A conversation with the CEO of ITT Corporation.

Steve Loranger: Steve Loranger, I’m the Chairman, CEO, and President of ITT Corporation.

Question: What does ITT do?

Steve Loranger: Yeah, ITT Corporation is a very diversified, multi-industry and multi-national corporation. Top statistics. We finished, last year, about $11.7 billion in sales. We have about 45,000 employees operating in a 130 countries around the world. What we do is, essentially, design, develop, and manufacture high technology, engineered components and services for a variety of essential needs throughout the world. Our portfolio is balanced in, really, 3 substantial legs or platforms, as we would call them.

First of all, we’re active in defending freedom. We’re a major supplier of sensing surveillance, electronic warfare, communications intelligence, and advanced engineering components primarily for the DOD, Department of Defense, but also for foreign militaries. We spend a lot of time defending freedom.

The second major platform we have is, what we call, global water leadership or our fluid technology. We are the world’s leader in high technology components and equipment to transport and treat water, whether it’s treating fresh water, whether it’s waste water, or whether it’s transporting and controlling all aspects of water, a technology is something that we do.

And then, finally, we have a motion in flow control business, that is designing high technology components in energy absorption, friction, aerospace controls for transportation, industrial, and some aerospace markets.

Question: How does ITT improve the distribution of water?

Steve Loranger: The water market is comprised of multiple levels of distribution, if you will. We’re not in the primary business of manufacturing large scale water treatment plants. We’re going to populate those plants with water equipment. So as a generality, somewhat like a municipality, a government, or a private municipality would develop a requirement for a new water treatment plant. They would contract with a large engineering company or a large installer of the brick and mortar and cement of the water treatment plant. They would then, in turn, contact us with respect to the supply of high technology equipment.

Question: Can you give us an example?

Steve Loranger: Well, I can give a number of them. Most recently, I was in Vienna, Austria. And they just had just completed a very, very significant waste water treatment infrastructure project. In fact, it’s the second largest in Europe. I forget the exact capacity but it was in the several hundred million gallon per day of water… of total waste water treatment, so all new capital structure. And we formed a partnership… we’re in partnership with the Vienna municipality, then supplied all of the pumps, all of the control systems, and some of the disinfection technology needed to operate that plant. That plant, today, is characterized by having the best water discharge back into the Danube River of many… of all of the water treatment plants. So it’s heralded, along the Danube, as something that is been a very, very environmentally successful.

Question: How does ITT get freshwater to people who need it?

Steve Loranger: There’s no doubt that access to fresh water and safe and sanitary water is a driving requirement for us to advance population growth in emerging markets, as well as providing the needed necessary environmental responsibility that we’re all working so hard for. What’s ITT doing? We’re doing a lot. First and foremost, by listening to customers, we are working to advance both environmentally friendly and energy efficient components.

An example is we are a leader in ultraviolet disinfection technology. And last year, we just invented and are, now, going to production with the world’s most energy efficient ultraviolet light bulb, which is transmitting ultraviolet radiation, just like the sun, over a period of time, which is disinfecting water. And so, that will be one example. I can give you many more in terms of pumping control systems and aeration technology, and other disinfection technology that’s really providing an edge for our company and our customers in terms of energy efficiency and environmental responsibility.

Question: How does ITT practice social responsibility?

Steve Loranger: Our vision is that we do essential things in extraordinary ways. So not only do we work on mission critical and enduring needs that the world’s population needs, whether it is safety, fresh water, returning home in a reliable way.

But we do so by having the right value structure. So when we are describing to our employees the kind of culture that we want and the kind of environment, we have elevated corporate responsibility, social responsibility, good citizenship, and environmental stewardship as a central strategy that is as important as value creation from an economic sense. So, absolutely. When we’re talking about getting into new businesses, we’re always thinking about how can we can migrate the portfolio into more valuable areas of environment and social responsibility. We think this is an important dimension of the advancement of human society, but it’s also an important recognition of the role of corporations. And it’s not only something that’s essential for society but it makes employees feel good.

