Xchanging provides business€¦ · managed services, software products and application management services. We also offer IT outsourcing services for complete technology needs, whether

Xchanging plc Annual report 2011

Xchanging providesbusiness processing, technology and procurement services internationally for customers across many industry sectors

Xchanging provides business processing, technology and procurement services internationally for customers across many industry sectors. We are a truly international outsourcing specialist.

Our values are embedded into everything we do.

Customer focusWe focus relentlessly on the customer. We provide flexible, practical and value added solutions. We deliver results by constantly taking the initiative.

Innovation

We challenge the status quo and approach our business with creativity, fresh ideas, lateral thinking and a commitment to do things in a new way. We inspire innovation.

Speed & efficiencyWe act quickly and decisively. Speed is of the essence.

People

We create value, are empowered to make a difference and are responsible and accountable for our actions. We succeed through teamwork based on mutual respect and the desire to invest in each other’s success.

Excellence

We are dedicated to continuous improvement which is reflected in our leadership in technology, implementation, operations and quality standards.

Integrity

We are dependable and responsible people committed to being open, transparent, honest and direct in all of our activities.

Company overview1 Performance highlights2 Xchanging at a glance4 Business model6 Our key strengths12 Our year in review14 Market review

Business review16 Chairman’s statement18 Chief Executive Officer’s report22 Key performance indicators24 Principal risk and uncertainties28 Operating and financial review42 Our people: Values Recognition

Awards43 Corporate social responsibility

Corporate governance46 Board of Directors48 Executive Board50 Directors’ report53 Corporate governance report60 Remuneration report

Financial statements70 Independent auditors’ report

(Group)71 Consolidated income statement72 Consolidated statement of

comprehensive income73 Consolidated cash flow statement74 Reconciliation of net cash flow

to movement in net cash74 Movement in net cash75 Consolidated balance sheet76 Consolidated statement of changes

in equity79 Notes to the consolidated financial

statements144 Independent auditors’ report

(Company)145 Company balance sheet146 Company cash flow statement146 Reconciliation cash flow statement 147 Notes to the Company financial

statements

Other information152 Shareholder information153 Glossary of terms

Company overview

Business review

Corporate governance

Financial statements

Other information

Xchanging plc Annual report 2011 1

Performance highlights

Financial highlights � Adjusted revenue was £650.0 million (2010: £681.8 million),

after adjustments relating to contract settlements � Statutory revenue was £651.2 million (2010: £688.7 million) � Adjusted operating profit was £43.2 million (2010: £56.1 million)

after adjustments, mainly related to restructuring costs and impairments

� Statutory operating profit was £6.6 million (2010: statutory operating loss of £(3.1) million)

� Adjusted operating margin was 6.6% (2010: 8.2%) � Adjusted basic earnings per share was 8.01 pence

(2010: 12.30 pence) � Statutory basic loss per share was (5.79) pence

(2010: (16.84) pence) � Renewed bank facilities for a period of four years

Strategic highlights � Four Part Action Plan to stabilise business implemented

and business re-shaping well underway � Sold loss-making US workers’ compensation business � Simplified the business:

– Restructured the Cambridge business – Obtained 100% ownership of Xchanging Broking

Services Limited � New and renewed contracts signed with:

– BAE Systems Inc in North America – L’Oréal for five European countries – The London Metal Exchange – State of Victoria, Australia – London South Bank University, University of Exeter,

and University of Surrey

0 100 200 300 400 500 600 700 800

Revenue £m

20112010

0 200 400 600 800

0 10 20 30 40 50 60

Adjusted operating profit £m

20112010

0 6030 40 5010 20

0 10 20 30 40 50

Operating cash flow £m

20112010

0 10 20 30 40 50

0 3 6 9 12 15

Adjusted earnings per share p

20112010

0 12 153 6 9

2 Xchanging plc Annual report 2011

Xchanging at a glance

Services

We offer business processing, technology and procurement services to international customers across multiple industries. We understand the challenges our customers face within and across these industries. We provide practical, pragmatic and powerful solutions for addressing those challenges.

Business processing Our business processing services help our customers release time and energy that can be dedicated to the things that really make a difference to their business. Everything we do is designed to deliver measurable business advantage for our customers: to optimise the things that are essential for the customer’s business to operate – but essentially peripheral to its reason for being in business. Our processing assets and expertise are applicable to almost any back office function and we have particular domain expertise in Insurance Services and Financial Services.

We have particular expertise in complex and critical business processing services. We have unique domain knowledge in insurance where we process policies and premiums, and handle claims, and in financial services where we handle securities processing, investment account and fund administration. But we are not limited to those industries. From telecoms to insurance to retail, our people have expertise in optimising

business processes across many industry sectors and multiple service areas. This expertise is underpinned with assets and resources to support outsourcing needs, including an extensive offshoring capability. For example, 2011 saw collaborative working in our Insurance Services business between the teams in Gurgaon, Folkestone and Chatham to support our Lloyd’s and London Market customers.

We take complex business processes and simplify them, applying Six Sigma principles along with subject matter expertise to deliver BPO best practice.

� The sum of all premiums and claims accounting transactions processed by Xchanging in 2011 was over £54 billion;

� Xchanging processed over one million premium transactions and nearly 750,000 Lloyd’s claim advices in 2011;

� We use our two banking licences to support the provision of financial services to our customers.

TechnologyBy using technology to make systems and processes work more easily in the business, we give executives the freedom to work more strategically on the business. So technology encumbered businesses become technology-enabled businesses. We serve more than 300 customers in the UK, support 160 brokers and insurers in the commercial insurance market globally, and deliver services and systems to some of the UK’s national infrastructures. We do all this through three complementary business units and increasingly blend our business processing and technology expertise in a flexible way to provide bespoke solutions for customers. We also offer consumption-based services in response to the need for ‘everything-as-a-service’ solutions that enable customers to achieve a variable cost base.

In Technology, we offer infrastructure including network-managed services, software products and application management services. We also offer IT outsourcing services for complete technology needs, whether of a department, a business unit or an entire organisation.

We have functional depth in our range of specialist insurance software products covering the full Property & Casualty life-cycle. We build, implement and support, as needed, end-to-end innovative software solutions, applicable to even the most complex insurance requirements.

The technology support we provide is often critical to the functioning of a customer’s business.

� We support the customers of the first nationwide 4G telephony and data network;

� Our technology supports the world’s busiest single runway airport; � We provide end-to-end technology for the insurance market.

Procurement and Other BPOWe help our customers deliver superior procurement performance. Our procurement services encompass the complete S2P (Source-to-Pay) process including sourcing procured goods and services as well as the administrative activities that turn a customer demand into a fulfilled and paid-for order.

We source in excess of £1.65 billion of indirect procurement spend on behalf of our customers. By leveraging our supplier relationships and applying our trading expertise and buying power, we drive savings to our customers’ bottom lines.

With an end-to-end portfolio of capabilities from knowledge-based sourcing and spend management through to transaction-based P2P (Procure-to-Pay), we ensure that savings, policy compliance and cost efficiency benefits are embedded in the business.

Our top categories of indirect spend are associated with human resources and environment spend and they include contract labour, travel, telecoms, facilities, workforce, IT and communication, office supplies and marketing and professional services.

� We manage 20% of the UK’s outsourced indirect spend, making us the second largest provider in the UK. We are the fourth largest in the world;

� We operate a flexible range of commercial structures and are willing to link our fees to results delivered;

� Our pan-European, Asian and American presence allows us to compete as one of only a handful of truly global players in this market.

Company overview

Business review



Other information


Revenue £m

183.3 189.0

179.897.9

Operating profit £m

7.2

36.612.3

7.0

Margin (%)

3.9

19.3

6.8

7.2

Insurance ServicesFinancial ServicesTechnologyProcurement

For further information on our Services, please visit our website at www.xchanging.com

How we do businessOur business model is summarised on the following spread which indicates what our business does and how we generate returns.

We compete in all our markets and sell our services by drawing on the key strengths described on pages 6 to 11 of this Annual Report, measuring ourselves against our performance culture and the Key Performance Indicators ‘KPIs’ indicated on page 22.

Our corporate values and our people are core to our performance. We describe these more fully on pages 11 and 42/43.

Principal locations

Business processing Our business processing services help our customers release time and energy that can be dedicated to the things that really make a difference to their business. Everything we do is designed to deliver measurable business advantage for our customers: to optimise the things that are essential for the customer’s business to operate – but essentially peripheral to its reason for being in business. Our processing assets and expertise are applicable to almost any back office function and we have particular domain expertise in Insurance Services and Financial Services.

We have particular expertise in complex and critical business processing services. We have unique domain knowledge in insurance where we process policies and premiums, and handle claims, and in financial services where we handle securities processing, investment account and fund administration. But we are not limited to those industries. From telecoms to insurance to retail, our people have expertise in optimising

business processes across many industry sectors and multiple service areas. This expertise is underpinned with assets and resources to support outsourcing needs, including an extensive offshoring capability. For example, 2011 saw collaborative working in our Insurance Services business between the teams in Gurgaon, Folkestone and Chatham to support our Lloyd’s and London Market customers.

We take complex business processes and simplify them, applying Six Sigma principles along with subject matter expertise to deliver BPO best practice.

� The sum of all premiums and claims accounting transactions processed by Xchanging in 2011 was over £54 billion;

� Xchanging processed over one million premium transactions and nearly 750,000 Lloyd’s claim advices in 2011;

� We use our two banking licences to support the provision of financial services to our customers.

TechnologyBy using technology to make systems and processes work more easily in the business, we give executives the freedom to work more strategically on the business. So technology encumbered businesses become technology-enabled businesses. We serve more than 300 customers in the UK, support 160 brokers and insurers in the commercial insurance market globally, and deliver services and systems to some of the UK’s national infrastructures. We do all this through three complementary business units and increasingly blend our business processing and technology expertise in a flexible way to provide bespoke solutions for customers. We also offer consumption-based services in response to the need for ‘everything-as-a-service’ solutions that enable customers to achieve a variable cost base.

In Technology, we offer infrastructure including network-managed services, software products and application management services. We also offer IT outsourcing services for complete technology needs, whether of a department, a business unit or an entire organisation.

We have functional depth in our range of specialist insurance software products covering the full Property & Casualty life-cycle. We build, implement and support, as needed, end-to-end innovative software solutions, applicable to even the most complex insurance requirements.

The technology support we provide is often critical to the functioning of a customer’s business.

� We support the customers of the first nationwide 4G telephony and data network;

� Our technology supports the world’s busiest single runway airport; � We provide end-to-end technology for the insurance market.

Procurement and Other BPOWe help our customers deliver superior procurement performance. Our procurement services encompass the complete S2P (Source-to-Pay) process including sourcing procured goods and services as well as the administrative activities that turn a customer demand into a fulfilled and paid-for order.

We source in excess of £1.65 billion of indirect procurement spend on behalf of our customers. By leveraging our supplier relationships and applying our trading expertise and buying power, we drive savings to our customers’ bottom lines.

With an end-to-end portfolio of capabilities from knowledge-based sourcing and spend management through to transaction-based P2P (Procure-to-Pay), we ensure that savings, policy compliance and cost efficiency benefits are embedded in the business.

Our top categories of indirect spend are associated with human resources and environment spend and they include contract labour, travel, telecoms, facilities, workforce, IT and communication, office supplies and marketing and professional services.

� We manage 20% of the UK’s outsourced indirect spend, making us the second largest provider in the UK. We are the fourth largest in the world;

� We operate a flexible range of commercial structures and are willing to link our fees to results delivered;

� Our pan-European, Asian and American presence allows us to compete as one of only a handful of truly global players in this market.


Our business model

Insurance Services

�� Policies and premiums, and claims handling for Lloyd’s

�� Own intellectual property

�� Premiums, claims and other processing and handling for commercial insurance brokers

�� Workers’ compensation administration services in Australia

�� Offshore capabilities

�� Gainshare

�� Cost plus

�� Largely annuity

�� Transaction-based

Medium

�� Domain expertise

�� Intellectual property

�� On/near/offshore service delivery

Financial Services

�� All aspects of securities processing

�� Investment account administration

�� Fund administration and portfolio management


�� Annuity/retail

�� Project-based

�� Cost plus


�� Time and materials

Medium

�� Domain expertise


Other

�� Wide range of business processes across many industries





Medium


Business Processing

What we do...

Market growth 2010-2015

Market profitability

Capital intensity

Revenue model

Competitive position

Growth drivers

5 – 10%

> 10%

�� Corporate change

�� Market maturity

�� Offshore platform

Company overview

Business review



Other information


Infrastructure Management Services

Sourcing

�� Comprehensive, flexible infrastructure and outsourcing solutions

�� Includes bundled and consumption- based services

�� Knowledge-based, establishing supplier framework and contracts

�� Cost savings, policy compliance and efficiency benefits

�� Administration support for category managers


�� Annuity


�� Fixed fee

�� Gainshare

�� Annuity

�� Advisory

Medium Low

�� Critical technology/national or core infrastructure

�� Flexibility

�� Niche

�� Expertise

�� Flexibility (type of service)

Software P2P

�� Insurance specific software

�� Genius.X – Property and Casualty market

�� Iris.X – Lloyd’s, London Market and international reinsurance underwriters

�� Elgar.X – International reinsurance

�� Brokasure.X – Full insurance life-cycle processing

�� Process and transaction- based

�� Optimisation of payment process to achieve savings and efficiencies

�� Streamline back-office operational interaction with suppliers

�� Supplier data management and reporting to improve control

�� Licence fee


�� Maintenance fees



�� Fixed fee


�� Fixed fee


�� Annuity

High Medium

�� Niche

�� Intellectual Property

�� Flexibility (type of service)

�� Expertise

Application Management Services

�� Comprehensive application management and testing services


Medium

�� Flexibility

�� Horizontal offering

Technology Procurement

> 10% > 10%

5 – 10% > 5%

�� Technical cycle

�� Corporate change

�� Everything-as-a-service

�� Geographic expansion

�� Increasing adoption rate – size and term reductions

�� Cost reduction

�� F&A outsource decision


Domain expertiseAlthough we work across all industries, we have particular domain expertise in Insurance Services and Financial Services. Our relationship with Lloyd’s is unique as we run their policies and premiums, and claims handling and back office systems. We also own intellectual property inherent within those systems. We have similarly deep relationships with the customers for whom we undertake securities processing, investment account and fund administration through our operations in Germany, Italy and India.

The back office expertise concentrated here is fully transferable and delivers efficiency and savings for customers within industries beyond Insurance Services and Financial Services. We combine functional and technology expertise with this deep industry domain knowledge in providing services for our customers.

Our key strengths

In building our ability to compete in our markets we have redefined our service offerings and our go-to-market strategy. We also draw on six key strengths.

Company overview

Business review



Other information


Complex and critical processesIn our Insurance Services and Technology businesses in particular, we specialise in the management of complex and critical processes. This takes a major burden away from our customers and gives them the flexibility to concentrate on their strategically important priorities.

Our recently renewed contract with the London Metal Exchange, for example, sees us providing the transaction processing technology that underpins trading transactions worth about £30 billion a day. With our support since 2005, the customer has effectively managed a tenfold rise in electronic trading volumes – with all the additional administration this entails.

Similarly, we have recently strengthened our relationship as a strategic IT partner for Gatwick Airport, providing end user computer services as well as network managed services for the world’s busiest single runway airport. We now have the opportunity to further simplify IT administration for this customer, having already rationalised 140 legacy systems into one common infrastructure. We will look to offer this competence at working in complex areas to an even wider range of customers in 2012/13.


PPI 267

Our key strengths continued

On/near/offshoreAs reflected on page 14 of this Annual Report, there is growing demand for global sourcing as organisations seek to leverage competitive advantage from globally distributed talent pools and lower cost bases.

We are well placed to serve the resulting market opportunity with our deep and diverse expertise in lower-cost offshore centres in India, Malaysia and Singapore, and nearshore centres in the countries where our customers are located. We have strength in delivering the right balance of onshore, nearshore and offshore resources for each individual customer in a flexible way – whether that is in a build-operate-transfer or build-operate-retain solution.

Our scalable managed services use well-defined risk management and project governance methodologies. Our rigorous use of metrics and documentation underpin both our quality assurance and our customers’ own compliance and regulatory requirements.

The scale and scope of such activities is driven by the international organisations we serve: customers that require bespoke solutions rather than a ‘one size fits all’ approach.

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Adaptability

We are a flexible organisation. This means that, across our businesses, we are adaptable in our approach and adopt a consultative way of working that provides potentially bespoke solutions for each individual customer. We can offer as little or as much of a service as the customer needs, and can blend business processing and technology into a bundled offering that delivers enhanced solutions.

We do not operate rigid hierarchies and all our customers have access to executives throughout the organisation – up to and including the Chief Executive Officer.

For mid-size organisations in particular, this flexibility can provide a good cultural fit. It delivers relevant, cost-effective and tailored outsourcing solutions which would not normally be available from bigger business processors.


Our key strengths continued

End-to-end servicesDue to the breadth and depth of our expertise, we have the ability to offer customers a full, end-to-end service across the life cycle of their business. We also have the flexibility to offer just the right amount of outsourcing that they need, for as short or as long a period as they need it.

For example, in Insurance Services, we offer software products and business processing covering full back office functions across the Property & Casualty industry. In IT outsourcing we can look after small targeted projects or manage complete IT needs for an entire enterprise.

To an increasing extent, we are also combining our business processing and technology services to enhance our offerings. We can offer this degree of flexibility thanks to our full range of assets for designing and delivering what our customers need at any stage of our business relationship.

This end-to-end capability allows a much wider range of organisations to utilise the full benefits of outsourcing.

Company overview

Business review



Other information


Corporate valuesOur corporate culture is built on six values:

These are set out on the inside front cover.

We take our values very seriously and seek to embed them into everything we do. They are publicised throughout the organisation to provide a framework for the way we conduct our business. We have launched our first Values Recognition Awards for employees making outstanding contributions that demonstrate the values in their work. You can read more about these awards on page 42.

Customer focus

Innovation

Speed & efficiency

People

Excellence

Integrity


Our year in review

In 2011 Xchanging decisively addressed critical challenges. We took measures to align our business more closely with customer needs, made key appointments, retained existing customers and won significant new contracts too.

For further information on Services, please visit our website at www.xchanging.com

Ken Lever becomes CEO

February 2011Ken Lever appointed to the role of Acting Chief Executive Officer after joining Xchanging in October 2010 as Chief Financial Officer. Ken launched the Four Part Action Plan and refocused Xchanging on six new corporate values. In June Ken was appointed to the permanent role of Chief Executive Officer.

Contract renewal: BAE Systems Australia

April 2011BAE Systems Australia extended its procurement services contract for a further three years. Under the new contract Xchanging will manage AUD180 million of indirect spend.

Contract renewal: State of Victoria, Australia

April 2011WorkSafe Victoria renewed the contract for provision of claims and risk management services for a further five years.

Company overview

Business review



Other information


Sale of US workers’ compensation business

June 2011US workers’ compensation and third-party administration operations sold to Sedgwick Claims Management Services Inc. The sale freed Xchanging of a loss making and cash absorbing operation and improved underlying profitability and cash flow.

Acquisition of 100% Australian workers’ compensation and Indian business process outsourcing business from Cambridge Solutions Limited (Cambridge)June 2011Previously, Xchanging had partial ownership through its 76% shareholding in Cambridge.

New business win: BAE Systems, North America

August 2011BAE Systems Inc awards a seven-year procurement services contract to provide sourcing and supply base management services for USD800 million of annual indirect procurement spend across many categories of indirect goods and services.

Full control of Xchanging Broking Services Limited

September 2011Aon Limited exercised its put option under the terms of the Enterprise Partnership, giving Xchanging 100% ownership.

Group bank facility agreement

August 2011A £20 million term loan and £75 million revolving credit facility agreed for a four-year term.

Board refreshed

December 2011Geoff Unwin and Bill Thomas joined the Board as Non-executive Directors. On 1 January 2012 Geoff assumed the role of Chairman.

Contract renewal: London Metal Exchange

December 2011The London Metal Exchange (‘LME’) renewed its contract for technology services for a minimum of three years. Xchanging has provided the LME with high-availability transaction processing systems since 2005.

New business win: L’Oréal

August 2011L’Oréal awards a three-and-a-half-year procurement co-sourcing contract to manage a significant indirect procurement budget across five countries – France, UK, Germany, Italy and Spain.


Market review

The overall market for business processing and technology services continues to offer opportunities. Companies in the low growth economies are seeking to reduce costs and improve profitability, whilst the market in the so-called ‘developing’ economies is showing increasingly encouraging signs.

However decisions on major projects tend to be delayed by the cautious economic outlook. A clear trend in all sectors is the move towards ‘Business Processing-as-a-Service’ (‘BPaaS’), with providers making available a combined offering of business process outsourcing and technology services in a systems aggregator role.

Outsourcing market trendsMarket advisory firm Everest advises that demand for outsourcing will remain tentative in the first half of 2012, given macro-economic and political uncertainty, particularly in the US and Europe1. However, business confidence is expected to return in the second half of the year. Scope for growth remains for outsourcing providers who take advantage of the trends outlined below.

Global sourcingAnalyst firm Ovum notes that customers now look for service providers’ ability to meet both global and local needs2. In parallel, customers are increasingly seeking to mitigate the risks associated with traditional outsourcing engagements by keeping some accountability and sourcing management in-house and allocating responsibility for day-to-day operations to trusted suppliers. This dual or hybrid approach has led to an increase in the number of service lines offered by service providers. Ovum data shows that on average, 60% of Total Contract Value (‘TCV’) has been allocated to a single lead supplier in multiple-supplier deals signed since 2009. This trend is set to continue in 2012.

InnovationSuppliers’ innovation initiatives are being applied across all parts of the outsourcing process. Everest notes that the demand for innovation is likely to drive a greater push for focused domain expertise, which will in turn drive investment in the development of new, more customer-centric products and services. This trend has already been

picked up by service providers, of which over 56% (according to a recent survey3) plan to invest in new areas of expertise, with their main focus on Cloud computing. This trend will also lead to new entrants who are focused on supplying a niche or specialised market – a development that balances the move in some markets towards vendor consolidation.

Cloud computing and Business-Processing-as-a-ServiceAnalyst firm Horses for Sources expects the uncertain macro-economic climate in mature geographies to encourage some organisations to look at more radical means to reduce cost and improve productivity4. BPaaS is one such means. BPaaS integrates some or all of Cloud computing technology, Software-as-a-Service and Business Process Outsourcing (‘BPO’) functionality, allowing suppliers to provide business services through a (normally shared) consumption model. This helps to meet customer needs for innovation, flexibility and cost reduction.

Sector developmentsPlease see right for some of the key global trends in our business sectors.

Business Processing

Insurance ServicesEverest forecasts that the Insurance BPO market will grow at 12–15% in 2012 (year-on-year), with tier 2/tier 3 insurers driving most of the growth in the Property & Casualty segment1. Domain expertise will remain important for customers in their partner selection strategy, along with technology capability. Many insurance BPO providers are increasingly offering technology-bundled solutions (such as Software- as-a-Service) and these solutions will become adopted more widely, along with technology-enabled transactional pricing for BPO.

In addition BPaaS is expected to be a developing trend in this sector, where the majority of processes are standard, high in frequency, administrative and able to be commoditised. A future challenge for service providers will be to develop competences in both this area and in the provision of services that require contextual input and customisation5.

Company overview

Business review



Other information


Financial ServicesFinancial Services remains the dominant industry sector in the outsourcing market, and according to market analyst firm Elix-IRR, will continue to grow in 2012 (although growth may not be as rapid as previously)6. While labour cost arbitrage was once the principal motivation behind outsourcing, financial services institutions are now looking to leverage service provider skills in process optimisation and technology innovation. In addition, the need to avoid large capital investment is trending towards tactical outsourcing and new operating models – such as pay-per-use, Cloud computing and technology platforms.

Service providers are also starting to add more value to their services by moving upstream in the value chain, including financial services specific processes, by working with the customer to improve business performance and add value.

Technology

According to Everest, macro-economic uncertainty will cause buyers in 2012 to focus their ITO spend on a smaller number of deals with simpler pricing models1. Cloud computing will remain a strong trend, with new and sophisticated solutions leading to new hybrid models and integration approaches, making Cloud adoption more mainstream. In turn this, along with other next generation IT such as Remote Infrastructure Management Outsourcing (RIMO), will drive growth in infrastructure outsourcing.

In industries facing increased regulatory requirements, such as insurance and financial services, IT spend will be driven by risk and compliance. Master data management will see growth and the agility and flexibility of technology solutions will be crucial in 20127.

Procurement

Procurement continues to be a rapidly growing market, with Everest predicting 20% year-on-year growth in 2012 to reach a market size of around USD250 billion of managed spend1. The US is the dominant market but growth will increase in the UK, Continental Europe and Asia Pacific. In the UK market, the public sector is expected to see activity in line with the stated government policy on procurement optimisation.

Buyers are predicted increasingly to take an end-to-end approach, concentrating on Source-to-Contract (S2C) or Procure-to-Pay (P2P) rather than discrete processes. Supplier activity will mirror this, with an increase in the number of partnerships and consolidations and a trend towards end-to-end Source-to-Pay (S2P) vendor capabilities. Technology capability will also grow in importance as market adoption of Software-as-a-Service based solutions increases, with providers acquiring or partnering to obtain this capability.

Understanding market and industry trends

1 Source: Everest Group, ‘2012 Market Predictions’, December 2011.2 Source: Ovum, ‘2012 Trends to Watch: Contracts and Outsourcing’,

December 2011.3 Source: PwC and Duke University, ‘The ever-changing global service-provider

industry’, September 2011. The survey received responses from 620 service providers from over 50 countries.

4 Source: Horses for Sources, ‘Will a Double-Dip Recession Reverse the Trend of Buyers ‘Delaying Outsourcing’ during a Slump? Here are 10 Factors to Consider’, August 2011. www.horsesforsources.com/double-dip-outsourcing_082211

5 Source: Horses for Sources, ‘It may be for life, but will there be innovation, as TCS inks the mother of all insurance BPO deals’, December 2011. www.horsesforsources.com/diligenta-friendslife-120911

6 Source: Elix-iRR, ‘Trends in Outsourcing and Offshoring in the Financial Services Industry, 2008 – 2011’, November 2011.

7 Source: Ovum, ‘2012 Trends to Watch: Financial Markets Technology’, October 2011 and Ovum, ‘2012 Trends to Watch: Insurance Technology’, October 2011.


Chairman’s statement

Xchanging has emerged from a year of considerable activity as it has addressed a number of operating and strategic issues. It was a year of transition as we started reshaping the business to meet the needs of changing markets.

During the year we generated adjusted revenues of £650.0 million and adjusted operating profit of £43.2 million. Net cash at the end of the year increased encouragingly to £45.2 million.

Operating progress In early 2011, a Four Part Action Plan was developed to address a number of strategic and operating issues and to stabilise the business.

By the time of the half year results, significant progress with the plan had been made. Notably, the US workers’ compensation business had been sold. In addition, the Group’s bank facilities had been re-negotiated. These two actions provided reassurance to customers, investors and employees alike and were significant steps enabling the business to move forward.

By the end of the year, significant cost reductions had been made, a new sales and marketing framework had been established and a cultural change programme had been launched.

It was a busy year. Some initial benefits have started to show with cost savings and improved working capital management feeding into better than expected operating cash flow.

2011 2012 2013

Stop the bleeding

Compete to win

Get fit

Company overview

Business review



Other information


Strategic progressIn its first decade, pursuing the founding strategy based on Enterprise Partnerships, Xchanging became firmly established, developed depth of expertise and a strong customer base. However, growth stalled. In 2011, the Board re-examined the appropriateness of this strategy in the context of an evolving and maturing outsourcing market. This is described in more detail in the Chief Executive Officer’s report. The Board also faced up to the need for transition from the entrepreneurial phase of Xchanging’s development to a strategy for sustainable growth.

As a result, towards the end of the year, Xchanging embarked on a highly focused drive to re-generate profitable sales growth, and this is also described in some detail in the Chief Executive Officer’s report. The process will continue in 2012 and the impact should be increasingly visible as we move through the year and into 2013.

BoardThere have been a number of changes to the Executive and Non-executive members of the Board. In June, Ken Lever was appointed Chief Executive Officer, after a period as Acting Chief Executive Officer following David Andrews’ departure in February 2011. At the same time, David Bauernfeind was appointed to the Board as Chief Financial Officer.

In August, Stephen Brenninkmeijer and Johannes Maret retired from their Non-executive Directorships. In December Bill Thomas and I joined the Board as Non-executive Directors. On 1 January 2012, I assumed the role of Chairman, following the retirement of Nigel Rich from that role on 31 December 2011.

These changes represent, in part, retirement after long service. They also reflect the view that, to address Xchanging’s challenges and to drive the regeneration of profitable growth in the next phase of development, the Board will benefit from a higher degree of industry-specific expertise. I would like to thank all the departing Board members, and my predecessor Nigel Rich in particular, for their dedicated service to Xchanging.

PeopleIn a very active year there have been many changes at all levels, including amongst our leadership. This has been unsettling for customers and employees alike. Our business is dependent on our people, and so it was greatly reassuring to learn from the year’s employee engagement focus groups of the high degree of dedication felt by our people. I would like to thank all our employees for their loyal determination through this difficult period.

Dividend and share priceXchanging’s share price ended the year at significantly less than its value at the start of the year. Together with the suspension of the dividend, this has not been a rewarding year for shareholders. However, the Board believes it is taking the right measures to address Xchanging’s challenges, and that during this regeneration phase it remains prudent to conserve cash. Resumption of the payment of a dividend will be reviewed by the Board at the half year 2012.

FutureXchanging is now moving out of a period of difficult change and into a time of renewal. Having stabilised the operations in 2011, attention is now focused on building our position with existing customers, further simplification of the business, on generating profitable new sales growth and increasing value for our shareholders.

Xchanging has a strong customer base and a track record of successful business processing, much of it in highly complex and technology-critical areas. However, we are not exploiting the full potential of either. We are clear about our mission in 2012. We will get closer to our customers, listen and respond better, and grow our existing relationships. We will develop our sales and marketing culture so that we can take the significant capabilities and offerings that exist within the Group to the market much more actively. We will do this by focusing on a more targeted set of primary offerings where we are demonstrably competitive.

We understand our markets better, as well as the opportunities they offer to Xchanging with our particular strengths. The reshaping of the Group is well under way, driven by a rigorous assessment of how best to generate value in each of the businesses.

2012 will be the year in which Xchanging focuses on proving itself. I joined the Group because I believe it has the talent, track record and capabilities – much of it unsung – as well as the opportunity to succeed. Under Ken Lever’s leadership, a great deal of progress was achieved in 2011, and we will continue this rapid progress in 2012.

Geoff UnwinChairman1 March 2012


Chief Executive Officer’s report

‘ 2011 has been a challenging year and a year of progress for Xchanging.’

Stopping the bleeding – stabilising the businessIn the first quarter, it was clear our business had stumbled. We had to address some key issues. Our workers’ compensation claims operation in the United States was incurring accelerating losses and absorbing cash, our cost base was too high, our revenue growth had stalled and the cash generation of our business was inadequate.

The Four Part Action Plan was launched to address these issues. It was designed to stop the bleeding and stabilise the business:

Part one: Strategic reviewWe performed a strategic review to identify our good businesses and those which were underperforming. We aimed to unlock value through operational improvement, business disposal and improvement in the economic value of our contract portfolio.

This resulted in the disposal of our loss-making US workers’ compensation business and the introduction of a number of improvement actions. We stabilised our loss-making business in Italy, restructured our 76% owned listed business in India and facilitated the acquisition of the outstanding equity in our Broker Services business when Aon exercised the put option in the Enterprise Partnership.

We will continue to hone our portfolio of businesses to unlock value if we believe disposal provides a better opportunity to enhance the intrinsic value of the Group. We will also examine contract renewals diligently and will not renew contracts on unprofitable terms even if this involves contraction in overall revenue of the Group.

Part two: Operational improvements and cost reductionWe established a new Executive Board structure and a Chief Executive Officer Support group. The new Executive Board is shown on page 48. It includes the business sector heads that have revenue, profit and cash flow responsibility and accountability together with our Chief Financial Officer and our Chief Human Resources Officer.

The Chief Executive Officer Support group includes the senior executives with functional responsibility for sales and marketing, technology, operations, implementation, communications, corporate and strategic development, and legal and corporate governance compliance together with the executive responsible for the interface with the London Insurance market. This structure has provided a basis for greater collaboration and coordination of activities across the Group as well as a sharp focus on value creation. Since the year end we have appointed Subramanian Gopalaratnam as the Head of Innovation. He will coordinate the development of services and innovative ideas around the Group.

We introduced a number of cost cutting measures. These resulted in the elimination of a number of management positions, delivering annualised savings in the order of £16 million, of which £8 million has benefitted 2011. Savings

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will be offset to some extent in 2012 by investment in our insurance growth strategy and potential expansion into Spain. We exited our Head Office and relocated the corporate staff into an existing, lower cost operational site in the City of London.

We also focused on reducing complexity in our business by starting to simplify internal company structures and operating units, and by eliminating processes and methodologies which were burdensome for a Group of our size.

We improved our processes for forecasting by introducing rolling 18-month forecasts so that we are more aware of developing trends in the business and can take corrective action as necessary.

Part three: Revenue growthThe sales and marketing strategy was reconfigured. Rather than focusing only on developing Enterprise Partnerships with large organisations, we chose to compete more widely in business processing, technology and procurement services markets by engaging more actively with third party advisers and also more aggressively pursuing smaller opportunities which we believe will grow in time.

Part four: Cash management and fundingWe successfully re-negotiated our banking arrangements with all of our existing banks to provide security of funding for the foreseeable future. Greater focus on investment and better management of working capital resulted in an improved cash performance. The details of the renewed banking arrangements are included in the Operating and Financial Review.

Getting fit again – building our ability to compete effectively across the boardAs the business stabilised we moved into the ‘getting fit’ phase – building our ability to compete effectively in our markets and to win new business.

Here we have redefined the strategic direction of our business. We have clarified our capabilities and our service offerings and further developed and refreshed the marketing strategy. We have reassessed our position in our key markets and identified those relationships we want to defend and those which we believe we can grow. We are also focusing on the opportunities we believe we can win. As a consequence, we have started to rebuild our pipeline of opportunities.

We have also launched an internal programme of change management to ensure that, as an organisation, we are less inward-looking and process-driven and more outward-looking and customer-focused. This programme is aimed at ‘Changing Xchanging’ and has a focus on four primary areas – see the box above.

Through this programme we aim to have the whole business aligned to the challenges ahead of us in 2012.

A key element of this programme is the focus on innovation. We believe that inspiring innovation is a key to building long-term relationships with our customers, helping us to stimulate creative change in their businesses and so to create value. A great example of our approach to innovation was the work we performed with YTL during 2011 in Malaysia, where we supported the roll out of the first national 4G network and are now supporting the roll out of e-learning to 10,000 schools.

Competing to win – regenerating growthSo as we move into 2012 we will focus on demonstrating our ability to compete to win in the markets where we operate. We will measure our success in 2012 by the momentum which develops from our selling effort and the improvement in sales and revenue opportunities.

One Xchanging

Focusing on embedding our values; creating consistent, collaborative, cross sector, cross geography working practices; deploying technology to harness and encourage collaborative working; and simplifying Xchanging processes.

Growing our business

Concentrating on transforming our customer service reputation and raising our market profile.

Creating value

Building a high performance workforce; incentivising success; ensuring that resources are allocated and investments are prioritised effectively; and bringing ‘inspiring innovation’ to life in all parts of our business.

A place where people want to workEstablishing great leadership for all employees; ensuring everyone is able to build a successful career at Xchanging; inspiring communication at all levels; and turning every Xchanging location into a great workplace.

Changing Xchanging


Chief Executive Officer’s review continued

Trading performanceBusiness Processing ServicesInsurance Services has continued to sustain steady growth and maintained good profitability and cash generation. In the UK we saw a steady advance in revenue at good margins. Insurance Premium Processing and Claims Handling continued to be the mainstay of our Insurance Services business.

We continued our proactive dialogue with Lloyd’s around the Claims Transformation Programme. This in due course will lead to an increase in choice in the market as Lloyd’s no longer mandates the processing of claims through one service provider. We also continue to participate actively in the market modernisation programme, which should also lead to greater clarity around the role of Xchanging in the Lloyd’s market in the future.

Our Broker Services business continued to progress well and the move to 100% ownership provides opportunities for developing this business further.

In Australia, we successfully renewed the workers’ compensation contract with the State of Victoria. We also improved the financial performance of the contract with the State of New South Wales. We are planning entry into the US Insurance business processing market in 2012.

Financial Services performed satisfactorily in Germany but overall financial performance was affected by the losses in the Italian business, Kedrios.

In Germany, we saw further expansion of our investment account administration processing for Independent Financial Advisers within Fondsdepot Bank, reducing the dependence of that business on Allianz Global Investors. At Xchanging Transaction Bank, we were able to improve margins as a result of cost reduction. In Italy we reduced cost and improved operating performance as we pursued the plan to achieve a breakeven position by the end of 2013.

Our near shore facility at Hof in Germany and offshore services facilities in India continued actively to support Financial Services during the year with much of the securities processing business and the investment account administration business being processed in locations.

TechnologyThe Technology business was disappointing. Our investment in resources in our Infrastructure management services business ahead of anticipated revenue growth caused some cost recovery issues when the revenue did not materialise. However, we continued to achieve good results from our major customers at the London Metal Exchange,

Gatwick Airport and Northgate. Actions have been taken to reduce cost and to improve cost recoverability. The renewal of the IT services contract with the London Metal Exchange was secured at the end of 2011.

Following on from a strong year in 2010 our software business only achieved a breakeven result as there were no additional sales of our newly developing insurance application platform. We have defined a new go-to-market strategy which should lead to a resumption of growth in 2012 through a combination of conversions from legacy products, direct sales and sales through channel partners. Annuity maintenance and licence fees continued for the other insurance software product offerings.

Actions taken to reduce costs and the benefit of the growing relationship with YTL in Malaysia have moved the Application management business, primarily providing application systems development and management services, into profit.

Procurement and Other BPO ServicesThis was a transition year for Procurement and Other BPO Services. Many of the smaller legacy contracts in the UK business were renewed and we successfully secured the L’Oréal contract in Europe and the BAE Systems contract

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in the US. These major contract wins have provided good momentum for the business going into 2012 when it is expected these new contracts will contribute to profitability. It was disappointing that we did not secure the renewal of the BAE Systems Human Resources contract. We will continue to provide services under this contract to BAE Systems through 2012 and we will actively participate in the migration of the service to a new provider. We continue to seek new business opportunities in HR services.

All our segments are supported by our low cost operations in India where we have significant depth of expertise. These operations saw revenue and profit growth as we continued to secure incremental accounts and controlled costs tightly. We are also seeing increasingly encouraging signs of growing activity in the local market. Recently we have been awarded pilot projects in the Indian domestic market with L&T Insurance and L&T Financial Services. There is much emphasis in this business on expanding through proactive account management with existing customers and growing accounts from small beginnings.

Strategic directionWe expect the growth of the Business Processing market to continue for some time to come (see Market Review on page 14). There is no doubt that the market is changing. Once the focus of very large businesses, outsourced business processing and technology services are increasingly available to lesser sized businesses as developing technology makes available ‘everything-as-a-service’.

As the economies of the developed world struggle to show growth we see opportunities to provide services that enable our customers to reduce their cost base through outsourcing and innovative management of processes and the use of technology. We also see the so-called ‘developing’ economies of the world offering opportunities for growth as new and developing businesses seek to secure services through a form of service delivery framework made available through advances in remote and Cloud computing technology.

We are aware of the competitiveness of the markets in which we operate and seek to differentiate our offering through technology, our ability to innovate and to provide superior service delivery.

The focus of our service offering will be procurement services and indirect cost reduction; the provision of offshore services; Business-Processing-as-a-Service (‘BPaaS’), particularly in areas where we have industry strength; insurance software, complex processing and critical technology; and transformation services (particularly in the financial services market).

Our industry strength remains in Insurance Services and Financial Services but we operate in a number of other industries such as logistics, healthcare, manufacturing, real estate and aerospace and defence.

‘ We are aware of the competitiveness of the markets in which we operate and seek to differentiate our offering through technology, our ability to innovate and to provide superior service delivery.’

OutlookWe achieved a number of significant milestones for the business in 2011 as we implemented the Four Part Action Plan. Xchanging is on a sound financial footing and has made significant progress in the reshaping of its business portfolio. I am pleased with the progress we have made.

Now that the business is stabilised we are building our ability to compete effectively in our key markets so that we are in a stronger position to win new business. 2012 will be the year in which we demonstrate our ability to compete to win, and as we build momentum, any improvement in year-on-year profitability will come from the continuing benefit of cost savings made in 2011. Our success in 2012 will be measured by the extent to which we turn new sales opportunities into contracts to grow profitable revenue in 2013 and beyond.

Ken LeverChief Executive Officer and Acting Executive Director, Procurement1 March 2012


0 2 4 6 8 10

Adjusted operating profit margin %

20112010

0 6 8 102 4

Adjusted cash conversion %

20112010

0 40 60 80 100 12020

Key performance indicators

Xchanging uses a number of key performance indicators (‘KPIs’) to monitor the Group’s performance over time in line with its strategy

Adjusted operating profit margin %2011: 6.6% (2010: 8.2%)

Adjusted cash conversion %2011: 114.8% (2010: 100.9%)

Adjusted operating profit margin measures our ongoing performance in managing the efficiency and cost effectiveness of the business. Adjusted operating profit excludes exceptional items, acquisition related expenses and amortisation of intangible assets previously unrecognised by an acquired entity.

Monitoring cash conversion ratios over time focuses attention on the levels of cash generated by the business. This in turn enables the Group to ensure that it has the financial strength to reinvest in the development of the business. The Group’s cash flow performance is measured based on the percentage of adjusted operating profit converted to adjusted operating cash flow. Adjusted operating cash flow is calculated as cash generated from operations (after adding back the cash impact of exceptional items and acquisition-related expenses) less net capital expenditure (excluding pre-contract costs) and dividends to non-controlling interests.

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Return on invested capital %

20112010

0 2015 25105

Return on invested capital %2011: 18.3% (2010: 22.2%)

Profitability measures alone may not provide a detailed understanding of performance as it is possible to generate good operating margins, but poor value for shareholders, if assets are not used efficiently. Return on invested capital is therefore reviewed alongside profitability measures to ensure there remains a focus on the efficient use of the Group’s assets.

Return on invested capital for 2011 of 18.3% compares with the Group’s weighted average cost of capital of 10%. Return on invested capital represents adjusted operating profit less a tax charge at the Group effective rate divided by invested capital. Invested capital is defined as the Group’s net assets less net cash.

Equity free cash flow £m

20112010

0 20 403010

Equity free cash flow £m2011: £21.3 million (2010: £33.8 million)

Equity free cash flow provides an assessment of how much cash is generated by the Group, which is available to invest in acquisitions, return to shareholders and pay down outstanding debt. Equity free cash flow is calculated as operating cash flow less interest and tax, and indicates cash available to shareholders of Xchanging.


Principal risks and uncertainties

Xchanging maintains risk registers covering each significant operation, business sector and the Group. We review our risk assessment four times per year, which helps to ensure we have a consistent approach and focus on the right risks. The Board approves the Group risk register annually.

We analyse the nature and extent of risks and consider their likelihood and impact, both on an inherent and a residual basis, after taking into account mitigating controls. This allows us to determine how we should manage each risk in order to achieve our strategic objectives.

During 2011 we undertook the implementation of the Four Part Action Plan which was outlined in the 2010 Annual Report.

The execution of the plan has led to a year of significant change to the structure and positioning of the organisation. This period of significant change has heightened key risks and uncertainties, and this is reflected in the risk table presented.

Continued execution of the plan/activities is fundamental for our long-term profitability and growth, and as such continues to be the key risk facing the business.

How we manage riskWe divide our risks into strategic, commercial, operational and financial categories: �� Strategic risks reflect the potential for

a significant strategic action to have a financial impact on the economic value of our business.

�� Commercial and contracting risks reflect the potential to enter into a critical contract or commercial arrangement which may have an adverse impact on the economic value of our business.

�� Operational risks reflect the potential for the failure of a critical process or procedure to have an adverse impact on the economic value of our business.

�� Financial risks include risks such as interest, foreign exchange, tax, pension valuations and liquidity. Failure to manage these risks could negatively impact the economic value of our business.

We define the economic value of our business as the net present value of the future sustainable after tax operating cash flows discounted at the weighted average cost of capital. Economic value is also intrinsic value.

Strategic risks

Key risk Commentary and mitigating plan

Successful and timely execution of the Four Part Action Plan is fundamental to achieving our long-term profitability and cash generation goals.

Chief Executive Officer’s Report – see page 18

Progress against the Four Part Action Plan is fully explained in the Chief Executive Officer’s Report. Execution risk is addressed through strong central oversight and focus on key initiatives including:�� Competing more widely in key markets by engaging more actively with third party advisers and pursuing smaller opportunities more aggressively.

�� Greater focus upon appropriate investment and improved management of working capital.

�� Building our ability to compete effectively in our markets to win new business.

�� Clearly defining the customer relationships we want to defend and those which we believe we can grow.

Our reputation and ultimately our profitability are reliant on successful implementation of large-scale partnerships and business processing contracts.

Business sector updates – pages 20-21 and 32-35

Following significant wins with L’Oréal and BAE Systems North America there are reputational and financial risks around implementation.

These are mitigated through:�� Detailed implementation plans with strong management control. �� Standardised procedures in use for the implementation of new contracts.�� Using experienced employees with strong project, change and people management skills in order to ensure successful implementation.

