Management Approaches to Restructuring

The Postal Service is in the midst of a major restructuring of the smallest of its operating networks, the one that handles sortation and transportation of bulk mail. The implementation of the new National Distribution Center network in the northeast both reduced costs and improved service quality. The positive results has caused the Postal Service to accelerate the program's completion.


The Postal Service could implement the restructuring with minimal if any loss of jobs by transferring employees to the larger network handling single-piece mail and mail drop shipped at processing plants. Clearly a similar restructuring of the entire processing network would give the Postal Service few if any opportunities to transfer employees. Without the ability to transfer employees, the Postal Service faces significant civil-service related procedural challenges, labor negotiation challenges, and substantial costs to reduce workforce levels before the savings can be acheived.



To see what would happen if the Postal Service had both the resources to handle the transition costs of creating a more efficient network and did not have to deal with civil service protection, one need only look to Canada Post which is in the midst of a $1.7 billion transformation plan that will introduce delivery point sequencing to all mail and consolidate letter carrier and parcel delivery routes. While delivery point sequencing is not new to the United States, how Canada Post is handling its implementation is different.



One of the first cities seeing the change is Winnipeg, Manitoba. Canada Post is building a new plant to house the new equipment that started construction last year.

As required by its contract with the Canadian Union of Postal Workers (CUPW), Canada Post informed the union that it plans cut 15% of Winnipeg employees including clerks, mailhandlers and letter carriers. As the Union's memo to employee implies, Canada Post under its labor agreements has the authority to lay off employees when demand for labor decreases. Furthermore, the letter implies that even more layoffs could occur in the more remote areas of Manitoba that the the plant serves.

Canada Post employees have not had civil service protection since at least the 1970's. The CUPW is at least as tough a negotiator as any union in the United States and has not been afraid to use a labor strike as a negotiating tactic. However, even while dealing with a tough-minded union, Canada Post has been able to negotiate an ability to rightsize its workforce as new technology is introduced, as long as proper notification is given to employees.

The approaches that Canada Post used to implement its introduction of delivery point sequencing reflects a labor complement management philosophy significantly different from the Postal Service employees. Canada Post determines its labor needs and then implements a plan to reduce its workforce quickly to the new level required. The Postal Service determines its workforce needs and then must find a way to reduce its workforce without layoffs through attrition and employee transfers. Both the Postal Service's approach of reducing the workforce through attrition and transfers and Canada Post's approach of outright layoffs of employees may eventually get the workforce down to the same optimal level. The Postal Service's approach is much slower to reap the gains from introducing new technology or a network restructuring.

The Canada Post reflects an active management style that a corporate structure, operating under standard Canadian corporate and employment law and union agreements that make sense for the business of Canada Post allow. Canada Post's management approach also reflects an understanding of all political parties that for Canada Post to survive and to serve the national interests of nationwide system of mail delivery it must operate in a manner like all other Canadian businesses without interference from local or national politicians.

The Postal Service approach reflects a more passive management style that has developed due to numerous influences. The first influence is the corporate structure, operating under a quasi-governmental business law and civil service employment law The second are the union agreements that only make sense for a business not experiencing technological or competitive changes. The third is a regulatory process that reviews any change in network infrastructure, introducing administrative costs through a public hearing process and increasing operating costs of restructuring by slowing down the process. The final influence on management style is Congress, who have on regular occasions legislated restrictions on the Postal Service's ability to restructure its business.

As this cursory examination of how Canada Post and the United States Postal Service dealt with a transformation issue illustrates, the business model and regulatory framework employed do make a difference. More detailed examination is warranted to fully explore how each of the differences in corporate law, employment law, labor agreements, regulatory oversight, and political interference between a postal operator and the businesses in the same country affect how well the operator deals with the stress of technological and market induced changes while still meeting universal service obligations. Without such a study, identifying the benefits of changing the business model and regulatory framework in the United States would be difficult.

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.

Marketing the Packstation

Deutsche Post did not just have to fund the purchase and installation of pakstations and train employees how to place parcels in them for pick-up by customers and remove parcels for processing but it had to fund a sizable marketing campaign to convince the public to use them. The two videos illustrated that marketing a new process of sending or receiving parcels is not an inexpensive proposition.

This web delivered commericial illustrates the problem of not being home when the delivery happens.

This video of a song was most likely used in shorter bits in commercials on the web, television, and radio. Since the Pakstation was introduced sometime before 2007 with a second order of 1,500 placed that, I am willing to bet that almost as many Germans can sing the chorus as can sing McDonald's big Mac jingle.

Dominos

Given the challenges that everyone in the courier, express, and postal industry face, we all need to smile and laugh a bit to keep our sanity

In my research on the industry, I found a DHL commerical that did just that. I thought the readers of this blog would enjoy seeing it.

Should the Postal Service Close All Post Offices?

Note: This blog post contains my first attempt to include pictures and videos. If you are having trouble viewing the videos they are all on YouTube and can be found by searching DHL and either Packstation or paketbox. I would appreciate feedback on workarounds for readers behind corporate firewalls from the more technically minded to the problem that many are having viewing the videos. For those that cannot see the videos at work, multiple readers have indicated that the blog is readable through virtually all ISP's on home computers. Thank you for your understanding. I will remove this paragraph once a workaround is found.

The Postal Service created a major political storm by proposing to close less than 700 retail locations. In addition to forcing every member of Congress to deal with irate citizens and Postal employees, the Postal Service must go though a laborious regulatory and public outreach process to make a rather small tweak in its retail network.

Deutsche Post, the German post office has just proposed closing its remaining company owned post offices. Does this mean that there is no retail access to postal services? No, in fact Deutsche Post guarantees that every town with greater than 2,000 population have a postal retail facility and in urban areas, no customer would be more than 2 kilometers (1.24 miles) from a retail facility.

How does Deutsche Post do this?

