Morgan Stanley (MS) Earnings Call Transcript & Summary

Okay. That's really helpful. Maybe, Harish, if I could ask you the same question. Just -- again, I know that you've mentioned shifting more to the cloud, but any traditional hardware vendors kind of most at risk in your spend because of the shift? And then have you considered adopting any of the consumption-based models from the traditional infrastructure providers?

Yes. And I think similar to, I think, [ Stephan ] or somebody else mentioned, we are also -- with that shift to the cloud, we are wanting to get less dependent on buying a specific piece of hardware from a laptop-PC perspective. We want to be able to get maybe a less expensive device, but provide productivity tools, collaboration tools and use that all in the cloud. So that's one thing. And there's a finite -- there's a set of users that need to compute on their desktop, on their laptops. So mostly finance teams and -- so those will continue. But there is, I would say, 30% of our population who are, I would call light users of PC. So those people, we are really looking at shifting completely to a VDI solution with Microsoft. So all the productivity tools, everything, they would get that in the cloud. So that would bring our expenses cost down for PCs and laptops. And with the -- we have a multi-cloud hyperscaler approach. We don't want to be stuck with one. So we use both Azure and Amazon AWS. And so there are certain areas. So the costs are hard to manage. So we're introducing new tools, new technology to better manage those solutions. So I'll give you an example. We have developers who have terrible habits of -- [ they spin off ] some services, and they won't turn them off, right? So we're actually investing in tools to make sure that there is -- if somebody turns something up, that they turn it down when they're not using it and looking at each of the different environments. So that's one area to better manage that. And also going to more consumption based for our larger applications. So we are working with our providers to look at much more of a consumption-based model.

Okay. Really helpful. Last question from my end, and this is for you, Jeff. Can you maybe talk about your data warehousing strategy in the competitive environment? Just coming from my end, thinking about do you use Teradata? If so, kind of what percentage of spend does it make up? Or do you use competitors and just how you think about the competitive environment would be helpful for me.

Sure. So we do not use Teradata. We've made a fairly large investment kind of holistically across the board in Microsoft. So we're leveraging Microsoft Azure [ Synapse ] platform. So we're working pretty closely with Microsoft because some of the capabilities we're looking for are continuing to be built. But within that ecosystem, we've got Informaticas as an ecosystem in that space as well as a pretty heavy Power BI shop. So sort of that Microsoft stack for us continues to be where we're going to invest. We've looked at some other tools, Snowflake and a few others, but haven't quite found [ the ROI ] for those.

Okay. Perfect. That is really helpful. So in the interest of time, I will leave it there. Thank you all for entertaining me there, and I will pass it to Keith Weiss, who covers software here at Morgan Stanley.

Outstanding. Thank you, Erik, and thank you to all of our participants. This has been a great conversation thus far. I'm looking to keep it going. Maybe sticking on the theme of analytics. Steve, you mentioned analytics as a top priority for you as well. Talking to all the innovation that we're seeing in the marketplace, I was hoping you could maybe dig in and talk a little bit more specifically to some specific sort of top of mind projects for you and perhaps the vendors that are supporting you there? Where are you finding this innovation from a vendor perspective?

First of all, to start off, it's like, again, data and analytics is important to everybody. But in the life sciences companies, it's our bread butter, right, been for years, and it's a real differentiator, right? With that said, a lot of our stuff that we do as homegrown, really becomes the database things. Like when you're in R&D, there's not a lot out there that can -- what I want to say, augment what we have. There are companies -- there's a company called Benchling we're looking at for -- that we do some work with. But if you think of that, it's more of up front, doing clinical trials and things like that [indiscernible]. But our biggest -- again, it's inside R&D, it's inside software. So we do work with consulting companies, right? So a lot of services are helping us out there. So we're doing work with the Cognizant -- doing a lot of work with Cognizant. Some of their analytical capabilities has been really good. If I want to say [indiscernible], again, IBM and some things and McKinsey. So a lot of consultative work going on there because there's not a lot of packages that are available that you can buy. And then the ones are just up and coming, again, like Benchling.

