CRN Exclusive: 30 Tough Questions For Cisco's John Chambers

Change Is In The Air

John Chambers sat down with CRN editors last month in his San Jose, Calif. office, where the 19-year Cisco Systems CEO got candid on everything from Cisco's rivalry with VMware to the steps he's taken to ensure his succession plan -- when carried out -- happens as smoothly as possible.

Chambers also shed light on Cisco's emerging Intercloud strategy, the looming impact of the NSA revelations on Cisco's business and why Satya Nadella, in his opinion, is "perfect for Microsoft." The following are 30 insights from Chambers on these topics and more. Take a look.

Is SDN or cloud the tougher market transition for Cisco right now?

What's going to be interesting is that people tend to think of each of these market transitions in isolation. I would argue that they are all happening at the same time. You have your technology transitions -- i.e., cloud, more and more software. We are going to tie software, hardware, ASICs and architectures together in ways that our counterparts are not. You have mobility, you have security, you have collaboration, you have video, you have the Internet of Everything and you have Intercloud going on. And, so, our view is that each of these together offers an opportunity for Cisco. And if we are going to become the No. 1 IT player, along with a very powerful channel partnership where we win and all of our channel partners win, you have to tie these together for customers, because you could be in a meeting when you talk about outcomes to a customer and you could have each of the groups I just said. What a customer wants is to take it from discovery to outcomes. And if we can do that as a company with our partners, they are going to pay a major premium for that. And [there will be] major benefits.

How are you getting over the perception that Cisco is too hardware-focused?

Results. First you outline vision and strategy. The majority of our engineers -- 80 [percent] to 85 percent of them -- are already software engineers. And if you watch the areas that are growing, it's software. Now what is ASICs? ASICs is hardware and software combined. You put in the hardware, something that doesn't change; you put in the software, something that changes all the time. ASICs is something that will be a combination of the two. So we have our software and hardware teams sitting side by side, developing ASICs. And before it even comes out, we are already starting on a second generation of custom ASICs where you put more software into it to get the speed.

So you just embrace it. So, if you watch, watch our scale and how quickly [our] ACI [Application Centric Infrastructure] takes off versus our competitors. In fact, I would actually argue our competitors in the SDN area have very few true, paying customers and very few examples of scale.

Is the development cycle for Cisco still to start off separately and end at the ASIC?

No. The goal would be you start off in certain amount of hardware, a certain amount of ASICs -- which is hardware and software combined -- and a certain amount in software, which we'll never change. You put into software what you are going to change, not monthly. If we do our job right, we will be changing software multiple times a day, just like the major web players do. And you have to build a structure that allows you to move with that speed and scale. And so what Application Centric Infrastructure does is it embraces software and [delivers] your advantages of SDN without the disadvantages.

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.

When you say 'software networks' can't scale are you talking about VMware NSX?

I'm talking about players like that, yes. And so, what we will do is take those concepts and introduce new concepts like self-learning networks. It was something we started about 15 months ago, you would have never heard about it if it didn't work. We took a small, couple handfuls of people and said, 'How do you really do self-learning networks for the Internet of Everything, for optimization of the network and for security reasons?' So you will see us embrace this software and then play it out with merchant ASICs, which is how other people do it, but also with our own custom ASICs where we embed it even deeper and it goes faster -- we let the customer [decide] on openness, whichever way they want -- and hardware. That leads to the Internet of Everything, which is really going to be the driver of business productivity for the next decade.

There's a lot of partner interest in Arista. Are they one of Cisco's top competitors right now?

Basically, Arista is one of several dozen competitors we face and one of several dozen that are in the top peers in a product category that we compete against.

We compete against them in architectures. We compete against them in terms of how you combine software and custom ASICs and merchant ASICs and hardware. And we compete against them in terms of embracing SDN in an implementation that is able to scale and able to do it with security.

So the way you compete is just say 'what is your differentiation and how do you make it happen?' Now let's deal with the numbers. The product was just shipping, the Nexus 9000, two quarters ago. Twenty-five customers were [adopting] it. Last quarter, 175. Now I can't share with you what this quarter is… But where we are is, just watch our number of accounts. And watch how quickly we blow right by Arista -- either revenue-wise or number of customers.

