Potential Business Models

The range of potential business models include nearly a continuum of options that run the gamut from a government department to a corporation owned by private shareholders. How close a particular model is to one end of the continuum or the other depends on choices regarding to corporate governance, employment and labor law, financial management, operations management and marketing management. This paper divides potential models into two groups, governmental and corporate models, depending upon whether the characteristics of the model are more similar to the characteristics of the models on either extreme of the continuum. In total five models were looked at:

Governmental Models

• Government Department – This is how the federal government currently provides air traffic control, weather, agricultural marketing, national parks, museums and other services to businesses and consumers. In all of these examples, the service is provided under standard federal government law, civil service and all or a significant portion of revenue is generated from the users of the government service or private donations.
• Government Enterprise as defined by current Postal law – This is the existing model under which the Postal Service operates
  
• Government Enterprise with relaxed human capital, financial, and operating constraints – This model maintains the governmental characteristics of the enterprise but modifies specific characteristics in a manner similar to other government enterprises.

Corporate Models

• Government Owned Corporation – The Postal Service operates under standard private-sector law and is owned by the federal government.This is most similar to the structure of municipal owned utilities and publicly owned commuter railroads. Many foreign postal operators fall under this business model. A government-owned private-law corporation can be loss making or profit making.
  
• Private Sector Corporation with or without government shareholders – A private sector corporation would include private sector owners and operate under a charter granted by the federal government. Services provided on behalf of the federal, state or local governments would be provided under contract and could include services that fall within the charter that are not sufficiently remunerative to justify their provisions .
  

The three governmental models reflect the general approach that the federal government has taken with business-oriented services. The corporate models reflect what foreign posts have chosen. The corporate models also reflect the models of all of the Postal Service’s competitors including those offering physical and electronic delivery, and those that compete by providing sortation or transportation of mail. The table below (can be seen on pages iv through vi of the full document as I am not sure how to put it in the blog) summarizes how well each of the models handles the challenges facing the Postal Service and policymakers. Examination of how well each of these models would handle the challenges facing the Postal Service finds all of the governmental models wanting. While relaxing the some of the constraints of the current model would be a reasonably safe choice, it would not be sufficient to serve the Postal Service’s retail and wholesale customers, and ensure that the Postal Service’s obligations to the Treasury are paid. Instead, the best solutions would involve preparing the Postal Service to operate as a government corporation, working under private sector law.

Making this transition will not be easy.The Federal Government has done this only twice with the US Enrichment Corporation and ICAAN. Neither organization was as large as the Postal Service. In particular, neither had the challenge of transferring more than a few hundred employees from civil service to private sector employment, nor did the have significant financial needs to cover modernization, debt and unfunded. However, the experiences of foreign posts, many which employ tens of thousands of employees and had similar financial woes illustrates how this can be done, and how it can be done with minimal disruption of the careers of postal employees.

Executive Summary Part 1: Choosing a Mail Industry Policy
Executive Summary Part 2: Challenges facing all Business Models
Executive Summary Part 3: Potential Business Models (this post)

Full Paper: Examination of Potential Business Models

Challenges Facing All Potential Business Models

Potential business models all have to deal with eight challenges. They are:

