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Network-Enabling Company Adjusts Corporate Strategy

February 2002
By Michael A. Robinson

An acquisition campaign gives way to an internal focus.

It is very rare that the experiences of one company can provide a snapshot of what has happened to the Internet sector, the U.S. economy and the technology industry in general.           

But in October 1999, when journalists, industry analysts and their initial public offering (IPO)-hungry colleagues on Wall Street said the Internet had ushered in an era of boundless economic vistas, a photograph of John Chambers, chief executive officer of Cisco Systems, San José, California, ran on the cover of the “new economy’s” magazine, Business 2.0.

Written by then-Editor-in-Chief James Daly, the article all but anointed Chambers as the king of technology acquisitions. With Chambers at the helm, Cisco had completed an astounding 40 acquisitions in just six years, a period in which many companies could command high premiums because of a booming stock market.

And why not? Cisco was—and still is—the undisputed worldwide leader in networking equipment for the Internet. The space was expanding so rapidly that the only way Cisco could possibly keep pace was to buy new product programs and great talent wholesale.

Now, however, a little more than two years later, the story comes full circle. Daly is no longer editor in chief; Business 2.0 was recently sold to Time Incorporated, which combined it with the defunct EcompanyNow in the midst of a grave slump in advertising revenue; and Chambers is sitting on the acquisition throne. He may be sitting pretty, but he’s sitting nonetheless.

Consider that in 2000, Cisco purchased some 23 companies, which represented more than half of its previous six-year total. That followed 18 corporate purchases in 1999. The Business 2.0 cover actually understated Cisco’s frantic pace of external expansion. Chambers bought another nearly 30 companies in the following 15 months.

But in 2001, Cisco went from purchasing two technology companies a month to purchasing just two all year. This was the lowest number since 1993 when it bought Crescendo Communications Incorporated and kicked off an unparalleled expansion drive. Ironically, Cisco has nearly $19 billion in cash and equivalents at a time when many technology companies could be purchased on the cheap because of the rout in technology stocks. Cisco ended fiscal 2001 with a loss of roughly $1 billion on net sales of $22.3 billion, which were up 18 percent from $18.9 billion registered in fiscal year 2000.

In a recent SIGNAL interview, Chambers said that despite the current technology slump and national recession, Cisco will remain a growth company. By necessity, Chambers has turned his wandering eye inward. In 2001, he furloughed roughly 20 percent of Cisco’s work force, shelved plans to build a new headquarters in San José and realigned some management reporting responsibilities to make the company more efficient. Thus, internal growth has become proportionally more important than in the past several years because Cisco has been adding new sales without buying more companies.

Chambers believes Cisco could do twice as well as industry analysts expect for the networking market overall, which is growth of about 15 to 20 percent annually over the next three to five years. Broad product lines, deep talent, geographic balance and a strong cash position all could translate into growth of 30 to 50 percent in the same time frame.

Chambers says he remains optimistic about the future of the Internet combined with the growing use of intranets, which are internal Web-based networks for companies, government agencies and other organizations.

“I think everyone would agree that both intranets and the Internet are considered an essential part of business, government operations, learning and personal communications and entertainment,” Chambers says.

“Cisco solutions ensure that networks—both public and private—operate with maximum performance, security, and flexibility. We expect to see more growth opportunities from corporate and government intranets as well as from more effective use of the Internet, for example, from e-government solutions that better serve the citizen.”

Use of the Web to save costs can have a dramatic effect on an organization’s bottom line, according to Cisco officials. The company itself saved almost $175 million last year by not hiring 1,000 engineers. Instead, they offloaded calls that would have gone to these technical support personnel to the Web. So, although hundreds of consumer-oriented Web companies have gone bust, the Internet is proving decisive in today’s complex electronic economy. This means that information technology managers will continue investing in the key backbone gear supplied by Cisco, which bodes well for its long-term future.

Meanwhile, Cisco wants to improve sales to the defense establishment and to increase further its inroads in the wireless market—another area of technology that has largely fizzled in the consumer arena but continues to attract investment by businesses seeking to cut costs and improve productivity.

