Today's CFO: Driving Strategy, Leading Change

My experiences in having served in a variety of job disciplines at UPS have prepared me well for the role of CFO. I believe the CFO can embrace multiple disciplines, such as finance, marketing, sales and engineering to become more effective. That's important because today's CFO is more than a money manager – they must also be a strong driver of company strategy.

Last year UPS celebrated its 100th anniversary. Companies don't get to be 100 years old without constant periods of transformation and reinvention. UPS is no different. What's driven that transformation is a constant view with a long-term focus partially helped by the fact that we were a private company for many years. The trick for UPS is to sustain that long-term focus with public market scrutiny.

From transformation we have learned you have to continually scrutinize your business model and be a catalyst to drive changes. What we've seen in UPS's history is successive cycles of extensions of the business model followed by periods of refinement and perfection. It's about reaching out and growing the business and then refining it to make sure you're creating value out of that expanded business. If you want to be around longer than the next business cycle, you've got to realize that the biggest risk is not changing.

Clearly UPS has been able to reinvent itself several times, transforming through various cycles. Along the way, our financial structure and organizational structure evolved in parallel.

Over the course of 100 years we've been somewhat unique. We started off as a messenger service in 1907 with a young teenager named Jim Casey who borrowed $100, bought a few bicycles and went into business with a couple of pals. Certainly in a simple business like that a very small limited partnership with limited capital needs was effective.

As the telephone made messenger services obsolete, the business migrated into one of contract services delivering packages from the large department stores downtown to homes in the surrounding areas in Seattle and then Los Angeles. We began to develop metropolitan operations – moving packages rather than messages – and began to share in a very limited ownership with about a dozen senior managers in the company to help bring in capital.

The big boost in capital demands came as UPS moved early to extend its coverage across the U.S. Rather than just operating in dedicated metropolitan areas for a limited number of big department stores we became a nationwide common carrier with a larger footprint. This required an incredible amount of additional capital to build a network of hubs and was the catalyst in the 1940s for UPS opening up and distributing shares of the company to its management team. We were a private company with very broad ownership. The benefit was we were able to generate capital and fund our growth but remain a private company. The other benefit was we began to develop a management team that was deep owners in the company.

Those capital demands continued as we grew and then in the early ‘80s began to embrace the air business. It's tough to be a private company and generate enough funds internally if you're in the airline industry. So we went to the debt markets in the mid-‘80s for our first-ever public issuance. Since we were still a private company and our managers were deeply invested we had to make sure that we let them sleep at night by maintaining a bullet-proof, triple-A balance sheet.

Following that we expanded globally, doing a number of small acquisitions to expand our footprint to Europe and Asia. We opened up the stock ownership broadly to all of our employees rather than just the management team – once again pulling in cash from our employees to grow the business.

Finally in '99 we thought it was time to move out into the public markets to create a currency that could be used for acquisitions. So we did an IPO and joined the public market.

For UPS, the business model, capital needs and ownership structure all have evolved together to meet the needs of the current time.

As we became a public company there was a need to revisit our balance sheet strategy. When your entire management team has most of its eggs in one basket you really have to make sure that basket is rock solid. UPS was overly conservative – very risk averse on the balance sheet and enjoying the triple-A rating with very little leverage. That made sense when the company was a market maker in the stock because it had to be available to call the shares or re-purchase shares when the employee wished them.

As we've entered the public markets and with some of those premiums for quality you saw declining, it didn't make sense for us to stay triple-A. The market just doesn't pay that much although we are seeing some change in the spreads now. So we announced a public approach to leverage the balance sheet up, but not radically. We've gone from triple-A to double-A so we're not exactly pushing the limit. One of the most important things we did was create a transparent external metric of funds from operation to debt to allow investors and/or internal managers and bond rating agencies to see the progress of the company as we leveraged up moderately and used those funds for acquisition and share repurchase.

Where are we today? We've been in several periods of this extension of the business model – trying to look out into the future and build the company toward that point where we think our capabilities will be needed. That's why in the early ‘90s we took a hard look at the way our business was changing and saw that global trade was emerging.

Outsourcing was becoming more and more popular and we began to think about both the opportunities and the risks that represented to our business because they're two sides of the same coin. Change is the coin -- opportunity and risk are the two sides. And what we saw was a threat. We had a profitable business in our U.S. domestic small package operation. It generated 90 percent of our profits and it had been the source of consistent earnings growth year-over-year. We had perfected that. We knew how to deliver packages smoothly and efficiently but we also knew that the puck was moving and that just focusing on domestic transportation would not keep the company vital in the years to come.

