UK: ICL LOOKS BACK IN LANGUOR.

UK: ICL LOOKS BACK IN LANGUOR. - ICL's directors long ago realised what needed to be done to outlive a collapsing market. But words have proved easier than deeds. Fiona Jebb reports.

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Last Updated: 31 Aug 2010

ICL's directors long ago realised what needed to be done to outlive a collapsing market. But words have proved easier than deeds. Fiona Jebb reports.

Captains of industry may - conceivably - spend their elusive leisure time enjoying the output of ageing rock stars, but that is usually as far as the relationship goes. Sir Peter Bonfield, however, for 11 years the man in charge of ICL, and, since January, CEO of British Telecom and non-executive chairman of ICL, is privileged to enjoy much closer ties with one world-famous musician - at least in the private world of analyst Richard Holway. 'I have,' says Holway, 'only two heroes.' Sir Peter is one. The other? That hardy rock perennial, Eric Clapton.

Holway, author of The Holway Report, expands on the reasons behind his admiration of the former with vigour. 'I think that in the '80s Peter Bonfield took on a moribund company dedicated to hardware and turned it into something completely different. He did really well and it meant that, when DEC, IBM and Unisys were all on the verge of going broke in the late '80s and early '90s, ICL seemed to know where it was going and what it was at.'

If only, says Holway, Sir Peter had not shown a rock star's (or a politician's) inability to quit while ahead. 'By '91 or '92, ICL had lost its way,' he explains. 'Bonfield was my hero for the '80s but - a bit like Thatcher - he should have retired (from ICL) four years before he did.'

Things certainly did not look bright when Bonfield (the knighthood came at the end of last year) was first brought into ICL back in 1981, then as second in command to a colleague from Texas Instruments Robb Wilmot.

The company, which had been set up as a grouping of existing UK mainframe firms in 1968, had flourished in the '70s, but floundered so badly in the '81 recession that the Thatcher government, keen to maintain a British computer industry, somewhat unusually felt obliged to mount a £200 million rescue package. With it came Bonfield and Wilmot. They moved the company into open systems, set up its PC arm and signed microchip technology agreements with Fujitsu of Japan into the bargain. When Wilmot went his own sweet way after ICL was taken over by UK telecoms company STC in 1984, Bonfield moved into both the hot seat and the limelight.

As Holway points out, the first decade or so of Bonfield's time at ICL was impressive in the extreme: 1981's £75 million loss was the last for many years, and if profits started to drop in the early '90s, any black ink on a computer firm's bottom line was considered good going against the numbers in red that competitors were reporting at the time. In any case profits and a healthy turnover were enough to tempt Fujitsu, which had long been looking for a European base, to part with £748 million for an 80% stake in the company in 1990, a holding it later increased to 85%.

To those who hollered at the loss of a British national champion, Bonfield offered the scant consolation that he planned to float the company within five years.

Far from seeing a flotation, however, the financial year 1995 saw ICL report its first losses since 1981. By the time a charge for reorganisation costs was added to operating losses of £31.2 million, the figure in red was £183.2 million. This on a turnover of £3.1 billion, up 17% on the previous year, and just shy of double the turnover in 1989 when the company was reporting record pre-tax profits of £145.7 million. While many speculated that the restructuring charge might have been lower had a new boy, Keith Todd, not just taken over the running of the company, the operating loss alone represented a £77.9 million swing from the pre-tax profit announced the year before.

The 1995 losses, said ICL, were due to the almost total erosion of hardware margins, most significantly in its D2D and volume products divisions, resulting in a £57 million loss across these two arms. Sure, said the analysts, the bottom dropped out of the hardware market, but hadn't the company long ago said it was to move away from hardware into systems and services? And, they added, wasn't the non-hardware divisions' combined operating profit of only £26 million on £2.6 billion (1% of turnover compared with 3.9% the previous year and a low industry norm of 5%) more worrying for the long term than the £57 million loss? Why had the emphasis been on growing turnover at the expense of growing margins in these businesses? Weren't managers perturbed by the fact that the only part of the systems group to turn in high - though dropping - gross margins is operating in a market (for mainframes) which is in terminal decline?

In Sir Peter's view, the collapse in hardware prices just about explains it all. 'Last year, prices of volume products dropped much more rapidly than we thought. The issue now (on these products) is making any margin at all,' he says. ICL found itself simply too small a player in a business where only global manufacturers can make sufficient economies of scale to survive. '18 months ago, I said that 1995 should be a good year and I still believe it should have been,' Sir Peter elaborates. 'If you take away the rapid cracks in the PC business, it wasn't too bad - after all £150 million plus of the loss was in reconstruction charges and they were always planned for some stage in the future.'

