Cisco wants to be a software company? Why customers should look beyond the hype

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Five years ago Forbes published an article called Now Every Company is a Software Company.  The magazine wasn’t the first to notice this phenomenon and it certainly wasn’t the last but it did neatly articulate a view that has grown louder with each passing year since the era of the boom when the notion first gained currency.

“Regardless of industry your company is now a software company, and pretending that it’s not spells serious peril,” wrote journalist, David Kirkpatrick.

In the 1990s, businesses used software in the same way they had once used typewriters, fax machines and office automation. Now, it appeared, software had in some way become integral to the identity of business, more than a mere tool to do a job. Something had changed. Software itself was the business.

This ‘everyone is selling software’ idea reared its head once again in recent days as networking giant Cisco announced 5,500 lay-offs, fewer than rumoured but still around seven percent of its global workforce. Tech firms go through a constant cycle of lay-offs and, as acquisitions are made, thorough tech cycles of growth and decline and in recent years Cisco certainly has form. As industry title CRN notes, in 2014 it laid off eight percent of its workforce, in 2013 five percent and in 2011 nine percent.

The latest slimming is consistent with this long-term pattern but some analysts spy a larger story based less on the size of the cuts but where they are being made. Revenue from routing and switching hardware is static or down, Cisco executives told journalists, and now only account for 45 percent of the firm’s revenues.  Customers are now buying more cloud technology and less on-premises equipment of the sort that made Cisco great – the firm’s Application-Centric Infrastructure (ACI) platform sales grew 36 percent to $2.3 billion, the firm said and so it made sense to restructure the workforce.


One implication of this analysis is that as tech firms become more software-oriented they might become smaller in terms of headcount although this is debatable. History suggests that what really decides the size of Cisco, or any big tech firm, is the demand coming from customers and the firm’s ability to generate profit by meeting it regardless of technology trends. Cisco also employs a huge number of people by industry standards; despite having a much larger capitalisation, Facebook employs around 15,000 to Cisco's 70,000 plus. This disparity in numbers between Cisco and other pure software firms will likely narrow but not by much.

Cisco wants to be a software company? Software or bust

Interestingly, Cisco first claimed it was turning into a software company at least decade ago and yet in 2016 the transformation is apparently still in the pipeline. Today, roughly a quarter to a third of Cisco’s sales come from software which in late 2014 former CEO John Chambers stated was set to grow at 5-7 percent each year. Still, it sounds slightly paradoxical: Cisco is forever becoming a software company but never actually being one.

A second point is that in important sense Cisco has always been a software company. It made its name building high-end routers that populate the Internet and yet the bit that made them useful was something called IOS, the routing platform itself.  Customers and Cisco didn’t think of this as being a software model but in a very basic way it was.

What seems to have changed is the notion of what software is and how firms express this in their accounts to shareholders or owners. The Cisco of old packaged up its software expertise in big, expensive boxes that sat in 19 inch racks.

The more of these it sold, the more money it made on a defined margin. These days, in a world that conceptualises computing through the cloud, what sits in these racks has become only one part of a multi-layered product layer sold as a service. The margin on that is probably a lot lower because hardware is forever being commodified. The profitable bit is the software that makes the whole thing understandable, manageable, and perhaps even affordable.

So what does it all mean? For Cisco, it all sounds like business as usual.  It’s selling as much software as it ever did but that is simply bundled up in a way that shifts the business model away from selling monolithic hardware.  This has been happening to lots of tech firms for at least the last decade as any PC hardware firm will attest.  Equally, without the hardware and software integration, some of the need for platform-based firms such as Cisco would go away.

Cybersecurity is the perfect example of this trend, a sector in which buying security layers bundled up in boxes has given away to the concept of security as a layer in a software-defined network. The sheer complexity of managing hardware using distinct systems ensured the success of this model.

But what has really changed here is the way software has followed hardware in becoming a commodity. That is what the cloud is: a way of offering complex systems through a consistent set of standards and technologies that let anyone buy the same service for the same price. But the integration between the two remains complex when building network infrastructure, however unsexy that sounds to analysts. Cisco will continue to employ a lot of people who understand how to make the two gel.

It is not, ultimately, that Cisco is any more of a software company than it ever was but that its customers are.  If we are witnessing the emergence of Cisco 2.0 as a would-be software giant it is the change in buying patterns and customer base that is at the root of this change.

Copyright © 2016 IDG Communications, Inc.

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