We drive for innovation. And the way we do that is we, first and foremost, listen to our customers. We’re trying to meet their needs. And we do know that energy efficiency, an environmental responsibility is growing in a very big way, particularly in the world of water. So when you think about how you drive innovation, you drive innovation with inspired employees who feel good about what they’re doing and they feel good about the environment that they’re in.

So if we can create a positive feeling with our employees because of our social responsibility, that, in and of itself, is an enabler to innovation and customer satisfaction. And so, our vision of creating economic value with the right values is a symbiotic vision. And it’s one that we find is really inspirational for our employees.

Question: Is defense contracting about creating new technology or protecting military personnel?

Steve Loranger: It’s both. We tend to operate in two dimensions in the defense industry. First, we are a high technology supplier of electronics. And these are in areas such as night vision, electronic warfare, cyber warfare, intelligent systems, and tactical communication systems.

So most of those are equipment based. We also have an advanced engineering and systems component that is servicing the troops around the world. And think about that as an engineering and system support. And it’s highly tied to personnel.

Question: How has ITT evolved with the American military?

Steve Loranger: When we’ve looked for years, in the past few years, thinking about where can we migrate our defense portfolio into those areas that are more valuable. Not surprisingly, we’ve migrated into areas that are around projecting our troops, projecting capability in the isometric threat, which is, essentially, the global war on terrorism and to project our capability in areas where we think is going to be more vital, information technology, sensing technology.

Even though we certainly have a need for strategy bombers and large scale equipment that sort of fought the years, fought the wars of the past, the fact is that in this world, information technology is everything. And so, we’ve been migrating our portfolio into the areas that I’ve mentioned. Secretary Gates’ announcement of rebalancing the mix of defense priorities, essentially, plays into our hand. Because we do participate in those areas that we think are more vital to defending freedom in the future than in the past. And so, as a consequence, this rebalancing is going to be somewhere between a neutral to, hopefully, a slight positive for us.

Question: What is ITT’s role in Afghanistan?

Steve Loranger: Well, in Afghanistan, let me stand, let me step back and talk a little bit about supported troops. We do have a number of US contracts where we support troops both from the communication systems and operations and maintenance of some of the vehicles. As an example, today in Iraq, we do manage all of the communication capabilities for the US army, in fact, not only in Iraq but at the entire Southwest Asia, including Afghanistan.

So as the conflict maybe moving into Afghanistan, we would expect to increase our participation. ITT today has several thousand employees in the Middle East, operating under contract for communications and operations and maintenance support for the US military. And we’re going to see some migration into Afghanistan as the troops increase. Additionally, we also have contracts to build new US military installations. And as the US military is going to be expanding their footprint in Afghanistan, we would expect to be doing some work related to construction and installation of new US facilities.

Question: How are you reacting to a shrinking military budget?

Steve Loranger: There’s no question that the defense industry has, historically, had cycles of spending. Not always tied to economics cycles but if you look at conflict cycles and whatnot, you see an up and down from World War II, Vietnam, correction, Korea, Vietnam, the Reagan buildup, and then, most recently, in the Middle East. So, I think, we agree with your premise that, over time, we could be going into a defense cycle that would be going down rather than up as it has for the last decade.

But a couple of things change and I think this really, it really highlights why this strategy, according to Secretary Gates, is so important to us. First and foremost, we want to be in those areas that are most essential. I mentioned that. But additionally, we also want to be able to have the capacity to use our technologies in a much, much broader area. And so, I’m pleased to say that we’re now working on contracts with the FAA, the Department of Energy, NASA, Department of Homeland Security, and many other organizations that are non-military related.

So our job is to make sure that we are continuing to migrate our technologies in areas that are most valuable from a business standpoint and, also, in those areas where we can parlay breadth across new customers to maintain an overall defense or defense related technology growth in our business.

Question: What does ITT do to protect military secrets?

Steve Loranger: Well, this is central to doing business with the Department of Defense. As you can imagine, we do have a lot of classified contracts based on the kind of things that I’m talking about. And so, information security is in the front of our minds. We obviously have a significant amount of government required protection and information security and that’s both physical and cyber. But it’s an area that we are always working on to make sure that we are compliant with all the regulations around classified material but also the regulations around the export in terms of the ITARs and customs regulations as well. So all I can say, as like all other defense contractors, we work extremely hard in ensuring that we don’t ever compromise those technologies which are vital to our nation’s success.