1. Maintaining Mail’s Importance to the Economy – The mail industry is responsible for over eight million jobs and $800 billion in economic activity.The business model can accelerate or retard economic growth depending on how well it serves customers that need mail delivery.
2. Minimizing Financial Risks to the Federal Treasury – At the end of the third quarter of 2009, the Postal Service’s obligation to the Treasury for debt, retiree health benefits and workers compensation payments is $ 72.7 billion.
3. Ensuring Financial Self Sufficiency – Since the passage of the Postal Reorganization Act, financial self sufficiency has been an objective of postal policy but was never defined much beyond the concept of accounting break even.While the Postal Accountability and Enhancement Act (PAEA) has as its objective that revenue and retained earnings of the Postal Service should be sufficient to endure financial stability, the current operating losses and limited cash reserves suggest that the Postal Service faces a significant challenge of being truly self sufficient.
4. Adjusting to New Market Realities Serving Wholesale Customers – With the decline of the Postal Service’s business handling transactions and correspondence, both the Postal Service’s ability to provide universal service and its financial viability will depend upon meeting the service needs of its wholesale customers that send 500 or mail pieces at a time and will in the future generate more than 70% of revenue and 80% of the volume that the Postal Service handles.
5. Adjusting to New Market Realities Serving Retail Customers – Over the next decade the Postal Service will see demand from retail customers declining below the 30% of revenue it is today.Adjusting the retail interface and operating network serving these customers creates significant financial, operating and political challenges.
6. Adjusting Operating Costs to New Competitive Realities – The market realities of serving postal customers requires a leaner processing and transportation network and a modernized retail network.
7. Funding Transition and Modernization Costs Rationalizing - Postal Service operations to reflect new market realities in wholesale and retail markets will require substantial cash outlays to cover the costs of right-sizing the network and workforce, modernizing the retail network and optimizing the processing network. The business model must find ways to raise this cash when operating losses, retiree health care payment schedules, and debt to cover prior-year losses provide few options
   
8. Creating a Workforce for the Long Term – The new market realities and the operating and retail networks that serve them can provide good jobs for postal employees.However, the existing civil service based employment law framework, labor agreements and consultative requirements with management associations all reflect significantly different market and operating realities and the labor-management environment that existed four decades ago. These challenges are not unique to the Postal Service.
   

Similar challenges existed for nearly every foreign postal administration that has gone through a transformation of their business model. In addition, the Federal Government has had experience in dealing with the bankruptcy of Conrail and other railroads in northeast.


Executive Summary Part 1: Choosing a Mail Industry Policy
Executive Summary Part 2: Challenges facing all Business Models (this post)
Executive Summary Part 3: Potential Business Models

Full Paper: Examination of Potential Business Models

Choosing a Mail Industry Policy

In choosing a potential business model for the Postal Service, policymakers are as much choosing a path for the entire industry within which the Postal Service operates as choosing a path for the Postal Service itself. The United States Postal Service is only one supplier within a much larger communications and parcel delivery market.This industry supplies households, businesses, government entities, and other organizations that need to:

• Solicit, conduct, and complete transactions;
• Distribute advertising, news, and other types of information;
• Communicate with friends, family, and business associates; and
  
• Deliver packets and parcels.

The public face of the Postal Service is its service to individual citizens through its 6-day delivery service and local retail post offices. However, the survival of the Postal Service, and for that matter the ability of individuals, governments, non-profits, and businesses to send hard-copy communications and parcels rests on the Postal Service’s ability to serve the business customers that generate over 88% of all revenue, a proportion which has grown as increasingly individuals have chosen electronic alternatives offering more convenient and cost-effective solutions. With non-household derived revenue likely to determine the long-term viability of the Postal Service, policy makers need to focus on ensuring that the future business model of the Postal Service can provide non-household mailers with a positive return on their mail spending in order that there is sufficient volume in the system to make the continuing use of mail by the general public affordable, reliable, and convenient.


Executive Summary Part 1: Choosing a Mail Industry Policy (this post)
Executive Summary Part 2: Challenges facing all Business Models
Executive Summary Part 3: Potential Business Models

Full Paper: Examination of Potential Business Models

Future Business Models for the USPS

The Postal Service has just posted on its website five papers on potential business models. Besides a paper presented by the Postal Service, four papers were prepared by independent consultants. As one of the four consultants, I will not comment on the other papers at this time.
The papers are lengthy and total over 200 pages so I urge those interested in the future of the Postal Service to download the papers and read them carefully as they all provide useful insights about the problems at hand.

