Back in early 2001, after 10 years of 80% annual growth, Cisco Systems Inc. (CSCO ) ran headlong into the tech downturn. As the weeks passed and Chief Executive John T. Chambers failed to change his outlook, his reputation as one of the most influential CEOs in business plummeted as fast as the networking giant's stock -- especially after a massive $2.2 billion inventory write-off seemed to give the lie to Cisco's claims of cutting-edge e-efficiency.
Now, less than three years later, Cisco is putting up record profits, it's starting to grow again, and investors are once again singing Chambers' praises. Here, he discusses Cisco's management journey over that time. His comments are taken from two interviews with BusinessWeek's Peter Burrows, as well as from a memo he wrote in response to questions. Following are edited excerpts:
Q:You've said that making the layoffs in 2001 was the hardest period of your business career. Obviously, no one likes layoffs, but avoiding them seems to have been an especially high priority for you. Why is that?
A:At Wang [where Chambers worked in the 1980s], I did five layoffs over the course of 15 months, and it was extremely painful. It's one of the reasons I left, because I lost confidence in the company, its direction, and its ability to deal with problems.... I'd hoped that I'd never have to do anything like that again.
In terms of Cisco, [I'd hoped that] if we really paid attention to profits, cash, and productivity, that this would hopefully not be an issue. So it was a very difficult scenario to deal with it when it happened. It was something obviously none of us had anticipated, especially given our growth rate over the past decade.
Q: Is it true that some of Cisco's executives had counseled you to make layoffs earlier? Also, I understand that when you finally made the decision to cut, you in fact made more cuts than some other executives advised. True?
A:[Once Cisco began to understand the breadth and depth of the downturn], we thought it would be the hundred-year flood and that it would last longer than people anticipated. I did not want to make the mistakes that I saw made by other companies during a downturn. The rule I followed was to make the changes one time, make them deeper than you think, articulate the changes in a way that explains your longer-term vision, explain why the changes have to be made, and outline what employees need to stay focused on. And then position for the upturn.
Q: On the night before Cisco announced its first-ever layoffs in March, 2001, you stayed up all night mulling over the alternatives. What was going on in your head? How do you normally deal with difficult situations like that?
A:My parents, who were both doctors, taught me from the very beginning to be calm in times of stress. Early on, I was able to be logical during times of stress. After the event, I'd look back at the seriousness of the situation, and then it might effect me, but at the time of the event, I'm usually very, very calm. In fact, usually the more serious the situation, the calmer I am.
Q: Did you seek counsel from other business leaders as to how to deal with the downturn?
A:First, I spoke to major global companies -- both in our industry and outside -- to get a feel for what they were seeing in the business during the mid-December through January/February time period. I then spoke with leaders -- mainly from the manufacturing, energy, finance sectors -- who had gone through multiple decades of upturns and downturns, and I spoke with them to understand how they handled downturns.
The consensus was that you have to deal with the world the way it is, not the way you wish it was. Do not fall into denial. Second, you need to determine whether you did this to yourself or whether there were larger market forces at play. Third, you need to determine how long you think the downturn will last and how challenging it will be, because your strategy will change depending on the depth and severity of the situation.
Jack Welch [former General Electric (GE ) CEO] said it best. He said, "John, you'll never have a great company until you go through the really tough times. What builds a company is not just how you handle the successes, but it's the way you handle the real challenges."
Q: Tell us about your plan to strengthen Cisco during the downturn. In a way, after so many years of hypergrowth, the downturn gave Cisco a chance to catch its breath and put in the kind of processes and controls that most $20 billion companies have. Was that the main focus?
A:It's much more complex than that. Our market changed dramatically, in terms of what customers expected... As the market changed, we needed to have engineering and manufacturing and professional services and [sales] and customer support working together in a way that wasn't required before. Success in the 1990s was often based on how fast could you get to market and how fast could you blow a product through your distribution [networks].
Q: You've made many changes in the way Cisco is run in the past few years. For example, executives can gain or lose 30% of their bonuses based on how well they work with their peers. To what extent have you reinvented the corporate culture?
A:Our basic culture hasn't changed that much over the past 15 years. We've increased teamwork as a priority, because to get [the most productivity gains possible], it has to be [made] across many groups. Our culture has always adjusted well to change -- so long as you think it out well and communicate it clearly. [As for the new compensation rules], when you tie something to compensation, people know you're serious about it.
Q: What do you think are the secrets of Cisco's success in coming through the downturn so effectively?
A:What we did so very well, especially over the last few years, was that we never lost track of where we were going. And I'd argue it's what we've done well since the 1990 time period.... And, the results of today are results of the decisions of what we did 18 to 36 months ago -- just as what we're doing today will determine the results 18 to 36 months from now.
So many companies fall into focusing on the individual quarter and being unrealistic in terms of what you do this quarter will dramatically impact next quarter. This is only true with expense cutting. It's not true with respect to your key strategy, the key markets you get into, and how you handle a downturn.
Q: What don't people understand about Cisco?
A:Our team today is pretty seasoned. We had a team that when I said here's where we're going to go, there wasn't a lot of discussion. In normal times, you make decisions with the whole team.
Q: What are your biggest concerns at this point?
A:While our strategy is exactly what customers and investors say is right, none of our competitors are following us. So we're going to be very right or very wrong. But if we miss, we will adjust. That's another think Cisco does pretty well.