International Business Machines Corporation (IBM) Presents at SVB MoffettNathanson Technology, Media, and Telecom Conference (Transcript)

International Business Machines Corporation (NYSE:IBM) SVB MoffettNathanson Technology, Media, and Telecom Conference May 17, 2023 11:00 AM ET

Company Participants

John Granger – Senior Vice President and Head of IBM Consulting

Conference Call Participants

Lisa Dejong Ellis – MoffettNathanson

Lisa Dejong Ellis

All right. I think we are going to get ourselves started here. Well, I would say — he’s not quite Lachlan Murdoch, but he does have a nice British accent.

John Granger

So he had a TV series written about.

Lisa Dejong Ellis

Yes, exactly. So, thanks for joining us, John Granger, Senior Vice President and one of the heads of IBM Consulting. So delighted to have you join us. Delighted to have you here for our miniature IT services track this morning at our conference, which has been terrific. So you’ve been at IBM for a long time, and you’re now leading the consulting division. So why don’t we just start there? Just to kind of familiarize your folks who may not have met you previously. What’s your bit of your background and your role right now?

John Granger

Yes. So look, I lead IBM Consulting, and just a bit of context about IBM Consulting, I think. Firstly, we grew out of the acquisition of PwC Consulting by IBM way back in 2002. And I was a partner in PwC Consulting. And in fact, there’s quite a few of us still on the leadership of IBM Consulting. So I think that was a pretty successful acquisition actually. And whereas, I would say, a full fat consulting organization, I mean, we cover all the things that you’d expect across the various functions and industry as well as having a full sort of global footprint.

We’ve got about 160,000 people, and I think the interesting thing, Lisa, in the context of IBM is that we’re now up to about — with the spin-off of Kyndryl, about 1/3 of IBM’s revenue. But 2/3 of IBM is people. So when you talk about — and when Ivan talked about an IBM, then he’s — he’s like is not, he’s talking about somebody in IBM Consulting. And then for me, personally, so I’m now leading IBM Consulting, I was previously the COO. And so I’ve worked around the world. I mean, I ran the U.K. for IBM Consulting, and I then ran Europe for IBM Consulting, I then went and lived in — so I live in Madrid for four or five years, then went live in Bangalore for two years, which was a good gig.

And so, when I ran the application business, so working with our India teams out there, and then I lived in the U.S. until the pandemic. And so when that all kicked off, I was actually in Miami Beach and Donald Trump was closing down the world. If you remember, he was coming on tele each day and things were getting shut down. And so, Arvind suggested I went home at that point. So I’ve been in the U.K. since.

Question-and-Answer Session

Q – Lisa Dejong Ellis

All right, nice. Good. Well, we’re just going to start right off with the AI topic because that’s certainly the hot topic of the day, generative AI and AI more broadly. Can you talk a bit about how IBM Consulting is thinking about the impact of AI on your business, both from a revenue perspective as well as incorporating it into your own operations?

John Granger

Yes. So look, I mean, we may come on to generative AI a bit later. But I mean, in the AI space, I think it’s important to say that, I mean, Arvind strategy is for IBM in a sentence is to deliver transformation powered by the preeminent technologies of our time, hybrid cloud and AI, leveraging the ecosystem. And so we’ve been in this AI space for quite a long time. And I mean, clearly, the market is huge.

I think IDC thinks it’s $35 billion now, going up to $65 billion or something, it’s growing enormously. But I mean, clearly, it’s also a fundamental source of competitive advantage for our clients. And I think it’s really around AI and automation, driving their ability simply to do more for less. So, whether that’s in productivity, whether that’s in innovation or whether that’s in scaling up.

I think AI and automation are an absolutely critical imperative for our clients at the moment. And so, we — we’ve got some good capability, significant capability in this space, Lisa. We’ve got 21,000 of our consultants are entirely focused on data and AI and have been in this space for a while, and we really focus around four use cases. So the first of those is customer care. So a good example there would be in the U.S., for example, the Veterans Administration.

You can imagine that they have to invest — ingest huge amounts of documents that are coming in around claims. And so we’ve helped them with the process and with the technology, which has got something like a 93% extraction accuracy, which has meant that the time now for them to process some of these claims has gone from like 20 days to a day and released huge amounts of time and effort. And that’s an IBM intelligent automation solution actually running on AWS’ GovCloud. So — so that customer care is one area.

