The gospel according to John
- 01 August, 2001 16:17
On the morning of one of the darkest days in his company's history, Cisco Systems CEO John Chambers had breakfast with 1,400 employees. They were not inner-circle executives or worldwide division heads: they were the Birthday Bunch.
Chambers hosts a monthly breakfast open to any employee whose birthday falls in that month. That day, March 9, just 11 days after Chambers publicly vowed there would be no layoffs at Cisco, the company announced its first job cuts. More than 8000 jobs would be lost, slashing the workforce by 17 percent. Cisco's stock, dropping steadily from its high of $82 in March 2000, got hammered again that day, sliding 8.5 percent to below US$21.
Facing a crowd fearful for their jobs and Cisco's future, Chambers exuded his usual confidence in Cisco's prospects. Once the economy rebounds, he declared, the company will resume growing at 30 to 50 percent a year. "People came to John looking for an answer, because they knew he'd be honest and straightforward," says Jerry Green, a program manager who attended the breakfast. "I think it'd be pretty tough to not come away with something uplifting."
That Chambers could inspire the rank-and-file even as they digested news of massive layoffs with their pastries and fruit testifies to the trust he's earned in his six years as the head of Cisco. But returning his embattled company to its glory days will take more than uplifting rhetoric.
Cisco is not only the world's premier supplier of telecommunications equipment; it's also one of the world's premier corporations, period. Since 1991, the company has more than doubled its revenue every two years, generating a couple of millionaires a day. When its market cap hit $555 billion in March 2000, it was briefly the most valuable company in the world. Along the way Chambers became Silicon Valley's minister of inspiration, the leading evangelist of the "Internet-changes-everything" religion.
But now that the Cisco dreadnought has hit stormy seas, Chambers' spiel is less convincing. Only seven months ago he was still insisting the company would grow as much as 60 percent. In a recent announcement that startled even the most pessimistic analysts, embattled Chambers had to acknowledge its first quarterly loss in 17 years -US$2.69 billion, was not the end of the networking star's "rapid deccelartion". Already down 30 percent in the third quarter, the fourth quarter sales, the company said, are expected to slide down another 10 percent. The news had Chambers searching for biblical metaphors: "A 100-year flood can happen in your lifetime.
This one was larger and more rapid than anyone could have anticipated."
Though Chambers remains optimistic, an increasing number of analysts, investors and partners have lost confidence in Chambers' assertion Cisco will recapture its projected growth rates. And, if the naysayers are right and Cisco's fastest growth is behind it, Chambers' reputation as a visionary could be history as well.
Chambers has a Clintonesque ability to connect with anyone, from the temporary employee to the Silicon Valley executive. When I met him outside his modest office at Cisco's San Jose headquarters, he gripped my hand and said soberly, "I hoped I'd never have to go through another layoff in my life. But when things fall off a cliff, you have to deal with the world the way it is, not the way you'd like it to be."
In conversation Chambers has a birdlike habit of cocking his head to signify his rapt attention to your every word.
Unlike CEOs such as Bill Gates and Larry Ellison - Chambers seems uncomplicated, blandly unreflective. When he talks of the empowerment the Internet brings to ordinary folks, you get the sense he believes every word. It's that apparent freedom from doubt that has made Chambers a consummate salesman - first at IBM, then at Wang Laboratories, where he became director of Asian sales in 1983.
At Wang, Chambers developed the strategy he would later perfect at Cisco. As Wang's workstations gave way to PCs in the late 80s, Chambers found a unique way around peddling his company's relatively weak products. Chambers found a contract manufacturer to build PCs, then slapped Wang's label on the box. Years later he would power Cisco's relentless growth by obtaining new technology through acquisitions - the company has sucked up 71 companies, including industry leaders such as Cerent and StrataCom, throughout Cisco's 17-year history.
Chambers also learned about failure at Wang. As Microsoft and the PC revolution caught Wang by surprise, the company went from $2 billion in profits in 1989 to $700 million in losses the following year. In late 1990, Chambers oversaw the layoff of 5000 employees before he himself resigned. The experience taught Chambers that selling technology is not enough - a truly great leader has to sell a vision of the future. Since taking the helm at Cisco in 1995, Chambers has crystallised that vision into a mantra he repeats to anyone who'll listen, even as the Cisco revenue machine sputters: "The future is unlimited."
