Cisco partners view an altered landscape

The networking vendor outlined a bold strategy for success at its recent Partner Summit.

Cisco chief John Chambers recently remarked that the IT industry was experiencing a "100-year flood".

It appears that during the past few years of economic downturn the voice and data networking giant has been busy building an ark to ride out the current turbulent waters.

Packed into this ark, Cisco has placed some new partner incentive programmes, new products, a new partner portal and an enhanced strategy that emphasises market specialisation.

When the market resumes its upswing, Cisco hopes to emerge in a breakaway position from its competitors, and that its channel partners' margins will start coming in two by two as they make the transition from a volume-based business model to one based on value.

Speaking at Cisco's recent Partner Summit in Las Vegas, Paul Mountford, vice president of worldwide channels, said: "Partner profitability is still my biggest challenge."

Mountford told vnunet.com's sister title Computer Reseller News (CRN) that Cisco has been working on a number of programmes to help improve its partner profitability. One is Cisco's discount model, which is under review. Another is its Value Incentive Program, or VIP.

"At the moment, you make the same margin on IP telephony as on desktop switching, and that's not right," Mountford said.

But Cisco's enviable cash position and market share haven't come without a price to pay. Its stock, like that of many companies involved in the networking market, is still in the doldrums; its revenues are flat; and in 2001 it had to make some redundancies, much to the dismay of its chief executive.

Six-point plan for stability
To stabilise the company, Chambers introduced a successful six-point plan. Many analysts have claimed this helped the company not simply to stabilise but propelled it into its current 'breakaway position'.

Perhaps the biggest change to Cisco's strategy in the past couple of years has been the quiet consolidation of its huge reseller channel and a renewed focus on the quality of its accreditation programme.

Executives at the company say this was done to attract a new breed of partner that offers not just the tin but the whole mix of product, consultancy and service.

From a high of 6,500 Gold, Silver and Premier partners last year, the number of partners considered a part of Cisco's certified community will be reduced to about 3,500. Chambers said this figure looks likely to shrink further in the future as "brutal consolidation" continues to sweep the industry.

"Twelve years ago the focus was on the internet revolution and creating unprecedented opportunities for customers, shareholders and partners," said Chambers. Today, the landscape is about partnering for success, profitability and survival, he added.

With growth in the IT industry slowing from 50 to 70 per cent a year to a virtual standstill, there had to be a consolidation of the company's partner base. "There were just too many partners going after fewer and fewer opportunities," he said.

Channel partners broadly approve of the company's strategy. Paul Cunningham, services director at Cisco distributor Comstor, told CRN that Cisco's consolidation in the UK channel was just another logical step in a process that has been going on for some time.

"In the past three years there has been a progressive reduction in the number of resellers in the field. This is not new but it is probably the public announcement [of this strategy]," he said.

According to Cunningham, the number of UK resellers that are actively managed by Cisco has fallen from about 250 to 50.

From volume to value
Clive Hailstone, general manager of the networking and enterprise solutions division at Cisco distributor Computer 2000, said the move from volume to value was a step in the right direction.

"Cisco encourages its value-add resellers [Vars] to invest in technical knowledge so they have a differential from the guy down the road. If you do invest you are going to be protected [by Cisco] from a competitor that comes in late and tries to steal the deal on price," Hailstone said.

Keith Humphreys, analyst at EuroLAN, believes that "partners are hurting". However, he added: "There is a conviction at Cisco to put profit back into the channel."

Cisco has announced that it will remain with the three distributors it deals with in the US, but it looks increasingly like there will be some incremental changes to the distribution strategy it started a year ago in Europe.

While emerging markets in eastern Europe are likely to deal with specialised local players, the rest of Europe looks likely to be sewn up by global firms such as Ingram, Tech Data and Comstor.

Martin Canning, vice president of European services research at analyst IDC, said: "Cisco is looking at overall distribution and is taking a bet on where it is going."

Humphreys, believes that such moves by Cisco will signal the "death of the regional distributor". Despite its cull of accredited partners, Cisco remains resolute in believing the channel represents its competitive advantage. In fact, Cisco executives claimed they have never been closer to channel issues.

Chambers told partners: "Trust is something Cisco has to earn every day."

Echoing these sentiments, Mountford added: "In tough times, it's all about sharing best practices. Good business is built on interaction, not isolation. Cisco is a listening company and wants to remain a listening company."

