In the first of two articles, Medtronic Chief Financial Officer Karen Parkhill discusses how her finance team helped lead decision-making and strategy during the early stages of the pandemic.
By the time Karen Parkhill joined Medtronic as executive vice president and CFO in 2016, she had a long and established career in the financial services sector, including serving as CFO first at JP Morgan Chase’s commercial banking business and later at Comerica. Her experience leading during the financial crisis of 2008 has helped shape her approach to guiding Medtronic through the unprecedented financial and health challenges that struck the medical and technology sector as a result of the COVID-19 pandemic. Here, Parkhill, who also sits on the board of American Express, discusses the critical role finance played in helping to successfully guide Medtronic through these uncertain times, and how finance adds value to the company’s strategic planning and innovation agenda.
Q: What has been the impact of the COVID-19 pandemic, and how has Medtronic responded in terms of its operations, workforce, and financial reporting?
Parkhill: Initially, the pandemic had a profound impact on the global medical technology sector. Many health care providers needed to focus on caring for patients affected by COVID-19, particularly during the early stages of the pandemic, causing them to put non-urgent and elective procedures, which make up most of our market, on hold. As a result, Medtronic saw a 25 percent decline in fiscal fourth quarter (ending April 2020) organic revenue, and a 62 percent decline in adjusted earnings per share (EPS). The strength of our balance sheet and financial position going into the crisis, however, enabled us to navigate this black swan event, but also, importantly, to maintain our focus on executing our long-term strategies and supporting our employees, customers, and communities. We went into the crisis with more than $10 billion in cash on our balance sheet, a $3.5 billion undrawn credit facility, and no near-term debt maturities. Since the depth of the pandemic back in April, we’ve experienced a faster-than-expected recovery, with a sequential improvement in sales that has continued into September. Additionally, procedural volumes continue to improve. We expect to be back to normal growth in the fiscal fourth quarter on a two-year stacked basis.
Finance is playing an important role in helping the company successfully manage through the pandemic, be proactive and flexible in our decision-making, and remain focused on the long term. We ran liquidity stress scenarios to prove that, even under dire circumstances, Medtronic’s finances would be secure despite the revenue decline. Those insights enabled us to avoid cutting back in areas that help drive long-term growth, such as investing in our employees. We continued to make incentive comp payments to our employees, with the exception of the executive leadership team, which kept our workforce motivated and reaffirmed loyalty and commitment. We also chose not to cut back on R&D and other important commercial investments, allowing us to minimize pipeline disruption and continue to bring new products to market. Those decisions have renewed the appreciation of finance and the engagement of our employees, and their collective enthusiasm will help move us forward. We believe we are emerging from this downturn even stronger from a strategic perspective.
All our finance employees, including those in shared services, had to transition quickly to work remotely, but they still managed the financial close for the quarter and the fiscal year without missing a beat. Our colleagues worked hard to mitigate the risks around the close and think ahead in terms of the technology and processes needed to make sure everything ran seamlessly. It was a great effort in all four of our regions around the world.
What role does Medtronic’s finance function play in enterprise strategy?
Parkhill: Finance plays a crucial role. Along with the CEO and our business unit leaders, our global finance organization is a strategic partner in developing and ensuring strong execution against our longer-term strategy. Strategy needs to be tied closely to investments, financial planning, and forecasting, so our finance teams have a natural connection to strategic planning and execution.
How do you manage planning and forecasting for pandemic conditions?
Parkhill: We had to fundamentally rethink how we forecast, but our team was well positioned to adjust quickly. We were finalizing our annual plan when COVID first hit, so we quickly pivoted our forecasting processes and reassessed how we put together the annual plan, given the lack of visibility into the length and depth of the pandemic’s impact.
In concert with our board, we agreed to complete the annual plan initially with modeling based on three scenarios, accounting for different pandemic epidemiological curves. We had to consider the impact not just in our largest market, the United States, but in regions around the world, since we operate in more than 150 countries. We needed to account for the variability in our compensation structures as well. That forecasting was shaped not only by macroeconomic factors but also by patients’ fears of returning to health care settings for procedures. That made this a far more complex set of scenarios to forecast–well beyond what we face in more normal times. We decided to use an annual plan based on the middle scenario, and to date that has been a prudent working strategy.
What do you see as the biggest challenges and opportunities facing the company and the life sciences sector going forward?
Parkhill: The biggest immediate challenge is continuing to provide patients with important life-saving products in the midst of a global pandemic and to maximize technology such as telemedicine to continue serving physicians and patients in a digital and remote engagement model. Over the longer-term, we have the opportunity to drive significant medical advances by leveraging new and disruptive technology into the med-tech and life sciences sectors.
At Medtronic, we have a robust pipeline and are aggressively innovating to bring disruptive technology to large healthcare opportunities, driving better patient outcomes while also increasing our cadence of tuck-in M&A and establishing creative partnerships to drive growth.
How does finance support that innovation agenda?
Parkhill: Our finance teams may not be in the labs creating innovations, but our work ensures that Medtronic invests strategically, deploys its capital to the best opportunities, and has the financial strength and flexibility to continue doing so. Finance also drives planning and forecasting, which are critical to support the investments required for innovation.
With risk management reporting to you as CFO, how do you manage strategies involving risk sensing, mitigation, and prevention across the enterprise?
Parkhill: CFOs are naturally positioned and inclined to set the tone for risk management. That said, we view risk management as an important part of everyone’s role every day at Medtronic; one person or one function cannot manage it alone. Each of our functions, businesses, and key leaders needs to contribute by managing the risks within their worlds, with ultimate oversight and direction rolled into our strategic plan.
We have placed more emphasis on risk management and adapted additional processes in recent years. Some of the changes include embedding more of a risk-prevention culture throughout the company and formally designating risk response leaders to manage crises when they happen. Even an activity such as risk sensing is distributed around the organization. We also have focused more on driving the right investments to manage and mitigate specific risks in advance of an occurrence. We think enterprise risk management is about ensuring that we have the right mindset and discipline across the company and the tools in place to both avoid and respond to specific risk areas, with larger risks rolling up to our executive leadership team.
How does your previous experience as a financial services CFO help you lead today?
Parkhill: I spent more than half my career in investment banking and then moved to a CFO role in the financial services industry just before the 2008 financial crisis. Managing through that crisis as CFO was a lifetime of learning crammed into two years; it was a learn-under-fire lesson in crisis leadership. Those experiences prepared me to help drive and lead Medtronic not just in normal times, but in times like we are in today. When the pandemic hit, I instinctively knew the first thing we had to do was demonstrate Medtronic’s financial strength to our leadership, our board, our people, and our stakeholders, and then describe how we should continue thinking about longer-term planning and not just short-term actions. In times of crisis, the CFO needs to be at the center of these leadership decisions side-by-side with the CEO.
— by John Labate, Deloitte Services LP, editor, Deloitte Insights for CFOs
Editor’s note: This article is part of an ongoing series of interviews with CEOs, CFOs, and other executives. The participation of Karen Parkhill in this article is solely for educational purposes based on her knowledge of the subject, and the views expressed by her are solely her own. This article should not be deemed or construed to be for the purpose of soliciting business for Medtronic.