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Strategic risks continued


Failure to retain and grow existing businesses.


Our existing business is coming under increasing pressure as the impact of the current economic climate and multiple contract renewals impact our competitive position.

This is being managed by:�� Investment by senior management in protecting our existing core businesses.

�� Looking beyond our existing markets, building upon our proven capabilities and domain expertise.

�� Ensuring the competitive cost advantage from our India operations is delivered to the end customer.

�� Investment in technological solutions.�� Active engagement with key customers to ensure mutual agreement positions are achieved.

�� Proactively engaging with third party advisers.

Failure to win new business.


There are a number of significant changes in the sectors we operate in. Successfully winning new business is being managed by:�� The development of a unified sales strategy which enables selling across business sectors.

�� Clearly defined service offerings and sales strategies which help us to attract customers.

�� Ensuring utilisation of our competitive cost offshore services and technological capabilities.

�� Proactively engaging with third party advisers.

Identification and management of non-profitable businesses.

All businesses are reviewed including a process of intrinsic economic valuation analysis in order to ensure non profitable businesses are identified and actions taken to address.

We must be able to anticipate and manage changes in the economic environment, including an inflating cost base in India.

Chief Executive Officer’s Report – see page 18

Following the economic recession there are risks in the economy which are likely to remain for the foreseeable future, affecting our ability to secure new revenue opportunities and manage margins.�� Offshoring enables us to conduct our processing activities where they are most cost effective.

�� Proactively researching offshoring sustainability in other locations, and expanding our activities in India Tier 3 cities such as Shimoga.

�� We operate in markets outside of the EU and US which are less susceptible to the economic recession.

�� Quarterly 18-month rolling forecasts help us respond to and recognise the impact of the changing financial conditions upon our business.


Commercial risks


We are exposed to material new and existing contracts in key markets which may have a significant impact on the Group’s performance. Specifically:

1) The development of, and increased competition within, the London Insurance Market.

2) Increased pricing pressures in the Financial Services sector.

Our commercial risks continue to be well managed through legal review, delegated authorities and contract monitoring processes.

With regards to the specific risks:�� Significant engagement with the Lloyd’s market as it is opens up to competition, ensuring that we continue to utilise our significant domain expertise in this area in order to establish ourselves as the leading provider to the market using our technology platform to drive change.

�� Extensive discussions with customers are ongoing to ensure that returns from the key contracts meet with the Group’s strategic objectives.

�� Further ways to utilise technology and offshoring capabilities are being explored in order to further reduce our cost base.

In certain cases, partners have rights to ‘put’ their shares to us, creating a cash requirement, or to ‘call’ our shares for little consideration.

Detailed registers enable close monitoring of all key contractual obligations with partners.

Structured service management identifies issues early and triggers corrective actions.

Operational risks


Our customers and partners demand efficient processing and high levels of service to help them achieve their objectives and protect their reputation. Failure to meet their expectation would have a significant impact upon our reputation and profitability.

How we deliver – page 6

Service levels continue to be consistently on target, as measured by our customers.�� We measure and monitor performance across all functions and focus on being responsive to customer needs, which is one of our core values.

�� We have a clearly defined operating strategy and target model.�� Our operations focus upon improving efficiency through standardisation, near shoring and offshoring.

�� Our quality function focuses on improving processes, controls and performance.

Continuing to retain our key personnel and recruit new talented individuals is key to our success.

Our people – page 43

During 2011 there were a number of senior management changes, including the Chief Executive Officer and Chief Financial Officer.

Principal risk and uncertainties continued

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Operational risks continued


This includes ensuring we have robust succession plans in place at Board level.

�� New Chief Executive Officer, Chief Financial Officer and Executive Director for Technology appointed, and succession plans updated.

�� Retention plans are in place for key employees, and demonstrated during 2011.

�� We have an established structure for employee performance and development monitoring.

�� A clear recruitment strategy and graduate programme attract high-potential employees.

�� Significant investment in leadership training programmes underpins our succession plans, and develops our employees.

Our service delivery and reputation are highly reliant on business continuity and information security.

We continue to work with customers to understand their requirements, in addition to continuously improving and achieving relevant quality certifications to support our internal requirements.

Business disruption, IT system issues or security issues could result in loss of service, loss or compromise of customer and internal data, breach of legal and regulatory obligations and damage to our reputation.

We focus on continued development of business continuity and disaster recovery planning, and testing in conjunction with our customers and suppliers.

Financial risks


The Group’s financial results may be subject to volatility arising from movements in interest rates, foreign exchange rates, taxation rates, pension asset and liability valuations and liquidity.

Operating and Financial Review – page 28

Our budgeting, forecasting and working capital controls have been strengthened through implementing a quarterly 18-month rolling forecast process and a weekly rolling cash flow forecast covering a 12-week period.

With these enhancements our financial risks are well managed, reducing the volatility of our financial results, giving the Board greater medium-term visibility and ensuring we have required credit facilities in place.

In addition:�� Our Group treasury and pension UK operations are controlled centrally. �� The Treasury Risk Committee (‘TRC’) meets on a regular basis and monitors our key financial risk measurements including bank covenant projections.

�� The TRC operates in accordance with clearly defined limits, policies and procedures authorised by the Board.

�� Regular discussion with the pension trustees, additional contributions to the schemes and prudent assumptions for actuarial valuations control our pension-related risks.


Operating and financial review

Group key performance indicatorsDuring the year, the Group disposed of its US workers’ compensation and third party administration operations. As these operations represented a separate major line of business, they constituted a discontinued operation.

All numbers presented below, unless stated otherwise, are from continuing operations only.

2011 2010Increase/

(decrease)

Adjusted revenue1 £650.0m £681.8m (4.7)%

Adjusted operating profit2 £43.2m £56.1m (23.0)%

Adjusted operating profit margin 6.6% 8.2% (160)bps

Statutory operating profit/(loss) £6.6m £(3.1)m 312.9%

Adjusted EPS – basic 8.01p 12.30p (34.9)%

Statutory EPS – basic (5.79)p (16.84)p 65.6%

Operating cash flow3 £35.9m £49.9m (28.1)%

Adjusted cash conversion4 114.8% 100.9% 1,390bps

Net cash5 £45.2m £33.5m 34.9%

Equity free cash flow6 £21.3m £33.8m (37.0)%

Return on invested capital7 18.3% 22.2% (390)bps

Notes:1 Adjusted revenue excludes exceptional revenue items. In 2011 and 2010, these relate to contract settlements (2011: £1.2 million, 2010: £6.9 million).2 Adjusted operating profit excludes exceptional items (2011: £31.8 million, 2010: £53.4 million), amortisation of intangible assets previously unrecognised by acquired

entities (2011: £4.8 million, 2010: £4.7 million) and acquisition-related expenses (2011: £nil, 2010: £1.1 million).3 Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre-contract costs) and dividends to non-controlling interests.4 Adjusted cash conversion is calculated as cash generated from operations, after adding back the cash impact of exceptional items and acquisition-related expenses, less net

capital expenditure and dividends to non-controlling interests divided by adjusted operating profit (as defined above).5 Net cash is calculated as cash and cash equivalents less bank loans and overdrafts and finance lease liabilities.6 Equity free cash flow is calculated as operating cash flow (as defined above) less cash tax and net interest paid.7 Return on invested capital is adjusted operating profit less a tax charge at the Group’s effective rate, divided by invested capital. Invested capital is calculated as the Group’s

net assets, less net cash.

As a result, the results and cash flows of the discontinued operation have not been included in the Group’s analysis of continuing operations. All prior year comparatives have been restated to allow a like-for-like comparison.

The Group’s adjusted KPIs are calculated after adding back a number of non-cash and acquisition-related items and exceptional items, as noted below, in order to present the underlying performance of the business.

Group performanceAdjusted revenue Adjusted revenue from continuing operations for the year ended 31 December 2011 was £650.0 million (2010: £681.8 million).

Organic revenue was £604.9 million, a decline of 6.9% on a like-for-like basis. In 2011, organic revenue excludes £45.2 million relating to the full year impact of acquisitions completed in 2010, including Data Integration (‘DI’), Kedrios, FondsServiceBank (‘FSB’) and SEB Investment service (‘SEB ISG’) transactions. In addition, organic revenue excludes positive currency movements of 0.6%.

The organic decline was driven primarily by lower UK procurement revenues, and lower revenues in the UK technology sector. These are partially offset by higher processing volumes in the UK insurance business, additional revenues in the Australian workers’ compensation business and growth in our South East Asian technology business.

Statutory revenue from continuing operations was £651.2 million (2010: £688.7 million). Statutory revenue includes exceptional revenue in respect of contract settlements recognised in the year of £1.2 million (2010: £6.9 million). In both years, these settlements arose in the Financial Services sector.

Adjusted operating profit Adjusted operating profit from continuing operations was £43.2 million (2010: £56.1 million). On a like-for-like basis, adjusted operating profit decreased 17.9%, excluding the full period impact of the 2010 acquisitions of DI (movement of £(2.0) million), SEB ISG (movement of £(0.2) million), FSB (movement of £1.2 million) and Kedrios (movement of £(2.6) million).

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Beneficial foreign exchange movements in the Euro and the US Dollar have broadly offset adverse movements in the Indian Rupee.

The organic decline in adjusted operating profit was driven by the impact of lower revenues, as noted above, on the Group’s profitability, further exacerbated by incremental investment costs incurred in both setting up the US Procurement entity following the contract agreed in August 2011 with BAE Systems North America, and in establishing an insurance presence in the US. These adverse variances were offset to an extent by improved profitability in the Australian workers’ compensation business, in the South East Asian technology business, and in the Indian BPO offshoring businesses.

Statutory operating profit from continuing operations increased to £6.6 million (2010: statutory operating loss of £(3.1) million). Statutory operating profit includes the following:�� net exceptional costs of £31.8 million

(2010: £53.4 million), primarily relating to restructuring costs (£18.4 million) incurred in respect of the Four Part Action Plan, to the impairment of goodwill, intangibles and other assets (£14.6 million) and in respect of contract settlements of £1.2 million;

�� amortisation of acquired intangibles of £4.8 million; and

�� acquisition-related expenses of £nil.

The table overleaf sets out the reconciliation from statutory to adjusted operating profit for continuing operations.

Xchanging’s share of adjusted operating profit after tax for the year from continuing operations was £19.2 million (2010: £29.4 million).

Case study

Innovation

The challenge

YTL Telecommunications is the fastest growing 4G mobile internet with voice provider in Malaysia. Whilst impressive, such dynamic growth also creates its own challenges in areas including expertise and resourcing. With that in mind, the customer was keen to find a partner who could help it jointly leverage its 4G platform to the full.

The solution

Our contribution spans operations, consulting and architecture, implementation, business processing and marketing. We act in close partnership with the customer across all these areas.

The benefits

Xchanging provides:�� The primary vendor coordination role�� Control of technology management and end user

change management�� A service that guarantees availability and reliability�� Participation in innovation and architecture forums

that determine the business and technical roadmap�� Partnership for determining the growth of the

customer�� Faster monetisation through support for solutions

rolled out across YTL group companies


Operating and financial review continued

MarginsAdjusted operating profit margin for continuing operations was 6.6% (2010: 8.2%). Margins have decreased by 160 bps, driven by a decrease in adjusted operating profit margins in the Technology sector due to lower levels of high margin implementation revenue, and in the Procurement and Other BPO sector due to initial costs incurred following the contract signed with BAE Systems North America, offset by an increase in margins in Financial Services which benefited from the impact of cost savings in the year. Please refer to the business sector analyses for further details.

Earnings per share (‘EPS’)When considering EPS, the Group uses Xchanging’s share of adjusted profit from continuing operations to represent the performance of the business.

On this basis, adjusted basic EPS for the period was 8.01 pence (2010: 12.30 pence).

For a reconciliation of Xchanging’s share of statutory profit after tax to Xchanging’s share of adjusted profit after tax, as used to determine adjusted EPS, please refer to note 11 of this Annual Report.

Exceptional itemsThe Group recorded total exceptional items of £36.1 million (2010: £53.4 million). In 2011, these related to:�� restructuring costs of £18.4 million

incurred as part of the review of the Group’s overall cost base under the Four Part Action Plan;

�� impairment of goodwill, intangible and other assets totalling £14.6 million (see section below);

�� exceptional income relating to contract settlements totalling £1.2 million (2010: £6.9 million); and

�� exceptional finance costs of £4.3 million (2010: £nil) have been incurred in respect of the refinancing of the Group’s debt facility, dated 29 July 2011.

ImpairmentsFollowing a review of goodwill and other intangible and asset balances, impairment charges totalling £14.6 million have been recorded. These relate to:�� impairment of goodwill and other

intangible assets totalling £10.4 million, relating to the HR business, reflecting the anticipated impact on the business following notification received by BAE Systems of their intention not to renew a significant contract with effect from December 2012; and

�� £4.2 million impairment of an available-for-sale financial asset, on the basis that a sustained decline in value of the share price of the company in which Xchanging had invested is not expected to reverse, and the investment holds no further strategic value to the Group. The £4.2 million had previously been recognised through reserves, but has been recycled to the income statement in the current year.

Discontinued operationOn 1 June 2011, we announced the sale of our US workers’ compensation and third party administration business (‘US BPO’), of Cambridge Integrated Services Group Inc (‘CISGI’), to Sedgwick Claims Management Services Inc for £13.6 million. The sale included virtually all contracts, assets, employees, current liabilities and future service obligations of CISGI. This constitutes a discontinued operation, and the associated results and cash flows have therefore been presented separately on the face of the income and

Adjusted operating profit2011 (£m)

2010 (£m)

Statutory operating profit 6.6 (3.1)

Amortisation of intangible assets previously unrecognised by an acquired entity 4.8 4.7

Acquisition-related expenses – 1.1

Exceptional costs 31.8 53.4

–Contract settlements (1.2) (6.9)

–Impairment losses 14.6 57.8

–Restructuring costs 18.4 –

–Onerous contract provision – 2.6

–Gain from a bargain purchase – (0.1)

Adjusted operating profit 43.2 56.1

Company overview

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Other information


Earnings per shareAdjusted basic/diluted earnings per shareContinuing operations 2011 2010 Movement %

Xchanging share of adjusted profit after tax (£m) 19.2 29.4 10.2 34.7

Weighted average number of shares in issue (m) 239.5 238.9 (0.6) (0.2)

Adjusted basic earnings per share (pence) 8.01 12.30 4.3 34.9

Xchanging share of adjusted profit after tax (£m) 19.2 29.4 10.2 34.7

Weighted average diluted number of shares (m) 240.2 239.9 (0.3) (0.1)

Adjusted diluted earnings per share (pence) 7.99 12.25 4.3 34.8

Analysis by sectors

Segmental analysis

Insurance Services

£m

Financial Services

£mTechnology

£m

Procurement and other BPO

£mCorporate

£mGroup

£m

External adjusted revenue2011 External adjusted revenue 189.0 179.8 97.9 183.3 650.0

2010 External adjusted revenue 179.8 174.2 116.2 211.6 681.8

Variance 9.2 5.6 (18.4) (28.2) (31.8)

% 5.1 3.2 (15.8) (13.3) (4.7)

Adjusted operating profit

2011 Adjusted operating profit 36.6 12.3 7.0 7.2 (19.9) 43.2

2010 Adjusted operating profit 33.4 11.2 17.3 11.1 (16.9) 56.1

Variance 3.1 1.1 (10.3) (3.9) (3.0) (12.9)

% 9.4 9.6 (59.5) (35.4) (17.6) (23.0)

2011 Adjusted operating profit margin % 19.3 6.8 7.2 3.9 6.6

2010 Adjusted operating profit margin % 18.6 6.4 14.9 5.3 8.2

Sector segments2010

£m

2010 impact of 2010

acquisitions £m

Exchange rate effect

£m

Prior year like-for-like

£m

2011 impact of 2010

acquisitions £m

Underlying change

£m %2011

£m

Group

External adjusted revenue 681.8 (35.7) 3.9 650.0 45.2 (45.2) (6.9) 650.0

Adjusted operating profit 56.1 (4.5) (0.1) 51.6 0.9 (9.2) (17.9) 43.2

Insurance Services

External adjusted revenue 179.8 – 1.8 181.6 – 7.4 4.1 189.0

Adjusted operating profit 33.4 – (0.3) 33.2 – 3.4 10.3 36.6

Financial Services

External adjusted revenue 174.2 (23.5) 2.1 152.8 32.9 (6.0) (3.9) 179.8

Adjusted operating profit 11.2 (2.8) 0.1 8.6 1.2 2.6 29.9 12.3

Technology

External adjusted revenue 116.2 (12.1) (0.2) 103.9 12.2 (18.3) (17.6) 97.9

Adjusted operating profit 17.3 (1.7) (0.1) 15.5 (0.3) (8.2) (52.8) 7.0

Procurement and Other BPO

External adjusted revenue 211.6 – 0.2 211.8 – (28.4) (13.4) 183.3

Adjusted operating profit 11.1 – – 11.2 – (4.0) (35.7) 7.2

Corporate

Adjusted operating profit (16.9) – 0.2 (16.7) – (3.1) (18.7) (19.9)



cash flow statements. They are not included within the Group’s analysis of continuing operations, and prior year comparatives have been restated to allow for like-for-like comparisons.

Subsequent to the sale of our US BPO operations, on 27 September 2011, we announced that the residue of CISGI would be wound down by means of voluntary insolvency and put into an Assignment for the Benefit of Creditors (‘ABC’ process). All remaining assets and liabilities were assigned to the insolvency trustee.

The results of the discontinued operation show a statutory profit of £4.5 million for the period (2010: statutory loss of £(51.0) million). This includes an exceptional release of deferred income of £11.5 million on a significant contract termination, a loss on disposal from the ABC process of £(7.3) million (including £3.3 million relating to net exchange losses previously charged to reserves and now recycled through the income statement) and a profit on disposal from the transaction with Sedgwick of £11.8 million.

At an adjusted operating profit level, the results of the discontinued operation show a loss for the period of £(4.0) million (2010: loss of £(0.9) million).

Adjusted revenue and adjusted operating profit movement: like-for-like analysisThe table on page 31 shows the adjusted revenue and adjusted operating profit movements, by sector, excluding the impact of foreign exchange movements and acquisitions.

Analysis by sectorsSee tables on page 31.

Insurance ServicesFinancial highlights

20102011

0 200100n Adjusted operating profitn External adjusted revenue

Insurance Services external adjusted revenue increased 5.1% to £189.0 million (2010: £179.8 million), including a positive foreign exchange impact of £1.8 million related mainly to movements in the Australian Dollar. Adjusted operating profit increased 9.4% to £36.6 million (2010: £33.4 million), representing an adjusted operating profit margin of 19.3% (2010: 18.6%), with a £0.3 million adverse variance arising due to foreign exchange movements (positive movements in the Australian Dollar have been offset by adverse movements in the US Dollar).

Revenues for the sector increased due to a number of factors. The sector benefited from an increase in the volume of insurance premiums processed by our UK insurance businesses in the Lloyd’s market. In addition, the UK completed delivery of the Electronic Claims File project (‘ECF2’). The Australian workers’ compensation business benefited from both improved performance fees and discretionary payments received under the terms of their contract with the New South Wales state government, and from an increase in market share following the renewal of the contract with the Victoria state government, effective 30 June 2011. These positive movements were slightly mitigated by lower project development revenues in both the Broker Services and Premium Processing businesses.

The UK insurance entities have once again delivered a stable, and profitable, result for the year, with increased processing volumes mitigating the impact on margins of lower development revenues. In the Australian business, the benefit of incremental revenue has had a positive impact at the adjusted operating profit level, as performance fees have had a direct impact on profitability. These movements have been partially offset by investments made in the year on developing a global insurance strategy, and establishing a US presence for the Insurance Services sector. During the year, the sector incurred £0.9 million of exceptional restructuring costs.

We no longer expect the contract with the New South Wales state government to be loss-making in 2012, although the longer term profitability of this contract remains uncertain. Therefore, at the current time, no adjustment has been made to the carrying value of the onerous contract provision recognised in 2010 in respect of this contract (AUD4 million), which will be reassessed when the longer term outlook of the contract is known with more certainty.

Financial ServicesFinancial highlights

20102011

0 200100n Adjusted operating profitn External adjusted revenue

Financial Services external adjusted revenue was £179.8 million (2010: £174.2 million), including incremental revenues from 2010 acquisitions of £9.4 million, and a positive foreign exchange impact of £2.1 million. On a like-for-like basis, adjusted revenue was £146.8 million (2010: £152.8 million). Adjusted

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operating profit for the year was £12.3 million (2010: £11.2 million), representing an adjusted operating profit margin of 6.8% (2010: 6.4%), including the adverse impact of £1.6 million from acquisitions in 2010 and a favourable foreign exchange impact of £0.1 million. On a like-for-like basis, adjusted operating profit has increased 29.1% to £11.1 million (2010: £8.6 million).

Adjusted revenue for the year includes £3.9 million of incremental revenue in the year from the additional investment account administration volumes added to the Fondsdepot Bank (‘FdB’) platform in 2010 as a result of the acquisitions of FSB and SEB ISG, and £5.5 million of incremental revenue from Kedrios, the Italian Enterprise Partnership established with SIA-SSB during 2010.

In our securities processing business, Xchanging Transaction Bank (‘XTB’), the impact of indexation on key contracts has also had a positive impact on revenue for the year. The impact of this was offset however by contractual discounts offered to key customers by XTB. In our investment account administration business, FdB, a decline in overall investment account numbers and discounts on contractual prices with key customers has also adversely impacted revenue.

Overall profitability for the sector was impacted by the €3.9 million loss for the year generated by Kedrios. Although Kedrios has now been stabilised with new management and cost control measures, the business is still expected to remain loss-making during 2012.

On a like-for-like basis, the increase in profitability within the Financial Services sector has been driven by operational

Case study

Managed IT services

The challenge

As the world’s largest single runway airport, Gatwick is one of the busiest public places in the world and part of the UK’s Critical National Infrastructure. Following the acquisition of Gatwick by Global Infrastructure Partners in 2009, a £1 billion investment programme was announced. With over 25,000 users, and a disparate, legacy network with more than 300 wireless and over 700 network devices, there was a need to create a common IT infrastructure. Reducing the carbon footprint was another challenge. In order to make Gatwick the airport of choice for passengers and airlines, a common infrastructure was needed that was secure, scalable, reliable and fast.

The solution

Xchanging delivered a managed service for wired and wireless networks across the airport. A dedicated onsite delivery team were put in place as well as 24 hour, 365 day monitoring of services. New design principles rationalised ‘kit’ and reduced space. Operational and security improvements have been made with virtualisation technologies and enterprise class monitoring tools.

The benefits

As Gatwick’s Network Managed Services partner, Xchanging created a common infrastructure for the airport which provides greater visibility and control over IT. Powerful dashboards enabled our customer to gain control and act quickly to threats. We were able to improve the carbon efficiency through reducing power thus delivering the green IT Gatwick required. We delivered secure flexibility through wireless. The ultimate goal of improving the passenger experience has been addressed by Xchanging, one example being the development of mobile check-in desks to reduce queue time for passengers. A second contract means that Xchanging also provides the airport’s End User Computing Services – a move that enables the partnership to work more closely to deliver improved IT services to the airport’s customers.



improvements identified as part of the Four Part Action Plan, especially within XTB. In the current year, the sector incurred £7.8 million of exceptional restructuring costs. Restructuring the levels of senior management, and achieving other sustainable cost savings have offset the impact of lower revenue on margins for the current year. The sector has also benefited from lower depreciation charged in the year, due to lower levels of capital expenditure compared with levels of depreciation and amortisation in recent years.

Technology Financial highlights

20102011

0 15050 100n Adjusted operating profitn External adjusted revenue

External adjusted revenue for the Technology sector was £97.9 million (2010: £116.2 million), including incremental revenues of £0.1 million relating to the 2010 acquisition of DI, and an adverse foreign exchange impact of £0.2 million. Adjusted operating profit was £7.0 million (2010: £17.3 million) representing an adjusted operating profit margin of 7.2% (2010: 14.9%), including an adverse movement of £(2.0) million from 2010 acquisitions and an adverse foreign exchange impact of £(0.1) million.

A slow start to the year impacted results throughout 2011. Revenue contributions from new contracts won in 2010 with

Gatwick Airport Limited and YTL in Malaysia, as well as further growth noted from contracts with existing customers, including the London Metal Exchange, were offset by the delayed timing of expected revenue from our new insurance software product (Xchanging Insurance Application Platform, ‘XIAP’).

The decision was taken at the end of 2010 to exit the IT reseller programme in our data centre hosting business. With a negligible impact on profitability, and a beneficial impact on working capital, the decision to exit the reseller programme does however account for £12.5 million of the decline in organic revenue in the current year (2011: c. £3.5 million of reseller revenue; 2010: c. £16.0 million).

Profit for the Technology sector has fallen below expectation. Adjusted operating profit has been significantly impacted not only by the overall decline in revenue, but also by the mix of revenue recognised in the year. Declines in higher margin insurance software service revenue have been offset to an extent, but by lower margin hosting services revenue. The profitability of the sector has been further impacted by investment in our hosting and network services business at the start of the year ahead of anticipated revenue growth (which did not materialise), and by higher amortisation charges in the year, in line with the incremental investment over 2010 and 2011 in the Group’s software assets, including XIAP.

With the decline in revenue adversely impacting the profitability of the Technology sector, the cost structure was rationalised during the year in order to align the cost base with the changes in activity level. During the year, the sector recognised £3.5 million of exceptional restructuring costs.

Following on from this restructuring exercise, the business and management layers of the business have been revised to support a more flexible sales strategy, targeting intermediaries and partnering arrangements to develop further growth of the business. Further actions have been taken to leverage more offshore resources, improve resource utilisation, clarify the sales offering and refocus the sales effort. We are confident that the Technology sector can be more profitable going forward as a technology enabled business. A new Executive Director and a new Finance Director have been recruited to drive improved performance of the Technology business.

Procurement and Other BPOFinancial highlights

20102011

0 300100 200n Adjusted operating profitn External adjusted revenue

External adjusted revenue for this sector was £183.3 million (2010: £211.6 million), with marginal impact from foreign exchange rates. The revenue decline was driven by the lower labour volumes from government spending cuts in the UK impacting a key customer, although this was partially offset by the impact of significant new contracts signed with CHEP Europe in April 2010 and L’Oréal in August 2011. The sector also includes the results from the Group’s HR businesses,

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which were adversely impacted in the current year from the termination of a pensions service contract in 2010. New contracts with L’Oréal and BAE Systems North America contributed £1.4 million of revenue in the current year, as these contracts are in their start up phases.

Adjusted operating profit was £7.2 million (2010: £11.1 million), representing an adjusted operating profit margin of 3.9% (2010: 5.3%). Operating profit margins have been adversely impacted by the investment outlay in establishing the US Procurement business following the contract signed with BAE Systems North America in August 2011, and maturing contracts on certain key contracts. A further £1.8 million of investment expenditure was incurred in developing the procurement business in the US in the first half of the year. These costs have been recognised within Corporate costs (refer to the Corporate section below). Margins have however benefited from the reduction in the lower margin activity associated with defence spending, while the recent contracts signed with CHEP Europe and L’Oréal have both contributed to the sector’s profit for the year.

During the year, the sector recognised £2.9 million of exceptional restructuring costs.

CorporateCorporate costs for the year totalled £19.9 million (2010: £16.9 million). Included within the 2011 costs (and incremental to the 2010 numbers) is £1.8 million of expenditure on specific new business opportunities in the US. Subsequent to the half year, and following the finalisation of the contract with BAE Systems North America, these costs are now part of the ongoing cost base of the new US procurement entity. A further £0.8 million within Corporate

costs relate to employees previously considered part of the US BPO operations, but retained by Xchanging following the business’ sale to Sedgwick, and who transferred to form part of the Group’s business development team. During the second half of the year, these employees have either exited the business, or have now been allocated to sectors (notably Insurance Services) and will form part of their sector results going forward.

Corporate costs have been impacted in the year by costs associated with the exit of the Head Office premises, with the restructuring of the Group following the disposal of the US BPO operations, and with incremental investment in sales and marketing. The Corporate cost base has, however, benefitted from restructuring undertaken during the year, with a focus on reducing complexity in processes and rationalising headcount. Exceptional restructuring costs of £3.3 million were recognised in the current year. The prior year comparatives benefited from the release of accruals no longer required.

Net finance costAdjusted net finance costs (pre-imputed interest on put options of £0.7 million (2010: £0.8 million) and pre-exceptional finance costs of £4.3 million (2010: £nil)) increased from £3.7 million in 2010 to £4.1 million in 2011. The increase in net finance cost is due to a combination of having a higher margin applied to the Group’s debt facilities following the refinancing in July and re-denominating the currency of bank debt from US Dollar to Sterling.

£4.3 million of debt refinancing costs were written off during the year as the Group refinanced its debt facility in July 2011. Of this, £4.0 million of arrangement fees were incurred in the year, with £0.3 million

relating to pre-existing unamortised arrangement fees. The fees, which relate to arrangement, legal and advisory charges have been written off, and have been included as exceptional finance costs.

Adjusted cash conversionThe Group delivered a strong performance in the year for adjusted cash conversion, improving significantly to 114.8% (2010: 100.9%). This improvement reflects the increased focus on cash and cash management instilled as part of the Four Part Action Plan across the Group.

Cash flow Operating cash flow from continuing operations was £35.9 million (2010: £49.9 million).

Cash generated from continuing operations decreased by 23.6% to £61.1 million. The year on year decline in operational performance has not been fully offset by the efforts made to improve our management of working capital in line with the Four Part Action Plan.

The level of cash generated from operations in 2010 was adversely impacted by cash outflows in respect of the utilisation of previous restructuring provisions (outflow of £12.5 million). During 2011, £14.9 million of cash was spent on restructuring costs as part of the rationalisation of the Group’s overall cost base.

Dividend payments to non-controlling interests were £7.7 million (2010: £8.5 million).

Equity free cash flow for the year was £21.3 million (2010: £33.8 million). No dividend was declared or paid in relation to 2010 (2010: a dividend of £6.6 million was paid in respect of 2009).



Net expenditure on acquisitions in the year was £9.7 million (2010: inflow of £1.7 million), £5.0 million of which related to deferred consideration for the 2010 acquisition of DI, £4.0 million to the

acquisition of the remaining 50% of Xchanging Broking Services Limited from AON Limited, and £0.9 million to an interim payment of the Fondsdepot Bank put option.

Overall, the net cash position improved by £11.7 million compared with 2010. The Group’s cash position has benefited from the sale of the loss-making US BPO business, suspension of the dividend

2011 £m

2010 £m

Adjusted operating profit 43.2 56.1

Add backs and exceptionals (36.6) (59.2)

Depreciation and amortisation 33.4 34.0

Impairments 14.6 57.8

Loss on disposal of assets 0.9 0.6

Share-based payment expenses 3.3 2.0

58.8 91.3

Working capital movement 2.5 2.9

Pensions (0.6) (0.6)

Provisions 0.4 (13.6)

Cash generated from continuing operations 61.1 80.0

2011 £m

2010 £m


Dividends to non-controlling interests (7.7) (8.5)

Net capital expenditure (17.5) (21.6)

Operating cash flow from continuing operations 35.9 49.9

Tax (9.7) (14.1)

Interest (4.9) (2.0)

Free cash flow from continuing operations 21.3 33.8

Free cash flow from discontinued operations (8.3) (17.4)

Ordinary dividends – (6.6)

Cash flow after interest, tax and dividends 13.1 9.7

Acquisitions and disposals (4.5) 2.2

Proceeds from sale of shares – 2.1

Foreign exchange movements 3.1 (1.2)

Movements in net cash 11.7 12.7

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payment in 2011, improved working capital management and lower levels of capital expenditure. Net cash at the end of the period was £45.2 million (2010: £33.5 million).

Capital expenditureOur net capital expenditure for continuing operations for the year was £17.5 million (2010: £21.6 million), representing 2.7% of adjusted revenue (2010: 3.2%) and 61.2% of depreciation and amortisation, excluding amortisation on assets previously unrecognised by an acquired entity (2010: 74.7%). In 2011, Xchanging invested in further developing our Technology sector insurance software product XIAP, and progressed in building our additional Indian processing centre in Shimoga.

Funding, distribution policy and dividendsFunding for sustaining investment and organic growth is met initially from operating cash flow. Our equity free cash flow and available debt finance determine the funding available for acquisitions and distributions.

To ensure that we have sufficient cash to fund future growth, it remains prudent to conserve cash, and therefore the Board has decided not to pay a dividend for 2011. Resumption of the payment of a dividend will be reviewed by the Board at the 2012 Half Year.

Treasury managementAll of our treasury activity takes place within a formal control framework, under policies approved by the Board. We monitor compliance with these policies and guidelines through regular reporting of treasury activities.

Case study

A superior procurement service

The challenge

For almost a decade, Xchanging had managed car fleet procurement for SELEX Galileo. The customer then became part of the Finmeccanica Group and the vehicle fleet reduced in size dramatically. As fleet is a volume-based category, our challenge was to deliver comparable savings and service to those which the customer had enjoyed under their previous procurement contract.

The solution

Skilled negotiation from Xchanging’s trading team with manufacturers, dealers and fleet leasing companies secured vehicles for the new contract at a similar price to the previous one. To ensure that the service remained bespoke, an extranet portal was built for SELEX Galileo’s employees to obtain quotes online, and a unique telephone line was set up. This gave employees the opportunity to make an informed decision about their next fleet vehicle and the convenience of ordering online or over the phone.

The benefits

We ensured that SELEX Galileo remained in the élite sector that is usually reserved for fleets in excess of 1,500 vehicles despite a smaller fleet volume. We also kept fleet management trouble-free for the customer and removed much of their administrative burden. In addition, a saving of more than 10% of total spend was delivered.



The treasury function’s primary responsibilities are to procure our capital resources and manage our liquidity, foreign exchange and interest rate risks on a Group-wide basis.

Borrowing facilitiesOn 29 July 2011, the Group successfully agreed the refinancing of its term loan and revolving credit facilities, and extended the maturity for a period of four years to August 2015. The revolving credit facility remains at £75.0 million. The USD26.0 million term loan was redenominated into Sterling and increased to £20.0 million. At 31 December 2011, £20.0 million (2010: USD34.0 million) was drawn under the term loan and cash

drawn under the revolving credit facility was £28.0 million (2010: USD45.0 million). Bank guarantees of €20.0 million (£16.8 million) and USD2.7 million (£1.7 million) were also drawn against the revolving credit facility (2010: £17.1 million).

The Group has a £10.0 million uncommitted overdraft facility linked to its UK notional cash pooling arrangement.

In addition to the above facilities, there is a working capital facility of INR330.0 million (£3.9 million) provided to Xchanging Technology Services Private Limited in India. The amount outstanding at the year end date was £2.9 million (2010: £nil).

The Group also has non-fund based facilities for the provision of bank guarantees. At the year end date, £2.6 million of guarantees had been issued.

During the year the Group repaid all bank term loan and working capital facilities provided to Cambridge Solutions Limited and there were no outstanding balances at 31 December 2011 (2010: £5.1 million).

At 31 December 2011, the Group had £28.5 million (2010: £28.8 million) of headroom under its committed debt facilities.

Headroom under committed and uncommitted credit facilities

As at 31 December 2011

Committed facilities

£m

Uncommitted facilities

£mTotal

£m

Total facility

Xchanging 97.5 13.9 111.4

Cambridge 0.1 – 0.1

Enterprise Partnerships – – –

Cash drawings

Xchanging (48.0) (2.9) (50.9)

Cambridge – – –


Letters of credit and bank guarantees

Xchanging (21.0) – (21.0)

Cambridge (0.1) – (0.1)


Headroom

Xchanging 28.5 11.0 39.5

Cambridge – – –


Total headroom 28.5 11.0 39.6

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We expect to be able to finance our current business plans from ongoing operations and our committed funding facilities.

Borrowing covenantsThe Group is subject to covenants, representations and warranties commonly associated with corporate bank debt for its term loan and revolving credit facilities.

As at 31 December 2011, there were financial covenants associated with the committed debt facilities relating to leverage, interest cover and debt service. The Group was compliant with all three covenants:

�� the ratio of consolidated borrowings to Xchanging’s share of consolidated profit before depreciation and amortisation (pre-exceptional items) must not exceed 2.0 times. As at 31 December 2011, the ratio was 1.1 times;

�� the ratio of Xchanging’s share of consolidated profit before depreciation and amortisation (pre-exceptional items) to net consolidated finance charges must not be less than 6.0 times. As at 31 December 2011, the ratio was 18.4 times; and

�� the ratio of net cash flow to UK cash pool debt service must not be less than 1.0 times. As at 31 December 2011, the ratio was 3.0 times.

Levels of borrowing and seasonalityXchanging operates in a wide range of markets and locations and, as a result, the seasonality of our borrowing requirements is relatively low. Underlying cyclicality before capital expenditure is driven principally by collections of dividends and royalties from Enterprise Partnerships and scheduled repayments under the term loan facilities.

During 2011, the lowest level of net cash was £6.8 million (2010: net debt £(7.0) million).

Consolidated net cash2011

£m2010

£m

Cash

Xchanging 30.3 8.0

Cambridge 4.9 11.7

Enterprise Partnerships 62.9 71.4

98.1 91.1

Bank loans and overdrafts

Xchanging (50.9) (50.8)

Cambridge – (5.1)

Enterprise Partnerships – –

(50.9) (55.9)

Finance lease and other debt

Xchanging (1.8) (1.1)

Cambridge (0.2) (0.6)

Enterprise Partnerships – –

Net cash (including finance lease liabilities) 45.2 33.5


Cash balancesWe invest surplus cash to maximise return, within liquidity and counterparty credit constraints that have been approved by the Board.

The majority of our wholly owned UK entities are included in a notional pooling arrangement, to optimise liquidity management. We review the efficiency of our other cash balances on a monthly basis.

The aggregate cash balances in Enterprise Partnerships represents working capital, accumulated but unpaid distributions to the Group and, in the case of FdB, customer cash deposits. Although subject to timing variances, as a general statement we would expect the aggregate cash balance to remain relatively stable as a high proportion of Enterprise Partnerships’ equity free cash flow is distributed to the Group. In 2011, total distributions from the Enterprise Partnerships to the Group exceeded their aggregate equity free cash flow due to the phasing of licence fee collections from XTB.

Approximately £15.1 million of the cash balance in Enterprise Partnerships at the year end represented accrued but unpaid licence fees that are expected to be paid to the Group in 2012, and a further £9.7 million is expected to be paid to the Group in 2012 as dividends in respect of 2011 performance. A further £11.6 million represented cash placed in customer deposit accounts offered by FdB for which an equal liability is recognised (2010: £10.4 million). The remaining cash balances in the Enterprise Partnerships represent dividends due to non-controlling interests and working capital.

Foreign currency translation exposureWe do not hedge foreign currency profit and loss translation exposures and our reported results may therefore be affected by currency fluctuations.

Foreign currency transaction exposuresWe are subject to foreign exchange transaction exposure in our Indian operations, where revenues are generated in Sterling, US Dollars and Euros and the cost base is primarily in Indian Rupees. The principal transaction exposures arising during 2011 included Sterling revenue of £23.0 million and US Dollar revenue of USD24.5 million. Under our foreign exchange risk management policy, exposures may be hedged with forward foreign exchange contracts when the underlying cash flows are deemed to be highly probable. Typically, we will look to hedge revenue to protect operating cash flow and to support the planning cycle. Foreign exchange contracts hedging revenue against the Indian Rupee amounting to £4.8 million and USD4.8 million were outstanding at the year end (2010: £nil).

Interest rate risk managementThe Group reviews its interest rate exposure against acceptable risk profiles on a periodic basis and may enter into interest rate swap agreements in order to achieve an acceptable balance of fixed and floating rate interest exposure. At 31 December 2011 all drawn debt was subject to floating rate interest.

PensionsThe Group has three funded Defined Benefit Schemes in the UK, all of which are closed to new members. The Group works closely with the trustees of the

schemes to manage risk in the schemes and, during 2012, will review the investment strategy on all three schemes, following the completion of the actuarial valuation exercises.

The cash contribution to the UK plans (Insurance Services and Technology sectors) includes £1.9 million per year in respect of recovery plans agreed with the trustees on two UK Plans, one in 2008 and the other in 2011. Recovery plans are agreed on completion of the triennial actuarial valuations and therefore new recovery plans for two UK schemes that currently have valuations underway will be put in place during 2012 following discussions with trustees. It is expected that contributions in respect of the UK defined benefit schemes during 2012 will be £5.4 million (of which £1.8 million is expected to be funded from UK Enterprise Partnerships, and the remainder from a wholly owned subsidiary) and these figures include the anticipated level of deficit recovery payments.

Around 60 UK employees are members of various BAE Systems defined benefit pension schemes; however, the contributions made by the Group to the BAE Systems schemes can only vary in respect of future service contributions and are therefore accounted for on a defined contribution basis. The Group has various indemnities in place with BAE Systems and therefore could only be exposed to deficits in the BAE Schemes in the event that BAE Systems were to become insolvent.

In Financial Services, the Group operates various unfunded defined benefit plans, the largest of which is supported by a Contractual Trust Arrangement (‘CTA’). The CTA investment strategy adopted by


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the Group seeks to match asset movements to changes in the value of the liabilities. It is expected that contributions in respect of the Financial Services defined benefit schemes during 2012 will be £2.8 million (all of which is expected to be funded from Financial Services Enterprise Partnerships).

The Group works closely with the trustees of each of the pension plans to manage the risks associated with the defined benefit pension provision. The factors that most affect the value of the liabilities are interest rate and longevity, and the Group’s sensitivity to these particular risks is shown in notes to the accounts.

Capital structureThe Group seeks to maintain a strong credit profile to aid its ability to partner in business and will aim not to exceed consolidated borrowings of 2.0 times Xchanging’s share of consolidated profit before depreciation and amortisation. In order to achieve its desired capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders and adjust asset holdings to reduce or increase debt.

Regulatory capitalXchanging operates in a number of regulatory regimes. The key businesses affected by regulatory requirements are XTB and FdB, which conduct securities processing and retail investment account administration in Germany. They both maintain full banking licences and are regulated under the German Federal Financial Supervisory Authority (BaFin). Sufficient regulatory capital must be held in these entities to cover the operating and credit risks of the business. The

regulatory capital requirement is based on market, operating and credit risk factors applied to asset classes. The regulatory capital in the business is calculated as total equity less total intangible assets. There is no obligation to set cash aside to meet regulatory capital requirements but funding may be required from the holding company if the required regulatory capital is less than the calculated regulatory capital.

No additional regulatory capital was contributed to the German banking group during 2011.

Components of the Insurance Services business are regulated in the United Kingdom by the Financial Services Authority (‘FSA’).

Weighted average cost of capitalThe Group uses a weighted average cost of capital of 10%.

TaxationThe Group’s effective tax rate on adjusted operating profit from continuing operations was 36.3% (2010: 29.2%).

The cash tax rate on adjusted profit from continuing operations was 34.5% (2010: 28.7%).

The 2011 rates have been adversely affected by losses in Italy and the US, where no tax benefit has been recognised, by profits arising in overseas jurisdictions with higher tax rates and by other non-deductible items.

The statutory tax charge and tax rate have been distorted by the effect of restructuring and by the discontinuance of the US BPO business, which have been treated as exceptional. Planning

has been undertaken to mitigate the associated cash tax costs.

Non-controlling interestsIn 2011, the profit after tax for total operations attributable to non-controlling interests was £4.8 million (2010: £7.5 million).

Non-controlling interest calculations for the Group’s Enterprise Partnerships are dependent upon the individual contractual terms. Some define adjustments in relation to certain items prior to calculating profit share based on the percentage share ownerships. These may include, for example, adjustments for differences between local and international accounting standards, and adjustments for any discounts or fees payable between parties.

Major accounting judgementsFor details of major accounting judgements, please refer to note 3 of this Annual Report, on pages 80 to 93.

David BauernfeindChief Financial Officer1 March 2012


1 2

People: Values recognition awards

These will provide recognition to individuals within the business who have made a particularly distinguished contribution to our development over the course of the year, as judged against each of our six corporate values.

As Xchanging emerges from a year of transformation our Values are an integral part of creating ‘One Xchanging’ as we compete to win.

It is important that we recognise the extent to which our Values are being embedded culturally, and their impact on Group performance. We will be delivering the Values recognition awards twice a year.

In each Values category, gold, silver and bronze awards are made.

The first winners of the gold awards were:

Customer FocusNigel Owens (1)Contribution towards securing LME contract renewal

ExcellenceJeremy CampbellSteve ReidWork supporting customer relationship with Lloyd’s

InnovationMani GopalaratnamGenerating new ITO business and progressing YTL account

We have this year introduced new employee awards linked to our Values.

IntegrityChris Pegler (2)Bev Stone (3)Restructuring of the Technology business

People Rakesh Pandey (4)Effective leadership in winning new business

Speed and EfficiencyGary Whitaker (5)Julian TurnerCara CunninghamVinod Goel (6)Rapid and effective execution of US BPO business sale

3 4

5 6

2

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Headcount

20112010200920082007

0 2,500 5,000 7,500 10,000

■ Corporate■ Insurance Service■ Financial Services■ Procurement

Services■ Technology

Services■ Offshore Services

Corporate social responsibility

Delivering our business responsibly Corporate social responsibility (‘CSR’) is fundamental to the way we plan and run our business, and is closely aligned with our Values. We divide CSR into four categories: people, environment, communities and marketplace.

Headcount by sectorPeople2011 has seen a period of change for our people. We are evolving into an organisation that is stronger, leaner and more focused. In March, a campaign was launched to focus our people on this change journey and our Four Part Action Plan, and in July we launched our new Values. These Values reflect what Xchanging stands for, what we believe in, and most importantly, how we behave.

