CRN Interview: John Chambers, Cisco

Cisco Systems CEO John Chambers spoke with CRN Infrastructure Editor Larry Hooper at this week's Cisco Partner Summit in Las Vegas.

CRN: Your partners tell me that Cisco is telling them to invest in specializations and training to move to a solutions sale model, but that Cisco's enterprise sales organization is still operating on a transaction basis. Some partners tell me that enterprise sales organization reps are pushing them out of deals because the solutions selling gets in the way of moving boxes.

CHAMBERS: I think the talented salespeople know how to sell systems and know how to sell business value as opposed to a box sell. If you're merely selling boxes, it might benefit you in this quarter or the next, but it will absolutely work to your detriment in the long term.

In fairness, those [partners] that effectively sell systems, solutions, etc., I think the sales force will welcome them in very well. If the salesperson is focused too much on the short term, then they may have a long-term problem here at Cisco.

At the Gold Partners lunch, partners were pretty consistent across the whole group. [They said Cisco has made] dramatic improvement on our focus on profit contribution for channel partners. They said they see that in every segment of our senior management. They said they see it going down through the management ranks, but they said they see it very inconsistently at the sales rep level. So one of the action items that we took coming out of this is to educate the individual sales rep on the importance of systems sales and channel profitability and how we really become a good partner in the sales cycle.

CRN: So there will be more effort to educate some of the salespeople who may not be focusing on this to make sure they are aware this is Cisco's philosophy going forward?

CHAMBERS: Absolutely. Not only to educate, but to tell them why it's important to our success. The second issue is that many of our partners are very good at selling solutions, just like many of our sales reps are. But there are individuals within channel partners and within Cisco that are not as good at that. It is something they have to learn, or their capability to make a contribution in the future will be challenged.

CRN: Several of your partners told me that they lost money selling Cisco in 2002. I know you are introducing programs to improve profitability now. But tell me why they should stick it out with Cisco instead of switching to a vendor they can make money with now?

CHAMBERS: First, we have to earn our partnership every day. This isn't something we started in the last year. It's something we started 12 years ago. Second, I think most people would say we have made pretty good progress over the last year. The issues that caused the profitability problems a year ago actually started three to four years ago. None of us could have predicted how dramatic the market would turn down.

Our No. 1 issue in distribution is partner profitability. So when we focus on things, we focus very well. I think the value we bring,whether it's the VIP, or the eAgent or the e-learning or the productivity tools,is very high. And our ability to commit to the channel is a given. This isn't a "nice to do." I was the one that took it from 10 percent of our business going through the channels to more than 90 percent. So to say I'm committed is an understatement. It's just that as markets evolve, we have to evolve our channel implementation strategy.

The last element is, we listen pretty well. The issues last year that were raised that were very fair [included] the relationship with a couple of our service providers here in North America, and I think people give us very good grades on that. And the issue about just too many channels going to market, certified partners going from over 6,000 to 3,500, was a good first step. But it was just a first step. We know we have to go further in terms of partner profitability.

CRN: Last year when we talked you said you were going to fix the problem with telecom carriers dumping Cisco hardware at cost or below and the resulting margin erosion for partners. In your view, where are you in that process? What has been accomplished and what's left to do?

CHAMBERS: It's almost two different topics. In terms of the issues with the carriers and their pressure on margin, we asked our Gold partners today how many felt we had made good progress over the last year, and almost all of them raised their hands. So I think people would give us very good grades on listening last year and making changes in the past year. We expect our partners to add value. That is very key to the health of the channel as a whole. I think they would give us an A in terms of the progress we have made in the carrier market and getting the carriers to focus where they add value and to avoid the issues that were raised last year.

On the issue of profit contribution, I think the grade would be lower. We came in well-prepared for the issues on profit contribution and announced both in the past couple of months and today a number of programs and progress along that way. But the pressure in the market today is very large across the industry as a whole.

CRN: This morning you said your partner base is half of what it was a year ago and you expect more consolidation there. How much more?

CHAMBERS: I think a lot of that depends on three factors. The first is the health of the market overall. If the market stays flat for a long period of time, then I think it's in our interest and our partners' interest to see a contraction. If the market starts to pick up, that takes the pressure off in many areas. The third element goes to how many of our partners move into what we hope will be 12 new growth markets in advanced technologies. These are the billion-dollar-plus opportunities for Cisco along with our partners. These are areas of security, storage, optical metro, wireless, the new home market we just entered into, etc.

We'll see how many of those we can make billion-dollar markets for us and our channel partners. If we were to do four to six, I think most people would say that would be pretty solid. And we'll constantly rotate through a second set of those, so we'll keep bringing new markets in that we think can reach a billion dollars until we hopefully get to 12 of them. We're off to a good start. I think that our partners would agree that the areas of IP telephony, storage and security look really solid, and our movement in the home market recently looks very good, but we'll see if we can execute as well as I hope on that.

CRN: Your partners have gone through a lot of changes with you in the past few years, and you've said there may be further contraction. Looking out a year or two, what will the Cisco partner that survives look like?

CHAMBERS: I wish there were a simple answer to your question. I think you will see multiple segments. I think you will see large, global, multinational VARs. You will see VARs that are specific to theaters, VARs that are specific to countries and VARs that are specific to regions within countries. You will find some that will move volume with a little bit of added value and others that will add a lot of value as well as volume, and then the mix varies depending upon the components. I think you will see not just VARs, but businesses such as ourselves, realize you are either in the [business of] mass marketing lots of products through the channel very quickly with very low overhead cost or you add value to it. I think more and more of that value-add is going to be unbundled so that you can identify it to the customers and the purchasing agent as opposed to having a channel conflict purely on a bundled solution. I think you will see more of the revenue streams unbundled in a way that is easier for us to jointly go to market on.

CRN: You mention purchasing agents. A lot of clients are running IT buys through purchasing agents, which makes it hard to focus on a solution. How can Cisco and its partners change that?

CHAMBERS: You have to sell effectively high as well as low. You have to realize that the CEOs understand that IT is the enabler. The CEOs of the world's most profitable companies understand that very well. If you have a less differentiated product or less differentiated solution, that won't have as much leverage. You have to be able to differentiate it for the business buyer and break it apart for the purchasing agent so they don't end up comparing one channel who is providing the product and the installation with very little value-add to another who is providing professional services, consulting, implementation, other software advantages and a strong relationship with knowledge of the account. All of us are learning how to sell value-add as well as stand-alone product.

The more our channels bring to market a solution sell, the easier it is to differentiate to the business buyer vs. a box sale, which is determined primarily on price.