We begin making a bet that the world would shrink and that the need for global capabilities and the ability to participate in the movement of goods across borders would become increasingly important. So in the early ‘90s we did a number of acquisitions in Europe and built an integrated small package network in anticipation of the EU coming together. It cost a lot of money but the vision was sound and it turned out to be great for us. Today we've been the fortunate beneficiary of the world becoming global, with our network there to help companies move goods.

After we built an international platform we realized it was time to look out again. In the late ‘90s we recognized that we were successful at extending our existing core business. But what's on the periphery of the core? As we looked outside of our own core business, we found that the small package business that we've known and loved for 100 years is a great business. But there was a lot more going on. And as we looked at the broader market it was clear that the supply chains of all businesses were becoming more complex. And through assessment we also discovered we were a big fish in what was actually a pretty small pond. In fact, small package movements only account for about six percent of total supply chain spend. So in some ways we were the tallest pygmy. We believed we were the market leader but as we looked closer we were just a moderate-sized player in this broad universe of global trade and supply chains.

In this environment there was risk and there was opportunity – the opportunity being to stretch our business model to address a larger portion of that supply chain process, since we already were a core part of most of those transactions. We had just not looked broad enough to see what happened before and after the package came to us. The opportunity was there. We had to stretch our boundaries and invent the future.

So we changed our UPS mission. This was as big an internal message as an external one. We told our employees our charter was to enable global commerce. And frankly a lot of people struggled with that inside the company.

In my marketing and sales function it seemed kind of fuzzy. How do you quantify or hold the company accountable to enabling global commerce? It was a big vision. It was ambitious – a little presumptuous perhaps – but it did open up our people's minds. All of a sudden they realized that what we'd been doing for 100 years might not really be all there was to it.

Enabling global commerce was a "man on the moon" mission for our company. It told the traditional domestic package people that there was a big world out there. It also told the people that we were there to enable and facilitate these moves that are happening. It was a great wake-up call. To live up to that vision required a significant amount of new capabilities. We had to stretch in order to be able to begin even addressing this broad vision.

So the question was, do you develop these needed capabilities internally or do you make acquisitions? Typically UPS has always been an organic growth company –
perfecting and refining year-over-year, getting better and better. But as we addressed the scope of what it takes to manage goods across the supply chain, it was clear that we couldn't build those capabilities ourselves. So from 2000 to 2005 we completed a number of acquisitions – over 30 – to fill out a portfolio of capabilities that could be aligned to help companies better manage their supply chains.

We acquired capabilities in logistics and distribution, transportation and freight, freight forwarding, trade management and brokerage services. In some cases we did a large single acquisition and in other cases we did many small ones. Regardless, the point was to bring new capabilities into the company so we could roll out services that helped customers manage an increasingly complex global trade environment.

Transformation, to be successful, requires that people change their perspective. I spent over a decade as an engineer, over a decade in finance and accounting and didn't think a lot about customers. The last four years I headed up the sales and marketing function which was an incredible way to help me think more like a customer. Ultimately your proposition has to bring customers value and for UPS our bet was if we could embrace complexity and manage global networks that would help simplify our customers' lives.

That is how UPS transformed over time and some of the areas we've had to change and adapt in order to remain vital for over a century.

What does this all mean for a CFO? What is the role of a CFO and how can the CFO add value in today's environment? Roles of the CFO in private versus public companies are in some ways similar and in other ways different. Certainly in a private company the CFO has the responsibility and perhaps the luxury of being able to think longer term to make sure investments will add shareowner value over time. Shareowner value is also clearer perhaps in a private company. I know that from working in our forecasting groups and doing business plans as a private company you kind of define success in your own terms. Assuming your models are correct, the results that you generate should have a clear tie to your plans. Whereas in the public markets you don't always see that.

One of the other great things about life in the private company, especially one that focused on employee ownership, was that it created a culture in which the management team thought like owners because they were deep investors. The CFO has to be the champion for that and speak for the investors at the same time they're talking to managers because they're one and the same. But another key roll of the CFO in a private company is to make sure the benefits of being private don't become a barrier to innovation and change. UPS was private for 92 years, was tremendously successful, and continued its record of innovation and refinement. But we were so big and so successful that sometimes we would be a little insular. When you're king sometimes nobody tells you you've got no clothes. And feedback is more difficult. In a private company it's critical that the CFO bring an external perspective – looking at the nature of the business and having a third-party view. A CFO has to be a catalyst for change in a private company because very few other executives in the company will have that objective perspective.

