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

So our next session at Citi's TMT Conference. I'm Ryan Potter from Citi Research. And just as a reminder, it is for Citi clients only. With this session, I'm glad to be hosting IBM. And from IBM, we have Kelly Chambliss, SVP of IBM Consulting Americas. Kelly, thanks for joining us.

Thank you. Happy to be here, Ryan.

Yes. So you've had a lengthy career now with IBM, and you're currently leading the consulting in Americas, as I just mentioned. Can you share a little bit on your background of the business you're running today?

Sure. Absolutely. Let me start with IBM Consulting. So we're a pretty large and material player in the consulting space and also a really big part of IBM. We are about 160,000 people inside IBM Consulting and represents about 1/3 of IBM's overall revenue and 2/3 of IBM's people or employees. So a big part of the market, but also a big part of IBM. As you mentioned, Ryan, I lead IBM Consulting in the Americas, focused and probably all of you know what IBM Consulting does, but everything from strategy advisory work through technical implementations, often in partnership with IBM Tech as well as other strategic partners. And then we also do operations. So think application support and management, but also business process outsourcing. America's role includes Latin America, United States and Canada. So currently leading IBM Consulting in the Americas. Prior to this, I was the Global Chief Operating Officer for IBM Consulting. So responsible for execution of our strategy, responsible for M&A, assets, offerings, our global delivery centers and network around the world. And prior to that, I also served as the Chief Technology Officer for IBM Consulting, again, focused on offerings and assets, but also led our business with IBM Technology, IBM Software in that role. So it's a great time. I've always loved working at the intersection of business and technology. I came into IBM actually through the PwC consulting acquisition. I started my career there as a technologist. So I was a developer architect and just have always loved working at that intersection of business and technology and then obviously came into IBM through the acquisition and have been here ever since. And I think it's a really exciting time to work in a tech company and specifically IBM.

Great. And speaking of technologists, there's a career technologist leading IBM now in Arvind. So maybe you could touch on some of the changes he's made to IBM as a whole and consulting in terms of strategic direction, I guess, go-to-market. Anything you can comment in terms of changes going on?

Yes, happy to. So I think the biggest thing is just clarity and consistency of the strategy and our focus since Arvind has stepped into the CEO role. So we're all about helping enterprises transform using hybrid cloud and AI and then other supporting technologies, whether it be security, automation. But that clarity and consistency where whether you're in IBM software, IBM Infrastructure, consulting, everybody is focused on helping our clients leverage kind of the preeminent technologies of our time, hybrid cloud and AI to transform their businesses, help their businesses run better. So that clarity and consistency of the strategy across the company is one thing that comes to mind for me as a shift. I'd say there's probably a few other things. One is greater focus, kind of in alignment with that strategy. I think many of you are probably aware kind of in an effort to focus around hybrid cloud and AI Infrastructure services was spun out and created a separate company, Kyndryl, some of the Watson Health assets were divested. So with focus came greater simplification. And Arvind is really focused on simplifying for speed, right? So we can react to changes in the market, but also client needs. And so focus and simplification come to mind. And then the third change, I would say, or shift during Arvind's leadership has been to a more open company. I mean it really started with the acquisition of Red Hat, which is obviously one of the leading open source product portfolios. And Red Hat by nature then works with a lot of other tech companies, and that drove all of us being even more focused on leveraging the ecosystem. We don't believe that any one company has all the technology required to transform and run our clients' businesses. So a lot of partnering, very open. You'll see that even our -- some of our recent AI Granite models were released as open source. It's just another example of how we leverage the broader ecosystem and really believe in being an open tech company.

Got it. And consulting also recently made a leadership change with Mohamad Ali taking over. So maybe you could touch on what he brings to the table and if you foresee any strategic changes going forward or just more of a continuation of Arvind strategy we've seen in recent years?

Yes, good question. So Mohamad stepped into leading IBM Consulting globally a couple of months ago. It's a pretty recent change. And he obviously has a really strong track record of executing on strategies, both inside IBM and outside IBM. He actually spent some time earlier in his career in IBM software and then recently returned to IBM as the consulting Chief Operating Officer before moving into the overall leadership role. And so far, very focused on building on the foundation that John Granger and Mark Foster before him had laid, but also bringing that software knowledge, expertise experience in terms of shifting IBM to consulting to being even more assets led. And that's going to be a really important shift that we'll make, and I'll talk a little bit more about it today as it relates to AI really giving us new capabilities and ways to differentiate in consulting. So I think a software background will help us probably accelerate that shift to being more asset-based consulting organization.

