The Lowdown: Chambers cracks the secrets of survival

Cisco was king of the internet and nothing could go wrong. Until it did. Stephen Pritchard finds its chief has been burnt but not broken

The drive to Cisco Systems' headquarters in San Jose passes a roller-coaster silhouetted against the haze-shrouded Californian mountains. The structure stands as a perfect metaphor for the recent history of both Silicon Valley's technology industry and Cisco itself, one of the companies at the heart of the internet boom.

At its peak, Cisco was worth $500bn (£318bn), its share price was $80 and it looked set to be the world's biggest company. But in 2000, as the internet bubble burst, it posted a loss of $2.69bn. Its shares are now below $15.

Since the company makes much of the infrastructure that e-commerce relies on, it is no surprise Cisco suffered. John Chambers, its chief executive, thinks the worst is over, but for someone known as a supreme optimist for his industry, he seems weary now – subdued and reflective, more determined than confident. He has been up and down the big dipper and knows how both parts of the ride feel.

That doesn't mean he can't tell a good story, though. "Our market share has grown faster than at any time in our history. We are profitable, our gross margins are 69 per cent and our productivity is up," says Chambers. Cisco also had just over $21bn in cash, cash equivalents and investments at the end of October this year.

One reason is that Chambers has been winning business from his rivals. Cisco's sales rose 9 per cent in the last quarter, while the rest of the networking industry contrac- ted by as much as 48 per cent.

But the recovery meant making painful choices, including shedding as much as 18 per cent of the workforce. Chambers believes Cisco is well placed for the recovery because it took its medicine early, and in a single dose.

He readily admits he failed to see the downturn coming and was then caught out again by its speed and severity. "The first thing we had to determine was whether it [the downturn] was something we did to ourselves or a market phenomenon. Once we determined it was the market, we acted decisively. Most of our peers took the exact opposite view and were in denial."

Chambers says companies that keep going back to the markets with profits warnings, or to announce more and more rounds of layoffs, destroy confidence. "I wish we'd been smart enough to see it coming," he says, "but we were able to adjust. We will come out of this a stronger company. I wish I had found a different way to accomplish that but, as a parent might say, it is character building."

But not all Cisco's problems can be blamed on the market. It suffered particularly because it had increased its stocks of internet hardware just two quarters before the downturn hit. Cisco had to write down $2.2bn of equipment that was no longer wanted.

"What got us," Chambers explains, "is that customers were complaining about our order lead times, saying it was stretching their loyalty. So we added to the inventory, but two quarters later we got surprised." And, as other technology firms have learnt to their cost, unsold inventory can destroy a business.

Chambers maintains that the routers, switches and wireless networking hardware made by Cisco are not commodity items like many PC parts. Even so, he is taking steps to stop lead times rising again. The company is also designing more common hardware and software into its equipment so there is less pressure on the supply chain. This should have the added benefit of making Cisco hardware cheaper too – a fortunate move, as Chambers does not envisage a quick return to big spending by IT departments.

What will persuade companies to spend more on technology, he believes, is the promise both of greater productivity and a healthier general economy

At the moment, one of the strongest sectors for Cisco is government, where there will always be pressure to cut costs and increase services. And Chambers is standing by his belief that technology can deliver all this in spades.

"Anything in industry that is to do with raising productivity or standards of living will do well," he says. "That is why I'm an optimist. We can have 3 per cent growth in gross domestic product; 4 to 5 per cent is not out of the question. Half of that is due to technology."

Cisco claims that it saved $1.9bn last year through using internet technologies and its internal network. The company operates mostly without paper; staff expenses, for example, are handled online. Others can do the same; just because the internet imploded does not mean companies are abandoning technology.

"Our customers are still moving on their plans. I don't know of any large company that isn't looking at how to drive productivity up. But they are not being as aggressive. Most won't spend until they see revenues going up."

Chambers believes hard times produce better companies. Cisco's goal is to be number one or two in the markets it competes in, and only to compete in markets worth $1bn or more. But the key is to match the technology investment with changes in the business process. He points out that both cisco.com and the concept of "e-learning" failed to make an impact within Cisco until it addressed the way they worked.

"E-learning didn't take off until the last year because all we did was automate what we used to do. We moved from a prescriptive approach to offering choice. People who automate but don't change the business processes don't get productivity increases."

And Mr Chambers, who has sat on committees under both George W Bush and Bill Clinton, points to government as the way forward. "Interest has remained very strong from governments," he says. "They have to do more with less and they understand efficiencies." If the state is prepared to spend to save, Chambers gives the impression that the least business can do is follow suit.