A second area would be skills and labor. So a good example there would be with TD Ameritrade. I mean you can imagine they have lots of client contact, people asking about opening accounts and margin trades and what have you. So we’ve helped them work across about 14 processes to release a significant amount of processing time they’re down by about 70%, McDonald’s we’re working with. So all the drive-through ordering, we’re automating all of that.

So I think skills and labor, that customer care and then obviously, you’ve got all of the cybersecurity. So Wimbledon is coming up. There’s something like 200 million events that attack Wimbledon. So we help them sort that and then IT management, a good example there. J.B. Hunt, who are a transportation company really helping them to understand how do they manage their multi-cloud environment now? How do they ensure that they’re getting the best value from those?

So, I’d say that we’ve been in this space for a long time. It’s an important part of our revenue. We’re focused on these four areas: customer care, skills and labor, IT operations and security. And it’s going to continue base piece is going to be — with all the profits going on with generative AI that we’ll come on to, but that base piece of automation, and AI and how important that is to clients’ transformation. I think that’s going to be really important for our revenues moving forward.

Lisa Dejong Ellis

Okay. And then let’s go to generative AI specifically. So last week, down at IBM’s major Think event down in Orlando, which I was there. For this, you guys launched a major new product platform called WatsonX, which is an enterprise-oriented platform designed to leverage generative AI. Can you talk a little bit about what WatsonX is, what it’s targeted at? How it’s going to generate revenues for IBM Consulting, IBM overall? It’s pretty exciting, yes.

John Granger

Yes. It is exciting. And I think — I mean, in a nutshell, WatsonX is an enterprise-ready tool set that uses trusted data that is going to accelerate the building and deploying of machine learning and foundation models. That’s the sort of core of it. And then as three elements, really. There’s WatsonX AI, which is the studio with all the tools in it. There’s Watson data, which you should think of as sort of a lake house that will not only access trusted data that IBM brings, but also more importantly, an envelope, if you will, and access to clients data.

And then thirdly, there’s watsonx.governance, which is really focusing on how you manage with integrity, how all this works. And look, I mean I — why I think this is important for us, Lisa. If I think about what differentiates IBM, not just IBM Consulting, I’d say that we’re differentiating in the market moment through being open through our deep technology and through our brand and our reputation for integrity and to some extent, WatsonX encompasses those three things from my point of view.

So if you think first of all, about — I mean, this — I mean, we are firmly of the view, but generative AI is going to be multi-model or multi-cloud. And so, this WatsonX tool set is going to do is really, therefore, allow you to work on one set of tooling on all of your data sets. So it will be open in that sense. And we’ve — as you know, we’ve talked about HuggingFace being part of the ecosystem because we think a platform is only going to be as good as the ecosystem that it enables. So HuggingFace will be part of the ecosystem, others as well.

So I think first then it instantiates what we believe in terms of open. Secondly, in terms of the depth of our technology, what we’re looking to bring forward within the tooling here is really shifting the focus from large language models to foundation models. And so we’re going to focus those around IT events around security and around digital labor. And then we’re bringing into production on a beta basis, some foundation models that are going to be geospatial around chemistry and around IT events.

And so, I think you’re going to see in this IBM’s technology strength as these foundation models really start to come to the fore. And then thirdly, Watson Governance is going to be about how do you explain the outcomes? How do you ensure you’ve got the right governance protocols in place, how can you be confident that you trust the data. So in some ways, this — I mean, — it is these three things: governance data and the studio tool set. But I think they sort of represent what we’re about.

Now you asked how we’re going to exploit this from an IBM Consulting point of view. And I think the analogy here that’s important is Red Hat. So since we acquired Red Hat, we have built from a standing start in IBM Consulting, the biggest Red Hat practice in the world that’s twice as big as anybody else’s. We know that because Red Hat have told us, they won’t tell us who the next competitor is, but they will tell us that we’re that big. It’s $2 billion, as you know, of our revenue, which is about 10%.

So we managed then to build up that strategic practice, driving forward that IBM technology and we did that quickly. But we did it. And the key thing I wanted to say here, Lisa, we did it at the same time as we built a $1 billion AWS business and $1 billion Azure business. So, this wasn’t — we’re just foregoing IBM. We were also, again, working in an open way. And so, that’s what we’re going to do with WatsonX. We’re going to replicate that Red Hat model.

We’re going to build the WatsonX business whilst at the same time, working with other partners. But we’ve already announced 1,000 people in our WatsonX center of excellence. And so that’s going to be important. We’ve done over — I think we’ve done over 100 client interactions in the last month with 40 paid engagements. So, I think this is going to take off. And so, we’ll see, hopefully, the same sort of impact.

