Thursday, December 10, 2009

Is the Future in Letter Mail?

In his most recent statement, Here We Go Again, on the current debate on postal policy, APWU President Burrus makes a fairly bold statement.

The future of the Postal Service is tied to the revenue generated from letter mail. (All quotes in this post are in italics.)

His statement is both true and troubling. It leads to two simple questions.
  1. If the future of the Postal Service is tied to letter mail, are there initiatives that can grow letter mail enough to replace revenue lost to the transition to the digital documents in order to maintain a workforce of 600,000, current levels of service quality, and the current operating and retail network; pay the costs associated with an accurate calculation of the Postal Service's retiree obligations, debt incurred for current operating losses and workers compensation payments; and generate sufficient cash to invest in improving service and efficiency to meet the needs of mailers in 2020 and beyond?

  2. If not, what changes are necessary to ensure that mail remains a critical economic driver as we work our way out of the great recession as well as 2020 and beyond?
These are questions that I had to think about as I looked at potential business models for the Postal Service. I saw the same facts that President Burrus did.

: In and of itself, restructuring has not and will not increase mail volume. Correct, restructuring is a response to changes in mail volume. To the extent that that restructuring makes the Postal Service more efficient, the Postal Service more competitive in shipping service products, and introducing the value of mail to customers who previously thought it was too expensive.

Fact: Major mailers independently determine the amount of hard-copy mail they send, and “reform” will have little influence on their decisions. The PAEA, which the large mailers unanimously supported, was followed by the most significant decline in mail volume in the history of the Postal Service. Mail volume since PAEA has been driven by the emergence of digital strategies developed by the major customers of the Postal Service and the increasing dependence of the Postal Service on economically sensitive advertising and parcels. The decline of single-piece letter mail that began over a decade ago reflects both a switch to digital alternatives for payments and a decline in payments reflecting lower economic activity. It is not clear whether a rebound in the economy that will increase mail payments or the new mortgages, phone services, credit cards, etc will only offer paperless transactions.

Fact: There is stiff resistance to government competition in the private marketplace. Therefore, it is unlikely that the USPS will be permitted to engage in banking, phone sales, and other new commercial activity. There is minimal tradition at any level of government in the United States of government entities competing in the private marketplace. This means expanding to provide customers complementary services in conjunction with letter or parcel services or expanding retail much beyond existing "postal products" will meet resistance from the private sector and Congress as long as the Postal Service remains a governmental entity. This restriction on the Postal Service serves neither postal customers nor postal employees. It is one of the reasons that I concluded that governmental models were wanting.

Fact: The opportunity to fix the PAEA by removing the crippling obligation to prefund retiree health care – a correction that is desperately needed – is hampered by Congressional “scoring” procedures, which prevent Congress from passing bills that add to the deficit. (Although the USPS is not part of the federal budget, it is part of the “unified budget,” so the Congressional Budget Office demands “offsets” when changes are made to the payment schedule.) The retiree health care illustrates a second failure of governmental models. As long as Congress has an opportunity to tie the Postal Service to the federal budget it can tax postal customers and employees with onerous calculations of retiree obligations, refusal to pay for services performed for free, and other assaults on postal cash and revenue.

Fact: Because they fail to address the fundamental challenges facing the Postal Service, reducing the number of employees, slashing the number of mail processing plants, and eliminating retail units are not long-term solutions. They are misguided cutbacks that diminish service and harm those who are the least “connected.” Burrus here highlights his real problem. Almost all of the proposals that the Postal Service have suggested to deal with declining volumes affect APWU members more than any other postal stakeholder.

Lower volumes will require continuous re-optimization and most likely consolidation of the operating network. As a previous post noted, the Postal Service may have both too few retail outlets and too many corporate outlets and existing outlets offer a range of services that are too limited to serve the needs of its retail consumer and business customers. Changing to a more aggressive network optimization strategy and a customer-focused retail strategy requires the Postal Service to show why these strategies will in the long-run improve service, maintain service to the least "connected," and provide postal employees with the best possible jobs that it can offer. By only showing cost savings, the Postal Service left stakeholders with a feeling that all it is thinking about is how it gets through the next fiscal year. All other stakeholders have a longer and broader perspective that is left unaddressed.

Given these facts, where options are there?

As it is in the interest of President Burrus to maintain the jobs APWU for as long as possible, he focuses on options for increasing revenue, as the Postal Service can avoid significant reductions in its workforce if revenue starts growing again. He rejects the "dream of a Postal Service that survives by providing a smorgasbord of services “around the edges” of mail processing and delivery." He sees these ideas, including some presented at a recent Congressional hearing as having negligible impact on the bottom line. It is here that he presents two options that can generate sufficient revenue growth that he sees is needed to "maintain the national network of more than 30,000 facilities; employ more than 600,000 workers, and deliver mail to every home six days a week."

