Chambers On The Record: How Cisco Plans To Become The No. 1 IT Company9:00 AM EST Wed. Oct. 24, 2012
A year and a half after beginning one of the most important restructuring efforts in its history, Cisco is once again in trim, fighting shape.
It was a strenuous step but a necessary one, argues Chairman and CEO John Chambers, because the Cisco of 2013 and beyond is a tech behemoth that not only looks at challenges, such as chief executive succession and the emergence of software-defined networking, but also has its eye on becoming the world's No. 1 IT company. It isn't far-fetched that Cisco, Chambers said, can be the largest IT company, given just how many of the major market transitions occurring, from big data to cloud to mobility, depend on the network.
The ever-effervescent Chambers touched on all those topics and several more during an exclusive, 45-minute discussion at Cisco's San Jose, Calif. headquarters this month with CRN. The conversation veered abstract at times, true to Chambers always-percolating way of answering questions. But, Chambers this time around was more forward-thinking, more upbeat, more evidently satisfied and more overtly competitive than he was just 18 months earlier during his last CRN sit-down. Things are clearly getting good at Cisco again.
Excerpts of that conversation follow:
You made some specific remarks a few weeks ago about Cisco's CEO succession and said you'd step aside likely in two to four years. Why is now the right time to be planning this?
So, the thing we've done well over the years, together on our focus on our channel partners, is be very predictable. The first decision I made when I came to Cisco was to move us from a direct player to a channel partner and that's still where 80 percent of our business goes. In terms of transitions, we've done this so smoothly as a company that you don't even see when we make transitions.
We've had seven heads of sales. I personally liked the second one because it was me -- little bit of humor there [laughs]. We're on our fifth CFO. We've had five or six different heads of engineering, a number of heads of manufacturing, and the point I'm trying to make is that we do this extremely well, and if we do it right, you'll see the same transition at the top.
Barring a surprise -- and if the board wants me to do it; I have to earn it -- you'll see me transition to chairman at that time as we pass the CEO mantle. But, the real issue here is that the market is moving very rapidly. We've had regular succession planning for two decades, a first wave and a second wave, but that was more "hit-by-the-bus" or I mess up. Now, we're looking at a logical transition occurring, and last year we said three to five years, so guess what, now we're saying two to four. No major surprises there.
What's exciting about it is that we have two waves on which we meet with the board on leaders. The first is three or four people, the second is five or six, and that seems like a lot, but really, it's what you need in the pipeline. It isn't just about who's going to be CEO, but who are the three to five people that are really going to run the company. And by the way, no one will be CEO here who would not stay if they weren't one of the three to five running the company. This is about culture and direction. And nothing's a guarantee, but it can be a lot smoother perhaps compared to what peers like GE went through with their transition.
In terms of why now, you have to basically get very visible in terms of the new leadership. You've seen me put Gary Moore on the road, you've watched me put Rob Lloyd on the road, you see up and coming players like Edzard [Overbeek], Pankaj [Patel] -- hasn't he been spectacular in engineering? We've got players in engineering stronger than we've ever had. We've got seven or eight VPs there who are really good: Marthin De Beer, Rob Soderbery, Chris Young -- an up and coming star -- Kelly Ahuja; I could just go boom, boom, boom, all world-class players, [and] David Yen. You see the same thing in sales. Rob has four to five players who could be the head of any of our competitors. Same thing in services: world-class organization.
What you see is a management breadth and depth that none of our peers have, and we're going to make these transitions ways that are almost completely transparent. Why? It's time to make clear what we're talking about, and even though at times, no good deed goes unpunished, we are going to be a transparent company. We're going to share with the market what we're seeing, we're going to share with the market what we think the implications would be, and I think we'd all agree that over the last 20 years, but especially in the last five or six, we've called every transition right.