Question: What kind of leader are you?

Steve Loranger: Well, I might not be the best person to answer that question, obviously, some of the folks that work for me. But a couple of things. I’m a leader, first and foremost, with a positive attitude. I believe as a matter of fact but I also believe as a matter of philosophy that are best years are ahead of us. I’m a leader who is not always accepting of the status quo. Everywhere I look, I see opportunity for improvement.

And I do try to drive improvement strategies everywhere we go, hopefully, directly lined to the needs of the customer. Third of all, I am a leader who believes in our people. It’s nice for me to sometimes stand up and represent the corporation. But without a strong team of smart people with the right culture, people who are motivated and fulfilled by what they do, the entire company will never be successful.

So my job and my leadership is to maintain a proactive anticipation around the future to make sure that it’s compelling, that people see the vision of where we’re going, and then to have the people in the organization that are able to… who want to follow in the sort of compelling and inspired way. And that is one of the dimensions of leadership that, I think, I bring. I try to… I’d say, I will just finalize by saying, I think I’m a leader that serves the people. Sometimes, people thank me for my time. I’m quick to say, no, this is my job. This is my job to help you do your job in whatever way. Don’t ever hesitate to call. If there’s an issue or challenge you’re working on, I’m always available to be able to assist because that way, I can serve the people in the best way.

Question: How do you manage a business across many different industries?

Steve Loranger: Well, that is an intense challenge. In the sense, that is, my job is different maybe from a pure player on a highly concentrated business where the CEO can be very, very personally involved in the details of the strategy. In my case, I’m not always involved in the details of every one of our strategies. We have easily 15 different businesses in our company. And not only different businesses but different in markets and different types of business, commercial, military, long cycle, short cycle, automotive, aerospace, and so forth as I mentioned.

And it really is impossible for me to have a detailed view of every strategy. But my job then, to specifically answer your question, is I got to have the right people. I got to have the right people using the right processes, and my approach to creating discipline, accountability, and good quality in terms of this strategic decision-making is to use good processes.

I do insist on everyone using good strategic planning processes to make sure that they do a good job of analyzing who they are, what markets they serve, what the customers want, what the competitive technical capability is and then, constructing actionable and effective execution plans that are accountable so that we can actually get something done. If we got… From my job then, if we got good people I can trust and I see that they’re using a good process, albeit populated with their data, then I feel confident that we’re driving the strategy in all these different markets. So, again, I think I’m saying that where I don’t have the detailed view of every strategic detail on the company, I then substitute good leadership and good processes to make sure that those are effectively deployed in the company.

Question: How do you find and retain the most talented employees?

Steve Loranger: I think that’s one of the most important questions in leadership because that is, if we can do that well, a lot of other things take care of themselves. Most of those people already work for you and they work for other companies. So the question is, how do you identify the talent, how do you assess their potential, and how do you, then, give them an opportunity to grow and develop. So I do spend a lot of time trying to answer those questions, getting to know a lot of people. And then, understanding whether somebody is either just capable to execute their current job or whether they have an aspiration to make their job better.

So when you find that appetite, when you find somebody who has a learning capacity that demonstrates that there’s a desire to go beyond what they’re currently doing, in fact, creating some strategic change, that’s the piece that I’m really looking for, when does somebody demonstrate that internal initiative to go a little bit farther than the next person. And then, when you identify those people, you give them more to do. You promote them. You expand their responsibilities and you help them.

So, developing talent and trying to find the talent that’s got the aptitude and the attitude to go farther is very, very important. Obviously, we hire on the outside as well. I would like to say that we hire most of our executive jobs, 80%, 85% are probably internal hires but we do hire on the outside. The outside hire is more difficult because you, then, have to rely on references and sometimes, you only get an hour, hour and a half, couple of interviews with a person. So it’s a much… it’s a much more difficult assessment. And you got to assess on the basis of references and, of course, your stomach. But finding those people who work for you, that want to do more and give them a chance is really a wonderful formula.

Question: What is one business challenge you have overcome?