In the next three posts, I will provide the readers of this blog with the executive summary of my paper. The links listed below connect you to the text of the executive summary and the full document. The paper is long so I urge you to take your time when reading it as well as the other papers. I know that those reading my paper will find a number of mistakes that a good edit would remove. Those who have stuck with this blog have been gracious in their willingness to overlook some of my basic logical, grammatical and typing errors and found some merit in the time that you have spent reading these posts. I look forward to comments of my readers on my paper as well as the other five papers

Executive Summary Part 1: Choosing a Mail Industry Policy
Executive Summary Part 2: Challenges facing all Business Models
Executive Summary Part 3: Potential Business Models

Full Paper: Examination of Potential Business Models

Job Cuts or Wage Cuts (2)

According to Radio Netherlands Worldwide, the Dutch postal union has agreed to an new contract with TNT that chose job cuts over wage cuts. The union agreed to the contract once it realized that the job cuts were inevitable.

Immediately, 5,000 postal employees or around 22% of all postal employees will be laid off. An additional 6,000 jobs will be eliminated with retirements, not renewing temporary contracts, and not filling vacancies. When the process is over TNT will have little more than half of the employees the have today.

TNT has an advantage over the USPS as it can afford the severance, early retirement incentives, and unemployment expenses associated with the layoffs. Also TNT does not have to deal with RIF rules that make determining who is left aft a layoff a real challenge for management.

While the Postal Service may not have to drop employees by half, further reductions beyond what attrition produces appears inevitable over the lives of new postal union contracts. Developing methods to make the reductions as painless as possible for employees and management would seem to be an area that will come up in the current negotiations.

The Future of the Document is the Future of Mail

In order to understand the future of mail, one needs to first understand the future of the document. The word "document" immediately congers up an image of a written, printed format. That image is too narrow in today's multi-modal communications world that includes information that can be provided printed on paper but also in numerous forms on a computer display or in text-messages, or other format on a wireless smart phone.

At the recent Document forum, Craig Le Clair of Forrester Research illustrated that companies develop three types of documents: Structured documents - identical or nearly identical documents that are sent to a large number of recipients at the same time;
On-demand documents - documents that are created in a way that allow the recipient to receive the document on their own schedule; and
Interactive documents - documents that use personalized information to create a document designed for one person. A fourth type of document, called Transpromo, represents an interaction between structured and interactive documents. These documents reflect the ability of new digital printers to develop personalized documents but print them as if they were a structured document. As such they neither fit the structured or interactive category but fall somewhat in between.

As the chart above shows mailed documents are primarily structured documents and to a lesser extent interactive documents. In both types of documents, and the transpromo documents that fall in between, the sender determines the schedule that the recipient receives the document.

The recent declines in mail volumes and shifts in mail mix reflect the growth of on-demand documents and a shift from structured and interactive mailed documents to their digital alternative (e-mail.).

Shift from Structured to On-Demand Documents
The documents that have shifted rapidly in this direction include financial payments and printed news and opinion, price lists and big-book catalogs. Travel and college brochures and catalogs are other examples of structured documents that have been replaced with websites that allow the recipient of the message to view information that once was printed.

Shift from Interactive to On-Demand Documents
The entire process of distributing specific prices to specific customers has changed so that much of this is produced. The use of web forms allow customers to do the paperwork on their own schedules that once required printing in an office. (Just think of how different the process is of opening a bank or brokerage account or making changes to the account. While a bank officer can combine your personal information into the loan documents in the branch off of the bank's computer, individuals can now do it on their own schedule without requiring the bank employee to act as an intermediary.)

Shift from Mailed Interactive to E-mailed interactive
This is the shift of personalized documents from printed to digital form. Business correspondence reflects this change. Also collaboratively produced documents that once were sent hard copy to other writers by mail or Express, now are sent as file attachments to that all parties can edit digitally, allowing the original author to make changes faster than ever before. E-mail also allow writers to use structured digital documents, whether in the form of pdf files that cannot be altered by the recipients in formats that are less restrictive.

Shift from Mailed Structured to E-mailed Structured
E-mailed structured documents are mass mailings from one sender to many recipients. These documents include:notices of bills and statements, newsletters, notices of new web content that is available for viewing, advertisements from vendors that the recipient has allowed to send e-mail and pernicious spam promoting get-rich-quick schemes or spreading viruses.

