Xerox was in such desperate trouble in 2000 that it had seemingly reached the point of no return. Since then however, the turnaround has been dramatic and with a new office products strategy firmly in place, western European boss Richard Cerrone is sounding bullish
OPI: Richard, we’ll begin with Xerox’s quarter two results. It showed net income of $187 million which of course, compares favourably with year ago figures of $75 million. Was it very much as expected?
RC: Well, we have met expectations, and therefore the balance of the year is that we’ve raised our expectations to Wall Street.
OPI: And in Q1 it was $222 million, so there has been a slight come down. Is there any particular reason? Would that be seasonal?
RC: No. I think there were some one off charges in that one.
OPI: Your results seem to be part of a two year trend where Xerox has clearly been on the up and if I can perhaps liken it to anything, it’s been a bit like turning a tanker around. What do you see as the fundamental factor in turning things around at Xerox?
RC: I think that it all starts at the top with the leadership from Anne Mulcahy. She’s created a very, very clear vision during the restructuring period on what the expectations were but more importantly, she has also set her stall out specifically, on what we have needed to do.
OPI: So she came in with a fundamentally new vision?
RC: There were several key initiatives that she had outlined, and everyone understood them, and everyone understood what their roles and responsibilities were, especially within the senior management team.
Whether it was about reducing our debt or whether it was improving our cost structure, or whether it was about improving our cost competitiveness.
OPI: Is Mulcahy more than just a cost-cutter?
RC: Absolutely. I don’t think we could have got this far with the improvements if it was just cost-cutting. If that was the case we really couldn’t have got to the levels that we’re at today.
OPI: You obviously know her well. Are you surprised how well she’s done?
RC: No, but I think when we went through our struggle, it was never expected that we would be making significant senior management changes with chairmans and CEOs.
OPI: Those changes were of course highly significant. Was it a smooth procedure?
RC: I don’t believe that there was an immediate timeline that had her moving into that position. It certainly wasn’t out of lack of capability or interest, it was just that so much was happening so fast, that perhaps if things had been a bit more steady, the timing would have been different.
OPI: Was she necessarily the front runner at the time of her appointment in January 2002?
RC: I don’t know. However, based on what I know of her and my experiences, Anne will go down as the strongest leader that Xerox has had, if for no other reason than that she took a company that was in dire straits back in 2000 and turned it around. So I would say she will go down in the history books as probably the greatest leader of Xerox.
OPI: As you see it, what actually caused the company to be in such dire straits?
RC: A lot of it was the business model at that particular time simply wasn’t working. It was an unsustainable business model that we had caused by very, very high debt. Our costs were becoming significantly higher than our competition and that was exacerbated at the time when the internet bubble burst, and so technology got hit very hard.
To make an analogy, it was almost like a perfect storm. There were some fundamental issues that we had in our business and then you tie that with a downturn in the economy, especially for high tech, and we got caught bang in the middle of it.
OPI: Had the organisation become bloated?
RC: Well costs were higher than many of our competitors in our industry, so we needed to be a much more cost efficient organisation.
OPI: We’ll move forward to April 2003 and the announcement of your new office market strategy. Succinctly, how would you define that strategy?
RC: The biggest thing that we’ve done is that we’ve gone from a direct model. As you know, Xerox’s legacy or historical patterns have always been that we sell through a direct model. What we’ve done now is we’ve shifted to an indirect model, going through distributors. One of the benefits of that is that it gives us tremendous access into the market. There are many, many distributors that we have as partners of ours who can be a gateway into acquiring other channels because of the relationships that they have.
OPI: It seems obvious, but why had you not gone down that path before?
RC: Over the years our heritage is that we’ve always been a direct sales organisation, and it has always worked for us. But, oddly enough, you’re starting to see trends in the industry where you see a shift in the types of competitors and how those competitors get product into the market. It’s not always through a direct channel. And I think we’re going to see more and more of it.
OPI: Will you still sell direct?
RC: If Xerox wants to continue to be effective in the market I think that there will always be a place for direct selling resource. That is especially true in your top tier, global accounts but you’ve got a lot of small and medium sized businesses that prefer to buy in a variety of different ways.
OPI: Talking about strategy, is it homogenous across your various organisations throughout the globe, or does it differ from country to country?
RC: In Europe, this office model works across all of our countries. We have not taken this model on a world-wide basis, but every country here is following the office model. Some are further along than others for some obvious reasons based on their local knowledge, how they’re structured, or how they were previously structured. But we are in the process of penetrating every country to make sure that they are following the model.
OPI: It’s getting on for 18 months now since the strategy was put in place. Can you see tangible results?
RC: Yes, absolutely. If you look at how we’re going to market inside our top tier accounts, we’ve inserted corporate resellers. Corporate resellers provide us an entrÃ©e into a different environment called the IT space where traditionally we have always gone through the traditional route of selling our products through procurement management.
