10th Apr 2012 07:00
10 April 2012
Logica plc (`Logica' or the `Company')
Annual Financial Report
The following documents have been posted, or otherwise made available, to shareholders:
1. Annual Report and Accounts 2011
2. Notice of 2012 Annual General Meeting
3. Form of Proxy for the 2012 Annual General Meeting
In accordance with Listing Rule 9.6.1, copies of the above documents have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.
The Annual Report and Accounts and the Notice of Meeting are also available on the Logica website at www.logica.com and in hard copy upon request to the Company Secretary, Logica plc, 250 Brook Drive, Green Park, Reading RG2 6UA.
The next Annual General Meeting of the Company will be held at Kings Place, 90 York Way, London N1 9AG on 11 May 2012 at 10.30am.
In accordance with Rule 6.3.5 of the Disclosure and Transparency Rules, extracted below from the Annual Report is a management report in full unedited text which contains a responsibility statement, principal risk factors and details of related party transactions. Accordingly, page numbers refer to those in the Annual Report. A condensed set of financial statements was included in the final results announcement issued on 22 February 2012.
For further information please contact:
Logica Investor & Media relations: Karen Keyes +44 (0) 20 7446 1338 /
+44 (0) 7801 723682
Brunswick: Tom Buchanan +44 (0) 20 7404 5959
UNEDITED EXTRACT FROM 2011 ANNUAL REPORT, DATED 12 March 2012
Management responsibilities
Each of the Directors, whose names and functions are referred to on pages 48 to 51 confirm that, to the best of their knowledge:
* the Group financial statements, which have been prepared in accordance with IFRSs, as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and * the Business review and risk factors include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
Risk management
The continuous monitoring of strategic and operational risks is the responsibility of the Board and line management, respectively. In order to address these challenges on behalf of the Board, the Executive Committee has responsibility for the regular evaluation of generic and specific risks within the business and the implementation of mitigation plans to address them.
The risk management process identifies, evaluates and manages significant risks faced by the Group. Risks are assessed with reference to the achievement of our business objectives and according to current market and economic issues. We have again completed a cyclical process of top down and bottom up review. From a top down perspective, the Executive Committee-owned risks were amended from eight to nine, separating out Information Security risk to give this topic greater focus (formerly, it was combined with business continuity risk). Our bottom up process requires all countries and entities to formally asses and document their risk and improvement mitigations against each of the nine risks and their sub-risks. The consolidation of this assessment is then reviewed and moderated by the Executive risk owner. Finally, the executive Committee reviews and approves the risk and controls report summary which is presented to the Board and Audit Committee. This report includes the agreed priorities for risk mitigation improvements for 2012.
Clearly defined delegation of responsibilities and authorisation levels contribute to a comprehensive system which exists for controlling these risks and helping to ensure that they are adequately addressed.
The key risks and measures to mitigate risks identified by the Board are listed on pages 30 to 33.
The conclusions arising out of the Group's risk management activities are interlinked with the evaluation and management of the Group's Key Performance Indicators (KPIs), which are set out on pages 22 to 29.
Our risk management policy, risk exposure and risk mitigation are regularly reviewed by the Board, Audit Committee and Executive Committee. We remain confident that we have strong overall mitigation plans and clear leadership in place against our nine Group risks. However, the charge we recorded in relation to some of our major contracts at the end of 2011 has led us to examine the need for stronger mitigation actions in this particular area.
Review of highly controllable risks
We identified nine Group level risks in 2011, with seven being assessed as high or medium priority items. Of these, four are deemed to be highly within our control.
Against our higher priority risks, business continuity was strengthened in 2011. The actions we took to improve our information systems, data security and operational resilience led to better risk mitigation. We did not identify any adverse material impact on revenue or client satisfaction from business continuity issues in 2011.
However, actions we had taken to mitigate major contract related risks proved to be inadequate, resulting in contract charges of £39 million which diluted margin by 100bps. In 2011, we performed a risk review of our top 100 contracts in terms of size, complexity, build up of work in progress and the status of the delivery to the client. This included the largest, most complex and most challenging contracts across the Group. An analytical review of our smaller value, short-term contracts also concluded that this portfolio of contracts was healthy.