1. Deutsche Post simplified its pricing structure for all letter and parcel products used by retail customers. The prices can be found on two Deutsche Post web pages.

Letters flats, and smaller light weight parcels

Parcels of any weight with size maximums beyond those set for parcels under 2 kilograms (4.4 pounds) with certain size maximums

Deutsche Post's price list for shipments of parcels of any size contains only seven different prices for shipments within Germany and only 20 different prices for shipments anyplace in the world. (If you look at the website, Deutsche Post uses the word "paket" for parcel and "päckchen" for small parcel.) It does this by nearly eliminating a customer's need to weigh the parcel that they are shipping. If a customer does not have the weigh a parcel to get a precise weight, they do not need a retail facility to weigh and price the shipment.

For domestic cards, letters, flats, and flat shaped parcels up to 2" thick there are five total rate levels . Besides the single rate for cards, there are four other rates: standard letters, heavy letters, standard flats and thick/heavy flats. Letters over 2 ounces are priced within one of the two flat categories.

For domestic parcels, customers only need to know the parcel's dimensions and whether the parcel weighs less than one of four weight band maximums. (Most parcels are handled by the DHL subsidiary.)

* 2 kilo (4.4 pounds) and no larger than 23.6" x 11.8" x 5.9" (60cm x 30 cm x15cm)
* 10 kilo (22 pounds) and no larger than 47.2" x 23.6" x 23.6" (120mm x 60mm x 60"
* 20 Kil0 (44 pounds) and no larger than 47.2" x 23.6" x 23.6" (120mm x 60mm x 60"
* 31.5 kilo (69 pounds) and no larger than 47.2" x 23.6" x 23.6" (120mm x 60mm x 60

For international parcel shipments, Deutsche Post has a pricing structure with a similar simple structure that has a total of 18 possible rates. Small parcels (parcels whose dimensions are such that width+ height+ length <= 35.5 inches) have two rates depending on whether they are destined within the European Union (EU) or the rest of the world. Larger parcels have rates within four weight-based price bands that are determined by destination country. Countries are grouped into four categories: the EU; rest of Europe; Middle East; and North America; and the rest of the world. For each country group, the weight based limits within each price bands are:

* 5 kilo (11 pounds)

* 10 kilo (22 pounds)

* 20 kilo (44 pounds)

* 30 kilo (66 pounds)

2.Deutsche Post contracts out all of its retail operations to either its former subsidiary, PostBank, independent providers of mail services or independent sellers of postage. Eliminating the need for precise mail weight simplifies the sale of postage. The simplicity of the transaction allows even the smallest kiosks and convenience stores can sell postage without the need for sophisticated point-of-sale terminals or revenue protection efforts that would be required with a more complicated tariff. Retailers can sell postage with the same level of effort they employ to sell scratch-off lottery tickets. By simplifying the product sold, Deutsche Post also simplifies the record-keeping, and security challenges with ensuring that non-corporate outlets do not pay for the postage sold, using models that work for lottery tickets and consignment items.

to the extent that weighing is necessary, a customer can go to an outlet that has a clerk that weighs the parcel. That is the service that the PostBank outlets can provide. However, the simplified tariff would allow a customer to go to an outlet that only sells stamps to buy the appropriate postage and determine the weight by using a scale the outlet provides for customer use, do the weighing themselves at home, or even just guess the weight prior to purchasing postage. The simplicity of the tariff allow individuals with limited training to determine the Deutsche Post postage stamp that would be appropriate for their letter, flat or parcel.

3.Deutsche Post has a significant technology program for self-service acceptance and delivery of parcels. They have developed two devices: paketboxes that can only accept parcels and packstations that can accept or delivery parcels. A simplified parcel tariff, on-line postage, and independent sellers of postage are clearly critical for the technology program to work. Paketboxes are larger version of the postal drop box and can be used for items that have postage already applied. Pictures on the web indicate that they are located in places not much different than where UPS or FedEx may have their drop boxes in the United States.

The video of the paketbox shows how it is used

Packstations are automated, large parcel lockers that can both collect and deliver parcels. They can deliver parcels to customers that are either not at home when the carrier arrives or for those customers that prefer to use the automated facility. They are located either in stand alone locations like cluster boxes in the United States or within buildings.

The following video shows how the packstation is used to accept parcels. (The process starts at the 20 second mark.)

The following video, most likely created by eBay and Deutsche Post, illustrates not only the use of a paketbox to tender a parcel and a packstation to pick up the parcel but the entire sortation process for parcels. The use of the paketbox by a customer and a Deutsche Post employee can be seen around 40 seconds from the beginning and the use of of the packstation can be seen at the 8 minute mark. All filming appear to have been done at PostBank or DHL facilities.




Could this be duplicated in the United States? Absolutely, but traditional thinking, regulatory processes and financial impediments prevent the Postal Service from doing so.

Traditional thinking prevents the simplification of the mail prices for retail customers to the extent that Deutsche Post has. The traditional approach to postal costing is to develop detailed tariffs with different rates for every characteristic of the item to be delivered that affects its costs. Shape based rates reflect a rationalization of this approach but did not change the complicated traditional weight and distance based tariff significantly. The Postal Service has two products that take a non-traditional approach to pricing: Express Mail envelopes and Priority Mail flat-rate boxes. The forever stamp is an example of a non-traditional way of selling postage for letters. While the market has shown that the success of these products in the retail market, traditional thinking prevent using these successes to expand the simplification of prices for retail customers.

