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Chuck's Rx: Cisco's Prescription For Subscription

Entering his second year on the job, Cisco CEO Chuck Robbins is putting his stamp on the company with a new recurring revenue software model to keep its core networking business and channel healthy.

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Entering his second year on the job, Cisco Systems CEO Chuck Robbins is set to disrupt the status quo once and for all for the $50 billion networking behemoth and its partners. Cisco executives from the top down have spent much of the past two years talking up the company's software credibility. The executives point to its jump into software-defined networking; its existing subscription business, which is driven in large part by WebEx and Meraki; as well as a Cisco DevNet community of developers that's more than 300,000 strong.

Now Robbins is set to make a dramatic leap in morphing into a software company by introducing the subscription model within its bread-and-butter network infrastructure business for the first time, a move that fundamentally changes what it means to be a Cisco partner.

The high-risk bet will start small within the next three to four quarters as a pilot program that delivers a new intelligent network software subscription model through fewer than 100 solution providers.

[Related: Cisco Network Leader On How CCIEs And Channel Partners Need To Reinvent Themselves With The New Network Subscription Model]

"The way that the subscription model will emerge on the core networking platforms is that we will disaggregate the control plane, much like Meraki, so that you'll still have a CPE [customer premise equipment] component running an operating system. But what we will do is give the customer the ability to drive automation, policy, security and extract analytics that also influence policy back into the network and give them a simple methodology to deploy policy across data center and the enterprise network," said Robbins.

"That's the way we'll evolve, and we've begun that journey." The 19-year Cisco veteran knows a thing or two about software, having started his IT career nearly 30 years ago as an application developer for a North Carolina bank.

Robbins' ultimate goal is to convert tens of thousands of Cisco partners from experts at selling network routers and switches into application specialists.

His objective is to help customers drive business outcomes and in the process to sell intelligent network software subscriptions on a per-user basis or in the form of enterprise software licensing agreements. Robbins himself concedes that it is a tightrope walk of sorts that could have dangerous consequences for Cisco and the channel if it is not timed right.

"We have to do it commensurate with the pace of the market. I think that is the real trick, and I don't say that lightly," Robbins said. "We really have to make sure that we don't abnormally push our partners faster than the market is ready to move. There is an art in aligning that so that they're pulling the market a bit, but we're not shifting so hard that their profit models are misaligned with what is actually happening in the marketplace."

Push too fast and the vaunted Cisco channel will be left financially battered and bruised as solution providers struggle to adapt to subscription-model economics. Push too slow and that same Cisco channel will be left sitting on the sidelines of the digital application revolution being driven by the Internet of Things.

Even if all goes as planned, Cisco channel partners themselves predict that a good chunk of the Cisco channel will find it difficult to make the necessary investments for the software transition. More than a few longtime solution provider executives predict that about one-third of the Cisco channel will disappear, either through acquisitions or because they fail to make the transition and fade into irrelevance.


Robbins knows the stakes are high and has been laying the groundwork for the big shift since he officially took the helm on July 27, handpicking a new team to lead Cisco into the future. He also restructured the company's 25,000-strong engineering team two months ago into four new teams -- Networking, Security, Cloud Services and Platforms -- with all of the unit chiefs reporting directly to Robbins.

Even before he became CEO—when he was leading the Cisco sales force as the senior vice president of worldwide field operations—Robbins was one of the big proponents inside the company of making the software move. In fact, he was one of the key players who drove Cisco's acquisition of security software maker

Sourcefire in 2013 and Meraki -- a networking company with a subscription cloud sales model -- in 2012. Those two companies combined have brought a $3 billion software run rate to Cisco.

Now Robbins is set to kick the software transformation plan into high gear—moving Cisco's flagship networking business, which accounts for 60 percent of Cisco's annual sales—into the software era. It's a far cry from the model that his predecessor, former CEO and current Executive Chairman John Chambers, put in place decades ago, launching the first-ever Cisco Certified Internetwork Expert (CCIE) certification program.

