Chambers: Time For Cisco Partners To Move

Cisco Systems President and CEO John Chambers discusses Cisco’s push toward intelligent networking, what role channel partners will play in it and the choices that partners now face in an interview with Infrastructure Editor Jennifer Hagendorf Follett. Here is an excerpt of the conversation.

CRN: How will your idea of the network as the platform for communications and services play out from the partner perspective?

CHAMBERS: What is really exciting is it opens up more opportunities for all of us. If the network evolves the way I believe it will, and you hit the two key premises, the network becomes ‘all forms of communication go into the network and all forms of IT go into the network.’ The network in essence becomes the platform for delivering applications and services. What that means is there has never been a better opportunity in terms of both selling the elements of the network together to customers and being able to add value on top of it for which customers will pay a premium.

So whether you call it share of customer spend, share of the wallet or share of capital spending, it appears--and this last quarter was a pretty good proof-point--that that will expand for us and our partners. The key issue for us is to transform beyond just selling ‘equipment’ and installing and making it work to say, ‘How do you add value, add services on it? How do you help the customers implement it in a shorter time period than they would have traditionally done? How do you help them move onto the business applications? How do you help them differentiate this new era for the network?’ Bottom line is, there’s probably never been a better time to be a Cisco partner.

CRN: Because of the opportunity?

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CHAMBERS: Because of the opportunity, but also because I think Cisco is getting better at truly partnering … I think we’ve gotten better and better at focusing on the partner. Perhaps five years ago, when everything was hot, the partner wouldn’t have wanted the help. But right now [we] focus on how we create new opportunities and new growth together.

CRN: From conversations I’ve had with some of Cisco’s channel executives, they are looking for partners to make some shifts in their business models. They either will have to become a broader partner, a really deep security partner or a really deep VoIP partner. What’s in it for the partner to make that risky choice?

CHAMBERS: I think what’s in it for the partner is exactly what’s in it for Cisco. We both face the same issues … what’s in it to justify the risk? I would word it the reverse way, that the real risk is in not moving. Now while things might continue well for another six months or 18 to 24 months, if this market transition truly evolves the way that I think it’s most likely to, the worst decision you could make is not to move.

Just like service providers are realizing that the transport of data, voice and video will commoditize, so will merely installing a product and making it work. If that’s your expertise, there’s not going to be much margin and much growth. It’s how you add value-added services, how you improve the profitability of it working in a shorter time period, how you add applications to that to integrate. It’s how you differentiate. So you can do it in multiple ways. You can be a partner that primarily installs it and makes it work. … By the way, the margins will be very, very, very thin. Or you can say I’m going to be a partner that works across many areas and be able to help our customers transform their business and I’m going to do that across multiple industries, or multiple applications in these industries. Or I’m going to be a partner that specializes in a few: IP telephony, security, storage, wireless. And this is where I think each partner has to say what do they want to do and be realistic on what is their sustainable differentiation and what is not, and how much resources they’re willing to put in play to achieve that goal. But the takeaway here is that the real risk is in not moving. …

By the way, the exact same thing is true of Cisco. The real risk we have is in not moving, staying in routers and switches, or staying in merely installing the products and making them work as opposed to integrating them, [looking at] how you bring value on top of it, how you reduce the risk for customers, how you provide them the ability to get the payback quicker, how you change. ... Our real risk was not moving. And by the way, we were very fortunate. Most of our industry peers did not move, and so they’ve given us a remarkably wide-open playing field for at least three to five years.

CRN: Cisco has brought out several new technologies, such as Application-Oriented Networking and IP Interoperability and Collaboration Systems (IPICS) radio technology, that don’t initially carry a strong channel play. When and how will they be brought to the channel?

CHAMBERS: One of the lessons learned was to do it slower, learning from our IP telephony example. We brought IP telephony out across too broad a base, across too many partners, and candidly we all went through some of challenges together. ... You want to only bring [new technologies] out when they have the stability, the mass-market opportunity, the leverage for our channel partners. …

My intent is to constantly have a pipeline, hopefully, of a new advanced technology every four months. So that’s a challenge I’ve given engineering. So as that occurs, by definition, over time once this really gets implemented, there should be a new advanced technology rolling out to our channel partners every four months. CRN: How much is too much for those advanced technologies? How many are too many?

CHAMBERS: We’ll find out if there is a limit or not. I think a lot of it depends on how customers make decisions. If customers make independent decisions, then your ability to have a wide variety of them would be very difficult. If the decisions are actually intertwined or capable of being first loosely and then tightly tied together: When you buy a switch, put in card and it becomes a router, put in another card it becomes a security device, put in another card and it becomes a wireless device, put in another card and it becomes a PBX replacement, that has a tremendous advantages to having multiple [forms] on it.

CRN: In 2004 and 2005, you had 12 acquisitions in each year. Is that the pace you expect for 2006?

CHAMBERS: No, [with] acquisitions, you ought to be careful not to set a pace. You use acquisitions to move into new markets, and you do it in a way that what you pay for them offers upsides for your shareholders and for your customers. So that’s both a timing issue and a new market opportunity issue. So the right answer isn’t, ‘Do we do three a year or do we do 20?’ The right answer is, ‘How many markets can we move into where an acquisition can either be our entry point or supplement our entry point?’

CRN: Would new acquisitions be tied to new advanced technology areas, or are you still filling in pieces of what you already have?

CHAMBERS: All of the above. For security, that’s going to be never-ending because security isn’t individual products, it’s an architecture. And no sooner do you anticipate what you need to do in one area then a new challenge or new bad guy crops up that you have to deal with. Others, then it’s not as likely--like in routing, for example.

CRN: So when you look across the Cisco portfolio today, what pieces are missing?

CHAMBERS: To your earlier question, there are a lot of pieces we can expand on--so really taking storage virtualization to the next level, to look at how you take that into processor virtualization, application virtualization. ANS [Application Networking Services] was just the first step, obviously. The ability to take data/voice/video convergence with mobility and move into issues like telepresence, etc. So I think at the present time it’s more which ones do we focus on and can we truly, sustainably differentiate ourselves. Remember, my guidelines are that I don’t enter a market where we can’t be No. 1 or No. 2 with a billion-dollar market potential for Cisco per year. That helps us filter what we do and don’t do.

CRN: Is there any fear or concern that the channel partners Cisco has today aren’t up to the task of spreading themselves across all of these different areas?

CHAMBERS: Let me answer the question maybe a little bit differently than you asked. There is not a concern that if we and our channel partners work this transition that we can’t be very successful together. It’s more a matter of, can we both execute well to achieve that? And being very open, hopefully most of the channel partners will. I’d be less than honest with your readers if I didn’t say that some will not make that transition. I think that’s more an issue the channel partner controls as opposed Cisco. We’ll be very open with our channel partners about where we think the transition is and challenge our partners to move.