The VARBusiness Interview: Chambers Reveals Lofty Ambitions For Cisco

"...You've got the fastest-growing segment in terms of new jobs and consumption of the new technology, combined with the potential of market-share gains," Chambers notes. "It's pretty exciting for us."

Now comes the stretch, which Chambers himself has pushed his team for years to master with onerous, often outrageous, "stretch goals" he asks key executives to outline for themselves each year. While going after the SMB sector with as many as 30 new products and a new channel push this year, he's simultaneously going after market share in another area where the company has yet to be a force: high-end switches for telecommunications carriers. With its new CRS-1 device, however, Cisco is poised to take on the likes of Avaya, Nortel and nemesis Juniper like never before.

The question is, can he do it? Can Chambers take on all this while still maintaining dominance in the core markets where his company competes? No one, of course, knows for sure. But it would be unwise to count him out. His company's stock, after all, has outperformed HP's, IBM's, Intel's and even Microsoft's during the past two years. And, unlike Intel, Maxtor, PeopleSoft, Siebel or a host of others, Cisco is holding fast to a robust outlook provided earlier this year. Add it up, and the company that once epitomized the dot-com boom and bust appears to be poised for a breakout year. In an interview with VARBusiness senior executive editor T.C. Doyle, Chambers discusses why staying close to customers like no other CEO has given him a leg up as he embarks on his latest missions.

VB: How many customers do you think you meet within a given year?

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Chambers: Hundreds of thousands if you count the speaking events a year. I think I do 44 major speaking events a year. So those can be very, very large. We rank ourselves, myself included, by how often we communicate with customers. In terms of individual customer meetings in individual sessions, when I am on the road you're probably talking as few as five, depending on the geography, to as many as 10 a day. I personally like to do small forums, such as a CXO exchange, [where you have] somewhere between three and 10 people. You can get on topics and see common themes and stay on them for a while.

The larger sessions, I like to do QandAs, even if it's 10,000 people. You get a feel for what's on the mind of the audience. Better yet, you poll ahead of time and ask them what they want to hear. We also go back and review what we said the year before, if we spoke at the same event previously. We look at the constructive criticism, etc. I think it's amazing how many people don't go back and look at what customers told them to do. In fact, it's one of the things I think people make mistakes about when they focus on the customer. The only thing worse than not asking customers what they think is to ask them what they think and not do anything about it.

VB: Well, you're consistent, if nothing else...

Chambers: If most of the changes that you implement take three to five years--and they do--and you constantly are changing your priorities or where you are putting your resources or key programs, I would argue you have no strategy. You have to think in three- to five-year increments. That took Cisco a while to learn. Long-term planning at Cisco used to be 12 months. And our partners would probably agree with that [laughs]. Now, it's three to five years on the major investments we make...I think the market has changed. It has moved from a very fragmented, very pinpoint product mentality to an integrated, cost-of-ownership, cost-of-support, how-to-get-the-productivity type of mentality.

VB: If you had to boil it down to one issue that seems to come up in conversations with customers over and over, what is that?

Chambers: Security. Just to digress for a second, most of our customers are telling us that security can only be solved by the networking player. If you think about it, you cannot solve it at just the edge because you need to have intelligence in the network that controls admission to the network, both on identity [and] also on the antivirus level, the operating system level, etc. You've got to have intrusion-detection capabilities. You've got to have capabilities in your routers and switches to identify packets that are distributing denial-of-service attacks and handle and isolate it. You've got to have a common element management system that ties together the network-management system that does this. In essence, you are talking about a self-defending network. So, we bring to the market the No. 1 firewall position, the No. 1 VPN, the No. 1 intrusion-detection [solution], etc.

But I think the fundamental change in the past six months is that most customers have realized there has to be an in-depth architectural approach to this. If the average virus spreads through your environment in 10 seconds, by definition you cannot have human intervention. People have watched the complexity of attacks, whether it's the Trojan horses, etc., or other issues. If you don't have an in-depth architecture structurally, it just doesn't work. Our customers have quit thinking about things as individual products, but instead think of how you combine a common element management system, how you basically handle almost all of the problems like the human body does without even being aware that they occurred. It's the exception that you take a couple of aspirin and go see the doctor.

VB: There's an old expression that says a man with one watch knows what time it is, whereas a man with two doesn't really know. Do customers need multiple solutions from multiple companies, or can one company give them what they need?

Chambers: I think you will see people move to one architectural play. It's one of those evolutions in technology that, when you take a step back, there's no other way to solve it. You cannot have different element management systems, seven or eight different security vendors, systems that are not integrated together that require human intervention in order to adjust to attacks. You're not going to be able to handle the future that way. So I think the market is set up for a player who can play across a number of the ranges within that, who also has a culture that truly accepts partnering. Not partnering where you partner for a while but then end up competing, but true partnering. I think we have a pretty good reputation for that. I think there's a high probability you'll find we will be not just the No. 1 security player, but No. 1 by a long way if we do our job right.

But there's a really important message with that: It isn't that this is just a market opportunity that is important to us, although it's a good one, as it is something that if we don't become more secure, we will limit the growth of the entire industry, ourselves included. This is, on the one hand, a market people look at, but on the other hand an environment where people want to put more on, not less.

