Cisco aims to boost reseller profits

CHICAGO: Cisco Systems Inc. has announced its decision to introduce several initiatives to boost profits of the companies that sell its products, hoping this can boost sales in a weak spending environment.

"My No. 1 goal at the moment is to fix partner profitability," Paul Mountford, head of Cisco"s global distribution network, said in a recent interview. Cisco"s fortunes are closely tied to those of resellers that sell most of its gear to corporate and commercial customers. Caring for resellers is crucial to Cisco at a time when corporations are spending less on information technology and rivals are courting Cisco"s resellers too.

Cisco said the new programs would not hurt its margins. But Mountford said the steps could boost resellers" profits by up to 50 percent in 12 to 24 months. Partners, who start their meeting Tuesday in Las Vegas, echoed his optimism.

After the dot-com and telecommunications bubbles burst in 2000, reseller profits slumped even as the number of partners certified to sell Cisco gear ballooned. Cisco has since moved to reduce the number of partners to strengthen the network.

"The resellers in the channel for Cisco got fairly upset when it seemed that everyone and their brother was signing up to sell Cisco gear," said J.P. Morgan analyst Ehud Gelblum, who has an "overweight" rating on Cisco"s stock. He does not own any shares in the company. Over the last several years, Cisco has shifted from selling products itself to using resellers. This keeps Cisco"s costs low by having others handle the many smaller accounts. It also allows Cisco"s sales staff to focus on touting technologies.

Four years ago, resellers sold 10 percent of Cisco"s products for the enterprise and commercial markets, with the rest sold directly. Resellers now account for 92 percent of that total, flipping the ratio, but Cisco still sells direct to most telephone companies.

Since April 2001, Cisco has slashed the number of resellers it certifies to 3,200 from 6,600. Including noncertified resellers that do not undergo training, Cisco estimates 40,000 companies sell its products. But certified partners sell more than 90 percent of the gear. Cisco also sells its gear to and through such telecom carriers as AT&T Corp., Sprint Corp. and SBC Communications Inc.

Focus on invested capital, balance sheet

Cisco"s new programs focus on the resellers" return on invested capital and their balance sheets, Mountford said.

Cisco does not just give the resellers money, but encourages practices that will help boost sales of its products. For example, a recently launched incentive program aimed at the security and Internet Protocol telephony markets awarded resellers a 10 percent cash rebate for hitting sales and customer-satisfaction targets, he said.

John Freres, president of Meridian IT Solutions Inc. in Schaumburg, Illinois, with annual revenues of about $45 million, estimated that program could add $250,000 or more a year to his bottom line. Boosting profits for its partners would also boost their loyalty to Cisco as rivals such as Canada"s Nortel Networks Corp. are trying to convince them to carry their products as well, analysts and resellers said.

Cisco also has worked to boost reseller profits by having them specialize by region or technologies, Gartner analyst Michael Haines said.

Partners said Cisco ultimately rewards loyalty. "You can"t put one foot in the water with Cisco," Freres said. "I tell everybody, being with Cisco is like being married. If you do it right, Cisco is very cognizant of supporting you."

© Reuters