Compass Points: Corporate Boards

Cisco Systems Capital

CISCO SYSTEMS CAPITAL is the captive financial services arm of Cisco Systems, Inc. The parent company had sales at a $28 billion annual rate in late 2000. Cisco Capital provided financing for $4 billion of these sales with fewer than 200 employees. Compass Points spoke recently with Cisco Capital’s General Manager, Mike Hampton, about the challenges of developing and implementing strategy in a business unit that is part of a rapidly growing and changing firm. Mr. Hampton came to Cisco from Apple Computer, at which he also started and built a captive financial services subsidiary.

CP: Mike, what strategic role does a captive financing entity play for a technology company like Cisco or Apple?

Mike: The role has to evolve to complement the parent firm’s strategies at different points in time. A captive is not simply another profit center. Instead, it creates the most value for the parent when it helps parts of the parent firm’s core business achieve their goals. I have lived through similar evolving roles at both Cisco and Apple. You have to stay nimble, pay attention to your charter, and to the strategic direction and challenges of the parent and evolve to meet the parents’ needs.

CP: What are some examples of the changing roles Cisco Capital has played for Cisco Systems?

Mike: On Day 1 we were simply a customer oriented sales tool - we supported customers and our sales organization by providing financing tools to give customers access to technology and to protect their investment in that technology. We were only an indirect profit source in that we helped Cisco book profits on sales that might otherwise have been lost or delayed. Making a strong financial return on our lease portfolio was of secondary importance.

Next, we became a competitive weapon. This evolution came about quickly as a result of our parent’s marketing and sales efforts in the emerging Internet Service Provider market, which was capital constrained and had no history. Understanding the market, as a result of being attached to the hip of the parent we were able to assess quickly the risk/reward on these new business models. We used Cisco’s strong balance sheet to facilitate transactions that weaker or smaller competitors could not support themselves. Our ability to act on our own shortened the sales cycle enabling Cisco to take market share and actually build the market.

Now we are helping our customers finance the build-out of their businesses and markets. We also help Cisco manage its mix of current revenue and deferred lease revenue. Soon we will focus on direct profit contribution in addition to our other roles.

Overall, we need to come to the table with a value-added proposition to customers, the rest of the company, and shareholders.

CP: What challenges does Cisco’s business pose for you?

Mike: Change. Everything changes - and fast. We see change all the time in the scale of our business because Cisco is growing so fast. High-tech often faces dips and valleys in different market segments and geographies. Globalization of markets requires localization of our financing offerings - channels, culture, and legal issues included. And what the parent firm needs from us changes depending on its overall situation at any one time. Vendor financing in the Service Provider segment is no longer a ‘nice to have’- it is a market requirement. With the Service Provider market fueling Cisco’s growth, Cisco Capital’s ability to scale to meet the financing requirements of our sales force and our customers is a huge issue.

CP: So what is the role of strategic planning versus just reacting really fast?

Mike: It all starts with a vision and a framework. We intended from the start to provide end-to-end financial services to mirror Cisco’s end-to-end networking solutions - for both end users and our channel partners. That vision has not changed over the years. Today we provide all types of leases, loans, and channel financing products for all customers, lines of business, and markets worldwide. We are truly “End-to-End”. The strategic plan captures the vision and provides the framework. We also use the strategic plan to communicate with our people, the rest of the company, and what we call our ecosystem partners. Within that, we are reactive as to when, how, and where we do things that serve the overall vision.

CP: When you say “reactive” is your time frame days, weeks, months or what?

Mike: It varies, but it is certainly months or quarters not the reaction du jour. You can’t just react. If you only focus on top line revenue growth you will fail. High growth can hide a multitude of sins in good times, but at the end of the day you will not be successful without a framework, milestones, setting and revising priorities, and holding people accountable at regular intervals. You need to balance planning, risk-taking, and reacting.

CP: What do you want your strategic plan to provide?

Mike: Our primary need is an agreed vision. Once we have it, the biggest challenge is implementation. It has to come in concise cycles - don’t bite off too much. We need short intervals for execution - up to a year - with quarterly and six month updates.

CP: Despite your unique situation, many of your needs sound similar to those of other firms that use Simplified Strategic Planning. How do you think your experience applies to firms other than Cisco?

Mike: We have a lot in common with all firms. Strategy has to deal with the drivers of growth and profit in your business. Our drivers happen to be scalability and time to market. I expect that all firms face these drivers, though perhaps to a lesser extent than we do.

Also, your implementation plan has to fit the business. Accountability on regular intervals is a must.

At both Apple and Cisco we built best-in-class financial services organizations in very short periods of time - that’s important - very short periods of time. Time is important to everyone. In both cases, strategy and implementation as we talked about them here were critical.

Since this interview Mr. Hampton has moved to Juniper Networks where he intends to repeat the successes he had at Apple and Cisco. –Ed.

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