Cisco held its annual Partner Summit in Boston a couple of weeks back now, and while the public themes of the show were unified computing, collaboration, unified communications and the economy, there was another theme that seemed to permeate throughout the conference. Much of the unofficial conference chatter though was how the relationship between Cisco and its channel was changing and indicates a rift may be forming. Many of Cisco's partners, some small and some large, are convinced that Cisco's growth in services will be or even has been at the expense of Cisco's channel.Since the conference, I've spent the last couple of weeks interviewing some of the partners and Cisco sales people I know, to understand where this is emanating from. Based on the feedback at the conference and discussions I have had pre- and post-conference, it is a fact that many Cisco partners feel that Cisco is "end arounding" its partners and is actively trying to steal the services business from under them. Most Cisco partners do not make that much money off product margin and make a bunch of money on services, so if this is true, the partners stand to lose a lot of money, forever changing the relationship between Cisco and its partner community.
This notion isn't just limited to the partner community either. Over the past few months I've had people from the media and investment community ask me about it, and I have even heard another industry analyst (competitive to me) claim that Cisco is building a clandestine services business to eventually keep all of the services business. I'm not sure what the genesis of this is, but here are some facts, some of which support the notion of a rift with the channel, and some that refute it.
Fact: Cisco services are designed to complement the channel, not compete with them. The Cisco services model is to build services competency in new areas, learn best practices and then turn the services over to its partners once the technology has matured a little bit. For example, Cisco has a wide range of services that are dedicated to data center transformation and UCS. Cisco will engage with customers directly, learn many of the best practices and then teach best practices. This allows Cisco to ensure that the early adopters of Cisco technology have a successful deployment, avoiding a possible disaster similar to some of Cisco's early VoIP deals. I can see how this would make some partners nervous, especially the ones that feel they're able to deliver the services without Cisco's intervention. This area of overlap is where Cisco will have the biggest challenge in managing its relationship with the partner community.
Fact: Cisco doesn't have the number of services people to compete globally. Cisco claims to have about 3,000 services people globally, which is tiny compared to pure services firms such as Accenture, IBM Global Services and Dimension Data. Cisco simply couldn't compete with its partners in any significant way. Of course, this has led to all kinds of rumors that Cisco will acquire as services firm such as Accenture. While this might make sense on the surface, I'm highly skeptical. A services firm would have a dramatically different margin structure and would significantly change the valuation on Cisco stock. From a shareholder perspective, this wouldn't make much sense.
Fact: The Cisco channel does feel like Cisco is stealing services business. Despite what Cisco says--that they are not actively trying to steal business from its channel--I have had more than a few partners tell me that Cisco is. Whether Cisco is or not, the company needs to be careful since perception can become reality. From the interviews I've done, I do believe there are some cases, maybe from overly aggressive Cisco sales people, where Cisco has taken business from its partners. It may not have been intentional, it's certainly the exception more than the norm, but it appears that it has happened. While Cisco claims there is nothing that would incent a Cisco sales person for doing this, I'm not sure there's anything that would disincent a sales person. In this economy, it's easy to see where someone might get overly aggressive and push services that are at the expense of Cisco's services partners.
Fact: Cisco's services revenue has been the same percentage of Cisco's overall revenue for the past few years. I believe Cisco's services revenue has been around 16% of the overall revenue for the past few years. On the surface, this would indicate that Cisco's services business hasn't grown over the past few years. However, Cisco's consumer and commercial (SME) business has grown faster than its enterprise business, meaning Cisco services business has grown as a percentage of enterprise, which would be the addressable market for Cisco services. Considering the number of new areas Cisco is moving in to, this actually makes sense that it's grown. No matter why the reason and whether it's right or wrong, this is a perception that Cisco needs to address this sooner than later. HP ProCurve, Juniper and other network vendors are starting to put significant pressure on Cisco's channel as they look to expand their own channel. Cisco's SVP of Channels, Keith Goodwin, seems aware of the issue but I think Cisco needs to be much clearer as to what it expects its partners to do, what Cisco will do and how the overlap will be managed. As Cisco moves into more IT focused areas and looks to expand its channel, it will be interesting to see how it manages its existing channel, especially with HP and others looming and ready to pounce.
