|BUSINESSWEEK ONLINE : SEPTEMBER 13, 1999 ISSUE|
Meet Cisco's Mr. Internet
Cisco Systems CEO John Chambers has a vision of a New World Order--with Cisco as its No. 1 supplier
Last May, John T. Chambers, the chief executive of networking giant Cisco Systems Inc. (CSCO), sat down during a swank technology conference near Laguna Beach, Calif., for a get-to-know-you with Carl Russo, CEO of the hot telecom-equipment startup Cerent Corp. After a few pleasantries, Chambers got right to the point: ''How much would it cost me to buy you?'' he asked, wearing his trademark ear-to-ear grin. ''How much would it cost for you to leave us alone?'' shot back a smiling Russo, an ambitious entrepreneur who had his eye on an initial public offering this fall.
In the end, it seemed no price would dissuade Chambers. On Aug. 26, Cisco agreed to pay a staggering $6.9 billion in stock for Cerent, even though the two-year-old startup has sold only $10 million in gear. The hypercompetitive Chambers simply would not go away. Convinced that Cerent's technology is critical for linking the Internet and telephone-system worlds, he restarted talks 10 weeks after first meeting Russo. By Aug. 13, Chambers had agreed to match Cerent's expected lofty IPO value, but Russo still had one hang-up: He wanted security for his 285 employees. To seal the deal, Chambers made a stunning concession: He told Russo that all personnel decisions about Cerent's workers would be made jointly by the two executives--forever.
What else would you expect from the Internet's No. 1 salesman? More than any other individual, Chambers has become the champion of a New World Order where the Internet is the crucial backbone for all communications and business transactions around the globe. If Chambers isn't pulling out the stops for one of the 40 acquisitions Cisco has made to help it be the biggest supplier of plumbing to the Internet, he's pushing others to figure out how to better use the Web. His hawking is incessant. One day, he's preaching Net religion to Chinese President Jiang Zemin, and the next he's meeting with six geeks in a garage who are noodling over a new networking technology.
Chambers is on the same near-maniacal rip for Cisco to be the ultimate model of an efficient Net company. Today, the company sells 78% of its gear over the Net, speeding up the process and wiping out costly and needless steps between order-taking and delivery. This streamlined way of doing business has saved the company a cool $1.5 billion over the past three years (page 140). And Chambers isn't shy about evangelizing just how the Net can do the same for every other company. ''What Bill Gates is to PCs, John Chambers has become for the Net,'' says Philip J. Lawlor, chairman of Internet service provider AGIS Inc.
Indeed, these days Chambers is spinning a vision of an Internet future that's as far-reaching as the ''information at your fingertips'' mantra that Microsoft Corp. (MSFT) Chairman Gates divined a decade ago. According to Chambers, there will be a day when a ''New World Network'' will seamlessly blend the technology of the Internet with high-speed optical fibers, cable, and wireless systems to carry voice and data everywhere. Voice calls will be free, and people will think nothing of zipping off huge chunks of data for everything from video E-mails to movies on demand. With Cisco's dominance in networks that handle corporate data, Chambers thinks his company can become the top supplier for the New World Network. ''If we do it right, we have the chance to become one of the most influential companies in history,'' he says.
Not that Cisco is a slouch today. Since becoming CEO five years ago, Chambers has steered the company's explosive growth from $1.3 billion in revenues in 1994 to $12.2 billion for the fiscal year ended July 31. And Cisco's not likely to slow down: Analysts figure its sales will grow 37% this year, to $16.6 billion. On Aug. 31, IBM said it would drop most of its own networking products to sell Cisco equipment instead, a deal that could add as much as $7 billion to Cisco's top line over the next three years. Torrid growth, coupled with rich profit margins, has pushed Cisco's stock up more than 2,300% over the past five years compared with about 200% for the Standard & Poor's 500-stock index. That gives the company a market capitalization of $220 billion--the fifth-highest in the world.
TECTONIC SHIFT. Now Chambers faces his biggest test yet in bringing about the New World Network. To reach his goal of tripling Cisco's sales over the next decade, he must muscle his way into the $225 billion market for telephone equipment, where the company now has less than a 1% share. To do that, he will have to best larger and more experienced rivals such as Canadian giant Nortel Networks Corp. (NT) and Lucent Technologies Inc. (LU), the high-flying former equipment arm of AT&T (T). Both have earned deep trust from telephone companies over decades by supplying the rock-solid gear on which the world's phone systems are built. And both are beefing up their offerings to include more Internet technology: Nortel merged with Bay Networks in 1998 and Lucent bought Cisco rivals Ascend Communications and Nexabit Networks earlier this year. ''We can bring reliability and end-to-end solutions that others can't match,'' says Daniel Stanzione, Lucent's chief operating officer.
