Cisco maintains indirect service approach

Ravenous Cisco Systems Inc. still has an appetite for acquisitions. But these days it’s a steady diet of everything IP and a total avoidance of anything that resembles direct network services.

Maybe the experience of Compaq Computer Corp. and that company’s particular difficulty in digesting the multiservices portion of old Digital Equipment Corp. has sworn other hardware manufacturers off from making similar moves. For Compaq, the services foray seemed like a good idea at the time. Shrinking margins on PC hardware and a desire to become a much more prominent computer company made the move to branch out into service provisioning a logical direction. For a company like Cisco, however, there’s certainly nowhere near the urgency since network hardware sales, especially in the high-end enterprise, are extremely profitable.

Still, enterprise customers might like to see Cisco take a more direct hand in providing the services around the equipment the company sells. But Cisco, for the time being, remains steadfast, living up to a longstanding vow to remain a network equipment seller only. Two recent deals with major services companies have reinforced this singularly focused position.

In late August, Cisco pledged US$1 billion to professional services giant KPMG, with the stated aim of building an organization called KPMG Consulting and, more specifically, a core of Cisco-trained engineers. The deal initially had the look of Cisco actually acquiring part of KPMG, but in fact the Cisco investment is in certification training. The goal in this deal is to Cisco-certify some 4,000 KPMG engineers as Cisco Certified Network Architects (CCNAs), Network Professionals (CCNPs), Design Architects (CCDAs), Design Professionals (CCDPs) and highly sought after Cisco Certified Internetwork Experts (CCIEs).

Cisco inked a somewhat similar service deal with IBM Corp. in early September. The fanfare was around the acquisition of Big Blue’s switching and routing product division coupled with a pledge to purchase IBM microprocessing chip sets. But the deal boils down to a commitment by IBM to train and ultimately Cisco-certify a number of its engineers, while Cisco commits to a reciprocal purchase of IBM products.

The intent with both IBM and KPMG agreements is for Cisco to continue to rely on these service organizations to do the things they do best, but to also ensure the network consulting, implementation and outsourced services offered by partners have a particular Cisco flavour. Cisco has repeatedly said it has no interest in a role as a direct provider of network and systems integration services, and Cisco Canada general manager Pierre-Paul Allard, during an interview to explain the details of the KPMG and IBM deals, reiterated the pledge. “We are not interested in providing services directly and will continue to rely on service partners,” he said in a recent interview with International Data Corporation (Canada) Ltd.

Still, Cisco does play a reluctant role in offering its best and/or most important customers a direct hand when they demand it. It’s a costly effort from Cisco’s perspective. A Cisco-employed engineer who assumes some type of project manager’s role typically involves pulling that engineer away from important development and research work in a Cisco lab somewhere. The deal with KPMG is an effort to create an engineering group that that can be pulled into projects rather than dragging in Cisco’s own development engineers.

Such alignment with service companies is something of an industry epidemic among network equipment providers. Nortel Networks, for example, previously announced important partnerships with Compaq and NCR Corp.- companies that will lead with Nortel Unified Networks products and solutions in the emerging space of IP multiservice network building.

Likewise, the Cisco agreement with IBM means Big Blue will lead with Cisco solutions, although both companies are quick to point out that “lead” does not mean “exclusive.” The KPMG deal is a bit more sensitive, since KPMG has built a reputation based on vendor neutrality. However, when it comes to dealing with Cisco, as any of the company’s key partners will tell you, there’s a great deal of pressure to be single-mindedly Cisco when it comes to the network solutions sold.

The thinking is that the enterprise networking equipment industry is at a similar stage in history that the PC equipment maker market was some 10 or 15 years ago. Most companies are in high growth mode, product margins, especially for high-end network gear, are still reasonably lucrative and there’s little interest or need on the part of network equipment makers to diversify in order to create certainty around profit streams. Cisco might well argue: “In our rapidly growing and profitable businesses we simply don’t need the headache of services.”

Logic and past history would dictate that the situation would change some day – either as network equipment profit margins seriously erode or as customer demand builds for much more direct service involvement from their network equipment makers.

In the meantime, expect integrators, consultancies, implementers and all sorts of other service company types to feast upon the network services opportunities that network equipment makers would rather not gobble up themselves.