Cisco aims for bigger services business, more software revenue

Cisco told analysts the growth of Internet connections could help make it the leading IT company

Cisco Systems plans to expand its services business over the next several years, seeing a more important role for itself in a world of connected machines and devices.

The company will build up its managed services and consulting services, focusing on specific vertical industries, Chief Technology and Strategy Officer Padmasree Warrior said in an interview, summarizing the company's messages from its annual financial analyst conference Friday.

Cisco currently gets about 20 percent of its revenue from services, but it plans to increase that proportion to 25 percent or more over the next few years, Warrior said. However, the company will continue to work with services partners, such as Accenture and specialized firms in specific industries, rather than launching a broad, overarching services business like that of IBM, she said.

"We're going to be very selective. We leverage our intellectual property to create value for our partners in services," Warrior said.

Eyeing what it calls the "mobile cloud era," Cisco says it can become the number-one company in IT as enterprises deal with new kinds of applications and start buying IT as a service rather than a capital investment. The growth in Internet Protocol connections, where Cisco is the biggest player, also gives the company a chance to play a more important role, she said.

Those connections include machine-to-machine networks that can link components such as sensors around a city. Cisco is already starting to develop this "Internet of everything" in large building projects such as the construction of the brand-new city of Songdo, South Korea. The company says newly built cities also may better serve residents through technologies such as videoconferencing for health care and education, another major business for Cisco.

The emergence of cloud computing, which may eventually allow enterprises to plug into IT resources as they would into a power grid, is a big opportunity for Cisco, said Pund-IT analyst Charles King. Utility-scale computing will favor big vendors that can build large-scale infrastructure, and Cisco has proved itself in that regard in both networking and computing, with its Unified Computing System servers, King said.

In time, Cisco could be at least a serious contender to become the number-one IT company, King said.

"I think they could take a swing at it," King said. "How successful they'll be ... is an open question."

Cisco's services business began with its traditional technical services, such as its Smart Analytics software, which provides network information to customers and channel partners to help them make their operations more efficient, Warrior said. It also includes what Cisco calls Advanced Services, where it helps customers carry out big changes such as data-center consolidation.

The company plans to expand its business in managed services, in which it deploys and manages infrastructure for customers, and in consulting services, which involves analyzing business problems and helping customers transform their businesses. Cisco has combined formerly separate divisions that did consulting before and after a sale, Warrior said. It will focus its consulting efforts on vertical markets such as energy and the development of highly networked "smart cities." The consulting work will be done with partners, Warrior said.

"The idea is that we would always have expertise, and that expertise is understanding our technology, understanding more broadly what the customer requirements are, and where we don't have a solution, working on that part of the solution with a partner," Warrior said.

In addition, Cisco is looking at new ways of generating revenue from its software, which is what 80 percent of the company's engineers work on, she said. Cisco makes embedded software in its network equipment, infrastructure software such as security APIs (application programming interfaces), and services software such as WebEx.

The company plans to use enterprise license agreements, perpetual license agreements and software-as-a-service models to monetize its software in the future. Chambers recently has said the company hopes to double its annual software revenue, currently $6 billion, over the next three to five years.

Overall, Cisco told analysts it expects its revenue to grow by 5 percent to 7 percent annually over the long term.

Stephen Lawson covers mobile, storage and networking technologies for The IDG News Service. Follow Stephen on Twitter at @sdlawsonmedia. Stephen's e-mail address is stephen_lawson@idg.com

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