What Cisco and its rivals are preparing for is a tectonic shift in the communications industry. Today, voice calls are sent over super-dependable telephone networks that are quite expensive, while data traffic is zipped through the less reliable Internet that, by comparison, is dirt cheap. What customers want is the best of both worlds: a single inexpensive network that's reliable enough to handle voice with enough capacity to meet the most rigorous demands of data. Using Internet technology to carry voice calls should lead to huge cost savings for customers and a flowering of all-new ways to communicate.
Cisco is betting that Cerent will help it get an edge in building the converged network of the future. Cerent gives Cisco equipment aimed at the heart of telephone networks where signals are zapped over hair-thin optical fibers. Cerent's technology weaves together voice and data traffic and zips it onto those optical fibers more efficiently than anything else on the market. The deal is a shot aimed especially at Nortel, whose optical systems carry the bulk of Net traffic. Although it's the largest deal Cisco has ever done and some Wall Street analysts think the valuation borders on the absurd, it could pay off. Analysts buy Cisco's estimates that Cerent will bring in $300 million in sales next year and at least $2.5 billion in 2002. ''Cisco will do extraordinarily well,'' says analyst Chris Stix of SG Cowen Securities Corp.
Even if Cerent is a winner, Chambers and his team will have to watch his back. A host of newcomers are wooing Cisco's traditional customers--corporations and Internet service providers, which use Cisco's routers and switches for directing data to their proper destination. Scrappy upstart Juniper Networks Inc. (JNPR) is starting to eat into Cisco's core market with a souped-up Internet router that's faster than Cisco's best. And Nortel is winning contracts from the likes of British Telecommunications and Australia's Telstra. Vows Nortel Executive Vice-President F. William Conner: ''We're going to stick it right to Cisco.''
Leave it to Chambers to bring out that kind of vitriol from competitors. He frequently refers to Lucent as an ''Old World'' communications company--a charge Lucent executives consider not only inaccurate but a childish taunt. Nortel, for its part, complains that Cisco intimidates customers who are considering rivals' equipment by threatening to cut back on product support. Chambers denies the charge, but the image of him as a bully is indelible. ''Cisco's competitors hate the company--I mean, really hate it,'' says Shannon Pleasant, a networking analyst with researcher Cahners In-Stat Group.
To rise above the acrimony, Chambers is adopting the role of industry statesman. He has frequent meetings at the White House and hobnobs with Washington insiders during their pilgrimages to Silicon Valley. In the past year, he has met more than 30 heads of state, including China's Jiang, British Prime Minister Tony Blair, and Australian Prime Minister John Howard. And earlier this summer, he spent two hours jawboning about the Internet with George W. Bush, whom he supports for President. ''Chambers works tirelessly to proselytize the new network economy,'' says L. John Doerr, partner at Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers.
Blair and Jiang are pretty heady company for a guy who was raised in Charleston, W.Va. Chambers grew up in a close-knit family, the eldest child of two doctors. With his two sisters, he would often vacation at Carolina beaches and spend summers at a nearby camp, catching frogs and trout. Although Chambers' parents didn't pressure them to succeed, all three children clearly understood the importance of achievement. One sister became a nurse, the other a teacher, and both are married to CEOs.
It was from his father that the future Cisco CEO inherited his interest in business. The senior Chambers, also named John, dabbled in businesses on the side, and John tagged along to work odd jobs at his father's motel and restaurant. The son also saw his father as something of a visionary. A story Chambers loves to tell is about how his dad understood that consolidation was coming to the medical field before most of his colleagues. In the 1970s, the elder Chambers spearheaded the merger of nine small hospitals in Charleston, even though their boards opposed the deals. ''My dad had the ability to see where things were headed,'' says Chambers.
''LAUGHED AT.'' The younger Chambers also grew up with a disadvantage that pushed him to work harder than most. He had a mild form of dyslexia that made reading difficult, and he needed two years of tutoring to catch up to his elementary-school classmates. The experience fed his drive to succeed. ''I got laughed at for being a slow learner,'' he says. Even now, he dislikes reading and never does it for pleasure. But like many dyslexics, he compensates with a remarkable memory: He recalls virtually everything he hears in meetings and always talks without notes during his dozens of public speeches each year.
To this day, Chambers prides himself on the family values he learned growing up. For 40 years straight, he and his father, whom he calls his best friend, have taken an annual, weeklong fishing trip that now includes his 19-year-old son, also named John. He has been married to his college sweetheart for 25 years. And despite his frenetic schedule, he reserves Sundays for his family: He blew off schmoozing customers one Sunday at the 1998 U.S. Open golf tournament in San Francisco, which Cisco was sponsoring. And he skipped a meeting with President Clinton to attend the birthday party of his daughter, Lindsay.
