Cisco Defines A Good Alliance At About $500 Million A Year

Investors Business Daily,
Date: 4/12/99,
Author: Michele Hostetler

Partnerships are so common among tech companies, and fail so often, that they can mean little. But Cisco Systems Inc. has formalized the process for its most crucial partnerships, which go by the buzzword "strategic alliances." Analysts say it's one of the best programs in the field.

The effort began two years ago, when Chief Executive John Chambers realized Cisco would need to become a global company - fast. The leading seller of networking gear took three steps: It promoted an executive to give him responsibility for strategic alliances, devised rigorous guidelines for finding the best partners and created concrete ways to measure the success of its partnerships.

What's that main measuring stick? That Cisco and its partner each should bring in $500 million in revenue annually after three years. And to make sure that lofty goal is on track, Cisco honchos meet every Tuesday morning at 7:30 a.m. to update the status of those key alliances.

Companies that want a global presence would do well to follow Cisco's example, says Jonathan Poe, an analyst with Stamford, Conn.-based Meta Group.

"(Globalization) that has taken Coca-Cola 60 years to accomplish is taking Cisco very little time - by using the right partners," Poe said.

Cisco has strategic alliances with companies such as Hewlett-Packard Co., Microsoft Corp. and KPMG Peat Marwick LLP.

"Partnerships are critical to our growth," said Gary Daichendt, Cisco's executive vice president of worldwide operations. "If we don't partner, we'll be left behind."

At the helm of these big partnerships is Charlie Giancarlo, Cisco's senior vice president of global alliances. For all the care he and Cisco take with these deals, none has a "formal" contract. That might sound risky, but Cisco -and its partners - wants to be able to react fast if market conditions change, Giancarlo says."We have a tight process rather than a tight contract," he said. That seems to work, Poe says. "Cisco has a lot of detail in their partnering process to drive out risks," he said. Gauging the success, though, is not yet possible. No strategic alliance has reached the $500 million-in-annual- revenue milestone because none is 3 years old yet.

KPMG, though, is nearing the $500 million goal, says Rod McGeary, vice chairman of KPMG Consulting. The companies aligned two years ago. KPMG last month landed a consulting contract to work with Ingram Micro Inc.'s electronic- commerce site. Without Cisco, KPMG wouldn't have won the deal, McGeary says.

These big partnerships must meet three criteria, Daichendt says. First, there must be a business need that each company can't fulfill on its own. Second, each company must bring a critical piece to the table. For example, Microsoft has a directory system that Cisco doesn't have, but Cisco has the gear to improve that directory, he says. Finally, there's the least tangible item of all. "Do we have a joint vision?" Daichendt said. "We do look at chemistry."

Cisco tests chemistry in a simple way. After details are hammered out, pens and paper are passed around the table to executives from both companies. Each side writes down the top three things that it thinks the other partner is going to gain from the relationship. "If the partner identifies the wrong three things for me, there's something wrong," Daichendt said. A potential Cisco alliance with a big-name company fell apart when the two sides couldn't agree on final details, Daichendt says. "The chemistry just wasn't there," he said. Though he wouldn't identify the company, it likely was either Northern Telecom Ltd. or Lucent Technologies Inc. Chambers acknowledged last year that Cisco's attempts to partner with Lucent or Nortel had failed. Now it competes with the two telecom gear makers.

Partnerships can be tougher than acquisitions, Giancarlo says. Since Cisco has no ownership, it has less control with a partner. "It's like choosing your friends and not your relatives," Giancarlo said. Some big partnerships can work without any of the above-mentioned criteria. "Shared destiny will overcome a lot of deficiencies," Giancarlo said. His example of a shared-destiny partnership: Intel Corp. and Microsoft. Then there's the matter of stepping on toes. "Things do happen that are out of the spirit of the agreement that we didn't intend to happen," Daichendt said.

Daichendt recalls when a partner made an announcement that seemed to violate their pact. When he confronted his counterpart at the partner company, he was given an "I didn't know about it" answer. "I found that hard to believe," Daichendt said. But suddenly the shoe was on the other foot. Cisco made an announcement that affected this partner. When his counterpart confronted him, Daichendt gave him the same "I didn't know" reply. He saw the same disbelief on his counterpart's face. Both companies smoothed egos, and the partnership is intact.

But even the best partnership will sink if it's not guarded, says Eric Buadois, HP's global marketing director for the telecom industry. "I think the bottom line is executive sponsorship," he said. "The sponsorship of (HP CEO) Lew Platt and John Chambers is very strong, and that makes a difference.". "I think the bottom line is executive sponsorship," he said. "The sponsorship of (HP CEO) Lew Platt and John Chambers is very strong, and that makes a difference." But more than top-level involvement is needed, KPMG's McGeary says. Six months into the partnership, KPMG realized it needed a full-time advocate within Cisco. That way, day-to-day issues could be dealt with as they happened, he says.

Cisco still is working to craft strategic alliances with software companies, systems integrators and Internet service providers, Daichendt says. Many firms might be contacted. Last month, Cisco began making moves into a new services area. The names of 12 prospective partners were written on a whiteboard. "We're going to call all 12 and tell them what we're thinking," Daichendt said. He hopes for at least one agreement by June.

In the end, any alliance has its limits, cautions Tom Nolle, president of CIMI Corp., a consulting firm. Cisco needs to own technology, not just borrow it, Nolle says. More than that, "You can't rely on partners for strategic insight," he said.
For more information please contact the KPMG/Cisco alliance hotline at 1-877-CCO-KPMG, or email cisco@kpmg.com.
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