Three Questions for UPS CFO Kurt Kuehn

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.

BF: When you look at the skills and the talent that you have in the finance department, are you dedicating different people to help better monitor counterparty risk than you were maybe 12 months ago?
Kuehn: I'm not sure we've really changed the people doing that work; what we have done is that we've communicated it more broadly. Normally, our accounts receivable and collections people kind of do their stuff, and it's not a companywide awareness. But clearly with the increased exposure, I have personally talked about it with senior management and we've communicated more broadly that our managers in the field need to stay in touch with their customers, watch for unusual occurrences or trends, and just collaborate.

At the same time, there are a number of great companies that we serve that are having some challenges but are going to be around for many years, and we don't want to overswing. So it's a delicate balance. The bankruptcy risk is probably the area that can be more challenging -- just the typical accounts receivable; as long as we stay in touch with our customers, we usually are able to maintain pretty good controls. But sometimes companies go bankrupt overnight, surprising everybody, and that's an area of challenge.

One thing that UPS does do, and we're pretty good at, is that when companies go into Chapter 11 and reorganization, we work very hard to help the company work through that and actually frequently get a preferred vendor status because typically UPS is one way that companies generate revenue. We stand real close to revenue with the delivery of the finished goods. So in many cases we're able to work productively and actually do two things: one, help the company come out of Chapter 11, and two, be able to recover most if not all of our exposure.

BF: What can you tell us about your banking relationships? Has there been a flight to quality that we frequently hear about?
Kuehn: UPS tended to focus most of its business in the larger organizations, just given the scope of our financial both assets and needs. We had a large group of preferred banks and that shifted a little bit, but not dramatically. I mean, as companies merge together, we redevelop relationships with the merged entities.