May 27, 1999
Cisco Systems to Focus Efforts
On Sales to Smaller Companies
By SCOTT THURM
Staff Reporter of THE WALL STREET JOURNAL
Cisco Systems Inc. became the largest maker of computer-networking
gear with an aggressive sales force pushing heavy-duty equipment to big
companies. But sales to big companies have been slowing.
So Cisco has made what appears to be a successful shift: selling more gear
to smaller companies. And it has been doing so largely through a global
army of consultants and retailers, not its own sales force.
Cisco's sales through resellers, mostly to
businesses with fewer than 500 employees,
should reach about $2.2 billion in the fiscal
year ending in July, up from $1.1 billion a year earlier and $170 million in
fiscal 1996. That's still less than 20% of Cisco's revenue, but sales to
resellers have accounted for roughly one-third of Cisco's growth for the
last two years. That's helped keep Cisco, San Jose, Calif., a Wall Street
favorite, and clipped the wings of rival 3Com Corp., the traditional
supplier to smaller companies.
"Cisco investors have an almost insatiable appetite for growth," says Paul
Sagawa, an analyst at Sanford C. Bernstein. "If Cisco had stayed in its
traditional market, there is no way it could have maintained its traditional
growth rate."
The move was well-timed. Spurred by the Internet, smaller businesses are
rushing to connect their computers into networks. Roughly 2.1 million
businesses with fewer than 100 employees now have networks, up 50%
from 1.4 million in late 1997, according to market-researcher Access
Media International Inc., New York. There's still plenty of room for
growth: More than 70% of the nation's small businesses still don't have
networks.
AMI surveys show there's still more 3Com gear than Cisco equipment in
businesses with fewer than 500 employees. But analysts say Cisco is
gaining fast. Cisco now is the leading maker of low-end switches for
moving data around office networks, and dominates the small-office
market for routers, which connect office networks to the Internet,
according to Cahners In-Stat Group, Newton, Mass.
But 3Com officials say they aren't overly concerned. "They have
established a presence," says Jarek Chylinski, head of 3Com's
small-business group. "We don't feel like they've done it at our expense."
Cisco flubbed its first thrust into the small-business market in 1995, with a
separate brand called Cisco Pro, which offered fewer features and white
equipment boxes rather than the company's signature dark green. It was a
move reminiscent of International Business Machines Corp.'s failed
attempt to sell a personal computer with inferior features, the PC Jr., to
consumers.
Cisco's effort confused sales people, resellers and customers. "The ugly
days," recalls David Williams, president of A & J Technologies, a
Richmond, Va., reseller, who says customers wondered if Cisco Pro was
"a real Cisco product." Commission-hungry salespeople fought for
business with resellers. Even Cisco Chief Executive John Chambers admits
the company was doing "poorly" among small businesses three years ago.
Cisco junked the Cisco Pro brand name in 1996, but continues to make
many of the same products. The company also began paying salespeople
partial commissions on any business they generate, even if the sale is
booked through a reseller. Last summer, Cisco equalized the commissions,
no matter where the sale is booked. "We were trying to fix a
channel-conflict problem with Cisco Pro, says Charlie Giancarlo, Cisco's
senior vice president for small and medium business. "What we did was
create a lot of other problems."
By equalizing commissions, Cisco has become very popular with resellers,
who say they no longer feel they are competing with Cisco's sales force.
"They don't have a fear of giving us leads," says Paul Ferraro, a
co-founder of Re/Com Group Inc., Moorestown, N.J. Re/Com dropped
other makers of networking gear last December to concentrate on Cisco.
WindStar Group Inc., Spokane, Wash., is a consultant and reseller for
IBM, Hewlett-Packard Co., Microsoft Corp. and others. But President
Jim Barry says he prefers working with Cisco. "Everybody uses the term
partnership, but it's more of a partnership with them," Mr. Barry says.
The growth of Cisco's small-business unit is eroding Cisco's traditionally
large profit margins. Cisco's gross margin for the first nine months of its
fiscal year was 65.1%, down from 65.5% in fiscal 1998. In its most recent
quarter, Cisco's gross margin fell below 65%. But analysts are
unconcerned. Cisco "can afford lower margins" because of its
"extraordinary profitability," Mr. Sagawa says.
For users, however, the commission policy means Cisco products often
cost more than competitors', because resellers add their own profit
margins. With startling success, Cisco urges resellers to keep margins lean
on the gear, and to try to make money by peddling services, such as
designing and maintaining networks. Re/Com charges up to $2,000 a day
for its consultants. "You have to get into the services end," Mr. Ferraro
says.
Users say they don't mind paying a little more for the Cisco name. "You
can buy cheaper hubs, but your performance is going to suffer," says Cecil
Helton, Web master for Sumerset Houseboats, Somerset, Ky. The
200-employee boat maker with $26 million in annual revenue recently
spent $6,000 to upgrade its network with Cisco products. |
