Cisco Makes $100 Million Bet on Small Businesses

November 10, 2008

By Charles Waltner

As part of its ongoing initiative to increase sales beyond its sweet spot with major corporations, Cisco Systems is now turning it sights on small businesses, especially those with fewer than one hundred employees.

Today the company formally announced a $100 million initiative to re-invent its small business operations. As part of this effort, Cisco has made substantial management, sales, and product changes over the past six months, culminating years of efforts by the company to generate greater revenue from this important but highly fragmented customer segment.

Ever since the dotcom meltdown in 2001, Cisco has been more purposefully developing its sales to companies outside of the Fortune 1,000. Cisco's focus on smaller businesses gained momentum in 2004 with the announcement of new products and marketing initiatives. And last year the company created a new equipment reseller program specifically for IT shops targeting small businesses.

Though Cisco now garners about $1 billion worldwide from businesses with fewer than 250 employees, the majority of that revenue comes from the segment's biggest businesses. So far, Cisco has not made dramatic headway with the smallest "sub-100" companies. Cisco believes that is about to change.

A Comprehensive Commitment

Cisco set the wheels in motion last August when it integrated the small business operations of its Linksys subsidiary into Cisco's new small business group. Combined, Cisco now has 48,000 "value-added" resellers (VARs) and other technology service companies targeting small businesses, in addition to another 9,000 specially certified service partners. To support its product and sales efforts, Cisco is also creating a dedicated global support center and an online knowledge community for small businesses.

The company says Linksys will continue to focus on consumer products while Cisco will direct all small business efforts. Eventually Cisco will migrate the small

business products from both companies into its new Cisco Small Business or Small Business Pro brands. The combination of the two product lines formally unites what Cisco believes is by far the broadest portfolio of networking equipment for small businesses.

Cisco has also made significant management changes to bolster its drive into the market. In April Cisco formed the Small Business Council, which includes three of Cisco's top-tier executives. They will guide Cisco's small business marketing, sales, and product efforts across the company. Members of the group include Cisco's chief marketing officer, Sue Bostrom; the leader of global channel sales, Keith Goodwin; and senior vice president of the access routing group, Ian Pennell.

In addition to the council, Cisco created a technology group, also headed by Pennell. With a $60 million budget in hand, Pennell is charged with bringing out a steady stream of new networking gear for small businesses. This December the group will debut its first products, including one focused on video communications.

Zeus Kerravala, a senior analyst with Yankee Group Research, says these steps mark a change in Cisco's approach to the small businesses market. He says most of Cisco's previous efforts were tactical and product-focused. Now he sees Cisco forming a much more comprehensive and strategic plan.

Tricky Business

But Cisco will need all of its formidable capabilities to conquer this notoriously complicated customer segment, Kerravala says. No technology company has ever been able to gain more than a 20 percent share of the market.

Small businesses are characterized by fragmentation, both in the types of technology products they buy and in the way they purchase those products, Kerravala says. "Small" businesses can be anything from a two-person florist shop or a 10-person doctors' office to a 50-person janitorial service or a 90-person regional law firm.

Kerravala says these companies might buy their networking products at least four ways: through traditional VARs and telecommunications companies, as well as online and at retail stores, such as Best Buy and Office Depot.

Kerravala speculates that no networking vendor has dominated the small business market because none of them has been able to master all four sales environments. "It all comes down to diversity in the sales channel," he says. "If there's a company that can do it, Cisco has the resources."

Cisco certainly has the motivation. The company estimates the worldwide networking equipment market for small businesses at $10 billion. In the United States alone, small businesses spent more than $150 billion on technology in 2007, according to the Wall Street Journal.

"This is the job I've been dreaming of," says Andrew Sage, who was appointed in May to the new position of vice president for Cisco's worldwide small business operations. "The pieces of our small business strategy have been coming together for several years. Now we have the products, sales, and leadership in place. We've decided what we want to do. We just need to execute on the plan."

Sage says his ambition is to exceed the market's 10-percent average growth rate. But to achieve that, he faces more than a few challenges.

