Strategy

Big Company Aims for Operational Discipline

New CFO at TE Connectivity tries to minimize wasted effort by engineers and finance staff alike.
David McCannDecember 27, 2017

TE Connectivity is, in one sense, a very mature entity, with roots going back to the 1940s. The $14 billion enterprise has been a stand-alone public company since 2007, when former parent Tyco International spun off two of its big divisions.

Heath Mitts

Heath Mitts

In another sense, the company is as modern as they come, given its core business of manufacturing electronic sensors and connectors for use in industrial products in the automotive, Internet of Things, health care, mining, and propulsion and power distribution spaces.

In his 15 months since becoming TE Connectivity’s CFO, Heath Mitts has focused on instilling a level of operational discipline that makes sense for a company with this size, maturity, and advanced product portfolio.

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Keeping the company’s approximately 7,000 engineers focused on profitable projects is a central goal. “Engineering content is great in that it develops products to solve problems, and then you get an annuity stream from sales of those products that lasts for a period of time,” says Mitts. “At the same time, it can get away from you. Most engineers have never found a problem they didn’t want to solve. But there needs to be commercial viability.”

As with most CFOs, a big part of Mitts’ role is allocating resources, but allocating to the engineering team is a particularly tricky task. It requires both an open mind toward R&D and the resolve to push back as needed. “It’s a gentle balance,” says Mitts. “And the balance is different in every end market and every region.”

There’s a heavy risk management component to the resource-allocation process. For example, finance team members have to have strong knowledge of the markets for the products other companies are making that incorporate TE Connectivity products.

“It’s not just, OK, this company says they’re going to sell 4 million units,” notes Mitts. “It’s also, what happens if they only sell 2 million? Will we still get a return on that?” In such a circumstance, the company may, for example, have to find ways to be more flexible with its design process for the product, or delay allocating capital until it’s really needed. “If we do enough of those things, it tends to balance out the risk,” the CFO says.

But the finance team itself also has to guard against wasting time. Just as engineers want to solve problems, finance professionals want to play with data. “They like to cut data 100 ways and show all the different things they can do,” says Mitts. “That tends over time to become a massive time suck.”

Since taking the job at TE, Mitts has made it a point to consistently question the need for various reports, especially thick ones. He’s trying to get team members to identify the decisions being made that are informed by particular data, as opposed to providing data that are “just nice to have or are interesting,” he says.

For example, there’s probably no need to keep creating a report that someone requested three years ago when, say, there were problems with commodity prices. It’s possible that someone will again ask for that report, but “part of my job is to manage those expectations,” the CFO says. “We’re going to do the stuff that’s relevant.”

And as much as excess reporting is a “time suck” for the people preparing that data, it’s much more so for the people who receive reports and have to “dig through that mountain of data to get a couple of nuggets they can use to make a decision,” notes Mitts.

Instilling such heightened discipline may be crucial at a company of TE’s size, because it’s easier for things to spin out of control. At the same time, that size also provides opportunities for efficiency.

Mitts’ previous employer, IDEX, a provider of engineered fluidics systems, was only a $2 billion revenue company, compared with TE Connectivity’s nearly $14 billion. His finance and accounting staff, which numbered 300 to 400 at IDEX, is 1,800 strong at his new gig. That scale is facilitating a move toward increased shared services.

“Instead of having 10 people here and 20 people there doing something like I did at IDEX, when I’ve got 100 people doing receivables and 80 people doing payables, I can begin to bring some things together,” he says.

Still, Mitts is keeping watch to make sure that 1,800 finance and accounting staffers isn’t too many. “At the end of the day we’re still an overhead function,” he says. “I’d rather the next 10 people the company hires be engineers than finance people.”

And there’s the rub for a company like TE Connectivity, for which R&D is its lifeblood. There’s a chronic shortage of engineers in many areas of the world. TE has 7,000 of them, “and we treat them like gold,” says Mitts. The problem is that a lot of them are nearing retirement age, and the new wave of replacements isn’t large enough, especially in the United States.

The problem is exacerbated  in TE’s case because the company’s sensors and connectors are largely tailored for harsh environments or those where a product’s failure could have serious consequences: aircraft, automotive, factory floors, and even appliances that pose fire risks, like ovens, dishwashers, and dryers.

That creates strong demand not only for engineers, but for skilled factory technicians as well. “We’re not hiring people to do textile assembly,” says Mitts. “We’re hiring people who really understand tolerances, material flow, and how to fix something when it’s not right. It’s not a high-labor environment, but they have to know what they’re doing.”

For now, TE’s response to the problem is to locate R&D activities and factories in areas of the world where more plentiful engineering talent is available. The company also sponsors technical schools providing two-year degrees, after which graduates can be brought on as apprentices. “It’s just very hard to do,” Mitts observes. “You don’t see as many people today entering the technical manufacturing side of the work force.”

Longer term, the hope is that further advances in factory automation may be able to at least partly solve the problem.

Meanwhile, TE Connectivity had a banner year in fiscal 2017, which ended Sept. 29 with organic revenue growth and earnings up about 8% and 22%, respectively, from the prior year. Much of the growth was attributable to the automotive segment.

“We’re in a very good spot through the electronification of vehicles,” notes Mitts. “Even if the number of cars being built grows only 1-2% in a year, we’re growing in the high single digits.” Also, an improving economy drove more investment in factory automation, and TE’s share of business in the electronic medical delivery space continued to grow.

“The world is moving toward more miniaturization and connectedness, which is [relevant to] just about everything we do,” the CFO says.