Missing from the Postal Service's Action Plan

In the upcoming months, Congress, stakeholders, and Obama administration officials will complete a comprehensive evaluation of the package of changes that the Postal Service proposed in its action plan.   While many stakeholders will focus on what the changes mean for them, Congress and the Obama administration need to focus on what the plan means for the United States postal market and the impact of a financially failing Postal Service on the pace of the economic recovery.

In that regard, Congress and the Obama administration will likely go beyond examination of what is in the plan.  They will quickly identify gaps that need to be addressed.   This process will force the Postal Service to transform the documents designed to mold public opinion into a presentation that is at least as detailed as what creditors would require before re-capitalizing a money-losing firm.   In these documents, the money-losing firm has to detail the changes that will be made in detail, the financial consequences of all changes, the financial result when changes are complete, and most importantly why supporting the transformation will increase the creditor's returns over liquidation of the money-losing firm today.

In that light, here are three gaps in the Postal Service proposal that could affect its successful implementation:

• No financial target associated with a self sufficient Postal Service.  The only financial target presented was a return to break-even in 2020.   A break-even target is same target that all government departments have, the only difference for the Postal Service is that revenue comes from ratepayers and not taxpayers.
  
  Without a return based financial target, it is impossible to know what levels of revenues and costs are required to generate sufficient cash to cover needed investments for the next generation of automation and information systems, transition costs of reducing and restructuring the workforce (including retirement incentives, transfer and training costs, and severance costs), modernizing the retail network, replacing the vehicle fleet, ending deferred maintenance and optimizing the sortation network. 
  
  The lack of a realistic financial target allows mailers and employees to underestimate the scale of the changes that are required for the Postal Service to be a self sustaining enterprise in 2020.   Mailers, employees and stakeholders will find it much easier to argue that changes that hurt them should be eliminated.  This makes Congressional passage of required changes more difficult.
  
  Finally, and more importantly for most stakeholders, the lack of a realistic financial target reduces the probability that Congress will take the necessary and prudent decision to adjust the retiree health payments.    As is clear to most stakeholders, retiree health payments are an issue that must be addressed in order for a sustainable Postal Service to emerge.   A break-even target allows members of Congress and others to argue that no change is needed and forces the Postal Service to operate like Washington DC's Metro and defer maintenance and other capital investments, raise rates, and reduce service in order to balance a budget.   (Similar strategies to balance budgets can be found in the commuter rail operations of METRA in Chicago and the MTA in New York.)
  
  
• No Capital Spending Plan - In response to a question at the forum presenting its action plan, Pat Donohue laid out the Postal Service's approach to capital spending going forward.  In this approach the Postal Service will focus on 1) improving processes using existing capital assets first; 2) increasing the utilization of existing capital assets with a focus on labor contract changes that allow that to happen; 3) reducing emphasis on big purchases; and 4) continuing a parsimonious approach to capital spending due to limited cash flows.  
  
  This approach reflects an organization in survival mode and makes sense right now.   However, there are limits to extending the replacement cycle on existing equipment even as lower volume reduces the wear and tear on existing production equipment and vehicles.   Furthermore, lower volume, and more importantly shorter runs may change the type of capital equipment required in a manner similar to how shorter runs have changed the equipment deployed in the printing industry.
  
  Modernizing the retail network will also have capital expenses.  The Postal Service needs to purchase additional current and next generation automated kiosks.   An expanded contract retail network will require spending to develop and train the new management structure for contract locations, improved information systems designed for managing a larger contract operation, and other start-up costs that will exist to create the more contractor-friendly approach necessary to open the number of locations necessary to make this approach work.
  
  The biggest risk to the survival mode approach to capital spending relates to dealing with adjusting the network to handle single piece mail and flats.  By 2020, the Postal Service may handle only 30% of single piece mail that it does today.   At that level of volume the Postal Service could meet today's service standards at a cost lower than current levels in no more than half of the facilities that sort originating mail today.  The declining volume will require a continuing process of moving equipment, retrofitting existing facilities, and in some cases building new faculties in more optimal locations will involve significant capital spending starting now so that implementation can proceed on a timely basis 
  
  The problem with flats is similar with one difference.  Most flats are sent by large volume mailers.    By 2020, it may make sense to have a flat sortation network, including sortation to delivery route sequences in fewer than one-third of the facilities that sort flats today
  
  Finally, while not exactly capital spending, the speed at which the Postal Service manages the changes that it proposes depends upon the availability of cash needed to handle the impact of the transition on postal employees.   The lowest cost and slowest method is to allow attrition to reduce the workforce. By using only attrition, the Postal Service drives the changes to its sortation and retail networks to the rate that employees leave the Postal Service.  A more efficient but more expensive approach uses retirement incentives and lay-offs that generate severance and unemployment costs to match the speed that it can manage the changes in its operations and therefore the size of its workforce.
   
• No specifics relating to changes required to most effectively and efficiently use non-union employees.  Non-union employees represent less than 10% of the Postal Service workforce.   The transformation envisioned will change the nature of the work that managers and sales, general and administrative staff do.   Just as the Postal Service cannot afford excess craft employees, it cannot afford excess non-union employees, and for that matter contractors who in many cases have staff responsibility that in the private sector employees would have.
  
  More important than the number of non-union employees, the new environment will likely require a different mix in the skills and management abilities than the Postal Service now has.   While many of its non-union employees are nearing retirement, it is unlikely that either their rate of retirement will match the rate that the mix of employee skills required changes or that retirements will occur first in positions that can be eliminated as the position is no longer needed in the new environment in positions requiring skills that are easily found internally or externally.  
  
  The current civil-service like employment rules severely restrict the Postal Service from adjusting its workforce at a rate anywhere near the rate that its skills need changes.  Civil-service like employment rules and pay schedules also encourage the use of contractors who have more flexibility to develop career paths for employees that reflect the changing skill mix required by the Postal Service.   For example, contractors can have large number of employees who meet the needs of the Postal Service for a number of years and then when the Postal Service's needs change, replace those employees with a different set with skills attuned to more current needs.  Of the original group, only a few remain with the firm in management roles and the rest are let go.  In information technology, finance, accounting, economics, engineering and other knowledge based fields, consultants can adjust pay levels for existing employees and new hires more rapidly to reflect changing market conditions than the Postal Service can.  (In fact in some technical fields, competitive pay levels may exceed the salary of postal executives.)
  
  Finally, compensation schedules for non-union employees need to be reviewed at all levels.   An increased focus on growing sales and creating new mail products requires an incentive and possibly a commission based compensation scheme to properly find the best sales and marketing people who compete in an employment market where most compensation is primarily incentive or commission based.  Introducing such a pay structure would require a significant change in compensation policy that may require changes in law.

The three items listed in this post are not likely all inclusive.   However, they identify three gaps that need a serious examination by those responsible for deciding the Postal Service's future.