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Cisco Chief Outlines Ways Companies Can
Embrace a Networked Business Model
November 1, 1997 -- On Tuesday morning at COMDEX/Fall, Cisco Systems
President and CEO, John T. Chambers, will deliver a keynote speech
that looks at how networking and the Internet are changing the way we
work, play and live. Cisco itself has been a pioneer in the Internet and
electronic commerce, and already does a substantial portion of its business
on-line. In advance of his speech, Chambers sat down with David Brousell
of COMDEX to discuss his ideas on networked business, how companies
should think about getting started, and lessons that Cisco has learned
through the process. The following are excerpts from that interview.
COMDEX: Why should a company consider adopting a networked approach to
doing business?
Chambers: The companies that don't adopt networking and the Internet will be
left behind, regardless of their size. The productivity gains are too large. Every
major aspect of how business will be done will be affected by this new
technology.
COMDEX: What kind of changes does it mean for the way a company does
business?
Chambers: Well, the textbooks that were written 10 years ago about the virtual
company, truly a global company, if you will, will become a reality. You won't
be able to tell where my production occurs, whether you're in San Jose or in
Singapore or in Europe. It will be completely virtual in terms of how our
suppliers, and ourselves and our shippers tie together. And we will be able to
focus on how we really benefit customers. So it's going to be a virtual company in
all aspects.
COMDEX: What are the most significant challenges facing a company trying to
implement a network-centric approach to doing business?
Chambers: There are a number of challenges that companies will face as they go
to a network-centric approach. The first is there are 5 to maybe 10 applications
that are the big payback applications. You want to select the right applications at
the right time for your industry. If you're too early, its not affecting the terms of
the payback; if its too late, you lose marketshare and productivity. So the first
thing is to select the right applications.
The second is to really think about how your network is going to work and what
the true cost of the network is. One of the key reasons that people are moving to
an end-to-end solution with fewer vendors is that they are really understanding
the true cost of ownership of the network. They're making the decisions on how
they're bringing this productivity tool to market as opposed to individual vendor
decisions for each product category.
And the third thing is to determine what they are going to do themselves and what
they're going to look for their partners to help them do in the implementation of
the network.
COMDEX: Do the applications vary by the type of industry you're in?
Chambers: Yes, the applications that have the largest payback will vary
dramatically by the type of industry you're in. In our own industry, as an
example, the key applications are how you interface to your customer, how you
do trading, how you do commerce. In manufacturing, aerospace or automotive,
it's how do you cut your design cycle down. In financial institutions, the way they
will interface to consumers will be through the network. And the network will
become their primary delivery vehicle and the way many of these institutions
move into new territories.
COMDEX: What lessons has Cisco learned from this process?
Chambers: Cisco has learned how large the productivity gains can be. To share a
war story with you, when we originally talked about our IS systems, a segment of
our board of directors considered it an expense rather than a productivity center,
if you will. So we were kind of careful about how we were spending money here.
But over the last 5 years we have really made it a key competitive advantage for
us. The other day, Pete Solvik, our CIO, presented to our board of directors and
he shared with them the productivity we have gotten out of this and at the end of
the meeting, after Pete had left, our toughest board member of all said, 'John, not
only are we very pleased with how the company has done here but we should give
this guy a raise.'
The point is that even the most conservative people suddenly are realizing that if
you select the right applications it can have huge productivity advantages and also
can be what separates you from your competition and perhaps not only
determines your growth rate but who survives.
COMDEX: Could you describe the scope of Cisco's current business over the Net
and where you see it going?
Chambers: Very often when companies or vendors talk about a key technology
they talk about how it should be used and very often they're like the shoemaker's
kids - there the last ones to really use it. Cisco's been the reverse. Our philosophy
is that we ought to be on the leading edge on how to use this technology: what are
the key productivity areas you can gain from it and understanding the strengths
and limitations of the technology so we can design our products to meet those
needs.
This last year alone Cisco had over a 12% increase in productivity in just 5 key
applications we did over the Internet. Now, 12% for the whole company gives
you an idea. That's over $250 million savings per year off an expense base of just
$2 billion.
