CRN Interview: John Chambers, Cisco Systems

Cisco Systems President and CEO John Chambers addresses the carrier pricing dilemma and outlines changes to Cisco's partner engagement strategy in an exclusive interview with Infrastructure Editor Larry Hooper and Editor In Chief Kelley Damore at the Cisco Partner Summit in Orlando, Fla.

CRN: Carriers are pricing Cisco's value-added partners out of the market by selling Cisco hardware--even emerging technologies such as IP telephony--at cost or below cost, turning Cisco products into commodities. How are you addressing that?

CHAMBERS: First, you have to say, when is there a valid point? There is a valid point here. Second, there are two players who are doing that and are violating our agreement with them. I will work with both of them to fix it, even if that costs me the relationship. I say I'm going to fix it. I'm going to back it up. Having said that, neither my own partner [who's getting squeezed on the margins, nor the service provider who installs it, nor Cisco win in that scenario. We all lose. So what you're going to see is more of how do we go to market together. The service provider is really after the transmission. Most of them don't make money on the attachment, etc. And they don't make money on the services. So if there is a way for all three of us to work together, that's the ideal scenario. This is one [issue that's going to take a little bit of patience to push through. But you have to be committed and say that if it costs me the relationship with that third party, I will [accept that. I think it's better not to play tough. Drawing a line in the sand causes people to behave inappropriately. If the [service provider is not winning, Cisco is not winning and our value-added partner is not winning. Everybody needs a change. There is a good business reason to make the change. Second, I expect people to live by the contracts they sign. So I think all of us just need to sit down in an unemotional way and say, 'How do we fix this?'

This is a U.S. phenomenon. As you get outside the United States, you don't see it, and it's mainly two people that misuse that situation. I am committed to getting it fixed. And being committed means we are going to find a way to do it. Will there always be some channel overlap? Of course. But you want people on a level playing field. At the same time, we want to help our value-added partners over the next couple of years to say, 'Here's the premium I bring to an account.' How do you make the account aware of that before the purchasing agent makes the purchasing decision on price? That's one more transition we need to do. As people get better and better at adding value, how do we summarize that for the customer? Cisco needs to develop tools and capabilities to allow that to occur faster. We're doing that internally on a pilot basis with 150 accounts. As we get that working really well over the next year, looking two years out, we should bring that to our partners.

CRN: Cisco is creating programs to encourage service providers and solution providers to work together. But there's a lot of mistrust from the solution provider side right now. How can you fix that?

CHAMBERS: First, people have to see a value in the two sides working together. Going back two years ago, there were no programs or value, and the market was growing so fast [that it didn't matter. By the way, it was growing so fast that Cisco didn't focus on this either. That was a minor issue [then. Today, it is a major issue, and we clearly understand that.

Second, we agree: We've got to fix it.

Third, the market has changed for all of us. We're all in this together. The service providers aren't making money on this. My partners aren't, and Cisco isn't. So it's only logical that people will find a solution here. Nothing causes a modification of behavior like survival. Right now, everybody is looking at a consolidating industry and is focused on profits and cash. If it's not working today, then people are very receptive to saying, 'How do we change?'

CRN: How will the problem be fixed?

CHAMBERS: We're going to take a classic approach. We're going to ask, 'How do we get together and make it work?' That's what Cisco has always done: Try different approaches, and see what works. A lot of that depends on our value-added partner. You figure out what went well and replicate it. And you don't replicate your mistakes.

I don't want to make it sound like it's something that's going to be corrected in three months. But you can make major progress over the next six to 12 months, and the timing is right to make major progress. We have clearly heard from our teams and from our value-added partners that it's not a win for them, so we have to fix it. It would be different if I weren't committed to long-term partnerships, but I am. Ninety percent of my product is moving through channels. I was the one that brought it from 10 percent to 90 percent. Make no mistake. I am really committed. I agree that it's a big issue, and we have to solve it.

CRN: Solution providers also are concerned with the gray market. How is Cisco dealing with that?

CHAMBERS: First, the gray market occurs automatically when you're a success. A certain amount of gray market isn't bad because that means that as products come off lease or otherwise, they have a place to go. And you can replace them with new products. So with almost all successful hardware companies, as that occurs, the gray market develops. How do you learn to add value on top of that market once that [product lands in another account? A certain amount you live with. That is the price of success.