Lisa Dejong Ellis

And what is the client feedback then, you’re out with customers, clients every day, even just after the announcement last week, how are they reacting to the WatsonX announcement?

John Granger

Well, I think, first of all, they — I mean, they’re all — everybody is in a frenzy of pilots and proof of concepts and what does this mean and so on and so forth. So I think the feedback has been, first of all, that they’re very pleased that IBM’s position is now clear.

And I think secondly, to the point I was making earlier, and they do believe and see that IBM brings as I think you hinted earlier, but brings a deep enterprise lens to this. So they feel that these are a set of tools and approach that understands enterprise but also recognizes some of the real issues around integrity and how you manage this because, look, I mean, everybody has been taking all these Board questions about sustainability.

And now all the Board questions are about, well, what are you doing with AI? How are you going to protect us? How are we going to ensure that our data isn’t spread all across the Internet? How are we going to ensure that we can maintain an integrity position for our company? And so I think knowing that IBM is playing in this space now is something that gives some confidence.

Lisa Dejong Ellis

I know you have the one — I think you call it one IBM or IBM first, basically, the idea that you apply all of these technologies to your own operations internally. How are you applying generative AI or will be into IBM Consulting? There’s a lot of debate out there about how it will affect the demand environment, the margin environment for the services side of the business?

John Granger

Yes. Well, look, I mean, I don’t think any of us know how this is going to play out yet. I mean, my own personal view is that the best analogy is with what happened in the consulting industry with off-shoring 20 years ago. I think there are some significant parallels. Firstly, off-shoring did offer a very significant productivity advantage. Secondly, there were huge change management issues. I mean everybody said, you can’t do this stuff in India. It’s impossible. There are all sorts of issues and so on and so forth.

But — and then the same I’ll say that certain things can’t be done by generative AI. And so — but I think that will come — that will resolve itself. And then yes. But the third element that I believe will play out in the same way is that at that time, everybody said, off-shoring will be the death of the industry, it will all shrink. And actually, it proved to be a fuel that made it a lot bigger. So that’s my broad perspective.

In terms of how we use this sort of AI in our business, particularly in the talent space, I mean, we’re recruiting a lot of people. We have a lot of churn and turnover. So I mean, we use a lot of these AI tools. So for example, we have a very good attrition tool, which actually predicts with a 95% accuracy in our team, who’s likely to be thinking of leaving.

And then we can — and that’s just based on how long they’ve been in bands, what their payers, what’s happening to pay out side, what the — I mean, we can look at their utilization patterns and so on and so forth. But we can then decide whether we want to intervene or not. And then we also use a lot of — what’s on orchestrate technology actually around the promotion process. So I mean you — in your organizations, well, that’s often very manual, a lot of data needs to be brought together.

And what that’s really doing is picking out that the whole process side of it, who’s collide and so on and so forth, you can automate all of that and then just make sure that you’re just bringing it down to who’s going to take the decision and then move that on. So we use all those sorts of tools all the time, Lisa, in order to try and improve our productivity and how we operate. But the overall impact of how this is going to play out yet, and I think we’re all still learning.

Lisa Dejong Ellis

All right. Well, switching gears off of AI. We could have done entire discussion about that. But moving over — since Arvind took over as CEO three years ago, he’s really pushed hybrid cloud to the forefront of IBM’s strategy, and you highlighted also that you’ve built up now several billion-dollar businesses within consulting across all of the different — basically against backing up the hybrid cloud strategy. So can you talk about where we are in the cloud journey with clients and what challenges are they facing now? How is IBM supporting them in cloud?

John Granger

Yes. Look, I mean, as I say, I mean, hybrid cloud is an incredibly important part of IBM’s strategy. I said the two preeminent technologies of our time, hybrid cloud and AI. But I also think that for IBM’s clients, I mean we’ve always been deep enterprise. And if I was just trying to characterize our clients, I’d say they all run mission-critical operations. So whether — I mean, as you know, where we’ve got a lot of financial services clients, and we’ve got a lot of government clients, telco clients, health care clients. They all need these mission-critical operations.

And I think what we’ve seen with them is that to date, 75% of their applications have not yet moved to the public cloud. And so when you think why that is? I mean, it’s really because for them with their mission-critical operations for reasons of data security, the complexity of some of the big application engines that they run, the cost of moving those to the cloud, let alone the concerns they’ve got about how they skill for all sorts of different clouds. All of these things have led them to conclude that a hybrid cloud architecture is the right answer, i.e., they have some of their applications on-prem, some in a private cloud and in multiple public clouds.

