Dynamic duo (pg. 2)

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By Betsy Morris, Fortune senior writer

Mulcahy is "one of the most effective leaders I've ever seen. She's worked 24 hours a day, seven days week, and now, all of a sudden, she has her baby breathing and moving in the right direction and she has to give up power and share the responsibility. That's hard on her," he says.

But the board had been nagging Mulcahy about the issue for at least three years, and it was not going to let up. Directors knew that Burns wanted to someday run a company, and they did not want to risk losing her. "We would talk about it at every board meeting, and obviously just by talking about it, there's pressure," says Larsen.

Last spring, when it was finally time to promote Burns, Mulcahy told her board that she'd like to talk to Burns herself about how to design their new working relationship. That in itself was unusual, since it's the kind of thing that's usually worked out in a "smoke-filled room ... shrouded in all kinds of fear and secrecy," says board member Robert McDonald, vice chair at Procter & Gamble (Charts, Fortune 500).

"It was Anne's idea," recalls Larsen. "She wanted to talk openly to Ursula and get the benefit of her insight. And we had an unfailing trust in how Anne wanted to handle this." Even Mulcahy had no idea how difficult the conversation would be.

She and Burns have a relationship that is complex and sometimes contentious. That results from being driven, passionate, and, Mulcahy believes, equally stubborn.

Does Mulcahy get angry with Burns? "Oh, yeah," she says. And Burns: "Never angry but frustrated."

In a conversation about it recently, they are both in Mulcahy's office where they can't help but finish each other's sentences. "I think we are really tough on each other," says Mulcahy. "We are in a way most people can't handle. Ursula will tell me when she thinks I am so far away from the right answer."

Chimes in Burns: "I try to be nice."

Mulcahy continues: "And I will tell you, I am tougher on her than I am with anyone else. I will say, 'What were you thinking?'"

So tough, Burns says, that she recently asked, "So is it possible for you to say one nice thing?"

Says Mulcahy: "I realized I don't spend any time with Ursula telling her the good stuff - 'You're smart and you're good and 99% of the time you're right' - and I guess it's because my expectations are so high."

Mulcahy was Burns' role model as she rose through the Xerox ranks. Burns remembers being on a panel with Mulcahy and realizing, "Wow, this woman is exactly where I am going."

She ticks off the similarities: They both have two children, husbands who are "slightly older than we are," both of whom retired from Xerox, both of whom are trivia nuts. "We also like similar things. I like shoes. Anne likes shoes." (Burns likes Stuart Weitzman; Mulcahy favors Bruno Magli.)

"We are both talkers. We can sit, which we do on a long ride, and talk about everything you can possibly imagine. We can gossip like the best of them," says Burns. "We talk about everything. Movie stars, the famous people, business. You know, our kids. Big-time about the kids." (Mulcahy has sons who are 20 and 24; Burns' son is 18, and her daughter 14.)

Through every milestone, Burns would consult Mulcahy: "Did you buy your sons a car? What kind of car? Cellphones? You name it. I have benchmarked every single thing possible by Anne."

So when Mulcahy began the conversation with Burns last February about how the two would work together as CEO and president, she didn't anticipate the thicket she was about to wade into.

She didn't get too far into it before "it became clear this would be a more fragile discussion than I thought," she recalls. She suggested the two of them go off and put their ideas down on paper in order to cut to the heart of the matter.

The problem: On Burns' piece of paper, she'd sketched the traditional setup - everyone reporting to the president and COO (herself), who reports to the CEO (Mulcahy). "I'll tell you what Anne said because I know she didn't tell you," says Burns, laughing. "She looked at [my paper] and said, 'Well, what the heck will I do?' And I said, 'I have no clue. What do CEOs normally do when they have a president and COO?'"

Mulcahy says that was a nonstarter. "I know it's the traditional structure, but there's a much more organic, dynamic approach that is better for the business. Me managing Ursula made no sense."

They decided to go off and try again. But the second time they got together, they found their white papers hadn't changed much. The third time around, they decided to try a role reversal. Burns would take Mulcahy's direct reports so that she could learn sales and marketing and the parts of the business she'd never done before. Mulcahy would take on operations, R&D, and product development.

It would actually take them a while to grasp the craziness of that idea. "I mean do you really want me in charge of engineering tactical planning?" Mulcahy recalls asking.

Zimmerman, whom they both trusted, volunteered to help them. They met for dinner in New York City in March at Le Périgord, elegant, seriously French, and at $65 prix fixe, unusually lavish for this group.

It was that night, Mulcahy says, that they got beyond the org chart and into the "moments of truth." She didn't want to be sidelined. Moreover, she didn't want the appearance of that either. Burns wanted more than a symbolic gesture; she wanted something substantive.

As Mulcahy recalls the question: "So how were we going to send a signal that said, 'Yeah, you're special. You're president. This isn't just a title.' Yet the doctor is still in, in terms of 'I'm still the CEO?'"

Zimmerman stepped in. First he told them to stop fixating on the org chart and to start thinking about what's best for Xerox. The company had come through the turnaround and was now at the tail end of the transformation to higher-growth businesses they'd worked so hard on. Now they had to rekindle growth.

