Category Archives: Layoffs

Cisco: The Merchant-Silicon Question

As reported by MarketWatch yesterday, Lazard Capital analyst Daniel Amir has written a note suggesting that Cisco Systems, “long a proponent of in-house solutions, has begun the shift to off-the-shelf Broadcom parts.”

Amir added that he expects Broadcom and, to a lesser extent, Marvell to benefit from Cisco’s move to merchant silicon, as well as from an intensification of an industrywide trend toward off-the-shelf parts.

Staying the ASIC Course

Many of Cisco’s networking rivals already have made the switch to merchant silicon. Cisco, along with Brocade Communications, has stayed the course with custom ASICs, believing that the in-house chip designs confer meaningful proprietary differentiation and attendant competitive advantage.

It’s getting harder for Cisco to make that case, though, as the company suffers market-share losses and margin erosion at the low end of the switching market, which is being inexorably commoditized, and as it also meets increasingly strong competitive headwinds from vendors such as Juniper Networks and Arista Networks in the some of the largest and most demanding data-center environments.

As Cisco’s recently announced layoffs attest, the company is under unprecedented pressure from shareholders to reduce costs. It’s also under the gun to raise its top line, but that’s a tougher problem that could take a while to remedy.

Need to Cut Costs

On the cost front, though, Cisco clearly cannot jettison employees indefinitely. It needs to look at other ways to reduce capital and operating expenditures without compromising its ability to get back on a sustainable growth trajectory.

Given the success of its competitors with off-the-shelf networking chips, one would think Cisco would stop swimming against the merchant-silicon tide. It’s likely that merchant silicon would help reduce Cisco’s development costs, allowing it to at least mitigate the margin carnage it’s suffering at the hands of HP and others in an increasingly price-sensitive networking world.

But even though Amir suggests that Cisco’s apparent dalliance with merchant silicon might not be a “one-time experiment,” it’s not a given that Cisco will ardently transition from home-brewed ASICs to off-the-shelf chips.

Mixed Signals

Just last month, Rob Soderbery, senior vice president and general manager of Cisco’s Unified Access business unit, contended that Cisco’s profits and market share in switching revenue might be taking a hit, but that it was holding its own it port-based market share. What’s more, Soderbery made the following statement regarding whether Cisco was considering adoption of merchant silicon over its custom ASICs:

 “There’s tremendous scale in our portfolio. We have competitive ASIC development. We always evaluate a make/buy decision. ASIC development is a core part of our strategy.”

Maybe Cisco, upon further review, has decided to change course, or perhaps Amir has misread the situation.

Next Setting Sun?

Nonetheless, EtherealMind.com’s Greg Ferro argued persuasively earlier this year that merchant silicon will dominate the networking-hardware market. If you haven’t read it, I advise you to read the whole piece, but here’s a money-shot excerpt:

 “I have the view that Merchant Silicon will dominate eventually, and physical networking products will become commodities that differentiate by software features and accessories – not unlike the “Intel server” industry (you should get the irony in that statement). As a result, any argument between “which is better – merchant or custom” is just matter of when you ask the question.

One interesting feature is that John Chambers continue to publicly state that custom silicon is their future. The are parallels with Sun Microsystems who continued to make their own processors in the face of an entire market shift, and that doesn’t appear to have worked out very well. In this another wrong footed innovation from Cisco? Time will tell.”

Besieged now by its shareholders as well as by its competitors, Cisco CEO John Chambers and his executive team are finding that time does not appear to be on their side.

How Cisco Arrived at the Crossroads

As reports of Cisco’s impending layoffs intensify and spread, I started thinking about how the networking giant got into its current predicament and whether it can escape from it.

One major problem for the company is that the challenges it faces aren’t entirely attributable to its own mistakes. If Cisco’s own bumbling was wholly responsible for the company’s middle-life crisis, one might think it could stop engaging in self-harm, right the ship, and chart a course to renewed prosperity.

Internal Missteps Exacerbated by External Factors

But, even though Cisco has contributed significantly to its own decline — with a byzantine bureaucratic management structure replete with a multitude of executive councils, half-baked forays into consumer markets about which it knew next to nothing, imperial overstretch into too many markets with too many diluted products, and the loss of far too many talented leaders — external factors also played a meaningful role in bringing the company to this crossroads.

Those external factors comprise market dynamics and increasingly effective incursions by competitors into Cisco’s core business of switching and routing, not just in the telco space but increasingly — and more significantly — in enterprise markets, where Cisco heretofore has maintained hegemonic dominance.