And if they so do, then they’re able to build their applications once, deploy them anywhere, they skill their people once and then they can use them wherever they wish. And most importantly though, and this is the open point, they can innovate anywhere with anyone’s technology. In order to do that then, you need a hybrid cloud architecture. You need a single integrated fabric that runs across those environments.

And in IBM, we think we’ve got the best solution to that, which is the Red Hat stack is that combination of RHEL, Kubernetes, Linux that you see in OpenShift. And so we found that to be very, very successful. And I think a really good example of that, and I think you know a little bit about it, Lisa, but it’s Delta. I mean we’re migrating — well, we’re modernizing and migrating all of their applications around their various business domains. And we’re taking them to an AWS cloud, and it’s perfect because it’s using ROSA, it’s Red Hat OpenShift on AWS. So it uses that hybrid cloud architecture.

But at the same time, to the point I’m making earlier, we’re also helping them reskill their whole IT operations team who are now more cloud-based than who were training as IBM Consulting in order to ensure that they can operate in this new hybrid cloud environment. So I think that’s a really good example of we’re helping them with the — as IBM Consulting with the overall architecture, but also with the people dimensions and all the change issues goes with it.

Lisa Dejong Ellis

One really notable thing about IBM Consulting has been the sort of repositioning or competitive repositioning of IBM Consulting over the past several years. What actions have taken, and this has really been heavily under Arvind’s leadership where he has really promoted the open and vendor-agnostic aspects of IBM Consulting. What actions have you taken internally in order to drive this change and reposition the business?

John Granger

Yes. So look, I mean — to come back to IBM’s overall strategy, as I said, deliver transformation, leveraging hybrid cloud and AI and using the ecosystem. I mean, I think the first thing as well as the openness that Arvind has brought, I think with the spinoff of Kyndryl, he’s really simplified the Company, Lisa. So, I’m accountable for delivering the transformation. Rob Thomas and the technology team are accountable for the technologies and products that support hybrid cloud and AI.

So we’re a much easier company to deal with than we were. And that’s a big bit of feedback from clients who used to find and you know this you needed to find it quite complicated to navigate IBM. So where they are focused on transformation, we do that through — we’re very clear about what our growth platforms are. So the one, as I say, is our hybrid cloud services, which is the journey to cloud, so the application migration, modernization, hybrid cloud management that we’ve just talked about.

But then we have another growth platform, business transformation services that you could almost call intelligent workflows that has our process expertise, supply chain finance, what have you. It has our BPO business. It also has all of our data and AI capability. And then our third growth platform is security. So I think we’re really clear about what we do. And then what we — I mean, to answer your question about how we’ve repositioned it, we’ve developed a framework that we’ve been maniacally focused on that we call Transform to Grow, which is I said of just six things, honestly.

And when you’re in a big company, you can get so distracted by different things that we’ve just said there are six things that we’re going to be maniacally focused on that we think if we execute well. We’ll deliver the growth for us. And the first of those — and it’s probably worth saying, and that sort of fits with the mantra that I’m in favor of which is that you should focus more and more on less and less if you really know what you want to execute on, as you would do with a client, bring the same level of discipline to the work that you do internally as you would do for a client.

So, there’s six things. The first is talent. We’ve grown our business to 160,000 now. So we were very focused on making sure we have more people, and that’s not just practitioners, but that’s also go-to-market people. But then the other thing is not just the quantum of people but their quality. So, we’ve had a huge focus on skilling. So we’re up to, I think, 66,000 now of skills and certifications in the cloud service providers, 55,000 in ISBs. And some of our partners like Microsoft say we’ve broken records for the amount that we’ve done because I’m a great believer that certifications are a leading indicator of revenue, if you can get that skill base, then you can make that happen.

So the first is talent. The second was brand, when we were Global Business Services before Kyndryl span, I mean, nobody knew what we did. So whether you’re talking to clients, and making sure clients understand that IBM Consulting is alive and kicking, or, as importantly, in my mind, when you’re trying to recruit people to come and join, if kids are got a choice between Accenture, Deloitte, and Global Business Services in IBM, I mean, that’s hard. When it’s IBM Consulting, then there’s a level playing field.

So I think we’ve done really well on pushing on that brand. Third thing I say would be client segmentation. So we’re doubling down and going deeper and deeper, Lisa, with our key clients. So we have a client segmentation of our elite, our premier, our foundation, and we focus on those really cutting the tail. A fourth thing would be going after the bigger transformational deals. We didn’t think we were getting our fair share of those in the market. So we put together a team that’s very focused on making that happen.