But competitive pressures on Cisco are increasing. Though the company dominates the router and switch markets, with 2000 market shares at 84 percent and 69 percent respectively, Cisco's pre-eminence in core routers -high-end machines at the heart of the Internet - is slipping. Cisco has been losing sales to California-based Juniper Networks, which pioneered speedy gigabit routers. In 2000, Cisco's market share in high-end routers dropped from 80 percent to 71 percent, while Juniper's grew from 15 percent to 28 per cent.
Cisco also must cope with the inexorable economics of technology. As Chambers often says, "Everything gets cheaper forever". The company's growth has been based in part, on high margins of about 62 percent. Now the market is saturated - Cisco has $1.6 billion in inventory - and its gear is getting cheaper. In the resale market, solutions providers package Cisco equipment for corporate customers and discounts of up to 40 percent are not uncommon.
Declining capital spending, increased competition, falling margins - all signs of a middle-aged company in a maturing sector with slowing growth potential. That's why Chambers is pushing the idea of new, high-growth "tornado markets" to help restore Cisco's brilliance.
Following a spectacular light-show introduction, Chambers kicks off Cisco's 2001 Partner Summit at the Mandalay Bay Resort and Casino in Las Vegas. Wearing a shiny blue suit, Chambers is here to restore the faith of Cisco's 3200 resellers, many of whom are seeing sales slow and profits erode. After delivering his usual bromides, Chambers gets to the point: just selling equipment is not enough anymore. He tells the execs they must become specialists in selling a new, specific technologies. In Chambers' vision, these high-margin products will also drive increases in overall Net traffic, expanding the market for Cisco's routers.
These new lines of business - including Internet telephony, wireless networking and video and audio over the Web - are unlikely to fuel Cisco-style growth over the next five years. Though Internet telephony is expected to be a $5.6 billion market by 2004, Cisco strategy chief Mike Volpi admits it will provide only a fraction of Cisco's revenues in the next few years. Neither is the fragmented wireless industry an answer to Cisco's woes - a recent report from Jupiter Media Metrix notes a host of problems with wireless. Slow adoption of broadband means "considerable uncertainty remains in the near term" for content-delivery companies.
Some Cisco partners share those doubts. After Chambers' speech, there's muttering in the corridors of Mandalay Bay. Cisco "doesn't really make anything anymore," says Bill Lunger, president of Minneapolis reseller Comstar. "They're moving into all these new markets, but, you've got to ask what's the core?"
To Chambers, Cisco's essential
product is itself - the company's
ability to foresee and adapt to rapid technological change. "We've had to change before - seven times in the last decade, in fact, we've always been three to five waves ahead of the market.
I think we can continue to do that."
Chambers' most crucial shift will be adapting to the next high-growth sector for routers and switches - the service provider market. As spending for corporate networks slows, Cisco is looking to extend its dominance to the much larger telecom build-out. In the past 10 years, U.S. telecom companies - the Baby Bells and upstart competitors, like Level 3 - have spent close to $100 billion installing fiber-optic networks, laying more than 130 million miles of fibre. Though telcos are currently cash-strapped, they are expected to spend more than $100 billion by 2003 on equipment to operate those networks.
When buying routers and switches, telecom companies tend to be choosier than corporate IT managers building private networks; they prefer the most sophisticated, "best of breed" devices -from multiple suppliers - to Cisco's reliable, comprehensive, "end to end" systems. Cisco will have a harder time dominating the service provider market than it has in the corporate sector.
Many big US companies have faced a similar transition, from controlling a major market to competing for revenue in an emerging sector. Consider Microsoft, which went from a dominant position in PC operating systems to one of many companies competing in the wider world of the Internet. Microsoft's revenues in 1991 grew by 56 percent; by 2000 that had slowed to 16 percent.
Chambers' unrelenting optimism makes it hard to tell if he's come to grips with the challenges his company faces. "There will be a bunch of different networking technologies," he allows. "We'll listen to our customers, we'll find out what they want, and we'll either make it, buy it or partner it."
He then slips on his jacket, shakes my hand and disappears in a sea of people. John Chambers has a faith to uphold, and doubt never sleeps.