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Navigating the Shoals in Fast-Moving Currents


Abstract:

Kurt Kuehn, CFO, delivered a keynote address at the Institute of Management Accountants 90th Annual Conference in Denver. In his remarks, Kuehn discussed the challenges companies face today and how finance professionals can increase their own personal effectiveness and even more importantly, help impact their company's success. He also identified seven habits of strategic finance to drive this impact.

Thanks John and good morning everyone. My apologies for that extended bio. The only real theme in my career is I can't hold a steady job. But I am a bit of a jack of all trades. And that's part of what I'm here to talk about today - a little bit to highlight the incredible challenges that businesses face today and also to talk about how we as managerial accountants can increase both our own personal effectiveness and even more importantly, help impact our company's success. I think it takes a combination of functional excellence and also business knowledge.

But before we get into that, these are incredibly turbulent times. I'll talk a little bit about how helping to navigate a company in today's environment does require different behavior and how companies can prosper if their finance and accounting group helps lead them through some of these challenges.

I'd like to start off with who is UPS. Everybody knows UPS but there are a lot of people that don't realize how dramatically we've changed over the last 10 years or so. We are a very large company. On any given day we move about 2% of the world's GDP and here in the U.S. where we have a very substantial market presence, we move about 6% of the GDP. We're a $50 billion revenue company. We have over 425,000 employees spread across the globe and we operate from 200 countries and territories. So the good old fashioned mom-and-apple-pie UPS that at least I started with many years ago clearly has evolved and adapted and has become a true participant in the global economy.

We operate the 9th largest airline in the world. We're unique in that we're an airline that has an AA balance sheet credit rating. We own all of our planes and we really don't belong in the airline category. We're also a high tech company. We spend more on IT than we do trucks and planes on a given yearly basis, and to manage all of the transactions we have the world's largest private DB2 database. So clearly it's not your father's or your mother's UPS.

For the accounting profession, these have been turbulent times, and you could make the case that it started around the turn of the century as some of the markets blew up and some of the fraud and deception that occurred partially through accounting processes and reporting forced a critical review of financial transparency. If I were here back in 2003 or so, clearly we would have been talking about this incredible challenge we're going to be facing and are facing with the soft transition and the increased scrutiny and the incredible amount of controls we had to put in. We thought that was tough. Frankly, that was about as challenging an environment as many of us in finance and accounting thought we could be placed in. Little did we know that would be just a footnote to some of the challenges we face now.

Just as things began to stabilize around SOX and many of us got our arms around the documentation processes necessary to meet those requirements, our businesses continued to expand and get more complex. The world became global and whether our companies knew it or not, most transactions had some components of non-U.S. content to them. So that began to put incredible challenges on our financial capability - A, just to keep track of the cost, and B, to help understand the new exposures and risks. For example, like having revenues in a foreign currency, cost in another currency, translation issues, staffing issues - all the great stuff that being a multinational company brings about. That layered even more challenges on to us, and at least it's got my function at UPS very busy managing the complexity of the global world.

There are great opportunities for business - you've got to go global if you want to lower your cost and if you want to find new sources of revenue. But the complexities and the risks from a financial perspective do increase substantially.

But then you lay on top of that where we are today, and that is the unprecedented volatility and economic uncertainty that we've been seeing now for the past nine months that dwarfs the other challenges. So at least for the first several months of this process - fourth quarter of last year and much of the first quarter - our focus was less about financial transparency and optimization and more about where is the finance function helping the company survive? So we've all had a bit of a litmus test.

So that in some ways has put things in perspective. We thought the battle days were five years ago when we were trying to meet Sarbanes Oxley. Where we are today is more risky but also more rewarding. To borrow the phrase from Charles Dickens, "it's the best of times and the worst of times." The worst of times is very apparent - tremendous economic uncertainty and threats to our business models. But it's the best of times in that this is when the finance function and managerial accountant can bring perhaps more value to companies than in normal times of prosperity. There's a burning platform in your company. Can you take advantage of that to make the changes necessary so that your company is stronger going forward? Yes, it is the worst of times. The trick is making the best of it.

