Q&A: Cisco's Channel Chief Reveals The Next Big Thing For Partners (Hint: It's Software)

In front of an audience of 2,200 solution providers in Montreal, Cisco Systems' global channel chief, Bruce Klein, will set the table Tuesday on the opening day of the 2015 Cisco Partner Summit by laying out Cisco's vision for where the company's channel partners need to place their bets.

At the top of the list is Cisco's move to focus on software, cloud and services, three areas toward which Klein and a bevy of other executives at the conference will try to direct partners' focus.

A week before kick-off, Klein, senior vice president of Cisco's worldwide partner organization, spoke with CRN Executive Editor Jennifer Follett and Associate Editor Mark Haranas about the company's desire to see more channel partners build Cisco software practices, why he thinks it's critical and the challenges partners will face as they do it. Edited excerpts of the conversation follow.

[Related: 2015 Cisco Partner Summit Coverage]

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CRN: What are the main themes you'll be hitting on in Montreal?

Bruce Klein: There's a lot to talk about, a lot of change happening. We're keeping on this discussion around change, because, boy, change is happening so fast, as [Cisco CEO] John Chambers continues to say. We're obviously seeing that. Things that we started talking about years ago are so present today.

One of the big topics is talking about what we have built over the last few years around the partner ecosystem. The success that we're actually having and seeing is pretty incredible. When we thought about it three years ago, some of the partners were looking at me and going, "Really? I don't get it. I don't see it. I don't see us connecting with other partners.' Although today it's happening. Time and time again, that's truly how our partners are [working] to deliver new solutions and outcomes to customers. So, we're going to talk about that: The partner ecosystem will be a big, big, part of it.

We're going to talk a lot about where our partners are seeing their growth and revenue come from, that profitable growth. We're seeing our partners' models evolving a lot more around IT as a service, really looking at the value they're providing their customers from a services perspective and a consulting perspective. They're starting to think about being more vertically oriented so they can add more relevance to their conversations and start talking outside of IT to line-of-business executives.

With that, they need new skills, and we're going to talk about how we're going to help them through that. We're going to talk about those opportunity areas around solutions, around hybrid IT, the way the customers are actually buying and consuming the technology both on-prem and in the cloud -- that's what we called hybrid IT -- and what we're doing in each one of those areas around solutions and hybrid IT.

Then the third big area is around software. … You're starting to see the information age morphing into the digital age. We see it all the time. You see the Ubers and the Spotifys and all these companies that are coming into the market in a digital way disrupting the old way of offering services and delivering value to their customers.

CRN: Are you talking about software-defined networking at this point, or something else?

Klein: No, software-defined networking is more of the technology. This is software that we're bringing to market like Cisco ONE that we announced a couple of months ago, where we're looking at the features that we've had in software that we sold separately, and what we're doing to now bundle those features together, and looking at how that aligns to an outcome.

For instance, if you're thinking about hybrid IT, there are a number of software components and features that we would have had to sell separately. What we've done within Cisco ONE is we've integrated those software components together into an integrated software suite that our partners can take to market that helps them have a different conversation with their customers. It's more of a business conversation.

It adds a tremendous amount of stickiness to the partner in that account when they start selling the software that you can actually move to different hardware platforms. Before, where the software and the hardware were connected, and when you bought a new router or switch … you'd have to buy the software and the hardware together. Now we're looking at putting these integrated software suites into their own SKU, if you would. It's a whole new way that our partners can offer value to the customer and it's a way to make a tremendous amount of additional profitable growth, to drive profitable growth, because the margin on software is also nice accounting.

CRN: What's been the uptake as far as the partners actually selling those SKUs?

Klein: It's been good. It's been a really good uptake. We've got about 176 partners [globally] that have been trained and are building practices around selling Cisco ONE. We're starting to see the things that we're talking about in terms of when we talk about growth and profitability. We've even modeled it out. We're seeing partners driving about a 60 percent uplift in revenue over a five-year period and about a 70 percent uplift in partner margins around selling software this way. We're starting to see a tremendous amount of value and a lot of wind is starting to pop up.

CRN: Selling that way vs. selling it the old way where it was all piecemeal?

Klein: Yes, exactly.

CRN: Were those partners that just started up right up in January with the launch of Cisco ONE or were they part of a pilot that had already been queued up?

Klein: Those were part of a pilot that were queued up. Then we've been doing a lot of training and workshops and more and more partners are coming on board through the training and the workshops.

CRN: How long does it take for a partner to build that practice?

Klein: It varies depending upon the partner's capability. A lot of partners already have a software selling motion. They're working with other software vendors. [For] those partners, it's easier, because they already have an organizational structure. Some partners are hiring talent to do this and retraining talent to do this. It really does vary. It's a different way of selling. Depending upon the level of experience they have, some need more enablement than others to make the transition. Some, again, they've been selling Microsoft. They've been selling Oracle. They've got folks that really understand how to sell software. Then it's easier for them.

