A steady hand in a time of trouble

Cisco Systems executive Mario Mazzola knows the answer to the trivia question, "What was the first company acquired by the networking giant?"

Mazzola, 55, is part of a team of executives that still remain from that deal, for Crescendo Communications, finalized in September of 1993. After 72 more acquisitions, Cisco has turned to Mazzola to oversee technology development at the sprawling San Jose, Calif.-based equipment maker as it attempts to restart a stalled growth engine that has left many wondering if Cisco's best days are behind it.

Mazzola, who speaks with a heavy Italian accent, briefly flirted with retirement early last year after eight years at Cisco. It seemed like the right time--Cisco was riding an endless tide of business from both entrenched telecommunications companies and well-funded start-ups looking to quickly build networks. Furthermore, the company's stock was close to all-time highs.

As Mazzola's last day neared, he was peppered with phone calls from Cisco Chief Executive John Chambers concerning potential new assignments at the company. There was even a retirement party for him two weeks before his planned June 2000 departure. But, in the end, Mazzola decided to stay, drawn in part to the challenge of being the company's first chief development officer, the result of a recent management shuffle at the company.

The reworked Cisco organization consists of 11 technology-focused divisions, all reporting to Mazzola. The challenge is daunting. Cisco has been kicked off its lofty perch as one of the most valued companies on the planet and has had to eat a large portion of humble pie in recent months, as it has been forced to write-off assets and lay off employees for the first time in its history. Cisco also posted lower sales for its most recent quarter, a clear sign that the telecom boom of the late 1990s has indeed gone bust.

Into this uncertain environment steps the steady hand of Mazzola. CNET News.com sat down with the veteran executive at Cisco's San Jose, Calif., headquarters recently to discuss how the company is altering its strategy, what it plans to do to compete in a changing networking industry, and whether Cisco can innovate technology after years of relying on acquisitions.

Q: Cisco has long been known as a company that acquires technology. Can it now turn around and innovate?
A: I have a bias since I've been so closely associated with acquisitions, being myself part of an acquisition, and also because I've managed several acquisitions. The reality is it's a complex mechanism. A lot of the innovation, in the cases that have been the most successful, has been done at Cisco. So I think Cisco's been doing a good job in many cases of leveraging talent. You know, in this industry, the technology is very perishable. So if you acquire a technology, in reality, many of those people (behind the technology) will quickly disengage. The important elements that allow all of this to work is a common vision and the capability and desire to engage teams.
Our acquisitions for a few years were considered much less than successful. One example, for instance, is Granite (a gigabit Ethernet start-up). We worked a lot with that team, and that's (now) one of the best teams in the industry. Now the results are coming (along) in a very strong way.

Is your role as chief development officer to organize a lot of these acquisitions that happened during the telecom boom of the late 1990s, when Cisco was acquiring more than 20 companies per year?
We acquire some talent that allows us to jump-start certain projects in the cases that are successful. But a lot of the innovation is carried on in the process of engaging people and defining the architecture and integrating the architecture with the other services that are required. This, for example, was a typical case with Selsius (an Internet telephony start-up). We decided not to sell the original Selsius product. In some cases, we are not acquiring technology in a state that it can be packaged and sold, so it will require 15 to 18 months of hard work and investment before all this can come to fruition.

What, if anything, does that signal about the company's plans for future acquisitions?
Looking ahead, I've been asked recently if the fact that I'm taking this position implies that we'll do (fewer) acquisitions and that we'll rely more on internal development. My personal inclination, and I think this is exactly the same direction provided by John Chambers and the top management of the company, is that the first preference for us is to develop internally, the second is to partner, and third is to acquire. The modulation of these three alternatives is also a function of how rapidly the market is growing. At a moment in which there is very rapid growth it makes more sense, in order not to lose a step, to acquire. I think Cisco has gotten a great deal of benefit from this. In the current climate, in terms of the economy, I think we'll evolve dynamically. I assume that by the second half of 2002 we'll start to see some growth. The current requirements are less (dependent) on acquisitions and more toward "let's make sure we don't have too many overlaps in our product lines."

Cisco is experiencing the first hiccup in growth of its lifetime. How do you think the company is handling this?
I can remember in times in which we were growing--hyper-growth, really--50 to 60 percent year to year in certain segments of the market, and sometimes even more. It was amazing to grow an enterprise more than 50 percent year to year. It's a very large base, a very large business. The messages, internally and externally, are that nothing is forever. The important element is the real structure and substance of a company and the management team. Ultimately, the goal of a company is to have the capability to appreciate reality in life and, to an extent, predict the possibility that certain things will have the promise of expansion and growth and to be, as much as possible, prepared--not only psychologically, but practically in terms of management (practices) and attitude.

