Watch your KPIs as new law starts to bite

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.

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

 

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