Chambers memo says Cisco lost focus, credibility

Says company got untracked last two fiscal quarters, execution flawed, changes coming

Cisco is feeling the heat from two quarters of very un-Cisco-like financial performance. So much so that CEO John Chambers issued a companywide memo rallying the troops to focus and regain lost momentum and credibility.

According to these stories in Reuters and Bloomberg, and this post on the Wall Street Journal blog, Chambers admitted in the memo that Cisco is flawed, has failed to execute and been slow to make decisions over the past couple of quarters. An example is the product transition upheaval in Cisco's $15 billion switching business - Cisco's switching revenue fell 7% in its fiscal Q2, profit margins missed their usual targets, and Chambers admitted at the recent Cisco Partner Summit that this caught the company by surprise:

"It did surprise us," he said. "I don't like surprises. We did get surprised on it. That's part of the focus on operations, to get operations up to the exact same level as innovation."

In the memo, this will be corrected, Chambers pledged. From the Reuters story:

"We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders," Chambers wrote. "That is unacceptable. And it is exactly what we will attack."

Cisco's shares have lost a third of their value over the past year. Some believe Cisco's lackluster financials over the past two quarters are due to its ambitious agenda of targeting 30 or so market adjacencies to stimulate high growth while sales of its traditional routers and switches chugs along at more modest growth due to Cisco's massive installed base and dominance in both markets.

There are calls for Cisco to divest some of the new product areas it's acquired its way into over the past decade in order to refocus on its traditional strengths in routing and switching.

At the same time, there are also indications that sales of these new products in these new markets is overshadowing the bedrock routing and switching business, signaling a transition underway at Ciscoto depend more on these new markets for growth and less on routing and switching. In his memo, Chambers did not deny that:

"Bottom line, we have lost some of the credibility that is foundational to Cisco's success - and we must earn it back," he wrote. "Our market is in transition, and our company is in transition. And the time is right to define this transition for ourselves and our industry."

In the memo, Chambers warned employees to prepare for a number of unspecified changes in the next few weeks and coming fiscal year, Reuters reported. Cisco's fiscal 2012 begins in August.