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The Financial Director Interview – Shifting up a gear from beancounter to rev counter.

In the popular mythology, engineers who run companies are prone tonto the fast lane as FD at Ricardo Group. Now he’s chief exec, proving that number-crunchers can crunch the gears, too. elementary financial mistakes and take corporate decisions on principles better suited to the workshop. And accountants who run engineering firms have no idea what the business is and hamstring innovation and good product development.

Over the last five years, engineering consultancy Ricardo has had both types in its chief executive’s chair. Rodney Westhead – chief exec since 1996 – is not only the group’s former FD but was, until joining the company in 1992, a partner in a sub-Big Six accountancy firm. Westhead, who succeeded an engineer in the top job, still gets a little puzzled by the belief that number-crunchers can’t run a company built around workshops.

“The product was different,” recalls Westhead of his move from Grant Thornton after 20 years, “but the actual fundamentals of the business were very similar: you’re selling professional time.” Ricardo specialises in R&D and design work in the automotive industry, specifically “powertrain” – gearboxes, engines and transmissions – and the new FD found it far from difficult to settle in with the “metal bashers”. Apart from anything else, he says, “show me a bloke who doesn’t like cars!”

But while enthusiasm for the industry made a nice change from the relative boredom of corporate finance, Westhead was not joining a company in the rudest of health. “There were quite a few attendant risks: Ricardo’s share price at that time was very low, they hadn’t had very good results (and) there’s always the risk of predators. But I decided that if we could weather the first year, which we did, it was certainly worth a gamble.”

The share price did rise after Westhead joined in 1992 – although throughout our interview, he is insistent that we stress the role of the company team, rather than any individual contribution he might have made – from 68p to nearly 200p, falling back in early 1996. “It ran all the way down to 112p or 114p, when the board decided they would ask Mr Ross to leave,” says Westhead.

Christopher Ross, an engineer by trade, was the then chief executive, the man whose long relationship with Westhead while he’d been at Grant Thornton had lead to the latter’s appointment at Ricardo in the first place. The ousting of Ross caused some ruffles in the industry at the time, although Westhead can’t talk about it as the case is still going through the courts. But even the tabloids got in on the act after Westhead was appointed as the new CEO. “A shareholder revolt faces Rodney Westhead … who has been in the job for only two weeks,” screamed the Mail on Sunday. An unnamed source boldly claimed: “Ricardo should reverse this. It needs to be run by an engineer, not a finance man.”

But Westhead is well-versed in tackling this argument. “As a senior partner in an accountancy firm, or as a senior executive of an engineering firm, whilst you need a clear understanding of what is being done, you’re not actually on the front-line delivering the service. You’re just privileged to lead the team.

“When you get to the top of a company,” he continues, “you cease to be practising your first discipline and now, if anything, my discipline is people.”

At the time, though, the financial discipline and insight that Westhead could bring to the role were vital. Ricardo had diversified from its base of automotive consultancy into aerospace and nuclear reactor design. And it had set up a number of regional offices in the US to service the Big Three car manufacturers. But these areas were detracting from the group’s focus, and Westhead knew that his new role meant even greater responsibility for restoring shareholder value.

“The decisions about what to get rid of, where to move next and then putting in place the right people and structures – that’s the shift in role (from FD to CEO),” he explains. Ricardo Group has a very small central management unit, essentially just Westhead, his FD, Andrew Goodburn, the company secretary, the property director and that’s it. “We have two secretaries, that’s the lot,” he says. That ensured that the decision-making process was quick, and the tough decisions were swiftly executed.

The small size of the management team is put into greater perspective, however, when one considers the fact that Goodburn did not take the FD’s role for nearly five months after Westhead first moved up to CEO. To reassure the shareholders that the right man was moving in, Ricardo commissioned a headhunting firm to select the new group FD. After more than three months, Goodburn, who was already FD of one of the Ricardo sudsidiaries, was chosen to take the finance role. Westhead is nonchalant about the period – “I just ran both positions. It was exciting” – but with his emphasis on the “people” nature of the business, it seems odd that there’s also no human resources director on the group board.

“I see the appointment of the right people as absolutely key,” he insists.

“They’re people businesses; you’re only selling people, all the assets go home every night. So unless you get the people appointments right, you haven’t got a business.”