If we look into the recent past, we can see that Cisco saw one threat coming well before it actually arrived. Before cloud computing crashed the networking party and threatened to rearrange data-center infrastructure worldwide, Cisco faced the threat of network-gear commoditization from a number of vendors, including the “China-out” 3Com, which had completely remade itself into a Chinese company with an American name through its now-defunct H3C joint venture with Huawei.

Now, of course, 3Com is part of HP Networking, and a big draw for HP when it acquired 3Com was represented by the cost-effective products and low-priced engineering talent that H3C offered. HP reasoned that if Cisco wanted to come after its server market with Unified Computing System (UCS), HP would fight back by attacking the relatively robust margins in Cisco’s bread-and-butter business with aggressively priced networking gear.

Cisco Prescience

HP’s strategy, especially in a baleful macroeconomic world where cost-cutting in enterprises and governments is now an imperative rather than a prerogative, is beginning to bear fruit, as recent market-share gains attest.

Meanwhile, Cisco knew that Huawei, gradually eating into its telecommunications market share in markets outside North America, would eventually seek future growth in the enterprise. It was inevitable, and Cisco had to prepare for the same low-priced, value-based onslaught that Huawei waged so successfully against it in overseas carrier accounts. In the enterprise, Huawei would follow the same telco script, focusing first on overseas markets — in its home market, China, as well as in Asia, the Middle East, Europe, and South America — before making its push into a less-receptive North American market.

That is happening now, as I write this post, but Cisco had the prescience to see it on the horizon years before it actually occurred.

Explaining Drive for Diversification

What do you think that hit-and-miss diversification strategy — into consumer markets, into home networking, into enterprise collaboration with WebEx, into telepresence, into smart grids, into so much else besides — was all about? Cisco was looking to escape getting hit by the bullet train of network commoditization, aimed straight at its core business.

That Cisco has not excelled in its diversification strategy into new markets and technologies shouldn’t come as a surprise. Well before it make those moves, it had failed in diversification efforts much closer to home, in areas such as WAN optimization, where it had been largely unsuccessful against Riverbed, and in load balancing/application traffic management, where F5 had throughly beaten back the giant. The truth is, Cisco has a spotty record in truly adjacent or contiguous markets, so it’s no wonder that it has struggled to dominate markets that are further afield.

Game Gets More Complicated

Still, the salient point is that Cisco went into all those markets because it felt it needed to do so, for revenue growth, for margin support, for account control, for stakeholder benefit.

Now, cloud computing, with all its many implications for networking, is roiling the telco, service provider, and enterprise markets. It’s not certain that Cisco can respond successfully to cloud-centric threats posed by data-center networking vendors such Juniper Networks as Arista Networks or by technologies such as software-defined networking (as represented by the OpenFlow protocol).

Cisco was already fighting one battle, against the commoditizing Huaweis and 3Coms of the world, and now another front has opened.

Cisco to Cut Staff; EMC Speculation Vanishes

Gleacher & Co. analyst Brian Marshall drew some notice earlier today when he wrote that Cisco could slash as many as 5,000 positions, about seven percent of its workforce, next month. Marshall estimated that the cull “could incrementally reduce Cisco’s pro forma operating expenses by about $1 billion annually.”

Cisco Confirms Cuts

Marshall said the estimates were his own, based on what he believed Cisco needs to do to meet its meet its $1-billion objective for reduced annual expenses. Cisco later confirmed that job cuts are coming in August, though it did not indicate how many employees would be affected. Previously, Cisco had been encouraging employees to take early-retirement packages.

At the same time he made his projections about how many workers Cisco might need to jettison, Marshall also speculated that Cisco should seek a “transformative merger” with EMC. On that theme, Marshall apparently opined that a combination with EMC would give Cisco “better exposure to enterprise storage trends, ownership of the VMware asset for virtualization, a more robust security offering and a better collection of IT service professionals.”

I included the qualifier “apparently” in the preceding sentence because it seems Bloomberg and BusinessWeek, which both earlier today published a report including references to Marshall’s musings regarding a Cisco takeout of EMC, have excised any mention of EMC from subsequent iterations of the coverage.

Marshall’s M&A Advice Disappears

It’s hard to tell what that means, if anything. All I know is that the earliest version of the story included reference to Marshall’s advice that Cisco buy EMC, and later iterations of the story made no mention of EMC. It’s odd, but strange things happen when news is published in realtime.

Presuming I did not hallucinate — and a report by Jim Duffy over at NetworkWorld suggests I did not — what are we to make of Marshall’s recommendation? Well, it wouldn’t the first time somebody has suggested that Cisco acquire EMC, and it probably won’t be the last. The conjecture or rumor (or whatever else you want to call it) has had more comebacks than Brett Favre. It’s an old chestnut that gets repeated plays on analysts’ virtual jukeboxes.

