Privatization is Not Free

Privatization of the Postal Service has received recent attention in a speech by Governor Tim Pawlenty and the editorial page of the Washington Post.    Neither presentation provided any indication of an understanding regarding what it would take to privatize the Postal Service either legally or financially.

In an earlier post commenting on Governor Pawlenty's speech, I noted that privatization would likely require resolving the retiree issues in the Postal Service's favor. 

Confirmation of that conclusion is coming from Great Britain.  The Financial Times reports that Ed Davey, postal affairs minister, told the Commons that, to put Royal Mail on a sustainable commercial footing, its balance sheet would need to be restructured to “significantly reduce” the company’s £1.7bn debt to the government.


That would be on top of taking over Royal Mail’s £8.4bn pension deficit. Officials said the scale of the capital injection would be determined by talks with the Commission, coupled with the company’s finances and market conditions.    

In total, the British government is expected to forgive debt or take over obligations of around $16 billion U.S.   This is to privatize an enterprise that generates one quarter the revenue of the Postal Service. 

Privatization may be what the Postal Service requires, but before the idea is to taken seriously more work is needed to understand what privatization would require legally and financially.

Marketing Mail in a Competitive Market

Third Sector reported the results of a TNT Post announced the results of a survey that it conducted in Great Britain on the effectiveness of mail for gaining contributions by mail.   The results illustrate not only why mail is an effective marketing tool for non-profits but also how postal operators in competitive markets work to expand sales.

Findings of the TNT sponsored study

• One-third of people who make donations to charity are prompted to do so by receiving direct mail from the organization.
• 57% of those who respond to mail appeals respond by mail.
• 87% of those who want more information get that information on-line.  Only 10% use the mail to get more information.

The results illustrate that even in an environment where potential donors use the web to seek information on a charity, mail plays a major role in getting donations.   In the article, both spokespersons for the Centre for Charitable Giving and Philanthropy and TNT Post about the importance of charitable organizations to use a multi-media strategy to solicit contributions.

What is unique about the survey is that it was conducted for TNT Post and and not the national post, Royal Mail, or for a trade association for direct marketers.  TNT is trying to differentiate itself from Royal Mail and a survey of the public is an inexpensive way to gain publicity for their service.

TNT Post's survey is particularly interesting once one looks at the websites of both the website of TNT Post's United Kingdom operations and Royal Mail.  Both firms provide nearly one-stop-shopping of all components of a direct mail campaign from design and printing, to delivery is done by Royal Mail, TNT Post or other delivery means, and analytics evaluating the effectiveness of the advertising campaign.

Based on what is happening in Great Britain, competition in the mail business in the United States could make it easier for advertisers that are hesitant to use mail or other forms of delivery of printed advertising to manage the process.  Clearly having multiple delivery companies marketing services could help expand the market.  The largest mailers will likely not need the services similar to those that TNT Post and Royal Mail are offering and continue to use the large printers to manage their needs

The United States market is not nearly as competitive as markets in Europe.   Restrictions exist as to what services the Postal Service can offer that would integrate delivery with all of the other activities associated with producing mail.   No company in the United States offers an alternative delivery network comparable to what TNT Post and other firms offer either.    Given that print fits well in a multimedia marketing strategy but is often shunned due to the production and delivery costs, it is worth posing two questions:

• Would print be better off in a competitive postal market? 
• How would the impact on economic growth if all aspects of printed advertising were sold in competitive markets?

Privatizing the Post

In the United States, the policy debate is over how the Postal Service will survive past the end of the fiscal year.   In Great Britain and Canada the debate is now respectfully when and if the Post should be privatized.

Royal Mail clearly is on a path toward privatization.

In July, Sky News reported the government hired advisers on a potential Royal Mail sale.

More recently, Royal Mail hired Moya Green, former CEO of Canada Post who the Times (London) steered the "organization to a trebling of its net profit to C$281 million (£183 million), despite a 5.1 per cent drop in revenue."  Ms. Greene also served as "Assistant Deputy Minister of Policy in the Department of Transportation, Canada from 1991 to 1996 and was responsible for broad reform of the over-burdened transportation system; the privatization of CN; the deregulation of the Canadian airline industry; and the commercialization of the Canadian port system." (Biography from Business Week) With this hire, Royal Mail has hired both an executive who has experience cutting costs in a postal enterprise in a period of declining revenue as well as one who understands the privatization process from the government's (owner's) side of the sale.

