Will Cisco's "aggressive" restructuring plan pay off?

by Ankita Mohinta    Aug 19, 2013

Cisco

Cisco recently announced that they were planning to restructure the entire organization. The re-balancing plan was implemented during a conference call to discuss financial results for the quarter year which just ended. The company also added that there would be almost 4000 job cuts to help implement the planned restructuring of the company. Cisco didn’t mention details such as when or in which regions the job cuts would be incurred. The incurred costs will be around $250 to $300 million and will be taken under first quarter of the company’s fiscal year of 2014. However, this news of job cuts ended in Cisco’s stock going down by 7 percent. This proves, that all is not well for the company.

Chairman and CEO John Chambers explained the motive behind the sudden move by saying that the decision was taken due to the uncertain economic environment in the the world. “We just have too much in the middle of the organization,” Chambers said. “We’re just not moving with the speed that we need in this area.” According to Bloomberg, Chambers said that Cisco plans to shift from hardware to high-margin software and services, including security software and cloud computing data centers. Their goal is “to become an IT player.”  There is some proof that this strategy is working because Cisco recorded earnings of 73 percent in the past five years even as profit from selling products has slowed down considerably. However, most analysts agree that Chambers made all these announcements at a bad time. He himself admitted that there was slow growth seen in emerging markets for the first time.

Simon Leopold, analyst and managing director at Raymond James,  told CNBC in an interview, that Cisco’s low revenue is not much of a surprise in this slow economy but the announcement to lay off jobs at this time came as a shock. “What we think they’re doing is really trying to control costs. It’s not a situation to reduce costs or cut costs, but I think this is going to make investors nervous,”  said leopold.

Some analysts suggest that the move is in line with Cisco’s aim to be the most important company in IT and its core foundation in networking to dominate entire enterprise and service-provider infrastructures. Chambers in a interview to CNBC said that his main aim was to move resources out of traditional areas and focus on new technologies.  He described his recent announcements as being ‘aggressive.’ “We literally are investing for the future. You have to balance that from where the resources are going to come from.” He defended his move stating that since resource allocation was not possible to be achieved in the long term, he had to do over one or two quarters. He also mentioned that not all employees will loose their jobs, some will be hired in other divisions. “I’ve learned in this business, you lead with your mind, not with your heart,” added Chambers.