Cisco's Best-Kept Secret: Distribution Growth

Fact: Over the past two years, Cisco's distribution business has grown to about $13 billion from $9.6 billion, a roughly 35 percent increase and these days more than 28 percent of Cisco's overall $46 billion revenue pie.

It's a growth statistic not much discussed outside the four walls of Cisco but one that for Cisco's major distributors -- particularly its global distributors -- holds special significance in an era where razor-thin two-tier distribution margins are tenuous and the traditional role of those distributors is being dismissed as outmoded for cloud computing.

"Distribution is one of the best-kept secrets at Cisco," said Scott Brown, Cisco's vice president, worldwide distribution, in a recent interview with CRN. "We've done this well not because we've added a whole bunch of new distributors but because we've focused on driving this as a sales growth opportunity for the company."

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Cisco's growth in distribution during Brown's tenure has been somewhat overshadowed, first by the supply chain crisis that left the Cisco channel reeling for much of 2009 and 2010, and then by a global restructuring that began in earnest in spring 2011 and has continued at Cisco through today.

Brown, who took over the distribution post at Cisco in September 2010, said that at the time he was appointed, Cisco's distribution sales were about $9.6 billion and had been flat for several years. The San Jose, Calif., company topped the $11 billion goal Brown set up for his first year at the helm and is hitting $13 billion for his second.

"We were doing a good job on the operational side of distribution, but I didn't feel like we were doing as good a job on the sales side," Brown said. "So when I began talking with our distributors about it, we were trying to basically swing the gun turret from an operational focus to much more of a sales- and growth-oriented focus."

"Cisco is one of the best vendors to work with, if not the best, as far as the relationship with distribution, the level of engagement you receive, and level of trust," said Alain Monie, CEO of Ingram Micro, Santa Ana, Calif. "They really are honest when they say they rely on distribution, and we are growing much more with them than we are with others."

Brown and his team have built upon many of the programs and relationships established during Dave O'Callaghan's run as distribution chief at Cisco, distributors said. O'Callaghan was promoted to vice president of worldwide commercial sales at the time of Brown's appointment in September 2010 and retired one year later in September 2011.

"Dave did a great job of establishing distribution as a viable route to market for Cisco," said Bob Dutkowsky, CEO of Tech Data, Clearwater, Fla. "I don't think six years ago that Cisco was nearly as in tune with distribution as it is now. Scott has now taken that to another level in terms of leveraging the capacity and coverage model that distribution represents. The numbers speak for themselves: Distribution is growing faster than Cisco is growing."

"They're not doing anything all that radical, but I will say that Scott has been a breath of fresh air," said Jon Pritchard, worldwide president of Comstor, the Cisco-centric unit of Westcon Group, Tarrytown, N.Y. "He recognized that we have to think about growth together, and he's made sure the programs that Cisco comes up with are very aligned to us. We've had a lot of input into helping them design some of those."

Credit for Cisco's distribution success appears to be due to a few structural tweaks, coupled with well-timed programs, promotions and an ongoing mutual investment between Cisco and its major distributor partners. With a few additions and subtractions, Cisco's distribution mix has remained about the same since Brown took over: approximately 170 distributors worldwide, with no plans to swing that number in either direction, Brown said.

"We've been really disciplined and really controlled and not brought on tons of additional distributors," Brown said. "Our goal is to double down and deepen the relationships we have."

NEXT: Cisco's Distribution Channel Evolves

Sales of Cisco's video, collaboration, security, wireless and data center products, including the blade and rack servers associated with its Unified Computing System (UCS), are leading the charge in terms of top Cisco distribution growth categories, Brown said.

Even so, said distributors, Cisco hasn't tried to juice that growth by spreading its distribution coverage too broadly, as other large vendors have.

"They've very closely guarded the way they've used distribution," Tech Data's Dutkowsky said. "They don't oversaturate, and I think all of us have found a way to make a good living inside of the Cisco system, whereas other vendors are overdistributed. Some of them sign up as many as they can, hoping to get broader coverage."

"You can count on them not opening up distribution to 2,500 companies out there," added Ingram Micro's Monie. "It's very steady."

Several distributors commended Cisco for successfully making its compensation neutral to encourage its sales reps to focus on distribution and the channel as much as possible. In return, they said, Cisco has demanded a deeper investment from those major distributors, many of which have set up Cisco-specific business units and VAR training programs.

"There have to be sales drivers way beyond pick, pack and ship," Brown said. "The way we evaluate it is that if folks don't measure up to that, they're no longer a part of our landscape. The complaint I've heard from a lot of people is that other [vendors] are signing on additional distribution capacity in countries where they clearly don't need it. If you have too many distribution partners in a geography, then it's not a good book of business."

"Cisco has a sales culture most companies would die for," Dutkowsky said. "But they have also figured out a way to make the sales reps neutral. That takes away a lot of channel conflict, and we can all kind of work together."

There also have been less-publicized structural changes at Cisco that directly affect distribution. During Cisco's broader corporate restructuring, for example, Rob Lloyd, Cisco's executive vice president, worldwide operations, streamlined management of Cisco's global distribution into a single roll-up to Brown.

"All of the regional distribution leaders report into me now," Brown said. "We send a number up to Rob every Monday morning, and there's very strong governance on what they're doing."

That's one of the ways Cisco has put a brighter spotlight on its distribution sales and tightened how it does forecasting with the major partners, who during the nadir of Cisco's supply chain stop-up were frustrated with the vendor for not providing better guidance on the depth of the problem.