After getting a law degree from West Virginia University and an MBA from Indiana University, Chambers was recruited into sales at IBM (IBM). He still recalls what his interviewer told him: ''You're not selling technology; you're selling a dream.'' Chambers was smitten by the pitch, and he spent six years at IBM, drinking up the company's legendary sales and service philosophy. ''He learned good lessons there--to deflect the discussion away from technology and toward business issues,'' says Prudential Securities Inc. analyst Luke C. Szymczak.
While Chambers became a star at IBM, he felt stifled by Big Blue's bureaucracy. The final blow came when a manager counseled the eager young salesman in a review that at IBM, the path to success lay in promising three goals and meeting them all. Chambers, the manager said, made the mistake of promising 10 goals, meeting nine of them, and falling flat on his face on the 10th. ''That's when I knew it wasn't the place for me,'' Chambers says.
He defected to Wang Laboratories Inc. (WANG), then a high-flying maker of minicomputers that threatened the dominance of IBM's mainframes. He stayed eight years, through its meteoric rise and ignominious fall. Near the end of his tenure, after becoming the top sales executive, Chambers had to lay off thousands of workers--an event that friends say scars him to this day. ''Everybody has a defining moment,'' says George ''Duf'' Sundheim, an attorney and Chambers' weekly tennis partner. ''He never wants to do that again.''
When a former Wang colleague called him in 1991 about a job at Cisco, Chambers jumped at the chance--even though the company had just $70 million in sales. From the start, Chambers was groomed for the top spot by then-CEO, now Chairman John P. Morgridge. ''The job was his to lose,'' says Gary Daichendt, Cisco's executive vice-president for operations, who worked with Chambers at IBM and Wang.
And lose it he almost did. Some members of Cisco's original management team thought Chambers was Too much of a salesman to run such a technical company. ''The board talked about having a bake-off or even going outside,'' Morgridge says. But Morgridge gave Chambers the chance to make more presentations to the board to gain directors' confidence. Eventually, they were won over by the realization that to grow beyond its technical roots, Cisco needed better sales and customer support. That point was quickly driven home. Chambers was 20 minutes late for his first board meeting as CEO because he was on the phone with a distraught user. ''The board members were not happy campers when I arrived,'' Chambers says. ''But when I told them why, they said I could use that excuse anytime.''
Cisco badly needed to improve relations with customers. Like many tech startups, the company had an engineering-driven culture where the needs of customers took a back seat to the coolest new technology. Chambers has flipped that relationship around. Today, all the company's top execs have their bonuses tied to customer-satisfaction ratings. ''He's done a really successful job of making everybody in the company think they're salespeople,'' says Tam Dell'Oro, president of market researcher The Dell'Oro Group. Cisco even made two acquisitions--Crescendo Communications Inc. and NetSpeed--because customers suggested them.
That underscores how much Cisco has become a reflection of Chambers, the salesman. His strength is not picking through nitty-gritty details to decide which technologies will dominate in the future. Rather, Cisco listens to its customers and often buys whatever technology they think they want. Critics say the result has been a whipsaw product strategy, and even Chambers concedes that some acquisitions have failed because of fickle customer demand. Still, he thinks he has a winning formula: Rather than focusing on gigabits and megahertz, Chambers builds lasting relationships with his customers.
JUST CALL. Take his courting of a Silicon Valley startup. When cable Internet service provider Excite@Home Corp. (ATHM) had just six employees in 1995, Chambers himself showed up to pitch the business. William R. Hearst, a Kleiner Perkins partner then acting as @Home's CEO, was stunned that Chambers came personally. And when Excite@Home gave some of its business to rival Bay Networks, Chambers came back and offered the startup the same terms as Cisco gave its biggest clients. Cisco ended up with all the business.
Chambers is still pushing hard. At a lavish event for customers last December in Florida, complete with fireworks and Beatles impersonators, he spent the evening working the crowd with his folksy charm. He focused particular attention on Bruce D. Parker, the chief information officer of United Airlines parent UAL Corp., because Parker uses equipment from Nortel. ''Chambers won't give up,'' Parker says. ''He just keeps trying, and someday, I may give him some business.'' With all customers, Chambers gives out his personal phone number and urges them to call anytime. ''He'll take a phone call at 2 a.m.,'' says Cisco Vice-President Daichendt.
