In his 30 years at IBM, Arvind Krishna has been driving innovation across core technologies, including AI, quantum, and cloud, to name a few. Since taking on the CEO role in 2020, the company’s market value has tripled. That’s a direct result of the changes he has introduced: doubling down on software, shedding big businesses that weren’t aligned with his new strategy, pursuing innovation, embracing the potential of AI, and getting a 250,000-person company to move with alacrity.
Krishna recently sat down for a conversation with McKinsey Senior Partner Eric Kutcher about IBM’s turnaround and the opportunities ahead, including his vision of the future of quantum computing. This is an edited version of their conversation.
Eric Kutcher: The phrase “interesting times” might be the understatement of the century. As a CEO, what are the forces at play today that you think about? How do you lead through those forces in a world where you have very little control over them?
Arvind Krishna: The word I would use is opportunity. Yes, the world is less predictable than it used to be, but when things are less predictable, by definition there’s volatility. When there’s volatility that means that the current world order changes, and as it changes you have to ask, “What’s the opportunity?” Let’s take inflation as an example. A consequence of inflation is higher interest rates. When there are higher interest rates, people are looking for more productivity. As they look for more productivity, there’s a greater appetite for technology solutions. So absolutely, volatility brings all these headwinds. And you could hunker down and say, “Oh, my God. This is not what I was planning.” Yes, it’s not what you were planning, but your competition has the same headwinds. So, I would say whenever there’s uncertainty there’s opportunity, and it’s our role as leaders to help guide our people through it and use it to take our clients to a better place.
Eric Kutcher: Even as they identify the opportunities that volatility can present, I sometimes find CEOs struggle with feeling too constrained to take them—because they still have to hit the earnings and keep the train on the tracks. How do you juggle that?
Arvind Krishna: One could go back and look at history. The pandemic came around, and everybody had uncertainty about what revenues and profits would be. The debates were rife, “How bad is the dip? Is it going to be three months or three years? Will it be a 3 percent dip or a 30 percent dip?” You could say, “Well, I’m just going to try to manage that.” Or you can say, “I’ve got five other tough things to do. Why don’t I just package them all up and take it all on?” In our case, it was: OK, let’s borrow cash so that we are good through the pandemic. We’ve got to spin out a third of our revenue. We’ve got to divest some things that don’t fit our long-term strategy. And hey, let’s set a new M&A strategy. We used the opportunity to take on all the bumps in one go. And then, to try to grow. Deferring pain is never a good idea.
Eric Kutcher: Let’s talk about one of the great opportunities: You are at the center of this moment around AI. What are some of the things you’re seeing in AI that are actually changing the way business works?
Arvind Krishna: This moment on AI is so interesting, because, in fact, the world has been using AI for about 30 years—there are many examples, but machine learning has long been used to make estimates in finance, in economics, and in sports. Then we had the era of AI that started with IBM winning Jeopardy! with a computer system called Watson. The problem with that era was that it was fragile and somewhat bespoke. You used a lot of data, and you used a lot of people to label the data; you constructed a model for a task, and if the task changed, or some of the data changed, you had to start again. What LLMs now do is they put that on an industrial base. If more data comes along, you don’t need to start from scratch, you can just do more training—if the task changes only slightly, you don’t have to change anything at all. So, the moment it’s on an industrial scale, you can begin to deploy it.
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On the B2B side, I think the current generation of AI is going to help those who embrace it add about ten points to their bottom line while increasing revenue growth rates. Now, I’m not saying we would all add it to the bottom line. Rather, it frees up money for investment that you can plough back into innovation, R&D, sales. Take your pick depending on where you are on that journey. Where in the world have you seen an opportunity like that?
On the B2B side, I think the current generation of AI is going to help those who embrace it add about ten points to their bottom line while increasing revenue growth rates.
At IBM, we want to leverage AI to become the leanest, most nimble, and most productive company we can be. I looked at a cost base of about $15 billion across what we would call third-party services, procurement, and G&A [general and administrative]. And I said, “We’ll take 20 percent out in the first two to three years, and then we’ll try to double that.” So, we set a bold target that we may not achieve, but if we get to 30 percent, I’ll claim victory. The idea is, this is not about tightening the belt and shaving 4 percent or 5 percent off; it’s reimagining how the work is done.
I think almost every back-office function can become 50 percent automated using AI. We’ve done a lot in our HR processes; we have something like 94 percent of our basic internal HR transactions handled by an AI bot.
