Cisco CEO Chambers: Company Has Lost Some Credibility

Cisco Systems Chairman and CEO John Chambers remains confident in the company’s strategy of expanding the role of the network in the modern technology environment. What’s ailing the $40 billion company is its execution, according to Chambers, and that is going to change.

In a lengthy internal memo to employees that has since been posted as a blog on the company’s Website, Chambers said he realizes that while the strategy may be sound, the execution problems have dogged Cisco for several quarters that have been plagued by lagging sales numbers, reduced profits and weak forecasts that have surprised analysts.

“We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders,” Chambers said in the April 5 blog. “That is unacceptable.  And it is exactly what we will attack.”

Cisco’s announcement in February of its fiscal year 2011 second-quarter financial numbers illustrates the company’s position. At a time when other technology giants like Intel, IBM and Google were turning in strong financial numbers, Chambers announced that Cisco saw increased revenues but falling net income, and gave a forecast that was below analyst expectations. While the company continued to see strength in such areas as data center products and collaboration solutions, there was continued weakness in Cisco’s core switching lines and other businesses.

The announcement echoed what Cisco had presented in previous quarters, and the company felt the wrath from investors—its market value reportedly dropped 15 percent after the February earnings call—and analysts. Forbes.com ran an article questioning Chambers' leadership, suggesting that Cisco misread where the industry was headed and was not doing enough to shore up its businesses against increased competition, such as in the core networking space, where rivals such as Hewlett-Packard and Juniper Networks are making inroads.

As it has expanded into newer areas such as the data center and collaboration, Cisco also has grown its base of competitors, including the likes of IBM, Oracle, Dell and Polycom. In particular, HP—which had been a strong Cisco partner—is now a key rival in several significant areas, including networking, the data center and collaboration.

In his memo to Cisco’s 73,000 employees—in which it looked to rally the workforce, prepare it for changes and reinforce the confidence he has in the company—Chambers said he recognized the issues, but remained committed to the company’s current strategies.

“Today we face a simple truth: we have disappointed our investors and we have confused our employees,” he wrote. “Bottom line, we have lost some of the credibility that is foundational to Cisco’s success – and we must earn it back. Our market is in transition, and our company is in transition. And the time is right to define this transition for ourselves and our industry. I understand this.”

Chambers promised to “make a number of targeted moves” over the next few weeks and as the company enters its fiscal year 2012, with the goal of gaining new customers and keeping current ones, and to create an environment to make it easy for Cisco employees to do their jobs. He didn’t elaborate on what those changes could be, but outlined what he called management’s guiding principles: Keep doing what’s working, make tough decisions, continue to compete in all areas of the company’s broad business portfolio; and simplifying the way employees work.

“We will reshape the operational foundation in order to empower our teams, integrate our major functions, and allow our people to focus on inspiring and important work,” Chambers wrote.

One change he already has made in response to Cisco’s issues was creating a chief operating officer position, which it filled in February with Gary Moore, who previously was head of Cisco’s services business.

Chambers’ memo apparently resonated in the marketplace; Cisco’s share price reportedly rose 4 percent after news reports about it started to emerge.