And then the last two, the one is the acquisitions. And these are related acquisitions and strategic partnerships. So, let me start with the strategic partnerships. We, as you alluded earlier, I mean, we’ve grown our Azure business or AWS business to over a billion dollars. We’ve always had a massive SAP business. As you know, we’re really working hard on Salesforce on Adobe ServiceNow, many other partners in order to ensure that we can bring whatever solution we need to with our clients.

And our acquisitions have been sort of backing that up, because a lot of our acquisitions, let’s just take cloud, for example. I mean, we bought Nordcloud in Europe, we bought Taos, we bought Neudesic in the U.S., BoxBoat. They all brought with them a lot of competencies in cloud service providers, a lot of skill people which really allowed us to sort of bootstrap that. That’s really the six things that the talent, the brand, the client segmentation, the big deals, the partnerships, the acquisitions, and just staying on those all the time. And we’ve had eight quarters now I think of consecutive growth and so seem to be paying off.

Lisa Ellis

And so now when you’re in front of clients does IBM Consulting win, what do you find are the big differentiators?

John Granger

I think — well, you know better than anybody, our marketplace is really crowded. So I think it’s quite difficult to say that you have unique differentiation. You sort of differentiate yourself against different segments within the market. But we think about three sources of differentiation. And the one is being part of IBM. The second is our deep understanding of clients and our third is how our clients experience this.

And I just want to unpack that for you a bit because years ago, I wouldn’t have said being part of IBM felt like a differentiation. But one of the things that I think your survey brought out, your CIO survey brought out is that in the space of really complicated end-to-end transformation, often with a global impact. Actually, clients only think of two players, it’s us and Accenture. And so whether that’s — I’ve just been talking about like with Delta or whether it’s a global SAP implementation, perhaps, it’s really just the two of us.

And the reason we’re in that segment, I think, is because we’re part of IBM. The one, the technical depth that IBM has that stands behind IBM Consulting, but also the financial strength that stands behind IBM Consulting. So being part of IBM, I think, is a helpful differentiation in that sort of segment. I also think that notwithstanding the work we do with partners that our association with IBM technology works for us.

I mean, our Red Hat business, I think, has been good on mainframe modernization. And then also, I think how IBM positions itself in the marketplace like I think the thought leadership on hybrid cloud and the thought leadership you’re going to continue to see around generative AI and how you use that sensibly. I think that helps us. So that’s the being part of of IBM.

The second bit really understanding our clients. I mean we have deep industry expertise. So against the — the Indian service providers, I think that’s a clear differentiation. And our clients would say, we understand more about their processes and their industry challenges than some of the other competition. We’ve also had a very extensive application management estate for a long time, which means that in certain clients is where we’ve been running their businesses from an application point of view for so long that we really understand it. So that’s the second bit of differentiation.

The third bit though, the really unique bit I think, is how clients experience us through Garage. Now Garage is an approach that we use to create to co-execute and cooperate with our clients, we’ve done — I think nearly 7,000 of these in 2022. And it’s really about how you build a minimum viable product very quickly with a client, you iterate very fast and then build that out. And what Forrester has found is that in an independent survey that they did at this is that when you use, Garage, you get 10x more innovative ideas your time to market is like 70% quicker and 6x more projects actually get into production than is the other way than in other ways.

And so, I have load of clients who tell me the one thing that is truly, truly nobody else has got is this Garage and how those clients experience us as IBM Consulting. So that’s something that we’re really building out on. So those would be the three things being part of IBM, our deep understanding of our clients and then thirdly, how our clients experience us through Garage, and we keep pushing on all of those.

Lisa Dejong Ellis

Let’s talk a little bit about the current demand environment. You guys just posted 8% constant currency growth in the most recent quarter. So you’re still seeing very strong revenue growth within IBM Consulting, but just talk a little bit about what you’re seeing out there. Are you seeing any signs of softness in the macro?

John Granger

Not really. I mean I should talk about the United States. But I mean, in the macro, I mean, I would say we would still see that technology-enabled transformation is top of clients’ minds. And I think this is the big difference in previous times of economic uncertainty. We saw a lot of this get shut down. We’re not seeing that. I mean we’re seeing that there are — those big technology-driven transformations are seen by clients as being essential.

