Solving a 'Wicked Problem': UPS CEO Scott Davis on Surviving a Shaky Economy

After all, UPS is no stranger to change. The company has reinvented itself many times over the years. It began in 1907, when 19-year-old James E. Casey hopped on his bicycle and started a business delivering packages and messages around downtown Seattle, Wash. When the telephone came along, our business became obsolete, Davis noted during a presentation at the recent Wharton Leadership Conference. A telephone in every office meant that there was no longer a need to hand-carry messages between businesses. Instead, the company, then known as American Messenger, invested in new technology to stay competitive. Casey bought a fleet of motorcycles and a Model T Ford so that the business could shift its focus away from messages and specialize in package delivery. A corporate name change -- to Merchants Parcel Delivery -- made the transformation complete. The company continued to grow even as new challenges came along in the form of the United States parcel post system in 1913, and eventually the use of e-mail for business communication in the 1990s.

We've continued to transform our business every time there was a new technology challenge, Davis pointed out. The company will reinvent itself when necessary, he added, but suggested that right now, strong leadership and a steady focus on long-term goals will help his corporation -- and others -- weather the economic storm.

Because UPS is the world's largest package delivery company, every blip in the global retail market affects the company. According to Davis, on any given day, approximately 6% of U.S. GDP and 2% of global GDP moves around the world in UPS trucks and airplanes. Retail composes the largest percentage of this volume.

The current downturn has brought the company to a new crossroads, similar to the turning point the business faced during the Great Depression. At that time, the company had grown enough that it was delivering packages to customers in all of the major cities on the West Coast. In 1930, UPS expanded to the East Coast, delivering packages from local department stores to peoples' homes in the greater New York City area. But customers curtailed buying from department stores after the stock market crash in 1929, and then during World War II, they were encouraged to carry their own packages home due to wartime fuel shortages. Both events caused one of UPS's major revenue streams to drop off significantly.

Sound familiar? It should: During the recent housing bubble, consumers bought retail items freely, and there was a global boom in consumer goods. Customers didn't just shop at their local department stores, but at stores all around the globe. Aided by a substantial technological infrastructure, UPS prospered as it delivered packages to customers and expanded into global supply chain management. Davis was CFO of the company from 2005 to 2007 -- the halcyon days of free consumer spending and cheap credit. We now have a special name for that retail period, Davis told the audience at Wharton. We call it, 'The good old days.'

As CFO, Davis was pressured to take advantage of the company's prosperity and take on more long-term debt. I'd get beat up every day by 25- and 30-year-old Wall Street advisors who were telling me: 'You've got to leverage the company more.' I stayed pretty conservative. He instead focused on the long-term goals of the company. Consequently, when the U.S. economy collapsed, UPS was on solid financial footing, Davis stated.

Under his leadership, UPS has expanded into new lines of business that complement the company's global package delivery operations, including multi-modal transportation services, new logistics technologies, international trade management, supply-chain consulting and financial services. How is Davis motivating his employees in an uncertain time? In a crisis, you have to talk to people, Davis stated. Our drivers see people every day. They know that their role is to help make our clients successful. When the downturn hit, Davis went on the road and met with many of the company's more than 400,000 employees in person. On the day of his speech at Wharton, Davis visited a UPS facility in Philadelphia. There isanxiety over the economy, he noted. But our corporate philosophy is to make things better for future generations. People believe UPS will get stronger.

A 'Wicked Problem'

Davis' presentation at Wharton was titled, The Wicked Problem of Recovery. The term wicked problem is used by engineers, he said. Tame problems are problems you can solve with your normal analysis and proven methods. Wicked problems are much more complicated. They are based on conflicting, contradictory information. You may solve one part of the puzzle only to discover another really hard puzzle.

An engineer by training and self-professed tech guy, Davis came to UPS in 1986 when the company acquired II Morrow, an Oregon-based tech startup where he served as CFO and later CEO. At the time, Davis didn't expect to stay with UPS longer than a few years. Once he began working there, however, Davis was pleasantly surprised to find that his new job was similar to his old position. At the startup, my job was to focus on customers and employees. At UPS ... my job is to focus on customers and employees. He held positions of increasing responsibility at UPS, leaving briefly from 1998 to 2000 to serve as CEO of Overseas Partners, a Bermuda reinsurance company. He then returned to UPS as vice president of finance, joining the UPS Management Committee in 2001, when he took the job of CFO and vice chairman of the board. He succeeded Michael Eskew as CEO and chairman of the board in 2007.

According to Davis, communication with customers and employees is more complex for a CEO, but still crucial. Another of Davis' priorities is seeing his company through the economic recovery. Davis has an insider's perspective on the competing interests at the highest levels of monetary policy, because he completed a term in 2009 as chairman of the board of the Federal Reserve Bank of Atlanta. In that position, he saw the tension created by practical decision-making for the purposes of economic recovery. On the one hand, politicians urged banks to extend credit in order to jump-start the economy. On the other hand, regulators cautioned banks not to extend so much credit that they endangered their reserves.

This tension, Davis noted, echoes another challenge facing corporate America: How can a company remain flexible and capable of rapid diversion in case of major disasters? UPS has invested heavily in technology to deal with this issue, Davis stated. The company's solution is two-pronged, relying in equal measure on information and technology. For the past 25 years, UPS has invested about $1 billion a year in technology. When flooding struck the Nashville, Tenn., area earlier this year, the company relied on employees and its technological infrastructure to keep customers' packages safe and to minimize service disruptions.

The current shaky economic environment is a challenge for all leaders, Davis acknowledged. He detailed three types of corporate responses to the economic downturn. Some companies won't make it. Some will be crippled; it may take five, six or seven years for them to get back to the level they were at before the collapse. The third type of company, however, will keep its long-term goals in sight. It will pursue strategic growth in line with its core values. These companies will effectively balance conventional and digital business, strive for efficiency and think globally. Consequently, Davis said, these companies will learn, adjust and evolve as the global economy recovers. Some companies will come out of the recovery stronger than ever. Times of great uncertainty are also times of great opportunity.