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Cisco layoffs announced in the face of changing networking market

Cisco's plan to lay off another 4,000 employees, even as its profitability and market share dominance hold, reflects a changing networking market.

Despite a good 2013 fourth quarter, highlighted by continued revenue growth and strong U.S. sales, networking heavyweight Cisco announced plans to slash its headcount by 5%, effectively cutting 4,000 jobs.

Cisco says the job cuts are aimed at helping the company grow faster by putting the resources into the right business units, but many industry observers say Cisco is also recognizing that the networking industry is changing, and Cisco must change with it.

I think [Chambers is] trying to be more aggressive now on increasing revenue in the main [networking] hardware area -- I don't think [the] growth that he wants is there.

Andre Kindness,
senior analyst, Forrester Research

The Cisco layoffs -- which company executives are attributing to a slow economic recovery -- will help the San Jose, Calif.-based vendor reposition itself for faster growth and put more resources behind struggling segments or new growth opportunities quickly, said John Chambers, chairman and CEO of Cisco, during the company's recent earnings call.

"In this tight environment, we as leaders must continue to rebalance our resources into opportunities. … I am … pleased with our momentum in the market; it's just not growing as fast as we need," Chambers said.

Cisco layoffs may highlight a changing market

Cisco plans to align resources to top opportunities, balance expenses to revenue and invest in growth, John Earnhardt, director of corporate communications for Cisco, said in a statement. "These actions include prioritizing research and development, [and] aligning new and existing talent to growth areas," he said.

Chambers specifically mentioned targeting middle-level management for job cuts, which often happens within technology companies that are preparing to abandon underperforming business segments as superfluous marketing, strategy and planning staff positions get axed, said Tom Nolle, president of Voorhees, N.J.-based CIMI Corp.

"If a company is entering a period of market consolidation, they are likely to look at the way in which their business units are structured and removing some middle layers that don't have organizations reporting to them -- that kind of a strategy is a good approach," he said.

But the Cisco layoffs and workforce reallocation could also point to dramatic shifts in technology within the networking industry, Nolle said.

"What we are seeing with Cisco is a symptom to the overall issue. These layoffs are telling us that the market leader is not going to be able to achieve enough growth in basic networking equipment to meet its own profit [expectations]," he said.

Cloud and software-defined networking (SDN) is giving traditional, hardware networking vendors a run for their money, Nolle said. "We are starting to see tech companies take a hard look at their product lines -- what may not be living up to expectations -- and remove them to focus the business more effectively," he said.

How will Cisco reallocate its resources?

While the Cisco layoffs are surprising given the growth of many of Cisco's business units, refocusing resources into areas that need more attention is a common strategy for Cisco, said Joe Rogers, senior network engineer for the University of South Florida in Tampa (USF), a Cisco customer.

"If Cisco wasn't able to re-task [employees] into other areas, the layoffs probably makes sense," Rogers said. "I think it's smart for Cisco to quickly refocus their efforts, rather than waiting and ending up behind their competition."

USF uses Cisco technology for its core routing and switching needs, as well as for its campus' wireless network. While Cisco has not specified whether the layoffs will affect certain business segments, Rogers hopes Cisco continues to invest in its wireless and core network hardware businesses. "Cisco does really well in these areas, but there are a lot of other vendors trying to steal business away. I want to make sure Cisco keeps developing new features for these technologies so they can stay competitive," he said.

Of the 4,000 positions being targeted, a "fair amount" of employees will be allocated to the new growth opportunities, according to Cisco's Chambers.

Cisco will probably use the flexibility it gains through the layoffs to devote more resource to software products and recent acquisitions with strength in that area, said Andre Kindness, senior analyst with Cambridge, Mass.-based Forrester Research Inc.

Just because Cisco will most likely be putting more importance on software doesn't mean its traditional hardware-based networking business segments will be abandoned. "Chambers has admitted that he has been a little slow on the draw in the past," Kindness said. "I think he's trying to be more aggressive now on increasing revenue in the main [networking] hardware area -- I don't think that growth that he wants is there."

The employment changes will begin during the first fiscal quarter of 2014, Cisco said.

Let us know what you think about the story; email Gina Narcisi, news writer, and follow @GeeNarcisi on Twitter.

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