is responsible for helping the new business divisions and the company asa whole identify new technologies and market and develop business plans for exploiting them.

The market for document-management software reached an estimated $300 million in 1993.When including software related to text retrieval and automation of the flow of work in an office,the market totaled $1 billion and was growing at a rate of 30% to 35% per year. Xerox wasworking with Novell to manage document files for computer networks. Their DEN (documentenabling networking) strategy is to provide access to any document, anywhere, regardless ofvendor, media or type.

With the move to “systems,” the company was working with customers to design andredesign their basic business processes. The greatest challenge came in building new relationshipsbetween Xerox and its customers, a shift from selling “boxes” to selling “document” processes. In the future, Xerox planned to partner with customers to enhance their productivity. Thatrequired sales people to know more about their customer’s business, their needs, and their use ofXerox products. It was more of a consultative approach. Allaire gave an example:

Recently I was in Austin, Texas to make a call on a customer who until then had not wanted to haveanything to do with us. The chief information officer at the company did not want any paper in hisorganization - and, therefore, he did not want any copiers because copiers generate paper.

When we finally got a meeting, our salesperson didn’t say a word about copiers. He talked about productdocumentation. “Have you ever had any delays in getting your product out the door because yourdocumentation wasn’t ready?” Well, of course, the answer was yes. So our salesperson said, “We mayhave some capability to help you with that. We want to come in an look at the way you are doing

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documentation and see if we can figure out a better way to do it. If we can get your products out the doormore rapidly, with more up-to-date documentation - and, by the way, more cheaply - would you beinterested?”

Needless to say, he was. So our salesperson did a study to analyze how the company could organize itswork more effectively. Not only that, he got the CIO a tour at another company down the road where wehad already done a similar thing. And we made the sale.3

Manufacturing The company had closed three factories and created six focus factories in 1991 to produce

consumer replacement units, low-volume machines, mid-volume machines, high-volumemachines, components and color machines. Labor and management had equal voice in the designof the factories. The industrial relations director took union representative on benchmarking tripsto focus factories in California, Texas and Europe. A focus factory replaced the assembly linewith self-managed cells that produce narrow lines of products. The cells contain their ownfinance, engineering, HR and quality staffs, and reduce the number of management personnel,pushing decision-making down to empowered employees. Also the amount of money spent ontraining and retraining had decreased. Teams within the factories were worked autonomously orsemi-autonomously. Instead of the traditional one supervisor per 20 employees, there was onecoach or facilitator per four teams. Teams elected their own group leaders. The companyprovided training for both team leaders and team members on company time. Many of the teamsdid their own scheduling, overtime balancing, ordering of parts and employee assignments. Tobecome an autonomous team, members had to know how to work as a team, be able to lead, beable to participate, and deliver a product within a cost and time specification. It took the averageteam two to three years to reach this status.

These new factories had decreased product-development costs 30%, improved quality by100 times and increased return on investment from 8% to 14%. Gross margins for documentprocessing activities ranged from 46% to 48% in recent years compared to 38% for Hewlett-Packard. While Xerox’s technological lead had provided the company with a premium, growingcompetition was forcing margins down. Hewlett-Packard introduced its first color laser printer atlist price of $7,300 and street price of $6000, about $1000 less than Xerox’s competing product. Xerox’s product was faster and of higher quality than the HP printer. Apple Computer andTextronix were expected to introduce competitive models by year end. With the pending launchof combined scanner, fax and printers for less than $1000, the profit margins were expected to bethinner than those at the high end.

On June 7, 1994, workers at Xerox's Webster, New York, facility ratified a union contractguaranteeing them jobs for the next seven years. The job guarantees were in exchange forconcessions made by the union membership to allow for measures that would help increase profitand productivity while reducing expenses and process redundancies in the manufacturing function.These measures included no wage increases for the next seven years except for quarterly cost-of-living adjustments to keep pace with inflation. Xerox could bring in temporary workers,outsource low-value-added jobs and exercise greater flexibility in promotional and transferactivities. According to Joe Laymon, director of corporate industrial relations, Xerox needed “theability to move people without regard to seniority, for the purpose of staffing a product line with 3 Ibid.

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the most qualified individuals to get the product out as quickly as possible and with as little costand as high a quality as possible.”

