Wash Post. The Cisco Connection. Network Giant Has Seen the Future -- and Is Poised to Piece It Together
[Interestingly, ASND is only networker mentioned other than LU/NT]
washingtonpost.com
By Elizabeth Corcoran
Washington Post Staff Writer
Sunday, August 9, 1998; Page H01
SAN JOSE-John Chambers believes in the power of networks -- both
personal and high-tech ones.
In 1991, shortly after Chambers quit as a senior vice president at Wang
Laboratories Inc., he sent out a couple hundred resumes, then waited for
the phone to ring. He got one interview. "The first month was kind of
humbling," he conceded.
Ultimately, he was saved by a network of friends and former colleagues
who knew there was more to Chambers than that resume conveyed. They
introduced him to a modest company that built the plumbing for data
networks, a firm called Cisco Systems Inc., which at the time had revenue
of about $70 million a year. That was long before the Internet craze, years
before ordinary people chatted about the speed of the electronic modems
that connected their computers to the global computer network as
confidently as they described the horsepower of their cars.
These days, Cisco and Chambers, who became president and chief
executive in 1995, are the darlings of Silicon Valley. Cisco reported its
fiscal 1998 results last week, posting a profit of $1.35 billion, or $1.26 a
share, on sales of $8.5 billion, which cheered investors. By the end of the
week, the company's stock topped $96 a share. Less than a month ago,
Cisco joined an elite group of fewer than two dozen companies whose
value as calculated by Wall Street has exceeded $100 billion.
Chambers and Cisco are the advance guard of the next wave of business
and technology. The future of tech, they believe, is not about computing
power -- it's about communicating. The electronic gizmos that people will
use to talk to one another will become as varied and unique as trinkets on
a charm bracelet. What will unite them, however, will be standardized
communications networks. If Chambers has his way, Cisco's technology
will reside at all the critical junctures, shuttling data from one place or
device to the next.
Make no mistake -- Cisco faces tough competition as it tries to expand its
business by creating the building blocks for very high-speed, sophisticated
pathways that fuse together data, voice and video signals over a single
network. Data-networking companies such as the smaller Ascend
Communications Inc. are eagerly trying to learn how to provide
technologies as reliable as the telephone network, while longtime
telecommunications giants such as Lucent Technologies Inc. and Northern
Telecom Inc. are scrambling to build up their data-networking muscles.
To maintain an edge, Chambers and Cisco aren't just selling new
technology -- they are pushing a new way of doing business based on the
Internet. Here's the pitch: Don't just become a Cisco customer, become a
"partner." A partner buys Cisco's products and also gets a kind of
consulting service thrown in for free: Cisco will show you how to run with
the Internet pack, save money, get into new markets and generally flourish
by using the power of networks. Exhibit A for how this works is Cisco
itself.
The Cisco people "have a great 'slideware' story," said Kevin A. Fong, a
venture capitalist with the Mayfield Fund in Menlo Park, Calif., using
Valley lingo to describe Cisco's corporate strategy presentations.
Picturing the Future Every networking company wants to build technology
that will fuse the traditional telephone network with the new Internet
technologies. But even if the technology isn't ready, Chambers is ready
with futuristic pictures that are as glossy as a layout on a living room in a
decorating magazine.
On a recent summer day, Chambers is the lunchtime speaker for a group
of half a dozen Italian data-communications businessmen from Omnitel
Pronto Italia, based in Corsico, whom Cisco is wooing. Chambers's dress
is surprisingly formal for Silicon Valley. As he greets the Italians, he gently
mocks his own pale-yellow dress shirt, dark-blue suit and patterned silk
tie. "It's my IBM heritage," he says apologetically, referring to the first job
he had after earning graduate degrees in law and business.
He spends only a few moments on such banter. "From what I've been told,
we're thinking the same way," he tells the Italians, drawing out his a's with a
West Virginia drawl. It's a smooth compliment. The businessmen are
proud of their company, which has one of the fastest growth rates of any
firm in Europe. Even so, its earnings are only a fraction of Cisco's.
What has driven Cisco's rapid growth, he tells them, has been the
company's decision to base its business around the Internet. Chambers
rattles off the numbers: By relying on Internet technologies to carry out
some traditional corporate functions -- including managing internal expense
accounts, handling a number of customer questions and increasingly
handling customer orders -- Cisco believes it saves at least $360 million a
year, "which is more than our major competitors spend on R&D," he tells
the Italians, referring to other data-networking companies' research and
development.
Making the Pitch Chambers flips through a book of slides: Here's a graph
showing Cisco's sales outpacing those of other networking companies by
more than two to one; another shows Cisco's market capitalization, almost
twice the value of other data-networking companies. (Those charts did not
include the recently announced $800 million acquisition of Stratus
Computer Inc. by Ascend.)
The implied message: Such results can be yours, too, if you adopt the
Internet business style.
Chambers doesn't go into the details of Cisco's history, which are fast
becoming part of Valley lore. The company was founded in 1986 by a
husband-and-wife team from Stanford University who came up with an
idea for building specialized computers for transmitting streams of data
called routers. When an electronic message is sent via the Internet, for
instance, a router breaks up the message into a jigsaw puzzle of envelopes
called data packets. Every packet carries with it a network zip code for its
destination called the IP, or Internet protocol, address, along with other
identifying information (such as its return address, so the recipient can
reply).
Routers act as the traffic directors throughout the Internet. They send data
from router to router, following a map (called a routing table) and a set of
rules that help a packet get closer to its destination with every move.
Eventually, routers deliver the packets to the intended network and
ultimately to a computer that pulls the contents from the envelopes and
reassembles the message.
