How Cisco learned to love software

March 28, 2013, 11:06 AM UTC

FORTUNE — Cisco Systems’ “transformation” into a more software- and services-centric company is far from complete. Over the next five years, the San Jose-based networking equipment giant plans to double the amount of revenues that come from software from $6 billion to $12 billion. To that end, it’s announced a string of software-related acquisitions, including SolveDirect, a maker of network services management tools, and Israel-based Intucell, which sells software for mobile operators, among others. It’s also shifted gears in its collaboration business, which grew just 3% from 2011 to 2012. Cisco (CSCO) is now focusing on delivering videoconferencing services over the cloud to any screen — not just pricey TelePresence rooms — and allowing more interoperability with other collaboration tools like WebEx. Last week, the company announced that customers will be able to invite users outside of their company to participate in TelePresence meetings via the WebEx service on their web browser. Fortune recently caught up with Robert Lloyd, president of Cisco development and sales (and possible successor to CEO John Chambers) to hear more about the company’s plans to revamp its collaboration business, and to get his take on the recent “working from home” debate sparked by Yahoo (YHOO) CEO Marissa Mayer.

Fortune: What’s the status of Cisco’s collaboration business, which seems to have dipped in growth?

Lloyd: I think that the collaboration business is at a turning point, it’s in transition. I was with Cisco when we started the world of IP telephony. Along that journey we became market leader. Then we led the transition and created a market for immersive video, which we call TelePresence. We made that market occur by demonstrating how the technology could apply to company processes. Then we hit a recession, and people deployed the technology because they needed to save money. What’s happening now is I think the market’s moving away from taking advantage of those technologies only as endpoints. We’re seeing a lot more software coming into that environment, and the market is turning towards endpoints being any devices — my iPad, my Samsung Galaxy S3, my TV screen. So our model will turn more to software as well as increasing the number of endpoints and the cloud-based delivery of enterprise communications. The other transition is the cloud and people buying things as a service. As a result our gross numbers are down, but in most of these categories our market share is up, which means the market’s kind of shifting. And with our market share position and the breadth of our portfolio we will power through that transition and I think come up with a much more integrated approach.

When do you expect that to happen?

I think it will take a couple of quarters. We are seeing increased demand for our cloud-based unified communications portfolio. And naturally this then leads to more recurring revenue for Cisco — unlike selling equipment and phones, it’s spread over time. This is actually part of our strategic plan, to build more recurring revenue.

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You’ve been pushing technology that allows employees to collaborate outside of the office, but some companies are trying to get them back into the office. Are you seeing similar efforts from you customers?

We’re not seeing that. When you really have to pull people together and you really have to transform a company that may be one tactic to doing it. At Cisco we bring all the leadership team together twice a year, but between those points we see them all the time — in virtual meetings, from iPads in airports. I can hold meetings from my home, which I do. Since I have a global job I can hold a meeting at 10 o’clock and still see my kids before they go to bed. The vast majority of our customers are looking to virtualize their real estate and are creating flexibility in their business model and looking at more global markets. You can’t do this any other way but by supporting a very virtualized work environment, or you will drive people crazy. We all know what it’s like to fly to Bangalore. We’re in San Jose, and if you took a knitting needle and stuck it straight through the world you would miss Bangalore by about 20 minutes. It’s a long trip.

Obviously you have to eat your own dog food, but how do you make this part of the Cisco culture? 

It’s top down, driven from [CEO] John Chambers. There were metrics put in place for parts of the company to make sure they were driving for these changes. When I was running worldwide sales at Cisco, the first decision I made at the beginning of the recession was to cancel our big, annual global sales meeting which everybody loves and do a virtual meeting over TelePresence around the world, instead of all getting on a plane, which at our scale costs a lot of money.

How did people react?

They didn’t like it. They missed their interaction with colleauges. But in the subsequent years they said in some ways it was better. They liked the ability to comment on a presenter’s presentation in real time and watch their colleagues dialogue in an online chat. You get a real-time interaction that you couldn’t achieve in a real room. There are examples across the board where we’ve used collaborative technologies in education, leadership, marketing, and communications that have really set the bar. We have people join meetings anywhere in the world on a WebEx connection. And now my WebEx can join my TelePresence, and from my WebEx I can appear in a TelePresence conference, so it looks like you’re part of the same experience.

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