VB: Storage, security, business applications. Customers have hiked their spending in those three areas. But what do you think they should they be spending on today? Are there any areas that you see that are being chronically overlooked?

Chambers: I think the one that has moved most dramatically in the past six months is IP telephony. Security was No. 1 and wireless was No. 1. Wireless still remains very important, but IP telephony seems to be at a tipping point, and we'll see if that continues. But I think the decision is about a single data/voice/video combined network. And as customers begin to make that decision, you see them in two camps: one that it is an architectural decision, in which case our win rate is extremely high, because who are you going to have for your data network, your voice network and video network? Or, the second camp is, is it an IP telephony as a quote, standalone network? And there, we still win the majority of times, not with the same percentage win rate, however.

It comes down to whether you view IP telephony as a single application in the network, or if you view it as just one more IP application, which is how most customers are now starting to view it, along with videoconferencing, along with voicemail and along with calendaring with a common security fabric. I think IP telephony is picking up pretty good momentum in terms of the marketplace as a whole. It's one of those [things] that during real tough economic times it's tough, but as the economy has eased up, it appears to be one that hits an inflection point.

VB: We've been talking a lot about customers. You have a number of pushes and initiatives ready to go in the SMB space. Does Cisco understand the small-business customer and the needs of that audience, and what are you learning of late that you can apply?

Chambers: I think, by definition, the market we understand best is enterprise. Second best is high-end commercial, then service provider, then what I would call SMB in commercial--less than 100 people [enterprises]. I have one category in that space from one to 20 employees, another at 20 to 100--the area that I think we can learn a little bit more about in terms of expectations. Now, having said that, our architectural play--as far as these networks being relatively transparent between an enterprise customer, service provider, wired and wireless customer etc.--is evolving as we thought it would. To answer your question very directly, we already go through 92 percent of our enterprise and commercial accounts through partners. As we move further down the market, it becomes 100 percent. As you watch from every product design, where we will launch 30 new products this year for the commercial marketplace, to our channel development, to efforts to make the products both easier to use and cheaper to support, we are trying to enable our partners.

Depending on whose numbers you use, the good news is that we are No. 1 in the commercial marketplace, though the bad news is that we only have 35 to 40 percent market share. The neat thing is, this will be the fastest-growing segment of absolute dollars spent on technology over this next decade. And it's one of the few areas where we have huge potential market-share gain. Time will tell if we can execute on that. But in the enterprise, we're already 70 percent plus in terms of market share. In commercial, we're at 35 to 40 percent. So if you've got the fastest-growing segment in terms of new jobs and consumption of the new technology, combined with the potential of market-share gains, it's pretty exciting for us.

VB: So why the bifurcated approach with regard to the Linksys brand? I know it's a different business with different margins that could be dilutive to earnings, but why different brands?

Chambers: It's actually a customer-driven issue. Our customers told us from the beginning to differentiate our products and services in a way they can understand what they should expect. My own view is that, depending on which country you are from, you should think of [Cisco] as a Mercedes, Cadillac or Lexus, and Linksys as a Toyota or Volkswagen. Linksys is our Volkswagen. It's the car for the average person. You have to understand that it doesn't have as much functionality or speed, and that it's a different support model, etc. It's still a very good car. But a call to a Linksys support center costs us $3. Our channel partners have to understand that they are competing with the distribution of a Fry's or Circuit City or other key players in this area, including Wal-Mart, etc. They have to provide at very low cost for the basic service and charge on a premium on top of that to add value. The reverse is true as you go into [the] enterprise. As you go into SMB, it's somewhere between the two. So you've got to make the products a lot easier to use so you don't get the support calls, and you have to make it without as much complexity that causes support to occur in, perhaps, a different way.

VB: The market at the low end is very cutthroat, very competitive. Are you satisfied with how you guys are performing against your rivals in that space?

Chambers: Well, on the very low end at home, we have gone from 47 percent retail market share to 57 percent retail market share in the U.S. in the last year. So, that's pretty good execution. Where I think we have to do better is on a global basis, because our brand is pretty much North-American-centric at the present time. We're just moving into Europe and Asia.

VB: You have often spoken about productivity gains that can be achieved and the different cycles and rhythms in which they move. But do some of the compliance issues force all industries to move forward in a little bit more of a lock-step fashion? If you're health care, for example, you cannot be the lagging industry anymore because of HIPAA...

Chambers: I think regulation slows you down most of the time, not the reverse. I think the key driver on health care will be more a function of the average American...being asked to carry the cost of health care. We simply cannot afford to carry the cost of annual increases of 10 to 20 percent per year. We simply cannot. Nobody can afford it. And technology can probably take, conservatively, maybe 25 percent of the costs out. Maybe aggressively 40 percent out of the whole system, and dramatically improve quality...

What Cisco is attempting to do through our partners and ourself is come at it through the technology solution for how we tie products together uniquely, and so it's the ability to combine routers with switches with security with storage with an architectural play, and how you do a common theme of issues, such as security or IP telephony, across that environment. Then also, how do you take this technology and say, "How does this change business or government models to get process change and productivity?''...I think the network has moved from something that was really useful to a small minority in business to a midsize business...to one that's very advantageous to every American in this next decade.

Channel Stats

Every six months, Cisco hires an independent research firm to evaluate the profitability of its certified channel partners. The following results are for January to June: