How IBM Used AI to Cut 40% of HR Operating Costs and Reinvest in the Company

26:42And so we've actually sat down with this client and would say, okay, well, you know, you can have this pod and they'll do that. Or you can have this pod and it's going to do this. And so now they're buying these human plus digital labor pods to do these particular things. So Henrik, it's basically sort of your outcomes-based thing, but at a more granular level than a large project, right? Like this procurement project that I mentioned. And so I do think that the large projects are going to get atomized a little bit. And I think to the extent that these like units, I'm not quite sure how small the units could be, but the units have to be able to combine human plus digital, right?

27:22You can't have one unit human and one unit digitally. Like it doesn't work for this part concept. But I think there's something there, right? Do you ever worry that one of the kind of observations I've had with just my own use of Magentic systems is that I now code a lot of things that I would normally buy, but I would normally pay for a contact management system, but I only use like 10 % of it, 2 % of it probably, right? And so now I could just basically vibe code myself into that specific feature. And then I let go of the subscription of the system that could do the 100%. And so, quote unquote, a worry slash like kind of an observation that I'm not sure that I know what the consequence will be.

28:10Is if all this stuff is a little bit like the unbundling of the album. Like when suddenly we didn't buy albums, music albums anymore. We bought like all the single thing. if I now buy the features, it seems that a lot of the money that came out of the music industry didn't go anywhere. Like it just kind of evaporated. And so where are you on that we suddenly are creating all this technology and it's actually not kind of accreted to any specific business. It's kind of like, we'll just kind of evaporate out of the overall spend of software. Yeah. You know, another really good question, because in some ways it's sort of like the burning question of what's the economics of all of this in the end.

28:53And, you know, for me, I think they're kind of two things that I look at. One is that historically, like if you go back hundreds of years, like every time there has been a technological shift that lowers the cost of doing something, the GDP has expanded, right? Now, you know, it's been difficult at times because certain jobs go away and certain new jobs are created. And with this, there is a possibility that that's the case here too. And let me kind of explain why I think that might be the case. So in the services business, many decades ago, when offshoring became a thing, and so you could basically build the same application with cheaper labor, the market didn't shrink.

29:40The market actually expanded. And when cloud came into existence, and you guys know this well, your technologist right it's like with cloud you could build apps way faster because the hyperscaler had like all these pre-built things and you know you could load and get stuff right and it turned out that the market didn't shrink they were just like poor demand for more apps because like we're always solving more and more problems and i think what's going what's likely going to happen is that there's going to be more demand for like lots more of these sort of gen ai power thing having said that, you were right.

30:16And so from that, you could say, well, like a services company like us, there could be a lot more work, but if you don't lead in it, right, you're going to fall behind and you're getting a lot less work. So this is, this is a part of why I'm leaning hard in this, right? Now, now for the software side, right? It's like, what happens to SaaS companies? And you're starting to see a little bit of the multiples come down because people are kind of wondering, is it going to get disaggregated? Because you're right, you can vibe code a lot of good stuff now, right? And as you put these Gen.AI kind of user experiences on top of applications, like you almost don't even know the applications are there anymore.

30:58Like you're not using the native user experience. And so they become, you know, sort of glorified databases. Now, companies who provide the software are not just going to let that happen, right? So I don't actually know, Henrik. I'm a great fancier, but I see those dynamics. Another just anecdotal thing that I looked up the other day, when the ATMs kind of came into place, everybody was very worried about the people who worked in banks. Turned out more of them got hired over time. Same thing apparently happens with the self-serve kiosks in McDonald's. Yeah. Like also I have now, Frond. And so it is interesting that just if you look at all the data points of things that have been in the past that kind of like was similar-ish.