And I think the root causes of those. I mean, a couple of them are still pandemic related. I think that whole transition to virtual relationships with your customers and clients that organizations have had to navigate. That still is driving a lot of demand for digital transformation. Supply chains aren’t fixed. We all know that. That’s driving a lot of demand security, as we talked earlier, still a huge issue.

And then I think the sort of coming back to the automation. I think clients have found it very difficult in the last year because of the wage inflation and because the attrition and the churn to see how they’re going to hang on to certain skills. And so consequently, they’ve concluded that actually in many cases, the best way of dealing with this is to find a way to automate those business processes so that you have less need for that sort of skill.

And so consequently, I think that’s driven a lot. And overall then, I mean, we see the market being — for our sort of business as being about $800 billion, growing over the next decades mid-single digits. Particularly, I think we see about half of that in the cloud and the intelligent workflow space. And I think we’re confident — I talked about our growth platforms earlier, which bang on those market pause. I mean we’re pretty confident we’re in the right place to pick this up. But there is an issue in the U.S.

Lisa Dejong Ellis

I was going to say, yes, so what’s the dynamics you’re seeing right now in the U.S. versus internationally?

John Granger

I think it’s really sort of paradoxical actually. I mean I think you’ve got all this — all this big transformation work going on. Clients are investing really heavily in that. But I think in the U.S., I mean, I’m not quite sure why it is, but particularly in the U.S. — I mean, there is a pressure on fundamentals. I mean we all feel that pressure on fundamentals. And so whilst there’s lots of support and drive around these big — these big transformations, I think elsewhere, clients have much less contingency. They’re very tight on their business cases.

I think in some — for some less important projects, they’re pushing them out. I think, in the space of staff augmentation. And Lisa, all those enhancements that sort of float around the edge of some of the bigger pieces of work that you’re doing, I don’t think there’s as much opportunity to pick that up. So yes, I think it’s become more difficult. I think the critical thing for us, however, is that we’ve seen no backlog erosion.

So nothing is getting canceled. It’s more that things are going to the right or clients are just pausing for a moment or two. But — so I mean it’s more difficult in the United States than elsewhere. And I think we’ve been public about that as others have. But on the other hand, I mean, we had very strong signings in Q4. In Q1, we had our strongest Q1 signings ever, I think. And normally, we have — you all know this, but we have a sort of seasonal dip of Q4 for Q1. So that’s indicating to us that the demand is still out there. So we we’re as confident as we can be ready.

Lisa Dejong Ellis

Good. Let’s turn to productivity and margins. This has been a big focus in IBM Consulting more recently as initiatives to bring up the margins. Can you talk a bit about, yes, what you’re doing to drive margin expansion within IBM Consulting?

John Granger

Yes. Well, we did — we expanded our margins 50 basis points in Q1, and we’ve been having a lot of investment that we’ve been making in the business for some time. So, we’re balancing what we’re doing on productivity with those investments. But in the same way, as we have this framework for growth, transform to grow, I think we’re also pretty focused on five levers that we push hard on in order to try and continue to make progress on our margins and productivity. And as you know, we’ve guided to that we’re going to improve by a point.

The first of those is pricing. I think we have been relatively successful in pricing. I mean we’ve moved beyond just enforcing COLA, those cost of living agreements, so really starting to leverage NPS scores. So I was talking about Garage earlier. We get an NPS score for Garage is about 79 is the average and 80 is world-class. One of the things that we’ve really started doing with clients is regardless of cost of living agreements and what have you, it’s just having an honest conversation about if we’ve got really high feedback, whether it be NPS score or anything else on the value of what we’re providing, yes.

And yet, we have an issue in terms of the wage inflation. And consequently, we need to do something with our pricing. And therefore, in the spirit of partnership, we need to come to some sort of arrangement. We found that those have been very productive conversations for us. And really pushing that point with them and saying, look, if it’s clearly value for you, then we need to be fairly rewarded for how we’re providing that value.

So I think we’ve got a lot more disciplined about that pricing and having that continuing conversation about that in the context of inflation. Labor pyramids would be a second thing. I mean the ideal within any consulting organization is to have a nice pyramid where you have the appropriate number of people at the higher levels leading the business, driving sales and what have you, but then more junior people really has been the engine of your revenue and your profit. So, we’re continuing to be maniacally focused on that and getting that right.

A third piece is around location. I mean, we’re blessed with a really good operating model. So, we have our offshore centers in India and Latin America and so on, but we also have a network of near-shore centers in Europe, for example, in the Netherlands and in Germany, but also in the U.S., in Halifax, for example, and in Baton Rouge. So — and then we have our domestic teams who are in market, and so making sure that the right work is getting done at the right place in that supply chain at the right price is also something that we work really hard on pushing forward.