I'm going to talk about two forms of preparing yourself and having an impact on your company. First is your personal preparation. Before you can really help your company prosper and succeed, before you can have maximum impact, you've got to look at yourself. Take a hard look in the mirror. What are your strengths and weaknesses? What are the areas that you've not really developed or not really changed with the times? The biggest risk is not changing these days, both from a personal perspective and from a corporate perspective. Frankly, it's hard to help your company change if you haven't challenged yourself to meet the challenges of the current decade.

One of the big guidelines is during times of great change, make sure you're developing your own skill set. If your company has become global and you haven't, try to get yourself exposed to how that works. What are the issues? What are the challenges? What's the information that you're providing to your non-U.S. business units? When there's not a lot of upward opportunity because companies hunker down, that's the time to sharpen your saw, develop your skills, and develop your people skills so that when growth returns, you can be more valuable than ever.

I also think being a generalist becomes more important during turbulent times. When the priority is not perfecting transparency or measurement but instead helping the company make big decisions, then the broader your field of vision, the broader your function's capability to step in, the more impact you can have. There's a time to be the best in your specialty. There's also a time to take that hat off, listen to what's going on in the company and have an impact. I think those are the times that we're facing today - they cause you and your people to focus a little more on expanding their own charters. Then you can have a big impact within the company, and that's really when the finance and the accounting function excel because these are times when we're needed more than ever - whether it's helping procurement processes; whether it's getting good, clear information to management so they understand what really is happening; whether it's separating fixed cost from variable; whether it's understanding product profitability and which products are really relevant in today's environment; whether it's understanding customer profitability and which customers are irreplaceable and need to be protected and which customers are in a state of decline; or whether it's looking at customer credit worthiness. There are a hundred things we can do to bring value to companies. Not all of them are listed in your day-to-day expectation of duties, and that's why this is such an important time both to develop your own capabilities to address these issues, and then more importantly, to impact your company. How do you execute professionally to have maximum impact?

I'm going to talk a little bit about how you develop practices, both personal and professional, that support your company's strategy. How do you become a proactive player in your company? We've simplified this so I can talk about it in terms of what we call seven habits of strategic finance that give you a sense of major areas where both you and your people can have a bigger impact. I'll also share the things that I've seen through my checkerboard career of how finance and accounting can maximize value in a company.

On the personal side, it's basically a digital process. It's learn and then lead, learn and then lead. If you see that as a constant cycle rather than a linear process where you've done all your learning and then you lead, I think it creates a better mindset. As for some of the things you've got to do, number one is just jump in. Some of us like to stay behind the scenes generating high quality results but not necessarily getting into the fray of action. You've got to look in the mirror, look at yourself and then pick your people that have the ability to be more engaged in a broader sense. Also take this opportunity to broaden your experience. Once again, in tough times, maybe where the company is not growing, the way that you can add value to your company or you can encourage your up-and-coming people is to kick them out of the function. Put them outside their area of comfort. This is the time to do it because promotions are probably not prevalent. Keep your people engaged and stimulated by giving them challenges and new tasks. This is a great opportunity for building your personal asset base and your people's asset base. So take the opportunity to broaden experience and understand more of the business and where finance's role fits.

In general we also need to make sure we're experts in our own company. Managerial accounting is clearly a profession and there are similarities across all industries. But relevance is a huge issue. The better you understand your company, the more relevant the information you provide can be. It's great to be a professional expert. But if it isn't relevant, if it isn't actionable, and if it doesn't help drive the right behavior, then the benefit is limited.

As I said before, retool your skill-set, invest in yourself, and help your people do it. That doesn't mean you've got to spend a lot of money on educational events. But the message should be during tough times you should hunker down and prepare for the better times.

So let's get into these seven habits and what it takes to drive maximum execution. First off, finance in general - and certainly managerial accounting - needs to increasingly take a seat at the strategy table to understand where the company is going. Make sure that wherever possible, where appropriate, you are a part of those kinds of discussions because the analysis, the information and the reporting that's needed has to be relevant to the challenges of the day. It's also important for finance in general to make sure that the investment prospective is brought into the strategy discussion. Every business strategy you make is an investment strategy. It may be an investment of time. It may be an investment of people. It may be just a give and take between two alternative approaches. The financial discipline can help managers make better decisions.