Got it. And yes, we'll touch on the software stuff a little bit later. But I guess kind of shifting to demand. IBM has characterized demand environment as strong for technology transformations. We've heard that from some peers in the market as well. So I guess what are you hearing from clients today that's driving that kind of core transformation demand? And then just in terms of how are clients reacting to continued macro uncertainty, where are you seeing discretionary spending, just elements like that.

Okay. I always think when we talk demand, it's probably good to start with the just overall size of the market. So the market that IBM Consulting operates in is of $800 billion a year, growing at mid-single digits. So kind of speaks to the point about consistent solid demand for transformations, which is really in large part driven by a lot of companies obviously are looking to leverage technology to not just drive productivity, but establish competitive advantage and differentiate and make sure that they're the disruptor, not the one being disrupted, right? So technology is playing such a critical role to all of our clients' businesses. That's driving a lot of that demand. When you look at the transformation side of it, I really think of it as there's been 2 waves of digital transformations. The first wave was really powered by and driven by hybrid cloud. And the second wave that's just really starting is driven by the combination of hybrid cloud and AI. So kind of think of it as digital transformation 2.0. So a lot of companies are looking to figure out, okay, not just the benefits and value of shifting to the cloud and leveraging hybrid cloud environments, but how can AI really further drive productivity, but also top line growth as well, new products, new services. And so I think a lot of the demand for transformation is driven by that intersection of cloud and AI, and that's a space in our market that's growing faster than the rest of the market. When you talk about just demand outlook and what we've seen in the first half of the year, and I think Jim and others mentioned this earlier in the year, but from -- starting around Q1, we saw kind of a little bit more of a dynamic environment as it related to clients investing in less strategic areas, I would call it. And a lot of it was to free up money to be able to invest in the areas that were most strategic. And so there is a little bit of a shift going on and a little bit more of a dynamic environment and what I would call that discretionary spend. And so we -- one of our big areas of focus is helping our clients prioritize, strategize, figure out what should move to the cloud, where can you best leverage AI and how to really minimize the cost to run kind of some of their existing technology. We have a lot of clients talking about tech debt. And so we really get in early, and you'll see that with some of our early AI wins and signings. We get in early and help them figure out what should I move to the cloud, what should I invest in, what should I deinvest in. So being a trusted partner right at the center of that is really important as we go forward given solid spend on the transformation side and a little bit more dynamic on the discretionary side.

Yes. On the discretionary side, what would it take for that market to open up a little bit more in terms of enterprise spending? Is it more clarity on interest rates, more sustainability of interest rates actually coming down, get past election cycles, just all of the above there.

I was going to say, as you were adding, I would say all of the above because when I think about what's driving a lot of the technology spend today, it's data management because you can't really leverage AI without investing in your data platforms and infrastructure, but it's Inflation, technology can be deflationary in some areas. It's skill shortages in some areas. So automation and AI can help with that. So I think it's a combination of all of the above. But I think as companies use technology to become more productive, that frees up cash flow to invest in those transformations, too.

Got it. And maybe we can touch a little bit on visibility because the consulting outlook has moved a little bit as we move through the year because of the discretionary element you highlighted. But can you just touch on the visibility we have into the consulting business? I don't know if it's -- you can talk about contract durations or anything like that. And then just in terms of the current outlook, just the wider assumptions that are embedded into that consulting outlook?

Yes. Well, through the first half of the year, our most recent quarter, Q2, we grew 2%. And I mentioned the broader market is in the low to mid-single digits. So we grew 2% in the most recent. And our Book-to-bill, so signings to revenue is, I think, trailing 12 months about 1.15. So seeing, again, as I mentioned, demand for those transformational capabilities, investments in technology. And so the market, like I said, is growing mid-single digits. And through the first half, we were almost in line with that and 2% coming out of the second quarter.

Okay. Is there -- in terms of macro, I guess, is there any assumptions for people to think through in terms of second half of the year? Or are you assuming kind of more of the same at this point?

No assumptions, and I don't have any reason to believe any outlooks we've given would change at this time.