Regulatory processes act to protect existing service locations, ways of serving customers and rate relationships. Changing to a simplified, self-service model would change where postal services are bought and parcels are tendered and would require abandoning any linkage between rates charged to retail customers and business customers of the Postal Service. By moving toward a simplified, self-service model, most traditional post offices would be unnecessary except to protect the jobs of existing employees and the social benefits that they now provide. As the current controversy over closing less than 1,000 post offices shows, both postal employees and citizens seeing changes in cherished routines are quite effective in making their interests known to Congress and the PRC. Similarly, de-linking the rate relationships between retail and business customers of the Postal Service would require overturning nearly forty years of regulatory precedent that has tried to balance the share of overhead that these two types of customers should bear, let alone how the overhead costs should be born among the various types of business customers. De-linking rates charged to retail and business customers would put the PRC in the uncharted territory of choosing market based rates over cost model based rates. The rulemaking on workshare discounts illustrates how wedded customers are to the regulator process, the concept that historical rate relationships matter, and the search for cost theories that would justify new rates and a regulator set advantage over competitors or the Postal Service. Weaning customers off of PRC protection and de-linking the prices of retail and business customers could create a ruckus just as loud as what now exists for closing a few post offices.

The Postal Service weak financial position and near-total lack of capital financing options leave a real retail restructuring beyond the reach of Postal Management. Over the next two years, the Postal Service does not have the cash to pay all of its mandated obligations for retiree benefits and will use most of an expanded borrowing capability to just cover operating losses. The financial requirements of a program that is the magnitude of what Deutsche Post did would dwarf the Postal Service's investment in Automated Postal Centers and would also have to deal with start-up costs of restructuring the concept of retail and covering costs of excessing both employees and facilities. Postal management position is not much different that scene in many Christmas movies where poor children can see the toys in store window but have no hope of seeing them under the tree.

Eliminating all post offices, therefore, is just a fantasy. Unfortunately, so is developing a modern customer-focused model for serving the Postal Service's retail customers.

Advertising Delivery: A Governmental Function?

In his thought provoking piece, APWU President William Burris summarized the challenge facing the Postal Service and its employees succinctly. I would like to focus on two quotes from his piece that highlight the challenge that he and his membership as well as all postal stakeholders will have to struggle with as Congress rethinks the business model for the Postal Service. Both of these quotes will like be central to one question that Congress will likely to debate: "Is the Postal Service's business still a governmental function?"

His first quote goes to the heart of what will be the policy debate, the core business of the Postal Service and governmental responsibility for ensuring that a provider exists to serve that market.

"Mail is what we process, transport, and deliver, but as the dominance of business mail demonstrates, the Postal Service is in the advertising business." [emphasis from original]

Mail advertising constitutes the bulk of the volume the Postal Service handles in its non-parcel postal products. Even bills and statements contain advertising.

No other advertising delivery business in the United States is government owned. The one possible exception is the Corporation for Public Broadcasting which allows sponsors of program to craft advertisements that are included at the end and beginning of programs.

No other advertising media is regulated to the extent that the Postal Service is regulated. Newspapers and periodicals that use newsstand, supermarket or home delivery are not subject to any regulation regarding what they can charge advertisers or the reading public, and are not subject to regulation as to how, where, and when those delivered to the household must be delivered. There is limited regulation of the broadcast industry but broadcast networks and local stations are free to set prices that they charge advertisers. Cable operators have some regulation regarding what they can charge customers and the range of their service offerings but do not have to submit to a regulatory process like the Postal Service.

The second quote focuses on the issue of business constraints.

"The Postal Service could do so much more to actively encourage citizens and business owners to use the USPS Web site to create customized messages for delivery by the Postal Service. Invitations to weddings or birthday parties; announcements of new business ventures; promotions of products and services — the possibilities are endless, constrained only by the imagination. Why isn’t the USPS advancing this concept rather than relying so heavily on messages developed by others?

We must use advertising as a tool that generates mail. The USPS has the potential to become a full-fledged advertising giant that, with extensive use of electronic media, creates volume."

The Postal Service is constrained to only provide "postal services" as defined by the Postal Regulatory Commission. This constraint prevents the Postal Service from doing what President Burris suggests. The constraints exist because competitors do not want the Postal Service, a governmental entity to compete with the private sector.

Removing the business constraints on the Postal Service that would allow it to enter businesses that relate to the delivery of advertising would create a more vertically integrated process, and possibly a lower cost process from conception to delivery. However, removing the constraint creates a significant policy quandary. If survival of the Postal Service requires it to enter a broader range of businesses related to advertising delivery that puts it in direct competition with private sector firms, should its existence as a governmental enterprise change?

I d0 not think that President Burris or APWU membership is prepared to accept the privatization option that might be required to fully take advantage of the Postal Service's capabilities as a deliverer of advertising. For too long privatization has been tied to cutbacks in jobs and reductions in compensation for APWU members or leadership to accept. However, the current financial challenges of the Postal Service suggest that those cutbacks and compensation reductions may come even without privatization. President Burris' message to his members suggests that it may be the time for the APWU to seriously invest resources to flesh out how a Postal Service free to pursue all opportunities relating to advertising delivery, and for that matter any business that could use the capabilities of postal employees and network of sortation and retail facilities, could improve the long-term prospects of the Postal Service and the APWU members that it employees.

Postal Service and the Federal Budget

More than anything else, the greatest political obstacle to a new business model for the Postal Service is the Federal budget deficit. Every legislative action to maintain postal services in light of current financial losses, and fund the transition that will create a new business model will have budgetary implications. Thee budgetary implications will likely become the primary arguments of postal competitors and other opponents of reform for delaying necessary changes that would make the Postal Service a viable and customer-focused provider of delivery and delivery related services.

Currently, the Postal Service is seeking relief from the demand of the Office of Personnel Management as included in the Postal Reorganization and Enhancement Act (PAEA) for accelerated funding of retiree benefit. The accelerated payments had a positive budget impact that smoothed the passage of the PAEA. However, the accelerated payment schedule reflected three misconceptions about the Postal Service that made the accelerated schedule seem reasonable.

• First, demand trends for mail were sufficiently strong to generate the revenue necessary to cover the payments. Congress, like many governmental and business executives at the time assumed the rosiest scenario for the Postal market and in particular demand for advertising mail and the mail revenue that it generated. When the recession hit and the revenue disappeared, the Postal Service lost its ability to meet the new payment terms.
  