Xerox had been a pioneer in total quality management and had won three prestigious qualityawards: the Malcolm Baldrige National Quality Award in the United States in 1989, the EuropeanQuality Award in 1992, and the Deming Prize in Japan was won by Fuji Xerox in 1980. Inaddition, top quality awards had been won in Australia, Belgium, Brazil, Canada, Colombia,France, Hong Kong, India, Ireland, Mexico, the Netherlands and the United Kingdom. Xerox’Leadership Through Quality program had enabled the company to reduce its costs, accelerate theintroduction of new products, improve customer satisfaction and increase market share. Xeroxproducts were rated among the world’s best by independent testing organizations.

MarketingXerox had a worldwide sales force of approximately 13,000 employees. The company also

marketed through a network of independent agents, dealers, distributors and value-addedresellers. The U.S. marketing channel for low end products of approximately 3,000 retail storesincluded Sears, Office Depot, Office Max, Service Merchandise, Staples, Wal-Mart, Costco, TheWiz, Price Club and MicroAge. Selling, general and administrative expenses were 30% ofrevenues compared to 20% for Hewlett-Packard.

The company adopted a controversial new logo with a digitized X, and an $8 millionadvertising campaign to herald the “new Xerox.” The goal was to change the corporate imagefrom financial services to document processing as the company shifted toward networked digitalproduct that link up with other office equipment. Digital products accounted for 21% ofdocument processing revenues. It was expected to reach 80% by the year 2000. The move todigital printing products put the company in direct competition with such firms as IBM, EastmanKodak and Hewlett-Packard. As it gets deeper into the digital world, it would face such softwaregiants as Microsoft. The company stressed the advantages of its brand name, reputation forquality and service, and office integration software.

Service. The worldwide direct service force included approximately 28,000 employees.The response time to customer calls were uniformly short, the diagnostic equipment was state-of-the-art and twenty-four-hour-per-day, seven-day-per-week service is available. Managementbelieved it had a competitive advantage in the response times to customer calls, product training,and diagnostic equipment. Many of the company’s products were equipped with modems whichallowed remote monitoring of copy quality and wear and tear, and scheduling of service callsbefore performance declined. Twenty-four-hour-a-day, seven-day-a-week service was available inmost metropolitan areas in the U.S.

Customer Satisfaction. Xerox surveyed customer on their satisfaction and was typicallymeasured over 90 percent. The company offered a Total Satisfaction Guarantee, “If you are notsatisfied with our equipment, we will replace it without charge with an identical model or amachine with comparable features and capabilities.” The guarantee applied for three years toequipment acquired from and maintained by Xerox or its authorized agents. It was the simplestand most comprehensive offered in any industry.

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Xerox of Arizona, with 270 employees, leads the nation in sales, customer satisfaction andemployee satisfaction. Arizona was one of the company’s NOVA (new operational visionachievement) sites in 1992 to develop new approaches in the delegation of personnelresponsibilities. Sales representatives were allowed to use their virtual office, at home, usinglaptop technology. The change reduced office requirements and commuting time. Customerresponse has improved and one person now handles all customer needs, whether equipment orbilling matters. It was now being considered for the whole corporation.

The Crisis of Opportunity

Document processing operations employed 97,000 people worldwide at year-end 1993. Theability to adapt Xerox’s organization to the new vision created what Allaire called a “crisis ofopportunity.” Xerox’s new vision challenged employees to "think creatively and act boldly" inpursuing new customers and new markets. He further urged employees to become more efficient sothe company's own productivity could help fund growth and serve as a selling point for its copiers,printers and services. Yet the chief executive reminded workers to heed the tough lessons of the 1980s,when complacency, a disregard for emerging competition, and a failure to capitalize on new markets,very nearly caused Xerox's demise. Allaire understood that "It's harder to get managers and employeesto recognize a crisis of opportunity than a crisis of survival."

The rapidly changing market conditions gave nimble competitors an advantage. Allairequestioned the ability of functional organizations to effectively respond because conflict resolutiontypically got pushed up the hierarchy, far from the customer. Decisions were often delayed or late.Allaire changed the structure:

We were staff-driven. Staff was primary, line businesses were secondary. I used to be the chief staff officerat Xerox, so I know what I’m talking about. At the time, in the mid-1980s, I viewed myself - quiteinaccurately, I should add - as the number two person in the company. It certainly wasn’t in terms ofresponsibility. There were people with billions of dollars worth of revenue and profit responsibility,whereas I didn’t have any. And yet, I was the CEO’s key adviser, and I ran the management process. Icould wield a lot of weight without a lot of real responsibility.

