Cisco’s plans to reduce headcount by 5,500 validates a deepened focus on software to maintain revenue and margin growth, with the importance of its partnership with IBM heightening as a result.
Under the stewardship of CEO Chuck Robbins, the networking giant has been slowly but surely pivoting its business away from its traditional switches and routers roots, instead chasing new dollars in emerging sectors such as cloud, security and the Internet of Things.
As reported by IDG News Service, the move will cost the company around $700 million in redundancy payments, with the layoffs expected to hit some of Cisco's smaller and more mature business areas where long-term growth prospects are low.
“The layoffs will likely be tied to legacy hardware units, paving the way for higher investment in its software portfolio,” Technology Business Research analyst, Patrick Filkins, said.
“Monetising software solutions will help Cisco mitigate the negative impact virtualisation is expected to have on its network and IT hardware businesses.”
The layoffs coincided with the vendor’s second quarter financial results of 2016, which reported a two percent rise in organic revenue growth, excluding its set-top box business, which the company divested in the final quarter of 2015.
Continued growth in Cisco’s secondary collaboration, security and wireless business lines enabled the company to notch low-single-digit growth during the first two quarters of the year, even as its traditional revenue drivers (Switching and NGN Routing) delivered mixed results.
NGN Routing, in particular, recorded another down quarter, declining six percent year-to-year.
Filkins said lower aggregate demand from telecom operators for high-end routing products will continue, a trend Cisco is partially offsetting through increased exposure to web scale players where demand for routers is strong.
Meanwhile, leading competitors, including Juniper and Nokia, also experienced lower operator demand for IP routers in 2Q16.
Importance of IBM
Looking ahead, Filkins said partnering with IBM enhances Cisco’s IoT position while pulling through sales of network infrastructure.
As reported by Reseller News, Cisco announced a new partnership with IBM designed to further flesh out its IoT portfolio in June.
Given IBM’s standing as a leading provider of IoT analytics software and professional services, Filkins believes partnering with Cisco will help ease major adoption hurdles across the two businesses’ respective install bases due to a more unified solution.
“These assets have been tested and validated and will help customers reduce implementation time and costs,” he explained.
While vendors such as Microsoft, Dell and GE have edge and centralised analytics and computing capabilities for IoT, which provide similar cost savings and time benefits, Filkins said this partnership will create proofs of concept and increase customer awareness of hybrid IoT.
“For Cisco, the partnership adds a vital third component to its IoT system, bringing in a powerful centralised analytics engine to pair with its platform (Jasper) and connectivity plays,” he added.
In short, Filkins said the partnership ultimately strengthens Cisco’s classic revenue driver - edge routing - while complementing its IoT-based software, security and software revenue opportunities.
“This agreement allows Cisco and IBM to approach IoT with joint sales and go-to-market initiatives where it is most beneficial for both vendors,” he added.
“Because the companies have separate cost structures under this agreement, we expect IBM to pursue partnerships with additional vendors, such as Juniper, to spur IoT market growth.
“At the same time, Cisco will explore tighter integration with other central analytics vendors, such as Microsoft and GE.”
For Filkins, the new-look Cisco also views the migration to cloud infrastructure (network and datacentre) as a strategic opportunity to capture increased spending on analytics.
In June Cisco launched its Tetration Analytics, an on-premises vendor-agnostic appliance designed to simplify IT management.
As explained by Filkins, Tetration collects data using hardware and software sensors embedded in switches and virtual machines to ensure a comprehensive set of data across hybrid environments.
“Delivering a higher-level IT management platform leveraging analytics will enable Cisco to monetise its existing ICT install base, but advancing an on-premises appliance is risky as some customers may instead opt for a hosted solution with lower up-front costs,” he added.
“To drive adoption, Cisco will emphasise the business case consisting of Tetration’s ability to deliver insights leading to a more secure framework, lower operating expenses and drive positive return on investment.”