Market evolution: Cisco picks a new path forward

As I’ve been reading about John Chambers’ comments on his plan to shift Cisco Systems' business model to a focus on software and services away from hardware, several things went through my mind.

My first thought– and I’m probably very late to the game – was that if hardware isn’t dead, it’s on life support.

That doesn’t mean that people will stop buying, but hardware just isn’t the growth market it used to be. Margins are lower. The technology is viewed as a commodity. It is nearly impossible to differentiate yourself based on hardware.

And in some cases, the need is shrinking, particularly if you look at things like data center consolidation and virtualization of servers. You just don’t need as many big racks anymore.

So Chambers, the long-time CEO of Cisco, wants the company to design and sell software and services, a much higher margin business. He wants to target large enterprises like the government that have big complex problems to solve and a need to be more efficient.

The trend isn’t new. I remember the shock when IBM decided to sell off its PC business. Their growth since then – and their acquisition strategy – has been focused on software and services.

Dell Inc. and Hewlett-Packard Co. are following a similar path, but they haven’t taken the dramatic plunge of selling off their PC businesses, though HP toyed with the idea. But both have been buying software companies in areas such as analytics, health and big data.

Cisco has been active acquirer, laying the ground work for the shift Chambers is describing.

The software model itself is going through a huge shift as well, with the idea of buying licenses giving way to purchasing software as a service.

In many ways, it seems like the sand is shifting under the feet of many of these large technology companies as well as the large systems integrators.

The model that made you successful to this point will not be the one that will continue to make you successful going forward.

It is a huge change because so many things in companies – salaries, bonuses, career paths, pricing, the cost of doing business – were built on the old model of hourly rates, software licenses and selling more products. Many of those structures won’t work with the new model of utility computing.

A significant challenge right now is that both the old model and the new model are running at the same time. It’s almost like these companies need parallel organizations so they can work both.

You can’t just throw a switch and change from one to the other. Some customers only know how to buy under the old model. And companies need to relearn how to sell. It’ll take years to make this switch and there are going to be mistakes and failures.

Chambers told the New York Times that the technology giants of today, and he listed Microsoft, IBM, HP, SAP, Oracle and Cisco, will not all be on that list in five years. Two or three may drop off, he said.

I would not venture a guess at which of those will disappear.

There also will be a huge impact on the partners that work with companies like Cisco, which sells very little direct to government customers or any of its other customers.

A ZDNet story reports that Cisco’s president for Asia-Pacific, Japan and Greater China, Jaime Valles, told partners at a large Cisco conference in Bangkok that they need to evolved their business models to a service-led model.

I think, in the government market, the focus will be on understanding the mission and focusing on solving customer challenges, rather than taking orders for 30 boxes. But at the same time, you still need to ready to serve those customers who just want to buy 30 boxes.

Or do you want to shift those transactions off to the equivalent of a Best Buy?

Chambers has always been seen as a visionary in the technology industry but Cisco is venturing off into very new territory. How will it navigates the new path remains to be seen, but his sense that the industry is going through a significant shift is spot on.

There is just too much evidence to deny it.