Cisco Systems and Cisco Systems and National Australia BankNational Australia Bank

MIS 204MIS 204Michael ReynoldsMichael ReynoldsAmanda GroveAmanda Grove

Who Cares about Cisco Who Cares about Cisco Systems?Systems?

►Founded by Stanford University Founded by Stanford University computer scientists in 1984.computer scientists in 1984.

► In 1990 the company grew at a double In 1990 the company grew at a double digit rate.digit rate.

►Now Cisco has 85% of the Internet Now Cisco has 85% of the Internet routing and switching equipment routing and switching equipment market.market.

Why Cisco Prospered at Why Cisco Prospered at first…first…

►Adapted the first multiple-protocol software.Adapted the first multiple-protocol software.►Cisco was the first to create the Cisco was the first to create the

commercially successful multi-protocol commercially successful multi-protocol router to allow previously incompatible router to allow previously incompatible computers to communicate using different computers to communicate using different network protocols.network protocols.

►Products first started hitting the internet in Products first started hitting the internet in 1995 and by 2000 Cisco Systems were 1995 and by 2000 Cisco Systems were selling 50 million products a day online.selling 50 million products a day online.

► Internet Protocol Internet Protocol

Two main Cisco Systems Two main Cisco Systems StrategiesStrategies

►First:First: The company outsourced most The company outsourced most of its production.of its production.

►Second:Second: The significant portion of its The significant portion of its growth was through acquiring and growth was through acquiring and investing in other companies investing in other companies especially suppliers.especially suppliers.

555 Billion to 100 Billion???555 Billion to 100 Billion???

► In 2000 Cisco was briefly worth $555 In 2000 Cisco was briefly worth $555 billion.billion.

►April 2001 it declined in value to April 2001 it declined in value to nearly $100 billion.nearly $100 billion.

►The stock price peaked at over $80 The stock price peaked at over $80 per share in July 2000per share in July 2000

►The stock price bottomed out at less The stock price bottomed out at less than $14 per share in April 2001than $14 per share in April 2001

Cisco Systems Internet SalesCisco Systems Internet Sales

►Customers use the Cisco Connection Customers use the Cisco Connection Online (CCO) to configure, price, route, Online (CCO) to configure, price, route, and submit orders electronically to and submit orders electronically to Cisco. Cisco.

►50% of the orders entered on CCO are 50% of the orders entered on CCO are sent directly to the manufacturers, then sent directly to the manufacturers, then shipped directly to the customers.shipped directly to the customers.

►Delivery went from taking 6-8 weeks to Delivery went from taking 6-8 weeks to less than 3less than 3

Cisco Sales DatabaseCisco Sales Database

►Cisco’s sales database is updated Cisco’s sales database is updated THREE THREE times daily. times daily.

►Engineering managers receive email Engineering managers receive email alerts if a big problem occurs that is alerts if a big problem occurs that is not solved within one hour.not solved within one hour.

Business to Business Supply Business to Business Supply Chain Extranet Chain Extranet

►Cisco created Manufacturing Connection Cisco created Manufacturing Connection Online for business transactions between Online for business transactions between manufacturers/suppliers with Cisco Sytemsmanufacturers/suppliers with Cisco Sytems

►Manufacturers could purchase supplies, Manufacturers could purchase supplies, make reports or submit forecasts and make reports or submit forecasts and inventory informationinventory information

► Inventories for Cisco’s suppliers were Inventories for Cisco’s suppliers were reduced by 45% after the formation of this reduced by 45% after the formation of this extranetextranet

Cisco’s DeclineCisco’s Decline

Starting in Spring 2000Starting in Spring 2000► Cisco projected its sales to double over the Cisco projected its sales to double over the

next year so they made the “necessary” next year so they made the “necessary” orders.orders.

► Telecommunications market was falling Telecommunications market was falling (dotcoms etc.) but Cisco wanted to expand (dotcoms etc.) but Cisco wanted to expand as it had before (mid 90’s)as it had before (mid 90’s)

► Year ended with 40% decline in Year ended with 40% decline in telecommunication sales (largest market)telecommunication sales (largest market)

► 6,000 employees released6,000 employees releasedEnding in April 2001Ending in April 2001

National Australia Bank and National Australia Bank and Computers ErrorsComputers Errors

►1998-National Australia Bank (NAB) 1998-National Australia Bank (NAB) was the largest bank in Australia.was the largest bank in Australia.

►NAB bought HomeSide Lending Inc. for NAB bought HomeSide Lending Inc. for around $1.2 billion. HomeSide was around $1.2 billion. HomeSide was located in Jacksonville, FL and was the located in Jacksonville, FL and was the 66thth largest home loan servicing largest home loan servicing company in the US (about 2 million).company in the US (about 2 million).

Problems from the beginningProblems from the beginning

► In 2001 the US Federal Reserve lowered In 2001 the US Federal Reserve lowered short term interest rates indirectly causing short term interest rates indirectly causing long term rates to fall especially for long term rates to fall especially for HomeSide.HomeSide.

► Several of these long term interest rates Several of these long term interest rates included mortgage rates so HomeSide included mortgage rates so HomeSide customers were refinancing at dangerously customers were refinancing at dangerously low rates.low rates.

►HomeSide and NAB cost themselves a $288 HomeSide and NAB cost themselves a $288 million after-tax write-down that year.million after-tax write-down that year.

HomeSide Computer HomeSide Computer Forecasting Software FailsForecasting Software Fails

►HomeSide developed a model to forecast HomeSide developed a model to forecast their income of loan servicing.their income of loan servicing.

► This forecast model was connected to This forecast model was connected to another model and both had to use the another model and both had to use the same type of rates (either both net or both same type of rates (either both net or both gross).gross).

► BIG MISTAKE: one model was using gross BIG MISTAKE: one model was using gross rate while the other was using net rate.rate while the other was using net rate.

► Complete overstatement was made in Complete overstatement was made in projection for the 2 yearsprojection for the 2 years

Costs for NABCosts for NAB

► $1.2 Billion to buy HomeSide$1.2 Billion to buy HomeSide► $288 Million write down in beginning of 2001$288 Million write down in beginning of 2001► $400 Million write down in July 2001$400 Million write down in July 2001► $760 Million for forecasting error 1999-2001$760 Million for forecasting error 1999-2001► Sold HomeSide for $1.9 Billion to Sold HomeSide for $1.9 Billion to

Washington Mutual, the US largest savings Washington Mutual, the US largest savings and loans companyand loans company

► 2006 Money Magazine named NAB “Bank of 2006 Money Magazine named NAB “Bank of the Year”the Year”

ReferencesReferences

►Case Study. “Cisco Systems and Case Study. “Cisco Systems and Australia National Bank”. Binder in the Australia National Bank”. Binder in the Library.Library.

►Former VP of Sales for Commercial Former VP of Sales for Commercial East Area Lou McElwainEast Area Lou McElwain

►Wikipedia Encyclopedia Wikipedia Encyclopedia http://en.wikipedia.org/wiki/National_Ahttp://en.wikipedia.org/wiki/National_Australia_Bankustralia_Bank