Rolls-Royce chief warns of senior job cuts in bid to fix engine-maker

Axe In Wood

The new chief executive of Rolls-Royce has warned that senior job losses will form part of £200m in annual cost cuts at the British engineering champion.

Warren East, who replaced John Rishton in July, said the company was so opaque and bloated that another in a string of profit warnings was possible, as he set out plans to revive the engine-maker.

He said the company was overburdened with managers, committees and processes to the point where it was hard to know what was going on.

He admitted that the company was at a “turning point”, saying that there were “things that are wrong and need fixing”.

He acknowledged that the “self-help” he expects to implement would involve “streamlining senior management”.

Rolls-Royce has 54,000 staff worldwide, around 2,000 of whom are deemed senior managers.

In a presentation to investors, East said the Derby-based company had a strong underlying business but he promised a review of all its operations, improved disclosure to investors, and a simpler business that would let engineers get on with their jobs.

“Neither myself or the board are under illusions about how concerned you are,” added Rolls-Royce chairman Ian Davis.

“The overwhelming priority is to improve our financial and operating performance, improve our speed and response to events and improve internal controls,” he said.

East did not go into details on potential job cuts, business disposals, or getting out of certain countries, but he said large layers of cumbersome bureaucracy needed to be stripped away so the company could function properly and respond to market changes.

He also promised to rid Rolls of the “accounting fog” that made Rolls impenetrable to outside investors and its own analysts by making accounting for its TotalCare servicing contracts and research and development costs clearer.

Over more than two decades Rolls became a beacon of British manufacturing excellence as one of the world’s top makers of engines for aircraft, ships and industrial use. But it has issued five profit warnings in the past 18 months, including two under East as he has sought greater clarity about the business.

The engine-maker’s fortunes turned after a decade of rising sales, leading to a series of profit warnings from early last year, when Rishton announced a “pause” in growth. East has stopped giving profit guidance and does not expect to restore targets for a year or more.

Asked if this was because Rolls’s internal accounting was too complex to analyse, he said: “Yes. I’m sorry to be blunt but it is.”

East said there was still “mud in the system” that could mask problems that would trigger a further profit warning. He said he hoped that would not be the case but he added: “The ground is not as clear as I would like it to be.”

Rolls is already shedding 3,600 jobs and East said more would go, including a swathe of top managers. “We are overmanaged,” he said.

“This is about improving the effectiveness of the operation; it’s not about reducing the number of engineers. We are an engineering company and the last thing I want today is less engineers. What I want to do is to make it easier for those engineers to do their jobs.”

East spent 10 years turning ARM Holdings into arguably Britain’s top technology business, supplying microchips to Apple and other leading companies before taking on the task of turning around Rolls. As well struggling financially, Rolls is under investigation by the Serious Fraud Office over bribery allegations in China, Indonesia and other parts of the world.

Asked how Rolls had got into this position, East said: “It’s a very valid question. If you’ve got a big business with a lot of different things happening, over the years people add complexity for good reason.”

But his predecessors failed to remove bureaucracy as they went along, East said. Rolls was run by Sir John Rose for 15 years before Rishton took over in 2011. “The processes and procedures you wrap around an organisation to make it work [have] frankly got very bloated,” East added.

East said an example of too much complexity was that Rolls’s 27 “key technologies” such as 3D printing and heat-resistant ceramics did not all need the same amount of management but that each was treated the same. They will be condensed into about eight “key technology themes”, requiring fewer people and meetings, he said.

Rolls, which makes engines for Boeing’s 787 Dreamliners and Airbus A380 superjumbos, has bet on demand for wide-bodied aircraft but the trend among regional airline operators has shifted towards single-aisle plane orders.

East said Rolls could have reacted more quickly to the changing market if information from staff talking to customers had been reported more quickly to top managers.

He also took aim at the government’s proposed replacement of the annual £600m innovation budget with interest paying loans.

He said that for every pound of grant Rolls received it generated another £17 through training and employing people and other spending.

Rolls is unlikely to move great swaths of research and development abroad if the plans take effect but other countries will offer grants that will tempt Rolls to locate operations there, he said.

Powered by Guardian.co.ukThis article was written by Sean Farrell and Rob Davies, for theguardian.com on Tuesday 24th November 2015 17.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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