31:41Yeah. But I mean, like, obviously it's tough not to kind of go like, oh, I wonder how this kind of play out specifically with kind of like maybe even junior staff in a consultancy where you are like learning how to do something in a dance model might be able to do a lot of the same work. So now like a project manager will have to sit and go like, oh, you know, do I save the X amount of thousand a year for this specific one and throw a digital work at it instead? or do I just kind of roll with it with the benefit of having a human of the loop? Yeah, and you know, those are like a lot of what we've applied is what I call low-hanging fruit, like these document-centric things.

32:16But there's like a whole other class of work that is coming at us and coming at us like hard, right? So we're doing this project at L 'Oreal, the cosmetics company, and this one's public. I could talk about it. And what it is, is L 'Oreal makes 11 ,000 products, right? So you can think of a lipstick. And a lipstick is a little bit like that steel vat that I mentioned earlier here, right? You basically pour a bunch of ingredients and out comes something with physical characteristics, texture, taste, whatever. And L 'Oreal has decades of data of stuff you put into the pot and characteristics that come out in the product.

32:54And so we're working with them to actually build an LLM from scratch. There aren't too many projects where we build an LLM from scratch. But you can imagine like the engineers that, especially the junior engineers, you get to work on a product like this, because at the end of it, you know, if you could sort of predict what goes into the pot and what comes out, then you don't have to go build these things in the lab and test them. Right. Or at least you could. It's almost like it's an alpha fold for cosmetics. Yes. Right. And so your product cycle comes down and L 'Oreal has a goal of moving to 95 % bio source.

33:28Right. So, so they get two goals. They get like shorter R &D so they can outperform their competitors. And they have a model now that can help them get to more sustainable outcome, which is like still a big deal in Europe and, you know, many parts of the world. Right. So those are like, those are not projects that we would have naturally gotten before. But now with this technology, I think there's a whole class of projects like that coming. That actually gets to something that I was hoping you touch on. So I appreciate you kind of opening the door. broadly speaking, one way to think about the implications of Gen.AI are kind of efficiency gains or you call it value capture and then new things to do or value creation, right?

34:08And the, you know, the 3.5 figure you shared this earlier in terms of reduced cost, et cetera, clearly a great value capture play. Tell us a little bit more about value creation. And this is a great case, right? Building an LLM is probably something you've never done for a client before, right? So are other ways you're thinking about creating new value? And perhaps how are you organizing the organization, not just to do the same set of activities with less human labor, but to imagine fundamentally new set of activities, maybe with more, even more labor because it's worthwhile. How do you think about organizing organization to do that?

34:45Yeah, I think you're right. I mean, part of this is productivity benefits. And there's actually, I think a ton of opportunity for productivity benefits. And as I think about this, I actually think by the end of the decade, almost every large company will actually have to run at between 10 and 20 % lower costs at the same revenue to be competitive because their competitors are going to do that. And we can see that that is possible today, right? So that's one thing. The other part of this is that I think some of that productivity gives you flexibility to invest in new. Yes. And this is a great example right there, right?

35:28Which is faster R &D cycles. And, you know, I mean, for a lot of companies, like R &D cycles make or break the company, right? And if you could do something in 12 months that your competitor is going to take 24 months, like game over, right? You know, this government scenario that I talked about, yeah, sure, it's, you know, I guess you could say that that's productivity and that's lower cost. But the key metric there is actually the customer satisfaction. Customer satisfaction has gone way up, right? Because you're not waiting for this thing forever. And when you get it back, it's actually higher quality in this particular case, right?

36:08And so what does that level of customer satisfaction mean? So if you apply that to a company, that company is going to win more business, right? And you're going to have a growth. wrote. Just last night, I was in Chicago with a client and the client said, hey, look, you know, we do this, they call trade marketing. You know, we have all this like doc, whatever. And then we put our product in Walmart. You know, there's one set of trade marketing and we put it in, you know, Costco is another set of trade marketing. I'm like, how do I go from this to that quicker? Because right now it takes me a long time.

