International Business Machines Corporation (NYSE:IBM) J.P. Morgan’s 50th Annual Global Technology, Media and Communications Conference May 23, 2022 2:30 PM ET
Jennifer Nason – Chairman of Investment Bank
Conference Call Participants
Rob Thomas – SVP, Global Markets
Good afternoon, everybody. Welcome to this session with Rob Thomas, thank you, Senior Vice President of Global Markets for IBM. I am Jennifer Nason, I am Chairman of the Investment Bank. I am very happy to have this conversation today.
Q – Jennifer Nason
So Rob, maybe I can start with sort of just the general question of how you find yourself in this position and this role at IBM, may be for the benefit of the audience if you could give us a little bit of a retrospective on the roles you’ve had at IBM, just the part you’ve taken to be in the position you are today.
Sure. Good afternoon, everybody. Great to be here. I started with IBM in consulting and then ended up in microelectronics because we were at the time we were building a services business in microelectronics and I did a couple years in Japan doing that and then when I came back to the US, I joined Software.
So I’ve spent most of my career in software. Did M&A in Software, ran engineering for Software, then actually ran Software and then about a year ago, took on go-to-market. So I think I’m the first sales leader in IBM that previously ran software engineering. But it’s a little bit of where we’re going in terms of what we see as the company and what the market is asking for out of our sales team, but that’s a brief recap of the journey.
So Arvind’s been in the role now as CEO for coming up on two years, I think now a couple of years. So as you — as you think about what’s been accomplished in the last couple of years and the imprint that Arvind’s already had on the company. Can you talk a little bit about that? What’s changed organizationally, culturally under Arvind’s leadership?
To bring it to two words, it’s growth and focus. From day one, he has talked about rebuilding IBM around growth and a lot of focus and the businesses that we’re going to be in, how we’re going to compete, how we’re going to win. He does run a very open culture, open environment and I always get a kick out of listening to him, but he does office hours with all of our employees about once a month and he can cover any topic you could possibly imagine from quantum physics to geopolitics, to business strategy and I think he’s built a real connection with the employees, kind of having that breadth and depth.
And last, I would say a relationship we announced, I think probably summarizes, I would say the mindset a little bit. We announced a partnership with McDonalds at the end of last year, and I’m not sure we would’ve done that kind of deal without, I’d say a combination of Vin’s technical prowess and business insight because in that case, we were taking on a business that they’d kind of struggled with around ordering.
We believed and we built a thesis around, we could use our natural language processing technology, which is very good to augment the McDonalds’ technology and we’re now starting to roll that out to many of their stores, eventually all their stores. And this is a great application of technology, wage inflation and quick service restaurants, we can do all the drive through ordering without requiring human intervention, every once in a while something will kick to the human, but it drives great economics to franchisees all through the power of software and through AI and creative construct and I think Arvind gets a lot of credit for bringing the mindset to do deals like that.
So is it creativity? Is it bureaucracy busting? Is it nimbleness, all of the above? Is that what you think is going on?
There’s definitely all the above. He can go very broader, very deep. On one hand we can sit and talk about capital allocation, where do we put resources, markets, countries that we want to invest in? And then you can do a five hour engineering review on quantum or AI and bring a lot of insight to the team. And what that really does in terms of the culture is it creates urgency and speed. People feel empowered to make decisions to go really fast. And I think that’s ultimately what we have to do to continue to be successful.
So let’s talk a little bit about growth, which is what everybody wants all the time, us included actually, and you just talked a little bit about investing for growth and moving faster. Tell us a little bit about that strategic focus and what that means. What is — where are the areas for growth that you are most focused on right now?
Everything has to start with the market. So if you go back about two years, we were looking at what’s happening in technology, what’s happening in the market, just a few stats. So 90% of the data in the world that companies have is underutilized or not used at all. That’s a pretty big problem. We said, we think we can go help solve that problem. That was an IDC study that said that.
McKenzie did a report talking about hours of work that can be automated, which has only been accelerated through things like wage inflation. So we said, automation is an interesting area. Cyber security incidents are going up 40% a year. 80% of companies have now decided they’re going to be on multiple public clouds and private cloud, which is a major change from a few years ago.