To create a customer-driven, cross-functional, and value-based company, Allaire reinvented thecompany:

We have embarked on a process of change completely the way we manage the company. Changing thestructure of the organization is only a part of that. We are also changing the processes by which wemanage, the reward systems and other mechanisms that shape those processes, and the kind of people weplace in key managerial positions. Finally, we are trying to change our informal culture - the way we dothings, the behaviors that drive the business.4

To balance organizational demands between autonomy and integration, Allaire establishednine relatively independent business divisions with profit and loss responsibilities organizedaround specific products and markets as shown in Figure 5. According to Allaire:

We have turned the traditional vertically organized company on its side. At one end is technology, andwe have retained an integrated corporate research and technology organization. At the other end is thecustomer. We have organized our sales and service people into three geographic customer operationsdivisions, so that we can keep a common face to the customer. Between these two poles are the new

4 Ibid. 108.

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business divisions. Their purpose is to create some “suction” on technology and pull it into themarketplace.

Figure 5: Xerox Restructuring

TECHNOLOGIES

MARKETS/CUSTOMERS

Personal Document Products

Xerox Business Services

Office Document Systems

XSoft

Advanced Office Doc. Systems

Document Production Systems

Printing Systems

Xerox Business Services

Xerox Engineering Systems

Governance:Corporate OfficeCorporate Staff

TechnologyManagementProcess

Corp. Research& Technology

CorporateArchitecture

Market & Tech.Development

ResearchCenters

Adv. Tech. &Comp. Dev.

CustomerOperations

America’sCustomerOperations

RankXerox

U.S.CustomerOperations

ManufacturingSupport

Integrated SupplyChain

Strategic Relationships

Supplies

CorporateStrategic Services

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Until recently, Xerox had the structure, practices, and values of a classic big company. We were anextremely “functional” organization. If you were in manufacturing, you strive to make manufacturing asgood as possible - and only secondarily to make the businesses that manufacturing affected work well. The same was true for sales, R&D, or any other function.

Each business unit had its own manufacturing and sales groups and allocated research and serviceteams. Scientists worked with business units to bring products to market more quickly.

Allaire also established “strategic services” to support the business divisions in areas suchas manufacturing and purchasing, where economies of scale were still key success factors. Heestablished a six-person corporate office with a lean corporate staff to make sure all business unitsfit together in a strategically coherent way. According to Allaire:

A big advantage of this structure is that it is remarkable easy to adapt. When we see new markets emergeor new technologies that don’t fit into our current structure, we can simply add another business team oreven a whole new division. Similarly, we can split a business division - or even eliminate one altogether -without changing the basic architecture of the company.

Along with the new organization came new empowerment. Division presidents wereresponsible for the success of their businesses. According to Allaire:

Before, setting priorities was a top-down process. Now, we’re turning that process completely upsidedown. We’re saying to the business division presidents, “You tell us what you are going to deliver and theresources you need to do it.” They are setting the priorities now. And they should be because they are thepeople closest to the market.

They should be coming to corporate management the way an entrepreneur goes to a venture capitalist orbanker. And we at the top should be looking at individual strategies and how those strategies cometogether for the company as a whole. We shouldn’t be starting out with a fixed R&D budget. How thehell is anybody smart enough to say what the right amount should be?

Division presidents also wore corporate hats and had corporate constraints:We in the corporate office will provide them with some constraints, some boundaries. If they feel theyabsolutely must cross those boundaries, then we expect them to tell us. But otherwise, they have thefreedom to run the business, to make the objectives that they have communicated to us and to implementthe strategy they have presented. Now of course, if we don’t think their business plan is credible, thenwe’ll object and talk with them about it. But the initiative is up to them.

The hierarchical organization was giving way to more decentralized, self-managed teamshaving end-to-end responsibility for satisfying customer requirements. They were more tightlycoupled to both customers and suppliers. Allaire explained:

Just setting up a bunch of small autonomous units isn’t enough. Most of our businesses rest on acommon technology base. What’s more, we are dealing with a market where in many cases, the samecustomer is buying a variety of different products from us. So it’s important not to lose the advantages ofa situation where a salesperson can say, “I am the single person who will represent Xerox to you. And ifyou have a problem anywhere in the world, we will take care of you.”

