The Cisco Sales Machine

It began with a simple idea: Communication. How could 5,000 computers on the Stanford University campus “talk” to each other? Computer lab director at Stanford’s business school, Sandy Lerner, and her husband, Len Bosack, decided to take on the question, with astounding results. Along with a team of 20-something nerds who were willing to basically live at the computer lab, they came up with a system of routers – hardware and software that allows communication between computer systems over distance. Eureka! Cisco Systems was born. Who knew it would be such a hit? Nobody.

But routers, it seems, would turn out to be really big. By 1990, Cisco Systems went public under a new president, John Morgridge. Lerner and Bosack left with Cisco stock worth hundreds of millions while Cisco shares kicked around below $5 for the first five years. Then along came the Internet. With a massive appetite for better and faster machines for moving information across millions of PCs and links worldwide, Cisco, with the best equipment in the market, was in prime position to take the biggest bite out of the Internet pie. Its stock broke the $25 mark in 1998 and in early 2000 closed in on $140. Today, at prress time, the company is number one in market capitalization, ahead of the wooly mammoth of big money, Microsoft.

The very aggressive, well-run, high-tech firm has acquired 50 other companies and formed alliances with such giants as IBM and Sun Microsystems. And it will need every ounce of that heft as it moves into telecommunications, where competitors like Lucent have years of experience and muscle.

Although it dominates a crucial point in the world’s hottest industry, Cisco still retains some habits from its lean days. Its San Jose “campus” is simple and inexpensively built. In fact, all but one of its buildings stand four stories tall – and the headquarters building towers at five. Everything is painted unobtrusive bland beige with green trim. Why? Because the man who took over the reins at Cisco Systems in 1995 ordered all company buildings to be identical and purposely neutral in case the company had to one day downsize and rent out space. In addition, Cisco still motivates all its employees with stock options that reward them for the company’s growth.

Who’s responsible for the modest face on this powerhouse of a company? His name is fast becoming a household word – John Chambers.

CEO Chambers
A native of West Virginia, John Chambers has two sisters. Though both his parents are physicians, Chambers chose to receive his bachelor degree and then a law degree from the University of West Virginia. But he wasn’t finished yet. He went on to earn an MBA from Indiana University and then took as his first job a sales position with IBM. The story goes that what convinced Chambers to join Big Blue was the recruiter’s comment: “You’re not selling technology; you’re selling a dream.” He bought into the idea and to this day focuses more on business issues than on technology.

After six years at IBM, Chambers went to Wang Laboratories, known for its minicomputers and word processors. Eight years later, in 1991, with Wang on the ropes, Chambers got a call from a former Wang colleague about a job at Cisco, which then had sales of $70 million. Chambers had learned a lot about failure at Wang. Now he would use that knowledge to his advantage.

He took the job, and then-CEO, now chairman, John P. Morgridge took a liking to him, eventually grooming Chambers for the CEO position. Then 50, Chambers was not an obvious choice for heading a technology company like Cisco. Techie firms tend to look to techies for leadership, while Chambers was an all-American salesman. Indeed, when Chambers took the reins from Morgridge, some Cisco hard-liners thought he was too much of a salesman and not enough of a techie. So much for that theory. In the five years and a few months since he took over the reins, Cisco has reached profit expectations in 21 consecutive quarters; grown from $1.2 billion in annual revenues to its current run-rate of $14 billion; is currently the fastest growing company in the history of the computer industry; is the highest-valued company in the world, reaching a $500 billion market capitalization quicker than any other U.S. company, and for its quarter ended January 29, 2000, sales were $4.35 billion, up 53 percent from the same period a year earlier. If you think that’s astounding, analysts agree you ain’t seen nothin’ yet.

Known for more than just his salesmanship on behalf of his company and the Internet, Chambers has been lauded by government leaders and countless publications for his visionary strategy, his ability to drive an entrepreneurial culture, and his warmhearted, straight talking approach. One of the great wheeler-dealers in the high-tech world, during the past several years, Chambers has engineered more than 40 acquisitions costing the company upwards of $20 billion and there seems to be no end of such company gobbling in sight. If Chambers didn’t head one of the hottest companies on earth, he could be one of the highest rollers ever to hit the Las Vegas casinos. This man will take a chance. And his risks have paid off big. In the last quarter of 1999, 85 percent of Cisco’s orders, more than $40 million per day, were transacted over the Internet.

