Two American companies are planning to tackle the 'perfect storm' of the coming recession through containing costs and bold expansion.
By Ramona Dzinkowski
Weathering economic storms
CFOs are pessimistic about the outlook for the international economy this year, according to a recent Global Business Outlook survey produced by Duke University and US CFO magazine. A US recession is predicted this year by 75 per cent of the finance chiefs polled (475 in the US; 205 in Europe; 393 in Asia, including 189 in China). Almost half felt this recession will linger for at least 15 months. Some 35 per cent of CFOs say that their companies have been hurt by the reduced availability of credit, and 60 per cent of companies are putting off expansion plans due to credit market conditions in general. Weak consumer demand and the current problems in the US credit and housing markets top the list of CFOs' concerns.
Although it's impossible to say for sure whether this is truly a global view, it certainly seems to ring true across America. Senior executives of some of the world's largest US-based international companies have jumped on the doom and gloom band wagon, predicting what has been recently termed 'the long, ugly, and deep recession'.
At the annual 'CFO Rising' conference held in March in Orlando, Florida, Jerry York, former CFO of both IBM and Chrysler, sent shivers up the audience's spine with his forecast for one of the steepest economic downturns in recent history. 'It's going to be a very bad recession, perhaps the worst I've seen in the 46 years I've been working,' he warned. He went on to call the current economic climate the 'perfect storm' of economic calamity where 'no one knows where the bottom is'.
How are corporate decision makers reacting to all this negativity? Do we see companies bracing for the type of catastrophic recession that the popular media and some pessimistic pundits would have us believe? Perhaps some are, but at least two companies whose CFOs presented at the conference are taking an all-systems-go strategy towards economic recession, and have an unrelenting focus on long-term growth.
UPS: change or die After 99 years in business United Parcel Service (UPS) has weathered more than one economic downturn. Its on-going strategy is to constantly reinvent itself. After many iterations of its business model, UPS is now a US$50 billion dollar company that manages roughly four billion transactions per year around the world. It has over 400,000 employees in 200 countries and territories. It is the ninth-largest airline in the world. Next year it will celebrate its 100th birthday.
Companies don't reach the century mark without constant periods of transformation and reinvention. 'We have to continually scrutinize our business model and be accountable to surprise changes,' says CFO Kurt Keuh. 'Ultimately, if you want to be around longer than the next business cycle, you've got to realise that the biggest risk is in not changing.'
UPS started in 1907 as a bicycle messenger service. Its founder, a young teenager named Jim Casey, borrowed US$100, bought some bicycles and went into business with a couple of friends. The small business thrived until the telephone made messenger services obsolete. The company then delivered packages for large department stores in the city centre to homes in the surrounding areas of Seattle and Los Angeles.
As automotive technology advanced, coverage was extended across the US, and rather than just operating in a dedicated metropolitan area for a limited number of big department stores, it became a broad common carrier. A big market expansion came in the 1980s as air carriers and hubs became more common. In the early 1990s the company built an integrated small package division in Europe in anticipation of the EU coming together. Today UPS is working at becoming global, with China earmarked as its next major market. It's also expanding outside its core business into the more complex and broader supply chain management.
Expanding into supply chain was a another monumental change in strategy that came about due to the globalisation of business, and a recognition that in order to ship goods around the world and remain competitive, efficiencies all along the supply chain would have to be maximised. 'We were a big fish in a pretty small pond,' says Keuhn.
'However, since small packages only account for approximately 50 per cent of total supply chains, in some ways, we were the smallest fish in a big pond. While it felt like we were the market leader, we were just a moderate sized player in this broad universe of global trade and global supply chains.'
Globalisation and the rise of China as an economic engine of growth was a call to action for UPS. 'The opportunity was there and we had to stretch our boundaries to access the future,' Keuhn says.
From this, the company created its new charter, which was to 'enable global commerce'.
'It was a big vision, a little presumptuous perhaps, but it did alter our company's mindset,' Keuhn says. 'All of a sudden we realised what we had been doing for 100 years might not really be all there was to it. So enabling global commerce really was a man on the moon' kind of vision for our company, but it told the domestic package people that there was a big world out there.'
As UPS began to try to address what it would take to manage goods across supply chains, it appeared the company couldn't build it all itself. Between 2000 and 2005 the company made an unprecedented number of roughly 30 acquisitions to begin expanding its portfolio of capabilities to help companies better manage their supply chains, capabilities such as statistics, distribution, transportation and freight-forwarding capabilities, freight management and road rate services.
