UPS CFO Utilizes Downturn Metrics

BF: How do you view the current economic conditions in the U.S. and globally? What changes do you see?
Kuehn: Clearly we're in a period of substantial volatility, with conditions changing day to day and week to week. So it does create a challenge for all business people to stay up to speed on what's going on and try to steer the boat in light of which way the winds are heading.

At a broad level, we see that the U.S. has been in the slowdown the longest, and clearly we see no light at the end of the tunnel yet for the U.S. economy -- although perhaps things are starting to at least find the bottom. I guess that's still a question.

Globally, we're seeing some dramatic changes in trade flows. Just in the last 3 to 4 months, trade flows between the major economies have shifted quite a bit as businesses have pulled in their horns.

BF: What is your take on the recovery to date? Are there missing pieces here, or elements that are missing?
Kuehn: I don't have any real advice as far as what the government should or shouldn't be doing goes. There is a lot of economic stimulus that's being thrown in, and at some point in time that will have impact.

Probably the consumer is the wild card in most of this -- they've clearly become much more conservative and seem to have closed up their pocketbooks in the last few months. So they're a wild card. Presuming that the financial markets continue to relax a little, then it will just be up to the consumers to determine when they start having enough confidence to jump back into the game.

BF: How does a company of UPS's size plan in a climate like this one?
Kuehn: We actually have put less focus on perfect forecasting. Normally, we spend a lot of time trying to really refine one good forecast, develop a business plan, and hold our people to it. We realize that in today's environment any forecast you make is going to be wrong by the time you make stride.

The goal that we have is not so much to try to forecast exactly what's going to happen, but to do two things: Number one, think more about a range of possibilities. So what do you do if it comes out lower than you think or higher? So create some anticipated range right off the bat and develop realistic scenarios and plans to operate in those different environments.

The other thing that we've done, and this gets into performance measurement and accountability rather than in trying to lock in a specific plan, is that we've created a number of flexible measures -- the real message being, that our people in the field need to make sure that they adapt, and if revenue comes in below plan, they adapt their cost to match it. So we've gone to a series of unit measures, unit cost. We've looked at operating leverage. We look at what's the ratio of the change in revenue to cost, rather than a fixed goal.

BF: Can you tell us how your focus on risk management has been evolving? Has it changed over recent months, or has the approach changed?
Kuehn: Certainly we've had more focus on the geographical components of it. Different economies in different states of maturity have different vulnerabilities. So we are staying highly attuned to the economic conditions in some of the areas around the world. Clearly, in those economies we think are most at risk we will tend to be more asset-light than those economies that are more stable.

The other area, though, of risk to us is the risk of our customers, and trying to make sure that from a finance perspective we are on high alert for guarding against our days sales outstanding getting too long, and the ultimate risk of bad debt. From a functional perspective that's a high priority now, because clearly all of our customers are facing headwinds and some of them may not make it. Being more sensitive to that than normal would be important.