UK: Rough ride at Rolls-Royce.

UK: Rough ride at Rolls-Royce. - Only four years ago Rolls-Royce Cars was purring along - towards a cliff. Geoffrey Foster describes how its executives took evasive action.

Last Updated: 31 Aug 2010

Only four years ago Rolls-Royce Cars was purring along - towards a cliff. Geoffrey Foster describes how its executives took evasive action.

Don't rock the boat! When disaster threatens, when waves are lapping over the gunwale and you are in imminent danger of being overwhelmed, you have to react quickly in order to survive. Lighten ship immediately - toss out everything that is not essential for sustaining life - and bail like hell. But be careful. Be sure to move very deliberately. Above all, do not do anything sudden or unexpected.

That way you will have the best chance of staying alive when things turn nasty in a seaway. It used to be the rule for corporate survival in extreme conditions on dry land too. But not any more, it seems. Numbers of endangered companies these days - companies like Rolls-Royce Motor Cars which are in peril as a result of the recession - have chosen the height of the storm as the moment to inaugurate profound organisational and cultural changes. Even while off-loading employees - hundreds at a time - and announcing a moratorium on pay awards, they have simultaneously been attempting to introduce novel practices based on trendy notions of cross-functional teamworking and "empowerment". It is a little difficult at first to think of any more high risk strategy.

It is not as if these businesses are oblivious to the risks they run. "It could be an unmitigated disaster if you (ie 'we') really cocked it up," offers a senior executive at Rolls-Royce Cars. Yet Rolls-Royce management has become convinced that the new modish ways of working are necessary to the company's continued existence: not simply to get it through the recession but to secure a place for it in whatever comes after. "Do you say: Is it going to be all right by the last quarter?" asks Peter Ward, the company's 47-year old chairman and chief executive, rhetorically. "Or do you say: For the foreseeable future the world has changed, and we need to restructure into a new company to meet the ravages that are coming at us?"

Like other motor industry chiefs, Rolls-Royce top managers have been reading The Machine that Changed the World (published by Rawson Associates), that seminal account of how Japanese motor manufacturers wrong-footed the West by moving on from mass production to "lean production"; and, unlike some, they have absorbed the message. So if the innovatory methods have to be brought in while the company is still fighting for survival, so be it. But it is also true, of course, that some kinds of change are easiest to introduce when a business is struggling, since that is when potential objectors - in organised labour or unorganised middle management - are least inclined to mount effective opposition. The question then is whether the new methods can retain their sparkle once the crisis is past.

Three or four years ago there was little cause to think about organisational change. Rolls-Royce Motor Cars was its parent Vickers's biggest and most remunerative division, and purring along almost serenely, ticking off the milestones. As late as 1990 new divisional records were set when turnover passed £278 million and pre-tax profits also peaked at £24.4 million. In that year a total of 3,333 Rolls-Royce and Bentley cars were sold to buyers worldwide. "Rolls-Royce Cruises Through Britain's Recession" cooed the headlines - but prematurely. Managers knew by then, from the order book, that the next year was going to tell a different story.

Sales in the first quarter were nearly 50% down, and they did not re-cover. The first few hundred lay offs came even before 1990 was out. Another 200-plus followed a couple of months later. "As 1991 progressed," says Peter Ward, "we really did fall off a cliff." By May 700 jobs were either going or gone at the main factory in Crewe. In the same month it was announced that the Mulliner works in London was to close with the loss of a further 500. The closure would reduce the company's payroll strength to 3,200. In 1990 Rolls-Royce Cars had employed close on 5,900 people in the UK.

But the pell-mell redundancies could not keep pace with the fall in demand, or with the worsening financial position. In 1991 retail sales reached only 1,723 new cars, a 48% reduction. And the job losses merely exacerbated the immediate financial problem. Of the £60 million and more which the company lost that year, approximately 50% was due to trading. The other half consisted of exceptional items; that is, redundancy payments plus the cost of shutting down Mulliner.

The crash of Rolls-Royce pushed Vickers firmly into the red too, and forced a cut in the dividend. The star performer of yesteryear no longer enjoyed a favourable Press. It was not a recession-beater any more. It was not even a symbol of British skill and British quality. Rather it was lambasted for being technologically backward, a maker of "instant antiques" soon to become part of the heritage industry. The Financial Times ran a scornful leader on the predicament of Rolls-Royce Cars under the headline "Perilous Niches". It concluded: "Manufacturers need more than the smell of leather and a glint of burled walnut to retain a reputation for luxury. They need to master modern manufacturing technologies as well."

Elsewhere it had long been argued that Vickers should unload Rolls-Royce. Sir Ron Brierley, the New Zealand raider, had set the tone when he tried to engineer a demerger in 1990. But then, at the end of 1991, came the confirmation: Britain's best known builder of luxury cars was indeed on the market, either wholly or in part.