We've been public now for nine years and it's been a great lesson for us. Having personally participated in the IPO I'm in the position of seeing it from a birds-eye seat. For UPS going public was in effect adding one seat at the table for the external market so that voice could be heard. That's a balancing act a lot of CFOs face. How do you keep the market from overwhelming the voice of management? How do you make sure you're balancing the short-term demands of the market with the longer-term plan of the company?

For UPS it was a healthy mix. We needed that external catalyst. We couldn't enable global commerce if we kept looking internally. The CFO in a public company has a role of both shielding the company from the market and also being the conduit of the insights from the market to the company. I like to think of it as living in two worlds. The CFO has to straddle and be the voice of the company to the market. Demonstrate credibility, transparency, and predictability, while you under-promise and over-deliver. But equally important – and at least at UPS even more important – was the other way, which was the CFO serving as the voice of the market to the management team and the employees, helping to interpret what the market wants. To be a catalyst for change and also bring the great insights that some of the world's best investors might have to challenge our strategies.

During my time in business development I got a better appreciation of the top line than I ever had before. While spending most of my career managing cost, enhancing our efficiencies and driving returns I did not think as much about growth. The best way to grow earnings was to improve margins. Well, after four years of listening to customers trying to drive market innovation I've learned to carry a little bit of balance. And I think all CFOs have to embrace this although certainly the growth tree is one that we're not used to living in. But unless you have a business with chronically low margins, the best way to add value is to expand the size of the company as opposed to squeezing out
an extra margin point of earnings. So it differs in every company and based on where your company is you've got to decide which of these two sides adds the most value.

UPS has the best margins in the industry with great returns on capital, and I will continue to focus on improving our utilization, yield, inventory and all the rest. But the real leverage for a company like UPS is continuing to grow this great business model. When you've got a 20 percent return on capital the way to add value is not squeezing that to 21. It's to keep growing the business and reinvesting. So I challenge CFOs to think that way and ask yourself, what is the major driver of value in your company and are you focusing the right proportion of your time and energy on that? My guess is you will find there may be some high drivers of value that are off your radar screen or at least aren't things that you're aggressively working on. An enlightened CFO realizes the value in their company and tries to adjust their time to play a stronger role. It doesn't mean you're out there selling every day but it means you've got to embrace sales and marketing as the primary leverage points that add long-term value.

After having spent four years organizing sales teams and aligning and developing products, I think about how to bridge these things and bring that back into my role as a CFO. And I believe you can play both roles. Certainly the traditional return focus we all live in – capital budgeting, integration of acquired companies and working to extract value out of that, driving shared services and cost synergies – we've got to keep doing those things and especially in times like today we've got to be prudent and disciplined.

But there's an important leverage CFOs administer. Be a catalyst for growth to make sure the company isn't totally driven by an operational focus – and your function – and also make sure your operational managers, engineers and finance people are broader business people, not just managers of their disciplines.

The CFO can also be a great growth catalyst by their personal involvement in reaching out to customers and developing relationships with CFOs of other companies that may be your customers. It's a great way to grow and expand the business.

Strategy is one of the areas where a CFO can have great impact. How do we manage strategy at UPS? Clearly we focus on efficiency. We've been the tightest ship in the shipping business for many years and that has to remain. But we also force our management team to step outside the box and continue to reinvent UPS so that the company they leave when they retire is more competitive than the company they joined early in their careers.

At least once a month we have an extended strategy committee meeting where the CEO is the chief strategist and the CFO plays a key role talking about M&A, new business ventures, reviewing our strategic level industries and what would be the most beneficial for growth.

The CFO has to live in the two worlds of short-term business plans and long-term view. So we may argue like crazy about the results for one month but then go into a different room, step back and start thinking about what the world is going to look like in the future. The way we do that is through scenario-based thinking, which is not trying to pick or guess the exact future. You can get into endless arguments over forecasts and if your point is trying to get everybody down to one view of the future you're wasting your time because it isn't going to happen the way you think it is.

What we found to be much more productive is instead to generate discussion around what are the major trends that could influence the business and then create a matrix that says if this trend is strong then we should operate this way. If this trend isn't strong we should structure the company differently.