36:40And if I can get stuff on the shelf quicker, then, you know, my revenues are going to go up. So I think there's going to be a whole bunch of like revenue opportunity as well for companies. Yeah. Are there mechanisms like a hackathon for value creation? Strikes me that the hackathon is a really elegant structure for value capture. Do you do the same kind of thing to imagine new possibilities or is it more just organic? Yeah. So we use it in two places, at least two places, like in our product. We have a whole product business, right? Like half the company's product, half the services. and in our product business, we're also using it to say, okay, well, what kind of products should we create?

37:22And I think that, you know, that's sort of a little bit of L 'Oreal example. It's less about building an LM from scratch and saying, hey, listen, if there's this big security problem, we all know like cybersecurity is just getting worse and worse and worse, right? Like the bad guys are, you know, getting better and better and better. And so there aren't enough human beings to actually keep up, right? So you're going to need a bunch of technologies to come to market that's going to be Gen AI inspired, right? And so that's a category of new products, right? And so, yeah, we have been applying the hackathons to also, like, how do we make our products better?

38:00I was wondering a little bit on the kind of like next wave of kind of like innovations you're going to do in this space. So you've done the low-hanging fruits. Yeah. When you look kind of 12 months out, what's the thing that, and you guys obviously are more advanced than most people. So like it is impressive just to hear kind of like how much impact the low hanging fruits have had. But what's kind of like the thing that you get excited about 12 months out? So, you know, if you guys, not that I think you do this, but if you listen to our earnings call from the last quarter, our CFO. I do that. I do that religiously, of course.

38:39IBM earnings calls on the calendar and never miss it. Just on his runs. He's always listening to him. On your runs. There you go. Podcast. So he actually committed to raise that$3.5 billion to$4.5 billion by the end of next year. So we actually see the runway is not over. And as I mentioned, we had taken 200 processes, of which only 70 we sort of apply this to. Of the 70 that we're applying it to, there's sort of incremental gains that we can have. And then we can apply it to new processes. You know, Jeremy, I think you mentioned HR. HR is one where we apply this at massive scale. And you might have caught in the document that we were able to lower our HR budget by 40 % because we basically automated all what's called transactional HR.

39:31So if you needed to transfer an employee to Henrik, you can't figure out how to do it in your HR system. So you call somebody, right? now we have this thing called ask hr you go and you chat with it and it helps you out and if you want to find your w2 form right you think about how hard that is right we all had to do it and you just go up this thing and you know chat with you make sure you are who you are whatever and you eventually get it and so 94 of all transactional hr has really been automated and we've taken some of those people and we've repurposed them we've taken them out of hr and put them in consulting so that those consultants can now go into companies and help them with their kind of HR optimization, right?

40:12So we've been able to - Wow, wait. So, okay, I've got to read that back to you because that's such an important point. I think when most people hear, we've reduced the cost of HR by 40%, what they think is we've fired 40 % of our HR staff, right? And I think what you just said is we've, and I don't mean to put words in your mouth, that's why I want to kind of put a fine point on it. We've redeployed 40 % of our HR staff from what was a cost center to revenue drivers of HR related consulting for our clients. Is that what you just said? So at a macro level, yes, that is what we are doing, right?

40:50So we are taking out costs in some areas and we are investing heavily in other areas. I mentioned R &D and sales, right? And in the HR example, we were able to redeploy some of those people into categories where they are now effectively going out and selling that playbook they created for HR, right? And so there's a large supermarket chain that you might've gone to. It's got 400 ,000 employees where this is one of the projects we put them on, right? Because they know how to do this, right? And so within our company, we have that flexibility. Not everybody's going to have that flexibility. I have one last question for you, at least for me.

41:26we talk a lot about cost savings and optimizing. One of the areas that is always interesting is kind of like resourcefulness is when you don't just do something faster or you get somebody to kind of a digital worker to do it for you, but you actually become much better of what you do. Do you have examples of that? You get much better. Do you know what I mean? Like it's not like, it's almost like you can produce the work in higher fidelity, not just kind of like have somebody else kind of do it, it becomes a better thinking partner. It allows somebody who were not able to design in the past to then suddenly make graphics for the deck and stuff like that.