Xerox’s total satisfaction guarantee covered any customer in the world that purchased its goods.

The sales divisions were becoming flexible, self-managed organizations. As one consultantexplained:

Each Xerox district, which does between $100 million to $200 million worth of business, could be considered anindependent franchise. However, the current Xerox districts have only limited empowerment. Some peopledescribe it as 'going back to Moscow to get permission to plant seeds.' Why not consider each district a franchise?

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Why have districts? Why not sell the territories and let others run them? A profit-maximizer would makeinvestments to support operations, such as in information technology. That idea is catching on. Denver now callsitself by its zip code, Xerox 80237, and the Phoenix office calls itself, Xerox of Arizona. The United Kingdom isexploring a similar idea, called "CBU's" (Customer's Business Units). CBUs are between $100 and $200 millionin sales and employee about 200 people; sales people, service people, business people. That's seems to be about theright size.

To transform U.S. Customer Operations, Barton modeled training and development plans afterthe Canadian Xerox Development System he implemented in 1991. In Canada, each job was profiled,and employee assessments were compared against desired skills and competencies. Then employeesand managers collaborated on training. Employees that did not achieve their goals and objectives wererecycled into the program again. Successful candidates went on to the next cycle. Barton explained:

It was review, assess, train, review, assess, train. The important thing is that people felt good because we weremaking not only the financial investments, but the personal investments to see that they were successful.

About 40% of a staff readily recognizes the need for change, and are ready to make the change. The other40% have a heard mentality. They wait until it’s safe and they can see tangible examples before they move.The remaining 20% are simply unwilling to change, and usually become the victims of change. However,losing 20% of your force because they’re not able to grasp something is not a good business decision.

In just two years, Barton had weaned Xerox Canada from the business of super-speed copiers toselling total office systems. Xerox Canada showed a 40% increase in revenues in 1992.

By the end of 1993, the Personal Document Products division, which sold low-endproducts, became a $200 million business and sold nearly 180,000 units. Xerox Business Servicesgrew its facilities management business 18 percent and went global. Advanced Office DocumentSystems brought products-to-market faster than thought possible and solidified strategic allianceswith partners like Microsoft. The Printing Systems Production Systems sold its 5,000thDocuTech Publishing System. According to Allaire:

One of the big challenges we face as we move into a technological environment founded on integratedsystems is to create a common design architecture for our products. When all our products were stand-alone devices, a common architecture didn’t much matter. The only goal was to optimize individualproduct design. As a result, we have copiers where the paper goes from left to right, and we have hadprinters where the paper goes from right to left.

But when it comes to designing an integrated system that includes all the copier components and all theprinter components, obviously you can’t have it both ways. So who decides what the unified architecturewill be? I have no interest in making that decision alone. I am not anywhere near smart enough. Andwhile we have created a technology architecture unit in our corporate research organization, I don’t wantour technologist deciding on their own either.

We have put a decision making process in place that will directly involve the line managers of thebusiness divisions. Of course, they will have to make compromises at times. There may well be anoptimum technology for one division and a very different one for another. Since we can’t afford todevelop both, they will have to sit down and say, “What is the right technology for Xerox as a whole?”

So too at the customer end. We want the customer to integrate the company. We don’t want to integratethe company and then go to the customer. The job of the customer operations divisions will be to build arelationship with the customer and then figure out with the business divisions how to integrate ourofferings for the customer. To do this, the customer operations people will have to understand not onlythe customer but also the strategies and direction of the divisions.

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Changing the Xerox Culture

Allaire wanted to keep the economies of scale, access to resources, and strategic vision of alarge $17 billion company, while making it more entrepreneurial, more innovative, and moreresponsive to the marketplace with the speed, flexibility, accountability, and creativity of a smallcompany. Allaire explained the challenge:

We are trying to change the total culture of the company. When you talk about that in general terms,everybody is all for it. But when you talk about it in terms of individuals, it is much tougher. And yet, ifindividuals don’t change, nothing changes.

The successful organization is one where the formal organization and the informal one work together,rather than always working against each other. When there isn’t a good fit between them, too muchhuman energy and creativity gets wasted simply in making the organization work. But when you alignthe formal and the informal, most of your energy can be externally focused on achieving the objectives ofthe business.

