Reborn but not yet rejuvenated, ICL is talking the talk of a major IT services company without yet proving it has the wherewithal to take on the industry’s top dogs. Despite a confident and well-focused strategy, the accountant continues to bring bad news for Fujitsu’s 2.735bn pound ($4.376bn) UK-based IT service company. Revenues were up just 7% in the 12 months to March 31, 1999, which also produced a net loss – for the third time in four years – of 152.9m pounds ($244.6m), due to the partial failure of the company’s 1bn pound ($1.6m) deal to automate UK post offices.
1998 and the first part of 1999 has been a busy period for ICL as it has continued its transition from hardware manufacturer to full-fledged IT services company. The company now feels this process is complete and that ICL will now be able to show its true competitiveness.
ICL’s services strategy is founded on providing a few key service lines to a number of core vertical sectors, a refocusing that has led ICL to close down 30 non-core operations in the last three years. By far the biggest grossing service line is the so-called ‘IT utility’, a range of IT infrastructure outsourcing and systems integration services centered on desktop environments, networks and data centers, which make up some 79% of the company’s total revenue. Enterprise applications implementation and managed services – including ERP (from SAP, Oracle and ICL’s own add-ons), applications management, collaborative applications (based around Microsoft’s Windows NT and Exchange) and various industry specific solutions – take another 18%.
A slim 3% of revenues are accounted for by ICL’s electronic business line, sold as a wide range of e-commerce and web-development services, again including industry specific solutions, with an emphasis on new customer interfaces. ICL’s final service focus is customer relationship management, again with an accent on exploiting new channels. However, these currently account for significantly less than 0.01% of revenues.
ICL’s second focal point is vertical markets. Having made a conscious decision to concentrate on those sectors it knows best, ICL trades heavily in government sectors (25% of revenue), retail (16%), financial services (15%), utilities (7%), travel (5%) and telecommunications (3%). The balance of ICL’s revenues continues to be generated from other sectors, notably media and the now de-emphasized manufacturing industry.
With its new strategy in place, ICL is certainly not lacking confidence. The objective of CEO Keith Todd is to make ICL one of the world’s leading IT services companies, an ambition that, if not yet achieved on a global scale, has become at least partly realized in its home territory. The company has now grown to become the third largest provider of services in the UK, behind only the giants of EDS and IBM Global Services and ahead of European luminaries Cap Gemini and Sema Group. In line with this, it has also added some 3,500 employees in the period from January 1998 to March 31, 1999, bringing its total to 22,500.
ICL has also done well in securing a number of large, complex projects from blue chip customers in the UK, including over 1.5bm pounds ($2.4bn) in outsourcing contracts from the public and private sector. As a result, the company’s order book has swelled an impressive 74% to 4bn pounds ($6.4m) over the last reported year-end of December 31, 1997. Business from its preferred sectors grew 16% in the 12 months to March 31, 1999, with profit before tax and exceptional charges up 17% at 64.5m pounds ($103.2m).
David Palk, group executive director at ICL attributes much of this success to the company’s history as a mainframe builder. [ICL’s] technology heritage is a big differentiator as is our ability to integrate technologies, he argues. Palk also points to the strength of ICL’s partnerships with leading IT suppliers, apart from that with its parent Fujitsu. We are Compaq’s number two or three reseller and Sun’s master reseller, says Palk who also added Hewlett Packard to this list.
More significant, though, is ICL’s global partnership with Microsoft, which the company expects will create 1,000 new jobs and generate an additional 500m pounds in revenue over the next three years. This multi-faceted and expanding agreement covers diverse Microsoft technologies with Windows NT becoming ICL’s preferred platform and Exchange leading its charge in collaborative software.
The company believes NT-based systems will enable companies to standardize on one operating system for the entire company, leading to cost benefits. Furthermore, it claims that the archiving, back-up, systems management and failure knowledge that ICL brought to its OpenVME mainframe operating system can now be brought to NT. The Microsoft tie-in also extends to ICL’s interests in smartcard technologies through the company’s Windows-based smartcard platform, SmartCity. It is also hoping to capture a substantial slice of the developing market for Microsoft-certified online IT training.
While the omnipresence of Microsoft suggests ICL’s growing alliance with the Redmond giant may look shrewd, questions remain over whether the company has lost more than it has gained by making NT its preferred platform. The feeling of some analysts is that concerns over NT scalability and robustness means it will remain a niche product as far as enterprise systems are concerned. ICL itself dismisses these suggestions arguing that enterprise systems based on NT are already a reality, even without the new features – such as such as data mirroring, better clustering and more addressable memory space – that will appear in the forthcoming Windows 2000.
But this is not the only question mark hanging over ICL. Palk is acutely aware that if the company is to join the computing services elite it needs to extend its business in the US. Geographically the UK remains ICL’s heartland with 57% of revenues, ahead of 32% for the rest of Europe and only 7% in North America, with the remaining 4% coming from the rest of the world. While ICL has been able to extend its European operations through a number of small acquisitions – including the Czech software services company PC-DIR, French SAP consultancy MSP and German desktop outsourcing firm Sarcom – it has not yet had the resources to do the same in the American market.
Its ability to rectify this situation depends on the success or otherwise of its much delayed initial public offering, planned for post-first quarter 2000. It is expected that Fujitsu will offer somewhere between 29% and 49% of ICL’s total shares, allowing the Japanese firm to remain the majority shareholder. Estimates suggest that the float will generate around 2bn pounds ($3.2bn), although ICL may struggle to realize this if margins remain thin. The company itself argues that figures have been distorted by the ongoing metamorphosis from computer manufacturer to IT services company and that post-IPO ICL intends to join the likes of Getronics as a market consolidator.
While ICL has done well to reinvent itself since the dark days of jobs cuts, factory sell-offs and its withdrawal from the PC market, it is not yet a pace setter and continues to be blighted by setbacks. Most recently ICL had to re-negotiate the 1bn pound ($1.6bn) Pathway project to automate payments through 19,000 UK post offices due to a government decision to drop ICL’s smartcards for benefits payments, possibly on the grounds of severe problems during the pilot phase. This cost the company 180m pounds ($288m) in write-offs, sending it into the red for the third time in four years.
ICL will have to work hard to address its financial difficulties in the run-up to IPO if it is to take full advantage of the funds generated.