  
• Second, the Postal Service was sufficiently capitalized to continually modernize its distribution and retail networks to reduce costs and improve service. The Postal Service had aggressively reduced its debt through the good fortune of strong demand for advertising mail, improved management of operating costs, and parsimonious spending on capital projects. Congress did not have an independent assessment of the true capital and cash needs of the Postal Service, particularly as they related to the legislation demand for improved cost management and network realignment.
  
  
• Third, cutting operating costs does not require significant one-time expenses if they are to be done quickly in ways that are transparent to customers. Both Congress and the Postal Service assumed that it had the time to reduce its workforce and streamline its network through the nearly costless method of employee attrition and minimal capital spending to move postal operations to locations that better fit today's mail distribution patterns. With no funds to reduce the workforce, the Postal Service is limited to those streamlining efforts that can be accommodated through moving employees to new jobs within the network that will not require payment of moving expenses.
  
  Unfortunately, markets can and did change more rapidly than either historical attrition rates or the slower attrition rates caused by the sagging stock market and economy. Accelerating reductions in the workforce, including supervisors and management at all levels, requires either early retirement incentives or severance pay. With an average hourly wage ranging from $25.70 for bargaining unit employees to $42.10 for headquarters employees, these incentives or severance payments can be a significant challenge for a Postal Service with limited or no cash reserves and the need to reduce its workforce faster than what attrition will allow.
  
  Similarly, limited cash reserves restricts both planning for and funding capital projects that can improve the placement of postal facilities in an effort to both reduce costs and improve service. While no company managing an operating network would replace an operating network with a new green-field one, all well capitalized transportation companies know that a continuously improving network requires having sufficient capital to fund moving operations over time as demand, technology and distribution patterns shift.
  

Right now, the increasing visibility of deficit politics affects the viability of proposals designed to enable the Postal Service to survive the next two years. In requesting that the GAO complete its report on potential business models in April, the Senate appears to acknowledge that more needs to be done. Given the political calender, dealing with the misconceptions of the PAEA and the financial reality of funding the needed transformation that each alternative business model suggested by GAO would require could put the impact that proposed alternatives will have on the deficit right in the middle of the 2010 political debate. If that happens, developing a long-term solution that the Postal Service continues to meet the needs of its customers will be far more politically charged than any previous efforts at postal reform.

Winning in Turbulence

Business Week has just posted a review of a new book by Darryl Rigby, the former head of Bain & Co.'s retail practice. Entitled, "Winning in Turbulence," the book looks at what strategies work in surviving a downturn.

While, I am in general a skeptic of the quality of many business books, especially those written (or ghost written) by retired chief executives, I have found that economic history provides valuable insight when today's challenges are beyond the experience of those trying to deal with them. I am a particular fan of the late Robert Sobel, who chronicled business failures in his book, "When Giants Stumble" which was one of dozens of books he wrote chronicling business during changing times. I hope that Mr. Rigby has joined the late Dr. Sobel in providing us with a clearer understanding about how companies have dealt with downturns in the past and identified strategies that worked and those that did not work. If he did this, then Mr. Rigby has provided postal managers and policymakers with some useful ideas on the potential impact of decisions that the Postal Service may have to make to survive if postal policy is not changed.

The following paragraphs summarize what I took away from the Business Week review that will likely cause me to buy the book.

The review states that a key to Mr. Rigby's view on surviving turbulence is the company's position prior to economic challenges. A company's ability to survive economic turbulence depends on their financial position going into the turbulence. If the firm is financially sound going in, it is more likely to come out of the turbulence a survivor.

The article identities three traps, that Mr. Rigby identified, that management has to avoid if possible as it works through turbulence

1. Going after new customers through price cutting as these customers may abandon you once the recover occurs and pricing becomes more rational.
2. Cutting costs in ways that core customers notice.
3. Curtailing customer focused innovation
   

As it appears logical that a firm's financial position prior to economic turbulence will affect its survival afterward, the question remains as to how a company can avoid Mr. Rigby's traps when they are not financially strong. My hope is that reading his book will answer this question.

Postal Service Bankruptcy

The headline says it all, "The U.S. Postal Service: Our Next Bankruptcy?" While the stark headline is startling, the potential impact is even more so. The article by Delia Lloyd was published on the website Politics Daily, a new politics website that now attracts 3.6 million unique users every month. It is not clear whether the article and the millions that will read it will sufficiently raise awareness of the Postal Service's difficulties to move postal policy higher on the agenda of Congress and the White House.

The problem right now for the Postal Service is that its troubles have been moved into the high pitched debate over health care reform. By mentioning the troubles of the Postal Service at two health care forums, President Obama made an easy but ill-informed comparison of the Postal Service with its largest private sector rivals FedEx and United Parcel Service.

While it is true that FedEx and United Parcel Service are weathering the economic storm, a more realistic comparison would be with the printing, mail preparation, and advertising industries that generate mail that represent over 80% of the Postal Service's revenue. The more realistic comparison would also include foreign postal operators whose business mix more closely matches the Postal Service's revenue sources.

An examination of the mailing industry worldwide clearly shows that the industry is suffering and that entities that plan to survive and continue to serve their customers and meet universal service obligations are making significant changes quickly. Both large and small printers have declared bankruptcy and some have liquidated. Advertising agencies are hurting so badly that some have begun to offer services at no cost just to keep talented employees on staff until the economy turns around. Throughout the industry, production facilities are shutting down and businesses are shrinking to levels that management believes will allow the enterprise to survive.

