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VOL. 127 | NO. 200 | Friday, October 12, 2012

Smith: Woes Accelerate FedEx Change

By Bill Dries

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FedEx Corp. founder and CEO Fred Smith ended 10 hours of immersion for analysts and investors in changes at the Memphis-based corporation Wednesday, Oct. 10, by telling the group of 200, “I think maybe we arrived at a better strategy through the wrong process.”

Asked directly if FedEx’s three-year transformation plan would be happening if FedEx Express hadn’t been hit hard by a lingering recession, Smith said yes. But perhaps it would be under different terms. Asked if the plan to add $1.7 billion a year in profitability, most of it through cuts in employees and other cost reductions, would continue if the economy somehow resumes 3 to 4 percent growth, Smith again said yes.

What followed the short answers in both cases was as interesting as the numbers and repeated confidence expressed by the tier of executives just below Smith on the management chart.

“Of course the business has deteriorated. That’s why we’ve done this,” Smith said of Express, the corporation’s oldest and largest division – the one with the worldwide fleet of cargo jets. “When we started going into fiscal year ’13, we were all thumping our chest thinking this is going to be a record year.”

The reason for the optimism as recently as February and March was that growth in international trade for decades had averaged twice the global gross domestic product. FedEx is a company tied closer than most to gross domestic product. And for Smith the growth in trade is confirmation of his belief that the force of markets like China joining the world economy is one stronger than the recession.

“There were recessions,” Smith said of decades past. “But there was a clear secular integration of the world economy.”

Smith then expressed concerns, as he has in recent months, about the impact fiscal and monetary policies in Europe, China and the U.S. have had on that growth beyond the impact of the recession.

“I’m not sure you can assume that is the same going forward that has been the case looking back. Our assumption is that it won’t be the same,” he added of economic growth in relation to global GDP growth.

And he emphasized the cost-cutting measures remain in place even if the assumption is wrong.

Of course the business has deteriorated. That’s why we’ve done this. When we started going into fiscal year ‘13, we were all thumping our chest thinking this is going to be a record year.”

–Fred Smith

“I can promise you that stuff goes to the bottom line like Sherman through Georgia. But we’re not counting on it as part of our plan,” Smith said.

FedEx Chief Financial Officer Alan Graf resisted giving out any numbers on the coming voluntary buyouts until Wednesday’s final recap.

The cost of the buyout plan will be approximately $600 million, which the company will divide over two fiscal years.

Smith acknowledged the buyout and what follows if enough employees don’t take them will likely affect thousands of FedEx workers across a company that employs 35,000 worldwide.

“We can’t just cut off an arm,” Graf said. “We have to do this by design and make sure our service levels improve. It depends on the take rate and how long we may need them to stay.”

Some of that might be through attrition, which Smith said the Express and Services division see a lot of each year among employees working in direct volume-related areas.

“Some of the folks will have to go to work at a different location to get the advantage of that,” he said of the impact on others. “We just don’t need as many people shuffling papers to clear items when we have the items online. You don’t need as many couriers and handlers when you have a system that allows you to schedule your work before it even comes into the station.”

Eliminating those parts in what amounts to a transformation of FedEx’s technology is what Smith, Graf and other executives say was already under way when Express’ successful model met the ongoing recession and the policy decisions that have meant slow growth and slow trade depending on the continent.

FedEx Chief Information Officer Rob Carter, who has been leading the move across the divisions to common information technology platforms, said he and his team found 237 systems in the corporation that managed addresses in some way. There were 302 address databases.

“That’s not a particularly pretty picture,” he said. “We’re building these enterprise foundational services … with 80 percent less complexity and code and sprawl from the history of our applications.”

Carter is working on four of the services – address, customer, label and clearance. And in January, Carter says FedEx Freight’s integration into the fedex.com framework should be complete. The FedEx global sales force is using common software – salesforce.com.

The work won’t eliminate all of the differences in function.

For instance, Express and Ground workers now use the same handheld computers but with different software.

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