CRN: The 176 partners, obviously, that is a pretty small piece of the overall partner base, but is this the direction where you're trying to push the majority of partners? What's the percentage of the partner base that you feel like needs to move in this direction?

Klein: Yes, we want more and more partners to move in this direction. They're going to see over time that we're going to come out with more and more software solutions. We're looking at partners to build a Cisco software practice. When you think about software, you also need life-cycle skills. So for life-cycle skills, those that actually sell the software, they land it -- we call it 'land.' Then those that can really help customers use the software, that's 'adopt.' Then when you get in and use it, there are always features that you can help them expand. So that's 'expand,' and then the last is 'renew.' It's land, adopt, expand, and renew -- that life cycle. You'll see more and more programs come out from us to get our partners to invest in that type of selling motion.

CRN: Are you thinking, though, that this is going to always be a slice, a minority slice, of the partner base or do you feel like within a certain amount of time, more than 50 percent of Cisco partners need to be selling this way?

Klein: I think more than 50 percent of the partners need to be selling this way, because again, if you look at where the market is going, we talk about digitization, and you can't digitize a company without software. We talk about cloud and hybrid IT. More and more of the software offerings are going to be coming out in the SaaS model. They're going to see that from us. They're going to see us recruiting ecosystem players, recruiting more of those SaaS providers on our cloud and for them to connect with those software plays. ... There'll be software that will come out of Cisco, both on-prem software and SaaS software. We want more than 50 percent of our partners to really work a Cisco software practice into their business model.

CRN: That would be a pretty big shift. You're basically saying that the majority of the Cisco partner base would actually be software-led partners vs. hardware led-partners, as they are today?

Klein: I wouldn't say [partners will be] software-led vs. hardware-led. I'd just say it'll be part of their practice, because they've got a Cloud Advantage Services practice. They've got a practice where they are selling our hardware, our technology solutions. They're Gold-certified. They do the specialization certifications. They'll still have that, absolutely, but I think the software piece is another big piece [and you'll] start seeing us put different roles into our ecosystem that we want partners to play. ... It's also a big growth area for them.

CRN: Can you help us quantify how big of a change this would be for the partner base? How big of a shift it would be, this concept of moving more toward software and Cisco ONE?

Klein: Cisco ONE is one component, because we're also coming up and introducing a lot of software around big data and analytics, and our collaboration suite. ... They'll see more and more offers, not just Cisco ONE. Cisco ONE is one piece. Then there's analytics that is coming out. There's collaboration. Even our security practices, they'll be a lot of cloud software based on security software that'll come out. Our whole portfolio of software offerings is going to expand over the next couple of years.

When you think of it, it's like any shift. It's like saying back when we were selling our routers and switches that were moving into voice. 'What's Cisco doing? They can't compete with AT&T and Verizon and the big boys.' The partners started coming. They started seeing the value that we were bringing to the market, where voice is a service on an IP network, and they started building practices around it.

Then, we said we're getting into the data center business. 'Why would you get into the data center business? Why are you competing against IBM and HP? You've got to be crazy.' Then we brought a disruptive model in and integrated network and storage and compute together. They started building data center practices, selling our data center [technology].

Software's another part of the journey. That's how I see it. It's another part of the journey. ... We do see these tremendous growth opportunities and profitability opportunities in software. It's just an evolution to us with our partners to bring in new innovation to them that will drive new growth opportunities and help them deliver what customers are asking for, help deliver more end-to-end solutions that have a return on investment. That's what we're doing.

CRN: All these shifts, as you've just said, have brought new competitors, so who are the new competitors that will be brought to the Cisco partners as a result of this software shift?

Klein: Well, I mean if you look at the various markets, with collaboration, it's the same competitors that we've been competing with. It's just that we'll have new offerings in the software area around collaboration, like Spark, where we're talking about new ways for customers to collaborate and have different types of ways to bring people together. There aren't any new [competitors] there. Security's the same. If you look at Cisco ONE, it's the same competitors.

I'll give you an example. Selling this way, bundling these packages together, we had a partner and a customer and a sales rep come together to present this to a large grocery chain, on what we're doing around creating this to, in this case, create a foundation for their branch offices. You can imagine, supermarkets all over the place.

They needed a foundation for their wide area network. There were five or six software components we packaged together to the customer. They saw that as, 'Wow, this is really a value to me. I see value. I see financial predictability,' because this is a recurring revenue opportunity so they know what they're spending on software vs. having to buy software together with all the hardware components. They saw a lower cost, a lower TCO. They said, 'This is exactly how we want to have this discussion. It's a business discussion vs. a technology discussion.'

With that, that bundle included WAN optimization. [They were using technology from] one of our competitors. They had 575 stores, and just with this one opportunity [our competitor] was basically replaced and they didn't even know they were replaced, because the supermarket chain chose to go with this bundled solution. They didn't need our competitor's solution in there, so they retired that. [Our competitor] lost the deal without even knowing [it.] They didn't even compete for the deal. It really does change the conversation.

CRN: When you said earlier you felt like that more than 50 percent of the partners need to move toward this model, how long will it take to get to a point where the majority of partners are looking at the world this way?

