A Model Brick and Click Emerges

UPS has emerged as a rare example of a traditional company that suddenly morphs into a solid brick-and-click with a business model that works. So what's their secret?

[From iSource Business, February 2001] When a caterpillar emerges from its chrysalis it's a butterfly. But when a company undergoes a metamorphosis and emerges into the New Economy, what is it? Its DNA is the same, but it looks and acts differently. Take AT&T for example. By the time we go to press AT&T may have spun off its long-distance service in order to concentrate on wireless and cable-based Internet broadband. It won't be your grandparents' AT&T, but it may emerge as something even Pa Bell would recognize.

United Parcel Service, the subject of our story, is such a creature. The nearly 100-year-old, $28 billion company delivers six percent of the nation's Gross Domestic Product and already controls half of all e-commerce deliveries. Since 1998, UPS' business is up 78 percent and 80 percent of its Logistics Group's business is B2B. Under these circumstances, it's easy to lose perspective when you learn just what goes on after a customer calls UPS for pick-up. It has 2.5 million customers, 345,000 employees, 160,000 trucks and a staggering 74-terabyte database of customer and package information that helps track 90 percent of all the packages it touches. Now it's building the e-commerce side of the house and becoming the "brick-and-click" it always knew it could be because, finally, the technology came along that allowed it to turn that big database into useful services for its customers and added value for its shareholders. If you've ever been at the right place at the right time you understand why it may never have occurred to UPS to not throw its arms around the Internet.

The Internet: It collapses time and distance, the genetic material of all logistical support services. UPS' very large, worldwide footprint doesn't fully protect it from the kind of clever competitors e-commerce can quickly grow through consolidation and partnerships. No one is quite sure yet that companies will rush to outsource their logistics or, as UPS proposes, management of their entire supply chains. Just-in-time inventory management isn't new, but the Internet makes it a more far-reaching reality, enabling companies to save money, knock their inventories down to zero and still keep control of a critical part of their business by investing in technology to manage their own logistics operations rather than farm them out.

Spreading Their Wings

UPS.com was launched in 1994 after which time the company's mission started to change in earnest. According to Alan Amling, director of the company's Alliance Program, "Three years ago, if you'd asked anyone what the mission was, it was to be the leading package deliverer worldwide. [In 1999] the company's leaders came out with a new mission statement to be the leading global e-commerce company."

That timing coincided with the announcement of eVentures, an incubator founded by UPS to develop full-service logistics capabilities through a combination of start-ups, mergers, acquisitions and partnerships. A management team of vice presidents that oversee day-to-day operations conceived the idea and decided the company should set up subsidiaries to pursue its e-commerce strategy, in part because of the anticipated differences in temperament between UPS and its subsidiaries. While some things at UPS shouldn't change, its Internet start-ups were all about change and needed a more freewheeling environment. Meanwhile UPS would continue to provide the package delivery services its customers depend upon less they should risk the costly trial and error that could disrupt and potentially damage the company's core business.

"The essential issue was to keep pace with the New Economy and e-commerce. The transportation company had a full-time job. If you want to explore other e-commerce ideas, you need a separate arm to do it so it doesn't conflict with core competencies," says Mark Rhoney, president of eVentures. He's also candid about UPS' decision making process  "thorough and long." eVentures is an escape from its parent company's corporate culture which may be plodding in comparison but necessarily so in order to protect the interests of millions of customers, not to mention its relatively new shareholders. (UPS' $5.5 billion IPO in November 1999 was the largest in U.S. history.)

eVentures has, so far, launched one business, e-Logistics, and has two in incubation and three on the boards. Rhoney says two key factors help decide which projects are green lighted: profitability and scale. "I've wanted to make a profit before it was in vogue," he says. "If I'm not bringing a valuable asset to the table I probably shouldn't be doing it." Also, "Is it big enough to move the needle at UPS?" Although the incubator's businesses are independent of UPS they're imbued with many of the parent's best practices, and success is measured by the same rigorous standards.

Rhoney's mission, in a nutshell, is "Move fast, create shareholder value and don't be afraid to make mistakes." Okay, but one gets a sense that he isn't enamored with pop culture's trendy view of failure as a virtue. However where UPS can't afford mistakes its subsidiaries are allowed their share in the hopes that a few will result in the sort of happy coincidences that result in break-through ideas. Once out of the incubator stage eVentures' start-ups are on their own. And it's worth noting that Rhoney isn't rushing them out of the box before they're ready. eVenture's first 18 months occurred in the midst of the huge B2B boom throughout 1998 and the first quarter of 1999 when there was enormous pressure to launch start-ups on the belief that they could be fixed on the fly. Many companies that gave in to the pressure are no longer, others are floundering, and some are the wiser.

Learning to Stand on It's Own

It would have been oh so easy to let it all hang  UPS has spent $11 billion on technology in the past decade. However, money can't buy you love. There's also trust. "That stands for something," says Harvey Rickles, president of the company's e-Logistics subsidiary. In making its transition from Old to New Economy, UPS has grappled with problems like everyone else. But its e-commerce offspring are inspired by something deep in the company's organizational brain and in a very fundamental way are the spitting image of old dad  a complete, reliable, stand-up outfit.