UPS's strategy relies on the free flow of good across borders. So one of the discussions we have is, are we in Thomas Friedman's flat world where goods are just going to continue to move more easily and more freely? Some forecasts call for 70 to 80 percent of total global GDP to cross borders by the year 2025. That's a frictionless world and certainly it's great – one we hope comes to be.

But you look at the other risks – the slowing domestic economy, increased pressure for protectionism, a possible freeze on trade agreements. And also the possibility of a radical swing toward a regressive world where companies or countries hunker down, block their borders and try to protect jobs. How do we manage in that world? I don't know which is going to happen. It doesn't do a lot of good to try and predict it but if you think about how your strategy should change as the world moves one way or another, it allows you to begin thinking in terms of probabilities and how you would operate in the future. Long-term planning is most useful when it allows variability rather than trying to get your people to forecast a model and lock everyone in.

Once we've got a future view then we position UPS respective of how the world could change. We identify our opportunities. We then bring in a model and say, "here are our financial goals." We determine the gaps and if business as usual isn't going to meet those targets than we think of how to best invest to fill those gaps. You then drive those long-term strategies into year one and year two execution. You start off in the clouds, focus it a little bit and then drive explicit business plans or product development initiatives to make it happen.

As a supporter of growth the CFO has a huge role in helping companies access and execute acquisitions. It's easy for management to fall in love with targets and like romantic love you sometimes lose your objectivity as you begin having eyes only for them. The CFO has got to be the spoiler. They've got to be objective and be the voice to the CEO or COO that helps to balance and create alternatives. The CFO has to be the neutral checkpoint. There may be great strategic value in an acquisition but what if you can only get to half the prize? Somebody has got to say that and if the CFO doesn't, often time no one will. We've seen many examples in business where the momentum starts on an acquisition and the price goes up. And nobody was willing to be the person that stepped in front of the train.

Regarding the expansion of your capabilities, it's also critical to drive a disciplined approach to evaluating when to buy and when to build. No one answer is right. Here are three different examples of major expansions we've done where we took three different strategies.

We decided that to enable global commerce we had to build a footprint of customs brokerage capabilities to allow us to move goods of all kinds – whether pallets of freight or small packages across borders. In that case it made a lot of sense to do numerous small acquisitions in North America – a roll-up of many little players because the industry was very fragmented.

However, when we decided to move into the LTL industry and create UPS Freight, we saw the difficult history of integration in freight. This industry has a lot of risk. There we did one relatively large acquisition – Overnight – and migrated that into UPS, rebranded it and invested in it. One acquisition made sense.

And lastly, in one of our busiest markets, China, we have executed more of an organic strategy. We developed a joint venture partner back in the late ‘80s and grew moderately with that. But as soon as we were able to we bought out that partner and in the span of three years hired over 4,000 people, dressed them in browns and created a UPS style of business that would look pretty much like the ones you see in the U.S.

With growth such a priority for companies, how does the CFO contribute to that objective? In the sales and marketing function I was focused on operating as one company, bringing multiple capabilities together and aligning the organization for growth. As CFO I can either help or hinder that activity – first by making sure aggressive cost savings initiative won't have a negative effect on the customer experience. You must think like a customer before you slash and burn or you will destroy value. It also means you've got to continue to think about the healthy balance of top line and bottom line growth and make sure that's well focused.

Also as head of sales and marketing I was very focused on creating a customer-centric organization. How do we get all of our employees to think like a customer? As CFO I can support that by making sure we have measures through the company and incentives that are aligned to the customer and that we're not unconsciously telling our people to do one thing but rewarding them for doing another.

One of my top priorities was creating a consistent customer experience across the globe so customers could feel and experience UPS the same in Beijing as they do in Brussels. How do you facilitate that in the finance function? One way is to help drive global standards so your company really can operate in a coordinated fashion so that it can communicate with itself. And make sure technology applications build to that future.

Marketing leaders must strive to create and drive market differentiation through effective strategies. The CFO can support that effort by aggressively investing in those areas where there is competitive advantage. Your job is not to be a road block or a hurdle. It should be as a champion when the function demonstrates to you that they create unique value. So be aggressive to your strengths and minimize your weaknesses. I think you'll find that if two functions collaborate, you can have both returns and growth.

So what are some of the lesson we've learned at UPS and some of the challenges? First, how do you satisfy the board of directors (most notably the audit committee), Wall Street, customers and employees? It's a tangled mix. The solution continues to be make sure you take care of your customers and employees, communicate clearly so the market stays in sync with you and the rest will follow.

