Cisco's Transformation: From Tech Wreck to Record-Setting Profitability

Challenges faced by Cisco during the tech wreck of the early 2000s

Task:

The tech wreck of the first few years of the 2000s caught many companies—especially tech companies—off guard. More than a few companies were in a state of denial, including Cisco Systems Inc. and its CEO, John Chambers. Cisco went from being the most highly valued company in the world to a poster child of the excess of bubbles in the tech sector. Finally, in 2001 Chambers decided it was time, and hopefully not too late, for a massive overhaul. This was not a time for evolutionary change; revolutionary change was the company’s only chance. “Explaining to people why we needed to change things was the hard part,” says Chambers years later reflecting on the radical and massive change at Cisco that was at times tumultuous.

The low point came in 2001 with a net profit loss of $1 billion, but by 2003 Cisco was back in fighting trim—stronger than ever, with record profits of $3.6 billion, while some of its competitors were just beginning to see black ink. Cisco could be a case study of how a discredited industry leader can use a slump to clean house and build a better foundation. Chambers took the opportunity of a downturn to rethink every part of the company, including operations, priorities, and culture. Chambers says, “We went through a life-threatening experience in 2001. At first, there is disbelief, then understanding . . . then how do you position yourself for the future?” Cisco seems to have learned its les- sons, if the recession that began in late 2007 offers an indication. For the latest year available, in 2008 Cisco had record net profits of $8.1 billion on record sales of $39.5 billion. This occurred at a time when there was a world-wide and severe recession. With cash reserves of $26.2 billion, Cisco has been expanding by adding new product lines, purchasing other companies, and helping their customers to finance Cisco products and services.

Cisco’s culture before the changes could best be described as a wild-west cowboy culture. Executives were encouraged to compete with one another. “All decisions came to the top 10 people in the company, and we drove things back down from there,” says Chambers. Executives were too busy taking orders to bother with efficiency or teamwork. Any idea was pursued with little discipline or accountability. But today is a different situation. The market changed dramatically in terms of what customers expected. As the market changed, engineering, manufacturing, professional services, and sales had to work together in a way that was not required before.

John Chambers' revolutionary change for Cisco's recovery

The changes that Chambers implemented permeated the entire company and not just the top managers. Previously, where Cisco had a top-down structure, it now has a network of councils and boards empowered to launch new businesses and products. A council is a team of executives who have decision- making authority on $10 billion or greater opportunities. Boards are teams of managers who make decisions on $1 billion opportunities. Working groups, similar to ad hoc committees, deal with a specific issue for a limited time. The teams that work on major initiatives of specific product lines cut across functional lines and are interdepartmental. In many cases, the teams are international where Cisco uses its Tele Presence technology in the meetings. Chambers is rarely involved with any of the decision- making groups. This structure allows Cisco to operate on a variety of major projects simultaneously and quickly respond to new opportunities. In a fast-paced global marketplace, being able to move quickly is required from the initial conceptual stage of a product or service to bringing it on line. Chambers says, “Fifteen minutes and one week to get a [business] plan that used to take six months!”

As the new structure required trust and openness and the old system required cut-throat competitiveness in order to gain Chambers’ attention, changing the culture was paramount. To reinforce the new culture, Cisco put into place a new financial incentive system that encouraged executives and rank-and-file employees to work well together. Executives are compensated on how well the collective of businesses perform and not how well their unit performs. To do this, Chambers says, “I now compensate our leadership team based on how well they do on collaboration and the longer-term picture. If we take the focus off of how they did today, this week, this quarter, it will work.” Cisco also learned that it needed a way to bring people and their ideas together. This is not an easy task with 66,000 employees plus customers and partners. This is where its vice president of IT Communications and Collaboration comes in. For this to happen, Cisco is using the technology that it sells, like routers, switches, servers, digital billboards, telephony, Flip video recorder, data centers, Tele Presence, and mobile devices. One tool that Cisco developed is WebEx Connect, a virtual workplace that supports online meetings, audio and video conferencing, file sharing, presence notification, instant messaging, and online chat. What’s more, tools like WebEx Connect are not only used by Cisco’s employees to help them collaborate internally on projects but are also used to encourage collaboration between its partners and customers. WebEx Connect is an example where Cisco has become a laboratory for developing and using technology that it later went on to sell. Mike Mitchell, who is charged with encouraging the company’s rank and file to adopt new technology, says, “We want a culture where it is unacceptable not to share what you know.”

Questions

1. What were the challenges faced in outsourcing work to India?

2. Can you think of any other things that will help Indian and U.S. teams work better together?

(Cisco’s Web site at www.cisco.com/ has information on its products, services, and applications. Its corporate annual reports have both financial and product information. Research this site to learn of its latest products for online collaboration. Its site for webcasts, which is continuously updated, may have some helpful topics.)