Our new Values represent six key behaviours around: Customer Focus, Innovation, Speed and Efficiency, People, Excellence and Integrity. All six have been chosen because they define what is important to us. We recognise that changing the way people work requires investment and commitment at all levels in the organisation. To support this we have launched a programme of change across our business that is committed to delivering a series of projects that move us towards closer integration of our global business, creating value and growing our business and ensuring that Xchanging is a place that people want to work. These projects are involving our people at all levels in the organisation.

Following the 2010 enhancement of our performance development review process and the increased rigour of objective setting, we have continued to invest in the development of our people. We have developed and launched three bespoke Talent Programmes which provide focused development for identified groups of high potential leaders to improve their readiness to succeed in larger business leadership roles. The programmes include participants from across our global businesses and include facilitated sessions by faculty from top business schools.

We have held employee focus groups across all Xchanging locations and responded to the feedback in multiple ways. We have ensured priority topics were included in our change programme, and have introduced more regular communication at all levels across the organisation. We have quarterly global webinars hosted by members of the Executive Board and each business area has a schedule of regular communications to their teams. We have regular ‘news flashes’ that keep all employees updated on activities within the organisation, from business changes to corporate social responsibility and charity events. Two-way communication is very important to us and we encourage all employees to use ‘Ask Xchanging’ which ensures that all questions Xchanging people may have are answered openly and honestly by the leadership team.

EnvironmentAll of our business operations apply Xchanging’s environment policy in order to minimise the impact on the environment.

Xchanging’s most significant environmental impacts are: �� Greenhouse gas emissions

as a result of our energy use. �� Greenhouse gas emissions

from business travel.�� The production of waste

going to landfill.�� The environmental impact

of our suppliers.

Our carbon footprintWe have published our carbon footprint each year since 2008. In 2011 Xchanging saw a reduction of approximately 7% or 1,515 tonnes in its carbon footprint relative to the previous year on a like-for-like basis (ie excluding the influence of discontinued operations and annual updates to emission factors).


GHG Protocol scope 20091

2010 includes US BPO

operations

2010 – adjusted for

comparability 2011

Scope 1 931 2,185 1,978 1,817

Scope 2 10,925 22,711 15,800 15,789

Scope 3 3,218 4,626 4,547 3,204

Total 15,075 29,521 22,325 20,810

Employees (average monthly)* 8,601 8,508 8,503† 7,930

* Average monthly number of persons (including Executive Directors) employed by segment.

† Inclusive of US employees – 2011 employee numbers will also include some US employee data.

1 2009 carbon footprint excludes the employees we gained as a result of the acquisition of Cambridge Solutions.

Calculated using the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard. Includes actual and estimated data for all offices operated by Xchanging. Excludes sites where employees are working on customer sites. Based on Scope as defined below.

Scope 1 – Direct emissions resulting from activities within Xchanging’s operational control. Includes on-site fuel combustion, refrigerant losses and company vehicles.

Scope 2 – Indirect emissions from electricity purchased and used by Xchanging.

Scope 3 – Indirect emissions other, including Xchanging’s employee business travel, and hired transportation during the period under review.

Carbon Disclosure Project (‘CDP’)Xchanging participates in the Carbon Disclosure Project and continues to review the most professional approach to corporate governance, in respect of climate change disclosure practices.

CommunitiesWe support the communities in which we operate, with an approach aligned to our people value of creating value and being empowered to make a difference, and our Integrity Value of being dependable, responsible and committed to being open, transparent, honest and direct in all our activities.

This means that we look to create long-term sustainable relationships with our communities, and focus on projects linked to youth and education. For example, our partnership with Vinoba Vidyalaya, a school in Shimoga, India, has a direct and positive impact on the Shimoga community. In 2011, Xchanging employees raised £11,972 for Vinoba Vidyalaya.

Each of our sites supports local charities, as well as national partners including Children in Need. In 2011, we donated our call centre facilities to the BBC and over 100 of our employees volunteered their time to take calls.

We are primarily focused on supporting youth and education and in 2011 we supported 24 charities worldwide. In the UK we continued to support our local educational charity partners, working

and meeting the needs of their customers. Our Service professionals manage our relationships with our customers and we invest a considerable amount of time obtaining feedback on our service delivery. We track this feedback in a consistent and measured way.

Many of our customers have sustainability agendas. They are keen to reduce their environmental impact and to ensure that their business operates in a sustainable and ethical manner. Xchanging has a part to play here. For example, the London Insurance Market use the Insurers’ Market Repository in support of electronic premium and policy submissions, to reduce the use of paper by over 90%. This is one example of our search for opportunities to reduce wasted capacity and lower the energy consumed by our customers.

SuppliersWe are committed to working with suppliers who respect our ethical and environmental standards. As a result, we have rolled out an ethical supply programme in our UK and German operations. We invited our suppliers to complete an online survey and sign up to our supply policy. The programme is based on ethical principles, such as environmental protection, anti-corruption standards, and labour and human rights.

Managing our responsibilitiesOur CSR Committee is responsible for setting the strategy for our CSR programme and overseeing its performance.

Corporate Social Responsibility CommitteeMembersChairman – Gary Whitaker(Company Secretary)People – Daniel Kasmir(Chief Human Resources Officer)Environment – Matthew Denham(Trading Director)Communities – Sally Bell(Internal Communications Manager)Market place – Gary Whitaker(Company Secretary)Communications – Alexandra Hockenhull(Group Head of Communications and Investor Relations)

with schools and colleges to introduce students studying business, IT or finance-related A-levels or equivalents to the world of work.

Our volunteering programme has seen 1,563 hours donated by employees in activities based around our commitment to youth and education, the local community and the environment. We believe that all of our employees have the skills and experience to make a real difference and that this is also an excellent opportunity for personal development.

Charitable donations Donations to various international, national and local charities amounted to £53,000. No donations were made to political parties.

MarketplaceWe aim to achieve long-term sustainable relationships with all of our customers and suppliers. Our Values, the Ethical Code of Business Conduct and other relevant policies (which together form part of our compliance with the requirements of the UK Bribery Act 2010) support what we expect of our people and their interactions with our customers and suppliers. We aim to be honest, transparent and ethical in all our interactions.

CustomersWe deliver our services to customers in 43 countries. Understanding our customers is critical to providing excellent service. Our aim is to transform our customers’ services, adding value to their operations

Corporate social responsibility continued

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Other information


Programme Management – Melanie Wheeler(Corporate Programme Manager)

Key areas of responsibility�� Determining the strategy for the

Xchanging Corporate Social Responsibility (‘CSR’) programme across the Group.

�� Ensuring that each member of the Group complies with the CSR programme.

The CSR Committee met twice during 2011. The CSR Committee seeks advice from external industry specialists on specific issues as required.

Xchanging monitors and measures its performance on a range of CSR activities through internal Quarterly Business Reviews (‘QBRs’).

In addition, each major location has a CSR champion. They are responsible for implementing our CSR programme and together they form our Group-wide CSR network.

Performance reportingWe monitor our CSR performance through our regular CSR Committee reviews.

FTSE4Good We are pleased that Xchanging remains part of the FTSE4Good Index Series for the fourth consecutive year. FTSE4Good has been designed to measure the performance of companies that meet globally recognised corporate responsibility standards.

Our people

Leading Edge Programme

The challenge

Succession management is a key factor in building corporate confidence – especially in a context of rapid and turbulent change. We needed to identify and develop a pool of senior talent from across the business, ensuring that a wider range of leaders were equipped with the capabilities and experience required of executive roles.

The solution

We introduced the Leading Edge Programme. Participants were selected from across the business and each region. A long-term development programme was designed to include work with business psychologists, experience with a number of top business schools, executive coaching and opportunities to work with the current Executive Board on a range of live, strategically important issues. Each element of the programme was specifically tailored to meet the carefully identified needs of each participant.

Benefits

All participants are committed to robust personal development plans; each has a range of new tools and techniques to improve their skills in areas like influencing, strategy formulation, innovation, leading change and organisational transformation, which they are applying now and each has contributed to a live strategic challenge, sponsored by the Executive Board, providing real solutions to current challenges.


Geoff UnwinChairmanGeoff Unwin joined the Board in December 2011 and was appointed Non-executive Chairman on 1 January 2012.

He is Chairman of the Nomination Committee and a member of the Remuneration Committee.

Geoff started his business career in 1963 with Cadbury Schweppes plc but has spent most of his career in the IT services industry. In 1968 he joined Hoskyns Group plc, a UK-based computer services company; he was appointed Managing Director in 1984, and took the company public in 1986 before becoming Executive Chairman in 1988.

Cap Gemini acquired Hoskyns in 1990 and Geoff became Chief Executive Officer of Cap Gemini Ernst & Young until January 2002 and remains on the board of Cap Gemini as a Non-voting Director. He is Chairman of Halma plc, Taptu Ltd, OpenCloud Ltd and sits on the advisory board of the private equity group, Palamon where he chairs one of their investments, RD Card Holdings Ltd. He was formerly Chairman of United Business Media plc, as well as several private equity backed companies, mainly in the technology sector.

Ken LeverChief Executive OfficerKen Lever joined Xchanging as Chief Financial Officer in October 2010 and became acting Chief Executive Officer in February 2011. He became Chief Executive Officer in June 2011.

Ken’s career has developed in two separate phases. Initially Ken progressed through the accounting profession with Arthur Andersen becoming a partner in 1985. Since 1987 he has served as a public listed company director initially with Corton Beach plc, a small conglomerate, where he was Finance Director and then Group Managing Director and then as Finance Director of Alfred McAlpine plc, the international construction services group, Albright & Wilson, the global chemicals group and then he spent eight years with Tomkins plc, the global engineering and manufacturing group listed on the London and New York Stock Exchanges. Ken then moved into the role of Chief Financial Officer of Numonyx BV, based in Switzerland. Ken left Numonyx at the end of September 2010 following the successful sale of the business.

Ken has previously had a number of Non-executive roles and is currently a Non-executive Director of FM Insurance Company Limited, the subsidiary of FM Global.

Ken is a member of the UK Accounting Standards Board.

David BauernfeindChief Financial OfficerDavid Bauernfeind was appointed Chief Financial Officer in June 2011.

A qualified chartered accountant, David Bauernfeind began his career in the audit discipline with Deloitte and Touche, before gaining experience with Johnson Matthey PLC and progressing to Head of Audit with Airbus.

In September 1998, David joined BAE Systems where he became financial controller (Defence) with responsibilities including acting as the commercial lead in the creation of an HR shared services joint venture with Xchanging.

David joined Xchanging HR Services in April 2001 to oversee this JV, delivering HR services to 50,000 BAE Systems Group employees and 100,000 pensioners. Over the subsequent decade, he has acquired extensive financial and operating experience of the various areas of the business having worked in almost all of them in senior financial positions. In his current role as Chief Financial Officer (Xchanging plc), David is responsible for the administrative, financial and risk management functions of the group, including the development of financial and operational strategy, the creation and monitoring of control systems to preserve company assets and the reporting of accurate financial results to shareholders.

Dennis MillardSenior Non-executive DirectorDennis Millard joined the Board in 2005 as a Non-executive Director and is currently Chairman of the Audit Committee and Senior Non-executive Director. He is also a member of the Remuneration and Nomination Committees.

Dennis is currently Chairman of Halfords Group plc and Smiths News plc and Senior Independent Non-executive Director and Chairman of the Audit Committee of Debenhams and Premier Farnell plc. He was previously Finance Director of Cookson Group plc. He holds an MBA from the Graduate School of Business of Cape Town University and is a member of the South African Institute of Chartered Accountants.

Board of Directors

Company overview

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Other information


Pat O’DriscollNon-executive DirectorPat O’Driscoll joined the Board in November 2008 as a Non-executive Director. She is a member of the Remuneration Committee and was previously Chairman of the Remuneration Committee until February 2012. She is also a member of the Audit and Nomination Committees.

Pat is currently an operational Managing Director with Terra Firma Capital Partners Ltd. She was CEO of Northern Foods plc and ran Shell’s European retail business. She is also a trustee of the Cherie Blair Foundation for Women and mentors young women in business.

Michel PaulinNon-executive DirectorMichel Paulin joined the Board on 1 January 2010 as a Non-executive Director.

Michel is a member of the Audit and Nomination Committees.

Michel is currently COO at the Louis Dreyfus Group’s major commodity trading business. He is also an Independent Director of Bull S.A. Michel recently held the position of Chief Executive Officer of Neuf Cegetel.

Bill ThomasNon-executive DirectorBill Thomas joined Xchanging’s Board of Directors as a Non-executive Director on 1 December 2011. He became the Chairman of the Remuneration Committee on 8 February 2012 and is a member of the Audit and Nomination Committees.

Bill led Hewlett Packard’s EMEA Enterprise Service business, most recently as Senior Vice President, having been Executive Vice President at EDS where he was a corporate officer and member of the Executive Committee. Amongst other roles he chairs the Advisory Board of the Cranfield School of Management.


Ken LeverChief Executive OfficerSee biography on page 46.

David BauernfeindChief Financial OfficerSee biography on page 46.

Joerg BrandExecutive Director, Financial ServicesJoerg was appointed Executive Director Continental Europe and member of the Xchanging Executive Board in March 2011.

Before joining Xchanging, Joerg was a member of Deutsche Bank’s corporate finance M&A team in their London office. Prior to this, Joerg held a number of banking and corporate finance positions with Dresdner Kleinwort and Dresdner Bank in London, Luxembourg, New York and Buenos Aires.

He joined Xchanging in 2002 where he was responsible for business development. Joerg was one of the main drivers for the successful execution of the XTB Enterprise Partnership transaction with Deutsche Bank and he played a leading role in securing Xchanging’s second enterprise partnership in Germany with Allianz Global Investors in 2007.

Joerg holds a Master of Science in Finance from the London Business School.

Daniel KasmirChief Human Resources OfficerDaniel joined Xchanging in July 2009. He has prior experience working with large global organisations across a range of industries. He has held senior HR positions at Shell, Manpower, The Caudwell Group and BDO.

His specialist HR background, strategic and operational experience and knowledge is important in engaging Xchanging’s geographically diverse workforce as well as ensuring our operations are leading edge. Daniel holds a degree in Economics and International Relations from the London School of Economics.

CEO Support Group

Sebastian RitzTechnology

Subramanian GopalaratnamInnovation

James KrugerImplementation

Max PellLondon Insurance Market Operations

Stephen ScottSales & Marketing

Gary WhitakerLegal & Company Secretariat

Alexandra HockenhullCommunications & Investor Relations

Rob MyersOperations

Jon StratfordStrategy & Corporate Development

Executive Board

Company overview

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Other information


Andrew Binns Executive Director, TechnologyAndrew joined Xchanging in January 2012 as Executive Director for the Technology Services business and is a member of the Executive Board.

Andrew’s career spans 27 years in the IT industry in outsourcing and consulting services. He has held positions with global responsibility within multinational companies spanning software, technology services, management consultancy and start-up ventures.

Prior to Xchanging, Andrew was CEO of global services at Temenos Group: a market leading provider of packaged banking software. Other senior roles include being Managing Director of Aon BPO and Consulting, CEO of software company Netengines and Managing Director of the EMEA outsourcing business of Digital Equipment Corporation (now Hewlett Packard).

Nimish SoniExecutive Director, Offshore Services – AsiaNimish Soni joined Xchanging following Xchanging’s acquisition of Cambridge Solutions Ltd. Prior to his current role, Nimish held the position of Managing Director for the BPO and ITO Divisions of Xchanging India.

Nimish brings entrepreneurial experience and deep knowledge of the Banking, Financial Services and Insurance (‘BFSI’) industry and Indian market. He founded Cambridge BPO (formerly known as ProcessMind) in 2001. Prior to founding ProcessMind, Nimish set up a captive centre in India for American Financial Group. He started his career with a five year period with Cap Gemini in USA.

Nimish holds a bachelor’s degree in Mechanical Engineering from UVCE, Bangalore and a Masters Degree in Manufacturing Systems from The University of Cincinnati, USA.

Jane TutokiExecutive Director, Insurance ServicesJane Tutoki joined Xchanging in November 2010 from her position as Chief Claims Officer at Zurich Financial Services. She had previous leadership roles at the Farmers Insurance Group and before that at the Hartford Insurance. Jane is responsible for delivering the strategy and financial performance across Xchanging’s international insurance businesses.

Jane began her affiliation with the insurance industry as a trial lawyer performing defence work for numerous insurance companies, then becoming in-house counsel for the Continental/CNA insurance company before joining The Hartford in 1993.

Jane holds a law degree (Juris Doctor) from the University of Pittsburgh and a Bachelor’s degree in management from Seton Hill College. She is admitted to practice law before the Supreme Courts of Pennsylvania, New York and the US Supreme Court and has a CPCU designation.


Directors’ report

The Directors present their report and the audited financial statements of the Group for the year ended 31 December 2011

Principal activities and business reviewThe Group’s principal activities are the provision of a range of industry-specific processing services to the banking and insurance industries as well as technology, human resources and procurement services across industries. The Company acts as the holding company for the Group.

The Companies Act 2006 requires Xchanging to present a fair review of the Group’s business and a description of the principal risks and uncertainties facing the Group. The information which fulfils these requirements is provided in the sections of the Annual Report entitled Chairman’s statement, Chief Executive Officer’s statement, principal risks and uncertainties in 2011 and operating and financial review, on pages 16 to 41, providing detailed information on the Group and its strategy, the operation of the businesses, and the results and financial position for the year ended 31 December 2011. These report on the principal risks and uncertainties facing the Group, trends and economic factors impacting the business and likely future developments.

Results and dividendsThe Board resolved on 28 February 2012 that no dividend would be recommended in respect of the year ended 31 December 2011.

Research and developmentThe Group incurs development costs in the design of processes and systems that substantially improve those already installed in the Enterprise Partnerships and used in other parts of the Group, which include business process mapping, process reorganisation and software development.

The amount capitalised in the year in respect of development expenditure was £3.9 million (2010: £7.9 million).

BranchesThe Group has a branch of its procurement business which operates in Spain.

Charitable donationsDonations to various international, national and local charities amounted to £53,000 during the year (2010: £100,000). No donations were made to political parties.

Directors and their interests Details of changes to the Board during the year, and up to the date of this report, are set out on page 53.

The Directors’ interests in the shares and share options of the Company are shown on page 68.

Significant agreementsThe key customer and supplier contracts and other arrangements essential to the Group are described throughout the business review. Xchanging does not consider itself to be dependent on a single key supplier.

Significant agreements – change of controlUpon a change of control (as variously defined in the respective agreements outlined below) of Xchanging plc, a number of significant agreements take effect, alter or terminate as follows:

Customer service agreementsUnder the terms of the agreement for the provision of information technology services by Xchanging Global Insurance Solutions Limited to the London Metal Exchange Limited (‘LME’), entered into on 8 December 2011, the LME may, if it has reasonable grounds for believing that Xchanging Global Insurance Solutions Limited will be incapable of providing the services or that Xchanging plc will be incapable of meeting its obligations under the guarantee (entered into between Xchanging plc and the LME on the same date) in each case as a result of that change of control, elect to terminate the contract. In addition, the LME may elect to terminate the contract in the event that Xchanging plc is acquired by a third party whose business competes with the LME.

Under the terms of the agreement for the provision of claims handling and related services by Xchanging Broking Services Limited to Aon Limited, entered into on 1 September 2006 (as amended on 10 March 2009 and 29 October 2010), Aon Limited may elect to continue to receive such services, or alternatively terminate the contract if the acquirer of Xchanging plc competes directly with Aon Limited for the provision of insurance services in the United Kingdom of the type being supported by Xchanging Broking Services Ltd.

Enterprise Partnerships Under the terms of certain Enterprise Partnership shareholders’ agreements, the Enterprise Partner may elect to exercise options over the shares in the Enterprise Partnership, for a share value as variously defined in the respective agreements. The agreements are as follows:�� Deutsche Bank AG (‘DB’) may elect to call Xchanging’s

shares in XTB under the terms of the shareholders’ agreement, entered into between DB and Xchanging Holdco No. 3 Ltd on 26 May 2004.

�� Allianz Global Investors Kapitalanlagegesellschaft mbH (‘AGI’) may elect to call Xchanging’s shares in Fondsdepot Bank GmbH under the terms of the shareholders’ agreement, entered into between AGI and XTB on 21 August 2007.

Revolving credit facility and term loanUnder the terms of the £95 million term loan and revolving credit facility, entered into on 29 July 2011, and provided by a syndicate of banks to Xchanging plc, the lenders may elect to continue to provide such facility, or alternatively cancel it and require all monies borrowed under such facility to be repaid.

Directors and employeesThere are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid or change of control, other than in respect of Kenneth Lever, the Chief Executive Officer (which expired on 31 December 2011), and Geoff Unwin, the Chairman. For more information please see pages 64 to 65.

Company overview

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Xchanging plc Annual report 2011 51Other information

Directors’ indemnitiesThe Company’s Articles of Association contain a qualifying third party indemnity provision (as per the Companies Act 2006) that provides, for the financial year ended on 31 December 2011 and as at the date of this document, that the Company may pay for Directors’ indemnities out of its own assets. The Company has procured directors’ and officers’ insurance for this purpose.

Share capitalAt the date of this report, 239,509,739 ordinary shares of 5 pence each have been issued, are fully paid up and are admitted to trading on the London Stock Exchange.

The rights and obligations attaching to the Company’s ordinary shares, as well as the powers of the Company’s Directors, are set out in the Company’s Articles of Association, copies of which can be obtained from Companies House or from the Company’s website, or by writing to the Company Secretary.

There are no general restrictions on the voting rights attaching to the Company’s ordinary shares (and the times by which proxies must be lodged are specified in the Articles of Association) or on the transfer of ordinary shares. No person holds ordinary shares in the Company carrying special rights with regard to control of the Company. The Company is not aware of any agreement between holders of ordinary shares that may result in restrictions on voting rights or on the transfer of ordinary shares. Unless expressly specified to the contrary in the Articles of Association of the Company, the Company’s Articles of Association may be amended by special resolution of the Company’s shareholders.

The Articles of Association contain provisions governing the appointment, retirement and removal of Directors.

The Articles of Association grant the Company power to purchase its own shares subject to specific authority being granted by the shareholders. An authority to purchase ordinary shares was granted at the Annual General Meeting (‘AGM’) held on 18 May 2011. A resolution to renew this authority will be proposed at the AGM in 2012, details of which are given in the Notice of AGM 2012. The current authority is described in the explanatory notes which accompanied the Notice of AGM 2011. The details of the replacement authorities to be proposed at the AGM in 2012 are given in the Notice of AGM 2012.

Substantial shareholdersOn 13 February 2012, the Company had been notified of the following material or notifiable interests in its issued share capital by persons other than the current Directors of the Company:

Number of shares Percentage

General Atlantic LLC 22,596,183 9.43

FIL Limited/FMR LLC 20,702,203 8.64

Deccan Value Advisors LP 18,511,292 7.73

Andrews D 16,389,556 6.84

Odey Asset Management 15,981,804 6.67

Legal & General Investment Mgmt Ltd

14,859,666 6.20

Artemis Investment Management 9,061,603 3.78

T. Rowe Price International Inc 7,577,006 3.16

Non-controlling interestsThe non-controlling interests in the Group’s subsidiaries at 31 December 2011 are set out as follows:

Non-controlling interestInterest in Xchanging Group Enterprise

Partnership

The Corporation of Lloyd’s 25% interest in Ins-sure Holdings Limited

50% interest in Xchanging Claims Services Limited

International Underwriting Association

25% interest in Ins-sure Holdings Limited

Deutsche Bank AG 44% interest in Xchanging etb GmbH

Sal. Oppenheim jr. & Cie. KgaA 5% interest in Xchanging etb GmbH

Allianz Global Investors Kapitalanlagegesellschaft mbH

49% interest in Fondsdepot Bank GmbH

SIA S.p.A49% interest in Kedrios

S.p.A

Non-controlling interestInterest in other Xchanging Group

companies

Scandent Holdings Mauritius Ltd (11.8%)

24.4% interest in Cambridge Solutions Limited

Katra Finance Limited (2.7%)

Aon Minet Pension Scheme (3.8%)

Other (public) (6.1%)

The profits of the Xchanging Group Enterprise Partnerships in which non-controlling interests have an interest are not necessarily shared in proportion to the shareholding interest in that company, as each Enterprise Partnership has a distinct contractual method of profit share.

Equal opportunitiesThe Group is committed to employment policies which follow best practice based on equal opportunities for all employees, irrespective of gender, race, nationality, colour, disability, marital status, sexual orientation, age or religion. All decisions relating to employment practices are objective, free from bias and based upon work criteria and individual merit. The Group’s policy is to offer appropriate training and


career development to disabled persons that are, as far as possible, identical to other employees and in line with best practice. In the event of a member of staff becoming disabled, the Group makes every effort to continue employment, arrange appropriate retraining and offer opportunities for promotion.

Policy on payment of creditorsThe Company aims to pay suppliers in accordance with the suppliers’ contract terms. The Company had an average of 31 days purchases outstanding (2010: 41 days) in trade payables in 2011.

Policy on financial instrumentsThe policy with respect to financial instruments is covered in the accounting policy xvii at note 2 on page 74 and note 36 to the financial statements.

Independent auditorsA resolution will be proposed at the 2012 AGM to reappoint our current auditors, PricewaterhouseCoopers LLP (‘PwC’), for 2012 and also to allow the Board to set their remuneration. The Board is satisfied that the external auditors remain independent and PwC have indicated their willingness to continue in office.

Statement of Directors’ responsibilitiesThe Directors are responsible for preparing the Annual Report, the Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the Group and parent company financial statements in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Parent Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:�� Select suitable accounting policies and then apply them

consistently.�� Make judgements and accounting estimates that are

reasonable and prudent.�� State whether applicable IFRS, as adopted by the EU,

have been followed, subject to any material departures disclosed and explained in the financial statements.

�� Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Directors’ statement pursuant to the Disclosure and Transparency RulesEach of the Directors, whose names and functions are listed in the Board of Directors, on pages 46 and 47, confirm that, to the best of each person’s knowledge and belief:�� The financial statements, prepared in accordance with

IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit/(loss) of the Group and the Company.

�� The Directors’ Report contained in the Annual Report include a fair review of the development and performance of the business and the position of the Company and Group, together with a description of the principal risks and uncertainties that they face.

The Directors are responsible for the maintenance and integrity of the Group’s website, www.xchanging.com. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Statement of disclosure of information to auditorsIn the case of each of the persons who are Directors of the Company at the date when the report was approved:�� So far as each of the Directors is aware, there is no

relevant audit information of which the Company’s auditors are unaware.

�� Each of the Directors has taken all the steps he/she ought to have taken individually as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

Corporate governanceDetails relating to the Company’s compliance with the UK Corporate Governance Code for the financial year are given in the Corporate Governance Report.

Going concernThe Directors have reviewed the liquidity position of the Group for the period ending 30 June 2013. The cash flows of the Group have been assessed against the Group’s available sources of finance on a monthly basis to determine the minimum and maximum expected levels of headroom. Based on this analysis and an assessment of the potential cash risks, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements.

Annual General MeetingThe Annual General Meeting of the Company will be held at 34 Leadenhall Street, London, EC3A 1AX at 10.00 am on Wednesday 16 May 2012. The notice convening the meeting, together with details of the business to be considered and explanatory notes for each resolution, is distributed separately to shareholders. It is also available on the Group’s website.

By order of the BoardGary WhitakerCompany Secretary1 March 2012

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Corporate governance report

Xchanging plc and its subsidiaries (‘Xchanging’) remain committed to the principles of corporate governance applying to UK companies with a premium listing on the London Stock Exchange as set out in the UK Corporate Governance Code (the ‘Code’). The Code is published by the Financial Reporting Council and is available from its website (www.frc.org.uk).

Throughout the year, the Board has complied with the Code in all respects, except whilst Nigel Rich assumed the role of Executive Chairman, during which period there was not a written division of responsibilities between the Chairman and Chief Executive Officer agreed by the Board (A.2.1). As Stephen Brenninkmeijer was determined by the Board to be non-independent, the Remuneration Committee did not comply with the Code requirement of having at least three independent Non-executive Directors (D.2.1). On Stephen Brenninkmeijer’s resignation from the Board on 31 August 2011 and Michel Paulin’s appointment to the Remuneration Committee in September, the Company became compliant with D.2.1 of the Code. On the appointment of Geoff Unwin his Terms of Appointment did not comply with D.1.3 of the Code. Further details of these instances of non-compliance are set out in the relevant sections of the Corporate Governance Report and Remuneration Report.

As at the date of this report Xchanging is compliant with the Code save in relation to D.1.3 of the Code.

The Board considers that this statement provides the information necessary to enable shareholders to evaluate how Xchanging has applied the principles of the Code during the year ending on 31 December 2011.

The BoardThe Board currently comprises a Non-executive Chairman, two Executive Directors and four further Non-executive Directors who together have the appropriate balance of skills, experience, independence and knowledge of the Group.

ResponsibilitiesThe Board is collectively responsible to shareholders for creating and sustaining shareholder value through the management of the Group’s businesses, and the long-term success of the Group. It sets the Group’s strategic plan and budgets, monitors their implementation and, with the assistance of the Audit Committee, ensures that executive management maintain a system of internal operational, financial and regulatory controls that identify and manage appropriately the risks set out on pages 24 to 27.

The Board has a formal schedule of matters reserved for its decision, including:�� The approval of half-year and full-year financial statements.�� Significant changes in accounting policy and practice.�� The appointment or removal of Directors or the Company

Secretary.�� Changes to the Group’s capital structure.�� Any significant investments, contracts, acquisitions,

mergers and disposals.

These Reserved Matters were last reviewed by the Board on 28 February 2012. Other specific responsibilities are delegated to the Board Committees, which operate within clearly defined terms of reference.

Full details of the schedule of Reserved Matters for the Board and the responsibilities delegated to the Board Committees can be found on the Group’s website www.xchanging.com.

Name of Director PositionDate of appointment as a

Director of Xchanging plc1 Date of resignation

Number of Board meetings attended in 2011 (Number in

brackets denotes maximum number

of meetings they could have attended)

Nigel Rich2 Chairman 2 April 2007 31 December 2011 17 (17)

Geoff Unwin3 Chairman 1 December 2011 1 (1)

David Andrews Chief Executive Officer 2 April 2007 9 February 2011 3 (3)

Kenneth Lever4 Chief Executive Officer, Executive Director

5 October 2010 17 (17)

David Bauernfeind5 Chief Financial Officer, Executive Director

7 June 2011 6 (6)

Dennis Millard Non-executive Director 2 April 2007 17 (17)

Pat O’Driscoll Non-executive Director 3 November 2008 15 (17)

Bill Thomas Non-executive Director 1 December 2011 1 (1)

Stephen Brenninkmeijer Non-executive Director 2 April 2007 31 August 2011 12 (14)

Johannes Maret Non-executive Director 2 April 2007 31 August 2011 13 (14)

Michel Paulin Non-executive Director 1 January 2010 16 (17)

1 Nigel Rich, David Andrews, Dennis Millard, Stephen Brenninkmeijer and Johannes Maret were previously directors of Xchanging BV, the Xchanging group holding company prior to IPO in 2007.

2 Executive Chairman from 9 February 2011 to 7 June 2011; Non-executive Chairman from 7 June 2011 to 31 December 2011.3 Appointed Non-executive Director on 1 December 2011 and appointed Chairman on 1 January 2012 on Nigel Rich’s retirement.4 Appointed Chief Financial Officer from 5 October 2010 to 9 February 2011; Acting Chief Executive Officer and Chief Financial Officer from 9 February 2011 to 7 June 2011,

henceforth Chief Executive Officer.5 Appointed Chief Financial Officer on 7 June 2011.


Board composition and structureFrom 1 January 2011 to 9 February 2011, the roles of the Chairman and the Chief Executive Officer were clearly segregated, and the division of responsibilities between the two roles was set out in writing and approved by the Board. The resignation of David Andrews on 9 February 2011 was unforeseen and resulted in the Company not being compliant with provision A.2.1 of the Code. Nigel Rich undertook the role of Executive Chairman, supporting Kenneth Lever as he took on the role of Acting Chief Executive Officer in addition to Chief Financial Officer. This was a temporary arrangement, designed to facilitate clear leadership while ensuring that no one individual had unfettered powers of decision. The Board deemed such measures necessary for the successful stewardship of the Company during this period and that extraordinary measures were justified in order to provide the Company with clear leadership in challenging circumstances.

On 7 June 2011, the Board, acting upon the recommendation of the Nomination Committee, appointed Kenneth Lever as Chief Executive Officer, and David Bauernfeind as Chief Financial Officer. At this point, Nigel Rich resumed his previous role as Non-executive Chairman. From this point onward the roles of the Chairman and Chief Executive Officer have been clearly segregated in line with best practice as set out in the Code and the Company has been compliant with provision A.2.1.

The Chairman is responsible for leadership of the Board, and ensuring its effectiveness. The agenda is set by collaboration between the Chairman, the Chief Executive Officer and the Company Secretary. The Chairman and the Senior Independent Non-executive Director are available to shareholders, should they have concerns which contact through the usual channels has failed to resolve or is otherwise inappropriate. For further information about communication between the Board and shareholders, please refer to communication with shareholders on page 59.

The Chief Executive Officer is responsible for running Xchanging’s business, and providing strategic leadership to the Group, in consultation with the Board.

David Bauernfeind was appointed to the role of Chief Financial Officer following a search facilitated by the Chief Human Resources Officer and third party consultants, and was awarded the role based on merit, against objective criteria determined by the Nomination Committee, and with due regard for the benefits of diversity on the Board, including gender.

On 23 August 2011, Stephen Brenninkmeijer and Johannes Maret each notified the Board of their independent decisions to retire from the Board, effective on 31 August 2011. While the contribution of both will be missed, each felt that it was an appropriate time to pursue other interests. The Nomination Committee undertook to evaluate the balance of skills, experience, independence and knowledge on the Board and, in the light of this evaluation, prepared descriptions of the role and capabilities required for two additional Non-executive

Directors to join the Board. In addition, following a period of acting as Executive Chairman during the first half of 2011, Nigel Rich indicated his willingness to step down in the event that an appropriate candidate for the role of Chairman became available, and the Nomination Committee prepared an appropriate job description accordingly.

On 1 November 2011, the Board announced that Geoff Unwin would join as a Non-executive Director on 1 December 2011, and would become Chairman on 1 January 2012, on the retirement of Nigel Rich from the Board. Further, on 7 November 2011, the Board announced that Bill Thomas would join on 1 December 2011, as a Non-executive Director.

The Board reviewed the independence of all Non-executive Directors at its meeting on 13 December 2011, and determined that they are all independent for the financial year commencing on 1 January 2012. Although the terms of Geoff Unwin’s remuneration are not compliant with D.1.3 of the Code (as further outlined in the Remuneration Report), after careful consideration the Board determined that upon his appointment as Chairman Geoff Unwin was considered to be independent because the non-compliant remuneration arrangements will not affect his judgement and character.

Directors’ induction, training and developmentThe Board has a full induction programme for all new Directors, covering their duties and responsibilities as Directors. On 7 June 2011, David Bauernfeind was promoted to Chief Financial Officer from his previous role as Chief Operating Officer and Commercial Director of the Xchanging UK Region, and underwent a full induction programme to equip him for a role as a Director of a UK main market listed company, which included meeting with advisers and attending training on directors’ duties by our advisers. In addition, Geoff Unwin and Bill Thomas joined the Board on 1 December 2011, and a full induction programme has commenced and will continue during the first quarter of 2012. The programme includes meetings with the principal business heads and management teams in each of the business sectors. Each newly appointed Director has access to the Company Secretary’s assistance both in orientation and guidance around the Xchanging Group, in addition to the exposure gained at regular Board meetings.

All Directors receive ongoing legal and regulatory updates to improve their knowledge and enable them to discharge their duties. During 2011, with the impact of the UK Bribery Act 2010 and the new UK Corporate Governance Code, specific briefings were held during Board meetings.

Formal papers are circulated to the Directors before each Board meeting, which enable them to make an informed decision on the issues under consideration. In addition to formal Board meetings, during 2011 the Chairman maintained regular contact with the Chief Executive Officer and Chief Financial Officer to discuss specific issues, which was extended during his period as Executive Chairman. The Company Secretary acts as an adviser to the Board on matters concerning governance and ensures compliance with

Corporate governance report continued

Company overview

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Board procedures. All Directors have access to his advice and during 2011 this was sought from time-to-time. Directors may also take independent professional advice at the Company’s expense. In the event that any Director has concerns which cannot be resolved within the Board forum about the running of the Company, or a proposed action, such concerns may be reflected in the Board minutes. Minutes of each Board meeting are circulated by the Company Secretary following the meeting to allow such comments to be raised.

Directors’ interestsUnder Xchanging’s Articles of Association, the Board may authorise any actual or potential conflicts of interest for Directors. Each Director provides the Company Secretary with information regarding any actual or potential interests that may conflict with those of Xchanging, such as other directorships, and any other potential interests that each thinks may cause a conflict requiring prior Board authorisation on an annual basis. If the circumstances of any of these disclosed interests change, the relevant Director is required to update the Company Secretary promptly.

The register setting out each Director’s current disclosures (where relevant) was last reviewed and approved by the Board at its meeting on 13 December 2011. In each such situation, the Director under consideration did not vote on the matter. The Board will continue to review the register of interests regularly to ensure the authorisations, and any conditions attached to them, are appropriate for the relevant matter to remain authorised. The Company Secretary maintains a list of all authorisations granted to Directors, setting out the date of authorisation and its expiry, scope and any limitations imposed.

Board performance evaluationEach year the Board undertakes an evaluation process in respect of itself and its Committees, under the leadership of Nigel Rich, the Chairman until 31 December 2011. Given the significant Board changes in the second half of 2011, the Board determined, as in previous years, to conduct an internal evaluation comprising the following steps:�� A questionnaire based on the provisions of the Code

was circulated to all Board and Committee members.�� Each Director discussed their responses to the

questionnaire with the Company Secretary, together with any other general issues that each Director wished to raise regarding the operation of the Board and the Committees.

�� The Company Secretary met with the Chairman to discuss the results of the questionnaire and other feedback from the Directors.

�� The Company Secretary prepared a briefing note for the Board setting out the principal issues raised and suggesting appropriate action points.

The principal issues raised in the 2011 performance evaluation were discussed at the 13 December 2011 Board meeting. The Board concluded that the Board and its Committees continue to operate effectively, but action will be taken to address any identified issues in 2012.

On 13 December 2011, Nigel Rich and Geoff Unwin conducted the performance review of Kenneth Lever, taking into account the views of the other Directors. Given the departure of Nigel Rich on 31 December 2011, no performance review of the departing Chairman was carried out. The performance of the Non-executive Directors during 2011 was reviewed by Nigel Rich, taking into account the views of the other Directors.

Election and re-appointment of DirectorsUnder the Articles of Association, all Directors are subject to re-election at the Annual General Meeting (‘AGM’) at intervals of no more than three years. At its meeting on 13 December 2011, the Board agreed that all Directors should seek re-election at the 2012 AGM. Each of Kenneth Lever, Dennis Millard, Michel Paulin and Pat O’Driscoll will, therefore, retire and seek re-election at the 2012 AGM. In addition, David Bauernfeind, Geoff Unwin and Bill Thomas will be put forward separately for their initial election to the Board by the shareholders. The Board believes that each of the Directors makes a valuable contribution to Xchanging, and supports their re-election or initial election in each case. All Non-executive Directors have three year appointments, save for Geoff Unwin who has a four year appointment from 1 December 2011. All Non-executive Director appointments may be terminated by either party upon three months’ (or in the case of Geoff Unwin, six months’) written notice, or by shareholder vote at the AGM.

The Non-executive Directors do not have any entitlement to compensation if their office is terminated. Full details of the Remuneration of the Non-executive Directors can be found on page 66 of the Remuneration Report.

Board Committees

The Board has established Audit, Nomination, Remuneration and Corporate Social Responsibility Committees, each of which works from terms of reference which are reviewed annually and are available on the website: www.xchanging.com. The terms of reference for each Committee were last approved by the Board at the 28 February 2012 meeting. The minutes of the Audit, Nomination and Remuneration Committee meetings are sent to all Directors and oral updates are given at Board meetings. Details of the Corporate Social Responsibility Committee are set out on pages 44 to 45.

Board of Directors

Audit CommitteeSee page 56

Remuneration CommitteeSee page 57

Nomination CommitteeSee page 56

Corporate Social Responsibility

CommitteeSee page 44


The Audit Committee

Name of Director

Number of meetings attended in 2011 (Number in brackets denotes

maximum number of meetings they could have attended)

Dennis Millard (Chairman) 4 (4)

Stephen Brenninkmeijer1 2 (2)

Pat O’Driscoll 3 (4)

Michel Paulin2 2 (2)

1 Resigned 31 August 2011.2 Appointed 31 August 2011.

In addition to the Audit Committee members, the Chairman, Chief Executive Officer, Chief Financial Officer, Company Secretary, Group Financial Controller and Head of Internal Audit were also invited to be present at the meetings.

Key areas of responsibility�� Monitoring the integrity of the Company’s financial

statements, together with any announcement relating to financial performance, and reviewing significant financial reporting judgements within them.

�� Monitoring the risks and associated controls over financial reporting processes, including the consolidation process.

�� Reviewing the Company’s internal financial controls, and reviewing the Company’s internal control and risk management systems as discussed in internal control and risk management on page 58.

�� Monitoring and reviewing the effectiveness of the internal audit team, including management’s responsiveness to the findings and recommendations of internal audit.

�� Making recommendations to the Board or the shareholders (as appropriate) in respect of the appointment of the external auditors, and approving the external auditors’ remuneration and terms of engagement.

�� Reviewing and monitoring the external auditors’ independence and objectivity, and the effectiveness of the audit process in light of relevant regulatory requirements.

�� Developing and implementing policy on the engagement of the external auditors to provide any non-audit services, and reporting to the Board on such engagement, recommending relevant actions where improvement is required.

During 2011, the composition of the Audit Committee complied with the Code, comprising three Independent Non-executive Directors: Dennis Millard (Chairman), Pat O’Driscoll and Michel Paulin. The Chairman Dennis Millard was deemed by the Board on his appointment to have recent and relevant financial experience. The Audit Committee maintains a formal agenda for each year to ensure compliance with the requirements of the Code. Key items considered during 2011 include the review of key accounting policies; material judgements; quality of earnings and estimates; scope of work and findings of the 2011 internal and external audits; half-year and full-year financial statements; risk register process; non-audit services; and the effectiveness of internal control and risk management systems.

The Audit Committee reviews the Group’s Annual Report and Accounts, as well as reports from the external auditors identifying any accounting or judgemental issues requiring its attention. In its July 2011 and February 2012 meetings, the Audit Committee approved the half-year and full-year financial statements respectively, and confirmed agreement with key accounting policies and material judgements.

In February 2012, the Audit Committee conducted its annual assessment of the suitability and performance of the external auditors in making its recommendation to the Board for their reappointment.

To ensure that the objectivity and independence of the audit is not compromised, a review was undertaken of the level of non-audit services provided by the external auditors and to ensure that relevant safeguards are in place. The level of non-audit services provided was agreed to be acceptable. In addition, the policy for the engagement of external auditors to supply non-audit services is reviewed annually by the Audit Committee.

In addition to the Audit Committee, each UK Enterprise Partnership (‘EP’) has its own audit committee whose members and chairman are independent of the EP. Such committees are attended by Xchanging’s partners, nominated Xchanging Executive Directors, senior EP management and the Head of Group Internal Audit on a regular basis. EP audit committees have similar terms of reference to the Audit Committee. In Continental Europe, XTB, FdB and Kedrios have shareholder committees attended by representatives from Xchanging’s partners and nominated Xchanging Executive Directors or senior management members.

Nomination Committee

Director

Number of Meetings attended in 2011(Number in brackets denotes

maximum number of meetings they could have attended)

Nigel Rich1 (Chairman) 8 (8)

Dennis Millard 8 (8)

Pat O’Driscoll 8 (8)

Michel Paulin 6 (8)

Geoff Unwin2 1 (1)


Johannes Maret4 1 (2)

1 Resigned 31 December 2011.2 Appointed 1 December 2011; appointed Chairman of the Committee on 1 January

2012 on the resignation of Nigel Rich.3 Resigned 31 August 2011.4 Appointed as a Committee member from 6 June 2011 to 31 August 2011.


Company overview

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Key areas of responsibility�� Evaluating the balance of skills, knowledge and

experience on the Board and, in light of such evaluation, preparing descriptions of the role and the capabilities required for any appointment.

�� Ensuring that plans are in place for orderly succession for appointments to the Board and senior management, to retain an appropriate balance of skills and experience within Xchanging and on the Board.

During 2011, the composition of the Nomination Committee complied with the Code, comprising a majority of Independent Non-executive Directors. The Nomination Committee leads the process for all Board appointments, preparing role descriptions, reviewing candidates and making a final recommendation to the Board, in compliance with the Code.

During 2011, at the direction of the Board, the Nomination Committee led the successful search for all new Board members, subsequently approved by the Board, as follows: a new Independent Non-executive Director (Bill Thomas appointed on 1 December 2011), a new Chief Executive Officer (Kenneth Lever appointed on 7 June 2011), a new Chief Financial Officer (David Bauernfeind appointed on 7 June 2011) and a new Chairman (Geoff Unwin appointed Non-executive Director on 1 December 2011 and Chairman on 1 January 2012).

The Board has recruited Non-executive Directors of a high calibre with broad commercial, international or other relevant experience. Non-executive Directors are expected to bring an objectivity and independence of view to the Board’s discussions, and to help provide the Board with effective leadership in relation to the Company’s strategy, performance, risk and people management as well as ensuring high standards of financial probity and corporate governance.