But Sir Peter does little to address the question of why the company was still in hardware in the first place, since he and his colleagues have been talking about transforming ICL into a systems and services business since at least 1992. Even though the £2.6 billion turnover the company claims for its systems and services businesses looks impressive given the firm's hardware history, a substantial chunk of these revenues are the result of selling on hardware to systems and services clients.

The case for retaining D2D, the award-winning contract manufacturing arm which was set up as a separate entity in 1994, is perhaps easier to understand, since the idea was to build up the brand name before spinning out the division, unless D2D could become a global player through alliances and joint ventures, that is, in a way which required no ICL or Fujitsu capital. But the argument for retaining ICL's volume products division - which assembles and manufactures PCs and servers - after Fujitsu acquired its stake is harder to make.

If ICL did not want to sully its hands with hardware any more, if it recognised that volume products require just that - volume - to be profitable, and if Fujitsu had that volume (1.5 million units a year at the moment, compared to ICL's 500,000), why didn't the merger now scheduled to take effect from this month happen years ago?

In this, as elsewhere, says Glenn Cuthbertson, vice-president and research director with Gartner Group Europe, a certain fuzziness took hold. Managers might have known what needed to be done, but doing it was quite another matter. 'They could have merged volume products with Fujitsu two or three years ago,' he says. '(Not doing so) was the triumph of hope over reality, of thinking, "If we just wait another 12 months. We just need a bit more time ..." Taking hard decisions is very difficult for these companies,' he continues, talking of ICL and the national champions of other countries Bull and Olivetti.

Todd - ICL's finance director before he took over at the helm - disagrees with the timescale Cuthbertson cites and fires off at other companies 'shooting from the hip' when restructuring. ICL, he says, has always preferred the route of 'treating people well, of retraining and reusing (them)'.

(It has nonetheless made 4,000 redundancies since 1993 and is predicting a further 1,000 before the end of the financial year, leaving it with a total workforce of around 23,000.) Despite such caveats, ICL's new CEO agrees that the volume products move is overdue. 'It could have happened earlier,' he ponders, 'but it wasn't viable back in '91, say. With hindsight, yes, I would do things faster: to scale it, some of these things could have been done a year earlier than they were.' It doesn't sound much until you realise that the volume products division alone lost close to £50 million in the course of 1995.

Neither Todd nor Sir Peter dwells on the problem of the wafer-thin - and falling - margins in the systems and services businesses, although Todd does air his belief that many of the company's activities have been underpriced. 'We have,' he says, 'contributed a lot to our customers' businesses and frankly we haven't been paid very well for it.' And, in expressing his ambitions for the company, he talks not of any significant increase in turnover - that was yesterday's priority, it seems - but of an increase in margins. Sir Peter just mentions in passing that in an ideal world there ought to be gross margins of around 20% in the systems and services businesses. It is left to Hideo Watanabe, director, Fujitsu relations, to volunteer that low margins in non-hardware divisions were a significant contributory factor to 1995's poor results. 'We have to make systems integration margins rise with better project management and cost reductions,' he concludes. 'The same applies generally but systems integration is one of the most important areas.'

To Todd and his team, salvation lies in the five-point programme he announced at the same time as the results, a programme more than slightly familiar to those who have been following the company over the years. Certainly there was nothing new in the announcement that the firm was striving to become a systems and services business and that the volume products division was to be merged with Fujitsu's (except the firm date set for the move: 1 July). Nor did the spin-off of D2D cause shock waves. A little newer perhaps was the announcement that an interactive media services business was to be launched as was a global software partnership with Fujitsu, based on the successes of the groupware product TeamWare in Europe and Japan.

Familiarity with the programme may explain why analysts question the speed but not the direction of the reorganisation; they suggest that ICL has been crawling along in first gear for several years and an acceleration into second won't solve the problem. Holway's reaction is fairly typical: 'I am 148% behind the current plan of action,' he says. 'There should just have been much more concentration on it before. I still think they (ICL) are involved in too many activities and should concentrate on the things they are really good at ... Why doesn't Todd just pull his finger out and do it?' Well, why doesn't he? 'He has a lot of baggage, he's a nice man, it's a nice company with lots of nice people,' comes the answer.

