The VARBusiness Interview: Bruce Claflin

Much of that can be credited to CEO Bruce Claflin's handling of the company. Only two years ago, 3Com was just four short quarters from burning through all its cash. As of the beginning of the most recent quarter, however, the company had $1.39 billion in cash and short-term investments. That's despite the fact that 3Com is still losing money and enduring a sales slowdown.

How has Claflin kept 3Com alive? By refocusing the company on its core mission and resizing it for its current run-rate. That has meant cutting thousands from the company's payroll and shuttering ventures that, while promising, weren't likely to produce earnings anytime soon. Gone for good, for example, is a nascent unit that was devising new network- attached devices for consumers. Claflin has also scrapped much of the company's own manufacturing capacity in favor of outsourcing arrangements.

Through all of the company's restructuring, Claflin refused to cut back in two investment areas that could very well give the company some additional spring in the months ahead. One area is R and D. The other is channels. 3Com continues to spend 17 percent of its revenue in R and D, despite the fact that a few percentage points less would mean profits instead of losses for 3Com. Furthermore, 3Com continues to offer solution providers the same margins on products that it did during its boom years. Although the company looked at changing its distribution strategies and cutting margins for partners, Claflin ultimately concluded that, "If we harm the channel in the name of helping ourselves, we will, in fact, ultimately hurt ourselves."

With a bevy of new products for enterprise customers, Claflin has set his sights on upending the status quo in the networking market. That includes going after Cisco, despite its clout and stature. How will he do it? With cheaper prices and a different value proposition. In an interview with VARBusiness senior executive editor T.C. Doyle, Claflin outlines his new strategy.

VB: What things are going to drive change in our industry in 2003?
Claflin: I hypothesize that one of them is going to be technical innovation. Another will be business models. Let me give you some background. I think the technology industry is filled with examples of established, major companies that have seen their fortunes uprooted because somebody came at them with a better business model. Go way back in time to IBM when it introduced its 360, then 370, mainframe architectures. IBM dominated the category. At the time, mainframes were new, not well-understood and complex. Standards weren't set. Interfaces weren't open. Management experience in implementing the technology was very limited. And it was mission-critical technology. So the vendors that won were the ones that could demystify technology and take the risk out of it. For that, they extracted a very premium price and IBM was a classic example with the 370. A lot of companies came along and tried to beat IBM with different technology. They offered a different way of doing mainframe computing. They were collectively called the bunch,Burroughs, Univac, Control Data, Honeywell, etc.,and all of them failed. But the guy who took 30-something percent share from IBM was Gene Amdahl. Amdahl said, "I'm going to give [customers current, high-quality technology." And he gave customers the assurances they were getting mission-critical technology. He was a real tier-one player. But then he said he was going to provide it at fundamentally lower price-to-buy and cost-to-own thresholds. As a result, he leveraged the standards and familiarization of the technology by coming in with a much better value proposition than IBM. And he [Amdahl Corp. took huge share.

VB: It happened again with PCs.
Claflin: You got it. IBM dominated the growth of the PC industry, had high gross margins and controlled the standards. There were, I think, 1,000 PC manufacturers that came into being over the course of the 1980s. Almost all failed because they either tried to do a different standard, such as Digital, which had a totally different operating system, or they just tried to be cheap. Neither approach worked. But the guy who took share from IBM was Compaq, which said, "I'm going to be a tier-one supplier." It was the same as Gene Amdahl. It gave great quality, current technology, and sold through all the channels with all of the services and support that customers were familiar with. And it leveraged standards, too. But it gave you all this at a fundamentally lower cost and price. And it cut the legs out from IBM. Was it the cheapest? No. But it was a quality supplier that leveraged standards and gave a better value proposition. I think the same thing is happening right now in storage, and I believe it is going to happen in networking, too...The dam breaks when someone comes along and says, "I am credible. I am current technology and I can support you mission-critically. But I have a fundamentally better business proposition, and I am going to leverage standards as opposed to forcing new ones on you."

VB: You haven't said it, but the implication is clear: Do these conditions right now exist in your space, networking?
Claflin: First of all, absolutely. Second, not everywhere at the same time. Think, if you will, of a continuum of networking technologies. Imagine a vertical bar, high to low. Coming in at the top are new technologies that are not standardized and not well- understood. I think at the very high end of the vertical bar, you're still going to see people perpetuating models that existed in the past. But over time, these technologies are moving down and becoming more standardized. So, 10/100 switching, even base-line switching, is becoming fairly standardized. It's not commoditized; there's still room to innovate. But the standards are set. As it comes down from new and mysterious to standardized, and as more of networking falls into that category, I think there's an opportunity for companies like 3Com to fundamentally change the playing field by having good technology, but at a much better price-to-buy and price-to-own [proposition. And this business-model advantage can really change the playing field.

