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

I think it's all of the above, Jim, yes. And I'll come back to what I just said. I mean I do think that it's really also about how clients can see their way through what they see as being their way through what they see as being their short-term cost pressures and how they organize themselves in order to get onto this transformational journey, and therefore, how do you break the thing out into bite-sized chunks that are organizationally easy to implement and to move forward that can actually get you going. And so I think it's how you actually break it out into an easy road map that is actually the most important thing to build momentum for these programs.

Then one thing is -- every company, obviously, has had to adapt over the past 6 months. You had to be more remote. You have to be nimble. You have to get clients willing to let your people work from home. So there's a contextual contact modification type of cycle in there. I guess the question is twofold. One, what have you done, broadly speaking at IBM, but also then more narrowly within GBS to transform yourself to increase the ability to work from home? And sort of the path forward, particularly when it comes to things like consulting and the consultative process and it involves often sitting down with the client historically, how does that change going forward in your opinion?

Okay. So I think this is really interesting because I mean we've been talking earlier in these earlier questions about the way the pandemic has accelerated some of the transformation that our clients are making. And therefore, we are, in that sense, no different. I mean, I would say, and I'll start to talk you through, I mean in terms of how we deliver services to our clients, I mean, we've made changes in weeks and months that would probably have taken us years to do previously. And what we have done, I think, is we believe we've now moved, Ashwin, to something that we believe is the archetype, if you will, of the next-generation of delivery. I mean -- and we're calling that dynamic delivery, and I'll explain a little bit about that. But I think before I go into that, it's important just to remember where we start from. So we start from a place in which our delivery was essentially in 3 tiers, yes? I mean you'd be familiar. We have people are alongside our clients. We have people in nearshore centers. We have people in offshore centers. And so as we've adapted, I mean I think we've seen that there have been 2 phases. The first phase would be how do you get resilient, yes? So we're very pleased that we have moved 99% of our people to working from home. We've done more than 50 go-lives now across 50 countries, more than 1 million service requests. We've done all of that, and we've managed to keep all of that going without real SLA breaks or anything like that. And so that's been the first piece that we've had to do. But what that makes apparent to you is that then your delivery network has become much flatter. I mean you look at the top of the screen and people who were nearshore, offshore, at the client, they're all in a line at the top of your screen now, yes? You've got much better access to skills, and you've got a much more flexible way of interacting with your clients. So then what we've built that out is into what we think is really the transformational next generation of delivery. And we've done that by looking at 3 elements. So the first is that we've thought really hard about how do you drive contactless delivery. I mean we've put a lot of work into automating all of our methods. So now for the main methods within our business, we can, if necessary, do the whole thing virtually. So we've just done, for example, a really big application outsourcing. The whole of the knowledge transfer, which normally would have to be face to face, completely done without anybody getting on a plane. So we've taken that whole way that the methods are done and automated it and virtualized it, so you can do it without physical contact. We've also looked at using dashboards with governance now so that we can have a much more agile governance relationship with our clients so that although we're not able to meet face to face with them, they can see in a much more transparent way exactly how that delivery is going. So that contactless delivery is one really important piece. But the second bit that we've really focused on has been what is the role of the individual now because previously, we and lots in the industry were thinking about groups. These groups in offshore centers, the groups in nearshore centers. And actually what the pandemic and the way we're working now is it's put a huge, a whole lot more focus on how you encourage and how you develop the individual within the network. So there, what we've been thinking about is really doubling down on virtual leadership. So how does the whole HR process work if you can't actually get to people, how do you motivate people, how do you keep people's engagement up when you're just seeing them on a screen, all that sort of thinking. Then secondly, how do you now -- if you're going to be using people from across the globe, how do you actually build a practice structure to ensure that you get the same quality of people. So if I'm taking an SAP expert who's helping us out with a client from Peru and I'm also using one from Czechoslovakia, how do I really make sure that I'm very clear about -- that I'm going to get the same level of competence from them. I always had that issue, but it's a much sharper focus now. So we're getting much tighter around those standards. And thirdly, how do we think through the automated learning and the knowledge management to ensure that you get that all the way around the network. And then of course, you need -- lastly, you need a technology foundation that you put all this on. We think that this is very differentiated. I was talking to a set of clients yesterday, and they said nobody else is thinking about delivery in that sort of holistic way as to how you're thinking, not only about the automated delivery but also about the role of the individual and the technology foundation that you're sitting on. And we think that this is going to, I mean, not only lead to reduced cost, but it's also going to improve client satisfaction and it's going to give time line certainty now at a point in all of our lives when time line certainty is something that is going to be absolutely at a premium. We can give much more confidence that we're going to get that sort of delivery done. So that, I think, is the emerging shape for us of what the new -- or the next generation, if you will, of delivery is going to look like. And then I think what's going to happen within that to come to the second part of your question about consulting. I mean, obviously, as we've thought through that, we've thought through what are the -- we've now got to a point where we can do and we can deliver our projects entirely virtually. But that's obviously not optimal. So we've been very clear about which are the pieces of innovation where you need to connect with clients when we really do need to be with them. And so that's -- I mean we've got that really picked out. And I think what's going to happen through this, and this is just my personal view, but I think you're going to see a much more of a flattening and much more focus on proximity because I think that you're going to see client service teams are much, much more geographically close to their clients than perhaps they've been. Because if I'm coming to see you and I'm consulting with you and I'm flying in from far away, you're going to be much less likely to want to talk to me than if it's a consulting team who are in the same region, area as you and therefore, in the same health environment that you're operating in.

