I have just tested this and Document Templates do work in 7.7 (with the example XML from the article). The output is meant to be an XML file - essentially the same template file, but populated with data from the Incident.
Can you raise this with your support provider, also providing any additional details from the error message please.
Thanks. Recently, I've been able to produce the xml file as well. Probably I had some problem with the window Create Document. Anyway I was expecting the doc format instead xml file. It's a little bit misleading in the documentation.