Got it. Got it. That's super helpful. I'm going to switch gears a little bit and switch to the security space, that's a top priority for all of our CIOs today. And one thing I mentioned, I think, across multiple CIOs was identity and a focus on identity management there. It sounds like a lot going on in your side of the fence, also a lot going on our side of the fence. There's a lot of vendor consolidation going on. We saw another vendor [indiscernible] being taken private by [indiscernible] today. Maybe -- again, we'll stick with you, Steve, and then we can move to [ Stephan ] and Jeff. With that focus on identity, what is the initiative that you're actually trying to kind of push forward at this point? Because, I mean, everybody has an identity framework. Where is the incremental investment?

Yes. It's such a good point, right? Because if you think about -- God, anybody's got a company that's fit on the digital and the [indiscernible]. The real issue is getting more into a role-based identity, right? It's the trick of not saying this person should have access to this, it's saying when this person logging, and this identify -- this unique identify should have these access to things. Because a lot of times, when you preset things up, you've got to think [indiscernible] when you set it up, some has gone in the hardware [indiscernible] this role -- well, this person should have access to these things. But with artificial intelligence, you can tell by where this person has been using things before to say, what should I give them access to. Because any part of this chain that's static is an opportunity for something to age and something that [indiscernible] opportunity to have an opening for somebody to come in and do bad things. So it's really trying to get into more of a dynamic environment around access and around the role base of the access and around the current uses of those access and putting that together to see, "Hey, why should I have to go in somewhere and [ put out ] this should have access to that," whereas through artificial intelligence, it can tell me that this role in this prior accesses mean that this person should also be able to touch these things. Does that make sense?

Yes, totally, totally. [ Stephan ], the same question to you. You mentioned identity is a key area of security investment. Maybe you could dig in a little bit to sort of what areas of identity are sort of incremental? And maybe help us touch on kind of which vendors are you evaluating for that type of capability?

I mean it's absolutely the same. We were trying to get more on the behavior of users because I think that's the fundamental of trying to get the security even better because, I mean, for access control and things, you can always have patterns in there, and you need admins and so on and so forth. However, if you try to analyze the behavior, especially with AI, then you could see things that are not in the same way as a user worked before even if the identity was stolen, for example. So that's one area. The second area is all on 2-factor [ authentication ], I think that's the way to move for the applications, for everything that we're now trying to get in a second -- that's not just a password as that is, as we see, for example, with initiatives of trying to see if our users reveal their password, and they do. So therefore, the second factor is a key. And we're trying to roll this out to all applications, also to the Windows login and so on and so forth. We have it with the office environment, which brings me to your questions on vendors. I think the fundamental thing in IT security is that the more holistic view on the users and everything in the environment you have, the better you can protect the environment. That makes it difficult. If you go into -- with one vendor in an area like, for example, Microsoft, then to switch to other vendors and integrate them. I mean that's possible. However, the more you have on -- in an integrated environment, the better it is. So for us, it is quite heavily on Microsoft with their different security tools, we see that they are investing quite a lot and it's a good combination that we have, and we are with Microsoft. However, with the network, we are in a second -- or with the second vendor with Darktrace for example, but that's also more on the behavior of users or what's happening in the network. So it's the behavioral thing rather than rules is artificial intelligence that we're setting on and heavily relying then on Microsoft. So for example, in the E5 license, where you have quite a good package of already security tools out there.

Got it. Outstanding. And then same question to you, Jeff. I believe you have a big identity project that you're looking to go live with next year as well.

Yes. So we've made a decision to really a combination of both Microsoft as well as -- we're pretty heavily invested with Saviynt as our IAM tool, very similar reasoning behind both of the other previous gentleman, right around authentication capabilities as well as we're really looking at kind of holistic world-based authentication across the entire organization. It's a challenge for us. And that spans everything from our SAP environment to, again, integration with our Microsoft environment to a lot of our cloud tools. It just become impossible to manage in a very manual process we have today.

Got it. Got it. Perfect. I want to switch gears again here and talk about some of the ERP work that you guys are embarking on. And the -- like the 2 kind of integrate this kind of questions that I have. One on one side of the equation is what's the actual work that you're looking to do? What are the systems that you're looking to sort of upgrade? And two, what was the catalyst? For me, again, similar to identity. It's always interesting to understand the catalyst or investment in ERP systems, larger enterprises such as yourselves. Obviously, you have the ERP systems in place, so it's almost always going to be a refresh. What was the catalyst to kind of refreshing those systems? And maybe we can start with you again, Steve.