UPS continually forces its management team to step outside the box to reinvent the company. The team has a very strong focus on strategy, and at least once a month ha an extended strategy committee meeting with the CEO as the chief strategist.
Keuhn says: 'We step back and start thinking about what the world is going to look like.'
The company uses a process called 'scenario-based thinking', focusing on what the major drivers are that influence its business. Then a matrix is created that examines trends and possible courses of action. 'If you can think about how your strategy should change as the world goes one way or the other it allows you to begin thinking in terms of probabilities,' says Keuhn. 'Long-term planning is most useful when it allows variability rather than trying to get your guys to forecast the model and lock everything in.'
As for how CFOs should behave in this turbulent economic climate, Keuhn says it's business as usual, with a twist. 'Certainly capital budgeting, integration of acquired companies, really working to extract value out of that, driving shared services and cost synergies must continue in times of possible recession,' he says.
'But it's also important to challenge your people to be catalysts for growth and to make sure that your operation managers, your engineers and finance people, are broader business people and not just focused on operations management. I would also suggest that CFOs could be great catalysts by their personal involvement, reaching out to customers, developing relationships with CFOs of other companies and maybe your customers. It is a great way to grow and expand the business.'
Qwest restructure After coming out of seven years of restructuring in order to save the company from bankruptcy, Qwest Communications is determined to maintain its renewed corporate health through what are expected to be two rough years of recession in America. John Richardson, Qwest's CFO says: 'Seeing the growth and transition today, as we continue to move forward to the good life, we've got to continue that path in 2008 and into 2009.'
Qwest provides voice, long-distance and data transport services. It has 37,000 employees and does business with 95 per cent of the Fortune 500 companies. It offers local phone services in 14 US states. The company was carved out of Bell when the Bell system broke up in the early 1980s. Qwest also owns Southern Pacific Railway. It has one of the largest fibre optic networks in the US, laid on its railroad's right of way.
Qwest communications is no stranger to battling through troubled times and emerging with a vision for the future. In August 2002, the company found itself in crisis. It had lost $US38bn and couldn't meet its debt covenants. By 2004 customers were leaving in droves due to poor service and the sense of impending doom. In order to save the company, new management was called in to overhaul the financial structure, reduce costs and rationalise the asset base.
At the same time, in anticipation of the huge demand for broadband capacity, it started on a program of investing in improving its network. Another area of focus was productivity. Its overriding goal was to make sure the workforce was balanced between meeting the demands of the marketplace and maintaining customer service. In five years the workforce was reduced from 51,000 to 37,000. 'We believe that productivity and efficiency initiatives are a never-ending story,' says Richardson. 'That's our goal moving forward.'
However, in the long run success is a function of continuously investing to accommodate future demand. 'We are very, very focused now on making sure that we invest only when we believe that we have a good return on capital,' Richardson says. 'We are spending approximately US$1.7 to US$1.8 billion on capital expenditure a year, largely against our strategic products sector. We are focused on increasing the speed of our network. Almost 50 per cent of our investments are around broadband and broadband speed as we transition from a traditional telephone company.'
After several years of financial redesign and cost rationalisation, the company is now in a net profit position of almost $US3 billion. Customer service has improved dramatically. According to a JD Power survey on customer service in communications, the company moved from among the lowest companies several years ago to number two.
'If you focus on your cost in a disciplined way, you can take costs out of the business very easily and still be able to improve customer service,' Richardson says. Customer strategy will continue to be a focus, as will partnerships, which are extremely important in the telecommunications industry. 'We were just one of the three telecommunications companies awarded the right to bid on $40 billion worth of business with the government,' Richardson says. 'And we have 135 partners that are helping us in the government services area.'
Weathering the storm Although the mood around the world is mixed when it comes to an overall economic outlook, US CFOs are decidedly more pessimistic than their Asian or European counterparts. However, companies such as UPS and Qwest Communications demonstrate that it's business as usual, despite this temporary glitch. Traditional companies that have seen decades of change in technology, demand and the world economy in general, are flexible to business conditions while remaining focused on their long-term growth plans. Economies around the world ebb and flow. However, the real danger lies not in the impact of a short-term economic downturn, but in underestimating the ca-pabilities of American companies to rise to meet the challenge.
