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Cisco's Homegrown Gamble

The company that believed buying talent was the key to success now relies on developing the employees it already has. Not everyone is convinced the strategy will keep Cisco Systems on top.

February 27, 2003
Related Topics: Change Management, Corporate Culture, Workforce Planning, Recruitment
With bold unwavering confidence, John Chambers, president and CEO of CiscoSystems, set out to amass the top 10 to 15 percent of technical talent in thefield. It was the late 1990s, and his groundbreaking Silicon Valley tech empirewas riding the New Economy boom, developing a reputation for its extremelyaggressive--and often highly creative--recruiting efforts. Sometimes the firmbought small companies simply to acquire their best engineers.

In an effort to lure star players from competitors, Cisco resorted to thesort of brash marketing tricks used to hawk soft drinks and sneakers. To gaininsight into the likes and dislikes of potential hires, it held focus groups tolearn what sorts of movies and Web sites were favored by the best and brightest.Hoping for chance encounters with possible hires, recruiters fanned out toplaces like garden shows and microbrewery festivals. The firm even rigged itscorporate Web site to spot visitors from rival 3Com and greet them with aspecial page that said, "Welcome to Cisco--would you like a job?" Formervice president for human resources Barbara Beck once told the WashingtonPost:"If someone was aggressive enough to try to check up on their competitor, wefigured we could use that person."

Back when it was flying high, Cisco’s hiring and retention practices wereviewed as keys to its success. To keep ahead of the competition, the companydrew in top talent at an enviable rate. Now, with revenue stagnant and companystock way down, it has had to adopt new practices, approaches some experts thinkmay hurt the company in the long run by hindering the flow of talent and ideasthat makes the company great.

Just a couple of years ago, Cisco, the dominant producer of hardware andsoftware for routing traffic on the Internet and on corporate networks, was oneof the fastest-growing companies anywhere. For a brief moment in early 2000,Cisco’s market capitalization of $500 billion made it the most valuablecompany in the world. But these days, with its stock hovering at about a thirdof its peak value and its sales flat over the past two years, the San Jose,California, company is operating in a radically different mode. In the spring of2001, for the first time since the company’s founding in 1984, Cisco cut itsstaff, laying off 8,500 employees, nearly a fifth of its workforce, andsubsequently began consolidating and streamlining its far-flung operations.These days, the company’s human resources team is facing the difficult task ofhelping employees and management cope with both a tough economy and thenecessary evolution of Cisco’s corporate culture.

The party isn’t over--far from it. But Cisco, like so many other bigcompanies, is changing, experimenting, and rethinking the way it recruits,hires, and trains its employees, and how it will maintain its winning culture.Today when the company must fill a key position in one of its business units,for example, the talent often comes not from the outside, but from another Ciscounit--with the help of a network application, Pathfinder. The software allowsCisco employees to search for jobs that interest them and contact thesupervisors directly to set up interviews.

"It was amazing how little time and effort the whole thing took," saysAshish Gupta, a Cisco engineer who used Pathfinder to move from a strugglingunit to one with brighter prospects. "Within a month, I was in my new cubicle,working." Though the move was lateral, he was pleased with the chance to keephis Cisco salary and benefits, at a time when many other Silicon Valleyengineers are out of work.

Human resources executives have devised innovative ways to help laid-offemployees, including a program that paid them a portion of their salary andbenefits if they went to work for a local charity or community organization. ButCisco also must help its remaining 35,000 employees maintain the focus andentrepreneurial spirit that originally made the company so successful, at a timewhen there are few opportunities for advancement or raises and the pressure toproduce is increasing. At the same time, Cisco is trying to achieve an ambitiouslong-term strategic goal. It’s seeking to transform itself from a "buy"culture, in which growth was sustained and expertise obtained via corporateacquisitions, to a "build" model, a leaner, more agile company focused ondeveloping talent internally.

Academics and consultants say the jury is still out as to whether Cisco canremake its culture so radically--and whether it’s a wise strategy.

Academics and consultants say the jury is still out as to whether Cisco canremake its culture so radically--and whether it’s a wise strategy. "In myopinion, they’re making a mistake," says John Sullivan, a professor ofmanagement at San Francisco State University and a founder of CaliforniaStrategic Human Resource Partnership, a consortium of 33 leading senior vicepresidents of human resources from Fortune 500 firms. "Cisco was the top brandin the world, but it got tarnished. They’ve got to rebuild the brand, to getout and remind everybody that they’re the best. Instead, what they’re doingis moving away from a lot of what made them great."

