Why Cisco’s ‘spin-ins’ never caught on

It is a question everyone asks themselves at some point in their career: Is it better to join a small company, where the risks may be higher but there is a better chance to make an impact and be rewarded accordingly? Or head into a bigger organisation, where you work on a larger canvas but are less likely to be on the leading edge of new ideas? And is there a way to get the best of both worlds?

It is not just workers who face this dilemma. In a time of rapid technological change, many established companies have been struggling with how best to organise themselves, taking advantage of their scale while creating breathing room for new ideas to take hold.

One of the most radical experiments in bridging this divide was pioneered by Cisco Systems more than two decades ago. The networking equipment company funded semi-independent start-ups, or “spin-ins”, under a group of managers who left the corporate mother ship to venture into a new product or market.

If the new businesses hit pre-agreed targets, they were bought out by Cisco — handing start-up-style gains to their executives and injecting a successful new business into the corporate parent. If they failed to hit those targets, however, Cisco would not buy the business.

The idea represented a structural approach to combining the benefits of scale with the speed of a start-up. While spin-ins have not taken hold more widely — and even Cisco has now backed away from them — they are a useful guide to some of the pros and cons of trying to span two very different corporate styles.

Cisco mounted a series of spin-ins with the same four executives at the centre — three of whom had come to the group on its first acquisition, of Crescendo Communications for $92m in 1993, with the other joining soon afterwards. Some of those involved in the spin-ins say they were an antidote to the myopia of managers who would be too absorbed trying to maintain large, established businesses to think about opportunities in new markets.

“You almost have to step away from that to look at the broader lens of where the technologies are shifting in adjacent markets,” says Soni Jiandani, one of the four spin-in executives. “You can’t say, I have a day job or I am building a multibillion-dollar business, and then I go home at night and I think about all the adjacencies.”

That predicament is even bigger for managers whose businesses are facing technological disruption. One spin-in backed by Cisco, for instance, created a software product that threatened to disrupt Cisco’s core business of selling hardware routers and switches.

“You have a true ability to look where the market is going, and what it will take to build a highly competitive offering,” says Jiandani.

Another advantage of the corporate-backed start-up was to retain entrepreneurial talent that might otherwise have left for brighter opportunities elsewhere.

John Chambers, Cisco’s chief executive throughout the period of its spin-ins, says normal staff attrition at Silicon Valley companies runs at around 15 per cent a year and more like 22 per cent at companies that are acquired. The only way to beat those odds, he says, is to try something entirely different.

Pointing to the four executives who led Cisco’s spin-in deals, he says most companies that have this type of talent do not retain it for more than two or three years. This team stayed with Cisco for 23 years.

The start-up structure also enabled Cisco to attract different types of talent into its orbit, says Jiandani. She cites Edouard Bugnion, a Swiss software architect and co-founder of cloud company VMware, as an example. He co-founded Nuova Systems, one of the spin-ins, before it was bought out by Cisco, after which he spent three years in a corporate role at the parent.

Yet spin-ins have not caught on more widely, and the idea has aroused strong opposition. Chief among the problems is that they stir up envy at the parent company because of the very different financial incentives offered to workers.

Spin-ins could stir up envy because of their different financial incentives

“You have to have a culture that accepts it,” says Chambers. Employees have to believe “it is OK for the person beside you to have made $1m because she or he took the risk, versus you getting paid $200,000 because you didn’t”.

“It puts a stress on the organisation. You have to have a risk-taking environment where people do what is right for the company long term.”

If mainstream workers find the windfall gains made by some of their colleagues hard to stomach, the problem is even worse if the risks taken by those who joined the spin-ins are not felt to have justified the rewards.

Cisco engineered an arrangement where spin-in executives were given big short-term goals. Typically, Cisco set a two-year revenue target: Should the spin-in fail to hit this, Cisco would have no obligation to buy in the business.

“It was a time bomb,” says Prem Jain, another of the Cisco executives. “If you don’t deliver in a certain amount of time, you get zero. It is a very high-risk proposition, because if Cisco doesn’t buy it, we make nothing.”

However, Cisco’s spin-ins also enjoyed big advantages other entrepreneurs would kill for, which reduced the risk of failure faced by employees in typical start-ups. These benefits included access to the parent company’s huge customer base — an important asset for a new business looking to test an idea. “We always build a product based on input from customers — that is the biggest leverage you get out of it,” Jain says.

The spin-ins could also tap into Cisco’s sales channel, manufacturing base and support functions. As Jain puts it: “All we need to do is marketing and engineering. All we need to do is get the right product, and deliver on time.”

But if this experiment in big company-backed innovation worked, why has it not caught on more widely?

One reason may be the internal animosity it aroused. One former Cisco executive, who declined to be named, says the people behind the spin-ins aroused deep resentment inside the group, where many felt they profited at Cisco’s expense. Chuck Robbins, who took over from Chambers as chief executive, has ended the experiment.

But Chambers himself is adamant it paid off. “I don’t buy it,” he says of complaints about excessive gains by Cisco’s spin-in specialists. “Did this team make more money when I acquired them than I did as CEO? Of course. Did I have any problem with that? Zero.” He also says the three businesses Cisco acquired this way — Andiamo, Nuova Systems and Insiemi — were among its five most successful acquisitions ever.

The former Cisco boss is still backing his old protégés. Jiandani and Jain are now at the helm of a new start-up, Pensando, that Chambers has invested in personally. Their longtime associates, Mario Mazzola and Luca Cafiero, have seats on the board. This time, however, there is no Cisco backing — and no limit to either the risks or rewards.