This is near and dear to my heart. When I joined our company 10 years ago, one of the things we had was over 120 different I won't say [indiscernible] but different instances of ERP systems globally. And that's because one thing -- we had a philosophy in the past that said, when you do acquire, you do [indiscernible], let everybody keep the systems they have. And as you know, that complexity over time will just bring you to your knees. So our focus has been over really the last 8 years of whittling down our ERP capability on to a couple of major systems, but really only one major technology and that is SAP in the cloud. So we made that decision about 3 years ago. I spent a lot of getting down to some final versions of our different business units. But that's been our focus. And when you say what drove that? It wasn't just a technical legacy underneath in the complexity. It was the speed of business, the speed of getting data in the hands of different business partners, whether they be in distribution, transportation, anywhere in logistics. But also more importantly, going the back way it's really been helpful with the cloud versions that have come out now is connecting to our partners. Our suppliers [indiscernible] when they can get direct access into what's going on and see the sales earlier, all the way to weekly performance, we don't have to order things anymore. We can -- they can basically place the [ fulfillment ] channel for our [indiscernible] products for us. And then we just reconcile things that we saw. And so it's really working -- moving in the right direction. But that's really been -- it's been the end-to-end supply chain, increase in speed of business that's driven to go where we're going.

Got it. That's super interesting. Same question to you, [ Stephan ].

I think for us, it is as well the consolidation, harmonization of processes and systems. So we also have developed landscape over the years and switching now to S/4 gives the opportunity to actually do a process redesign and consolidate some of the systems as there is different functionality into the systems, and we're trying now to bring all the functionality to all the users, which is one of the driving factor. The second one is as well to look into the cloud environment because for us, at least, the strategy of bringing everything in the cloud is not really there for me at the moment. So the appetite to bring everything out there and then also be locked in with the vendor, like, for example, the SAP and in this case, for ERP, is currently not the strategy. So I'm trying to keep the S/4 system then on site and then linking it into cloud solution or the different cloud solution that SAP offers, for example, like SuccessFactors or the Sales Cloud. So we are trying then to combine the environment of on-premise and cloud systems, consolidating our systems and harmonizing the processes, which will be a tough one as we are distributed quite over the world and have bought in a lot of companies that have the different processes. So we'll see how we can actually maximize the process harmonization in this area, but it's definitely driven that we want to reduce complexity that we want to harmonize processes and systems and interfaces, of course, and then integrating it into the cloud world of SAP, but still having S/4 on-premise because always the slogan is the internal IT doesn't have to make a margin, where everybody else has to make a margin in their services. And that's why the cost benefit and also a data protection thing for us at the moment to have the S/4 is still on site.

Got it. Got it. And then when you're talking about the process redesign and some of the process engineering, a lot of the vendors that we talk to are focused on process automation, whether it's like an RPA vendor, like a UiPath or ServiceNow with their workflow engine. When you're talking about process redesign, is there a technological foundation you're doing that process redesign on? Or is it more so more services and consulting oriented and just getting your processes that are aligned with your existing systems?

Yes or at least try to reduce the modifications you have in the system and therefore, maybe agree on a standard process. That's what I meant with the process harmonization that we're trying to do. I mean in the RPA environment, we are heavily investing into that as well because, I mean, some of the areas you can't harmonize and there is -- it's more difficult to harmonize or to consolidate it then to run the RPAs on that. That's an area where we always make the decision what's the better thing of optimizing or running then, for example, in RPA. So that's a combined effort we're doing.

Got it. And may I ask, who do you guys leverage for that RPA technology?

UiPath. We are currently looking at the [indiscernible] UiPath is one of the -- yes, probably the biggest ones where I would put my money on because that looks quite interesting. On the other hand, the RPA model sometimes are now getting so expensive that -- it's sometimes even cheaper to do them in India, for example, manually, which is a shame. But I mean the price models of some of the vendors are extremely high. So it's not actually good to do it. But from a financial perspective, it's -- it would be better to do it manually in an offshore country, for example.

