Accelerating Our Future and Growth Strategy

Team:

On my first day as CEO, I made a commitment to the growth of IBM. I stated that a maniacal focus on our open hybrid cloud platform and AI capabilities is key to this outcome. Day by day, product by product, project by project—we are dedicated to helping our clients unlock the immense value this represents.

Building on the solid foundation Ginni has put in place, we are focused on accelerating our growth strategy and seizing the $1 trillion hybrid cloud opportunity.

As we work toward this goal, two things are becoming increasingly clear. First, we’re seeing a tremendous increase in client demand for our capabilities and expertise. Second, we’re noticing that client buying needs for application and infrastructure services are diverging.

Because of this, we have decided that the managed infrastructure services business of our GTS segment will become an independent company, which we’re initially referring to as “NewCo.” We expect the new company to be created sometime toward the end of 2021. IBM will sharpen its focus on its open hybrid cloud platform and AI capabilities. And the new company will focus on delivering managed infrastructure services.

I am confident this is the right move and that our collective future is brighter as a result. I am excited about the path ahead and the tremendous value we will create by having two companies focused on what they do best. This will benefit our clients, employees, and shareholders and place both IBM and NewCo on an improved growth trajectory.

IBM: Growth through greater focus on our open hybrid cloud platform and AI

To drive growth, our strategy must be rooted in the reality of the world we live in and the future our clients strive to build.

Today, hybrid cloud and AI are swiftly becoming the locus of commerce, transactions, and over time, of computing itself. This shift is driven by the changing needs of our clients, who find that choosing an open hybrid cloud approach is 2.5 times more valuable than relying on public cloud alone.

We also know that there’s tremendous value in focus. Our intent is to concentrate our energy on the things that matter the most to our clients so we can move them the furthest. As a more focused company, IBM will innovate and move faster, and invest more strategically in the future of our business.

That is why, as part of this major change, IBM will accelerate actions to simplify and optimize our operating model for speed and growth. The savings from these actions will also give us the financial flexibility that we need to invest in our open hybrid cloud platform and AI capabilities and to bring innovations to market more quickly.

Going all in on our open hybrid cloud platform and AI solutions will create value for our clients, our company, and our shareholders. This change best positions IBM for improved growth.

Today, services account for more than 60% of our revenue. When NewCo becomes an independent company, our software and solutions portfolio will account for the majority of our revenue. This represents a significant shift in our business model. The success we’ve had with Red Hat gives us confidence that this is the right move.

Our decision is also the logical next step in our pursuit of the $1 trillion hybrid cloud opportunity. The acquisition of Red Hat allowed us to build an open and secure hybrid cloud platform that cuts across all the places our clients do computing—on-premise, private, and publicly-operated public cloud environments. This was the first major step to seize this opportunity and underpins everything that has followed.

Since we embarked on our journey with Red Hat, we’ve significantly strengthened our mutual positions in the marketplace. Client demand for our open hybrid cloud platform is soaring. This is driven by the value clients find in a hybrid cloud architecture built on open source innovation that enables choice and control.

With Red Hat in our portfolio, we have since launched our Cloud Paks and strengthened our systems portfolio. We built an industry-specific cloud designed to tackle the most stringent needs of the financial services industry. And we beefed up our hybrid cloud and AI capabilities by acquiring two companies, Spanugo and WDG Automation.

An important part of our open hybrid cloud platform’s value lies in the expertise and services we provide to help clients on their journey—whether that’s modernizing apps, building cloud-native apps, or migrating to the cloud. This represents a significant portion of the $1 trillion opportunity.

What gives our open hybrid cloud platform the fuel it needs to accelerate adoption and become ubiquitous is the large ecosystem of partners we are building. With freed up resources, we will continue to form strategic partnerships as we have recently done with Tech Mahindra, Adobe, and Schlumberger.

One thing is certain. Having a clear focus is only the beginning of the journey. To bring our ambitions to life, we are also relentlessly pushing forward on the creation of a culture that fosters learning, radical candor, curiosity, speed, and innovation—a growth and entrepreneurial mindset.

NewCo: A global leader in managed infrastructure services

NewCo has a bright future as an independent company. NewCo has proven expertise in successfully managing the complex and mission-critical infrastructure of the world’s most important organizations. On its first day, NewCo will be the leading company in managed infrastructure services with nearly $19 billion in annual revenue—twice the size of its nearest competitor.

NewCo already serves more than 4,600 clients—including more than 75 percent of the Fortune 100. Its global reach will span 115 countries and include about 90,000 of our teammates who have deep expertise in a wide array of industries, doing important, technology-intensive work.

As a stand-alone company, the new company will be able to build a more efficient operating model focused on service delivery excellence and designed to offer the next generation of transformational managed infrastructure services.

NewCo will also have greater freedom to forge partnerships and alliances in the managed infrastructure services space. This will open new avenues for growth.

Our two companies will continue to share a strong bond as NewCo will remain IBM’s preferred partner for infrastructure. Meanwhile, the Technology Support Services (TSS) business of the GTS segment will remain an integral part of IBM.  

What will not change

Our decision to create a separate company is a consequential move. Apart from what will change, it is important that I also emphasize what will not change.

Perhaps the greatest strength that both companies have as each charts its own path and future is our purpose. Both companies will share the same DNA. Namely, a deep understanding of how to apply the power of computing, how to solve complex problems, and how to work with customers to develop solutions that make sense in the context of their industries.

Most important of all, IBM and NewCo will continue to be united in the belief that we simply can’t win unless our clients win. For both companies, client success will remain their north star. This relentless focus on clients’ success is something that I am asking each of you to heed as we work to achieve our goal of creating two separate companies by the end of 2021. It is imperative that we all remain steadfast in our mission to help clients and continue to act as one IBM.

Leadership is not a birthright. It takes perpetual reinvention. It requires working tirelessly to innovate. It demands a willingness to question tired traditions. And it implies making big, bold decisions to be on the right path. This is what we are doing today. It also happens to be inherent part of who we are as a company.

IBM has always transformed itself to better help clients move from one technological era to the next. This is the through line that connects all of the important moments that mark our rich history. From punch cards, to vacuum tubes, to transistors, to mainframes, to PCs and now hybrid cloud and AI—the history of IBM is largely the story of a company set on a path of continuous transformation.

I am excited about what the future holds, and I am convinced that sustainable growth will follow—on all levels. Growth as a company. Growth as individuals. Growth in our ability to serve clients. Growth in terms of the impact that we have on the world.

This is an important turning point for our future that will benefit our clients, employees, and shareholders. I look forward to seeing what each of us can do – with newfound focus – to make that bright future as successful as it can be.

Arvind