Chambers Q&A: Cisco Is Breaking Away In Data Center

Cisco Systems Chairman and CEO John Chambers sat down with CRN's Kelley Damore, vice president and editorial director, and Senior Editor Chad Berndtson at Cisco's headquarters in San Jose, Calif., early this month. The wide-ranging conversation touched on the growth of the Cisco channel, why he believes Cisco is a more compelling bet for partners than HP or IBM, and what role the network, collaboration, video and other Cisco hallmarks will play in the businesses of the future. Following are excerpts of the conversation.

What is your message to partners at Partner Summit this year? If you're looking to tee up how to motivate them and get them to visualize the industry heading into 2011 and beyond, what do you tell them?

At the 10,000 foot level, what's most exciting is that many of the market transitions we anticipated happening are happening. The network is becoming the platform not just for all forms of communications and IT, but it's going to enable a different generation of productivity around collaboration, it's going to change the data center, it's going to change healthcare, it's going to be at the center of everything from security to video. The exciting thing about Cisco and its partners is we're going to play there together. We are better together. There's a key reason for that.

If you look at the breadth and depth ranging from such issues as collaboration, it'll drive a decade of productivity. The first time I've ever heard [it] at the World Economic Forum, with top economists from Europe, the U.S. and China, we talked about GDP growth for the next three to five years and beyond, and I asked about productivity and expected a candid answer of one to one-and-a-half percent, which is what they always say, 'You can't drive faster than that.'

All of them agreed -- all of them agreed -- that we were in for a decade of productivity growth that was probably two to three percent or more. When I asked them what's going to cause that, they said, 'What you're doing, John.' They said that in front of 100 of my customers, so I could have hugged them right there [laughter], but it would have been inappropriate. What it does speak to is collaboration is the next generation of productivity, organizational structure, and is almost unlimited and an area I expect grows very rapidly for us in the next five to 10 years.

The second thing is there hasn't been a new hardware player in the data center for decades, and contrary to all the prognostications, we are breaking away there. We have very much established ourselves. We are in the top three x86 players, we're winning a lot in the cloud, which is the second generation of virtualization data centers, the product is winning most of the performance awards, and it isn't servers separate from the network separate from storage, it's that combined, first in a physical data center, then in the cloud, then all the way in your home. And [we] build VDI and other capabilities off of it.

The third area you think about in terms of the approach is video. Video is the next voice. It's going to be how we communicate. When we built a router, nine years ago now, that did a billion phone calls -- voice, if you will -- everyone thought we were crazy. Of course, 5- or 6,000 CRS-1s later, and 500 customers-plus, we are now building a router than does a billion videos. I think you'll see the same exponential curve on that, except video will have much more cost justification whether it's entertainment or productivity, whether it's how you enable a collaboration, how you enable virtual organizations together, whether it's just permitting you to travel halfway around the world. It enables opportunities and meets tough issues.

NEXT: Has Cisco Spread Itself Too Thin?

Probably 75 percent of my time now with customers is virtual, as opposed to visible, and it usually isn't one-to-one anymore, it's usually many-to-many. What you see with telepresence, coming down to Tandberg, coming down to show-and-share to the desktop to what we've done with Videoscape, you know where we're headed, and it's any device, any content, all video. We don't produce phones. It's data, voice and video together.

So between the focus on collaboration, the focus on video, the focus on data center virtualization, the focus on clouds, you have a breadth and depth of array that none of our peers have. I just came back from the World Economic Forum and I never get good marketing confused with what the customer is saying -- that's why I spend half my time with customers. We have moved from being a provider of routers and switches to more and more, we're providing the technology architecture, and with our leading edge customers, we're starting to provide business and government architecture. Who would have thought that Cisco would be the key to innovation as the leadership in Russia started to transform their country? Who would have though that when there were issues in the Middle East, we'd be right in the middle in terms of how you create jobs and balance that, where high tech can play a key role and help raise jobs for all? Who would have thought in America we can talk about the future of this country and the way we grow out of it is through productivity and job creation though these new technologies -- by the way, all enabled by the network.

Now, to answer your indirect question: Have we spread ourselves a little bit thin? I've always spread us thin at Cisco. The key is market transitions wait for no one. This verticalization, whether it's good or bad, it happening. And unlike our peers that we're competing against, we share the majority of our direction with our partners, including even the services level where I would expect our partners to generate five, ten times the services revenue we do, even though we're all needing to move to a services-led sell and services-led implementation. So while there will always be bumps in front of us, and there's probably a few -- though to be candid, no one handles those bumps better than Cisco, though I always wish I was smarter to avoid them -- we eventually get it right and get a process going.

VARs and the industry as a whole hear often about your 30 adjacencies, or the 30 to 50 adjacencies. One thing we consistently hear from channel partners is that partners are overwhelmed by the level of opportunity, from smart grid, to video and healthcare and the rest. How do you want them to prioritize? What do you want them to go after?

