Cisco keeps its focus with IBM deal

1999-09-01

Cisco’s drive towards world networking dominance tool a step forwards yesterday when it purchased the best parts of IBM’s routing and switching technologies and patents, for an estimated $2 billion. Cisco has rarely been out of the news over recent weeks due to its procurements of technology companies – this latest move should be seen within the context of its overall strategy.

The networking market, it is generally agreed, is in a state of flux. The keyword is convergence – the advent of technologies such as Voice over IP means that IT systems, networking equipment suppliers and telecommunications companies are constantly treading on each other’s toes while they define their position in the market. Companies such as Lucent, Alcatel and Nortel Networks see the key to be to amalgamate networking and telecomms. Following some hefty buys, they are now remodelling their internal organisations, not without some difficulty as the two markets have traditionally followed very different business models. Cisco has, for the moment, adopted a different tack, namely to concentrate on acquiring networking companies and technologies which help them to grow into the telecomms space. This, more organic approach is likely to cause less internal grief but means that they might lag behind when trying to meet the needs of “pure” telecomms.

All of the companies recognise the value of services. This is a trend which can be seen across the technology industry, with vendors from application development tool suppliers to networking equipment manufacturers keen to capitalise on what is clearly still a growing market. IBM’s own model is clearly a good one to follow: IBM have grown their services arm within the last three years to a multi-billon business. Again, Cisco has chosen not to go with the networking flock: while Nortel Networks and Lucent have their own services arms, Cisco are partnering with companies such as IBM and KPMG.

Cisco’s policy is a sensible one, namely “do what we do, and do it well” whilst growing the company into new technology areas and using partners for non-core business. It remains to be seen whether this strategy will be world-beating, but the alternative can result in a company growing too fast without being able to assimilate its constituent parts (as demonstrated by Alcatel a couple of years back). Interestingly, it is a policy which is also paying off for IBM: the deal with Cisco enables it to focus on its core businesses, namely as a computer manufacturer and a services provider.

(First published 1 September 1999)