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Networking leaders take a stab at services

Recent investments and acquisition deals by Lucent and Cisco have highlighted the increasing role services will play as firms grapple with the changing nature of their networks.

For networking giants Lucent Technologies and Cisco Systems, there is safety in numbers.

With back-to-back moves, the networking industry leaders have brought the esoteric profession of computer network design, consulting, and construction to the forefront. In doing so, Lucent and Cisco have highlighted the increasing role these types of services will play as corporations and communications providers grapple with the changing nature of their networks.

KPMG, which grabbed a $1 billion investment from Cisco earlier this week, and International Network Services (INS), bought by Lucent for $3.7 billion, have one thing in common. They both have an army of skilled consultants who can serve as conduits for Cisco and Lucent's sales organizations.

In each case, the companies will gain thousands of network professionals who are well trained at building networks. Cisco's investment will fund the hiring of 4,000 new consultants at KPMG, while Lucent's purchase of INS brings the company 2,200 new employees on top of its existing services organization of 3,300.

It is no longer enough to reap the windfalls that the business of high-end networking equipment offers. Increasingly, these multibillion-dollar firms are faced with a dearth of talent at a critical time when networks are become more complex, driven by the urge to send voice, video, and data traffic across a single infrastructure.

"In today's multi-vendor network, services and consulting are increasingly important," noted Pat Russo, executive vice president of strategy at Lucent. "We intend to lead that space."

Cisco's chief John Chambers said the company declined the opportunity to acquire INS, preferring to partner with the firm.

"We are very comfortable with our strategy," Chambers said during Cisco's end-of-year earnings conference call.

Offense or defense?
Cisco's KPMG investment signals a new stage in a partnership strategy that could indicate that shaking hands on an agreement in the age of "converged" networks isn't enough--money often seals the deal.

But Cisco's Chambers said the company intends to remain focused on its partnering strategy and preferred that method, calling it "much more effective in the long-term."

The dearth of network professionals that executives bemoan isn't news to Cisco. The company has gone as far as developing a networking "academy" with a curriculum that is used in schools across the United States and in 39 countries to spur interest in computing and networking.

It also hints at an internal evolution at the once product-driven firm. Analysts note that much of the technology Cisco offers will only fuel pricing pressures in the market, forcing Cisco to develop new strategies and find new revenue streams to sustain its stock valuation.

"Cisco realizes in the long run network gear will be commoditized," said Michael Speyer, analyst with industry consultants the Yankee Group.

Added Craig Johnson, analyst with the Pita Group: "Cisco has said they don't want to be an integrator, which is a strategic mistake."

In the short-term, Cisco's KPMG investment may have been a pre-emptive move, given its ties to INS--a large integrator of Cisco equipment. Cisco, as of last year, held a 7.8 percent stake in the firm, according to Securities and Exchange Commission filings. The data giant also held a seat on the company's board.

Executives from INS were quick to claim they will remain an unbiased consulting and services firm, but its relationship with Cisco will likely be altered as a result of Lucent's move, they said.

"[Cisco's] going to have to figure out what their strategy is," said John Drew, president and chief executive of INS and new leader of Lucent's support organization. "I think it would be unrealistic of me to think nothing is going to change.

"Going forward, I really don't know what to expect," Drew said.

Four prongs
Lucent has said it intends to compete in four markets: networking hardware, software, silicon, and services.

The company claims the network services and consulting industry is growing at a rate in excess of 15 percent annually, from $96 billion in 1998 to a projected $153 billion by 2002. "As IBM and Digital have proven historically, having the services side of the equation makes sense," said Johnson. "It's an opportunity for Lucent to make inroads into accounts."

In fact, IBM's global consulting and services organization is one of Big Blue's fastest growing divisions.

In the case of network consulting, a company with a services arm could emphasize its own network equipment in company solutions. Lucent's Russo said that scenario was "well understood" by the firm as part of its strategy in acquiring INS.

The networking industry is not alone in mining the services industry for increased revenue. Other technology segments, such as the database and business application market, have seen an increased focus on services as a means to drive sales.

With the move, Lucent continues a prodigious spending spree this year. In June, the company closed a nearly $25 billion merger with Ascend Communications and snagged Nexabit Networks, a high-end start-up, for nearly $1 billion.