For years, building routers was a steady but dull business. "Five years ago,
the majority of technical people thought that Cisco had the wrong model,"
said Eric Schmidt, chief executive of Novell Inc., a major software
company. Routers, which rely heavily on software to provide the
"intelligence" that helps them carry out complex tasks, were useful for
connecting companies together. "Switches" were considered more
powerful, capable of swiftly handling rivers of information, including
traditional voice signals but limited to relatively small networks (local area
networks, or LANs).
Cisco and others saw, however, that some of the technology used in
switches could be used to make larger and faster routers. These days,
top-of-the-line routers are so fast that they can carry voice signals along
with data, albeit with varying levels of quality. Such technology has set
people dreaming of the holy grail of networking: a single network that fuses
data, voice and video information.
Companies such as Cisco, nonetheless, must still prove that data networks
can offer high-quality connections and be as reliable and flexible as voice
networks have been. No company yet has reliable products that combine
voice and data signals, contended Fong of Mayfield.
Setting a Standard "Under controlled circumstances you can send voice
[signals] over IP networks," he said. But before Fong considers the
technology real, "you've got to make it work on Mothers' Day," the busiest
calling day of the year.
As Cisco's management works on putting together the pieces for that
grand network, it runs the company very handily with the communications
systems available today. According to Carl Redfield, Cisco's senior vice
president for manufacturing and logistics, 80 percent of Cisco's annual $2
billion in materials purchases are handled via electronic networks, in which
computers at either end communicate directly with one another. The rest
are handled via the Internet, he said. "I'm saying that no one should be a
supplier [to Cisco] unless they do business via the Internet," he said.
Doing the Final Assembly Cisco itself largely does only the final assembly
of its routers. "We want to maintain control over the intellectual property of
manufacturing, not the bricks and mortar," Redfield said.
Cisco gives its suppliers intricate orders on how to build its components,
and then computerized scripts for testing those parts. "We employ five
people externally for every one person inside manufacturing," Redfield
said. The less time and fewer people Cisco devotes to manufacturing itself,
the better its profit margins.
Cisco also is nudging its customers to place orders via the World Wide
Web. Cisco executives say they are booking as much as $20 million a day
via the Web. The goal is to link Cisco's ordering and production system so
tightly that a customer's order triggers component suppliers to ship their
parts. That makes products more tailored to customer needs and shrinks
inventories.
Internally, Cisco now handles all employee expenses and a growing
number of customer service and support tasks via Web page applications.
Proxy voting for shareholders is another candidate for the Internet.
As Chambers sees it, Cisco is just a few steps ahead of many other
companies in grabbing the savings that come from becoming an "Internet
company." So he's come up with a recipe to help Cisco create sticky
bonds with its customers, ones that are hard for them to break.
As Cisco becomes a one-stop shop for everything a customer needs to be
an Internet company, Chambers is also exploring ways that Cisco can
pump up its name recognition through national advertising -- a tactic aimed
at making a decision to "buy Cisco" easy to explain.
Most significantly, however, Chambers is steadily turning Cisco's
"customers" into "partners" that rely on the networking company to help
chart how they use technology and that even help Cisco prospect for future
business. He recites his list of allies with the reverence of the devout
naming the saints.
First there are "strategic alliances" with big companies such as Microsoft
Corp., Intel Corp. and Compaq Computer Corp., which Cisco counts on
to provide the technologies that it either can't or won't create on its own.
Cisco believes that such deals should promise both it and the partner $500
million to $1 billion in revenue that they wouldn't have won on their own.
Cisco has struck 10 such deals, and Chambers has his eye on a few more.
Some will be flops, he conceded. But because they let Cisco tell a
customer it can arrange for all the necessary technology to create an
end-to-end network, Chambers calculates that the deals are worth the
effort.
'Simple' Alliances
Then there are simple "alliances." To some, these Fortune 500 companies
might simply be customers. But Chambers wants Cisco executives to work
closely with them to guide how they use networking technology and help
them convert their suppliers and customers to the Internet way.
Cisco can also provide muscle when such companies try to win new
business themselves. For instance, if Omnitel forms such an alliance with
Cisco, it might both resell and use Cisco technology. Cisco executives, in
turn, might help the Italians as they pitch their services throughout Europe.
Chambers would like Cisco to form these alliances with as many as 80
percent of its enterprise customers, up from 50 percent today. [Not much leveraging power left...]
Finally, much as International Business Machines Corp. did a generation
ago, Chambers wants even smaller customers to lean on Cisco for advice
as well as technology. "IBM understood the needs of its customers better
than the customers," Chambers said.
He'd like as many as half of Cisco's enterprise customers to be "partners."
So far, only about 10 percent are, he said. Rather than just asking them to
buy the technology, Chambers wants these companies to become a part of
the Cisco story, too.
"We're building a large part of our strategy around our ability to partner,"
he tells the Italian executives. "Maybe you'll say you aren't that big, but if
you are cutting-edge, then your impact is just as important to us."
Forty-five minutes later, Chambers is driving his message home: "I need
three short-term and long-term goals that you want from us," he says. As
soon as they and Cisco managers can agree on the goals, the deal will go
forward.
The meeting ends cordially, with Chambers offering to lend a Cisco hand
when the Italians grapple with their government over regulations that affect
the Internet. "If there's anything we can do to help . . . just call us," he
urges them.
Afterward, he sends them bottles of a California cabernet. It's vintage
Chambers: a gesture that delights the Italians and guarantees they won't
forget about Cisco. The bottles have a Cisco emblem indelibly etched into
the glass.
c Copyright 1998 The Washington Post Company
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