They're the same issues we have. First of all, be realistic given the market. Which areas do you have differentiation and which areas do you want to invest in? The good news is, it's a portfolio play. And the portfolio will come together every time, so you can reconnect at a future time. In terms of one of the charts I'll use at the partner conference, I'll talk about the very top of our big bets, and I'll separate them into categories. Small to medium business, IP NGN [Next Generation Network], Borderless Networks, and then the next generation, data center virtualization, video, and then the next generation after that, clouds and what we're doing with EMC, and the generation after that, smart grid.

You think of it in buckets and those are the major moves we're going to make. Then we'll do a portfolio play and tie them all together. I wouldn't try to be all things to all people. I would say based on the business case, where do you move, but what has to change is you don't want to take on a competitor on a single, standalone product.

Our products are the most competitive they've been since I've been here at Cisco. You see that in our market share, in awards for that, but if you're selling a single, standalone product, you're ignoring perhaps the strongest thing Cisco does, which is an architectural approach, which protects their investments, allows them to move into new markets relatively seamlessly, and while they might not move into quote "video" or cloud today, or security architecture today, what we build is the vehicle that allows them to do it from an architectural play, and is how you change business process and government process.

When I talk with the leaders of large retailers, you can imagine I don't talk routers and switches, I talk how does your physical world come together with your virtual world? How does your supply chain change? What are your competitors doing that you need to do differently? How does the customer buy today versus how they used to buy? How can we help change that in a store, physically and virtually? Same thing in the automotive arena. Don't talk routers and switches, we talk about what are your incremental revenue streams, we talk about your design cycle, how do you do time to market, and as you design your car of the future -- people forget -- it's a network car. We can play a role there that's very unique.

Government and healthcare. You can't afford the healthcare expenses coming at us in this nation or around the world, so we'll have to see a decade-long run of collaboration and healthcare productivity, or we'll break the healthcare system. As they said at WEF -- and these are the top healthcare experts in the world -- all of them [healthcare systems] are on the verge of bankruptcy. There's no choice but to change. So the nice thing about our partnering portfolio is, yes, I think we've hit the market transitions right, yes we win in many of the areas, we are spread a little bit thin just like our partners, and if you have to prioritize, pick and choose based on the customer segment you're doing.

But the nice thing is that you can re-engage across the board for an element you decide on later, because it's an architectural play. That's different from our peers. And we treat partners different, we've always been number one and focused on partners.

NEXT: What The Cisco Partner Of Tomorrow Looks Like

What does the next-generation VAR look like? Do they need to be business consultants asking these questions you are? What skills do they need to have as we go through these market transitions?

I think the most important thing to realize is that these market transitions wait for no one. Many of our partners will say what level of differentiation they want to add. So there's room for just making the architectural stack work well together. There's room for saying, 'We need to go sell that in a given geography or industry vertical.' And that's much better than their counterparts that are selling stand-alone unified communications, stand-alone security, stand-alone wireless, stand-alone routers and switches -- which, by the way, were designed to work together.

The major thing is just take it one step up in terms of being able to understand the advantages of architectural sell regardless of how many you sell. The nice thing about the portfolio at Cisco is you can add value on top of that. You can get very sophisticated about what you do from a security perspective, or what does this really mean in terms of video and collaboration to healthcare, or what does it means in safety and security for customers in terms of how do you combine safety and security in an architecture, with any device, any content. I can take it up one level, second level, third level. Then there'll be a set [of partners] that really gets good, that takes this as an architectural play and translates that into either across the board productivity and business model changes, or, in a specific industry: defense, or retail, or manufacturing, et cetera.

But all of us have to move. Merely providing a router and a switch and responding to an RFP is probably not going to make either one of us very much money, although I want them to win it like I want my team to win it. Playing at the level, the ability to make money is going to be more in services so serviceds will be a key element of the future. [We'll] watch our services probably grow five to 10 percent faster than our core business and that should be true of our partners as well. When there'll be some overlap, our golden rule is with [Executive Vice President, Cisco Services] Gary Moore: customer satisfaction. It's about margin and it's about our partners having five to 10 times the services that we do, in terms of revenue and people than we do.

We are an ecosystem partner, and that's a lot different than what HP and IBM are doing. They clearly want it for themselves, and it's an afterthought to have their partners do it.

You mention HP, and with Leo Apotheker now running the show, we've heard a lot of emphasis from HP on becoming a software company and upping its stake as a software company. Does Cisco need to be seen as a software company? What's the plan to invest in software?

So three separate questions, If I can. First, Leo is a good person and a good friend, and I wish he weren't at HP. Same thing with Ray Lane, their chairman. And I will feel very guilty beating them.


You heard it here first!


You did! But it's hard to change the culture and direction of a company. We spend 13 percent of our revenues on R&D. We acquire a huge number of companies every year. In the last year alone, we spent over $6 billion in acquisitions. That's hard to do. Our success rate on acquisitions has been off the chart. The Tandberg success, the Starent success, just amazingly good. And while 90 percent of this industry's acquisitions will fail, ours, 70 percent hit or exceed what we expect. We will have some misses of course, and if we don't, we're not taking enough risk in terms of the direction. So what I'm really saying is that we've got a very good lead.