Klein: Well, I can't say. It's hard to predict. Again, the partners look at where are they going to invest? Where do they see the biggest return? I'll think we'll paint the picture about this [and] they'll see what customers are asking for, because they see it. ... When we look at this market potential, in the software features, this is about a $14 billion market. Today, with our partners, we capture about $100 million of that market. There's tremendous white space here in taking this to market. I'm just talking about Cisco ONE itself.

How long? I don't know. ... The more conversations we're having with partners, the more they're going, 'I get it. I see the opportunity, and I want to invest.'

CRN: What are the biggest challenges that they would face as they try to make this shift?

Klein: Just like anything else, like when they shifted to hybrid IT and cloud: It's getting their sales reps trained. Getting their sales rep to feel comfortable having a different conversation both inside IT and outside IT. A lot of the software solutions are sold to a line of business or they're sold to CXOs, like CFOs. Some of it is a financial discussion.

CRN: So you do or you don't think this is going to be for most partners a shift in identity in the way that they think about themselves, where they used to think of themselves as a hardware partner and now they need to think of themselves as a software partner?

Klein: I think it's a shift in identity of how partners need to shift in general. It's not just software, as I said. I think they need to shift. They need to have competence in those three areas. They have competence in delivering solutions vs. the balance of just selling boxes and technology. ... What we think is extremely critical for our partners is to have that competence going forward in the way that their customers are buying and what they're doing in moving to digitization and helping them solve real problems.

CRN: The increases you talked about earlier, the uplift in revenue, and in margin partners can see selling this way, what are the primary things that drive those uplifts?

Klein: When we sell these software features bundled, each sale is about two and a half times the size it was before. Again, it's because the value that the customers see in these multiple software features vs. if you just went in to try to sell one feature here, one feature there. They didn't see this value. We're seeing that the deal size is higher.

Just in general, if you look at the growth of the software market, it's growing two times that of the hardware market. If you break it down and you look at the technical services in software vs. the technical services in hardware, it's growing more than six, seven times on the software side. There's just tremendous opportunity there. The margins on software vs. the margins on hardware are much higher. Those factors, when you put that together, and you look at selling a software bundle over four, five, six years, that's when the revenue and margin models start playing out.

CRN: Will there still be a place in the Cisco partner ecosystem for a partner that doesn't really want to move in this direction?

Klein: Absolutely, absolutely, Customers are still buying technology, and there are partners that are going to stick that way. It's a question of time. ... Will they thrive today? Will they still grow today? Yes. The question is, we're seeing this shift, and over time, as other partners start shifting the conversation, and are building the capability in solutions hardware, software and services, and being able to have more relevant conversations with customers -- the same customers that would be competing against a partner who's just selling technology -- they're going to have a harder time to win that business, a harder time to create that relationship, because the value comes more in the solution selling than it does in the technology selling.

CRN: When you spoke earlier about the rise of the digital age vs. the information age and all the Ubers and all those kind of digital customers, isn't that a threat for Cisco given that a lot of those companies are actually looking more for like a white-box network solution, kind of in the vein of the Facebooks of the world?

Klein: No, we don't see it, because what we see is, and what we really hear from customers too, is deep down when they look at making that shift, it's about thinking through what we have invested in and innovated in over the last couple of years, and bringing it all together. You've got these point product solutions, yes, but think about what's No. 1 on their mind. It's security. ...

What we've done around ACI, what we've done around the data center, around the collaboration tools, you know you think about all the different areas that we're bringing together and having these different components, these different solutions, technology solutions work together to solve or help them digitize. There's no other company in the world that can bring this to market in the way that Cisco's bringing it to market.

CRN: What about Hewlett-Packard?

Klein: I think HP has its own challenges in what it's doing, obviously. There's a lot going on with HP with the split-up of the company. We'll see what they come out with.

If you look at what they're doing, what they're focused on, and you take a step back and you think about what Cisco is doing about bringing all of these components that we've been working on together and even what we've done around being bold and reorganizing the company and our engineering teams to create new divisions that are focused on putting these horizontal solutions together made up of all the different business units' technology to help our partners deliver these integrated suites and integrated solution sets, and how our services teams are offering more services offerings for our partners, I don't think anybody is delivering that to our partners like we are.

CRN: HP is making a lot of moves in the same markets you are. It does seem like this is now a Cisco vs. HP world, don't you think?

Klein: Well, I think we have a lot of competitors, right? We look at it as 'competition is good.' It keeps everyone on their toes. It keeps everyone focused on how do you differentiate and how do you bring the right solution to market. ... We're not just focused on one competitor. We're focused on what we can bring to the market that truly solves what the customers are asking. I don't think anybody in this market does it better than Cisco. … We've got a track record that proves it. All the predictions we made around voice, around data center, around Internet of Everything, it's all come to reality. … We have not steered [partners] wrong. They have continually grown their business with us. I think that, from a partner perspective, I would not bet against Cisco.

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.