The Cisco Channel Advantage
So how did Chambers sell all those routers? Simple. He envisioned Cisco as an old-fashioned manufacturing company, albeit of equipment useful for Internet connectivity, and set about constructing channels to sell his company’s wares.

While many a manager is running scared, doom-and-glooming over cyberspace as a war zone of unearthly weapons ready to rain down upon the heads of every established marketing channel, the true future of traditional channels is not at all bleak. And Cisco Systems Inc. proves it. This Wall Street darling controls more than three-quarters of the global market for products that link networks and form the hardware foundation for the Internet.

Chris Silva, associate research analyst at IDC, a research firm in Framingham, MA, calls Cisco the Internet’s “poster child,” so closely tied are the two. While Cisco transacts 85 percent of its sales over the Web, it may seem as if the channel might have as much of a role at Cisco as a brick and mortar store at Amazon.com. In point of fact, that couldn’t be further from the truth.

Tom Stevenson, Cisco’s former vice president of global partners, explains that while this widely quoted 80+ percent figure is accurate, it misses the point. This is not direct fulfillment but is, in fact, sales generated by Cisco’s channel partners. They’re the ones using the Web. The idea of bypassing the channel isn’t on his radar screen.

He views the channel and its Internet attachment to Cisco as a competitive advantage. The company has about 6,000 salespeople and sales managers and an additional 22,000 partners worldwide, about half in the U.S. Stevenson says, “We couldn’t scale enough staffing here to equal that [the selling power of 22,000 channel partners]. But with the Web, where they’re engaged in interacting with you, you’ve got complete involvement. It gives you a definite leg up with your competitors.”

Tom Mitchell, vice president of worldwide channels, agrees. “The Internet will affect sales channels. That is certain. If I go back four or five years, the organization had all the channel managers. One of the challenges was how to get the information to them about a complex product line that changes all the time. The big challenge was that most of our resellers – 60 to 70 percent – didn’t have Internet access. I couldn’t afford the printing costs of collateral material. We put together packages that provided Internet access at little or no cost. Sales reps would no longer give you all the product sheets and information. So we helped them get Internet access.”

Salespeople hearing that Cisco strongly supports the channel while espousing the virtues of the Web are probably wondering if Cisco’s claims are more smoke-and-mirrors than reality. There’s evidence they are not and that the company really does use the Internet to the advantage of its more traditional channels.

Jeanne Dunn, Cisco’s director of Internet business solutions, notes that Cisco always had a direct sales force, and still does. “We let our customers decide where they want to buy our product,” she notes. “We try to push as much through channels as possible. Channels provide all the value-added design services and installation services that we don’t do directly.”

Salespeople get paid regardless of where the order comes in. “We take the money out of the equation. We don’t take money out of the salesperson’s pocket. We make sure the right decision is being made for the customer,” says Dunn.

According to Mitchell, “The Internet boosted productivity of Cisco’s people 30 to 40 percent. Probably the biggest leap of faith for many of our partners – bigger than getting information on the Internet – was entering orders over the Internet. They were used to interfacing with the sales reps. But as our business grew dramatically, it was clear we could not add people at the rate we were growing.”

With some parts of Cisco growing 100 percent a year, the company set up a marketplace site where the resellers entered their orders and they could get the same information as customer reps – order status and product availability.

Says Mitchell, “That was hard for our channel as well as the people. But our channel partners learned very quickly that they got better information that was more timely. Once again we got enormous bump in productivity, because before we had expensive salespeople simply tracking orders. It allowed my sales team to spend more time working with their partners on substantive issues rather than order status.”

In the future, all channel partners across all industries will have to be at least partly Internet savvy. As Mitchell relates it, “We have provided configuration tools [software given to resellers]. It reduces the average design time for a network down from 40 minutes to 22 minutes. We think we can help partners take costs out of their business. The Internet is becoming ubiquitous. I think there are huge potential wins in education with distance learning.”

While high-tech companies chalk up productivity gains in the double and triple digits, the gains cross other, more traditional boundaries as well. Consider lowly expense reports.

Mitchell reports that even there Cisco has made impressive inroads. “We have on the order of 25,000 employees; our expense reports are done on an automated system on the Web. We have two people doing the audit and review and processing of the expense reports. What is the alternative? It’s copies in triplicate with lots of receipts stapled to them. This system works better, you get paid back faster.”