VB: What is the next killer app, or are we done with the period in which one, singular innovation, gadget or piece of code drives so many sales?
Claflin: First, I don't know what the next killer app is. Second, I'm not embarrassed to say it because I never knew what the others were until they came along. The fact that I don't know doesn't mean it won't be there. I have a slightly different view on this, and I'll go back to my point about technology. One of the early interesting questions is this: Why is it when technology moves at absolutely predictable rates,Moore's Law, Photonics Law, Storage Law,the use of technology is completely unpredictable?

I think the answer is that technology by itself adds no value for customers. It's only when combinations of technologies working together deliver something of value or real utility that technology adds value. Consider this: Apple introduces the Newton, the idea of a handheld, personal organizer. It was a brilliant idea. But it failed. Why? Because the combination of technologies just wasn't right. Power consumption wasn't right. Screen technologies weren't right. Batteries weren't right. Software wasn't quite right. While they had a brilliant idea, they failed. Why did Palm make it? Well, a couple of years later, the technologies had all evolved just sufficiently that when you put them all together, you could create a device of real utility. That's what I am talking about: combinations of technologies that mature sufficiently that, when you put them together, they offer real value. So what might some of those be? I'm convinced that wireless remains one of the enormous growth opportunities. If there's anything we know, we love to be connected. We love to interact with each other, exchanges messages, e-mail, get access to information,it's an almost insatiable desire.

VB: Let's drill down more about your business, per se. Feeling better about where things are today than three, four or six months ago?
Claflin: Yeah, I do. I'll go back a little longer. When the meltdown first hit, we knew it in about November 2000. So it's been two years. We have a chart we use internally that we created in January 2001. It was use-of-cash. We did a projection that asked if the markets continue to turn down at the rates they just have and if our use of cash continues at the rates it has, what will happen? Well, the answer was that we would have been out of business in four quarters. So it was obvious that we needed to make dramatic changes in our cost-and-expense structure to get the balance sheet strong.

To our credit, we did it well. We recognized the problems early, we took the right actions and our balance sheet is in fantastic shape. And in that regard, I sit here today and the very questions of survivability are gone. In fact, as this slowdown goes on, our competitive posture is actually improving as we find ourselves now with a much more stable business and a fantastic underlying financial condition. So, I feel a lot better today than I did, certainly, a year-and-a-half ago.

VB: So what are the revenue contributions you get from the various three groups that you have,the enterprise, the connectivity and the CommWorks units?
Claflin: I forget the exact amount, but roughly our business networks company,the enterprise business, if you will,is about 65 to 66 percent of our business. Last quarter, it was roughly $200 million. Then CommWorks, our carrier business, is roughly $40 million. So that's roughly 13 percent of our business. The rest is connectivity, which was about a $60 million business.

VB: What's the fastest-growing segment of your business?
Claflin: None of them. So I think the honest answer is the best-performing business is business networks, our enterprise business. It's been flat for the past five quarters, which probably says we are gaining a little share. By the way, it's been flat with dramatically improving profitability. Clearly, the near-term opportunity for growth and good financial returns for our company is the business that targets the enterprise.

VB: In conversations with [John Chambers, your colleague on the other side of the fence at Cisco, he touts the huge market-share gains that his company has made. And he attributes it to Cisco's dogged pursuit of delivering productivity gains for customers. So, if you're gaining share and he's gaining share, who is losing it?
Claflin: Well, it's interesting. I'm thinking of one example. We introduced a set of Gigabit technologies over the past year,Gigabit switches in a stackable form factor. And we went from essentially no share to 25 percent share in six months. As we introduced it, we positioned it relative to Cisco. Well, what ended up happening was that as we were punching Cisco and Cisco was punching us, the punches landed on Extreme. And if you saw Extreme's recent announcements, they talked about dramatic declines in their stackable product lines. And that's market share that we got and that Cisco got.

VB: At the end of the day, do you [subscribe to the theory that there are only going to be two, maybe three, players left standing and, if so, you've got to be one of those remaining two?
Claflin: I think the industry will bifurcate. I think there will be at the top maybe three large, full-product companies that offer end-to-end products with global reach. And then I think there will always be a set of smaller companies that are innovating, that either emerge as new leaders or they get [swallowed up by one of the established companies. I don't subscribe to the idea that there are two or three,and that is the industry. I think there is just so much innovation still to be done in networking that we are going to see two or three department-store companies, and then boutiques that are really innovating and doing some great things.

VB: You'll see a Foundry here and there?
Claflin: Absolutely. Think about it: We're all so down on the market environment, but think of things right now that are happening in networking. Voice is being integrated into the data network, and convergence is happening right now. Big time. As that happens, people are upgrading their networks and putting in better-quality service management to prioritize voice traffic, so networks are getting more intelligent. Security is being built into networks because of the risks we have all identified from the outside. Power,we don't talk a lot about it, but as you put new kinds of devices on and you run voice, you need to have power over your infrastructure. That's an upgrade opportunity. Then, of course, you have the movement from 10/100 to Gigabit and 10 Gigabit as bandwidth requirements increase. All that's happening right now. Then put on top of it emerging opportunities, like network storage and metropolitan-area networks linked to the enterprise, and there's all kinds of places for growth and innovation.