Okay. I guess just moving towards, just looking at high level of IBM Consulting and overall market in general, what would you say kind of differentiates consulting most versus some of the peers in the market?

Yes. Thank you for asking that question. This is one of my favorites because there are a lot of other consulting firms. And at scale, we're the only one at scale inside a major tech company, right? So I love the question about what makes you different, what makes you unique and special. I'd say, Ryan, really 3 things. First is the integrated IBM value proposition. As I mentioned, we're the only large consultancy or scale consultancy inside a tech company, and that provides benefits for IBM as a whole, but also to our consulting business. So for IBM as a whole, as an example, a lot of the work we do, we have a whole practice around mainframe modernization. And so as we help clients figure out what workloads to move to the mainframe, how to optimize that, it creates sustainability for IBM in that platform. Same thing when either of us, consulting or technology makes acquisitions, there's synergy going both ways. So the best probably story or kind of proof points of that is Red Hat and the size of the business we built inside consulting with Red Hat. But as consulting makes -- or as technology makes other acquisitions like I look at Instana, Turbonomic, Apptio, some of the FinOps and optimization products, there's some synergistic effect for consulting, but that goes the other way as well when we make acquisitions in consulting. So I'd say that integrated IBM value proposition is one of the greatest differentiators for IBM Consulting. I'd say the second one, and you've seen a lot of focus on this in the press from IBM is our investment in strategic partnerships. As I said earlier, no one technology company can run entire enterprises, help them transform and deliver the productivity benefits that they're expecting. And so we partner a lot, whether it be with SAP, Salesforce, Oracle, Adobe, Microsoft Azure, AWS, very focused on not just partnering with them, but one of the things that differentiates us is the depth of technical expertise we build. So being part of IBM and always having been known for innovation and depth of technical expertise and prowess that translates over to heavy focus on certifications and really being the people that can make that partner technology work and deliver value quickly. And then last but not least, one of the unique things that we probably don't talk about enough in IBM Consulting or about IBM Consulting is how we work. I think some of you may have heard in the past, we have an approach to doing work with all of our clients across all of our offerings and capabilities called IBM Garage. And it really kind of gives you the best of both worlds in terms of harnessing the power of our clients, talent, institutional knowledge, process knowledge with our domain industry technical knowledge to operate in a really creative, agile way to deliver value faster. The IBM Garage method has this approach inherent in it that's all about ROI, helping clients figure out what to prioritize next. And so it's a really innovative way of working that clients have really embraced and recognized as a differentiator. Our NPS scores when we are using the IBM Garage way of working with our clients is 79, which I think is in the world-class range. So that unique way of working and delivering value with clients at greater speed is a differentiator. And one of the things we've added recently with the emergence of AI, we see AI not just as an opportunity to build AI-enabled solutions for and with clients, but to use it to be more productive in how we deliver solutions to clients. And so we launched a platform called IBM Consulting Advantage. And it's a platform that has assets, accelerators, assistants that help all of our consultants be more productive. So if you're a consultant working on an SAP program and you sit down to write a design spec, it's a lot faster than it used to be because there's these AI assistants that help you do your job. So everything from design specs to test cases, everything. So think of it as digital labor inside this platform that makes all of our consultants more productive. So when we couple this IBM Garage way of working with that IBM Consulting Advantage kind of services platform, it's really, really powerful and can be a differentiator as well.

Yes. That's great. Maybe double-clicking on the strategic partnerships element. I know consulting over 40% or I think up to 40% of revenue comes from strategic partnerships currently, and that's worked that way up over recent years. So maybe if you could dive into what you've done to like work up that piece of revenue? Is it just getting more certifications with these partners, working on more joint go-to-market strategies with these partners? And going forward, the opportunity to keep pushing that beyond 40%?