We do find often that general managers make a lot of gut decisions. And sometimes gut is a great approach but in general one of the most important roles in finance functions is to make sure that financial implications are fairly evaluated, hidden capital requirements are talked about, and options are reviewed. Evaluating the financial ramifications of one option is risky. You may have a perfect number but if you haven't helped create some range of options or challenged management to do that, you really haven't given a series of paths management can take.

This isn't easy stuff and it's different in every company. In some companies I've seen where the finance and accounting group is a huge player in this. They are in fact the auditors of management strategy. In other companies, somebody throws a number over the wall and says, "calculate this out and let us know." So the trick is, try to get in the middle of that. Try to help your company develop scenarios and a range of options because right now nobody knows where the world is going. So get a seat at the table if you can.

If you look at the management of the day-to-day business, one of the things I've found - at least at UPS where we have gotten more diverse and more complex - is that old rules of thumb or return expectations get outdated. When I joined the company, we were basically in one line of business - pick up and delivery of brown packages within the United States. That business had one set of investment requirements. It had a certain volatility on the revenue side. It had a proportion of fixed and variable cost, and it had a certain amount of capital intensity. And we all anchored into that as a kind of a guidepost. The problem is as your business changes, those things change dramatically across business lines. And one of the things that I have found is that companies frequently are behind the eight-ball - you tend to operate using last year's or last decade's paradigms around return expectations. So it's critical as you look at helping your company manage a broader portfolio that you really bring to the table different maturity levels of the business, the capital intensiveness of the businesses, what are risk adjusted returns, and what are targeted margins. We've done a lot of work lately on that. UPS has gone through an incredible transformation in the last 10 years - getting into global freight forwarding, logistics, brokerage - really helping enable global supply chains. And guess what? We can't measure freight forwarding with the same yardstick that we use with small package or an airline. So helping companies understand that there's different levels of expectations and behavior is critical because as business has gotten more complex, everybody went global quickly without really understanding the impact. Balance sheet ramifications, working capital -- every one of those things are substantially different if you're a business that as a lot of different lines.

So the bottom line, and the CFO plays a big role in this, is to define different, separate return expectations for each of your major business lines to help management understand that a 10 percent margin may be absolutely great or it may be absolutely terrible depending on the characteristics. We found that to be an important process. Working capital is one of the hottest areas for us right now. With everybody squeezed for cash, it's critical to understand which of your products and which of your customer lines are soaking up the most cash. We're challenging management to do that. In fact, within the last year, we've initiated a number of working capital measures at the field level that our managers haven't had to play with before just because of those issues.

Once you've done some of this work internally, then you can begin to communicate those differences to the market because the better they feel that you understand how value is created in your company and that you differentiate across those lines, the more confidence investors will have that you'll help steer these uncertain times better. This gets to this concept of thinking of your company as a portfolio and helping your managers make the best decisions across the portfolio. Rigid rate of return requirements may not make a lot of sense if you've got product lines with dramatically different risk characteristics. If the revenues are based in different countries, you've got different risks. So this whole concept of the company as a portfolio is important. Some companies are way ahead of this and I'm preaching to the choir. I think a lot of us don't tend to think of it that way. But it is just as you would do with your own personal portfolio. You may not expect your bond fund to have quite the same returns as your equity funds. Now unfortunately that has gone upside down. I just wish I had more of a bond fund, but it's the same inside the company. Helping management understand that is useful. In general, managing the portfolio is important because in most scenarios growing the company organically by harvesting and managing that portfolio creates the safest value.

Some companies have a bias toward continually doing acquisitions for fund growth. If you can do that, that's great, but the odds are against you. The batting average on acquisitions is about .200 or so at best as far as really creating value, so as much as you can keep management focused on growing the portfolio that exists organically. At least that brings safer revenue and less risky projects to the company. So challenging yourself to stretch the existing portfolio is a big issue. Clearly that was a big part of what I was doing during the four years I spent heading up sales and marketing. You can always look at the next acquisition and it's exciting but the real value is created by looking internally and understanding whether your portfolio is relevant in today's environment. Are your premium products what customers want or you should be working with the marketing team to target and bring value to customers in a different way?