OPI: What does that offer you?
RC: Just like our competitors, we are witnessing a shift in technology where the copier is becoming a multifunctional digital device that’s residing on the network, and that dramatically changes your audience. So they have tremendous skills and relationships with IT departments. As a result, we’re starting to see a significant change in who we’re talking to and who we’re selling to, and those corporate resellers that I mentioned are giving us that opportunity to do that.
OPI: Does it just give you greater flexibility ultimately? Is that a fair way of summing it up?
RC: I wouldn’t say flexibility necessarily but it certainly gives us greater opportunities. However we do offer great flexibility to the channel partner that wants to sell our products. One of the key offerings is our new service operations, which allows us to share in the post-sale annuity margins with the corporate reseller.
It’s easy to sell the box, but where the complexity and where the value proposition plays very, very well for the customer, is making it easy for the customer to administer the asset as well as the billing of those assets and how they’re being used.
OPI: Are they happy with it?
RC: Yes because our new service offerings enable us to provide a very pliable, very flexible service offering to the channel partner, and they can adapt to it to meet customers’ requirements. And, at the same time, they not only meet the customers’ requirements to enhance the ease of doing business through them in tandem with Xerox, but also they provide them with some of the margin where they can start to build equity with Xerox.
OPI: There’s always been the perception that Xerox has traditionally only serviced the big blue chips and the corporates. Is this new strategy designed to change that by aiming fair and square at the SMEs?
RC: It’s both. Again, our heritage has always been that we deal very, very well with the major accounts, the top tier accounts. But going through distributors, to the two tier model, gives you greater access into fresh markets because of the channels that now have the opportunity to take on your products. And the scope of those channels is way beyond the major accounts so it definitely gives Xerox access to new areas.
OPI: And you’re actively pursuing that market?
OPI: The other perception is that Xerox has often been viewed as expensive – not for the corporates, but for the SMEs, and you have gone on some price cutting initiatives in the last year. Is that something that’s going to be a long term policy?
RC: We have to make sure that we have cost competitive products that can compete across the board, through all the segments of the market in which we’re selling. That means in all the customer segments as well as the product segments. So we’re going to continue to work on that. It’s a fundamental commitment.
OPI: But is price the fundamental criteria?
RC: No. We also want to be able to create value and not just sell price. We want to make sure that there’s a price-value relationship in what we sell. Our services-led strategy provides us with an opportunity in office to sell other things other than just equipment. The software enablement programmes that we have, outside partners that we have in that area, will afford us the opportunity to create more value for the customer in buying products and services from Xerox.
OPI: I’ve obviously picked on one or two of the negatives there in terms of perception, but it’s also fair to say that you’ve always had a reputation for high quality. Did the brand take any sustained damage in that period four years ago when you were in such trouble?
RC: It’s a resilient brand and it’s a brand that has tremendous equity. And I just saw in Business Week in August that Xerox ranked 51 in the top 100 global brands. In terms of brand equity we also grew two per cent, whereas some of our competitors fell away. So I would say that again, it’s one of the key assets and whether it’s through good times or bad times, it’s very strong.
OPI: Now, in terms of your competitors, obviously you’ve got your traditional rivals such as Epson, Canon and Ricoh. They were able to steal something of a march on you around the turn of the century, but do you feel that you’ve clawed back that ground now?
RC: Well, if you look at the facts, it would say that in 2003 we grew share in the mono MFP space by one point. We are still number one for colour, at least that is if you view Ricoh as a brand rather than as a manufacturer. So I think that we’ve improved significantly.
The turnaround strategy is clearly behind us and, as far as I’m concerned, it’s old news. We should be talking about things that we are discussing now about how do we grow share, how do we grow distribution capacity, and how do we continue to take a leadership position in this market space.
OPI: If we focus on the type of products now that are out there in the market, is it firstly colour and secondly MFPs that are going to drive the market over the next ten years?
RC: There’s a blending of the two. I think that you’re seeing more and more MFPs, and more multifunctional devices that not only provide black and white, but also colour. Colour is a sweet spot for us. If you look at our full product array, there’s more depth and substance behind our product set both on the printer side as well as on the MFP side than any other competitor that we have, and we need to continue to leverage that through our customers and our channel partners.
OPI: Presumably all your competitors are going very much the same way, is that correct?
OPI: Does the European market differ from the American market in this respect? Is one ahead of the other?
RC: This is a very bright, vibrant market. The market size here in Europe is about $24 billion to $25 billion so obviously it’s a good market to be in. I think the biggest difference is that this is a market in Europe that mixes down more. If you look at the majority of where our establishments reside, and where the bulk of the copying and printing is done, it’s done with companies that have less than 100 employees, which is very, very different from what we see in North America where they’ll get a higher-end mix of office products penetration.
