Lets be honest, there are many things that Cisco does well, and some things that Cisco doesn’t do well. Somebody once said that being a successful company is to do more good things than bad.

For me, one area that is becoming a bigger and bigger design problem is the price on Cisco products. Recently I took more notice of Cisco’s financial statement in Barrons – Tech Trader Daily – August 6, 2009,

its gross profit of 65.3% of sales was above the 64% folks were looking for;

SIXTY FIVE PERCENT GROSS MARGIN

While I see the value in making good products, and choosing vendors that are in a good financial position, if Cisco is making a sixty five percent gross margin then I am starting to question the value of those products. When you get down to it, that is an huge profit margin and means that wealth is being transferred from my company to Cisco and it shareholders.

Fair enough.

The question to consider is whether this level of profit is warranted. Does Cisco give anything back that makes it worthwhile ?

Positives

In general terms, the thing that most attracts me to working with Cisco are:

• the TAC actually works
• the TAC never gives in – they problem will always be solved
• the web site has information that you need to make buying decisions. More is readily available by contacting your account manager.
• the web site provides all the information that you need to own and operate your Cisco product.
• training and study resources are available on the product and software
• The product generally works as advertised.
• Progression and development. Cisco is willing to terminate product lines and keep customers moving into new technologies. As Nortel found out, stagnant products put you out of business.

Ambivalent

And there things that balance out, they are kind of bad and good.

• The number of bugs and quality issues in all of their software. Negative because there are so many, positive because of feature and product development – end result is ambivalent.
• The use of Java for all web interfaces instead of HTML – really, there is no excuse for this anymore.
• The austere ‘funless’ Cisco. For many years Cisco has been, well, fun to work with. The staff had lots of freedom to solve problems and creative solutions could happen. Recently, with the ‘Cisco frugality’ drive, all that is clearly over and it is rapidly becoming just another big company. The engineers that I work with on a day to day basis, have their time carefully managed, cross referenced, expenses are scrutinized, justification and audit are regular. End result, blah.

Negatives

• Price
• Price
• Reseller quality – not controlled by Cisco but the way Cisco mishandles their resellers causes most of these problems. If Cisco let their resellers make a reasonable profit instead of grabbing it for themselves, customers would be a lot happier. And volume is not a replacement for profit.
• Cisco moving into markets that aren’t related to Networking. Flip/Linksys at one end, and UCS/servers at the other. I don’t like dealing with diversified conglomerates because the structure inevitably kills the business. For example, being a telephony customer of Siemens who make power stations, lights and healthcare is a terribly painful business. They aren’t committed to Telephony and it shows. Will this happen Cisco as they diversify ? Experience says yes, they will lose focus.
• Price – did I mention that already
• Staff morale – once upon a time Cisco was THE place to work. Today, staff at Cisco don’t have the same passion and commitment. While that is the sign of a mature business that is probably moving into steady state, it’s not company I’m used to and makes me less committed to Cisco than before.

On Balance

Alternatives

Cisco has been able to continue with high prices for several reasons. These are my opinions on why this has been possible.

Training

The Cisco training programs have shown that people tend to buy what they know. If you train on Cisco, you will tend to purchase that product, even it is more expensive.

Juniper is finally getting hold of this and boosting their training programs. But none of the other vendors seem to have realised how fundamental this could be to their success.

The failure of Nortel, the rise of HP

In real terms, Nortel has been the only practical competitor for a long time. As it stumbled to it’s final, unlamented demise, the startups have been reluctant to go head to head with Cisco even though the opportunity existed. It’s something like the Google or Microsoft effect that blocks investment.

It became clear that HP was building a network product range about three years ago. (Probably about the time Cisco started planning their UCS server offering). Cisco and HP appear to be going head to head. I doubt very much that HP has the capability to deliver¹ and suspect that HP will lose, thus reinforcing the ‘invulnerable Cisco’ concept.

Bottom Feeders and Niche Players

Bottom feeders such as Foundry and Extreme have managed to make a living around the lower cost end of the market, in Cisco’s shadow or in niche markets that Cisco didn’t cover well. But these products are disappearing (Foundry is now part of Brocade((still can’t believe that a storage switch company thinks they can be a networking company, really it’s not the same thing)) for example and Extreme is doing OEM to stay viable ). These products reinforce the value of Cisco’s products by delivering low feature sets, poorly supported and generally lesser products.

More interestingly, niche players have appeared such a Blade Networks, Arista, Force10 and other to fulfill certain niche markets that Cisco cannot address because it’s too big and because they are so expensive. These companies can cover ground that Cisco will never compete in.

And because Cisco charges so much, these companies have room to exist.

Customer Standards

Many companies have a ‘Cisco only’ policy. Again, the poor products and low quality services and support from Cisco’s competitors have meant that Cisco uses it’s tech support leadership to close accounts to competitor products.

In recent meetings, I am seeing reluctance at Management level to pony up the big bucks for Microsoft upgrades. Windows XP is doing just fine, and Windows 7 isn’t a killer product. This might be creating a precedent for IT where upgrades will be bypassed, and quite possibly for a long time.

Sixty Five percent

So I’m sure that John Chambers is pretty pleased with himself, bilking customers with large markup on product, and he has getting away with it for the last ten years or so. And those early share holders who made a lot of money pretty quickly are pretty happy to.

But now I’m looking to the alternative suppliers. And I’m revisiting design principles that I used back in the 1990′s when networking was astronomically expensive and difficult.

• Can I self spare this product with on-site spares instead of purchased hardware maintenance ?
• Can I have lower service levels and risk some service impact on non-core services ?
• Can management sign off on lower capex / opex and accept some service risk ?
• Can I reuse retired or slightly older assets instead of buying new ?
• Can I get smaller units and risk the growth path ?

And I’m looking at those smaller, second tier suppliers:

• Have they got viable products in a niche market ?
• What are their support arrangements and can I live with those ?
• Can I live without certain feature ?
• What about lower SLA’s ?
• Is this a technology that Cisco does badly ? (there are quite a few of those)

Recession Networking

It could be time to start thinking recession networking, and consider cutting some Cisco out of your budget. If Cisco is going to take sixty five percent gross profit on the deal then I’m wondering whether my business owners / shareholders should be getting that cash. I want to keep my job, not keep Cisco rolling in cash.

Footnotes

1. HP has wasted it’s engineering capability and seems unlikely to build something of value to me in the near future. If they stay persistent over five years, then maybe…. [back]