Yes, absolutely. You're right. It is about 40% of our business today. And we do see it as a big growth opportunity as clients, as we were talking about earlier with digital transformations, moving more of their capabilities to these platforms, we see there continuing to be a lot of opportunity to team with strategic partners to drive growth. We created a couple of years ago, an entire organization focused on our strategic partners. And that's everything from really driving certification, that technical depth of expertise that I talked about earlier to joint assets and accelerators as well. So inside this consulting advantage platform that I talked about, some of the assets and accelerators are with strategic partners. So for example, we have an asset that is targeted at counties and states that helps them share data across agencies. And so that was built on top of Salesforce. We have industry templates and assets around SAP. And those are in this platform as well, so we can accelerate the time to value for clients with the partners. You've probably seen quite a few press releases from us lately, too, in the AI space, right? So teaming a lot with our partners around AI for the application providers like SAP, Oracle, Adobe, Salesforce, they're embedding AI, sometimes AI from IBM, like Salesforce is using some of the Granite models, but they're embedding AI in their solutions. But then also a lot of the investments being made on the public clouds like Azure, AWS, they're looking to build AI on top of that capability. So we're partnering with them a lot in that space. It's interesting, if you look back just 5 years or so ago, our businesses with Microsoft Azure and with AWS were very small, and they're now both over $1 billion. So that focus and investments and a lot of it driven by the investments in accelerators and assets is really starting to yield growth, as you highlighted.

There's opportunities with other partners to that $1 billion level over time. I know Arvind and Jim had mentioned that as well too.

Exactly Microsoft Azure and AWS that are over $1 billion today, and the focus is getting more into that cloud.

That's great. You touched on IBM Garages earlier, but maybe we could touch on kind of industry focus. And I know in recent years, you focused on also experiential selling and kind of pivoting your go-to-market. Can you just comment on how the go-to-market has evolved and how the experiential selling has actually maybe helped elevate kind of demand you're seeing in flowing?

Yes, absolutely. We go to market by industry. So all of our consultants have both a specialty, and it could be data and AI, it could be hybrid cloud transformation. And then they also have an industry that they're building depth and expertise on because as we implement these transformations for our clients, it's so important for our consultants to really understand the industry that they work in. So a lot of focus on industry talent expertise. You see we publish a lot of thought leadership around industry. And then as I mentioned, some of our assets as well are industry focused. We have assets around payments in the telco networking space. I mentioned the one that counties and states for data sharing. And so a lot of the asset development we do is very industry focused. And you touched on a really important point about experiential, not just selling, but just entire engagement model being more experiential. And Garage does that in the delivery, as I talked about. But in the sales process, it is really, really rare that we aren't building a proof of concept or a pilot as part of a sales process because we're all living and working in a fill me versus tell me world, right? And so a lot of focus and most of our consultants roll up their sleeves side-by-side with clients and build out proof of concepts and pilots as part of the sales process. And that also makes for a more natural, seamless transition to delivery and kind of closes any potential expectation gap we might have had in the past when we were sharing documents as opposed to being able to look, feel, touch the technology, and then it gives them greater confidence to move forward with us.

Got it. I guess maybe shifting gears towards everyone's favorite topic, Gen AI and AI broadly. I mean you mentioned one of IBM Consulting's differentiation is technology, you leveraging IBM's technology. You touched on AI earlier. But can you dive into, I guess, a little bit of maybe examples of how IBM is helping clients leverage AI and Gen AI broadly today?

Yes, absolutely. Again, I'll go back to size and scale of the market to start. I talked about how the consulting space is $800 billion a year roughly, right, growing mid-single digits. It's projected that by 2027, the AI services market will be close to $100 billion. I think the number I saw was $99 billion. So you think about in a pretty short amount of time, it's rapidly not just out there as potential, but clients will realize value from it, and there will be a big services opportunity for us as well. One of the things that we're seeing in the market is -- it's been a little while now since everyone's been talking about Gen AI, right? But wanting kind of faster proof points, accelerated value from AI. And I would summarize, Ryan, kind of 4 areas where we're seeing clients actually getting material value from AI today. We're doing a lot of other work. You saw some of our recent in Q2 signings and win numbers around AI. But when I think -- when I take a step back and just say where are clients today realizing material value from AI, there's 4 key areas. One is customer service. Two is application development. Three is security, probably no surprise with all of the attacks, I think, what, almost 50% of companies in our latest security reports have had some kind of cyber attack in the last year. And then fourth is IT ops, just running technology operations and having that not be as labor-intensive as it was in the past. So you asked, for example, it's in the customer service space, which is where we're seeing the greatest uptake in terms of not just broad adoption, but real value realized from AI. An example, for a telco client, we within weeks, stood up an AI assistant to handle more of the customer interactions in a digital way, and it reduced call wait times by 30%. And so we're not talking about months and years of implementation time. Solutions in that space, AI-generated or AI-led customer service solutions can often be stood up in weeks. And then at scale for a large health care provider, we've actually digitized and our calls handled by AI is in the millions per year and took not just a lot of cost out of their business, but it improved the customer experience as well. That's one of the great things about AI in the customer service space is almost always the satisfaction levels go up as well. So they're able to handle large volumes at scale, but in a way that the customer wants to continue to interact with the brand and the company. Those same use cases that are delivering real value in customer service are also starting to deliver real value in employee service. So a lot of companies are adopting almost very similar solutions for employee self-service. And same thing, takes out a lot of administrative time and frees up people to do higher-value work. So it makes the company more productive. At the same time, and I've experienced this myself at IBM, it's as good, if not better experience for the individual as well. So customer experience and employee experience really high on the list in terms of real value being realized today. I talked a little bit about application development as well with some of our own tools on the Consulting Advantage platform, but combined with some of our partner tools, too, like Microsoft Copilot, we're seeing time to develop code being 30% less in some cases. And we've got a couple of clients where we've migrated code as well from one language to another in 30% plus less time than it would take in the past. So customer service, application development, IT operations and security are 4 areas that real value is being realized by clients today using AI.