Holway, like Cuthbertson, believes the company needs to acquire as well as dispose, partly to spread ICL's geographical focus, reducing its overdependence on Europe (85% of revenues) and the UK (half of European sales). More importantly, acquisitions might offer the full breadth of services across a range of markets particularly in the sectors such as retail, local government and financial services where ICL is considered a serious player. A similar breadth-of-service logic caused EDS to acquire AT Kearney in order to offer clients strategic consultancy as well as technical advice. At the moment 50% of all ICL's services revenue comes from commodity maintenance activities. 'To succeed in the services business, you need to offer everything from consultancy through to outsourcing,' says Cuthbertson. 'And growing a services business organically is very hard. ICL should be looking to acquire businesses already in the market. But again, it's a little late in the day for that: there are a lot of US companies looking for the same thing and prices are going up.' And, of course, companies which have just reported significant losses tend to hesitate before drawing up a corporate shopping list.

If a shopping spree is not to be the road to raising margins, in the short term at any rate, Todd is looking carefully at the issue of pricing his people businesses. Rumour has it that a memo has gone around the company, instructing staff to come up with ways of adding more value to their clients' businesses and then to price their work accordingly (5% to 10% higher) when they are selling it.

One area rich in potential is ICL's retail business where coming up with the technology to enable retailers to track their customers' buying habits more closely could reap handsome rewards for retailer and IT supplier alike. Higher margins may well be the result too of ICL's search for new contracts outside the UK's public sector (its recent success as part of the consortium which won the £1 billion Private Finance Initiative contract to automate social security collection at the Post Office notwithstanding).

This, explains Todd, is the reasoning behind the £6 million advertising campaign currently running in Britain, the company's biggest market, aimed at convincing punters that ICL, like love, is all around. 'One thing I am doing is ensuring the ICL brand is noticed and recognised, and understood for the values that we want to have ascribed to it,' says Todd. 'Associating us with (just) the public sector is part of the old image.' The company has high hopes too of impressive returns on its TeamWare software, the groupware product it has launched to compete with Lotus Notes, Microsoft's Exchange software, and the growing popularity of intranets. The product is already doing well in Japan although the US market is proving problematic.

So will the spin-offs, pricing changes, precision retailing, TeamWare software and advertising be enough to return ICL not just to profits but decent profits? And will Todd, a company insider, one of the directors who has overseen the year-on-year dwindling in profits until they became transformed into loss, prove to be the man to revitalise the company in this way?

Highly vocal doubts remain on both issues. Todd, say critics, is a finance guy at heart whose appointment may well be the herald of far greater Fujitsu control over its investment (an interest that is in any case going to be heightened by the Japanese firm's underwriting of a £200 million rights issue to help ICL get on with the five-point plan). Meanwhile the latest restructuring, 'seems very half-hearted,' says Cuthbertson, who points out that over the next couple of years much of the income stream from leased mainframes - ICL's cushion - will dry up.

Mainframes currently account for 5% of ICL's revenues but a far higher percentage of its systems profits.

With speed and decisiveness, much could be achieved (even Todd's aim of 5% to 6% net margin by 2000), but these are hardly the qualities for which the company is now known. Cuthbertson makes a fairly convincing case that there is a nine-in-10 chance of the ICL flotation not taking place before 2000. By then, he says, ICL 'will either have gone public as a viable services provider or become a salvage case where the bits are stripped off. We will know within the next couple of years. The Japanese don't move that quickly, they're very patient, but even they want a return on their investment at the end of the day.'

What's What - ICL hangs on to hardware divisions in decline

Systems and Services (£2.6 billion turnover although significant intertrading with hardware divisions)

- ICL Retail - supplies in-store IT solutions (services, hardware, software, systems management) worldwide.

- ICL Financial Services - delivers solutions (such as retail branch automation) to more than 400 financial companies.

- ICL Enterprises - focuses on large, complex systems integration projects.

Customers include central and local government, utility companies, travel firms and airlines.

- ICL Sorbus - provides services, independent of brand of software or hardware, software installation and consultancy.

- CFM - outsourcing business, mainly facilities management. Projects in a range of industries.

- Technology Plc - provides customers with multivendor hardware and software products.

- High Performance - includes profitable mainframe business, where ongoing lease agreements will make for generous margins for next couple of years.

- TeamWare Group - groupware software developed by Nokia Data (acquired by ICL).

Hardware

- Volume Products - sold approximately 500,000 PCs in 1995 and 10,000 servers. Revenue: £680 million+.

- D2D - award-winning contract manufacturing company.

Revenue: around £350 million.

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