So you take all those elements and we said, we see an opportunity for IBM to focus in data and AI, automation, security, hybrid cloud and consulting because a big part of this is the skills that clients need to be successful in these projects and that is the new IBM; it’s data, automation, security, hybrid cloud, consulting, that’s a different IBM than it was a few years ago and that type of focus, it helps me in my job make it really clear to the sales force, what I expect and what people need to do. It’s clear guideposts for R&D, which includes what we do in IBM research, how we commercialize and productize through our software business or infrastructure business. Focus is really powerful. I think that’s the biggest change.
So do you feel that the portfolio you have today is the portfolio of assets that you need because you touched on consulting and most companies think about, do I need to own everything, the pieces and some of the parts, all of those issues. So it sounds like your view right now is that those pieces together have probably never been more important than they are right now, but that portfolio approach and what you can deliver holistically to clients is at a premium.
I think that’s actually been extenuated in the last couple years where as you can see from the demand we’ve had, for things like consulting, most businesses do not have the skills they need to drive, whatever the next transformation is. So I think that becomes a really critical aspect to this.
Then you take it to look in technology, the job is never done. You always have to be innovating and figure out what comes next. Couple examples and when I was running Software, we started investing in software-defined networking, and wasn’t a business we were in before. And this is the kind of thing that you iterate on, you learn over time. We’re making progress. Recently, we announced a business in sustainability software, which again is about capitalizing on ESG reporting, how that connects to data sources, that’s kind of a combination of automation and data. So the job is never done on that.
The challenge is how do you keep producing new relevant products, finding product market fit, building a robust go to market around that, but consulting and technology to me are two sides of the same coin and it’s probably one of the greatest advantages we have in IBM is having both of those.
So let’s talk a little bit about sort of M&A, if I could for a moment, so Red Hat, Turbonomic and the recent spin-off of Kyndryl. So that’s all in the last few years, which has been a lot — a lot of moving pieces at IBM. And I look outside right now at the value of assets given the market has sort of come off the boil. And you are one of the few — IBM is one of the few tech companies that’s kind of held in there through the recent market turmoil.
How do you think about M&A as a strategic tool because you’ve obviously been very busy over the last couple of years transacting. So how important is that going to continue to be for you to achieve your growth objectives?
Like you say it’s been a busy couple years and I think we’ve made a lot of progress to reposition and refocus the company, but M&A is something we’re always looking at. What happens any given month or quarter in the market doesn’t really change the philosophy. We are always looking at M&A to drive growth, to fill in portfolio gaps, whatever those may be, and that’s what we’ll continue to do.
So in two years, I think we’ve done 24 acquisitions, which has been, I think, a really good run for us in terms of building out capabilities. About half of those were in consulting, half in Software. The ones in consulting have really focused on the big strategic partnerships that we’ve built. So companies like SAP, Salesforce, Adobe, AWS, Microsoft Azure; we’ve basically acquired capabilities, skills in those areas that helps us build practices faster, including assets that helps us drive workloads with those companies.
On the software side, it’s been in all the areas I’ve talked about and I think in automation is actually a good example of buy and build, meaning, we had built a product called Watson AIOps. It’s a really good product. It’s the brains for how you understand what’s happening in an IT environment, but the brain is only as smart as the data that you can feed it. And so we bought Turbonomic, which looks at compute storage and networking, can feed that into Watson AIOps.
Instana, looking at the application layer, MyInvenio, looking at process mining. So it’s a good example where we had a good core product, but we needed to feed more data into it. And that’s really built out the core of our automation portfolio. We’ve done acquisitions in security to go into places like XDR. I talked a little about software-defined networking, in the McDonald’s example I gave that was acquiring an asset around data and AI. So M&A will continue to be part of our strategy.
Okay. And I’m just thinking, I only quoted the deals we worked on. So I need to — I need to do better, I think. So look a great recent quarter, so the first quarter, very strong, obviously really important, particularly in this environment to have great quarters. That’s what the market probably values more than anything else right now.
Can you share a little bit about what your view is of sort of enterprise spend, technology spend the sort of macro environment we are going into right now and how you sort of feel that’s going to impact performance across the board in technology and for IBM specifically,
We’re certainly proud of the progress that we’ve made, but it never stops. And one thing I’ve noticed, anytime there’s any level of uncertainty in the market, companies that we work with, tend to focus more back on, I’d say their core operations, core part of the business. I think we’re really well positioned for that.
The areas that I talked about, those don’t stop, even if people are wondering what’s going to happen in the environment. Some examples. Aldi, we’ve done a lot of work, both in consulting and technology. We’ve reduced their server footprint by more than half that’s about using automation to drive their technology strategy.