Maintaining a humane culture
    Cisco is reluctant to discuss its strategy and tactics for coping with thechallenges of a downturn. The company’s senior vice president for humanresources, Kate DCamp, declined to talk to Workforce, and a subordinate, HollieCastro, senior director of human resources for worldwide business functions,provided few specifics in a half-hour interview. A public-relations officialanswered some additional background questions. That reticence is a markedcontrast to the boom years of the 1990s, when a Wired story described Cisco as aplace where cubicles were filled with "shiny, happy people," so blissfullycontent with their jobs that they regarded 60-hour weeks as "electronicheroin." Mindful of the $250,000 cost of replacing every engineer who left tojoin an Internet start-up, Chambers and then vice president for human resourcesBeck set out to keep employees so exultant that they wouldn’t even takerecruiters’ calls.

The company achieved an attrition rate of less than 9 percent--remarkable bySilicon Valley standards--by focusing on workplace satisfaction down to thesmallest details, such as putting executives’ offices in the middle of floorsso that rank-and-file workers could have the windows. It offered a dazzlingarray of benefits, such as a state-of-the-art day-care center equipped with "nannycams" so that employees could check in on their kids without leaving theirdesks. And Chambers was quick to offer support whenever an employee needed help.Once, when a Cisco worker’s home burned down, the human resources departmentasked Chambers for permission to advance funds to the person until an insuranceclaim came through. The CEO’s response: "Double it."

Even when Cisco was compelled to furlough 8,500 workers in the spring of2001, the company put a lot of effort into easing their pain. Chambers, who cuthis own salary to $1 in order to save jobs, visited the company’s outplacementcenter in an effort to boost morale. The company gave six months’ severancepay to those who had to leave, contacted recruiters from other companies ontheir behalf, and even assisted workers who were foreign nationals instraightening out possible problems with immigration status.

As DCamp, who became head of human resources in mid-2001, explained in apublic radio interview in January, the company wanted departing employees tohave the attitude that "I’m going to go out and find a job, and come back toCisco when conditions permit." To make that a reality, Cisco developed aninventive program in which it agreed to pay employees one-third of their salaryand continue their health benefits and stock-option grants if they agreed towork for a local charity or community organization. About 80 employees took theoffer, and the company recently renewed 40 of them for another year.

As a result, Cisco seems to have lessened the deterioration in employeesatisfaction that other companies have suffered. In 2001, it won third place on Fortune’s list of the 100 best companies to work for in America, an honorbased on confidential interviews with employees. In 2003, Cisco is still rankedin the top quarter of the list, at number 24--a remarkably slight decline for acompany that has had major layoffs and restructuring.

Retaining values that spurred growth
    Still, the mandate for Cisco to streamline its operations has producedstress. During the 1990s, when the firm was continually acquiring companies andadding up to 1,000 workers a month, it didn’t waste time worrying aboutefficiency. It was known to launch separate, competing development teams in aneffort to get the best possible product. "This was a company that planned forgrowth," Sullivan says. "They didn’t plan for shrinkage."

Cisco now has had to shift its talent to the most promising places. Ratherthan resort to wholesale reassignments, however, Cisco adopted a somewhatunorthodox approach that gives employees a choice of where they go in thecompany. It created and launched the Pathfinder software application on itscorporate network. Pathfinder enables employees to load their résumés andqualifications into the system, sift through a database of openings throughoutthe company by location, career level, and other criteria, and then contact thehiring managers in other business units directly. While Cisco is far from beingthe first company to use such software, it has relied heavily on Pathfinder.About 20 percent of the company’s engineers have used the system to changejobs, according to a Cisco official.

Cisco engineer Gupta, one of those who have used Pathfinder, believes thatthe system reinforces the workplace values that helped make Cisco successful,such as personal initiative and an emphasis on skills rather than schmoozing asthe route to success. "The program makes it possible for an engineer like me,who might not know a lot of people outside his unit, to find opportunities,"he says.

