The answer can be found in understanding a sequence of leadership misjudgments. A few pivotal events can irreversibly deflect an enterprise toward its rise or demise.

The fate of Xerox can be traced back to 1983, when conflicts between its computer-oriented innovators and xerography-focused sales force were settled by dooming the inventions from the company's Palo Alto Research Center to being technological marvels without competent marketing to sell them. Shortly thereafter, Xerox management crippled itself from participating in the information races altogether by taking much of its cash and investing it in "safer" business lines such as insurance.

After that, it was only a matter of time before most of Xerox's elite IT organization would be tagged as being dispensable and outside the firm's core competencies. It was an easy way to cut the bloated overhead of a company whose profits were sputtering.

In 1994, Xerox entered into an outsourcing agreement with Electronic Data Systems Corp. Initially, it transferred to EDS about 2,000 people who were running demonstrably efficient operations, keeping only a staff of fewer than 400, mostly planners. CIO Patricia Wallington hailed the deal, saying, "Xerox didn't outsource to replace a failing IT department or simply to save money. The $3.2 billion deal with EDS enables IT to focus on new systems and strategies." Thus, Xerox handed over the responsibility for running "as-is" mainframe systems, legacy software (such as critical billing and sales-commission systems) and telecommunications and for supporting PCs.

It was a bad deal for Xerox. Trusted talent, necessary to innovate amid rapidly changing competitive conditions, left the company. EDS now owned the talent farm that had nurtured star performers. And the culture of the conservative and highly regulated EDS people conflicted with the liberal and improvising Xeroids, who were pushed to reduce overhead.

It was also a bad deal for EDS. Taking over operations where there was little fat didn't leave much room for profit gains. To deliver attractive financial results, EDS had to rely on standardization of technology and greater uniformity of services.

To attain economies of scale, EDS adopted a more rigid fixed-cost model to extract profits. The goal was to grow volume at little extra expense to produce superior profit margins. That didn't happen. The Xeroids were adept at taking over IT functions in turf conflicts with EDS over the most potentially lucrative sources of added profit for EDS.

The stage was then set for the drama that's now being reported only as a recent technical and organizational snafu.

In late 1998, Xerox stopped honoring bills from EDS. EDS had to write off $200 million - almost half of its 1998 profits - attributing it largely to "billing disputes" with Xerox. In February of last year, EDS filed a multi-hundred million dollar lawsuit against Xerox. When Xerox reorganized its sales and marketing operations later that year, the billing system fell into disarray, and the sales force's efforts were diverted to administrative chores instead of selling.

Management Implications