How do you keep strategy ahead of M&A so the desire to acquire doesn't create the strategy but is driven by it? You must get the company to be explicit and agree on the strategy and direction of the company. Then have periodic validations of whether it is working. Then you must determine how you make mid-course corrections if necessary.

Regarding acquisitions, what do you buy when you are going to buy? For UPS the focus has been on buying capabilities not market share. Why pay somebody else a rich multiple for a business they've already built up. You're not really creating sure undervalue. For us at least the real value is to add capabilities to the company. And then when you've got the business model right you grow it.

So do you buy a fixer-upper or do you buy a premium company? To make the right decision you've got to be explicit and do a rigorous assessment of the health of the target company. What's the premium and what's the real cost of integrating or enhancing a fixer-upper? Unfortunately one of the realities of public markets is the purchase price seems to be forgotten very quickly. But if you buy a fixer-upper and those improvements end up hitting your income statement you've got a harder story to tell. So if you want to have an easier life then go for the premium one. If you want to create shareowner value you've got to communicate to the market that there's going to be ongoing expenses for X number of years and help them understand that margins will be suppressed but maybe you saved a billion dollars by buying the fixer-upper. But that's not an easy task.

And on the growth side are your people really prepared? Is finance and accounting prepared for change and prepared to think about their role in growth? It's important to convey to everyone in the finance function and across the company that growth is everyone's job. Whatever process you're doing, whatever business unit you support you need to think like your customer, and how what you do does or doesn't impact the customer experience. That's the new mantra at UPS – it's everybody's job whether you're cranking out bills or doing receivables you can impact the customer experience and enhance the portfolio of the company.

A big challenge for CFOs is trying to maximize value and grow at the same time. It's easy to do one or the other but balancing the two is challenging. First, don't allow the company to get too carried away with diversification. Unless you really know your core competency, diversity only makes your company harder to manage. When you can reinforce and extend your core business, you stretch the boundaries of what you do. Think of it as concentric circles rather than hopping over to a new island. That way you're able to leverage the past and create the future.

Another rule of thumb is to buy capabilities and not a book of revenue unless you're completely sure that you can keep that revenue and gain synergies. Capabilities stay forever. Revenues can walk out the door. You need also to manage the return expectations of your broader business lines based on realistic expectations of the maturity of the business. We certainly can't use the same yardstick for our U.S. package business – one that's mature and very stable – that we use with these emerging business of freight forwarding and capabilities in China. So make sure you're flexible enough to ultimately get the shareowner value but also realize the dynamics and volatility are different.

As you're expanding your business you do not want to be an obstacle. Perhaps the best thing for a CFO to do is to make sure that as decisions are made there are clear timelines for reviewing status and results so that you can make a mid-course corrections if needed.

And don't pull back in tough times. Great, long-term companies continue to execute. You've got to be responsive. You must have a flexible cost structure, but taking one of the wheels off to save some money ultimately will slow the vehicle down. It's hard to do but easy to preach.

So what's the takeaway from my limited experience as the CFO, and how can the CFO become a change agent? First I'd like to think of the CFO really as a gardener. And what does a gardener do? Well certainly they grow. Certainly they fertilize with capital but a good gardener also has the discipline to prune. No tree will grow to its maximum height unless it's pruned, and those branches that aren't prospering should be cut off. You can be a great gardener and still have the discipline to prune and to pluck out. You may plant 100 seeds. You know that if those grow you're going to have to select which ones are the best. I think for impact on the company being seen as a gardener that both invests and plants but also has the responsibility to prune allows you a little more flexibility.

The CFO can and should also be the external catalyst. We have to think in a common language with the rest of the world. It's our role to make sure the rest of the management team thinks that way too.

As a catalyst for change you also need to be willing to stick your toe in the water. Go ahead and let your company make some mistakes but make sure they fail fast. There's nothing worse for destroying value than a long, torturous period of under-performance in which nobody ever makes a decision. It's like purgatory. As a CFO you can be a little elusive if you know there's a mechanism in place that if it is a bad decision you've got a willingness to follow up and shut it down. So sometimes by giving up a little you actually gain more control. In other words enable the company to grow liberally but manage your financials conservatively.

And finally, if you're not involved in the strategies of the company, try to get yourself and your people involved. Talk to your people about what's going on. Discuss the major issues so they begin to think more as shareowners, more as general management, so the finance function is at the table when the important decisions are made.