Many-?including Unit, SEINES, GET/BAN, and over 5,000 other Sips (Internet Service Providers)-?were competing on price to provide fax, messaging, and EDI (electronic data interchange)l capability. All of this activity signaled the acceleration of the trend to IP (Internet Protocol)-based networks, a market that did not exist three to five years earlier. By 1999 in the United States, it was estimated that data network traffic exceeded voice network traffic. More than 75% of all Internet traffic traveled over Cisco products.
In 2000, more than 275 million people were on the Internet, projected to be more than a billion by 2005. In 2001, Lucent Technologies (with revenues of $33 billion and a market cap of $60. 1 billion) was the leader for telecoms gear and had not stood still since its 1996 spin-off from AT&T. As phone companies shifted their traffic from overstretched networks-? which were designed to carry voice versus the zeros and ones of computers-?Lucent was remaking itself to transition with its customers. IP-based networks had cost advantages over traditional phone networks.
In addition, the new Abased technology revisers such as Cisco were better equipped to address performance and security issues due to their constant influx of venture capital and talent. Many of the IP-based technology companies benefited from being located in Silicon Valley where there was a strong spirit of innovation in both technology and management. Juniper Networks competed with Cisco directly by providing next-generation Internet backbone routers specifically designed for service providers.
Juniper Networks floated their PIP on June 25, 1999, and with revenues of about $100 million had a market value of $2. 1 billion. In 2001,Juniper had revenues of $673. Million and a market cap of $31,974 billion. 2 did any of the other network companies, including Northern Telecoms (Nortek), Bay Networks (now a part of Nortek), or com. 3 All of the network companies were racing to develop a new hybrid product with the speed and efficiency of a router and the precision of a telephone switch. The Top Management Team at Cisco The two founders of Cisco were long on innovation acumen.
Don Valentine, partner of Sequoia Capital and vice chairman of the board of Cisco,4 was the initial venture capitalist who invested in Cisco; believing that Cisco would be a success, he took a hence when other venture capitalists were more cautious. One way that Valentine protected his initial $2. 5 million investment was by reserving the right to bring in professional management when he deemed it appropriate. In 1988, Valentine hired John Mirroring as CEO. Mirroring, an experienced executive in the computer industry who had worked at Grid Systems, Stratus Computers, and Honeywell, immediately began to build a professional management team.
This team soon clashed with the 1 McKinney 1997 Report on the Computer Industry, up. 1-55. 2 Enclosure, February 2001. Nortek acquired Bay Networks in June 1998 for $9. 1 billion in stock. At the time, Nortek had annual revenues of $15. 4 billion and a market value of $28 billion, compared with Coco’s annual revenues of $6. 4 billion and a market value of $85 billion. 4 Don Valentine was previously the outside executive chairman of the board of Cisco. Cisco maintained its chairman of the board as an outside director. As of 2005, John Mirroring was serving as an outside director and chairman of the board. Founders, and after Coco’s initial public offering in 1990, both founders sold all of their stock and left the company. Some observers felt that this early exit of the founders provided a receptive environment and laid the groundwork for disciplined management which, in turn, let the company capitalize on market opportunities and grow at a phenomenal rate without derailing its focus or losing control. Not appreciate the proven ability of the functional organizational structure to scale without sacrificing control during high levels of growth.
Accordingly, Mirroring maintained a centralized functional organization that was still in place in 2005. While product marketing and R&D were now decentralized into three “lines of equines” (Enterprise, Small/Medium Business, and Service Provider), the manufacturing, customer support, finance, human resources, information technology (IT), and sales organizations remained centralized. The only responsibility of country sales managers was to sell the three market segment products. They were not responsible for non-sales activities (e. G. , accounting, IT, manufacturing, etc. Within a country or geography. There was a belief within Cisco that consistency of strategy, goals, organization, and management provided a strong stabilizing benefit to a fast- growing and fast-moving company. Coco’s Business Strategy Mirroring hired John Chambers in 1991 from Wang Laboratories and turned over the duties of CEO to Chambers in 1995. Mirroring reflected: “When Chambers took over, Cisco never lost a beat. “6 Chambers continued to execute a plan that he Jointly created with De Ouzel (chief technical officer) and Mirroring in 1993. The plan consisted of four elements:7 1 .
