A broken record?

For networking giant Cisco and CEO John Chambers, 2011 must feel like 2009 all over again

Tags: Cisco Systems IncorporatedHewlett-Packard CompanyJuniper Networks Incorporated
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A broken record? Cisco has struggled with dwindling profits and loss of share in key markets
By  Daniel Shane Published  July 20, 2011

Cisco boss John Chambers must think his company is stuck in a time warp.

During the recession of  2008-09, he witnessed revenues at the world's largest provider of networking equipment slump for several quarters in succession. This was of course not unusual for the time; tech heavyweights like IBM, Microsoft and Hewlett-Packard equally saw sales suffer during the down turn.

Predictably, each instigated their respective employee redundancies, resulting in thousands of job losses. During this period, Cisco culled about 2,000 of its own. As the global economy improved though, so did the performances of these companies, with some emerging from the downturn leaner, more efficient operations. In May 2010, for example, Cisco reported a 27% year-over-year upswing in quarterly revenues, leading Chambers to declare the three-month period "probably the strongest" in his company's history.

So, how have things gone so badly wrong since then? In April 2011, the vendor closed its consumer-focused Flip camera division, shedding 500 or so jobs in the process. This is not the worst of Cisco's problems, however. In its most recent financial quarter, the company's net income deflated 17.6%, and total sales rose by a meagre 4.8%. This kind of turnout may not be a match for some of its most despairing moments in 2009, but equally it does not intimate a company riding any sort of market recovery.

Things then took a grim twist in July when Cisco disclosed that 6,500 employees were to be handed their cards. Astonishingly, some industry commentators had forecast before this announcement that redundancies could touch 10,000. Around 2,100 of the jobs lost are those who "elected to participate in a voluntary early retirement programme", while the company is also jettisoning a Mexican subsidiary off to Taiwanese chip maker and suicide-scandal hit Foxconn. Through such actions, the company hopes to trim $1 billion from its operating costs by 2012.

There are other warning signs too. Industry barometers, such as those published by analyst firm Dell'Oro, show that Cisco's stranglehold on its core Ethernet switching market is slackening, with upstarts like HP Networks and Juniper Networks racking up market share. 

So, what is behind this? A former Cisco executive told me this month that a big part of his former employer's current woes could be traced to the company's bloated corporate structure: "There was an adoption of this concept of boards and councils, and in effect what it meant was decision by committee, and one of the big things that I think everybody felt was a lack of accountability," they claimed. "When things were fine, everybody was happy, but when they went pear-shaped, [you had to ask] ‘where does the buck stop?'" 

The former exec added that this corporate philosophy impacted how staff "at the coal face" interacted with customers. "The whole management structure turned problematic and slowed us down, and Chambers is back-peddling from that quite a bit now." The source did, however, add that they expected Cisco to "come through the troubles stronger and healthier".

Chambers, for all his detractors, knows that something must change: "We're a $40 billion company," he said recently. "[But] if you don't change, you get left behind, regardless of size."

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