Got it. And I know on the last earnings call, it was mentioned that IBM has done $2 billion of bookings of Gen AI since kind of the rise of Gen AI and you guys have released watsonx as a platform. And 3/4 of that has been in consulting, correct me if I'm wrong. But has that 3/4 of that $2 billion been largely in those 4 areas you talked about? And just in terms of, I guess, maturity of projects, is it still more kind of experimentation type proof of concept? Or are you seeing stuff actually move to more production stages?

Yes. Good question. So of that science to date, a large portion of it is in those 4 areas, but there's also a portion of it that is doing proof of concepts and pilots as clients are wanting to test out and see what the potential could be. And so that will give us an ongoing funnel and pipeline of new opportunities as we prove out the technology with clients. So a lot of focus. And we've got teams from across IBM, both technology and consulting working to do those POCs and pilots with clients so they can test it out because there's a lot of industry-specific use cases that don't fall into the 4 categories I just talked about that our clients are anxious to get value from. One we're seeing a lot of interest and focus in is regulatory requirements and compliance, which can tend to be very costly and labor-intensive inside clients like banks. And so a lot of proof of concepts going on in areas like that.

Got it. And maybe you can dive a little more into -- you talked about consulting management multiple times. But just in terms of day-to-day, how it could help the average consultant, is it more just making them more productive, making the work they do potentially more accurate as well? Does it potentially also reduce the, I guess, amount of consultants you need on a project? Or is it more just it can lead into a quicker inflow of projects coming in as well as they're being more productive on the projects they're working on?

Yes, good question. So I'll go back to a question you asked me earlier, Ryan, about differentiation and that I saw AI as a big opportunity to differentiate. And so when we're proposing to a client, for example, to implement SAP, do an SAP-enabled transformation, we've set a goal for ourselves to say, okay, how can we take what used to -- how many hours an SAP implementation used to take, how do we do that in 30% less hours? And we've really worked through the entire end-to-end life cycle. We've done this across a number of our offerings, just using SAP as an example and gone through and said, okay, how could AI make us productive enough to do that for 30% less time and hours and then elapse duration, so the client gets value faster. And then as we're doing that for each of our offerings, we're putting these assets and accelerators into the platform. So when you're a consultant on the project, as I was describing earlier, you sit down to write a design spec or create a test case, you go into Consulting Advantage and you use those assistants that we've built and then will continue to mature over time to just do the work that you do in a faster, more efficient way. And we see that as a competitive differentiator and ability to -- gives us the ability to win more work, but also deliver client value faster, which then can be a catalyst for additional opportunities.

Got it. And in terms of the focus on partnerships, strategic partnerships, does it change at all with Gen AI? Is it kind of lessons learned with the hyperscalers, you also applying to how you're building up Gen AI partnerships, whether it be Consulting Advantage or any other ways you're kind of deploying Gen AI?