Sullivan, however, thinks such a free-form flow of talent around the companymight actually hinder Cisco’s ability to cope with an increasingly mercurialmarketplace. Compared with some of Cisco’s other management tools--executivescontinuously track and analyze sales performance over the Internet, for examplePathfinder seems surprisingly unsophisticated. It doesn’t contain anyintelligent capabilities, for example, that would guide workers to jobs wherethey are most needed. "What you really want is your A players, your topperformers, going to growth areas," Sullivan says. "This system doesn’thelp put them there. It’s not easy for people to figure that out bythemselves. What you have instead is the chance that top performers may end upin places where they’re not going to make much money for you."

Additionally, Pathfinder has met resistance from Cisco managers, who face theprospect of losing staffs that they’ve worked hard to develop. "I know themanagers dislike it," says Kevin Wheeler, president of Global LearningResources, who has worked for Cisco as a contractor. "But the reality is thatif you’re a good manager, your employees are less likely to be out therelooking."

Going from buy to build
Joe Strongone, worldwide talent resourcing manager, says that one purpose ofthe Pathfinder system is to allow employees to move within the company anddevelop skills that facilitate Cisco’s goal of relying on internally nurturedtalent. The company continues to strive to employ the best technical talent inits industry, he says. "We’re trying to develop all our people to be thattop 10 to 15 percent."

"In the past, people at Cisco would have viewedtheir careers as moving up through the company. We’retrying to grow in a different way.

During its high-growth years, Cisco was the business equivalent of a baseballteam that wins pennants by continually luring superstar free agents away fromother franchises. By contrast, the new Cisco is determined to stick with theplayers already on the roster, with the aim of further developing their talent.For those employees, however, the development process may often mean movinghorizontally, since Cisco’s streamlining and consolidation mean feweropportunities for promotion. "In the past, people at Cisco would have viewedtheir careers as moving up through the company," Castro says. "We’retrying to grow in a different way."

Cisco also is trying to give employees more exposure to others outside theirown business units. The company hopes to do this through initiatives such as itsBusiness Cooperation Council, which brings together individuals from far-flungbusiness units to work on common projects.

Like Pathfinder, the "build" approach isn’t totally novel, but it’s asurprising turn for Cisco. "Lots of companies have begun to think again aboutdeveloping talent internally, though few actually have made a big move in thatdirection," says Peter Capelli, director of the Center for Human Resources atthe University of Pennsylvania’s Wharton School. "What’s interesting isthat Cisco really was unique in its buying of talent."

The "buy" mentality has long been woven integrally into Cisco’sstrategy. Most of its product line was created by engineers who came to Ciscowhen it acquired smaller companies, according to a 2000 study by StanfordUniversity professors Charles A. O’Reilly III and Jeffrey Pfeffer. Much ofCisco’s competitive advantage, in fact, came from the company’s skill atmaking talent from acquisitions feel comfortable enough to stay with Ciscorather than fleeing, as "new" employees often do. Those periodic additionsof top performers enabled Cisco to aim at quickly becoming first or second inevery segment in which it chose to compete.

San Francisco State’s Sullivan is skeptical about whether Cisco can achievethe same high performance level while relying mostly on internally developedtalent. "In the past, great people got even better when they came to Cisco,but it wasn’t because of Cisco’s training," he says. "It was becausethey continually put some new guy next to you who was smarter than you were, andyou had to find a way to keep up with him. I remember somebody admitting to meonce, ‘I feel stupid when I go into work at Cisco.’ When you just buildinternally, you don’t have that sort of fear factor, the pressure that makesyou keep getting better and better."

Even if a "build" culture can produce the same results, another questionis whether it can deliver quickly enough to keep Cisco on top. In February,Cisco posted a record quarterly profit of $991 million for its most recentquarter, up nearly 50 percent from the comparable period in 2001. But analystssay those numbers are chiefly the result of cost cutting measures. Sales actuallyslipped slightly, and the company doesn’t expect any growth this year.

Over the horizon, Cisco faces increasingly tough competition from new playerssuch as China’s Huawei Technologies and domestic computer giant Dell, whichwill try to undercut Cisco with cheaper networking hardware and software. JohnChambers has indicated that Cisco will try to compete both on price and byinnovating on high-end features such as network security. Those challenges willprovide an early indication of how well Cisco’s new culture can supplant theold.

Workforce, March 2003, p. 34 -- Subscribe Now!

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