Another one - and this is a bit of a UPS-specific story, although I think it fits pretty well here - is the whole concept of nurturing a customer-centric culture. There was a decade in my career when I was doing engineering and finance where I did not talk to a customer at UPS. Ten years. And it didn't seem like a problem to me. I guess that's why eventually they put me in sales and marketing, so watch what you criticize. It was also a period in my engineering career where I never lost an argument with a salesperson because it came down to the tradeoff of operational excellence, financial results, and customer needs. At least at UPS in the '80s we were an operationally focused company. The customer came second. And that isn't right. The finance guy should lose some arguments with the sales guy. The engineer shouldn't always prevail if it's a tradeoff between customer needs and efficiency. Some of this is UPS' history of being focused on operational excellence.

But I expect there are bits of this trait within the finance function. We tend to like to throw rocks at the softer side of business. Put together a project, our cost numbers are going to be rock solid. The sales and marketing team will throw some fluff for revenue. We kind of shake our heads and that's the way it is. And it's great to have skepticism and credibility. On the other hand, just saying no doesn't work if you're trying to grow a prosperous business. So one of the big priorities I had as I moved into sales and marketing at UPS was to make sure that the company listened to its customers in a way we hadn't before and that every function, including finance and accounting, our tax guys, our audit group, plays a role in understanding customer needs and how their piece of the puzzle meets those needs. It doesn't mean that you spend all your time in customer meetings; although, we've increased the amount of time spent directly with customers. What it really means though, is how do you add value to customers even if you don't meet one? Sometimes that's a hard question to answer. It may be that you add value to customers by facilitating better processes for the people that do face them. Make sure the financial systems and measures that you have are supportive of effective sales execution and operation. It's impossible for the sales people to get a price quickly if they don't have visibility into profitability other than at the end of the month when we report it. Those are the kind of things that can hamper sales effectiveness. Are we there helping marketing understand the profitability of products? Is your managerial accounting relevant in driving value to customers? This stuff can be very powerful if you align financial insight, product design and customer execution. You get all three of those lined up, there's a synergy that can be extremely beneficial for customers and companies. Sometimes we just don't ask those questions though.

And - this is a tough one today - make sure your cost initiatives aren't coming at the expense of the customer. You do have to agonize over everything today. Clearly everything's on the table - staffing, expenses, product design issues. We've had some very serious internal discussions about redefining our product content to take cost out. Those things can be beneficial if the customer doesn't want to pay for them. I guess the way to think about it as you're working and creating information around products for customers is to think of the customer sitting at the table there with you. And as you're developing insight so your management team can make decisions, at least make sure that voice of the customer is floating in the room. That way, even if you make decisions for short-term gain, you also think about the long-term implication for customers.

And last but not least, make sure as you create performance reports and compensation systems we really understand the ramifications on both customers and shareowners. It's a complex world and we're trying to navigate between the rocks. You swing too far for the customers and the shareowners get a little upset that you're gaining market share with no value. You only listen to shareowners and long-term you're destroying the customer goodwill that ultimately is what supports us all. So it's an interesting process but I would challenge you to really ask yourself, is the voice of the customer in your function? Is it helping to guide decisions at least to the extent it should?

The other part driving effectiveness from a financial perspective is you have to be brutally honest. A good gardener has the discipline to prune branches or to weed out those plants that aren't going to prosper. Why? Because it zaps energy out of the tree. Allowing a lot of sprouts to come off of the main plant can keep the tree from growing as tall. That's the paradigm that I like to think about as we're looking at M&A, as we're looking at business units. The more we can set specific metrics and define what success looks like, then the more capabilities finance has to bring these decisions to a head. It's where you decide, "this branch is growing moderately but it's zapping the energy of the tree." And so having the discipline to know when to prune is an incredibly important element.

Now on the other hand if you've got a big set of shears and you're cutting off every branch there is, sooner or later the tree is going to run out of energy to grow. So you can't get crazy with it. But make it where finance creates the ability to make decisions around these kind of underperforming business units. It's awfully easy for companies, especially big companies like the one I work in, to tread water and never really face some of these decisions. But the discipline to prune leads to a much stronger plant. And I think that's an important role for us to play.

