UPS has engineered a strong comeback from theeconomic slowdown. Last month, the package delivery companyreported that its revenue surged 8.4% in the fourth quarter amidstrong holiday volume. The pick-up included a 4.8% increase ininternational shipments, with business in China up 30%.Treasury & Risk checked in with CFO Kurt Kuehn on UPS'expansion overseas and the risks involved.

T&R: You've said emerging markets are a keyfocus in the year ahead. Which markets do you have your eyeon?
Kuehn: It's really a focus for the next decadeahead. Emerging markets is not going to be a one-year story,certainly for UPS and for most global companies that are lookingout. But they have been a priority the last couple of years. Wehave done a number of joint ventures and acquisitions, whetherthat's Eastern Europe or Turkey or Malaysia or Indonesia. Vietnamis another exciting area. It's going to continue to be an area ofincreased focus for us. Clearly some of these economies are pastemerging and are rapidly developing, so it's important that wedevelop enough capabilities there to help be part of the economicgrowth.

But emerging markets are tricky. You've got to find the rightbusiness model in each market. The highly automated processes thatwe have in the U.S. and parts of Europe that give great returnsagainst fairly high-cost labor do not make sense in some of theseemerging markets. So we clearly have learned the lesson that onesize does not fit all when it comes to business models across theseemerging markets. That's a challenge for a lot of companies.

T&R: Is there a particular model that doestend to work in some of these emerging markets, especially inAsia?
Kuehn: No, I think that's part of the innovationand learning that certainly UPS is working toward. A good exampleis what we call our DIAD board [Delivery Information AcquisitionDevice], the electronic clipboard that is a miracle of moderntechnology. It's basically a portable computer and it keeps thedrivers in constant contact, it has unique delivery instructions.It really allows us to be extremely efficient and alsoflexible.

But that DIAD may cost almost as much as a year's salary forsome of our drivers in these emerging markets. There the benefitsare outweighed by the costs. So it may mean that instead of ahigh-powered DIAD, they use a cell phone for updating the status ofpackages. It just requires creativity. It requires a combination oflocal relevance, so you have to have people there who understandthe market.

T&R: As you grow and expand in thesemarkets, you're picking up new and greater risks. How do you managethat from a finance point of view?
Kuehn: It creates a much more expansive platformand clearly we have a very active risk management program, both forfinance and for the whole company. Emerging markets present greatopportunities, but they're also areas where you can't always keepyour finger on the pulse. We've done a lot of work lately to makesure we validate all of the partners that we use in differentcountries, that they adhere to standards, that we require verystrict documentation of payments back and forth to avoid any hintof any questionable practices. It's a challenge, though. Clearlyour audit committee stays very busy, because we have operations ofsome sort or another in over 200 countries.

T&R: One of the risks that is not unique toUPS, but that many companies don't face to the same extent as UPS,is terrorism risk. How has the company's approach to terrorism riskchanged as you expand?
Kuehn: It's really been an evolution. The bigstory with some of these risks now is we're pushing, I thinksuccessfully, to get a much deeper business and governmentcollaboration. That's really the answer to some of these things, tomake sure that all information that's known can be shared, that wework together so you have a physical security, technologicalsecurity and intelligence. It's that multilayered approach that isa good balance for that. So we've been very active working withgovernments across the world, certainly here in the U.S.especially, to be a part of the solution and to help bothgovernment and private enterprise find a good balance.

T&R: Have your hedging strategies changednow that the company appears to be heading into an uptick? Anydifferences in the strategies you employed for finance over thelast two years?
Kuehn: I don't think it's changed dramatically. Ifanything, volatility has dropped a bit. So the outlier eventsperhaps are less likely, although you never know when one's goingto happen, so there's a little less panic. Hedging is cheaper thanit was a year or two ago. As volatility increased it was hard tohedge in a low-cost fashion. So in a more stable environment, then,our hedging becomes a little bit more routine. Currencies certainlymove around, there's a certain amount of volatility in currency.We're continuing to refine our processes on that.

I think the biggest thing around hedging and risk managementwe're doing is to continue to simulate as best we can all exposuresin aggregate for the company. It's still a work under way, but inmany companies, UPS included, some of this hedging is in silos. Youdo fuel separately from currency and across different businessunits. So we continue to work on aggregating all the businessunits, all the different activities to understand how cash balancesreact across these different business units, to be able toaggregate all those and really see in total whether we're long orshort in a particular currency or commodity.

T&R: So more of an emphasis on enterpriserisk management?
Kuehn: Yes, at the highest level. I think thereare a few companies that are doing this well, but the more diverseyour business is, then the more challenging that is. Because ourtraditional small package business has different cash and exposuresthan does our freight forwarding and our logistics businesses. Sogetting all those together and understanding all of that across theglobe is a pretty big activity. But we think there's a benefitthere. It allows you to make sure that you're not double-hedging,that you really understand the value drivers of the company. So Ido see that as an important emerging area in finance.

T&R: Is it an emphasis on technology orprocesses or both?
Kuehn: It certainly requires technology tosimulate it. You have to look for how things are correlated. Somecurrencies move with fuel in a positive sense, some move inversely.Some currencies are correlated to other currencies. We certainlyeven use commodities other than just fuel. So it's multi-layered,and technology is a big piece of making that happen. But it alsoputs a big challenge on the finance and accounting function to makesure that our ledgers contain all the information that's needed toreally effectively simulate this.

For more on Kuehn's strategy at UPS during the economicdownturn, see Delivering the Goods in Bad Times.