Regardless of what happens in the macro environment, that’s going to be an interesting project for any company because it’s about making them leaner, more agile. I don’t think that changes. We’ve done work with Lufthansa around integrating different data sources and all these different data silos.
How do you build that into a single data fabric, where they can do data science? Now yes, the airline industry has had some ups and downs. But these core technologies drive productivity for the long term. So I think that’s a good example.
We’ve done work at CVS, where we’re automating their customer service. We’re now getting into containment rates of 70%, meaning anybody that calls CVS, 70% gets handled with software using Watson. That was a big part of how they dealt with the COVID vaccine rollout. So I look at these projects, these are the kinds of things that don’t change based on the macro environment.
So we’ve really focused on core parts of the business. If you look at the consulting, we focus on hybrid cloud services, which Aldi is an example, how we help clients move from private cloud to public cloud, how they manage workloads across those. We do work in business transformation. Again, I don’t think these needs really change. So we’re positive on what we see going forward.
So it sounds like you see that the sort of continued demand from customers. So you don’t expect any — and look, it was JPMorgan’s Investor Day today and a big part of our story is the significant increase in technology spend. Do you think it’s just the wave of innovation and the need to continue to invest in technology is just not something that the macro factors are going to dramatically impact?
Well, I do think something has changed here, right? If we were having this discussion 15 years ago, at that time, people thought of technology or IT as a cost to be managed. We’re going to give a budget to our CIO. The only thing we know for sure is the budget is going to be less every year.
We’re going to squeeze out every dollar. We got Harvard articles being written, IT is dead. That was probably not a very great take, if you think about it; like technology’s become much more core to the business strategy than it ever has before. So I don’t have any discussions where people are like, we’re trying to figure out how to reduce or minimize our cost. I think every company has realized this is core to their strategy going forward.
So yes, they may change how they look at problems, which ones they attack first. But I think that’s the biggest difference. This is core to their strategy.
Can you touch on how the go-to-market strategy has changed, evolved? You’ve made a bunch of announcements around that over the last year or so. And in the context of Red Hat in particular, just what is — how has go-to-market shifted or evolved? Or is it — is different at IBM today?
I think there’s 3 big differences, then I’ll talk a bit about Red Hat. The number one is focus is everything and go-to-market. And majority of people in our go-to-market are focused on consulting or technology. They know exactly what they have to go do because we’ve been really clear on priorities from a product perspective. We’ve changed the incentive model, which Arvind has talked about before in terms of a focus on revenue. And again, salespeople do what you pay them to do. And we’ve been really clear on that.
I’d say the second piece is around what I would call creating an experiential go-to-market. And that’s moving away from PowerPoints and dinners, which don’t get me wrong, that’s all good, but clients are looking for technical skills. People that are going to roll up their sleeves and help them solve a problem. We’ve created 2 new teams in our go-to-market. One is presales, it’s called client engineering. And what we do is we deploy a team of engineers to work with a client on any problem they have. We don’t charge for this team. That is not what clients expect from IBM. They expect to receive an SOW and be charged, we’ve really changed that model.
And one is we have to train clients, that’s the new model. But by deploying client engineers, we can help them work through a problem. Ultimately, we want them to use our technology to solve that problem. I mean, we’re pretty clear on that. But being able to deploy deep technical talent that immediately solves the problem that you’re dealing with on managing multiple cloud environments or orchestrating and responding to a security incident. You don’t never have to do a PowerPoint. You don’t ever have to do a sales call. If you’re the technical team that’s there solving the problem, you become the choice. So that’s one of the new roles.
The other new role is what we call customer success, which is post sale. So when we sell something like a Cloud Paks, that client immediately has assigned a customer success manager. And that person is incented and paid on ensuring that, that client deploys the product, uses the product and ultimately expands, uses more over time.
So before our go-to-market was largely oriented towards sales, just direct sellers and changing the complexion where we have more people doing client engineering and customer success that has a big impact. Now it takes some time. We have to keep working through that, but really positive on the progress there.
And I would say the third dimension on go-to-market is around ecosystem. I think there was a time we used to approach clients and it was a very IBM-centric point of view. And I see clients today are a little surprised when we come in and talk about, hey, we work with MongoDB. And we can talk about how MongoDB can run better in a hybrid cloud environment working with you or what we’re doing with Salesforce that I mentioned or Adobe or with AWS or Azure. We’ve now put our software on AWS and on Azure. We can talk more about that if you want.