As it happened there were no takers, although in the early months of last year discussions took place with several half-interested parties including Toyota and, in particular, BMW. (Rolls-Royce was already talking to the German company about technology: this was one of several collaborative arrangements which, managers argue, made up for their own lack of resources - and which were made possible only by the fact that they were "neutral", ie not competing directly with their collaborators.) With sales dragging along the bottom it was obviously not the ideal moment for bringing willing buyer together with willing seller. For the time being, at least, Rolls-Royce was thrown back on its own resources - and on those of its parent.

But had sales really hit bottom? If they had not, where was the bottom. And if they had, how long would they stay there? Rolls-Royce managers never accepted the notion that conspicuous consumption was going out of fashion for ever, or that their market would wither away because, "If you're going to make several hundred workers redundant, you don't turn up in a new Roller". They argue, on the contrary, that the quality of the product makes it easy for the Rolls-Royce owner to put off its replacement. "All the customer research we do demonstrates that we face a deferment of purchase rather than an exodus of customers," says Ward. "In the UK we haven't lost a single customer," he claims. Maybe, but while buyers insist on postponement it comes to much the same thing anyway.

As 1992 began to unfold managers kept on seeing signs of recovery. Yet when midsummer came and went it was clearly not going to happen. Moreover, in all probability "1993 was going to be very similar". The realisation that the company could count neither on an early improvement in the market nor on an injection of cash from some friendly foreign investor served to concentrate managerial minds no end. What emerged was an attempt to tackle the Rolls-Royce problem from a new angle: the solution, it was decided, lay not so much in another slimming exercise as in a fundamental redesign. Nevertheless another massive wave of redundancies was inevitable.

To start with, management assumed that it would probably not be able to sell more than 1,300-1,400 units a year, around 40% of the 1990 peak.

"We then built up from there," according to Ward, identifying the core value-adding activities that would allow the company to break even at that level. This became the "minimum operating design" - MOD in Rollspeak. Ward, who is himself on the board of Vickers, persuaded the hard-pressed parent company to put up £12.4 million in order to see it through.

The plan envisaged that, wherever possible, non-core operations would be put out to contractors. "We aimed at taking out fixed cost and converting it into variable cost." Thus the computer centre - fortunately on a rented site - is in the process of being sold. However, Rolls-Royce Cars will continue to account for up to 60% of the centre's capacity for its own purposes, and not least for the "essential" MRPII system that was installed in the late-'80s. Similarly, print and stationery have been hived-off to an external supplier. Many businesses might think the print department an eminently suitable case for such treatment. That is not necessarily so in a motor company where it encompasses parts catalogues, special tool designs, the technical writers, and so on. "Technical publishing is very different from company newspapers," it is pointed out.

Nor has manufacturing itself been exempt. Rolls-Royce used to produce its own exhaust systems. Then management went looking for alternative sources and found a coppersmith in Manchester with a good reputation and spare capacity. Several workers have transferred to the new supplier. Various fasteners that used to be made in-house are currently bought-out from a small engineering works down the road in Crewe. Again a couple of men switched employers. On the other hand, the burled walnut fascias and leather seating are considered to be as crucial to a Rolls-Royce car as the drive train. Their production will stay directly under management's control, "come hell or high water," says Ward.

But the aspect of this latest convulsion that attracted attention was obviously the announcement, last September, that another 950 jobs were to go. This was going to reduce the payroll to not many more than 2,100. Those who had gone to work for newly-appointed suppliers were undoubtedly the lucky ones. As on earlier occasions a "package" was put together, and specialist consultants were called in to advise redundant workers. As before, too, volunteers were invited to come forward, especially from among the older employees. In the end only 80 or 90 people were actually sacked, but morale took another dive.

At that stage, whatever their level, almost all the news that employees had heard over the past 21 months had been bad. (Rare exceptions were a couple of successful model launches, notably that of the Bentley Continental R coupe in the summer of 1991; the Bentley Brooklands launch last September almost coincided with the latest and largest round of redundancies.) Even when less than alarming, the news was threatening as they were to do with changes in established working practice.

For shop-floor workers it started early in 1991. The so-called Green Book, which the unions accepted in March that year, officially ended demarcation in the factory. This has meant, as a first line manager points out, that work is no longer held up for trivial reasons, like the temporary absence of an electrician to connect a battery. There has not, so far, been much wholesale relocation of workers. But that, too, is on the cards. And last November, during the rush to get vehicles out of the door before the year-end, one experienced buyer - who had long before trained as a trimmer - might have been surprised to find himself making car seats again.

