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

October 19, 2007

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, 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, where it worked. Think Coca-Cola, 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.

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