Xerox's dynamic duo

Anne Mulcahy and Ursula Burns saved Xerox in a historic turnaround. Now they face a different kind of challenge: sharing power and managing succession. Fortune goes behind the scenes.

By Betsy Morris, Fortune senior writer

Brutal honesty is the code when Mulcahy (top left) and Burns meet with North American chief Jim Firestone (bottom left) and CFO Larry Zimmerman.
Mulcahy was a surprise choice who became a charismatic leader.
Burns is an engineer by training and a problem solver by nature.
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Mulcahy and Burns on the working style of their relationship.
--"Do we get mad? Yes, definitely. The way we resolve it is we take it out of the big group and we sit in a room and we battle it out." -Mulcahy
"Anne knows when I'm frustrated in a meeting. Generally that's when we're not deciding something I think is obvious fast enough." -Burns
"Ursula absorbs problems like a sponge. Once she takes them on, it's 'Let's go!'''
"We have learned how to communicate in extreme shorthand. Anne will say X, Y, and Z, and I'll say, 'Got it, got it, got it.'"
"At this level, leadership is not about 'I told you to do it, now go do it.' Some people do their own thing. Some people have to be hugged and loved. To her credit, Ursula gets it."
"Anne told me, 'You are going to have to become more detached from your organization and spend a lot of time outside - with customers, salespeople, in the field. Just learn, learn, learn.'"
"Ursula's son left for college last month and didn't look back. As painful as that is, I told her that's what she'd spent 18 years trying to accomplish. Another thing I said: 'Call him every day to let him know you care. Just to hear his voice.'"
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(Fortune Magazine) -- For seven years Anne Mulcahy and Ursula Burns had worked together like combat soldiers in the same foxhole, and there was no reason to believe this year would be any different.

They had fought off furious lenders as Xerox lurched dangerously close to bankruptcy. They navigated the company through a minefield of technological change, endured a government probe of the company's books, and did battle against a growing army of competitors.

Through it all, they have developed the kind of partnership that can only emerge from a trial by fire. They read each other's minds, finish each other's sentences, debate R&D spending, and then consult each other about the wisdom of buying one of their kids a cellphone. They can resolve their disagreements no matter how heated - and they can get pretty heated.

"The experiences they've been through - they shape you," says Eric Armour, the company's strategy chief and a former U.S. Navy fighter pilot. "Have you seen Band of Brothers?"

Last March, however, Mulcahy and Burns hit an impasse. It was time for Mulcahy, the CEO, to anoint her eventual successor, and the two executives found themselves suddenly at loggerheads.

Their dispute was not over Mulcahy's choice. That had been settled for some time: Burns would become her No. 2 and president, get a seat on the board, and eventually succeed her - likely making this the first time a woman CEO of a Fortune 500 company turns over the reins to another woman. (No timetable was discussed.)

The size of Burns' pay was not the issue either. But now that it was time for Mulcahy to promote her, they could not agree on how to divide their duties. How would they share the power? The more they tried to figure it out, the more frustrated they got.

"It was like, 'Why don't you just get it? Why can't you just understand?'" Mulcahy recalls.

Succession - the power sharing, the delicate balance of egos and wills that it entails - is the thorniest, most dreaded, and least-talked-about rite of passage in corporate America.

It is no easier for women, it turns out, than it is for men. Even when the two parties genuinely like each other. Even when one anointed the other and has been helping her to prepare for years. Even at a place like Xerox (Charts, Fortune 500), which learned its lesson about grooming successors after the nearly disastrous choice eight years ago of an outsider who lasted only 13 months as CEO.

For Mulcahy, 54, and Burns, 49, the succession struggle had nothing to do with the glamour or executive perks. (There aren't any.) This isn't about the country club memberships: Neither executive would have time for that. Or the big corner office: In the new, downsized, eight-story headquarters in Norwalk, Conn., the C-suite happens to be on the sixth floor with an uninspiring view of neighbor General Electric's helipad.

No, this succession struggle had to do with how much of the org chart each executive would get to claim - and everything that symbolizes. In large part, it's about how much control each gets over what happens next, because the Xerox story is not yet finished, nor is Anne Mulcahy.

While the team has achieved a minor miracle in the past five years, more than halving the company's debt to $7 billion, boosting net earnings 13-fold to $1.2 billion, and producing breakthrough products like the brand-new, solid-ink printer that can make color copies for the cost of black-and-white - despite all that, revenue has been flat for five years now.

Its once booming black-and-white business is steadily disappearing, and nearly everything else faces fierce competition.

In fact, though, the spring standoff between Mulcahy and Burns was also about matters much deeper, what Mulcahy calls the "moments of truth" - primal personal stuff like change, purpose, what-do-I-do-for-my-next-act, even mortality - that afflict virtually every CEO in the FORTUNE 500 when the time comes.

"If you had told me back in 2000 that this would be difficult, I would have said, 'What? Are you nuts? If I can survive in my job that long, I'll be so happy to get out,'" says Mulcahy. "But it is a hard thing. It's hard to learn how to give the next generation the opportunity to be ready when their time comes."