Got it. That's definitely something to keep an eye on. Harish, to you, same question on the ERP transition. You're moving to the cloud for ERP. What's the system you're moving to? And what's the system that you're moving from? And what was the catalyst?

Yes. So we took a different approach. We were traditionally a monolithic, one ERP. We're running on Oracle. We made a decision 2 years ago to go to more [indiscernible]. So we -- the approach we took was we defined our application systems and business processes in 2 buckets. One of system of the differentiation and another bucket of systems of record. So -- but the areas that fell into the system of differentiation, we decided to use a best-of-breed approach. So for us, warehouse management, supply chain planning, transportation management, quality management, CRM, direct-to-consumer, e-commerce those type of systems or applications fell into the differentiation. So that's where we would differentiate ourselves in the market. And our ERP will fell into system of records. So things like procurement, quality management, finance, order management. Those things, we're going to continue to do in our ERP, and that we're going to do last. And we're going to shift to the cloud with Oracle on their Fusion platform. But that will be the last one we will do because it works today on the on-prem, but we wanted to focus on our differentiation system. So that's the approach we took. So we picked Manhattan for our warehouse management. We're evaluating currently our supply chain planning solution. And the transportation management, Manhattan has a solution as well that we're considering. And same thing with QM, Quality management, we're looking at some different alternatives for that solution as well.

Got it. And one last one, I'll just sneak in. You're evaluating OCI from Oracle as well. Would that be part and parcel of the ERP migration? Or is there a broader use case you're looking at OCI for?

That would be part of the ERP migration.

Got it. Got it. Fascinating conversation. Thank you for the time. I'm going to hand it over to James Faucette, who covers the consulting and services names for us to bring us home. So off to you, James.

Thanks, Keith. And echoing Keith's comments, really find today's conversation engaging. And so glad we get to spend the last few minutes talking about services. I want to chat with our CIOs today about some of their specific relationships and some of the services vendors that they've been using and how they see that evolving. And so maybe I'll start with you, Steve. Given how large your enterprise is, let's talk a little bit about your relationship with Accenture. Can you talk through that partnership, its breadth and how you think about using them?

Most, certainly, no. First of all, Accenture is one of our big 5 approved partners in the services or consulting world, along with some like McKinsey and Deloitte and few others. And they've been a great partner. Accenture has been an integral part of the success of the global services area we have, which is our centralized transformation and back-office systems and things. And when we talk about business process redesign and RPA and all those types of things, they've been integral to our success in that area, like I said. So a great partner. I guess, I can't say enough about them. And going forward, they'll still be part of our success.

And with that being said, though, obviously, we're all cognizant of the shifting macro environment. How does that impact your services usage generally?

What do you mean by services usage?

Just like if the macro shifts, do you increase usage -- usage of partners like Accenture decrease [indiscernible] change the nature of it?

It's funny, right? You think that business -- first of all, business is doing great. So that's not an issue that is driving off and then we have to worry. But we do keep an eye towards the future, and you get 2 things with services. One is, the more we look at using outside services, it's usually to augment internally what we're trying to accomplish. But we're also looking for the thought leadership. And that thought leadership for us is always centered around being more effective and being more efficient. A lot of times, services come in and they're doing work and it's all around efficiency. A lot of our services partnership is around how to go to market better, it's about how to win more business. And it's about putting in the business processes and capabilities and data and analytics to do that. So a couple of years ago, we kind of switched over from just using the services to save money. And it's really -- we've moved it from defense to offense. So how can we make more money? Where should we go? What should we get into it? So -- and it's not -- it wasn't saving the money. It wasn't spending more money. It was saving the money in the back and reapplying it to the front to accelerate.

Interesting. And then one of the key things that we hear a lot about or have heard a lot about over the last few years is the issue of talent scarcity. What are you seeing from that perspective in your own business? And how does that then impact the way that you work with Accenture pricing? Any other color you can give us on what you're seeing generally?

