That’s when we identified the culprit: profitability for our sales partners. The company’s traditional programs provided margins of 8 to 12 percent to resellers of data products. Given the additional money they could charge for value-added services in the information technology market, these margins were acceptable. But those same numbers didn’t work for resellers in the traditional voice world. For them, margins were typically 20 to 25 percent. Worse still from their perspective, our new technology virtually eliminated a lucrative revenue stream for traditional voice resellers: the charges for “moves, adds, and changes” to enterprise phone systems.
We realized that unless we changed the math, there was no reason for voice resellers to give up their traditional business to help us. Nor could we count on existing non-voice partners to jump in. They just weren’t familiar with voice customers and voice technologies.
Cisco was effectively blocked from gaining traction in the market, so we needed to move — and fast. First, the company voted to increase spending to recruit voice consultants and analysts who could help influence voice customers on Cisco’s behalf. Then we did something unprecedented: We gave 20 percent of the revenue from every voice product sale back to the partnering company that helped Cisco secure that business.
It was a tough choice. But rather than allow our sales partners to suffer and miss a major market opportunity, we reduced Cisco’s own return on investment. This policy meant asking internal business managers to accept a lower contribution margin in exchange for jump-starting sales. After some discussion, the leadership team decided that its long-term need for partners far outweighed any short-term gain in profitability. So Cisco created its Value Incentive Program, which paid resellers a fee for every VoIP deal they successfully closed. In most cases, partners could double, if not triple, their profitability on any VoIP deal. Overnight, Cisco’s management innovation lab changed the dynamics of the voice market.
In the two years that followed, Cisco phone sales rose 40 percent per year. Some traditional reseller partners volunteered to invest in training so they could sell the new technology. Eventually, more than 2,000 partner companies signed on to deliver voice solutions around the world. Cisco, which had once languished as sixth in a crowded market, moved to the number one position, with more than 30 percent market share.
Once again, as with consumer products and disruptive technology, we learned how powerful management innovation can be. To be sure, not all of the ideas that spring from our virtual management laboratory produce results like this. But even when they don’t pan out, they keep our company young and hungry — like a startup with everything to gain and not much to lose.
Reprint No. 11106
- Inder Sidhu is the senior vice president of strategy and planning for worldwide operations at Cisco Systems, and a member of the company’s operating committee. Between 2006 and 2010, he co-led Cisco’s Emerging Countries Council; between 2006 and 2009, he co-led its Enterprise Business Council, which is responsible for its corporate business, representing about half of the company’s total revenue.
- This article is adapted from Sidhu’s Doing Both: How Cisco Captures Today’s Profit & Drives Tomorrow’s Growth (FT Press, 2010).