Given its current valuation, though, EMC probably isn’t going anywhere. At the conclusion of stock-market trading today, EMC had a market capitalization of more than $56.1 billion, whereas Cisco had a market capitalization of $84.8 billion. Cisco has made a few sizable acquisitions in its time — though it established its wheeler-dealer bones on smaller, bite-size technology buys — but it never has done a deal on the gargantuan scale that would be required to land EMC.

Cisco’s Repatriation Holiday

What’s more, Cisco still has most of its cash overseas, It’s lobbying the U.S. government assiduously for a repatriation tax holiday, but that break hans’t been accorded yet. Even if Cisco were desperate enough to abandon its old acquisition playbook and splash out obscene amounts of cash and stock for EMC — and, for the record, I think Cisco is teetering on the cusp of becoming seriously desperate — it is not in a position to make the move until its overseas cash hoard (of approximately $31.6 billion) has been repatriated.

Even then, does EMC want to sell? Like every other vendor out there, EMC faces daunting challenges as the ascent of cloud computing realigns the data-center landscape. Still, one could make a compelling case that EMC, with its storage leadership and its 80-percent-plus ownership of VMware, is better placed than most vendors, including Cisco, to survive and even thrive in that brave new world. Does it really want to take Cisco stock — any deal would have to involve Cisco shares as well as cash — as part of a potential transaction? I don’t see it happening.

Dividing the Spoils

Cisco might have concerns regarding its share of the spoils from its Virtual Computing Environment (VCE) joint venture with EMC, which perhaps partly explains why it has partnered increasingly aggressively with NetApp on the FlexPod converged infrastructure architecture. Nonetheless, Cisco isn’t in a position to buy EMC, and EMC isn’t willing to part with its majority-owned VMware, so even a more modest deal is off the table.

Could Cisco buy NetApp? It could, but such a move would entail a different set of consequences, risks, and rewards, all of which we will save for another post.

Final Thoughts on Hurd Affair

Unless somebody on HP’s board of directors gets drunk at a party or has a nervous breakdown, I don’t think we’ll learn anything else of significance about why, exactly, Mark Hurd was ousted from his big chair at the company he led since the boardroom putsch that dethroned Carly Fiorina in 2005.

Larry Ellison has leaped, presumably over a tennis net, to his buddy Hurd’s defense. That was to be expected. The men are friends, after all, and they were both CEOs with colorful pasts, though of different hues. Ellison, of course, remains a CEO, but not so Hurd.

Now that the story seemingly is winding down, much to the relief of the HP board, we can only wonder at what it was all about. I’m not the only one who thinks HP’s official story isn’t the real or whole story. Still, it’s the one the company is sticking with, and nobody on the outside can produce factual evidence to refute it.

Skepticism Required

That doesn’t mean we have to believe it, though. Consumers, whether of information or goods and services, should always inoculate themselves with a healthy dose of skepticism, especially when they’re being sold something that seems of questionable authenticity.

Of all the theories about what led to Hurd’s walking of the plank, the one put forward by PC World’s Tony Bradley strikes me as closest to the mark, if you’ll pardon the pun. I invite you to read it, and to consider other scenarios that have been advanced elsewhere.

In my view, HP’s board must have had compelling reasons, other than those they’ve cited, for dumping the company’s president, CEO, and chairman. In an ideal world, a corporate chieftain might be brought low by the ethical transgression of filing inaccurate expense reports. Alas, this is not an ideal world, and we know companies will go to great lengths to protect those they deem of great value.

That HP chose not to go to those lengths to protect Hurd tells us something. It tells us that Hurd might have done something far worse than what he’s been charged with doing by the HP board of directors; or that the HP board no longer valued him, and was looking for a pretext or rationale to part company with him.

Too Much of a Harsh Thing?

The second explanation seems the simplest, and therefore the most likely. As I noted in an earlier post, the feeling from some within HP — and from within certain high-value customers — seems to have been that the company had gone overboard with its operational austerity measures, slashing muscle and bone as well as fat.  HP had eschewed innovation in favor of cost controls and relentless commoditization. That goes so far, but no farther — and it fails to create the next big thing.

Hurd wasn’t the CTO, so perhaps it wasn’t his job to be creative or to nurture innovations. But his lean, mean regimen, according to some, made it difficult for anybody else to do that job.

Perhaps the HP board believed that Hurd had done all that he could do for the company, that it was time for a cultural shift toward a corporate glasnost that might revive some of the creativity and innovation that Hurd had left behind. As a theory, it’s at least as convincing as the case HP has made for its decision to push its chief executive overboard with his pockets full of cash.