Utilization is obviously the lifeblood of what we do. So very focused on that and ensuring that’s in the right place. And then one of the things that I think has become more important that we’re on at the moment, Lisa, in the current market environment that we’ve just been talking about is something that we call delivery to price case. And that is, in our business, you — I mean, a client needs something doing, you release a solution, you see how you’re going to staff in and so on.

And in the same way that I said clients have got much less contingency, we need to be super careful about our contingency, and we need to make sure that we actually deliver the work that we proposed at the margin that we said we were going to, which means that our teams have got to be really tight on ensuring that they are using the right level of people and that they’re managing all of those scope issues really tightly. So we’ve got a big focus on that.

None of that is rocket science. I mean this is just — you just have to grind it out and it’s just heavy lifting. So, that’s just what we do. But again, we try and keep it down to a relatively small set and drive ourselves towards excellence in those. And in so doing, that will help us ensure that we deliver at least a point of margin improvement.

Lisa Dejong Ellis

Good. All right. Let’s talk a little bit about M&A. You commented earlier on a number of the companies that you have acquired into IBM Consulting. Can you just talk about your M&A strategy now and what your appetite is for larger deals versus smaller deals, any particular areas of focus?

John Granger

There are three questions that we really ask ourselves around our acquisition strategy. I mean the one or our acquisitions. I mean the one is align strategy. The second is, is it going to create some measure of synergy for the — across IBM? And the third is, is it going to be accretive from a cash flow point of view in a reasonable period? And so, that’s the sort of test that we set ourselves, in particular, in terms of the strategy, I think we’ve been focused on how we build capabilities that support in some ways, like I was saying earlier, that support those growth platforms of hybrid cloud and intelligent workflows, but also our partnerships.

So you’ll see we — as we said, I mean, in the cloud space, we acquired — Nordcloud, Taos, BoxBoat, Neudesic, which is the big Microsoft shop in North America. But we also acquired because we — as I said, we want to build out with Salesforce, we acquired 7Summits and way in North America and Europe, respectively. We bought a data property in Europe called Bluetab. And then, we started to expand our product engineering capability with Dialexa. So these — a lot of these acquisitions, the point I’m trying to make is that they’re sort of like bootstrapping, the strategic areas that we want to get into.

We are making some specific acquisitions in markets where we want to be strengthened. And so, our recent one and a big one for us was to your point about appetite for bigger ones was Okta. So we have about 4,000 — 4,500 people in our federal business. Okta is about 1,500 people. So I mean, it’s a big addition. And there I think working in the federal space. I mean they’re in cloud, AI, experience, so same sort of areas as us. But they’re also in this sort of co-creation culture. So they have something called OLabs, which I’ve been to in Virginia. You should see — I mean, it’s a really nice facility where they co-create with their clients. And so I think that works really well for them. So that’s a good example of where we’re getting into an industry play rather than a capability play into a market where we want to strengthen, which is federal, but also of a reasonable size.

But the other thing we think about — so I did just want to mention is how the integration is happening is actually quite important here because the integration of services companies is different from the integration of software company. So within IBM, we’re actually quite — obviously, as consulting. We’re very focused on because all you’re buying is talent. So you really need to make sure that you’re bringing them into IBM in a way that — or into IBM Consulting, in a way that is going to maximize the retention that you have, whereas sometimes on the software side, it’s more asset-based, so you can take a slightly different point of view, but that’s in about. Yes.

Lisa Dejong Ellis

Another thing you highlighted earlier in the discussion was the big strategic partnerships and technology partnerships that you have at IBM Consulting. You have a huge one with SAP. You had a recent announcement there. You also have big ones, of course, with the big cloud providers. What’s your approach and strategy around these strategic partnerships?

John Granger

The business logic here is — I mean, all of it has been clear. No one company can have — and this just common sense can have a monopoly of the technology solutions that a client needs. And it’s also good to mitigate and diversify your risk by working with more partners. So we’re clear that we need to do this. And I guess there’s four things we’ve done, two of them we’ve talked about already. So I mean I’m not going to reiterate on skills, but a massive buildup of skills with these partners and skills being this leading indicator of revenue, but also the acquisitions.