Overseas, postal operators have reacted aggressively to deal with the changing mail market and economic conditions. Postal operators in Great Britain and the Netherlands are taking a hard-line in their labor negotiations with their ability to settle with their unions depending upon how well labor understands that bailout of the postal operator to save jobs is unlikely. Deutsche Post is closing its remaining stand-alone post offices and replacing them with contract offices run by either its former subsidiary Poste Bank or other contractors. Operators in numerous countries are redoubling their efforts to streamline processing networks and optimize their delivery operations. Privatization proposals are popping up in Japan, Denmark, Sweden, and Latvia as the capital needs of dealing with the changing marketplace and modernizing operations become greater than what governments are willing to provide or what the operators can raise through postage rates without affecting demand so much to threaten the continuation of universal service.

But realizing that the entire American mail industry is in trouble, does not excuse Congress for creating a postal policy that has resulted in the Postal Service being the only western postal operator that is in such a precarious financial position and without the means to weather the economic downturn. In many ways, the modification of Postal Policy is reminiscent of Congress's initial foray into reforming railroad policy with the passage of the Regional Rail Reorganization Act of 1973. That act opened up some flexibility in pricing and service just as the Postal Accountability and Enhancement Act did but did not fully recognize the extent of change required to ensure that railroads could survive the technological and competitive changes that they faced. It took additional trauma in the railroad industry and two more legislative efforts before the modern framework for the railroad industry developed within which railroads are profitable, growing and able to provide substantial number of highly paid jobs.

By raising the concept of bankruptcy, Delia Lloyd illustrates how Congress has to rethink postal policy. In a bankruptcy reorganization, the objective is to create a new company that will be a viable enterprise with the prospect of paying back its creditors and new investors who provide the debtor-in-possession financing that funds the restructuring necessary to fund the restructuring and operating losses during the transition. In bankruptcy, creditors have it in their interest that all contracts entered into prior to bankruptcy are subject to renegotiation. Renegotiation of labor contracts is often critical because creditors are unlikely to fund the transition unless they believe that labor agreements reflect the new business reality. This is exactly what happened in the GM and Chrysler bankruptcies and the Federal Government's loans were dependent upon new agreements with suppliers, dealers, and organized labor. Creditors have significant leverage over bankrupt companies and their employees as they can raise the threat of liquidation if the company's management cannot develop a viable path through reorganization.

As the Postal Service's largest creditor, Congress is on the hook for scores of billions of dollars for retirement health benefits, workers compensation payments, and postal debt. Its financial interest is similar to the interest that creditors have in companies undergoing bankruptcy reorganization.

The one challenge to the bankruptcy model is the Postal Service's universal service obligation, as that for all intents and purposes takes the liquidation threat off the table. The Federal government has a constitutional responsibility to ensure the continuation of mail service, let alone the responsibility to ensure that mailer needs are met. Fortunately, there are models that deal with the challenges of reorganizing a financially bankrupt company whose business is such that liquidation is not an option. These models are the models that have been used to restructure railroads, shareholder-owned public utilities, and government-owned public utilities.

As the postal policy debate moves forward, the term "bankruptcy" will likely remain a favorite of editorial pages, columnists, headline writers, and politicians. While a real Postal Service "bankruptcy" is unlikely to move beyond the rhetoric of postal policy, the use of term will likely force postal stakeholders to make changes in all of their business and contractual relationships with the Postal Service as a condition for giving the Postal Service the time flexibility, and the resources needed to ensure that Congress's financial interests are secured.

Opening the mailbox

At yesterday's MTAC meeting, a mailer asked if mailers could have access to the mailbox for delivering periodicals, newspapers, and advertising on Saturday if the Postal Service stopped delivering on that day. While the hypothetical question was dismissed, it illustrates the risks that reducing delivering on that day could have for the Postal Service. Currently, access to the mailbox is restricted but reductions in the service that the Postal Service offers could create real demand for access that was just theoretical in the past.

The Postal Regulatory Commission's report on Universal Service dealt with the question of mailbox access in its report on Universal Service. However, it did not deal with the question of mailbox access if the Postal Service no longer used the mailbox on a particular day or at all.

Mailbox access is one of the most contentious issues in postal policy as it raises issues of privacy and the security of the mail. Mailbox access is generally not an issue at business addresses, as those addresses have doors that can accept delivery without violating the Postal monopoly on the mailbox. Mailbox access also creates a situation that UPS, FedEx, and newspapers have to either drop off their items on the stoop or set up their own box for their own items. Cluster boxes and post office boxes create a different issue as they are not attached to the residence of business and have more characteristics of a privately provided delivery point.

To date, the Postal Service has completed a significant amount of planning regarding operational changes and the impact on the workforce. It has just begun the process to understand how the change would affect senders of mail and total Postal revenue. The Postal Service is just now conducting the market research necessary to determine the impact of the change on senders of mail and their spending on Postal products. Once this research is complete, the Postal Service should know what is the market for Saturday delivery and more broadly what is the market for postal operations on Saturday.

In listening to the challenges that the Postal Service has in dealing with the proposed change to 5-day service, and mailer questions about how the change would affect them, three distinct groups of customers seem to be affected.

• Customers who use retail services on Saturday - Postal retail services like all other retail services serve customers on Saturday whose work or school schedule prevent using the service during business hours between Monday and Friday. This includes people who want to pick up parcels that could not be signed for during the regular delivery schedule, and those who need to tender mail and parcels. An important user of retail services on Saturday are larger billers who use caller service or Post Office boxes to receive remittances and losing a day of delivery slows down the process of depositing payments and increases the cost of using the mail for billing and payments.
  
  
• Customers who require Saturday delivery - As the question illustrated, Saturday delivery is important to senders of daily and weekly periodicals, and advertisements. Saturday delivery is a direct competitor with advertising placed in the Sunday paper. As newspaper circulation declines, many newspapers use mail deliveries to serve those addresses that do not receive the paper, the advertisement would have to be delivered either on Friday or Monday and it is not clear that the advertisement would be as effective on a day when customers have less time to look at what they receive. Loss of Saturday delivery will have the greatest impact on advertisers in those areas of the country where newspaper circulation has the least coverage of all households. Loss of Saturday delivery would also impact political campaigns that try to have the last critical mailing arrive on the Saturday before the election to coordinate with other media.
  