That was good, but also a little bit lucky. We got the tar beat out of us on the transitions that were negative and those [problems] were criticized as "unique to Cisco," but once again, we emerged stronger than we did in any upturn or downturn. That's what Cisco does. We will do the same with the top position. My job and the board's job is to make sure this is relatively seamless.
NEXT: How To Groom Cisco's Next CEO
What would make that Cisco CEO transition two years as opposed to four?
I'm not going to go down that path. But if I were to answer it very directly, it's more when things are ready. It's more when the opportunity is there. The opportunities in front of us are as big as they've ever been. The second part of the question you asked earlier, I wanted to say that before, we were a world-class networking company and we're very proud of that. Most people would say we've pulled away from everybody there. But the market transitions occurring in big data, mobility, software throughout the data centers, the ability to think about the Internet of everything, social networking, Wi-Fi, smart grid, every one of these transitions is network-enabled.
Cisco is uniquely positioned. We've positioned architecture across enterprises and service providers. There will always be a set of tough competitors -- startups and otherwise. If there isn't, that's a bad sign; it means you're not in a good market. The good news is that we anticipate being in a good market for a good little while. '
The key takeaway, what people now realize, is this. I said to a large group of very sophisticated industry analysts recently, how many of you think that we have a chance to not just hit our aspirational goal of being the No. 1 communications company, but the No. 1 IT company and the best business partner for our customers? More than half the room raised their hand.
That shocked me. I would have been ecstatic with 10 to 15 percent. But people watched what we did in service provider, where you saw end-to-end Cisco. And service provider, it used to be the kind of organization people said used to be, quote, "systems integrator," but then you saw Cisco moving throughout key franchises there. You're going to see the same, with all appropriate caveats, you're going to see us do the same in enterprise and commercial.
Then, we see these organizations coming together. If you're already No. 1 by the furthest way in service provider, you can be already No. 1 in enterprise, and be No. 1 in commercial. You suddenly see the opportunity in front of us. That's why I get excited for our partners.
We have never hesitated in our commitment to partner success. That doesn't go up and down by year, it doesn't go up and down by economic times, or in market transitions. We are a partner-driven company, period.
Staying on the succession aspect for a little bit, are you confident saying your successor will definitely come from inside Cisco?
You need to understand that this is a board decision on which I have an influence. I think all of us recognize there are huge advantages coming from internal. It is such a complex operation. When you think about the complexity on our ASICs alone that's very unique in the industry. We develop the most complex ASICs in the industry -- you don't even think of us that way. Sixty percent of our engineering is in software.
Each customer segment, when you talk to service providers at the CEO level, we have a relationship about how do we achieve business goals, grow top line and bottom line and how do we help them add value and perception to their customers. We help them bring new services to the market at a faster pace. In short, we help them with every major business initiative they have, so we have become their most trusted business partner. We have the same opportunity in the other segments because when you begin to look at the new markets, all of them are network-centric.
There has never been anything more network-centric than what some people define as software in the data center. I would actually argue that it's a unified data center of the future, made up of hardware and software and ASICs and a unified fabric as well. That will evolve, not just as cloud but as distributed capabilities throughout the entire network. So when you look at it -- hardware, software and ASICs -- if you execute it right, that will probably win. And if you look at merchant silicon, that's a risk of what happens. When you come out late with merchant silicon, and you're beaten to the market by a long way with an architecture that's 200 nanoseconds, when the next generation of ASICs we've seen looks like 350, that's game over. So that's our ability to constantly reinvent ourselves in a very positive way.
If you can be faster to the market on ASICs, and we waited a bit too long in the case of this one competitor [Arista Networks], you can also build the most complex [routers] like our CRS-1 and CRS-3 and follow-on products. And if you can build the most unique [system] that everyone thought could not be done with UCS, with the UCS interfacing to the network and common software across that, that's an unbeatable combination.
This is a fourth generation occurring. The prior generation was servers and ASICs and the players like Intel, and a Dell putting it all together or an IBM or an HP putting it all together. Cisco does those combinations too. But don't think of us in the old model, think of us in terms of the Apple model. Think of architecture and where the differentiation is and how the money is made, and compare that to the Android model. That's exactly what we're going to do with this.
