We said we are going to remake IBM into a much higher growth company and in the areas where there is relevance in the market. We began at about 20% of the company was software back in 2019. Today 45% of the company is software. AI is going to be an incredible productivity tool. That said, I believe that services to the first point will get transformed. Actually, I don't think it'll go away. I think about 50% of the total work that is done by people today will be done by AI agents. I think we should all face up to the fact there will be, I will use the word, some job displacement and as that gets displaced then the question is whether there are other roles that are going to come in. We actually support nations wanting to be sovereign. You use big public global infrastructure and you need local sovereign infrastructure. That's the way I believe it plays out. Quantum is the first time we actually have a new form of computing since 1947. This is a completely different paradigm.
Arvind Krishna has run IBM for 5 years. In that time, he has shifted the company's revenue mix towards software, spun out its managed services arm, and placed two bets: hybrid cloud and AI that are now being tested in real markets. IBM operates at the intersection of where that pressure is most visible: enterprise software, IT consulting, and the mainframe systems that run the world's banks and airlines. India is central to all three. As AI compresses the cost of software development and raises questions about the future of IT services, Krishna's read on what holds and what doesn't carries weight. This episode is that conversation with ET SG editor Suri Agarwal. Listen on. It's Wednesday the 25th of February. I'm Aner Banjri. This is the latest episode of Corner Office Conversation.
Arvind, very good morning to you. Thank you so much for joining us on the Economic Times. It's a real pleasure. Let me begin by asking you, you've completed 5 years as IBM's chief in January. Talk to us a little bit about your 5-year journey. I think IBM has done exceptionally well in these last 5 years. I was looking at the stock price. It's risen over 120%. How do the next 1 year, 3 years, 5 years look from your lens? I know it's a very hard question to ask these days, especially in the context of the changing times. IBM stock just last night I think crashed about 13% given all that is happening in the world of AI. What is your vision for the future?
First, good to spend time with you and with ET. So look, when I became CEO I had a very clear vision that we need to grow and we need to focus IBM on the areas of incredible growth. A lot of the stock market reaction, that's an outcome of the investors having confidence not only in the current growth and in the current makeup of the company but also in how sustainable it is over time. Then investors will reward you with the appropriate multiples and the appropriate ownership. So let's focus on the business side. So we said we are going to remake IBM into a much higher growth company and in the areas where there is relevance in the market.
We began at about 20% of the company was software back in 2019. Today 45% of the company is software.
Three-quarters of our M&A and about the same in terms of our R&D innovation goes into software. So that's the first big change that we did. The second was we also felt that the consulting part of the business can grow but managed services is unlikely to. So we separated that and spun it out, big task. It was a third of IBM. It was about a third of our revenue and we took it outside the company. So we got those two things under our belt. Then we changed our capital allocation strategy to focus very heavily on both organic R&D as well as M&A. So our mission would be even higher total growth, even more how the company becomes software and that we begin to improve both our cash flow and our R&D in order to sort of serve towards those two ends. I think we're maybe halfway through the journey, not likely at the end of the journey.
Sure. But in today's world where AI is eating software and we had a chance to talk to Mr. Vinod Khosla at the India Impact Summit and he has predicted there would be nothing called IT services or software services anymore. Do you feel that there is maybe a reset required in that strategy also? If you could just talk about what happened last night when Anthropic has released Claude and the stock has sort of seen an impact by 13% because of that. A lot of I think companies like IBM run a lot of legacy systems which are based on mainframe and Claude, how does that change the strategy for you?
Yeah, you know it's really interesting to hear some of these statements. I won't comment directly on Vinod but maybe there's a sentiment around which is similar but held by a lot of people and certainly reaction yesterday plays into that sentiment. I would say that a lot of these people are using the same exact logic as eyeballs was used in the year 2000. And I think time has told us what happened to all those companies. Eyeballs turned out to be a metric that was irrelevant in the long term, completely irrelevant. And the only ones that survived from that period were those who could create cash flow. Let me note the ones who have survived are Google, Amazon, eBay. I think that's about it from that era. AI is going to be an incredible productivity tool. I'm a firm believer in that. As an example, inside our own company, we have so far created $4.5 billion of productivity gains which we have reinvested in R&D and sales.
