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15 July 1997 COMPANY CONFIDENTIAL
CHIEF EXECUTIVE’S REPORT - July 1997
1. Overview
Progress continues with the half year PBT £8.8M ahead of
budget and £14.9M ahead of last year, but we are still
in loss (£18.2M). This first half profit improvement
and the actions being implemented in each business will
help underpin the full vear_budget. oro tt before tax,
£25M. Progress on th RO
and the acceleration of the canine business
progressing, but slower than I would like. We have
identified some issues in the Pathway Project through
the testing of Release 1C and a programme audit I
instigated. Remedial action has been taken but an eight
week slip has been declared to the customer for handover
of Release 1C now due in October.
2. Political
The Bonn Ministerial Conference on the Information
Society was held last week. I attended as part of the
UK delegation; Naruto-san as part of. the Japanese and
Nortel were represented as part of the Canadian
delegation.
The declarations are a valuable framework for government
and industry to work together. The key outputs in my
view were:
2.1. Recognition that Industry must lead the Information
Society, with government legislation being minimal.
2.2. The application of technology to education was at
the cornerstone of the Information Society.
2.3. The governments should declare a date by which
their preferred basis for provision of. services to
the citizen and SME is electronic.
We are well placed .to take advantage of the
opportunities in education and provision of services. I
am working on a proposal for the Commission (Martin
Bangemann/Edith Cresson) on how to move forward in
education from rhetoric to action.
M4
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The new UK government has continued to act aggressively.
After a period of tension around Camelot, common-sense
prevailed and the Camelot Board are in dialogue about
the best way to proceed with the lottery when licence
renewal comes up in 2001.
The effect of the budget actions on the elimination of
ACT recovery for pensions funding is being assessed. In
isolation it will reduce the surplus in the fund; this
is -offset by the corporation tax reduction and other
favourable movements in valuation factors. In addition
we are reviewing the implications of the ACT changes on
our preference share issue to Fujitsu.
Market
The business environment is still strong. The delays in
Government spending in the UK because of the political
change continue due to reassessment by the new
government of all programmes existing and future.
The Year 2000 opportunities are now starting to
materialise and I believe we will. see a significant
increase in business activity from September.
We are focusing our energies on building a market
awareness of "new" ICL in UK, Nordic, Holland and
Central Europe, (Poland, Czech & Slovak Republic,
Hungary, Romania). We need to do more work to expand
the awareness of ICL through local events and.press
activity. The ‘positioning’ is around ICL leading in
the Information Society.
Competition
The general environment is the same, however, it is
becoming clear that EDS now see ICL as a major
competitor. We will need to be careful in all our
dealings as EDS are themselves under pressure following
their profit warning and share price reduction.
We are seeing Computer Centre, who are a large PC
distribution company, move into the provision of
commodity services. They are setting new (lower) price
points for technical services. I am having a full
competitive assessment of their strength to assess what
degree of threat they are to the traditional service
companies.
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ave confidentially approached me to
see if we could work closely together across government
in the UK. They would be happy for ICL to lead and
would consider collaboration or JV. This is very
sensitive and only three people in ICL are aware.
Richard Christou and Richard Stokes are conducting an
internal assessment.
Strategic Suppliers
5.1. SUN
I launched the ICL JAVA Centre of Excellence in
Dublin last week. This is the focal point for
the ICL/SUN JAVA collaboration and important in the
new world. The distribution business continues to
go well with Ireland signing a:‘new agreement. We
will sell about £100M of SUN equipment in 1997.
5.2. Microsoft
The Microsoft NT Centre of Excellence is going well
with no capacity currently left. We have nearly
100 trained. We are planning on opening a _ similar
centre in Scandinavia.
I met with Steve Ballmer in Seattle in June for my
biannual review. He is pleased with progress
between ICL and Microsoft (and said so in an
interview with Newsweek magazine) . We are
specifically focusing on:
i. The UK government opportunity where Microsoft
have said they will work with us
"exclusively".
ii.
iii. Retail and education markets.
5.3. Fujitsu
5.3.1. Retail. Good progress on a common
software strategy for Global Store
Precision Retail. The profitability of
our retail hardware collaboration needs
resolving.
5.3.2. Financial Services. Developing an
effective ATM strategy for the USA and
Europe and our approach to. electronic
commerce. More work: is needed on this.
5.5.5.
dealing with
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Hardware Server Strategy. We need to
agree an appropriate strategy to avoid
duplicated investment and achieve a
common marketing story for IcL and
Fujitsu. This needs to cover UNIX, NT
and Intel SPARC. The driver from my view
is to avoid confusing our customers and
saving money.
TeamWARE. Progress has been made on
stabilising the product issues and
releases for 1997. An approach to
coordinating product development strategy
and sales and marketing strategy has been
agreed. We are not however making
progress quickly enough, the forward
product strategy and marketing messages
are not yet sharp enough and the US
strategy is...nat....fillv...daveloped. The
work with! GRO is being
progressed. to be led
aggressively from an American base.
Software
IcL and Fujitsu have a number of
competing and complimentary software
products. (ICL’s products include:
i500, DAIS, Dialogue Manager, Commands,
Document Management, Process Wise) .