Hellmail has reported that Richard Hooper, who is engaged in his second evaluation of the future of Royal Mail, "argues that the recent hiring of former Canada Post CEO Moya Greene and the swap from Allan Leighton to Donald Brydon as Chairman will have increased the value of Royal Mail."


The departure of Moya Greene has raised the privatization issue in regards to Canada Post as it is clear that the key difference between her position at Canada Post and the one at Royal Mail is the challenge of taking a government enterprise through the privatization process.   The issue of privatization of Canada Post was first raised by the Organization for Economic Co-operation and Development (OECD) last spring and received a tepid response from the Harper government at the time.    The departure of Moya Green has generated a number of articles and letters to the editor on the subject which include those by Michael Warren, former CEO Canada Post, Denis Lemelin, National President, Canadian Union of Postal Workers (CUPW), and Kevin Gaudet, federal director of the Canadian Taxpayers Federation.

The expected privatization of Royal Mail and the discussion of privatization of Canada Post illustrate that the decision to privatize is a decision of the government and not the postal operator.   While the operator may have the data necessary required to determine whether privatization is possible, and its management may have opinions on the advisability of privatization for the long term viability of the enterprise, the decision is that of the owner of the enterprise, the government involved.

Any examination of privatization of the United States Postal Service would have to be approved by Congress and most likely have the support of the Administration with the lead most likely taken by the Department of Treasury with the support of Departments of Transportation and Commerce and the Federal Trade Commission and the Federal Communications Communication.  Even if privatization is not on the table, it may be time for Congress to begin demanding that administration recognize its position as owner of the Postal Service and designate a point person for examining potential business models and a regulatory framework that would ensure the Postal Service's survival as a self sufficient enterprise in 2020 and beyond.

Amazon: Avoiding the Post Office

In Rethinking the Parcel Market, I noted Amazon's effort to offer same day delivery and what that means for UPS, FedEx and the Postal Service in the United States. Today's Times Online reports that Amazon has launched "a secret search for bricks-and-mortar stores to support its rapidly growing website. It is understood to be scouring the country for high-profile sites."

According to the article, Amazon is not looking to open retail outlets where customers can buy goods that the store has in inventory. Instead, the stores will provide a delivery point for customers that order larger items that mail or truck delivery is inconvenient.

[Monday 12/7/2009 Amazon has subsequently denied the story. Given the success of Apple stores and Amazon's success in revolutionizing the retail supply chain, the idea that Amazon would add a brick and mortar option seems logical. The brick and mortar option clearly fits with Amazon's clear interest in reducing the time from order to delivery. The post was edited following its original posting to reflect why Amazon may have explored the possibility of retail even if it has for now rejected the available brick and mortar options.]

Amazon's move if completed would put it in direct competition with Argos, Tesco and John Lewis which all offer similar services. The Times reports that Argos' customers pick-up 18% of their Internet purchases in brick and mortar outlets rather than have the items delivered by parcel carrier or road transport. Argos will generate half of their television sales this Christmas via the combination of a purchase on the Internet and delivery to a brick and mortar outlet.

If Amazon goes ahead with a retail strategy, it should be able to haul items for pick-up to its "stores" using contract carriers dedicated to their retail network. Amazon's business case would most likely show that both customers prefer to pick-up their larger items at a retail outlet and the overall delivery costs, including the cost of operating retail outlets, is less than the cost of home delivery. Amazon could then decide to hold some inventory of fast moving items at retail outlets to further reduce costs and allow for same day pick-up of these items. For this strategy to be successful, the customer's experience in retail outlets has to be just as good as the experience on the website.

A retail initiative by Amazon's would be a direct assault on Royal Mail, DHL, UPS, TNT, FedEx and road transport companies that handle items that weigh over 75 pounds (34 kilo). The reported new initiative would also be a direct assault on retail outlets of Royal Mail and its competitors that could provide a similar service to replace the loss of sales as single-piece letter mail volume decline.

Amazon is unlikely to pursue a similar strategy in the United States. Pursuing this strategy in the United States could require Amazon to collect sales taxes on sales in those states where it opened retail outlets. Losing the sales tax advantage would eliminate a price advantage that Amazon has over Best Buy, Sears and other s that offer store pick-up of Internet sales. Given the peculiarity of U.S. tax law there is an opportunity for FedEx, UPS, and the Postal Service to work with Amazon to expand the hours of a limited set of their retail outlets to make them pick-up points for Amazon and other Internet retailers. Alternatives any of these competitors could follow the lead of the German and Danish Post Offices and open self-service lock-boxes for after hours parcel delivery.