Yes, good question. So IBM technology has the watsonx platform, but each of the public cloud providers also have capabilities around AI. So we're really building deep skills capabilities, certifications in all of the leading platforms. And then a big focus is on accelerators and assets. And we sit down and talk with our cloud partners. That industry lens is where they look to us to team and bring that expertise so that they can go to market faster as well with assets that can deliver value to clients faster. And so a lot of focus on partnerships as it relates to leveraging AI and application providers as well, whether it be Salesforce, SAP, Oracle, they're embedding AI in their solutions, but they love what we're doing around Consulting Advantage because clients can get value from their platforms more quickly, and so we spend a lot of time with them as well about exchanging ideas and collaborating on what we can put into the platform that would help them sell their products and deliver value to clients faster, too. So a lot of collaboration within the asset base that we're building.

Got it. So we spent a lot of time on AI. I know since Arvind's current focus has been on AI, but hybrid cloud as well. And hybrid cloud is arguably the bigger piece of revenue where you've kind of taken advantage over recent years. So maybe just dive in a little bit more into consulting's role with hybrid cloud. Like what have been client pain points in terms of migrating to the cloud? What inning are we in terms of client adoption of the cloud? And I guess, what's the opportunity going forward with consulting and hybrid cloud?

Okay. I'd start by saying that there's probably very, very few large enterprises that hybrid cloud isn't the right answer, like moving everything to public cloud in most cases, won't make sense. It could be due to data gravity, just the amount of data that sits elsewhere and the challenges around moving that, could be security and just even cost benefit. So when you ask about the work we do around hybrid cloud, it all starts with -- we have a Hybrid by Design offering and methodology to help clients figure out what should sit in which environment, but that's always a point in time. So we've also built assets and accelerators to help clients kind of monitor over time, would it make sense to move this to the cloud and really being sort of an adviser as well as people who can then execute on that strategy. And I think some of you probably saw we did a study with McKinsey 2 or 3 years ago. And the conclusion was that there's 2.5x more value to use hybrid cloud than just 100% public cloud. But then the challenge then is, okay, how and in what situations do I use what environment for which workloads. So a lot of the work we do is helping clients think through that and then execute on it. But as a platform-centric company, one of the big benefits to our acquisition of Red Hat and our practice around Red Hat is we help clients architect their solutions so they can move it across clouds and across environments. They're not locked into any one environment over time. So that's why there's been a huge amount of focus in IBM Consulting on not just building the Red Hat capabilities, but having the skills to advise clients on when to move different workloads to different places and monitoring that over time. We have a whole FinOps practice to help clients figure out, okay, maybe now is the time to move and here's why and how to be very data-driven.

Got it. I guess just shifting to productivity a little bit. We can talk about 2 sides of it, the demand side and also what you guys are doing internally. But from the demand side with clients focus on kind of cost efficiencies and savings, I guess, how is IBM placed to help clients on that path? I mean, historically, would you say IBM has better capabilities than maybe some other providers in terms of helping clients on that cost efficiency path?

Yes. So we've -- and you've heard Arvind and Jim and others talk about this, but we, as a company, are very, very focused inside IBM at becoming a lot more productive. And you've started to see some of the benefits of this in our results in the first half of the year and starting last year. And so one of the things and benefits we get from that in IBM Consulting is we call IBM client zero because we're working with IBM to drive that -- those productivity benefits. And then we can, in turn, go help clients do the same. And so that's been a really, really powerful story for us because we've done it to ourselves first and have kind of proved it out and seen what worked and what didn't work and then being able to take those learnings from being client zero to clients, I think, gives us an advantage in the driving productivity and cost savings piece, combined with our AI technology. So I talked about we applied some of the employee self-service AI capabilities to ourselves in IBM. That was 50,000 hours saved in a year that could be freed up to do higher-value activities, but also improve free cash flow and bottom line. And so being able to go share those stories with clients and then help them leverage that same technology that we built for ourselves, I think, has put us in a good position as it relates to driving cost efficiencies, productivity.

Got it. I look at consulting margins though, they lag what you might see in some of the peers. So maybe you could touch on why you believe margins are lower than some peers and maybe the flow-through, how consulting can lead into maybe higher margin opportunities in software and some parts of IBM that you're willing to accept lower margins?