So I think it kind of surprises clients when they hear about it. It’s not really the IBM that they expect. But those are the 3 big differences in terms of what we’re doing.
Yes. So let’s just drill down on that a little bit more. So I hear a lot and have heard a lot over the last few years about best in breed. And even we institutionally in picking technology providers have tendered over the last few years to get very micro-focused. But IBM has a great reputation as really being best-in-class at managing large complicated enterprise customers like us.
Do you think that scale is more important today? And you just talked about sort of managing almost like a syndicate of providers to some extent and having that technical expertise that you bring to the table to make sure it’s all stitched together properly and execute it well. Does that make sense?
Is that — are we going to see sort of the reassertion the notion of you pick IBM because you can — IBM can manage a complicated customer and really deliver even if not all the technology is provided by you?
I think — I’m not sure you go as far as managing all that. It’s more about we want to be open. And I think if there’s one thing that we’ve learned through Red Hat, it’s about openness and the value of openness when it comes to technology and how we approach the market. So by bringing in other partners as part of these landscapes, one is, in many cases, they’re already there.
But two is, to your point, it gives the client a chance to pick and choose between the capabilities that they want. Now I would say best-of-breed is really good until you have like 1,000 security problems. And so I think there’s a ditch on the other side of the road there, and we try to help clients navigate that.
Just one example of what we do even within IBM. So when we position Cloud Paks to a client. I’ll pick one, say Cloud Paks for Data. So that client today might just be a Db2 user. And we go in and we talk about the value of moving to a Cloud Paks.
One is, it creates a huge flywheel where they get the Db2 capability, and now it’s containerized, but something they have access to all the other capabilities in the Cloud Paks. It could be Watson Knowledge catalog that’s doing metadata, data cleansing. It could be Watson Studio, which gives them a data science workbench. It could be some ETL capabilities.
So this client went from — I just used Db2, so now I have a modernized set of containerized micro services that do much more than just a transactional database. That’s obviously revenue growth opportunity for us.
We also embed a version of OpenShift in each of the Cloud Paks. So the client doesn’t have to make a container decision, but when they make the Cloud Paks decision, now they have an embedded license to open OpenShift. So this might be a client that wasn’t using OpenShift before and now they are. And why is that valuable?
It’s very costly to build and manage your own container incidence because you have to deal with how am I going to do my logging, my monitoring, my observability, how do I do security patching? How do I do upgrades? And we can manage all of that for them as part of the Cloud Paks environment.
So I think it’s about simplifying what are really hard enterprise technology problems, but doing it in an open way. Before Red Hat, we probably would have done a proprietary version of the container piece. Instead with Red Hat, it’s open source. People can take that and run it anywhere they want. They can go download the code off the Internet if they want.
I think that’s the other part that probably surprises clients a little bit about IBM as they don’t expect that type of open architecture, but I think that’s a big tailwind for us.
So how complicated are potentially, I guess, are the network of relationships or the ecosystem then that you participate in? Do you worry about that getting more complicated over time? Tell me how you think that’s going to evolve and change because that’s something, I guess, a lot of technology companies want to be managing all of those relationships. How do you think that’s just going to evolve? Is that going to get harder, easier? You’re just going to get — you are very good at that, how does is that going to work?
We want more partners. So let’s be clear. Our goal is more partners working with IBM. Let’s kind of break down what partners or ecosystem means because there’s a few different categories. There’s resellers and VATs [ph]. It’s been a big part of our distribution channel for a long time, certainly, with software, storage, our power systems. We want to continue that. And I think there’s an opportunity to grow with more resellers. Resellers, the good ones add a lot of value in terms of deployment skills that they bring to a client. So that’s one part of when I say ecosystem.
Next is ISVs, other software providers, where I think we have a great value proposition to them on embeddable AI, running on OpenShift, running on our financial services cloud, there’s different ways that they can differentiate themselves by working with IBM.
So that’s part of ecosystem. We put a big focus on global systems integrators. So building out partnerships with Accenture, Deloitte, EY, to name a few. And look, that’s a realization that while we have a consulting arm and is really core to our strategy. There are many different choices for systems integrators. And we want our technology to be a part of every bit going to a client. So we’ve built out those.
The last category, as I would call strategic partners, some of the ones that I mentioned. And think about where we are today with AWS and Azure versus 2 years ago. 2 years ago, none of our technology ran there. Just a week before last, we announced kind of an upgraded relationship with AWS, where now our software is available as a service on AWS, which again changes and eases the consumption model. So it’s a much more open approach to making our technology available.
