Partners: Cisco's Software Strategy Is Resonating With Customers, Driving Business

Cisco Systems is aiming to drive consistent, long-term revenue growth with a software-focused and largely consumption-based sales strategy, and the responsibility for executing that strategy falls to the channel.

"The channel holds the keys to the kingdom," said Daniel Ives, chief strategy officer at GBH Insights, a New York-based market research firm. "The move to the cloud and other growth areas is really about Cisco having the right product strategy, but the execution is going to be done through the channel.

"A lot of new products are going to come out, and there's going to be some transition, but it's a turnaround that's starting to turn the corner, and getting the channel behind Cisco and preaching to their customers is really front and center," said Ives in an interview with CRN following Cisco’s first-quarter earnings earlier this month.

[Related: 6 Keys To Cisco's New Performance Metrics For The 'Network Intuitive' Era]

Mike Girouard, executive vice president of sales at Teklinks, a Birmingham, Ala.-based solution provider Cisco partner, said the company is indeed "beginning to turn the corner" toward a software-based model.

"The way they do software subscriptions is great, but they've got some kinks to work out as far as invoicing and taxes are concerned," Girouard said. "You can tell they're new to it."

Still, "Cisco usually gets this stuff worked out," Girouard said, and the opportunity for partners in Cisco's software business is undeniable.

"I have options to talk to my customers about operating expenses and taking the lumpiness out of tech refreshes," Girouard said. "It makes hardware more affordable from a Capex perspective and operationalizes the software. It makes our cash flow less lumpy, and it does the same for the client. You can see Cisco moving to a pay-for-what-you-use approach. It's more natural. It spreads the risk out for customers and for us, and it forces Cisco and us to have a tighter relationship with customers."

Already, Cisco is seeing traction with new products aimed at moving customers into integrated, multi-cloud environments where products are purchased as a service and paid for on a subscription or consumption basis and away from the expensive, proprietary stand-alone hardware products that made the company an IT power. Recurring revenue accounted for nearly one-third of the company's first-quarter sales, said Cisco CFO Kelly Kramer.

Kent McDonald, vice president of Long View Systems, a Calgary, Alberta, solution provider that works with Cisco, said Cisco's software strategy is resonating with customers. "We're just reviewing our fiscal year and we were 50-50 hardware and software in our Cisco practice," McDonald said. "The transition to software is allowing customers to make investments and see the value. They have the value prop of investing in various architectures and then buying the hardware to enable that. Now, I have the latitude to refresh the hardware without losing the investment in the software when I refresh the hardware.

"As a partner, I'm liking the story," McDonald said. "We're seeing growth. Software is a great place for partners to work with customers to help them adopt [software technology] and consume that investment. We can deliver services, consultation and enablement. The more traditional hardware rack and stack has not been a growing commodity. Software has gone up dramatically. It was rewarding to see how much of an impact software has become and a large part of our growth was driven by software delivery."

Cisco CEO Chuck Robbins said during a conference call to discuss the company's first-quarter results that the subscription-based Catalyst 9000 family of switches that form the foundation of Cisco's Network Intuitive platform has been adopted by more than 1,100 customers. In addition, Cisco's ACI software-defined networking offering is seeing consistent double-digit growth and its HyperFlex hyper-converged infrastructure line is performing "at the high end of my expectations," he said.

Robbins also said he expects customers to begin deploying Cisco's Viptela SD-WAN offerings in the second half of this year.

Cisco's $12.1 billion in first-quarter revenue was down 2 percent year over year, as its traditional router business dragged its infrastructure platform revenue down 4 percent. Still, the results beat Wall Street investors' expectations, and the San Jose, Calif.-based company said it expects sales to grow between 1 percent and 3 percent in the second quarter.

"If they can get back to 3 [percent to] 5 percent growth, that's a win," GBH Insights' Ives said. "They have a massive install base, and with the acquisitions they've made – AppDynamics, Broadsoft – they can really take that to the next level. The move to SaaS is significant. Now, it's really about executing and sticking to a strategy that they don't deviate from."

That also presents solution providers with a challenge, namely how to adapt strategies to new consumption models that require partners to act more as consultants and advisers.

"That's really a challenge the channel needs to take on," TekLinks' Girouard said. "You become a life-cycle advisor, and adoption is about, 'You said this was important to your business, we're going to realize value and then renew.' That model has its challenges. There's no additional margin there. The customer might pay a little less because they're not paying for features they're not going to use. That's why we're dipping our toe in the water rather than diving in."