  Saturday delivery is also important for senders of bills. Bill senders have a printing cycle set to a 6-day delivery time. When the bill arrives has an impact on when the bill is paid. Changing the delivery schedule will affect when the company receives the money they are due. Saturday delivery is also important for billers when they accept the payments. As most large billers pick up their mail at the Post Office, the Postal Service will continue this service.
  
  
• Customers who require Saturday Processing - Saturday processing affects mailers with strict delivery requirements on Monday or Tuesday of the following week. Saturday processing also affects billers as it affects the speed at which bills are processed and therefore received. While allowing billers to collect payments on Saturday allows them to quickly deposit payments that have arrived at the local office, it slows the arrival of bills that are elsewhere in the system.
  
  Eliminating Saturday processing affects small business and individual mailers in two ways. For bills, it would require them to mail earlier to ensure that bills arrive on time. For parcel shippers, it eliminates the advantage that the Postal Service has over its private sector competitors for orders shipped late in the week and on Saturday.
  
  Finally, eliminating Saturday processing affects the delivery of fresh produce, live plants and animals. Losing a processing day increases the chance that the produce, plant or animal will not arrive as the sender intended. Creating significant problems for the small group of senders whom the Postal Service serves in this market.
  

While the market research that the Postal Service does now will be helpful, it will not likely describe the full impact of the change. If the Postal Service changes to 5-day a week delivery, every local and national television news program, radio station, and newspaper will be covering the change as a top story for an extended period. Stories will be presented on alternatives to mail to pay bills and ship parcels. Awareness of alternatives and their advantages will increase substantially and the relative impression of the Postal Service's products compared to electronic and physical delivery alternatives will be diminished.

The massive free media on the switch to 5-day delivery will complicate the Postal Service's marketing challenges. The Postal Service will have to deal with increased marketing pressure from electronic and physical delivery alternatives as well as local newspapers. This marketing effort will highlight why their service is now a better deal than the Postal Service.

Banks and others sending bills and receiving payments will use the change to highlight the advantages of electronic bill presentment and payment. Some will introduce or increase fees for hard copy bills and increase incentives for electronic payment, knowing the free media will reduce the size of the fee change or incentive offered to cause a customer switch delivery mode. Weekly newsletters and periodicals with Friday or Saturday deadlines will also expand their effort to move their customers to electronic delivery, again using the free media to reinforce this effort.

Countering this effort will be expensive and difficult. The Postal Service's marketing effort will need to be as detailed as its operating plan and in addition to advertising would require that every available person with some sales or marketing responsibility contact customers in person in order to retain their business. With millions of customers, large and small affected by the change, the success of the transition requires that the high-touch business retention effort that is required succeeds.

President Obama and the Postal Service

At today's health care summit, President Obama made this comment when trying to explain how private insurers could compete with a public plan.

"If you think about it, UPS and FedEx are doing just fine. It's the Post Office that's always having problems."

This quote was taken from Politico.com's website's Politico44 page and they report that it occurred at 1:50 pm. The Wall Street Journal's live blog places the quote at 1:45.

The President's remark makes you think that the Postal Service may have made it onto his daily briefing.

Fixing the Postal Service

It is clear now that there will be legislation within the next year that will change the business model within which the Postal Service now operates. The fact that new legislation is needed so soon after the Postal Accountability and Enhancement Act (PAEA) was enacted raises questions two critical questions.

1. Did the act cause the crisis that is now focusing policy-maker's attention on the new legislation?
2. Does the current crisis change the political environment sufficiently to allow policymakers to choose options that stakeholders were then unwilling to accept?

What is driving the crisis now is a combination of the economic downturn and the requirement that the Postal Service must pre-fund its post retirement benefit. While electronic diversion creates a challenge for the Postal Service, diversion did not generate the precipitous decline in volume over the past two fiscal years.

Impact of the Economic Downturn

The economic downturn for the Postal Service began when the vertical markets (e.g. industries like automotive, financial, housing, retail, etc.) began experiencing significant declines in business in 2008 and cut all forms of advertising. Advertising mail is both more economically sensitive than the rest of the Postal Service's products and its price sensitivity rises and falls depending upon the business cycle. As the economy worsened after the Lehman bankruptcy, so did the decline in advertising and the volume of mail delivered, with a particular focus on the mail deliveries to households. The economic decline exposed four key flaws in the current business model

First, the current business model does not allow the Postal Service to react to changes to business conditions in as timely fashion as it must. Both the producers of mail and the Postal Service's competitors reacted significantly faster to the decline in volume and most were able to survive the downturn in shape to compete when the economic cycle turns upwards.

Second, the decline in business exposed why the pricing models and historical price relationships may no longer make sense. The economic decline exposed the fact that all mail has a return on investment for the sender. Mail business can thrive when the return is sufficiently positive and both prices and costs must reflect the challenge of ensuring that the Postal Service's customer's can generate a positive return in all business conditions.

Third, the business model created by the PAEA underestimated the capital needs of the Postal Service to deal with both modernization, structural changes, and the cost of adjusting plant and equipment to deal with changes in business conditions and market opportunities.

Fourth, the business model created by the PAEA limits the Postal Service in a way that made it increasingly dependent on the success or failure of one product, advertising mail, and one part of the conception to delivery process, the last mile. While mail advertising, appears to have survived the downturn in better shape than broadcast advertising, not all delivery services are as bi-polar. The focus on the last mile may have prevented the Postal Service from fully participating in the vertical production consolidation that is occurring in the mail industry.

