John Rishton should be careful what he wishes for. The Rolls-Royce chief executive last year suggested that it was hard to cut costs at Britain’s proudest industrial company without a “burning platform” to create a sense of crisis.
“We’ve got profits at record levels. It’s difficult to get people’s attention,” he told analysts in February 2013.
Since then he has had to issue four profit warnings and this week announced 2,600 job cuts– including many of the company’s highly-prized engineers. People are certainly paying attention now. But the question is whether he is the man to bring the fires back under control.
“There is a set of circumstances which are not catastrophic, but which could give a sufficient sense of urgency to get to where they need to get,” says Nick Cunningham, aerospace analyst at Agency Partners. “He is treading a fine line. Can it be done without falling into the fire?”
The former chief executive of Dutch supermarket group Royal Ahold, Mr Rishton was a surprising choice when he was named in 2010 to succeed Sir John Rose. An accountant by training, who had worked at both Ford Motor Company and as finance director at British Airways, he could not have been more different from the outspoken Sir John. “Very private”, “cautious” and “rather reticent” is how some who have worked with the chief executive describe him.
His task, rather surprisingly for a finance man, was to “reindustrialise” the company, according to a former board member. Though some had been pushing for an outsider to shake up a culture that had become insular and unresponsive, as a Rolls-Royce non-executive director, Mr Rishton understood the challenge.
Under Sir John, Rolls-Royce had become the world’s second-biggest aircraft engine maker – a remarkable feat for a company a fraction of the size of rivals such as General Electric.
But the engineering that was winning customers was also creating a certain complacency about execution. “Rolls-Royce had the front end humming along with huge order books,” says the board member. “But we were not producing the engines on time.”
Mr Rishton’s first focus was on improving operational performance – which he has largely achieved, says one person who worked closely with him. “The civil engine business is delivering 100 per cent on time for the first time in years.”
Airbus executives say that with the arrival of Mr Rishton, “a commitment became a commitment”.
His second challenge spoke more obviously to his financial strengths, but by his own admission has been more difficult to achieve. It was to raise margins in the civil aerospace division. This accounts for close to 50 per cent of earnings but is expected to return margins of just 12 per cent next year, against GE’s 19.8 per cent in 2013.
In part this is down to different accounting treatments. Rolls-Royce spreads the combined income from engine sales and maintenance over a set number of years to smooth out volatility in earnings. This leaves margins looking weaker than rivals in good times but more resilient in the downturns, says Zafar Khan of Société Générale.
But the group has also suffered from outdated and overcomplicated systems which had made costs harder to track. Mr Rishton, says his former colleague, has an ability to “look at cost in a very simple way. He has made a big difference.”
The difficulty now, say insiders, is in applying this approach to external suppliers who account for about 80 per cent of Rolls-Royce’s direct costs.
There is not much time left. The fires set alight by the successive profit warnings have been fanned by the perception that Rolls-Royce has badly communicated the difficulties it is encountering. Mr Rishton’s inclination to stay behind the scenes has made the current situation more difficult, say some with knowledge of the situation. “He is intellectually capable, but he hasn’t been as efficient as he should have been in letting people know what he is trying to do,” says one.
Investors will not tolerate another setback. “It is two strikes so far for Rishton,” says one analyst. “They are saying three strikes and it is over.”
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