Cisco Aims To Increase Services Business

During analyst briefings ahead of the recent Cisco Live conference, Cisco executives talked about the company's financial position for the year ahead. To hit top-line growth of 5% to 7% with hardware revenue growth at 4% to5% means services revenue needs to grow by about 10%, executives said. With Cisco planning substantial growth of its professional services revenue, resellers need to prepare for radical changes.

These changes are coming amidst a data networking business that has largely been stagnant for last 10 years. Most industry change has focused on scaling performance and density, with little new technology development. IP communications was the last major transition, and that happened in early 2000s. As a result, resellers and customers haven't focused on bringing new networking services to their infrastructure stacks during the past few years.

However, Cisco's Application-Centric Infrastructure (Cisco's new name for software defined networking) will require new skills and expertise in the services area.

In the forthcoming SDN era, resellers must invest in training so that their engineers gain new skills, and service teams must adopt and build new service processes. Resellers will need to adapt to engage customers in new ways. Yet this seems highly improbable in the current market, where resellers are struggling to maintain sales targets while regularly earning less than 5% profit on Cisco sales.

[Among Cisco's many announcements at Cisco Live was a new Catalyst switch. Ethan Banks weighs in with "Cisco Catalyst 6800: Same Game, New Name."]

Cisco uses marketing programs and incentives to encourage resellers to offer professional services. Partly, this is a justification for ignoring the notoriously low margins on product sales, but also because a strong professional services team leads to more sales overall. Cisco wins each way on this business tactic.

However, building and maintaining a profitable service business is risky and expensive. Resellers must invest capital in engineers to have "services stock." But labor laws and bad management make the "stock" hard to control; unhappy engineers can always leave a company. Cisco also requires development of help desks, case management systems and certification commitments that increase static business overhead. Many Cisco partners focus on "shifting metal" instead of developing services because the business risk is lower.

To encourage resellers to move beyond simply "shifting metal," it seems likely Cisco will offer more service products for resale to support new technologies like SDN. This way, Cisco doesn't have to rely on its reseller partners to build up their own professional services.

Today, Cisco offers services for customers with Unified Compute products and in service provider markets. These engagements are limited in scale today, but growing.

The Meraki Factor

Cisco acquired Meraki last year, but not for its wireless products. The real value in Meraki is its cloud services platform to manage and monitor customer networks. It's reasonable to expect Cisco will announce products that monitor and manage switches and routers using the Meraki cloud instead of using traditional management tools.

In its pre-Cisco Live briefing with analysts, company executives indicated that the company will acquire more cloud service products during the next 12 months.

It seems likely that Cisco will include cloud services as part of the package of products it offers to resellers. Resellers are unlikely to build and maintain their own cloud products, so "service resale" will replace product revenue as customers move applications to the cloud.

Perhaps the most surprising part of this development is that Cisco is at the forefront of this market transition, which is an unusual position for Cisco. It's not clear, however, whether Cisco's reseller channel is ready.