In many ways structured e-mail is nothing more than an digital glossy envelope. The real content is either an attachment to the e-mail or on a site which can be accessed by clicking on the link on the e-mail.

The one problem that senders have with e-mailed interactive and structured documents is that the recipient treats the messages, attachments and links in a similar fashion to on-demand web content. The more e-mail that the recipient gets the more likely that a particular message will be ignored until after the sender would like the e-mail viewed. The sender wants the recipient to look at the attachment or click on the link and take the appropriate action. For example, companies that e-mail bills want the link clicked so that the bill is viewed and payed. Advertisers want the advertisement clicked so that the advertisement is read and a sale made.

Senders of digital documents have found that mail can help increase the value of the documents that they have shifted to digital formats. Mail sent in conjunction with e-mails increases the sales that the the e-mail generates. Websites that offer a full catalog of products, describe a college, provide information on resorts or the schedule of a theater or outside venue will more likely be be accessed if potential customers receive mail enticing them to look. The combination of mail with e-mail and website content is receiving the greatest attention among advertisers but those sending bills and statements may find that combining post cards with e-mail bills may increase the speed that customers pay.

The mail sent from now forward will be different than what was sent before. Many mailers will find that electronic delivery is sufficient without supplementary encouragement of mail. For these senders, mail will become a legacy delivery method available only existing customers who have not chosen to switch to electronic delivery or to those new customers that request it. This is the expected direction of transactional mail, mail that represents over half of First Class volumes.

Those customers that that still use mail will use formats that are smaller and lighter generating less postage per piece. The proportion of letters, flats and cards will shift as customers experiment with formats that minimize their paper, printing, and postage costs. J.C Penney has announced that this fall it will send its last big book. J. C. Penney is not abandoning the mail. Instead it will send smaller specialty catalogs tailored to the interests of the recipient, directing them to the website for both a wider selection of options and the order process. Eddie Bauer has replaced some of its catalogs with post cards that direct the recipient to the website to see all of the deals available.

In the next six months, various parties will propose business models for the Postal Service. The viability of these models will depend on whether they will allow the Postal Service to adjust fast enough to decisions senders make regarding how they will produce and send documents and the impact that this will have on mail volumes, Postal Service revenues and the operating networks necessary to sell, collect, transport, sort and deliver mail.

Note: If you would like a clearer picture of the drawing, e-mail me at alan.robinson@directcomgroup.com and I will send the PowerPoint slide.

The USPS and Apple.

It is about time. The Washington Times reported today that the Postal Service is finally making Click-N-Ship compatible with Apple Computers and the Safari Browser. Apple has a 9% market share. Apple now has a market share among consumers of at least 21%. Consumers are one of the target markets for Click-N-Ship, so this step is probably a year or more overdue.

Not being compatible with Apple computers will likely hurt the Postal Service during the peak consumer parcel shipping period starting now. Apple computers are expensive and therefore are likely more common in higher income households that are the heaviest users of mail services. These consumers are driven by convenience as much as price. If they find that shipping with UPS or FedEx is more convenient, and lines at FedEx Office, the UPS Store, Staples, Office Depot or independent shipping stores are shorter, they will use UPS or FedEx even if prices are somewhat more expensive.

According to the article, the Postal Service will have its Apple compatible Click-N-Ship operational by next summer. For the Postal Service's sake, lets hope its Iphone apps, Android apps, and Blackberry apps are as far behind competitor's similar applications.

The End of Mail? (Just Kidding)

In its 10-k, the Postal Service honestly reported that 2009 was a terrible year. Its forecast for 2010 is not much better as it projects:

• a loss of an additional 10 to 15 billion pieces of mail;
• an operating loss of 7 billion which means the USPS will have an operating loss of $1.5 billion before accounting for retiree health benefit payments;
• the need to borrow $3 billion in 2010 and borrowing needs in 2011 that will exceed its statutory borrowing limits; and
  
• a continuation of the freeze on construction of most new facilities, which severely limits its capability to optimize its processing and transportation network; and
• a cut in employee work hours of between 80 and 90 million on top of the 115,000 cut in 2009.