NEXT: How Will Cisco Keep Partners Loyal?
From the partner perspective, particularly among the Cisco Gold and Silver partners, going back over the last couple of years, you hit some air pockets, you needed to restructure, there was the supply chain challenge, all of which made it a little frustrating to be a Cisco partner. But, they didn't defect. They didn't defect to HP in large numbers, to Juniper in large numbers; you kept their business. How will you reward them for their continued investment in Cisco and what will they see over the next few years?
Well, I think the most important thing is that we've never varied off of consistency. Every time throughout that, even though you rightly said well look at all the challenges, what people forget is that we see market challenges one, two, three, sometimes four quarters ahead of everyone else.
Fast forward to today. Oracle, IBM, Juniper, HP, Dell. What is their year-over-year growth? Negative 2, negative 3, negative 4, negative 5, negative 8 percent. And remember two quarters ago when Intel said we don't see the problems in enterprise spending and the global environment that Cisco's seeing? Four months later, they miss a quarter by $1 billion. There may be no reward for being transparent, but that's who we are as a company. Through all of this, we didn't falter. We led the industry.
We told you we were going to beat Juniper. Now they're on the defensive. They're really being challenged now. Avaya, who was going to out-execute us in collaboration, make no mistake: they are struggling. We're beating them very bad. And Hewlett-Packard, which said we were going to exit the data center a year after we got into it, well, there's 22.5 percent market share in North America in UCS for us, and it grew at 58 percent last quarter while our peers grew in single digits. Perception-wise, we hit some rough sledding, we clearly did. We needed to change. But our competitors went through the same and did much worse. There's not a challenge I'm aware of that our peers didn't have to go through too.
Look at our competitors from 15 to 20 years ago. You remember the "four horsemen": Cabletron, Wellfleet, SynOptics, Cisco and probably 20 to 40 other companies. How many exist today? All gone except for Cisco. You could say the same about 10 to 15 years ago. All gone, except for Juniper, and right now, Juniper is questionable. And five to 10 years ago, remember it was Alcatel-Lucent, Nortel, Ericsson, Siemens, and they were going to eat our lunch. They said we couldn't spell telephony. Well, we might not have been able to spell it but we got 65 percent market share in business and IP telephony. And more recently, all these competitors who said they were going to pull away from us? We're about 70 percent market share in switching again, and margins are back to where they were, plus or minus 1 or 2 percent.
If a partner had bet their future on any of the peers I just mentioned, would they have a future today? I'd have to challenge you that it would be extremely stressful. Consistency, industry leadership and innovation. If we do our job right, you haven't seen anything yet.
So what does the future hold? We're going to try to move from the No. 1 communications company to the No. 1 IT company. We are the best advisors for our customers, what's happening now has never been more right down our mainline. IBM had that opportunity for the mainframe era. Other companies had that with the mini-computer, including my former company Wang and DEC, and you don't remember a lot of them today because they didn't transition. Later there was Microsoft, Intel and Dell; they were a classic combination. But now, we're at the Apple model vs. Android. We provide the products, hardware and software. Even in an area like UCS where Intel said you could not add additional memory. We clearly did, to the x86 chip. We are company that like any company has weaknesses and flaws, but our strengths have allowed us to break away.
Back to the numbers. In the last quarter, we grew 4 percent. The market had us growing at 4 to 6. Oracle was down 2, IBM down 3, Juniper down 4, HP down 5, Intel down 8, Dell down 8. Tell me: which partner do you want? We're the most partner-centric and loyal, and we're the best growth opportunity for them on top and bottom line together. That doesn't mean we don't have to change -- we clearly do. But, it means that if you partner with Cisco, you partner with a company that doesn't lose. When we need to reinvent ourselves, we do.
