CPET 575 Management of Technology. Cisco Systems, Inc.

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1 CPET 575 Management of Technology CASE III-6 Cisco Systems, Inc.: Implementing ERP 1997 by Mark Cotteleer From Robert A. Burgelman, Clayton M. Christensen, and Steven C. Wheelwright, Strategic Management of Technology and Innovation, 5th edition, McGraw-Hill, ISBN , 2009, pp Paul I-Hai Lin, Professor A Course for M.S. In Technology Purdue University Fort Wayne Campus 1 Cisco Systems, Inc. Founded 1984, by Leonard Bosack and Sandy Lerner, computer specialist at Stanford University Grew out of a Stanford U. networking project Multiprotocol Router John Morgridge, CEO, John Chambers, CEO, 1995-present 2 1

2 Cisco Systems, Inc. Corporate Overview Quick Facts, [Accessed 2010/11/18] Founded in 1984 NASDAQ: CSCO Q1 FY11 Revenue: $10.75 billion Q1 FY11 Employee Count: 72,600 Q4 FY 1 Revenue: $11.2 billion Q4 FY11 Employee Count: 71,825 Cisco Overview Market Transition Technology/Products Offerings Research & Development Cisco Culture Corporate Social Responsibility Environmental Sustainability Welcome to the Human Network Mergers and Acquisitions Cisco Channel Strategy Cisco s Corporate Overview Presentation, ew_blackbackground_eng_fy10q4.pdf orate_overview_fy11_q3.pdf 3 Exhibit 2 Cisco Selected Financial Data, Five Years Ended July Net sales $8,458,777 $1,334,436 Net Income $1,350,072 $322,981 Net income per share - basic $0.88 $0.25 Net income per share - diluted $0.84 $0.24 Shares used in per share calculation 1,533,869 1,296,023 -basic Shares used in per share calculation 1,608,173 1,342,213 - diluted Total assets $8,916,705 $1,129,

3 Top Cisco Competitors Industry where Cisco Competes Networking & Communication Devices, Computer Hardware, Storage Networking Equipment Alcatel-Lucent (ALU), Paris, France, Company Overview, Hewlett-Packard Company (HPQ), Palo Alto, CA, Products & Services, Juniper Networks, Inc, Sunnyvale, CA, Products & Services, 5 Comparison of Cisco s Competitors Source ( ) [Accessed 11/11/2010) Alu = Alcatel-Lucent, S.A. JNPR = Juniper Networks, Inc HPQ = Hewlett-Packard Company CSCO ALU HPQ JNPR Market Cap B 6.73B 97.51B 16.58B Employee N/A 78, ,000 7,231 Revenue (ttm) 40.04B 20.24B B 3.84B Gross Margin (ttm) 64.04% 34.80% 23.47% 66.49% EBITDA (ttm) 11.19B M 17.35B M Operating Margin (ttm) 22.89% 0.31% 10.17% 19.29% Net Income (ttm) 7.77B -1.13B 8.64B M EPS (ttm) P/E (ttm) N/A PEG (5 yr expected) P/S (ttm)

4 Comparison of Cisco s Competitors Source ( ) [Accessed 11/18/2010) CSCO ALU HPQ JNPR Market Cap B 6.71B 92.91B 17.32B Employee N/A 78, ,000 8,104 Qtrly Rev Growth (yoy) 19.20% N/A 11.40% 22.60% Revenue (ttm) 41.77B 19.85B B 3.84B Gross Margin (ttm) 63.47% 34.80% 23.47% 66.48% EBITDA (ttm) 11.54B M 17.35B M Operating Margin (ttm) 22.48% 0.31% 10.17% 19.29% Net Income (ttm) 7.91B -1.11B 8.64B M EPS (ttm) P/E (ttm) N/A PEG (5 yr expected) P/S (ttm) Comparison of Cisco s Competitors Source ( ) [Accessed 11/17/2011) CSCO ALU HPQ JNPR Market Cap 99.16B 4.01B 53.97B 11.96B Employee 71,825 79, ,600 8,772 Revenue (ttm) 43.72B 22.05B B 4.52B Gross Margin (ttm) 61.42% 36.14% 24.23% 65.61% EBITDA (ttm) 11.21B 1.81B 18.02B M Operating Margin (ttm) 20.15% 3.83% 10.15% 16.46% Net Income (ttm) 6.34B M 9.37B M EPS (ttm) P/E (ttm) PEG (5 yr expected) P/S (ttm)

5 Financials & Incomes Terms Source: Net Sales (Revenue) NetSales = GrossSales Returns DamagedMissing Goods Allowed Discounts = Money expected to receive Gross Margin Gross Margin (%) = (Revenue Cost of Good Sold) / Revenue EBITDA (Earning Before Interest, Taxes, Depreciation and Amortization) Net Income Net Income = Revenue Cost of Doing Business Depreciation Interest Taxes Other Expenses 9 Financials & Incomes Terms Source: EPS (ttm) - Earning Per Share trailing 12 months EPS = (Net Income Dividends of Preferred Stock)/(Average Outstanding Shares) Diluted EPS: including shares of convertible or warrants outstanding at the end of period P/E (ttm) Price to Earning Ratio PE = Market Value per Share/ EPS PEG (5 yr) PE to the Expected Growth rate PEG = PE/(Expected Growth Rate in Earning) P/S (ttm) Price to Sales Ratio PS = Price per Share/Revenue Per Share 10 5

