Examining Cisco's Promises

How'd he do? Well, investors have reason to be thankful. Shares that traded a year ago for around $14 have more than doubled since then. At press time, they sold for $29 each.

Of course, some promises are more difficult to keep than others, such as the ones to business partners. The last time Cisco gathered its partners for its annual partner get-together was last April. In sunny Las Vegas, top management from the company pledged to do what they could to improve the profitability that the company's top 3,000 partners derive from the sale and support of Cisco's goods and services. On the eve of the 2004 Cisco Partner Summit, which takes places this week in Honolulu, we put Cisco's promises under a microscope and examine how well Cisco executives lived up to commitments made last year.

Interestingly enough, we aren't the only ones looking to see how well Cisco has done. Remembering the commitments he made 10 months ago onstage in front of thousands of partners, Cisco's Paul Mountford, senior vice president of worldwide channels, has also endeavored to see if partner profitability has improved. In advance of this year's Partner Summit, he again looked into the economics of Cisco's partners as he has done for the past three years. His goal: to determine how '03 initiatives helped improve market conditions.

As you may recall, Cisco hatched several new ideas for battling margin erosion at the 2003 Partner Summit. They ranged from creating a new rebate program to limiting partner involvement in advanced technologies. Perhaps the most ambitious program, known as the Value Incentive Program (VIP), promised to put money in partners' hands directly. That program promised to pay partners rebates totaling as much as 10 percent of their Cisco equipment sales.

Thanks to these and other changes, conditions have improved. According to the research Mountford commissioned, profitability is up from one year ago. Specifically, Cisco's channel-partner profitability has increased for the first time in 18 months; product support, services, professional services and application software margins have all increased in the United States; and gross margins have also increased by more than 20 percent in the United States.

The same study also reveals that Cisco's share of partner revenue has increased as a percent of overall revenue in the past year, and that Cisco's partners are generating more revenue from services as opposed to products than ever before.

Although margins have improved, the issue remains. One reason, Mountford says, is because economic conditions haven't been right until recently for partners to reap the most from changes made in the past two-and-one-half years. Now that the economic climate has improved, Cisco is hoping partner profitability will increase even more. As it did last year, the company is expected to emphasize the issue at this year's Partner Summit, whose theme is "Fusing the Elements of Success." In particular, Cisco is hoping to help its partners increase their advanced technology sales, hunt for new opportunities and adapt to current market conditions. Watch for programs that address each of these areas.

While seemingly obvious, Mountford believes these and other initiatives underscore how Cisco is trying to break new ground in terms of channel economics. It all started more than two years ago when the company launched the Value Engagement Model, a highfalutin name for a plan to get partners involved earlier in deals originated by Cisco's sales team. That helped many sell higher value-added services in conjunction with Cisco gear. The Value Engagement Model was followed by Cisco's regional-planning initiative, which led to the creation of 500 regional business plans. For each, Cisco identified go-to partners that it supplied with business consulting and other forms of help.

Other efforts also have had impacts. Working in conjunction with Doug Dennerline, Cisco's senior vice president in charge of the enterprise sales organization, for example, Cisco launched a "no one-off policy" that forbade Cisco's direct-sales organization from creating one-off deals that went around channel partners by establishing special discounts unavailable to all. Cisco also eliminated a 15 percent uplift last August that the company's service sales organization enjoyed when it took deals direct. And Cisco tied the compensation of its top U.S. channel executives, including vice president Chuck Robbins, to partner satisfaction.

Recognizing that increasing partner profitability will require ongoing attention, the company has painstakingly improved programs thought to be well-crafted at their launches. Though widely acclaimed, Cisco's eAgent program, for example, needed an overhaul shortly after it debuted. Cisco quickly recognized that an administrative fee imposed on program participants was limiting the success of the program in fiscal 2003 and eventually did away with the fee. That effort helped contribute to a 70 percent jump in eAgent revenue generated by participants in the program, who now number more than 150 companies.

In addition, Mountford has turned his sights this year on helping allies better run their businesses. To that end, Cisco has created Partner Consultative Services, a formal mentoring and knowledge-transfer program that will help Cisco partners launch profitable engineering practices.

Still, the question that Cisco partners will no doubt ask themselves this week looms: "Am I better off than before?"

Thanks to the improving economy, many, of course, are. But selling Cisco gear is still competitive, despite the fact that Cisco has reduced the number of certified partners to 3,000 from 6,000 in North America. Then there are niggling things that linger. Some partners, for example, don't like having to wait for customer satisfaction to be measured before receiving rebate money as they do with the VIP program. In some cases, getting promised compensation can take as long as six months,an eternity for those trying to get by on hardware margins.

But such feelings are not universal: Some partners prefer the wait because it helps cut down on price erosion. That just proves there's no pleasing everyone.