International Business Machines Corporation (IBM) Earnings Call Transcript & Summary

Thank you. Good afternoon. My name is Tien-Tsin Huang. I cover the payments processing and IT services sector at JPMorgan, and I am so pleased to have Mark Foster who heads up Services at IBM join us. So welcome, Mark. I appreciate the time. I know how busy you are.

Tien-Tsin, it's a real pleasure to be with you, albeit virtually this time.

Virtually, well, you look good digitally. So what we'll do, if that's okay, Mark, is we'll go through some questions in a fireside chat format. We do have the chance for the audience to ask questions through the Q&A button. So for those that would like to ask questions, please do so there. But I did poll a lot the investor community to put this question list together, so I'll do my best to get through it. But again, Mark, thank you so much for joining us here.

I wanted to start, and we just got off with Tyco over at Genpact, and you spent a lot of time on this. But I want to start with you on the same subject, which is actually on the supply side, not so much the demand side. I think one of the things I was most surprised by -- from your earnings call was how quickly IBM mobilized its workforce and moved to work from home. So can you maybe walk us through how that developed? And if there are any surprises on your side with the shift to work from home?

Thanks, Tien-Tsin. Well, first of all, I want to say how amazingly pleased we were with the smoothness we've got the teams around the world actually responded to the situation. It turned out that obviously we had business continuity programs and plans in place all over the world. I don't think any of us were fully expecting this kind of issue to hit, however. Having said that, those plans proved to be extremely resilient and robust. And within a very short period of time, we had a very large majority of our people working seamlessly from home. I think by the end of the quarter, which is probably in a couple of weeks since the peak of the issues around the world, we already have some 99% of the total workforce of IBM Services, which is some 240,000 people who are working from home. And I think what was important was also not only the fact they were working from home, but they were delivering with quality on what the clients were expecting them to do. We saw -- meeting all of our SLAs and, of course, in our key relationships. This is true across our BPO business as well as our IT services and, of course, our broader businesses that we're more used to working in domestic near face-to-face ways as well. And I think that what pleased me particularly was that even during this period, not only were we able to kind of keep up without all the processes around things like hiring people, bringing people on board into the business, training them, et cetera. We've been able to carry on doing go-lives for clients. We've been able to start programs and projects around the world and delivery a degree of service, which, to be honest with you, we've had some fantastic feedback on. NPS surveys have been really, really positive and mainly just really appreciative of the fact that we not only were able to carry on doing what we were doing before but actually able to lean in and do even more to help clients with the new issues they were facing as they actually dealt with their own continuity challenges.

So how -- given the success and how quickly you did that, and I don't take it for granted, I mean, 240,000 moving that quickly to work from home is impressive. So Mark, how does that maybe change your thinking about how IBM should deliver services going forward structurally, whether it be work from home or near-site, on-site, offshore, et cetera? I'd love to hear your thoughts on that.

Yes. I mean we've always had a model that clearly combined skills that we drew upon for around the large engine, whether they were the local teams, the near-shore centers or our global delivery network. And I think we're going to carry on having capability pools like that around the world that we draw upon. I think what we have learned is the world has got significantly flatter over this period. And what's really interesting is actually some of the additional opportunity that does bring to us to allow us to leverage these skill sets even more fungibly and carefully, thought-free across the world. The truth of the matter is we can run a workshop with pretty much the best experts on the planet from anywhere. I happen to be on -- running a workshop with an Australian client with probably 3 of the biggest experts we have in the company on Sunday evening for 2 hours. And we can bring anybody to bear to do that. We've been able to see that our Garage methodology, which we put in place, which is our methodology for working closely on co-creational models with our clients in a physical environment, was that -- we're able to move themselves very quickly to being just as effective in a virtual environment, if anything, it's enhanced because we can bring even more skills and more -- combine things together. And I was particularly pleased to see how someone like our Frito-Lay garage, which is one that's -- one of the most -- one of the biggest garages we have, it has sort of 11 concurrent streams, transforming the way they do their customer service thinking. And we were able to not only maintain that in the virtual world very quickly but actually leverage it now to be even more dynamically facing a whole bunch of helping Frito-Lay resolve for its day-to-day supply chain dynamics in a very, very powerful way. So I think that what we can see going forward is we will learn from this. We are already creating some new methodologies. We think we actually have a unique capability here. But it's something that clients are going to want to leverage more if we're able to actually reinvent it appropriately. And I think we've learned a lot. But this actually does give us, frankly, we think, some competitive advantage in terms of now taking this model to market more broadly.