A Hurd Conspiracy Theory

One of the conspiracy theories making the rounds about Mark Hurd’s forced departure from HP’s mahogany row is that at least some of the company’s board members set him up.

Yes, that seems outlandish, and I don’t put much stock in it. Still, let’s walk through the scenario, if only because it’s a Sunday morning and there’s not much else to do.

Exploring the Conspiracy Theory

According to the conspiracy theorists, a minority of HP board members had become convinced that Hurd had overstayed his welcome. They were concerned that Hurd had done all he could in implementing his unique brand of operational rigor, replete with “labor arbitrage” (that’s a bloodless description of shipping jobs overseas to low-cost jurisdictions), lean command-and-control hierarchies, relentless emphasis on efficiencies and cost cutting, and automation of any and all processes that could benefit from it.

Despite what the gullible business press tells you, Mark Hurd was no innovator. He wasn’t a strategic genius or a visionary. He didn’t really take HP into any new areas during his reign — they already had services before EDS, they already had networking before 3Com, they already had mobile devices before Palm. His proficiency was in making things run leaner and meaner, to the point where the company and its business units became carefully monitored, resource-maximized operations.

Not a Visionary

Hurd isn’t a creative man. He’s not Steve Jobs, looking to redefine product categories with striking new designs and far-reaching market vision. That’s not Hurd’s strength. Instead, his claim to fame was the ability to take charge of an organization and squeeze inefficiencies out of it. His preoccupation was the elimination of waste, which results in reduced operating expenditures, not the creation of new products and revenue streams.

The conspiratorial murmurs suggest that a minority of HP’s board members felt it was time for new leadership, that HP had executives in place who could carry on Hurd’s cost-control disciplines in his absence. What they felt they didn’t have, according to the theory, is a team of executives who could engender meaningful innovation at the company. Under Hurd, HP had become a company whose only innovations came in cost cutting.

Apparently the dissident shareholders didn’t have enough votes to oust Hurd, who was also the company chairman, without creating a catalyzing event, a pretext, for the change. Hence a setup and the scandal you’ve just read about in the news.


Other Factors

Now the conspiracy theory includes other background elements. As I mentioned yesterday, morale at HP, especially in the USA and Europe, is dangerously low. As you can see, Mark Hurd isn’t the most popular man in the world. At a certain point, especially if you have a company in which nobody below the executive level feels much like coming to work, you have a problem. There was also the matter of compensation. Hurd’s contract was coming to an end, and he apparently wanted to be paid like Alex Rodriguez.

Still, in my view, the conspiracy theory doesn’t hold. While I think we have yet to learn the truth about what really transpired between Mark Hurd and the mysterious marketing contractor, I don’t think a faction of HP’s board hatched a plot to fatally embarrass the company’s CEO. Anything could have happened, I suppose, but this scenario seems very unlikely.

The full story has yet to emerge, but I don’t think we’ll discover that a cabal of Hurd’s fellow board members engineered his downfall.

Questions Abound in Wake of Hurd’s Ouster

Not much happened this past week. Oh, except for the sudden resignation of Mark Hurd, HP’s now-former chairman and CEO, under mysterious circumstances and an obstinate cloud of suspicion.

I don’t think this story has played itself out. If the business press keeps digging, we’ll probably learn a lot more about the circumstances that precipitated Hurd’s abrupt ouster from the company he led for the last several years. The official story from HP,  as to what transpired and why Hurd had to go, doesn’t feel like the real story.

No Sexual Harassment

What we’ve been told is that an independent marketing contractor made sexual-harassment allegations against Hurd on or about June 29. HP’s board investigated the charges, and it found “numerous instances” in which Hurd submitted inaccurate expense reports intended to conceal Hurd’s “close, personal relationship” with the mystery woman, whom HP and her lawyer, Gloria Allred — yes, that Gloria Allred — refuse to identify.

At this point, I hasten to add that HP says it found no evidence of sexual harassment by the HP chieftain. What’s more, Allred wished “to make clear that there [had been] no affair and no intimate sexual relationship between our client and Mr. Hurd.”

What HP did find, according to the company’s general counsel, Michael Holston, was that Hurd’s behavior reflected a “profound lack of judgment” and violated HP’s standards of business conduct. Perhaps Holston is alluding exclusively to Hurd’s bogus personal expenditures on the company’s dime, which covered receipts for expenses ranging from $1,000 to $20,000 over two years, including meals and travel.

More Questions than Answers

As I mentioned before, though, it sure feels as though there’s a hidden dimension to this scandal. Questions abound.

