Cisco's Big Challenge: Will Chambers Stay To See It Through?
After 19 years at the helm of one of the most influential IT companies in the world, Cisco Systems CEO John Chambers is no stranger to change. In fact, Chambers is quick to note that navigating market transitions -- and emerging from them not just unscathed, but stronger -- has for decades been key to Cisco's success. He urged audiences at the 2014 Cisco Live and Partner Summit events to remember how Cisco not only survived, but thrived, when it came to major industry shifts because in the ultra-fast-paced world that is technology, it's always change -- or die trying.
Today, however, the pace of market change is accelerating and the transitions Cisco faces are some of its toughest yet. Even looking at its track record, some partners question how Cisco—a company whose DNA is so deeply rooted in hardware—can continue to win in a network and infrastructure market that's racing so quickly toward software. How Cisco plans to compete, and go to market, with cloud services through its new Intercloud strategy is another question weighing heavily on partners' minds.
But one of the biggest questions looming over Cisco's some 68,000 channel partners is how long Chambers, who in 2012 said he could retire any time between now and 2016, will stay on board to see these transitions through.
In an interview with CRN editors last month, Chambers detailed Cisco's game plan for navigating and capitalizing on the rapidly shifting tides of today's IT landscape. He also made one message clear: Cisco intends to be a leader in software-defined networking and cloud—both during and after his tenure.
"We are pretty good at getting these [transitions] right," Chambers told CRN, sitting at a desk in his modest-size office within Cisco's San Jose, Calif., headquarters. "It doesn't mean we underestimate the challenges and opportunities, but this is how Cisco has always approached these areas: with no fear, just a healthy paranoia around what you can do wrong."
Since being tapped to lead Cisco in 1995, Chambers has grown the company from a $2.2 billion hardware manufacturer to a $48.6 billion network hardware, software, security and services powerhouse that's more bullish than ever on becoming the world's No. 1 IT company. Cisco had 3,827 employees when Chambers was appointed CEO. Today, there are more than 70,000.
Still, Chambers' tenure hasn't been all smooth sailing for Cisco. In April 2011, Cisco began a painful corporate restructuring that resulted in the loss of 7,800 jobs in the course of two years. It was a move that also suggested Chambers had tried too hard to make Cisco all things to all people; the Flip videocamera line the company acquired through its $590 million purchase of Pure Digital in 2009—a move that, at the time, left some analysts scratching their heads—was shuttered completely in the corporate reshuffle.
"I don't think there's an analyst on the planet who thought that Flip was a good acquisition," Alex Henderson, former analyst with Miller Tabak, told The New York Times when the ax fell on Flip. "Cisco had this idea that they wanted to be in the consumer's home network, but they had a grand vision that was not grounded in reality."
In 2013, Cisco's consumer division was whittled down further when it sold its Home Networking Business Unit, including its Linksys line, to Belkin. Cisco had acquired Linksys in 2003 for $500 million.
More recently, it's been Cisco's financial performance, rather than its M&A strategy, that's put Chambers on the hot seat. Cisco in December slashed its long-term growth outlook, projecting overall revenue to grow between 3 percent and 6 percent over the course of the next three to five years, rather than 5 percent to 7 percent as originally expected. Analyst estimates suggest Cisco will report annual revenue of roughly $47 billion—down just more than 3 percent compared with last year—when it reports its fiscal year 2014 and fourth quarter earnings Aug. 13. While Cisco shares have shot up 10.8 percent in the first half of 2014—climbing from $22.43 on Dec. 31 to $24.85 on June 30—they've lost almost 70 percent of their value since peaking in 2000 at about $82.
Simon Leopold, Communications Equipment analyst at Raymond James, said Cisco is undergoing a transformation, moving on from its days as a "cool, sexy growth company" to more of an "adult" company that, despite not reporting the growth levels it used to, is still a "quality, lower-risk and classically blue chip-type of investment."
"If you look over the last decade, it's really been [for Cisco], in some ways, a reset —or maybe 'maturing' is the way to think about it. We have a company that went from, just a few years ago, being considered a growth company to now being considered more of a mature, industrial company. We went from a company that used to have, regularly, double-digit top-line growth rates to a company now that has low, single-digit growth rates," Leopold said. "There was a transformation. And that transformation was not just in [Cisco's] business, but a change in who invested in Cisco."
The New Face of Cisco
Chambers, who turns 65 later this month, declined to comment directly on the timing of his retirement. He told CRN the next time the industry hears from Cisco on the topic would be when his succession plan is revealed.
