Cisco's Channel Overtures

Cisco Systems' president and CEO said in an interview last week at the Cisco Partner Summit in Orlando, Fla., that he will fix the problem of carriers selling Cisco gear at or below cost and squeezing the margins out of solution providers' businesses.

What's more, Chambers and other executives at the San Jose, Calif.-based networking hardware vendor said they're working to boost channel opportunities and profits by improving coordination between Cisco, solution providers and service providers. That effort, they said, will include a transition from a neutral-engagement sales model to a value-engagement model, under which Cisco will bring partners into a deal earlier in the sales process.

But Chambers agreed that the more immediate concern is resolving the carrier pricing issue, since it's disrupting the market for Cisco hardware. "Make no mistake. I am really committed," he said. "I agree that it's a big issue, and we have to solve it."

The practice of selling Cisco equipment below cost is bad for all parties involved, he said. "Neither my own partner that's getting squeezed on the margins, nor the service provider who installs it, nor Cisco win in that scenario. We all lose," he said.

Two service providers in particular are doing the most damage, Chambers said, adding that he plans to deal with those carriers personally. "There are two players who are doing that and are violating our agreement with them," he said. "I will work with them to fix it, even if that costs me the relationship."

Chambers declined to name the service providers in question but said he and other Cisco executives plan to meet with them to come up with a solution. "There is a good business reason to make the change. 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?' " he said.

"I think it's better not to play tough," Chambers continued. "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."

A resolution to the issue won't happen overnight and could take six months to a year, Chambers said. Part of the problem is structural, he said. Service providers make their living primarily off the transmission, not the hardware and solutions, where Cisco and its solution provider partners make their money, Chambers said. "So if there is a way for all three of us to work together, that's the ideal scenario," he said.

Some Cisco solution providers, however, say they're leery of teaming up with service providers.

"I'm not sure that's the solution. Selling their services is not my business," said Dana Zhaka, president of Select, Westwood, Mass.

But the market is evolving, and Cisco and its channel partners must change with it, Chambers said. "The market has changed for all of us. We're all in this together," he said.

For starters, an attitude shift must occur in which service providers, solution providers and Cisco learn to recognize how each party brings value to a deal, Chambers said.

"Going back two years ago, the market was growing so fast that [adding value 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," he said. "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 focused on profits and cash."

Cisco's solution provider and service provider partners are missing big opportunities by competing instead of partnering, said Paul Mountford, Cisco's vice president of worldwide channels. Service providers are facing mounting pressure from Wall Street to sell new IP services on recent infrastructure upgrades, he said.

As a result, Cisco is creating programs to reward service providers for working with solution providers and minimizing conflict over product resales, Mountford said. Service providers can benefit when Cisco solution providers sell their services, and in turn Cisco solution providers can snare more business by selling carriers' services, he said.

Solution providers applauded Cisco's responsiveness in addressing its channel partners' concerns.

"We're excited that they seem to be aware of and willing to address some of the problems," said Michael Fong, CEO of Calence, a Cisco Gold partner based in Tempe, Ariz. "It's huge that Chambers will be personally involved. You need someone with the power to commit to making the tough choices."

Cisco also aims to help solution providers better convey the value they bring to a deal. "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," Chambers said. "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."

To help partners increase profitability, Cisco also is changing the way it markets its solutions by shifting from a neutral-engagement model to a value-engagement model, Mountford said. Key to the change will be bringing Cisco partners into a deal much earlier in the sales process.

"We recognize that we need to change for [our partners to be successful in this market," Mountford said. Cisco's neutral-engagement model often leads to lowest-price sales and lower margins, and engaging partners late in a deal often leaves high-margin services opportunities out of the mix for solution provider partners, he said.

More important, the neutral-engagement model has yielded lower levels of customer satisfaction, said Mountford. About 8 percent of Cisco's enterprise sales are direct, and the company earns a customer satisfaction score of 4.59 out of 5 on those sales, he said. About 22 percent of Cisco's sales involve only a partner and the end user,largely in the SMB space,and partners earn an average customer satisfaction score of 4.4 out of 5 on those sales.

Cisco and its partners deliver the remaining 70 percent of Cisco's sales together, and in those deals the customer satisfaction score is 4.15 out of 5, Mountford said. "It's not a tragedy, but it shows we're not engaging well enough together. And the key issue is late partner engagement," he said.

Chambers agreed that Cisco and its partners must better coordinate their go-to-market practices. "Part of that [responsibility Cisco owns, where we go to market and invite the partner in at the last moment," he said. "Once the price is already set, [partners have a very hard time adding value. So we need a better go-to-market strategy earlier [in the process to address that."

Under the new value-engagement model, Cisco would pull partners into a deal during the early stages, giving them a greater opportunity to deliver high-margin, presale design and consulting services, Mountford said. "We recognize that just through engaging better together, we can help drive profitability for our partners and Cisco," he said.

Solution providers welcomed Cisco's move toward a value-engagement sales model. "Absolutely, we have to get in there early to sell the higher-margin services," Select's Zhaka said.

Calence's Fong also likes Cisco's new sales approach. "It sounds like a great plan," he said. "The real test will be what happens in the marketplace."

Last year, Cisco changed its partner program to reward value-add rather than sales volume, a move that included an increase in specialization requirements. Over the past year, the number of specializations Cisco's partner base has been awarded jumped to 3,900 from 400, Mountford said. The number of specialized partner companies grew to 2,500 from 300 in that time, he added.

Cisco is still counting on emerging technologies to drive the company's growth and restore margins for partners. During its growth spurt of recent years, Cisco referred to IP telephony, storage, security and wireless LAN technologies as "tornado markets." Now those markets may be more like "dust devils," but they're still key to future growth, Mountford said.

For instance, IP telephony hardware sales are expected to rise 36 percent to 44 percent annually, and IP telephony services revenue stands to grow 66 percent annually, said Mountford. In total, the four emerging markets represent about $13 billion per year in hardware sales and at least $13 billion per year in services revenue, he said.

As more new technologies and products emerge, Cisco will develop its distribution strategy with margins in mind. By limiting distribution to specialized partners, only partners that make the investment in learning about the technologies will be competing for the business, Mountford said.

And going forward, Cisco will pay close attention to its partners' calls for additional high-margin opportunities, Chambers said.

"We've heard that [message 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," he said. "But my sales cycle is zero about technology. At the top, I'm selling solutions all the time."