Principal risks and uncertainties

It is recognised that the Group’s business objectives can only be achieved if risks are taken and managed effectively. By understanding the nature of our risks we can be in a position to make better decisions and maximise the returns of the Group while managing our reputation.

Regular review of risks and actions to address risks takes place at all levels of the Group. Risks are defined as threats to the achievement of business objectives or to the continuing reputation of the Group. The top level corporate risk register reflects the outcomes of lower level programme, function or business unit risk reviews and is reviewed in detail by the risk committee. Nevertheless, the Board retains its strategic responsibility for risk decision making regularly reviewing the corporate risk register and considering these risks in the context of the business strategy, as reported to it by the risk committee.

The risks and uncertainties on these pages are considered to be principal to delivering our strategy and business results, and specific to the nature of our business, notwithstanding that there are other risks that may occur and may impact on the achievement of the Group’s objectives.

Risk or uncertainty and potential impact How we manage it
Significant external events affecting demand for transportation such as terrorism, political change, global pandemic, natural disaster or continued and deeper economic retrenchment
  • Established a balanced business portfolio
  • Strong access to parts of the world where demand remains robust
  • Diversity of global operations
  • Regularly exercised senior response team
Failure to minimise the environmental impact of the Group’s products and operations leading to reputational damage and ultimately loss of market share
  • R&D in low-carbon technologies such as nuclear power, tidal energy and fuel cells
  • Significant investment in innovative solutions for aviation, marine and energy markets
  • Governance structure headed by the environment council to oversee improvements
Reduction in government spending due to global financial uncertainty and budgetary constraint in Europe and the US in particular causing reduced revenues on existing platforms and inhibiting investment in new technologies
  • Development of a diversified portfolio of products and services for various markets and regions
  • Proactive lobbying for research and technology funding
  • Achieve commitments under current contracts
Failure of counterparties, including financial institutions, customers, joint venture partners and insurers, driven mainly by the economic uncertainties and pressures in the current environment, potentially affecting short-term cash flows
  • Established policy for managing counterparty credit risk
  • Common framework to measure, report and control exposures to counterparties across the Group using value-at-risk and fair-value techniques
  • Internal credit rating assigned to each counterparty, assessed with reference to publicly available credit information and subject to regular review
Fluctuations in foreign currency exchange rates affecting operational results or the outcomes of financial transactions
  • Long-term hedging policy, using a variety of financial instruments (see note 17, page 101 of the consolidated financial statements for more information)
  • Where applicable, currency matching of assets and liabilities to manage translational exposures
  • Regular review of risks and appropriate risk mitigation performed where material mismatches arise
Regulatory changes relating to financial derivatives may require the Group to post cash collateral, increasing cash flow volatility and the risk of default
  • Close monitoring of proposed changes
  • Evaluation of potential financial impact in terms of cash collateral required and use of public trading exchanges
  • Lobbying politicians and regulators in conjunction with other large European corporates
If the Group's products, services and pricing do not remain competitive, this could result in the loss of market share, with attendant impact on long-term financial performance
  • Establishment of long-term customer relationships to differentiate products and services and protect margins
  • Steady focus on improvement in operational performance, for example through the modernisation of facilities
  • Increased focus on managing the costs of operations and products
  • Sustained investment in technology acquisition
Non-compliance with applicable legislation and regulations, for example export controls, anti-bribery and authorisation of chemicals and substances compromising the ability to conduct business in certain jurisdictions and exposing the Group to reputational damage and potential financial penalties
  • A business-wide compliance structure focusing on anti-bribery and corruption legislation
  • Exports committee, chaired by the Chief Operating Officer directs strategy and policy on exports
  • Resources to comply with requirements are embedded throughout the business
  • Employee awareness training
Failure to grow capable resource globally due to demographic trends and limited supply of appropriately skilled personnel affecting programme delivery, damaging reputation and stifling opportunities for future innovation
  • Continued significant investment in resourcing and capability infrastructure
  • Objective assessment of performance using improved system for developing and monitoring the competency of individuals
  • Regularly refreshed framework to develop managers and leaders
Product performance not meeting expectations affecting safety and reliability with adverse long-term financial consequences
  • Operating a ‘safety first’ culture, including delivery of regularly refreshed mandated product integrity training to employees and suppliers
  • Future safety requirements are defined by the product safety assurance team
  • Activities to improve maturity of products at entry into service
  • Engineering focus on improvements to product reliability and service lives
Disruption of supply chain due to external factors or failure to deliver parts to committed costs and quality reducing the ability to meet customer commitments, win future business or achieve operational results
  • Continuous improvement of all processes and project management controls to ensure both technical and business objectives are achieved
  • Customer excellence centre provides improved response to and analysis of supply chain disruption
  • Focus on production quality through plant and supplier improvement plans
  • Providing duality of capability through establishment of world-class manufacturing centres
  • Pursuit of low-cost sourcing strategies
Downgrade in credit rating restricting the Group’s ability to secure funding, hedge forward or provide vendor financing
  • The Group has developed a strong financial risk profile and continues to improve the business risk profile
Failure to conduct business in an ethical and socially responsible manner causing disruption and reputational damage
  • Ethics committee established to oversee and maintain the highest ethical standards (see page 50 for its report)
  • Global Code, in 18 languages, issued to all employees supported by a training and engagement programme to improve awareness of the Group’s values
  • Global telephone and intranet channels are available for employees to report in confidence any concerns regarding potentially unethical behaviours
Failure to manage multiple complex product programmes effectively with potentially significant adverse financial and reputational consequences, including the risk of impairment of the carrying value of the Group’s intangible assets and the impact of potential litigation
  • Continuous improvement of all processes and project management controls to ensure both technical and business objectives are achieved
  • All major programmes subject to approval and regular review by the Board, with particular focus on the nature and potential impact of emerging risks and the effective mitigation of previously identified threats
Breach of IT security through increasing volumes of data being transmitted electronically across international borders may cause controlled data to be lost, corrupted or accessed by unauthorised users, impacting the Group’s reputation
  • Continual upgrading of security equipment and software
  • Deployment of a multi-layered protection system that includes web gateway filtering, firewalls and intrusion detection
  • Specialist resources employed to increase capability
  • Active sharing of information through industry and government forums
Failure to execute the programme to modernise the IT infrastructure impacting efficiency and effectiveness of business operations
  • Governance structure established to oversee the programme
  • Project and risk management methodologies are being followed
  • Specialist resources have been secured to increase capability
  • Involvement of multiple service providers to provide competition and remove dependency on any single supplier
Loss or unintended disclosure of Intellectual Property damaging the Group’s competitive position and causing potential breach of contractual requirements
  • Strengthening of resources to manage patents
  • Creation of a global framework of Intellectual Property officers
  • Procurement of a global IT system to make patent information more widely available to engineers

Chairman’s statement

Rolls-Royce has a highly skilled and motivated team – proud of its heritage and ambitious for its future...

Chief Executive’s statement

Our strategy has stood the test of time and has proved itself in battle...

Finance Director’s review

Demand for our products and services remains robust.