Assemble a broad product line so Cisco can serve as one-stop shopping for business networks. (Exhibit 2 shows how information is routed through the Internet; it also shows Coco’s revenues and market shares for various products. 2. Systematize acquisitions as an efficient business process. Cisco made more than 70 acquisitions and key strategic alliances since 1993 to fill out its product line. 3. Set industries software standards for networking. Cisco issued ISO (Networking Operating System) licenses to Allocate, Ericson, Northern Telecoms, Compact, Hewlett- Packard (HP), Bay Networks, com, Microsoft, Intel and 12 Japanese companies. . Pick the right strategic partners. Cisco worked with Microsoft to create an industry standard for security over the network; with MIMIC to deliver premium Internet arrives; and with HP to develop and sell Internet-based corporate computing systems built with HP and Cisco products. Chambers believed that if he could successfully execute on this four-point plan, Cisco would be the lead architect and provider of technologies for the new Internet-based network. Chambers further believed that 5 Chambers had also worked for IBM for six years. 6 Geoff Beam, “Coco’s CEO: John Chambers,” Forbes ASAP, February 23, 1998, p. 2. 7 Brent Slender, “Computing Next Superpower,” Fortune, May 12, 1997, p. 88. 3 . By providing the end-to-end network plumbing, we can change the way entire impasses and industries operate. Only now are businesses beginning to realize how much the network will touch their people and customers and suppliers, and how much productivity and profitability can improve when they become truly global networked companies. 8 In the end, Chamber’s ultimate focus was on the customer, emphasized by his directive to have the words “Dedication to Customer Success” on every Cisco worker’s badge.
Building Coco’s IT Infrastructure When Peter Solves Joined Cisco in January 1993 as its new CIO, Cisco was a $500 million company and was running traditional financial, manufacturing, and order- entry systems. Solves, fresh from Apple, concluded that he had two key challenges: First, Coco’s Information Technology (IT) department was too traditional in being viewed as a cost center reporting through the finance department. In addition, it was too internally oriented. As a result, the potential contribution of IT to the business was much smaller than it could be, and Solves believed this had to change.
Solves second challenge was that the current systems could not scale to support Coco’s growth, nor were they flexible nor robust enough to meet management requirements. To address the first challenge, three changes were made: First, the IT- reporting relationship was changed from accounting to the Senior Vice President of Customer Advocacy. (See Exhibit 3 for a Cisco organization chart. ) Second, the IT budget pertaining to the functions were returned to the functions, leaving Just a small portion in the G&A (General and Administrative) account. This created a structure in which all IT application projects were client-funded.
Third, the central IT steering committee was disbanded and replaced with a structure whereby IT investment decisions on application projects were pushed out to the line organization but still executed by central IT. Finally, in January of 1994, Coco’s legacy environment failed so dramatically that the shortcomings of the existing systems could no longer be ignored. An unauthorized method for accessing the core application database-?a workaround that was itself motivated by the inability of the system to perform-?malfunctioned, corrupting Coco’s central database. As a result, the company was virtually shut down for two days.
Coco’s struggle to recover from this major shutdown underscored the fact that the company’s systems were on the brink of total failure. Solves, Randy Pond (a director of manufacturing). And several other Cisco managers concluded that the autonomous approach to systems replacement that they had adopted was not going to be sufficient. An alternative approach was needed. Solves described what they did: We said, “we can’t wait casually by while order entry, finance and manufacturing go out and make three separate decisions. It would take too long to get those applications in place. ” We needed to take faster action.