Our management of major contract risk relies on a robust bidding system with clear reviews through the bidding process, tiered levels of authority involving our commercial and finance functions, defined project quality delivery processes and methodologies at the delivery stages and monthly business reviews. The £39 million of charges stemmed from the fact that these disciplines were not rigorously embedded everywhere. We therefore failed to identify the impact that a worsening economic environment could have on a small number of volume dependent contracts. Applying increased rigour to the achievability of cost transformation across the portfolio in a weaker economy exposed vulnerability in an additional five contracts. Our delivery risk management should have pinpointed these risks more clearly. As highlighted here, as well as in the Financial review and Audit Committee reports, future mitigation will be through more rigorous review of volume dependent contracts in the bidding stages as well as continuing to drive standardisation faster to ensure more protection against difficult economic environments. We have established an independent contract accounting function and stronger delivery assurance.
Our strategic change programmes included productivity programmes aimed at reducing direct costs and overheads and improving delivery effectiveness, risk and change management. These were the focus of more attention in 2011 - but other industry players also stepped up the pace and meant that pricing pressure remained a factor in some areas. The faster transition of our Infrastructure Management activities to our offshore centres and the restructuring announced in December were undertaken in 2011 to offset this. While we saw little material change to our win rates or order intake at the bidding stage, our ability to maintain this will rely on our continued industrialisation and offshoring of our Outsourcing activities, particularly around Infrastructure Management. A significant step up in our activities in 2012 should be a key contributor to gross and operating margin improvement over the longer term
High priority and highly controllable risks
Major contract-related risks
Many of our 6,000 contracts are complex and vary in scope and length. They may incur penalties for non-performance or yield contract losses if the costs to deliver exceed the revenues. Good risk management control mechanisms and effective monitoring of delivery are required. These actions are intended to limit the reputational damage and financial impact to our revenue and profit.
We monitor all our major projects regularly through the year as part of our operational reviews at Group level. In 2011, we undertook a much more thorough review of contracts as outlined above. Our risk management process considers both project and operational risk, underpinned by a quality management system. The focus for 2012 will be establishing a more holistic framework for the systematic and consistent review and execution against contract performance across the organisation through an independent contract accounting function, stronger delivery assurance and stronger commercial support at the bidding stage.
Delivering our strategic change programmes to achieve operational excellence and improvements in operating margin
The market is increasingly demanding the ability to deliver globally. This in turn opens up the market to an increasing number of global players. An inability to demonstrate global process excellence in a timely manner in this environment would result in lower win rates, lower order backlog and book to bill at the bidding stage and lower revenue once in the delivery stage over the longer term, leading to our inability to meet our longer-term margin objectives.
As evidenced by our 2011 performance, we need to continue to strengthen our management of change programmes in 2012. Serge Dubrana was appointed as Chief of Operations in December 2011 to focus on this area. The consistent implementation of our global blueprint for how we run the business and the associated tools and processes, is key to mitigating this risk. The creation of an Investment Council run by Himanshu Raja and Serge Dubrana will also place stronger accountability on return on investments.
Business Continuity risks associated with information system and data security
Strong security is essential to protecting Logica's information and assets, and those of our clients. As well as direct damage, a physical or information security breach would undermine the reputation we have earned in this field. The gross risks in this area continue to increase and so we must continue to invest to address these.
In addition to investments in increased monitoring and threat protection, we continue to improve network access controls and focus on addressing the risk of data being leaked outside Logica through security awareness training across the organisation, and tight control of domestic and cross-border data protection issues.
Business Continuity risks associated with operational failure and information system availability
Failure of internal support systems (including IT services), operational processes, management systems or controls could adversely affect Logica internally or have a direct impact on clients
Infrastructure improvements and investment as well as transformation of our finance function is key to mitigation. We build in appropriate levels of resilience in technical infrastructure. Business continuity, service continuity and disaster recovery plans are in place and tested regularly. We have strong business-as usual controls covering financial systems, Treasury, supplier payments and management reporting.
Review of medium controllability risks
The remaining three high or medium priority risks rely in part on our operational effectiveness, but also on external factors in the markets in which we operate. These are therefore less within our control.
In a tougher competitive environment, improving differentiation between Logica and our competitors was more of a challenge as all players stepped up their efforts to get closer to clients. We also constrained some investments in 2011 to mitigate the short-term risk to underlying margin. While we maintained our market position in most of our key markets, our client satisfaction declined. We made progress on people satisfaction despite a challenging environment. We introduced volunteering and community programmes as outlined in the responsibility and people sections.
To ensure we can make progress in 2012 against our longer-term goals of people and client satisfaction and sustainable margin improvement over the longer term, we are more carefully examining the prioritisation of our investments through a strengthened investment review process. This is aimed at driving the best returns. The tough decisions we took to restructure the business at the end of 2011 should provide more room to invest in our client offerings and people programmes, which are outlined in more detail on pages 8 to 11.
