Corporate restructuring can be a hard but necessary part of a corporation's evolution. Once a company gets to a certain size or age, it can be easy for the employees to forget that the point of the business is ultimately to make money. As a company ages and evolves, the need for restructuring is essential to its very future. However, in order to make any kind of significant change to a multinational which will stick long-term, the key often lies in changing the fundamental culture of the organization.
This is the exact struggle Declan Guerin faced when he was hired as group chief restructuring officer at Rolls-Royce. Speaking at this year's CFO Rising Europe Summit, he explored the inherent difficulties that arise when trying to change a 100-year-old company viewed as a national institution by many Brits. "It's a national treasure but it hadn't had a positive cash flow for many years and that simply couldn't carry on," said Guerin.
This is why the company needed to restructure, to become "simpler, leaner and more agile". This is hard enough for any company, but was certainly a struggle for a company spread out over five large divisions and so deeply steeped in its own storied history. But the management wanted Rolls-Royce to become a leading industrial engineering company today and to do that it needed to leave the 20th century behind.
Build a simpler business
The first step Roll-Royce took was both the simplest and the most drastic. Rolls-Royce consolidated two of the company's five division, leaving it with the civil aerospace, power systems and defense divisions. It consolidated its nuclear/ nuclear submarine and maritime divisions because they did not fit the image of the 21st-century company it was aspiring to be, were spreading the company too think and were not making a profit.
"Company's partner much more today. You don't need to make everything and to an extent, you shouldn't," explained Guerin.
By consoloidating down to three high performing divisions, it was better able to allocate resources where needed, saving money which had been lost on those fiscally poor divisions. The company could also now implement changes faster and, "not only change speed but change course at speed too."
Then came the hard part; changing the culture at Rolls-Royce to embody the simpler, leaner and more agile company it wanted to become. Along with the divisional fat-skimming, it had to cut and rejig upper management and build a new executive leadership team. It also needed to instill a sense of accountability among remaining managers. As Guerin puts it: "A change in culture starts from the leaders and cascades down."
Creating a sense of accountability in a company as stable and populous as Rolls-Royce is no mean feat. One of the first things Guerin did to address accountability among his colleagues was to introduce a new culture of actual performance evaluation. Guerin explained why the existing performance review structure was ineffective: Of thousands of employees who were reviewed yearly, very few people had ever failed (one year, only one person failed to pass their review in the entire company). This proved bad for everyone involved, as they were either performing well and it was going unnoticed or they were performing badly and had no incentive to improve. Making performance reviews with real objectives and targets fostered a sense of ownership in the business which in turn led to performance improvements.
Another major culture shift Guerin addressed was the way the company spent money on patently insignificant expenses such as the travel and accommodation costs for upper management. It was not unusual for executives to have first-class train tickets for short journeys or to have a high-class taxi ordered for every journey. Guerin recognized these are hard costs to go after because everyone enjoys little perks that come with their jobs.
"You have to go after costs as if they were enemies day-in and day-out," Guerin explained. "That's the culture stuff. If it doesn't add value, get rid of it or challenge it."
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These were but a few of the many changes David Guerin and his team made to restructure the company. It is hard to understand and track the impact of many of the changes.
"Due to the nature of the business. You may make changes to improvement levers and not see the effects for up to seven years. This is hard to stomach in our age of rapid progress," explained Guerin. However, Guerin managed to save £400m ($525.7m) in annual savings from reducing fixed costs and company headcount, while also creating a simpler and more responsive business structure.
Guerin ended his presentation by stating his four must do's:
These insights were shared with delegates at the CFO Rising Europe Summit, which took place in London on September 12–13, 2018. To find out more about future CFO Rising Summits, visit CFO Rising West Summit and CFO Rising East Summit.