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CISCO SYSTEMS / On the record: John Chambers

Published 4:00 am, Sunday, February 29, 2004


  • Cisco Systems CEO John T. Chambers.
    Cisco Systems CEO John T. Chambers. Event on 2/4/04 in San Francisco. JERRY TELFER / The Chronicle MANDATORY CREDIT FOR PHOTOG AND SF CHRONICLE/ -MAGS OUT Photo: JERRY TELFER


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John Chambers is president and chief executive officer of Cisco Systems, the world's largest purveyor of Internet equipment.

Cisco became Wall Street's darling during the Internet boom of the late 1990s, when the San Jose company briefly surpassed General Electric to become the most valuable company on Earth. The Internet bust, which hit at the end of 2000, ravaged the company's sales and stock price.

Cisco spent the downturn taking market share from its rivals while cutting employees and costs. In the past year, Cisco's revenues and share price have started climbing again. The firm has never been more profitable. Cisco brought in $5.4 billion in revenue in the most recent quarter, a 14.5 percent jump from the same period the year before. With the firm's stock trading in the mid $20s, Cisco is worth more than $160 billion.

Chambers has led Cisco through its rise, fall and rebound. He recently sat down with Chronicle editors and reporters to talk about the state of Silicon Valley, including the promise of broadband Internet and the debate over counting stock options as a company expense.

Q: What is it going to take for Silicon Valley to remain a leader in technology? Is it necessarily going to dominate the next upturn in the technology world?

A: Well, maybe break the question into three pieces. What makes Silicon Valley really work?

It's a unique combination of great educational institutions -- especially at Stanford -- that generate engineers and a culture that starts companies. You have venture capitalists. We view them as experts who also help finance your company and give directions and also some pretty candid discussions about what you have to do better.

You have role models in the industry. One of the best role models, for example, has been Hewlett-Packard over the decades. They helped us a lot.

You have supportive government. And you have an unusual culture of risk- taking employees who are willing to work very hard for a piece of the American dream of ownership.

So I think Silicon Valley can continue to lead in terms of its high-tech position in the globe, if we focus on education, if we focus on infrastructure build-out and employee ownership.

Q: Are there specific policy actions you need to see?

A: Well, I think we've made good progress on education, but we've got to realize that it was just that. We've got to continue to raise the bar.

The second is broadband build-out. This is the infrastructure of the future, and we're the only G-8 country that doesn't have a broadband policy. We ought to have it for every American who wants it, with choice, by the end of this decade. Here we are in Silicon Valley, and a lot of my employees have trouble even getting it.

On employee ownership, which is to me perhaps a whole separate topic, there's not been a single successful company in the history of high-tech in the last two decades that has done that without broad-based stock option plans. When I originally heard about that in school, I would have called it socialism, when in fact it is the ultimate form of capitalism. It is a very effective way to align interests.

Now, that doesn't mean that there weren't changes that needed to be made, such as how long CEOs hold them, etcetera. But with options, I think it's very key to the future of our industry, and it's very key if you're going to be operating at a cost delta (difference) of 5 to 1 and 10 to 1 compared with Asia.

I think it's very important that the government either decides to study this and be careful about its implementation, or expense just the top leaders, which is fine with me; the impact on us is relatively nominal and will not change our program overall. Or expense them at a reasonable level.

Q: It seems like last year, the momentum was entirely toward expensing options, but it's not a topic that people have been discussing much in the last couple of months. What's your sense right now?

A: I think, honestly, it's a jump ball.

I do think this is perhaps the most important issue facing the valley. We've been very fortunate to create a unique environment here, and our rule ought to be "do no harm" at this point in time, as opposed to saying, "Let's approach some theoretical accounting issues and put the technology leadership of our country at stake."

Q: Housing prices. I'm guessing that's an issue for Cisco, but how much? What do you think the answer is?

A: If you're going to have a very expensive place to live, that means by definition you've got to incent your employees to be able to afford it. It's very difficult to do that, especially attracting people out of college, young married couples from all over this country and all over the world here, which we do a remarkable job of. But if your average cost of a house is $500,000? My first house cost $72,000, and I struggled with, "How am I ever going to pay for that?"

So I think it's very key that we create the incentives that allow people to attract the best and the brightest from all over the world to come here.

