Original URL: http://www.theregister.co.uk/2011/04/06/cisco_ceo_memo/

Cisco CEO: 'We have disappointed our investors'

John Chambers outlines turnaround strategy in lengthy memo

By Chris Mellor

Posted in Data Networking, 6th April 2011 14:42 GMT

John Chambers has led Cisco into becoming too broadly spread, undisciplined and caused three quarters of poor results disappointing investors. Now he wants to turn the tide and get Cisco back on track.

The company's performance in the past three quarters has gotten Cisco to the point where Chambers has had to do something exceptional, and that is nothing less than a call-to-arms memo. The memo was published outside the company to reassure employees, customers, investors and partners that Cisco's self-inflicted disease has been diagnosed and a treatment regime is being planned.

Chambers' long memo identifies a few problems with the computer networking company. According to the memo, Cisco needs to simplify processes for employees, and to install discipline. Chambers sums it up by saying: "We have disappointed our investors and we have confused our employees."

He asserts that Cisco's core strategy is correct and then points to operational issues as the problem area: "It is aspects of our operational execution that are not [sound]. We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders. That is unacceptable. And it is exactly what we will attack."

Chambers recently appointed Gary Moore as the chief operating officer, and his memo mentions Moore and indicates that the new COO will be helping drive the changes Chambers says are needed.

Five focus areas

The company's five focus areas are laid down: "Our five company priorities are established: leadership in core routing, switching and services; collaboration; data centre virtualisation and cloud; architectures; and video."

Then Chambers goes into "tough decisions" mode: "We will take bold steps and we will make tough decisions. With change comes disruption, and you will see this necessary and healthy disruption as we make meaningful decisions in a timely, targeted and measurable way. We will address with surgical precision what we need to fix in our portfolio and what we need to better enable."

In other words, some products are liable to get chopped because they aren't delivering the goods. The internal processes that enabled such crap products to get out there are going to have to be fixed as well. Chambers does not say in any detail what will be done and in which areas products will be scrapped, but there is a thumping great omission from the five priority areas above: home or consumer products. That is clearly not a focus area.

This means that ūmi telepresence, Valet and Linksys home networking, Flip video and cable set-top boxes now have question marks over their status.

Chambers also says that Cisco faces great competition in switching: "In switching we understand that our customers are buying across broader segments and specific needs in this market. We understand that our competitors in this area are fierce, with different business models and architectures... we will not leave or devalue this business. "

Strategy questions

What does El Reg think about this? We note that Cisco is facing competition from HP ProCurve, which is getting stronger all the time. Brocade is still there in storage networking and making a go of Ethernet switching. Juniper is delivering on Project Stratus. Huawei has switching products as does Hitachi and they have pricing flexibility under Cisco's fat margins.

We note too that Cisco's UCS servers are not a game-changing, knock-out success, not compared to server sales from Dell, HP, IBM and Oracle. These companies know that servers are not sold alone and that converged IT stacks mean the traditional four-way split between servers, networking, storage and system software is eroding. The trend, it appears, is towards integrated and converged IT stacks from one vendor... "from one vendor," not from a coalition such as the Cisco-VMware-EMC coalition. This, El Reg thinks, is a fundamental weakness of Cisco's server strategy. The servers are not integrated enough with networking, storage and system software products.

This issue is not addressed by Chambers' memo and it is not an operational issue. The logic of converged IT stacks is that Dell, HP, IBM and Oracle will all pursue the acquisition of integrated IT product stacks in-house, leaving little market space for vBlocks, the VCE coalition's bundle of EMC storage, VMware virtualisation software, and Cisco UCS servers and networking. We're not saying there isn't market demand for vBlocks – there obviously is – but it isn't growing fast enough to get Cisco out of its problems, self-evidently so, otherwise Chambers would not have needed to write his memo.

We're not saying Chambers is wrong about the other issues identified in his memo, far from it, but we do think there are questions to be asked about Cisco's server strategy, and these are not being asked.

Internal Cisco changes

Cisco is going to have to change internally and Chambers will drive and back Moore to ensure these changes happen: "We will simplify the way we work and how we focus our attention and resources. We will significantly rework our systems, tools and funding models to do this. We will reshape the operational foundation in order to empower our teams, integrate our major functions, and allow our people to focus on inspiring and important work. We created the role of COO to expedite this effort and Gary Moore and I will drive these changes with the leadership team."

It's an impressive memo. Chambers demonstrates a terrific ability to express ideas simply and clearly and encourage everyone involved to feel engaged in, and committed to, fixing the problems. Let's see what emerges over the next three months and see if Cisco gets back on its revenue and earnings track. If it does then Cisco's CEO succession might rear its head, with Gary Moore looking well-placed to be a candidate. ®