Figure 6 described the new culture. Ramcharamdas explained the new market connected, actionoriented, and absolute results oriented culture that was being sought:

Xerox must change more in the next five years than it has in the past ten. We are trying to build a changeculture into the company. Our quality has helped us there except, when you're not up against the wall, it's verydifficult to keep thinking that you need to constantly change. That's the challenge we have.

If we do this right, jobs will change from simple tasks to multifunctional, enriched jobs. Division of work willshift from function to process. The role of the manager in a nonfunctional, networked organization, is basicallyone of coach. So what happens to the functional expertise? That is one of the challenges that organizations willface . You can be sort of cross-functional, but at the same time you need a basic expertise. In the model we arethinking about, there needs to always be a center of competency around function. For example, there needs to bea center of competency that people look to as their home.

The structure will shift from hierarchy to team-based groups using networks. In a network organization, there isno manager watching over your shoulders. Your contributions have to be assessed by two people -- yourcustomer and your peer. Have you added value? Have you worked with members of your team to deliver valueto the customer? In a network organization, managers cannot evaluate performance because they are not there tosee one work. As a result, coordination will be transformed from command and control to value alignment andempowerment of the employees. The value focus will be on the customer, not on pleasing the boss. Attitudeswill be in making choices and decisions for yourself, as opposed to following instructions, i.e. empoweringpeople in the front line. Managers will become coaches rather than supervisors. People will be valued for theirminds and will be viewed as assets rather than as numbers and costs. Productivity has to be focused on valuecreation, as opposed to fostering better or cheaper products, i.e. traditional productivity goals. Technology wouldbe embedded in the process, not something one thinks of afterwards; it would work as an internal device insteadof being something one does separately. I think that's where the culture of this company is going. It will bemore than a place for employment, it will offer real job fulfillment for its employees.

By 2000, Xerox would transform its purpose, structure, culture, and processes with knowledge-basedproductivity.

Allaire had been unable to find an example of a multi-million dollar company that hadreorganized by business process. His experiment had been created without specific individuals inmind. Allaire explained:

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We didn’t discuss who would occupy those positions until we had decided what kind of structure weneeded and wanted. Once we had designed the new organization, however, we tried to be explicit aboutthe type of people we need to operate within it. We started with a clean slate and defined the idealcharacteristics of a manager in the new Xerox. We developed a whole new set of criteria for evaluatingpeople - 23 characteristics in all, seven of which we decided were absolutely critical for running a businessdivision or team. Many are things that, frankly, we never thought of as so important before.

Figure 6: Xerox’s Future Culture

JobsDivision of WorkStructureCoordinationValue FocusAttitudeManagers’ RolePeopleProductivityTechnologyWork Place

OLDSimple TasksFunctionsHierarchyCommand and controlThe BossFollow InstructionsSuperviseHeads, CostBetter, Faster, CheaperAdjunct to ProcessPlace of Employment

NEWMultifunctional / EnrichedProcessTeams, NetworksValue Aligned, EmpoweredThe CustomerMake Choices, DecisionsCoachMinds, AssetsValue Creation FocusedEmbedded in ProcessPlace for Fulfillment

Allaire’s new organization attempted to balance independent business divisions withintegrated research and technology, and customer operations. He redefined managerial roles andresponsibilities, changed the way managers were selected and compensated, and renewed thecompany’s senior management ranks. New managers were given responsibility for selecting theirown staff. Strategic thinking was now considered essential for division presidents. But that is notadequate according to Allaire. “Knowing how to think strategically is no longer good enough. You must also know how to act strategically.” Teamwork, the ability to delegate and toempower subordinates, personal integrity and courage, grace under pressure, were now essentialin the selection of Xerox managers. To find these people, Allaire took an active role:

I sat down with a few top managers, and we rated some 45 people we thought were candidates for roughlythe top 25 jobs in the company, including the top position in all the business and customer operationsdivisions. First, each of us rated everybody individually. Then we compared and discussed our individualratings of each candidate and agreed on a common rating. And we did it without regard to particular jobs.It was only afterward that we considered individuals for specific positions.

Three of the nine new business division presidents were with Xerox for less than a year. Aboutone-third of the top 40 managers had been with the company for less than three years. The 12business division and customer operations’ presidents used the process to select their generalmanagers and support staff. They rated 100 people for 50 jobs.

Allaire articulated the new values and behaviors that Xerox managers needed in a morecompetitive and faster changing business environment.

