Editor’s note: Tech investors will be watching Cisco, which reports its latest earnings this week. Beyond quarterly data, however, a new engineering structure is crucial going forward. Analysts Andrew Smith and Patrick Filkins at Technology Business Research break down what’s happening inside Cisco in part two of a three-part review. (Read Part One in blog linked with this post.)
HAMPTON, N.H. – Launching of Intercloud has established Cisco’s (Nasdaq: CSCO) cloud footprint, but a new engineering structure will drive hybrid cloud innovation
Built on OpenStack, Intercloud launched Cisco’s entry into the cloud market in 2014 through a series of partnerships with telecom operators such as Deutsche Telekom and Telstra. Cisco will continue to expand its Intercloud network and enable OpenStack-based cloud services designed to operate in complex, multitenant cloud environments at scale. Cisco’s Intercloud strategy is ambitious; requires the ongoing establishment of complex, federated cloud networks; and relies on customers’ choosing Cisco networking gear and appliances and Cisco applications over other open competitors’ offerings. OpenStack adoption and maturity will be a major challenge, as customers and partners continue to develop the relative skills and reference architectures.
We expect Cisco to increase its investments in open-source and OpenStack technology to provide customers and partners with additional avenues for OpenStack training and certifications.
Cisco’s latest round of restructuring is indicative of its shift to the cloud model. In March Cisco CEO Chuck Robbins announced substantive changes to the company’s engineering groups, which will now align under four segments consisting of: Networking, Market Segments and Solutions (NMS); Security; IoT and Applications; and its new Cloud Services and Platforms group. Additionally, under the NMS group, Yvette Kanouff will now lead Cisco’s Service Provider business, supplanting Kelly Ahuja, an 18- year Cisco veteran. Kanouff was previously SVP and GM of Cisco’s Cloud Solutions group, indicating Cisco’s desire to rapidly shift to a cloud-first focus in the telecom market.
TBR believes the restructuring is a necessary move as its customers transform and adopt cloud infrastructure.
However, like many of its peers, Cisco will be challenged by the business and financial model shifts associated with a cloud services model. The biggest threat will be to Cisco’s existing customers, whose own hybrid cloud migration will expose them to a wider range of services and solutions outside the Cisco ecosystem that may be cheaper or easier to procure. An early example of this is Huawei, which leverages lower price points and its own emphasis on cloud to capture market share, especially among Cisco’s enterprise customer base.
Cisco will seek to overcome this challenge by ensuring its physical and virtual cloud components work most efficiently in concert with one another, delivering enterprise-level scaling and multitenancy as differentiators. However, achieving these levels of scale requires customers and partners to use proprietary solutions such as Intercloud Fabric Director and Intercloud Fabric Provider in concert with solutions such as Cisco ACI. This approach may create conflicts for customers and partners who are looking to develop a vendor-agnostic platform of cloud management, networking and delivery systems within their OpenStack ecosystem.
We believe Cisco can use a two-pronged strategy to help mitigate this challenge.
First, Cisco can prioritize the development of a wider range of hybrid cloud management and orchestration capabilities to accommodate customers. The vendor has already built multihypervisor and third-party hardware support into its UCS Director solution to aid this process, but will need to expand even further to support increasingly complex demands generated by customer adoption of application containerization and microservices architectures. Second, Cisco can highlight its hyperconverged systems to extend the value of its hardware assets with pre-engineered solutions and embedded management, edge networking and analytics capabilities. Cisco has played in this area over the past years through involvement with integrated systems such as FlexPod, Vblock and VSPEX, but the release of its own hyperconverged solution, HyperFlex, will help Cisco have more control over its destiny in the growing market
Next: Expect Cisco to acquire hybrid cloud management and orchestration software and expand its hyperconverged solutions to effectively compete with HPE, Dell, EMC and Nutanix.