The closure of the Mulliner works in May 1991 brought more upheaval to the shop floor. Production of the Rolls-Royce Phantom came to an end at that point. However, assembly of the Corniche was transferred to Crewe, where the factory had to adjust to the introduction of an unfamiliar model in a period when redundancies were taking effect and when departments were on short-time. But bigger and more far-reaching changes were in train.

Management was already in discussion with consultants from United Research (now Gemini Consulting) about beefing-up working practices, and the assignment expanded until it touched every department and every aspect of work at Rolls-Royce Cars. The original aim was cycle compression: reducing the time and effort needed, for example, to get a new model to market. But cycle compression is also concerned with taking out cost, so the approach remained highly relevant to the company as it simultaneously piled up losses and came down in size. It is now a central feature of the corporate re-design.

In former times the organisation structure had been wholly functional, and work tended to move in sequential fashion from department to department. A new model programme, say, would start in engineering, go on to the commercial departments and eventually to production, and would spend three or four years over the journey. In September 1991 the first cross-functional teams were created, bringing together people with different specialisms who were responsible for seeing through a major project. The Bentley Brooklands was one of the first fruits.

This mode of operation is now part of the corporate culture. There are a couple of major teams, working on model-years 1993 and '94, plus a fluctuating number of other project teams set up to carry out specific tasks. Within the model-year teams, different types of development all go forward together - once the broad concepts have been agreed - while sales and marketing are kept in the picture throughout. Some call it "simultaneous engineering". At Rolls-Royce it is known as "parallel processing". The departmental barriers have all but disappeared, according to commercial managing director Michael Donovan. "After only a year hardly anyone thinks in functional terms." Donovan claims to be a "spectator" today, whereas Tony Gott, a major team leader (and a senior manager, although short of board level) is one of those who have been "empowered". "Tony and his team worked with board-level authority," Donovan points out.

One result, reports Gott, has been "a tremendous upsurge of energy". There has been a "dismantling of the empires" on the shop floor as well. Here, too, says Peter Hill, managing director at the manufacturing end of the company, "We're trying to organise ourselves around people power." These days the interior of the big redbrick factory on the edge of Crewe, which once produced Merlin engines for Spitfires, is marked off into "zones". Each zone is said to be a business unit, in a customer-supplier relationship with neighbouring zones. It's "a factory within a factory", complete with its own engineering and other support staff. Moreover, the engineers are not located, as they were, in distant offices but around the edge of the zone, in touch with the machinists and assembly workers.

The 60 or 100 workers who complement a zone are divided into teams (naturally), each one under a working team leader. In some areas operators take individual responsibility for the quality of their work, signing-off the bill sheets themselves. Other areas have already been provided with tables and chairs adjacent to the workplace, for eating and/or problem-solving. The picture of a Japanese factory is made complete by the signboards hanging above the aisles. "World Class Manufacturing", says one somewhat cryptically. "Customer satisfaction is our business," announces a second.

Yet another Japanese touch: here and there are notice boards on which bar charts trace zonal performance against key indicators. Key performance indicators are in use everywhere at Rolls-Royce nowadays: in the factory the KPIs are Delivery, Productivity and Non-Conformance. A team leader (and former shop steward) in Small Components draws attention to his zone's record under the first heading. Against a target of 90% of deliveries on time, the men were achieving 85% until the redundancies were announced in September, when the figure dropped straight to 41%. By November, a week after the last of the 950 departed, it had climbed back to 68%. "Everyone's head was down, but we bounced back," says the zone manager triumphantly.

Given all that has happened, morale is "remarkably good", Peter Hill believes. However, he "wouldn't say it's 105%". Ward admits, "There is fear there." But it is obviously true that, in general, "People are working pretty hard and looking pretty cheerful." It is vitally important that things should stay like that. For having conceded "power to the people" - even to the very limited extent that it has - management needs their cooperation all the more. And the company is not out of the wood yet.

Rolls-Royce Cars made another thumping loss last year, although trading losses were significantly down on 1991. Looking ahead, the prospects for luxury cars, in particular, remain discouraging. But unless management's sums - and its assumptions - turn out disastrously wrong, the company should at least break even. And the more cars it can sell above that level the greater the gearing effect. Plant is at present "dramatically under-utilised". As output rises (as presumably it will sometime) outsourcing is scheduled to increase, and the existing workers so displaced will be re-trained for other core jobs. Then there will be more overtime working. However, for the foreseeable future, the aim is "not to employ more people". If and when numbers need to rise, there should be no shortage of experienced car workers in Crewe. But, whatever happens, Rolls-Royce Motor Cars looks set for a lean future. "The business will not recover," Ward promises, simply "as a smaller version of what it used to be".

For reprints of this article, contact Anne Oakley (071) 413 4336.

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