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the Software View: The Cisco kids. (Part II)
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LEAD BY EXAMPLE
So far, Cisco is leading the Internet age by example. More than seventy percent of Cisco sales are generated on the company's Web site - which has inspired numerous resellers to adopt a similar sales model.
At premier Cisco partner, Transparent Technology, for one, customers can order products directly from the reseller's Web site. Larger customers that place bigger orders (for say, fifty or more routers) receive a dedicated Web link that allows them to track the order through delivery.
VIRTUAL CLOSE
Justin Fox writes, "Sit with Larry Carter, who was Chief Financial Officer in 1999, in his little office on the top floor of Cisco's headquarters in San Jose, California, and you see, with astonishing clarity, an entire corporation arrayed out before you. Not out his window, which affords a view of a bunch of cubicles on his floor, but upon his computer screen. With a couple of mouse clicks and a password, CFO Carter can call up his company's revenues, margins, orders, discounts given on those orders, and top ten customers - all for the previous day. "Could I actually get earnings per share (EPS) in one day?" Carter asks rhetorically. "Yes, but I don't know what that benefit would be."
This is the promised land to which all those billions of dollars spent upon enterprise software and upon Web sites tying in employees, suppliers, and customers may finally lead corporate America. Financial data that once took weeks to gather and verify are now collected automatically as part of doing business. This doesn't just cut down on the need for number crunchers or on those "negative earnings surprises" that freak out Wall Street. It makes for a company that reacts more quickly to market shifts and competitive threats. It allows executives of a big corporation like Cisco (with 18,000 employees and annual sales of $10 billion) to stay in tight control without suffocating its employees' entrepreneurial spirit.
There are a couple of reasons why Cisco is at the forefront of this movement toward having all of your financial data at your executives' fingertips all of the time. As a youngish company (founded in 1984), it doesn't have a bunch of incompatible, old record-keeping systems gumming things up (everything runs on Oracle enterprise software). Cisco also does everything it possibly can over the Web. Right now, seventy-three percent of the company's customer orders are taken over the Internet. Meanwhile, employees make all of their travel arrangements and file their expense reports over the Web; same with purchases, both big and small, and hiring decisions.
All of this use of the Internet has enabled Cisco to shorten the time it needs to close its accounting and financial books at the end of each quarter; from the ten days it took when Carter first joined the company four years ago to one day now - while cutting spending on finance from two percent of sales to one percent. Carter had focused initially only upon the end-of-quarter close; he thought shortening the closing period would result in more reliable numbers and cut the amount of time his staff spent on bookkeeping. "Then it sort of struck me last year that in order to have it in one day, you had to have the information all the time anyway," he says. "Then you start thinking, 'This gets kind of interesting.'"
Thanks to this "virtual close," as Carter likes to call it, he and CEO John Chambers can detect changes in market conditions almost instantly. "A year ago we saw an uptick in countries in Europe that had been flat, and we authorized accelerated hiring there long before any of our competitors did," Carter says. Remember those daily figures that Carter gets on orders, margins, and discounts? If he sees someone landed a big order, he may send congratulations. "Everyone in the sales organization knows that John and I look at this every day," Carter says.
The top-down transparency allows for a management structure in which people can make decisions quickly - for example, all of Cisco's employees are free to fly anywhere in the world without prior approval.
TERA FIRMA: THE TERABIT CHALLENGE
Every step toward the New World Network has direct repercussions for Cisco's first born: the network router. As mega-bit machines have become a thing of the past, and giga-bit machines are today's norm, the state-of-the-art will soon be tera-bit powerhouses.
The distinction between switches and routers will collapse. Classic routing (circa 1996) meant that IP switches and routers were stand-alone products. The router told the packets where to go, and the switch moved them around. Switches, being primarily hardware, are much more reliable than routers, which use lots of software calculations to figure out exactly where to send packets.
The newest routers are also switches. They combine the wire-speed advantages of switches with the intelligence of routers.
Cisco has become a fervent supporter of switch routers. Its top-of-the-line 12000 GSR series was developed in-house and was one of the fastest switch routers shipping in April of the year 1999.
THROUGH THE LOOKING GLASS
To move packets at the tera-bit speeds that will be required by the New World Network, IP has to interface directly with the fiber. This means new routers will be needed to internetwork with the glass at fiber-optic speeds.
Companies like Qwest, Level 3, and Williams have laid enormous fiber trunks and are in the process of expanding their networks. Level 3's current fiber network, for instance, can carry an amount of data equivalent to forty times the world's daily long distance telephone calls.