We have not been able to ‘coordinate the
investment and marketing strategies for
their products. We need to avoid market
confusion and reduce costs. An open
minded approach should be taken by those
involved in the assessment.
I met with Ann Bowtell to review ICL
Prégress was regarded by her as good in
the settlement . of the ASSIST issue, but
clearly the news of the delay on Pathway is of concern.
I briefed her
on the issues and actions taken.
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7. Financial Performance
QUARTER 1 HALF YEAR FULL YEAR
ACT B/(W) B/(W) ACT B/(W) B/(W) FCST B/(W) B/(W)
BDGT LYR BDGT LYR BDGT LYR
Revenue 576.0 (12.1) (162.0) ] 1189.1 (28.1) (260.6) I2659.6 (37.9) (144.2)
PBT (15.3) 7.4 7.4 (18.2) 8.8 14.9 25.0 - 27.6
Borrowings 83.8 74.9 91.2 159.6 8.2 (105.7) [238.5 27.4 (147.6
As stated earlier the half year PBT is £8.8M ahead of
budget. The improvement has largely come from reduced
costs and the contribution from increaséd sales of HPS
mainframe products (compared to budget) offsetting lower
than budget performance in TeamWARE, Retail, Sorbus,
Services and South Africa. .
Tplc, Enterprises, Financial Services, Retail have
improved their profit performance compared to last year.
The major adverse profit performances compared to last
year were: High Performance Systems - where the
mainframe profit is reducing, although they are ahead of
budget. The new product range, Trimetra (CMOS
mainframe) will be released in Q3-Q4. The first
customers are running "live" loads successfully.
Sorbus profit is. substantially down on last year (£11M)
due to the competition on proprietary maintenance
revenues and lower maintenance prices from the newer
product ranges. The improvement in profitability for
Sorbus is dependent on re-engineering the pan European
approach to service delivery and with more global OEM
and customer deals. ‘
South African performance is disappointing and has
undoubtedly been affected by doubts about the ownership
structure.
We have now bought out the Malbak investment. This has
helped take the market issues away and will allow us to
reconstruct the company and shareholding to meet the new
black empowerment opportunities.
The full year forecast of £25M is achievable. There is
a lot of work to do to ensure it is underpinned but the
first half over achievement clearly helps.
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Pathway
Following the completion of the internal audit and the
results of the early Release 1C tests we have declared
an eight weeks slip. This in effect means that the 1C
deliverable would be 15 weeks later than expected.
The project issues are being addressed with
strengthening of the programme management, technical
support and increase in project resource to address the
volume of test issues.
The reasons for the delay are rooted in the long delay
in agreeing the delivery spec, specifically the security
environment was not agreed until the end of April and
the multiple additional interfaces into the customer's
systems.
There are clearly lessons to be learned from this
project for future PFI projects and these will be shared
with the customer. The priority is to ensure the
project implementation goes in effectively and the
customer confidence is restored.
I have briefed the head of DSS, Benéfits Agency and Post
Office Counters personally with the project team, in
parallel with the project activity to deliver 1¢C in
October and Release 2 in March. We are assessing the
implications on the overall programme with the customer.
.Medium Term Profit Improvement (1998-2000)
The priority is to deliver the budget, £25M. We will,
over the short term, continue to take a "stingy"
attitude to cost and target short term revenues.
However improvement in the underlying profitability will
come from:
9.1. Elimination of loss making business
9.2. Resolving internal "hot spots", e.g.
° single client relationship management to major
customers - supported by specialist sales teams.
° simplifying inter-trading rules
° eliminating duplicated ICL offerings, e.g.
document management, technical service skills centres.
9.3. Achieving a Breakthrough (fundamental change) in
following:
the
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9.3.1. Customer Satisfaction. We have made
progress; the customer satisfaction score
averaged is 6.4. Achievement within three
years of 9+ will transform our customer
relationship and allow for "premium pricing"
opportunities. Specific actions are in
place for each customer as we complete the
customer satisfaction interview programme.
9.3.2. People. We need a "new deal" for the ICL
work force. They must be skilled, work as
teams, have the tools and access to
knowledge to allow them to do a superior
job. This will be achieved by the effective
roll-out of TeamWARE, Goldeneye (the new
network infrastructure programme) and
Project VIK (my knowledge management
activity). These, together with some
changes to the rewards and. obligation of the
employees, are intended to produce a highly
effective and motivated work force.
9.3.3. Margin Improvement . Clearly dramatic
improvements in both customer. satisfaction
and people effectiveness will in itself
improve margins.
Two other activities are also key:
° Walue Pricing. We need to be able to
demonstrate the value of the technology
proposals we make to the customers and
strengthen our negotiations defending our
offering on its benefits to the customer
and against the competition.
° Purchasing. We have to be able to
leverage our total group muscle to
achieve better (low cost) deals with
all our suppliers. We have a base line
position and have made some savings.
More are necessary.
These activities are underpinned with various programmes
in the Business Units and are linked to my review
activity. Success on these will mean that we
permanently reverse the profit downward slide from the
"old world" revenue streams and create highly profitable
systems and services offerings in the "new world".
Keith Todd