Mailing to Santa

Santa Claus's Main Post Office
Arctic Circle, Finland


Given all of the troubles the USPS is having with mail to Santa this year, I took a quick look at how it is handled in other countries. Mail to Santa is a worldwide phenomena and countries close to the North Pole all receive thousands of pieces of mail addressed to Santa. Many have formalized programs to answer the letters.

A couple of Posts have websites that help children (and their parents) send letters to Santa. All of these countries reflect English culture. Here are three.

Australia Post - handles over 100,000 letters to Santa. They have a special address and Postal Code. Australia Post works with Santa's elves to ensure children who write a letter to Santa at his special address receive a reply. The website includes pdf files of special stationary for Santa letters

Canada Post - replied to 1.4 million letters and 63,000 emails in 2008. Like Australia Post, Canada Post has a specific address and zip code for Santa letters. Its website also has the link to Santa's e-mail address which allows it to digitally savvy children. The website also includes holiday games and a weekly posting from Santa.

Royal Mail - has a special address for Santa letters and responds to as many as possible.

Posti (Finland Post) - has both a mail and e-mail address for Santa. Finland Post receives mail from children worldwide at a real Post Office on the Arctic Circle. It appears that you can get request a letter from Santa as well.

What is common among all of these postal operators is that they turn the Santa letters into a way to promote the corporate image to both children and their parents. Too bad the Postal Service is constrained from taking advantage of this image building opportunity.

Dealing with Fear

The combination of the recession and electronic conversion has created a new market environment that requires new ways of thinking about the postal workforce. Naturally, postal employees fear that the new market environment will mean changes to decades-old compact between national postal operators and their employees. The fear is driving actions by unions and postal employees to strike national postal operators refuse to cooperate in annual assessments of employee satisfaction, and lash out at customer unwillingness to pay higher prices that would support the old employment compact.

The old compact includes four parameters:

1. career long employment without the threat of layoffs;
2. full-time jobs for all craft employees;
3. explicit barriers between crafts;
4. civil-service based employment law, compensation and hiring and dismissal processes.

The old compact held as long as strong customer demand and normal employee attrition allowed management to incorporate limited efforts to optimize the network and introduce automation at rates that would not require adjustments to the compact and still keep postal product prices at levels acceptable to both large volume and single piece customers. (In this context, acceptable is used in a manner similar to the idea that lines at the department of motor vehicles are acceptable.)

Also, national postal operators, operating within a monopoly and regulatory and policy constraints had little pressure to move postal prices from acceptable to competitive levels. Nor did they did do all of the research necessary to understand what makes its prices and services levels competitive for specific market segments (retailers, banks, insurance companies, local real estate agents, etc.) and so even if they felt the desire to offer a more competitive product as such information was considered unnecessary for designing and pricing products within the existing regulatory structure.

An alternative more-efficient, more-flexible employment compact was well known to policymakers and both postal management and union leaders. That compact, first employed by United Parcel Service (UPS) in the late 1960's as it expanded its parcel delivery network nationwide involved using mostly part-time workers to sort and load parcels and full-time workers to deliver them. While all of UPS's drivers and sortation center employees were unionized Teamsters, UPS retained great flexibility in its union agreements to adjust its workforce to both optimize employee time and adjust the total workforce as demand changed.

The compact was designed around the idea that the fastest way to move parcels by ground minimized the amount of time that parcels spent in any facility. The flexibility imbedded in its union contracts that allowed UPS to continually optimize employee time and adjust workforce size reflected the fact that the parcel delivery market was highly sensitive to economic cycles. Using lots of part time employees, and later fully automated facilities, UPS limited the number of sortation centers while continuing to provide better service at lower prices than either Railway Package Express or the Postal Office Department could at that time.

UPS has maintained its employment compact until today. The expansion of FedEx Ground nationwide stressed the compact by adding the complication of price and service competition. Competition required that UPS redouble its employee optimization, plant modernization, information system modernization efforts in order to reduce the labor component of delivering parcels. However, competition did not break the flexible framework that UPS created in the 1960's. UPS has had to bend somewhat in its mix of full and part-time jobs but still over 50% of UPS employees are part-time. UPS has changed its pension benefits for one-third of its full-time employees by withdrawing from the Central States Pension Plan but in doing so, it agreed to retain an equivalent benefit in a new UPS-Teamster managed corporate plan.

