The Operating and Financial Review (OFR) became a legal requirement for all UK-quoted companies for financial years beginning on or after April 1, 2005. This landmark legislation is the first time that organisations are required to report on non-financial elements that contribute towards performance.
The OFR identifies trends and factors relevant to the investors’ assessment of the current and future performance of the company and the progress towards the achievement of business objectives. Auditors, meanwhile, have to review and report on the OFR and express an opinion on whether the directors have prepared the OFR after ‘due and careful enquiry’ and ensure it is consistent with their knowledge of the accounts.
For logistics companies throughout the UK, the implications of these demands will mean huge changes. Historically, strategic awareness amongst logistics businesses has not been as good as it could have been. The very operations behind logistics are often tactical and last minute, accommodating urgent changes.
However, under 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.
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 effect market rating and cost competitive position. Firms risk being ‘hoisted by their own petard’.
However, logistics firms 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 ultra-competitive logistics industry, 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 strategy1. Simply put this has to change, quickly. Logistics firms must become adept at linking strategy to performance in a very tight timeframe.
So how does a business fuse strategy and performance, then continually assess operational progress towards the successful achievement of strategic objectives? This huge, dynamic task can be broken down into 11 steps in order to be made manageable:
• 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; and finally, budgets are assigned to those activity plans.
• 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 that ‘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 are the result of doing the right things. It is the activities that are monitored as well as their impact on achieving strategic goals.
• Measure. Plans should be measurable. Objectives and strategies have measures of success, while activities have measures of implementation.
• Assign responsibilities. 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 in management as businesses adapt will be vital if logistics firms are to comply with the new rules and keep existing and future investors assured of the health and viability of the industry.
Michael Coveney works for Geac.
Tel: 01527 496200.