Ricardo actually makes almost nothing. Apart from a few special edition gearboxes and some parts for the racing teams they supply – there’s a small part of Michael Schumacher’s Ferrari that comes from Ricardo’s Shoreham workshop – everything it sells is intellectual property in the form of R&D, consultancy or software for testing engines.

The company has a long and interesting history. Founded in 1915 by Sir Harry Ricardo – who had built his first commercial engine at the age of 20 in 1905, and who invented the Octane fuel rating scale – the company went public in 1962. Sir Harry, who died in 1974, would certainly recognise the company under its modern stewardship. He was active in designing engines and components for the motor sports fraternity throughout his career – as Ricardo does today. Even the American operation would not be alien, as Sir Harry was an active collaborator with both French and Italian motor companies before and after the war.

But the aerospace and nuclear division would not have been so familiar to the group’s founder. “The view when investing in those companies was not the conglomerate attitude to get (them) because they looked good,” explains Westhead. “The view was that, perhaps there was an opportunity to spread the technologies, but it didn’t work like that.”

One of the main problems was that the aerospace companies, unlike the car giants, were suspicious of letting an outsider get so close to some of their core technologies. But the decision of the divisional managers to stage a buy-out early in 1997 when it became clear there wasn’t a compelling reason for them to be part of the group proved there was some value to be had.

As an ex-finance man, Westhead was aware of the importance of getting the right price during the sell-off, and the pitfalls when dealing with comparative experts. “They are the day-to-day managers of the business and they probably know more about it than you,” he says. “They have a real interest in being as cautious as they can in demonstrating the value of the company. They have a contradiction, of course, in that they need to demonstrate to the venture capitalists that it’s worth more.”

Westhead’s experience as a corporate financier at Grant Thornton and as group FD played a large part in being able to strike a deal that he felt comfortable with. “I had my personal view of what the value was, and we did the work to satisfy ourselves as to the value before we even started to talk to the management team.”

This strong sense of financial know-how was also instrumental in turning round the poorly performing US subsidiary, Ricardo Inc. It was a time-consuming task and painfully expensive, as one particularly onerous contract was cancelled. But the new streamlined operation has seen rising orders and far lower costs.

Withdrawing from the US market was never really an option. Far too much of the world’s automotive industry is centred around Detroit, and customers like their suppliers close at hand. With most of the big OEMs in the business conducting 90% of their own vehicle development, fighting for the remaining 10% is a critical task. But it’s not just nuts-and-bolts money.

“The current annual spend on vehicle development by the large manufacturers is about £25bn,” explains Westhead. “Of that, about £2.5bn comes out to the likes of Ricardo, indepedent consultants, but that 10% is growing.

The powertrain (transmission and engine) market is about £600m or £700m, and we do about 13% of that.” Without making a single component. Not bad, but Westhead knows that the company must expand its customer base to cover all eventualities.

The main area for expansion is ‘vehicle’, the trade term for things such as ride, handling, braking, steering, chassis work, electronics and crash-worthiness.

Expanding the company’s ‘vehicle’ business also means it can maintain its markets if, for example, electric cars go into production. Westhead explains that “whether it’s a battery or a fuel cell, there are two terminals coming off providing the motive power. From that point forward, we can be as expert there as we are with petrol coming out of the tank into the engine.”

Indeed, up to now, what are commonly seen as attacks on the car are meat and drink to Ricardo’s engineers. “Emissions legislation has been tremendous for the business over the last ten years,” Westhead enthuses. The vehicle manufacturers often have to meet different emissions and noise control limits in different countries, and companies such as Ricardo can pick up high value work researching new ways to reduce fuel consumption and pollution.

And not making the components themselves is also great business. “If you look at the costs of engine design – a serious engine for a large manufacturer – you’re talking anything from £30m to £100m,” he says. “For a line to build the engine, you’re talking about an investment that would start at between £250m and £500m.”

It’s not just lower investment capital either. “When you’re designing gearboxes for France at FFr7.5 to the pound and delivering at FFr10 to the pound, that’s a 33% increase and the cost to deliver the box to the customer is absolutely frightening,” says Westhead. “The impact on our business is negligible because (manufacturing) is less than 2% of all we do. But you can see that the impact on big manufacturers has to be devastating, really grim.”