Many postal stakeholders are counting on the economic recovery to generate volumes better than what the Postal Service projects in order to stave off some the worst of the impacts on postal finances, rates in 2011, and postal jobs. Unfortunately, looking at mail volume trends over the past decade, and efforts by major mailers to adapt to customers who want access to information that traditionally was suggest that many years may pass before mail volumes stabilize.

This conclusion is drawn by looking at volume data over the past decade combined with information that the Postal Service published in its most recent Household Diary Study. The rest of this post presents the data upon which I drew this conclusion.

For the purpose of this analysis, it is useful to think of the Postal Service as serving four types of customers.

• Single piece mailers of payments
• Single piece mailers of correspondence
• Volume mailers of financial documents (e.g. bills, statements, proxy statements, etc.)
• Volume mailers of advertising and parcels (e.g. all mail other than First Class mail financial mail)

The following table shows the year to year change in mail volume for these four types of customers.



From looking at this table it is clear that the future of single-piece mail and in particular single-piece bill payments is bleak.

• Single piece payments now represent around 52% of single piece mail and its share of single piece mail declines as consumers choose other methods to pay bills. Single piece bill payments were declining at more than 6.5% year to year even before the recession began in 2007. (Note the recession began in the fourth quarter of 2007 which would have been the Postal Service's first quarter of 2008.)

• Single piece correspondence declined in every year but one would expect that a forecast of single piece correspondence would see annual declines of 1-2% less than declines in payments.

• The volume-tendered transaction mail column shows some moderate impacts of the economic cycle in 2007 through 2009. However, it is not clear how much of this change reflects the economic cycle, and how much reflects consumers who are no longer making payments by mail choosing to no longer receive their financial documents by mail either. A recovery in financial/transaction mail would normally follow the increase in the number of financial accounts households open as the economy improves However, there are serious questions about whether households will continue to prefer hard-copy mailed bills, statements, and reports in the future. For the cohort of households in 2015 headed by someone younger than 30 today, familiarity with the web and smart-phone technologies will make a preference for mail increasing less likely.

• The advertising mail column clearly shows a product that is sensitive to economic cycles. Volumes of volume-tendered advertising were growing when other mail products were stagnant or declining. When the recession hit, the bottom fell out of advertising mail volumes. Again, there is anecdotal evidence that some of the decline in mail advertising reflects shifts to electronic modes. Expectations of volume increases in the current recovery should by muted to reflect the availability of low-cost, impact-measurable electronic alternatives that did not exist when the Postal Service came out of previous economic downturns

So what would be reasonable working expectations to assess whether econometric forecasts generate reasonable results for the Postal Service of 2015?

• Single piece payment volumes will continue to decline by at least 6.5% a year as, service providers begin to mandate electronic payments, comfort with electronic alternatives grow with older Americans, and an increasing share of the bill-paying public never start the practice of paying bills by mail.

• Single piece correspondence continues to decline at a rate slightly less than that of payments. The most optimistic scenario would result in correspondence mail hitting a plateau sometime in the next 6 years.

• Volume-tendered financial mail will begin to decline even as the number of accounts that require communication of financial information grows. Fewer customers that do not use the mail to pay bills will receive their bills, statements and other financial documents by mail. The rate at which volume-tendered financial mail declines will depend upon the recipients’ preference for mail or electronic delivery, and the entry into the workforce of individuals that have since they opened their first checking account only used the web, smart phones, and ATM’s to receive and send financial information. Demographic factors will likely drive this decision as much as any incentives that mailers employ to encourage electronic delivery.

• Finally volume-tendered advertising volumes will depend on three factors. First the speed and extent of recovery will determine the overall amount of spending on advertising. Second, how the value of mail for the sender relative to other advertising modes changes as electronic forms of advertising improve their ability to serve needs of advertisers. Third, the ability of the Postal Service to adapt to new service requirements for the delivery of parcels and advertisements and in particular the ability of the Postal Service to ensure advertisers that both the mail and e-mail will arrive on the same day. The fact that all non-financial/transaction mail has grown at less a 1% annual rate since 2000 does not suggest that the Postal Service will see volumes grow at a faster rate in the face of emerging Internet competitors.