Currently, most of the traffic being shunted across the fiber-optic networks uses expensive equipment running two old-school, fail-safe protocols: SONET (synchronous optical network) and ATM (asynchronous transfer mode).
This world is about to explode. A number of new data networks from the likes of Sprint, Enron, and Frontier are now avoiding these protocols almost entirely, using IP to work in the optical world. This reduces latency by sending data through fewer boxes and this means that the networks can scale to extremely high bit rates. Canada's CA*net3 - a government, university, and research backbone - will use IP over fiber and transfer data at speeds approaching forty gigabits per second.
In networks like these, routers end up replacing the SONET and ATM switching equipment. Which is great news for Cisco and terrible news for traditional SONET and ATM vendors like Fore Systems and Tellabs. Cisco had more than a hundred people working on creating products that directly interfaced with the fiber, and has already released the first generation.
SMART BILLING
Selling cheap voice minutes over the Internet is only the foot in the door. The big opportunity is to think up new services that could be delivered over this suddenly cheap, plentiful, and still unregulated channel. What about a unified messaging service that provides Internet and Web services, voice, fax, voice-mail, and e-mail - all through a local call?
Enhanced services aren't worth doing unless there is a way to bill for them.
The economics of the New World Network mean that all-you-can-eat high-speed access for $40 per month is very unlikely. Flat-rate pricing simply can't finance the infrastructure buildout. Most users will end up paying for the networks resources they actually use, and even extra to ensure high-priority, high-reliability communications. Which creates a potential billing nightmare for the ISP's and telecommunications companies that will provide and deliver new broadband services.
Right now, there is no way to tell who is using expensive data services, and who is not. That is about to change.
The traditional router is designed to be democratic - it does not discriminate against any given data packet. Whether a packet is a snippet of an urgent digital phone call or a bit of a spam, it has an equal right to the router's services.
The New World Network router needs to be more discerning and discriminating. To handle hundreds of high-speed lines effectively, it needs to know which type of data it is handling, its priority, and, last but not least of all, how much someone is paying to have it delivered.
It is already possible to do some specialized billing today, but only by using a series of complicated workarounds. Cisco has created an IP billing initiative with Hewlett-Packard that aims to solve the problem more elegantly. The system is designed to let voice-over-IP and other broadband services be billed the same way traditional telecommunications companies prefer to bill.
WIRELESS WEB
Most people today are familiar with only two types of wireless services: cell phones and pagers. Broadband wireless is coming to the local area network (LAN). Radiata Communications, a small Australian company, is creating chip sets for wireless LAN systems that can deliver 32-MBps data streams to mobile users.
Much further out, broadband wireless will be available through networks of satellites. GlobalStar and billionaire Craig McCaw's Teledesic are pursuing this market. Teledesic's idea is to put more than 250 satellites into low Earth orbit, route IP data between them, and beam it down to terrestrial sites. Teledesic is spending $10 billion to have the system operational by 2003.
Of course, wireless is an excellent opportunity for Cisco. At the beginning of February 1999, Cisco teamed up with Motorola on its own broadband wireless scheme, which uses the cell phone network. The companies plan to spend as much as $1 billion over the next five years on it. And in 1998, Cisco made a significant move by buying Clarity Wireless. The small start-up company was working on a fixed wireless technology - LMDS, or local multi-point distribution service - that allows megabits of data to be beamed to tiny microwave dishes on remote office buildings. Cisco now wants to apply it to residential communities.
BUYING SPREE
When asked whom he fears most - the big companies or the start-up companies - Chambers' answer is immediate: "I have a list of a dozen little companies that I'm tracking very closely," he says, although he refuses to share it. "Guys who can start from a fresh sheet of paper have an enormous advantage technologically. We have to carefully integrate new capabilities into our existing product lines, and that is tougher. They keep us on our toes.
We have always believed that our toughest pin-point product competition would come from technology start-up companies. We measure this success of our research and development based upon how we do versus these start-ups. Because of our strategy of internal development, partnering, and acquisitions, we have been able to achieve this Number one or Number two market share in almost every product area."
As the race to build the New World Network has heated up, Cisco has made a series of key company purchases designed to either blunt or co-opt some of the crucial developments. Since 1993, it has used its super-heated stock price to acquire some thirty companies. There were nine acquisitions in 1998 - the most in one year since the company was formed in 1984.
In the twenty-four deals for which the purchase prices were disclosed, Cisco paid more than $7.9 billion. The largest acquisition was StrataCom, which sold ATM and frame-relay technology to big businesses; Cisco bought the company in April of 1996 for $4.7 billion. Most acquisitions, however, are must smaller, weighing in at around $100 million.