High or medium priority and medium controllability risks
Business Continuity risks associated with external events
Continental or global influenza or related virus pandemic and terrorist attacks continue to be possible threats. Our wide geographic presence also means we could be exposed to political, financial, economic and social unrest. While generally outside our control, any of these incidents affecting a large number of employees or a group critical to a client project could impact our operations or our delivery against contract obligations. This could affect client confidence in and satisfaction with Logica, with any resulting lost business potentially affecting revenue and profitability.
We continued to assess the business continuity plans we maintain in light of events in several geographies. In 2011, we reacted to flooding in Australia, typhoons in the Philippines, hurricanes in the US, and the "Arab Spring" upheavals in North Africa. Our plans enabled us to continue without material impact on our operations or services to clients.
We have also tested our local plans against a range of disaster scenarios.
Improving differentiation between Logica and our competitors
Logica's client intimacy strategy is to engage with our clients in a way that drives value and deepens the business relationship. Our focus is on solving business challenges and supporting business objectives rather than purely implementing technology. Logica aims to develop a unique and rewarding relationship that differentiates us from the competition, supporting new orders and revenue growth. The value we create protects us from commoditisation and drives margin improvement. We define how we choose to deliver value for our clients through a Client Value Proposition (CVP) widely understood through the business.
The client intimacy strategy depends on choosing clients who will work well with us and investing in the right offerings to drive sustained growth in our business with them. Logica develops a strong ecosystem through both partner and internal engagement, to provide a sustainable business relationship that drives value for all parties. We are deepening the adoption of our client engagement model through Logica.
Risks related to Logica's People Vision and the Employee Value Proposition (EVP)
Our ability to meet the demands of the market and compete effectively with other IT suppliers is, to a large extent, dependent on our ability to attract, retain, develop and effectively utilise the skills and commercial experience of our people. This impacts their performance contribution and attrition.
Attrition can be both a plus and a minus in terms of refreshing talent and enriching Company capability but it requires focus, attentive management and strong leadership.
Our ability to generate speed and agility with an appropriate balance of onshore, nearshore and offshore resources also affects client satisfaction. Our nearshore and offshore headcount and employee engagement indices are key performance indicators as the long-term sustainability of our business relies heavily on the competitive sourcing of motivated and inspired people who feel proud to be part of a long-term future committed to the delivery of value to our current and future clients.
These risks are proactively managed locally. We also then monitor these monthly in our business reviews. Our annual People Survey gives us a much more targeted view of pressure points in the business so that we can identify mitigation items. Our attrition has remained at reasonably healthy levels of 13-14% through 2011. More effort has been made to analyse key skill groups to be retained in the business through resource planning. Where specific skills have been required, targeted recruitment campaigns have been successful through 2011. We are implementing a global HR process based on Oracle 12 to address our HR needs and manage risks via our global shared service centre in Manila.
We have two additional risks which are reviewed at Group level in the areas of 1) compliance with standards and regulation and 2) major client dependencies and regional market sector risks. Executive responsibility for these risks lies with Himanshu Raja and Jean-Marc Lazzari.
These are less directly controllable or regulatory areas where our management are supported by our advisers in ensuring we comply with standards and regulation or where the processes to comply are built into our underlying business processes. In 2011, the challenging Benelux and Eurozone markets created an exposure against which we, like other companies, were required to react and we adjusted our forecasts accordingly.
While there is little certainty that any changes to European currencies might result from the current Eurozone issues, we continue to seek advice and monitor the impact that any might have on our contracts and reported financials. Given that our costs and revenues are often both in local currency, we would not expect any major impact on underlying profitability. The Group's financial risk management is also outlined in note 26 on page 122.
Related party transactions
Remuneration of key management personnel
The remuneration of the Directors of the Company and the Group's Executive Committee, who are the key management personnel of the Group, is set out below in aggregate for each of the categories required by IAS 24 `Related Party Disclosures'. Further information about the remuneration of individual Directors is disclosed in the Report of the Remuneration Committee on pages 69 to 89.
2011 2010 £'m £'m
Short-term employee benefits (including bonus) 6.7 6.3
Post-employment benefits 0.4 0.5 Termination benefits 2.9 - Share-based payment 1.8 4.6 11.8 11.4
The amount for share-based payment is that calculated in accordance with IFRS 2 `Share-based payment'.
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