Okay. No, that's great. That's great to hear. So maybe let's rewind a little bit. I don't want it to be just a COVID discussion here in a short period of time. But I guess, pre-COVID, GBS did have some nice momentum. The backlog was building. You're on track to show in some revenue acceleration, Mark, under your leadership. So can you just maybe summarize for us what was working? I know a lot of that gets lost sometimes in the bigger picture. But maybe if you can go back to basics and give us your thoughts on what was working.

Yes. Well, I think, clearly, I guess I've been in the journey for 3 years plus now around GBS. And I think that a few things have been at the heart of that transformation, and they continue to be important. First is a really big focus on clients and making clear that we really understand and know where we want to be working and being really clear about the dedication and commitment to having people really get deeply into clients' shoes. That's a very important part of the strategy that is working. I think secondly was a clarity around the offerings we then drove after and being really clear around the idea, digital was going to be important, obviously, but digital now evolving into cognitive, i.e., the move from the front end of the business into the application of broader technologies around process reengineering, what we call the intelligent workflows, which we see as being the next big area of transformation in our clients. Then thirdly, of course, the focus on the evolution of our application portfolio into a more cloud-centric world. I think the clarity around those offerings relates to those 3 main areas, a focus on our clients and then, of course, a really deep focus on the quality of our talent, both our go-to-market talent and the practices we've created around the world. Our practice strategy has been at the heart of the GBS reinvention. The fact that we have these 40-or-so practices around the world, which are the skill pools that we can develop, and we understand which ones are developing and growing, which ones we need to re-skill. We can move people between them. It becomes a very robust tool for planning and for operational management. And I would say that, again, right now, it's proving to be hugely powerful as we think about how we morph our skills, re-skill people to respond to some of the new needs that are out there as we see certain aspects of our work here changing their dynamics. So I think that those focus areas were all really important. I will also say that we also manage to bring a very strong operational discipline to bear. And I think that, that focus on not only, therefore, having a clear strategy, clarity around clients, offerings and skills was then to then put that into a context of dealing with quality, methods, approaches, all those tools in a smart way.

So given all of that, with the demand environment constantly changing and projects getting probably -- priorities changing, budgets getting reordered and sized up in certain places, sized down in others, like how has IBM been adapting given you have that go-to-market order that you just went through?

Yes. Well, I think that, clearly, some of the things that we spoke to our clients about have changed their priorities, and we have seen some shifting priorities. Some of the areas that were more discretionary, clearly, people have thought twice about whether -- we talked about in our earnings around the fact that when it came to engaging around some of the longer-term ERP rollouts, clients were thoughtful about the sequencing of rollouts. They were thoughtful about whether they could start engaging new teams around program start-ups. And of course, they became very focused on things like just the basics of being operationally stable, having cash liquidity and the business continuity side of things. So I think we certainly saw that early near-term response. And we very quickly flipped to what we call our Big 7 COVID-19 offerings, which were a series of offerings that really were focused around the areas of IT resiliency, basic business continuity to start with, but also then helping with near-term leads like how to solve for huge uplifts in customer service requirements through their customer service centers, being able to make sure that employees were able to work remotely. And then moving on from that into areas like operational cost reduction, like supply chain and general process optimization and flexibility. So I think we've been able to flip from a near-term understanding of what clients were worrying about into very quickly having a set of offerings that were fit for purpose for the new world. But I'd also say that we're finding that the clients we are working with that were already on the path to transformation found themselves in the best way placed to actually respond to this current environment. So clients like Credit Mutuel, we were working with already around their application of Watson and virtual assistance to their banking assistance. They were able to turn that on a dime very quickly to respond to the very different kinds of queries they got from their customers and indeed from their employees around the challenges that came from the COVID world. The same was true with our work for many of the banks across the U.K. We were able to turn some work that we're doing for Providence Health Care in Washington State, where we're already helping them hire some 4,500 nurses a month, to use that capability to hire people remotely so that, actually, we were able to have those nurses agree to actually be available at such an important time. And I could think of many other cases where the fact that we were already working with clients, so we're on the journey to becoming cognitive enterprises, applying new technologies at scale, thinking about the smart ways of leveraging the cloud. We were able to then find those -- the ones that have been able to respond faster to situation. So we're working with them now. And indeed, of course, all the other organizations that we see that are accelerating their transformation because of this situation. And I think we're going to find a lot more situations where -- one client I was, again, talking to in Australia that over the course of 3 weeks, they developed some 20-or-so new bots in their call center, which was having a massively big impact on their efficiency. And the truth of the matter is that will never go backwards. They're going to carry on leverage that capability and just driving that forward going forward. And so we're going to lean into that and make sure we're well positioned to help clients with these new areas.