That said, I believe that services to the first point will get transformed. Actually, I don't think it'll go away because services is used when companies want to transform themselves strategically and then they want to use somebody else because that's a bubble cost and two there isn't a long-term need to put all of that expertise and all of that resource inside the company because you don't want to fire them 5 years from now when you're done with that transformation. So, you tend to use a consultant who naturally gets fired when the task is over, right? So if you're going to tell me that need goes away, I don't really see that. A lot of the work is in business process change and in change management. How do you teach your people to use a new tool? How do you teach your people to become more productive? That is much easier done using outside people than inside. I could tell you that with now deep scars in my own transformation of IBM that it is useful to use consultants to get that done.
The other part, we released a Claude modernization tool two and a half years ago used by almost 200 clients. Of course today certain companies get a lot more media attention so they got media attention but to me, a, there was no news there and two, it completely misses the point of the systems. Why does the bulk of the world retail banking, why do airline reservations, why do claims management, why do credit card authorizations run on the mainframe? It's got nothing to do with Claude. It has to do with the architecture of the mainframe for certain critical workloads. Like if you're a bank that does a trillion dollars of transactions a day and you need to net it because certain central banks all over the world want to know that you can close your books in 40 minutes, that's a workload that the mainframe is great for. Or you want resilience or you want to make sure that your encryption is so great that even if people steal the data, they can't do anything with it. Or if you want to make sure that it is completely mission critical with six nines of availability, that is our customer who uses the mainframe. So I think time will tell and all these things the next 6 months, 12 months, 18 months will tell us. We actually believe that one should have good AI tools to modernize your code bases and in the end of the day the environments that people have is not a line of code. The environment is where is your data, where are your analytics, where are your authorizations, all of that integration is back to the architecture of the environment and that is so critical to leverage going forward.
Right. I mean how do you foresee AI and software services sort of coexisting in say the next 6 months or 12 months because every few days we are seeing a new tool which is set to completely disrupt the IT services industry and you are a leader in that.
We are actually quite clear. We think that IT services which has largely been based on people is going to be augmented by, you can take your phrase, is it a digital worker, is it an AI assistant, is it an AI agent. And we actually leaned forward into that two years ago. We created what we called IBM Consulting Advantage which is our set of, I think over 200 digital workers now, deployed at over 200 clients that actually augment the work that our people do. If I was to give you a thumb in the air estimate, I think about 50% of the total work that is done by people today will be done by AI agents. So you would turn around and say oh that means that half the people will no longer have roles. Actually I disagree. I think actually the number of people will only stay the same or increase because there is so much tech debt. There is so much work to be done that if you can lower the cost point leveraging AI agents then clients will tell us oh then there is more work we can get done because your unit cost has gone down. I think people have always forgotten this element in technology. If you lower the cost then the appetite to consume goes way up and we can see that. I believe that is what AI agents will do. But if you don't embrace it to become twice as productive, you're going to lose.
Right. I was also going through this Citian report that has just come out I think last night where the author was talking about that how it's not just going to impact the software industry but because there are going to be such white collar job losses it's going to impact a lot of other related industries: food delivery, credit, real estate and things like that. For a company like IBM which has a broad-based offering across multiple segments if we were to talk about job losses in these areas, how do you foresee business environment, what could be sort of the tertiary or the secondary impacts of this?