Just because we're trimming, it doesn't mean we aren't at the same time investing. And the parallel here is that it's important to fertilize in the winter. It's easy to go out and fertilize and grow when the sun is shining, but sometimes that's too late and a plant can get a little overgrown. The real time that you strengthen and nourish the roots are when the growth season isn't there.

So this is the best of times and the worst of times. Down business cycles are challenging and none of us have the funds that we'd like. But it's also a great time to be investing in the long-term, and there's no magic bullet on this. There are no secret guidelines of what's prudent and what isn't. But in general, because of the burning platform, because management has more willingness to change, these are times when you can make structural changes, and if you have the funds and they're above-average return opportunities, it's a great time to be doing that. Acquisitions are cheaper than ever. New capabilities are cheaper than ever. We're seeing tremendous reductions in unit prices in our procurement area. M&A activity is low right now but that means it's a buyer's market if you have cash. So even though you hunker down, you batten the hatches, and you're trying to make it through this period, having the courage to facilitate unique investment opportunities in this environment can be very beneficial. Research is pretty compelling. I talked about the low batting average with the success for M&A. The real value creation for M&A is in the early acquirers. The vast majority of shareowner value in an industry when it goes through a major M&A spurt is the first or second players in the door. So even though it's hard to do sometimes, if the numbers show it and it's strategically valuable, sometimes investing in the worst of times can really generate the returns. You get in too late and all you're doing is paying for the frenzy at the top of the market. We had an acquisition where we did that and had to take a fairly large write-down. Strategically it made a lot of sense but our timing was terrible. So that means sometimes leaning against the window a little bit, but you've got to fertilize in the winter. You've got to be thinking about investing even as you're in the worst of times.

Which feeds us to the last point and that is having the wisdom to know what to buy, when to buy and when to build. The choice companies have is organic growth versus acquisitions. As I talked about earlier, acquisitions make the headlines. But most times the preferable option is to expand or extend what you're doing today organically or at least through small acquisitions. If you're acquiring, your better batting average is usually by acquiring smaller new capabilities. So one thing to clarify as you're looking at M&A is are you buying capabilities that help the company do something new or are you just buying market share. Both can work, but they're different risk profiles. The risk with buying market share is you're paying for somebody's value that's already been created. The sweet spot at least for us is what capabilities do we need, how can we buy them through relatively small acquisitions, and then let us enjoy the value through growing. There's no magic formula here either. Trophy acquisitions are great. It's fun to stand up on the podium and announce victory. All too frequently though the seller is the winner in most acquisitions. So helping your company make that balance - making sure that a buy versus build and a buy versus buy small are alternatives - creates real value.

Those are some thoughts about seven key ways that all of us personally and our functions can help play a stronger role, help our companies ask the right questions and maybe be a little more nimble in a tough time. Becoming a key player in your company is more critical than ever. Balancing resilience with opportunity, which is making sure the company is defensive and can react to conditions but at the same time isn't so hunkered down that it's missing opportunities for growth. That is the challenge today - being prudent, battening the hatches, navigating the shoals - but at the same time keeping the company moving forward. I tried kayaking a couple of times and one thing I learned was you have more control when you're moving forward. And I think that's a good parallel to companies - keeping your company moving forward even as you're trying to avoid the shoals is critical because playing purely defensive means it's going to be harder for you to react and take advantage of the future.

When it's all said and done, just to reference poor Charles Dickens here again, as we work our way through these worst of times, I think we're really going to see that it's been a tale of three companies. When the dusts settles, there will be a number of companies, in fact there already are, that will perish, liquidate or disappear. There will be perhaps a larger number of companies that will survive today but will come out in a position of less strength, wounded perhaps financially, or without momentum to move forward quickly. And then there will be a select few companies that will be coming out of this stronger than when it started, companies that were prudent, protected themselves from the shoals, but also moved forward to capitalize on the advantages they had. So which of these buckets your company will end up in will depend on a lot of things, hopefully part of it is your role in helping the company prosper.

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