True, when sterling is high, Westhead has to consider the relative wage costs against overseas competitors, but the highly technical nature of the business means customers are much less sensitive to price fluctuations than with commodity items. That means keeping the R&D at the cutting edge is even more important. Foreign competition has also helped reduce the effect of the strong pound: “Now that the pound is strengthening, rather than priced aggressively against us, (foreign rivals) have taken the opportunity to restore their margins,” Westhead explains.

Indeed, Ricardo seems to be remarkably risk-friendly. Capital investment is relatively low (Ricardo has also improved its return on capital employed from 19.5% to an impressive 30.8% over the last year), exposure to currency fluctuation is minimal, and the best part is that the company, at least according to the CEO, is recession-proof.

“Any car company must keep its model range fresh,” Westhead points out.

That means R&D for new models even if sales fall dramatically. And if the big car companies look for cost savings by moving more R&D and design out of house, the independents can only benefit.

But after disposing of the non-core divisions, Westhead is all too aware of the dangers of over-stretching a company like Ricardo. Powertrain and ‘vehicle’ are one thing, but would the company ever go into body design?

“Not design,” he says, almost with a shudder. “Not styling, nothing in styling.” Fashions come and go, and the expertise of engineers is probably a lot more reliable than the fickle tastes of a designer.

Equally, Westhead is fairly scathing about the efficiencies of a conglomerate structure. BTR, which is fast retreating back into the engineering sector after some time as a diversified industrial company, is a case in point.

“Owen Green knew exactly where and how he was leading that company,” he says. “You have got the strength of that one guy holding it all together.

Hanson is another parallel … but you have to examine why it falls apart without that individual. There’s no commonality within a conglomerate.” Then he adds, perhaps mindful of the long and stable history of Ricardo, “There must always be something there for the next generation.”

But even if organic growth can be kept on track – and Westhead needs only to look back at the recent past to see how quickly fortunes can change – Ricardo also needs to find strategic acquisitions to strengthen its move into ‘vehicle’.

But Westhead has a problem here. “There’s no listed company out there that if we wanted to we could either in a friendly or aggressive way say, ‘we’re going to buy you’,” he says.

While regulatory drivers like emissions and noise control will help sustain organic growth, Westhead is equally hopeful that changes in the vehicle marketplace will continue to generate demand. “(Manufacturers) are under commercial pressure to produce more and more vehicle variants, more niche vehicles,” he says. “They’re all trying to get from concept to showroom quicker, and that’s good for organic growth.”

Westhead clearly understands the business and has dispelled early fears about having an accountant in charge. He’s fixed many of the problems which developed in the early 1990s. And he’s aware of the need for ongoing growth. The question now is whether, having taken a spanner out of the works at Ricardo, he knows what to bolt onto it next.


Name: Rodney Westhead, FCA

Age: 54

Salary + bonus: £216,000


1969 Audit senior at Pannell, Kerr & Forster

1969-72 Audit supervisor at Coopers & Lybrand specialising in computerised auditing.

1972-92 Moved to Grant Thornton chartered accountants. After 1982, moved back into general practice, rising in 1987 to become the managing partner at Grant Thornton’s London office. From 1988 to 1992 was a partner in the Eastern region specialising in corporate finance, including the investigation of a major fraud case prosecuted by the SFO.

1992-96 Group finance director, Ricardo Group

1996- Appointed chief executive of Ricardo after ousting of Christopher Ross

Westhead on Rolls Royce: “The engine for Rolls Royce has got to be made by BMW. The bodywork can be made in smaller numbers and at smaller value; the capital cost to produce a small run body can be an order of magnitude less than for an engine.”

Westhead on the euro: “A common currency will inevitably drive policies together. How you actually grapple with the huge deficits in some countries and the cost of, say, French social security is another matter …”

Westhead on skills: “We’ve got an excellent body of technical people, and to replace them we realised we would have to take on our own apprentices, we have a responsibility to fill our own skills gap. What sector takes the biggest proportion of the brightest graduates? The City, the accountants, the service industries. There are graduates available, the problem is persuading them to be engineers.”

Westhead on FRS10 (goodwill on the balance sheet): “If you take out a big chunk of goodwill and it distorts your gearing ratios, that can be troublesome. But you have to look round the goodwill – a lot of which is artificial – and watch the cash.”

FTA sector: Support services

Activities: Consulting engineering company with special emphasis on petrol and diesel engine design, emissions and fuel economy, vehicle and chassis engineering, transmissions and test automation design.

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