The Cisco kid survives the battle to fight another day

A year ago he was leading one of the world's most valuable companies. Then the bottom fell out of the internet market, and Cisco systems posted a $2.69bn loss. But now the smoke has cleared and John Chambers, the company's ever-optimistic leader, is ready to fight another day
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John Chambers says he will stay at Cisco Systems, the internet infrastructure giant he has headed since 1995, until the day he retires. Then he would like to teach. We are not talking minor public school here, although Mr Chambers, who is 51, does have the air of an over-zealous housemaster. He exudes a kind of inviolable optimism, bordering on smugness, that is jarring, given the deep crisis that Cisco finds itself in.

Reluctant to stop talking, Mr Chambers lets our interview run 20 minutes over time, to the distress of Abby, the press handler. Fit from regular jogging and tennis, he finally lunges out of his disappointingly modest office ­ 12ft by 12ft with no window on the outside ­ and on to the open-plan first floor of the executive building to greet managers waiting to start a manufacturing meeting. He strides towards them, pumping his arms in and out from his sides, palms smacking each time they come together. He is ready to eat up the agenda, whatever it is, and they had better be too. But he has second thoughts and diverts suddenly to the men's bathroom down a nearby corridor. A CEO who has no view from his office, even a chief exec voted the best in America, is not going to have an en suite toilet either.

He seems thrilled to find the foreign reporter inside similarly occupied. Perhaps it is just his sheer friendliness and sense of hospitality, but Mr Chambers, who still has that disarming honey-drawl of the South ­ he's from West Virginia ­ seizes the chance to chat again. He has a story, about an old insurance grandee in Detroit who once advised him of the wisdom of always taking a leak between appointments. "You want to be free of all pressure points," was what Mr Chambers had learned then and is eager now to pass on at the urinals.

The Chambers phenomenon is well- chronicled. For years, he was beating down the doors of business chieftains and world leaders to deliver his message. They called it the Gospel according to Chambers. The internet revolution, and all that it promises in connecting people, democratising knowledge and boosting productivity, has barely begun. Embrace it and your country or your company will flourish. Ignore it and you will wither. And, by the way, the company that will provide you with the wherewithal to make those connections work is Cisco. Anyone who has heard the pitch ­ he has been Tony Blair's guest in Downing Street "multiple times" ­ will tell you the same. Mr Chambers, the Evangelist of Silicon Valley, is a salesman with almost celestial powers.

Few dared challenge him. Under Mr Chambers' leadership, after all, Cisco Systems (Cisco, by the way, as in San Fran...) had itself flourished to an almost unimaginable degree. In April last year, its market capitalisation touched $500bn (£364bn) and it was vying to become the world's most valuable company. Throughout most of the Nineties, Cisco achieved annual revenue growth rates of 30 to 50 per cent, making it the god of Nasdaq. The Cisco name is stamped on roughly 80 per cent of all the world's routers, the boxes of tricks that direct data traffic on the internet. Cisco, in many ways, was the internet. Then, at the end of last year, Cisco began to stumble.

Mr Chambers started to worry in mid-December. Every evening, he receives a detailed internal report with all the numbers from the company. He noticed a couple of days when sales had mysteriously slowed. When the dip extended to five days, he really became alarmed. "We had never seen that before," he recalled. His next step was to ring around his counterparts at other companies. What they said scared him. "More than two-thirds of the CEOs I talked to said, 'John, I have never seen anything like it in my career. Our business has gone off like a light switch'. They all described it in the same way.

"Exactly three weeks later, we hit the wall. It was the second week in January," Mr Chambers says. He was about to go before a press panel at the world economic forum in Davos, when he received the final numbers for Cisco's second financial quarter from headquarters back in San José. "It wasn't the quarter itself that was the shock but the slowdown in orders. That was the real issue." (Earnings per share were off by 1 cent on forecasts). By mid-March, Mr Chambers and his managers knew they would have to act. Their inventory was huge, largely because Mr Chambers himself had spent much of 2000 purposefully building it up to answer customer complaints that Cisco's delivery times were too long. But if they faced an inventory overhang, they faced a workforce overhang too.