Today, national postal operators still tied to the old employment compact can no longer hide behind growing volumes and attrition of an older workforce to avoid tough operating decisions that require changes in the employment compact. As the proportion of transaction and correspondence mail, both single-piece and bulk, declines, mail becomes increasingly sensitive to economic cycles and competition from other advertising modes. The impact of this switch is greatest in the United States, where the use of paper checks to pay bills still remains the primary payment method among those over 40. Even these customers may soon desert the mailstream as their preferred method to receive and pay bills as incentives from banks and other creditors become too enticing to pass up.

Clearly the new framework must accommodate the following:

1. Lower total volume levels;
2. Much lower volumes of single-piece mail requiring sortation at origin;
3. Total volume and revenue that is sensitive to business cycles.
   
4. Volume and revenue that is sensitive to price such that the sender must generate a positive return for spending to design, print, and deliver a hard copy document or ship a parcel.
5. Optimized processing and delivery operations that reflect the new characteristics of demand with costs at levels that permit product prices that allow mailers to earn a positive return on their mail spending Increased levels of customer service and sales efforts to identify and accommodate specific customer needs
   

The UPS employment compact could handle all of these factors. The challenge that national postal operators have is installing a similar compact. Without the ability to install a compact similar to UPS, efforts to optimize sortation and delivery networks through expanded use of information technology, and automation equipment installed in fewer, larger plants cannot be made financially viable. To the extent that a national postal operator needs to make significant capital investments to optimize the network, the lack of a new employment compact makes it nearly impossible for the investments to make returns to justify the spending. (To the extent that legislative actions prevent changes, national postal operators may put off optimization efforts that could provide a positive return even under the current compact and optimization efforts that require a change in the compact are not even considered.)

Royal Mail has developed an operating framework that exists in a leaked "Next Steps" document. In this document, Royal Mail outlines a vision for duty cycles based on 4 and 8 hour increments, increments that are nearly identical to those that UPS uses in the United States. While the public focus and rhetoric from both sides focus on issues of privatization or maintaining Royal Mail as a “public service,” in truth, the real conflict is over delaying the end of the old employment compact that postal jobs were full-time jobs with security for an employee’s lifetime.

The United States Postal Service faces similar issues for its delivery carriers (rural and city), clerks, mailhandlers, supervisors, and postmasters.The changes in the market have smashed the basis for the old employment compact and employees have real concerned about what comes next.

Clerks, mailhandlers and supervisors can see workloads declining; employees placed in standby rooms, and not help but wonder how much longer their plant or job will exist. Postmasters and retail clerks can see declines in retail traffic and the growth in postal franchise operations of non-US postal operators and wonder how much longer will the Postal Service use corporate post offices as the primary means of providing retail services.

What employees see is pain and they fear that postal management has nothing but pain to offer them. The economic downturn intensifies this fear as the thought of transfer, demotion, reduction in hours, or job loss raise anxiety about how bills will be paid, college education will be funded, and loss of connections to long-established relationships in one’s community. What employees don’t see at either Royal Mail or the Postal Service is something that they will gain in return for the pain to come. In many ways, what they perceive is not much different from what a young child sees when getting their first vaccination. They fear the pain of the shot and know of nothing else. How do doctors deal with this problem? They give the child a lollypop or small toy as a reward for dealing with the pain. By the time the child leaves the office, he/she may still have memory of the pain but have in their hands the reality of candy or a toy. The next time the child is vaccinated; they then know of the pain but know they will leave with something that is sufficient to deal with the shot.

What policymakers in the Great Britain and the United States have to fine is the reward for employees for dealing with the pain coming in the transition to new market realities. Employee unions and associations should also be looking for potential rewards that would enhance the new employment compact, including rewards that the current business model may not be able to offer, as policymakers and postal management have not publicly offered anything to ease the fear of changes to come.In the past, this blog has written about the experience of Conrail. Conrail had to significantly downsize its network, reduce its workforce, eliminate a number of railroad crafts and find a way to negotiate out of contracts that guaranteed jobs. Employees from top to bottom suffered greatly during the transition to a leaner and profitable railroad. At one point, employees even had to take a substantial pay cut to turn the company around. Employees did receive rewards for their pain.

The pay cuts were restored as soon as Conrail returned to profitability. Conrail employees received 15% share of Conrail stock in return for concessions in work rules and wages. The shares that employees received at the public offering price of $28.00 in 1987 were worth $214.67 when Norfolk Southern bought the company a decade later. Right now neither Royal Mail nor the Postal Service could offer employees any rewards that approximate what Conrail employees received for the change in their employment compact. As both postal operators face the possibility of new business models employees need to think hard about which models could include rewards sufficient for them to accept the pain that they are likely to endure in the transition to new market realities.