Considering what HP has chosen to disclose about the matter, why didn’t it fire Hurd for cause instead of giving him a generous severance package? HP’s Omerta apparently is back with a vengeance. What about Allred’s client? Perhaps she’s walking away with a generous parting gift, too. Silence can be bought, though it doesn’t come cheap.

What was the nature of the relationship between Hurd and the mystery woman? It was’t sexual, evidently, but it was a “close, personal relationship.” Did it involve the disclosure of confidential, insider information by Hurd?

SEC Curiosity

This woman worked as a contractor on HP CEO forums that ran through the fall of 2009. If you will recall, the fall of 2009 was when HP acquired 3Com. Just before that acquisition was announced, some rather unusual trading in 3Com shares occurred, triggering the curiosity of the Securities and Exchange Commission (SEC). Did Hurd reveal anything to the mystery contractor that should not have been disclosed?

The SEC might wish to pursue that line of questioning.

There are other aspects to this story that I feel compelled to mention. Mark Hurd was lionized by shareholders and market analysts for increasing the market capitalization of HP during his reign. His actual accomplishments in that regard, however, might have been short-lived and overstated. That’s an argument that has been advanced repeatedly, including today, by Eric Jackson.

No Tears to Cry

While some shareholders might mourn Hurd’s passing, a large number of HP employees, past and present, won’t be shedding any tears for their former strongman. Hurd was reviled by many of them. It was’t for nothing that he had his own high-priced security detail and equipped HP’s executive entrance at its Palo Alto headquarters with the latest in physical-security gadgetry as well as a healthy dollop of old-school barbed wire.

Fear and loathing were palpable at Hurd’s HP. The CEO liked it that way. As recounted by the Los Angeles Times earlier today, Hurd made the following statement to the Wall Street Journal when he came aboard as HP’s CEO:

“As I’ve cut costs, I’ve seen some employees crying [when they've been laid off] and even brought to their knees. It’s painful — but as CEO these days, you face relentless pressure from shareholders.”

Should I say what I think here? In this case, I’ll keep my counsel. It’s better than having to hire one.

Fear of a Converged Data Center

In a relatively short piece today, Michael Vizard has managed to cover a lot of ground. He deserves plaudits for his concision.

Quoting Ashish Nadkarni, a practice lead for Glasshouse Technologies, Vizard’s salient point is that while vendors, notably Cisco and HP, are pushing data-center convergence with fiery ardor, enterprises have not responded with reciprocal fervor.

Resistance is Manifold

The resistance to data-center convergence is manifold. CFOs are wary of anything resembling forklift upgrades accompanied by substantial capital outlays. Meanwhile, CTOs and CIOs are leery of stumbling into vendors’ trapping pits, drawn by the promise of long-term cost savings into a dungeon of proprietary servitude.

Last, and definitely not least, there is cultural and political resistance to sweeping change within IT departments. This makes perfect sense. Any student of history will know that revolutions displace and supplant power structures. The status quo gets pushed aside.

If we think about data-center convergence, we find that many potential enterprise-IT interests are threatened by its advance. As Vizard has mentioned previously, IT departments long have had their specialists. They are staffed by high priests of servers, viscounts of storage, lords of networking, and a smattering of application wizards.

Kumbaya Falls on Deaf Ears

By its very nature, data-center convergence entails that all these domain masters work in concert rather than in isolation. That scenario has theoretical appeal, and many salutary benefits could result from such IT kumbaya and common cause.

However, human beings — particularly in a realm where their positions are subject to offshoring and where job security has faded into a bitter, mocking memory– can be forgiven for eschewing collective idealism in favor of realpolitik calculations of personal survival. In their minds, questions abound.

If the data center is converged, what happens to the specialists? Who benefits, who wins and loses, who emerges from the fray with a prosperous career path and who becomes a dead man walking? These are uncomfortable questions, I know. But you can be sure many people are asking them, if only to themselves.

Answers Needed

An integrated, unified data center, with across-the-board automation and single-console manageability, has its charms — some of which are undeniable — but not necessarily to the specialists who inhabit today’s enterprise data center.

Cloud computing, whether of the private or public variety, faces many of the same issues, though the public option addresses the CFO’s concern regarding capital expenditures. Then again, cloud computing is challenged by the same cultural and political issues discussed above, and by other inhibitors, such as nagging questions about security and compliance.

I know these issues have been discussed before, here and elsewhere, such as by Lori MacVittie at F5’s DevCentral. Vendors, especially executives ensconced in boardrooms eating catered lunches, tend to overlook these considerations. Their salespeople, though, need cogent answers — and they had better be the right ones.