What drives Chambers more than anything is the simple fact that he hates to lose. ''John Chambers is the single most competitive person I know,'' says John W. Sidgmore, vice-chairman of MCI WorldCom Inc. (WCOM) and the head of its UUNET Internet unit. ''He is incessant.'' On a recent Cisco executive retreat in Alaska, for example, Chambers and his top managers took off in two-person dingies. When a torrential rainstorm hit, Chambers didn't want to turn back and risk losing a contest to catch the most fish, so he and Barbara Beck, Cisco's vice-president for human resources, stayed in their boat for eight hours, returning to dock near 6 p.m. The rest of his team, it turned out, had thrown in the towel at noon and were waiting for him at the lodge.
A day in a downpour may seem like nothing compared to what lies ahead. To become a serious player in the telecom-equipment market, Cisco has to build relationships with a whole new set of customers and earn their confidence. So far, Chambers has gotten a foot in the door with AT&T, MCI WorldCom, and Sprint Corp. But Cisco isn't winning much business from the big local phone companies. That's largely because they're not convinced the firm can deliver the reliability that Lucent, Nortel, and others are known for. Changing their minds won't be easy: Lucent, for instance, has more sales and support people in the field than Cisco has employees, and matching that would wreak havoc on Cisco's juicy 28% operating margins.
The company's early forays into the market have offered sobering lessons. Cisco tooted its horn loudly when it won part of the contract to supply gear for Sprint's highly acclaimed Integrated On-Demand Network, or ION, a scheme to blend both phone and Net technologies into speedy access to the Web. But Nortel was always the primary supplier for ION. And because Cisco had trouble meeting some deadlines, Sprint is handing Nortel even more business. Nortel would not comment specifically on ION, but, says marketing chief Conner, ''we're having a very good year with Sprint on our data products.'' Cisco Executive Vice-President Don Listwin denies there are significant technical problems.
Cisco's investments in gear for telephone carriers have been problematic, too. Consider its second-largest acquisition, the $4.4 billion purchase in 1996 of StrataCom Inc., which made data switches used in large networks. Cisco is selling the switches to Net service providers and emerging phone companies. But traditional phone operators continue to buy them from Nortel, Newbridge Networks, and Ascend Communications, which is now part of Lucent. Now, Cisco appears to be backing off from StrataCom-type devices known as ATM switches. It has canceled one product and delayed another.
''NEXT WAVE.'' Chambers denies Cisco is walking away from ATM but concedes the company's focus is shifting. ATM, a decade-old technology that remains popular with telephone companies, dices phone calls and Net data into digital cells that zip across a phone network's optical fibers. But Chambers believes that the communications world will put Net data directly onto fiber-optic cables, eliminating ATM as a go-between.
That's where Cerent comes in. The company's technology efficiently handles the link between Net gear and fiber optics. Chambers figures the market for Cerent-type equipment could grow from $4 billion now to $10 billion by 2002 and that Cisco, depending on its execution, can grab 25% to 70% of it. ''Optical is the next wave. This is a breakaway moment for us,'' he crows. Analysts think he's on to something. With the communications revolution under way, says researcher Dell'Oro, ''the door is open to suppliers like Cisco who might have had the door slammed on them in the past.''
That's critical to Cisco's future. The company is moving from the $28 billion data-networking market that's growing by 15% a year into the $225 billion telecommunications-equipment market, parts of which are growing by 50% annually. The company has scored big wins with emerging carriers in telecom, including Qwest Communications International Inc. (QWST) and Level 3 Communications Inc. (LVLT) Chambers says he expects to make even more headway. The IBM deal should help open doors for Cisco at telephone companies. And Cisco has set up a new business unit of experts to help consultants understand how to roll out E-commerce systems for their clients. The company, for example, is investing $1 billion in KPMG Peat Marwick so it can add 4,000 Cisco-trained engineers.
Chambers thinks Cisco's acquisition strategy is just as key to its success. In buying 40 companies since 1993, the company has made a science of absorbing new technology and engineering talent. Indeed, Chambers has built his top management team from the ranks of acquisitions, and he claims Cisco's annual employee turnover is 6.7%, vs. the industry's 18%. But critics gripe that Cisco hasn't invented anything significant since the router and uses acquisitions as a crutch--spending 13% of revenues on R&D, largely to stitch together its acquired technologies.
Critics aside, Chambers' strategy has been paying big dividends. So much so that Cisco's directors unanimously voted to sign him up for another five years as CEO. They're certainly sold on the Internet's No. 1 salesman.
By Andy Reinhardt in San Jose, Calif.
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Meet Cisco's Mr. Internet
COVER IMAGE: Cisco
TABLE: Building John Chambers' New World Network
RESUME: John Thomas Chambers
PHOTO: John Chambers with Son John on a Fishing Trip
TABLE: Cisco's Stock Rockets
TABLE: The Tech Industry's Cookie Monster
The Man Who Hones Cisco's Cutting Edge
ONLINE ORIGINAL: Cisco Could Be the Safest Net Play Around
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