OPI: Even throughout the troubled times, you’ve always maintained a strong commitment to R&D. Is that something that will always be at the core of the Xerox philosophy?
RC: Yes. Last year it represented about six or seven per cent of our total revenues that we spent on R&D, and I think that we will continue to do that especially wherever we can create value and differentiate ourselves in the market.
OPI: Do you consider yourself to have the best products out there?
RC: Absolutely. That’s not saying that the competition is bad – the competition that we face is very tough. They’re very, very keen on coming after our success that we’ve had, especially in colour, but I still believe that our overall value proposition is the strongest and that our product set is the widest range of products that you can get.
OPI: And it’s always about keeping one jump ahead.
OPI: Hewlett-Packard (HP) of course, have come into the high end copier market since November of last year, and they aim to take ten per cent of the market by 2006. Have you noticed anything perceptible in terms of those plans?
RC: Well, we track all of our competitors, not just HP. Obviously HP is very, very well respected especially on the IT side. But all I would say is that the best form of flattery is when somebody wants to repeat what you do, and copy what you do, and we think that when we look at their overall strategy, it’s a copy of what we do.
Nevertheless, I think that HP will be formidable, but we’ve had a lot of formidable competitors in the past, and Xerox has always been able to withstand the test of time on how well we can compete against them. So we’ll continue to do the things that we’re doing. We’re not doing anything differently because of HP’s announcement.
OPI: That includes the likes of IBM and so on in the past.
RC: Well, if you go all the way back to the 1970s, it was IBM and then it was Kodak, to mention but a few.
OPI: Is Hewlett-Packard trying to compete fundamentally on price? It has said it plans to undercut the market by approximately 30 per cent.
RC: Well I don’t want to get into any specifics at all, but I think that if it is going to want to get into this market it’s going to have to a variety of different things. One is the overall level of service. It doesn’t have its own service organisation whereas we have a world-wide service network. That’s obviously very important when you’re dealing with global accounts.
So I think on a variety of different fronts, there are a lot of things that it’s going to have to demonstrate and prove to the customers and it’s definitely not just price.
OPI: The market is becoming interesting in the way that we’re seeing these various partnerships forming up – Dell, Lexmark and Xerox Fuji on one side for example and Hewlett-Packard on the other side. Is this kind of consolidation and cross partnerships the way it’s likely to go over the next five to ten years?
RC: Yes, I think you’ll see more and more consolidations. I wouldn’t want you to ask me to speculate on the next acquisition or consolidation, but I think that this market is a very mature market. I think whenever you have segments of your market that are mature, there will be a certain amount of consolidation.
OPI: You don’t see a trend towards mergers necessarily – because these really are big heavy weights now aren’t they?
RC: I think it will come in a variety of different ways.
OPI: We, of course, see Xerox as a global organisation, and you have Fuji Xerox. But three or four years ago you got out of China. Is China a market that still interests you?
RC: Well, I think it was part of our strategy when we went through the turnaround that we would sell off the China operation. Obviously China is attractive because of the high growth, but I’m not at liberty to say, nor could I speculate whether or not Xerox will enter that market again.
OPI: Back to Europe, and we’ll talk about Western Europe as opposed to Eastern Europe. How do the markets differ in Eastern versus Western Europe?
RC: I don’t see a lot of differences between Europe and Eastern Europe as far as if you look at the profile of the customer segment. It’s what I said before, whether it’s Eastern Europe or it’s Europe itself, we mix down more than the rest of the world, so the markets are very, very similar from that standpoint.
OPI: The Go For Gold event that you held in Seville this May brought together many of your sales teams from all over Europe. What was the fundamental purpose of that event?
RC: I think there are two things that came out of it. Firstly, it was a great learning event, and we have packaged it so that we now have this training continuum that we’re doing in the field now, through a variety of different media, whether it’s on Xerox TV or it’s live training, or it’s with a CD that we send out to the channel partners.
The second one is that it gave us an opportunity to re-energise our brand and get all of our channels feeling very, very comfortable with where Xerox is today and where it’s going in the future.
OPI: How was that perceived by the staff?
RC: The feedback, both informal and formal, was very good. I think the satisfaction rating came in at something like 99.5 per cent.
OPI: Let’s go back three to four years now. Presumably there must have been a staff morale issue with the bad coverage, the job cuts and so on which ultimately led to in excess of 20,000 jobs going globally. So, is it fair to say that the exercise was very much about re-building morale and confidence in the whole brand as well?
OPI: And it worked?
RC: Yes. That was one of the by-products that came of it. As I said before, it was about re-energising not just our employees but, more importantly, our channel partners.
OPI: Richard, thank you very much for your time today. It has been a