Last November, Cisco announced the creation of the Cisco Global Defense and Space Group (GDSG), chartered to provide information, interaction and support for integrating networking technologies with command, control, communications, computers and intelligence systems. Because Cisco has no direct sales to these defense agencies, the 50 employees in the new unit based in Herndon, Virginia, are experts in the art of soft sell. They establish relationships with the highest-level national defense leadership as well as with executive staffs, business development teams and technical development centers of the top defense/space integrators in five geographic theaters: Americas International; Asia Pacific; Europe, Middle East, Asia; Japan; and the United States.

“The staff of GDSG has extensive defense and defense/space industry experience—an impressive assembly of top expertise in this area,” Chambers says. “Global means being in country with resources indigenous with the end users, not being a U.S. firm and selling abroad.”

The new unit will be headed by James P. Massa, a Cisco vice president and an AFCEA International board member who joined the company in 1993 as regional manager for eight southeastern states. Under his leadership, the sales region grew 175 percent and 85 percent in two consecutive years. In 1995, Massa was promoted to director, federal operations, and moved to Washington, D.C., where he assumed responsibility for all Cisco business with the U.S. federal government. That business grew 300 percent in three years.

Cisco’s GDSG reflects a greater overall commitment to serving the federal government, Chambers maintains. Government is one of three markets along with health care and education that just now are capturing the benefits of Internet technologies. All three, he predicts, will provide tremendous benefit for society worldwide. Some markets have already adopted Internet technology for business reasons, but the advances in those three arenas will be far more significant because they will change the way people live, work, learn and play. In particular, the government market directly affects the ability of a country to safely address the health and education needs of its citizens.

Unplugging the Internet also will play a large role in Cisco’s growth, Chambers says, because the wireless Web helps companies reduce employee overhead. Cisco became the first major networking vendor to deliver mobile Internet protocol (IP) in 1998, and the company enhanced the service last fall. Ironically, as with the past year in particular, much of the early excitement about the mobile Internet for the consumer market has faded sharply. But large enterprises can benefit significantly from mobile applications, Chambers allows.

For example, Cisco increased the satisfaction ratings of its employees while saving $138 million in overhead just by providing connectivity to its increasingly mobile work force. Increased productivity resulted from the reduced commute time of the 40 percent of Cisco’s work force that works remotely at least once a week.

A Cisco router along with its entire network of connected IP devices can roam seamlessly across network boundaries and connection types. In addition, Cisco mobile IP also provides new revenue opportunities for wireless service providers, enabling them to expand service into such markets as emergency management services, railroad and shipping systems, and automobiles.

“We think that many government agencies, as well as small, medium and large enterprises, will be interested in the new Cisco Mobile Networks,” Chambers explains. “It enables cost-effective deployment of entire networks to be mobile, providing benefits for such organizations as the Coast Guard and other agencies that deploy mobile teams.”

Chambers adds that the National Aeronautics and Space Administration (NASA) wants to use Cisco’s Mobile Networks on low-earth-orbit research craft and now is working with the technology, although the exact date of deployment is not known. He says that continuous connectivity is a particularly important feature as the new mobile system requires no special software or equipment behind the router—any device that runs IP will work.

These advantages underscore the thrust of today’s economic outlook. With the economy in recession and many of Cisco’s clients facing soft sales and corporate layoffs, getting the maximum revenue for dollars invested is imperative. Here Chambers sees a strong opportunity for Cisco. Profitability, cash flow and productivity are the watchwords of the day. In the long run, Internet applications, whether fixed or mobile, running on Cisco systems will deliver a wave of improvements in all three of these critical areas, he believes.

“These applications will go across the entire company, across functions within the company, down to the individual departments and, over time, down to each individual,” Chambers concludes. “Our experience has been a 50 to 100 percent increase in productivity in each of the areas we’ve targeted. In the future, there will be only one network: a network that combines data, voice and video. To have the bandwidth and architecture required for these applications will require companies to upgrade the majority of their infrastructure.”

Additional information on Cisco Systems is available on the World Wide Web at http://www.cisco.com.