By almost any measure, Cisco Systems is the biggest fish in the networking pond. Thanks to more than 130 acquisitions, a brisk pace of internal development and a much-discussed new organizational structure that the company is using to attack a slew of new markets, Cisco's reach extends from the consumer to the enterprise and deep into service provider networks. The company offers everything from personal video cameras to high-end telepresence systems, set-top video boxes to, lately, servers for the data center, in addition to more traditional network gear like routers and switches.
But Cisco's real ambition, as articulated by its high-energy CEO, John Chambers, is to become the most important IT company of all. In this installment of IDG Enterprise's CEO Interview Series, Chambers talked with John Gallant, Scot Finnie, and Editor-in-Chief Eric Knorr about the market transitions fueling Cisco's bold strategy, what it means for enterprise customers and how the company will compete head-to-head against the industry's biggest players.
Q: Everyone knows Cisco as the leading network company, but your remarks at Cisco's recent Financial Analyst Conference made clear that your goal is for Cisco to be the number one IT company. That's pretty ambitious. What's it going to take for Cisco to become the number one IT company? And, what will it take to convince customers?
John Chambers (JC): I always start from a customer perspective when I look at this. It is when your customers suddenly are encouraging you to go well beyond what your current scope is. That is the most important indicator the opportunity exists. The second; when you make movements into new market areas or have dramatically different relationships with customers, you've got to catch market transitions. And the third is you've got to have an engine that does innovation, not just internal, but partnering and acquisitions.
If you think of them in sequence, it can be as simple as smart [power] grids. I wish I could tell you it was brilliance from the top. It was not. It was basically the utility companies in Europe saying: "Cisco, pay attention. This is an instant replay of the Internet -- 360 protocols and no security. You have a lot of the pieces. Put it together." Once we got it, we then used the effectiveness of our organization structures around councils, boards, working groups. The concepts of social networking, if you will, brought together with process and discipline, and interdependencies among the groups.
So, the second part of innovation is organization structure innovation, as well as business models. Everything at Cisco -- it doesn't matter if it's response to a corporate social responsibility issue or a strategy in the data center, a strategy in the home, our engineering product evolution -- it's first around vision, which is five, 10 years plus. Then, what's your differentiated strategy? Two to four years. Then, execution-wise, what are you going to do in the next 12 to 18 months. Get the vision, differentiated strategy and then execution.
What a lot of people don't realize is that all of these 30 new [market adjacency] areas that we're working on will be at first appear to be independent. But they will actually be very loosely and then tightly coupled together.
We have the number one position in most every product [area] we've gone into. We've also gotten very good about doing acquisitions -- 137 of them. Usually, 90 percent of acquisitions fail. My definition of fail: Did you keep the management team? Did you keep the key engineers? Did you get the next-generation product out? Did you gain market share? Seventy percent of ours have hit or exceeded what we told our board of directors we'd do.
So, with innovation, Cisco is pretty good at doing internal [innovation], internal start-ups, acquisitions and strategic partnering. Not perfect in any of them, but very good versus our peers.
So, the first thing is [that this is] customer driven. Second, is [our] innovation, and the third element is catching market transitions. What's the transition here? It's the role of the network. The network's going to be the platform for all forms of IT and communications, if we're right. The network is not just dumb pipes. We're actually aligned very closely to service providers on this. I'll make money on plumbing and there will be a lot of plumbing to be done.
But with intelligence throughout the network -- starting in the data center with virtualization -- you don't [have to] know which servers are used, where the data is stored, where the application resides. That will start first in the data center, but go all the way to the home, where you won't know if your movie is on your TV set, on your Microsoft device, set-top box, at Disney or the point of presence of the service provider -- that's what virtualization is about. That's Cisco's core competency there.
One of the other market transitions is that video's role will be huge. It won't be just the primary way we communicate; it will be the way I deliver my sales, my support, my partner interface, my service, etc., to customers.
Then [there is] collaboration. Collaboration, I think, will drive productivity at two to three percent per year in the U.S. and Western Europe. Most economists would say that is unlikely, because you can't grow productivity by more than about one-and- a-half percent sustainably. But, yet, the first generation Internet did. We're going to see an instant replay of that in my opinion around collaboration.
Q: At that same analyst conference, you said that all the exciting new developments in IT were tied to the network. What does that mean for IT?
JC: You're starting to see an increase in IT spending because people have delayed some spending but, secondly, they're realizing they've cut costs as tight as they can. Without process change, they're [going to have to] cut costs more. They're all looking at new revenue streams and they're all looking at productivity. Process change will continue cost cutting. [For example,] telepresence reduced $750 million a year in Cisco travel to $250 million. Every CEO gets it isn't just about travel. It's about the process change behind it. But travel pays that first expenditure.
The second area in terms of productivity is collaboration. Using Cisco as an example, our productivity grew 17 percent in two quarters, measured by revenue per employee. Part of it is just because our business ramped up. But, I would say at least of half of it was because of these new business models, the vision strategy, execution and organization structure, because my productivity was actually a lot higher than that. We moved a billion dollars of resources into new models that produced no revenue or no material revenue. So, at the same time, we were driving our traditional models, we are going into a whole bunch of areas like sports and entertainment. You know it's a rounding error how much [business] we'll do in the stadiums around the country. But the play is bringing that into the home over service provider networks, changing the advertising models, etc.
So, to the CIO, what's important to him? Productivity and collaboration is a huge part of that. Infrastructure refresh, and we clearly are benefiting from that. And process ways of changing cost. We're playing in all three.