The Internet still doesn't inspire a whole lot of confidence, so while e-Logistics is asking its new customers to buy in on faith, it's good to have the benefit of dad's solid reputation. This is a valuable insight for companies struggling to find their place in the electronic universe. The word "technology," without even knowing what kind and for what purpose, immediately calls to mind change, chaos and the unknown. In the end a company's goodwill is what puts it on the short list and makes it easier for customers to pick up the phone. It goes beyond name recognition. It's that thing money can't buy.

Most of us see UPS as the sturdy guy or gal in the brown uniform hustling packages in and out of the familiar brown trucks. Like ants carrying off the potato chips at a picnic, they seem to be able to manage a hundred times their own mass. In many ways UPS behaves just like an ant colony, ambitious and productive, with a complex organizational structure and social environment. It hasn't always been a happy place, recalling the drivers' strike that nearly brought UPS to its knees in 1997 and gave a huge boost to FedEx and the United States Postal Service. Here, too, the ant analogy fits. When an ant falls out of the column the rest wander off as well until the leaders go out and bring them back. UPS has a 90 percent employee retention rate which indicates that its leaders continue to invest in human capital as well as technology, which is something else customers depend on.

If you build it they will come: the original and already tired dot-com proposition. It turns out that when, not if, they come you have to build it. Lynnette McIntyre, a spokesperson for the Logistics Group, tells the story of a European customer who was concerned that the Fender guitars it ordered for its music store were arriving out of tune. Rock musicians in the Netherlands hired by UPS through a Dutch music magazine now tune every shipment of guitars before they're shipped on to Fender's European customers. Among the Logistics Group's other customers is UPS, which sends its PCs over for repair. As a matter of fact, the Group will repair any customer's PCs, reconfigure hard disk drives, and split and combine semi-conductor chips. Another project is the re-engineering of Ford Motor Co.'s finished vehicle delivery system, which will identify each part by VIN number so that cars and trucks can be tracked throughout the supply chain and the information can be presented to executives, dealers and car buyers in the most appropriate formats.

From Amling's perspective, UPS' partnership with Oracle is the best example of the company's e-commerce mission. "We want this connectivity with our customers to be painless and to be integrated into their core business processes." Oracle is a major presence across the company, but UPS is also working with SAP and PeopleSoft to smooth integration with their ERP systems. In addition to Oracle, e-Logistics' other technology providers are EXE Technologies and PricewaterhouseCoopers.

e-Logistics, the first eVentures start-up, is following a staged rollout of its services that began in the fall of 2000. Eventually the company will be folded into the Logistics Group. Rickles describes the ideal customer as a small to medium sized B2B or B2C Internet pure play, or a brick and mortar with revenues of $5 million and up that has the potential to generate as much as half a billion. At the point when a business is ready to implement an e-commerce strategy, e-Logistics will provide the following services:

Stage 1  Fulfillment, returns management, call center support and configuration to order. Time to market is four to six weeks. Fees are based on transactions.

Stage 2  Early 2001. The company doesn't build Web sites, but will be able to provide the necessary connectivity to its clients' in order to replace batch-processed information with real-time reports.

Stage 3  Mid-2001. Supply chain management that will offer demand planning and inventory management, including stocking and replenishment.

As other shippers are discontinuing COD terms, UPS and its subsidiaries remain committed to offering the service to help small businesses that either don't have credit or prefer to pay by check. Customers can also use credit or procurement cards. UPS Capital Corp. will finance inventory and receivables, and although it can manage credit lines, aided by its partnership with Oracle, e-Logistics isn't sure yet that its customers are ready or willing to go in that direction.

Rickles believes the ideal time for a company to outsource its logistics is the moment its Web site is finished. "Many need to come to the realization, particularly in the B2B space, that they don't have the infrastructure to do business on the Net." Where the first phases of B2B e-commerce focused on e-procurement and streamlining transactions, the objective now is to automate funds flow and then to consolidate logistics infrastructure, particularly for online exchanges. "If you think about the physical aspect of it, inbound shipping can be consolidated across multiple suppliers. Outbound can be coordinated by one logistics provider. Ten years from now, e-Logistics will be facilitating those exchanges with a global infrastructure." Rickles says three or four software companies are building a database of regulatory information pulled from the top 200 industrial trading nations to facilitate the documentation required for international trade.

Not Your Stereotypical Net-skates

Business consumers of logistical support services aren't necessarily your stereotypical Net-skates. While the Internet tends to drag down the price of goods and services, businesses traditionally balance logistics pricing against such things as shipping and receiving the right item in the right box, bomb-proof packing, on-time shipping, and pleasant and diligent customer care. UPS has learned this well and its businesses weave relationship management methods and technologies into their e-commerce efforts to avoid getting caught up in the sort of Net-fueled pricing warfare that inevitably leads to declining customer service and business failures.