Okay. Yes. So we saw over the last year or so in consulting, our ability to drive margins up some, more work to do, as you called out. And that was really for 2 reasons. One is a little bit of pricing leverage as a result of our investments in deeper skills. Clients are demanding depth of expertise, especially technical expertise. There's a shortage in the market of some of those skills. So as we've invested in deeper skills and specialization, we get some pricing leverage from that. And then we're also focused in consulting as we are across all of IBM on productivity. So productivity for us in consulting, labor mix, locations, utilization, how we deliver, and so this is where Consulting Advantage and some of the accelerators I talked about come into play, and so a lot of focus ongoing on continuing to be more productive, but there is also a synergistic impact of having consulting inside IBM Tech and $1 in the platform does drive multiple dollars of services back as well. So that should make an impact, too.

Got it. Maybe shifting over to M&A. Most of the M&A recently has been more directed towards the software side of IBM. Maybe you can tell us a little bit about IBM and IBM Consulting, specifically approach to M&A and appetite broadly for larger deals.

Absolutely. Our acquisition strategy, as you would expect, in IBM as a whole, is very focused on hybrid cloud and AI in alignment with our strategy. And sometimes you'll see on the software side, some acquisitions around complementary areas, I would call it, like automation, like security. And that's true on the consulting side as well. Most of our acquisitions obviously kind of are underpinned by our strategic focus on hybrid cloud and AI, but they really fall into 3 categories on the services side, industry, strategic partnerships and then cloud and AI. And we've actually made 15 acquisitions in consulting over the last few years. And when you look at them, 3 or 4 were in the hybrid cloud space and building some partner capabilities like with Neudesic with Microsoft as an example. Quite a few of them were strategic partnership skills, capabilities, that depth of expertise that I talked about earlier, Salesforce, SAP, Adobe were some of the areas we made acquisitions. But also -- and you asked earlier, Ryan, about industry depth and expertise. We also acquired a couple of companies in the government space, one in the U.S. Octo and then one in the U.K. with specialist skills around the defense industry. So you'll see most of our acquisitions in consulting, not only all focused on building on our hybrid cloud and AI strategy, but deepening our industry expertise and our strategic partner skills and capabilities as well.

Got it. Anything you can call out in terms of the current state of the M&A pipeline in terms of consulting, in terms of what's out there for capabilities that you might be interested in? And also from a valuation standpoint, I see any disconnect between public and private valuations at all?

Probably can't comment too much on that other than to say that we ask ourselves kind of 3 questions. Does it align with the strategy? Is it accretive in a reasonable amount of time? And is it synergistic? So a lot of the opportunities that we look at in consulting, we also think about how will this help drive benefit on the technology side as well, and they do the same.

Got it. So look on how helps the IBM platform as a whole broadly.

Exactly. That integrated IBM value proposition that I talked about upfront.

Got it. So I guess we can wrap it up with one last question in terms of what we're most focused on in terms of the key to continued success of IBM Consulting and what we can look forward in the next couple of years?

Based on what I've said so far, Ryan, it won't surprise you that I'd say there's 4 things that are really key to sustained and continued success going forward. One, I'll start with strategic partnerships, leveraging the ecosystem, teaming really closely, not just with IBM Tech, but also with a broader ecosystem of partners and continuing to invest in the depth of skills but also the assets accelerators to really help clients get value from those investments more quickly. So that's first. The second one is there's a lot of questions around is AI an opportunity or a challenge for services firms, and we're really focused on creating opportunities and differentiating ourselves using it, which is why I've talked so much today about IBM Consulting Advantage platform and us using it to be able to deliver value from technology faster to clients. So I'd say really leveraging AI as an opportunity and a differentiator for us would be second. Third, continuing to be all in and focused on hybrid cloud and AI. In a consulting firm, you can -- there's so many different spaces that you could play in, and so our focused strategy and alignment with IBMs that I talked about upfront, staying focused is really important. And then last but definitely not least, we're a people business in IBM Consulting, and we're a relationship business. And so continuing to take actions and create a culture and environment where people feel supported and inspired and a place people want to work and continuing to make IBM and IBM Consulting an even better place to work is a fourth. And it's definitely not last but least kind of statement. It's kind of equally important to everything else I talked about today because it really is kind of the heart and soul of our business and consulting our people. And so taking care of them and creating a good environment for them to thrive is really important as well.

All right. Great. Thanks, again, for the very helpful conversation, Kelly. I appreciate it.

Thank you, Ryan.