Warp Speed

• Web-based applications drive financial operations
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• Real-time financial reporting allows company to react to changing markets
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• CFO discusses future of vendor financing

At 57, Larry Carter may just be the oldest guy at Cisco Systems. But he says he feels great, adding that being CFO at the world’s premier networking company is the “most exciting” job he’s ever had. And having a few years on the young technology bucks that populate Cisco’s sprawling Silicon Valley campus doesn’t mean that Carter isn’t pushing the tech envelope.

In fact, finance at Cisco is a prime example of how the com-pany “eats its own lunch” when it comes to the technology of networking. Carter is one of the few CFOs anywhere that runs finance in near real time. His ability to close Cisco’s books in a single day, the much talked about “virtual close,” was actually something that Carter had achieved while at Motorola, where he worked for nearly 20 years.

When he joined Cisco six years ago, he was confronted with a company that was growing by leaps and bounds. Carter knew that in an environment where the only constant was change, control could only come through knowledge. By applying Web and networking technology throughout the company, Carter now has the ability to provide Cisco management with almost real-time data on virtually anything they might want to know — every day.

This up-to-the-minute knowledge has been a big competitive advantage as Cisco has aggressively entered new markets. Cisco has emerged as the wonder child of telecom equipment vending after entering the market just three years ago. If current market share trends continue, Cisco could realistically become the world’s largest telecom equipment vendor sometime this year, overtaking giants like Nortel and Lucent.

Behind Cisco’s lightning rise has been the company’s place at the center of the new “pack-etized” world. Being the leading seller of equipment powering the Internet made it a natural for Cisco to become the standard bearer for advocating the spread of telecommunications networks that run on IP protocol and that are based on open-distributed systems.

Since these “next-generation” networks are expected to grow much faster than the circuit-based networks that currently dominate the service-provider arena, there may indeed be some truth to Cisco CEO John Chambers’ recent claim that the company will weather the downturn in telecom equipment capital spending better than its competitors.

But having been used to selling into an enterprise environment, Cisco must now cope with the exigencies of the service provider market. In the service provider market, for example, vendor financing is often the norm.

As service providers have become an increasingly large part of sales, about 40 percent according to Epoch Partners, Cisco’s equipment financing activities have picked up dramatically. Carter says total vendor financing on Cisco’s books is about $2.4 billion, out of which about $600 million is in equipment loans made mostly to service providers.

Cisco’s new markets have obviously brought some new risks. Larry Carter spoke to Telecom Business about these risks, his high-tech finance department, Cisco’s service-provider strategy and other things.

TCB:Cisco is more wired than practically any company in the world. It seems you have the ability to run the company almost in real time. Can you tell us how you set up these systems?
Carter: If you go back around five or six years ago, the company’s growth rate was continuing to accelerate. Through the customer Web site we were able to solve technical issues and common kinds of problems. Today, more than 90 percent of our orders come in over the Web. You can get problem resolution, the product information, technical support, training, etc. So that’s where it all started.

Then when I joined at the end of ’94, I started an initiative within the finance group to also take advantage of the technology. I started a program to reduce the close from 14 days down to one day. My initiative at the time was really focused on how do we get not just more timely information, but also how do we improve the integrity of the data.

Over the past few years, new Web-based applications started to really hit the market. We were able to be more efficient as we were among the first to implement these new Web-based applications. So the story just goes on and on. As Web-based applications became more available, we were able to continually integrate the network. Now you can get just about anything you need inside the company electronically.

Our customers and employees are networked, but we also have specific Web sites for our manufacturing partners — our sub- contractors. We have many factories around the world of which only a few are owned by Cisco. As orders come in electronically over the Internet, they are fanned out to the appropriate subcontractor. More than half the time the product is completed and dropped shipped directly to the customer.

My only job now is to collect the money, and I’m already working on a way to do that electronically.