The big Robbins bet effectively transforms the $180 billion Cisco network switching and routing installed base -- with Cisco IOS (Internetwork OperatingSystem) as the central nervous system -- from an aging IT asset into a high-growth next-generation hybrid cloud computing network on steroids.

Cisco channel. The sales vehicle for the software offensive is Cisco ONE software licensing, which for the first time will be offered as a software subscription on a per-user basis or as a traditional enterprise licensing agreement. Since its launch in January 2015, Cisco ONE has only been sold as a perpetual software license. So far, 2,400 solution providers and 8,000 customers have participated in Cisco ONE.

The Cisco ONE intelligent network software layer, which is based on Cisco's Digital Network Architecture (DNA), will eventually power a new generation of cloud-era Internet of Things applications that could "dynamically influence the infrastructure based on the needs of the application at any given time," said Robbins. "So much like we were doing in the early days with ACI [Application Centric Infrastructure] and data center, just think about the fact that we would extend that capability across the entire network, and we'll give broader capabilities around security."

"Everyone knows we're in an applications-based economy right now, and applications are what the line-of-business buyers are particularly interested in evolving and adapting to drive their business forward," said Wendy Bahr, senior vice president of the Global Partner Organization for Cisco, San Jose, Calif.

"When you have a network that is intelligent enough to sense the needs of that application and adjust accordingly, that is a huge differentiator. We think that it will in fact open up much, much more budget and much more conversation about value."

For solution providers, the intelligent network subscription model gives partners a chance to capitalize on all the investments they have already made, said Bahr. "If I am a partner that has a huge installed base of Cisco, I am going to look at this as being one of the biggest opportunities that we have had in the past maybe two decades to go out and really have a strong value proposition for our customers," she said.


The Power Of Software

Bob Cagnazzi, CEO of Presidio, the $3 billion Cisco enterprise channel powerhouse that is No. 22 on the 2016 CRN Solution Provider 500, says the new subscription model slams the door on network commoditization and opens up new opportunities for Cisco and its channel partners.

"It's a smart play," said Cagnazzi. "Cisco is making the right move here, saying, ’You may be successful commoditizing the hardware, but you'll never be successful competing with Cisco on the operating system.' The strategy is a really, really sound one. The ability for the client to consume the technology in this new way enables all of us to have greater opportunities to expand the services around the network."

Cagnazzi, who is already delivering a Cisco Presidio Managed Cloud Solution to the market, sees the subscription model changing how customers view the core network and how they consume network services. "It changes how customers consume this technology and gets them thinking about the different software services we can offer. Then we can work with them to start planning how they are going to implement analytics or programmability around ACI or software-defined network. This extends Cisco's lead in the networking space and it protects the base they have."

Cagnazzi credits Robbins with laying the groundwork for a richer and more vibrant Cisco channel. "The investments that he has made have started to make Cisco a lot more relevant in a lot more areas where they weren't before," he said. "Cisco has done a good job of jumping into new markets before, but truth be told, things were getting a little bit stale near the end of [Chambers'] tenure. Chuck has come in and with the appointment of [Zorawar] Biri Singh [as CTO] and some of the reorganizations has really put a focus on areas where Cisco can create a competitive advantage in how they're going to market and the technology that they bring to market. There's been more evolution of what we can sell and what clients can take advantage of in the last 12 months since Chuck has been there than we've seen in a long time."

So how big is the potential windfall from the Cisco software transformation? Big enough that Carousel Industries, a $400 million powerhouse ranked No. 64 on the 2016 CRN Solution Provider 500—a longtime Cisco antagonist that has partnered up until now with Cisco rivals like Juniper Networks, Avaya and Extreme Networks—is making a massive investment to be a major Cisco partner in the intelligent network subscription era. Carousel earlier this year hired Brian Davies, a nine-year Cisco veteran, as vice president of Cisco sales to build a Cisco practice. Carousel is even eyeing strategic channel acquisitions to accelerate its Cisco go-to-market plan. Davies sees the Cisco software transition powering Carousel to cross the $1 billion mark.