So how can other companies determine how the Web will affect their businesses? “You have to understand the value chain of how your products go to market. How will the Internet bring efficiencies, and when do you need human contact? That goes to the complexity of your products. Networking products require enormous sophistication. Ultimately you need to have people sit down with other people to determine what the business solution is. How do you enable the Internet to let your partners collaborate with each other?” suggests Mitchell.

The Cisco Strategy
It sounds good to promise reps they’ll still get their money while pushing customers onto the Web, but even those outside the company agree this really is Cisco’s strategy. Timothy R. Furey, CEO of the consulting firm Oxford Associates Inc. in Bethesda, MD, and author, with Lawrence G. Friedman, of The Channel Advantage (Butterworth-Heinemann, 1999), says that Cisco had from the beginning a very smart strategy. It recognized that every channel has a “sweet spot” – the point where it enjoys advantages over other channels.

According to Furey, Cisco spent about five years building its channels and focusing on their sweet spots. The channel consisting of field reps, for example, has large, complex sales as its sweet spot. After-market sales, though, are not a strong suit for sales reps. “If I have 10 Cisco routers,” asks Furey, “why do I need a sales rep for the 11th?” Call centers are better suited for these types of sales, as is the Web. The Web also has a sweet spot consisting of small customers. It’s not economical to sell to these via face-to-face sales.

Focusing customers to the appropriate channel may sound like nice theory, but can a company really implement it? Furey says Cisco actually trained its reps to tell customers that, for low volume, commodity-type transactions, they should use the call center or the Internet. The selling point to customers was that they could get faster, better and more convenient service using these other channels. The selling point to reps was that they would still get their commissions for business that went through the Web or over the telephone. Plus, by not having to deal with these inefficient orders, reps had more time to pursue more lucrative sales.

Notes Furey, “Companies have to adjust their commissions and raise their quotas. But companies find that for every x number of dollars of revenue, they need fewer reps but can pay each more money. That’s the secret of the game.”

Jim Cathcart also believes that, while the Internet can augment traditional channels, companies must make some accommodation. A professional speaker and author of Relationship Selling (Perigee, 1990), La Jolla, California-based Cathcart notes that companies traditionally compensated salespeople in part for generating leads, as with cold calling. They also were compensated for their ability to close a sale. Well, the Internet is changing that scenario, at least in some situations. “We’re now able through the Internet to generate business contacts from sources we had no idea existed,” he says.

He goes on to note, “Today, if a Website is good enough, customers will sell themselves. In more and more basic sales transactions, the salesperson isn’t needed.”

Does this suggest the demise of the salesperson? Not at all, says Cathcart. Complex sales transactions and sales that carry risk for the buyer will always need the personal touch. “In the past, we wanted strong closers,” he notes. “Now what we want is trusted advisors.” He illustrates by citing the stockbroker who used to make a living by taking buy and sell orders. “Those folks are dinosaurs. Now, the brokers who are successful are able to earn their client’s trust and become trusted advisors who invest a person’s entire portfolio. In a business like Cisco’s, the same is true. The order taker is no longer needed because of the Internet, but that doesn’t mean the personal touch has gone the way of the portable computer that required a handcart to move it. Let individuals do what they do best, while letting the Web take over other functions,” says Cathcart. Find the sweet spot. “Automate all routines that are routine and predictable, and personalize all the things that require trust and human interaction,” he says.

Supply Chain Management
That sounds like a page from Cisco’s playbook. It uses the Internet to automate processes that can be automated – such processes as its supply chain. Stevenson says that when people talk about Cisco’s use of the Web, few understand that the key application that’s saving all the time and money is supply chain management. “It starts with the sales force and being able to accurately predict and measure where you are in terms of sales activity,” he says. “Without the Internet, you couldn’t do that for a global sales force.”

Dunn says Cisco’s Internet strategy began with the company first approaching its large partners. “Our approach was not so much, ‘Let’s cut the channels out’ but ‘How do we add value to our resellers, to distribution and so forth, to create better mind share with them?’ We wanted to make it easier to do business with Cisco than to do business with our competitors. That was our first model onto the Internet.”

By focusing on its largest and most demanding partners, Cisco figured it could create an Internet model that would work for smaller partners as well. It developed a number of Internet tools relating to the supply chain that allowed resellers to investigate product offerings, get pricing and see inventory levels.