VMware said recently they have 150 NSX customers. So that sounds pretty on par with ACI adoption?

Well, I would ask three questions. First, we already have 175 customers, two quarters in, with what we are doing. Two quarters in, not five years in. Secondly, are those [NSX] customers really in scale and are they paying for it? In other words, are they large scale implementations and are they paying for it or are they just taking a segment of their enterprise licensing agreement and allocating it to NSX? I can't tell you that. You all can decide.

It's a nice way of saying, I love our hand vs. VMware and I love our hand vs. Arista. And while two to three years ago you could say we were slow in embracing in 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.

Will those 175 Nexus 9000 customers definitely deploy ACI?

In fact, they have put [the Nexus 9000 switches] in first, in standalone [mode]. And then you will see a number of them move to ACI. So we will track those ACI customers. But remember, ACI just ships this quarter. So we are in the middle of just starting at the end of the summer and then it’s the implementation done through it.

But that is where our selling mission has changed. We don't sell SDN. We sell programmability, investment protection, lower cost of ownership, quicker outcomes, and we combine these.

Have you had to make significant changes in your field sales force to make these transitions around cloud and SDN?

Yeah, I think all of our sales force and, indirectly, our channel will have to evolve. And I was just with [Senior Vice President U.S. Enterprise] Brian Marlier and [Vice President, Business Transformation] Sandy Hogan, who run our U.S. enterprise. I can't say what they did this quarter but last quarter they grew 10 percent in a market that's growing, what, 2 percent? They sell outcomes. And they sell very tightly with our partners. So it's the ability to say 'How do you transition your sales force and your partner community with you as this transition occurs?'

And, by the way, back to the question you all alluded to earlier: Watch our win rate against Arista or our win rate vs. [other] SDN implementations. The numbers will speak for themselves.

What's the biggest transition partners should be undertaking right now?

The way they deliver outcomes. The way we deliver outcomes. So it starts with how do you talk to customers in discovery mode and then it's how do you make this relatively transparent from discovery to outcomes? And how do you bring each of Cisco's franchises or, if you will, architectures to life to be able to deliver on this?

It won't change. In my view, I clearly understand services is a huge part of making this work. But my ratio is 5 to 1. For every [dollar] of revenue we get for services, I want my partners to get five, and say 'How do we together deliver outcomes?' That's the transition together that I think we have to make as an industry and this is how you compete against bare metal, white-box, new startups and individual players.

Do you consider cloud and SDN the last big transitions before you retire?

I think transitions will be ongoing. And this is perhaps important for the partners to understand as well. I have been through five or seven transitions -- depending on how you want to count them -- over my time here since I came in '91. They are occurring more frequently.

…. So I think what you have to think about as a company is how do you do this architecturally and how do you build it so when these transitions occur, it's just part of a normal evolution. It's how do you build that into your DNA and, candidly, into your partners' DNA. Otherwise, the transitions that occurred every seven years, then became five and now are three -- some of them we handled smoothly, some of them we handled with a little bit of pain, but we will handle them, period, and appropriately. But I think you've got to build a company that almost runs itself every quarter at a time with a five quarter rolling type of approach. We will be constantly changing and evolving. You build that into your DNA.

Some wonder if you are going to be CEO long enough to see these transitions through. What's your message to them?

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. And if you watch, as a company, we have changed every player at Cisco during my time here at least three to maybe even seven times and partners didn't even notice. We are a partner-centric company, period.

It didn't matter [if it was Cisco Executive Advisor] Rick Justice, it didn't matter [if it was Cisco President] Rob Lloyd or [Cisco Senior Vice President] Chuck Robbins … we changed services [leads], we changed CFOs, we changed marketing leads, multiple engineering leads. We do this very well. And this has allowed Cisco to stay on top for what? Two decades? Who else has stayed on top and moved into new areas with anywhere near the leadership that we have? I'd say no one. This is why I am so committed to partners. Partners are a huge part of making that happen. Now, each time we move, they have to move with us. And, if you remember, a decade ago most partners paid no attention to services. Today, it's probably 50 percent of their average revenue and maybe as much as 70 percent of their profits.