Kerravala says managing the brand and product distinctions between Cisco and Linksys will continue to be tricky. Though Cisco is consolidating all direct business efforts under one roof, many of the smallest businesses will still buy Linksys consumer-grade networking products. "The Cisco brand has the higher quality image, but also the higher price stigma," he says. "Linksys is more the 'value' line. Demarcating between these two will be tough."

Products Key to Unlocking Market

Even more important than branding will be integration among all of Cisco's small business products, says Roger Otterson, president of Qualitec, a three-person IT services VAR in San Diego, Calif. Qualitec is just the kind of new sales partner Cisco is looking for. The company has about 50 small business customers, ranging in size from three to 55 employees.

Otterson says a consistently interoperable line of networking equipment from Cisco will be invaluable for his business and his customers. "If Cisco can offer that, it will make life much easier for me since I won't have to cobble together networks for my customers. And my customers certainly want to keep things as simple as possible."

He notes that mix-and-match products will be necessary, since small businesses have widely varying needs.

For the most part, Cisco has yet to throw its engineering prowess fully into the task of creating networking equipment tailored for small businesses, something that is a lingering complaint of both small businesses and Cisco's sales partners. "They can't just cut the trunk off a Cadillac and call it a Prius," Otterson says. "They have to make technology specifically for small businesses, regardless of what other product lines they have on the shelves."

Sage says Cisco has already built a few products for small companies, including the Smart Business Communications System, a package that offers network switches, office phones, wireless access points, and other options. "It's getting good interest from the sub-50 employee company," he says. "This is showing us that we can make these kinds of products in-house. Our sales partners have been very vocal about having an array of networking gear suited for any of their diverse customers. So that's what we are now focused on providing."

Despite his concerns, Otterson says he likes what he is hearing from Cisco. More importantly, he adds, Cisco's plan for the small business market couldn't happen at a better time. Small businesses are now placing much more importance on their communications networks and other information technology.

"The industry and market has matured enough that small companies now view their networks as crucial to their operations," Otterson says. "Everyone in the office has a computer and Internet connection, so small businesses view IT services like having an accountant. Sure, you could do your taxes yourself, but they are realizing that investments in IT expertise and equipment are money well spent."

That's good news for Cisco. The world's leading communications equipment company needs new sources of revenue to drive its nearly $40 billion operation. Cisco faces limited growth to its historic "enterprise" base of major corporations and other large organizations. It already owns a dominant share of that market in North America and Europe.

Room to Expand

According to the Yankee Group, small businesses with less than 100 employees account for about a quarter of total IT spending in the United States. Cisco's share of the U.S. LAN (local area network) market in 2006 was 22 percent for companies with 20 to 99 employees but only 9 percent for companies with two to 19 employees. The other top vendors in the market include IBM, Hewlett-Packard, and 3Com, the research firm says.

Though Linksys products can also claim a share of this market, especially with very small businesses, Cisco clearly has room to expand.

In particular, the growth of emerging markets has brought small businesses to the forefront of Cisco's global strategy. The company is making a big push into countries such as Brazil, Turkey, Russia, Poland, Saudi Arabia, South Africa, and Egypt. Small businesses make up a bigger share of the market in these types of countries, and Cisco's ability to sell to small companies will be vital for such success. Mom-and-pop shops also comprise a huge market in Europe and Asia. All in all, small business technology has become a big opportunity for Cisco.

But reaching all of these small businesses will require some "heavy lifting," says Dan Schwab, co-president of D&H Distributing, a Cisco authorized distribution partner in Harrisburg, Penn. D&H provides technology products to tens of thousands of resellers that directly service small businesses.

Schwab says selling to small companies demands a lot of up-front effort but can build into a lucrative business over time. "It's a foxhole-to-foxhole battle, and it's typically a long sales cycle, but once you have converted your customers, they can be very loyal and become sort of an annuity-model for revenue."

Sage says such insights have not been lost on Cisco. The tech giant now understands it is dealing with an animal of a different stripe. "We can't fall back on old habits and treat this like our enterprise or other business markets," he says. "Certainly, all these changes are just a beginning, but if we stay true to what this market needs, I expect some real magic to start happening."

Charles Waltner is a freelance writer in Piedmont, Calif.