And there's a difference in managing during this period than managing in a period of growth?
Sure, it's always easier to manage in a period of growth than to manage in periods of potential compression. But I think the response of the company has been very strong. Essentially, it is for us to lose. We have a very good position in the industry, not only in terms of technology, but in terms of distribution channels, partnerships, and financially. If we execute, there's an opportunity two or three years from now to make very evident an important level of distance between Cisco and many of the traditional competitors. But, as always, nothing is for free. It's very important and fundamental that we execute.

Do you think recent times have humbled Cisco?
I think that looking at the company from inside, maybe there are situations in which we might appear too self-confident. But it is also true that consistently internal messages, especially when things are going extremely well, tend to be very well calibrated...the classical example of being paranoid, especially in moments of hyper-growth. Through the years, being an old person now, there's been a lot of superstition, I can tell you, especially when things are going extremely well. I often feel we should pause a little bit and reflect.

And from the outside?
Maybe from the outside, yes. The first indication of a slowdown was we missed the quarter by one penny, and it was a big, traumatic event. Then we realized we had a huge inventory, which was really a sobering event. One thing that is good about our company is that we don't (dwell) on our issues; we try to act as quickly as possible. Nobody can assume to be always right or to always make the right calls, but it's very important, at least, to communicate with candor and openness to give a sense of the situation. I think the company has been doing this very well. It was very difficult for many of us, in particular for John Chambers, to lay off people.

So what is the current networking market telling you? It has been tough going for some time, and nearly every company has admitted that it lacks a lot of "visibility." Are customers upgrading old equipment? Are they upgrading to new equipment?
I think it's difficult to generalize...

Especially after Sept. 11?
Exactly. In spite of the fact that we try to be as astute as possible, sometimes the reading is not so obvious. There are segments in which it looks like there is a kind of overcapacity, which has been built. Examples include the optical space and the DSL (digital subscriber line) space...there is that type of phenomenon, the level of growth and huge deployments and so on, especially in the service provider market, that was projected. I think there was a real creation of overcapacity, and it will take time to absorb that.
In the enterprise, we see CEOs and CIOs more consciously deciding about large investments, but I think, globally, the conviction that the level of productivity and the advantages that you obtain through automation--that is not changing. The longer-term assessment is positive.

In speaking with several smaller telecommunications start-ups, it seems like there is a trend to build a network using technology from multiple companies, rather than rely solely on Cisco, for example, for all of their needs. Does this trend worry you?
No. If we consider, if you will, this end-to-end umbrella as an alibi and relax our excellence in terms of performance, cost and so on, then yes, that would be a concern. We don't. That is one type of consideration. A second element is many situations in the service provider market. The cost of the equipment is a relatively small fraction, vis-à-vis the operational costs. So I don't want to confuse manageability end to end with an excuse to deliver less value in other areas or to increase prices, and so on.

With that said, several smaller public companies have hit hard times. Would Cisco be interested in acquiring a company of this type, such as a Redback Networks, or would it still be more interested in start-ups?
It depends on your point of view. For us, by and large--and there are always exceptions--it's not the point to acquire a product and to put that product in the channel and milk revenues and so on. All of this (technology) is very perishable. Something that looks competitive today, if it doesn't have the proper additional features and cost reductions and the insertion of new interfaces...A year from now it's much less brilliant, much less relevant. To be too opportunistic, if you want, is--for sure--not the strategy.

How many companies would Cisco acquire in, say, the next 12 months?
In the next twelve months, the figures that have been quoted have been in the ballpark of 12...in that range.

Can Cisco be a company that innovates? I think people wonder if that is the case at a company of this size, particularly a company that has acquired so much technology.
It's a very legitimate question. For me, the answer is absolutely. If you look at the current management team, even in this reorganization, you see people with real tracks records and a history, in terms of start-ups and being real entrepreneurs. People who are willing to take risks to get important steps ahead. So this is not a culture or company where people at the top are looking for a safe job, an 8 am-to-5 pm thing. The team at Cisco has a strong entrepreneurial bent and a strong track record.
It is, objectively, more difficult to move at a very fast pace in a large organization. There is no question. It's different to have 10,000 customers, revenue streams in certain product lines of a few billion dollars, than to have 100 customers and a small exposure in the market.