"Time to market is crucial for us," says Michelangelo (Mike) Volpi, who as vice president for business development has been in charge of Cisco's acquisitions for four years. "But so is being able to identify emerging technologies that are going to be important, and grabbing them. We couldn't possibly develop all the pieces on our own, nor would we want to. At a start-up company, a small team of folks will work twenty-hour days for months to get a product out the door, and take a shot at the big financial reward. Those are the types of people we want to join us. We use our stock price to give them the big payoff, and we get a jump on getting them to market."
Too often, technology acquisitions are crippled by a lack of corporate structure, and resemble one start-up company buying another - crucial systems, like payroll, benefits, and communications, simply melt down. At Cisco, every detail is considered. Within thirty days after the acquisition, all of the basics are taken care of: phone systems integrated, paychecks handled, e-mail forwarded, business cards printed, pension and 401(k) plans updated. Most of all, Volpi says, "we want to retain everyone."
Chambers notes that, "Each of our acquisitions underscores our commitment to offering customers a broad range of best-in-class technology choices. The companies we acquire share our vision in terms of the marketplace and also value an open, standards-based platform. Most of our acquisitions also focus on companies that have an entrepreneurial, team-oriented and customer-focused culture. Over the past several years, we have acquired numerous companies for their technologies and their people. Each acquisition has played a key role in our overall success."
"If you want to know how well an acquisition worked, find out how many of the top management and engineers are left two years later. Attracting and retaining the best talent are two of our innumerable strengths."
But what do you do if you can't buy them? Tame them, of course. Cisco has strategic partnerships with more than a dozen A-list technology firms, including Hewlett-Packard, Sun Microsystems, International Business Machines, Intel, Dell, Motorola, Oracle, PeopleSoft, Alcatel, GTE, Sprint, U. S. West, EDS, and KPMG Peat Marwick. An impressive list, to be sure.
Chambers is determined. "Too many partnerships fail because they don't get the resources and credibility within the organization. When we started to do this, I took one of my top guys and made him a senior vice president for strategic partnerships. He reports directly to me and has his own staff, so he doesn't have to go begging for the help he needs."
His dream date: Hewlett-Packard. "HP has created a culture where their word is their bond. We have dozens of alliances going on with that company, and not a single contract is required. That's my kind of partner."
Cisco's not a bad partner either - especially for its employees. Platinum-plated stock options have made at least 2,000 of its 17,000-plus employees millionaires. In Silicon Valley, where thirty percent annual turnover rates are not unheard of for the industry, Cisco's voluntary attrition rate is only three percent. And what Cisco gives, it also gets. Its employees at its forty-building San Jose campus are now some of the most productive in the technology world - even more so than Microsoft's. For the 1998 fiscal year, revenue per employee averaged $563,000 at Cisco, versus $535,000 up in Redmond, Washington. At Lucent, the figure was an anemic $214,000.
Says Chambers, "Any one of our employees could leave for more money and more stock options tomorrow. There isn't a one that couldn't leave for fifty percent more money and one hundred percent more stock options. I think that people like to work in an exciting environment around other good people. I think that people want to work in a place where they can change things - for a higher purpose than just making money. They also like to work for good leaders. People usually leave a company because they don't like or respect their managers. We bind our rewards system to the success of the company (as a whole), so we attract the best and the brightest. We win or lose as a team. This is a story that has never been told, but when problems occurred in Indonesia, we were one of the first companies in the world to get our people out of that country. We took our people out in ambulances and flew in jet airplanes, picked them up and had them out. One of the individuals had a heart attack and we made sure he was taken care of all the way home. We set it up ahead of time as a process, for medical emergency or political instability. Luck comes to those who are prepared. Cisco cares about every single one of its employees."
CISCONOMICS
Add it all up.
In early February of 1999, Cisco announced its latest quarterly earnings reports. Revenues were up forty percent over a year earlier. Profits, on a per share basis, grew by more than thirty percent. It was the company's thirty-sixth consecutive quarter of growth in revenue and earnings. A single share purchased in the 1990 initial public offering (IPO), after five 2-for-1 and two 3-for-2 stock splits, then totaled seventy-two shares. That $18 investment was then worth roughly $7,000. John Chambers' net worth then exceeded $360 million. Cisco's stock market capitalization then exceeded $160 billion.
It was time to start growing.
To be continued ...
Sincerely,
Mark Kuharich
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