You have a multibillion pound engineering firm that’s issued five profit warnings in two years and you’ve got activist investors breathing down your neck to do something drastic about it. Where do you start?
If your name’s Warren East and the firm in question is Rolls-Royce, the answer appears to be ‘at the top’. East announced today that he’s ditching the divisional structure he inherited from his predecessor John Rishton in July in an effort to simplify the firm’s bureaucratic decision-making process.
From the New Year onwards, Rolls-Royce’s five businesses – Marine, Defence Aerospace, Nuclear, Civil Aerospace and Power Systems – will report directly to East, rather than through the now redundant Aerospace and Land and Sea divisions. The two long-serving executives heading those divisions – Tony Wood and Lawrie Haynes – will leave the firm as a result.
‘The changes we are announcing today are the first important steps in driving operational excellence and returning Rolls-Royce to its long-term trend of profitable growth,’ East said. This may seem surprising, given that two redundancies aren’t going to go very far towards the £150m-£200m in cost cuts he’s promised for next year, but East does have a point.
Organisations with bloated management structures will be very hard to transform in a meaningful way while those structures remain in place. Removing a management layer has more to do with getting stuff done tomorrow than saving a buck today, and sends a clear and reassuring signal of East’s intent.
Whether this (and more importantly the further changes that will undoubtedly follow in the New Year) will be enough to placate activist investors ValueAct remains to be seen, but shareholders broadly seemed impressed. Rolls-Royce shares were up 3.3% by lunchtime on the news, to 558p.