But I think the other things that we’ve done is, firstly, we’ve deliberately built an alliance organization, Lisa. So, we’ve actually got people who almost in a white glove way, treat these partners like clients. That’s the mindset that we tried to get into is that we need to build very close relationships with them. We need to become friends with them. We need to have people who are full-time dedicated to managing the relationships with them.

And in that, there’s a really important concept of trust because none of these partnerships work unless you have deep trust with each other. Because I mean where it goes wrong is if — is if I agree with you as a partner, we’re going to go this pursuit and then halfway through, I flip to somebody else, then that can set you back decades. So very disciplined in how we’re building the trust across the organization.

So, I’ve talked about acquisition skills, this alliance organization, but then also building joint solutions. And we’ve been doing this for ages with SAP. We do something called Rapid Impact Solutions where, for example, we’ve got customer care solutions for utilities. And these are just industry solutions within SAP that no other provider has. And therefore, people in SAP now, are you go to IBM Consulting, if that’s the issue that you want to take forward?

And that’s, I think, what we’re starting to do now with all of these partners because if you can get these more specific industry solutions built that are almost unique to our partnership, then that’s how you drive footfall and traffic, if you like, within your partner towards you. So we’ve been very deliberate about this and sort of now moving up that maturity curve to ensure that we’ve got a really good set of joint solutions with each of these partners.

Lisa Dejong Ellis

So down to our final two questions, I guess. The first is around the synergy with IBM technology, as you highlighted post the spin-off Kyndryl, one of the really affecting Arvind has done is simplify how IBM goes to market to customers. How should investors think about the relationship between IBM Consulting and the technology side now in this sort of new modern context? How frequently are you pulling through IBM technology? And how does that interplay work?

John Granger

So I mean, clearly, we’ve — I mean Red Hat, as I said earlier, is the poster child here, yes, with the amount that we’ve driven for them. Elsewhere, we have about 15 of our practices in IBM Consulting that are focused on IBM technology. So mainframe modernization, maximum, sustainability with the Envizi platform and what have you and obviously security and did some really good stuff, for example, at the Soccer World Cup recently for where we had 30 experts on the ground that we’re really providing a lot of the cybersecurity for the Qatar National Cybersecurity Agency.

So, we have a lot of capability around that. And we are for IBM technology, we’re the number one channel in terms of their system integrators, yes. But I think the really important point, as you say, how should investors think about it is we are absolutely not tethered to and nor are we a channel for IBM or solely a channel for IBM technology — we have a really strong culture that Arvind is 101% behind, which is that we’re a client-first but with a point of view. So what we do is — the most important thing for us is to become a trusted adviser to a client and to give advice that the client is going to believe in.

And so, we’re client first in the sense that we look at the clients issues, the client’s challenges and then decide what is the best answer. Many times, a client has already decided, and it’s not IBM technology, in which case we will often see that, that is also the right answer, and we’ll just work as I said, with partners to ensure that we’ve got that right technology. The client first is with a point of view is, however, if the client is still not made their mind up if the client is still uncertain, then we may recommend IBM technology. Always on the assumption that our point of view is that the IBM technology is, in fact, the right answer.

So, I think we’ve been pretty effective at maintaining this. Funnily enough, I think from how this ties together, well, Lisa, is I think the clients who know us in IBM Consulting, will know that to be true. The people we have the most difficulty we are actually clients who don’t know us so well, i.e., new logos as it were, we think that that we’re more closely tethered to IBM than in fact, we are. And so in that sense, the growth strategy that I talked about earlier in terms of doubling down on less line actually helps to position us appropriately because those are clients that understand how this works.

Lisa Dejong Ellis

Good. All right. And so just to close, what are your personal top three or four priorities to ensure that IBM Consulting maintains the level of growth and success that you’ve had over the last couple of years?

John Granger

Look, I mean I just I’ve explained, I think we’ve got quite a structured way of thinking about our growth and about our margins. And the thing we need to do is just keep executing, yes? I mean it’s — you don’t want to get diverted. That’s how we’re going to be successful. So, we’ll stay focused on our six growth priorities, we’ll stay focused on our five margin priorities.

I do think, however, to where we went earlier, a personal priority will be making sure that we can make WatsonX a success for IBM Consulting as well as for IBM in the same way that we made Red Hat a success for IBM, but also for IBM Consulting because I think, clearly, the whole market opportunity around generative AI is something that we’ve got to jump into. Yes.

Lisa Dejong Ellis

Excellent. Thank you.

John Granger

Thank you.

Lisa Dejong Ellis

All right. Thanks, John. Thanks a lot. Thanks, everyone.