What Went Wrong at Cisco in 2001

There’s Cisco Before and Cisco After, and the two crossed paths, awkwardly, this past April.

Cisco Before was CFO Larry Carter writing in April’s Harvard Business Review about the San Jose, Calif.-based company’s "virtual close" software. "We can literally close our books within hours," Carter boasted in the article. "More important, the decision makers who need to achieve sales targets, manage expenses and make daily tactical operating decisions now have real-time access to detailed operating data." Cisco’s decision makers possessed a godlike ability to peer into every nook and cranny of the business, 24/7, which Carter says allowed the company to forecast a slowdown in Japan’s economy and garner half of the switching market there. Cisco After was CEO John Chambers, admitting to The Economist that same month, "We never built models to anticipate something of this magnitude."

That something was what is now inelegantly referred to as the recent economic downturn. It created a major earnings surprise for the manufacturer of switches and routers?the company’s first negative quarter in more than a decade. In the third fiscal quarter of 2001, sales plunged 30 percent. Chambers wrote off a mountain of inventory $2.2 billion high, and 8,500 people were laid off. On April 6, Cisco’s stock sunk to $13.63. Thirteen months earlier, it had been $82.

Chambers surveyed the wreckage and compared it to an unforeseeable natural disaster. In his mind, the economy?not his company’s software nor its management?was clearly to blame.

But other networking companies, with far less sophisticated tools started downgrading their forecasts months earlier. They saw the downturn coming. Cisco did not. Other companies cut back on inventory. Cisco did not. Other companies saw demand declining. Cisco saw it rising.

Even more troubling, there’s ample evidence that the company’s highly touted systems contributed to the fog that prevented it from seeing what was clear to everyone else. Cisco executives may have been blinded by their own good press. What’s clear is that overreliance on technology led the company down a disastrous path.

CIO Peter Solvik defends his company’s systems. He insists that without the forecasting software, that third quarter would have been even worse. He says that once executives realized there was a crisis, the day-to-day, near-real-time data helped Cisco quickly hit the brakes. It was just that "the speed of the swing caught everyone by surprise," Solvik says.

Of course, surprise was exactly what Cisco’s software systems were supposed to eliminate.

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