Warren East, chief executive of Rolls-Royce, is said to have commissioned a secret internal study to identify how the company's performance could be improved. This study has revealed that the company could be making £1bn (€1.28bn, $1.45bn) more in profit, if it can increase its 12% profit margins to match that of its US rival, General Electric's 18%.
It is understood that the study was delivered to top executives at the British engineering firm by Bain & Company, the American consulting firm. East has since asked his senior managers to identify areas where broad cost-cutting measures could be implemented to save as much as £1bn over time. However, there is no firm time frame that has been set to achieve the same.
While a few seniors in the organisation have seen the study, they are yet to take any decision on the proposals suggested. A company insider said, "It is about reducing complexity and not necessarily people", Rolls-Royce said, "If we achieved best-in-class margins our profits would be £1bn higher and we are focused on closing that gap, including through cost reduction."
The new internal study follows' East's own review of the FTSE 100 company, after which it pledged to save £150m this year. In its February annual results statement, Rolls-Royce said certain actions that could generate additional savings in 2017 were already work-in-progress. "As part of our transformation programme we have cost-reduction targets in the order of £150m in the current year, which represents early progress with a lot more to do", the company said.
These cost-cutting measures are important as they would help restore investor confidence in the company, which had declined following the five profit warnings issued by Rolls-Royce over the past two years. While the downturn in the defence and marine industry is blamed for a decline in its profits, another reason is also said to be the high costs that had built up in the company over the past 20 years.
However, a few insiders were sceptical about Rolls-Royce achieving the same margins as GE. They said GE enjoyed greater economies of scale and had a different composition of business. One insider added that another reason for being sceptical was that the American conglomerate earned a large portion of its revenues from higher-margin services than Rolls-Royce.