3Com CEO explains push to recover corporate business

Bruce Claflin, CEO of networking vendor 3Com, says his fingerprints are among those of the company executives who made the decision three years ago to exit the enterprise networking market.

Bruce Claflin, CEO of networking vendor 3Com, says his fingerprints are among those of the company executives who made the decision three years ago to exit the enterprise networking market. Claflin, a 22-year IBM veteran who also has several years as the No. 2 executive at Digital Equipment Corp. under his belt, was No. 2 at 3Com when the Santa Clara, Calif.-based company moved away from enterprise networking. He took over as CEO when Eric Benhamou stepped down nine months later. Claflin spoke yesterday with Computerworld about that decision and about 3Com’s latest steps to try to get the high-end corporate business back. Excerpts from that interview follow (discuss the interview in our forum):

Your recent announcement of a joint venture with China’s Huawei Technologies is another step back into the enterprise business that 3Com exited three years ago. How much of a credibility problem do you have with enterprise customers, some of whom told us at the time that they felt betrayed and abandoned?

There clearly were a few customers who felt that way, but let’s make sure we put it in perspective. Our total installed base at the time was 4 percent of the market, so that means there’s 96 percent who didn’t have experience with us. And of that 4 percent — now fast-forward three years — the vast majority kept their 3Com equipment. We lived up to every obligation we had, and they are one of the customer bases we want to go back to first, because there are quite a few of them who feel very good about their products. All of them? Absolutely not. Are there some who were mad at us? You bet. But I think today, particularly given the fact that almost every competitor now has retrenched to some degree, the actions we took then don’t look particularly unusual.

Did you support the decision to exit the enterprise business?

Yes.

So in hindsight, you don’t think it was a goof?

That’s a different answer. You’ve got to remember, to set the context, at the height of the bubble we were losing market share — not growing — and losing money. So I would argue that the strategy probably wasn’t very effective, and that’s what caused us to question it. I remember the CEO (Benhamou) ran the meeting, and he went around the table to every senior vice president and said, “What do you believe we should do?” And every one of us voted to take the actions that we ended up doing. So it was not a unilateral decision by one man. Obviously the CEO drives it, but there were a lot of us whose fingerprints were on that decision.

With the benefit of hindsight, I think that directionally we had to make those changes. I think we had very little chance to succeed on the course we were on at the time. If I had it to do over, though, I would do it differently. First of all, I would have probably exited some of the fading protocols, like (Asynchronous Transfer Mode), and I would have moved to an Ethernet-only strategy. And I think for those products we did get out, we should have had a much longer horizon for customers to make their decisions than we did.

Are you concerned about Cisco Systems’ intellectual property lawsuit against Huawei?

Not particularly. First, the dispute is between Cisco and Huawei, not between Cisco and the joint venture or Cisco and 3Com. Second, I’ve seen these a hundred times, and the overwhelming majority of them end about two years after they’re filed, in some form of a settlement. They rarely go to trial. My opinion is this is going to go the path of almost all (intellectual property) disputes, which would be to eventually settle. Probably not for a while.

You were in Hong Kong in 1989-90 as general manager of IBM’s Asia/South Pacific operations. Did that experience have anything to do with your openness to enter into a joint venture with Huawei?

Yes and no. Yes, in that I became very familiar with Asian companies and comfortable working with them. I was involved in probably seven or eight joint ventures in China alone. But I say no, because China today is so different from how it was when I was there in ’89. Today it’s thriving, entrepreneurial, enormous wealth and a fabulous environment, compared to where it was 10 years ago.

You go to the Shenzhen campus of Huawei, and the first thing that strikes you is it’s all gleaming, beautiful new buildings. The warehouse is one of the largest, most advanced that I’d ever seen in my life. The manufacturing site is all build-to-order, and the manufacturing line had 11 quality tests. I’m ashamed because inside our own factories we’re nowhere near as efficient, and furthermore, we only had four quality tests on our entire line.

Our engineering team went over to evaluate their technical competency. They came back and said (Huawei’s) software development skills and their process for software development are better than anything we have in 3Com. These guys are world-class, and they have a cost structure that’s incredible.

Do you think Cisco CEO John Chambers is worried about Huawei?

Absolutely. He should be. He said publicly at a meeting I attended in New York that he views them as a strategic competitor. I do think that a part of their motivation (for the lawsuit) is they see Huawei as a strategic threat everywhere in the world, and they wanted to try and take whatever action they could to stymie them. It’s basically people leveraging standardization — he (mentioned) Dell — that was his worry in this meeting. As the industry becomes more standardized, people can come in with a better cost structure and put his business model at risk. Frankly, I think he’s right to be worried. This is a part of our strategy, to attack him from a business-model as well as a product-competency front.

You’ve also said you plan to release a high-end IP softswitch in the third quarter, so you certainly have some aggressive product plans. Is your aggressiveness born of some conviction that the economy is going to turn around and you’ll actually be able to sell this stuff?

I may surprise you with my answer. I’ve concluded that the market is still ugly and likely to stay that way for a long time. I believe the industry has structurally and fundamentally changed, and that when we come out, we’re going to see growth of one or two points ahead of (gross national product). So my long-term view is networking might grow 4 percent to 6 percent — half of what I would have thought a couple years ago. What that means, if I’m right, is that if a company really wants to have a high-growth profile, it can only do it if it takes market share.

So part of the reason we’ve executed all these changes is we want to take market share. We don’t want to wait for the industry to improve to lift our fortunes. If the industry improves, that’s icing on the cake.

Are you comfortable, three years later, that the decision to spin off your Palm handheld business was a good one?

That has to be one of the best decisions ever. And I really give the credit to our CEO at the time. Someone once told me, when I became a CEO, that a trained gorilla could do the job 95 percent of the time; it’s the other 5 percent that makes a difference.

When Palm came into 3Com via the U.S. Robotics acquisition (in 1997), I don’t think anybody would attempt to say Palm was the gem at the time. But by the time I joined (in 1998), it was becoming the gem. And the founders (of Palm) were inside 3Com, and they were agitating to take it out and let it go public and let them run it. And our CEO at the time, Eric Benhamou, said no. He said he thought Palm could grow and thrive inside 3Com for at least a while and that we would create a lot more shareholder value if we waited.

At the time, the investment bankers were saying we could get $1 billion to $3 billion if we took it out, and the whole market cap of the company, I think, was $5 billion, so that was pretty compelling. But Eric said, “No, we’re going to let it go at least another year.” Well, a year later he did it, and he paid a dividend to the existing 3Com shareholders of $20 billion. So by waiting one year and managing it right for that year, he created $17 billion of incremental wealth. And with the benefit of hindsight, we know that the bubble ended, and if we had waited a year, we never would have gotten it. It was arguably one of the best decisions ever made in industry.