Tales of corporate waste inside Rolls-Royce’s web of dysfunction

A Rolls-Royce logo is seen at the company’s aerospace engineering and development site in Bristol, Britain. (Reuters pic)

LONDON: Three Rolls-Royce Holdings Plc employees once flew from the UK to the south of France to erect a company sign because the team didn’t trust a local contractor to adhere to the jet-engine maker’s branding policy.

That’s just one example presented by the jet-engine maker’s new chief people officer last week, showing how the pride of British engineering has become riddled by dysfunction, waste and obscure procedures. The findings contributed to 4,600 white-collar job cuts and a push to entirely reorganize back-office functions, the latest and most radical restructuring plan under Chief Executive Officer Warren East.

The tales of corporate largess that Harry Holt, a former commanding officer in the British army, told an audience of investors on Friday highlight how Britain’s flagship manufacturer has more to do than cut jobs. As Holt and East tell it, it’s a matter of reshaping Rolls-Royce’s culture to make it more agile and productive — and ultimately capable of responding to market shocks.

Holt, working with restructuring specialists Alvarez & Marsal, has been planning the overhaul since being appointed to the post earlier this year. All told, there are 80 people involved in the project, with about 50 coming from within the company.

While some battles may seem small, the challenges are many: On average, managers have two to three direct reports. Then again, others have none. Internal decisions can require as many as 26 signatories. A single print-out of the group’s internal protocols would fill 5,450 double-sided sheets of paper. Back-office managers have “almost endless meddling rights” to force new systems or processes onto Rolls’s core businesses, Holt said.

As president of the company’s nuclear unit, Holt once led an acquisition of a small North American business for about USD6 million, only to be told by HQ that it would cost “considerably more” than that just to make its single facility compliant with Rolls-Royce’s property standards.

“This was a building that had been cleared by the US regulator to handle nuclear contaminated material,” Holt said at a capital markets day event Friday. “The ‘Rolls-Royce solution’ is not always a good moniker.”

Shares of Rolls-Royce surged 15% on Thursday and Friday, after the restructuring details were first announced, the biggest two-day jump in more than two years. It’s a sign investors believe East is serious in pledging cost savings that will help him exceed an earlier target of generating 1 billion pounds ($1.33 billion) in annual free cash flow by 2020. The stock was down 1.3% at 8.04 am Monday in London, for a market value of 17.4 billion pounds.

In many ways, the remaking of Rolls-Royce is the job that East was brought in for: he made his mark building a chip designer, ARM Holdings Plc, in an industry that is fast-paced, cut-throat efficient and brutally competitive. Rolls-Royce, by contrast, serves customers with some of the longest product life-cycles imaginable, with marine, power and aircraft engines that can remain in operation for decades. That makes fast responses all the harder.

“This isn’t a cost-reduction exercise to achieve some better returns,” East said at the briefing. “This is about making an organization that is ready for the next phase of development. A fundamental change is required.”

Holt’s candid descriptions of the many minutiae that can balloon into corporate waste is one insight into East’s attempt to make the company itself reflect more on the way it does business, he said.

“The danger of giving you lots of stories here is you come away thinking we are profligate,” Holt said. “We actually have a lot of good people working on cost reductions, but we still have aberrations where we seem to incur ridiculous cost just because someone — normally acting out of best intentions — thinks they’re upholding a group policy or standard.”