What Chambers did stress, however, is that he's been grooming his senior leadership team for years to ensure that, when he does hand over the reins, it will be as smooth a transition as possible. "I think you have watched how our company has evolved and we have been very much focused on this. We knew that this would be a hard issue 10 years ago, and if you watch the breadth and depth of our team, it's the best it's ever been," Chambers said. "And if you watch how we are running the company, I am empowering my team more, and sometimes it gets tremendous results and sometimes they make mistakes. But if you don't give them a chance to learn, then their ability to lead as a team won't be there. We have been very much focused on how to make these transitions smooth and have been working with our board and others over the last decade and especially over the last three to five years."
There are several members of the Cisco leadership team that partners have pegged as potential successors to Chambers. Chief among are them are President of Sales and Development Rob Lloyd and Senior Vice President, Worldwide Field Operations Chuck Robbins.
"The fortunate thing for Cisco is that John has built a very deep bench with some really high-quality executives in the business—the Rob Lloyds of the world, the Chuck Robbins of the world, and I could go on and on," said Bob Cagnazzi, CEO of Presidio, a New York-based Cisco Gold partner. "I think he has built a very deep and experienced management team, should they choose to stay with an inside candidate."
An executive at one Cisco Gold partner, who asked to remain anonymous, said there has been chatter in the channel of Chambers possibly announcing his retirement later this month at the Cisco global sales meeting, which kicks off Aug. 25 in Las Vegas, according to the event's website.
"For the first time I think in five years Cisco is having their sales kickoff in Vegas. For years previously, it's been virtual," the partner said. "So there is some speculation that John will use that as his forum to announce his retirement. It either is just adding to the rumors or is an interesting point—one of the two."
If Chambers does exit in the near term, his leaving will come as Cisco stages a major organizational shift in the way it operates and goes to market. Chambers said Cisco is attempting to break down "silos" between different organizations such as sales, services and engineering and to think more horizontally across Cisco product portfolios such as switching, routing, collaboration, security and the Internet of Everything.
"We just announced our reorganization of engineering," Chambers said. "We moved from selling in silos that at times even competed with each other to horizontal and simplicity and business outcomes."
According to Cisco's Lloyd, the company's engineering organization is moving to more of a DevOps approach, with the aim of accelerating software development cycles and bringing software—be it network operating systems, collaboration, security software or otherwise—to market more quickly.
"We are going to move the entire engineering organization to a DevOps and an Agile development model," Lloyd said. "That's hard work. But, in many cases, it's a different way of doing things that will allow us to do things quicker, faster and much more customer-centric."
Chambers On SDN: ACI Is Our Answer
Of all the market transitions Cisco has tackled over the years, SDN is one of the toughest. With or without Chambers as CEO, it's a trend that takes direct aim at Cisco's bread-and-butter hardware business, transforming the high-end functions of switches, routers and other networking gear into software that can run on cheap, commodity hardware.
As SDN adoption moves downstream from major cloud and service providers to the enterprise, research firm IDC expects the SDN market to soar to $3.7 billion by 2016.
The SDN threat, to be fair, is not unique to Cisco. It's a technology that poses a significant challenge to all network hardware incumbents. But the specific impact of SDN on Cisco, given its nearly 70 percent share of the overall network switching market, could be "particularly dire," according to a research note last month from Credit Suisse analysts.
Cisco's core routing and switching businesses have taken a hit as industry buzz around SDN continues. In its third-quarter earnings report in May, Cisco said its routing and switching businesses were down 10 percent and 6 percent, respectively, compared with the previous year.
In November, the company revealed its long-awaited answer to SDN in the form of its new Application Centric Infrastructure (ACI). Consisting of Cisco's new Nexus 9000 switches and Cisco's Application Policy Infrastructure Controller (APIC), which started shipping this month, Cisco said ACI takes the core concepts of SDN—such as making networks more programmable, automated and easier to manage—a step further.
Specifically, Cisco argues that ACI is the next evolution beyond network virtualization overlays, a common type of SDN deployment that involves running a separate, software-based layer on top of existing network infrastructures. The overlay concept was popularized early on by SDN startups such as Big Switch Networks and is supported now by Cisco's part-friend, part-foe VMware, whose NSX platform employs this software-only model. Chambers said Cisco views this pure software approach to SDN as one that introduces more complexity into a customer's infrastructure.
"What Application Centric Infrastructure does is it embraces software and [delivers] your advantages of SDN without the disadvantages," Chambers said. "To have a software network, virtual [and] separate from the physical network, is very costly, very difficult to do problem determination, causes you to move very slow and often doesn't scale."
Chambers said he has confidence that Cisco can compete head-on, and ultimately win, against SDN competitors including VMware and Arista Networks.