Absolutely. No, that makes a lot of sense, I mean in terms of removing at least some of the uncertainties around delivery and not adding the complication of crossing borders and things like that. So yes, I mean, dynamic delivery. So do you get to then charge for dynamic delivery? It seems to have better governance. It seems to have better tool sets, better -- perhaps on-time eventually. Do you get to charge for that?

Yes. Yes. Yes, we think that that's going to be differentiated in -- and that we'll be able to price that in accordingly, yes.

John, when we look at these cloud transformations, can you talk a little bit about, are they mostly new cloud-native apps or migration from on-premise? And do they start out with single cloud? Or are they starting out with multi-cloud environments when you're doing the work with them?

Okay. So I mean I think -- I mean when it comes to the whole cloud story, I mean our point of view is that you can explain that cloud story in terms of chapter 1 and chapter 2, where chapter 1 is and we're at the end of that really now is where clients have done a lot of very exciting and great innovation on the cloud with lots of proof of concepts, experiments, easy customer-facing applications have been moved to the cloud. But in that context, only about 20% of their applications have really moved. And chapter 2 is really about where we start to move the mission-critical applications to the cloud and that we really start to take advantage of the scale and the opportunity that the cloud offers. And we are definitely, Jim, at that point where we are now moving into chapter 2. And a lot of the conversations, as I said earlier, that are going on at the moment in which the crisis has accentuated are about how we now move at scale into the cloud. I think one of the key things, though, is that as we think about moving mission-critical applications to the cloud, the nature of those mission-critical applications is forcing some architecture choices because, by and large, mission-critical applications are complicated. They're highly integrated, and they can involve extensive legacy. So that means that it's not a straightforward thought about I'm going to lift and shift this straight to the public cloud. And so the architecture choice that increasingly our clients are making is that they need to have a hybrid cloud architecture. And so consequently, what they're thinking is that they need -- parts of those applications may remain as micro services in a traditional on-prem. Some will be in the private cloud and some will be across multiple public clouds. And they're thinking that they really need that architecture in order to ensure that they get the real benefits that the cloud can offer because if you don't take advantage of that, I think you risk. First of all, a number of your applications won't be able to take advantage of the cloud, and therefore, you won't be able to get the benefit. If you're solely in the public cloud, there are security risks that you are going to be running. If you are using multiple public clouds, you run the risk of building up cost in terms of individual silos. You also run the risk of not being able to really take advantage of all the innovation that you can have by moving things across and into different clouds. And so -- and then finally, you run the risk of losing your strategic optionality by being locked into a single public cloud provider. So for all those reasons, our clients are looking very closely at hybrid cloud architectures. And indeed, we think there's something like 2.5x more value that is going to come from a hybrid cloud architecture than simply moving to the public cloud. And we're seeing a lot of clients are wanting to explore that with us. So we just signed, for example, a very nice piece of work with Coca-Cola Bottlers in Europe to create that single integrated fabric, that hybrid cloud architecture that is going to allow them to use and to modernize their applications across both traditional, private and many public clouds. And that, I think, is how we're going to see this market develop.