Right. So helping clients, having full breadth obviously is important, which I think is a good segue to my next question, which was in April, you were named the Head of IBM Services, which brings together GTS and GBS into one place. Why combine the 2, Mark? I've been getting that question from investors. It seems like obviously a big move. Why is it important to do now?

Yes. Well, we've been on a journey for a while to start to think about these 2 pieces in a more joined-up way. I've sort of been the godfather of Services for over a year now. And really, at the heart of that was the fact we were seeing clients combining the worlds of application and infrastructure. In a cloud-based world, no one's going to attack new applications and new infrastructure in a separate way. We thought we wanted to bring together the power of what is, in fact, the world's largest business and technology professional services organization in terms of the scale of that business that we have there, the 240,000 people we have around the world that we can take advantage of in terms of being able to really power through in solving client issues across an amazing breadth that goes right from digital strategy through our agency capability, through BPO, through process consulting, through analytics, into SI, then through all the depth of our network, data center, mainframe management, cloud management capabilities. That is a unique breadth of skills. And we happen to think that right now, with clients facing the need to move quickly but also to move with certainty, the ability to bring our change and our run skill sets to bear around mission-critical transformation is just the perfect thing to now try and do. And so I think we're on a journey around that. And there's clearly much to do around making sure both businesses can fully line themselves up against this opportunity. But I'm very excited about the power we have across IBM Services now.

Sure. I think on the earnings call, I remember the phrase was used a couple of times, the idea of tightening GTS with GBS. And I know there's a lot of work involved to get there. But can you elaborate on what that would look like, tightening the 2 organizations together?

Yes. Well, again, Tien-Tsin, we're already on the journey. I think we -- it started by, frankly, the 2 teams just getting to know each other better. That was what a lot of last year was about, just to understand more about each other's business because they had been operated quite separately for quite a while. But I think that what we've been able to do is really focus on bringing together a single phase to the client and a single touchpoint, therefore, around the transformation journeys they're going on. We've been focusing very much on the go-to-market teams, bringing those together to take combined value propositions and deals to market. Indeed, some of the big deals like the Anthem example we spoke about in earnings is actually a classic case of great co-working across 2 teams, which I think has been very powerful. And I think you're going to see more and more of that. We've done a lot of work now increasing on our offerings. We brought together a lot of offerings obviously around the hybrid cloud space, what we called our 14 in 4 offerings last year around advice, move, build and manage on the cloud. And I think we're going to see that offering-centricity just to get stronger and stronger and our methods and ways of working merging around a shared view of the IBM way as it were across the business. But perhaps the biggest opportunity we'll see is around the leverage of talent. This is a fantastic shared talent pool. And what we can do both in terms of the go-to-market and the practitioners to really leverage that capability in a more dynamic way for the organization, I think, is a big opportunity. Quite apart from the fact that there clearly are areas of shared service efficiency, things that we both do that we can now do in a single place, in a single team, and we'll be looking at those opportunities as well.

Yes. So I know GTS for some time, there's been some various changes there. And it was talking about maybe evaluating cost competitiveness within GTS and that there could be some other actions that we see within GTS. You mentioned culture, and I'm sure we'll talk about that later. But what's the end game for GTS in your mind as you now have that under your leadership and you're bringing it together and tie it with GBS?