For each of the new Board appointments, the Nomination Committee considered the requirements of the respective roles and authorised the Chief Human Resources Officer to engage an external search consultancy to assist in identifying candidates with the appropriate skills and experience for each position. In addition, for the role of Chairman a job specification was prepared which included an assessment of the time commitment needed, particularly noting the need for availability in the event of crises. During meetings of the Nomination Committee where the role of Chairman was considered, Dennis Millard acted as chair of the Nomination Committee.

For both the executive and non-executive roles, as appropriate, members of the Nomination Committee met with a number of candidates from varied backgrounds and, in consultation with the Chief Human Resources Officer, identified the successful candidates for each role.

The Nomination Committee meets as and when required. During 2011 it met eight times, in February (twice), May, June, July, September, October and December.

Remuneration Committee

Director

Number of meetings attended in 2011(Number in brackets denotes maximum

number of meetings they could have attended)

Pat O’Driscoll (Chairman) 7 (7)


Michel Paulin2 2 (2)

Dennis Millard 7 (7)

Bill Thomas3 1 (1)

1 Resigned 31 August 2011.2 Appointed as a Committee member 13 September 2011.3 Appointed 13 December 2011.

Key areas of responsibility�� Deciding the policy for the remuneration of the Chairman,

the Executive Directors and members of senior management. The objective of such policy shall be to ensure that members of the executive management of the Company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the Company.

�� Reviewing the ongoing appropriateness and relevance of the remuneration policy for Executive Directors, including short- and long-term incentive arrangements that are stretching and designed to promote the long-term success of the Company.

�� Making recommendations to the Board on the Group framework of remuneration for all Group employees, retaining sensitivity to pay and employment conditions across the Group.

�� Judging where to position the Group’s remuneration policy relative to other companies in a similar sector.

�� Reviewing the design of all share incentive plans for approval by the Board and shareholders. For any such plans, determining each year whether awards will be made and, if so, the overall amount of such awards, the individual awards to Executive Directors and designated senior management and the performance targets to be used.

�� Monitoring the compensation commitments incorporated in the Directors’ terms of appointment which would become effective in the event of early termination to ensure that poor performance is not rewarded.

�� To be exclusively responsible for establishing the selection criteria, selecting, appointing and setting the terms of reference for any remuneration consultants who advise the Committee.

During 2011, the Remuneration Committee was not compliant with Code provision D.2.1 because Stephen Brenninkmeijer remained a member of the Remuneration Committee until his retirement on 31 August 2011, despite being declared non-independent in December 2010. The Board felt that he continued to show clear judgement in remuneration matters, particularly given his period as Chairman of the Remuneration Committee during 2010


and considered that his continued role was helpful in ensuring that the Remuneration Committee’s workload was evenly distributed across a depleted Board during 2011. On Stephen Brenninkmeijer’s resignation, Michel Paulin was appointed a member of the Committee with effect from 13 September 2011 and the Committee became compliant with the Code. Michel Paulin stepped down as a Committee member on 13 December 2011 and Bill Thomas was appointed in his place. On 8 February 2012 Bill Thomas was appointed Chairman of the Remuneration Committee and Geoff Unwin was appointed a member of the Remuneration Committee. The composition of the Remuneration Committee now complies with the Code, and it is intended that it shall remain compliant during 2012.

Only Remuneration Committee members and the Company Secretary (except when his own remuneration is being considered) are entitled to attend meetings of the Remuneration Committee. However, in 2011 the Chairman, Chief Executive, Chief Financial Officer and Chief Human Resources Officer and others attended by invitation.

Further details of the activities of the Remuneration Committee in 2011 are given in the Remuneration Report on page 61.

Internal control and risk managementThe Board is responsible for regularly reviewing the operation and effectiveness of the Group’s internal controls. The internal control system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, and not absolute, assurance against material errors, losses or fraud. The Board is also responsible for ensuring that appropriate systems are in place to enable it to identify, assess and manage key risks.

The financial reporting process and control system (which includes the preparation of consolidated accounts) is monitored and maintained through the use of internal control frameworks which address key financial reporting risks, including risks arising from changes in the business or accounting standards. Effectiveness is assessed through self-certification and independent testing of the controls.

The Group’s key internal control and risk management procedures include the following:�� Review of the Group’s strategy and the performance of

principal subsidiaries and EPs, through a comprehensive system of reporting based on variances to annual budgets, key performance indicators and regular forecasting.

�� Well-defined Group policies and processes, communicated through the Group Financial Reporting Procedures Manual and intranet portal, and a strict process governing the approval of sales opportunities and capital expenditure.

�� A defined organisational structure with appropriate delegation of authority.

�� Formal authorisation procedures for all investments with clear guidelines on appraisal techniques and success criteria (Xchanging’s ‘Authority to Invest’ process).

�� Formal authorisation procedures for all significant sales opportunities and bid management, with clear guidelines on success criteria (Xchanging’s sales opportunities approval process, including ‘Bid review approval’, ‘Solution approval’ and ‘Contract approval’).

�� A quarterly business review for each business sector. This covers financial performance, a detailed range of strategic risks and opportunities and KPI metrics measuring the overall performance of the business sector. This identifies the key operational issues and actions required to address any deficiencies.

�� The work performed by the Group’s Internal Audit department is focused on areas of greatest risk to the Group, as well as issues identified by the quarterly performance reporting. Internal Audit’s objective is to provide independent assurance to the Board and Audit Committee over financial, operational and compliance controls and to assist the Board in its assessment of the effectiveness of internal controls. The Head of Internal Audit reports directly to the Chief Finance Officer, but has the right to report to the Audit Committee Chairman independently of the Executive Directors. All significant internal audit reports are reviewed by the Audit Committee and made available to the external auditors.

�� Each business sector has a delegated person responsible for the quality of controls and processes within that business sector as well as for ensuring compliance with policies and procedures, legislation and the operation of risk management procedures. Each responsible person reports to the business sector management team on an operational basis, but has an additional dotted reported line into the Head of Internal Audit. They also attend, by invitation, the EP audit committees within their business sector.

The Group’s key risk management procedures have been in place throughout 2011 and up to the date of approval of this Annual Report, including the maintenance of a hierarchy of risk registers for each business sector, which are monitored on an ongoing basis within the relevant management teams. The Group risk register incorporates risks pervasive or material to the whole Group and is reviewed at least annually by the Board and the Audit Committee, with the last review occurring on 28 February 2012.

The Audit Committee has, on behalf of the Board, reviewed the effectiveness of the Group’s internal control systems for 2011 and the period prior to approval of this Annual Report. The Audit Committee reported its findings to the Board at the 28 February 2012 Board meeting. It considered all material controls in accordance with the Turnbull guidance.

The internal control environment will continue to be monitored and reviewed by the Board and the Audit Committee.


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EthicsXchanging is committed to the highest standards of business integrity in each country where it operates, maintaining an Ethical Business Code of Conduct which applies to all employees and provides guidance regarding their conduct, and how Xchanging conducts business.

Xchanging will not tolerate any form of bribery or corruption by its employees. Measures have been taken to ensure Group wide compliance with the Bribery Act 2010. In the event of any bribery or corruption incident brought to the Group’s attention, Xchanging would take immediate steps to effect corrective action and report it to the relevant authorities as required. Xchanging considers that each employee has the duty to the Group to act with integrity and good faith in their role, and avoid any circumstance which either conflicts, or could potentially conflict, with Xchanging’s interests.

Xchanging has implemented an Employee Disclosure (Whistle-blowing) Policy to allow employees to voice any concerns in a responsible and effective manner, without fear of reprisal. Employees can communicate concerns in confidence to a dedicated email address, to which only the Group Compliance Officer and the Company Secretary have access.

Reported concerns are investigated at the earliest opportunity by the Group Compliance Officer, the Company Secretary and, if appropriate, by management of the respective businesses. The concerns raised and actions taken are reported to the Chairman of the Audit Committee.

Communication with shareholdersThe Board places importance on communication with shareholders and gives them the opportunity to meet the Chairman and Directors as appropriate. Shareholders will continue to be given the opportunity to meet the Chairman and Directors in the coming 12 months. Arrangements can be made for major shareholders to meet with any newly-appointed Directors. The Company’s Investor Relations team organises an ongoing programme of dialogue and meetings between the Chief Executive Officer and Chief Financial Officer and institutional investors, fund managers and analysts.

Brokers’ reports and investors’ feedback are circulated regularly to the Board, who discuss these and any other key matters relating to investors. In each case the Board, in conjunction with advisers where appropriate, determines the strategy to address significant issues raised.

The Company’s AGM on Wednesday 16 May 2012 will provide a valuable opportunity for the Board to communicate with private investors. We encourage shareholders to attend the meeting and to ask questions of any of the Directors following the conclusion of the formal part of the meeting. Details of proxy voting by shareholders, including votes withheld, will be made available on request and will be placed on the Company’s website following the meeting.

Additional informationInformation on the impact on the Company as required by the Takeover Directive, and information required under the Disclosure and Transparency Rules, is given in the Directors’ report (see page 52) and forms part of this corporate governance statement.

The attention of shareholders is drawn to the independent auditors’ report on page 70, which incorporates their report on corporate governance.

By order of the BoardGary WhitakerCompany Secretary1 March 2012


Remuneration report

ForewordXchanging has successfully emerged from a number of business and operational challenges in 2011. During this time Kenneth Lever and David Bauernfeind were appointed Chief Executive Officer and Chief Financial Officer respectively, and the business was successfully stabilised. The appointment of Geoff Unwin as Chairman from 1 January 2012 was also announced towards the end of the year and has helped complete the stabilisation process and accelerate the turnaround.

As outlined on pages 18 to 21 over the next 12 months we will seek to move towards the next phase of our growth plan which includes a focus on maximising the economic value of the business and the growth of profitable and sustainable revenue streams. The Board has taken the view that managing for growth in this way will help lead to superior levels of medium- and longer-term value creation for our shareholders.

Embedding this philosophy across the Company will take some time to implement. The proposed revisions to our executive incentive arrangements in 2012 outlined in this report represent some of the first steps towards achieving our growth aspirations.

After a review of our executive remuneration arrangements over 2011 the Committee has determined that:�� There will be no change to our policy of calibrating base

salaries for Executive Directors around appropriate mid-market norms over time, taking account of corporate performance, market conditions and individual performance.

�� There will be no change to pensions or benefits arrangements which remained positioned towards the lower end of the market; with the exception of the introduction of an annual health screen.

�� We will implement a revised annual bonus plan with payouts linked to three measures: operating profit, revenue growth and cash flow performance. In 2012 we plan to maintain the maximum and target bonus opportunity at 150% and 90% of salary, respectively.

�� One third of any bonus award will be deferred into shares for three years for Executive Directors and other senior executives.

We will continue to make awards under the Performance Share Plan (‘PSP’) with vesting after three years although the Committee intends to make changes to the performance conditions and vesting arrangements for awards made in 2012 and thereafter. Full details will be published in the 2012 Directors’ Remuneration Report.

To be clear, the proposed changes outlined above will not result in any increases to the quantum of pay opportunity in 2012, and the Remuneration Committee is committed to only paying for demonstrable returns to shareholders.

In conclusion, the Remuneration Committee will continue to closely review the appropriateness of the revised arrangements during 2012 as the business develops and grows.

Bill ThomasChairman of the Remuneration Committee

Company overview

Business review




Remuneration CommitteeOver 2011 the Remuneration Committee was chaired by Pat O’Driscoll who was appointed on 22 July 2009 by the Board.

At the start of 2011, the Remuneration Committee consisted of the following Non-executive Directors: Pat O’Driscoll, Dennis Millard and Stephen Brenninkmeijer. Stephen retired from the Board on 31 August 2011 and was replaced by Michel Paulin who was appointed to the Remuneration Committee for the period from 13 September 2011 to 13 December 2011. Bill Thomas was appointed to the Remuneration Committee with effect from 13 December 2011, and when Pat O’Driscoll stood down as Chairman of the Remuneration Committee, on 8 February 2012, Bill took over as Chairman. Pat O’Driscoll remains a member of the Remuneration Committee.

Geoff Unwin was appointed as a member of the Remuneration Committee with effect from 8 February 2012.Stephen Brenninkmeijer was deemed not to be independent for the year commencing 1 January 2011. All other members were deemed independent throughout the year.

The Company Secretary is Secretary to the Remuneration Committee. Only Remuneration Committee members and the Company Secretary (except when his own remuneration is being directly considered) are entitled to attend meetings of the Remuneration Committee. However, the Chief Executive Officer, the Chief HR Officer and others may attend by invitation of the Chairman of the Remuneration Committee.

The Remuneration Committee’s primary purpose is to review the ongoing appropriateness of the remuneration policy as it applies to the Executive Directors and key senior management and to make recommendations on the framework for their remuneration and to determine their specific remuneration packages. In addition, the Remuneration Committee is responsible for monitoring the remuneration strategy and policy of the Group. In making its decisions, the Remuneration Committee considers the Employee, Social and Governance (‘ESG’) implications in making its decisions. It is also mindful to ensure that inappropriate risk-taking is not incentivised.

The Remuneration Committee’s Terms of Reference can be found under the corporate governance section of the Xchanging website. The current Terms of Reference were adopted on 28 February 2012.

The Remuneration Committee received advice from Towers Watson (our appointed advisers) and Clifford Chance during 2011. Towers Watson has also provided remuneration advice more widely to the Company with the permission of the Remuneration Committee. Towers Watson has signed the Remuneration Consultants Code of Conduct and has made the code available to Xchanging. Clifford Chance provided legal advice on the operation of share schemes, employment matters and legal advice more widely to the Company.

Remuneration policyXchanging’s remuneration policy is to ensure that we attract and retain key talent in order to create sustainable long-term value for shareholders. To help inform the Remuneration Committee, total remuneration is benchmarked periodically against relevant FTSE 250 companies (excluding financial services) taking into account the geographic reach of each role in determining competitive remuneration. The Remuneration Committee has determined that the FTSE 250 still remains the most appropriate peer group for its UK-based executive talent during its current transformation phase. The Remuneration Committee has also agreed that the remuneration philosophy for 2012 will remain as follows:�� To position base salaries around competitive market

practice over time. Mid-market base salary benchmarks will be determined by reference to the local geographic market for the role, and its size and scope.

�� To reward for business success with a significant proportion of the reward opportunity for our senior employees linked to sustainable performance in the form of variable compensation:

– annual bonuses will reward business performance delivered in the year above pre-agreed and appropriate thresholds and based on affordability. Performance measures will be based on a balanced set of key value drivers of the business;

– long-term incentives will form part of a market competitive remuneration package. Making awards in the form of shares aligns the interests of our executives with those of shareholders.

�� To encourage our senior team to build a personally significant stake in the business over time.

The Remuneration Committee believes that the remuneration policy described above is aligned to Xchanging’s business objectives and is in the interests of shareholders. The Remuneration Committee will continue to monitor performance against the total remuneration policy to ensure that it achieves its aim of attracting, motivating and retaining the senior management talent that is required to develop the Company and deliver shareholder value.

Remuneration for Executive Directors in 2012Remuneration packages for the Executive Directors will continue to consist of base salary, annual bonus, awards under long-term incentive schemes and other benefits. Following a review of remuneration policy and feedback from investors the Remuneration Committee intends to make a number of changes in 2012. These changes, which are outlined below in more detail, will maintain levels of target and maximum total pay for Executive Directors at the same levels as for 2011 but will seek to more closely align Xchanging’s executive incentive plans with our key value drivers going forward.

Base salaryIn light of the current economic circumstances, base salaries for the Executive Directors will remain fixed at £475,000 and £300,000 for 2012 for the Chief Executive Officer and Chief Financial Officer respectively.


Annual bonus plan for 2012Maximum annual bonus opportunity will remain at 150% of salary and the target opportunity, for reaching the challenging business plan for 2012 will remain at the current level of 60% of maximum (ie 90% of base salary). Maintaining this policy reflects the current environment in which the business operates whilst also providing management with an incentive to deliver the agreed business strategy. No bonus will be paid in the event that threshold profit-based hurdles are not achieved. Performance will be measured over three equally weighted key metrics:�� Operating profit;�� Revenue growth; and�� Cash flow targets.

Payment of bonuses will be delivered in light of performance across these three measures and appropriately challenging hurdles determined at the outset of the year. Performance will be assessed between each respective hurdle rate and plan maximum on a sliding scale basis.

For Executive Directors one third of any bonus earned will be deferred into equity which will vest into nil-cost options after three years and will continue to be exercisable for a further seven years to increase alignment with shareholders. A similar bonus deferral structure will also be extended to the wider senior management team in 2012.

Long-term incentives in 2012Over the course of 2011 the Committee undertook a review of existing long-term incentive arrangements to ensure that they remain appropriate. In assessing the new arrangements the Committee was mindful of the following guiding principles for incentives:�� They should be simple to understand and communicate.�� They should provide management with incentives that are

appropriately geared and represent an acceptable cost to the company and shareholders.

�� They should be based on goals that are challenging but achievable.

It was determined that long-term incentive awards under the Performance Share Plan (‘PSP’) will continue under the current policy for Executive Directors and a more focused selection of senior management than in previous years.

The Remuneration Committee also intends to revise the existing performance test to align them with our current business priorities and at the same time preserving the current, ‘Basic’ and ‘Stretch’ awards approach in place in 2011. Therefore Basic awards will continue to represent an annual award of up to 100% of base salary and the Stretch award up to an additional 50% of salary. The Remuneration Committee will communicate the new arrangements to its major investors and will disclose them in the 2012 Directors’ Remuneration Report.

A shareholding policy continues to apply to the Executive Directors that requires a minimum shareholding equivalent to 100% of base salary to build up over a maximum period of five years.

Pay mix in 2012Assuming the proposed changes described are implemented, the two charts below illustrate the resulting pay mix for Executive Directors based on target and maximum performance. In both cases, variable pay forms a significant portion of total remuneration in accordance with the Remuneration Committee’s policy described earlier.

Executive Director pay mix (%)(Target performance)

16.0

4.0

42.0

25.0

13.0Base salaryTarget annual bonus (cash)Target annual bonus (deferred shares)Long-term incentive threshold vestingPension

Executive Director pay mix (%)(Maximum performance)

37.0

2.0

24.0

24.0

12.0

Base salaryTarget annual bonus (cash)Target annual bonus (deferred shares)Long-term incentive threshold vestingPension

Remuneration during 2011Base salary Kenneth Lever was appointed Acting Chief Executive Officer on 9 February 2011, in addition to his role as Chief Financial Officer. He was appointed Chief Executive Officer on 7 June 2011. As Chief Financial Officer his salary was £375,000, and after his appointment as acting Chief Executive Officer his base salary remained unchanged but he received a £60,000 per annum pro rata allowance in recognition of the additional responsibilities. On appointment as Chief Executive Officer, the payment of the allowance ceased and his salary was increased to £475,000 per annum. David Bauernfeind was appointed Chief Financial Officer on 7 June 2011 on a base salary of £300,000.

Remuneration report continued

Company overview

Business review




Historical TSR graphThe graph below is prepared in accordance with Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008. It shows the Company’s TSR from the time of listing on 24 April 2007 to 31 December 2011 against that of the Total Return Indices for the FTSE 250, and the FTSE All Share index.

Historical TSR performance Growth in the value of a hypothetical £100 holding invested in Xchanging plc at the IPO price, FTSE 250 (excluding investment trusts) and FTSE All Share comparison based on spot values.

Apr 07 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11Dec 06

£200

£175

£150

£125

£100

£75

£50

25

£0Valu

e of

hyp

othe

tical

£10

0 h

oldi

ng

Date

Xchanging plc FTSE 250 (Excl.investment trusts) FTSE All Share

Additionally 12 employees were granted restricted shares in April 2011 where a three-year service is the only vesting condition applied. Those granted an award included David Bauernfeind prior to his appointment as Chief Financial Officer.

Share Purchase Plan (‘SPP’) At the start of 2007, prior to the listing of Xchanging plc, certain Directors, and members of senior management (excluding David Andrews) (the ‘F Share Loan Participants’), purchased class F common shares (in Xchanging BV), under the terms of the SPP, at the prevailing market price. Upon IPO, the class F common shares in Xchanging BV were split into shares in Xchanging plc on a one-for-four basis, with an equivalent value of £1.325 per share (the ‘SPP shares’).

Under the terms of the SPP, the Xchanging BV 2007 Employee Benefit Trust provided non-interest-bearing loans to 12 F Share Loan Participants, who were deemed key to retain following IPO, to enable them to fund the purchase of the class F common shares. The SPP shares were subject to an 18-month lock-in period, which expired in August 2008. The SPP shares could then be sold on the condition that a pro-rata proportion of any loan from the Xchanging BV 2007 Employee Benefit Trust was repaid.

The non-interest-bearing loans provided to the F Share Loan Participants become repayable on the earliest of the F Share Loan Participants ceasing employment, the transferring or otherwise disposing of their shares (or attempting to do so), accepting another loan from a member of the Group to refinance the loan and the ‘long stop’ date of 31 December 2011.

Annual bonus for 2011Executive Directors, Kenneth Lever, Chief Executive Officer and David Bauernfeind, Chief Financial Officer will receive a performance bonus in respect of 2011 of £150,000 and £60,000 respectively. The Committee determined that both Directors made a strong contribution in stabilising the Company and in particular through:�� Renegotiating our banking covenants. �� Restructuring of the business.�� Restructuring of the senior management team.�� Initiating the Changing Xchanging Programme.�� The successful implementation of the Four Point

Action Plan. �� the liquidation of Cambridge Integrated Services Group Inc.

One third of bonuses will be deferred into shares, for three years.

Long-term incentive plansThe Company established a number of equity-based share incentive plans around the time of the initial public offering (‘IPO’), namely an Approved and Unapproved Executive Share Option Plan (‘ESOP’) and a Performance Share Plan (‘PSP’). Other share plans, namely the Share Purchase Plan and earlier Approved and Unapproved G Share Options Plans were also in existence at the IPO, but no further awards will be made under the pre-IPO Plans.

Executive Share Option Plan (‘ESOP’)An ESOP award was made on 4 March 2011 to 45 senior managers including David Bauernfeind, who was appointed Chief Financial Officer in June. This award was made partially as approved options and partially as unapproved options.

Performance Share Plan (‘PSP’) The Remuneration Committee chose the PSP as the primary vehicle through which share-based long-term incentives were offered to Executive Directors and other senior executives in 2011.

The Awards made will vest three years after grant, depending upon the Company’s Total Shareholder Return (‘TSR’) performance when compared to the TSR performance of the constituents of the FTSE 250 index (excluding investment trusts) (the ‘Comparators’) and continuous employment over the vesting period.

The ‘Basic award’ will vest ranging from 25% if the Company’s TSR is equal to the median TSR of the Comparators, through to 100% if the Company’s TSR performance is at or above the upper quartile of the Comparators. The ‘Stretch award’ will only begin to vest if the Company’s TSR performance is at least upper quartile of the Comparators, with full vesting of the Stretch award only for upper decile performance. In any event, the Basic and Stretch awards will vest only if the Company’s annual average EPS growth over the relevant three-year period is no less than the UK Retail Price Index (RPI) +3%.

The extent to which the performance conditions are achieved will be determined by the Remuneration Committee, having received appropriate third-party advice.



As at 31 December 2011, a loan of £662,500 made to Richard Houghton remains outstanding with repayment due on or before 31 March 2012. A mortgage has been taken over his SPP shares by the Xchanging BV 2007 Employee Benefit Trust to secure this loan.

Other benefits Kenneth Lever is eligible for a cash allowance of 10% of base salary per annum in lieu of pension contributions. His cash allowance is non-bonusable.

David Bauernfeind is a member of the Xchanging Pension Scheme, a defined contribution scheme, and he receives 6% of his base salary capped at a base salary of £129,600.

No payments other than base salary are pensionable.

Executive Directors are eligible to receive other benefits including Life Assurance and Permanent Health Insurance (‘PHI’), and are also eligible to join Xchanging’s private medical insurance scheme in accordance with the scheme terms and conditions under which cover is provided.

The Group’s Life Assurance and PHI scheme provides a benefit equal to four times their basic salary at the time of death and 75% of their basic salary should an individual be unavailable for work due to a critical illness for 26 continuous weeks. David Andrews was a participant and David Bauernfeind is a participant in the insured Death in Service Pension Plan.

David Andrews was not a participant in any Xchanging pension scheme, however, had he died in service his widow would have received a pension. The liabilities of this plan ceased when his employment terminated.

Dilution and the pre-IPO share pool for entrepreneurial achievement As disclosed in Xchanging’s IPO prospectus, 4,006,388 shares authorised by shareholders prior to the IPO, but not allocated to employees at that time, may be placed under option or issued under the Company’s share incentive plans without counting towards the ongoing Association of British Insurers (‘ABI’) guideline dilution limits. The Remuneration Committee has subsequently approved that such pool of options may be awarded to employees under any of the shareholder approved schemes.

Service contracts Executive Directors have service contracts with notice periods of 12 months from either the Director or the Company. This is in line with best practice for listed companies. The Company has the right to terminate the employment of an Executive Director without notice or with less than 12 months’ notice by making a payment in lieu of notice equal to the base salary the Executive Director would be entitled to receive during any unexpired period of the notice period.

Executive Director appointmentsKenneth Lever was appointed as Acting Chief Executive Officer on 9 February 2011. At this time his base salary was not increased although he received an allowance of £60,000 per annum pro rata and on 11 April 2011 was awarded 572,519 PSP shares with a Basic award of 458,015 shares and a Stretch award of 114,504 shares.

On 7 June 2011, Kenneth Lever was appointed Chief Executive Officer and his base salary was increased to £475,000 per annum to reflect his increased responsibilities and the allowance was withdrawn. In addition, on 23 June 2011 he was granted an additional Basic award of 94,451 and Stretch award of 135,773 shares under the PSP bringing the total shares awarded under the PSP in the year to a grant value of 150% of salary.

In addition, 150,000 shares will vest on 6 October 2012 providing that Kenneth Lever remains in continuous service.

This award represents the second tranche of an award previously disclosed in the 2010 Directors’ Remuneration Report. On a similar basis this award will not vest if he has given, or received, notice of termination of his employment with Xchanging on the anniversary of the date of grant, and to the extent not vested; will lapse in the event he ceases employment with Xchanging during this period.

It was contractually agreed on Kenneth Lever’s appointment as Chief Financial Officer that should there be a change in control in the period to 31 December 2011 the Company would pay a discretionary bonus of no less than 60% and no more than 150% of base salary for the period of notice. Any entitlement to a guaranteed bonus ceases after the 2011 bonus payment date (March 2012).

David Bauernfeind was appointed Chief Financial Officer on 7 June 2011 and on 23 June 2011 received a Basic award of 129,207 shares and Stretch award of 64,604 shares under the PSP. In aggregate over 2011 he received Basic awards of 219,207 and Stretch awards of 64,604 with a grant value totalling 150% of salary.

Additionally David Bauernfeind received Approved Executive Share Options over 38,772 shares on 4 March 2011 at an option price of £0.77375, and Unapproved options over 56,228 shares on the same date and at the same option price.

Leaving arrangements David Andrews’ employment with the Company ended on 31 March 2011. The amount payable on departure was £505,685 payable in 11 equal monthly instalments commencing in April 2011.

Following his departure David Andrews entered into a consultancy agreement with Xchanging plc until 28 February 2012 as a special adviser to the Chairman to support the Company’s business development initiatives. The agreement expired automatically on 28 February 2012. Under the terms of the consultancy agreement, Xchanging paid David Andrews a monthly retainer of £8,500. In total he received £76,500 in retainer fees during 2011.

Company overview

Business review




Non-executive Directorships, and other external appointmentsKenneth Lever continues to be a member of the Accounting Standards Board for which he received fees of £15,000 during 2011.

He was also appointed a Non-executive Director of FM Insurance Company Limited, a subsidiary of FM Global, and has received fees of £17,000 during 2011.

Non-executive Directors The Board aims to recruit Non-executive Directors of a high calibre with broad commercial, international or other relevant experience. Non-executive Directors are expected to bring objectivity and independence of view to the Board’s discussions, and to help the Board with effective leadership in relation to the Company’s strategy, performance, risk and people management as well as ensuring high standards of financial probity and corporate governance.

The fees paid to Non-executive Directors are reviewed regularly. In setting the fees, a review of current market practice is undertaken which takes into account time commitment and responsibilities. The fees payable to Non-executive Directors are ratified by the Board, based both on the recommendations of the Executive Directors and the Chairman. The Non-executive Directors do not participate in the Company’s incentive or pension schemes, nor do they receive any employee benefits. The Company will reimburse all expenses reasonably incurred by the Non-executive Directors in the performance of their duties. The Company has obtained appropriate directors’ and officers’ liability insurance. All fees to Non-executive Directors will cease to accrue with effect from the date of ceasing to be a Non-executive Director for whatever reason.

Nigel Rich stepped down as Chairman with effect from 31 December 2011 and he received no compensation on departure.

Stephen Brenninkmeijer and Johannes Maret resigned as Non-executive Directors on 31 August 2011 and received no compensation on departure.

Geoff Unwin was appointed as a Non-executive Director on 1 December 2011 and was appointed Chairman on 1 January 2012. His appointment is for an initial term of four years from 1 December 2011, unless terminated earlier by either party with six months’ notice.

Geoff Unwin will receive a fee of £160,000 per annum which is subject to review after three years and thereafter annually. In accordance with his Terms and Conditions of Appointment, Geoff Unwin purchased with his own funds 270,908 shares in Xchanging which he is expected to hold for at least four years.

In the event that Xchanging is acquired by a third party for a price per share in excess of £1.00 before 2 December 2015 the Company will match Geoff Unwin’s purchased shares he still holds on a one-for-one basis.

Should Geoff Unwin cease to be a director at any time as a result of death, disability or any other reason but not including resignation before 2 December 2015 and before such date Xchanging is acquired by a third party for a price per share in excess of £1.00, the Board may in its sole discretion match Geoff Unwin’s purchased shares on a one-for-one basis.

He is under no obligation to hold such matched shares for a set period of time.

Though the share matching and the absence of a requirement to hold the matched shares for a period of time is not compliant with D.1.3 of the Code, the terms of Geoff Unwin’s remuneration were discussed with the major shareholders in advance of his appointment.

Bill Thomas was appointed as a Non-executive Director on 1 December 2011 for an initial term of three years with an annual fee of £40,000. With effect from 8 February 2012 he will receive an additional sum of £10,000 per annum for his work as Chairman of the Remuneration Committee. The level of fees will be reviewed after three years and thereafter annually.

Dennis Millard was appointed as a Non-executive Director on 2 April 2007 and following his re-election was appointed Senior Independent Non-executive Director on 2 April 2010 for a term of three years or until the 2013 AGM whichever shall occur later.

Michel Paulin was appointed Non-executive Director on 1 January 2010, and he has been appointed for a period of three years from 27 April 2010.

Pat O’Driscoll was appointed as a Non-executive Director on 3 November 2008 and will serve for a period of three years from 21 May 2009.



This part of the remuneration report is audited

Individual Directors’ remunerationThe remuneration of Directors for the year ended 31 December 2011 is made up as follows:

Directors’ remunerationFor the financial year ended 31 December 2011

Director

Base salary and fees

(£)Bonus

(£)Benefits

(£)Other

(£)Total

(£)

2010Total

(£)

Executive Directors

David Andrews1 146,250 – 2,697 413,742 562,689 611,483

Kenneth Lever2 431,795 150,0003 47,9294 20,8085 650,532 155,039

David Bauernfeind6 171,984 60,0003 7,122 – 239,106 –

Total 750,029 210,000 57,748 434,550 1,452,327 766,522

Non-executive Directors

Nigel Rich7 150,0008 – – – 150,000 150,000

Geoff Unwin9 13,333 – – – 13,333 –

Stephen Brenninkmeijer 30,000 – – – 30,000 45,000

Johannes Maret11 26,667 – 16,66712 43,334 68,500

Dennis Millard13 65,000 – – – 65,000 65,000

Pat O’Driscoll14 50,000 – – – 50,000 50,000

Michel Paulin 40,000 – – – 40,000 40,000

Bill Thomas15 3,333 – – – 3,333 –

Total 378,333 – – 16,667 395,000 418,500

Grand total 1,128,362 210,000 57,748 4,451,217 1,847,327 1,185,022

1 David Andrews resigned from the Board with effect from 9 February 2011. The payments classified as ‘Other’ represent pay in lieu of notice agreed to be paid in 11 equal monthly instalments commencing in April 2011. David Andrews had a special adviser consultancy agreement with the Company which expired automatically on 28 February 2012. His payments under this agreement were £76,500 during 2011.

2 Kenneth Lever was appointed Acting Chief Executive Officer on 9 February 2011, in addition to his role as Chief Financial Officer; he was appointed Chief Executive Officer on 7 June 2011.

3 This figure represents the total bonus, one-third of which is deferred for three years in the form of equity. 4 Kenneth Lever’s benefits include a cash allowance of 10% of base salary in lieu of pension contributions. 5 Kenneth Lever received an allowance of £60,000 per annum pro rata for the period when he was acting Chief Executive Officer (February to June). 6 David Bauernfeind was appointed Chief Financial Officer on 7 June 2011. The remuneration shown is that received since his appointment. 7 Nigel Rich resigned as Chairman with effect from 31 December 2011. 8 The fee paid to Nigel Rich was in his capacity as Chairman of the Board and Chairman of the Nominations Committee. 9 Geoff Unwin was appointed as a Non-executive Director with effect from 1 December 2011 and took over as Chairman on 1 January 2012. 10 Stephen Brenninkmeijer resigned from the Board with effect from 31 August 2011. 11 Johannes Maret resigned as Non-executive Director on 31 August 2011. 12 Johannes Maret received £16,667 under a special adviser agreement until his resignation. 13 Dennis Millard receives £40,000 as his base fee as a Non-executive Director, £10,000 in relation to his role as Chairman of the Audit Committee, and £15,000 in relation to his

appointment as Senior Independent Non-executive Director. 14 Pat O’Driscoll receives £40,000 fees as a Non-executive Director and an additional £10,000 in relation to her role as Chairman of the Remuneration Committee. 15 Bill Thomas was appointed to the Board with effect from 1 December 2011. He receives a fee of £40,000 per annum as a Non-executive Director. Bill Thomas was appointed

Chairman of the Remuneration Committee on 8 February 2012 and will receive an additional fee of £10,000 per annum in recognition of undertaking this role.

Note: Richard Houghton stood down as a director on 5 October 2010, and left employment on 31 March 2011. During the period 1 January 2011 until 31 March 2011 he received a salary of £102,750. His termination payments were reported in the remuneration report for 2010.

Company overview

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Other information


Share options and long-term incentive schemesDetails of share options held, granted, and exercised in 2011 in respect of qualifying services are outlined below.

Xchanging plc share options – approved scheme

Director

Number of options held at

1 January 2011

Granted during the year

Exercised during the year


31 December 2011

Exercise price £

Date from which exercisable Expiry date

David Bauernfeind – 38,772 – 38,772 £0.77 4/3/2014 4/3/2021

Xchanging plc share options – unapproved scheme

Director


1 January 2011

Granted during the year

Exercised during the year


31 December 2011

Exercise price £

Date from which exercisable Expiry date

David Bauernfeind – 56,228 – 56,228 £0.77 4/3/2014 4/3/2021

Johannes Maret 200,000 – – 200,000 £1.63 15/3/2010 15/3/20171

1 Following Johannes Maret stepping down as Non-executive Director on 31 August 2011 these options have now lapsed.

The options shown above have no performance conditions attached.

Xchanging plc 2007 Performance Share Plan (2007 PSP)

DirectorNumber of PSP shares Basic award Stretch award

Date of vesting

Total conditional

David Andrews

Grant 12/4/2010 431,415 287,610 143,805 12/4/2013 431,415

Kenneth Lever

Grant 11/4/2011 458,015 114,504 11/4/2014 572,519

Grant 23/6/2011 94,451 135,773 23/6/2014 230,224

David Bauernfeind

Grant 26/8/2010 159,907 26/8/2013 159,907

Grant 12/4/2010 25,943 12/4/2013 25,943

Grant 11/4/2011 90,000 11/4/2014 90,000

Grant 23/6/2011 129,207 64,604 23/6/2014 193,811

Note: The Remuneration Committee has applied its discretion under the 2007 PSP to allow David Andrews to maintain his outstanding awards on a pro-rata basis. As a result up to 431,415 conditional shares may vest on 12 April 2013 to the extent that the applicable performance conditions are satisfied at those dates and provided that a pro rata reduction (68% reduction) in shares awarded based on the term of employment during the vesting period shall be applied to the awards. The market price at the time of the award on 11 April was £0.82. The market price at the time of the award on 23 June was £1.06.


Directors’ shareholdings

Director

Number of shares at

1 January 2011

Disposals of shares during the year

Acquisition of shares during

the yearShares

awarded

Number of shares at

31 December 2011

Executive Directors

David Andrews1 21,120,3122 4,000,0003 17,120,312

Kenneth Lever 0 100,000 61,6504 161,650

David Bauernfeind 64,8005 0 0 0 64,8005

Non-executive Directors

Nigel Rich1 250,000 50,000 300,000

Geoff Unwin6 0 270,908 270,908

Stephen Brenninkmeijer7 253,272 70,000 323,272

Johannes Maret1 1,224,004 0 1,224,004

Dennis Millard 100,000 0 100,000

Pat O’Driscoll 12,230 14,000 26,230

Michel Paulin – 30,000 30,000

Bill Thomas8 – – –

1 The Director retired from the Board during FY11 (David Andrews 9 February 2011, Nigel Rich 31 December 2011, Stephen Brenninkmeijer 31 August 2011, Johannes Maret 31 August 2011).

2 Includes 400,000 shares held by the Trustees of the David William Andrews Discretionary Fund and 1,146,864 held by his son William Andrews, as a connected person under the Listing Rules and 175,000 shares held by his spouse Sylvia Andrews.

3 Transferred interest in 4,000,000 shares into a Trust for the benefit of his four children.4 The shares awarded had a market value of £0.70 valuing the grant at £43,155. This represents an award of 150,000 shares under LR 9.4.2 R(2). Sufficient shares were sold to

cover the relevant tax liabilities accruing to Kenneth Lever. 5 David Bauernfeind holds 28,000 shares and his spouse holds 36,800 shares in the Company which were acquired prior to his appointment as a Director.6 Geoff Unwin was appointed Non-executive Director with effect from 1 December 2011 and was appointed Chairman with effect from 1 January 2012.7 Amended data following discovery that the acquisition by Stephen Brenninkmeijer of 3,272 shares, which had been announced on 24 May 2007 had not been incorporated

into his total shareholding since that date.8 Bill Thomas was appointed Non-executive Director on 1 December 2011.

The Directors’ shareholdings have not changed between the end of the financial year and the publication of the report and accounts.

Company overview

Business review



Other information


Employee Benefit Trust Xchanging has three Employee Benefit Trusts: The Infrex Employee Share Trust, the Xchanging Employee Benefit Trust and the Xchanging BV 2007 Employee Benefit Trust.

The trustees of the Infrex Employee Share Trust during 2011 were David Andrews (replaced by Gary Whitaker from December 2011) and Kenneth Lever. The Infrex Employee Share Trust is a discretionary trust for the benefit of employees of Xchanging UK Limited and its subsidiaries as the trustees decide. The Infrex Employee Share Trust holds 191,108 shares.

The trustee of the Xchanging Employee Benefit Trust is Ogier Employee Benefit Trustee Limited, an independent professional trustee situated in Jersey. The Xchanging Employee Benefit Trust is a discretionary trust for the benefit of such employees of Xchanging BV and its subsidiaries as the trustees decide. The Xchanging Employee Benefit Trust does not hold any shares.

The trustee of the Xchanging BV 2007 Employee Benefit Trust is Ogier Employee Benefit Trustee Limited, an independent professional trustee situated in Jersey. The Xchanging BV 2007 Employee Benefit Trust is a discretionary trust for the benefit of such employees of Xchanging UK Limited as the trustees decide. The Xchanging BV 2007 Employee Benefit Trust does not hold any shares.

Approved on behalf of the Board of Directors

Bill ThomasChairman of the Remuneration Committee


We have audited the group financial statements of Xchanging plc for the year ended 31 December 2011 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated cash flow statement, the reconciliation of net cash flow to movement in net cash, the movement in net cash, the consolidated balance sheet, the consolidated statement of changes in equity, and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors’ Responsibilities set out on page 52, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements In our opinion the Group financial statements: nn give a true and fair view of the state of the Group’s affairs

as at 31 December 2011 and of its loss and cash flows for the year then ended;

nn have been properly prepared in accordance with IFRSs as adopted by the European Union; and

nn have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006 In our opinion:nn the information given in the Directors’ Report for the

financial year for which the Group financial statements are prepared is consistent with the Group financial statements; and

nn the information given in the Corporate Governance Statement set out on pages 53 to 59 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion: nn certain disclosures of Directors’ remuneration specified by

law are not made; or nn we have not received all the information and explanations

we require for our audit; ornn a corporate governance statement has not been prepared

by the Parent Company.

Under the Listing Rules we are required to review: nn the Directors’ report, set out on page 50 to 52, in relation

to going concern; nn the part of the Corporate Governance Statement relating

to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and

nn certain elements of the report to shareholders by the Board on Directors’ remuneration.

Other matter We have reported separately on the Parent Company financial statements of Xchanging plc for the year ended 31 December 2011 and on the information in the Remuneration Report that is described as having been audited.

Paul Aitken (Senior Statutory Auditor)For and on behalf of PricewaterhouseCoopers LLPChartered Accountants and Statutory AuditorsLondon

1 March 2012

Independent auditors’ reportto the members of Xchanging plc on the Group financial statements

Company overview

Business review




2011 Restated2

2010

NoteAdjusted

£m

Adjustments to adjusted1

£mTotal

£mAdjusted

£m

Adjustments to adjusted1

£mTotal

£m

Continuing operations

Revenue 4 650.0 1.2 651.2 681.8 6.9 688.7

Cost of sales 5 (584.7) (19.9) (604.6) (605.0) (12.4) (617.4)

Gross profit 65.3 (18.7) 46.6 76.8 (5.5) 71.3

Administrative expenses 5 (22.1) (17.9) (40.0) (20.7) (53.7) (74.4)

Operating profit/(loss) 43.2 (36.6) 6.6 56.1 (59.2) (3.1)

Finance costs 9 (14.1) (5.0) (19.1) (13.2) (0.8) (14.0)

Finance income 9 10.0 – 10.0 9.5 – 9.5

Profit/(loss) before taxation 39.1 (41.6) (2.5) 52.4 (60.0) (7.6)

Taxation 10 (14.2) 8.3 (5.9) (15.3) 0.6 (14.7)

Profit/(loss) for the year from continuing operations 24.9 (33.3) (8.4) 37.1 (59.4) (22.3)

Discontinued operation

(Loss)/profit from discontinued operation 13 (4.0) 8.5 4.5 (0.9) (50.1) (51.0)

Profit/(loss) for the year 20.9 (24.8) (3.9) 36.2 (109.5) (73.3)

Attributable to:

– Owners of the parent 16.1 (28.2) (12.1) 28.7 (107.5) (78.8)

– Non-controlling interests 29 4.8 3.4 8.2 7.5 (2.0) 5.5

20.9 (24.8) (3.9) 36.2 (109.5) (73.3)

Earnings per share attributable to owners of the parent (expressed in pence per share)

Basic

– Continuing operations 11 8.01 (5.79) 12.30 (16.84)

– Discontinued operation 11 (1.32) 0.72 (0.30) (16.14)

Total operations 6.69 (5.07) 12.00 (32.98)

Diluted

– Continuing operations 11 7.99 (5.79) 12.25 (16.84)

– Discontinued operation 11 (1.32) 0.71 (0.30) (16.14)

Total operations 6.67 (5.08) 11.95 (32.98)

The notes on pages 79 to 143 form an integral part of these consolidated financial statements.

1 Adjustments to adjusted in 2010 and 2011 include exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity, acquisition-related expenses and imputed interest on put options.

2 The comparative amounts have been restated 1) to reflect the impact of the discontinued operation, 2) to show adjusted profits and 3) to reflect changes in accounting policies. Further explanation of the restatement is included in note 2 (i) on pages 79 and 80.

Consolidated income statementfor the year ended 31 December 2011


2011

£m

Restated1

2010£m

Actuarial losses arising from defined benefit pension schemes (6.3) (1.0)

Revaluation of available-for-sale financial assets (0.4) (1.0)

Revaluation losses recycled to the income statement on disposal of available-for-sale financial assets 0.1 –

Revaluation losses recycled to the income statement on impairment of available-for-sale financial assets 4.2 1.2

Fair value movements on hedging instrument qualifying for hedge accounting (0.6) –

Fair value movements on hedging instrument recycled to the income statement upon de-designation 0.1 –

Cumulative translation differences recycled to the income statement in respect of the discontinued operation 3.3 –

Currency translation differences (8.8) 5.9

Other comprehensive (loss)/income net of tax (8.4) 5.1

Loss for the year (3.9) (73.3)

Total comprehensive loss for the year (12.3) (68.2)

Attributable to:

– Owners of the parent (16.8) (75.7)

– Non-controlling interests 4.5 7.5

(12.3) (68.2)

Total comprehensive loss attributable to the owners of the parent arises from:

– Continuing operations (22.7) (34.7)

– Discontinued operation 5.9 (41.0)

(16.8) (75.7)

Items in the statement above are disclosed net of tax. The income tax relating to each component of other comprehensive income is disclosed in note 10.


1 The comparative amounts have been restated to reflect the impact of the discontinued operation. Further explanation of the restatement is included in note 2 (i) on pages 79 and 80.