At that point we got sponsorship from the SSP of manufacturing, Carl Redefine. He was with Digital before Cisco, in PC manufacturing. He 8 John Chambers, as quoted in Brent Slender, “Computing Next Superpower,” Fortune, May 12, 1997, p. 88. 9 Randy Pond became coeditor with Pete Solves of the ERP project. 4 took the lead and said, “K, let’s get on with this .. . Let’s start from the manufacturing perspective, and see if we can get the order entry and financial groups interested in doing a single integrated replacement of all the applications instead of taking a longer time to do separate projects. And so in February, about a month after the [company shut down], we put together a team to do an investigation to replace the application. Redefine understood from previous large-scale implementation experiences at Digital how “monolithic” IT projects could take on lives of their own. He echoed Solves concerns about project size and had strong views about how Cisco should approach a large implementation project: I knew we wanted to do this quickly. We were not going to do a phased implementation-? we would do it all at once. We were not going to allow a lot of customization, either.
There is a tendency in MR. systems for people to want the system to mirror their method of operation instead of retraining people to do things the way the system intended ND [we wanted to] make it a priority in the company as opposed to a second-tier kind of effort. Selecting an ERP Product Coco’s management team realized that implementing to meet business needs would require heavy involvement from the business community. This could not be an IT- only initiative. It was critically important to get the very best people they could find.
Solves elaborated: “It was our orientation that in pulling people out of their Jobs [to work on the project], if it was easy then we were picking the wrong people. We pulled people out that the business absolutely did not want to give up. Consistent with the need for a strong Cisco team, the company would also need strong partners. Solves and Redefine felt it was particularly important to work with an integration partner that could assist in both the selection and implementation of whichever solution the company chose. Great technical skills and business knowledge were a prerequisite.
Solves explained the choice of KEMP as the integration partner: KEMP came in and saw an opportunity to really build a business around putting in these applications. They also saw this as kind of a defining opportunity to work with us on this project. As opposed to some other firms that wanted to bring in a lot of “grannies,” KEMP was building a practice of people who were very experienced in the industry. For instance, the program manager who they put on the Job, Mark Lee, had been director of IT for a company in Texas that had put in various parts of an ERP system.
With KEMP on board, the team of about 20 people turned to the software market with a multistoried approach for identifying the best software packages. The team’s strategy was to build as much knowledge as possible by leveraging the experiences of others. They asked large corporations and the “Big Six”1 1 accounting firms what hey knew. They also tapped research sources such as 10 MR. represents a class of systems, often thought of as predecessors of ERP, that focus on planning the material requirements for production. Forecast or actual demand is fed to MR. either manually or from other types of systems.
MR. functionality is embedded in the offerings of all leading ERP vendors. 11 In 1994 the “Big Six” accounting firms were Arthur Anderson, Coopers & Library, Dolomite & Touché, Ernst & Young, KEMP Peat Amharic, and Price Waterholes. 5 Gardner. 12 By orienting the selection process to what people were actually using and anointing to emphasize decision speed, Cisco narrowed the field to five packages within two days. After a week of evaluating the packages at a high level, the team decided on two prime candidates: Oracle and another major player in the ERP market. Pond recalled that size was an issue in the selection. We decided that we should not put Coco’s future in the hands of a company that was significantly smaller than we were. ” The team spent 10 days writing a Request For Proposals (RAP) to send to the vendors. Vendors were given two weeks to respond. While vendors prepared their responses, he Cisco team continued its “due diligence” by visiting a series of reference clients offered by each vendor. Following Coco’s analysis of the RAP responses, each vendor was invited in for a three-day software demonstration and asked to show how their package could meet Coco’s information processing requirements.
Cisco provided sample data, and vendors illustrated how key requirements were met (or not met) by the software. Selection of Oracle was based on a variety of factors. Redefine described three of the major decision points: First, this project was being driven pretty strongly by manufacturing and Oracle had better manufacturing capability than the other vendor. Second, [Oracle] made a number of promises regarding the long-term development of functionality in the package. 13 [Third, we liked] the flexibility offered by Oracle’s being close by. 4 Cisco also had reason to believe that Oracle was particularly motivated to make the project a success. Randy Pond provided his impression of Oracle’s situation: “Oracle wanted this win badly. We ended up getting a super deal. There are, however, a lot of strings attached. We do references, allow site visits and in general talk to many companies that are involved in making this decision. The Cisco project would be the first major implementation of a new release of the Oracle ERP product. Oracle was touting the new version as having major improvements in support of manufacturing.
