A: Any good CIO would tell you that if all you do is automate what you've already got, you get very little productivity. The hardest part is not the technology, it's the process change and it's the cultural change to really get productivity. We moved into councils and boards out of necessity. In 2001, we learned our lessons. I went into [the downturn] a two product company -- routers and switches, some good services. Our new advanced technologies were four to five years out, we didn't go into it with as much cash, didn't go into it with as much flexibility. This time we went into the slowdown with $28 billion dollars and are coming out of it with $40 billion dollars [in cash]. We went into it with 30 market adjacencies, a different organization structure, different business models. We cleared our decks very quickly at the front end of it, then turned the aircraft carrier into the wind and launched. We've never been more aggressive in our history.
Q: So this organizational structure enables you to launch products more quickly?
A: It's a way to launch more products, but [it's more about] movements in new markets because, remember, I'm not a product company. I don't sell standalone products. We sell an architecture that ties routers and switches and security and wireless. I don't go into markets where you don't tie back to the vision.
But I didn't answer the question that you asked at the beginning. Is this a more effective way of managing? The answer is yes. Each one of these [teams] that are formed has to have one person from each functional group that can speak for the whole functional group. So, whoever represents sales has to speak for all of sales. Whoever represents engineering has to speak for all of engineering. Legal, IT, supply, demand, manufacturing, the same. It's a way of balancing exactly what I do at the Operating Committee level. It took us almost seven years to get this technique down. But now, I can come up with a new idea -- the smart grids we talked about earlier or a commitment to virtual desktops or a commitment to virtualization in the data center -- and I can take any two of my leads, they form their councils and boards. I review their vision, differentiation, strategy and execution. And they can be [presenting] to my board of directors in two months. That would have taken me two years before, if I could have done it, and it would all be Senior VP's.
Q: This goal of being the number one IT company puts Cisco into a different market. People know you as the network company because you are selling against, say, Juniper on point products. But now you'll be selling a vision of IT against the HPs and IBMs of the world. That's a very different thing.
A: [We're] one of the top architectural players, as well as the top communications company, which you could argue we're in pretty good shape on. We'll play architecturally on both technology and on business.
We've had a track record in whatever markets we've entered, becoming the number one player. Even our toughest critics would probably give us credit for that. The first generation of competitors we took on were very good companies: SynOptics, Wellfleet, 3Com, Cabletron. Only none of those now exist. And, the same thing could happen to Cisco if we don't get market transitions right.
Secondly, we have a healthy paranoia. We know we could be left behind too. Make no mistake about it. While we have no fear, we have a lot of healthy paranoia about what can go wrong.
Third; when we started in the service provider market, people said we didn't understand service providers. It's a different set of competitors, Nortel, Lucent, Alcatel, Siemens, Ericsson. To think you could even play here is probably a stretch. To think you can become the number one player, forget it. And yet, we did. Those were tough competitors. But we got our market transition right. We moved in a way they did not. We did it on architecture.
If you were at the Mobile World Congress, you ask any service provider who is your most likely business partner? And who's your most likely technology architecture partner? We'll get the answer the majority of the time. Now, that was something you would have said five or six years ago was not possible.
In the data center, I did not want to compete against IBM and HP. I tried to partner with both of them. I would have preferred that. But we knew going in -- and the decision was made five years ago -- once we started down the path with virtualization, that if they would partner we'd prefer to do that, and would have actually given them a large part of our technology. But if not, it was too important strategically to us, because it wasn't a question about moving into new markets. I'm not after servers. I'm after virtualization, where you don't know where your processors are, your information's stored, the application resides. You don't care. If done another way, the network becomes dumb pipes, commodity like. So we had to move into this in terms of where the market was going. We focused on market transition, not competitors. And I think you'd have to argue, we're off to a good start, both in mind share and vision and strategy. But it comes down to how well we do on our first pilots.
Q: What is it about the data center that Cisco gets that you think these other big companies don't get?
A: It isn't a question of 'gets.' It's all about virtualization in the cloud and the role the network plays in it. We think the network is the central piece. It's not the data center or the end user device. It's any device to any content wherever it is in the world over any combination of networks wired or wireless to the home, to an Apple device, to a Microsoft device, to an IBM device, HP. Doesn't matter to us.
Secondly, it is not going to be about voice or data. It's going to be about video. Now, you can say that's a big stretch. But, remember again, we said before it would be all-in-one data, voice, video. [We] made that decision a decade-and a half ago and we began building them to architecturally work together.
So, is it a stretch? Perhaps. But we've done this multiple times before. We do it through innovation. We can acquire companies. How good are the large companies at acquiring companies? How many times have they acquired a company, kept the top leaders, kept the top engineers, brought out the next generation product and gained market share? The answer is: not very often. We've done 137 acquisitions. The vast majority of them have exceeded what we told our board we would do. This is innovation. This is our game. It's about market transformation. It's about being customer driven. And, I learned that the hard way at IBM and Wang. I don't fall in love with technology. Most every move we make, including this virtualization focus, was driven by customers. It was the customers' grasping what we needed to do. Then, it's usually internal innovation or an acquisition that kick starts you into it. Much like buying three switch companies kick started us into switching, which is now 40 percent plus of our revenue.