She admits it's difficult to give up not only the "clarity of control" but also "the incredible pull of being needed all the time. It's like your kids growing up, I guess, right? It's like, 'Oh, I'm not the center of the universe anymore.'"

What's different about this succession story is that rarely are the CEO and heir apparent so respected and trusted that they are given the authority by the board of directors to work the matter out for themselves. Rarely are the two players such straight talkers - which is, they concede, both help and hindrance. And rarely, if ever, are they willing to talk about the power struggle so honestly and openly in the hope that corporate America can learn something from it.

What follows is FORTUNE's unusual glimpse into the complex dynamics of the coming of age that happens in every company when it's time for one generation to yield to the next and is so potentially perilous that it can make or break a business. (Think GE (Charts, Fortune 500), where it worked. Think Coca-Cola (Charts, Fortune 500), where it didn't.)

"There's a lot of ego and emotion involved, and it has nothing to do with women. It's there for all of us," says Mulcahy, "and the question is, Do you deal with it or don't you?"

A new approach

Xerox nearly blew it last time around. In 1999, with the company already critically late in making the transition from analog to digital copying, CEO Paul Allaire promoted a relative newcomer to take his place. On paper Rick Thoman, a former CFO at IBM who had been named Xerox's president two years earlier, looked right for the job. But little more than a year later, with Xerox spiraling downhill fast, Allaire stepped back in to take control and turned to a surprise candidate to be his No. 2: Anne Mulcahy.

FORTUNE later dubbed her the "accidental CEO" because she had never aspired to the job - hadn't even considered it. She had a degree in English and journalism from Marymount College and a career spent mostly in sales with some HR and line experience.

On paper, at least, she looked like a desperation choice. But she immediately enlisted the strongest talent she could find. A key player was Burns, an engineering hotshot from Rochester who, despite her smarts, had an equally unlikely history. She had been raised in a housing project on Manhattan's Lower East Side by a hard-working single mother who cleaned, ironed, did child care - anything to see that Burns got a good Catholic education and eventually a graduate degree in engineering from Columbia.

Their loyalty, true grit, and stubbornness made them the right leadership team for the times. Mulcahy became a charismatic leader, Burns a fearless problem solver. As Mulcahy cajoled bankers by day and studied nights to teach herself enough finance to handle the restatement of three years of earnings (she had no CFO, and nobody would touch the job because of allegations of past accounting fraud), it was up to Burns to downsize Xerox without killing its future.

Mulcahy's instructions were pretty simple, Burns recalls: Keep the company going. Don't ask anybody to do what you wouldn't do. Make sure we come out of this with a company our kids could work at. "Go away and figure out how to get $2 billion out," Burns says. She remembers walking out of the cafeteria thinking, You want me to do what?

Their time in the crucible spawned an operating style that was working just fine until the succession issue arose. It called for zero hierarchy and protocol. Day in, day out, nobody seems to care much how the dotted lines cross the org chart.

Xerox is so lean at the top (its workforce is now 58,000, down from 91,000) that it just sold its monolithic glass-and-concrete headquarters building in Stamford, Conn., because it was practically empty. Most high-level work gets done on the fly in quick phone calls, hallway pass-bys, or one-on-ones (as in a real-time conversation between the two decision-makers).

"We're big on one-on-ones here. We didn't have so many of those at IBM," says CFO Larry Zimmerman. That's one reason Mulcahy was able to talk him out of retirement after a 31-year career at Big Blue and fly in from his home in Colorado every Monday morning to be her CFO.

Once she had chosen the best people for the top jobs, she allowed a balance of power to develop among them. She realized she had "better be damned careful to surround myself with people who actually have respect for the facts," she says.

That would only work, though, if those people were strong enough to challenge her and tell her the truth - people like North American operations chief Jim Firestone, whom Burns and Mulcahy call "the intellect," and the irreverent Zimmerman, whom they refer to as "the bully" because of his persistence.

This is Mulcahy's inner circle, which meets biweekly in her office with no agenda except to discuss the company's pressing issues with brutal honesty and vigorous debate. Everybody has a say in decisions; when they don't agree, Mulcahy makes the call.

Their discussions often focus on how to get Xerox's top line growing again. Recently Mulcahy told Burns to "go find" $20 million in R&D to redirect from the withering B&W business to faster-growing color and document services. Burns held her tongue, though she knew it would cause havoc with thousands of customers who would still expect software upgrades and tech support for the life of the expensive machines.

After analyzing the request, she came back with a compromise. Most people, Mulcahy knows, would have just followed the order, if only because she's the CEO. But that's not what she's after. She's interested in the best outcome that emerges from the equilibrium on her team. Naming a successor was surely going to disrupt that.

The Xerox board, however, was determined not to be caught off guard again. "Succession is hard. You walk a tightrope," says Ralph Larsen, former chairman and CEO of Johnson & Johnson (Charts, Fortune 500) and a Xerox director since 1990. A CEO's natural tendency is to stall - to prolong the tryout, to sidestep the bruised egos.

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