"To me it was as clear as day, there's only one company out there that can allow a large organization like Carousel to be able to get to the next level," he said. "If you look out a couple of years, I don't think there's any company even close to [being] positioned as well as Cisco is."

Carousel is starting from a blank sheet of paper, putting in place a compelling software subscription plan for customers. "We're not married to any legacy way of doing business, so we can really look at doing things from a fresh slate and build a business that's going to be agile in this environment as it is -- not as it was," he said.

Davies predicts the current Cisco channel model—composed of 80 percent capital expenditure-based hardware and 20 percent operating expense-based software subscriptions with offerings like Sourcefire, Meraki, Webex and SmartNet—will shift to a 50 percent Opex-based software and 50 percent Capex-based hardware model in the next two to three years.

"This is something Cisco needs to do to stay relevant and grow market share," he said. "It's the way customers want to acquire technology. They don't want to go out and put down large amounts of Capex for hardware that is going to be depreciated over many years. They're interested in a pay-as-as-you-play, Opex software model."

Davies predicts that the new software subscription model will drive customers that have been balking at multimillion dollar network upgrade expenditures to move into the SDN era. "If you make it easier for customers to consume the technology with a subscription model, it should pull forward a lot of business that might have otherwise lingered out there for some time," he said.

Mont Phelps, CEO of NWN, No. 68 on the 2016 CRN Solution Provider 500, says Cisco is his company's most strategic vendor and he is confident that under Robbins' leadership the company has what it takes to make the transition.

"We are anxious to see this happen," said Phelps, whose company is driving 50 percent recurring revenue in some regions with Cisco's unified communications software as a recurring revenue cloud-based offering. "We're putting our money where our mouth is with Cisco and betting on the Cisco software transformation. We continue to be extremely bullish on our Cisco relationship and where we are going with them."


The Digital Application-Centric Era

Cisco executives say the intelligent network transformation will not only drive higher channel profitability but will also move the tens of thousands of CCIEs in the channel to play a more critical role in the digital application-centric era. What's more, they say, is that network hardware upgrades will continue into the future.

The benefits for partners with the Cisco ONE software is ultimately increased profitability in the application-centric cloud era as partners deliver new services to line-of-business services customers, said Bahr. For example, she said, partners in the future will be advising retailers on sales per square foot or insurance agents on the average cost per claim. "Partners get a lot of credibility when they start talking about the functionality of the software to help drive insight into the [network] analytics," she said. "This is what digitization is really all about. We think this is a tremendous opportunity for our partners to add more value and for our customers to gain more value out of their networks."

A major Cisco challenge, partners say, will be making sure the Cisco sales force is on the same page as the channel. Those sales reps have been compensated handsomely to drive network hardware upgrades and now—like the channel—will have to drive line-of-business sales hand in hand with partners. The potential for channel conflict in such a transition, partners say, is extremely high. Some partners predict significant Cisco sales force turnover as a result of the transition.

"Cisco thinks they can adjust the knobs on the [Cisco sales rep] comp plan and that will result in a favorable outcome," said the CEO of a top national Cisco partner, who did not want to be identified. "They have the best sales force in the industry. But this transition is more complicated, and it is going to require more direction and management in the field than just changing some comp plans. I see a gulf between what Chuck and top management sees as the opportunity and the direction of Cisco reps in the field. That is a big execution risk for them. They have to make sure they have reps who understand software, recurring revenue and software solutions."

Bahr said she is determined to make sure the Cisco sales reps and the channel are carefully aligned in the Cisco ONE software charge. She said Cisco ONE in a perpetual license format already has one of the highest partner rebates in Cisco's highly regarded Value Incentive Plan (VIP) rebate program and that the value exchange will continue as Cisco rolls out the Cisco ONE subscription plan.

The key for partners, Bahr said, is investing in new Cisco software roles—specifically, Lifecycle Advisor, which is aimed at driving software and renewal sales, and Software Integrator, which is aimed at programmability, integration, API management and DevOps.

