Fortive Pricing Spineometer: 3 of 5 Vertebrae

Fortive, a technology conglomerate working in healthcare and operating with many branded business units, had a positive Q2 2023. Revenue increased 4.3% to $1.5 billion and earnings before interest and taxes increased 9.4% to $291 million over the same period last year after excluding Russia exit costs.

A review of Fortive July 26^th earnings call and financial report clarifies the drivers to this performance and the importance of pricing capability.

Jim Lico, CEO of Fortive, began his remarks speaking of the importance of Fortive’s “culture of continuous improvement” centered around their FBS version of Kaizen.

Kaizen and related business practices seek to drive productivity improvements by standardizing processes, reducing errors, and improving throughput through a repeated cycle of Plan-Do-Study-Act, often attributed to Shewhart and Deming.  The approach has been applied to pricing as covered in my Pricing Done Right text.  Might Mr. Lico be leading Fortive to use this approach to pricing at his company? Scant evidence supports this hypothesis.

Most of the earnings call focused on the book-to-bill ratio, a slowdown in China, and the unwinding of the impacts of Covid and supply chains and distribution channels.  Tidbits hinted at further future merger and acquisition activities.

When Mr. Lico did address pricing, he expounded two opposing orientations to which reconciliation is possible but requires a declaration of faith.

On one hand, Mr. Lico directly connected price to value delivered and the importance of managing price well.  “The kind of value and investments we’ve made in innovation … really speak to our ability to hold price.  We think of it as value creation and our ability to create more value for customers and get paid for it.”  Mr. Lico continued with claiming, “We’ve always been a good price leader.”

On the other hand, many of the remarks made by management could be interpreted to imply a belief that pricing is largely outside of their control.  Phrases like “favorable pricing” and “solid price realization” could imply active management to reduce pricing errors or could reflect random impacts of currency fluctuations and negotiation outcomes.  Similarly, the statement of “over delivered in Sensing,” a precision technology offering, does not clarify if this was the outcome of a well-managed process or a chance positive result.

Pricing should have a strong role within Fortive.  Their operations span the globe and would benefit from pricing professionals geographically dispersed to address the market appropriate variances in commercial policy.  Their claimed focus on creating and capturing value leads to an expectation of clear processes for pricing new offering developments.  Their varied direct sales and channel sales efforts create strong opportunities for price error reductions leading to account management planning, negotiation strategy, and price-promotion management.  Given the variety of margins of goods sold, pricing should work with human resources to implement Deal Quality Scores in sales compensation.  The high complexity of their business, multiple brands in multiple industries, would further drive benefits from a pricing function with a deep bench.

Given the orientation of Mr. Lico to pricing and the size of his business, we expect to find 12 to 60 pricing professionals at Fortive.

Research uncovered a capability at the lower end of this spectrum and unevenly dispersed across the many Fortive business units.

Pacific Scientific, Tektronix, and Gordian could all be found with dedicated pricing professionals.  In these divisions, pricing took roles of analyst, manager, and, if I am generous in translating titles to focus, director.  They could be found in multiple geographies.  They appeared to focus on sales operations and contract management.

In other divisions, such as Anderson-Negele, Qualitrol, Setra, industrial Scientific, ASP, and Invetech, our research did not uncover a similar pattern.  Not even Fluke, a widely known brand of which I am a fan, had a clearly identifiable pricing team.  Instead, pricing was part of the responsibilities of their digital marketing teams, their product management, or marketing, sales, or finance in general.  While these individuals are likely very capable, I would have expected a more dedicated team given the comments of Mr. Lico and the complexity of Fortive.

Pricing capability appears to be a work in progress with strong opportunity for improvement at Fortive.

Given the importance and capability of pricing at Fortive as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of August ‘23.

Fortive Pricing Spineometer: 3 out of 5 Vertebrae.

FTV (Fortive Corp.) rose strongly from 74.2 on the day prior to their earnings call to 78.3 one week later. FY 2022 revenue of $5.8 billion with a 17% operating margin and P/E ratio near 35.

For FY 2022, a 1% improvement in price would yield a 5.8% improvement in EBIT holding all else constant at Fortive.