Second, there is an abnormal amount now because of the huge amount of failures in business. It's the dot-coms or, in reality, more of the alternate service providers. The number of our alternate service-provider customers has gone from 5,000 to 500, just in the Unites States So it's been brutal. That's going to be with us for a while, but that is a onetime phenomenon--and temporary, because as you move into new product cycles you move past that.

CRN: Paul Mountford, Cisco's vice president of worldwide channels, mentioned in his keynote that customer satisfaction ratings are higher when customers deal with just a partner or with Cisco. The rating drops when Cisco and a partner engage a customer together. Why is that?

CHAMBERS: What that says is we've got to do better when we go to market together. Part of that [process Cisco owns, which is where we go to market and we invite the partner in at the last moment. As one partner told me at lunch, once the price is already set, it gives them a very hard time adding value. So we need a better go-to-market strategy earlier [in the process to address that.

CRN: Cisco is telling partners to sell solutions, but Cisco's enterprise sales organization (ESO) remains a transactional organization. What's being done inside Cisco to evolve the sales organization?

CHAMBERS: When you make transitions as a company, it takes a lot to do it. It takes time, and you bring your organization along as you move. Cisco will always have, as long as I'm here, pressure in the short term. It isn't an 'or.' I believe you can have the best customer satisfaction and the best profitability. I believe that you can have time to market and quality. I believe that you can focus on the short term and balance the long term.

Our organization is moving more rapidly toward a systems sale, and when I roll out the strategy on this to our directors next month, I will focus on that. Many times, our sales force has already moved into that. [Cisco Senior Vice President Sue Bostrom's whole Internet Business Solutions Group was absolutely an overlay to help our customers understand how to do this. If you look at the accounts that they work with, you'll find that they view us as selling solutions. And by the way, we implement it with a technology.

We are getting very good at summarizing that, which at the right time I will bring to my partners as well. We're just starting on how to do it, but it's working very well in the first 150 pilot accounts we put it into. So I am not going to ask my partners to do anything I'm not doing myself. We're moving very rapidly. So if all you're doing is selling technology--or worse, boxes--the margins on that are going to be very tight. It's like the PC dealers. They didn't make the transition. Very few of them did. If all you are doing is providing a product with a little bit of installation and network design services, then you are going to have to do that at dramatically lower gross margins, which means by definition your operating margins have to come down dramatically or you're not going to make money. Then it's deciding what to do on top of that. That's not to say you won't make money just installing the equipment and doing the network design. You can, but you have to realize the margin pressure on that is going to be pretty dramatic. So if you don't increase your productivity or dramatically bring down your SG&A, you're not going to be as effective.

CRN: But is the way the ESO sells changing? Can it continue to sell the way it does and still work with solution providers?

CHAMBERS: Big time. We have been doing a better job, and we will continue to do it in terms of bringing the partners in earlier. We've heard that loud and clear. We've got a long way to go. I don't want to hide behind anything. It speaks to how we can work closer together. But my sales cycle is zero about technology. At the top, I'm selling solutions all the time.

CRN: How many of your partners are specializing and moving into higher-margin services, and how many are choosing to resell product and adjusting their cost structures?

CHAMBERS: I think most of the resellers clearly understand that [transition today, just like most of my competitors. Most of my value-added partners understand the transition for this and understand the leverage we bring together to the marketplace. Now it's just a business decision for them on what combination they do. Based on that decision, they have to structure their productivity and overhead appropriately. It isn't that everybody has to move one way. There are going to be profits to be made in all markets. You have to realize that the overhead structure you can support is dramatically different in each segment. We've done it pretty effectively over the past 18 months ourselves. I'm just asking my partners to do the same thing I have done.

CRN: You talk a lot about customer satisfaction. The numbers are showing that customer satisfaction has gone up for Cisco partners. Is there any rating for Cisco on how satisfied the partners are?

CHAMBERS: A reverse satisfaction rating? No, I haven't set one. That's a 360-degree review. If you were going to do that, you'd have to stick by it. It would surprise you how many thousands of man-years and people-years we have put into our customer satisfaction rating. There are two ways to do it. You can do it in a session where you ask about it [in person and get pretty good feedback on it, or you can do a regular survey. I'll think about whether it should be a regular survey or not. I think I know pretty well, good news or challenging, what our partners are comfortable with and what they're not comfortable with.