Impact of Pre-funding Post Retirement Benefits

The presentations that Postmaster General Potter made this week provided the clearest picture as to the impact that pre-funding has had on the Postal Service. Since 2007, the Postal Service has made payments to OPM of $18.3 billion. Some of the payments was funded from borrowing from the Treasury with the rest coming from cash generated by the sale of products and services. As the Postal Service's primary creditor, to whom the Postal Service must pay its obligations for debt, retiree benefit obligations, and workers compensation obligations, the Federal Government is not made any better (except possibly in an artificial budget score-keeping sense) if the Postal Service must borrow from the Treasury to pay the Office of Personnel Management for retiree benefits. The amount the Postal Service owes the Treasury does not change, only the account that the money has to paid to changes.

Based on what the Senate and the House of Representatives are now discussing, and the Postal Service's projections of its borrowing needs to cover operating losses, the Postal Service now owes the Federal Government around $65 billion dollars. In requiring the Postal Service to pay its retiree benefits in the manner it did, the PAEA in effect required the Postal Service to speed up payments on obligations to its creditor. This is the equivalent to a creditor requiring faster repayments from a debtor, that the creditor was worried may not be around long enough to pay off all of its debt so it requests a faster payment schedule. Just as a creditor may not worry whether the faster payment schedule would force the debtor out of business, neither did the PAEA take into account whether the Postal Service could take the necessary actions to generate the cash necessary to speed repayment of its obligations. So the Postal Service is now faced with the equivalent of bankruptcy, insufficient assets to pay off its obligations, and insufficient cash flows to make the required payment schedules.

While there is no disagreement that the Postal Service has obligations for retiree benefits, debt and workers compensation claims, the Federal Government has limited options to ensure that the obligations are paid right now. Liquidation of the Postal Service, which would be available in bankruptcy is not an option and would unlikely provide sufficient cash to cover all of the obligations. Liquidation is also not an obligation also because of the Federal Government's constitutional responsibility to provide a postal service and the untenable impact that shutting down the Postal Service would have on the American economy.

In essence, the Federal Government, as a creditor, as little choice but to renegotiate the payment schedules on the Postal Service's obligations, while at the same time it must develop a business model and business plan that will allow the Postal Service to generate the cash flow that will pay some if not all of its obligations. In many ways it is in the same position as creditors of railroads were when nearly all of the railroads in the Northeast went into bankruptcy over three decades ago. The public interest required that the railroad continue to operate as long as a viable business model could be derived that will allow the creditors to be paid.

Of the two most attention-getting proposals that the Postal Service has presented to cut costs, only the elimination of one day of delivery could have a substantial impact on the Postal Service's ability to remain a competitive enterprise and generate the cash necessary to pay off its obligations to the Federal Government. As the Postal Service's creditor, Congress has to think long and hard whether the short term savings is worth the risk that future loss of business would weaken the Postal Service's ability to pay its obligations to the Treasury. If it believes that the risk is too great than it must provide sufficient funds to continue the service. At the same time, it may need to give the Postal Service the opportunity and funds to streamline its operations in ways not apparent to customers. Otherwise the potential for the turnaround necessary to pay off the Treasury cannot occur.

The proposals on the table appear to reflect the Congress's understanding that it is a creditor and the Postal Service is a debtor. The changes in payment schedules and increases in loan limits provide for a short-term fix until a more viable business model and comprehensive business plan is set for the Postal Service. Time is short but for those that know the mail business and the people at the Postal Service the potential for a successful solution exists.

The Patient is not Dead

Reading recent news reports about the Postal Service, one would think that it is on its deathbed. While times are dire and a major restructuring is in order, the underlying business may be better than what some of its competitors face even if the Postal Service's ability to remain a sustaining enterprise under the current business model looks increasingly unlikely.

Why do I think the future of the mail business is positive even though the Postal Service's situation is dire?

First, it appears that the worst of the economic decline is over. The economy may still be sick, but the fever has finally broken. The businesses that have survived the downturn all see a turnaround, some as soon as this fall and clearly no later than the fall of 2010. The recovery of the stock market suggests confirms that investors, as a group no longer see a catastrophy but just see a return to a normal recessionary cycle. (Unfortunately, everyone had to endure the last 9 months to get back to just a recessionary cycle.)

Second, and most importantly mail dependent businesses are starting to see the smoke clearing. In particular advertising mailers are beginning to notice that while mail volumes are down, mail and advertising has not been hurt as badly as other media as advertising budgets were cut. In particular, chain retailers have found that glossy coupons can have a far greater stimulative effect per dollar spent than what television, cable, or even internet display advertising. Mail is not the only recipient of this movement toward "value-oriented" advertising as free standing inserts in newspapers have done even better than mail as the delivery costs are lower than what the Postal Service now offers.

As one of the largest mailers, Valassis illustrates where mail advertising is today in its July 30 conference call. The following are some relevant excepts from the comments of Allen Shultz, the CEO of Vallassis.

Business is bad but not as bad as the competition.

"From a revenue perspective, although the economy has driven down client media spending, we continue to outperform most other media companies who are reporting advertising revenue declines in the 13 to 30% range. Our reported revenue for the quarter was down 8.6% versus prior year quarter. When you remove 9.8 million of revenue from divested and discontinued businesses and the 1.8 million impact of currency fluctuations from the prior year quarter, revenue declined 6.7% on a pro forma basis this quarter."

Business Profits are improving even at lower volumes

"The revenue decline in our Shared Mail segment was due to a reduction in mass merchandiser spending, continued grocery retailer light weight and the general competitive of the market place. On the plus side, we are pleased that Shared Mail margins continue to do well, which may seem counter intuitive considering the high operating leverage associated with this business.

As you saw in our release, revenue decline 10.5% but segment profit increased 2.6%. We continue to drive efficiency with package optimization efforts, newspaper alliances and overall improvement and expense management. We also made a small improvement of 1 percentage point in unused postage and a 3% increase in pieces for package versus last year."

Seasonal advertising patterns may be returning

"in terms of third quarter Shared Mail business, I would say in general, Shared Mail and kind of across the Board in terms of our product portfolio, I think we have seen a relatively strong back-to-school promotional time period."