We’ve also used AI at scale across about 8,000 of our 40,000 people who write code on products, and on that 8,000, we are getting 45 percent productivity increases. Many people react with, “Oh, my gosh. They’re taking 4,000 people out.” But no, I’m adding 4,000 because if it’s cheaper to build products, I can build more products that appeal to smaller and more niche audiences, whereas previously I might have said it was too expensive. In customer service and customer experience, anybody who says, “AI can’t help me in half of that” is delusional. Right now, we’re only at 5 percent there, but I think 70 to 80 percent is within reach. The opportunity to harness this generation of AI across all of this is here and now.
Eric Kutcher: You’re also at the center of quantum. What happens from an AI point of view when you suddenly have quantum? And where are we right now in terms of quantum versus when we’ll start to see it become more mainstream?
Arvind Krishna: If we define 2022 as the moment when AI went from being of interest to mainstream [use] and recognize that tech cycles move faster after each one, I’d say that quantum today is where AI was in 2015 or 2016. For the short to medium term, which I would define as the next ten or so years, quantum is additive to AI, meaning it’s solving problems that AI can’t solve very well. Think of AI as being great for large amounts of data, finding patterns that are in the data. Quantum is much more about deep compute—so, looking forward as opposed to looking backward on data. At some point as quantum gets better and more mature, it will replace some of the AI work. That intersection is longer term; we are maybe 15 years out from that.
Quantum is much more about deep compute—so, looking forward as opposed to looking backward on data. At some point as quantum gets better and more mature, it will replace some of the AI work.
The interesting question becomes, what are the problems you can solve using quantum? We’re already seeing this play out with our clients, where you can do better portfolio optimization using a quantum algorithm, or better bond pricing because quantum can find patterns hidden deep within the data. So, you can already start to look at new solutions with quantum, and that unlocks new markets.
Eric Kutcher: When you stepped into the role of CEO in 2020, the world was in a moment of great uncertainty, and IBM had been somewhat stagnant for a while. What was your thinking coming in, and how have you approached growth at IBM over the past five years?
Arvind Krishna: I had a very strong view that to be relevant in the market, you have to grow. And you can’t just say, “I want to grow.” Grow how, and where? When I came in, I said, “We have to be known for innovation.” And this meant growing in areas that lean into innovation. I think the gap is that most people are not willing to take the hard actions necessary to do that. If we wanted to grow and be highly innovative, first we had to look at why we had low-margin, less innovative businesses inside the company that were also declining. We had to say, “Those do not belong; they’re not aligned to the long-term strategy,” and take them out. Most people get hung up on, “Oh, my God. I don’t want to upset people. Customers will get upset. Employees will get upset.” We took out a third of our employees and a third of our revenue. Is it really hard to do? It is. But it unlocks many opportunities.
The second part of growth and innovation was being willing to invest in R&D—as well as M&A—that creates more innovation for your clients. Over the past five years, we’ve added over $3 billion a year to our R&D budget. The third part I would say is that the world of tech is so big, you can’t really operate alone, you’ve got to form great partnerships. And sometimes when you form those partnerships, you’ve got to say, “OK, I’m not going to operate in those areas because that’s where the partner is really strong.” And so that was the third element of the unlock, and it was about pulling these three things together.
You were kind when you used the word stagnant, I think our CAGR was around –2 percent over some years leading up to that moment. We’ve now been at 5 percent, so that’s a 7 percent swaying already on revenue CAGR. My ambition is to make it more than that.
Eric Kutcher: You’ve made some big portfolio moves, and some would say you’ve sold in some areas that were high growth. Talk a little bit about how you thought about the reconfiguration of the portfolio, and this idea of organic versus inorganic growth.
Arvind Krishna: You’ve got to be willing to “do”: As opposed to getting disrupted by somebody else, disrupt yourself while you still have the cash flow and clients who value your capabilities. Software is a great example. The value for clients and consequently for investors lies in software. When we began, the company was something like 22 percent software. Today, we are 45 percent software, with the software portfolio growing at about 10 percent. It’s about half the company, and the company’s growing at 5 percent. If we maintain that, that means software will soon cross over half, which is a big difference from where we were five years ago.
I don’t think there is a clean division between inorganic and organic growth; I would never buy something unless it was going to help my organic growth rate go up. And I want the organic part to help increase the growth rate of the inorganic parts; these work together as a virtuous flywheel. I’ll assert that with everything we have bought in the last six years, the growth rate has increased after we bought it, which most people think of as surprising because they think a big company will buy something and slow it down. It’s been the other way around.
Eric Kutcher: IBM has historically been an organization where leadership has grown from within. You’ve made a lot of management changes. Can you talk about how you bring in talent today and make it work?
