Rolls-Royce tries yet again to make restructuring work

Employees and suppliers frustrated by failure to end bureaucratic practices

Engineers work on the Trent 700 engine at Rolls-Royce's Derby factory — Chris Ratcliffe / Bloomberg

 George is a Rolls-Royce engineer in his mid-40s who has worked at the aero engine company since graduation.
 When chief executive Warren East this week unveiled the most drastic job cut programme of the past 18 years in a bid to force through a radical transformation of the UK's premier engineer, George did not even bother to read the announcement. It was the seventh restructuring in recent years, so he knew the script: a lot of activity but not always a lot of actual change.
 The latest plan to cut back-office and middle management jobs is the linchpin of the pledge made by Rolls-Royce yesterday to generate about £1.9bn in free cash flow in the next five years. That sent the shares to a six-month high.
 Rolls-Royce's problem in investors' eyes has long been that its financial results have been opaque and volatile. Moreover, it has achieved margins far below those of its bigger competitors such as General Electric, giving it less investment firepower. Investors were heartened to see details of the transformation plan that the group hopes will finally deliver on its promises.
 Yet, despite the market euphoria, George is not the only person feeling dubious about the result of yet another attempt to shake up the company's bureaucratic practices in a bid to become more competitive. Many employees and suppliers, frustrated with Rolls-Royce's interminable processes, have been disappointed to see that despite a series of plans since 2014 to cut jobs, many of the roles that should have gone have crept back in.
 Within a year of the 2014 plan to cut 2,600 jobs, including 900 in engineering, Rolls-Royce had hired back 1,000, an insider said. The company declined to comment on the numbers. A supplier also complained that in the most recent attempt to cull managers, the result was that “the wrong people left”.
 Mr East admitted that of nearly 2,000 recent job cuts, the net reduction was just 600, in part due to the need to hire staff with different skills as Rolls-Royce seeks to exploit opportunities in areas such as digital-led services.

'This all comes back to the culture of the organisation'

 The Rolls-Royce boss said that the company was too fragile after five profit warnings in 2014 and 2015 to do more than in his first three years. Nevertheless, the latest plan to cut 4,600middle managers, largely in the UK, is an acknowledgment that those previous attempts underestimated the effort required to change processes accumulated over decades.
 “This all comes back to the culture of the organisation,” said one Rolls-Royce engineer. The bureaucracy “just finds ways of reintroducing itself to make sure this doesn't happen”.
 In a four-hour investor meeting yesterday, Mr East agreed that resolving Rolls-Royce's competitiveness problem would not happen by “wading in and cutting a few costs here and there.” Harry Holt, who was promoted in January to chief people officer to drive more fundamental change, outlined the challenge of tackling Rolls-Royce's appetite for “complexity”.
 A study with turn round specialists Alvarez & Marsal had proved startling, he said. Several project managers had been left to their own devices without direct reports. Of 18,000 job functions examined, 2,000 could be stopped. There were 4,500 posts in a corporate centre that had “almost endless . . . rights” to meddle in the business, imposing costs for services they neither needed nor wanted, he said.
 Complex procedures shielded these fiefdoms. The study examined 167 group processes. These required compliance with 751 steps and 6,955 different rules. “That is what I mean about revelling in complexity,” he said. “We believe complexity is an end in itself.” Progress was being made, Mr Holt said, that indicated significant potential for efficiencies. Of the 167 procedures, 44 related to customer relations, which had been cut to 18.The 10-month budgeting cycle had been cut to two, and included an element that allowed businesses to adapt forecasts to changing circumstances.
 Mr East has made it clear to staff that failure was not an option if Rolls-Royce is to remain in control of its own destiny. “He has said that if we do not do this, someone else will,” said one person at the meetings.
 But there are risks, not least in the potential for such upheaval to distract management and employees from the urgent task of ramping up aircraft engine production to record levels. There is also the risk that after so many redundancy plans, morale will struggle. Mr East admitted a year ago that at some stage Rolls-Royce's 50,000 employees needed to look forward rather than fret about job cuts. Ensuring that those who remain stay motivated could be Mr East's next big challenge.


Rolls-Royce: demolition Derby
 “Simplicity is a state of being,” Warren East intoned, sounding every bit the chopsocky sage. The restructuring detailed by the Rolls-Royce boss smacked more of kung fu a disciple might dish out. About 4,600 jobs will go, roughly 8 per cent of the workforce. The engine maker's historic home of Derby will be badly hit.
 That is tough for workers at “The Rolls”, as the jet engine maker is known locally. But Rolls for too long believed itself immune from pressures afflicting other engineers.
 No one can accuse Mr East of wasting a good crisis. Aside from slashing the workforce, he is anointing cash flow as the main measure of performance. This reflects accounting rule changes that delay profit recognition. It is also a propitious point in the product cycle to switch. Cash-draining engine deliveries will slacken in the medium term, ensuring cash-swelling service revenues start to rise.
 Investor day guidance suggests that in 2020 Rolls will generate £1.2bn in free cash flow (crudely described as operating cash less capital spending). Further out, free cash would rise to over £1.8bn. Rolls made £270m in 2017 and £780m in 2013, its last good year. A promise of fat dividends is implicit. Rolls says free cash must cover payouts 2.5 times. That suggests dividends would total 26p per share for 2020 and 40p in the medium term. Shareholders received just 12p per share for 2017.
 The market, maintaining its reputation for heartlessness, marked up Rolls shares 8 per cent yesterday after a 6 per cent rally on Thursday. That represented a £2.2bn gain. Taxed and capitalised, £400m in savings mooted by Rolls would be worth £3bn. The £800m difference between the figures is a discount for the possibility Mr East's sums do not work out. If he succeeds, Rolls will resemble a Zen rock garden more than the cluttered metal shop of old. Better that than an industrial museum paying tribute to a bygone manufacturing giant.
Source: Lex on the web



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