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Productivity Revisited

John Chambers, an avowed optimist, is having his mettle tested in more ways than one.
It's a Monday in mid-July and the Dow has dropped more than 400 points, then regained much of the lost ground. With the exchanges finally closed, John Chambers emerges from his modest office at Cisco Systems' headquarters in San Jose, Calif., with a sigh: "You got this market figured out for me?"

Chambers, an avowed optimist, is having his mettle tested in more ways than one. Not only is investor sentiment playing havoc with Cisco's stock price--shares were trading near a 52-week low that day--but businesses continue to take a conservative approach to what they spend on IT. Cisco, the quintessential high-growth technology company of the late '90s, eked out just 2% year-over-year revenue growth in its most recent quarter.

So what is Cisco's president and CEO doing in response? Staying the course. More than a year ago, Chambers concluded that Cisco's product and services strategy wasn't to blame for the company's sales slowdown, so his focus has been on preparing the company for growth when the economy improves. The catch, of course, is that the slowdown in capital spending is holding back economic growth.

Chambers admits he's not sure when tech spending will rebound: "CEOs are cautious about what's in front of them. They are not going to spend in most situations until they see their own businesses turn up, and they're probably going to hesitate by anywhere from two to six months" after that. He declined to discuss the current quarter, because Cisco's financial results are due this week.

Yet he's optimistic because of the potential for even greater productivity gains than companies already have realized from IT investment. Web-based applications could increase productivity at U.S. businesses by 3% to 5% a year, according to studies supported by Cisco. "Time will tell if we're right," Chambers says. "If we are, the standard-of-living implications are huge, and the role that technology will play in the growth or survival of companies will also be very large."

For companies that want more productivity but don't have the wherewithal to spend on IT to get it, Chambers has an intriguing proposition: Leverage existing infrastructure. When researchers evaluated IT investment over a nine-year span, he says, they found that businesses got more productivity out of systems in years four through six than in one through three, and even more in years seven through nine than in the middle years. "That shocked us," Chambers says. And it suggests that all the companies that spent wildly to build out E-business infrastructures in the dot-com rush have yet to fully exploit those systems.

Chambers believes business processes and culture are key to wringing more value out of existing networks. "Merely putting in the applications, the infrastructure, doesn't get you productivity," he says.

When businesses do ramp up spending, Cisco's chief says, multimedia convergence will be imminent. "There's no discussion anymore about whether IP voice, data, and video will come together. The answer is yes," he says. "The question is, do you do IP telephony this year or within five years?" How CIOs answer that question will have a lot to do with how quickly Chambers' optimism is rewarded.

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