Here are his options:

  1. Raise rates - He argues that rates do not drive volumes, factors beyond the Postal Service's control drive the overall trend and therefore rates can be raised without much affect on the long-term trends. While the price sensitivity measured in volume forecasts suggests that customers are not sensitive to price changes and price increases would have minimal affect, the positive impact of the summer sale on volumes suggest that large customers when given price incentives to mail do increase both volumes and total revenue. The impact of the summer sale suggests that we should be less confident about the value of price sensitivity measures filed with the Postal Regulatory Commission when evaluating pricing innovations. More information is needed on the value of mail for specific types of customers, and in some cases specific customers, to set prices that both maximize volume and revenue. Otherwise, the Postal Service is most likely leaving revenue on the table and mail pieces unprinted. A customer-focused pricing structure should be able to increase revenue and avoid the rate increases that his approach would produce.

    Relying on higher rates that are not designed around the specific value of mail to specific customers will likely depress volumes, revenues, and net income. Until more customer-specific pricing becomes common place, along with the internal infrastructure and regulatory framework to support it, increasing prices will remain an unpalatable option for growing revenue.

  2. Expand Services to Small Businesses Underserved by the Postal Service. This idea repeats his earlier statement that the future of the Postal Service is in advertising. Here he goes further to note there are many postal customers that are underserved by the Postal Service as well as the private sector. His description of the problem that small business have with Internet advertising is the same problem that they have with all other media, their ads get lost in the clutter.

    For example, let’s assume you operate a small “gutter cleaning” company and you want to inform homeowners about your services. Television is a very expensive way to advertise, and viewers may or may not have trees around their homes. The same is true for advertising on the radio or in newspapers. If you use the Internet for advertising, your business will be listed with hundreds of other gutter-cleaning companies. As a result, you may decide to post signs at traffic lights and distribute leaflets in parking lots. You probably never thought that you could afford to send a letter to every home in the community that might need your service.

    This is an opportunity to marry the Internet to hard copy and, in the process, save the Postal Service.

    In many ways, President Burrus understates the problem of underserved potential customers. Small businesses are underserved by the problem goes beyond small businesses to those that want to advertise in communities that fall outside the core city in a media market or looking to replace advertisements that previously were delivered to every address within a newspaper. The private sector attempts to meet these needs through envelopes filled with coupons, marriage mail, and pennysavers that are delivered by mail as well as free newspapers that are delivered to a local community.

    The kind of partnership that President Burrus envisions involves more than accepting the efforts that private sector firms catering to serve small businesses. In his words: We have a golden opportunity to do what no other company can do: transform an idea into an advertising message, convert it to hard-copy mail, and deliver it to a specific audience. This is known as one-stop shopping. (If you want to apply real discounts, give them a package deal.) President Burrus is describing introducing vertical integration to the process from concept to delivery as a way to cut costs and improve service. In implementing this idea, the Postal Service would confront one of the key facts that President Burrus outlines, resistance to government competition with the private sector.

    The kind of product that President Burrus envisions also requires rethinking the definition of postal products. Postal products, regardless of class, need to be thought in terms of day certain delivery. The internet and mail work together best if the sender is certain when both will arrive. Networks need to reflect this and untamed processes, now managed by the private sector and the Postal Service, for moving mail from concept to delivery have to be eliminated to remove delivery uncertainty.

In summation, President Burrus has shown that even his best ideas to save the jobs of his members cannot succeed due to barriers that exist in the current business model and regulatory framework. Three barriers are noted in this post: resolution of the retiree benefit payment issue, independence from the Federal budget and Congressional interference, and inability to fully take advantage of all opportunities to serve customers due to the Postal Service's status as a government entity. Removing those barriers in a new round of legislation would give his members their best shot for maintaining the greatest number of existing good-paying jobs. Removing these barriers will require a new business model that includes changes far greater than envisioned by the authors of the PAEA.

1 comment:

Tom Landis said...

whether a rose is a rose is a rose is not a question of fact? How the people (business and the citizens) are served is the real question. Be it government or a quasi model makes no difference. To be pragmatic, the USPS is in dire need of leadership. Time for vote of no confidence in Board of Governors and especially Potter / Donohoe. Thanks to Burrus and yourself to elevate the discourse.
From the bottom up view the service, or lack thereof, is in shambles. It is driven by the budget. If you believe a private model would change that, I beg to differ.