UPS CFO Spies a Silver Lining

It has been almost a year since we last caught up with UPS CFO Kurt Kuehn and asked him to reflect on the remarkable challenges and opportunities that the recession has brought forth. Twelve months later, Kuehn has plenty to say concerning his organization’s new “ultimate flexible budget” and its “zero-based” tolerance for extra cost.

BF: When we last spoke you underscored the these were really the best and worst of times for finance. What lessons have you learned over the last 12 months, and how did finance respond to the business climate?

Kurt Kuehn: Well, there's no question it has been the best of times and the worst of times for the finance function to borrow the Charles Dickens quote. Certainly, it's been the worst of times because of all the challenges companies have faced.

On the flipside -- and I think that a lot of companies have realized this -- it did create an opportunity for finance to step forward and play a very critical role as a business partner and help business managers within the company navigate these rocky shoals. At UPS, my goal was to make certain that we became a very integral and active part of helping to manage the business through this unforeseen territory. It actually was a very good time to be part of the finance function because the company needed us. The CFOs of the business units and the various controllers were critical to business strategies, and in some cases more so than I think they were in the past. I think that it really gave the function a chance to step up and help you contribute to the company at a time when some of the traditional rules and expectations didn't apply.

BF: What are the key metrics that are important to understand in describing the company?

Kuehn: First, there was an increased focus. With so little visibility to see where revenue was headed, we clearly became focused on all expenditures. We started by taking almost a zero-based approach: What do we have to spend to keep the wheels moving? So we created a need among operation managers for a higher level of detail. Another thing we did was that we very quickly threw out our business plans with absolute targets and measures and went instead to a much more variable concept. We focused more on operating leverage and trying to make certain that we take costs down to whatever degree revenue drops, so rather than budgeted amounts, the real issue -- your job month to month -- is to continue to match your costs to wherever revenue shows up. This created a much more variable paradigm -- it was really the ultimate flexible budget.

This was very useful for us, especially in certain areas where there had been a shift from long steady growth trends to developments that you just couldn't see. This was a big shift of gears, and I think that one of the things that we did correctly was to accept the idea that forecasting was really the height of arrogance back then. You really knew that you couldn't forecast, so rather than do plan after plan after plan, the point was to create flexibility and responsiveness to where each month you look at all these elements and which ones we were successful in and which ones we weren't, as far as trying to adapt the business.

The primary metric that we put the spotlight on was operating leverage and the rate of change of costs versus revenue, and breaking that down to the point where every function had a goal, every business process had a goal, procurement had goals. There was this sense that every group has to realize that they can't continue to operate under the presumption of normal business momentum. This was pervasive and did create some new reports. Also, the primary measure of your operating success was a ratio to revenue and a relationship to units more than absolute amounts, so it took less of a P&L focus and more of an adaptability to whatever conditions were.

BF: When you stepped into the role of CFO what was the kind of job that you wanted to create, and how has the last year changed that view?

Kuehn: I was determined to make certain that the finance group was a catalyst for growth and to make certain that if there were any structural barriers or reporting barriers or systems that we manage that weren't customer friendly and didn't facilitate growth, we would try to minimize them. Frankly, when the bullets started flying, growth became less of my concern and financial management and economic survival became a higher priority. This certainly was a shift of gears for me. We became a little less focused on customer systems and alignment and more focused on managing the company through a tough period.

I do continue to make sure that the customer is in the minds of even the most technical financial people and that everything we do has impact either on customer experience or on the cost of our services. I continue to try to make awareness of the real business issues be part of our accountants' mind-set. The things that haven't changed are the critical importance of finance being valuable and active as a business partner in running the business, and making certain that finance has a seat at the table for growth decisions, for strategy decisions, and certainly for M&A decisions. This continues to probably be my top charter, to encourage my people to understand the businesses they're in and get their hands dirty. They need to develop good relationships so that they have credibility with their managers and make a difference in running the business. As our business gets more and more global, as it gets more complex and technology-driven, as it gets broader with logistics and freight forwarding, the financial abilities to summarize the performance of these businesses becomes more critical. We don't all have the same points of reference -- finance is really the lingua franca of business.

BF: What advice would you have for people in finance at this moment in time?

Kuehn: It's been almost too easy these past two years. CFOs and finance managers took a lead during the financial chaos because they had to help their companies navigate. There are some people who think that this is the new normal and that finance is now enshrined as a critical strategic function, but I think that this can be lost as easily as it was gained if functions don't continue to stay attuned with the business, when growth maybe becomes a higher focus as opposed to cost management. I think that this is the challenge facing finance over the next year. It's remaining relevant.

You want to grow smartly, and finance needs to be deeply involved in the business strategy. This may mean working more closely with marketing on understanding product and understanding what brings the most value. Finance must help management to understand customer profitability, revenue management, reverse reviews of new product strategies, and M&A. There are a lot of areas that are not just about cost reduction -- it's about understanding where profits lie.