42:05You can suddenly do more than just doing faster. Yeah. I think that is true in a lot of our creative stuff. And you, I think, started an ad agency, if I'm not mistaken. One of you guys invested in one of them, right? Yeah. So I think a lot like a lot of the creatives i mean we do a lot of creative stuff right so there's a new airline being formed it's called riyadh air and it's not a startup that gets five million dollars it has 50 billion dollars of funding they've already placed enough orders for aircrafts to be the size of united so this is saudi arabia competing with emirates and so forth right and so we were hired to build the whole it stack and they didn't actually want us to start with traditional of airline software because airline software is like train ticketing software from 50 years ago it might be on mobile device but it's like it's rigid and whatever they wanted to start with e-commerce software like an amazon shopping cart right so so we built that and that's really cool but the creatives are just incredibly impressive because they also you know this is like this is the middle east everything has to be like incredibly like compelling right and so we've used like the best Adobe Flash and all of that.

43:18And what we've been able to do there is just iterate through things so fast that they can effectively come up with stuff that is better than anything else. Right. And, you know, your mobile app, for example, when you go to it and buy a ticket, you get to pick a seat. And it's like a pretty static thing with this mobile app. It'll be like a full immersive experience. You can be able to see stuff and it's going to be fast. Right. And we wouldn't have been able to iterate so many options on that and get it so well done if it wasn't for him. Okay, Muhammad, last question. And then I know we should wrap.

43:59Two years ago, you started this journey. Imagine another leader like you is seeking to undertake the journey starting today. What are your kind of two pieces of advice to help them succeed? this is not one of them this is like the zero right and the zero is you've got to get all the technical stuff straight right and you know like we we had to build that that sort of ai virtualization platform we had to build that we have 3 000 digital workers in different domains and all that so you got to get all the technical stuff but i would say probably the most important is actually around the people. Like, you have got to figure out how to get people excited about this journey.

44:47And for us, you know, we encouraged everyone to learn how to use Gen. AI, put it to work in their own, you know, areas. And the approach here is it's like Excel, right? It's like, you know, today, like we all use Excel. If you don't know how to use Excel, like you're not just not valuable to the company, but you're not valuable in the market. Learn how to use this. Be the best at it. that you'll be valuable with the company, you'll be valuable externally. And so, you know, people are invested in it. And I would say that if you can't get, I mean, I'm mostly focusing on businesses here, right? Because that's what we do to focus on.

45:23If you can get your employees excited that this is going to make their lives better, they're going to make the company a winning company, they're going to be working for a winning company, you know, they're going to be valuable out in the marketplace. If they don't believe that, they're just not going to come along, right? Even if you have technical pieces, right? That's incredible. Good place to end. Jeremy, that was a fascinating conversation. Thoroughly enjoyable. What a winsome human being. I really liked getting to know Mohamed. You know, one thing just right off the top, we talked about at the end, but it's so fascinating to think about a, perhaps a unique advantage of a consultancy, which I had never thought about before is if they have internal experts, they can turn them from a cost center into a revenue driver.

46:11Right. So unlike, say, you know, a football club, if their HR professionals become world-class at leveraging Gen.AI, it's unlikely that the football club is going to start advising other organizations and turn those HR professionals into revenue drivers. You know what? I've actually done a bit of research on this lately. It's really cool. And I think it happens more than people realize. So if you look at like Delta Airline, what do they make a lot of their money on? Their credit card. That's not about travel. Like obviously AWS is really a big revenue dryer from Amazon. And so if you start to actually dig into the numbers for a lot of these companies, a lot of them have really managed to find a way of taking a part of the system, a capability that they were incredibly good at and then monetizing that in order to serve their customers even better and it's obviously awkward because like when you create the narrative for the company like do you go out and say you know we are delta we're proud people of travel and credit cards right like you can't really and so right there i haven't really seen a good kind of catch all kind of descriptor of this um and i think you might see more of it with ai right to the point about hr If you become so good of using something internally, there should be no reason why you don't kind of spin that out and kind of sell it to other people.