Both Mountford and Chambers urged partners at its conference to stand up and challenge Cisco if they felt the company was not getting it right.

"If we get off course, hit us on the side of the head," Chambers told them.

Cunningham gave another view of Cisco's listening-and-learning stance. He told CRN that although he welcomed initiatives such as VIP, he felt that Cisco has perhaps set the bar too high in the UK.

He believes the security VIP scheme will be attainable by only a handful of UK resellers. But he added: "The good news is that Cisco is listening and has taken our comments on board. This is often the problem of rolling out a global programme."

Hailstone also pointed out that sometimes Vars have not seen return on their investment when trying to raise their game to match Cisco's channel requirements.

In this scenario, Hailstone believes that the bar has either been set too high or that too many people have been trying to get in on the act, as in IP telephony, for example.

But he welcomed the news that Cisco was looking at changing margins on different products. He accepted that resellers will always find it hard to get the right balance when positioning themselves between existing business and new opportunities.

Cunningham is also concerned that a skills gap will emerge between those that Cisco singles out to become its specialised 'elite' forces and the unaccredited suppliers that make up Cisco's 40,000 channel partners worldwide.

Some analysts have said that this might create a conflict between Cisco's need to push volume and its desire to develop its accredited channel to add value.

Commenting on the occasional clash between Cisco's sales force and its resellers over the need to shift volume and the need to sell solutions, Cunningham said this will always be a difficult balancing act.

Promoting the solution sell
He believes the message about promoting the solution sell is percolating down from the top echelons at Cisco to the rest of its sales force. However, Cunningham said, the reality is that at the end of the month or the quarter, numbers are numbers and deals get done.

"There is nothing sinister about this and Cisco is doing a better job than most [in promoting a solution sell]. It just lives in the real world," he said.

Commenting on the extra investment and resources needed to qualify for VIP and the specialist programmes Cisco is rolling out, Cunningham said it will be a lot harder for the smaller resellers that have not invested in their businesses to reach the new requirements. This situation will in turn drive further consolidation, he said.

Following the big reduction in the number of Cisco's partners, Canning believes the remaining ones will be able to change their business model to fit into the new specialisation areas that Cisco is touting: IP telephony, storage and security.

"Resellers will have to look at what they are doing and where they are going. The areas they are currently strong in may not be in the near future," he said.

Chambers is encouraging Cisco's partners to engage with new areas of specialisation in the belief that the implementation of these new technology platforms will help drive end-user productivity.

At the Summit, Chambers said he was optimistic that technology will be the catalyst that will help businesses drive productivity and therefore profitability.

However, for companies to achieve not just three to five per cent increases in productivity, but percentages up in the 20s, Chambers said they must embrace a new business model which will enhance the use of new technology and maximise the returns.

Embracing a new business model
To demonstrate this, Chambers admitted that Cisco is eating its own food to demonstrate to other companies the benefits of implementing new technology platforms. His vision includes the network virtual organisation (NVO), or a network of networks.

As long as there are common standards in place to manage voice, video and data, Chambers believes an NVO can be created which handles 'intelligent data' from a number of integrated home, wireless and corporate networks via waves of applications.

Provided the underlying business model is right, this will help companies respond more quickly, make faster decisions and increase productivity beyond the five per cent mark.

Chambers said that Cisco's own internal implementation of a new business model, combined with new technology, will help the company achieve a 20 per cent improvement in productivity.

In the future, companies' implementation of this sort of technology combined with a changed business model will be "as fundamental as the assembly line was to business", Chambers predicted.

Speaking about Cisco's plans for the NVO, Canning said: "Cisco has to take a few bets on the future. Sometimes these are right, sometimes they are wrong, but the company is definitely putting its stake in the ground.

"It is going to take time and money for resellers to be able to change. Resellers that talk to us [IDC] have business horizons that can be measured in months.

"For some Vars this business horizon is three months, for others it could be six months. What Cisco is looking at [with NVO] is several years out."

In a survey of all the 1,000-plus delegates at the conference, more than half of the respondents said that the specialised sector they want to see Cisco invest in is voice.

Canalys analyst Sandy Fitzpatrick believes Cisco has a two-fold strategy in the voice space: one for carriers, the other in the corporate space. Both are long-term strategies, but Fitzpatrick believes the carrier space will take longer to adopt.