Yes. Again, I won't say Accenture in general, but all my partners are -- the 2-fold thing going on, right? I can't find the people. I have thousands of openings across the company globally. I can't find a lot of the technical capability we need to accelerate forward faster. And then so we work with partners to augment that, and they've got the same problem. They can't find them. So it has driven up the cost of what we pay. It has -- I can give you specifics on that with like an SAP, trying to find SAP technical architects and engineers, whether we want to hire them whether we just want to put them on the contract or [indiscernible], they're hard to come by. And when they do come by, the prices have really driven up the cost of the implementation. So we have to have to go back and reevaluate some implementation [ and decide that ] we're going to slow them down or not, but they're all business dependent. And I'd tell you, most of the times, we're not slowing things down, but we're figuring out how to save cost in other areas to pay for the technical services needed to keep us driving forward. So it's not a thing around just Accenture or Deloitte or [indiscernible] or anybody. It's really about all of us working together to find those resources that are needed, and they're just not out there. Schools aren't turning them out quick enough.

That is great, great color there, Steve. I appreciate that. Harish, let's turn to you because I understand that you've been using the likes of HCL and Infosys on some of your project work and talent. It seems like it's probably an issue as well for those companies and the like. Can you talk us through your resource constraints that you might be seeing? And why you think those constraints are persisting maybe?

Yes. It's consistent to what was said. What we're seeing with the HCL, Infosys is that their delivery centers in India, they're having the huge turnover. So what's happening is companies like Bank of America or Wells Fargo, so they're creating -- or Deloitte are creating their own resource centers in India, and they're plucking from HCL, Wipro, Infosys. And their people are turning over for 2 or 3x their current pay. So I don't know how long that's going to be sustainable, but good for the employees. I mean they're doubling some and tripling their pay. So getting resources has been a significant struggle. I just say 2 weeks ago, we had 2 people from HCL Leap and strong people, and they couldn't keep them. And they were onshore people left to another company for a 30%, 40% increase in pay. So it's struggling for us to get employees right now. It's -- we're just not churning them out in the U.S. and in our education system, unfortunately. And that -- I think that's a push, we collectively as an industry as IT and CIOs, we need to push hard to get universities to either pay for somebody's education who's going to be in the engineering field. So we need to do something because this is very problematic for us, I think, across all industries.

Yes, for sure. And back on specifically like what you're seeing in terms of employees and them jumping at bigger paydays. How has that dynamic impacted your current engagement pricing? And what do you think that's going to do to any incremental changes going forward?

Yes. So we were kind of lucky. We started -- because we started our transformation initiative about 2 years ago. So we did a multiyear agreement with our partners. And so in there -- and the language is baked in pricing increases. And so if they have a turnover, it's on them to do it without charging us anything, right? So -- and if they can't source it, then there are penalties in place that they have to pay. We don't want to exercise penalties, you'd rather have the resources. But -- so we're not seeing it today, but when those come up for renewal, I absolutely expect a pretty big jump in our pricing. So...

Got it. Well, and to keep everybody on time here. Maybe I'll wrap asking a question [ of Stephan ]. Back to this point of macro uncertainty, it seems like we've heard of some companies looking to execute on cost optimization initiatives. How do you think about your offshore strategy, particularly given what we've seen over the last few quarters in terms of pricing and what's been mentioned by both Steve and Harish?

I mean our strategy for offshore is to do maybe the offshore ourselves because that's an area where we can influence. However, we see huge turnover as I previously explained, as well in offshore. So the question is really on the additional cost that you have with this high turnover. And the market is really going crazy. And somehow, you can't really keep the talent because they are offered 30%, 40% more, but then you can't give the whole true 40% more in just order to keep them. So that's a real struggle to see how that works. In terms of the cost, I mean, it really depends from us from a European perspective, you have to really go far off and India is probably the only one where you have the huge cost benefits. We're trying to see if we can do an internal offshore workforce to create that with a good momentum and with a good spirit. And then we see whether this works or if we have them to work with partners to create some of the cost benefits you have with offshoring.

Great. Thank you very much. I want to tell everybody that's joined us today for the call with our CIOs thank you very much. And extend our thanks to the CIOs themselves on behalf of everybody, including all of us here at the Morgan Stanley research team. If anybody would like to talk further on any of these topics, please be sure to reach out to us directly here at Morgan Stanley or via your Morgan Stanley rep. And with that, I'll turn it over to today's operator, [ Vaseem ]. Thank you very much.

Thank you. And this concludes today's call. Thank you for your participation. You may disconnect.