"And two people working on that is better than one," recalls Burns. The point was not about the boxes but about how the two leaders act. "Ursula, you have to be presidential. You have to have broad reach," Burns remembers him saying. "And unless people are literally confused by English, they will understand the hierarchy here."

Suddenly, sometime after the second glass of wine (Mulcahy favors pinot grigio), she remembers feeling "that cleansing breath of letting go." It happened to them both at the same time, she says. They segued back to talking about business, or families - nobody can remember exactly. The crisis was over.

The org chart did change to give Burns experience in new areas and Mulcahy more time to court big customers. Burns added marketing, strategy, global sales accounts, and human resources to her portfolio.

The real change, though, is that instead of dividing the workload by function, they divide the problems. So Burns is tackling the complex business of centralizing Xerox's IT business in Europe, freeing Mulcahy to spend more time with customers, such as closing a service deal with Fidelity. While Burns planned to keynote a trade show in India, Mulcahy was scheduled to host an event for CEO-level customers in Germany.

Mulcahy scoffs at the notion of mentoring Burns: "Me mentor Ursula?" She just laughs. "Hello. It's like, 'Ursula, here's another big problem. Fix it.'"

But she is definitely coaching. In meetings Mulcahy shoots veiled looks designed to signal Burns to listen instead of "letting my big mouth drive the discussion," says Burns with a laugh, because now she knows she can hijack a meeting if she's not careful. Mulcahy is pushing her to develop a poker face. After a meeting Mulcahy will tell her, "Ursula, they could read your face. You have to be careful. Sometimes it's not appropriate."

As her horoscope reminds her again one morning when we talk, "Patience is not one of my strengths." A voracious problem solver, she has found that outside the realm of manufacturing and production, the right answer to a problem "is only about 10% of the solution."

In sales, for instance, she muses, it's "Okay, Ursula. Fine. You've got it. And if you could do it all yourself, that would be the greatest solution in the world. But you can't. Anne has taught me that 90% is getting the rest of the organization to line up. Anne is a master at that. An absolute master."

They both have a tremendous loyalty to Xerox. Neither wants to work anywhere else.

"I have been talking to Anne about life after Xerox," says Michael Marks, who is both chairman of Xerox's major supplier, Flextronics (Charts), and also a senior advisor at the buyout firm KKR. "She can have any opportunity she wants." KKR chiefs Henry Kravis and George Roberts have been interested in meeting with her, he says. When Marks talked with her recently about another big CEO job, it turned out "she had zero interest," he says.

At some point, Mulcahy allows she might consider some kind of "public-private endeavor" to take on a big world problem. But she hasn't begun to think about that. "I've been pretty clear the only company I want to run is Xerox. This is where my head and my heart are."

Mulcahy won't be satisfied until she and Burns have been able to jump-start revenue. And there are still challenges ahead.

"If you had asked me would it take this long, I would have said no," she says. "We were focused on getting it right and not on the kinds of things that will drive the quick-growth spikes."

The document-management business Xerox built from scratch generated more than $1.6 billion in revenue in the first six months of this year, an 8% increase from last year. The strategy is to push into other burgeoning segments with proprietary products like Xerox's solid-color ink.

Still, it's a tough road. The gradual loss of its high-end black-and-white business as print shops transition to smaller machines and color continues to dampen revenue. And everything else gets tougher, with Canon (Charts) and other rivals encroaching on color and now the possibility that low-cost inkjet technology could catch on in the office.

"This is a very crowded industry with a lot of players," says director McDonald. On top of that, the challenge at Xerox is, he says, "How do you build enough at the top end to offset the losses at the bottom end?" There are signs the strategies are working. In fact, revenue in the first half of 2007 grew 5%, to $8 billion.

These days, Mulcahy and Burns have forgotten the org chart and gotten back to business. So has everybody else. Firestone and Zimmerman and several other top managers were promoted to executive vice president. Mulcahy has noticed the tenor of some meetings changing as executives realize that Burns might not be as patient as she is. "They are figuring it out. It works."

She and Burns aren't thinking about succession for the time being. It's all about who's going to Europe, who's dealing with partner Fuji Xerox, who's handling the investor conference.

"I definitely want to lead this company," says Burns. "But I do not want to lead it until Anne doesn't want to." As long as the question is when, and not if - well, she's okay with that. "If that's all it's about, then this is the only place I would ever want to consider."

As for Mulcahy, the prospect of quitting has haunted her for years. She always meant to retire to spend more time with her kids. She always wished she'd had time to volunteer. Every time she bought a business suit, she would tell a colleague, "This is such a waste of money because I am going to be retiring soon." But she could never quite bring herself to do it.

Now, she says with a sigh, "The way I think about it is: I'm not leaving tomorrow. And I believe I will know enough not to stay too long."

For every successful CEO, it seems, this is the ultimate test of executive judgment, and it drives some of them to craziness. For Anne Mulcahy, the accidental CEO who inspired a workforce and imbued them with enough fervor to save their company, the hardest job of all may still be ahead - and that will be knowing when to turn off the copier and walk out the door.  To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.