Cisco Reins In Management System That Spurred Exodus at Top

Cisco Systems Inc. (CSCO) overhauled a management structure that investors and former employees say slowed decisions, fueled market-share losses and led to an exodus of senior executives.

Cisco, the world’s largest maker of computer-networking equipment, said in a statement today it will reorganize the sales, services and engineering operations to focus on five areas aimed at spurring growth in network and Internet use. Global field operations will be concentrated in three regions, and Cisco will rein in its council-style management structure.

Chief Executive Officer John Chambers vowed in April to make changes to help the company regain lost credibility after earnings disappointed investors for four straight quarters. Employees have grown impatient with the council-based structure, put in place by Chambers in 2005, that was designed to spur cooperation among units yet created a slow-moving bureaucracy.

“They’ve got a culture that frustrates talented people,” said Robert Ackerman, founder of venture firm Allegis Capital, which has sold three companies to Cisco. “They’ve got a lot of talented people feeling like they’re beating their head against the wall.”

Pressure on Chambers has mounted amid a stock dive and market-share losses. In routers, which made up 16 percent of Cisco’s sales last year, Cisco’s share dropped to 55 percent last year from 66 percent in 2006, according to IDC, a market- research firm in Framingham, Massachusetts. Cisco also lost more than 10 percentage points of share in network-security hardware.

Lack of Purpose

“Having a clear, concise purpose has gotten away from them,” said Kim Caughey Forrest, an analyst at Pittsburgh-based Fort Pitt Capital Group Inc. which manages about $1.1 billion and recently sold Cisco shares. She said the management structure had become “very confusing.”

Cisco, based in San Jose, California, declined 34 percent on the Nasdaq Stock Market in the past year, while 14 of its closest peers, including Juniper Networks Inc. and Alcatel- Lucent SA, gained. Cisco shares rose 1 cent to $17.48 at 1 p.m. New York time.

“The stock patterns have definitely diverged,” said Erick Maronak, who oversees $2 billion in Victory Capital Management Inc.’s large-cap growth fund. He owns shares of Cisco rivals Juniper, F5 Networks Inc. and Riverbed Technology Inc.

Chambers set up the councils to support his push into more than 30 new markets, including computer servers, consumer videoconferencing gear and corporate social-networking software. Unlike the traditional command-and-control management structure Cisco used to have, a series of interlocking councils would have the authority to tap resources from around the company without having to wait for Chambers’s approval.

Decision-Making Slowdown

Yet by requiring employees to petition groups of people for department budgets, the councils slowed decision making, said former employees and other people familiar with the matter. It left managers without full control of units, said the people, who asked to remain anonymous because they aren’t authorized to speak for the company.

Debra Chrapaty, former senior vice president of Cisco’s collaboration software group, became Zynga Inc.’s chief information officer last month. Other Cisco managers who have departed since April include Dan Scheinman, the former mergers and acquisitions chief, and Nawaf Bitar, a vice president in the security division, who is now a senior vice president at Juniper Networks Inc. (JNPR), which competes with Cisco in networking gear.

The management exodus began after the council system was put in place. Mike Volpi, then a senior vice president in charge of Cisco’s router and service-provider groups, and Charles Giancarlo, Cisco’s development chief, departed in 2007. Both were viewed by investors as potential successors to Chambers.

Executive Exits

Jayshree Ullal, head of the data-center business, left the following year, while Tony Bates, a senior vice president who ran Cisco’s largest unit, exited to become CEO of Skype Technologies SA last year.

All four executives had become frustrated with the council system, which prevented them from decisively running their parts of the company, said the people, who are familiar with their thinking.

As part of the changes today, the councils will be reduced to three from nine. Each will be led by two executives, rather than as many as five in the past, said Karen Tillman, a spokeswoman for Cisco. Tillman declined to comment further, referring to a memo sent by Chambers to employees on April 4.

“We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders,” Chambers wrote in the memo.

New Operations Chief

Chambers appointed Gary Moore to a newly created operations chief position on Feb. 22. Cisco said on April 12 that it will close the Flip video-camera business and cut 550 jobs.

Cisco today said today that Moore will continue as leader of the services organization, in addition to his other duties.

Engineering will be co-led by senior vice presidents Pankaj Patel and Padmasree Warrior, with a dedicated unit for early- phase businesses led by senior vice president Marthin De Beer. Robert Lloyd, executive vice president, will continue to lead worldwide field operations.

After restructuring, Cisco will have management councils for its enterprise, service provider and emerging markets businesses. Most changes will happen over the next 120 days, with a new sales organization in place by the end of July.

“Having fewer committees tends to always make an organization less bureaucratic, so it’s probably a good thing,” said Alkesh Shah, an analyst at Evercore Partners Inc. in New York. The overhaul announced today will likely help stem the tide of executive departures, Shah said.

Now, Cisco should shed other businesses, such as the Linksys home-router division, said Simon Leopold, an analyst at Morgan Keegan & Co.

“I’m not in the camp of people who say John Chambers needs to go,” Leopold said. “But he definitely has a credibility problem.”

To contact the reporters on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net; Joseph Galante in San Francisco at jgalante3@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.

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