Steve Loranger: One of the most challenging business decisions I made was a year and a half ago, to significantly expand our defense portfolio. We were at a time when our defense portfolio was relatively a strong piece of our business. And we really had a desire to grow our fluid technology business on a global basis. But we had an opportunity to create four or five strategic advantages in our defense with the acquisition of another company that was called EDO, a company that we did acquire, was the largest acquisition we ever made.

So it was a high risk acquisition because we were going into a defense cycle that we were concerned about going down, as you mentioned before. And also, was in a piece of the portfolio that we weren’t sure we want to expand disproportionately to other pieces of our portfolio. And the evaluation was in, as always, in all these deals, a tough challenge. So the first decision we made was to get very, very honest about the strategy and honest with the customers, honest about what we could really do.

So I would say the pre-due diligence work to really understand what that company had of real strategic value in its portfolio and then couple with what we would really do about it, how we would actually run it, what the probability of success was, and what the integration plan was to accomplish that was very, very significant. We spent literally, a year or more. And, certainly, the last couple of months, just really, intensely, understanding that component. Obviously, when we made the transaction, we negotiated the best value that we had.

But the third; we negotiated the best value that we could. But the third issue was to have pervasive and very strong leadership in integration plans. And I’m pleased to say today that we have EDO facilities, previously EDO facilities that are in the ITT fold today, that you would feel, were part of the ITT family for the last 50 years. We have technologies that have transition boundaries between the previous EDO and the ITT, where we’re creating greater value for our customers. And we have leadership communication, leadership principles and talent development that’s also going cross boundaries. And we have connected IT systems.

This sort of relentless and very, very significant integration focus was one of the things that really created value for us. Today, we couldn’t be happier with the acquisition. We got the cultures together. We got the technologies aligned. We’ve resolved some customer satisfaction issues. And we’ve exceeded our revenue and our cash flow objectives with this acquisition. But going into it, what we understood was a great deal of risk. But I would say, good discipline and accountability and the execution was really what paid off. And our defense team just did a great job.

Question: What was the best business advice you ever received?

Steve Loranger: I think the best business advice I ever received came to me from Dan Burnham, who was my boss, was the group president at AlliedSignal, and, later, rose to be the chairman of Raytheon. And, of course, Dan is now retired. Dan told me, many, many years ago, that one way to stay ahead was to anticipate as a leader. And he always said, no matter what action you want to take, take 30% more action, 30% sooner than you think you need to take it. So Dan called it the 30-30 rule. But it was, essentially, making your actions more ambitious in accelerating the expected timeframe. And I follow that advice.

It means, I drive for more sales and I drive harder than I think I need to make my plan. It means, I think about getting more productivity quicker than I think I actually need it in terms of operating efficiently. And following, for me, following the 30-30 rule, as I’ve come to claim it as well in the company, has not only kept me out of trouble but I think it’s enabled us to stay right-side-up in many cases.

So let’s just take that rule and transition over to this economy and say, so how is this playing out in this economy? Even though we have an attractive portfolio, one that does address enduring needs that are not quite as subject to certain economic cycles as others, which is part of our strategy. But not withstanding this enduring component, in this essential component of our portfolio, we’re not immune to the economics.

So the minute we saw the potential downturn or even anticipating, I should say, actually, months and months before we actually saw it. But when we first recognize that it would impact us, we made very, very quick decisions in terms of resizing our cost base, rescheduling our factories, and putting in initiatives around receivables, cash flow, and liquidity that would enable us to succeed. We did a lot of that work in this economic crisis, in September, October, and November of last year while we were still creating record business performance.

But I’m pleased to say that even though those actions were ambitious, you could argue they were earlier than a lot of our other companies, than other peer companies took. They were, in effect, helping us really set up for the first quarter, second quarter, third quarter of 2009. And so, in a way, we turned in an outstanding quarter in the first quarter. We beat our expectation. We beat the Street’s expectation. And in part, when we dissected the reasons for that, we say, well, because we took early productivity action. And that productivity action came to play before we thought. So we’re never done with that kind of a subject. We still got a lot of activity in front of us in this economy. But that’s an example of, as a leader, always trying to stay ahead, pushing the edge, driving for breakthrough, and trying to create an advantage by overachieving in the process.