TCB: How has your ability to run finance in near real time changed the way Cisco is managed?
Carter: Having this information on a mostly virtual basis has allowed us to empower the organization. We can move at a much faster pace and become more agile as things change. I don’t have to tell you — you know what’s going on in the service-provider market and around the world — things can change very quickly.

TCB: Yeah, the economy turned down on a dime late last year and so did the technology capital-spending outlook. 3Com, Foundry, Nortel and others have all issued warnings. Yet your CEO John Chambers has remained confident, saying Cisco will be less affected by the slowdown in technology capital spending. What sets Cisco apart?
Carter: John has been pretty consistent in saying that if there was any kind of macroeconomic slowdown affecting capital spending, we wouldn’t be immune to that. But I think we probably would be less affected and, in fact, we have an opportunity to gain market share.

There are three reasons for this: First, I don’t know of any other company in the network- infrastructure arena that has such a broad product line as we do.

The second thing is our overall geographic balance. Fifty-two percent of our business is in the U.S., with the rest outside the country. And even that is pretty well distributed. So you’d have to have a whole lot of countries going down at the same time to create a problem.

And finally, we are in every vertical market in the world. Everyone needs a network and we’re basically in everybody’s network.

TCB: Your recent big increase in bad-debt provision was due in large part to CLEC equipment financings. Will you be cutting back on equipment financing to CLECs?
Carter: I don’t think it’s any different with a CLEC than with any other customer. You look at the business case, management and at the technology, and you try to make an assessment. You ask: Is this a good business decision? Are you gonna get paid? Are you gonna make some kind of reasonable return for the risk? You have to make an appropriate business decision and go for it.

TCB: Has Cisco’s desire to make inroads in the service-provider market made the company overly aggressive in making equipment loans?
Carter: I don’t think so. We set up Cisco Capital several years ago because we were in such a strong cash position. I felt this was a good use of our cash to provide leasing to our top-tier enterprise accounts. Then the service-provider markets started to evolve. The service provider was building out a large network and the financing was just part of the business proposition for these types of buildouts.

TCB: What’s Cisco’s strategy for growing their share of the service-provider market?
Carter: There’s a strong business case to be made for having less vendors in the network for service providers. Financially, it’s a better proposition. There’s less maintenance and less training.

Our strategy is to provide a complete equipment range to customers so that we can deliver an end-to-end solution. We want to move from being a strategic vendor to being a trusted advisor. And if you look at some of the networks we have put in, at AT&T for example, you’ll see that the reliability is just as good as any old-world technology, if not better.

TCB: One of the ways that Cisco has been able to deliver such a broad range of products is through acquisition. Last year, Cisco acquired something like 23 companies. What’s the mergers and acquisitions outlook for Cisco this year?
Carter: I think it’ll be the same. I don’t see any reason to change this in spite of what you might think with the economic situation. You know our stock is down substantially. I think the companies we might be thinking about acquiring are probably down even further.

I don’t know if you’ve heard us talk about our breakaway strat- egy, but given the opportunity we have with our products, global presence and what’s going on in the communications market, particularly with voice, we think we have a tremendous opportunity to really start to break away in terms of market share.

I think that the opportunity here hasn’t changed, so I think we would say the acquisition strategy will continue as it has been.

TCB: What are the main risks to Cisco going forward?
Carter:We try to be realistic and confident, but at the same time we make [Intel’s chairman] Andy Grove look light on paranoia. We worry about everything. First off, we obviously don’t control the overall macroeconomic situation. It’s on our minds and we’re watching carefully like everyone else.

But with the things that are within our own destiny, we’re making sure we stay on top of what our competitors are doing. With the large, established ones and the startups, there’s a lot of competition. Staying focused on customers is an absolute must.

When companies get in trouble, they’ll often get internally focused on what they need to do to reduce cost or to do this or do that. So, managing growth is the next challenge. The market’s changing quickly, so how you manage that change and how you reprioritize resources as needed is really important.

Ted is a Telecom Business contributor and freelance writer based in Chicago.