John, can you maybe speak specifically as to how Red Hat assets and the integration within GBS can differentiate your offerings, particularly as it relates to your client needs for cloud migration, multi-cloud environment and so on?

Yes. So I mean building on my previous answer, I mean we do think that hybrid cloud is the best architecture for our clients. I mean we think clients will be able to build once, deploy anywhere. We think they'll be able to take advantage of innovation across a set of multiple public clouds, and they'll be able to optimize for cost efficiency. And so that hybrid cloud market is really big. I mean we think it's something like $1.2 trillion, and services within that are $600 billion. So if hybrid cloud architecture is the best answer for our clients because of that innovation, because of those cost advantages and so on, then the Red Hat set of offerings are absolutely critical to that because when you're looking at that hybrid cloud architecture, what you really want is a horizontal platform in terms of containers, Kubernetes and Linux that actually enables you to move your applications on a container base between these various clouds. And in OpenShift, Red Hat has the only horizontal container platform in production that does that. So we see that as a very exciting part of this overall hybrid cloud architecture. And the recent deal that we signed with Schlumberger, Ashwin, is a really good example of that. I mean they have a platform called Delfi, which is where they have a number of partners and collaborators who come into that in order to take advantage from an oil exploration point of view of data and AI that can help accelerate what each of those partners is doing in oil exploration. Now although that business has been growing really nicely, 300% in the last 12 months, there are some things that stop that business growing further. So some collaborators can't use the platform because they're on different architectures because they have different data residency requirements and so on and so forth. Now with the OpenShift architecture providing that horizontal orchestration and integration layer, enabling applications to be built once and to be deployed anywhere across different clouds, we're able to then bring those collaborators in the rest of the world onto that platform and significantly open it up for other clients for Schlumberger. So that's the opportunity really that Red Hat offers in the hybrid cloud architecture and really opens up that open innovation to our clients. So consequently, what we've done, to answer your question about GBS and Red Hat, is, I mean, we've really piled on. So whilst we don't know details, we do -- we are very confident that we have the biggest Red Hat practice now in the world. We've added hundreds of clients since the acquisition where we've done Red Hat work. We've added another 60 in Q2. And we run a program called OpenShift Everywhere where we actually invest with clients to experientially demonstrate to them applications that we can put on to OpenShift in order to show them the benefits of this orchestration and integration platform. We've done over 600 of those now. So really excited about how we're now opening up our clients' eyes to the possibilities of this Red Hat integration platform. Now obviously, our relationship with Red Hat is nonexclusive because the way that we are handling that integration within IBM is that we do recognize that Red Hat has very important relationships with other GSIs, Accenture, Capgemini and so on and so forth and has important relationships with other platform providers. So those are all continuing, and ours is not an exclusive relationship. But we've absolutely doubled down on it, and we're seeing a lot of synergy benefits.

John, I think it's important to note, I do look at signings not only on a quarter basis, but also on a trailing 12-month basis. And if we look at signings, it's been pretty soft. Can you help us understand what's going on with signings? Because so far, the prior 30 minutes, you've talked to us on this fireside presentation, it's very encouraging and you would think growth, growth, growth, new, new, new. But can you walk us through about signings and underlying businesses, how we should think about signings?