Question: Who else has influenced your development as a leader and manager?

Steve Loranger: Well, there were a couple that I like to highlight. When I left the US Navy, I joined the Garrett Corporation about 25, 26 years ago as a sales engineer. Then, I worked for one of the most experienced sales managers that the Garrett Corporation ever had, Tom Weck.

And one of the things, and Tom gave me, over a period of several years, just a wonderful set of perspectives and advice with respect to working for the customer, what did the customer really want, what did the customer tell you, what didn’t the customer tell you, and then, analyzing the customer mindset to help be constructive about providing the right capability from my company to the customer. And likewise, Tom was enormously helpful in terms of making sure that I was holding our corporation to the highest standards.

So I really have to credit Tom with giving me a very, very strong footing. As a young man, I was 31, 32 years old when I was working for Tom, but he had a perspective and a seasoning around the ebb and flow of business and he was able to dissect and try to create a teachable moment for me and, he spent a lot of time helping me. The other very significant figure in my career was Larry Bossidy. I worked directly for and indirectly for Larry for 9 years, when he was the CEO of AlliedSignal and, later, Honeywell. And I think Larry’s reputation stands on its own. But, nonetheless, he is a great leader, he’s inspirational, he was somebody, despite being tough, despite Larry’s toughness, he was always compassionate and supporting of my strategies. But he was always holding me to a very, very high standard.

So while it wasn’t easy working for Larry, it was fulfilling because this was a guy that would ask a lot of you to do, he would help you get it done, he expected the best, but when you gave it to him, he rewarded you. And I found Larry to be a really wonderful, balanced leader. So those are couple of my best examples.

Question: What was the best personal advice you ever received?

Steve Loranger: Well, that would have to come either from my father or my mother. And I’m not sure whether it was both of them or who it was. But when I was growing up, my parents never asked me to do a lot but they always let me know that I could do whatever I want to do. And that I was accountable for that choice.

That I was probably going to work hard no matter what. But as long as I was working, I should probably work to aspire and achieve in areas that would ultimately be fulfilling. And so, I think my parents sort of opened my eyes to the fact that I was accountable, no one was going to give me anything, I was going to have to work for it, but yet, I had the ability to do whatever I chose to do. And whether that’s the American dream or whether it’s just a philosophy of achievement, it, in fact, was impactful to me. And I took their advice.

Question: How can companies survive the financial crisis?

Steve Loranger: It is uncertain. But what is not uncertain is we’ll get through this. I can’t predict when. But nonetheless, we do know that the underlying demographics in the global needs for a strong global economy is still there. We’re going to add 3 and a half billion people to the earth in the next 50 years. We’re transitioning. And that is a challenge I understand. And we are transitioning a 150, 200 million people per year from what would be called, the classification of lower class or poverty to middle class, and that drives consumption. So we’ll get through these economic times, hopefully, with more discipline and focus than what we had in the past. So how do we think about this at ITT? It’s really a two prong approach. One, you got to keep the ship afloat.

And that means, focusing on your customers, focusing on cost, your costs breakeven in focusing on your cash and liquidity, keeping your employees engaged and inspired, and making sure that your long-term strategies are on track. That’s our formula for the short-term. So we are working very, very hard to make sure that we do maintain our liquidity and we maintain our cost position. I’ll come back to that. But then, with respect to the future, we have to be undaunted by this economic scenario and be a little, be consistent in terms of our view. So even though we are doing a lot of discretionary cost reductions, we’re taking some tough prioritizations, we’re not compromising our long-term future. This is not a time to burn the quarter, excuse me, to burn the furniture to make the quarter.

This isn’t the time for that. Now, our economic model is in pretty good shape because of the nature of the business and the way we run it, as I mentioned. But nonetheless, we do have to respond. But the real key to the future is to be able to make sure that we’re taking this time to seize on the advantage, whether it’s evaluation for an acquisition, whether it is to move into market share, where a competitor has decided to retrench, or whether it’s to generate a new level of loyalty with the customer because they need us in times when it’s tough for them and they’ll remember it when times are good. And so, these strategies of us, maintaining our focus on the long-term are very, very important to us. And let me just cycle back for a minute to the centerpiece of your question, which was cost and cash. Clearly, 30-30 rule applies.