To give you some specific examples, a year ago we were doing zero networked
commerce, if you will. Networked commerce, in our opinion, will be largely
business to business over the next 2 or 3 years. The year 2000 and beyond it will
become a heavier set to the consumer. Today we process over 32% of our orders
over the Internet. We are already in a position where you are talking about a $2
billion run rate for Cisco alone. Now that's as big as some people thought the
whole market would be just a several years ago, and yet we're a rounding error
in the total global economy.
Cisco, if we're fortunate, and execute well, might be as much as $15-20 billion in
the early 2000 years ourselves in this area, and we are a rounding error again.
COMDEX: What stage do you think most companies are at in going to the
network model and what's the road map going forward?
Chambers: If you look at where most companies are in terms of the
implementation of networking we used to say that the U.S. was a year or two
ahead of Europe, that Europe was a year of two ahead of Japan, that Japan was a
year or two ahead of the rest of Asia. That delta has changed dramatically where
there's probably not more than a year's difference on a total global basis. So I
think your seeing most of the industrialized nations moving rapidly toward
implementing networking in all aspects of business and government.
If you're talking about a baseball game with 9 innings, I think we're in the second
or third inning in terms of implementation.
COMDEX: You've mentioned cost of ownership a couple of times. What does it
mean to your customers?
Chambers: Many people tend to think about cost of ownership as the cost of the
PC on your desk. Or only as the cost of the network component part they bought
from Cisco or from some other vendor. The real cost of ownership are your
support costs, your communications lines, your system integration, your security,
your help desk, etc. The cost of the PC itself is only about 25% of the total cost of
ownership of the PC.
With networking its even more complex. Only about 20 to 25% of the cost of the
network is actually the networking component parts that people buy. The majority
of the costs are in such areas as service and support. How you support the
network. How you do systems integration in the network. Our figures show that
between 35 to 40% of the total cost are in that category and the remaining
approximately 40% are in the communications lines, the maintenance that goes
with it, etc.
A number of our customers would say that each vendor you add in the network
will cost you an additional 10% toward the total cost of ownership. And so you
are going to see both enterprise customers as well as service providers as well as
systems integrators say this doesn't make sense. If I can get a company who
provides the number one or number two product in all those areas of the network
tied together through software, I can focus my time and energy and resources on
the content and applications where my users and customers really get the payback.
COMDEX: You've outlined a pretty broad vision of networked business. One of
the key issues that always comes up is security. How is Cisco addressing this issue?
Chambers: One of the often asked questions in this industry as you begin to look
at a networked generation or a networked society is the role of security and how
you control what goes over the Internet and what goes into our homes. Either
existing today or in the not too distant future you're going to have the security
capability that most people will want in the network. It is a large emotional issue.
The more security you put into it by definition the difficult it is for some people
to get through the network. So there will be a conscious tradeoff about the
importance of security versus accessibility of information.
Let me draw an example within Cisco. When we originally disclosed to all of our
customers not only the ship dates of their products, the product specifications, the
key white papers on how you do something and all the known product bugs, if
you will, that exist, there was concern about security to our competitors. We
made a very conscious decision early on that it was more important for our
customers to be able to get access to that information and to be easy to gain access
regardless of where they were than it was to try to screen out the competitors.
Although some of the competitors have taken a little bit of an advantage of this, as
a whole we've felt that the benefits far outweigh the disadvantages. We could have
made it more difficult to get through but it would have caused problems for our
customers and others who wanted to see the information. What we did was - and
we had a little bit of fun with it - we allow a competitor to get into the network.
We just have them look at a couple of Cisco job openings before they go further.
So I think there will be a conscious decision between the level of security you will
have and how easy it is to get throughout the network. And you will have
different databases or knowledge islands, if you will, that you will have very tight
security around, but as a whole I think you will see most networks fairly open.
The second issue is there has to be some cooperation with governments both in the
U.S. and worldwide about what you can export in terms of key security issues. I
think it is naive to think that the government can effectively control that in a
given point of time. So I think you're going to see companies such as Cisco and
others spending a lot of time educating government officials who will make the
right decisions if they are given the proper data.
In terms of determining what goes over the Internet, there are obviously huge
First Amendment issues here. We believe that the technology will be here in the
not too distant future that will allow people to screen what they want at given
levels. I think, personally, that should be done at the home level.
What I'm saying is that a lot of the issues are more emotional than fact; however,
those that do have basis in fact we've got to work through, and I'm cautiously
optimistic that you will see us do that over the next 2 or 3 years.
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