Will the Cisco Reorg Work?

Some of you may have been following some of the drama and debate about the future of Cisco, the leading company in the networking market. A month ago we published a detailed analysis of the challenges facing Cisco, a company that has been losing market share in its core networking space and whose stock hasn't gone anywhere during a ten-year technology bull market.

Our "Here's What Cisco Needs to Fix" article, published in June, now has more than 30,000 pageviews (subscription required). Coincidentally or not, on the company's earnings call on August 14th, Cisco announced a massive 7% layoff as well as a corporate restructuring that converges the security and networking businesses. It's clear from the move the Cisco CEO Chuck Robbins and the board have undergone a major shift in mindset, seeing the company's static competitive position as a serious problem.

Why Cisco Is Integrating Divisions

First up, the restructuring of Cisco's divisions and the departure of former networking EVP and GM Jonathan Davidson. Cisco announced that Davidson will be leaving the company and Cisco is combining three of its units under one leader, Jeetu Patel, who will be in charge of the Networking, Security, and Collaboration units.

Networking, Cisco's largest division, absolutely has to be fixed. Finally management has realized the urgency. As you can see from the numbers in Cisco's last four quarterly earnings below, the networking division has been a major drag on its numbers. The networking division has been down on a year-over-year (y/y) basis for the past three quarters in a row.

This must have been the primary driver behind the departure of Davidson. This move shows a couple things. First, management has lost confidence in the trajectory of networking and the leadership of Davidson, who just didn't deliver the numbers.

This underlines many of the long-term challenges we have outlined in our analysis. Cisco has been losing market share to many of its competitors, in a trend known by some customers as "ABC" (Anybody But Cisco). In the datacenter, Arista Networks has been growing share rapidly as well as emerging as a leader in networking for AI. And in the enterprise/campus markets, Cisco has formidable competition in the form of Extreme Networks, HPE, and Juniper Networks. As we’ve mentioned before, the looming merger of HPE and Juniper should be keeping Cisco executives up at night (though, in general when they talk, they never speak as if they are worried about anything).

So, it was clearly time to do something more dramatic about networking. It's been shaken up.

Focusing on Network-Security Convergence?

So what's next? By combining the three units, it looks like Cisco would like to focus on integrating its products and services, especially networking and security, which lend themselves especially to convergence.

As we have outlined, Cisco has been bleeding market share because of the lack of confidence from customers. They are frustrated by too many products, lack of integration across product lines, and overselling of portfolios. These complaints are glaring on popular Cisco user message boards, such as this one on Reddit.

The move toward integration may mean that Cisco is preparing to take a "platformization" approach, which Palo Alto announced months earlier. Platformization is an industry code-word for the bundling and integration of products to provide a more holistic solution to customers. While directionally this would be the correct move by Cisco, the company is only now signaling a move in this direction, several months (if not years) behind platform moves by competitors. Ultimately, the success will come down to the execution. Real platformization will involve a painful combination of sales forces, technical integration, and discounts. It’s going to be a slog.

We do believe it's the correct move. Networking and security convergence will become more important with the growth of multicloud and hybrid cloud infrastructure as well as AI, with the boundaries of networking and infrastructure becoming less defined. Integration would be the right move, because Cisco overwhelms its customers with hundreds of products and services, many of which require painful management of complex network operating systems (NOSs), licenses, and management functions. In order to work, Cisco's going to have to deliver true technical integration, rather than just moving food around the plate.

Many of Cisco's competitors are focusing on networking and security convergence, especially in the multicloud space. This trend was the topic we recently addressed in a leadership brief we wrote for Aviatrix, which addressed how networks can become a natural conduit for security applications with their access to data and applications behavior. And Palo Alto Networks’ CEO, Nikesh Arora, in the spring of 2024 announced a new focus on converging product and services through platformization.

Because Cisco is in the unique position of having the dominant installed base of networking products as well as a large security portfolio, it’s in a good position to deliver better integration of networking and security. In addition, its acquisition of data analytics firm Splunk—its largest acquisition in history—give it huge potential to further the use of data collection to generate security and network analytics benefits for customers.

This is where the business has promise. Security and observability have been growing robustly. The problem is that they are a small part of the business. For example, in the most recent quarter, networking was about $7 billion in revenue per quarter, while security is approaching $2 billion.

Restructuring Hits Hard

Now, onto the people. As we mentioned in our analysis, one of Cisco's big challenges is its culture. It was once known as a great place to work with a hard-driving culture. Most of the current and former employees we speak to say it's now seen as a much more political and difficult place to work.

The restructuring and the mass layoff make this much clear: The company is struggling to figure out the right mix of leadership and workforce. A 7% layoff is nothing to sneeze at. Will it simply generate better profits or demoralize employees, resulting in some kind of downward spiral?

The executive reorganization has clear logic behind it: Patel was successful at growing security, and Davidson was not successful in growing networking. By putting Patel in charge of all of Cisco’s most important units, the idea is that they are betting on the right general.

Is Chuck Changing His Mindset?

Here's another thought: Chuck Robbins is trying to save his job. When a leading technology company's share price doesn't go anywhere in the largest technology bull market in history, eyebrows are raised. The move shows that Robbins is feeling the heat and may be changing his mindset. He's got to find a catalyst, and the shakeup shows he's looking for something. Things have grown more urgent.

Since Cisco’s reorg announcement, shares are up nearly 10%. With its status as a dividend-paying, low-valuation profitable company, it is likely to withstand a potential correction in AI tech stocks. That's a bright spot. Robbins has bought himself some time.

Change is good. If it works. One positive takeaway from Cisco’s moves is that finally the company, and CEO Chuck Robbins, have realized that bigger change is needed. This is a big change in mindset from Robbins, who tends toward a rosy embrace of the status quo rather than revolutionary change. In addition, the 7% layoff will give Cisco better margin.

“This new organization will help us accelerate our product innovation and bring our portfolio together in a more integrated way than ever before,” said Robbins on the quarterly call “[F]urther uniting our product teams is an important step toward unification and simplification and will ultimately lead to even stronger technology outcomes for our customers and partners.”

In his blog, Robbins pointed out that Patel’s successful creation of Cisco Hypershield, an AI-driven analytics approach to security, shows ingenuity in security product innovation. Hypershield could benefit from further integration of data from Cisco’s networking division as well as Splunk. The convergence of the divisions and the elevation of Patel sends the message that Cisco is more serious about building integrated networking and security platforms.

Whatever happens next, the transformation of Cisco will be a long process. With $50 billion in revenue, Cisco plays squarely in the oil-tanker category of the technology market—as one of the largest technology companies in the world by revenue and employees. Big changes in direction won’t come quickly.

Futuriom Take: The recent changes at Cisco demonstrate management's acknowledgement that the status quo was not acceptable, and we are eager to see if Patel can implement meaningful technology change in the core of the company—and a rebound in networking.