Consolidated statement of comprehensive incomefor the year ended 31 December 2011

Company overview

Business review




Note2011

£m

Restated1

2010£m

Cash flows from operating activities

Continuing operations:

Cash generated from operations 32 61.1 80.0

Income tax paid (9.7) (14.1)

Discontinued operation (7.8) (16.8)

Net cash generated from operating activities 43.6 49.1

Cash flows from investing activities


Acquisition cost of subsidiaries (5.3) (15.3)

Cash and cash equivalents acquired with subsidiaries 33 – 18.7

Purchase of available-for-sale financial assets – (0.8)

Proceeds from sale of available-for-sale financial assets 0.5 –

Purchase of property, plant and equipment (6.6) (7.1)

Purchase of intangible assets (8.4) (14.4)

Pre-contract expenditure (2.7) (0.4)

Proceeds from sale of property, plant and equipment 0.2 0.3

Interest received 1.1 0.7

Dividends received – 0.2

Discontinued operation:

Net proceeds from sale of discontinued operation 13 5.2 –

Other cash flows from investing activities (0.5) (0.6)

Net cash used in investing activities (16.5) (18.7)

Cash flows from financing activities


Proceeds from issue of shares – 2.1

Proceeds from borrowings 84.1 30.2

Repayment of borrowings (85.8) (13.6)

Transaction costs of arranged borrowings (4.0) –

Acquisition of non-controlling interest in subsidiaries (4.9) (0.9)

Proceeds from sale of shares in subsidiary – 0.4

Interest paid (2.0) (2.9)

Dividends paid to equity shareholders 12 – (6.6)

Dividends paid to non-controlling interests (7.7) (8.5)

Discontinued operation (0.3) (0.8)

Net cash used in financing activities (20.6) (0.6)

Net increase in cash and cash equivalents 6.5 29.8

Cash and cash equivalents at 1 January 91.1 60.1

Effects of exchange adjustments 0.5 1.2

Cash and cash equivalents at 31 December 19 98.1 91.1


1 The comparative amounts have been restated to reflect the impact of the discontinued operation and to recognise the impact of the gross up of the customer accounts. Further explanations of the restatement are included in note 2 (i) on pages 79 and 80.

Consolidated cash flow statementfor the year ended 31 December 2011


2011

£m

Restated1

2010£m

Increase in cash and cash equivalents in the year 7.0 31.0

Cash outflow/(inflow) from movement in bank loans and overdrafts 2.6 (15.5)

Movement on finance lease liabilities (0.6) (0.4)

Movement on receivable purchase facility (0.1) –

Change in net cash resulting from cash flows 8.9 15.1

Finance lease liabilities disposed of with discontinued operation 0.3 –

Receivable purchase facility disposed of with subsidiary (not discontinued operation) 0.3 –

Other non-cash movements (0.5) (0.5)

Exchange movements 2.7 (1.9)

Movement in net cash in the year 11.7 12.7

Net cash at the beginning of the year 33.5 20.8

Net cash at the end of the year 45.2 33.5

Movement in net cashfor the year ended 31 December 2011

Restated1 2010

£mCash flow

£m

Cash and debt disposed

£m

Other non-cash

movements£m

Exchange movements

£m2011

£m

Cash and cash equivalents per the cash flow statement 91.1 13.3 (6.8) – 0.5 98.1

Bank loans and overdrafts, including loan arrangement fees (55.9) 2.6 – (0.5) 2.7 (51.1)

Finance lease liabilities (1.5) (0.6) 0.3 – – (1.8)

Receivable purchase facility (0.2) (0.1) 0.3 – – –

Net cash 33.5 15.2 (6.2) (0.5) 3.2 45.2

Restated1

2009£m

Cash flow£m

Cash and debt acquired

£m

Other non-cash

movements£m

Exchange movements

£m2010

£m

Cash and cash equivalents per the cash flow statement 60.1 11.1 18.7 – 1.2 91.1

Bank loans and overdrafts, including loan arrangement fees (38.0) (15.5) – (0.5) (1.9) (55.9)

Finance lease liabilities (1.1) (0.4) – – – (1.5)

Receivable purchase facility (0.2) – – – – (0.2)

Net cash 20.8 (4.8) 18.7 (0.5) (0.7) 33.5

1 The comparative amounts have been restated to gross up customer accounts. Further explanations of the restatement are included in note 2 (i) on pages 79 and 80.

Reconciliation of net cash flow to movement in net cashfor the year ended 31 December 2011

Company overview

Business review




Note2011

£m

Restated1

2010£m

AssetsNon-current assetsGoodwill 14 167.2 190.3Other intangible assets 15 53.2 67.6Property, plant and equipment 16 20.2 29.7Available-for-sale financial assets 17 23.2 24.6Trade and other receivables 18 4.8 4.4Retirement benefit assets 34 0.3 0.5Deferred income tax assets 24 24.9 21.7Total non-current assets 293.8 338.8Current assetsInventories 0.2 0.1Current income tax receivable 0.9 0.3Trade and other receivables 18 130.1 160.0Cash and cash equivalents 19 98.1 91.1Total current assets 229.3 251.5Total assets 523.1 590.3LiabilitiesCurrent liabilitiesTrade and other payables 20 (146.9) (176.9)Current income tax liabilities (7.3) (7.9)Borrowings 22 (4.3) (17.0)Customer accounts 19 (11.6) (10.4)Other financial liabilities 22 (20.0) (27.6)Provisions 23 (22.1) (23.2)Total current liabilities (212.2) (263.0)Non-current liabilitiesTrade and other payables 20 (6.3) (18.2)Borrowings 22 (48.6) (40.6)Other financial liabilities 22 (3.6) (5.1)Deferred income tax liabilities 24 (7.0) (8.8)Retirement benefit obligations 34 (42.7) (34.1)Provisions Ordinary 23 (7.1) (7.9)Total non-current liabilities (115.3) (114.7)Total liabilities (327.5) (377.7)Net assets 195.6 212.6Shareholders’ equityOrdinary shares 25 11.9 11.9Share premium 27 107.8 107.8Merger reserve 27 409.7 409.7Reverse acquisition reserve 27 (312.2) (312.2)Other reserves 28 (4.1) 20.9Retained earnings 27 (45.7) (44.4)Total shareholders’ equity 167.4 193.7Non-controlling interest in equity 29 28.2 18.9Total equity 195.6 212.6

1 The comparative amounts have been restated to gross up customer accounts. Further explanations of the restatements are included in note 2 (i) on pages 79 and 80.


The consolidated financial statements on pages 71 to 143 were approved by the Board of Directors on 1 March 2012 and signed on its behalf by:

David Bauernfeind Kenneth LeverChief Financial Officer Chief Executive Officer

Consolidated balance sheetas at 31 December 2011Company number: 5819018


Attributable to equity holders of the Company

Note

Ordinary shares

£m

Share premium

£m

Merger reserve

£m

Reverse acquisition

reserve£m

Other reserves

£m

Retained earnings

£m

Totalshareholders’

equity£m

Non-controlling interest in

equity£m

Total equity

£m

At 1 January 2010 11.8 105.8 409.7 (312.2) 15.6 42.6 273.3 15.5 288.8

Comprehensive income

Profit or loss for the year – – – – – (78.8) (78.8) 5.5 (73.3)

Other comprehensive income

Actuarial losses arising from defined benefit pension schemes 28/29 – – – – (1.3) – (1.3) 0.3 (1.0)

Revaluation of available-for-sale financial assets 28/29 – – – – (1.1) – (1.1) 0.1 (1.0)

Revaluation losses recycled to the income statement on impairment of available-for-sale financial assets 28/29 – – – – 1.1 – 1.1 0.1 1.2

Currency translation differences 28/29 – – – – 4.4 – 4.4 1.5 5.9

Total comprehensive income for the year2 – – – – 3.1 (78.8) (75.7) 7.5 (68.2)

Transactions with owners:

Arising on business combination 33 – – – – – – – 2.3 2.3

Recognition of put option – – – – – (3.6) (3.6) – (3.6)

Deferred tax on put option – – – – – (0.1) (0.1) – (0.1)

Share-based payments – – – – – 2.3 2.3 – 2.3

Deferred income tax on share-based payments 24 – – – – – (0.7) (0.7) – (0.7)

Current income tax on share-based payments 10 – – – – – 0.5 0.5 – 0.5

Shares issued in respect of employee share-based payments 25 0.1 2.0 – – – – 2.1 – 2.1

Disposal of shares in a subsidiary – – – – 0.4 – 0.4 – 0.4

Consolidated statement of changes in equityfor the year ended 31 December 2011

Company overview

Business review





Note

Ordinary shares

£m

Share premium

£m

Merger reserve

£m

Reverse acquisition

reserve£m

Other reserves

£m

Retained earnings

£mTotal

£m


equity£m

Total equity£m

Other translation equity movements 28/29 – – – – 1.8 – 1.8 0.1 1.9

Dividends paid/payable 12 – – – – – (6.6) (6.6) (6.5) (13.1)

At 31 December 2010 11.9 107.8 409.7 (312.2) 20.9 (44.4) 193.7 18.9 212.6

Comprehensive income

Profit or loss for the year – – – – – (12.1) (12.1) 8.2 (3.9)

Other comprehensive income

Actuarial losses arising from defined benefit pension schemes 28/29 – – – – (7.1) – (7.1) 0.8 (6.3)

Revaluation of available-for-sale financial assets 28/29 – – – – (0.6) – (0.6) 0.2 (0.4)

Revaluation losses recycled to the income statement on disposal of available-for-sale financial assets 28 – – – – 0.1 – 0.1 – 0.1

Revaluation losses recycled to the income statement on impairment of available-for-sale financial assets 28 – – – – 4.2 – 4.2 – 4.2

Fair value movements on hedging instrument qualifying for hedge accounting 28 – – – – (0.6) – (0.6) – (0.6)

Fair value movements on hedging instrument recycled to the income statement upon de-designation 28 – – – – 0.1 – 0.1 – 0.1

Cumulative translation differences recycled to the income statement in respect of the discontinued operation1 28 – – – – 3.3 – 3.3 – 3.3

Currency translation differences 28/29 – – – – (4.1) – (4.1) (4.7) (8.8)



Note

Ordinary shares

£m

Share premium

£m

Merger reserve

£m

Reverse acquisition

reserve£m

Other reserves

£m

Retained earnings

£mTotal

£m


equity£m

Total equity£m

Total comprehensive income for the year – – – – (4.7) (12.1) (16.8) 4.5 (12.3)

Transactions with owners:

Share-based payments 26 – – – – – 3.1 3.1 – 3.1

Transaction with non-controlling interest 28/29 – – – – (20.3) 7.8 (12.5) 12.5 –

Dividends paid/payable 12 – – – – – (0.1) (0.1) (7.7) (7.8)

At 31 December 2011 11.9 107.8 409.7 (312.2) (4.1) (45.7) 167.4 28.2 195.6

For a description of the nature and purpose of each reserve within shareholders’ equity refer to note 27. The notes on pages 79 to 143 form an integral part of these consolidated financial statements.

1 The cumulative translation differences recycled to the income statement in respect of the discontinued operation are included within the profit on disposal of the discontinued operation of £4.5 million.

2 In total comprehensive income for the year, amounts are stated net of tax.

Consolidated statement of changes in equity continuedfor the year ended 31 December 2011

Company overview

Business review




1 General informationXchanging plc (‘the Company’) and its subsidiaries (together ‘the Group’) provide a range of business processing services, primarily to the financial services and insurance industries, as well as procurement, and technology services across industries. The nature of the Group’s operations and its principal activities are discussed further on pages 2 to 15.

Xchanging plc is a public limited company incorporated and domiciled in the UK. The address of its registered office is 34 Leadenhall Street, London, EC3A 1AX. The Company’s ordinary shares are traded on the London Stock Exchange.

2 Principal accounting policiesThe principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to both years presented, unless otherwise stated.

(i) Basis of preparation of the financial statementsThese financial statements have been prepared in accordance with the European Union (EU) endorsed International Financial Reporting Standards (‘IFRS’), IFRIC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of available-for-sale financial assets, other financial assets and financial liabilities at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3.

The comparatives as presented for the year ended 31 December 2010 have been restated for the following reasons:

nn During the year ended 31 December 2011, the Group sold its US workers’ compensation and third party administration operations, which constituted the Group’s US BPO cash-generating unit within the Insurance Services business segment. Subsequent to this sale, the legal company Cambridge Integrated Services Group Inc. (‘CISGI’) was put into an Assignment for the Benefit of Creditors and the Group’s control over the remaining assets and liabilities of the US BPO business ceased. These transactions constitute a discontinued operation in accordance with IFRS 5, ‘Non-current assets held for sale and discontinued operations’, as the transaction represented the disposal of a separate major line of business and, at the time, was the primary business in the US. The results and cash flows of the discontinued operation have therefore been presented separately on the face of the income statement and cash flow statement, and are not included within the Group’s analysis of continuing operations. Prior year comparatives have been re-presented to allow for like-for-like comparisons. Further details are provided in note 13 of these consolidated financial statements.

nn As indicated in the Annual Report for the year ended 31 December 2010, the Group has moved from reporting underlying operating profit to reporting adjusted operating profit. Adjusted operating profit is now the primary measure used to evaluate the performance of the Group and its operating segments. Adjusted operating profit excludes all material non-recurring operating items and adds back both acquisition-related expenses and amortisation of intangible assets previously unrecognised by an acquired entity. The adjusted results of the Group, instead of the underlying results, have therefore been presented on the face of the income statement and the prior year comparatives have been re-presented. Underlying profit for the year ending 31 December 2010 from total operations was £46.0 million, however adjusted profit for the year ending 31 December 2010 from total operations is presented as £36.2 million as a result of the exclusion of non-recurring contract revenue of £4.9 million relating to the discontinued operation and non-recurring contract settlements of £4.9 million, net of tax, relating to the continuing operations.

nn Following a strategic review in 2011 of the investment account administration business of Fondsdepot Bank GmbH (FdB), part of our Financial Services sector, the revenue recognition accounting policy in respect of initial load fees has been changed with effect from 1 January 2010. Initial load fees are received from customers on the acquisition of funds. These fees are then passed on to independent financial advisers as commission for placing the funds for the customer. Previously, the fees received from customers were recognised as revenue and the commission payable was recognised as an expense within cost of sales. It has been determined that the amounts collected on behalf of customers are not economic benefits which flow to the Group and do not result in an increase in the Group’s equity. Consequently, the corresponding revenue recognition accounting policy has been changed so that neither the revenue nor the expense is recognised. The prior year comparatives have been restated as a result of this change in accounting policy. Revenue and cost of sales for the year ended 31 December 2010 have been reduced by £13.7 million. There is no impact on the overall profitability, or equity of the Group.

Notes to the consolidated financial statementsfor the year ended 31 December 2011


2 Principal accounting policies continuednn On the acquisition of FondsServiceBank by FdB on 3 April 2010, it was identified that £8.9 million of cash accounts were

transferred to FdB. These accounts held cash deposits paid in by customers. In the provisional acquisition accounting presented for the year ended 31 December 2010, these accounts were not included as part of the assets acquired as management believed that this cash was held on behalf of customers with no right of use by FdB. During 2011 it was determined that there is no set agreement between FdB and its customers on how the funds in the cash accounts are to be administered and that FdB has full legal rights to use the cash, earning interest income as a result. Consequently, the revised business combination disclosures for this acquisition (refer to note 33) have been prepared to include the £8.9 million of cash in these accounts as part of the assets acquired. As FdB is liable to repay these funds on demand to its customers, an £8.9 million customer accounts current liability has also been recognised on acquisition. In addition, the comparatives for the year ended 31 December 2010 for the balance sheet, cash flow statement, reconciliation of net cash flow to movement in net cash, movement in net cash, the cash and cash equivalents, financial instruments, and segmental reporting disclosures have been restated to take into account the £10.4 million of cash held in the customer accounts at 31 December 2010.

The table below summarises the restatements to the ‘adjusted’ results for the year ended 31 December 2010:

2010As previously

reported£m

Initialload fees

£m

Contractsettlements

and taximpact

£m

Discontinuedoperation

£m

2010As restated

£m

Revenue 780.6 (13.7) (6.9) (78.2) 681.8

Cost of sales (692.7) 13.7 – 74.0 (605.0)

Gross profit 87.9 – (6.9) (4.2) 76.8

Administrative expenses (20.7) – – – (20.7)

Operating profit 67.2 – (6.9) (4.2) 56.1

Finance costs (13.4) – – 0.2 (13.2)

Finance income 9.5 – – – 9.5

Profit before taxation 63.3 – (6.9) (4.0) 52.4

Taxation (17.3) – 2.0 – (15.3)

Profit for the year 46.0 – (4.9) (4.0) 37.1

(ii) Going concernThe Directors have reviewed the liquidity position of the Group for the period to 30 June 2013. The cash flows of the Group have been assessed against the Group’s available sources of finance on a monthly basis to determine the level of headroom against committed bank facilities. Based on this analysis, and an assessment of the potential cash risks, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements.

(iii) Changes in accounting policy and disclosure(a) New and amended standards and interpretations adopted by the GroupThere are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 January 2011 that would be expected to have a material impact on the Group (although they may affect the accounting for future transactions and events).

(b) New standards, amendments and interpretations issued, but not effective for the financial year beginning 1 January 2011 and not early adopted:IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Group is yet to assess IFRS 9’s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after 1 January 2015, subject to endorsement by the EU.

Notes to the consolidated financial statements continuedfor the year ended 31 December 2011

Company overview

Business review




IAS 19, ‘Employee benefits’, was amended in June 2011 but the amendments are not applicable until 1 January 2013. The impact on the Group will be to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (or asset). The Group is yet to assess the full impact of the amendment.

There are no other IFRSs or IFRIC interpretations that are endorsed by the EU but are not yet effective that would be expected to have a material impact on the Group.

(iv) Basis of consolidation (a) SubsidiariesSubsidiaries are all entities (including special purpose entities such as an employee benefit trust) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The Group also assesses existence of control where it does not own more than 50% of the voting rights but is able to govern the financial and operating policies by virtue of de facto control. De facto control arises in respect of the Group’s Enterprise Partnerships through the specific contractual arrangements giving the Group power over the financial and operating policies.

Subsidiaries are fully consolidated from the date on which control passes to the Group. They are deconsolidated from the date control ceases.

Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Intercompany transactions, balances, income and expenses on transactions between Group companies are eliminated. Profits and losses resulting from intercompany transactions that are recognised in assets are also eliminated.

The Group recognises any non-controlling interest in the income statement, balance sheet and other comprehensive income based on the non-controlling interest’s proportionate share, except where there are specific contractual arrangements where this is not applicable, for example, where guaranteed dividends payable to non-controlling interests exist instead of proportionate profit-sharing arrangements.

(b) Business combinationsThe Group applies the acquisition method to account for business combinations. A business combination is deemed to have occurred where the Group acquires a third party business, either in whole or in part, so that it obtains overall operational and financial control of that business.

The consideration transferred for the acquisition of a business is the fair value of the assets transferred, the liabilities incurred to the former owner of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement.

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or a liability is recognised either in the income statement or as a change in other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at acquisition date.

The Group recognises any non-controlling interest in the acquiree on an acquisition by acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets.

Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the net identifiable assets acquired and the liabilities assumed. If the consideration is lower than the fair value of the net assets of the business acquired, the difference is recognised directly in the income statement.

Acquisition-related costs are expensed as incurred.


2 Principal accounting policies continued(c) Changes in ownership interests in subsidiaries without change of controlTransactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions. That is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity; specifically other reserves. Gains or losses arising on disposals to non-controlling interests are also recorded in equity.

(d) Disposal of subsidiariesWhen the Group ceases to have control of a subsidiary, any retained interests in the equity is remeasured to its fair value at the date when control is lost, with the change in the carrying amount recognised in profit or loss. Any amounts previously recognised in other comprehensive income or directly in equity, in respect of that subsidiary are accounted for as if the Group had directly disposed of the related assets and liabilities. This may mean that amounts previously recognised in other comprehensive income or taken directly to equity are recycled to the income statement.

(e) Discontinued operationA discontinued operation is a component of the Group’s business that represents a separate major line of business. This may be the whole of or part of a subsidiary’s operations. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier.

(v) Revenue recognitionRevenue is measured at the fair value of the consideration received or receivable, excluding value added tax, rebates and discounts. It comprises the value of services provided for customer administration services, including investment administration services, business process services, claims servicing, securities processing, maintenance contracts and software sales, software development services, procurement services, as well as human resources, finance and accounting services. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Group and when specific criteria have been met for each of the Group’s activities described below.

nn Customer administration servicesRevenue in respect of the provision of administration services comprises amounts receivable for subscription fees, a transaction charge for the provision of administration services and fees for other ad hoc services. Subscription fees are recognised in the income statement according to the period to which they relate. Transactional revenue for these services is recognised in the period in which the transaction takes place. Ad hoc revenue is recognised in the period in which the service is provided.

nn Business process servicesRevenue in respect of business process services contracts is divided into an implementation phase and a service provision phase.

Revenue in respect of the implementation phase is accounted for on a long-term contract basis, where it is separable from the provision of administration services. The percentage completion method is applied, based on the proportion of costs incurred to the total estimated costs. Profits are recognised on an implementation phase where the final outcome can be assessed with reasonable certainty. A full provision is made for all known or anticipated losses on each contract immediately, once forecast.

Revenue in respect of the provision of post-implementation administration services to business process services customers is recognised in the period to which the service relates.

nn Claims servicingRevenue from the servicing of claims is recognised over the period of the underlying service contract, where there is a defined service period. Revenue from incentive schemes associated with the provision of claims servicing is recognised on the basis of estimates of the amounts which are considered reasonably certain to be received.

nn Securities processingRevenue from the provision of securities processing services is recognised according to the period to which the service relates, net of guaranteed rebates to customers.


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nn Maintenance contracts, hosting services and software salesRevenue in respect of the rental or maintenance of computer software programmes, hosting and other services is recognised as earned. Billings are included in trade receivables in accordance with the terms of the relevant rental or maintenance contract. To the extent that billings are recorded in advance of the relevant revenue, such advance billings are included in deferred income.

Revenue from maintenance contracts is recognised on a straight-line basis over the term of the maintenance contract.

Revenue from the sale of perpetual software licences, including revenue relating to both the initial licence fee and implementation phase, is recognised over the length of the implementation of the software. Revenue from the sale of subsequent licences, where no implementation is required, is recognised when the significant risks and rewards of ownership are considered to have passed to the buyer and all obligations have been fulfilled; usually considered to occur on delivery of the licences to the buyer.

nn Software development servicesRevenue from software development services is recognised as related services are performed when the contract is based on time and materials or under the percentage completion basis where work is performed under a fixed price contract. Revenue from maintenance contracts is recognised on a straight-line basis over the term of the maintenance contract.

nn Procurement servicesRevenue from the provision of procurement services is recognised on a gross basis where the Group is responsible for the whole supply chain process and associated business process from end-to-end. Where the Group acts as an agent, revenue is recognised on a net basis. Revenue is recognised, net of guaranteed rebates to customers, according to the period to which the service relates and only when all obligations are fulfilled.

nn Human resources/finance and accounting servicesRevenue from the provision of human resources and finance and accounting services is recognised according to the period to which the service relates, net of guaranteed rebates to customers, when all obligations are fulfilled.

(vi) Deferred incomeDeferred income relating to claims handling income received at claim inception in our workers’ compensation business is released in line with an estimate of the cost to service the claims based on actuarial table profiles. The profiles determine, for each class of claim that the Group processes, the estimated life cycle and work effort of a typical claim. The majority of this revenue is released over a two year period.

Deferred income relating to software maintenance and licence fees received in advance is predominantly in our insurance business. This income is released evenly over the year to which it relates.

(vii) Finance costs Finance costs are charged to the income statement using the effective interest rate method.

(viii) Borrowing costsThe Group capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The amount of borrowing costs to be capitalised will depend on whether directly attributable borrowings or general borrowings are used to finance the asset. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss.

(ix) Finance incomeFinance income is reported in the income statement as it arises through the application of the effective interest rate method.

(x) Dividend distributionsDividend distributions to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. Interim dividends are recognised when paid.

(xi) Foreign currency transactions (a) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Sterling, which is the Group’s presentation currency.


2 Principal accounting policies continued(b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the income statement within ‘finance income or cost’. All other foreign exchange gains and losses are presented in the income statement within ‘foreign exchange (loss)/gain’ in cost of sales or administrative expenses.

Translation differences on non-monetary financial assets such as equities classified as available-for-sale are included in the revaluation reserve in equity.

Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss.

(c) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: nn All assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet.nn Income and expenses for each income statement are translated at monthly average exchange rates (unless this average is

not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions).

nn All resulting currency translation differences are recognised as a separate component of equity.

On consolidation, currency translation differences arising from the translation of long-term monetary items designated as part of the net investment in foreign operations are taken to shareholders’ equity.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Cumulative currency translation differences recognised in equity in respect of a subsidiary disposed of are recycled to the income statement in the same period that the disposal is recognised. The effect of the cumulative currency translation differences is taken into account in determining the gain or loss on disposal.

(xii) Derivative financial instruments and hedging activitiesDerivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (a) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction

(cash flow hedge); or(b) hedges of a net investment in a foreign operation (net investment hedge).

The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability.

(a) Cash flow hedgeThe effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.

Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of forward contracts hedging foreign currency revenues is recognised in the income statement within ‘revenue’.


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When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

(b) Net investment hedgeHedges of net investments in foreign operations are accounted for similarly to cash flow hedges.

Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.

Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold.

(xiii) Goodwill Goodwill recognised under UK GAAP prior to the date of transition to IFRS, 1 January 2003, is stated at net book value at the date of transition. This goodwill had been amortised on a straight-line basis over its useful economic life (being 10 years).

Goodwill recognised subsequent to 1 January 2003, arising from the purchase of subsidiary undertakings, represents the excess of the fair value of the consideration paid over the fair value of the identifiable net assets (including intangible assets) acquired. After initial recognition, goodwill is stated at cost less any accumulated impairment losses. Goodwill recognised subsequent to 1 January 2003 is not subject to amortisation.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

(xiv) Other intangible assets(a) Development costsWhere development costs meet the criteria for capitalisation, these are stated at cost less a provision for amortisation and any provision for impairment. Research costs are expensed as incurred.

Costs incurred during the development period of new contracts, including the costs of process and system designs that substantially improve those processes and systems already installed in either the Enterprise Partnerships or recently acquired subsidiaries, are treated as development costs. Expenditure relating to these clearly defined and identifiable development projects is recognised as an intangible asset only where costs can be reliably measured and after the following criteria have been met:nn The technical feasibility and commercial viability of the development project have been demonstrated.nn The availability of adequate technical and financial resources and an intention to complete the project have

been confirmed.nn There is an ability to use or sell the project.nn Future economic benefits are expected.

Costs that are capitalised comprise directly attributable incremental costs incurred during the development period, including wages and salaries of staff employed solely for the purpose of improving the processes and systems, and third party costs. Development costs do not include restructuring costs, (including redundancy, early termination penalties and such like), which are expensed to the income statement as they are incurred.

Amortisation of development costs occurs on a straight-line basis over the life of the contract to which they relate (between 6 and 12 years). This period represents the useful life of the intangible asset.

(b) Software costsSoftware costs are stated at cost less accumulated amortisation and accumulated impairment losses.

Software costs include purchased software licences and software development expenditure, which are capitalised where they meet the criteria for recognition under IAS 38. Where the criteria for capitalisation are not met, software development expenditure is expensed as incurred.

Software development costs are amortised on a straight-line basis at an annual rate of 20% or over the life of the related contract, where appropriate, so as to write off the asset cost on a straight-line basis over the expected useful economic life. Purchased software is stated at cost and amortised on a straight-line basis over three years.


2 Principal accounting policies continued(c) Assets in the course of developmentAssets in the course of development are not amortised until the asset is brought into use.

Subsequent expenditure undertaken to ensure that an asset maintains its previously assessed standard of performance, for example, routine repairs and maintenance expenditure, is recognised in the income statement as it is incurred. Subsequent expenditure that significantly enhances an asset is capitalised.

(d) Contractual customer relationshipsContractual customer relationships are stated at cost less accumulated amortisation and accumulated impairment losses.

Contractual customer relationships are capitalised on acquisition where they meet the criteria for recognition under IFRS 3 and IAS 38. Amortisation of customer contractual relationships is in line with the expected length of the customer relationship, which is between 1 and 7 years.

(xv) Property, plant and equipmentProperty, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses, except for assets in the course of development and land. Assets in the course of development are carried at cost less any recognised impairment. Depreciation commences when the assets are ready for their intended use. Land is carried at cost less any recognised impairment. No depreciation is charged on land.

The cost of property, plant and equipment is their purchase cost, together with any incidental costs of acquisition.

All repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation is calculated so as to write off the cost of the assets, less their estimated residual values, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal annual rates used for this purpose are:

Leasehold improvements over the period of the leaseComputer equipment 20–33% per annumFixtures and fittings 10–33% per annumMotor vehicles 25% per annum

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within the income statement.

(xvi) Impairment of tangible and intangible assets (including goodwill)Property, plant and equipment, other intangible assets and goodwill are reviewed for impairment if a trigger event is deemed to have happened, unless the asset has an indefinite useful life, then these assets are reviewed at least annually. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects the current market assessments of the time value of money. Future cash flows are adjusted to take account of any risks specific to an asset. Fair value less costs to sell is determined by reference to either the expected proceeds of sale or the expected discounted cash flows in respect of the asset, less any costs that are expected to be incurred to secure the sale.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss in respect of property, plant and equipment and other intangible assets subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in the income statement immediately.

Any impairment losses identified in respect of goodwill are not reversed.


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(xvii) Financial instrumentsFinancial assetsClassificationThe Group classifies its financial assets into one of the following categories: loans and receivables, available-for-sale and financial assets at fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired. The Group determines the classification of its financial assets at initial recognition:nn Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an

active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets.

nn Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

nn Financial assets at fair value through profit or loss includes residual equities purchased as part of a requisitioned trade on behalf of a client of the Financial Services sector and are held at their fair value until the opportunity arises to sell the equity as part of a new requisitioned trade by a client. They are included within current assets and classified as held-for-trading assets within trade and other receivables in the balance sheet.

Recognition and measurementRegular purchases and sales of financial assets are recognised on the trade date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest rate method. Held-for-trading assets are carried at fair value through profit and loss.

When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in other comprehensive income are included in the income statement as gains and losses from investment securities.

Dividends from available-for-sale equity instruments are recognised in the income statement as part of finance income when the Group’s right to receive payments is established. Gains or losses arising from changes in the fair values of other financial assets at fair value through profit and loss are presented within finance costs or income in the period in which they arise. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognised in other comprehensive income.

The fair values of quoted investments are based on current bid prices at the close of business on the balance sheet date.

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered to be an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from other comprehensive income and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the income statement.

(xviii) Put options granted to non-controlling shareholdersIn accordance with IAS 32, when non-controlling interests hold put options that enable them to sell their investments to the Group, the net present value of the future payment is reflected as a financial liability in the consolidated balance sheet. At the end of each period, the valuation of the liability is reassessed with any changes recognised in the income statement for the period through finance costs.

(xix) InventoriesInventories are stated at the lower of cost and net realisable value. Cost is determined by the first-in, first-out (FIFO) method. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.


2 Principal accounting policies continued(xx) Trade and other receivablesTrade and other receivables are recognised at fair value and subsequently measured at amortised cost less provision for impairment. A provision for the impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows. Impaired debts are derecognised when they are assessed as uncollectible.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the income statement.

Pre-contract costs comprise legal and other professional expenses and other directly attributable staff costs incurred in order to obtain specific customer contracts. Costs that are directly attributable to a contract are deferred when they are separately identifiable, can be reliably measured and it is probable that the contract will be awarded and the contract will result in future net cash inflows with a present value at least equal to all amounts recognised as an asset.

Pre-contract costs are included within trade and other receivables and are amortised on a straight-line basis over the life of the contract, starting from the date when the contract commences.

(xxi) Cash and cash equivalentsCash and cash equivalents include cash in hand, demand deposits and short-term highly liquid investments which are readily convertible to cash and are subject to minimal risk of changes in value.

(xxii) Trade and other payablesTrade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

(xxiii) BorrowingsBorrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings, using the effective interest method. Bank overdrafts are shown within borrowings in current liabilities on the consolidated balance sheet.

Fees paid on the arrangement of debt facilities are recognised as transaction costs to the extent that some or all of the facility will be drawn down. Fees are capitalised as a prepayment against the borrowings and amortised over the period of the facility to which they relate.

An exchange or a modification of a debt facility arrangement is accounted for as an extinguishment where the terms of the new arrangement are substantially different to the original arrangement. Both qualitative and quantitative factors are considered in determining whether the terms of an arrangement have substantially changed.

On extinguishment, all unamortised transaction costs related to the extinguished facility are released to the income statement. All fees paid in respect of the exchange or modification of a debt facility are also taken directly to the income statement. These amounts are presented within finance costs.

(xxiv) Operating and finance leasesLeases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Rental costs under operating leases are charged to the income statement on a straight-line basis over the lease term. Lease incentives provided by lessors to the Group are amortised over the lease term together with any related costs of acquiring the lease.

Assets held under finance leases are initially reported at the lower of the fair value of the assets and the present value of minimum lease payments with an equivalent liability categorised as appropriate under current or non-current liabilities. The asset is depreciated over the shorter of the lease term and its useful economic life. Finance charges are allocated to accounting periods over the period of the lease to produce a constant rate of return on the outstanding balance.

(xxv) Taxation including deferred income taxThe tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the associated tax is also recognised in other comprehensive income or directly in equity, respectively.


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The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income.

Management periodically evaluates positions adopted in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except for a deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

(xxvi) Employee benefit costs(a) Pension obligationsThe Group operates, or participates in, both defined contribution and defined benefit pension schemes. All the pension schemes are accounted for in accordance with IAS 19.

The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Scheme assets are measured using closing market values at the balance sheet date. Pension scheme liabilities are measured using the projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. Variations between the scheme assets and liabilities identified as a result of these actuarial valuations (actuarial gains and losses) are recognised in full through the statement of comprehensive income (‘SOCI’) in the period in which they arise. Current service costs, expected returns on plan assets and interest costs are charged to the income statement. Past-service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

The Group participates in a number of defined benefit schemes which are multi-employer schemes and where insufficient information exists to be able to account for the schemes as defined benefit plans as there is no consistent and reliable basis for allocating the obligations, plan assets and costs to individual entities participating in these schemes. In accordance with IAS 19, such schemes are accounted for as defined contribution schemes and contributions are charged to the income statement as incurred.

Contributions to the Group’s defined contribution schemes are charged to the income statement as incurred.

(b) Share-based compensationThe Group operates a number of equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of an equity-settled transaction, for example options, is recognised as an expense over the periods in which the performance conditions are fulfilled, ending on the vesting date of the award. The total amount to be expensed over the vesting period is determined by reference to the fair value of the equity instruments granted. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. Awards, where vesting is conditional upon a market condition, are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

When the options are exercised, the Company issues new shares. The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised.


2 Principal accounting policies continuedThe grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised in the Company accounts over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity.

(xxvii) ProvisionsProvisions are recognised when a present legal or constructive obligation exists as the result of a past event and it is probable that this will result in an outflow of resources, the amount of which can be reliably estimated.

Restructuring provisions are only recognised if an obligation exists at the balance sheet date, ie a formal plan exists and those affected by that plan have a valid expectation that the restructuring will be carried out. Employee termination payments are included within restructuring provisions. Provisions are not recognised for future operating losses.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as a finance cost.

(xxviii) Share capitalShare capital comprises the nominal value of all issued shares. On subscribing for shares any excess consideration over the nominal value of the shares issued less any issue costs is credited to the share premium account.

(xxix) Fair value estimationThe fair values of short-term loans and overdrafts with a maturity of less than one year are assumed to approximate to their book values. For loans due in more than one year the fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the market interest rate available to the Group for similar financial instruments. The fair value for quoted available-for-sale financial assets and held-for-trading equity securities is based on their quoted market price. The fair value of unquoted available-for-sale financial assets and held-for-trading equity securities is estimated by reference to a discounted cash flow calculation.

(xxx) Exceptional itemsExceptional items are events or transactions that fall outside the ordinary activities of the Group, and which by virtue of their size or incidence, have been separately disclosed in order to improve a reader’s understanding of the financial statements. These include items relating to the restructuring of a significant part of the Group, impairment losses, expenditure relating to the integration and implementation of significant acquisitions and other one-off events or transactions.

(xxxi) Segmental reportingOperating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Board.

3 Critical accounting estimations and judgementsThe Group’s principal accounting policies are set out in note 2 of these financial statements. Management is required to exercise significant judgement and make use of estimates and assumptions in the application of these policies.

Areas which management believes require the most critical accounting judgements are:

(i) Retirement benefit obligationsThe Group operates a number of defined benefit plans. The retirement benefit obligations recorded are based on actuarial assumptions, including discount rates, expected long-term rate of return on plan assets, inflation and mortality rates. These assumptions are based on current market conditions, historical information and consultation with, and input from, actuaries. Management reviews these assumptions annually. If they change, or if actual experience is different from the assumptions, the funding status of the plan will change and the retirement benefit obligation will be adjusted accordingly. The assumptions used are detailed in note 34.


Company overview

Business review




The assumed discount rate and life expectancy have a significant effect on the measurement of pension liabilities.

The following tables show the sensitivity of the valuation of the pension obligations, and of the 2011 income statement charge, to changes in these assumptions for the material UK and German schemes at the end of the year:

UK

Decrease/(increase)in liability

£m

At 31 December 2011

0.25% increase to discount rate 5.2

One-year increase to life expectancy 2.5

Germany

Decrease/(increase)in liability

£m

At 31 December 2011

0.25% increase to discount rate 1.7

One-year increase to life expectancy 0.8

The impact of the 0.25% increase in the discount rate and 1 year increase in life expectancy on the service costs of both the UK and German pension schemes was assessed as insignificant.

The Group participates in various BAE Systems’ pension schemes. The terms on which the Group participates in these schemes give the Group protection against any requirement to fund future deficits that arise in the schemes, and against future exit debts that may arise on withdrawal from these schemes. However, in the event of BAE Systems becoming insolvent, there is a risk that the Group could become liable to fund the wider pension schemes of these companies, which would result in a significant exposure should these events occur. The Directors consider the risk of this event to be extremely remote and consequently the schemes are accounted for as defined contribution schemes as per note 34.

(ii) Estimated impairment of goodwillThe Group tests at least annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 2(xvi). The recoverable amounts of cash-generating units have been determined based on value in use or fair value less costs to sell calculations. These calculations require the use of estimates (see note 14).

(iii) Exceptional itemsThe Directors consider exceptional items to be items of income or expense that fall outside the ordinary activities of the Group, and which by virtue of their size or incident, should be disclosed separately if the financial statements are to reflect a full understanding of the financial position and underlying financial performance of the Group on a comparable basis (see note 6). Consideration of what should be labelled as ‘exceptional’ requires management judgement to be applied.

(iv) Calculation of pre-contract costs and appropriate amortisation periodThe original cost of pre-contract costs includes project development costs (including appropriate direct internal costs) which are deferred from the point that it is virtually certain that the project will proceed to completion. The Directors consider that this point of virtual certainty is normally reached when the memorandum of understanding related to the contract is signed by all parties involved (see note 18).

The amortisation of these pre-contract costs is charged so as to write down the value of the asset to its residual value over the life of the contract.

(v) Assumptions on put optionsThree put options are accounted for as financial liabilities under paragraph 23 of IAS 32 at year end. These liabilities are carried at fair value through profit and loss and measured at the fair value of the future cash flows associated with them. The levels of these cash flows and the relevant discount rates used in the fair value calculations are based on future projections and incorporate a certain element of management judgement (see note 22).


3 Critical accounting estimations and judgements continued(vi) Income taxesThe Group is subject to income taxes in numerous jurisdictions. Judgement is required in determining the Group-wide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recognised, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

The Group is required to estimate the corporate tax in each of the jurisdictions in which it operates. This requires an estimation of the current tax liability together with an assessment of the temporary differences which arise as a consequence of different accounting and tax treatments. These temporary differences result in deferred tax assets or liabilities which are included within the balance sheet. Deferred tax assets are not recognised where it is more likely than not that the asset will not be realised in the future. This evaluation requires judgements to be made, including the forecast of future taxable income.

(vii) AcquisitionsWhen acquiring a business, the Group has to make judgements and best estimates about the fair value allocation of the purchase price. The Group tests the valuation of goodwill on an annual basis and whenever events or circumstances indicate that the carrying amount may not be recoverable. These tests require the use of estimates (see note 3 (ii)).

(viii) Deferred income recognitionThe Group applies judgement in determining the most appropriate method to use in estimating the amount of deferred income to be recognised in a financial period. Following the acquisition of Cambridge Solutions Limited on 1 January 2009, a significant amount of deferred income was recognised on acquisition relating to a number of claims service contracts. The amount of deferred income released in relation to these contracts was then based on management’s estimation of the services performed to date as compared with the total estimated cost to fulfil all obligations. Following the disposal of the US workers’ compensation and third party administration business on 31 May 2011, the remaining deferred income of £11.5 million in respect of one claims service contract was recognised as revenue in the income statement. Management believe that no further costs will be incurred in respect of this contract as all contractual obligations have been fulfilled (see note 21).

(ix) Valuation of provisionsDue to the nature of provisions, an element of their determination is based on estimates and judgements, including assumptions regarding the future anticipated cash outflows required to settle obligations, and the period over which these outflows will arise. The actual outcome of these uncertain factors may differ from these estimations, giving rise to differences with the estimated provisions. Any such differences between actual outcomes and the provisions recorded may impact the Group’s results over the periods involved. The timing of the outflow of resources required to settle these obligations is subject to similar uncertain factors. See note 23 for a discussion of critical estimates and judgements on specific provisions.

4 Segmental reportingManagement has determined the operating segments based on the information presented to and reviewed by the Executive Board, the chief operating decision-maker for the period, on which strategic decisions are based, resources are allocated and performance is assessed.

During the period, and in line with the changes explained in the year ended 31 December 2010, the Group has revised its management organisational structure, moving from a regional focus to one based on global business sectors. This restructuring was undertaken in order to make better use of available resources and expertise around the Group.

A brief description of each reportable segment is as follows:nn Insurance Services provides technology infrastructure and managed services to the insurance market. It includes the

workers’ compensation claims processing services business in Australia, and prior to disposal, the US workers’ compensation and third party administration business.

nn Financial Services provides banking, securities processing and investment account administration and fund administration in Germany and Italy.

nn Technology provides technology infrastructure and managed services. nn Procurement and Other BPO provides procurement services to a range of customers, and HR resourcing and administration

services.nn Corporate provides the infrastructure, resources and investment to sustain and grow the Group, including performance

management, and business management functions.


Company overview

Business review




Insurance Services and Financial Services form a significant part of our business processing services offering.

Management uses adjusted operating profit as a measure of segment result. Adjusted operating profit excludes exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity and acquisition-related expenses. Interest income and expenditure are not allocated to sectors, as this type of activity is driven by the Group treasury function, which manages the cash position of the whole Group.

Management makes regular use of this measure to evaluate performance in the operating segments, both in absolute terms and comparatively from period to period, and to allocate resources among its operating segments. Management believes that this measure provides a better understanding, for both management and investors, of the operating results of its business segments for the period under review.

The Group’s reportable segments account for inter-segment sales, and transfers, as if the sales or transfers were to third parties, ie at current market prices.

Corporate costs reallocated to operating segments includes investments in Enterprise Partnerships, depreciation and amortisation of centrally recognised other intangible assets, lease payments and other costs incurred centrally on behalf of other operating segments.