"I love our hand vs. VMware and I love our hand vs. Arista," Chambers said. "And while two to three years ago you could say we were slow in embracing SDN, now we are going to lead. We know how to scale, we know how to tie back to Application Centric Infrastructure when it isn't about the data center but about the WAN and the edge. This is how we compete against them."
An executive from one Cisco solution provider partner, who asked to remain anonymous, said he continues to see the competition intensify between Cisco and VMware on the SDN front.
"I have been in IT for 25 years and never seen the level of animosity there is between vendors like there is between Cisco and VMware," the partner told CRN.
While Cisco and VMware face off in the SDN arena, the two companies also partner through the VCE joint coalition with VMware parent company EMC. Chambers said Cisco and EMC will remain committed to the success of VCE, despite the VMware-Cisco rivalry.
"There are areas of our business where we will compete with EMC companies, and SDN is one. We are already emerging as the No. 1 SDN company," Chambers told CRN in a follow-up question after the interview. "As we shared in our last quarterly earnings call … customer adoption of our Application Centric Infrastructure strategy has been extremely strong. We are winning with ACI because we're delivering on the promise of SDN without asking customers to make sacrifices on security, scale and performance."
More than 175 customers had adopted the Nexus 9000 platform as of Cisco's third-quarter earnings report. While some of these customers might not use Nexus 9000 to deploy ACI—the switches also can be used in what Cisco calls stand-alone mode—Chambers said he expects "a number" of these customers to migrate to ACI.
Presidio's Cagnazzi said his company already has completed two Nexus 9000 deals with customers who plan on deploying ACI. He said he believes ACI will compete strongly against some of the "open-source, non-vendor-specific" SDN products on the market, and against competitors such as VMware.
"Clients have a platform, and predominantly it's Cisco. They understand the Cisco product set, they understand how their infrastructure operates, and they know that Cisco is standing behind it. I think ACI is a great fit for folks who believe they can create greater value in their network infrastructure through the programmability that ACI delivers," Cagnazzi said. "It's got an excellent chance of continuing to position Cisco as the premier provider of network infrastructure solutions."
Cisco: 'The Disrupter' In Cloud?
As SDN continues to evolve the face of Cisco, so, too, does the cloud. The networking giant in March shook up the industry with the launch of Intercloud, a global network of public and private cloud services to be hosted both within Cisco's own data centers and Cisco partner-owned data centers that are powered by ACI.
The idea is that customers will be able to move workloads across different public and private clouds through a technology called the Cisco Intercloud fabric. The goal, however, is not for Cisco to become the next Amazon Web Services or to follow a strictly public cloud play, according to Chambers.
"Intercloud is a step beyond a public cloud," Chambers said. "Think of Intercloud as Cisco services delivered from a cloud: hosted communication, security, collaboration. Think of it as our customers' private cloud capabilities. Think of it as our partners' and Cisco's architectural implementation of this, if you will, in terms of our partner clouds. And think of it in terms of a public cloud."
Cisco has revealed two Intercloud hosting partners since unveiling the service: systems integration giant Dimension Data and Australian service provider Telstra. Cisco's top cloud executive, Nick Earle, senior vice president of the company's new Cloud Sales and Go To Market Organization, told CRN in July that, while Cisco will do a portion of the hosting on its own, 95 percent of the Intercloud services will be hosted by partners.
But for some Cisco partners -- and especially those that already have invested in building out their own cloud offerings -- their role in Intercloud, and the margin opportunity it provides, are still not entirely clear.
Presidio's Cagnazzi said he definitely thinks Intercloud fills a gap by providing "the glue" for hybrid cloud environments, but the details around execution and partner profitability still seem light. "We are excited about the program and think it solves a need in the marketplace but need to see the details around the execution and the profitability programs," he told CRN.
An executive from another top Cisco partner, who asked not to be named, said there hasn't been enough communication from Cisco to help partners really understand their role in the Intercloud vision.
"I haven't heard enough from them," the partner told CRN. "I want to be an early adopter. I don't care if it's not well baked yet. We need to learn together and make mistakes together because that's how you get better in the future. But they have just been slow to get the message out."
In May, Cisco tapped longtime channel chief Edison Peres to head up Cisco's Cloud and Managed Services Organization, a new division dedicated to enabling Cisco partners around Intercloud. To many partners, Peres' move was a sign of assurance that Intercloud would be a channel-friendly play.
Peres told CRN that all partners, including those that have invested in their own Cisco Powered offerings, would play a key role in "lighting up" the Intercloud ecosystem. For Cisco Powered partners, specifically, the idea is that they will be able to use the Intercloud fabric technology to access and move workloads across the broader Intercloud network.
"To me, this is a major, major revenue and margin opportunity for our Cisco partners because of professional services [and] working with end users to help them understand which workloads to move to which environment [and] which is the most cost-effective and the most secure. It provides a lot of professional services opportunities," Peres said.