I'll be very candid with you: Who do you think has done a better job over the last 15 months? Name one person that's even come close from our competitors.
NEXT: How Does Cisco Become The Top IT Company?
When we last interviewed you here about 18 months ago, we asked you where did you see a hole in the portfolio and you said, very quickly, security. I wonder if you've plugged that hole and can you talk a little about Cisco in security?
Sure, but let me approach that with what would have been the question from 24 to 36 months ago to give it a tint. Our challenge then was mobility. Here we are No. 1 in almost every mobile area we need to be in: wireless LANs, which grew 24 percent last quarter, the mobile edge with our ASR 5000. Service provider Wi-Fi, on fire. We saw that change and went after it aggressively. Small cell -- we're doing that as well, bringing this capability to service providers. We took what were the biggest challenges and became No. 1.
We're doing the same thing with cloud. Three to four years ago, we didn't see that coming as well. When Padmasree [Warrior] came over -- she was the co-lead with Pankaj [Patel] and now leads not just CTO but [is] also chief strategist; I wish I'd moved her there earlier; she's really good at this -- I said to her, Padma, I need a cloud strategy. Fast forward to today, and I imagine you do your homework on this, we've got more than half of the customers who are truly using productive clouds. So that's our ability to adjust even if we don't see things coming quickly.
It's the same thing with software in the data center, which we've seen coming for a long time. Why do you think we've done Insiemi? You know what we're going to do there: the best ASICs, the best hardware, the best software team and our speed to market. It isn't just about the number of transistors and capacity; it's about how many spins can you do, and can you get it out there in two to three years, or 12 months? All together, that's a tough team to beat
If you look at our ability in security, or how about in an area like fresh water leakage, where, without the right technology, 35 percent of it is lost, and with the right technology, you could take that down to 5 percent. Look at electricity: more efficient, and you could buy it based on carbon emissions and pay a premium if you choose. Look at ... well take every automotive plant, which has about 50,000 IP devices in it. Think about what happens when you begin to connect those.
When you begin to connect the unconnected, amazing things happen. But also, when you have this many billions of devices, you can't just bring them back to the cloud or a single data center -- you'll clog even the widest bandwidth if you do, whether it's wireless or wired. So, what if you could make the decision on handling that at the edge of the network, or get a service person to capture that data -- that's distributed intelligence throughout the network.
If you think about the software aspects and the architectural play, this is right in our home-run area. Some of our peers will come at us with just software-only. Well, then they have to figure out what's in the network, which means they have to take snapshots and program those snapshots. Meanwhile, we open up our APIs. What happens then?
The best technology doesn't always win. While I think we have the best technology here, our key is execution. We have to execute at Cisco speed with even more consistency than we did two years ago. So in the last two years, we reinvented ourselves again. Look at what Rob Lloyd has done, what Gary Moore has done, a world-class job in operations. Edzard Overbeek, what he did in Asia Pacific, and the amazing job in engineering done by Pankaj [Patel]. I can keep going. What you have to do is stay the course, adjust or reinvent. We are strongly positioned for the future.
And that goes back to our succession planning. It should be a non-event. It should just naturally occur, and we know in our industry there are very few of those that have gone well. Whether it's right or wrong -- and I do believe it's right -- we're going to be transparent. You'll see us move around our players, out of silos -- which used to be the way you developed people -- and take a services person and move him into engineering, or put an engineering person into operations. You'll see us move around our team with regular frequency with the job being to not just see who's been in silos, but who does well and who will struggle a bit. That's what leadership is about.
NEXT: How Important Was Paring Down Cisco's Councils And Boards?
One more question on the restructuring effort. We've talked to a number of Cisco executives over the last six months in particular and asked, what is the single biggest move through which they've seen the best change? I have to tell you they pointed down to that paring down of your internal councils and boards, and that streamlining of decision-making. Is that accurate, you think? Is that the most fundamentally important move that was made?
