The Operating and Financial Review (OFR) has become a
legal requirement for all UK quoted companies for financial years
beginning on or after 1 April 2005.
This landmark legislation is the first time that organisations
are required to report on non-financial elements that contribute
towards performance.
Directors are required to provide both current and future
strategies to be adopted by the business. The aim is to help
investors assess the potential for these strategies to succeed.
The OFR identifies trends and factors relevant to the investors'
assessment of the current and future performance of the business
and the progress towards the achievement of business objectives
For IT teams in companies throughout the UK, the implications of
these demands will mean huge changes. Under the OFR, management
teams will have to not only plan what they intend to do, but also
report on how well they did, assess the impact of those plans on
actual results and how they plan to act in the future.
Accountability will be enshrined in company law and it will be
the IT team who are called on to demonstrate this progress towards
achieving the goals.
The key performance indicators (KPIs) used to make these
evaluations will be crucial. If companies get it wrong through
inadequate planning and execution, their own OFR could damage their
reputation among stakeholders, detrimentally affect market rating
and cost competitive position.
However, businesses brave enough to take an early lead in KPI
disclosure will be in a commanding position, effectively setting
the agenda for the competition, telling them how to measure
effectiveness. This is the corporate strategy equivalent of
Coca-Cola analysing a Pepsi taste challenge, and in the competitive
industries, the advantages for OFR early movers could be
considerable.
The bad news is that in the early stages of OFR adoption,
failure is a lot more likely than success. Research has shown 85%
of executive teams spend less than one hour per month discussing
strategy and that only 5% of the workforce understand strategy.
Simply put this has to change, quickly. UK firms must become adept
at linking strategy to performance in a very tight timeframe and
that will mean big changes for IT departments.
So how does a business continually assess operational progress
towards the successful achievement of strategic objectives? This
huge, dynamic task can be broken down into key steps:
- Make strategy drive all management processes. The planning
process should consist of three distinct phases: First, senior
managers determine the high level goals to be achieved over the
next few years and the way in which they are going to be achieved.
Next, operational managers define the activities and an estimate of
the resources that will be required to implement the strategic
plan. Finally, budgets are assigned to those activity plans. For
successful strategy management, most time is spent on the second
phase.
- Plan answers to key questions on direction. Strategic and
operational plans should also answer "what happens if things do not
turn out as planned?" Do not assume plan A will always work.
- Ensure the operational plan covers present and future issues.
Plans need to address how the current operations are to be
maintained, how to improve the efficiency of current operations,
and what new ventures or initiatives are to be implemented.
- Focus. High-performing organisations do not plan in excessive
detail as it often means more analysis and less activity.
- Link plans to actions. Link activities into a cause and effect
hierarchy as securing objectives is the result of doing the right
things. It is the activities that are monitored as well as their
impact on achieving strategic goals.
- Plans should be measurable. Objectives have measures of
success, while activities have measures of implementation.
- Make specific people responsible for individual activities.
Empower them and give them control of the resources to ensure the
delivery of the activity.
- Record and monitor assumptions. Monitor the range of business
assumptions that are tied to the targets set for corporate
objectives. If assumptions change, reconsider the associated
targets.
- Clearly communicate the plans. Plans need to be freely
available to the various stakeholders so they know how they, or
their department, contribute to the success of the
organisation.
- Develop multiple scenarios. Successful plans have multiple
budget scenarios such as "expected" and "best case" so users know
how far performance can deviate before invoking an alternative
plan.
- Make the process continuous. The planning process is driven by
events rather than a date on a calendar.
These steps and the necessary change management as businesses
adapt will be vital if firms are to comply with the new regulations
and keep investors assured of the health and viability of their
industry.
Michael Coveney is director of business service at Geac and
co-author of The Strategy Gap