"The more we move to a hybrid [model], the more the channel partners are going to be in the middle of helping customers understand how to make that hybrid environment the most effective and the most cost-effective to the end user."
When Intercloud was unveiled, some Cisco competitors were quick to suggest that the networking giant was too late to the cloud services game, especially to take on incumbents Amazon, Rackspace and Microsoft. Chambers, though, argued that Cisco isn't late to the cloud market; it's just rethinking it. What sets Intercloud apart, he argued, is the flexibility it allows customers in terms of workload mobility, along with "guaranteed response times" and the ability for customers to always host their data locally.
"The key takeaway here is Cisco is the disrupter," Chambers told CRN. "We are going on the offense. We are not playing defense. We are not going to respond to people who are challenging. We are going to say, 'Here is what the customers want and we are going to deliver it with faster speed with our partners than anybody else can.' "
Taking Partners Along For The Ride
It's one thing for Cisco to navigate the rough waters of SDN, cloud and an impending CEO succession on its own. It's a whole other to take its partners along for the ride. But Cisco—long considered one of the most channel-friendly companies in the industry—doesn't plan on shedding its partner-centric DNA anytime soon.
"Who else has stayed on top and moved into new areas with anywhere near the leadership that we have? This is why I am so committed to partners," Chambers said. "Partners are a huge part of making that happen. Now, each time we move, they have to move with us."
Cisco has made a number of changes this year to ensure that move happens. At its Global Partner Summit in March, Cisco rolled out a redesigned partner program that included new requirements for Gold and Premier partners to sell cloud and managed services. To reach Gold status moving forward, for instance, partners must be actively selling a minimum of four Cisco cloud or managed services offerings, and can only meet that requirement by selling at least one cloud service and one managed service.
The new services requirements are almost a kind of tough love; as painful a transition it can be for solution providers to take the leap to the cloud services model, it's one they need to make to survive, according to Bruce Klein, senior vice president of Cisco's Worldwide Partner Organization.
"The reality is, customers are requiring that [partners] come in and talk about their business problems and that they have both on-prem and cloud-based offerings," Klein said.
The new Cisco partner program also requires Gold partners to achieve the new Cisco Business Value Practitioner certification, focused on selling to line-of-business customers outside IT. The aim of the certification is to help partners change the tone of their customer conversations so that they focus more on the business outcomes Cisco technology drives, rather than the technology itself.
So far, nudging partners toward cloud and selling business outcomes seems to be paying off. The number of cloud services offered by Cisco Powered cloud partners has shot up 60 percent over the past seven months, according to Klein.
Meanwhile, to enable partners on the SDN front, Cisco already has started rolling out a training program focused on ACI. John Growdon, senior director of Data Center Sales, Worldwide Channels at Cisco, said "hundreds" of partners have completed the training to date.
Lastly, Klein noted that Cisco would continue to encourage its partners to bolster their own application ecosystems through the Cisco DevNet program. For those partners that don't have the resources to invest in their own application development practices, Klein pointed to the Cisco Solutions Marketplace, which he described as a Match.com-like service for pairing Cisco reseller and ISV partners.
Cisco leaders including Klein and Lloyd said they fully expect Cisco to maintain its partner-centric culture, even after Chambers has passed the torch.
"I think our partner model is an innovation engine for Cisco," Lloyd said. "I think it gives us a competitive advantage. And I don't think any one person in this company could actually overcome the way in which that is built into our DNA."
"Our whole business model, as a company, is set up around a partner-centric business model," said Klein. "That is a decision you have to make. If we weren't partner-centric, you would have to build a tremendous amount of internal infrastructure to do what our partners are doing. When John decides he is going to be chairman of the board and the next CEO comes in—I'm sure it's going to be an internal candidate—all of our leadership is very, very focused on continuing to be a partner-centric company."
Partners, for their part, expect that same level of consistency when Chambers steps down.
"I think the DNA of Cisco is very, very partner-centric," said Jim Kavanaugh, CEO of World Wide Technology, a St. Louis-based Cisco Gold partner. "They have built out this ecosystem of partners and I think they find it to be very cost-effective. It would be, I think, very foolish—just to be very blunt—if somebody came in and didn't look at this partner community as a huge, valuable asset that John Chambers and the rest of the executive team has built up over the past 15 to 20 years." Chambers, it seems, agrees.
"I think what you are going to see Cisco do is maintain a very crisp vision, strategy [and] execution … model. We will adjust as we go through it, but if you watch these transitions we have just made, we have really set our strategy for the next three to five years," Chambers said. "We are a partner-centric company, period."