Cisco CEO talks about weathering the economic slump

In a keynote presentation Tuesday at the Cisco Global Partners Summit in Las Vegas, Cisco Systems Inc. president and CEO John Chambers pondered the fate of the economy and what Cisco is doing amid a spreading slump.

In November, Chambers said, business was looking good. By early December, he said, there were signs of an economic slowdown but no real warning of a major dip. Then came January.

That, said Chambers, is when “we saw a lag (in corporate spending) that we had not seen before.

“We did the typical Cisco dive-and-catch in January,” Chambers said, describing a grab for last-minute sales aimed at bolstering revenue prior to quarterly earnings announcements. But the U.S. economic downturn was so sharp that the San Jose, Calif.-based company couldn’t maintain its record of beating earnings predictions by a penny per share.

In fact, when it announced second-quarter earnings in early February, they came in 1 cent per share less than what analysts had forecast. Cisco saw its stock dip to record lows and just last month announced plans to lay off 8,000 workers.

According to Chambers, the overall softening of the U.S. economy began with a slowdown in consumer spending that spread to manufacturing, where companies began delaying capital purchases. Now the slowdown is migrating from the United States to the Asia/Pacific region and to Europe.

As for Cisco’s own business, Chambers stressed that to continue to be successful, “we must deal with the world the way it is, not the way we wish it was.”

Ironically, “the way it is” might actually be good for the company over the long term, said Jim Shepherd, an analyst at Boston-based AMR Research Inc., who was at the conference. “It (the economic downturn) is an inflection point that someone like Cisco can capitalize on using their brand advantage to advance market share,” he said.

Chambers cautioned resellers attending the Las Vegas conference that simply selling the latest technology shouldn’t be their primary focus. Applying a new technology may initially be a way for a business to differentiate itself from competitors, but other companies will soon copy that application. When that happens, the technology becomes a commodity.

The way to survive and benefit from this cycle of innovation, application and commoditization, Chambers said, is to be first with technology and then demonstrate the value of that technology by showing how it saves companies money and increases their productivity.

The CEO of a large company cares less about the specifics of a technology than about its cost, Chambers said. But “when you talk about how that US$20 million investment can save $50 million, and point out how quick the payback will be, then you start looking at the customer based on business needs instead of just the technology needs.”

Cisco has traditionally either developed or acquired technologies from other companies to propel growth, Chambers said. Now, the company is moving into a phase where partnering with resellers, integrators, consultants, developers and customers will become a key element in Cisco’s future expansion. And, he said, customer satisfaction will become a key differentiator for Cisco.

“Cisco seems focused on working with resellers and other partners to improve the profitability of its customers,” Shepherd said. But partnering is hard. And Shepherd said it is unclear whether Cisco “can bring the same level of skills, processes and metrics to partnering as they’ve done with acquisitions.”

As for the near future, Chambers acknowledged that Cisco might not grow as fast as it has in the past, and could even experience periods of “negative growth.”