Well, the first thing to say is that we have an amazing asset actually in our GBS business, that it is a business that is still serving many of the biggest enterprises of the world, still delivering mission-critical service to them. It's been that backbone that, frankly, the world has fallen back on to some extent during this difficult period. A lot of that's coming out of our GTS incumbency. And obviously, therefore, we want to try and make sure that we take advantage of that. Having said that, GTS has been on a journey of its own reinvention. It has to recognize that, obviously, it has started from a more on-premise legacy moving to a world of cloud. We are on that journey in terms of how we, together with GBS, I think, see that journey going to the next stage. I think that the future of GTS is not seen as GTS is at right. We're seeing it in combination with GBS because that combined hybrid cloud services space becomes so interesting for us both. And I think if we're able to also look at the mutual cross-selling opportunity between the AMS incumbency of GBS and the IS incumbency of GTS, there's actually a lot of interesting cross-selling opportunity there because, in many cases, we're dominant in one but not in the other. And so that's a huge stimulus to go on these journeys together across that. And I think that's going to be a really important part of the future. And I see the capacity for GTS, in particular, to really give us an opportunity to see some of the major new control points around the infrastructure architecture of the future, particularly if we can leverage things like our Red Hat OpenShift capabilities, our multi-cloud manager capabilities in new areas such as some complex multi-cloud data management, complex multi-cloud security management. There are going to be so many areas where the ability to deal with that complexity, which has been the bedrock of GTS overall this period of time, will be reinvented in a hybrid cloud world. And that I think is -- that's exciting, and that's the piece that clearly I'm getting the juices flowing on right now around how we make sure that happens and do it in very much in conjunction with both GBS but also, frankly, other parts of the IBM organization.

Yes. I can't believe we made it this far, and we finally just mentioned Red Hat. Well, you touched upon it, so let's expand on it. So you went through the -- bringing together GTS and GBS. How does Red Hat then fit on top of all of that?

Well, first of all, I mean, clearly, the Red Hat acquisition last year was a big deal. It was a big bet for IBM and one I think we're really, really pleased with in terms of what it brings to the overall organization and, frankly, our overall positioning in this emerging hybrid cloud world. And it is at the heart of the hybrid cloud platform that Arvind has described as being heart of the IBM strategy. I think that we always saw that, that hybrid cloud opportunity was very largely a services opportunity as much as it was a product opportunity. And therefore, the ability for us to be relevant in the transformational journeys clients are going on from their app modernization into these new cloud infrastructures, then how they manage and run those environments, that is the big marketplace opportunity. And it's going to be multi-cloud. And what the world of OpenShift does is actually allow not just multi-cloud but also this move between mainframe, on-prem, private cloud and public clouds to be done in a way that is more seamless and -- which means it derisks the journey for clients as they go on that journey. It also frankly presents, as we have always been, IBM Services, we are agnostic. Yes, we're part of IBM. Yes, we leverage and have a preferred relationship around the IBM Technologies. But we're absolutely in a position where we're meeting clients where they are, and as clients -- in deleveraging AWS, Azure, Google Cloud, whatever it may be, IBM Public Cloud, we are in a position where we are very much able to operate in that space. And what Red Hat OpenShift does is create a new architectural standard, if you like, for enterprises, which we can both help it become a standard but also leverages a standard to allow us to drive more work for ourselves. So it's a very interesting symbiotic relationship, Tien-Tsin.

Yes. No, I think especially with -- in this post-COVID world, I would imagine with cloud and hybrid cloud, multi-cloud, I mean, we're hearing it all the time, core modernization, cloud migration. It's just so top of mind right now. So it's going to be -- for sure, is fun to watch and hopefully have more chance to talk to you about it. You did mention intelligent workflows earlier, right? And so I want to make sure we don't miss that here. So how does that get weaved in? And how do you monetize that around intelligent workflows?