What milestones have you set for the channel organization to ensure partners make this transition?

We both go off of what the customers say. Our end customers. And this is where our channels have done such a great job. The channel customer satisfaction is equivalent to Cisco satisfaction -- so whether you are dealing with just us standalone or dealing with our channels. That's a huge improvement, as you all know, over the last five years.

[Also,] the ability for our channels to grow and make their profits. So first is what our customers say and second is what our channels say and the results they are getting on it.

How would you 'grade' your partners on how well they are making this transition with you?

Well I would probably give our partners, as a total, an "A" in how we are communicating back and forth that the change has to occur. But just like Cisco, we are in the very early stages. And the partners vary dramatically [in terms of] where they are in the early stages of making this transition. Some of them are really running fast and are selling architectures and outcomes and results. Others are transitioning over. So it varies by geography, by type of partner, by industry, etc.

Talk about steps you've taken to build a smooth succession plan.

This is my family. If we do this right, this transition, you won't even notice.

My goal is to make this one of the best transitions there has ever been in high tech, and I know a number of them haven't gone very well over the years. But this isn’t something we have just been focused on the past year. We have been focusing on this for a decade about how we build the relationship and a strategy that the company buys into and is implemented by the company. I have the broadest base of leaders and the strongest leaders I have ever had by a factor of two- or three-fold. And I have moved the people out of the company that were passive aggressive and not as strong of a team player. So this is just one more transition.

How big of a threat is the white-box trend to Cisco's core business?

In summary, white-box … we saw that coming three and a half years ago. If you are selling a standalone router or a standalone switch, especially if you are doing that with merchant ASICs, your differentiation -- whether it's a server white-box or a storage white-box or network white-box -- is very little. When we saw this coming, we moved to architectures so you combine the technology of the network, the custom and merchant ASICs with the software, with the hardware, with the storage and do it throughout the network and you focus on outcomes. Customers will pay a premium. If you are buying the cheapest product, that's probably not where we are going to win. If you are buying the best total cost of ownership and highest probability of outcome, we're tough to beat.

How long do you think customers will be willing to pay a premium for Cisco products?

If we do our job right, forever. The reason I say that with confidence is do you get these market transitions right? Do we become the No. 1 IT company for our customers? Do we get the architectures evolving right? And we have to earn that every day. So don't misunderstand; that's not brash confidence. If we do the transitions we have said right -- you sit down with all the other players. Who even thinks this way in the industry? And isn't this what customers want?

And this is where partners are so powerful. We are so close to the partner community, it's one of our top … strengths as a company. And we will evolve with our partners.

Has Cisco shifted its R&D budget to focus more on software?

Big time. Big time. If you watched, we just announced our reorganization of engineering. We moved from selling in silos that, at times, even competed with each other to horizontal and simplicity and business outcomes. So R&D has to change not just more to software -- i.e., security or software collaboration or software in terms of Meraki or what we do in new cloud models -- but you've also got to tie these together in a way that customers see as being simple and easy to work with. That allows our partners and Cisco to focus on outcomes, and that allows you to move into the Internet of Everything which is $19 trillion in either cost saving or profits either for governments or for business. Think how big that number is and the impact that will have on every customer we and our partners have.

What percentage of Cisco's R&D budget would you say is for hardware vs. software?

Well, because we bring them together, it’s a hard number to break out. [Cisco Executive Vice President and Chief Development Officer] Pankaj [Patel] would give you a better estimate. But just hardware engineers are probably less than 15 or 17 percent.

With Intercloud, some are saying Cisco is late to the public cloud game. How would you respond?

Key takeaway here is Cisco is the disrupter. 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.'

What are the partner economics around Intercloud?

… Interlcoud is a step beyond a public cloud. 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.

Our role is we see all four of them growing well and we are going to play in all four. So Amazon is a customer, a partner and, at times, a competitor. But it's a public cloud. Then our customers' own private cloud is what we help build out.