Q: Can you tell us from your own experience running a very large company, why are jobs coming back so slowly, even as business conditions improve so dramatically?

A: Well I think the jobs will come in waves, based upon the companies returning to profitability and business executives' comfort level.

I think all of us will probably see the majority of job growth over the next decade in smaller to midsize companies in this country. Large companies as well, they're going to wait until they see their own business do better. And let's be very, very open: It's been largely in the past quarter.

As business improves I personally think they'll spend first on productivity and capital and then on hiring. So if you look at it, it's progressing in the logical sequence. Business is improving, they're starting to spend on capital although not at the pace we'd like to see, and then after that, hiring should occur. Your danger is this is slower than traditionally has occurred in other economic recoveries, for a combination of reasons.

So if you use Cisco as an example, we are a global employer. For the past three years, we've kept our head count pretty balanced world-wide. We're driving our productivity to $700,000 (in annual revenue) per employee, up from $500,000 or actually $480,000 during the downturn. And so, once we get to $700, 000, then we would look to hire. And if the environment is as of today, we'd hire pretty uniformly around the world.

If we lose the leverage of stock options, it becomes tougher in terms of the decision on how much do you grow in which locations, whether it's in Europe or the United States or Japan, which are much more expensive areas.

Q: Where do you see growth in hiring and employment on a global scale? Maybe we can use that to talk a little bit about the trend of offshoring in the tech world.

A: This is way beyond out-shoring, if you will, or out-tasking. This is about e-enablement, and about e-out-tasking, the way I would use the words, which is where you maintain control of the strategy, the architecture. The implementation is virtual from your customer's perspective, whether it's a Cisco service person who showed up on your door or an IBM service person who showed up on your door or somebody handled the call from Raleigh or from India. And it is that combination of each of the product areas that I think is the natural evolution of business that will occur.

There isn't anything magical about what jobs you have, what jobs your partners have, whether they're here in the United States or around the world.

Q: You're saying productivity is the answer to outsourcing or offshoring?

A: It's a balance, yes.

The business model is inevitable. And how many of those jobs stay within Europe or in the United States or in Japan is how effective each of the component parts are in their own productivity. So if you're like Cisco, driving productivity 10 to 15 percent per year not only the last year -- we've already got 18 percent this year, and we think we can for the next five -- then that has a huge impact on where you put your jobs.

So I think these are things that very much are controllable if they happen at a reasonable pace. But we've got to have help from government in terms of our education system, our infrastructure and incentives to allow companies to compete effectively.

Q: You just pointed to two trends, the drive for productivity and the movement of jobs to lower-priced locations, both of which suggest a slower rate of job growth in Silicon Valley.

A: Not necessarily.

Q: Well, that was what I was going to ask.

A: It depends on how good we are about focusing on what our core competency is, how good we are about continuing to attract the best and the brightest. There are a lot of advantages that are unique to the valley. We were very fortunate that we've been dealt a very nice hand to play in terms of the education system and the venture capitalists whose experiences were here. The venture capitalists will be the first to tell you, the further they move away from this central location, the lower the hit rate.

Q: So are you an offshore skeptic?

A: No. I think you will see growth in jobs go where the best educated workforce is, with the right infrastructure, with the right supportive government. I've been saying that for literally a decade or two.

I think the balance of that, on a global basis, is dependent upon how well both companies and governments adjust to creating the right environment that allows this to occur naturally, which will raise the whole world's economy and allow the 5 billion people around the world who don't participate in today's industrial revolution to have a part in that. (I'm) just asking, "Give me reasonable cards to play to help do that." And the rule in the short term ought to be "do no harm" at a time when there's a huge acceleration occurring in some of the challenges we face.

Q: How many employees do you have in India at this point, and how much has that grown in the last couple of years? Because their countryside is literally dotted with schools with people specifically trained to work on your products.

A: India and China do a great job, as well as other Asian countries and a lot of countries around the world, in terms of training people.

I think that's just government understanding how important it is to have world-class education that attracts jobs. And by the way, world-class infrastructure. It's really exciting what the Chinese are doing on building their infrastructure, and almost leapfrogging what the United States has done.

Q: Can Silicon Valley return to strong job growth?

A: I don't think anybody's projecting we're gonna go back to the boom. I don't want to say that.

