Room for Improvement
Short-term strategic focus; incomplete business models; KPIs that aren’t ‘key’. Is this really how companies want to present themselves to their investors?
Delving into KPMG’s reporting database, I can find many good examples of reporting practice from around the world, but I also see some common themes that limit shareholders’ ability to look beyond the financial performance of a company. Whilst investor briefings may address some of these gaps, investors value the rigour and confirmatory role of annual report disclosures. So, annual reports need to work harder to provide objective insight into business strategy and prospects.
Investor interest in understanding company strategy is well documented, but it’s notable that many strategy discussions are limited to an eighteen month horizon. The emphasis is on short-term incremental improvements – cost saving initiatives, incremental revenue bumps – rather than the strategic direction of the business. That is not to say that short-term opportunities are unimportant, but some balance is required. Customer focus would be a good place to start for many. Whilst 40-50% of companies outline efficiency and revenue initiatives, just one in five explain strategies for managing their customer base, and even fewer explain how they will develop customer experience to support this.
Looking at companies’ business model descriptions, it’s easy to see why there are gaps in strategy reporting. Across eight common areas where businesses typically aim to build competitive advantage, on average only five are discussed, often at a superficial level. Most strikingly, knowledge & expertise does not feature in over 40% of business model discussions. It looks as though aspects of the business that underpin success are being taken for granted – at least in reporting terms.
The relevance of non-financial performance has been recognised in recent years. Most companies can point to KPIs covering two or three aspects of their performance. The right measures can provide valuable insight into strategic progress and business prospects, but these are not widely used. For example, just 17% of reports tell you whether the business is winning or retaining customers. This type of information is common in the telecoms sector, it should be relevant to many other businesses.
There are some general steps companies can take to improve the usefulness of the KPIs they report, such as reporting measures over a five-year period, so that trends can be seen and discussed – fewer than 10% currently do this. But, companies need to look harder for those measures that best align with the success factors for their business. In many performance areas, the most insightful KPIs are often the least reported. The right measures in the right areas are needed.
KPMG’s Survey of Business Reporting is entitled Room for Improvement for a reason. By embedding a deeper assessment of strategy into reports, and providing performance measures to match, Integrated Reporting has the potential to deliver that improvement.