Q: You said you would have preferred to partner on this data center initiative, but isn't one natural consequence of wanting to be the number one IT company that you have to burn some bridges? There certainly is the perception that that is happening now. Is there a risk of Cisco becoming isolated?
A: I think to look at the models that have tried to go it alone, that's a fair question. But Cisco is a partnering culture -- we've been rated number one in terms of resellers and partners for almost a decade. Doesn't mean we're perfect, but we're pretty good. And secondly, you partner with the players that you have to [have] to win the long term architecture. So, service providers align very tightly across the board. And it isn't just about selling routers and switches to them. Or doing technology. If you talk to Randall Stephenson [CEO] at AT&T, I'd be surprised if he didn't say we were his best business partner too. Who would have thought?
Is that important to enterprise CIO? The candid answer is that it's probably not as important now as I think it will be three, four, five years from now. But it's something they would not want to bet against because I think service providers will play a different role in terms of the enterprise CIO three to five years from now versus where they are today. But I'm not asking the CIO's to commit. We'll provide that capability. We'll take the lead. We'll partner with the players like AT&T or Verizon. And then if their role expands as I expect, we're right. If it doesn't, we've got the customers covered on it. Our ability to catch a market transition has been very good. It's a new generation of players. Who would have thought that Intel would be a strategic partner for me like they are today? Or EMC or VMWare? Or Net App?
You probably wouldn't have thought that our key services partners would be Accenture, Wipro [Technologies], Infosys, Tata Consulting. Yet if you watch who the new movers and shakers are in this industry, it's them. If you're going to compete on services, I don't want to be a body shop and have to compete against all those players. I'd much rather do the project management and use our partners to implement, because I couldn't staff it even if I could afford it.
We didn't burn bridges. Instead we formed new partnerships. I never burned the bridge. Is the bridge still there at IBM? Absolutely.
Q: You burned one recently with HP.
A: Question of who burned the bridge. Very simply, there's a point in time where you've got to be realistic about what's going on in the market. Your customers see it. Your partners see it.
When we made the move this week with HP, my customers were pretty much unanimous saying it was about time. You can't be giving your partner your product plans, your directions, your evolution and then compete.
Q: So that was less about you and more about their increasing aggressiveness in your market -- in your core market?
A: Well, I think it had to do with the way that we would partner, sharing information was not constructive, in terms of giving them product plans and directions. And, for our existing customers and partners, it made no sense to be doing that.
Q: How do you respond to the three most common things that competitors say about Cisco? Cisco products are proprietary. They come at a premium. When you can't get win with IT, you go around them to the business side and create a stir.
A: First, let's deal very much with proprietary. We are an open standard company, period. The Internet is open, any device to any content. When we moved into telepresence, we got huge market share on the high end. Sixty-four percent. Yet, we made it an open standard. We made it an industry standard available to others, not just for a Tandberg-type of interface, but anybody who wanted it. All of our base is off an open, standard net -- the Internet. We don't have a proprietary operating system that only operates in our products. The Internet, any device can interface to it. And we want it to. First, it allows us to move in markets faster. Secondly, customers are protected. They don't lock in to a device operating system, a device or in the data center.
The second part of your question about whether we sell the technology to the business side at the same time? Of course. If you're really going to be a successful company, it isn't about how you just work the technology side. You've got to be able to develop the confidence to the business leaders, the CEO's and the IT organization at one time. IT is no longer about managing this complex data center and making it run. IT is about enabling the business strategy of a company, using it to differentiate yourself versus your peers, drive productivity. I would argue [it's about] even embedding IT into your core capability, whether it's how you do services, product development, sales. In fact, at some point you won't be able to tell the difference between what's my business strategy and my IT strategy, they'll be so deeply intertwined. Anybody who's going to be successful here must learn to develop the trust, both of the IT organization, the CIO, the CEO, the business leads. In fact, if you only develop the trust of the CIO organization, you can't help the IT organization as they begin to move rapidly in key project areas.
Q: What about the middle point about the Cisco price premium? They call it the Cisco tax, that people pay a big Cisco tax.
A: Well, that's a little bit unfair. Do we come down Moore's Law at tremendous speed? The answer is yes. As long as you do that, customers don't have a problem with you making a premium, because if you don't make a premium, you don't develop new products. You don't protect their investment. They've all been through that.
Do I believe there's a rapid industry consolidation taking place? Absolutely. Do I believe that part of the decision for who's going to win is based upon your innovation, based upon your ability to catch market transitions, based upon making your products play architecturally together, protecting the customers' investments, and an open architecture? Yes. Will customers pay a premium for that? Absolutely. But, I would argue it's not a premium. I'd say [it's about} your total cost of ownership versus your productivity. It costs a lot less. Wal-Mart considers us at the very top of their partnerships. You would think that unlikely because they are one of the toughest in the world on cost. Yet, if you talk to the CEO or the CIO, they would say we're at the very top of the list. If I had told you two or three years ago BT would say we're their strategic business partner, not just technology partner, you'd have said unlikely. Yet, we are. If I were to have said the same thing about a G.E.