We’ve been very ambitious on reducing our cost, not just peanut butter spread but reducing our cost in areas where we can prioritize and make effective decisions. We’re driving restructuring. We’re consolidating facilities. We are moving lines to lower cost regions. And in some cases, we are streamlining organizations and we do have some head count reductions. So making sure we stay ahead of the game on cost is very, very important. We also want to maintain a real discipline on cash flow. So we’re looking at receivables every day. When we have a receivable that looks out of line, we’re making, we’re taking quick action. We want to make sure that our cash flow conversion maintains a really, really good conversion ratio to net income right now.

We also have been reducing our capital expenses. And we have other strategies where we have not deployed them, but we know what we would do if you saw further credit markets lock up. And so, as an example, what we’re trying to do is say, with respect to cost and cash and, of course, on the revenue side, making sure that the business stays right-side-up. There’re a lot of companies out there that are in deep financial trouble and in strategic trouble. We’re not one of them but we’re not planning on being one of them. And so, having that focus each and every day is really, really critical in this economy.

Question: Which companies are weathering the economic storm well?

Steve Loranger: Well, I think a lot of them are. I think, reflecting on even what I’m saying is not unusual. I know United Technologies. I happen to be a board member on the FedEx Corporation. And I know at FedEx, the FedEx team is doing very much the same thing. Looking at capacity, looking at cost being conservative on capital spending, and so forth. So every company has a little different lever that they’re pulling but I would say that we do find that the high quality, multi-industry companies that I watch, a lot of them are doing the same thing.

Question: What advice do you have for the administration?

Steve Loranger: Well, from our perspective, the first thing that needs to be addressed is taking care of the troops. We got a lot of men and women that, bless their hearts, are doing dangerous work for the United States to defend freedom. And I think it’s important that we make sure that they have the latest technology. You heard about reset or recharge. What those words mean is that some of our arm service personnel, particularly those in conflict, have used up some of their equipment.

They don’t have all the modern and all the latest of the equipment that they need. And I think it’s important that we make sure that they have the latest technology and the best equipment to be able to position appropriately around the world. So taking care of the troops and making sure that they’re recharged with equipment. The second policy I would have to say, and this get, somewhat, political is that we have to understand the military and the military industrial component very, very well before we get involved in future conflicts.

And it’s not to say that we don’t do the very best job we can but, obviously we got into Iraq. It’s going to be hard to get out of Iraq both from a political standpoint and a sociological standpoint. And so, understanding these components of the foreign policy equation, I think, are very, very important. The other thing, I think, we have to learn as Americans, and so I would offer this advice to our administration, and that is we are a participant in a broad, global, political network. And I think it’s very, very important for us to make sure that we bring along the other key global constituents of that network as we think about foreign policy. This is a change for the United States. It’s, obviously, very complex to think through. But nonetheless, I think if we can advance together with our arms lock together with other global partners with respect to foreign policy, that would ultimately be beneficial.

Question: Why did the defense industry get a bad name in Iraq?

Steve Loranger: There were a few, there were some highlighted examples of something like time card charging or some events which occurred that, I think, were somewhat surgical in nature. And in the grand scheme of things, we’re relatively small. Unfortunately, I believe that the defense industry was painted unfairly with respect to what you refer to as a disequilibrium. I think it’s important to recognize that the defense industry is comprised of a very, very strongly dedicated, patriotic group of people. Many of our companies, 30%, 40% of them are ex-military members in the defense private sector today.

And this is an industry that not only is doing very, very essential things for the US defense of freedom, for everything that we have in this country, but doing things in a very compliant and a very socially responsible and philanthropic way. And so, when you look at the defense industry in the aggregate, it’s a wonderful industry. It’s populated with a great group of high quality, high character individuals. And as a consequence, I would like to see more of a positive brush painted over this industry ‘cause this is the industry that’s creating the technology and the know-how to allow the United States to operate as effectively as it does.

Recorded on: May 13, 2009