Look, I think we should all face up to the fact there will be, I will use the word, some job displacement and I'll try to quantify for you how much I think that could be. So then the onus becomes what are we going to do around upskilling and reskilling. I think in the physical world where you have people lifting things, doing things, this is going to take a much longer time to play out than anybody imagines. So 60% of the world's workers work in some form of pretty physical work. It's hands-on. There's no displacement there. Now, let's go to the other 40. Half of that is in some sense creative roles like yours because you have to have a sense of what the person you're interviewing is, what your audience is interested in. That'll take a long time. So that 20 I put aside and I say, yeah, you certainly will be more productive. You probably used AI to prepare for today because it synthesized material and gave it to you in short form. Okay, great. Maybe you suggested some questions. My guess is you looked at them and you modified them as opposed to use them directly. Now you're left with that final 20% of all workers. Do I imagine that five to 10 of that 20 could get displaced by AI? Absolutely. And as that gets displaced then the question is whether there are other roles that are going to come in. Now we're going to design the world for an AI world. AI is going to unlock all these aspects of delivering new business models that'll easily consume that 5 to 10. But those transitions are always somewhat painful. Let me acknowledge that.
But I think this time around governments are aware and want to do work but so are companies. Like as an example, we IBM committed to train five million people in India with AI literacy skills.
All right. So we'll do our piece. So should many others.
Sure. I think it's a very significant time for India. India is trying to catch up in this whole AI race. At the same time, it's worried because it's the epicenter of the IT services market and we are the sort of the technology hub for the rest of the world.
Actually look, I don't believe that India is trying to catch up on AI. So I might have a very different view than many people. So let's separate AI into two pieces. AI that is going to be needed for sovereign needs. Let's put that on one side because the countries who need that have to go develop it.
And I think that some of that work has already started. When I was speaking with Ashwini Vaishnaw including at Davos but also this week he's been very clear India needs to build about a dozen models. I think three of them have already been produced. Another couple were being talked about. Okay. So, five out of 12 is not bad if it's a year in, right?
And the other seven are on their way. The government is quite clear. They're quite willing to work with startups and private companies, not just government, to go produce those.
I believe that India ought to focus on AI deployment because in the end, you're part of the global economy. You do work for clients that are all over the globe. I think Indians are as astute in figuring that out as anybody else. You got to leverage the AI which is available through the globe and leverage it for our clients' benefit. I really believe that that is where India can excel and India can thrive.
I mean I think two years back when you came to India I think you were the one who coined this term that India needs to have its own sovereign strategy right? And now I think the government of India has taken that very seriously. They have announced this 20-year tax holiday when it comes to AI data centers and they're giving swap tax ops to a lot of cloud service providers, foreign cloud service providers. What do you think of this strategy and how does IBM fit in there?
Look, this is a big question on public policy. I fundamentally believe that when the government uses incentives, so whether it's taxes, whether it's a little bit of capital money, whether it's access to infrastructure, whether it is limits of liability being waived, I think that those are great public policy vehicles for getting the behavior in the private sector to where you want it to go. They wanted more on sovereign, so they want to grow more of a capability within the shores.
All of them don't succeed. Some succeed, some don't. But that's great. That's taking more risk. Historically, India has avoided risk. But I think at the current economy size, you've got to take risk if you want to succeed. And I think that's the right approach for right now.
Right. Do you want to talk a little bit about how IBM wants to sort of participate in some of these initiatives and also you've opened so many software labs especially in the smaller cities of the country like Kochi, right? What's the strategy there?
Yeah. So two different answers. One, we are not going to directly participate in capital infrastructure buildout.
We have made a decision a while back that we will partner. As an example, we partner with Bharti Airtel here in India. So they are the provider, they are building the sovereign capabilities. We will work with them to add capabilities and we just are doing one around cloud infrastructure where they are the provider of data centers, they are the provider of the network, they are the majority owner. We will add capabilities managed out of the Chennai data center but also populated into Mumbai and hopefully as a client base expands then we'll go into more. So that allows us to both help that motivation from the government as well as partner with the local provider who we have a lot of trust in.
And who's a strong provider.
Right. Then on the second, to help the government and sovereignty, whether it's BharatGen or whether it's some of the sovereign AI model development, we provide a lot of our capabilities to these people.
Who are doing it, in some sense it's IBM inside.
And then you asked about the software labs.