A successful implementation at Cisco would launch the new release on a very favorable trajectory. From inception to final selection, the Cisco team had spent 75 days. The final choice was teammates. Solves described how the decision was made and presented to the vendors: The team internally made the choice and informed the vendors. There was no major process we had to go through with management to “approve” the selection. We Just said “Oracle, you won; [other vendor], you lost. ” Then we went on to contract negotiations with Oracle and putting a proposal together for our board of directors.
The focus immediately turned to issues of how long the project would take, and how much it would cost. The team decided “yes, we will do this and we ought to go forward with the project. ” So now at the very end of April we were putting the whole plan together. 12 The Gardner Group is a leading industry resource for information on ERP and manufacturing-related research. 13 Redefine later noted that not all of these promises were met in the time frame greed on during contract negotiations. 14 Oracle and Cisco world headquarters were both located in the Silicon Valley approximately 20 miles from each other. Going to the Board Before going to the board for approval, the team needed to answer two very important questions: How much would it cost and how long would it take? They knew their executives were worried that a big project might spin out of control and deliver substandard results. Despite the risks, the team took a pragmatic approach to estimating project requirements. Solves described the process: Our quarters go August to October, November to January, February to April, and May to July. 5 So right here on May 1, [at the] beginning of the fourth quarter, we are asking “how long should it take to do a project to replace all of our core systems? ” This is truly how it went. We said “you know we can’t implement in the fourth quarter. The auditors will have a complete cow. ” If it takes a year we will be implementing fourth quarter, and that wont work. We thought it really should take 15 months, July or August a year later. Tom Herbert, the program manager, said, “there’s no way we are going to take 5 months to get this done. That’s ridiculous. So we started going in the opposite direction and said, “well, can we do it in five months? ” That Just didn’t seem right. Understand, we did not have a scope yet. In the end we basically settled that we wanted to go live at the beginning of SQ, so we would be completely stable for SQ. [See Exhibit 4 for a summary of milestone ERP implementation dates. ] That took care of setting a target date. Next came the task of estimating a project budget. Once again, Cisco was aggressive: Solves explained: “After we set a date, we estimated budgets. We put this whole thing together without really being that far into this program.
We Just looked at how much [the ERP system] touched. ” Instead of developing a formal business case (I. E. , a financial analysis) to demonstrate the impact that the project would have on the company, the team chose to focus on the issues that had sparked the analysis in the first place. In Solves view, Cisco had little choice but to move. He explained his approach to the situation: We said that we had this big outage in January-?that we were the biggest customer of our current software vendor and that the vendor was being bought by another company. It was something.
The reliability, the scalability and the modifiability of our current applications would not support our anticipated future growth. We needed either upgrades to the new version of the current application or we needed to replace it. If we replaced it, we could either do it in parts or do it as a whole. We evaluated those three alternatives, talked about the pros and cons of each one, and recommended that we replace our systems “big-bang,” with one ERP solution. We committed to do it in nine months for $15 million for the whole thing. [See Exhibit 5 for a breakdown of project costs.
Although Cisco was, to some extent, compelled to implement ERP, proceeding without a formal economic Justification was also a matter of management philosophy. As Redefine put it: Mimi don’t approach this kind of thing from a Justification perspective. Cost avoidance is not an appropriate way to look at it. You really need to look at it like, ‘Hey, we are going to do business this way. ‘ You are institutionalizing a business model for your organization. ” At $1 5 million, the project would constitute the single largest capital project ever approved by the company.
Members of the team repaired to take this number to senior management with some trepidation. The first meeting with CEO Mirroring did nothing to alleviate their concerns. Pond described the meeting with Mirroring: 15 Coco’s financial year-end was July 31 . 7 Pete Solves, Tom Herbert, and I took the proposal to Mirroring and the reaction was pretty interesting. He made the comment, “you know, careers are lost over much less money than this. ” Pete and I were as white as a sheet of paper. We knew that if we failed that we were going to get shot. Failure is not something the business took to well, especially with this kind of money.