Well, I mean -- look, I mean the only thing I'd say about signings is, I mean, I do think the dynamic of how signings relate to revenue is complicated and has been changing. I mean it's technically possible. And we have shown that you can improve your signings or you can improve your revenue, I should say, on the back of weak signings. And the reason for that is that as clients are looking to break up some of the big programs, then there is a shift to smaller signings. As clients are moving away from big and long-term AMS maintenance deals to more consulting-type deals within digital transformation, they tend, as I said earlier, to put those into smaller packages. And therefore, although the overall signings number might appear to go down, you are getting a higher revenue burn because these are -- I mean these have got more revenue content within them. So in the last couple of years, we have been growing our revenue even though our signings have not been growing at the same pace. And indeed, over the last couple of years, our backlog duration, I mean, how far out our backlog goes has dropped by about 1/5, reflecting the fact that we have a much more concentration of our revenue opportunity in the near term. I mean -- as I said earlier, I mean I think that the -- our signings opportunity is good, particularly around these programs, these digital transformation programs, but it may come in smaller packages. And so I think that there is opportunity there. But as I said earlier, I mean because of the volatility of the situation, it's hard to be confident about broad-based growth in this signing space.

John, I wanted to close out talking about profitability, but I also have a quick follow-on. It's partly question, partly suggestion with regards to your response. And I've seen other companies begin to talk a little bit more about ACV instead of TCV. Sort of annualize that, it might help get over that hurdle. If you look at your -- and you might not be able to answer this right away because I know there's a lot of computation that goes into these things. But if you generically looked at this on an ACV basis, would you say that it would maybe paint a different picture than the TCV you present?

Could do. I mean that's certainly something that I think is worth us looking at, Ashwin, yes.

Okay. Okay. On the profitability question, as promised, the -- what are the key drivers that you're focused on for improving profitability in GBS? And what signposts should investors look for as it...

Well, look, I mean our business model is to improve by 50 basis points. And as the COO, I mean, I think there's 5 things that we've been working on pretty consistently over the last 2 or 3 years that have worked well for us. So the first of those is a big focus around our delivery methods, tooling and solutioning. Now you might not immediately think about those in terms of profitability. But actually, getting greater confidence that we are going to staff our work in the right way with the right people, that we're going to finish when we say we're going to and roll people off and move on to other things and that we're going to avoid deals and projects that get themselves into trouble and make losses, that's a really, really important part of how we manage our margins. I mean, first of all, it's great for our clients because it means that their satisfaction goes up, but it also means that we roll people off when we want to. We avoid those losses. And so consequently, our margins go up, and our client satisfaction goes up. So we've put a lot of time and effort into revamping those methods, that tooling and that solutioning. And that sort of plays back into what I was talking about in terms of dynamic delivery. If you get those basics right, then that means that you can hold up your priced margins but also your delivered margins. And we put a lot of effort into that. The second thing that we've looked at really hard are what I call our pyramids. So making sure that we have the right balance of senior people and more junior people. So that when we offer a blended price to the client, it's competitive, but it also makes money. And also, the balance between the people that we have who are near to the client and the people who we have in offshore centers and getting that blend right is also really important for our profitability. That's the second lead. But the third, of course, is utilization. It's keeping our people busy. And we've used some good new tools that leverage AI in order to ensure that we really match people up to the right opportunities. Keeping them busy is really important because, of course, that's what energizes them. That's also what keeps our clients happy, but that's also how we get our best return on each of those people. And one of the things that I think we've done very well during the pandemic has been to ensure that we keep our people busy, and therefore, we've been able -- in some cases, where demand has been soft, we've been able to let some of our subcontractors go, and therefore, manage our costs in that way. The other 2 things that we've done, as I said earlier, we've really maintained a focus on price margin. I think our value has improved, and therefore, our ability to talk to our clients and to hold our margins has been good. And then, of course, we've kept our house tidy. I mean we've continued to invest in shared services, in HR, in finance, in operations. And we've been able to keep good control of our overhead costs through that way. So working on those 5 levers -- I said our target was 50 basis points. I mean, in the first half, we've improved by 170 basis points, in the second quarter by 240 basis points. And we really think that our profitability is looking good because we've been working at it in this systematic way over a long period of time. And therefore, we hope that we'll continue to make the appropriate progress that we need in terms of our overall business goal.

Okay. Thank you very much. That wraps up our session. I want to say thank you very much, John, for your insights and especially thank you because I know you're calling in from the U.K. And with the time difference, it's quite late there. So appreciate that very much. Thank you.

Nice to talk to you, Ashwin, and nice to talk to you, Jim. Yes, I wish you the best with the rest of your day. Thanks very much.

Yes. Thank you. Thanks. Bye.