The darkest day came on 9 March. The Reuters agency had run a report overnight speculating about job cuts at Cisco; Mr Chambers was woken at 1am and briefed on it. The report had most of the facts wrong, but the company was left unable to deny the thrust of it, that lay-offs were indeed coming. By 4am, Mr Chambers had summoned his managers to a "team meeting". There they agreed on the coming massacre. Cisco would lay off 8,500 people, or 18 per cent of the workforce. The press was told, the financial community was told, and so was everyone attending Mr Chambers' once-a-month birthday breakfast that was coincidentally scheduled for that day. The breakfasts, for anyone with a birthday in that month, are meant to be a morale-boosting affair for employees anxious to meet the big boss. On that day, they choked on their orange juice as Mr Chambers let them in on the calamity to come.

Only when we talk about those cuts does the self-assurance in Mr Chambers flicker. He is a religious man, married with two adult children, and he offers glib philosophical aphorisms about hard times. "I don't get depressed but I do get down a little bit," he says. "I believe in God and I have a tremendous spouse. But, you know, don't feel sorry for the situation. Try to execute the best way you can." Running has helped him cope. Instead of running twice a week, since January he has been going out every night.

"[The firing} was the worst thing I ever had to do," Mr Chambers says. All Cisco employees picked for termination have now gone. "I understand some believe that [laying people off] is just part of business. I have always believed that if you run your company effectively you won't have to do that." This is the nearest Mr Chambers comes to self-chastisement throughout our conversation, though he is aware of the judgement of much of the financial press, that Cisco's loss of altitude was due largely to pilot error. The critical stories multiplied after the company's third-quarter results early in May. They were disastrous. For the first time in its 11-year history as a public company, it reported a loss and not a modest one either. While Cisco reported pro forma earnings of $230m (£167m), its net loss was $2.69bn after taking account of restructuring expenses and a whopping $2.2bn inventory write down. All this because of a collapse in sales Mr Chambers had noticed before Christmas.

Hindsight says that building inventory the way Cisco did in 2000 was madness. The company, which has its European headquarters in Britain, has $1bn worth of hardware sitting in warehouses. Mr Chambers is unrepentant. "I had the best customer satisfaction I have ever had last year ­ it was 4.4 on a five-point scale. I mean that's off the charts. It's ecstasy. But you know the one area on which I got clobbered? Deliveries. It was the one issue I didn't solve all year, so we started to build up more inventory to catch up."

What happened between mid-December and mid-January, no CEO could have foreseen. That is what Mr Chambers wants us to know. He has frequently compared it to a 100-year flood. He used to think Cisco's flood would come when it suffered maybe a 5 per cent drop in sales. "Well, we did minus 30. It's like having sandbags in your basement to handle floods around your house and it flows right over your house," he says. The great lesson for everyone, he goes on, is that slowdowns like these come on far more quickly than anyone thought possible in the new, connected economy. "I never modelled going from 70 per cent growth (where Cisco stood in November) to minus 30 per cent growth in 45 days. We have learned that the peaks will be much higher in this new economy than people realised and the valleys will be much lower. And they will occur much quicker and closer together." Peaks and valleys are his favourite metaphors right now. Along with floods.

"Changes that used to occur in 10 years now occur in one or two," he says. "Changes that used to occur in two years now occur in one or two quarters and changes that used to occur in one or two quarters now occur in a couple of weeks."

Cisco did act quickly when the flood hit. Mr Chambers says about 15 per cent of the company's business suddenly vanished, probably for good. That was the dot.coms and alternative telecommunications service providers, all suddenly cut off from their capital sources as investors tired of putting money in new companies that were big on hi-tech thrill and small on earnings. Most importantly, he says, the company took all of its medicine at once, with the huge inventory write-down and workforce contraction.

"We did the opposite of a number of our peers. We didn't do a second shoe or a third shoe, because then some of your customers start to lose confidence in you, and your employees do and your shareholders do. Cisco has been very decisive. You can argue whether we are headed the right way or not, but we did not hesitate."