"We're really going to be helping our partners with workshops, with enablement, bringing on that Lifecycle Advisor role, helping them understand what it takes and the resources they need to invest in to get that adoption and lifecycle management practice stood up," she said. "We see this as a huge area of opportunity for our partners to create real stickiness with customers with the ability to turn on and utilize the feature functionality across our entire [software] portfolio—collaboration, security, Cisco ONE."

Bahr knows that there is uneasiness among partners concerned about the big shift to software.

"There's a little bit of excited nervousness about the journey," she said. "But there's a whole lot of expanded opportunity that the partners are really excited about." Besides, she said, Cisco and its partners have broken new ground before—leading in breakthrough new markets like unified communications and collaboration, which is now a $4 billion Cisco business.

Cisco has been talking to partners about the software licensing and subscription model for some time and is now simply applying the model to network infrastructure with Cisco ONE, said Bahr. "This is not a revolution," she said. "It's an evolution. What we've always done with them so incredibly well in the past is we go on a journey together and in that journey timing is important. We have to time the elements of our value exchange."

Jeff Reed, who took over in March as Cisco senior vice president and general manager of the enterprise infrastructure and solutions group, sees the network playing a more critical role in the future as customers remake themselves for the digital application era. What Cisco is embarking on is a plan to leverage its network operating system to virtualize the infrastructure. "This is about taking all the goodness in IOS and delivering it in both a physical form factor, but also in a virtual form factor and really allowing customers to be able to deploy this in the best place in their network on the appropriate hardware across the infrastructure," he said.

The new intelligent network model will enable billions more connected devices on the edge of the network—providing more automation and analytics. Cisco is also delivering the cloud-based service management platform—DNA—which is a software-driven, service-centric solution that is open and extensible with publicly available APIs, said Reed. He said he is heartened by the investment partners are already making in the new software capabilities. "They're looking at taking what we're doing in DNA and being able to extend it and customize it for our customers as they go deploy networks," he said.


In the next several quarters, Reed said, Cisco will have a whole set of products that will "only be available in subscription or ELA." The beauty of the Cisco ONE software model is customers that buy the subscription license will now automatically receive powerful new intelligent network functionality on a continuous basis, he said. "We think it's going to be hugely impactful," he said.

Reed expects the majority of customers to opt for a software subscription model versus a traditional ELA. "We have customers where this fits their budgeting process," he said. "It's really exciting because this takes Cisco to a new place both from how we deliver capabilities as well as a consumption model that changes how we transact broadly with our customers and through our channel. It's going to open up huge opportunities for the company."

Reed sees the software transformation moving CCIEs from "mundane" network automation tasks to playing a central role in the digital application business for customers. "We're in the process of changing the [CCIE] certification process and adding capabilities and requirements around moving to a digital network architecture [that is] controller-based, programmable." In the future, CCIEs will focus on network-enabled business outcomes, he said. "There's a whole host of things that enriches the type of capabilities the CCIE can deliver," he said.

Reed does not expect a drop-off in network hardware upgrades even as Cisco fully unleashes Cisco ONE. "I don't see a big change near term or for the foreseeable future in the hardware refresh," he said. In fact, he said, Cisco's Digital Ready Network sales offensive is driving upgrades. "There's a lot of old gear out there that can't support the new capabilities we're enabling in DNA, and so that's going to be a huge focus of the Cisco field and the partner community—driving that [network refresh]—in the future."

What Are The Risks?

As Cisco moves forward with Cisco ONE, there are battle lines being drawn within the Cisco channel with regard to just how the software subscription model will work—with some solution providers pushing for a metered usage option that provides a compelling alternative to Amazon Web Services or Microsoft Azure rather than just a monthly per-user subscription or an ELA model. What's more, some partners are pushing for Cisco to restrict access to the software subscription model to an elite group of Cisco partners.