We want people who can hold two things in their heads at the same time, who can think in terms of theirindividual organizations but also in terms of the company as a whole. Our architecture won’t work ifpeople take a narrow view of their jobs and don’t work together.

To do that requires a total business focus - something that the narrow functional organization does notprovide. This was a big issue when we were selecting our business division people. The fact is, we simplydo not have as many general managers as we need who have that broad experience. There is no

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traditional career path inside Xerox to become a business team general manager or a business divisionpresident.

To align the strategic objectives with individual rewards, Allaire introduced an incentive programfor the top 50 managers:

In addition to stock options, we also have a program for awarding people what we call “incentive shares,”outright grants of Xerox stock. However, these shares are earned only if the company meets certainhurdles fixed in advance and based on return on assets. Everybody has to work together to make thosenumbers, and the numbers don’t get reset from year to year. If we miss it the first year, that means thatnext year’s target is all that much tougher. We have to do better in 1992 than we did in 1991 and improveagain in 1993 and in 1994.

Without achieving return on asset targets, no incentive shares were issued. To ensurecommitment, senior managers had to purchase one year’s salary worth of Xerox stock.

Compensation was changed to support the new organization. Bonuses were based onindividual, unit and corporate performance, tying people’s future more tightly to the whole company.The top 2,000 people also had a bonus plan under the new structure. Allaire explained the plan:

In our new reward system, we have what I call a “multiplicative” approach. The categories are the same -corporate performance, division performance, and personal performance. But instead of adding themtogether, we multiply them against each other. So if a manager does well personally - say 120 on a scaleof 100 - but the company as a whole does poorly - say 70 on a scale of 100 - his bonus will suffer. He willget only 84 percent of his intended bonus.

If both were 120 percent, then the bonus would reach 144 percent of the intended bonus. Theintent was to ensure that managers looked at the company as a whole. An additional 10 percentof the entire bonus pool was set aside to handsomely reward exemplary performance.

The new Xerox organization had created uncertainties for employees throughout thecompany. Ursula Burns, vice president and general manager of the facsimile, digital color andblack-and-white copier business, explained:

My impression is that people in engineering, below the middle manager level, generally think the changeswe are making are outstanding. They hear us making changes that will make their jobs easier. But thereare a lot of middle managers at Xerox who don’t know where they fit, and the that makes them anxious. There are a lot of staff functions that we just aren’t going to need anymore.

Mid-career managers, even vice presidents, were being told that the rules had changed and thatthey must now do things differently. They were expected to make decisions and stand by themnow. Allaire explained the impact:

When we rated managers against our new criteria, we also told them, “Here are the three or fourcharacteristics where you are weakest. It is important that you work on these weaknesses because part ofthe way we will evaluate your success is your ability to work in this new manner.”

The new system rated people on a seven-point scale was being used for selection purposes.Out of a possible score of 161, the top people were scoring in the 50s and the bottom people inthe 20s. Allaire explained, "We’re not doing this just to be perverse. The change process wehave begun is extremely difficult. It’s hard for any organization to get out of its history. We haveto be very diligent so that old habits, practices, and behaviors don’t sneak back in."

Allaire identified the challenges facing the company over the coming decade:

• We need to clearly strengthen the connection between Leadership Through Quality and productivityimprovement.

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• We need to radically increase the clock speed of Xerox to reduce the time to market, ahead ofcompetition, with offerings that meet or exceed customer requirements.

• We need to develop process breakthroughs that will achieve quantum improvements in businessperformance while empowering individuals and work groups to continuously improve their businessprocesses.

• We need to use Managing For Results as the planning and management process for setting direction;deploying our vision, goals, and objectives; and managing the business.

• We need to use process measures and work process improvements to deliver business results.• We need to link customer satisfaction to customer loyalty in order to increase market share and

profitable revenue growth.• We need to achieve universal and disciplined mastery of our quality tools.• And we need to increase effectiveness in the application of quality tools and in the use of Quality

Improvement Teams on priority business problems.

If we intend to sell customers our expertise as designers and implementers of new, more effective, andmore productive business processes, then we had better make sure that our own organization is a showcasefor better ways of working.5

5 Robert Howard, “The CEO as Organizational Architect: An Interview with Xerox’s Paul Allaire,” HarvardBusiness Review, September-October 1992:109.