Logistics costs are said to average 10 percent of the cost of all goods, but that's weighted for domestic transportation. The cost for foreign goods can easily exceed 50 percent. If you've ever been to a truckstop and noticed truckers huddled over their laptops then you have an inkling of the U.S. transportation industry's progressive nature  and the reason UPS tends to look over its shoulder as it runs. But even in Europe UPS' 17,000 trucks are bumping over dirt roads to deliver the goods. Elsewhere transportation is still via elephants, camels and pack mules; technology can only do so much and go so far. Companies still have to accommodate their customers' and suppliers' divergent capabilities. The technology the Logistics Group uses allows it to accept a supplier's fax from Manila and another supplier's e-mail from Mexico City, absorb the information into its huge database, and transmit it to Houston in a format the buyer's system can understand.

This is the sort of technological edge UPS hopes will stall its competitors, which seem to be everywhere and nowhere. Rickles isn't really being boastful when he says, "From what I've seen, we're putting together the most complete and integrated service to facilitate e-commerce. I don't see anybody who's putting together all of the pieces of the pie we're bringing to the table." It's still early in the game, but even $17 billion FedEx, the company's nearest rival if you exclude the USPS, is half the size of UPS and growing at half the rate.

This doesn't mean FedEx won't catch up, but Deutsche Post? "Who'd have thought?" asks McIntyre. Germans used to call their pokey postal service Schneckenpost, or snail mail. Now, at www.deutschpost.de you can read press releases on its e-commerce services or send a "Funpost" to your German relatives. UPS is clearly behind on its entertainment content, but the situation isn't all that funny. Government-subsidized postal services could pose a real challenge. For example, package deliverers in the United States are required by law to charge higher rates than the USPS. How it plans to engage in e-commerce is up to Congress. Other governments aren't so restrained.

But does the Logistics Group's competitors also see Deutsche Post, Danzas AIE Intercontinental or USFreightways as potential problems? Amling cites a famous article, "Marketing Myopia," written by Theordore Levitt and published in 1960 in the Harvard Business Review. In the article Levitt observes that the railroads failed to recognize their business as transportation and ignored the competition posed by trucks and planes. UPS understands the danger of adopting the same myopic vision. It's seen it all: where transportation infrastructure evolved over a century, the Web, the Internet's commercial hub, is only seven years old. Today's Schneckenpost could be tomorrow's e-commerce powerhouse.

One of the primary means by which companies have become players in the New Economy more quickly than they might otherwise have is by establishing partnerships with other businesses that can add mass, fill voids or in some way provide access to a complementary asset. It's kind of a hard concept to grasp because Old Economy companies tend not to play well with others. Compared to Internet companies, they like to do everything in-house because control is important, even when the thing being controlled doesn't add much in the way of value.

Or you can buy what you need. UPS shops for "best-of-breed" companies that fall outside its existing transportation core. For example, in October 2000 the Logistics Group purchased Livingston Inc., Livingston Health Care and their combined 24 distribution centers in the United States and Canada. The purchase is part of its effort to create what you might call an in-house logistics boutique, or bundles of services that outfit particular industry verticals. The Livingston companies are experts at distribution and supply chain management in the health care and consumer products industries. Other targeted sectors include automotive, electronics, apparel, pharmaceuticals and telcos.

Even so, when all is said and done, there's still that whopping $11 billion technology investment, plus an annual IT budget of $1 billion. One of the things money can do is help protect a public company from the vicissitudes of "whisper numbers," day-trader chat rooms and cranky analysts that can turn Wall Street violent when there's even a whiff of bad news. Late last September Apple Computer's value dropped an incredible 55 percent within a week of announcing lower than expected second quarter earnings and a modest sales warning. This was all based on the faulty projections of an industry-wide slowdown in PC sales, and it came after Apple had done so many things right over the past few years.

This sort of thing poses a real dilemma for companies, if not the entire economy. In his book The Coming Internet Depression Michael Mandel writes that the real difference between the Old and New Economy is, in fact, money. In addition to venture capital and companies' investments of their own resources, U.S. business has borrowed $5.5 trillion in the past five years. Gifted with this enormous amount of investment capital, businesses have been able to move faster than ever to implement new technologies and to achieve ever-greater cost efficiencies and labor productivity. Although 45 percent of the nation's economic growth in 1999 was attributable to technology companies, the benefits were felt in places like the manufacturing sector, which was responsible for much of the country's productivity gains.

But the basis for the decade-long expansion has been optimism, the friend of the free market. Mandel writes that for the economy to keep on rolling during a downturn but before an actual depression sets in, if indeed such a thing ever happens, "Businesses should keep investing in new technology under the assumption that their investments will pay off in the future."

UPS will discover holes in its e-commerce strategy in due time, but not for lack of good sense. Conversations with the people in charge of implementing its various parts reveal the sort of thinking one might expect from a company that formed at the edge of the Industrial Age and now finds itself on the edge of the Internet revolution. The tale is one of a company with a strong identity, a clear mission, a dedicated customer focus, an appreciation for the competition, and a big bankroll.