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Kyndryl CEO Martin Schroeter On Getting Rid Of Low-Margin Business
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By Joseph F. Kovar Martin Schroeter, Kyndryl’s CEO, spoke with CRN after the company’s second fiscal quarter earnings report about how it is moving on from ‘basically resell- ing other people’s equipment’ to position itself for long-term growth. Here is an excerpt of that conversation. Looking at Kyndryl’s results, we see revenue down but the company’s loss is down even further. It appears Kyndryl is attributing that to getting rid of some lower-margin business. So what exactly did Kyndryl do? What we’ve been talking about, particularly this year, is engineering a decline in revenue to get rid of either low-[margin] or no-margin businesses that we inherited in the [spin-off from IBM]. And that’s particularly evident this year, offset partially by the growth that we’re driving into capabilities that we’re bringing to market. We inherited a business [from IBM] that was basically reselling other people’s equip- ment. And we’re taking that down dramatically this year because there’s nothing in it for us. It’s all empty calorie revenue. We also inherited a lot of contracts that basically had other companies’ IP, primarily IBM: IBM mainframes, IBM software stack. And so we’re trying to get that out of our contract because there’s no margin, there’s no benefit to buying that through us now that we’re independent. And we’re encouraging our customers to buy that directly through IBM. But don’t some of the product sales that you’re moving away from also include services that you would then lose as well? No. See, that’s the thing about the nature of what we do and how vital we are to our customers. We’re able to engineer getting out of the resale without losing the labor. In fact, we’re growing our labor content on a like-for-like basis. The labor piece of our business is actually growing because we’re so vital to how our customers operate. We are able to navigate this. I don’t know that anybody else could. But we’re able to navigate this. We’re able to get rid of and push back the content that we don’t want and give it to the owner of the IP. And we’re able actually to grow the labor piece, which is what is important to us because we’re a labor business. Again, I don’t think anybody else could do it. But we’re able to do that in a way to position ourselves for long-term growth. And quite frankly, we’re able to do it not only because of who we are and the skills we bring, but all of our customers are still in an industrywide skill shortage. So we continue to play a critical role in how our customers see themselves, building up and getting access to the skills they need, whether it’s mainframe, security, cloud, etc. So we fit that really, really important part of their secular challenge around skills, and we can get out of the stuff that we don’t want. It’s a very unique spot. It’s interesting to hear a solution provider trying to push customers to purchase directly from the vendor rather than wringing their hands over direct sales to the end-user customers. We identified these ‘empty calories’ already two years ago before we were spun out as something we needed to figure out. The commercial terms that IBM pro- vided in the spin were just not going to suit us over the long term. And so two years in, we’ve made a lot of progress. And ultimately we have more to do, but ultimately this will work out fine for us.
6
DECEMBER
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