Not only could the reseller now channel access information more easily, but also the system Cisco set up had a built-in “intelligence.” Cisco sells some fairly complex products and systems. As a result, about 25 to 30 percent of orders contained errors – a necessary part not ordered or parts thought to work together that are, in fact, incompatible. Such errors typically don’t show up until the order is processed and shipped and the customer discovers something’s amiss. Cisco built intelligence into its order system by including all configurations and making the system “dummy proof,” says Dunn. The result: Order errors have dropped to less than 1 percent.

“It’s a lot to ask for a purchasing person to be a product expert in your products. They are usually ordering a lot of products from many vendors. Rather than asking them to be product experts, we’re taking the complexity out of it,” says Dunn.

Sales managers themselves should be viewing the Internet as a tool to help them. “One successful attribute of any sales manager is the relationship they have with their salespeople and customers,” notes John Farrell, senior director of channel marketing at the Carlson Marketing Group, a Minneapolis-based marketing consulting company. “The Internet is another means of strengthening those relationships. It’s an opportunity to communicate more regularly, provide new customer service potential, better handle sales tracking and deal with price elasticity.”

These are the positive attributes of the Internet for the sales manager, says Farrell, but he warns there is a downside – the risk the sales manager gets handcuffed to the Internet, he says. The manager becomes hostage to it, to the point of losing sight of the value of personal relationships, face-to-face selling. “The Internet will never take the place of leadership or the need for motivation on the part of the sales manager,” comments Farrell. “There will always be the need for face-to-face recognition with the sales force, a need for a pat on the back.”

But the payoffs of effectively implementing an Internet strategy can be huge. Cisco says that using the Internet to integrate its core business processes throughout its organization and culture have saved, in just the last year, $825 million in operating costs, while customer satisfaction has increased 25 percent. To date, the company has invested about $500 million in its Internet strategy.

The Future?
Perhaps CEO Chambers’ most notable – some might say notorious – acquisition to date occurred last August when he paid the handsome sum of $6.9 billion in stock for Cerent Corp. Never heard of Cerent? Don’t feel bad. Few had until Chambers made his move. At the time of the acquisition, Cerent was but two years old and had sales of $10 million. Chambers justified the purchase by saying Cerent’s technology, which links the Internet and telephone systems, was crucial to Cisco’s future. You see, Cisco is moving into the telephone world as a way to continue its torrid growth rate. Whether the Cerent acquisition will make economic sense only time will tell, but it says a lot about Chambers and his view of Cisco’s future that he made such a bold – and expensive – purchase in the hope that Cerent’s technology will pan out.

The future for Cisco and the channel looks bright, in fact. “They were predicting the death of the newspaper and now there’s a ton of advertising in newspapers [from dot-coms]. The print media are not going away because of the Internet. They’re complementary,” notes Eric Klein, senior analyst at the Yankee Group, Boston, as an example of the continued importance of traditional channels. “The more traditional channels will only increase in importance.”

“The Internet is a tool for channel partners,” says IDC’s Silva. He calls Cisco “online-centric,” because of its devotion to the Internet, and he believes this is a big plus for the company.

You don’t have to be a high-tech company like Cisco to take advantage of the Internet, suggests Silva. The key, he says, is educating partners on what you’re doing and how to use the technology and finding out what your partners need. “Don’t just place what you think they need on the Web. Survey them,” he suggests.

Cisco’s Jeanne Dunn agrees, saying, “This is the advice we would give anyone who is looking to do business online: First and foremost, understand your customers and their needs.” She suggests testing your analysis of customer needs and wants with some key customers. Cisco, she says, took an interactive approach. It designed a set of features, tried them out and found out which ones customers liked. It kept those and then designed another set of features and tried those out. “Understand what you’re trying to accomplish,” she suggests. “For us, it was trying to simplify the order process and make for a better experience for our customers and our channels.”

For a successful Internet strategy, don’t forget your own management. “You have to have a management commitment,” states Cisco’s Stevenson.

Traditional channels will certainly be affected by the Internet. But that doesn’t mean they will necessarily suffer. The savvy sales manager and salesperson view the Internet as a tool for more effective, more efficient selling. Smart sales professionals at all levels will use cyberspace for traveling into areas they were never able to travel to before. And, as a result, nearly everyone can come out ahead. That’s what John Chambers saw at Cisco Systems. Opportunity for more sales.

In the end it doesn’t matter what a company sells: To deliver the goods, someone still has to sell them.

Additional material by Henry Canaday