No. I actually think the most important was what Gary [Moore's] led: operational excellence across the board in each function and each department. It isn't about a transaction or a segment; it's really about becoming consistent in our operational excellence and how that will seed the money to be able to grow in the future. That's most important.
To your comment about boards and councils, that's fair. One thing at Cisco, we all have opinions. We don't mind people voicing them; that's very healthy. We don't mind going back and forth, but I would put the councils and boards and layers of management and the span of control and being fat in the middle as opposed to where you want to be fat as symptomatic of playing at a higher level. It's a different level. I'd say it was that overall approach. I tend to frame things in what is the big picture, and how do we get there. So, it was a combination of those things.
But remember what people said about us 15 months ago. Remember what people said about is in 2007 about the financial industry and how that's unique to Cisco, and nine months later, we're in free-fall. And late 2009, we said we saw things looking up, and people said 2010 was going to be a bad year, and 2010 was pretty good. And we said 2011 did not feel good. We got the tar beat out of us for that, but then things started to slow again. This is what Cisco does that's important about our culture. Far from a perfect company, but we are transparent, and we are right. We won't be all the time. But in spite of all the challenges over the years, have we ever missed a quarter? Have we ever had to update a quarter saying we're going to miss by a billion dollars?
Will we always beat? Of course not. But, if you watch what we've done, we've had a consistency that almost everyone else has not been able to maintain. That's the most valuable thing to partners.
NEXT: Will Cisco Abandon EMC And VMware?
Let's talk about some of your ecosystem partnerships, particularly EMC and VMware. We saw VMware acquire Nicira, Cisco ally with Fusion-IO in one respect, EMC sign a server agreement with Lenovo, and there's been a lot of media noise about the fraying of the EMC-Cisco relationship. On the last earnings call, you did say that EMC and VMware need Cisco. Is it fair to say they need you more than you need them?
If the relationship is good, you need each other. In terms of an area of the market, we are going to continue to be very open. When we partner ... well, I'm not looking at my wife and saying I'm going to partner with you till I find somebody cuter. That wouldn't work. That's how we approach partnerships. We are far from perfect, but we do not say we're going to partner and then move on our partners. Almost every major vendor in the [industry] wants to partner with Cisco right now. The network is at the sweet spot of every major market transition going on. It's all about the network. Will EMC be a very good partnership for us? Maybe our best? Yes. Will we compete against VMware as it relates to networking? Absolutely. And when we compete, we don't lose
When there's an opportunity to partner, i.e. EMC, we partner. When there's software competition against Nicira, they're a competitor. Microsoft is a great partner in the data center, maybe a great partner in terms of hypervisors, and then we compete against them in collaboration. IBM may be a partner in some areas and a competitor in others. What you see is an ecosystem.
If we make mistakes, what we've gotten better at over the last 18 months is we just adjust. And remember what we always say about our acquisitions. Saying two-thirds work is saying one-third fails. In an industry where 90 percent of acquisitions fail, that's pretty good, but people tend to focus on the one we fail on -- the Flip we fail on. We should have moved FlipShare into the cloud and put it on every smartphone. We missed that move.
But watch our big ones. That one, Flip, was $600 million. Starent was $3 billion; we've had tremendous success on the edge and that grew 30 percent again this last quarter. Tandberg, so important to our video strategy. And you've seen what NDS is doing -- that's a $5 billion acquisition and already off to a great start. So while people tend to focus on the negatives, that's just part of the culture of the industry press. We are the one that in the past years has had the courage to continue to acquire, and boy, if we hit two out of three, that's so much better than what anyone else in the industry does.
So much of the converged infrastructure play is related to the network, so why does Cisco prefer to partner in storage versus acquire in storage or build in storage?
Very fair question. We see storage evolving very rapidly. If you gave the choice between partnering with a player like EMC, and a very good partnership we have with NetApp, or you take it out to related markets like what we have with Citrix, or Red Hat, or Microsoft, or an OpenStack capability, or IBM, I vastly prefer the bigger picture. We've always had a philosophy where we'd like to make the pie much bigger and have a smaller percentage of the pie, instead of having a much smaller pie on our proprietary advantages but a much smaller revenue stream. It's our culture. We have an open culture; we think that's what wins.