The Economic downturn has generated more price competition

"Basically what I am referring to in terms of competitiveness in Shared Mail, it's a market place where everyone that we're competing with is living through the same economic downturn that we are living through and everyone is being very competitive from a price perspective in order to secure business."

Postal Costs Matter

"What we try to do is blend newspaper and Shared Mail and digital into an optimized solution for customers and so if postal cost go up, then we could see ourselves shifting business into other media."

The Challenge of Retail

The Postal Service has whittled down its Post Office closing list to around 1,000 offices. The final list represents less than 3% of all existing Post Offices. While many communities may feel relieved that the have been spared the loss of their post office, the Postal Service still faces the challenge of providing retail services that makes both business sense and serves the non-business needs of the communities the Postal Service serves.

Providing retail postal services in stand alone offices goes back to the founding of the Post Office Department when the  individual office not only sold stamps, weighed parcels and determined postage but also delivered and collected all mail at a counter. The invention of door-to-door delivery, collection boxes, carrier pick-up, and sale of postage at supermarkets and over the Internet has shrunk the frequency that postal customers use a post office. These changes suggest that a new innovative model is needed to provide retail access to the Postal Service to reflect the reality of the current methods of handling mail and to maintain the Postal Service's competitive advantages in serving retail customers of parcel and express services.

The Postal Service is not alone in finding it a challenge to serve retail customers.   Both FedEx and United Parcel Service have extensive retail networks in the United States with  well over 10,000 locations nationwide in a combination of company owned stores, franchised mail centers and counters in office supply superstores.   Even though they both use a variety of business models to provide retail access, providing such access profitably has been a challenge.   FedEx has had to revamp its FedEx Office operations to deal with its weak profit performance.   UPS franchises, and in particular smaller franchises  have had challenges making sufficient profits to justify their investments.   Both UPS and FedEx deal with the challenge of providing services to the retail market by charging higher prices to customers who require retail access and the highest prices to customers who do not ship frequently enough to take the time to get a UPS or FedEx corporate account number that is available to any business or individual who asks for one.

The challenge of retail is also one of the top challenges of foreign postal services.  In general, the approach that they took depended upon political, labor relations and business considerations and focused on solving three problems:

• The existing postal retail network is too expensive to operate.
• The existing retail network provides too few services/products to justify the network.   
• The existing postal retail network is often in the wrong location for where people now live, work, or shop.

To solve the first problems, postal operators have used technology to reduce the cost of providing the service.   For example, some have made the self-service concept that the the Postal Service has barely implement with its Automated Postal Centers into the primary option for customers needing a retail postal service.   Deutsche Post has taken this a step further in regards to parcel delivery, creating automated parcel lockers that eliminate the need for a postal employee to look for a parcel that could not be delivered.  Recipients are notified that a parcel is in a locker by e-mail or mail along with the location of the locker, the locker number and the code necessary to open the box where their parcel resides.  

To solve the second problem,  postal operators have expanded their reach into other types of retail transactions and the provision of government services.   Retail services including packaging of items for shipping, selling of office supplies, copying services, banking, and insurance.   For example the Italian Post Office entered the market for simple life insurance and savings products for individuals whose needs were too expensive for larger firms to serve and used that to turn its retail locations into profit centers.   Other Posts expanded banking operations that already existed, or in the case of La Poste in France started a whole new bank.   Some Postal services also contract with governments to provide services that require a retail counter including those relating to motor vehicles, driver licenses, etc.

To solve the third problem, postal operators have a combination of closure of traditional facilities, opening of new corporate owned facilities in better locations, and franchises within both small businesses and nationwide chains.   One of the first things that Canada Post did when it faced a similar financial crisis two decades ago was a complete revamp of its retail strategy to include franchises.  Franchises were important because Canada Post did not have the capital to revamp its retail strategy in urban and suburban areas.  Today, retail access generally is better than it was two decades earlier and in many cities and suburban areas where there are more franchised locations than corporate offices.  Canada Post still is responsible for providing retail services in small towns and rural areas which remain a financial challenge to the corporation.

Given the Postal Service's strength in the retail market, it needs to look at its problem as an opportunity and develop a real strategy for providing and pricing retail services profitably.   It needs an innovative strategy that reflects the needs of customers for easy access to services, the experience of UPS, FedEx and foreign postal operators with franchising services and the capabilities self-service technology.   A truly creative strategy would look at the non-business benefits that a post office provides to small communities and senior citizens  to see whether a model focussed on these benefits provided by the Postal Service, a private enterprise, a community organization, or municipality could include the mail services in a multi-faceted retail facility.  Only with the annoucement of a coherent retail strategy would the Postal Service have a positve message when making the neccessary changes to its retail locations and communities would see that there are private sector and community based options to meet the needs that the Postal Service cannot provide with its existing retail model.

Unfortunately one strategy may not be sufficient.   The Postal Service faces many constraints that affect its ability to implement a coherent retail strategy including the availability of cash, labor contracts, regulatory processes for modifying locations or opening new ones, and other legal constraints on retail services.   Retail strategies need to be developed that reflect the existence and removal of each of these constraints.  

As the Postal Service faces significant financial challenges that raise questions about its future, at a minimum  it needs two retail strategies, one that examines the issue without constraints on capital and one that includes the constraints that exist due to the continuing operating losses and other restrictions that affect operating flexibility.   Without developing an unconstrained strategy, management and policymakers cannot know what the full cost is of maintaining the status quo with regards to operating flexibility  or the full capital needs of creating a real future for the Postal Service's provision of retail services.    

Sorry for my absence

For the past week the computers at blogger marked this blog as spam. It prevented me from posting. I have no idea why and nothing on blogger's website explains why. I apoligize to my readers for the ineruption.

Within the next few weeks, this blog will be moving to my business's website where this will not happen again. The swich will also allow me to better coordinate my writing on a variety of topics.