Nothing Mr Chambers says suggests that Cisco plans to change course dramatically. He will, for example, resume his strategy of growing and innovating through acquisition. Cisco has swallowed more than 70 companies in its quest for domination. It may be that the company's stock is down disastrously ­ by about 70 per cent from its 52-week high ­ but so is everyone else's.

To demonstrate this, Mr Chambers walks to a Bloomberg screen a few doors down the corridor from his office. There are all his main competitors ­ Lucent, Redback, Juniper and Sycamore ­ and, true enough, their market capitalisations are down further than Cisco's. Only Ciena seems to have fared better.

"Our stock has no negative effect on our ability to acquire. Almost all of our targets are down more than we were." Do they include Marconi in Britain, which is seen by some as a dish waiting to be eaten by Cisco? "Unlikely," replies Mr Chambers, before admitting that he has no idea whether anyone at Cisco has been looking at Marconi as a possible acquisition or not.

As for the failure of Lucent's efforts to merge with Alcatel of France, Mr Chambers says he knew they could not make it work. Cisco, he says, would never consider a merger of equals with anyone. (Those hoping for a Cisco-Sun marriage may have a long wait.)

Of course, Cisco will be making adjustments. "If someone had told me I could go from 70 per cent growth to minus 30 per cent, I would have said it was mathematically impossible. Not only was it mathematically possible, but it did happen and it happened in 45 days. So we have to build a system to handle this 100-year flood and you have to get both your expense base and others in place to do that. And we will."

Mr Chambers also notes mistakes made in depending too heavily on sales to the upstart telecoms providers. Cisco even loaned cash to some to help them buy Cisco equipment on the assumption they would be money-spinning customers for the long term. Instead, they went belly up. "The second lesson learned is to keep focus on profit contributions in every product area. Some of our groups had fallen into the trap of focusing over-much on market share with just OK profits, saying the good profits will come later. Well, we won't do that again."

He avoids predicting when ­ and if ­ the good times will return. "The markets continue to be very tough and we share that openly," he says. "We would not have done lay-offs if we thought it was a one-quarter phenomenon."

Mr Chambers repeats the conditions he identified at the start of the year that might have allowed the slowdown to pass quickly. The US, he says, had to do three things: address the malaise in its economy before it spread to Europe and Asia, prevent significant downturn in consumer confidence and be aggressive on interest-rate policy. "Well, two out of the three did not occur," he says. Only the Fed's actions on rates have gone the way he hoped.

Will Cisco get back to its 30 to 50 per cent rates of growth? "I believe we will. And if it isn't us, it will be someone else in the industry. Even conservative people think that the industry will grow 15 to 20 per cent a year again. And that's an industry most people would love to be in." And the mantra for Cisco, we should remember, is to be number one or number two in all of the markets in which it competes.

You wonder why there hasn't been a company rebellion at Cisco. Employees thought they were the blessed ones working here. Now nearly one in five have been fired; the others have seen the values of their once-golden options evaporate. But Mr Chambers says morale is good. "If people were angry, I could handle it better. It's when people say, 'I understand, I am sorry, but I understand it's the right thing for the company', I find it hard."

He adds that of the e-mails or voicemails he received from employees who were sacked, 95 per cent were supportive. You could possibly think that Mr Chambers either doesn't know his company as well as he thinks he does or that he has had the workers brainwashed. He doesn't find the latter suggestion amusing. "No, not at all, there isn't anything that Cisco is doing that is really unique," he says. "It's just doing the basics well. You treat people as you would want to be treated yourself. We are just very open with our employees."

To call Mr Chambers smug seems unfair. But, as he talks about the loyalty of his staff, about the $1 salary he is taking this year, and about his egalitarian policies of no reserved parking or first-class flying for himself or any Cisco executives, he gets that more-superior-than-thou, housemasterly look again. And the urge returns, if not to jab him in the shins, then at least to find a bike shed and smoke behind it. If there is such a thing on the Cisco campus.