The segment information for continuing operations for the year ended 31 December 2011 is as follows:

Year ended 31 December 2011

Insurance Services

£m

Financial Services

£mTechnology

£m

Procurement and

Other BPO £m

Corporate £m

Total £m

Adjusted revenue 193.6 187.7 132.5 200.6 – 714.4

– From external customers 189.0 179.8 97.9 183.3 – 650.0

– Inter segment 4.6 7.9 34.6 17.3 – 64.4

Adjusted operating profit/(loss) 36.6 12.3 7.0 7.2 (19.9) 43.2

Adjusted operating profit margin 18.9% 6.6% 5.3% 3.6% – 6.6%

Segment assets 98.5 173.2 135.6 143.2 59.1 609.6

– Inter segment assets (7.6) (1.7) (26.1) (10.1) (66.8) (112.3)

– Unallocated assets – deferred and corporate tax assets 25.8

Total assets 90.9 171.5 109.5 133.1 (7.7) 523.1

Segment liabilities (78.4) (77.0) (85.4) (61.6) (46.6) (349.0)

– Inter segment liabilities 44.7 10.9 21.0 14.1 21.6 112.3

– Unallocated liabilities – borrowings and other financial liabilities (76.5)

– Unallocated liabilities – deferred and corporate tax liabilities (14.3)

Total liabilities (33.7) (66.1) (64.4) (47.5) (25.0) (327.5)


4 Segmental reporting continuedReconciliation of non-GAAP operating profit from continuing operations measures to IFRS statutory operating profit from continuing operations:

Year ended 31 December 2011 Note

Insurance Services

£m

Financial Services

£mTechnology

£m

Procurement and

Other BPO £m

Corporate £m

Total £m


Adjusting items:

– Amortisation of intangible assets previously unrecognised by an acquired entity (1.0) (2.1) (1.4) (0.3) – (4.8)

– Exceptional revenue 6 – 1.2 – – – 1.2

– Exceptional cost of sales 6 (0.9) (7.8) (3.5) (2.9) – (15.1)

– Exceptional administrative expenses 6 – – – (10.4) (7.5) (17.9)

Operating profit/(loss) before allocation of corporate costs 34.7 3.6 2.1 (6.4) (27.4) 6.6

Allocation of corporate costs (0.4) (0.5) – (0.4) 1.3 –

Operating profit/(loss) 34.3 3.1 2.1 (6.8) (26.1) 6.6

Net finance costs (9.1)

Taxation (5.9)

Loss for the year from continuing operations (8.4)

Other segment information for continuing operations by segment was as follows:


Insurance Services

£m

Financial Services

£mTechnology

£m

Procurement and

Other BPO £m

Corporate £m

Total £m

Depreciation and amortisation 7.3 10.4 9.5 2.5 1.9 31.6

Capital expenditure

– Related to business combinations, including goodwill 0.5 – – – – 0.5

– Normal business activities 1.6 4.0 8.3 2.2 0.2 16.3

The restated segment information for continuing operations for the year ended 31 December 2010 is as follows:


Insurance Services

£m

Financial Services

£m Technology

£m

Procurement and

Other BPO £m

Corporate £m

Total £m

Adjusted revenue 188.7 181.6 156.6 220.0 – 746.9

– From external customers 179.8 174.2 116.2 211.6 – 681.8

– Inter segment 8.9 7.4 40.3 8.5 – 65.1


Adjusted operating profit margin 17.7% 6.2% 11.1% 5.1% 8.2%

Segment assets 145.5 191.9 121.0 128.8 99.0 686.2

– Inter segment assets (5.2) (1.6) (9.2) (6.7) (95.2) (117.9)

– Unallocated assets – deferred and corporate tax assets 22.0

Total assets 140.3 190.3 111.8 122.1 3.8 590.3

Segment liabilities (145.7) (95.8) (75.2) (46.2) (25.7) (414.3)

– Inter segment liabilities 75.8 10.7 17.4 7.8 6.2 117.9

– Unallocated liabilities – borrowings and other financial liabilities (90.3)

– Unallocated liabilities – deferred and corporate tax liabilities (16.7)

Total liabilities (69.9) (85.1) (57.8) (38.4) (19.5) (377.7)


Company overview

Business review




Reconciliation of non-GAAP operating profit from continuing operations measures to IFRS statutory operating profit from continuing operations:

Year ended 31 December 2010 Note

Insurance Services

£m

Financial Services

£m Technology

£m

Procurement and

Other BPO £m

Corporate £m

Total £m


Adjusting items:

– Amortisation of intangible assets previously unrecognised by an acquired entity (1.1) (1.8) (1.6) (0.2) – (4.7)

– Acquisition-related expenses 7 – (0.3) (0.1) – (0.7) (1.1)

– Exceptional revenue 6 – 6.9 – – – 6.9

– Exceptional cost of sales 6 (3.5) (4.2) – – – (7.7)

– Exceptional administrative expenses 6 (39.6) 0.1 (7.0) (5.6) (0.5) (52.6)

Operating profit/(loss) before allocation of corporate costs (10.8) 11.9 8.6 5.3 (18.1) (3.1)

Allocation of corporate costs (4.2) (0.5) – (0.4) 5.1 –

Operating profit/(loss) (15.0) 11.4 8.6 4.9 (13.0) (3.1)

Net finance costs (4.5)

Taxation (14.7)

Loss for the year from continuing operations (22.3)

Other segment information from continuing operations by segment was as follows:


Insurance Services

£m

Financial Services

£m Technology

£m

Procurement and

Other BPO £m

Corporate £m

Total £m

Depreciation and amortisation 9.4 12.6 7.1 4.0 0.9 34.0

Capital expenditure

– Related to business combinations, including goodwill – 24.9 8.9 – – 33.8

– Normal business activities 2.1 5.9 11.3 2.1 1.5 22.9

The tables below present revenue from continuing operations by the geographical location of customers and by category:

Revenue from continuing operations by geographical destination 2011

£m2010

£m

United Kingdom 385.8 436.3

Germany 163.0 166.5

Other Continental Europe 25.6 17.8

United States of America 20.7 26.4

Australia 37.2 28.4

South East Asia 12.2 8.1

India 1.3 2.4

Rest of World 5.4 2.8

Revenue from continuing operations 651.2 688.7

Analysis of revenue from continuing operations by category2011

£m2010

£m

Revenue from services 607.9 640.8

Sale of goods 43.3 47.9

Revenue from continuing operations 651.2 688.7


4 Segmental reporting continuedThe table below presents total assets other than financial instruments, deferred tax assets, and retirement benefit assets by the geographical location:

Total assets by geographical destination2011

£m

Restated2010

£m

United Kingdom 212.7 241.7

Germany 117.6 134.2

Other Continental Europe 12.3 17.6

United States of America 43.9 61.2

Australia 24.2 23.5

South East Asia 6.1 3.9

India 57.0 61.1

Total assets by geographical destination 473.8 543.2

Material customersRevenues from two external customers each account for greater than 10% of the Group’s external revenues. Revenues of £144.4 million, attributable to the Procurement and Other BPO Services segment, and £83.9 million, attributable to the Financial Services segment, have been derived from these two customers for the year ended 31 December 2011 (2010: £173.7 million and £86.7 million respectively).

5 Expenses by nature from continuing operations

Note2011

£m

Restated2010

£m

Cost of goods and services directly related to sales 177.2 207.0

Direct staff costs 8 249.2 239.1

Other staff-related costs 31.1 29.9

Technology and communications 64.4 66.4

Property costs 29.2 29.7

Depreciation of property, plant and equipment 16 11.0 9.2

Net amortisation of intangible assets

– Amortisation of intangible assets previously unrecognised by an acquired entity 15 4.8 4.7

– Amortisation of other intangible assets 15 15.8 18.6

Amortisation of pre-contract costs 18 1.8 1.5

Other costs 27.1 24.3

Exceptional items 6 33.0 60.3

Acquisition-related expenses 7 – 1.1

Total cost of sales and administrative expenses from continuing operations 644.6 691.8

Included within:

– Cost of sales 604.6 617.4

– Administrative expenses 40.0 74.4

644.6 691.8


Company overview

Business review




Other items charged to operating profit from continuing operations are:

2011£m

Restated2010

£m

Research and development 2.4 1.7

Loss on disposal of property, plant and equipment and other intangible assets 0.8 0.7

Loss on disposal of available-for-sale financial assets 0.1 –

Impairment of trade receivables 0.3 0.6

Operating leases 12.1 12.2

Foreign exchange (gain)/loss (1.3) 0.8

Fees payable to the Group’s auditors in the year were as follows:

2011

£m2010

£m

Audit services

Fees payable to the Group’s auditors for the audit of the Company 0.1 0.2

Fees payable to the Group’s auditors for other services

Audit of Group’s subsidiaries 0.9 0.9

Other audit services pursuant to legislation 0.1 0.1

Tax services 0.4 0.9

Other services 0.1 0.1

Total fees payable to the Group’s auditors 1.6 2.2

6 Exceptional items from continuing operations

2011

£m

Restated2010

£m

Exceptional items from continuing operations comprise the following:

Impairment of goodwill (9.8) (49.0)

Impairment of other intangible assets (0.6) (5.6)

Impairment of available-for-sale financial assets (4.2) (1.8)

Write down of held-for-trading equity securities – (1.4)

Total impairment losses (14.6) (57.8)

Onerous contract provision – (2.6)

Gain from a bargain purchase – 0.1

Contract settlements 1.2 6.9

Restructuring costs (18.4) –

Debt refinancing costs (4.3) –

Total exceptional items from continuing operations (36.1) (53.4)

Included within:

– Revenue 1.2 6.9

– Cost of sales (15.1) (7.7)

– Administrative expenses (17.9) (52.6)

– Finance costs (4.3) –

(36.1) (53.4)


6 Exceptional items from continuing operations continuedDuring the year ended 31 December 2011, a £9.8 million goodwill impairment charge and a £0.6 million other intangible assets impairment charge have been recognised in respect of goodwill and software assets attributed to the Xchanging Human Resources Services Limited business, part of the Procurement and Other BPO sector. The goodwill and software assets have been impaired due to the uncertainty over the future economic benefits expected to be derived from the remaining business following notification received by a customer of their intention not to renew a significant contract with effect from 31 December 2012.

The impairment of available-for-sale financial assets of £4.2 million relates to cumulative revaluation losses recycled from equity, of which £0.8 million was incurred in 2011, in respect of listed equity securities held in an Italian company. The market value of these securities has suffered a significant and prolonged decline in value.

Restructuring costs of £18.4 million incurred in the year relate primarily to redundancy costs in the Financial Services sector of £7.8 million, the Technology sector of £3.5 million, the Procurement and Other BPO sector of £2.9 million, the Corporate centre of £3.3 million and the Insurance Services sector of £0.9 million. These costs have been incurred as part of the review of the Group’s overall cost base under the Four Part Action Plan.

£4.3 million of debt refinancing costs were written off in the year in respect of the refinancing of the Group’s debt facilities. These costs include upfront fees paid to the bank of £2.1 million, legal fees of £1.2 million, advisory fees of £0.7 million and £0.3 million in respect of the write off of the remaining unamortised debt fees associated with the original debt facility agreement.

The exceptional revenue of £1.2 million recognised in the year relates to a revenue contract settlement fee in the Financial Services sector.

The tax credit arising in respect of exceptional items is £4.3 million (2010: £3.1 million).

In the year ended 31 December 2010, exceptional costs totalling £57.8 million related to the impairment of goodwill, other intangible, available-for-sale financial and held-for-trading assets in the Insurance Services and the Procurement and Other BPO sectors. A £2.6 million exceptional provision was recognised for an Australian workers’ compensation processing contract deemed to be onerous in the Insurance Services sector. Exceptional revenue of £6.9 million was recognised in respect of two contract settlements in the Financial Services sector and an exceptional gain of £0.1 million also arose within the Financial Services sector on the acquisition of 51% of Kedrios S.p.A. (refer to note 33).

7 Acquisition-related expenses from continuing operations

2011£m

2010£m

Acquisition-related expenses from continuing operations incurred in respect of the following

Legal fees – 0.6

Stamp duty – –

Other professional and advisers’ fees – 0.5

Total acquisition-related expenses from continuing operations – 1.1

Included within:

– Cost of sales – –

– Administrative expenses – 1.1

– 1.1

The £1.1 million of acquisition-related expenses incurred in the financial year ended 31 December 2010 relate to the acquisition of Kedrios S.p.A., Data Integration Limited and additional costs incurred in completing the acquisitions of FondsServiceBank and SEB Investmentservice GmbH.


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Business review




8 Employees and Directors

Note2011

£m

Restated2010

£m

Staff costs for the Group during the year

Wages and salaries (including Directors) 228.3 243.7

Social security costs 22.9 23.0

Share-based payments 26 3.3 2.0

Pension costs – defined contribution schemes 34 7.5 7.2

Pension costs – defined benefit schemes 34 4.5 4.2

266.5 280.1

Included within:

– Cost of sales from continuing operations 239.2 225.6

– Administrative expenses 10.0 13.5

5 249.2 239.1

– Net finance costs from continuing operations 9 1.4 1.3

– Discontinued operation 13 15.9 39.7

266.5 280.1

During 2011, £7.4 million of staff costs were capitalised (2010: £7.2 million).

2011

Number2010

Number

Average monthly number of persons (including Executive Directors) employed by segment

Insurance Services 1,606 2,568

Financial Services 2,586 2,454

Technology 1,763 1,534

Procurement and Other BPO 1,869 1,821

Corporate 106 126

7,930 8,503

Disclosures in relation to Director and key management compensation are included within the related party disclosures in note 37. Further information is provided in the Remuneration Report on pages 60 to 69 of this Annual Report.


9 Finance costs and income from continuing operations

Note2011

£m2010

£m

Finance costs from continuing operations

Bank and other interest (4.1) (3.2)

Debt refinancing costs 6 (4.3) –

Interest cost on defined benefit pension schemes 34 (9.7) (9.5)

Imputed interest on put option to acquire non-controlling interest (0.7) (0.8)

Amortisation of loan arrangement fees (0.3) (0.5)

Total finance costs from continuing operations (19.1) (14.0)

Finance income from continuing operations

Bank interest 1.5 1.1

Expected return on plan assets – defined benefit pension schemes 34 8.3 8.2

Dividends received on available-for-sale financial assets – 0.2

Other interest 0.2 –

Total finance income from continuing operations 10.0 9.5

Net finance costs from continuing operations (9.1) (4.5)

10 Taxation from continuing operationsThe analysis of the tax charge from continuing operations is presented below.

2011

£m

Restated2010

£m

Current tax:

– Current tax on profits for the year 10.8 18.8

– Adjustment in respect of prior years (1.6) (1.6)

Total current tax 9.2 17.2

Deferred tax:

– Origination and reversal of temporary differences for the year (3.8) (3.1)

– Adjustment in respect of prior years (0.3) 0.1

– Impact of the change in the UK tax rate 0.8 0.5

Total deferred tax (3.3) (2.5)

Tax charge for the year from continuing operations 5.9 14.7

In addition to the above amounts charged to the income statement, a current income tax credit of £0.3 million (2010: £0.8 million credit) has been recognised in equity, of which £0.2 million (2010: £0.3 million) has been credited in other comprehensive income and £0.1 million (2010: £0.5 million) has been credited directly to equity, and a deferred tax credit of £1.5 million (2010: £0.7 million debit), has been recognised in equity (note 28).


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Business review




Factors affecting the tax charge for the yearThe tax charge for the year is higher (2010: higher) than the standard rate of corporation tax in the UK of 26.5% (2010: 28%). The standard rate of corporation tax in the UK changed from 28% to 26% with effect from 1 April 2011. Accordingly the Group’s profits for this accounting period are taxed at a blended rate of 26.5%. The differences are explained below:

2011

£m

Restated2010

£m

Loss before taxation from continuing operations (2.5) (7.6)

Loss before tax multiplied by the standard rate of corporation tax in the UK of 26.5% (2010: 28.0%) (0.7) (2.1)

Changes in tax rates 0.8 0.5

Goodwill impairment 2.6 16.2

Investment impairment 1.1 (0.5)

Refinancing costs 1.7 –

Unutilised tax losses 0.9 0.3

Expenses not deductible for tax purposes 0.8 2.9

Research & development credits (0.2) (0.4)

Tax in respect of prior years (1.9) (1.5)

Difference on foreign tax rates 0.8 (0.7)

Tax charge for the year from continuing operations 5.9 14.7

The tax (charge)/credit relating to components of other comprehensive income is as follows:

2011 2010

Before tax£m

Tax (charge)/ credit

£mNet of tax

£mBefore tax

£m

Tax (charge)/ credit

£mNet of tax

£m

Actuarial loss arising from defined benefit pension schemes (8.0) 1.7 (6.3) (1.5) 0.5 (1.0)

Revaluation of available-for-sale financial assets (0.4) – (0.4) (0.9) (0.1) (1.0)

Revaluation losses recycled to the income statement on disposal of available-for-sale financial assets 0.1 – 0.1 – – –

Revaluation losses recycled to the income statement on impairment of available-for-sale financial assets 4.2 – 4.2 1.2 – 1.2

Fair value movements on hedging instrument qualifying for hedge accounting (0.6) – (0.6) – – –

Fair value movements on hedging instrument recycled to the income statement upon de-designation 0.1 – 0.1 – – –

Cumulative translation differences recycled to the income statement in respect of the discontinued operation 3.3 – 3.3 – – –

Currency translation differences (8.8) – (8.8) 5.9 – 5.9

Other comprehensive (loss)/income (10.1) 1.7 (8.4) 4.7 0.4 5.1

Current tax 0.2 0.3

Deferred tax 1.5 0.1

Total tax 1.7 0.4


11 Earnings per shareBasic earnings per share is calculated by dividing the net profit attributable to owners of the Parent by the weighted average number of ordinary shares of the Company.

For diluted earnings per share, the weighted average number of ordinary shares in existence is adjusted to include all potential dilutive ordinary shares. The Group has three types of potential dilutive ordinary shares: share options, share awards under the Performance Share Plan and other share awards to the extent that the performance criteria for vesting of the awards are expected to be met.

Continuing operationsEarnings

£m

Weighted average

number of shares

thousands

Earnings per share

pence

Basic earnings per share:

– 31 December 2011 (13.9) 239,510 (5.79)

– 31 December 2010 (restated) (40.2) 238,950 (16.84)

Diluted earnings per share:

– 31 December 2011 (13.9) 239,510 (5.79)


Discontinued operationEarnings

£m

Weighted average

number of shares

thousands

Earnings per share

pence

Basic earnings per share:

– 31 December 2011 1.7 239,510 0.72


Diluted earnings per share:

– 31 December 2011 1.7 240,207 0.71


The incremental shares from assumed conversions are not included in calculating the diluted earnings per share for discontinued operations in 2011 and 2010 for both continuing operations and discontinued operations as the numerator is negative (i.e. loss from discontinued operations attributable to equity holders of the Company).

The following reflects the share data used in the basic and diluted earnings per share calculations:

2011

thousands2010

thousands

Weighted average number of ordinary shares for basic earnings per share 239,510 238,950

Dilutive potential ordinary shares:

– employee share options 52 974

– awards under the Performance Share Plan 645 –

Weighted average number of ordinary shares for diluted earnings per share 240,207 239,924


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Business review




Adjusted basic and diluted earnings per shareIn addition to the above, adjusted earnings per share values are disclosed to provide a better understanding of the underlying trading performance of the Group. The adjusted value is in line with the KPIs as used to measure the Group’s performance in 2011.

Continuing operationsEarnings

£m

Weighted average

number of shares

thousands

Earnings per share

pence

Adjusted basic earnings per share:

– 31 December 2011 19.2 239,510 8.01

– 31 December 2010 (restated) 29.4 238,950 12.30

Adjusted diluted earnings per share:

– 31 December 2011 19.2 240,207 7.99

– 31 December 2010 (restated) 29.4 239,924 12.25

Discontinued operationEarnings

£m

Weighted average

number of shares

thousands

Earnings per share

pence

Adjusted basic earnings per share:

– 31 December 2011 (3.2) 239,510 (1.32)


Adjusted diluted earnings per share:

– 31 December 2011 (3.2) 239,510 (1.32)


The incremental shares from assumed conversions are not included in calculating the adjusted diluted earnings per share in 2011 and 2010 as the numerator is negative (i.e. adjusted loss from discontinued operations attributable to equity holders of the Company).

The adjusted earnings per share figures are calculated based on the Company’s share of adjusted net profit for the year, divided by the basic and diluted weighted average number of shares as stated above.

The owners of the parent’s share of adjusted profit for the year from continuing operations is calculated as follows:

2011

£m

Restated2010

£m

Loss for the year from continuing operations attributable to owners of the parent (13.9) (40.2)

Exceptional items (net of tax) 27.4 54.2

Acquisition-related expenses (net of tax) – 1.1

Amortisation of intangible assets previously unrecognised by an acquired entity (net of tax) 0.9 3.2

Imputed interest and fair value adjustments on put options (net of tax) 0.7 1.0

Debt refinancing costs (net of tax) 4.3 –

Non-controlling interests’ share of adjustments (net of tax) (0.2) 10.1

Adjusted profit for the year from continuing operations attributable to owners of the parent 19.2 29.4


11 Earnings per share continuedThe owners of the parent’s share of adjusted profit for the year from the discontinued operation is calculated as follows:

2011

£m

Restated2010

£m

Profit/(loss) for the year from the discontinued operation attributable to owners of the parent 1.7 (38.6)

Exceptional items (net of tax) (9.2) 47.4

Amortisation of intangible assets previously unrecognised by an acquired entity (net of tax) 0.7 2.7

Non-controlling interests’ share of adjustments (net of tax) 3.6 (12.2)

Adjusted loss for the year from the discontinued operation attributable to owners of the parent (3.2) (0.7)

12 Dividends payableNo dividends payable to the owners of the parent relating to the year ended 31 December 2011 have been declared.

A dividend of 2.75 pence per share relating to the year ended 31 December 2009, amounting to £6.6 million, was paid on 1 April 2010, to members registered at the close of business on 19 March 2010.

A £0.1 million dividend is payable to Allianz Global Investors Kapitalanlagegesellschaft mbH (2010: £nil) relating to the year ended 31 December 2011 under the terms of the shareholder agreement for FdB, an Enterprise Partnership in the Financial Services sector.

13 Discontinued operationThe discontinued operation represents the assets and liabilities associated with the workers’ compensation and third party administration operations of Cambridge Integrated Services Group Inc. (‘CISGI’), which constituted the Group’s US BPO cash-generating unit within the Insurance Services business sector.

The business was sold on 31 May 2011 for a cash consideration of USD22.4 million (£13.6 million). Subsequent to the business sale, the CISGI legal company was put into an Assignment for the Benefit of Creditors, effective on 26 September 2011. All residual assets and liabilities of CISGI were assigned to Lawrence M Adelman, as the CISGI insolvency trustee. Cash of USD10.6 million (£6.8 million) was disposed of, and directly attributable costs of £1.6 million were incurred.

Financial information relating to the discontinued operation for the period to 26 September 2011 is set out below. The income statement and the cash flow statement distinguish discontinued operations from continuing operations. Comparative figures have been restated.

2011 2010

Adjusted

£m

Adjustments to adjusted

£m Total

£m Adjusted

£m

Adjustments to adjusted

£m Total £m

Revenue 24.0 11.5 35.5 73.3 4.9 78.2

Cost of sales (27.9) (7.5) (35.4) (74.0) (4.4) (78.4)

Gross (loss)/profit (3.9) 4.0 0.1 (0.7) 0.5 (0.2)

Administrative expenses – – – – (52.3) (52.3)

Operating (loss)/profit (3.9) 4.0 0.1 (0.7) (51.8) (52.5)

Finance costs (0.1) – (0.1) (0.2) – (0.2)

Loss before tax from discontinued operation (4.0) 4.0 – (0.9) (51.8) (52.7)

Taxation – – – – 1.7 1.7

Loss after tax from discontinued operation (4.0) 4.0 – (0.9) (50.1) (51.0)

Profit before tax on disposal of discontinued operation – 4.8 4.8 – – –

Taxation – (0.3) (0.3) – – –

Profit after tax on disposal of discontinued operation – 4.5 4.5 – – –

(Loss)/profit for the period from discontinued operation (4.0) 8.5 4.5 (0.9) (50.1) (51.0)

Revenue from the discontinued operation of £35.5 million for the year ended 31 December 2011 includes a £11.5 million exceptional release of deferred income on a significant contract termination. Revenue for the year ended 31 December 2010 includes non-recurring revenue of £4.9 million.


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Cost of sales of the discontinued operation of £35.4 million for the year ended 31 December 2011 includes provisions for potential liabilities and additional exposures totalling £6.8 million (£3.3 million is within the litigation provision, £2.5 million is within employee related provisions and £1.0 million is within other provisions in note 23) and amortisation on intangible assets previously unrecognised by an acquired entity of £0.7 million (2010: £4.4 million).

Administrative expenses of the discontinued operation of £52.3 million for the year ended 31 December 2010 includes an impairment charge of £50.4 million recognised in respect of goodwill attributed to the US BPO business, and an impairment charge of £1.9 million relating to a development asset that was deemed to be impaired based on the likelihood of insufficient future economic benefits deriving from that asset.

The tax credit arising in respect of these exceptional items is £nil (2010: £1.7 million).

a) Assets of the discontinued operation disposed of:

Note2011

£m

Goodwill 14 3.3

Other intangible assets 15 3.1

Property, plant and equipment 16 1.3

Deferred tax asset 24 0.1

Trade and other receivables 7.9

Cash and cash equivalents 6.8

Total 22.5

b) Liabilities of the discontinued operation disposed of:

Note2011

£m

Trade and other payables 12.3

Deferred tax liabilities 24 0.9

Borrowings – finance lease liabilities 0.3

Provisions 23 5.2

Total 18.7


14 Goodwill

Note

£m

Cost

At 1 January 2010 259.6

Business combinations 19.2

Exchange adjustments 10.9

At 31 December 2010 289.7

Disposal – discontinued operation 13 (3.3)

Exchange adjustments (10.0)


Aggregate impairment

At 1 January 2010 –

Impairment charge (99.4)

At 31 December 2010 (99.4)

Impairment charge 6 (9.8)

At 31 December 2011 (109.2)

Net book amount

At 1 January 2010 259.6



Goodwill is allocated to the Group’s cash-generating units (‘CGUs’) identified according to operating business, this being the lowest level at which assets generate separately identifiable cash inflows independent of the cash inflows of other assets or groups of assets.

An analysis of goodwill by segment is as follows:

2010£m

Disposal£m

Exchange£m

Impairment£m

2011£m

Insurance Services 50.7 (3.3) (5.4) – 42.0

Financial Services 35.9 – (3.3) – 32.6

Technology 40.7 – – – 40.7

Procurement and Other BPO 63.0 – (1.3) (9.8) 51.9

190.3 (3.3) (10.0) (9.8) 167.2


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Impairment testing of goodwillThe key assumptions applied in the impairment testing of goodwill as at 31 December 2011 are set out in the table below.

Basis of cash flows Operating margin range Growth rate¹Terminal

growth rate Discount rate

Insurance Services Value in use 1.0% – 20.0% 0% – 5.3% 0% 10.0% – 11.0%

Financial Services Value in use 9.1% – 17.1% 1.3% 0% 10.0%

Technology Value in use 0% – 12.4% 2.0% – 10.5% 0% 10.0%

Procurement and Other BPO Value in use 6.4% – 19.3% 10.7% 0% 10.0%1 Based on compound growth rate over five years.

Where the recoverable amount of a CGU has been determined based on value-in-use, the value-in-use calculations use pre-tax cash flow projections based on budgets approved by the management of the CGU and the Board (which cover a one year period) as well as cash flows for years 2 to 5 using management’s expectations of sales growth, operating costs and margin based on past experience and expectations regarding future performance and profitability for each individual CGU.

With the exception of Data Integration Limited (included within the Technology sector), a terminal value is then added using a nil growth rate assumption. For Data Integration Limited, a terminal value has been calculated using a long-term growth rate of 2.0% given the high growth profile of the markets in which this CGU operates. The long-term growth rates used do not exceed the long-term average market growth rates in which the CGU operates.

A discount rate ranging between 10.0% and 11.0% (2010: 10.0% and 11.0%) is applied to cash flow projections. The discount rate is based on management’s estimate of the Group’s weighted average cost of capital, with an appropriate risk adjustment depending on the CGU. Management believes it is appropriate to use rates within this range on the basis that cash flows are adjusted as considered appropriate to reflect any risks associated with operating within specific geographic or operational segments. The increase in discount rate applied to certain CGUs reflects the increased risk profile within the respected markets.

Impairment chargesAll impairment charges have been recorded in the income statement within exceptional administrative expenses.

The impairment charge relates to Xchanging Human Resources Services Limited (which sits within the Procurement and Other BPO sector). Further explanation of this impairment is provided in note 6.

Sensitivity analysisIn relation to remaining goodwill balances across the Group, sensitivity analysis performed on the current base case assumptions fully supports the carrying value of the remaining goodwill. However, in some cases, a significant change in material key assumptions could cause the carrying amount of goodwill allocated to certain CGUs to exceed their recoverable amount. Reasonably possible changes to key assumptions are not anticipated to result in the carrying value of goodwill exceeding the recoverable amount.


15 Other intangible assets

Note

Development costs

£mSoftware

£m

Customer contractual

relationships£m

Assets in the course of

development£m

Total£m

Cost

At 1 January 2010 20.4 87.8 29.9 1.8 139.9

Business combinations 0.2 0.3 13.8 0.2 14.5

Additions – internal 0.9 6.8 – 1.2 8.9

Additions – external 0.2 5.6 – 0.5 6.3

Transfers (to)/from property, plant and equipment – 0.8 – (0.6) 0.2

Transfer from assets in the course of development – 1.9 – (1.9) –

Transfer (to)/from other intangible assets (3.4) 3.4 – – –

Disposals/write-offs – (2.2) – – (2.2)

Exchange adjustments – (1.8) 0.7 – (1.1)

At 31 December 2010 18.3 102.6 44.4 1.2 166.5

Business combinations 33 – – 0.5 – 0.5

Additions – internal – 4.7 – 0.4 5.1

Additions – external – 3.9 – 1.0 4.9

Transfers (to)/from property, plant and equipment (0.4) 4.8 – – 4.4

Transfer from assets in the course of development 0.8 0.7 – (1.5) –

Disposal – discontinued operation 13 – (35.5) (14.6) – (50.1)

Disposals/write-offs – (2.3) (1.0) – (3.3)

Exchange adjustments – (4.1) (1.5) (0.1) (5.7)

At 31 December 2011 18.7 74.8 27.8 1.0 122.3

Accumulated amortisation

At 1 January 2010 10.0 41.3 13.2 – 64.5

Charge for the year 2.1 16.7 9.5 – 28.3

Impairment losses 1.9 5.1 0.4 – 7.4

Transfers from property, plant and equipment – 0.1 – – 0.1

Transfers (to)/from other intangibles assets (0.8) 0.8 – – –

Disposals/write-offs – (1.4) – – (1.4)

Exchange adjustments – (0.5) 0.5 – –

At 31 December 2010 13.2 62.1 23.6 – 98.9

Charge for the year 1.9 14.1 5.5 – 21.5

Impairment losses – 0.6 – – 0.6

Transfers from property, plant and equipment – 2.9 – – 2.9

Disposal – discontinued operation 13 – (34.1) (12.9) – (47.0)

Disposals/write-offs – (2.1) (1.0) – (3.1)

Exchange adjustments – (3.7) (1.0) – (4.7)

At 31 December 2011 15.1 39.8 14.2 – 69.1

Net book amount

At 1 January 2010 10.4 46.5 16.7 1.8 75.4

At 31 December 2010 5.1 40.5 20.8 1.2 67.6

At 31 December 2011 3.6 35.0 13.6 1.0 53.2

Amortisation expense for continuing operations of £19.1 million (2010: £21.9 million) has been charged through cost of sales, and £1.5 million (2010: £1.4 million) through administrative expenses. Amortisation expense for discontinued operation of £0.9 million (2010: £5.0 million) has been charged through cost of sales from the discontinued operation.


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The impairment loss for the year of £0.6 million (2010: £7.4 million) has been charged through exceptional administrative expenses from continuing operations in the income statement. For an explanation of the impairment loss refer to note 6.

In 2011, all of the customer contractual relationship amortisation charge of £5.5 million relates to amortisation previously unrecognised by an acquired entity, of which £4.8 million is from continuing operations and £0.7 million is from the discontinued operation. In 2010, £9.2 million of the customer contractual relationship amortisation charge of £9.5 million relates to amortisation previously unrecognised by an acquired entity, of which £4.7 million is from continuing operations and £4.4 million is from the discontinued operation.

16 Property, plant and equipment

Note

Leasehold improvements

£m

Land and buildings

£m

Computer equipment

£m

Fixtures and fittings

£m

Motor vehicles

£m

Assets in the course of

development£m

Total£m

Cost

At 1 January 2010 13.5 – 35.2 13.2 0.3 0.7 62.9

Additions 0.6 – 6.8 0.6 0.1 1.1 9.2

Transfers to/(from) assets in the course of development – – 0.7 – – (0.7) –

Transfers to intangibles – – (0.2) – – – (0.2)

Disposals (0.5) – (1.7) (0.9) (0.2) – (3.3)

Exchange adjustments 0.2 – – 0.6 – – 0.8

At 31 December 2010 13.8 – 40.8 13.5 0.2 1.1 69.4

Additions – internal costs – – 0.2 – – – 0.2

Additions – external costs 0.9 – 3.2 0.5 0.3 1.2 6.1


Transfers to/(from) assets in the course of development – 0.2 – – – (0.2) –

Disposal – discontinued operation 13 (1.1) – (2.3) (5.3) – – (8.7)

Other disposals/write-offs (1.2) – (2.8) (1.3) – – (5.3)

Exchange adjustments (0.7) – (1.3) (1.1) (0.1) (0.4) (3.6)

At 31 December 2011 11.7 0.2 33.4 6.3 0.4 1.7 53.7

Accumulated depreciation

At 1 January 2010 4.4 – 20.8 6.9 0.1 – 32.2

Charge for the year 2.2 – 5.2 2.6 0.1 – 10.1


Disposals (0.5) – (1.5) (0.9) (0.1) – (3.0)

Exchange adjustments 0.1 – 0.1 0.3 – – 0.5

At 31 December 2010 6.2 – 24.5 8.9 0.1 – 39.7

Charge for the year 2.1 – 7.0 2.0 0.1 – 11.2


Disposal – discontinued operation 13 (0.7) – (2.0) (4.7) – – (7.4)

Other disposals/write-offs (0.7) – (2.5) (1.3) – – (4.5)

Exchange adjustments (0.4) – (1.3) (0.8) (0.1) – (2.6)

At 31 December 2011 6.5 – 22.8 4.1 0.1 – 33.5

Net book value

At 1 January 2010 9.1 – 14.4 6.3 0.2 0.7 30.7

At 31 December 2010 7.6 – 16.3 4.4 0.1 1.1 29.7

At 31 December 2011 5.2 0.2 10.6 2.2 0.3 1.7 20.2


16 Property, plant and equipment continuedDepreciation expense for continuing operations of £9.9 million (2010: £8.3 million) has been charged through cost of sales, and £1.1 million (2010: £0.9 million) through administrative expenses. Depreciation expense for the discontinued operation of £0.2 million (2010: £0.9 million) has been charged through cost of sales from the discontinued operation.

Included in property, plant and equipment are computer equipment assets held under finance leases with a net book value of £2.0 million (2010: £1.1 million) and fixtures and fittings held under finance leases with a net book value of £nil (2010: £0.3 million).

17 Available-for-sale financial assets

2011£m

2010£m

At 1 January 24.6 26.3

Additions – 0.8

Disposals (0.6) –

Impairment loss – current year diminution in value (0.8) (0.6)

Net gains/(losses) transferred to equity 0.5 (0.9)

Exchange adjustments (0.5) (1.0)

At 31 December 23.2 24.6

The impairment loss for the year of £0.8 million (2010: £0.6 million) has been charged through exceptional items from continuing operations in the income statement. This amount is included in the total impairment loss of available-for-sale financial assets of £4.2 million (2010: £1.8 million) in note 6.

Available-for-sale financial assets include the following:

2011£m

2010£m

Listed equity securities – Eurozone 2.5 3.9

Listed debt security 20.7 20.7

Total available-for-sale financial assets 23.2 24.6

The listed equity securities are held at fair value, based on the listed price of the securities at the year end date. The underlying currency of these investments is the Euro.

The listed debt security investments are held within our Xchanging Transaction Bank Enterprise Partnership and are held at fair value, based on the listed price of the securities at the year end date. Conversion of the listed debt security investments into cash is restricted under the terms of a trust agreement until 18 March 2017. The listed debt security may be transferred between specific investment classes under the terms of the trust agreement. The underlying currency of these investments is the Euro.

The maximum exposure to credit risk at the reporting date is the fair value of the debt securities classified as available-for-sale.


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18 Trade and other receivables

Note2011

£m2010

£m

Current trade and other receivables

Trade receivables – non-related parties 40.5 60.5

Trade receivables – related parties 37 8.6 7.3

Trade receivables 49.1 67.8

Less provision for impairment of receivables (3.5) (5.5)

Net trade receivables 45.6 62.3

Other receivables 15.1 17.1

Loans to related parties 37 1.7 3.1

Prepayments – non-related parties 15.9 18.8

Accrued income – non-related parties 47.4 53.6

Accrued income – related parties 37 0.4 2.5

Held-for-trading equity securities 0.7 1.2

Pre-contract costs 3.3 1.4

Total current trade and other receivables 130.1 160.0

Non-current trade and other receivables

Other receivables 2.7 0.9

Prepayments 0.8 1.3

Pre-contract costs 1.3 2.2

Total non-current trade and other receivables 4.8 4.4

Note2011

£m2010

£m

Pre-contract costs

Written down value at 1 January 3.6 4.6

Pre-contract costs deferred in the year 2.8 0.4

Amortisation charge for the year 5 (1.8) (1.5)

Exchange adjustments – 0.1

Written down value at 31 December 4.6 3.6

2011£m

2010£m

Held-for-trading equity securities


Business combination – 0.9

Disposal (0.5) –

Write down – (1.4)


The carrying values of all financial assets within trade and other receivables are considered to approximate to their fair values. It has been assumed that the loans to related parties will be repaid in the short term and no discounting has been applied. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security.


18 Trade and other receivables continuedAs at 31 December 2011, trade receivables of £14.0 million (2010: £30.0 million) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. All trade receivables, whether current or past due, are reviewed for impairment on a case-by-case basis to identify impairment taking into account the ageing of the debt, the likelihood of recoverability and other external factors. The ageing analysis of the trade receivables is as follows:

2011

£m2010

£m

Neither past due nor impaired 31.6 32.3

Past due:

1 – 30 days 8.6 15.5

31 – 60 days 3.0 5.9

61 – 90 days 1.5 3.4

Over 90 days 0.9 5.2

Net trade receivables 45.6 62.3

Movements on the Group’s provision for impairment of trade receivables are as follows:

2011

£m2010

£m


Business combinations – 0.4

Disposal – discontinued operation (1.0) –

Charged/(credited) to cost of sales in the income statement:

– Provided in the year 0.8 1.2

– Released in the year (0.7) (0.8)

Used in the year (0.9) (2.8)

Exchange adjustments (0.2) 0.2


The other classes within trade and other receivables do not contain impaired assets.

The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:

2011

£m2010

£m

Sterling 82.5 96.3

Euros 35.1 42.9

US Dollars 7.4 14.8

Australian Dollars 3.6 5.3

Indian Rupees 3.3 2.2

Other 3.0 2.9

At 31 December 134.9 164.4


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19 Cash and cash equivalents

2011

£m

Restated 2010

£m

Cash at bank and in hand – held in Enterprise Partnerships 55.4 71.4

Cash at bank and in hand – held in non-Enterprise Partnerships 29.9 18.2

Cash at bank and in hand 85.3 89.6

Short-term deposits – held in Enterprise Partnerships 7.5 –

Short-term deposits – held in non-Enterprise Partnerships 5.3 1.5

Cash and cash equivalents 98.1 91.1

Included in the above cash at bank and in hand held in non-Enterprise Partnerships is £0.2 million which has been posted as collateral for the purposes of issuing bank guarantees.

The cash reflected on the Group’s balance sheet not only includes cash immediately accessible for wholly owned operations but also includes cash held within the Enterprise Partnerships. The Enterprise Partnerships make cash payments to the Group on an annual, or in some cases quarterly, basis as contractual dividends and licence fees. Enterprise Partnerships operate a 100% profit distribution policy and dividends are paid to shareholders on an annual basis.

Included in the cash at bank and in hand held in Enterprise Partnerships is £11.6 million (2010: £10.4 million) which relates to interest-bearing cash accounts held by FdB, on behalf of its customers. A Customer Accounts liability for the outstanding cash accounts is recognised on the balance sheet as FdB is liable to repay these funds on demand to its customers.

20 Trade and other payables

Note2011

£m2010

£m

Current trade and other payables

Trade payables – non-related parties 24.0 34.3

Trade payables – related parties 37 7.2 13.0

Trade payables 31.2 47.3

Social security and other taxes 12.4 13.2

Other payables – non-related parties 22.8 18.1

Other payables – related parties 37 0.4 0.5

Accruals – non-related parties 58.6 75.0

Accruals – related parties 37 1.0 2.4

Deferred income – non-related parties 21 20.0 20.2

Deferred income – related parties 21/37 0.4 0.2

Dividends payable to non-controlling interests 0.1 –

Total current trade and other payables 146.9 176.9

Non-current trade and other payables

Other payables – non-related parties 0.2 1.0

Accruals – non-related parties 0.9 1.0

Deferred income – non-related parties 21 4.9 16.1

Social security and other taxes 0.3 0.1

Total non-current trade and other payables 6.3 18.2


20 Trade and other payables continuedThe carrying amounts of the Group’s trade and other payables are denominated in the following currencies:

2011

£m2010

£m

Sterling 93.9 90.6

Euros 39.1 55.0

US Dollars 5.6 32.0

Australian Dollars 8.7 8.2

Indian Rupees 4.5 7.3

Other 1.4 2.0

At 31 December 153.2 195.1

The carrying values of all financial liabilities within trade and other payables are considered to approximate to their fair values.

21 Deferred incomeThe reconciliation of movements in deferred income, disclosed in note 20 above, is as follows:

2011

£m2010

£m


Business combinations – 3.1

Disposal – discontinued operation (7.0) –

Revenue deferred in year 19.3 15.1

Revenue recognised in the income statement in year (22.4) (25.8)

Exchange adjustments (1.1) 0.8


Included in the £22.4 million of revenue recognised in the income statement for the year ended 31 December 2011 is £12.7 million of revenue recognised in relation to the discontinued operation of which £11.5 million is deemed to be exceptional revenue of the discontinued operation, as described in note 13. The balance at the end of the reporting period comprised the following:

2011

£m2010

£m

Workers’ compensation claims handling – 20.6

Software maintenance and licence fees 12.8 5.6

Other 7.0 4.3

Amounts to be credited to revenue in future periods 19.8 30.5

Lease incentives 5.5 6.0

Total 25.3 36.5

Included in deferred income is £5.5 million (2010: £6.0 million) relating to a lease incentive which is being amortised over the lease term. The amount which is amortised is offset against the operating lease expense in the income statement.


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22 Borrowings and other financial liabilities

2011

£m2010

£m

Current borrowings

Bank loans and overdrafts 3.0 16.4

Finance lease liabilities 1.3 0.6

Total current borrowings 4.3 17.0

Non-current borrowings

Bank loans 48.1 39.5

Finance lease liabilities 0.5 0.9

Receivable purchase facility – 0.2

Total non-current borrowings 48.6 40.6

Current other financial liabilities

Put options to acquire the non-controlling interest in Enterprise Partnerships 12.1 22.6

Deferred consideration on acquisitions 7.9 5.0

Total current other financial liabilities 20.0 27.6

Non-current other financial liabilities

Put options to acquire the non-controlling interest in Enterprise Partnerships 3.6 3.6

Deferred consideration on acquisitions – 1.5

Total non-current other financial liabilities 3.6 5.1

The Group has non-controlling shareholders in three Enterprise Partnerships that hold the right to sell their shares to the Group at a future date. The estimated future cash flows associated with these options are discounted back to their present value.

On 28 September 2011, Aon Limited (‘Aon’) exercised the put option it held to transfer its entire shareholding in Xchanging Broking Services Limited (‘XBS’) to Xpanse Limited, a wholly owned subsidiary of the Group. A consideration of £10.0 million will be paid in two instalments to Aon for their 50% shareholding. £4.0 million was paid on the date of exercise and the remaining £6.0 million will be paid on 28 September 2012, along with interest of £0.5 million. The £6.0 million deferred payment is included in the current deferred consideration on acquisitions amount of £7.9 million, along with £0.1 million of accrued interest.

The carrying amounts of the Group’s financial liabilities are denominated in the following currencies:

2011

£m2010

£m

Sterling 57.4 16.9

Euros 15.7 16.6

US Dollars 2.9 54.6

Indian Rupees 0.3 –

Singapore Dollars – 2.2

Australian Dollars 0.2 –

76.5 90.3

The fair value of the current financial liabilities equals their carrying amount, as the impact of discounting is not significant.


22 Borrowings and other financial liabilities continuedThe fair values of the put options not yet exercisable are based on the cash flows expected to settle the obligation discounted using a rate based on the year end effective interest rate. No discounting is applied to determine the fair value of put options exercisable. At the year ended 31 December 2011, one put option (2010: three put options) is not yet exercisable and is disclosed as a non-current other financial liability. The fair value of this Euro-denominated instrument has been determined by using a discount rate of 5.25% (2010: 4.00%).

The fair values of the bank loans and overdrafts are assumed to equal their carrying value as these are recent arm’s length transactions, and are subject to floating rate interest rates determined by movements in LIBOR.

Credit facilities and liquidity managementThe Group maintains committed credit facilities to ensure that it has sufficient liquidity to maintain its ongoing operations. During the year, the Group refinanced its syndicated loan facilities and extended the maturity to August 2015. The facilities comprise a £75.0 million multi-currency revolving credit facility and a £20.0 million term loan. There is a subsidiary cross guarantee arrangement on the committed facilities and the Group has provided security in the form of share pledges over its investments in its subsidiaries. The facilities are subject to debt service, leverage and interest cover financial covenants and contain representations and warranties commonly associated with corporate bank debt. As at 31 December 2011, £28.0 million (2010: USD45.0 million (£29.1 million)) was drawn as cash under the revolving credit facility and a further €20.0 million (£16.8 million) and USD2.7 million (£1.7 million) (2010: £17.1 million) were utilised for letters of credit issued on behalf of the Group. At the end of 2011, the balance outstanding against the term loan was £20.0 million (2010: USD34.0 million (£22.0 million)). As at 31 December 2011, the Group had £28.5 million (2010: £28.8 million) of headroom available under its committed debt facilities.

In addition to these facilities there is a working capital facility of INR330.0 million (£3.9 million) provided to Xchanging Technology Services India Private Limited (‘XTSI’), a wholly owned subsidiary of the Group. The facility is secured by way of a charge on the current assets of XTSI and is subject to a corporate guarantee. The working capital facility is uncommitted and renewed on an annual basis. As at 31 December 2011, the amount outstanding was £2.9 million (2010: £nil).

During the year the Group repaid all bank term loan and working capital facilities provided by various Indian banks to Cambridge Solutions Limited (2010: £5.1 million).

The Group has a £10.0 million (2010: £10.0 million) uncommitted overdraft facility linked to its UK notional cash pool.

