Bespoke Finance

No one doubts the importance of internal controls, but it is essential to ensure that they are the right controls. When Hanno Kirner became CFO at BMW’s wholly owned subsidiary Rolls-Royce Motor Cars Ltd, he inherited what appeared to be a robust and efficient financial process.

However, convinced that anything can be improved, he began analysing the reporting structures, looking to see what was actually helpful and what was simply being reported out of habit.

OVER-REPORTING

Kirner says: "I inherited a very sophisticated, very detailed and very complex financial reporting package, which was created on a weekly basis for the management board each Tuesday. Every Friday at noon, the financial team would start working round the clock to finish the report in time for distribution on Monday.

"However, when I looked closely at our reporting, I saw that some of the KPIs were not actually changing on a weekly basis and some were certainly not items that you would consider for a weekly review because you would never take weekly measures to influence them. For instance, we do a lot of work measuring our warranty costs, but we only do that on a monthly basis, so why report them weekly?"

Kirner then did a brave thing: "Without any prior notice, I simply dropped the full reporting pack for two weeks from the board meetings." In the third week, he established that the rest of the board had not felt the loss of the reporting package. "To me, that was a clear sign that the pack was not very helpful to them at all."

Kirner and his team then embarked on a project to simplify internal reporting and focus on the issues that were of real importance to the company. He explains: "We slimmed it down greatly. I also had my team explain every manual step in the process to me." The end result was that he managed to get rid of every manual input of data save three unavoidable occurrences where programmes did not interface.

He adds: "All the financial data come straight from the actuals and the basic SAP financial backbone into the reporting system. I have a total overview, along with the full management board, all the time. What I can see, every fellow director can see, which I believe is very important. Then on top of that, we have additional analysis, which we conduct on a monthly basis when we delve deeper into particular issues."

TRUSTED PARTNER

Rolls-Royce's relations with the BMW Group in Munich are, says Kirner, extremely positive. The UK firm is run as a standalone entrepreneurial company save in two areas: Rolls-Royce’s employees are members of the BMW group’s defined benefit pension scheme and major finance is provided via Munich.

Kirner explains: "Generally speaking, in the automotive industry we are looking at multiples of hundreds of millions for new model development. So while we have a bank line for working capital, we absolutely take funding from the group because without the financial strength of BMW behind us, we would never ever get close to the conditions we enjoy."

When Rolls-Royce presents BMW with a product or major construction decision, the standard business case contains a set of KPIs that look at all elements of the investment. Kirner believes that this means that "there is a good and structured way of presenting the decision".

He adds: "I believe that Rolls-Royce has maintained positive business development over the past three years – there has been a strong growth and confidence in the business overall. And because we have been remarkably adept at delivering on our promises, there is a lot of trust from BMW and very little day-to-day detailed involvement.

"We only report EBIT to the BMW Group. We don’t go into details. We report the major economic developments on a monthly basis because obviously that is needed for group consolidation, but apart from that we are very much operating independently."

THREE STEPS TO SUCCESS

Kirner believes that in order to succeed in the automotive industry, there are three things to get right. "One is product substance – you cannot get away with a poor product. You may be able to get away with it for two or three years, but then it will eat into your brand equity. This leads to the second factor – you need to have a strong brand. And thirdly, you must be profitable.

"Now obviously, product substance and the development of a brand and profitability are not always pointing in the same direction. So at Rolls-Royce, we constantly have to juggle these interests. But it is absolutely essential to get this right."

For example, the Phantom is constructed with its famous 17 cowhides per car. From a finance perspective, it is obvious to ask if it is possible to do with less. However, Kirner points out that this is the wrong question because it would take away some of the car’s substance.

He says: "Such a perspective can remove the very reason that our customers consider the car to be special." Although the luxury car maker only has two models, the Phantom and the Drophead Coupé, the bespoke options mean that there is a wide variety of product offerings, and these each have to be costed from the very beginning.

Kirner says: "We have a good track record on how to track bespoke items. One member of my team concentrates fully on this side of the business. He works with the engineers from the conceptual discussions as part of a cross-functional team, so finance is involved from the very start." The principle is that there should be no financial surprises in a tailor-made car.

Kirner adds: "If there was some imperfection from our side which we had to make up for, this may mean forsaking some contribution margin. The customer expects a Rolls-Royce and he will get a Rolls-Royce. If that means that we have to lose some of the margin because of a process imperfection that has to be corrected, then we will do it. Obviously we are not going to risk our reputation."

As Kirner has shown, the finance function behind a luxury brand needs to be as bespoke as the product itself. From reporting the right KPIs to carefully balancing costings with quality, managing a tailor-made luxury car takes a lot more care than simply cutting costs on a production line.