IBM CEO says company culture was too slow to change | Mint
IBM CEO says company culture was too slow to change
Arvind Krishna says the enterprise tech giant’s mindset still has ties to massive licensing deals of the past.
IBM Chief Executive Arvind Krishna is remaking the company once again, only this time he views the fundamental challenge mostly as one of culture.
Since taking the helm of the tech giant, he has made big structural moves and placed large bets on technologies including quantum computing.
Now, he is focusing his attention on the company’s sales force, long-accustomed to selling massive licensing deals. It hasn’t evolved fast enough toward new consumption-based business models rooted in the cloud era, Krishna told me in an interview on Wednesday, just hours before the company issued hotly anticipated official results for the second quarter.
IBM’s shares lost 25% of their value after the company issued a rare profit warning, marking the largest one-day drop on record. They subsequently fell an additional 5%. The company issued its full and official results this afternoon. While the second-quarter miss reported today was consistent with last week’s warning, IBM also issued guidance that wasn’t shared on July 14.
IBM said Wednesday it expects full-year revenue growth in the range of 4% to 5%. Earlier this year, the company projected full-year growth of more than 5%. IBM acknowledged that some analysts had downgraded full-year revenue growth projections.
For the second quarter, IBM said it earned $2.2 billion on revenue of $17.2 billion.
The company also said Wednesday it continues to expect full-year free cash flow to increase by about $1 billion year-over-year.
Sales of the z17, the company’s flagship enterprise mainframe designed for the artificial-intelligence age, fell short of its expectations, in line with the previous investor warning. This decline was closely tied to the software associated with the platform. IBM’s infrastructure revenue fell 7% to $3.8 billion, mirroring the company’s prior profit warning.
Still counting on mainframes
Krishna said the 42% decline in Z mainframe infrastructure is typical for the current stage of the mainframe product cycle, which begins with an expansion of around 70%, followed by a 30% to 40% contraction, and a period of stabilization before the cycle begins anew.
I asked Krishna if increasingly powerful AI could disrupt that cycle by making it easier to permanently shift workloads and data to other nonmainframe platforms. He noted that while generative AI made such shifts easier across all sorts of platforms, the real question is whether the mainframe continues to make sense for certain transaction-heavy applications, such as retail banking, flight reservations and credit-card authorizations. In these areas, he maintained that the Z platform and its associated software remained highly competitive based on factors such as economics and security.
He acknowledged that the conditions that led some customers to shift quarterly capital spending away from such infrastructure and into scarce and increasingly expensive servers, storage and memory won’t go away soon. But neither is the mainframe business and its associated software doomed, given that it remains competitive in certain markets, he argued.
The real question for the company is how to maximize the shift away from the parts of the business that are reliant on the customer’s capital spending budget and tap in to more growth-oriented opportunities tied to the customer’s operating budget. That means dedicating less mindshare to big software licensing deals and more to consumption-based software deals.
How to change a culture
While IBM’s consulting business and most of its software business already focus on the consumption model, some areas such as software tied to the Z platform aren’t.
“Look, I think that when things generally go well, you focus on what’s going well and you tend to maybe not focus so much on the things that you need to do,” Krishna told me. “How do we increase the number of clients we serve? Making sure that we have engineers and (sales teams in) the field focused on consumption as opposed to large capex deals, those are big shifts. Tapping and monetizing innovation very quickly, as opposed to taking multiple years, is a cultural shift.”
Accountable to the board
I asked Krishna if the shift, presumably under way for years, lagged behind his expectations. “Yes, it does,” he said. “Cultural change always takes longer.”
Decades of success associated with certain behavior patterns must change, as must the incentives that support them. “If people had a lot of success for a long time in one set of motions and tasks, then you’ve got to now teach them how to do this in a different way,” he said.
He said he had been in regular communication with board members.
“The board is very confident in our strategy and our approach to the market,” Krishna said. “They absolutely are very focused on all the areas I laid out where we need to change our approach, and we need to move faster and have more focus. They are now going to hold the leadership team accountable for making those changes happen. And if we don’t—or if certain individuals don’t—I would expect the board to be incredibly inquisitive and demanding. But that is what they should do. I don’t see them having a lack of confidence in the approach, but if we don’t execute, they will.”
Write to Steven Rosenbush at steven.rosenbush@wsj.com
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