Randstad has in place an extensive performance management system. It starts with using specific performance measurement tools at the lowest level in our organization by applying field steering. Our field steering model requires our units and teams to translate information on actual performance into action on a daily basis. More information on our field steering model can be found in the strategy section. Up to the Executive Board level, our planning and control cycle is operationally driven. Direct reporting lines exist between the Executive Board and the management teams of operating companies. As a result, Executive Board members are closely involved with the operating companies under their responsibility.
Our day-to-day performance overview includes KPIs showing our growth, productivity, profitability, working capital and cash flow. We use a variety of tools within our planning and control cycle to assess our performance and align future strategic and investment decisions to best utilize commercial and organizational opportunities. The planning and control cycle is embedded in our risk & control framework.
The performance of each operating company is measured at various stages during the year:
Each month, the Executive Board discusses performance with the management team of each operating company. The agenda includes financial and operational performance, forecasts, risk management, and the progress made in achieving strategic goals. Internal and external benchmarks are used to challenge performance and to identify points for improvement. In addition to the monthly control cycle, a yearly strategic planning cycle takes place during spring and an operational planning cycle during autumn.
Besides our field steering model, we use ‘simple’ metrics to manage our profitability, such as the incremental conversion ratio (the percentage of gross profit that is converted into EBITA) in times of growth, and the recovery ratio (the percentage of lost gross profit that is recovered through reduced operating expenses) in a period of contraction. Successful cost control involves reacting in time, based on transparent reporting and review procedures. Key performance indicators are used to measure and monitor performance against budgets, forecasts, the previous year, and our strategic targets. These indicators are described hereafter.
Weekly volumes act as an important indicator within our field steering model and measure the success of the units and teams.
Gaining profitable market share is an important strategic target. We aim at measuring market shares at the lowest possible level (units and teams), if possible.
Profitability indicates the quality of our top line and operational efficiency. Our overall financial goal is to achieve an EBITA margin of 5% to 6% over time. More information on our performance in 2012 can be found in the 'financial performance' section.
We focus on temp margin (gross profit generated through temporary staffing) and the contribution of permanent placements and other fee-based business. Gross margin is, however, not a strategic target as such. In order to realize our EBITA-margin target, we focus on the extent to which gross profit is converted into EBITA.
Personnel costs are the largest contributor to operating expenses. By using our field steering model, we know when and where we have to add or reduce staff. Other costs are highly flexible and tightly controlled.
We measure the percentage of gross profit converted into EBITA. At an early stage of recovery, we require the incremental conversion ratio of a company to be close to 100%. Once recovery is more developed, an incremental conversion ratio of 50% will be required. In the 'financial performance' section we have included an overview of conversion ratios in recent years.
Productivity improvements (see 'financial performance' for more details) are important in helping us to achieve our profitability targets. We measure productivity in three ways:
There is a strong focus within Randstad on days sales outstanding (DSO) and working capital. This focus is also reflected in the bonus targets set for our senior management. As a further incentive, through a simplified EVA method, operating companies are charged for their use of operating working capital. Within working capital, the 'trade receivables' component is the most important for us to influence. Our liabilities comprise mainly wage tax and social security payments to tax authorities. Clearly, those payment terms are more difficult to change.
Over the years we have shown substantial progress in improving our working capital management. In the section 'financial performance' we have included a more detailed analysis of our historical performance.
To maintain a solid financial position, we monitor our leverage ratio (net debt divided by EBITDA). This is used as guidance for dividend payment on ordinary shares and as a basis for our acquisition policy. Strategically, our target range is between 0 and 2, while our bank covenants allow for 3.5. This provides us with a cushion in managing through the cycle. More information on our financial position and capital structure can be found in the section 'investor relations'.
Better profitability and more efficient use of working capital result in sound cash generation, which we measure on the basis of the amount of free cash flow generated. Free cash flow includes operating profit and movements in working capital plus capital expenditure. In a normal year, our free cash flow moves in line with the seasonal pattern in our business. While the free cash flow in the first quarter is normally low, it is negative in the second quarter, as working capital requirements increase in line with higher revenue and the payment of holiday allowances. Free cash flow in the second half of the year is normally higher, based on higher revenue and profit. Traditionally, we experience unwinding of working capital in December. The development in free cash flow per quarter is shown in the graph 'free cash flow development'.
In a downturn, we typically see significant unwinding of working capital, as in Q1 and Q2 of 2009.