NEXT: Cisco's Supply Chain Challenges

We in many ways caught the market transition on data center virtualization, and our large peers, by surprise. Much like we did when Nortel, Lucent, Alcatel, Siemens, Ericsson said 'Cisco, you really don't understand telephony, you really don't understand this market.' We didn't do bad. We became the number one player, probably five times the market cap.

The data center in this market has similar characteristics. Make no mistake about it, they see us coming -- this time we're not going to sneak up on anybody -- but this really is the breadth and depth we offer to our partners that no one else does. We are a partner-driven organization. Our other peers, you don't hear that from any of them.

So at the heart, are we perfect? No. Do we occasionally make mistakes? Absolutely. And I want to apologize for the lead times last year and communications with the partners. We clearly hurt them and hurt ourselves and hurt our customers, and it look us too long to fix it. But if you look now, all the lead times, with very few exceptions, are within range where want it, and we've got a different process that, while there'll occasionally be bumps during the year or surprises from a supplier, I think you'll watch us handle it differently. We didn't just handle the transaction, we had a systemic issue. Did we make a mistake? Absolutely. Did it take us too long to fix it? Absolutely.

How often are you meeting with partners?

Pretty often. When I'm on the road, it's probably a partner a day, minimum, and sometimes large groups of partners. Candidly, just like we did at the WEF and then in the U.K., I met with industry analysts who knew the partners and they talked about what we needed to do differently with our partners. I used to go there to sell, and try to get out without getting scalped, and now I go to listen: what are we doing right, what do we need to change.

That's one of the fundamental changes that I think is occurring not only at Cisco, but I think business organizations and governments worldwide. We're moving from command-and-control, which, candidly, we're really good at doing and which I love. But we're moving to collaboration, teamwork, social networking capabiliites. First, I think it's inevitable. I think work will come to virtual teams -- that's where productivity is going to occur. But the cool thing about it is, it sells a lot of networking stuff. These transitions are all enabled by video, cloud, Videoscape, security, wireless -- they all come together, and it is about changing the business model.

Not only are we pretty good about the market transitions, but if you watch, we're always one to three quarters ahead of our peers on market transitions. They say, 'We're having no problems there.' They do. And occasionally, we'll just miss. But it's not too often, [and] if we do miss, we'll get back on. Cisco's track record in that is unequaled, and while we have a lot of limitations, that's not one of them.

NEXT: What's Next For Cisco And IT?

Three-to-five years down the line, look at the next big transition. If we go back that time you were talking about video, now everyone's got a video play. So what's three-to-five years down the line now?

Three-to-five years down the line is going to have a lot to do with organizational transformations and the effectiveness that goes with it. That will drive a decade of productivity, that's really big. It'll save some of these systems close to bankruptcy in healthcare and it will transform education, internally to companies as well as education in K-12 systems and higher education -- just watch what's going on at Duke, for example, it's transformational.

You will also see, if we're right, the organization structure [change]. Suddenly, and I would argue it's going to be the network IT will be so deeply embedded in the business process that you won't talk about business process and IT enabling it. They will be one and the same. That in people's minds might have been a stretch three to five years ago, but when I talk to the top five percent of CEOs in the world, they not only get it, but when you sit and listen to them, you can't tell what's IT and what is their business. It's starting to occur, and plays extremely well for Cisco and our partners.

Another game-changing acquisition at the level of Tandberg; will we see one this year?

You will see constant, if we do our job right, game-changing acquisitions. We don't do them just to acquire. We do them when the market is right, when the price is right, and we try to catch market inflection points. So we try not to look in our rearview mirror, and we never set our strategy off of our competition.

If you're setting your strategy off your competition, by definition, you are two to three years behind. That's how I know we're doing well, when our competitors start to say 'end-to-end.' When our competitors, who haven't been able to acquire, start to acquire. When our competitors who haven't believed in a vertical stack begin to do a vertical stack. So, to me, it's about execution. I do not minimize the hurdles in front of us or our partners, but the opportunity is really exciting. Definitely some bumps in the road for all of us. The nice thing is, we partner for life. I'm not perfect, as my wife reminds me every day I'm not [laughter], but I'm pretty darn good and well worth keeping!

John, any holes in the portfolio?

Oh, constantly. The nice thing is we're right on this architectural issue and there are going to be constant holes you've got to firm up. Security is our number one emphasis across the whole company, mainly because it's our customers' No. 1 issue. There is no such thing as a secure data center or network. That is huge for the future and huge for the industry, and probably has to be solved in the network.

So that's an area we have to do dramatically better, you can't unless you're in the data center, unless you're in enterprise, unless you're in service provider, unless you're in wireless, unles you go all the way to consumer, any device to any content. I don't know how to resolve this the issue without this. On the positive side, it's great it's the focus. On the negative side, you've got to say, what took you so long. 'If you're the only architectural play, which you probably will be, why don't you move faster?' And that's probably fair criticism.

Security in and of itself can cause a huge upgrade cycle. It's an architectural play if we're right on that.