"We have to be mindful that we don't commoditize the consumption of the software," said one top executive for a large Cisco enterprise partner, who did not want to be identified. "The software is going to have a lot of value and features in it—that's great. But we don't want to turn that into a purchasing department decision. If you commoditize things, then obviously we can't make money. The biggest challenge for [Robbins] is ensuring that the model that Cisco puts together for channel partners to take the software to market doesn't lend itself to commoditization on a massive scale."

Robert Keblusek, chief technology officer of Downers Grove, Ill.-based Sentinel Technologies, a $200 million Cisco Gold partner that is No. 131 on the 2016 CRN Solution Provider 500, said he would like to see Cisco come to the table with a metered usage model that will allow his company to bill and take hold of the software license subscriptions.

"We do subscription models with Cisco, but it is not month-by-month pay-for-use," he said. "It would be really nice if we can at least have options to have a month-to-month pay-foruse. We meter on our [Sentinel CloudSelect] cloud a lot of different things and then we charge back to the customers. We hit licensing points for Cisco products all the time because they aren't really metered and paid for use. We end up having to buy a 12-month or 36-month contract license on behalf of the customers and over the course of the life of that contract they might need more bandwidth, things that increase or even decrease. Cisco doesn't really have a pay-as-you-grow model." Partners need more visibility and education with regard to the profit opportunities in the new software model, said Keblusek.

The biggest risk as Cisco makes the transition to a software subscription model is that the sales of network routers and switches could plummet as more customers embrace the cloud. "It's a delicate transition that has to be made," said David Heger, a financial analyst at Edward Jones & Co. "You've got a big chunk of revenue in the switching and routing arena. If that goes away too quickly, you may go through a time period of down revenue and a potential drop in profitability as they make the transition."

Heger, however, sees Cisco's router and switching hardware sales staying relatively flat over the next several years. "I'm modeling it relatively flattish," he said. "When you get beyond the next two years that's when you get to where the software piece of it could become more important and customers might start making that transition faster."


One positive sign for Cisco on the network hardware front is that Cisco sales to its top 10 Web-scale customers—companies in the vein of Google or Amazon Web Services—were up 31 percent in the most recent quarter. Even though the Web-scale giants have moved to commodity x86 servers, they still have not been able to get to a point where they can run completely on commodity routers and switches, said Heger. "That gives me confidence when I talk about [Cisco router and switching] revenue being flattish over the next two years, the technology has not evolved enough yet. We're just not at a point yet where a big Web-scale player is going to jump full bore into commodity networking hardware."

Heger said the channel will be critical in driving the Cisco software transformation. "They definitely have to have the channel on board to make the transition," he said. "Cisco really has to have buy-in from them to manage the transition. A lot depends [on how] the transition occurs, how quickly partners pitch the new model."

So far, Heger said Robbins has done a good job balancing the transition. "Cisco is in a better position than some of the other big tech companies who have had a rough time making a major transition," he said.

Kent MacDonald, vice president of business development at Calgary, Alberta-based Long View Systems, a Cisco Gold partner ranked No. 85 on the 2016 CRN Solution Provider 500, said there has never been a better time for Cisco to bring a "disruptive" new model to the channel. "Partners are looking for a different consumption model and, more importantly, for our customers to be able to buy it on a scalable model and a monthly recurring model versus pre-buying infrastructure and then trying to leverage it over its life cycle," he said. "This gives the customer the protection, investment continuity and scalability as they go forward. From a partner lens, we're very enthused to see the creativity and innovation versus continuing to always drive something from the speeds and feeds of a hardware scenario."

Robbins, for his part, said he is confident that Cisco will evolve its channel incentives in a manner that "leverages and enables" all of Cisco's partners to participate in the intelligent network software transformation.

"If you look back to our history, we've gone through lots of transitions that we've worked with our partners," he said. "Any time we've had a value proposition for them, they make the transition."

That said, Robbins knows Cisco must move faster. The clock is ticking for Cisco and its channel partners. "The thing that I continue to stay focused on," he said, "is the fact that we have to move even faster than we're moving today. I think our partners are ready, and we just have to drive that." Cisco and its channel partners are counting on it.

Steven Burke contributed to this story.

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