The Group has the following undrawn committed and uncommitted borrowing facilities available:

2011£m

2010£m

Expiring within one year 11.0 10.9

Expiring later than one year but not more than two years – 28.8

Expiring later than two years but not more than five years 28.5 –

39.5 39.7

Scheduled repayments of the £20.0 million term loan start from January 2013. The amortisation rate is £3.3 million every six months.

The finance leases held by the Group relate to leased assets including computer equipment and other various items of office equipment.

The gross finance lease obligation is as follows:

2011

£m2010

£m


Expiring later than one year but not more than five years 0.5 0.9

Gross finance lease obligation 1.8 1.6

Future finance charges on finance leases – –

Present value of future finance leases 1.8 1.6


Company overview

Business review




The present value of finance lease liabilities is as follows:

2011£m

2010£m


Expiring later than one year but not more than five years 0.5 0.9

Present value of future finance leases 1.8 1.6

23 Provisions

Note

Onerous leases and contracts

£mRestructuring

£m

Operational risk £m

Litigation provision

£m

Employee related

provisions £m

Other £m

Total £m

At 1 January 2011 12.0 7.0 0.9 3.7 3.5 4.0 31.1

Disposal – discontinued operation 13 (4.7) (0.1) – (0.4) – – (5.2)

Charged/(credited) to the income statement:

– Provided in the year 0.4 18.9 0.1 3.5 3.5 2.1 28.5

– Released in the year (1.1) (0.5) – – – – (1.6)

– Unwinding of discount1 (0.1) – – – – – (0.1)

Used in the year (3.3) (14.9) (0.1) (2.1) (0.9) (1.3) (22.6)

Exchange adjustments (0.2) (0.1) – 0.1 (0.2) (0.5) (0.9)

At 31 December 2011 3.0 10.3 0.9 4.8 5.9 4.3 29.2

1 The £0.1 million impact of unwinding the effect of discounting on provisions in the year is recognised within the finance costs of the discounted operation in note 13.

Included within the provided in the year amounts for the litigation provision, employee related provisions and other provisions are provisions created in respect of the discontinued operation.

Provisions have been analysed between current and non-current as follows:

2011 £m

2010 £m

Current 22.1 23.2

Non-current 7.1 7.9

29.2 31.1

Included in the onerous leases and contracts provision is an onerous contract provision in the Australian workers’ compensation business of £2.6 million. The value of this provision is based on the best estimate of the costs to exit this contract; these are expected to be lower than the future losses expected to be incurred on continuation of this business.

The £10.3 million restructuring provision recognised at the year end relates to an estimate of the cost of the Four Part Action Plan restructuring programmes. The estimated costs include expected termination and redundancy payments along with employee related taxes. We expect the majority of this to be utilised in 2012.

The operational risk provision comprises an estimated liability in respect of identified operating errors which had occurred in the ordinary course of business in the Financial Services sector up to 31 December 2011. This is an ongoing provision representative of the nature of the securities processing market. The timing of expected outflows is uncertain as utilisation of the provision is dependent on when claims are made for past errors.

The litigation provision relates to a number of ongoing claims and potential exposures. The utilisation of the provision is dependent on the timing of the settlement of the underlying cases. The settlement is, to an extent, outside the Group’s control and there is therefore an element of uncertainty regarding the timing of the provision’s utilisation. Estimates have been made of the expected cash outflows in relation to future and current litigation.


23 Provisions continuedThe employee related provision includes gratuity provisions, early and part-time retirement provisions, long service provisions and workers’ compensation claims provisions for former employees of CISGI. Long service awards are based on actuarial valuations which are updated at each reporting date. The gratuity provisions as well as the early and part-time retirement provision both have an element of uncertainty surrounding their amount and timing of utilisation. The workers’ compensation claims provisions are based on the best estimate of the expected medical insurance claims that former CISGI employees will submit. There is uncertainty over the timing of payments therefore the provision has been classified as current.

The other provisions primarily include provisions for archiving required under banking regulations and costs to migrate an IT platform following the disposal of the US BPO operations. The provision is based on a best estimate of the costs of the migration solution and it is expected to be fully utilised in 2012.

24 Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 25% (2010: 27%) for differences arising in the UK, and at the relevant local statutory rates for differences arising in other countries.

Deferred tax assets and liabilities are only offset where there is a legal right of offset and there is an intention to settle the balance net. Deferred income tax assets and liabilities are attributable to the following items:

2011

£m2010

£m

Deferred tax assets

Retirement benefit obligation 12.4 10.6

Tax losses 2.6 3.4

Decelerated tax depreciation 3.5 2.5

Share-based payments – 0.1

Put option – 0.1

Other 6.4 5.0

Total deferred tax assets 24.9 21.7

Recoverable within 1 year 6.4 3.3

Recoverable after more than 1 year 18.5 18.4

24.9 21.7

Deferred tax liabilities

Accelerated tax depreciation – (2.6)

Put option (0.1) (0.2)

Other (6.9) (6.0)

Total deferred tax liabilities (7.0) (8.8)

Arising within 1 year (1.0) (2.8)

Arising after more than 1 year (6.0) (6.0)

(7.0) (8.8)

Tax losses arising in the current and previous years from continuing operations, total an estimated carried forward amount of £2.6 million in the UK (2010: £9.2 million) and losses of £39.2 million in the US (2010: £33.7 million) and £14.9 million (2010: £12.3 million) in other tax jurisdictions. US losses expire 20 years from the year in which they arise.

The principal deferred tax assets recognised for losses are £0.7 million (2010: £2.5 million) in respect of the UK and £1.8 million (2010: £nil) in respect of the US.


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The Group has not recognised deferred tax assets of £17.8 million (2010: £16.1 million) which principally arise on losses in Italy and the US. The Directors consider that it is unlikely that there will be sufficient profits in the future to realise these deferred tax assets, and therefore the assets have not been recognised in these financial statements.

The Finance Act 2011, which was substantively enacted on 5 July 2011, includes legislation reducing the main rate of corporation tax from 26% to 25% from 1 April 2012. The change from 26% to 25% has been reflected in the closing deferred tax balances included in these financial statements.

Proposed further reductions of the main rate of corporation tax by 1% per year to 23% by 1 April 2014 are expected to be enacted separately each year. These changes had not been substantively enacted at the balance sheet date and therefore are not included in these financial statements. The annual impact of the 1% reduction is expected to reduce the net deferred tax asset included in the financial statements each year end by approximately £0.6 million.

The movement in the net deferred tax position is as follows:

Retirement benefit

obligation £m

Tax losses £m

Decelerated/ (accelerated)

tax depreciation

£m

Share-based payments

£mPut option

£mOther

£mTotal

£m

At 1 January 2010 10.9 4.4 (0.8) 1.0 (0.1) (2.1) 13.3

Recognised on business combinations – – – – – (3.8) (3.8)

(Charged)/credited to the income statement (0.5) (1.0) 0.7 (0.2) 0.1 5.1 4.2

Credited/(charged) directly to other comprehensive income 0.2 – – – – (0.1) 0.1

Charged to equity – – – (0.7) (0.1) – (0.8)

Exchange adjustments – – – – – (0.1) (0.1)

At 31 December 2010 10.6 3.4 (0.1) 0.1 (0.1) (1.0) 12.9

Reclassifications (0.9) 0.1 2.9 – (0.1) (2.0) –

Disposal – discontinued operation (note 13) – – – – – 0.8 0.8

Credited/(charged) to the income statement 1.2 (0.5) 0.7 (0.1) 0.1 1.9 3.3

Credited directly to other comprehensive income 1.5 – – – – – 1.5

Exchange adjustments – (0.4) – – – (0.2) (0.6)

At 31 December 2011 12.4 2.6 3.5 – (0.1) (0.5) 17.9

25 Ordinary shares

£m

2011 Number of

shares £m

2010 Number of

shares

Authorised

Company ordinary shares of £0.05 each 17.5 350,000,000 17.5 350,000,000

Allotted and fully paid

At 1 January 11.9 239,509,739 11.8 237,116,600

Exercise of share options – – 0.1 2,393,139

At 31 December 11.9 239,509,739 11.9 239,509,739

During the year, no share options were exercised (2010: 2,393,139).

Share rightsAll Company ordinary shares carry equal share rights.


26 Share-based payment plansThe Group operates a number of equity-settled share-based payment plans. These plans are detailed below.

(i) Share optionsOptions are granted with a fixed exercise price at the date of grant. The contractual life of an option is 10 years. Awards are granted to Directors and employees on a merit basis, and are subject to continuous employment. Options granted become exercisable on the third anniversary of the date of grant, and are valued using the Black-Scholes pricing model. The Group has no legal or constructive obligation to repurchase or settle the options in cash.

The number of shares subject to options, the periods in which they were granted and the periods in which they may be exercised are outlined in the table below.

Grant Balance at

1 January 2011 Granted in year Exercised in yearLapsed/forfeited

in year

Number of options

outstanding at 31 December

2011Exercise price per

share (£) Exercise period

2003 Approved* 85,180 – – (85,180) – 0.94 Nov 06 – Nov 13

2003 Unapproved* 400,000 – – (400,000) – 0.94 Nov 06 – Nov 13

2004 Approved* 93,950 – – (30,000) 63,950 0.97 Apr 07 – Apr 14

2004 Approved* 12,000 – – – 12,000 0.97 Aug 07 – Aug 14

2005 Unapproved* 200,000 – – – 200,000 0.95 Apr 08 – Apr 15

2005 Unapproved* 500,000 – – (500,000) – 0.94 Jul 08 – Jul 15

2006 Approved* 64,000 – – – 64,000 0.93 Apr 09 – Apr 16

2006 Unapproved* 216,000 – – – 216,000 0.93 Apr 09 – Apr 16

2007 Approved* 197,544 – – (56,076) 141,468 1.33 Feb 10 – Feb 17

2007 Unapproved* 894,381 – – (147,849) 746,532 1.33 Feb 10 – Feb 17

2007 Unapproved* 200,000 – – (200,000) – 1.63 Mar 10 – Mar 17

2007 Unapproved* 104,938 – – – 104,938 2.77 Dec 10 – Dec 17

2008 Unapproved* 95,062 – – – 95,062 2.81 Mar 11 – Mar 18

2008 Approved* 12,158 – – (12,158) – 0.94 Aug 11 – Aug 18

2008 Unapproved* 27,842 – – (27,842) – 0.94 Aug 11 – Aug 18

2009 Approved 15,789 – – (15,789) – 1.90 Mar 12 – Mar 19

2009 Unapproved 9,211 – – (9,211) – 1.90 Mar 12 – Mar 19

2011 Unapproved – 2,883,420 – (681,140) 2,202,280 0.77 Mar 14 – Mar 21

2011 Approved – 1,106,580 – (368,860) 737,720 0.77 Mar 14 – Mar 21

2011 Approved – 35,000 – – 35,000 0.80 Sep 14 – Sep 21

Total 2011 3,128,055 4,025,000 – (2,534,105) 4,618,950

WAEP** 1.07 0.77 – 0.90 0.87

WAEP*** 1.28 0.77 – 0.99 1.02

Total 2010 5,751,194 – (2,393,139) (230,000) 3,128,055

WAEP** 1.06 – 0.96 0.18 1.07

WAEP*** 1.16 – 0.86 0.27 1.28

* These options have fully vested ** Approved shares weighted average exercise price (£)*** Unapproved shares weighted average exercise price (£)

1,643,950 options were exercisable at the end of 2011 at a weighted average exercise price of £1.37 (2010: £1.18). There were no options exercised during the year.

The options outstanding at 31 December 2011 have an exercise price in the range of £0.77 to £2.81 and a weighted average contractual life of 7.7 years.


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Share option valuation and measurementThe fair values of options granted during the year were calculated using the Black-Scholes option pricing model. The inputs into the model were as follows:

Share Option Plans 2011

Vesting period (years) 3

Option life (years) 10

Expected life (years) 3.25

Expected dividends expressed as dividend yield (%) 1

Possibility of ceasing employment before vesting (%) 10

Risk free interest rate (%) 1.9

Expected volatility (%) 56

Weighted average share price at grant date (£) 0.81

Weighted average fair value of options granted in the period (£) 0.31

The expected volatility is based on the Company’s historical volatility. The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the assumed option life.

The weighted average share price for options granted during the year was £0.81 per share (2010: £nil). The total income statement impact for the year relating to employee share-based payments under the share option plans was a debit of £0.3 million (2010: credit of £0.2 million), all of which related to equity-settled share-based payment transactions.

(ii) Performance Share Plan Awards have been granted under the Performance Share Plan (‘PSP’) to Executive Directors and certain members of the Group’s management group. Under the terms of the scheme, two types of awards are granted: conditional awards which will vest at the end of a three-year performance period; and non-conditional awards. In both cases, awards are granted to Directors and employees on a merit basis, and are subject to continuous employment over the length of the vesting period, or at the discretion of the Group if determined to be a ‘good leaver’ upon leaving. Awards granted vest three years from the date of the award. The Group has no legal or constructive obligation to repurchase or settle the awards in cash.

The number of conditional Basic and Stretch awards that will vest is dependent on the performance of the Company’s total shareholder return (‘TSR’) as compared with the performance of its comparator group (defined as the constituents of the FTSE 250 index excluding investment trusts) and on the attainment of an earnings per share growth underpin. 25% of the Basic awards will vest if TSR is at a median position and 100% if TSR is in the upper quartile. In between these positions, the Basic award will vest on a straight-line basis. The Stretch award will also vest on a straight-line basis, with 0% vesting if TSR is at an upper quartile position, up to 100% if TSR is in the top decile. The earnings per share underpin is the UK RPI plus 3%.

Conditional awards are valued using a Monte Carlo simulation model. The Monte Carlo simulation model used for valuing PSP awards with a TSR performance condition requires additional assumptions. A coefficient assumption of 18% for the April 2011 and 17% for the June 2011 awards (2010: 21%) (based on historical analysis) has been used in the current year, representing the level of correlation of growth in TSR between the comparator companies simulated in the model. The three-year historical volatility for each company in the comparator group at grant date has been analysed and this historical volatility has been used in the model to project TSR for each company.

The share awards granted and the assumptions used as inputs into the fair valuation model are as follows:

PSP 2011 June 2011 April 2010

Vesting period (years) 3 3 2.75

Expected life 3 3 2.75

Expected dividends expressed as dividend yield (%) 1 1 1

Possibility of ceasing employment before vesting (%) 10 10 20

Risk free interest rate (%) 1.21 1.95 1.87

Weighted average share price at grant date (£) 1.04 0.84 1.95

Weighted average fair value at grant date (£) 0.69 0.52 0.96


26 Share-based payment plans continued

GrantBalance at

1 January 2011 Granted in year Vested in year Lapsed in year

Number of PSP awards outstanding at

31 December 2011

2008 March 3,589,535 – – (3,589,535) –

2009 April 1,555,062 – – (415,657) 1,139,405

2009 September 1,069,500 – – (166,509) 902,991

2010 April 3,707,339 – – (422,913) 3,284,426

2010 August 983,917 – – – 983,917

2011 April – 3,448,651 – (599,422) 2,849,229

2011 June – 424,035 – – 424,035

Total 2011 10,905,353 3,872,686 – (5,194,036) 9,584,003

Total 2010 6,666,745 4,893,320 – (654,712) 10,905,353

Of the 9,584,003 PSP awards outstanding at 31 December 2011, 2,003,917 are non-conditional awards which will vest only upon continuous employment over the length of the vesting period. These awards do not have a TSR performance condition.

The total charge for the year relating to the PSP, including social security charges on the awards, was £3.0 million (2010: £2.2 million).

(iii) Share Purchase Plan 2007 (SPP)The Group adopted the SPP during 2007, in which Executive Directors and certain members of senior management were invited to participate. Under this scheme, set up in February 2007, an employee benefit trust loaned money to the participants in order to allow them to purchase class F shares in Xchanging BV at the market value at the time of £5.30 (the Company equivalent value £1.33). These loans are non-interest bearing and the terms and conditions are described further in note 37. Participants may not normally sell, transfer or otherwise dispose of the shares awarded under the scheme for a period of 18 months from issue. Shares may now be sold on the condition that a pro-rata proportion of any loan from the employee benefit trust is repaid. As the shares were granted at the fair market value at the time there is no share-based payment charge as a result of this scheme.

(iv) Share AwardsIn October 2010, share awards were granted to the newly appointed Chief Financial Officer. 150,000 ordinary shares in the Company vested in October 2011 and 150,000 ordinary shares in the Company will vest in October 2012. These awards are subject to the continuous employment within the Group up to October 2012. 27 Shareholders’ equityOrdinary sharesThe balance classed as ordinary shares is the nominal proceeds on issue of the Company’s equity share capital, comprising 5p ordinary shares.

Share premiumThe amount paid to the Company by shareholders over and above the nominal value of the shares issued to them, less the direct costs of issuing the shares, is classified as share premium.

Merger reserve and reverse acquisition reserveThe merger and reverse acquisition reserves arise as a result of the share for share exchange undertaken in advance of the initial public offering. The merger reserve comprises the excess of the market value of the Company shares issued to the Xchanging BV shareholders over the nominal value of those shares and arises as a result of the application of merger relief under Section 131 of the Companies Act 1985. The reverse acquisition reserve consists of the difference between the market value of the Company shares issued to the Xchanging BV shareholders and the total share capital and share premium of the Xchanging BV shares.

Other reservesComposition of the other reserves is described in note 28.

Retained earningsThese represent the accumulation of the Group’s net profits retained within the business, after the payment of any dividends.

Non-controlling interest in equityThese represent the non-controlling interest’s share in the assets and liabilities of both the Enterprise Partnerships and of Cambridge Solutions Limited, in which the Group had a 75.62% interest at 31 December 2011.


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28 Other reserves

Note

Available-for-sale reserve

£m

Translation reserve

£m

Hedging reserve

£mOther reserves

£mTotal

£m

At 1 January 2010 (2.0) 13.2 – 4.4 15.6

Revaluation of available-for-sale financial assets (net of non-controlling interest’s share) (1.1) – – – (1.1)

Revaluation losses recycled to income statement on impairment of available-for-sale financial assets (net of non-controlling interest‘s share) 1.1 – – – 1.1

Actuarial loss on pensions (net of non-controlling interest’s share) – – – (1.8) (1.8)

Deferred tax on pensions (net of non-controlling interest’s share) – – – 0.2 0.2

Current tax on pensions (net of non-controlling interest’s share) – – – 0.3 0.3

Disposal of shares in a subsidiary – – – 0.4 0.4

Currency translation differences (net of non-controlling interest’s share) 0.1 4.3 – 1.8 6.2

At 31 December 2010 (1.9) 17.5 – 5.3 20.9

Revaluation of available-for-sale financial assets (net of non-controlling interest‘s share) (0.6) – – – (0.6)

Revaluation losses recycled to income statement on disposal of available-for-sale financial assets (net of non-controlling interest’s share) 0.1 – – – 0.1

Revaluation losses recycled to income statement on impairment of available-for-sale financial assets (net of non-controlling interest’s share) 4.2 – – – 4.2

Actuarial loss on pensions (net of non-controlling interest’s share) – – – (9.4) (9.4)

Deferred tax on pensions (net of non-controlling interest’s share) – – – 2.1 2.1

Current tax on pensions (net of non-controlling interest’s share) – – – 0.2 0.2

Fair value movements on hedge instruments qualifying for hedge accounting – – (0.6) – (0.6)

Fair value movements on hedge instruments recycled to the income statement upon de-designation – – 0.1 – 0.1

Transaction with non-controlling interest 30 – – – (20.3) (20.3)

Cumulative translation differences recycled to the income statement in respect of the discontinued operation – 3.3 – – 3.3

Currency translation differences (net of non-controlling interest’s share) – (4.1) – – (4.1)

At 31 December 2011 1.8 16.7 (0.5) (22.1) (4.1)

Available-for-sale reserveThe available-for-sale reserve comprises the fair value adjustments and related tax on the available-for-sale financial assets held by the Group.

Translation reserveThe translation reserve comprises the exchange adjustments arising from translating the results of foreign operations into the Group’s presentation currency of Sterling.

Hedging reserveThe hedging reserve comprises amounts taken to equity in respect of cash flow hedges in place to mitigate foreign exchange volatility in the Group’s Indian operations.

Other reservesThe other reserves comprise the amounts taken to equity in respect of retirement benefit obligations, transactions with non-controlling interests and differences in share price between the date of issue, and the date of control passing in respect of acquisitions.


29 Non-controlling interest in equity

Note2011

£m2010

£m


Non-controlling interest’s share of adjusted profit for the year 4.8 7.5

Non-controlling interest’s share of adjustments to adjusted 3.4 (2.0)

Non-controlling interest’s share of profit for the year 8.2 5.5

Non-controlling interest’s share of actuarial gains and losses 1.4 0.4

Non-controlling interest’s share of deferred tax on pension movements (0.6) (0.1)

Non-controlling interest’s share of current tax on pension movements – –

Non-controlling interest’s share of revaluation of available-for-sale financial assets 0.2 0.2

Non-controlling interest’s share of revaluation losses recycled to income statement on impairment of available-for-sale financial assets – 0.1

Non-controlling interest’s share of deferred tax on revaluation of available-for-sale financial assets – (0.1)

Non-controlling interest’s share of currency translation differences (4.7) 1.5

Non-controlling interest’s share of other comprehensive income (3.7) 2.0

Non-controlling interest’s share of fair value net assets on acquisition – 2.3

Non-controlling interest’s share of currency translation differences – 0.1

Transaction with non-controlling interest 30 12.5 –

Dividends paid to non-controlling interests (7.7) (6.5)

Non-controlling interest’s share of items taken directly to equity 4.8 (4.1)


Non-controlling interest calculations for the Group’s Enterprise Partnerships are dependent upon the individual contractual terms. Some define adjustments in relation to certain items prior to calculating profit share based on the percentage share ownerships. These may include, for example, adjustments for differences between local and international accounting standards, adjustments for any discounts or fees payable between parties.

30 Transactions with non-controlling interestsa) Acquisition of additional interest in XBSOn 28 September 2011, Aon exercised the put option it held over its 50% shareholding in XBS. Aon’s entire shareholding was transferred to Xpanse Limited, a wholly owned subsidiary of the Group, for a consideration of £10.0 million. The Group now holds 100% of the equity share capital of XBS. The carrying amount of the non-controlling interest in XBS on the date of the acquisition was £nil. There has been no overall impact on the equity attributable to the owners of the parent from this transaction.


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b) Acquisition of additional interest in Cambridge Integrated Services Group Inc.On 31 August 2011, Waltham Holdings Limited, wholly owned by Ogier Employee Benefit Trustee Limited in its capacity as trustee of the Xchanging Employee Benefit Trust, acquired 100% of the issued share capital of Cambridge Integrated Services Group Inc., ‘CISGI’, from Cambridge Solutions Limited, a 75.62% owned subsidiary of the Group, for a consideration of £1,000. The Group now holds 100% of the equity share capital of CISGI. The fair value of the non-controlling interests in CISGI on the date of acquisition was a credit of £3.0 million. The Group derecognised non-controlling interests of £3.0 million and recorded a decrease in equity attributable to owners of the parent of £3.0 million. The effect of changes in the ownership interest of CISGI on the equity attributable to owners of the parent during the year is summarised as follows:

2011 £m

Fair value of non-controlling interests acquired (3.0)

Consideration paid to non-controlling interests –

Excess of consideration paid recognised in shareholders’ equity (3.0)

c) Acquisition of additional interest in India BPO business On 21 July 2011, XTSI acquired the Indian business process outsourcing business, ‘India BPO’, including its investment in Cambridge Builders Private Limited, from Cambridge Solutions Limited, a 75.62% owned subsidiary of the Group, for a consideration of USD66.2 million (£41.5 million). The Group now holds 100% of the India BPO business. The fair value of the non-controlling interests in the India BPO business on the date of acquisition was a debit of £0.8 million. The Group derecognised non-controlling interests of £0.8 million and recorded a decrease in equity attributable to owners of the parent of £8.7 million. The effect of changes in the ownership interest of the India BPO business on the equity attributable to owners of the parent during the year is summarised as follows:

2011 £m

Fair value of non-controlling interests acquired 0.8

Consideration paid to non-controlling interests (10.1)


d) Acquisition of additional interest in BPO Australia business and assetsOn 12 June 2011, Xchanging Procurement Services Pty Limited, a wholly owned subsidiary of the Group, acquired 100% of the issued shares of Xchanging Integrated Services Victoria Pty Limited, ‘XISV’, from Cambridge Solutions Limited, a 75.62% owned subsidiary of the Group, for a consideration of USD16.7 million (£10.4 million). The Group now holds 100% of the equity share capital of XISV. The fair value of the non-controlling interests in XISV on the date of acquisition was a debit of £2.3 million. The Group derecognised non-controlling interests of £2.3 million and recorded a decrease in equity attributable to owners of the parent of £0.2 million. The effect of changes in the ownership interest of XISV on the equity attributable to owners of the parent during the year is summarised as follows:

2011 £m

Fair value of non-controlling interests acquired 2.3

Consideration paid to non-controlling interests (2.5)


31 Financial commitments and contingent liabilitiesAt 31 December future aggregate minimum lease payments under non-cancellable operating leases were as follows:

2011

£m2010

£m

Within one year 15.6 17.8

Later than one year but not more than five years 28.5 36.0

Later than five years 9.9 15.2


31 Financial commitments and contingent liabilities continuedThe Group’s most significant leases are those of the premises at Leadenhall Street, London; Basildon; Sydney; Melbourne; Chicago and Frankfurt. The London lease expires in February 2021, the Basildon lease expires in September 2014, the Sydney lease expires in February 2016, the Melbourne lease expires in March 2015, the Chicago lease expires in April 2012 and the Frankfurt lease expires in December 2013.

The Group is contractually obligated to invest amounts, on behalf of the Enterprise Partnerships it has established, in technology development and maintenance and in the development of new processes and systems. The total commitment outstanding at 31 December is presented below as analysed by the period in which the commitment falls due:

2011

£m2010

£m

Within one year 4.5 1.7

Later than one year but not more than two years – 2.1

4.5 3.8

During the year Xchanging Global Insurance Solutions Limited, a wholly owned subsidiary of the Group, contracted to purchase software licences of £0.6 million and capital goods of £0.4 million in 2012.

On 28 July 2010, Cambridge Builders Private Limited, a wholly owned subsidiary of the Group, signed an agreement with the State of Karnataka, India to purchase the leasehold for, and jointly develop, land in a new Special Economic Zone in Shimoga, a Tier 3 (rural) town north-west of Bangalore, India. Construction of a state-of-the-art processing centre on this land is expected to be completed in the next financial year. The expected development costs of this project are £3.9 million, of which £1.7 million has already been incurred (2010: £0.5 million).

During 2008, the Group put in place a guarantee covering contributions to one of its pension schemes as part of an agreement reached with the scheme’s trustees for funding the scheme at the 2007 actuarial valuation. The guarantee will remain in place until 30 April 2017 and will reduce in value in line with contributions paid to the scheme under the agreed contributions schedule. The value of the guarantee was £5.5 million at 31 December 2011 (2010: £11.2 million). The Group would be required to make contributions to the scheme under the guarantee following any of the below occurring:nn An insolvency event of the sponsoring employers of the scheme.nn A failure by the sponsoring employers to make contributions to the scheme under Section 75 or Section 75a of the

Pensions Act 1995.nn A failure by the sponsoring employers to make contributions to the scheme under the agreed contributions schedule

within 15 business days of that payment becoming due.

On 15 December 2011, Xchanging Resourcing Services Limited, a wholly owned subsidiary of the Group, signed an agreement with Elemense Limited, to sell its business of sourcing and placing contingent labour for a consideration of £0.4 million. The assets included in the sale are primarily the contracts of the business, the staff and the databases required to carry out the business and a contract to supply UK entities of the Group with contractors for a period of two years. The sale completed on 16 January 2012.

The Group has provided £21.1 million (2010: £22.2 million) of bank guarantees in respect of non-performance of obligations under contracts entered into in the ordinary course of business and lease property deposits. £18.5 million of the guarantees (2010: £17.1 million) are issued under the Group’s £75.0 million revolving credit facility and a further £2.3 million (2010: £4.9 million) are issued under a separate guarantee facility. The remaining £0.3 million (2010: £0.1 million) are cash collateralised with cash from the operating business for which they are issued.

The Group has contingent liabilities arising from guarantees in respect of subsidiary undertakings, which are entered into in the normal course of business. It is not practicable to estimate the magnitude of possible obligations that may arise in respect of subsidiary undertakings.

On 31 May 2011, following the sale of the US workers’ compensation and third party administration operations, certain guarantees were made to the buyer as part of the sale and purchase agreement, in respect of any claims that may arise relating to periods prior to the sale. Amounts have been provided within the litigation provision for claims that the Directors reasonably believe may arise.

In the normal course of the Group‘s business, legal proceedings are pending or may be brought against the Company and its subsidiaries arising out of current and past operations, including matters related to commercial disputes, product liability, antitrust and premises-liability claims. The Directors believe that the impact of these legal proceedings on the Group‘s results of operations, liquidity or financial position will not be material, apart from those matters specifically provided against at year end. Refer to note 23.


Company overview

Business review




32 Cash generated from operations

Note2011

£m

Restated 2010

£m

Loss before tax from continuing operations (2.5) (7.6)

Net finance cost 9 9.1 4.5

Operating profit/(loss) from continuing operations 6.6 (3.1)

Adjustment for non-cash items:

– Impairment losses 6 14.6 57.8

– Employee share-based payment charges 8 3.3 2.0

– Depreciation of property, plant and equipment 5 11.0 9.2

– Amortisation of other intangibles 5 20.6 23.3

– Amortisation of pre-contract costs 5 1.8 1.5

– Loss on disposal of property, plant and equipment and other intangibles 5 0.8 0.7

– Loss on disposal of available-for-sale financial assets 0.1 –

– Gain from a bargain purchase 6 – (0.1)

58.8 91.3

Changes in working capital (excluding the effects of business combinations):

– Decrease/(increase) in trade and other receivables 22.1 (2.8)

– (Decrease)/increase in payables (19.6) 5.7

– Decrease in pensions (0.6) (0.6)

– Increase/(decrease) in provisions 0.4 (13.6)


33 Business combinationsa) Current year business combinationOn 1 August 2011, Xchanging Pty Limited, a wholly owned subsidiary of the Group, acquired a 14 month insurance services contract and the related employees to service this contract from Elumina Group Pty Limited for a total consideration of AUD0.7 million (£0.5 million based on the exchange rate prevailing on the date of acquisition). AUD0.3 million was paid up front with the remaining balance settled in equal monthly instalments to 31 March 2012. £0.2 million is included in the £7.9 million deferred consideration on acquisition recognised at the year end, refer to note 22. A fair value of £0.5 million was attributed to the customer contract on acquisition.

The Directors do not consider this transaction to be material to the Group and therefore disclosure as required under IFRS 3 (Revised) ‘Business Combinations’ has not been included in the consolidated financial statements.

b) Changes to the prior period business combinationsAs at 31 December 2010, the book and estimated fair values of significant assets and liabilities of the prior year business combinations were presented as provisional amounts. Following the lapsing of the measurement period, 12 months from the date of acquisition as permitted by IFRS 3 (Revised), ‘Business Combinations’, the fair values of the net identified assets of all prior year business combinations are now presented as final.

The only change made to the provisional amounts presented in the financial statements for the year ended 31 December 2010, relates to the FondsServiceBank business combination. The contracts migrated from DAB bank AG were subsumed onto the existing FdB investment account processing platform from 3 April 2010. The acquired customer accounts were disclosed net of the cash assets. In the current year, this was disclosed gross to reflect the current year consolidated cashflow statement impact as disclosed in note 2(i).

(i) FondsServiceBankOn 13 May 2009, the Group entered into an agreement with DAB bank AG to acquire the trade and assets of their FondsServiceBank (‘FSB’) business unit, an investment funds administration business. As a result of this agreement, on 3 April 2010, the Group migrated all contracts with distribution partners and customers relating to the safekeeping and administration of investment fund shares. This transaction meets the definition of a business combination under the principles of IFRS 3 (Revised), ‘Business Combinations’ and has therefore been accounted for under the acquisition method of accounting, in accordance with IFRS 3 (Revised).


33 Business combinations continuedThe total cash paid in consideration for the acquisition was €21.6 million (£19.1 million based on the exchange rate prevailing on the date of acquisition), of which €9.95 million was paid in 2009.

The contracts migrated from DAB bank AG were subsumed onto the existing FdB investment account processing platform from 3 April 2010. This is consistent with the Group’s strategy to grow existing platforms and derive benefits from economies of scale, with overall performance being measured at the combined FdB business unit level. Consequently, revenues and profits or losses earned from investment account processing services in relation to the FSB contracts are not separately identifiable from the pre-existing FdB contracts. Therefore, it is impracticable to disclose the revenue and profit or loss in relation to FSB since the acquisition date included in the consolidated statement of comprehensive income for the period ended 31 December 2010 or for the current reporting period as though the acquisition date had been on 1 January 2010.

The book and estimated fair values of significant assets and liabilities as at 3 April 2010 are set out below:

Acquiree’s carrying amount

£mAdjustments

£m Fair value

£m

Intangible assets (excluding goodwill) – 10.1 10.1

Cash 8.9 – 8.9

Customer accounts (8.9) – (8.9)

Deferred tax liabilities – (3.2) (3.2)

Net assets acquired – 6.9 6.9

The fair value adjustments in respect of intangible assets are due to the recognition of customer relationships.

Goodwill represents the value of both sales and cost synergies expected to arise from combining and integrating the operations of FSB onto the Group’s existing FdB banking platforms.

Details of net assets acquired and goodwill are as follows:

£m

Purchase consideration

– Cash 19.1

Total purchase consideration 19.1

Fair value of net assets acquired (6.9)

Goodwill 12.2

(ii) SEB Investmentservice (‘SEB ISG’)On 31 December 2009, the Group entered into an agreement with SEB Bank and SEB Asset Management to acquire 100% of the share capital of SEB ISG, a B2B investment accounts business. This transaction completed with effect from 12 March 2010. The results of SEB ISG have been consolidated by the Group from 1 March 2010 and the company has been renamed Xchanging Investmentservice GmbH.

The total consideration paid for the acquisition was €0.2 million (£0.2 million at the exchange rate prevailing at the date of control being assumed).

SEB ISG contributed revenue of £7.7 million and statutory profit for the year of £3.1 million to the Group for the period from acquisition to 31 December 2010. If the acquisition date had been 1 January 2010 SEB ISG would have contributed revenue of approximately £8.9 million and statutory profit of £3.1 million to the Group for the year ended 31 December 2010.


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Business review




The book and estimated fair values of significant assets and liabilities as at 1 March 2010 are set out below:


£mAdjustments

£mFair value

£m

Intangible asset (excluding goodwill) – 1.8 1.8

Deferred income tax assets – 0.4 0.4

Trade and other receivables 3.3 – 3.3

Cash and cash equivalents 0.7 – 0.7

Trade and other payables (3.4) – (3.4)

Pension liability (0.7) – (0.7)

Deferred income tax liabilities – (0.6) (0.6)

Provisions (0.2) (1.3) (1.5)

Net assets/(liabilities) acquired (0.3) 0.3 –

The fair value adjustments in respect of intangible assets relate to the recognition of £1.8 million in respect of customer relationships. The adjustment to provisions relates to the recognition of a £1.3 million onerous service contract provision. The adjustment to deferred tax assets and liabilities relate to the valuation adjustments for intangible assets and provisions and are based on management’s best estimates.

Goodwill represents the value of both sales and cost synergies expected to arise from combining and integrating the operations of SEB onto the Group’s existing banking platforms.


£m


– Cash 0.1


Fair value of net assets acquired –

Goodwill 0.1

(iii) Data Integration LimitedOn 15 June 2010, the Group acquired 100% of the share capital of Data Integration Limited (‘DI’), a UK-based reseller business specialising in network security, application optimisation, mobility solutions, high performance networks, IP telephony and open access networks. The results of DI have been consolidated by the Group from 1 June 2010.

DI contributed revenue of £12.1 million and statutory profit for the year of £1.0 million to the Group for the period from acquisition to 31 December 2010. If the acquisition date had been 1 January 2010, DI would have contributed revenue of approximately £18.3 million and profit before tax of approximately £1.2 million to the Group.


33 Business combinations continuedThe book and estimated fair values of significant assets and liabilities as at 1 June 2010 are set out below:


£mAdjustments

£mFair value

£m

Intangible assets (excluding goodwill) – 2.0 2.0

Property, plant and equipment 0.1 – 0.1

Deferred income tax assets 0.1 – 0.1

Inventories 0.1 – 0.1

Trade and other receivables 2.6 0.5 3.1


Trade and other payables (3.4) (1.0) (4.4)

Deferred income tax liabilities – (0.5) (0.5)

Net assets/(liabilities) acquired 1.1 1.0 2.1

The fair value adjustments in respect of intangible assets are due to the recognition of £2.0 million in respect of customer relationships. The adjustment to trade and other payables and trade and other receivables relates to the recognition of £0.5 million deferred income as a result of bringing Data Integration’s accounting policies in line with the Group policies. The adjustment to deferred tax liabilities relate to the valuation adjustments for intangible assets and is based on management’s best estimates.

Goodwill on acquisition represents the value of both sales and cost synergies expected to arise from combining and integrating DI’s experienced and expert workforce into the Group to enhance our existing Technology offerings.


£m


– Cash 2.5

– Deferred guaranteed consideration 6.5


Fair value of net assets acquired (2.1)

Goodwill 6.9

The purchase consideration comprised a guaranteed component of £6.5 million, of which £2.5 million was paid on completion. Further instalments of £5.0 million were paid in 2011 and a final instalment of £1.5 million will be paid in March 2012.

(iv) Kedrios S.p.A.On 30 July 2010, the Group acquired 51% of the share capital of Kedrios S.p.A. (Kedrios), the Italian subsidiary of SIA-SSB that specialises in securities processing and fund management. The remaining 49% shareholding is held by SIA-SSB S.p.A. who is also represented on the Kedrios management board. The results of Kedrios have been consolidated by the Group from 1 August 2010.

Kedrios contributed revenue of £5.3 million and statutory loss for the year of £1.8 million to the Group for the period from acquisition to 31 December 2010. If the acquisition date had been 1 January 2010 Kedrios would have contributed revenue of approximately £12.7 million and statutory loss of £4.3 million to the Group.


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Business review




The book and estimated fair values of significant assets and liabilities as at 1 August 2010 are set out below:


£mAdjustments

£m Fair value

£m

Intangible assets 1.3 (0.7) 0.6

Deferred income tax assets 1.1 (1.1) –

Trade and other receivables 7.0 – 7.0


Trade and other payables (6.1) – (6.1)

Pension liability (1.5) 0.2 (1.3)

Provisions – (3.0) (3.0)

Net assets/(liabilities) acquired 9.3 (4.6) 4.7

The fair value adjustments in respect of intangible assets are due to the impairment of £0.7 million of software assets deemed to have no future economic benefits at date of acquisition. The adjustment to deferred tax assets relate to the write off of a deferred tax asset recognised under Italian GAAP which would not meet the criteria for recognition under IFRS due to uncertainty over future taxable profits. The adjustment to the pension liability is as a result of bringing Kedrios’s accounting policies in line with the Group policies and IAS 19. The adjustment to provisions relates to the recognition of a restructuring plan provision under IFRS. This plan was announced in January 2010 and was being implemented prior to the acquisition. Management will continue to implement the plan as originally intended over the period to December 2012.


£m


– Cash 2.2


Owners of the parent’s share of the fair value of net assets acquired (2.3)

Gain on acquisition recognised in exceptional items (0.1)

34 Retirement benefit obligationsThe Group operates a number of pension plans for its qualifying employees. The principal plans are three defined benefit schemes in the UK, four defined benefit schemes in Germany and one long-service obligation in Italy, which are presented together under the heading ‘Continental Europe’. In the UK, the defined benefit schemes are funded and assets are held in separate trustee administered funds. In Continental Europe, only the largest scheme (the XTB Scheme) has assets held in a separate Contractual Trust Agreement (‘CTA’). The remaining schemes do not have assets in a CTA and as a result, pension liabilities are fully recognised on the balance sheet as a retirement benefit obligation with pension assets being integrated with the business assets. The Group also participates in a number of multi-employer defined benefit schemes and operates a number of defined contribution schemes.

(i) Defined benefit schemesThe disclosures below relate to post-retirement benefit plans in the UK and Continental Europe which are accounted for as defined benefit plans in accordance with IAS 19. The valuations used for the IAS 19 disclosures are based on the most recent actuarial valuations undertaken by independent qualified actuaries and updated to take account of the requirements of IAS 19 in order to assess the funding position of the plans at 31 December each year. Plan assets are shown at the market value at 31 December each year.


34 Retirement benefit obligations continuedFinancial assumptionsThe assumptions used by the actuaries are chosen from a range of possible actuarial assumptions which, due to the long-term nature of the schemes, may not necessarily be borne out in practice. These assumptions are as follows:

2011 2010

UK %

Continental Europe

%UK %

Continental Europe

%

Rate of increase in pensionable salaries 3.75 2.50 4.15 2.50

Rate of increase in pensions in payment (RPI up to 5%) 2.80 n/a 3.10 n/a

Rate of increase in pensions in payment (RPI up to 2.5%) 2.20 n/a 2.00 n/a

Rate of increase in pensions in payment (CPI up to 5%) 2.30 n/a 2.80 n/a

Rate of increase in pensions in payment (fixed 5%) 5.00 n/a 5.00 n/a

Rate of increase in pensions in payment n/a 2.00 n/a 2.00

Rate of increase in deferred pensions 2.20 2.00 2.90 2.00

Discount rate 4.80 5.37 5.50 5.20

Inflation assumption (RPI) 3.00 2.00 3.40 2.00

Inflation assumption (CPI) 2.20 n/a 2.90 n/a

Long-term rate of return expected at 31 December n/a 5.00 n/a 5.00

– Equities 7.25 n/a 7.70 n/a

– Gilts 2.80 n/a 4.20 n/a

– Bonds 4.80 n/a 5.50 n/a

Following a government announcement in July 2010, some of the UK schemes’ benefits are linked to CPI rather than RPI. A CPI assumption equivalent to RPI less 0.8% has been adopted as at 31 December 2011 (2010: RPI less 0.5%). For the Rebus and LPC schemes this change was allowed for in the 2010 financial statements. For the XDBS scheme this change has been allowed for in the current financial statements as a change in the actuarial assumptions in the statement of other comprehensive income. The liability in this scheme has been reduced by £0.1 million as a result of this change.

To develop the assumption around the expected long-term rate of return on assets, the Group considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return assumption for the portfolio.

The post-retirement mortality tables used for the schemes are based on country specific mortality tables, namely the PA 00 series for the Rebus and XDBS schemes in the UK (based on year of birth with a scaling factor of 110% with allowance for the CMI 2011 future improvement projections and a 0.75% long-term improvement rate), the SAPS Light table for the LPC scheme in the UK (rated up by one year and based on year of birth with allowance for the CMI 2011 future improvement projections and a 1% long-term improvement rate) and the Richtaffeln 2005 G, Heubeck-Richtaffeln GmbH, Köln 2005 table in Germany. The table below illustrates life expectancy assumptions at age 65 for current pensioners and future pensioners aged 45 for the UK schemes at the accounting date and at age 65 for current pensioners and future pensioners aged 17 for the material Continental Europe schemes at the accounting date:

2011 2010

UK (Rebus and XDBS schemes)

years

UK (LPC scheme)

years

Continental Europe

years

UK (Rebus and XDBS schemes)

years

UK (LPC scheme)

years

Continental Europe

years

Male current pensioner 22.0 22.4 18.4 21.2 21.6 18.3

Male future pensioner 23.0 23.6 24.6 22.5 23.0 24.3

Female current pensioner 24.0 23.6 22.5 23.5 23.0 22.4

Female future pensioner 25.1 25.0 28.3 24.7 24.4 28.2


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Amounts recognised in the financial statements in respect of the defined benefit pension schemes

The net retirement benefit obligation recognised in the balance sheet is:

2011 2010

UK £m

Continental Europe

£mTotal

£mUK £m

Continental Europe

£mTotal

£m

Equities 42.8 3.7 46.5 47.1 4.4 51.5

Sovereign and corporate bonds 49.1 46.5 95.6 42.5 49.3 91.8

Property 5.6 – 5.6 5.3 – 5.3

Cash 0.3 3.9 4.2 0.1 4.6 4.7

Derivative instruments – 4.9 4.9 – (4.4) (4.4)

Fair value of plan assets 97.8 59.0 156.8 95.0 53.9 148.9

Present value of funded obligations (135.5) (63.7) (199.2) (117.3) (65.2) (182.5)

Net deficit recognised in the balance sheet (37.7) (4.7) (42.4) (22.3) (11.3) (33.6)

The derivative instruments of £4.9 million (2010: £(4.4) million) relate to interest swaps that are designed to align to the interest rate exposures on the XTB scheme plan assets and plan liabilities.

The net deficit of £42.4 million (2010: £33.6 million) at 31 December 2011 comprises £0.3 million retirement benefit asset in respect of one of the schemes and £42.7 million retirement benefit obligation in respect of the other schemes (2010: £0.5 million and £34.1 million respectively).