Now, if we can move around workloads based upon guaranteed response times, security issues, etc. to meet the customer outcomes that they want -- that's what Intercloud really does. You can maintain, if you wanted, data sovereignty in a country. And, at the same time, that offers a huge competitive advantage. So this is classic Cisco. It's not that we are saying, 'Here is what we are doing with our own cloud and here is what we are doing with our customers' private clouds and here is what we are doing with our partners' architectural clouds built on Cisco and here is what we are doing in public.' It's how do we bring the hybrid, the private and the public together and how do we do it in a way that really accomplishes what customers want.

Some partners fear Intercloud competes with their own cloud services. What's your message to them?

First, as you all know, at each of the partner conferences I poll [partners] constantly.

A year ago -- in fact, it's been a year and a couple months now since that partner conference -- I asked [partners] how many thought we should move into this market. My team thought everybody would say 'yes' but I knew they wouldn't. When I asked it was fifty-fifty. And when I asked this year, it was 95 percent. We of course looked at the five percent who didn't want to do it, and we immediately went to them. I won't say who they are, but we immediately went to them.

And so if you watch where we are going, watch how partnerships like the one we have with Dimension Data, how this evolves. And watch how partnerships like the one with IBM evolves. So I think all partners just need to understand how they are going to evolve here and why this is in their best interest and ours. And I don't understand the challenges. This is a complex move. It's like the Internet of Everything six or seven years ago. I had to buy people drinks to get them to talk about them. Now I have board of directors coming in, we have government leaders coming in, etc.

You've said the NSA revelations has impacted Cisco's business abroad. Are they still?

Let's move way beyond the NSA. Let's talk about what's so important. Customers have a right to knowing that their data is secure and so do the citizens and so do the companies. And this is not an issue unique to the U.S. Every country is involved in espionage. That's what they do. They have done it for a long time.

What needs to occur is a standard of conduct and rules of the road that will guarantee to customers the supply chain and data integrity that they need. And I think that's where countries have to step up and begin to provide these guidelines and an outline to that.

As you know, we don't give anybody our core software even though a number of peers do because if you get the software you can eventually, with the processing power, figure out how to break it. We don’t provide backdoors. And we focus on outcomes. And if we find anyone -- doesn't matter if its hackers or governments -- involved in any of our customer environments anywhere in the world, we tell our customers, period. And we do that in the U.S., in Europe and China and India. And we have done it.

So NSA spying has had a direct impact on Cisco?

It does have. And it's mainly in a couple of countries, but it's the overall security issue where, instead of saying this is a problem, you reserve it. We are going to move to become the No. 1 security player globally. We'll use concepts such as Intercloud for data sovereignty. You begin to say, 'Here is the problem we can solve' and then, at the same time, you work with governments to say to the leadership in Europe and Germany … 'Here is what we can do together.' And to the U.S. the same way and to India and China the same way and say, 'How do we solve this problem?' because they have equal interest. Think of how much of the supply chain comes out of China or out of Asia. This is what has made our industry so powerful is the complete globalization of the supply chain and the ability to move and for every citizen and every country in the world to potentially have a benefit from it.

So this is where, I think a lot of people tend to look in the rear-vision mirror. In my letter to [President Obama] I said, 'It's interesting how we got here, but it's even more important how we go forward. How do we solve these problems together?' Part of them we will solve on our own. We are going to be very direct in terms of protecting our customers' data, information, etc. and very direct in terms of if we find any issues, regardless of where they come from, to turn them over to customers.

Has the U.S. government given any assurance it's not tampering with Cisco gear?

Well, remember, this could be any gear by any company anywhere in the supply chain. And I don't know of any government that has given those assurances. So this is where I would like to see countries come together to say these are the rules of the road or the business conduct. Now, having said that, we are going to do the same. We are going to make the equipment very difficult to tamper with. We are going to ship it with a lot of information on it, and we are going to say 'How do we do this better than anyone else?' But, remember, this is just one of 100 different ways people can gain access to information. That's why I think you need some rules of the road and that's in every country's best interest.

So what supply chain 'rules of the road' would you like to see established?

Basically, what you are going to do and not do in supply chain. Basically, in terms of, if you find problems, it doesn't matter if it's my products, or Alcatel Lucent's products, HP's products or Huawei's products. If you find those weaknesses, I think they ought to tell the vendor, 'You got a problem, go fix it.'

