16 | BUSINESS REVIEW| Our financial performance
partnerships. The Group’s largest cost is personnel cost and during the year, headcount, on a full-time equivalent basis, fell to some 723 at 31 December 2012 from847 at 31 December 2011.
During 2012, we incurred a number of exceptional operating costs, which are excluded fromour underlying results. These include employment expenses, property expenses, outsourcing expenses and litigation expenses, details of which are set out in note 6(a) to the consolidated financial statements.
As noted above, we continued to implement the cost reduction programme which we announced as part of 2011’s strategic review. In addition, we executed certain other cost reductions, either to ensure that we are able to invest resources in areas of potential long-term growth whilst controlling our overall cost base, to rightsize functions in line with our changing business needs and requirements, or to ensure that we can absorb inflationary cost rises within our overall targeted cost base. Themajority of these cost savings will be realised through headcount reductions and during 2012 exceptional employment related costs of £8.2million have been recognised in respect of termination and benefits payments; these represent the one-off cost to be incurred to generate the annualised savings.Whilst we anticipate that further such costs will be incurred during 2013 as remaining actions are implemented, we expect a substantial reduction in exceptional employment costs during 2013.
Exceptional outsourcing expenses of £3.3million primarily represents projectmanagement, implementation and consultancy costs incurred in connection with the outsourcing of our back andmiddle office to State Street.Whilst the outsourcing contract became effective during 2011, we have incurred significant project costs associated with the transfer of our administration arrangements to State Street’s long-term, strategic platform.We previously anticipated that this project would have been completed during 2012; the final implementation was completed in Q1 2013 and, accordingly, associated implementation costs will cease at that date.
When we announced our outsourcing contract in 2011, we indicated that the reduction in headcount through the transfer of personnel to State Street would allow the Group to reduce its premises costs by approximately £3.0million per annum. This saving has now been realised, with an associated net cost of implementation of £1.3million.
The finalmatters associated with F&C Partners litigation were settled during 2012. Both the litigation and settlement were complex and although the economic consequences were substantially recognised in the 2011 financial statements, the nature of the final settlement agreed in 2012 resulted in an exceptional accounting charge of £1.3million being recognised in the year.
Operatingmargin The Group’s underlying operatingmargin for 2012 was 29.2 per cent compared to 24.4 per cent in 2011. The successful implementation of the cost reduction programme has been a key contributor to the increase inmargin. Operatingmargin represents one ofmanagement’s key performance indicators, and its importance will increase as a measure of success of the Group’s strategy, whereby we are seeking to leverage on areas of scale and competitive advantage. As a result of this, we aremore agnostic on the feemargins associated with new
business, so long as that new business carries adequatemarginal profit. Successful implementation of our strategy will be reflected by further increases in operatingmargin.
Operatingmargin ismeasured as underlying operating profit as a percentage of net revenue. For this purpose, adjusted operating profit represents operating profit before the impact of exceptional items but after deducting variable compensation payable tomembers of Thames River partnerships.
Foreign exchange gains and losses As indicated earlier in this review, the Group’s results are sensitive to foreign exchange rate
fluctuations.Translational gains and losses on revenues and expenses are reflected within the Sterling equivalent of those revenues and expenses, however, the Group also incurs exchange gains and losses on the retranslation of assets and liabilities held in foreign currency. During the year these losses amounted to £2.0million. As they do not reflect the ongoing profitability of the business, they have been excluded fromunderlying earnings.
On a constant-currency basis, had 2012 results been recognised at the same average Euro/Sterling exchange rate as 2011, the underlying operating profit would have been some £5.4million higher than reported. This equates to an underlying earnings per share impact of approximately 0.8p.
Financing revenue and expenses The Group’s finance revenue fell to £14.6million (2011: £17.2million). The principal reasons for this change were a reduction in performance- related carried interest income of £2.6million, offset by gains on debt repurchases of some £1.1million.
Our finance costs fell by £2.0million to £33.4million, with reductions in interest costs arising fromsenior and subordinated loan notes repurchased during the year of £0.4million and reduced bank and loan facility fees and costs of £0.7million. Repurchases of loan notes during 2012 will reduce our annualised interest costs by some £1.3million per annum.
Amortisation and impairment of intangible assets Under IFRS, when an acquisition ismade, there is a requirement to recognise separately the fair value attributed to intangible assets, in our case,management contracts. The excess of consideration over the fair value of net assets acquired represents the business value and infrastructure and is recognised as goodwill.
Management contracts are separated by client category and are amortised over their estimated useful lives.Where an indicator of impairment occurs, such as greater than anticipated fund losses, we are required to review the carrying value of these contracts.
No such indicators of impairment arose during 2012 and, accordingly, no impairment charges were recognised.
We are also required to conduct an annual impairment review of the carrying value of goodwill. This review demonstrated that there was no impairment and hence no requirement to write-down goodwill.
Thames River acquisition The Group continues to incur various acquisition-related expenses arising fromthe acquisition of the Thames River group; in line with the
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