The amounts recognised in the income statement are as follows:

2011 2010

NoteUK £m

Continental Europe

£mTotal

£mUK £m

Continental Europe

£mTotal

£m

Current service cost (1.8) (1.2) (3.0) (1.7) (1.2) (2.9)

Past service cost (0.1) – (0.1) – – –

Interest cost (6.4) (3.3) (9.7) (6.2) (3.3) (9.5)

Expected return on plan assets 5.6 2.7 8.3 5.5 2.7 8.2

Total included within staff costs 8 (2.7) (1.8) (4.5) (2.4) (1.8) (4.2)

Included within:

– Cost of sales (1.9) (1.2) (3.1) (1.7) (1.2) (2.9)

– Net finance costs (0.8) (0.6) (1.4) (0.7) (0.6) (1.3)

(2.7) (1.8) (4.5) (2.4) (1.8) (4.2)

The total amounts for the defined benefit schemes credited/(charged) to the statement of other comprehensive income are as follows:

2011 2010

UK £m

Continental Europe

£mTotal

£mUK £m

Continental Europe

£mTotal

£m

Actuarial (losses)/gains (16.0) 8.0 (8.0) (1.5) – (1.5)

Exchange adjustments – – – – 0.4 0.4

(16.0) 8.0 (8.0) (1.5) 0.4 (1.1)

Cumulative amounts recognised (20.5) 11.3 (9.2) (4.5) 3.3 (1.2)


34 Retirement benefit obligations continuedAnalysis of the movement in the present value of the defined benefit obligation

2011 2010

UK £m

Continental Europe

£mTotal

£mUK £m

Continental Europe

£mTotal

£m

Fair value at 1 January (117.3) (65.2) (182.5) (106.8) (65.3) (172.1)

Business combinations – – – – (2.0) (2.0)

Acquired in year (not through business combination) – – – – (0.3) (0.3)

Current service cost (1.8) (1.2) (3.0) (1.7) (1.2) (2.9)

Interest cost (6.4) (3.3) (9.7) (6.2) (3.3) (9.5)

Actuarial gains/(losses) (14.5) 1.3 (13.2) (5.3) 0.2 (5.1)

Plan participants contributions paid – – – (0.2) – (0.2)

Past service cost (0.1) – (0.1) – – –

Benefits paid 4.6 3.2 7.8 2.9 3.1 6.0

Exchange adjustments – 1.5 1.5 – 3.6 3.6

Fair value at 31 December (135.5) (63.7) (199.2) (117.3) (65.2) (182.5)

Analysis of the movement in the fair value of the plan assets

2011 2010

UK £m

Continental Europe

£mTotal

£mUK £m

Continental Europe

£mTotal

£m

Present value at 1 January 95.0 53.9 148.9 84.6 57.7 142.3

Expected return on plan assets 5.6 2.8 8.4 5.5 2.7 8.2

Actuarial gains/(losses) (1.5) 6.7 5.2 3.8 (0.2) 3.6

Employer contributions paid/(received) 3.8 (3.0) 0.8 4.0 (3.0) 1.0

Benefits paid (5.1) – (5.1) (2.9) – (2.9)

Exchange adjustments – (1.4) (1.4) – (3.3) (3.3)

Present value at 31 December 97.8 59.0 156.8 95.0 53.9 148.9

Actual return on plan assets 4.0 9.4 13.4 9.3 2.5 11.8

The assets and liabilities at 31 December 2011 for the UK include £4.8 million (2010: £4.5 million) in relation to pensioner members of the London Processing Centre Ltd Retirement and Death Benefits Scheme who have insurance policies held in respect of their benefits.


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Historical information of experience adjustments on plan assets and liabilitiesThe historical information below has been presented in relation to the schemes from the later of 1 January 2007, or the date the scheme was acquired by the Group.

2011 2010 2009 2008 2007

UK

Fair value of scheme assets (£m) 97.8 94.9 84.6 72.8 79.3

Present value of defined benefit obligation (£m) (135.5) (117.3) (106.9) (87.3) (85.6)

Net liability recognised (£m) (37.7) (22.4) (22.3) (14.5) (6.3)

Experience adjustments on plan assets:

– Amount (£m) (1.6) 3.8 6.5 (17.8) (0.2)

– Percentage of scheme assets (2%) 4% 8% (24%) 0%

Experience adjustments on plan liabilities:

– Amount (£m) 0.9 1.0 (0.7) 0.7 4.0

– Percentage of scheme liabilities 1% 1% (1%) 1% 5%

Continental Europe





– Amount (£m) 6.7 (0.2) (0.5) (0.9) (4.5)

– Percentage of scheme assets 11% 0% (1%) (1%) (9%)


– Amount (£m) 0.1 1.4 (2.8) 0.3 1.8


Total





– Amount (£m) 5.1 3.6 6.1 (18.7) (4.6)

– Percentage of scheme assets 3% 2% 4% (14%) (4%)


– Amount (£m) 1.0 2.4 (3.5) 1.0 5.7


It is expected that the contributions to the schemes during 2012 will be £5.4 million for the UK schemes (of which £1.8 million is funded from Enterprise Partnerships in the UK) and £2.8 million for the Continental Europe schemes (all of which is funded from the Enterprise Partnerships in Germany and Italy).


34 Retirement benefit obligations continued(ii) BAE Systems defined benefit schemesThe Group also participates in a number of multi-employer defined benefit schemes run for the employees of BAE Systems.

The terms on which the Group participates in these schemes were set in commercial agreements reached with BAE Systems during 2006. Under the terms of these agreements, the contributions payable by the Group represent the cost of accrual of future service benefits and the Group’s share of the deficit contributions made by BAE Systems to the schemes only (not including any one-off contributions made by BAE Systems during 2006). The contributions are expressed as fixed percentages of pensionable payroll. The Group’s contribution rates to the schemes are contractually fixed and will only be affected by changes to the cost of accrual of future service benefits, as determined at the triennial valuations of the schemes. The Group’s contribution rates are not affected by any future changes in the past service position of the schemes, relating to past service of its own employees or other members of the scheme.

It is not possible to identify the Group’s share of the underlying assets and liabilities of the schemes on a consistent and reasonable basis. Accordingly, the Group accounts for contributions to the schemes as if they were defined contribution schemes under IAS 19.

The pension cost that was charged in the income statement relating to current year contributions was £0.4 million (2010: £0.6 million).

(iii) Defined contribution schemesThe Group also operates a number of defined contribution schemes for the employees of various subsidiary companies. Pension costs for the Group that were charged to the income statement for the year relating to current year contributions were £7.5 million (2010: £7.2 million).

35 Financial instrumentsClassification of financial instrumentsThe following tables analyse by classification and category all of the Group’s financial instruments that are carried in the financial statements.

Assets as per the balance sheet Note

Loans and receivables

£m

Assets at fair value through

profit and loss £m

Available-for-sale financial

assets £m

Total £m

31 December 2011

Available-for-sale financial assets 17 – – 23.2 23.2

Trade and other receivables 18 65.1 0.7 – 65.8

Cash and cash equivalents 19 98.1 – – 98.1

Total 163.2 0.7 23.2 187.1

31 December 2010

Available-for-sale financial assets 17 – – 24.6 24.6

Trade and other receivables 18 83.4 1.2 – 84.6

Cash and cash equivalents 19 91.1 – – 91.1

Total 174.5 1.2 24.6 200.3

Financial assets within trade and other receivables comprise net trade receivables, other receivables, loans to related parties which have been classified as loans and receivables in the table above, and held-for-trading equity securities classified as assets at fair value through profit and loss.


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Liabilities as per the balance sheet Note

Liabilities at fair value

through profit and loss

£m

Other financial liabilities

£mTotal

£m

31 December 2011

Trade and other payables 20 – 54.6 54.6

Borrowings excluding finance lease liabilities 22 – 51.1 51.1

Finance lease liabilities 22 – 1.8 1.8

Customer accounts – 11.6 11.6

Deferred consideration on acquisitions 22 – 7.9 7.9

Put options to acquire the non-controlling interest in Enterprise Partnerships 22 15.7 – 15.7

Total 15.7 127.0 142.7

31 December 2010 (Restated)

Trade and other payables 20 – 66.9 66.9

Borrowings excluding finance lease liabilities 22 – 55.9 55.9

Finance lease liabilities 22 – 1.5 1.5

Customer accounts – 10.4 10.4

Deferred consideration on acquisitions 22 – 6.5 6.5

Put options to acquire the non-controlling interest in Enterprise Partnerships 22 26.2 – 26.2

Total 26.2 141.2 167.4

Financial liabilities within trade and other payables comprise trade payables, and other payables.

Fair value estimationsThe table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:nn Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).nn Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is,

as prices) or indirectly (that is, derived from prices) (level 2).nn Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

The following table presents the Group’s assets and liabilities that are measured at fair value at 31 December 2011:

Level 1 £m

Level 2 £m

Level 3 £m

Total £m

Assets

Financial assets at fair value through profit or loss – held-for-trading equity securities 0.7 – – 0.7

Available-for-sale financial assets

– Equity securities 2.5 – – 2.5

– Debt security 20.7 – – 20.7

Total assets 23.9 – – 23.9

Liabilities

Financial liabilities at fair value through profit or loss – put options to acquire the non-controlling interest in Enterprise Partnerships – – 15.7 15.7

Total liabilities – – 15.7 15.7


35 Financial instruments continuedThe following table presents the Group’s assets and liabilities that are measured at fair value at 31 December 2010:

Level 1 £m

Level 2 £m

Level 3 £m

Total £m

Assets

Financial assets at fair value through profit or loss – held-for-trading equity securities 1.2 – – 1.2

Available-for-sale financial assets

– Equity securities 3.8 – – 3.8

– Debt security 20.7 – – 20.7

Total assets 25.7 – – 25.7

Liabilities

Financial liabilities at fair value through profit or loss – put options to acquire the non-controlling interest in Enterprise Partnerships – – 26.2 26.2

Total liabilities – – 26.2 26.2

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

Specific valuation techniques used to value financial instruments include:nn Quoted market prices or dealer quotes for similar instruments.nn Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial

instruments.

The following table presents the changes in level 3 instruments for the year ended 31 December 2011:

Note

Put options to acquire

the non-controlling interest in Enterprise

Partnerships £m

At 1 January 2011 26.2

Exercise of put option 22 (10.0)

Dividend payments (0.9)

Gains and losses recognised in profit or loss 0.7

Exchange adjustments (0.3)


Total gains or losses for the period included in profit or loss for assets held at the end of the reporting period 0.1


Company overview

Business review




The following table presents the changes in level 3 instruments for the year ended 31 December 2010:

Held-for-trading equity

securities £m

Available-for-sale financial

assets – unlisted

equity securities

£m

Put options to acquire

the non-controlling interest in Enterprise

Partnerships £m

Total £m

At 1 January 2010 1.4 0.6 (23.4) (21.4)

Issue of put option recognised directly in equity – – (3.6) (3.6)

Write down/impairment of financial assets recognised in profit or loss (1.4) (0.6) – (2.0)

Gains and losses recognised in profit or loss – – 0.8 0.8

At 31 December 2010 – – (26.2) (26.2)

Total gains or losses for the period included in profit or loss for assets held at the end of the reporting period (1.4) (0.6) 0.8 (1.2)

The loss of £0.7 million (2010: £0.8 million) recognised in profit or loss for the year is disclosed as imputed interest on put options to acquire non-controlling interest within finance costs (note 9).

36 Financial risk managementThe multi-national nature of the Group’s operations and their financing exposes it to a variety of financial risks: market risk (including foreign exchange risk, fair value interest rate risk, cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group may use derivative financial instruments to hedge certain risk exposures but the Group does not undertake any speculative trading in financial instruments.

The Group’s treasury function acts as a service centre and all treasury activity takes place within a formal control framework under policies that are approved by the Board. Compliance with key policies and exposure limits is monitored through regular reporting of treasury activities and reviews by internal audit.

Interest rate riskThe Group’s exposure to the risk of changes in market interest rates arises primarily from long-term debt obligations which carry a floating interest rate charge. The Group reviews its interest rate exposure against acceptable risk profiles on a periodic basis and may enter into interest rate swap agreements in order to achieve an acceptable balance of fixed and floating rate interest exposure. Currently all financial liabilities are subject to floating rate interest.

The Group holds a Euro denominated financial asset which carries a fixed coupon.

Working capital is generally held in variable rate operational accounts, with surplus cash placed on fixed rate short-term deposits.

The Group has used a sensitivity analysis technique that measures the estimated impact on the income statement and equity of a reasonably possible change in market interest rates of 25bps to 100bps for each class of financial instruments, with all other variables held constant. The sensitivity analysis is based on the following assumptions:nn Changes in market interest rates affect interest income or expense of variable interest financial instruments.nn Changes in market interest rates only affect interest income or expense in relation to financial instruments with fixed

interest rates if these are recognised at their fair value.

With all other variables held constant the Group has assessed that this reasonably possible change in market interest rates does not present a material exposure to the Group’s balance sheet and income statement.

Foreign exchange riskThe international nature of the Group’s operations exposes the Group to a number of foreign currencies. The Group does not hedge foreign currency profit and loss translation exposures and the reported results may therefore be affected by currency fluctuations.


36 Financial risk management continuedThe Group is not generally subject to foreign exchange transaction exposure except in its Indian operations where revenues are generated in Sterling, US Dollars and Euros and the cost base is primarily in Indian Rupees. Under the Group’s foreign exchange risk management policy, exposures may be hedged with forward foreign exchange contracts when the underlying cash flows are deemed to be highly probable. It is the Group’s policy to negotiate the terms of the hedge derivatives to match the terms of the underlying cash flows in order to maximise hedge effectiveness. At 31 December 2011 the Group had forward FX contracts of £4.8 million and USD4.8 million in place to mitigate foreign exchange volatility relative to the Indian Rupee. Of these, £4.7 million and USD4.2 million were designated as cash flow hedges of highly probable US Dollar and Sterling revenue. The cash flow hedges were assessed to be highly effective as at the year end date and a net unrealised loss of £0.6 million was recognised in equity. There were no outstanding forward currency contracts as at 31 December 2010.

The Group has used a sensitivity analysis technique that measures the estimated impact on the income statement and equity of a reasonably possible change in foreign currency exchange rates for each class of financial instruments, with all other variables held constant. The sensitivity analysis is based on material non-functional currency financial instruments within each entity within the Group.

The Group has assessed that a reasonably possible change of 10% in non-functional currency foreign exchange rate does not present a material exposure to the Group’s balance sheet and income statement. Foreign exchange sensitivity on the Group’s assets other than financial instruments is not included in this assessment.

Credit riskCredit risks arise from the possibility that customers may not be able to settle their obligations as agreed. To manage this risk the Group periodically assesses the financial reliability of customers, taking into account their financial position, past experience and other factors. Individual risk limits are set accordingly. Receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not material. The Group has a concentration of credit risk with respect to trade receivables due to the nature and structure of the Enterprise Partnerships. An analysis of all debts which are past due is included in note 18. Credit risk assessments are performed when signing up new customers. Credit risk is mitigated to an extent by the profile of companies with whom the Group has entered into Enterprise Partnerships, being blue chip companies.

With respect to credit risk arising from the other financial assets of the Group, the principal assets being cash and cash equivalents, the Group’s exposure to credit risk arises from default of the counterparty. The Group’s treasury function only transacts with counterparties that have a strong investment grade rating from a credit rating agency and ensures that no exposure to any one institution at any given time exceeds the Board approved exposure limit.

Liquidity riskThe Group holds cash and undrawn committed facilities at a level sufficient to ensure that the Group has available funds to meet its medium-term capital and funding obligations, including organic growth and acquisition activities, and to meet any unforeseen obligations and opportunities. The Group monitors its risk of a shortage of funds using a daily cash management process and through regular cash reporting. These processes consider the maturity of both the Group’s financial assets and liabilities and projected cash flows from operations. The Group’s policy is to ensure that all projected borrowing needs are covered by committed facilities, maintaining minimum funding headroom defined by the Board.

As at 31 December 2011, the Group had available cash of £97.9 million (2010: £91.1 million) and undrawn committed debt facilities of £28.5 million (2010: £28.8 million).


Company overview

Business review




The table below summarises the maturity profile of the Group’s financial liabilities based on contractually agreed undiscounted cash flows:

Expiring within one

year £m

Expiring later than one year but not more

than two years

£m

Expiring later than two

years but not more than five years

£m

Total contractual

amount £m

At 31 December 2011

Trade and other payables excluding taxes, accruals and deferred income 54.4 0.2 – 54.6

Borrowings excluding finance lease liabilities 3.0 6.6 41.5 51.1

Interest on bank borrowings 2.2 2.0 2.6 6.8

Finance lease liabilities including related finance cost 1.3 0.5 – 1.8

Other financial liabilities 20.0 – 3.6 23.6

Total 80.9 9.3 47.7 137.9

At 31 December 2010

Trade and other payables, excluding taxes, accruals and deferred income 65.9 1.0 – 66.9

Borrowings excluding finance lease liabilities 16.7 39.8 – 56.5

Interest on bank borrowings 2.0 0.6 – 2.6

Finance lease liabilities including related finance cost 0.6 0.5 0.5 1.6

Other financial liabilities 27.6 1.5 4.1 33.2

Total 112.8 43.4 4.6 160.8

Price riskThe Group holds listed investments, classified as available-for-sale financial assets, which expose the Group to equity securities price risk. Potential investments are thoroughly analysed in respect to their past financial track record (mainly cash flow and return on investment), their market potential, their management and their competitors. These investments are reviewed on a regular basis to ensure their suitability according to the Group’s risk profile.

A 5% increase or decrease in the market value of the Group’s available-for-sale financial assets would have a £1.2 million impact on equity (2010: £1.2 million) and no impact on the income statement.

Capital risk The Group’s objective in managing its capital structure is to keep the ratio of net debt to earnings before interest, tax, depreciation and amortisation below a target level reviewed by the Board. The Board sets the dividend policy and reviews uses of cash and debt to ensure that the capital structure ratio remains within the target and therefore comfortably below the financial covenants contained within the Group’s debt facilities.

The table below presents quantitative data for the components the Group manages as capital:

2011 £m

Restated 2010

£m

Shareholders’ funds attributable to owners of the Parent 167.4 193.7

Bank loans and overdrafts 51.1 55.9

Obligations under finance leases 1.8 1.5

Cash in hand and at bank (97.9) (91.1)

At 31 December 122.4 160.0

The Group operates in a number of regulatory regimes. The securities processing and retail investment account management businesses in Germany, Xchanging Transaction Bank (‘XTB’) and Fondsdepot Bank (‘FdB’), maintain full banking licences and are regulated under the German Federal Financial Supervisory Authority (‘BaFin’). The holding of full banking licenses requires XTB and FdB to maintain Risk and Compliance departments that ensure the German businesses comply with German banking laws and are appropriately capitalised and maintain liquid assets in a pre-planned and controlled manner. Operationally the Risk & Compliance departments report directly to the Chief Financial Officer of XTB and FdB and maintain independent checks and balances to ensure the operations follow all BaFin required risk and compliance processes, such as running a Sub-Risk Committee Board.


37 Related party transactionsThe following companies are considered to be related parties of the Group as they hold non-controlling shareholdings in a number of the subsidiaries of the Group.nn The Corporation of Lloyd’s held a 25% interest in Ins-sure Holdings Limited and a 50% interest in Xchanging Claims

Services Limited for the full year ended 31 December 2011. Some of the directors of Xchanging Claims Services Limited are employees of the Corporation of Lloyd’s. The emoluments of these directors were borne by the Corporation of Lloyd’s.

nn The International Underwriting Association held a 25% interest in Ins-sure Holdings Limited for the full year ended 31 December 2011.

nn Deutsche Bank AG held a 44% interest in Xchanging etb GmbH for the full year ended 31 December 2011. Some of the directors of Xchanging etb GmbH are employees of Deutsche Bank AG. The emoluments of these directors were borne by Deutsche Bank AG.

nn Allianz Global Investors Kapitalanlagegesellschaft mbH held a 49% interest in FdB for the full year ended 31 December 2011.

nn SIA-SSB S.p.A. held a 49% interest in Kedrios S.p.A. for the full year ended 31 December 2011. Some of the directors of Kedrios S.p.A. are employees of SIA-SSB S.p.A. The emoluments of these directors were borne by SIA-SSB S.p.A.

In addition:nn Aon held a 50% interest in XBS up until 28 September 2011 when they exercised their put option (refer to note 22 for

further details). Some of the directors of XBS during the period ended 28 September 2011 were employees of Aon. The emoluments of these directors were borne by Aon.

A description of the nature of the services provided to/from these companies by/to the Group and the amount receivable/(payable) in respect of each at 31 December, are set out in the table below:

Sales/(purchases)Year end

receivables/(payables)

Services provided by/to Group2011

£m2010

£m2011

£m2010

£m

Securities processing services 104.9 107.1 10.1 26.9

Processing, expert and data services 26.3 39.8 0.9 2.1

Property charges 0.3 0.8 (0.1) (0.3)

Consultancy services 0.3 4.7 – –

IT costs, premises, divisional corporate charges and other services in support of operating activities (22.6) (24.7) (7.4) (13.4)

Operating systems, development, premises and other services in support of operating activities 1.3 0.1 – –

Desktop, hosting, telecommunications, accommodation and processing services (2.2) (4.2) (0.7) (1.5)

Consortium relief – – (0.4) –

No provisions (2010: £nil) have been recognised against receivables from related parties.

Transactions with Directors and key managementThe compensation disclosure below relates to the Company Directors and key senior managers within the Group, who constitute the people having authority and responsibility for planning, directing and controlling the Group’s activities. For the year ended 31 December 2011, the key senior managers within the Group are deemed to be the Executive Board members. For the year ended 31 December 2010, the key senior managers within the Group were the members of the Xchanging Management Board. The Xchanging Management Board was replaced by the Executive Board.

Key management compensation (including Directors)2011

£m2010

£m

Short-term employee benefits 4.0 6.3

Post-employment benefits 0.3 0.3

Share-based payments 1.2 0.8

Termination benefits 1.4 0.8

Total 6.9 8.2

Further information regarding Company Directors’ remuneration is disclosed in the Remuneration Report on pages 60 to 69.


Company overview

Business review




37 Related party transactions continuedThe total gain made by Directors during the year from the exercise of share options was £nil (2010: £1.8 million).

During 2007, prior to the IPO, loans were provided by the Xchanging BV Employee Benefit Trust to a number of employees including Directors and key management personnel to enable them to purchase shares in Xchanging BV (these shares have been subsequently exchanged for shares in the Company). The loans are non-interest bearing and become repayable on the earlier of the cessation of employment, transfer or disposal of the shares, acceptance of another loan from the Group to refinance the shares and 31 December 2011.

No balances are outstanding from current Directors and key management personnel.

The following table shows balances due from those individuals who were either Directors or members of key management in prior years but have subsequently left the Group and are therefore no longer considered to be related parties of the Group. The information is provided for comparative purposes only.

2011 Balance

outstanding £m

2010 Balance

outstanding £m

S Beard 1.0 1.1

R Houghton 0.7 0.7

M Bruno – 0.3

Total 1.7 2.1

Steven Beard is required to repay his loan on or before 31 December 2012. A mortgage has been taken over 800,000 shares in favour of the Employee Benefit Trust.

Richard Houghton is required to repay his loan on or before 31 March 2012. A mortgage has been taken over 500,000 shares in favour of the Employee Benefit Trust.

Melissa Bruno has signed an amended loan agreement allowing her to repay the remaining amount of £0.1 million, monthly on a means-tested basis commencing on 1 January 2012, such amount being subject to interest at 1.5%, provided that repayment in full is complete on or before 31 December 2015. She has also been offered consultancy work at market rates with Xchanging to be paid by off-set against the loan.

A non-interest bearing loan was granted to Matthias Sohler for the purposes of purchasing shares in the Company. Matthias Sohler left the Group in February 2011. The loan had an outstanding balance of £1.3 million at 31 December 2011. Under the terms of the loan agreement, the loan is repayable within 45 days of 1 January 2012, being 14 February 2012.

38 Investments in subsidiariesA list of significant subsidiaries of the Group is provided in note 4 of the Company financial statements.


We have audited the Parent Company financial statements of Xchanging plc for the year ended 31 December 2011 which comprise the Company balance sheet, the Company cash flow statement, reconciliation of operating loss to net cash inflow/(outflow) from operating activities and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 52, the Directors are responsible for the preparation of the Parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements In our opinion the Parent Company financial statements: nn give a true and fair view of the state of the Company’s

affairs as at 31 December 2011 and of its cash flows for the year then ended;

nn have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

nn have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006 In our opinion: nn the part of the Directors’ Report to be audited has been

properly prepared in accordance with the Companies Act 2006; and

nn the information given in the Directors’ Report for the financial year for which the Parent Company financial statements are prepared is consistent with the Parent Company financial statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: nn adequate accounting records have not been kept by the

Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

nn the Parent Company financial statements and the part of the Directors’ Report to be audited are not in agreement with the accounting records and returns; or

nn certain disclosures of directors’ remuneration specified by law are not made; or

nn we have not received all the information and explanations we require for our audit.

Other matterWe have reported separately on the Group financial statements of Xchanging plc for the year ended 31 December 2011.

Paul Aitken(Senior Statutory Auditor)For and on behalf of PricewaterhouseCoopers LLPChartered Accountants and Statutory AuditorsLondon

1 March 2012

Independent auditors’ reportto the members of Xchanging plc on the Parent Company financial statements

Company overview

Business review




Note2011

£m2010

£m

Fixed assets

Investments 4 75.8 73.4

75.8 73.4

Current assets

Debtors 5 249.7 246.0

249.7 246.0

Current liabilities

Bank overdraft 6 (2.0) (0.7)

Creditors: amounts falling due within one year 7 (55.5) (55.1)

Net current assets 192.2 190.2

Total assets less current liabilities 268.0 263.6

Creditors: amounts falling due after more than one year 8 (0.1) –

Net assets 267.9 263.6

Capital and reserves

Called up share capital 9 11.9 11.9

Share premium account 10 107.8 107.8

Other reserves 10 7.8 7.8

Profit and loss account 10 140.4 136.1

Total shareholders’ funds 11 267.9 263.6

These financial statements on pages 145 to 151 were approved by the Board of Directors on 1 March 2012 and signed on its behalf by:

David Bauernfeind Kenneth LeverChief Financial Officer Chief Executive Officer

Company balance sheetas at 31 December 2011 Company number: 5819018


2011 £m

2010 £m

Net cash (outflow)/inflow from operating activities (1.3) 3.6

Equity dividends paid to shareholders – (6.6)

Financing

Proceeds from issue of shares – 2.1

Net decrease in cash (1.3) (0.9)

Cash at 1 January (0.7) 0.2

Cash at 31 December (2.0) (0.7)

Reconciliation of operating loss to net cash inflow/ (outflow) from operating activities

2011 £m

2010 £m

Operating loss from continuing activities (1.7) (35.6)

Impairment of investment in subsidiary – 34.6

Share-based payment expense 0.9 0.5

Decrease in debtors (0.8) (1.8)

Increase in creditors 0.3 5.9

Net cash (outflow)/inflow from continuing operating activities (1.3) 3.6

Company cash flow statementfor the year ended 31 December 2011

Company overview

Business review




1 Accounting policiesBasis of preparationThe financial statements have been prepared under the historical cost convention and in accordance with the Companies Act 2006 and applicable Accounting Standards in the United Kingdom. A summary of the more important Company accounting policies, which have been applied consistently, is set out below.

No profit and loss account has been presented by the Company as permitted by Section 408 of the Companies Act 2006.

(i) Going concernThe Directors believe that preparing the financial statements on the going concern basis is appropriate based on projections for the foreseeable future.

(ii) Fixed asset investmentsFixed asset investments are stated at cost less any provision for impairment. Impairment reviews are conducted at the end of the first full year following acquisition and thereafter where indicators of impairment are present. As permitted by the Companies Act 2006, cost is the aggregate of the nominal value of the relevant number of the Company’s shares and the fair value of any other consideration given to acquire the share capital of the subsidiary undertakings.

(iii) Financial instrumentsThe accounting policy for the Company for financial instruments is the same as that shown in the Group accounting policies. This policy is in accordance with FRS 26, ‘Financial instruments: Recognition and Measurement’.

(iv) Dividend incomeDividends receivable from the Company’s investments in subsidiary undertakings are recognised when the Company’s right to receive payment is established.

(v) Share-based paymentsThe Company operates a number of equity-settled share-based compensation plans. The fair value of the employee services received in exchange for the grant of an equity-settled transaction is recognised as an expense over the periods in which the performance conditions are fulfilled, ending on the vesting date of the award. The total amount to be expensed over the vesting period is determined by reference to the fair value of the equity instruments granted. Non-market vesting conditions are reflected in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the profit and loss account, with a corresponding adjustment to equity. Awards where vesting is conditional upon a market condition are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

Equity-settled share-based compensation plans that are made available to employees of the Company’s subsidiaries are treated as increases in equity over the vesting period of the award, with a corresponding increase in the Company’s investments in subsidiaries, based on an estimate of the number of shares that will eventually vest.

The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised.

(vi) Related party transactionsThe Company has taken advantage of the exemption available in FRS 8, ‘Related party disclosures’, not to disclose transactions with its wholly owned subsidiary undertakings. There are no other external related parties.

2 Directors’ emolumentsDisclosure of the Directors’ remuneration is contained in the Remuneration Report on pages 60 to 69 and in note 37 of the Group financial statements.

3 Auditors’ remunerationThe audit fees payable in relation to the audit of the financial statements of the Company are £0.1 million (2010: £0.1 million). Fees paid to the auditors and their associates for non-audit services to the Company itself are not disclosed in the individual financial statements of the Company because Group financial statements are prepared which disclose such fees on a consolidated basis.

Notes to the Company financial statementsfor the year ended 31 December 2011


4 Investments

£m

At 1 January 2010 106.2

Increase in investments in subsidiaries – share-based payments 1.8

Impairment (34.6)


Increase in investments in subsidiaries – share-based payments 2.4


The impairment in the year ended 31 December 2010 related to the write-down of the Company’s investment in Xchanging Holdings Limited as a result of its recoverable value being insufficient to support the carrying value in the Company’s ledgers after the impairment of the Group’s investment in Cambridge Solutions Limited via the investment in Xchanging (Mauritius) Limited.

Notes to the Company financial statements continuedfor the year ended 31 December 2011

Company overview

Business review




The Company has the following significant subsidiary undertakings:

Name Country of incorporation Principal activity

Effective interest and proportion

of equity held

Xchanging Holdings Limited1 England and Wales Holding company 100%

Xchanging BV The Netherlands Intermediate holding company 100%

Xchanging GmbH Germany Business processing services 100%

Xchanging UK Limited England and Wales Management services to Group companies 100%

Xchanging Claims Services Limited England and Wales Intermediate holding company 50%

Ins-sure Services Limited England and Wales Business processing services 50%

London Processing Centre Limited England and Wales Business processing services 50%

LPSO Limited England and Wales Business processing services 50%

LCO Non-Marine and Aviation Limited England and Wales Business processing services 50%

LCO Marine Limited England and Wales Business processing services 50%

Xchanging Procurement Services Limited England and Wales Business processing services 100%

Xchanging HR Services Limited England and Wales Business processing services 100%

Xchanging Transaction Bank GmbH Germany Business processing services 51%

Fondsdepot Bank GmbH Germany Business processing services 25.5%

Xchanging Broking Services Limited England and Wales Business processing services 100%

Xchanging Global Insurance Solutions Limited England and Wales Business processing services 100%

Xchanging Systems & Services Inc. USA Business processing services 100%

Xchanging Asia Pacific Sdn. Bhd. Malaysia Business processing services 100%

Xchanging Technology Services India Private Limited India Business processing services 100%

Xchanging Resourcing Services Limited England and Wales Business processing services 100%

Ferguson Snell and Associates Limited England and Wales Business processing services 100%

Xchanging Procurement Services Europe SAS France Business processing services 100%

Xchanging (Mauritius) Limited Mauritius Intermediate holding company 100%

Cambridge Solutions Limited India Business processing services 75.62%

Scandent Group Inc. USA Business processing services 75.62%

Nexplicit Infotech India Private Limited India Business processing services 75.62%

Cambridge Solutions Europe Limited England and Wales Business processing services 75.62%

Cambridge Solutions Pte. Limited Singapore Business processing services 75.62%

Cambridge Solutions Sdn. Bhd. Malaysia Business processing services 75.62%

Cambridge Solutions Pty Limited Australia Business processing services 75.62%

Xchanging Integrated Services Victoria Pty Limited (formerly Cambridge Integrated Services Victoria Pty Limited)

Australia Business processing services 100%

Xchanging Integrated Services Australia Pty Limited (formerly Cambridge Integrated Services Australia Pty Limited)

Australia Business processing services 100%

Data Integration Limited England and Wales Business processing services 100%

Xchanging Investmentservice GmbH Germany Business processing services 25.5%

Xchanging Italy S.r.l. Italy Intermediate holding company 100%

Kedrios S.p.A. Italy Business processing services 51%

Xchanging Procurement Services Italy S.r.l. Italy Business processing services 100%

Xchanging Procurement Services Spain SL Spain Business processing services 100%

Xchanging Services Inc. USA Business processing services 100%

Cambridge Builders Private Limited India Property development company 100%

1 Held directly.


4 Investments continuedA full list of subsidiaries will be annexed to the Company’s next annual return filed with the Registrar of Companies.

Entities in which the Company holds less than 51% of the equity share capital are treated as subsidiaries because the Company has overall operational and financial control.

5 Debtors

2011 £m

2010 £m

Amounts owed by Group undertakings 249.0 243.9

Corporation tax 0.7 1.9

Deferred tax – 0.2

Total debtors 249.7 246.0

Included within amounts owed by Group undertakings above, is an unsecured loan to XUK Holdco (No. 2) Limited, a wholly owned subsidiary, of £47.7 million (2010: £47.7 million) which bears interest at 2.5% above LIBOR, with no fixed date of repayment.

All other amounts are unsecured, interest-free and have no fixed date of repayment.

6 Cash and bankXchanging plc’s current account forms part of a regional cash pooling arrangement. The cash balances within this pool are offset on a notional basis to optimise the region’s liquidity management. There is a £10.0 million net overdraft facility attached to the cash pool.

7 Creditors: amounts falling due within one year

2011 £m

2010 £m

Trade creditors 0.1 –

Amounts owed to Group undertakings 55.2 54.8

Other creditors 0.1 0.1

Accruals 0.1 0.2

Total creditors falling due within one year 55.5 55.1

All amounts owed to Group undertakings included in the above balance are unsecured, interest-free and have no fixed date of repayment.

8 Creditors: amounts falling due after more than one yearAn amount of £0.1 million has been included in long-term creditors (2010: £nil) relating to tax and social security balances due after more than one year.

9 Called up share capital

2011 £m

2010 £m

Allotted and fully paid

239,509,739 (2010: 239,509,739) ordinary shares of 5 pence each 11.9 11.9

Issued share capital – ordinary sharesDuring 2011, no share options have been exercised (2010: 2,393,139 for cash consideration of £2.1 million).

Share rightsAll Xchanging plc ordinary shares carry equal share rights.

Notes to the Company financial statements continuedfor the year ended 31 December 2011

Company overview

Business review




Share-based paymentsA charge of £0.9 million (2010: £0.5 million) has been incurred in the year in respect of the Performance Share Plan. Further details on this scheme are included within note 26 of the Group financial statements.

10 Reserves

Share premium

£m

Other reserves

£m

Profit and loss reserve

£m

At 1 January 2011 107.8 7.8 136.1

Profit for the year – – 1.2

Dividends paid – – –

Value of employee services attributable to share-based payments – – 3.1

At 31 December 2011 107.8 7.8 140.4

Other reserves comprise amounts in respect of share-based payments.

The Company’s profit for the year was £1.2 million (2010: £117.4 million).

11 Reconciliation of movements in shareholders’ funds

2011 £m

2010 £m

Opening equity shareholders’ funds 263.6 148.3

Issue of shares – –

– In respect of share options issued in the year – 2.1

Profit for the year 1.2 117.4

Dividends paid – (6.6)

Value of employee services attributable to share-based payments 3.1 2.4

Closing equity shareholders’ funds 267.9 263.6

12 Contingent liabilitiesThe Group, of which the Company is a member, has a £75.0 million multicurrency revolving credit facility and a £20.0 million term loan provided by a syndicate of banks, in respect of which Xchanging plc is a guarantor. At the year end date, £28.0 million (2010: USD45.0 million (£29.1 million)) had been drawn as cash under the revolving credit facility and a further €20.0 million (£16.8 million) (2010: €20.0 million (£17.1 million)) and USD2.7 million (2010: £nil) had been utilised for letters of credit by the Group. The balance outstanding against the term loan was £20.0 million (2010: USD34.0 million (£22.0 million)). Both the facilities mature in August 2015.

On 31 May 2011, following the sale of the US workers’ compensation and third party administration operations, certain guarantees were made to the buyer as part of the sale and purchase agreement, in respect of any claims that may arise relating to periods prior to the sale. Amounts have been provided within the litigation provision for claims that the Directors reasonably believe may arise.


Share price informationThe Company’s share price can be found on the Company’s corporate website at www.xchanging.com within the Investor Relations section.

Shares onlineEquiniti Limited provides a range of shareholder information online. Shareholders can access their shareholdings and find advice on transferring shares and updating their details on www.shareview.co.uk

ShareGiftShareholders who only have a small number of shares whose value makes it uneconomic to sell them may wish to consider donating them to charity through ShareGift, the independent charity share donation scheme (registered charity no. 1052686). Further information about ShareGift may be obtained from Equiniti Limited or from ShareGift on +44 (0)20 7337 0501 or at www.sharegift.org. There are no implications for capital gains tax purposes (no gain or loss) on gifts of shares to charity and it is also possible to claim income tax relief.

Shareholder enquiriesFor queries concerning shareholdings, contact Xchanging’s registrars, Equiniti Limited, whose details are below.

Shareholders who have any questions about the Group’s business should contact Xchanging’s Investor Relations team on +44 (0)20 7780 6999 or email [email protected]

Shareholder fraudFraud is on the increase and many shareholders are targeted every year. If you have any reason to believe that you may have been the target of a fraud, or attempted fraud in relation to your shareholding, please contact Equiniti Limited immediately.

Company registration number5819018

Company’s registered officeXchanging plc34 Leadenhall StreetLondon EC3A 1AXUnited Kingdom

RegistrarsEquiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA United KingdomTelephone: +44 (0)871 384 2030Overseas tel: +44 (0)121 415 7047

The helpline is open from 8.30 am Monday to Friday. UK calls to 0871 numbers are charged at 8 pence per minute from a BT landline and other telephone providers’ costs may vary.

AuditorsPricewaterhouseCoopers LLP1 Embankment PlaceLondon WC2N 6RHUnited KingdomTel: +44 (0)20 7583 5000

BankersLloyds TSB Bank plcCity Office GillinghamPO Box 72Bailey DriveGillingham Business ParkKent ME8 0LSUnited Kingdom

SolicitorsClifford Chance LLP10 Upper Bank StreetLondon E14 5JJUnited Kingdom

Corporate brokersCitigroupCitigroup CentreCanada SquareLondon E14 5LBUnited KingdomTel: +44 (0)20 7986 4000Fax: +44 (0)20 7986 2266

J.P. Morgan Cazenove10 Aldermanbury LondonEC2V 7RFTel: +44 (0)20 7588 2828Fax: +44 (0)20 7155 9000

Financial public relationsThe Maitland Consultancy Limited Orion House 5 Upper St. Martin’s Lane London WC2H 9EA Tel: +44 20 7379 5151 Fax: +44 20 7379 6161

Financial calendar16 May 2012 Annual General Meeting30 June 2012 Half year end1 August 2012 Announcement of half-year results31 December 2012 Financial year end

Shareholder information

Company overview

Business review




AAGI – Allianz Global Investors Kapitalanlagesellschaft mbH.AGM – Annual General Meeting. Adjusted operating profit – excludes exceptional items, acquisition costs, amortisation of intangible assets previously unrecognised by an acquired entity, and non-recurring operational items that the Directors believe will aid the reader’s understanding of the accounts.Adjusted earnings per share – Xchanging’s share of adjusted profit for the year divided by the weighted average basic number of Xchanging plc shares in issue for the year ended 31 December.Articles or Articles of Association – the Articles of association of Xchanging plc.

BBaFin – German Federal Financial Supervisory Authority overseeing banking, insurance, securities and asset management. Board of Directors – the Board of Directors of Xchanging plc, comprising Geoff Unwin, Ken Lever, David Bauernfeind, Dennis Millard, Pat O’Driscoll, Michel Paulin and Bill Thomas.BPO – Business Process Outsourcing.

CCAGR – compound annual growth rate. Cambridge – Cambridge Solutions Limited and its subsidiaries.Cash conversion – is calculated as operating cash flow divided by adjusted operating profit. CEO – Chief Executive Officer.CFO – Chief Financial Officer.Cloud computing – is the provision of fully managed consumption-based services over high speed internet infrastructure.Combined Code – the Combined Code published in June 2008 by the Financial Reporting Council. Company – Xchanging plc.CRM system – customer relationship management system.CSR – Corporate Social Responsibility.CTA – Contractual Trust Arrangement.

DDI – Data Integration Limited, one of the UK’s leading networking, security and communication technology providers, acquired by Xchanging in June 2010.DB – Deutsche Bank AG.Directors – the Board of Directors of Xchanging plc, comprising Geoff Unwin, Ken Lever, David Bauernfeind, Dennis Millard, Pat O’Driscoll, Michel Paulin and Bill Thomas.Disclosure and Transparency Rules – the disclosure and transparency rules of the UK Listing Authority.

EEBIT – see underlying operating profit. EBITDA – underlying operating profit before depreciation and amortisation. ECF2 – Electronic Claims File. EdW – Entschädigungseinrichtung der Wertpapierhandelsunternehmen. EP – Enterprise Partnership, a corporate partnership between Xchanging and a customer.ESG – Employee, Social and Governance.ESOP – Executive Share Option Plan.EU – European Union.Executive Board – the Executive Board of Xchanging are listed on pages 48 to 49.

FFdB – Fondsdepot Bank GmbH, an EP between Xchanging and AGI in Germany.FRS – Financial Reporting Standards.FSA – Financial Services Authority.FSB – FondsServiceBank GmbH.Four Part Action Plan – Xchanging’s four-part action plan includes performing a Strategic and intrinsic value review, generating operational improvements, revenue growth and cash flow funding structure.

GGroup – Xchanging plc and its subsidiaries and subsidiary undertakings.

HHR – human resources.

IIAS – International Accounting Standards.IFRIC – International Financial Reporting Interpretations Committee. IFRS – International Financial Reporting Standards.IMR – Insurers’ Market Repository.IP – intellectual property.IPO – initial public offering. IRIS – international insurance and reinsurance solution.IT – information technology.ITIL – information technology infrastructure library.ITO – information technology outsourcing.IUA – International Underwriting Association of London is the world’s largest representative organisation for international and wholesale insurance and reinsurance companies.

KKedrios – Kedrios S.p.A., representing the partnership between Xchanging and SIA-SSB in Italy.KPI – key performance indicator.

Glossary of terms


LLCH – London’s Clearing House.The Leading Edge Programme – Xchanging’s HR initiative which selects employees from each region and business to develop into the Company’s future executives. LME – London Metal Exchange.London Market – comprises insurance and reinsurance companies, Lloyd’s syndicates, P & I clubs, and brokers with the core of its activity being the conduct of internationally traded insurance and reinsurance business. LMA – London Market Association provides professional, technical support to the Lloyd’s underwriting community and represents their interests.

NNearshore – near to the customer’s premises, typically in a cheaper region of the same country.Non-executive Directors – the Non-executive Directors of Xchanging are listed on pages 40 to 47.

OOffshore – another country or region where costs are lower.On-site – where Xchanging operations are located at the customer’s site.Operating cash flow – is calculated as operating profit (EBIT) plus non-cash items and working capital movements less capital expenditure and dividends to non-controlling interests.OTC – over the counter.

PPSP – Performance Share Plan.PwC – PricewaterhouseCoopers.

RRevenue visibility – recurring revenue comprising three components: annuity, volume at risk and renewals. RPI – Retail Price Index.

SSDF – service delivery framework.SEE – social, ethical and environmental.SIA-SSB – European financial and payment systems services provider and Xchanging’s partner in the Kedrios partnership.Six Sigma – a process optimisation methodology, which seeks to improve outputs through eliminating errors and variance.Solvency II – the updated set of regulatory requirements for insurance firms operating in the European Union, effective 1 January 2013.Special Economic Zone – a region within a country where economic growth is promoted through local economic and legal incentives.SPP – Share Purchase Plan.SWIFT – Society for Worldwide Interbank Financial Telecommunication.

TTESA – The Electronics Securities Architecture, our proprietary trading software.TPA – third-party adviser.TSR – total shareholder return.

UUK Corporate Governance Code – the UK Corporate Governance Code published in June 2010 by the Financial Reporting Council. UK Critical National Infrastructure – The national infrastructure comprises the facilities, systems, sites and networks necessary for the delivery of the essential services upon which daily life in the UK depends.UK GAAP – UK Generally Accepted Accounting Practice.Underlying earnings per share (EPS) – Xchanging’s share of underlying profit for the year divided by the weighted average basic number of Xchanging plc shares in issue for the year ended 31 December. Underlying operating profit – underlying operating profit excludes exceptional items, acquisition costs, and amortisation of intangible assets previously unrecognised by acquired entities.

XXBS – Xchanging Broking Services Limited.Xchanging – Xchanging plc and its subsidiaries and subsidiary undertakings.XIS – Ins-sure Holdings Limited, an EP between Xchanging, Lloyds of London and the International Underwriting Association in the UK.XISG – Xchanging Investmentservices GmbH, an Xchanging Group company.XMB – Xchanging Management Board. XPC – Xchanging Performance Committee.XTB – Xchanging Transaction Bank GmbH, an EP between Xchanging, Deutsche Bank and Sal Oppenheim in Germany. XTS – Xchanging Technology Services, Xchanging’s technology businesses in the UK.

Glossary of terms continued

Company overview

Business review





Notes

Documents

Xchanging provides business€¦ · managed services, software products and application management services. We also offer IT outsourcing services for complete technology needs, whether