Q: If you talked to the governor, what would you tell him in terms of things the state could do to help Silicon Valley businesses compete more effectively?

A: I think there's a good chance that you will see balance, reasonable balance, if the governments and businesses react properly around the world to allowing a broader industrial revolution than occurred last time, where you raise most all the boats.

I don't think it has to be a win-lose (situation). I think a lot of people are addressing this as a win-lose. I don't think that's the situation at all. On the broader issue, do I think we have issues we have to deal with very fast here in California? Yes I do. I think the governor has been effective, I think he's off to a good start.

Q: Do you support the bond?

A: Yes, I do.

Q: Do you think John Chambers' federal taxes are too high, too low, or just about right?

A: It's hard to pay taxes on a dollar. I got my bonus last year for 38 cents and sent it back to the company, said, "I don't really need it." (At the start of the tech downturn, Chambers reduced his annual salary to $1 until business conditions improve. The company continues to compensate him with stock options. The 2003 option awards could be worth between $34.8 million and $85.7 million by the time they expire in 2012.)

I think taxes are fair at my income level, both on a national level and a state level. I think we've got to be very careful in California that for the average person, which all of us are at one time in our lives, you have to be very careful not to put your state at a disadvantage based upon the tax structure.

Q: It's hard for the average person to imagine the wealth that you've enjoyed and have now. Does it make you a different person?

A: I hope that it does not. Most of my friends would say it does not. My friends that I had when I moved here to Silicon Valley are still my best friends. It didn't change dramatically. The most important thing to me in my life is my family. I want to do whatever I do at work, do it well. It's excitement. Money's never been a primary motivator in my life.

Q: So what are you worried about now?

A: Well, I worry about the future of my family. And I worry about ever letting down my customers, my shareholders and employees.

Q: Are you doing what you thought you'd be doing when you were a kid?

A: No. I thought I'd be in business in Charleston, West Virginia.

Q: Did you have any idea what it would be?

A: No. Small business. My dad and mom were both doctors. I like to believe that I got my business knowledge from my dad. He was able to see trends a long way off. And my mom is very good with people and emotional.

Q: I have a question I've actually wanted to ask you for five years. When you would pick up the newspaper and you would see some portfolio manager say, "You've got to own Cisco stock. It doesn't matter what it costs," what would you think, personally?

A: I hope I never let them down.

I think at least my philosophy of leadership is you focus more on the areas you have to improve or the mistakes than you do on your successes. And that's just how I am in real life. I don't want to let down my customers, my employees, my shareholders.

Q: What is the proportion of your employees who are here in the valley and here in the states?

A: We have about 600 employees in India, as an example, and it might be as many as 18,000 in California. (Those employees are in Silicon Valley.) So over half the population of our company is here in the state.

Q: Do you foresee that staying in the same proportion if things turn out the way you want them to?

A: I think in terms of expenses, if it turns the way I think, that's a reasonable goal to drive to. I do not see dramatic, dramatic change in head count in terms of expenses. Will we grow in some areas as sales grow there? Of course. If they grow in Florida, am I going to put more people in Florida? You betcha. This is a unique spot. There are a lot of things we can locate here if we deal with some of the issues.


Age: 54

Job: president and chief executive officer of Cisco Systems in San Jose.

Education: law degree and bachelor of science/bachelor of arts in business at West Virginia University. Master of business administration in finance and management from Indiana University.

Board affiliations: vice chairman, President Bush's National Infrastructure Advisory Council.

Family: married, with a daughter, 27, and a son, 24.


What's your morning routine? "I get up, let the dog outside, go downstairs and jog, watch the news, the business news. ... Then I have a doughnut and orange juice and drive in to work. I'm usually in to work by 7:30. "

What's the dog's name? "Cali. For California."

What's your best business decision? "Joining Cisco. That's an easy one."

What's been your biggest regret? "That I didn't share my issues with dyslexia earlier. I didn't realize how that impacts others. Because you consider it a weakness and you don't share your weaknesses. And you don't realize that it helps others who have this issue, and also your family."

What's your favorite sport? "It was tennis. It is now golf. If you'd watch my golf game, you'd buy our stock, because obviously I'm not spending enough time at it. ... It's something my wife and I do together. Usually when I play it's with my wife. To be 12 inches apart for 18 holes, four hours, it allows you to get a lot of time in."