Yes. Tien-Tsin, we actually gave out our 3-year strategy planning session and presentation, Arvind and Jenny this week. And I was just really reinforcing again the fact that I think we do see 2 main value pools that IBM Services and the IBM can really explore from the period ahead. We've talked a lot about the hybrid cloud value pool. We are the big value pool, its intelligent workflows. And to be really clear what we mean by that. We've talked a lot about the Cognitive Enterprise, which is our definition of an enterprise in the future where every client, every company is a technology company. Every company is a platform company in their own way if you like. And the way they'll actually be instantiating the application of AI, automation, blockchain, IoT, 5G, et cetera, will be the application of those exponential technologies in their critical workflows, whether that's their customer service workflow, their supply chain workflow, their talent acquisition workflow or indeed, there's some industry-specific workflows like claims management and insurance or core banking in a banking environment. So we're very clear this definition of a workflow, which is like a process put on steroids, a more front-to-back, a more end-to-end viewer processes than we've seen before, massively enabled by technology. Learnings, it goes along, to become smarter and smarter, leveraging the data of an organization in a very smart way. And also reinventing the way the expertise of the teams and people run along those workflows is going to be the major transformational vehicle that clients are going to use to go on the journey of change. It will be what the hybrid cloud will be for. The hybrid cloud will be for supporting these new intelligent workflows that clients are putting in place. And I think that we see our ability to bring, therefore, our industry smarts, our process and domain, change smarts, together with our understanding of these technologies, to bring them together, as we are in many of our garages around the world even now to completely reinvent workflows, delivering massive cost savings, massive flexibility, massive new value and growth in some cases. And that, we think, is going to be just a huge marketplace opportunity, which also allows us to leverage other products in the IBM suite, whether it's some of our software like Sterling or Maximo, whether it's some of our solutions like our Cloud Paks for data or in the other parts, the IBM Public Cloud, could all help to support these critical intelligent workflows. So it's an exciting space, one we think we are poised to really make a big deal on as we go forward.

All right. No, that's great. That's great. So I know we have less than 10 minutes here. I want to make sure I hit a few of these things because I was excited to have you and I've learned a lot talking to you in the past. I always remember one of the earlier conversations, you always talk about culture with these people-based businesses, services businesses, don't ever underestimate that, right, with talent acquisition, retention, everyone's drive to get to work. So talk to us about what you've done there. And how would you describe IBM's culture? And how does it mesh with Arvind and his mission as he comes on -- under his new leadership here at -- with IBM, Mark?

Well, that's actually interesting because we teed off Arvind on a joint all-hands co-event of the Services group webcast just a couple of weeks ago when he came on board. And we talked a lot about this area of the culture. And one thing that Arvind has talked a lot about is growth mindset, a growth mindset. And I absolutely have a growth mindset. It's something that I felt I brought to the organization very much when I arrived. It's been the driving force behind the way we thought about GBS and now thinking about IBM Services. And I think it starts lots of things that I talked about before. It's anchored in client-centricity. It's anchored in being very, very aware of the client and what they need and making that a driver for what you want to go after. But it's also around a wish to kind of bring innovation, not to stand still, to be continually moving forward and progressing, bringing innovation to our clients but also, frankly, learning as individuals. And I think that one of the things that's really powerful about the way we're looking at the culture in IBM Services right now is about making sure it's a continuously learning culture, that it's one that is progressive and forward looking, these new technologies we're talking about. And I've been so excited to see the work we've done on future-skilling our teams, people moving between practices because they learn new things and move into new spaces, that kind of approach allied with our partner teams, our executive teams, our sales teams, having a growth mindset to go proactively to clients with big ideas. And again, that's something we're seeing so much more of now. We're not waiting for the RFP. We're not waiting for the end of a contract to flip it over to the next few years or add a few years on the -- on an existing contract. We're being proactive about transformative relationships. I'm thinking about this, you say, with fundamentally a growth mindset. And I think that's -- when you put that on top of 240,000-plus people, that's the real power I talked about unleashing. And I think that's something that I'm excited about going on the journey with our products with.

No, that's refreshing to hear, Mark. That's definitely refreshing to hear. Somewhat related then, culture being so important. I know acquisitions can be a little tricky with bringing in a company with a different culture and making that work and hopefully not driving too much attrition. But we've seen a lot more acquisitions in the services space, in the, whatever, couple of decades I've been following this. It does feel like we've seen more M&A across the services companies. What are your views on acquisitions? And what can and can't be done at IBM Services?