Arvind Krishna: At this point, about a third of my direct leadership team is people who didn’t grow up inside IBM. About two-thirds are people that have grown up here, and we’ve pulled many people into the top layer from two, three layers down.
When you bring people in from the outside, you can do your hard checks IQ-wise and résumé-wise. What is hard to check is the interpersonal fit, and whether they align to how things are done, or what people call culture. I acknowledge that half of the outside hires will work, and half will not. It’s very hard to prejudge that as it rolls out, but you can get great talent from the outside.
One thing to recognize is when something inside is not working; even if you get people from inside to fix it—and we do have a lot of great people to do that—it can take them longer to make big changes because that’s how they’re used to seeing it. So you might get somebody from the outside, who brings a different perspective, to support them to succeed.
My “interview” focus is not all about what the person has done. Invariably it is, “Hey, if you were in this chair, how would you approach this?” So they’re coming in already aligned to, “I need to make all these changes.” Whether from the inside or outside, part of it is about who is aligned to taking risk? Who is aligned to changing the way we do work? Who is aligned to growing in the areas we’re going to grow, which right now is software, and then having a much more integrated company? People who are aligned toward those things and willing to take risks to get there are what we want in a team.
Eric Kutcher: We talked a bit about IBM having a period of stagnancy. You could argue that the speed of the organization has been slow. How do you get a more-than-100-year-old organization of this size to move with greater speed?
Arvind Krishna: There are two reasons why speed is a challenge. One, as a large company, we operate in 190 countries across multiple lines of business. At 250,000 people, there is an element of just sheer scale that makes it slow. But I think there’s a bigger challenge which causes slowness, and it comes back to the risk point. If people are risk averse, they’d rather get a check-in with somebody. If that somebody is risk averse, they would rather say no than yes, and you end up fighting through ten nos. To get people moving faster, you’ve got to say, “Hey, they’re going to fail a third of the time. They may not succeed.” You’ve got to begin to get to a culture where you say, “It’s OK to be mostly, but not always, right.”
If that somebody is risk averse, they would rather say no than yes, and you end up fighting through ten nos. To get people moving faster, you’ve got to say, “Hey, they’re going to fail a third of the time. They may not succeed.”
How do you get people used to the fact that not everything they do will work? Or that if you are going a lot faster, then you actually more than make up for the total success in the speed? A team came to me about two years ago and said, “Hey, we can build this great tool, leveraging gen AI to help modernize the mainframe. We need 21 months.” I said, “OK, great, but can you do it in six?” Their response was no way, so I asked them to go away and think about what they would need to do it in six. They came back about two weeks later and said, “One of the reasons we are going slower is that we know some gen AI, but if we had a couple more people who knew it well, it could help. And we need more resources. But it’s still probably nine to 12 months away.” I got them what they needed, and they did it in six. Now, that story gets around, and people start to see that’s how they can and should do it.
I really do think that this is where senior leadership often falls down. We put people in a box and simply tell them to go and do it. You’ve got to help them; it is a huge unlock to say, “What do you need?” as opposed to “Just do it.”
We put people in a box and simply tell them to go and do it. You’ve got to help them; it is a huge unlock to say, “What do you need?” as opposed to “Just do it.”
Eric Kutcher: Given everything you know today, what do you wish you had known before you took on this role?
Arvind Krishna: When I came into this role, my order of priorities was strategy, talent, and then culture. Now that I have five and a half years under my belt, I would completely flip that order. In reality, all three are deeply intertwined and equally important. But I think many people coming into the role spend 50 percent of their time on strategy, and then a good 30 percent externally. That only leaves 20 percent total for talent and culture. I think it ought to be 50 percent on talent and culture and 50 percent for everything else.
Eric Kutcher: You’re in now what we could call your third season as a CEO, and five years in is a real checkpoint. You’ve roughly tripled the share price—that’s an amazing run. How do you get the energy and the vision to be able to take it toward another tripling?
Arvind Krishna: If I look upon my original intent—how do I get us to be perceived as much more innovative, and how do we get to much more growth—I tell myself I’m only halfway there. By the way, you never get all the way, and I actually think anyone in my position should be able to step back and say, “If we are really slowing down on our rate of progress, then it’s time to get somebody else who’s got the energy, the fresh thinking.” For me, that is the moment when you should go do something else and let somebody else take it. But as long as I believe we have a lot more to do, then I’m energized to keep pushing the organization forward to unlock that potential, and that is what keeps me jumping out of bed in the morning.
