USPS: Last Post Standing

The Japanese government announced yesterday that it will begin the process of privatizing Japan Post.  (See: Business Week)  The decision by the Japanese government leaves the United States Postal Service alone as having a business model with many characteristics of a government department.

The following chart illustrates where many of these posts sit on a continuum from government department to a corporation with only private shareholders.     Postal Operators operating as a government department, in a manner similar to the pre-Postal Reorganization Act Post Office would be placed on the far left side of the chart.   A national post with only private sector shareholders would be placed on the far right side. National posts located between the center and the far right sides of the chart all operate as government owned or partially government owned corporations operating under standard or nearly standard corporate, employment, and tax law. 
 

Once Japanese government sells shares in the its national post to the public, this chart will look particularly unbalanced.  All other posts will fall somewhere between the center and the fully privatized side of the chart.   In the instances of the Swedish, Danish, and Belgium posts, the current positions will likely shift toward privatization once they begin selling shares to the public.

The shift toward privately owned national posts are happening in countries with governments that are considered both left and right of center.   The decision Swedish and Danish governments to begin privatizing their posts reflect concerns that the national operators cannot raise sufficient capital from private debt markets alone to cover capital needs to manage the transition to a business model that is less reliant on document delivery.

In the near term, privatization appears unlikely in Australia, Canada, Finland, France, and New Zealand.  In these countries, cultural norms allow government owned corporation, operating under commercial business, employment, and tax laws to fully or nearly fully compete with the private sector.  In some of these countries, privatization would be politically unpopular.  In others, there is no political drive to privatize the national post and postal management has not expressed a need for the capital that selling shares would provide.

Privatization is off the table for the Postal Service until its finances improve.   This chart illustrates that privatization is unlikely to remain off the table for ever.

The Courier, Express, and Postal Business and the Nobel Prize

The research that Oliver Williams completed that brought him the Nobel Prize in Economics highlight key issues in the transformation of the courier, express and postal (CEP) business over the past two decades. In its press release, the Nobel Committee stated that "Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson's theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets."

So what does that mean in plain English? More importantly, why am I writing about this award in a blog dedicated to the courier, express, and postal industry?

Simply, operators in this business have a choice as they try to provide service across a broad geographic area or across the range of transportation and communications needs of their customers within a firm rather than through contractual arrangements between regional or modal partners. With few exceptions, when faced with the choice of providing service with a partner through a contract or within the constructs of a corporate structure, operators in this business have chosen corporate structures. The expansions of Deutsche Post, FedEx, TNT, and United Parcel Service all followed this path.

These firms succeeded by out-competing national postal operators that had to offer international service through bi-lateral or multi-national contractual arrangements, many of which were negotiated through the Universal Postal Union. The key problem of these contractual arrangements were that the operator selling the international service could not truly tell the buyer how long it would take to get delivery because they could not control the end-to-end service. Nor could the originating operator offer a seamless track-and-trace service until many years after the global corporate operators had made them a requirement of international express and parcel delivery.

The choice of a corporate model reflects a choice on a less global scale as well. Efforts by La Poste (France) and Royal Mail to provide service throughout Europe illustrate attempts to create a corporate structure within the Europe for parcel delivery to replace the contractual service that involved each national postal operators. The Austrian Post has purchased a number of firms focused in Eastern Europe with a goal of creating a stronger regional delivery competitor. The recent decision to merge the post offices in Sweden and Denmark also illustrates the choice of a corporate rather than a contract model to provide service within the CEP markets that the two independent posts now operate. Finally, Purolator Courier, a Canada Post subsidiary, and Canada Post itself, have established a strong corporate presence to handle cross-border traffic. Purolator is using its presence in the cross-border market to begin a domestic United States service.

Now there are limits to the use of a corporate model in the CEP industry. Firms in the industry use both a corporate and contractual or franchise model to provide retail services. The cost of maintaining a stand-alone retail infrastructure that has different business challenges than the rest of the CEP business has driven many firms to switch from the corporate to the contract model for this part of the business.

The last area that may fall under the contract model is the pick-up and delivery services themselves. Here the question is whether it is better to manage the delivery process with employees or contractors. The local courier business has always used a contractor model reflecting the uncertainty of the traditional on-demand unscheduled delivery service that they offered. FedEx Ground has used that model since its founding as Roadway Package Express. The recent court cases, IRS rulings, and NLRB rulings illustrate the challenge of maintaining the delivery function as a contractual arrangement and still maintaining proper control over the delivery portion of the service. However, both FedEx and local couriers believe that the cost advantages of managing delivery with contract drivers rather than employees is worth creating the proper legal structures to both ensure a reasonable level of control while still maintaining the driver's contractor status.

The question of corporate vs. contract models will likely come up as Congress looks at potential business models for the Postal Service. The work of Oliver Williams suggests that use of contract model could work for the retail side of the business where a franchiser that does not live up to its end of the bargain could be replaced. His work also suggests that delivery contractors could work in those areas where control over the appearance and schedule of the deliverer was not an issue. This is precisely what the Postal Service does with box-route contractors that serve many rural areas.

More importantly, his work explains why breaking the Postal Service into regional franchises or separating the delivery from processing and collection processes make little sense. Once the separation occurred the various parts would still have to contract with each other to provide end-to-end service. There is no competitive market for large-scale sortation. The growth of UPS’s and FedEx’s use of Parcel Select suggests that the collection and sortation companies would still have to contract with a company running the existing delivery network. Mr. Williams research suggests that there would be significant coordination issues and contractual gamesmanship between the various parts of what is now a unified Postal Service. The experiences of Citi Mail in Sweden and TNT, DX and others in UK illustrate the preference of operators to offer end to end service and the coordination issues and contractual gamesmanship that exists in developing interline agreements when these firms have to contract with either a national postal operator or another independent operator. [One of the drivers behind mergers and territorial expansion of railroads and less-than-truckload trucking firms in the US was the failure of a regulated interline process to resolve contractual and service issues when one firm passedfreigt to the other]

Finally, his work suggests the mail business will see more consolidation and not less in the future. The current process in which multiple firms handle the process a taking a document from concept to delivery with each handoff handled via a contracted or regulated process, could soon involve fewer firms as the advantage of integrating more of these processes within a single firm becomes clear to firms on either ends of these processes merge.

Packstation vendor

For those that are interested, the Packstation's vendor is a KEBA AG, a European company (either Austiran or German). From press releases on their website, they have sold at least 2,400 packstations to Deutsche Post and 60 to the Danish Post office. Sales to other postal operators is not indicated on their website.

Their brocure on the product provides a bit of history of its delvelopment and the product's features.