"They misinterpreted the data they were getting," Comstor's Pritchard recalled. "I mean, we didn't just start rolling down a hill, we fell off a cliff -- the product stock just went away. But they were making some decisions in isolation."

To hear the distributors tell it, recent Cisco programs such as the 2010-launched Fast Track 2 and last year's Power Up have been just as crucial to tightening the relationships.

Fast Track 2 accelerated how lower-end, transactional-type Cisco products such as several of its routing and switching lines move through distribution, whereas Power Up sparked UCS C-series rack servers to a 430 percent sales increase through distribution, according to Brown.

Cisco sought distributor input for many of those programs. Comstor, for example, was an active contributor to the Power Up program, said Pritchard, who listed it as a good example of Cisco soliciting distributor feedback instead of spooning out decisions to the field.

"Historically, what would have happened is that someone in a business unit would make a decision without any understanding of how it would transact in distribution," Pritchard said. "That has changed. Scott has the understanding that distribution really is key to what they're trying to do now."

NEXT: Cisco Distribution Programs And Hiccups

Cisco's global distributors have been tightly involved with Cisco at a strategic level as well. Comstor, for example, uses a program called Executive Relevance Selling to teach sales associates how to engage customers in architecture-led business conversations -- a program Cisco itself is now using to train its data center go-to-market team.

Other moves have been more comprehensive. Ingram Micro's relationship with Cisco in the supply chain, for example, centers on the distributor's ability to remove working capital by assembling Cisco orders in its warehouses at the last minute.

"The end result is you carry a lot less inventory in the overall supply chain," Ingram Micro's Monie said.

Monie said Ingram Micro attempted to push a similar model with other major vendors but few of them went for it. The difference between Cisco and other tier-one vendors, he said, is that Cisco will take in distributor ideas and work through them with gradual feedback vs. other vendors that assign distribution policy and manage it top-down.

"It is real money that gets saved," Monie said of the Ingram Micro-Cisco strategy. "It isn't a lot of money to some. But some [vendors] are just faster and smarter than others."

Not everything in the Brown era of Cisco distribution has gone smoothly, however. Brown took over from O'Callaghan with the supply chain wounds still relatively raw, but there were also smaller headaches, such as the distribution transition following Cisco's 2010 acquisition of Tandberg.

At the time, Cisco partners were anxiously seeking feedback as to how they'd get access to Tandberg video products. But distributors were left wondering the same, especially since Tandberg had relied on a much smaller channel of value-added distributors that were by and large not used to a high-intensity sales and marketing machine such as Cisco's.

It led to a lot of confusion over distribution of Tandberg product, Brown acknowledged, but he wouldn't have done it differently.

"If I had immediately transitioned those distributors to our traditional Cisco model, that would have done them a lot of harm," Brown said. "The models were very different. Those distributors weren't stocking distributors, and my goal was to move from an integration standpoint very carefully and very deliberately so we wouldn't lose their value."

In November 2010, Cisco confirmed Visitec Marketing Associates, KBZ Communications and TMDistributing as its specialty distributors for the Tandberg lines, and it also began transitioning the video wares to its broadline distributors. The Tandberg distribution as of 2012 has mostly smoothed out, Brown said.

"They were all frustrated because it was taking longer than they wanted it to take," Brown said. "But we quickly jumped in, fixed those issues and got it back on track. That business has been booming for us."

NEXT: Cisco Distributors Tackle The Cloud

About distribution's role in the cloud computing era, Brown said Cisco is committed. The networking titan plans to continue to leverage its major distributors not only for traditional products but also for cloud-based services such as its Hosted Collaboration Solution, WebEx collaboration, IronPort hosted e-mail security and ScanSafe Web security.

"I think they'll make the transition very well," Brown said of distributors and the cloud. "We believe [in] doing it through them and with them as opposed to standing up a huge data center and server farm. We believe there's so much value that's added by the channel."

It's more valuable for Cisco to partner with the distributors instead of cut them out, Brown argued, because distributors are still very influential among solution providers, particularly SMB-focused VARs and integrators.

"I really do think distribution is going to play a big role. You can't underestimate the stickiness of the relationship they have with the partner base," he said. "Distributors provide the lifeblood, working capital, they take a risk on partners by providing them credit capacity and presales help, to name a few. It's a symbiotic relationship."

More cloud-focused Cisco distribution offerings are coming. Cisco in July will launch a program through which its distributors will be certified on sales of Cisco cloud offerings, including Hosted Collaboration Solution, ScanSafe, IronPort, WebEx and VXI, Cisco's VDI platform.

"We'd tried a few pilots and decided to go broadly with that in the last year," said Brown. "I think it shows the strategic importance of this route to market."

Cisco distributors also will soon be able to create their own white-label services offerings using Cisco offerings such as SmartNet and Advanced Services -- part of a broader push by Cisco, unveiled at this year's Partner Summit in San Diego, to drive what it says is a $200 billion total addressable market in services opportunities for the channel.

But the best opportunity for Cisco distributors to expand their participation may yet be partner-led, the broad channel sales initiative Cisco rolled out last year to drive more sales to midmarket and small-business customers through solution providers.

Several distributors told CRN Cisco has pitched partner-led to them as, in the words of one, "prime time for the SMB customers our partners know best," and something in which Cisco expects distributors to take a lead in as far as training and motivating partners.

"It's clear they want the long tail of the reseller base," Comstor's Pritchard said. "They see partner-led as a way to get a bigger channel than what they have today, and they want us to make commitments to partners to help them escalate with Cisco. It's still a challenging market out there -- everyone wants to see better growth. But they're working to maximize [the opportunity] for us."