Analysis: The full impact of Cisco's job cuts

Jim Duffy looks at what's behind the downsizing; Cisco NZ country manager says local effects yet to be determined

When you combine this week's layoffs with other recent restructuring, Cisco Systems has actually eliminated 12,050 jobs from its workforce, a reduction of 16.5 percent that includes the largest downsizing in the technology industry this year.

Cisco this week announced it eliminated 6,500 jobs, 2,100 of which came from the early retirement programme implemented in May. Cisco shed an additional 5,000 positions when it sold a cable set-top box plant in Mexico, along with its workforce. Add to that the 550 that went when Cisco dumped Flip and restructured its consumer business.

According to outplacement firm Challenger, Gray & Christmas, Cisco's downsizing is the largest job cut this year in a technology sector that is experiencing record low downsizing. Technology firms announced just 14,308 job cuts in the first half of 2011, a 60 percent drop from the 35,375 cuts announced during the same period a year ago, the firm says.

"The Cisco cuts notwithstanding, the overall health of the technology sector remains very strong," said John Challenger, CEO of Challenger, Gray & Christmas, in a statement. "In fact, it is one of the best performing industries in the economy at the moment."

Prior to the Cisco workforce reductions, which will be counted in Challenger's third-quarter tally of tech-sector job cuts, the largest reported layoff this year came from Qwest Communications, which announced 1,800 planned job cuts in March.

Some analysts say the total sum of Cisco's downsizing will exceed the company's expense reduction goal of $1 billion by another quarter-billion dollars.

But is Cisco done? Cisco was expected to cut 4,000 to 5,000 positions, or about 6 percent of its workforce, before speculation had that number climbing to 10,000, or almost 14 percent.

"The number is about where I expected it to be," says Scott Denehy of Technology Business Research in New Hampshire. "Certainly at the high range when you factor in that extra 5,000."

But aside from the 550 in the consumer business and 2,100 in early retirement, it's still not clear where in Cisco the cuts took place and what product lines may have been most significantly affected. Analysts and other observers are still waiting for details on specifically where the cuts were made and which product lines are affected.

Cisco is expected to shed some businesses, like it did with the Flip videocam operations, in an effort to pare back down to its core.

"I'm curious to get some detail around where those cuts were made and the rationale behind them," Dennehy says.

Cisco may give more insight and detail into the areas affected by the cuts during its earnings call on August 10. It would appear, though, that actually making cable set-top boxes -- which came from the 2007 acquisition of Scientific-Atlanta for close to $7 billion - is less strategic to Cisco than actually selling them.

Then again, is selling them still strategic?

"It wasn't clear to me what the rationale of the plant shutdown was - to outsource that job or a sign of things to come for that set-top box business," Dennehy says. "When I think about that Videoscape architecture and the vision they have for that, ultimately those will not include a (cable) set-top. It might make sense for them to outsource for a little while and then go to someone else entirely."

Videoscape was introduced by Cisco early this year at the Consumer Electronics Show. It utilises cloud computing, IP networking and client devices and software to deliver internet-based video services. In the home, Videoscape includes a media gateway to integrate voice, video, high-speed data, wi-fi and network traffic routing; an IP set-top box to support all forms of video delivered to a TV, including pay TV, broadcast channels, premium channels, video-on-demand and web; and client software for home and mobile devices, including TVs, tablets and smartphones.

But there's a broader impact expected from the Cisco layoffs, the company's most significant since the 8,000 positions eliminated in 2001 after the dot-com bubble - Cisco wants to lose an image of being a tough vendor to work with.

"The goal is to make them easier to do business with," Dennehy says, "because competitors are focused on making it easy for Cisco customers to do business with them. Traditionally, it was take it or leave it, my way or the highway. Shedding that image of 'difficult to do business with' is really going to be critical for them."

Shedding some businesses may whet Cisco's appetite for more strategic acquisitions, too - purchases that are more tightly aligned to its five core markets: routing/switching/services, data center/cloud/virtualisation, video, collaboration and architectures.

"Cisco needs a big play in storage to double down on their data center fabric architecture of compute, networking and storage integration" after the restructuring, says industry analyst Nick Lippis.

Lippis also feels Cisco is going through a metamorphosis that others will likely encounter as industry buying patterns shift to adopt new paradigms like cloud computing.

"Cisco may very well be the first to go through this transition," he says. "HP and Microsoft have found that in the last 18 months their products are on the wrong side of a massive buying curve, that being mobile and cloud computing."

Geoff Lawrie, Cisco's New Zealand country manager, told Reseller News the implications of the cuts locally would be known in the next two months.

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