Cisco Services: Proceed with Caution

Cisco Systems is embarking on major initiatives in the services space. Over the next two years, the company plans to introduce a number of changes to its services program geared towards establishing tighter alignment with the global channel program and increasing their ability to detect, analyze, and address any problems that might emerge on the network.

The word “collaboration” factors heavily into the Cisco message. But Cisco needs to proceed carefully here -- even more so than most vendors that take an active role in service delivery.

Several years ago, the Cisco channel program underwent a series of adjustments aimed at addressing collapsing channel margins caused, in part, by service providers willing to forgo product margins in order to capture recurring services revenues. This led to a Cisco focus on value as the primary underpinning for partner compensation.

Partners were told point-blank that if they did not build their businesses around a strong in-house services capability, Cisco would be unable to rescue them if their businesses faltered. In other words, there was no point in complaining about product margins. Product margins would belong to the vendor. Service margins would belong to channel partners. Services also became a primary way for Cisco channel partners to differentiate themselves against their competition.

Many of them followed Cisco's advice.

The word "collaboration" can be a lot less warm and fuzzy than it appears. On the one hand, Cisco intends to help its partners raise their services capabilities. On the other hand, no one is really sure how Cisco's collaboration will impact those profit margins that the channel built their businesses around. Undoubtedly, Cisco intends to share in the financial opportunity. To what extent remains to be seen.

Cisco executives say they have no directive to dramatically grow services revenues. But Cisco is also in a precarious position. The law of large numbers will continually make it more difficult for Cisco to maintain the growth rates demanded by Wall Street. If those numbers falter, the stock price will undoubtedly take a hit. It's also hard to imagine that the company might be able to take more cost out of a model. Budget-cutting has already reached the point where even important business travel is closely scrutinized, if not outright forbidden.

So the emphasis is on continuing to cut costs while continuing to grow. Not exactly an enviable long-term situation. Therefore, it will only be a matter of time before the channel's lunch starts looking pretty tasty. Whether Cisco will be able to resist that temptation remains an open question. Surely they recognize the channel's role in maintaining their routes to market, but desperation can do strange things to people.

It's also true that Cisco has established such strength in the networking sector that partners may consider themselves to be without real alternatives. But such a misstep by Cisco would open the door to any number of competitors seeking to take a quantum leap at the channel.

Note to Cisco: Be careful.

• Cisco