Board Review
How we measure achievement
The board uses a number of key performance indicators (KPIs) to judge progress towards strategic objectives. The board believes that in a complex company such as Rentokil Initial output measures, such as portfolio development, revenue and profit growth are the most relevant way of demonstrating to internal management and to shareholders progress on important issues such as customer satisfaction, service levels, staff satisfaction and innovation. The commentary on performance against KPIs at group and divisional level can be found in the Review of Performance contained within the Business Review.
For businesses with recurring revenue (i.e. virtually all of our companies apart from City Link) KPIs relating to the development of our contract portfolio are important, some because they are an inherent measure of the level of service we are providing to our customers and others because they are indicators of market strength. The contract portfolio represents the annualised value of our customer contracts and is a leading indicator of performance. We refer to the increase in the contract portfolio as “net gain” which is made up of a number of component KPIs. “New business wins” shows us how successful our sales activities are. “Customer retention” indicates how satisfied our customers are with the service we provide. Changes in the “as used” portion of contracts show variation in the amount of business existing customers give us under their contracts and the impact of price movements: as such they can often be an early indicator of market trends. For example, in some of the European Textiles businesses, a general decline in the “as used” portion of garment contracts (i.e. the actual number of garments we process for customers) is a reflection of the shift in manufacturing jobs to lower cost countries. For non-portfolio businesses such as City Link, the equivalent KPIs are numbers of consignments handled and revenue per consignment. Our problems with City Link’s trading in the fourth quarter have caused us to re-evaluate our KPIs for this business. New KPIs will be introduced to monitor our new business pipeline more effectively, and to help us better understand trading patterns in our 25,000 customer accounts.
Other business and divisional KPIs include growth in total and organic revenue and net margin, as a way to judge the success of performance and productivity and improvement initiatives; improving efficiency in a sustained way is fundamental to first stabilising and then expanding margin. Our business and divisional profit KPI is operating profit (before amortisation of intangible assets). In 2007 we reported operating profit both before and after one-off items, referring to the latter as adjusted operating profit. We believe that to look at underlying trends we need to strip out these items, as they principally relate to one time restructuring/rationalisation projects.
Our activities have the capacity to generate significant cash flow, although growth in revenues is likely to be to the detriment of working capital performance and spend on capital equipment for rental to customers. We therefore monitor divisional operating cash flow and days sales outstanding (which measures the amount of working capital tied up in trade receivables). For the overall group, we look at all these KPIs plus some which are only relevant to the group as a whole – free cash flow (which measures our ability to invest in our businesses and to pay dividends) and profit before income tax and amortisation of intangible assets (PBTA). As with operating profit, in 2007 we have used adjusted profit before income tax (adjusted PBTA), which also excludes one-off items.