Obviously, that leads to more technology consumption, but it’s also a bigger opportunity for the consulting business because the consulting business can now go in on our front foot and say, look, we have technology on this cloud. We can help you build the bridge between what you’re doing on your private cloud. We have the Red Hat skills to help you on how you’re going to deploy open source as part of this.
So ecosystem is a really critical topic because the size of the addressable pie grows dramatically when we’re operating that way.
Yes. And very consistent with the whole hybrid cloud and multi-cloud approach. So can we just touch on the new mainframe cycle Z16. What’s the broader opportunity for mainframe at IBM? It’s sort of the gift that keeps on giving.
It’s an incredible product. This is what happens with great technology. It lasts forever and people continue to grow on it. We’re coming off a great mainframe cycle with Z15, which we feel really good about. And I think Z16 is a whole different level of innovation in a few areas. One is really good at hybrid cloud, how you would manage data applications, easily move workloads around an organization with the mainframe as the core because that’s doing a lot of the transactional processing of these companies. That’s one aspect.
Second is AI. I think time will tell that this is the most sophisticated enterprise AI system in the world. We do something called on-chip inferencing. So it’s built into the silicon where a company like Visa or Mastercard, they can do all their real-time fraud analytics instantly on the silicon. So you no longer have to say, well, get the transaction, was that fraud? Let’s look at it. With on-chip inferencing, you are literally doing real-time analysis of transactions that can dramatically improve their businesses, just as an example.
And there’s other applications for on-chip inferencing. But this is a pretty advanced use case of AI that now anybody can make a part of their business. I’d say third is the Quantum Safe capabilities. We’re at this point now where Quantum will commercialize at some point in the next few years. And at that point, it creates a lot of questions about current encryption and we’re able to, with Quantum Safe, make sure that workloads, applications running on the mainframe will not have any issue with Quantum encryption and how that changes over time.
So there’s a lot of value in the new mainframe. We’ve really targeted those specific areas. So we feel very confident about what we’re going to do there.
So last couple of questions. I did want to ask you just about return to the office, and we were chatting a little bit about this just outside. Just how IBM is handling people management return to the office, the war for talent or all of the people-related issues, how is that functioning at IBM? And how is this impacting at all your sort of technology relationships with your customers as everybody else navigates this issue as well?
What we found is people actually are really interested in getting back to the office. They may not know it, but the minute they do it, they’re like, “Wow, this is what I was missing.” We had our THINK Conference here just right across the street 1.5 weeks ago, which was sold out. The Red Hat conference was in this building, sold out. Like people are looking for human engagement and we started bringing people back to the office around the world, not in China right now. Rest of the world is largely coming back.
And look, I think the new normal has changed. It’s not going to be everybody going to an office every day, but coming into an office for the activities that make sense, makes a lot of sense. And I think that will continue to evolve over time, but I’m certainly starting to see clients back in the office. I’m back to a pretty normal travel schedule. So I’ve been through Europe, I’m doing Asia in 1.5 weeks. And as I travel around, there’s IBMers in the office, there’s clients in the office. So it’s definitely happening.
And so we’re encouraged by that. I think it will be good. But I also think there was a lot of good things that we learned about digital selling, as an example, during the pandemic, and that doesn’t need to go away. We can still have a very intentional strategy around digital engagement, how we work with clients. And I think that’s — will stay with us.
So just in closing then, as the global sales leader at IBM, how do you think about your objectives in this role for the sales force that you lead? Give us a sense of just what your targets are? What you want to accomplish in your role?
All of our targets are the same. We’re going to grow mid-single digit and focus on cash flow. Those are the 2 things that we said publicly. That’s what we are tooled around. My focus with our sales team is really around focus. People have to be experts. It is no longer good enough just to manage a relationship. So I’m really focused on expertise in the areas that we talked about, consistency. We have a good model. We need to stick with that model, keep going with that model, building out the technical teams that I talked about. I think that’s a really important aspect.
And then ultimately, look, we want to be aggressive and to grow. I think we have the portfolio now where we can be on our front foot, be aggressive. I mean technology is a very competitive world. So we are building a confident and aggressive sales team to go out and win in this environment, and I think we can do that.
Rob Thomas, thank you very much.
Thank you, Jennifer.
Thank you, everyone.