Powering the Future – Rolls Royce Total Care Business Success

by NIck Frank on August 20, 2014

RR engineRolls Royce recently went through the significant milestone that more than 50% of its revenues now come from Services. This has been no accident, but a conscious decision to change Rolls Royce from a product/technology company selling engines, to delivering ‘Total Care’ that improves their customers operations.

This transformation was driven by two key events in its customer base:

1. Their highly profitable Aftermarket parts business was opened up to 3rd party manufacturers, threatening profitability

2. Key customers such as American Airlines were demanding ‘On the Wing’ contracts’ better known as power by the hour where they only pay for the power they use.

Rolls Royce’s answer was to introduce sophisticated maintenance contracts which the guaranteed engine availability. No longer were engines maintained on a time and material basis. Customer’s pay for engine power as they used it. For Rolls Royce this met the increasing expectations of their customer’s as well as securing the spare parts business. It enabled the airlines to move from investing significant fixed costs in engine maintenance, to a variable cost. This business model innovation has been one of the enablers for the growth of the lean low cost airline business model, which is now dominates air travel. It has also enabled the objectives of the airlines and Rolls Royce to be truly aligned. It’s in the suppliers interest to design and develop an engine with the lowest Total Cost of Ownership.

But how to make this transformation profitably?

As Dave Gordon, VP Service Strategy in their defence business explained in a recent interview, it’s been a long journey to change the culture, capabilities and infrastructure requiring the full focus of the senior leadership.

Rolls Royce have completely changed their operational footprint from a centralized to decentralized structure able to provide services locally and globally.

Their people and culture have had to change.  The notion of disruption costs was introduced that has changed mindsets.  Each failure to meet the customer requirements is quantified as a cost of disruption to the customer. The best engineers are now put into the data/operations centers to solve customer problems, because their work will lead to improvements in technology and new service offerings. The capabilities of employees have been developed to encompass services. For example an MSc degree course has been developed for Rolls Royce’s future business leaders to understand what makes a great Services business.

And an area where Rolls Royce now excel is in their use of data. They monitor the engines constantly using sophisticated telematics. This data is not only used to reduce the cost of service using predictive analytics it is also used to develop the new generation engines. These engines have had service offering literally designed into them from the get go.  Not a trivial task when you consider that the lifecycle of this type of development from inception to meaningful feedback is in the region of 6-8 years. This data also has incredible value. For example fuel consumption is one of the major cost drivers for the airlines.  Rolls Royce can offer services that help airlines optimize this cost driver.

What Rolls Royce have successfully achieved, is to transform themselves from a product company, to a services/customer centric company. One way to think about this is that value is not so much created in the factory as with a product, but much more within the Customer’s environment. Technology is still incredibly important, but it has been harnessed with people and processes in a coherent and integrated way to improve their customer’s competiveness. But this offering is also important at a strategic level. Much to the annoyance of the aircraft OEM’s such as Airbus and Boeing, Rolls Royce is able to forge very intimate relationships with the end user, thus strengthening their position in the Supply Value Chain.

The growth of Rolls Royce share price over the last 10 years shows just how effective this integrated business model has been in creating sustainable and profitable growth.

Key Indicators for growth

Rolls Royce Share price 2004-2014

RR Share Price

 

 

 

 

 

 

2. Revenue growth – Annual Report for year 2013

(Light blue due to acquisition of Tognum AG 1st Jan 2013)

RR Revenue growth

 

 

 

 

3. Earnings Growth – Annual Report for year 2013

(Light blue due to acquisition of Tognum AG 1st Jan 2013)

RR Profit growth

 

 

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