ICL: English Patient in need of radical surgery?

Fujitsu must make some radical decisions about its UK subsidiary ICL. Nicholas Enticknap assesses its options and finds that...

Fujitsu must make some radical decisions about its UK subsidiary ICL. Nicholas Enticknap assesses its options and finds that analysts are upbeat about users' concerns

Fujitsu has acted with uncharacteristic speed and firmness following the fiasco of the abandoned flotation of its subsidiary ICL.

Chief executive Keith Todd left in a hurry, and now two other senior executives closely associated with the flotation have followed. Finance director Alan Gibson and corporate development director Nigel Hartnell, have joined him in the discard pile.

Group executive director Robin Hacking has also gone. He had been with ICL since 1974, and his departure suggests a determination to make a decisive break with the past.

The fifth senior executive casualty, David Palk, was already on his way out before the flotation was cancelled.

Palk was head of the Operational Services Division, the largest part of ICL which employs about half the company's 21,000 workforce.

IDC analyst Lionel Lamy said, "I think he's gone because he's not put the numbers together. In the late 1990s, when things were going all right for the IT industry, ICL didn't do well enough, and it was a bit late into e-business."

So heads have rolled. But this is not the end of the story - it's only the beginning.

Maintaining morale

Fujitsu has decide what to do next, and decide quickly. Staff morale, already battered by torrents of adverse publicity over ICL's flagship Pathway project, has dived further with the bad news about the cancelled flotation. Last week's news that ICL client Camelot has lost the lottery contract has not helped matters.

It is not only that it keeps on having to find answers to awkward questions from ICL customers. Many employees had share options that would have netted them considerable sums if the flotation had gone ahead. Even quite low level people have been complaining that they have lost £20,000, while one senior executive just below board level said he was £200,000 out of pocket.

For a services company, good quality employees are vital. Fujitsu simply cannot allow the best staff to slip away in dribs and drabs while it decides what to do.

The e-business operation, in particular, could be seriously damaged, said Anthony Miller from analyst firm Richard Holway. "The people working in that are like gold dust. To keep them, ICL must make a statement about the future".

What are Fujitsu's options? It could sell ICL - but who would buy it? It could break it up and sell off the various parts.

That is more viable, but it would be an embarrassing admission of failure, and Fujitsu has already lost enough face. Furthermore, it would mean starting from scratch again in its attempt to build up a European services organisation.

There is little point in doing that as much of ICL is working well, particularly the new e-business operation. Though still small, it is thriving, with revenues doubling to £178m in the last financial year.

A third option is to regard the ICL brand name as irretrievably tarnished, and to quietly integrate the company within Fujitsu.

There is a precedent for that - the PC division of ICL went that way in 1996, becoming first Fujitsu-ICL and then simply Fujitsu. This cannot be ruled out, either in the short term or the long. But the ICL brand still has value in the UK public sector, and the company for all its faults does have a loyal customer base. Lamy pointed out that, "The order book is strong."

Saved by services?

Fujitsu is most likely to redouble its efforts to get ICL onto the road that its former senior executives claimed to be driving on all along. That means pushing towards sustained growth and profitability as a services company and particularly an e-business services company.

According to Bloor Research analyst Martin Brampton, "ICL is historically a services company. It has got to figure out how it can move forward with that customer base, build on that, and do better in this area."

That will involve deciding which bits of ICL are essential to success as a pan-European (and perhaps ultimately global) services company and which are not, and off-loading the latter.

For example Miller argued that the reseller operation "does not belong to a services operation" and should be sold off.

The way ahead naturally involves continuing the already successful move into e-business services. As far as traditional services are concerned, there is a need to strengthen the large-scale project management side to avoid highly publicised setbacks, such as the Pathway project for computerising benefits payments (also known as Horizon), which was due to go live this year but is way behind schedule.

According to Lamy, "One of the consistent failures has been to manage big projects, such as Pathway. Whatever good happens is negated by that. It lost £180m - that's higher than the whole turnover of one of the smaller players."

Brampton concurred, "The Pathway project was a bit of a mess. You would think it would have some idea of how to deal with government with all its experience."

Improving its image

Also necessary is a campaign to improve ICL's tattered image.

Brampton said, "It needs to demonstrate some imagination, so that people get more excited doing business with ICL. It matters less if the direction is wrong if people are persuaded that the direction is worth following."

Brampton also believed ICL needs to show "a bit more leadership".

As he said, "Customers want service providers to be giving them some sort of direction - positive ideas as well as positive support. It's no good having suppliers that just react to what you ask for, and bring nothing to the game."

Underpinning all this must be sound financial management, which in the first instance has to return the company to operating profit and then keep it there.

The problem is that all this is bound to take time. Lamy drew a parallel with another former mainframe company: "It took [chairman and CEO] Lawrence Weinbach three years to turn Unisys around and make it profitable. Before that, it was doing badly and its image was not good - just like ICL."

Lamy fears that Fujitsu will not have the patience to wait that long. "If, after 24 months, ICL is not going in the right direction, it will break it up."

Key to all of this is the person at the helm. Fujitsu needs to find a new chief executive as quickly as possible, and there is no question that he or she must come from outside the company. ICL badly needs a Lou Gerstner, the CEO recruited by IBM when it was going through a bad patch in the early 1990s.

With no corporate baggage he was able to take the hard decisions the previous boss - brought up within IBM - was quite unable to do. ICL needs someone similar.

Miller doubted whether Fujitsu will "be bold enough to do that".

But, he said, "Hopefully they've understood that the English Patient does need radical treatment."

ICL performance over the past decade

The operating profit shows clearly the extent of the financial difficulty over the past five years, during which time the IT industry generally has been booming. The 1991-1994 figures are quite impressive considering that ICL was at the start of this period still very much a mainframe company, and that period featured a cataclysmic decline in mainframe revenues.

Year ending Turnover Operating profit (loss) Net profit (loss)
  £m £m £m
31 Mar 00 2,774.6 (86.9) 78.5
31 Mar 99 2,735.2 (157.4) (150.4)
31 Dec 97 2,477.1 32.5 10.2
31 Dec 96 2,916.9 (6.6) (19.2)
31 Dec 95 3,114.4 (182.7) (192.8)
31 Dec 94 2,654.5 58.3 15.9
31 Dec 93 2,623.5 32.5 5.4
31 Dec 92 2,477.9 52.0 28.2
31 Dec 91 1,875.7 78.2 41.3

Note: the turnover figure is affected by sell-offs in 1996 and 1997. They brought a temporary return to profitability. In the last financial year further sell-offs turned an operating loss into a net profit.

Advice to users

"Don't panic" is the advice of IDC analyst Lionel Lamy. "ICL will make doubly sure that its services are delivered properly - it's got to, because of all the negative press it's had. So don't panic, keep asking questions of the people you interface with, and don't let things slip when there's a problem."

Anthony Miller from Richard Holway takes a similar view. "I don't think customers have much to worry about. I do believe Fujitsu is committed to ICL as its only hope of establishing a European services provider. The ICL brand is a bit tarnished but is still a strong brand, with a loyal customer base, and parts of the organisation are doing great things."

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