6 ERP Implementation Lessons Learned and Questions Peter Solvik, Cisco Systems, CIO: They had done well, but how well? What had gone right? What had gone wrong? Given another project of this magnitude and risk, would they be able to do it again? What factors had made the difference between success and failure? Where had they been smart? Where had they been just plain lucky? Could they do it again if they had to? 11 Questions Class Questions: ERP Concept Why ERP? How important is the ERP to the overall IT architecture? What factors had made the difference between success and failure of the Cisco ERP project? Do you think that the Cisco team could do such a project again if they had to? Why? Why not? 12 6

7 Encountered IT Problems/Issues (Pete Solvik, CIO, ) Cisco - $500 million company Legacy System: Running UNIX-based software package to support core transaction processing: Financial Manufacturing Order Entry systems 13 Encountered IT Problems/Issues (Pete Solvik, CIO, ) Needs/Problems/Issues Future Business Need: expected growth from $500 million to $5 billion plus, but current software cannot provide degree of Redundancy, Reliability, and Maintainability Decentralized IT upgrade/replacement practice System failures, malfunctioned, corrupting central database 14 7

8 Selecting an ERP Products Approach to ERP Decision Making Analysis: KPMG Integration Partner Gartner Group, Seek advice: Big Six accounting firms ERP packages (Order Entry, Manufacturing, Finance, Sales/Reporting) Vendor size Output: Decision and RFPs 15 ERP (Enterprise Resource Planning) KPMG, 2011, Services (Audit, Tax, Advisory) Industries (Banking & Finance; Building, Construction & Real Estate; Chemicals; Communications & Media, Diversified Industrials; Electronics, Software & Services; Energy & natural Resources; Food Drink & Consumer Goods; Government; Healthcare & Pharmaceuticals; High Growth Markets; Insurance; Investment Management; Japanese Practice; Mid Market; Private Equity; Retail) 16 8

9 Implementation Approach KPMG Integration Partner Oracle - ERP Vendor Offered strong manufacturing capability, long-term functionality Flexibility Close proximity to Cisco headquarters ERP Project Contract (team, quality, costs, time duration) Building the Implementation Team Rapid Iterative Prototyping approach 17 Implementation Approach ERP Project Contract Team: 20 people => 200 people; Costs: $15 million (3% of $500million); Project time duration: 6 months Building the Implementation Team Executive Steering Committee (Cisco, Oracle, KPMG) Program Management Office Order Entry Track (Business Lead, IT Lead, Business Consultants, IT consultants, Users) Manufacturing Track Finance Track Sales/Reporting Track (IT Lead, Business consultants, IT consultants) Technology Track (IT Lead, IT consultants) 18 9

10 The Desired ERP System 19 Implementation Approach (Rapid Iterative Prototyping approach) CRPO Phase - Conference Room Pilot Goals: (1) Training the implementation team, (2) Setting up the technical environment Issues/Scope Changes/Modifications/Budget Change/Time Delay Deliverables Lesson learned CRP1 Phase Fully staffed Goal: Make the system work within each specific area Issues/Scope Changes/Modifications/Budget Change/Time Delay Deliverables 20 Lesson learned 10

11 Implementation Approach (Rapid Iterative Prototyping approach) CRP2 Phase (Module testing, System Integration) Activities: Major modifications, a after sales support package, data communication data warehouse Issues/Scope Changes/Modifications/Budget Change/Time Delay Deliverables Lesson learned 21 Implementation Approach (Rapid Iterative Prototyping approach) CRP3 Phase (System Testing) Goal: Testing the full system, assessing readiness to go live Final testing, all users, full transaction load Issues/Scope Changes/Modifications/Budget Change/Time Delay Deliverables Lesson learned 22 11

12 ERP Project Evaluation/Lesson Learned Performance Cost $15 million Bonus $200,000 Project Time Lesson Learned and Replication? Leadership Planning Contract negotiation Staff 23 A Modern Enterprise IT System Involves Data Integration System Integration Application Integration Interoperability Loosely coupled (LAN, WAN, Web connected, Wireless connectivity) Service-Oriented Cloud-based 24 12

13 A Modern Enterprise IT System 25 A Web-based Database/Warehouse 26 13

14 Project Management Body of Knowledge (PMBok Guide, 4 th edition, ANSI/PMI ) Nine Areas Project Integration Management Project Scope Management Project Time Management Project Cost Management Project Quality Management Project Human Resource Management Project Communications Management Project Risk Management Project Procurement Management 27 Summary 28 14