I think a lot of the issues go back to part of the economic implications and the impact of being able to change the world. We are going to lead in terms of data security and you are going to see us start to really focus on security as a whole.

What are your thoughts on investors pushing for EMC to spin out VMware?

Well the last thing I would ever try to do is give one of my peers and a good friend, Joe Tucci (pictured), advice. So I think looking at how we approached our business and how multiple players in the industry, not just EMC, but HP, IBM and others approach theirs, we chose a different path.

If you look at what we just outlined here, every one of our product areas are now completely coming together in a total architecture. So routing isn't separate from switching, isn't separate from collaboration, isn't separate from services, isn't separate from mobility, isn't separate from security, isn't separate from the Internet of Everything, isn't separate from InterCloud, isn't separate from ACI, isn't separate from compute with storage with the network. They are all tied together so that our customers get the benefit and so that our products have a premium. And our ability then to continue to transform the organization, it gets results that companies who lead in these silos or are loosely coupled together, do not get.

So we took a different approach than almost everybody else in the industry in terms of [having] 18 major product families and then said 'How do you bring them together in architectures that allows you to get a premium, a quicker response from your customers, and a partner community who will standardize on you, and outcomes?' We chose a different approach here and I would argue we are getting the benefits of that. I don’t know anybody would look at Cisco and who really understands our business, especially the moves we have made in the last few years, who would argue that breaking the company into pieces makes sense.

You personally congratulated Satya Nadella when he became Microsoft's CEO. What do you think he brings to Microsoft?

I normally don’t comment about my peers, but I am going to make an exception. If you watch, the industry … has not done a good job with CEO transitions. If you watch, often when CEO transitions have occurred in high tech over the last 30 years, especially if the CEO had been the person who grew the company or the founder for a number of years, they have been rough. And you can probably count on one hand those that even went okay vs. really good. And it's one that we will make differently.

Now, Satya (pictured), I think, is perfect for Microsoft. If you watch, and watch what he has already done, he comes from a very strong technical background. He understands their culture. It would be very different to bring in somebody from outside to run Microsoft, even though people have different views, because it is so complex what goes on. Yet, you had to have somebody who was a change agent and somebody who, given their culture, is pretty technical in terms of the direction. I found him to be a breath of fresh air in terms of his willingness to make changes. And while some people might second guess him on his strategy or his implementation or his decision to size the organization right, those are decisions leaders have to make. You can't lead if you don't make the tough decisions.

Talk about how Nadella might impact or change the Cisco-Microsoft partnership.

… We have probably done more with Microsoft, with Sayta, in the last year than we had in multiple years before that. And it wasn't that we didn't get along well with the [previous] leadership at Microsoft; we got along very well. But watch out data center announcements together. Watch what we do in terms of the market. They were on stage with us at our ACI launch. Sayta was. So it's a hard job and I don't underestimate the challenges that Sayta will face, but if I were betting on whether he's going to be successful, I think he absolutely will be.

You noted how tough CEO transitions can be. Why do you think Cisco can pull it off so seamlessly?

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 ten years ago. And if you watch the breadth and depth of our team, it's the best it's ever been. 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.

So 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.

What Cisco products are most in need of a refresh?

I think they all have to constantly do a refresh. If you watch, you could almost say, 'What product have we not refreshed recently?'

… It's the most new products we have ever launched in our history in the last year. Think about it. We have launched entirely new, two high-end routers. Those usually come, historically, every seven years. We have announced and complemented our high-end switching in the data center. We have announced a whole new set of collaboration products. We have announced architectures and really finally brought them to life. We've announced ACI and how do you drive this through and just started, literally, shipping it at this present time in terms of the implementation. We have moved from a player that no one would say is the No. 1 security player to [somebody] who many people would say, 'now Cisco is really getting serious and they could become our No. 1 security player.'

The point I'm making is that it's probably 2x the amount of new products that we have ever brought out in our history. And yet, Pankag [Patel] and I and the rest of the leadership team, are saying, 'This isn't enough. We have to organize for faster speed and scale and identify the market … and not think of those as silos, but think of those horizontally and say, 'How do those play together to bring the Internet of Everything to life?'