PCs go out with the post

David Bowen examines ICL's radical change of strategy

ICL, created 28 years ago as the crown jewel of the British computing industry, is to stop making computers. This is the little-noticed flipside of the company's announcement last week that it has won a pounds 1bn contract to link Britain's post offices electronically.

In the past two months it has made three announcements that together highlight a shift in its strategy - and the increasing difficulty of distinguishing between manufacturing and services in the hi-tech sector. The Post Office announcement is the latest: ICL is leading a consortium called Pathway that will replace order books and giro cards with swipe cards. It will handle pounds 1bn of payments a year and should, the Government says, save pounds 150m in fraudulent claims.

In March ICL said it was shifting its personal computer operation to a new company in which it will have a stake of less than 20 per cent. It is, in effect, handing its PC business to Fujitsu - only a year after the business was set up and nine months after it bought a German PC maker. The factories in Finland and Germany where the PCs are made will now be directly controlled by the Japanese company, and the much-advertised Fujitsu-ICL multimedia computers will be withdrawn.

More significantly, ICL announced it wanted to sell a majority stake in D2D. Despite its fashionably obscure name (it stands for Design to Distribution), D2D is nothing less than ICL's manufacturing division. It has factories in Manchester and Stoke-on-Trent that are regarded as among the most advanced in the world: they make parts and computers for giants such as Compaq, Dell and Sun Microsystems, as well as ICL itself.

When the D2D deal goes through, ICL will not control a single factory. Instead, it will be another "services and systems" company, competing directly with groups such as Hoskyns, EDS and Andersen Consulting. To people outside the information technology industry, these companies' activities appear vague: concepts such as systems integration and outsourcing are difficult to grasp. But IT insiders see a simple logic: the manufacture of hardware will inevitably be concentrated in the hands of a few international groups with huge economies of scale. Unless you are one of these, you should concentrate on selling skills rather than boxes - for example, by integrating complex computer systems (such as the Post Office's) or running other organisations' computer departments (this is outsourcing).

Does all this mean ICL is doing well or badly? As always in the fuzzy world of IT, it is difficult to give a straight answer.

In financial terms, ICL is suffering. In March it announced its first loss since 1981 - it lost pounds 183m after making exceptional charges of pounds 152m. New chief executive Keith Todd appeared to be shovelling the bad news in early (a good trick by a good accountant, because things can then only get better). But there was an underlying pounds 31m operational loss, mainly on the PC side.

Half a million ICL PCs were sold in the past year. Prices have been falling so fast, however, that margins have been hit, and ICL's bosses decided it could not keep up with the big boys. It was an embarrassing U-turn, but analysts say it was probably right to pull out before losses increased. Fujitsu makes 1.5 million PCs a year and, with ICL's production, has a chance of becoming one of the giants. It is already strong in Japan and about to start manufacturing in Oregon.

But according to George O'Connor, of market analyst IDC, the miracle is that ICL managed to avoid making a loss for so long. "There was a recession in the UK and prices were falling at up to 40 per cent a year," he says. "Most of its competitors were haemorrhaging."

Mr O'Connor points out that ICL moved nimbly into new technology and Keith Todd did a good job managing the balance sheet. "It was a very sharply managed business in the recession," he says. But he is less impressed by its ability to move ahead now the recession has, more or less, lifted.

The decision to get out of manufacturing could, he believes, force ICL to concentrate its mind. As a pure services company, it will have to go hell for leather for big service contracts. That is why the Post Office deal is so important.

ICL has been shortlisted for several giant outsourcing contracts. The Inland Revenue, the DVLC vehicle licensing centre and many large companies have placed contracts recently. So far, ICL has failed to win any, and Mr O'Connor is concerned that its lack of international clout is a disadvantage. However, one big deal would transform its prospects.

Should we be depressed that a company that was formed as a national champion is now not only owned by the Japanese but has pulled out of manufacturing? Over the long term, yes. ICL could have become a world giant, and failed to do so through its own incompetence. But given its present condition, it is probably doing the right thing.

The excellent D2D factories will continue operating and ICL seems at last to have a clear idea of where it is going. Whether it will get there depends, though, on the vagaries of the frighteningly fast-changing world of IT.