Well, first of all, we've obviously done some acquisitions. The ones we've done, I'm actually very pleased with in terms of the fact that they have all added great value to us, whether it's the Promontory, risk and regulatory stuff, whether it's the Bluewolf acquisition, which brought us into an excellent position around the whole sales force world. We have got some very good success stories of acquisitions that we've done. We've done less than some of the others have done over the past period. That is true. And I think as we look forward, that's something we are looking very seriously at. We always want to look at the opportunity for adding new capability. We are in a marketplace where skills are needed quickly, and the need to access new skills quickly is clearly there. We've proven that we can build capability, like we managed to build the world's biggest Red Hat practice in the course of about 6 months from scratch, fully certified practitioners. That's something we sure we can do without doing any acquisition. But at the same time, I think that we recognize there will be opportunities to build skills that are out there. We're certainly an organization that, despite having invested so much last year and being focused on its cash returns, is still a marketplace for acquisitions. And I think that you can expect the IBM Services strategy going forward to have that as being one of the levers of growth that we'll be leveraging.

Okay. Good. And that'll be fun to watch on the journey then. Let me get you out of here on one last question, Mark. And again, thank you for the time. I wanted to ask, just given what you've seen and observed talking to shareholders, the Board, leadership team, et cetera, what do you think is misunderstood or maybe underappreciated about IBM Services by the investment community?

I think the first thing is really just how the scale and the breadth and the depth of its capability. I think, again, I'm often surprised when people say, "What do you do?" And I say, "Well, I run IBM Services." And they realize how big it is, $45 billion-plus and 240,000 people. It is the world's largest business technology services organization. People understanding the depth that we can go from in terms of that right from digital strategy on one end down to detailed network management at the other end in terms of the full stack of what we can deliver. And I think the insight and understanding of that with the global reach that we can do it, I mean -- and that's just that sheer ability to drive scale across an amazing breadth of customers and clients and industries, I think, is a bit of sort of a hidden secret, I would say, under the overall way that people might think about IBM. So I think that's the first thing I'd say. And the second thing is, actually, the importance of this capability in terms of positioning IBM overall and the role that our relationships, our scale and our breadth brings to being at the control point, which is actually valuable for pulling through the rest of the IBM organization, that our ability to be helping our clients go on the journey to become cognitive enterprises enabled by the hybrid cloud, that capacity that IBM Services will have to own and direct those relationships is going to be hugely important for IBM to live up to its overall mission and vision as well and drive the growth of the whole enterprise. So I think there's 2 things: just understanding the unique scale and breadth we have here; and then secondly, what a big part it plays in the overall story of IBM. And that's something I'm just very excited about making sure that more people understand and what we bring to life more in everything that we do.

Yes. No, that's terrific. I appreciate it. Maybe I'll sneak in one more, if you don't mind, Mark, and we'll let you go. I think we have maybe 2 minutes here. But just you mentioned godfather. You've been in this business a very long time, and you've seen a lot of different tech waves. You've seen a lot of crises, whether it be September 11 or the great financial crisis. And of course, the pandemic is a terrible one, and I don't want to call it a -- turn it into a positive in any way. But how would you compare this sort of opportunity for change and to utilize technology and drive demand in a different way here relative to, let's call it, past cycles?

Yes. I think as what is different with regard to that, I think it's different because technology has actually been part of our near-term response to it. Technology has kind of come to the fore as the way that we're talking now and the way that everyone has reacted to this particular terrible situation around the world, with so much sadness and grief to so many people that we have to have in our thoughts. But I do think that the fact of the matter is it is acting as an accelerant. Organizations are having to think about things in a very different way. Really, really different way. No one's going to work in the same way they worked before. And that means that when they were thinking about transformative goals, thinking about new ways of doing processes, thinking about new markets they want to grow into in a different way, this will just leapfrog that, I think. It will make sure -- and we're seeing it already. And I think that is exciting. And we've got to get through this. We've got to get through it safely for the world, and that's the most important thing. But I am excited about the fact that as we emerge from it, we have the opportunity to emerge stronger. We are excited about how we see our offerings being so relevant for that world that's going to be out there. When people are going to want to come to quality, they're going to want to come to scale, to be certain in a time of uncertainty, and I think that plays into our hands, and it's up to us to be ready to meet that challenge.

Terrific. Mark, thanks for giving us a few minutes today. I learned a lot. Always enjoy chatting with you. So hopefully, I get to see you soon in person next time.

I look forward to telling you that. It was great to see you again. I'm looking forward to the next time we meet and say that in a more face-to-face way.

Yes. No, for sure. Please stay well and healthy, okay?

You, too. You, too. Cheers.

Bye, everyone. Thank you.