Cisco breaks the hockey stick

Cisco, the data networking equipment giant, claims to have made many breakthroughs in its 17-year history. But to seasoned executives in the technology sector, none will seem quite so remarkable as that described by Larry Carter, the company's chief financial officer, just before Christmas.

In its two most recent quarters, says Carter, Cisco has achieved near-perfect "linearity of orders". That means that the flow of orders into the company no longer follow the classic 'hockey stick' pattern that bedevils just about every technology company in the world, and has done for as long as anyone can remember.

The 'hockey stick' means that most sales are made during the last days of the month, the last weeks of the quarter, the last months of the year. It is one reason why companies never seem to be able to reliably predict their final results, and why the last quarter of the year is usually the biggest.

It is also one of the main reasons why technology companies suffer margin erosion. Desperate efforts to meet targets led to heavy end-of-period discounting. It can also lead to inventory gluts, forecasting problems and delivery delays.

But not at Cisco – or at least, not any more. In recent quarters, it says, orders followed a smooth, upward line: 10% in the first 10% of the month, 20% in the first 20%, and so on. It is a remarkable claim and, if true, a remarkable achievement.

It certainly was not true a year ago. In a recent article, Business Week recounts a frenzied close of quarter at Cisco that, to people outside the technology, must have seemed almost surreal. On the last night of Cisco's second quarter in January 2001, under the floodlights at the company's San Jose warehouse, hundreds of workers worked late into the night, literally running around as they desperately attempted to match orders and get routers, switches and other devices into rtucks and out the gates. Cisco needed to make the sales numbers it had promised Wall Street and accounting rules lay down that orders don't count as sales – the goods must be shipped.


John Chambers, Cisco


Throughout the evening, a worried looking Carter watched over the bustle, monitoring the figures on a console. Finally, at midnight, he had to break the news to John Chambers, the CEO. Cisco had missed its forecasts by some distance. The news triggered a share price collapse.

Even in highly-automated, real-time businesses such as Cisco – and no-one has made a bigger effort to computerise its own operations – some cramming in the warehouses is inevitable. But linearity of orders can be done, Chambers told Infoconomist.

The first rule, he says: No discounting. "You have to stick to the sales terms. You have to walk the talk. You don't discount." The reasons are clear enough – customers come to expect discounts and will press for them. If there is no prospect of discounts, customers will gain nothing by holding out for an end of quarter bargain.

But as most managers know, having a 'No discounts' policy and actually not discounting are not the same thing. Towards the end of the quarter, sales staff, line managers and financial officers are all desperate to reach targets. Discounting is not just normal; it is almost universal.

This, says Chambers, is where education and corporate culture come in: It is vital, he says, that sales staff do not have a silo mentality where they just aim to hit their own numbers. "The bottom line: understand the implications of what you are doing," he says.

According to Carter, Cisco has managed to create a special kind of culture where staff retention and corporate loyalty is high. As an example, he says that during the middle of dot-com mania, most companies were forced to cut the period before their employee stock options matured from three years to two. "We went from four to five."

Chambers insists Cisco does not incentivise its sales staff to get their orders in early. He has, he says, worked at two companies that tried such schemes, and they only worked for a quarter. "I have never seen a sales plan that had more than three or four variables."

Carter also claims a little luck. Cisco has peculiar, uneven quarters, so that customers rarely know when a period is about to end. But many of Cisco's customers are wily buyers at very large corporates, who know every trick and will always play suppliers off against each other. How does Cisco overcome this?

Perhaps the key lies not so much in Cisco's sales management, but in the competitive environment. First, of the perhaps ten to 15 clearly defined market sectors where it is active, Cisco is overwhelmingly so in more than half. That makes it much easier not to discount; sales are likely to reflect overall market demand.

Second, in the telecom carrier markets where Cisco is trying to win business many of its competitors and customers have serious financial and strategic problems. Flexibility and security are more important than the actual price. As Chambers says: "I would not underestimate the importance, early in the sales cycle, of having strong financials." Cisco, with $19 billion in the bank, has a head start.

The lesson from all this? Resist giving discounts, do some training. But be realistic. For most companies, the hockey stick is here to stay.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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