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Category: REVENUE GROWTH The sweat labor that helped turn this package-delivery company into an overnight sensation.
Russ Banham, CFO Magazine
September 1, 1998
Memphis in early August is about as hot as it gets in the summer-soaked South. Yet, there was Alan B. Graf Jr., executive vice president and CFO of FDX Corp. (parent of Federal Express), down in the trenches, sweating in a golf shirt, heavy gloves, and steel-toed boots, hauling packages at the company's central hub facility.
His suit "stashed somewhere in a locker," Graf and his staff of finance executives left their third-floor offices to pitch in wherever needed at the airport-based hub. The reason? The stunning volume increases caused by a strike last year by United Parcel Service workers, a major FedEx competitor. "I forgot to wear a back brace that first day," says Graf, a former college athlete who should have known better. "I didn't forget it the second day."
Graf also never forgot to see the opportunity in the situation. "It was educational," he says of the 15-day period in which FedEx handled more than a million pounds of additional traffic a day. "I began to think about how efficient the SuperHub could be during peak operation hours, and what additional technology we could put in to make things more efficient and easier." (FedEx estimates it's been able to keep 15 percent of the 800,000 extra packages a day it delivered during the strike, ultimately adding roughly $150 million to its domestic revenue.)
Such a "keen sense of looking beyond the financials," says Frederick W. Smith, FDX chairman, president, and CEO, has been Graf's trademark ever since the 45-year-old joined the company in 1980. But it is in the financials that his contributions have been most apparent. To wit: since 1991 when he was promoted to senior vice president and CFO, overall revenues have more than doubled from $7.7 billion to $15.9 billion in 1998; the once-unprofitable international segment now contributes 20 percent of total corporate operating profits; and the tide of declining revenues per package in the United States has been reversed.
Graf's impact was first felt in the international segment, which was losing almost $1 million a day when he became CFO. "We had aggressively grown our international network, including an expansive intra-European network," he recalls. "We believed we could serve all three markets in Europe equally well- -intra-country, intra-Europe, and intra- continental. We were wrong. There was long- entrenched competition [in these markets]. We also found we needed significantly different operations for, say, intra-country versus intra-continental. We were sending out waves of couriers, pick-up and delivery times were all over the place, and nothing meshed."
Ultimately, FedEx embarked on a European restructuring that refocused its capital on just its intra-continental service, a painful decision that cost more than 11,000 jobs--not to mention a $254 million write-off. But it was absolutely necessary for FedEx to put a tourniquet on the bleeding and rebuild its European base.
"It was time to cut off money to what was a losing operation. Alan recognized this and made tough decisions," says Jim Runde, managing director in charge of worldwide transportation at Morgan Stanley Dean Witter, adding, "He could look beyond the European debacle and see how his decision eventually would translate into a higher P/E."
To monitor FedEx's progress, Graf developed key performance metrics by which the international operations are now measured--in particular, increasing volume by 15 to 20 percent per year for overnight packages. "Previously, we simply had this belief that since our strategy worked in the U.S., it stood to reason it would work the same in Europe," he says. "But we hadn't built a financial and strategic model to understand our cost structure. Once we did that, it became clear that all these tremendous investments we were making-- investments that were bucking the conventional wisdom on the Street-- would pay off. And they have." In 1997, international revenues reached $3.2 billion, and international operating profit totaled $141 million.
Competing on the Ground
Domestically, Graf worked on multiple fronts to tackle the company's declining yield per package--the result of aggressive price competition and a higher dependence on heavily discounted customers. To reverse the trend, Graf and his cross-functional team first renewed existing accounts to eliminate some loss leaders; next they implemented selective rate increases for some large and national accounts, beginning in January 1995; and finally, in July 1997, the company implemented distance-based pricing for all domestic express services. The result was that the yield per package, which had fallen to $12.60 in 1995, was up to $13.35 by 1997.
To increase revenues going forward, Graf recently turned to a subject both he and Smith had considered for some time: acquiring or developing a lower-priced, less- time- sensitive package transportation service to compete against UPS's three-day product. Their brainstorming led to the $2.2 billion acquisition of Caliber System Inc., a ground transport company in Akron, last January. "It was a very smart move because it effectively gave FedEx a position along the continuum of services provided to the customer that they did not have before," says Jack Levy, head of mergers and acquisitions at Merrill Lynch.
Graf took the lead on the project, not only identifying the target but also pursuing it when all appeared lost. "Fred gave me the go- ahead, and there were lots of stops and starts," the CFO says. "Ultimately, we changed the transaction from a cash acquisition to a stock merger. The market had changed so significantly that the stock merger became a creative rather than a dilutive strategy for FDX shareholders. That was not the case when we made the original contact."
Others agree. "Alan nailed Caliber at a very attractive price for FDX shareholders," says Runde. "He figured the timing perfectly. He also outfoxed the competition in terms of this timing. The competition was asleep; he wasn't. He seized the day and made a decision to go forward on his terms, without going to an auction. Ultimately, he created a lot of value for the company."
Upon completion of the deal, Graf was kicked upstairs to become FDX's first CFO. And he seems bound to run a company some day, a prediction by Jim Riddle of Riddle & McGrath, an Atlanta-based executive search firm. "Alan provides leadership and a style that others want to follow," he says. "He's not focused just on the numbers. He understands the big picture, and has all the attributes of a CEO."
Of course, if things don't pan out as Riddle projects, there's always a career in package loading and unloading. "I liked the physical part of the job," Graf says, adding with a fake groan, "once I got that back brace."