Letter from the Chairman & CEO
HOW WE MEASURE ACHIEVEMENT
The board uses a number of key performance indicators (KPIs) to judge progress towards strategic objectives. Although many of these KPIs are “output” measures – such as portfolio development, revenue and profit growth – in a complex company such as Rentokil Initial the board believes they are the most relevant way of demonstrating to shareholders progress on important issues such as customer satisfaction, service levels, staff satisfaction and innovation. This is because if we fail to move forward in the latter we will be unable to make sustainable progress in the former. A commentary on performance against KPIs at group and divisional level can be found in the review of performance.
For businesses with recurring revenue, KPIs relating to contract portfolio development 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 services we provide. Changes in the “as used” portion of contracts show variations 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 decline in the “as used” portion of garments contracts (i.e. the actual number of garments we process for customers) is a reflection of a shift in manufacturing jobs to lower cost countries. For non-portfolio businesses such as Parcel Delivery, the equivalent KPIs are number of consignments and revenue per consignment.
After the portfolio, we look at growth in total and organic revenue. We then look at net margin which is a way to judge the success of performance and productivity improvement initiatives; improving efficiency in a sustained way is fundamental to first stabilising and then expanding margins.
Our profit KPI is operating profit (profit before interest, tax and amortisation). In 2006 we have reported operating profit both before and after one-off costs, referring to the latter as adjusted operating profit. We believe that to look at underlying trends we need to strip out these costs as they principally relate to one-time restructuring/rationalisation projects. As the level of one-off costs diminishes in the future, we will no longer need to use adjusted operating profit as a KPI.
For the overall group, we look at all these KPIs plus some which are only relevant to the group as whole. These are operating cash flow and free cash flow – which are measures of our ability to invest in our businesses and to pay dividends – and profit before tax and amortisation (PBTA). As with operating profit, in 2006 we have also used adjusted PBTA which excludes one-off costs.
