The Fight at the Network/IT Border–and the Fighters

Anyone who believes in “cyclical spending” or “refresh cycles” or “secular recovery” in tech should take another look at the numbers after both Cisco and IBM reported yesterday.  We are obviously in a general economic recovery and yet tech is stagnant.  As it happens, though, the same two companies’ reports offer some insights into what comes next.  We have people who are thinking strategically, and those who are not.  We have people singing their positioning song too low, and others too stridently.  It’s like a soap opera.

The significant thing about both Cisco and IBM is that both companies are stuck in revenue neutral at best.  IBM has suffered revenue losses for nine quarters, and Cisco also continued its year-over-year decline in the revenue line.  Given that these companies are the market leaders in their respective spaces, there’s really only one possible conclusion, which is that buyers are trying to cut costs and technology is one place they’re cutting.  That shouldn’t surprise these guys; they see themselves cutting (Cisco plans to slash another 6,000 jobs) but somehow everyone doesn’t get the message.

There is nothing complicated about technology deployment.  A company these days has not one tech budget but two.  The first is the money that simply sustains their current capabilities.  The second is money that is added to the pot because there are new business benefits compelling enough to meet the company’s ROI targets—the “project budget”.  It’s this budget that creates longer-term revenue growth because it adds to the pool of deployed technology.  The sustaining budget is always under pressure—do more for less.  Historically, in good times, the project budget is bigger than the sustaining budget.  For the last six years, companies have reported their project budgets shrinking, and now we’re almost at the 60:40 sustaining versus project level.

I know that at least some people in both IBM and Cisco know this, because I’ve had conversations about it.  The interesting thing is that the two companies, facing the same problem, are responding very differently.

IBM’s theory is simple.  We have to reignite long-term technology commitment, and that’s what their focus on mobility is designed to do.  The theory is that mobile empowerment is the largest single opportunity to gain worker productivity, so it brings the largest possible benefit case to the table.  IBM wants to be the leader there, largely by embracing Apple’s aspirations in the enterprise tablet space and combining them with IBM’s software and cloud goals.

This is going to take a while.  The facts about project budgets have been known for a long time, so you have to ask why everyone hasn’t jumped on this.  The reason is that it’s much harder to drive a productivity-justified new project than just to replace an old server or router.  IBM is committing to a shift that will likely take two or three years to play out.  They should have started sooner (the signs have been there for almost a year and a half) but at least they’re starting.

Where IBM is going wrong here is in their positioning.  If you are doing something new, something that nobody else is doing, something that’s probably too hard for others to do easily, you don’t sit with your hands over your mouth, you sing like a bird.  IBM should be touting their new story from the rooftops, but they haven’t managed to get even savvy media to grok what they’re up to.  As usual, IBM is relying on sales channels to drive their story into the market, and that’s not good enough.  The salesforce needs a strong marketing backstop to be productive, and IBM continues to demonstrate it’s lost its game there.

Cisco?  Well here we have almost the opposite situation.  Cisco simply does not want to admit that new benefit paradigms are needed.  They want us to believe that a bunch of teen-agers who are downloading and viewing content at marginal returns that are falling by half year over year should be supported in their appetites no matter what the ROI is.  They want us to believe that all our household appliances and all our business devices are little R2D2s, eager to connect with each other in a vast new network with perhaps the chance of taking over from us humans, but with little else in the way of specific benefits to drive it.  Cisco thinks traffic sucks.  It sucks dollars from their buyers’ wallets into Cisco’s coffers.  All you have to do is demonstrate traffic, and Cisco wins.  Nonsense.  In fact, Cisco’s biggest problem now is that it’s expended so much time positioning drivel that it may be hard to make anyone believe they have something substantive.

To be fair to Cisco, they have a fundamental problem that IBM doesn’t have.  Worker productivity and even network services are driven by experiences now largely created by software at the application layer.  IBM understands applications, and Cisco has never been there.  The comments that came out recently that Cisco needs to embrace software are valid, but not valid where they were aimed.  It’s not about software-defined-networks it’s about software that’s doing the defining.  Cisco has confused the two, and now its fear of the first is barring it from the second.

No vendor is going to invest money or PR to shrink its own market.  SDN and NFV and the cloud—our trio of modern tech revolutions—are all about market shrinkage because they’re all about cost savings.  They’re less-than-zero-sum games, unless you target the revolutions at doing something better and not cheaper.

Cisco wants to be the next IBM, which begs the question of what happens to the current IBM.  IBM has weathered more market storms than any tech company; Cisco is an infant by comparison.  For Cisco to really take over here, they have to take advantage of IBM weakness, which they can’t do by doubling down on their own.  Think software, Cisco, in the real sense.  You have, or had, as much credentials in the mobile space as IBM.  Why didn’t you realize that SDN and NFV and the cloud were going to create opportunities for new benefits, services, and experiences that would drive up the total “R” and thus justify higher “I?”

Cisco has aligned with Microsoft, as IBM has aligned with Apple.  Microsoft is a solid Clydesdale against Apple’s Thoroughbred in terms of market sizzle, and they have the same problem of being locked out of emerging benefits as Cisco does.  But Cisco could still use the Microsoft deal to lock up the middleware and cloud models that would validate mobile empowerment and suck them down into the network layer.

That’s the key here for the whole IT and networking space.  About a quarter of all the value of new technology that new benefits could drive are explicitly going to IT, and another quarter to networking.  The remaining half is up for grabs, clustered around the soft boundary between the “data center” and “the network”.  If IBM can grab the real benefit case, support it fully with both IT and IT/network technology, it can move that boundary downward and devalue Cisco’s incumbency and its engagement model.  If Cisco can grab it, they can move the boundary up.  One of them’s singing a sweet but dumb tune, and the other is playing a great tune in their own mind.  Who fixes the problem first, wins all.