But, we are looking to compete. I love to compete. Look at in terms of the direction, say Arista in low-latency [networking]. They may have had their last good quarter when it comes to year-over-year growth. We've moved very aggressively against them, we're winning jump balls by a long way and we're blowing them out of accounts where they used to have a foothold. And Silver Spring [Networks], which you may not have heard of, they were our toughest competitor two and a half years ago in smart grid, and we're winning there now.
What you are hearing is a sense of competitiveness across the board at Cisco. I think it's time. We took more shots than maybe we should have, and I think as a family we need to be critical of ourselves without having to read about it in the press. We're going to have transparency but also a very direct message: when you compete against Cisco, you're going to lose. It is that confidence we have across the board. We all know we could falter, and anything I've said here shouldn't be taken as saying anything about this quarter. It's just that I wouldn't bet against us.
NEXT: How Cisco Wrestles Market Transitions
If you could name one competitor above all to Cisco, who would you name?
That's an easy one. It's all about market transitions, and that's where people get it wrong. I was back in West Virginia this past weekend. They put up 70 points against a ranked team, Baylor, and a quarterback threw for 45 completions out of 51 with no interceptions, 656 yards and 8 TDs. No one had done that before. They're a football team at a university in transition and they're getting it right. Our issue is getting transitions right.
I look at the competition not in the negative point of view but in a positive point of view: How do you adjust to those [transitions]. Our competition is purely our ability to execute off of transitions, good or bad, and you look back at our track record and it's been extremely good. So the key takeaway from the discussion: What Cisco does better than anyone else is innovation. But what causes innovation is where we catch market share, being customer driven and partner driven. Our customers told us to go to smart grid. Our customers told us to go to the data center. Our customers told us which video company we should buy, NDS, just as they did Scientific Atlanta in that area before. We compete against market transitions. Individual competitors are just a way of keeping score -- although, as you can tell, I love to keep score.
Our sibling company, UBM TechWeb, recently polled CIOs on their top spending priorities and I wanted to share with you some of that data. They take stock of a lot of the IT buyers and what are their care-abouts, and you see the expected mentions of security and cloud. Video is not high up on that list. Is the opportunity for growth of video really as pervasive as you've been saying it is for the last few years?
More. Video will be the primary way we communicate; we all understand the entertainment aspect. The majority of the video you watch on your TV at home will be user-generated: the soccer games, the West Virginia game I watch over and over so you can keep trash talking [laughs]. But how does Bank of America bring in a financial expert to talk on a branch location? How does that work? My counterpart at one of the largest financial companies talked to me about video expectations and said you're off by two to five [times] what it is. It's not just to communicate, but it's part of the primary way we use IT, with the Medianet and other underlying capabilities beneath it.
I want to come back to your earlier question about security and just say that is one we have to improve on. We brought on Chris Young, and he's made great additions. We're coming along there pretty well. I like our direction on security, and it's time to execute on that.
The number one criticism of Cisco from those customers uniformly is still pricing. That's come up a lot over the years, is Cisco too expensive, and it's in conversation especially now with SDN and dynamics like that changing the conversation. How do you respond to that?
If you watch what we've done, we listen to criticisms. We're coming down Moore's Law faster than we ever have, doubling our price performance every 18 months. We came down very fast in switching about a year and a half ago. In terms of our ability to move pricing down, we absolutely will. Our price performance will increase dramatically as we move forward, but what we're seeing for us and for our partners is if you're selling a standalone product vs. a standalone competitor, you should still win, but the pricing margins on that are going to be smaller. If you're selling on architecture, your win rate goes up dramatically. Your margins go up dramatically.
PUBLISHED OCT. 24, 2012