What Went Wrong at Cisco in 2001

1 2 Page 2
Page 2 of 2

But Cisco remained upbeat. Xilinx’s Wall Street warning came two months before Cisco Chief Strategy Officer Mike Volpi told The Wall Street Journal in November, "We haven’t seen any sign of a slowdown." Volpi told The Journal that Cisco hadn’t changed its internal plans since the beginning of its fiscal year in August. "We have guided [Wall Street] accurately, and we can execute to plan."

On Dec. 4, CEO Chambers crowed to analysts, "I have never been more optimistic about the future of our industry as a whole or of Cisco."

Eleven days later, CIO Solvik says, the company saw the problem for the first time. It overlaid the virtual close and its forecast, and sales had crossed under its projections. Cisco decided to seriously curtail expenses. Three weeks later, revisiting the data would lead to a hiring freeze. Solvik says the near-real-time data prevented what eventually happened to Cisco from being worse, if that’s even imaginable.

"I’m saying it could have been a lot worse," Solvik says. "We were able to react to trends day by day [using our infrastructure]."

But what was Cisco doing in September, October and November? Why wasn’t the virtual close telling Cisco that demand was evaporating? Why wasn’t the infrastructure that allowed Cisco to forecast Japan’s economic slump so accurately able to even see a more severe swing here? If Cisco acted quickly when the sales line fell under the forecasts line, why didn’t executives see those lines converging?

"We disclosed at the time what we thought," Solvik responds. "Other than what we publicly stated, I can’t comment on the outlook [at that time]."

By year’s end, the economy was foundering. It was neither a "U" nor a "V" but a "7". A cliff. The Fortune 100 halted capital spending. Alternative telecommunications carriers disappeared, along with many of the dotcoms that had been so feverishly buying Cisco gear. That equipment ended up on a gray market; barely-used Cisco switches could be had for 15 cents on the dollar, and Cisco lost money every time one was snapped up. Traditional telecom companies stopped spending too. In short, demand vanished. Cisco finally threw on the brakes Dec. 15. The freight train spit sparks and burned up the steel track as it tried to stop short of the cliff. It jolted down the supply chain, derailing suppliers like Xilinx and manufacturers like Solectron and their distributors. And Cisco, the networking industry’s big engine, went over the edge.

The Road to Recovery

CHELLAM AT XILINX attributes Cisco’s failure to act expeditiously to the fact that its software ignored such macroeconomic factors as debt levels, economic spending, interest rates, the bond market and so forth, while trusting data freighted with growth biases. In short, the virtual close and forecasting didn’t include the right economic indicators.

"They missed the shift," Chellam says flatly. "They were focused on what their customers were ordering. No one looked at the macroeconomic factors overshadowing the entire communications industry and spoke up. Someone should have said, ’These orders can’t be sustained.’"

Chellam has created a task force at Xilinx to develop software that injects more macroeconomic indicators into his forecasts. He considers it the key ingredient missing across the networking supply chain. "I can’t rely on just what Cisco tells me," he says. "We’re developing leading indicators that are more macro in nature. Information that comes through banking, Wall Street, debt levels and economic spending?they’re not intuitively related to me directly, but they have an effect." In essence, Chellam is attempting to draw a more detailed map than the one Cisco used to navigate the future. It is still, however, a map, not the territory itself.

He’s also building a virtual close system, based largely on Cisco’s. "Forgetting their failure to look at [macroeconomic] factors, I still think Cisco’s use of the Internet is an asset," Chellam says. "But tools like the virtual close are secondary to [human judgement] decisions, to process improvements. The virtual close can get better."

Cisco is making the virtual close and its demand forecasting better, Solvik says. But it’s not clear how. As vague as Chambers sounded last May when promising a return to 30 percent to 50 percent growth sometime in the future, Solvik similarly doesn’t provide many specifics for how Cisco is updating its infrastructure.

Solvik does say that the next step in its virtual supply chain is to create much-needed visibility into all levels of the networking industry. What he calls the new network supply chain will also allow the company to communicate with all networking-related companies and even see data passed between two other companies in the chain. Also, he says Cisco is updating its forecasting software, enhancing each business unit’s forecasting capabilities.

One area Solvik is specific about is macroeconomics. He argues against its wide use, despite what Chellam says about the role of big-picture data. Solvik thinks the economy is too complex to get anything meaningful out of such broad numbers as gross domestic product or interest rates. "We can’t put a judgment across the entire supply chain. Look at the economy today. Consumer confidence is up, and capital indicators sunk again. It’s pretty darn complex," Solvik says, with perhaps a new appreciation for the limitations of his software.

But Cisco still wants to attribute its recent problems to uncontrollable forces, as if the historic $2.2 billion inventory write-off and the steep decline of the company’s stock had nothing to do with the men at the top or the systems they trusted.

"If we could look backward, I know there are a lot of things we’d do," Solvik says. "If we had a crystal ball...I just can’t predict how we might have reacted if we had insight into these things we didn’t know."

By intimating that only magic could have saved Cisco, Solvik is seconding CFO Carter’s sarcastic comment to the Financial Times last April. "The slowdown happened at Internet speed," Carter said. "We’re developing a new module for our system right now. It’s called a crystal ball."

But some people don’t believe a crystal ball was what Cisco needed. The ability to look away from the computer screen and out the window to see the rain coming down just might have sufficed.


Copyright © 2001 IDG Communications, Inc.

1 2 Page 2
Page 2 of 2
7 secrets of successful remote IT teams