47:32I couldn't agree with you more, my friend. I know you. Um, the other thing that jumped out at me too, was having the controller involved from the very beginning, um, to document and catalog the wins and put them on the board and to be rigorous about what they are advertising on earnings calls and things like that. Reporting their gains on a quarterly basis, I think is a really smart way to keep yourselves honest and also signal the transformation to the market? Why would the controller not be involved in the weekly updates when you're driving that kind of a cost reduction, for example? I think the only thing I would add to the points that you made was the importance and probably difficulties of seeing it as your senior manager's job to make the organization excited about AI.

48:27I think a lot of people are very worried about AI and, you know, obviously understandable why they might be that. But without creating the environment where people come to work and going like, I can now learn a skill that really will make me not much better in my current job, but basically much better at any job, is not an easy task. And they really seem to mention, obviously, Mohamed seemed to be such a charismatic person. you can see how we'd be able to kind of like get like the hoo-ha going. But that is probably something that we haven't really explored on these podcasts on how do you become better of basically promoting that internally.

49:09Feels like that could be a whole other conversation with Muhammad is just how do you get people excited? Yeah. I love the frame of IBM as the first customer, so to speak, or the first client, is it client zero? I think is what they call it. Yeah. Yeah. And really propping up, he didn't put it this way, but the way I took his comments was they created an internal AI consultancy. They treated themselves as the first client and they treated it like a consulting project, which is actually how they get bandwidth. And I couldn't help but wonder in a lot of organizations, if having a consulting engagement, even as a framework would be a really useful way to think about deploying experiments.

49:51Because right now, I think a lot of people are just moonlighting or it's bolted onto their existing job. What does it look like to be an internal AI consultant to actually look for opportunities and to create proof points? I thought there, again, it's maybe a unique competitive advantage of a consultancy that they can just deploy a consulting team towards the inside of the organization. But it feels like a model that anybody could leverage. Yeah. And then potentially sell to others. we recently had Adam Brockman and Andy Sachs on to talk about their book AI First right I was reading that on the flight this past week and in the conclusion they talked to Ethan Mollick former guest of our podcast as well and one thing Ethan says to them in the end is organizations need to build AI R &D labs and it strikes me that that is what IBM did without calling it that they'd be the internal team that was working on behalf of IBM as client zero was effectively an AI R &D lab.

50:55Yeah. And I mean, like maybe just to end on that when he talks about, and obviously he runs the consultant side. So obviously, and, and, and with reason is very proud of what they've done there. And so I think kind of like corrected us when we said, you know, like that it was humble and ambitious to say we didn't get there first with the foundational model so at least we should be there first with the applied ai um and then obviously card does because like they do technology too and so uh you know worth mentioning but it is very interesting two things one is being able to realize what game you cannot win and then kind of like find another game you can um i obviously very very inspiring and the second thing is to see applied ai as a discipline.

51:43I think a lot of us, when we hear about AI technology, we think about the core models and like the bits and bobs that goes into that. But really increasingly, like the difference between what is technology and what is systems design is kind of like blending, right? Because increasingly, as you were saying, you need to be able to understand the system design and how you re-architecture that in order to really use AI in a very effective manner. And so these disciplines are kind of like also kind of merging to the point where, you know, applied AI is kind of a technology in itself. Skill set in itself, for sure.

52:26Yeah. It's been another great episode of Beyond the Prompt. Thanks for listening with us today. If we may say ourself. Yeah. I mean, I loved it. Did you? I really enjoyed it. hashtag I loved it too that's the code word for today I loved it too just like Jeremy and Henrik did perfect love it hit like hit subscribe share with a friend share with a colleague and uh share with somebody who needs to get excited hopefully this might be a point of leverage to get them excited until next time take care no no no Henrik you always say bye-bye Bye-bye. Okay, bye-bye.