When James Cannon joined FLIR Systems as its chief executive in June 2017, he immediately stated that making the company more diverse was a key goal. Five months later, he hired Carol Lowe to be FLIR’s new CFO.
Lowe herself embraces diversity and believes becoming a high-ranking woman in a male-dominated industry — industrial technology — was an important step.
But she also stresses she’d never want to be a management team’s “token female.” She prefers to emphasize another quality that appealed to Cannon: her years of experience with Lean manufacturing and driving continuous operational improvement. In addition to two prior CFO posts, Lowe has twice served in divisional president roles.
The company had been performing well from a financial standpoint, but it was clear to Cannon that it was nowhere near a state of optimal efficiency, according to Lowe. Among her first initiatives at FLIR was to begin planning for a launch of Lean methodologies in the first quarter of 2018.
Having wrapped up her first year on the job, Lowe says the effort to jack up efficiency “is just now starting to get its legs.”
FLIR manufactures and distributes thermal imaging systems and other technologies that detect people, objects, and substances that may not be perceived by human senses. A third of its business is defense-contractor work.
In its most recent fiscal year, the company’s top line was $1.8 billion — not paltry, but far below the approximately $7 billion business she oversaw in her previous role as CFO at Sealed Air Corp.
Change is a key theme at FLIR these days. In addition to the operational rejiggering, every senior executive in the company has either joined it or been assigned to a new role within the past 18 months.
Lowe recently spoke with CFO about her transition to FLIR, the company’s strategies, and its implementation of Lean. An edited version of the discussion follows.
Why did you move down the company-size scale by coming to FLIR?
Compensation usually correlates to revenue, but Jim tells people that he “paid up” for me as a point to emphasize how committed the company is to diversity. And actually, while FLIR’s revenue and number of employees are both less than at Sealed Air, its market capitalization is larger than any company I’ve been at.
But at this point I’m no longer chasing my career. It was about coming to a company that’s making a difference in the world, with our products and solutions that save lives and livelihoods.
How has the transition gone for you?
I’ll be honest, it was a challenge, coming in with responsibility for finance, IT, sales operations, and global procurement. For the first three or four months I probably went slower than I’ve ever gone in my career because of not knowing the business.
In that position, you don’t know whether some of the change you want to drive around standardization and efficiencies will break something. FLIR is the type of company where there’s a secret sauce in the technology and engineering capabilities — it’s almost like playing a giant game of Jenga when you’re new.
I had to get to a point where I reminded myself that I knew how to be a CFO and be part of a management team that’s driving change and continuous improvement.
How did you see the company from an operational standpoint when you arrived?
There was a lot of work to do around standardizing processes and becoming world class in our R&D operations. In fact, in April we entered into a [$30 million] consent agreement with the State Department regarding [FLIR’s] noncompliance with [International Traffic in Arms Regulations].
What were the first challenges in implementing Lean methodologies?
Typically when you start a Lean journey, it’s a big change. You’re empowering people who are doing jobs day to day with making decisions about process changes. And managers don’t necessarily want to give up that control or may not trust employees to make those decisions.
So, there’s uneasiness. The organization has to identify quick wins so that people can see it’s worth taking the risk.
Typically those quick wins are where the organization has a lot of pain. Maybe there’s too much raw materials inventory. Maybe there’s a [chronic] bottleneck in one part of the factory.
It must have been especially tough to get buy-in for Lean, because the company wasn’t exactly hurting financially.
Yes. Our margins are much higher than those of our defense-industry peers, and are in line with those of other industrial technology companies. There’s nothing about the financials that says there’s something that needs to be improved here. We have meaningful market share and are recognized as a leader in most of the markets where we play.
But what stood out for the new management team was that the company was spending about $180 million a year, or around 10% of its revenue, on investments for R&D and engineering, yet the company hadn’t delivered organic growth in excess of 5% for about 10 years. That was not considered the best investment or the best return we could deliver for shareholders.
As we started looking at that, we saw where we didn’t have the good standardized processes across the company that would allow efficiency. Our working capital turnover ratio was less than three. If we could improve that by only half a turn, we could generate $100 million of cash.
What could we do with that cash? We could invest for growth. And yes, we actually do want to grow disproportionately through M&A so we can grow faster. We’re on track for organic growth of 7% this year, but our three-year strategic plan has us growing the top line by approximately $200 million organically and $300 million inorganically.
So we need to generate a lot of cash because of the multiples you pay today for a company with good technology and growth opportunities.
Is the Lean initiative only for the manufacturing operation, or does it extend beyond that?
Traditionally, most companies think of it as being for shop-floor operations. But a company that does a good job with Lean can apply it across the board, even in the back office.
How do you measure improvement there?
For finance, a lot of it is the amount of time it takes to close the books. Business leaders are waiting for information about whether they’ve had a successful month or quarter.
But for me, closing the books is not just about putting a balance sheet and a P&L in front of people. They need actionable information to make decisions around what to do differently or to keep doing. Finance has a responsibility to provide analysis, insights, and trends: what is the data telling us? Let’s call it an interpretation, as well as recommendations.
Until we can provide that to management, I don’t consider the books to be closed.
The concept of Lean is associated with continuous improvement. But aren’t there diminishing returns as a company moves closer to optimal efficiency, such that it’s knocked down in priority?
What you hope is that it becomes very much a part of the culture, that it’s not called out separately where you have big investments and bring on a lot of new people, like the Lean Black Belts we’ve hired. Then change happens organically, as opposed to it being forced.
Honestly, it might take five years before a company starts seeing [diminished returns]. But you have to continually reinforce that culture.
What are your thoughts about being a woman in business today?
If you look at the top five defense companies, four of them are now led by women, although within the industry overall women are still few and far between.
At a prior company where I was the CFO, the CEO asked all the other executives whether they would consider moving to South Dakota to take over an acquired company. But he didn’t ask me, and I asked him why. He said he didn’t think I’d ever consider it, because of my husband and son. I did take that job and stayed there for three years.
So initially I thought a lot about my messaging, in light of my gender. But I’m pretty much out of that mindset now.