However, she points out that there are signs of some significant deployments, citing as an example one by European carrier Telecom Italia. But it will take a few more Telecom Italias to really start the critical mass going, she said.

"A driver for the adoption of IP telephony is mobility," Fitzpatrick said. "Another catalyst is when branch offices use it through the central corporate network."

Commenting on how well-prepared the channel would be to roll out new technologies such as voice, Fitzpatrick said: "Few are ready today but most realise that it is something that would be beneficial to get into."

She also suggested that resellers should look at the different issues raised by the emerging opportunities, and that resellers should perhaps look for the "lower hanging fruit to their existing business".

However, Fitzpatrick believes that voice offers much better opportunities for resellers to sell into new sites rather than just upsell to existing customers.

She also believes that through the addition of voice products to resellers' portfolios, there could be "competitive warfare", in which a Var offering voice could go after another Var's installed base.

But Fitzpatrick added that the channel needs a lot more consultative skills and more understanding of tariffing if data Vars are going to succeed in the voice and data market.

The overall reaction to Cisco's announcements at its Partner Summit from both analysts and partners was positive. Canning summed up the general mood of optimism.

"Competitors should look closely at what Cisco is doing in the channel. It seems really well thought out, and competitors could do worse than look at how they can emulate it," he said.

Full of VIP and vigour
Cisco recently launched its Value Incentive Program (VIP) as one initiative that has been designed to boost partner profitability. The company's revamped eAgent programme is another.

VIP pays partners a 10 per cent rebate on IP telephony and security deals, but only if partners achieve customer satisfaction targets.

Analyst Keith Humphreys, at EuroLAN, believes that the VIP scheme is the right way forward for the vendor because the reseller is not guaranteed to receive the rebate until it has earned it. "This is a clever move," Humphreys said.

Judging by the ripples of applause from resellers at the Summit when Paul Mountford, Cisco's vice president of worldwide channels, outlined the scheme, Humphreys concluded that it had been "warmly received".

Cisco announced some other initiatives to help boost partner profitability, including a 24-month lease programme to make it easier and cheaper for resellers to acquire demonstration lab equipment.

The launch of a 'channel-neutral' version of its eAgent programme to Europe has also been welcomed by partners.

Under the new eAgent programme, Cisco will remove its one per cent administration fee. Certified Cisco partners can place orders with Cisco and have Cisco handle the customer financing, billing and product delivery.

Cisco would then pay partners a fee for the order, essentially the difference between the price the partner negotiated with the customer and the partner's discount with Cisco.

Cisco's former UK channel chief, Nick Watson, has been promoted to become UK and Ireland marketing and commercial director. John Donovan will take over as channels and alliances manager, UK and Ireland. But its commitment to the channel is as strong as ever.

• Partner profitability is a big issue for Cisco, to this end the vendor has launched a raft of initiatives such as its VIP programme to help boost partner profitability.
• Resellers encouraged to move into specialised areas such as voice and security, partners want Cisco to invest in voice.
• New partner portal rolled out to boost partner productivity.
• Network virtual organisation touted as the new weapon to drive end user productivity and profitability

Portal with a view
Cisco has introduced Partner View, a revamped portal that links resellers to a site containing tools, resources and applications.

The portal, which is fully customisable, provides access to 13 content modules, including channel announcements, certification and specialisation, e-learning, and customer and partner satisfaction.

By using PartnerView, resellers can keep track of their certification and specialisation status and see summaries concerning individual certified employees, including notification of certificate expiration dates.

Also included is a business planning tool that helps partners coordinate with Cisco channel account managers to target leads and close deals.

About 175 resellers are already using the pilot version of Partner View. Gold and Silver certified partners can begin accessing the portal in May. Premier certified partners will gain access in August.

Cisco also plans to implement a channel-neutral compensation policy which it hopes will increase overall services sales while minimising conflict between partners and the company's own direct sales force.

Wim Elfrink, senior vice president of customer advocacy at Cisco, said that under the new model, which is scheduled to launch in August, Cisco's direct sales force will receive compensation based on 100 per cent of Cisco services sales, including SmartNet maintenance contracts. The rate applies whether products are sold direct or through a reseller.

Currently, Cisco's sales force receives compensation based on 85 per cent of channel services sales and 100 per cent of direct sales, he said.