So what would be a reasonable, back of the envelope, forecast for mail volume in 2015?

• Single Piece First Class – 24 billion pieces down from approximately 33 billion handled in 2009.

• All Other Mail – 141 billion pieces up from approximately 139 billion handled in 2009.

(Authors note: 2009 numbers based on estimate of 2009 4th quarter. Currently the Postal Service reports that total volume in 2009 was 176 billion pieces, slightly more than the sum of the two figures for 2009)
If this forecast turns out to be right, then by 2015, single piece mail will drop from the 20% of volume today to around 15%.
The Postal Service will need to downsize its retail network, collection efforts, and origination sortation, and transportation from origin to destination facilities to what is needed to handle almost a third less volume. The destination sortation network would require some modest trimming as well, reflecting the decline in single piece mail.

Finally, in 2015 the Postal Service would be delivering about the same volume of mail to more households. With delivery density declining, the Postal Service's carriers would likely find themselves delivering less mail over their workday. Today's delivery optimization efforts would need to be intensified to deal with lower density.

Congress will likely require a public forecast from the Postal Service, the PRC and other entities with econometric skills and budgets. Congress would be well served if multiple analysts examine the future of mail volumes so that a consensus emerges about the scale of changes that required for the Postal Service to be financially self-sufficient in 2015 and beyond. The sooner these forecasts are made public, the sooner questions about network optimization, retail modernization, long-term needs for postal operating and management employees can be assessed.

USPS, UPS, FedEx Express and the RLA

The choice of labor law (Postal Reorganization Act (PRA) vs. National Labor Relations Act (NLRA) vs. Railway Labor Act (RLA)) going forward for the USPS may not be clear, FedEx has a clear preference for keeping the FedEx Express Service under the provisions of the RLA. FedEx Express's current position under the action has been under attack by United Parcel Service and the Teamsters who would prefer that that FedEx Express status be changed so that it would be covered under the NLRA.

The change is currently included in HR915, the House version of the FAA Reauthorization Act. This would make it easier for the Teamsters, or any other union, to organize FedEx Express employees. The Teamsters, UPS and FedEx have run aggressive lobbying campaigns. Both UPS and FedEx have courted support from various interest groups that received extensive coverage by Politico last summer.

UPS's position is clearly presented on its website. FedEx, in addition to posting its position on its site, has run a numerous set of web-ads (that may have appeared on television in Washington DC) making its position as a satire of UPS's white-board ads.


The future of this fight over FedEx Express's status, and the labor law under which it operates will depend upon action in the Senate on the FAA reauthorization bill and a possible House-Senate conference to follow. Aviation News has reported that further congressional actions is unlikely this year, so this fight will carry on into the 2nd session of the 111th Congress.

What this fight shows is that the RLA provides advantages to non-unionized firms in their effort to stop organizing efforts. As the employees of the Postal Service and UPS are both unionized, this advantage for management has little value to them. For these firms, preference for operating under the RLA, NLRA, or PRA would depend on whether they believe that the negotiating process under the RLA is better or worse than what they now have. Unions representing UPS and the Postal Service have to ask the same question.

Market-dominant airlines and railroads have had significant challenges adjusting labor contracts to fit new competitive environments and new transportation technologies under the RLA. This should caution management of market-dominant unionized firms facing a changing competitive landscape of using the RLA as a model for labor law in their industry. UPS and Postal Service unions should be equally cautious as less is known about how the RLA negotiation process may have helped or hurt airline and railroad employees dealing with an industry in transition.

Negotiating under the Railway Labor Act

In a recent post (Does Labor Law Matter for the USPS), this blog raised the point that the Postal Service, its labor unions, and other policymakers and stakeholders should think carefully about the potential impact of changing the Postal Service's labor law. One of the options that is available would have the Postal Service operate under the Railway Labor Act (RLA). The Airline Pilot's Association provides a detailed overview in question and answer format of bargaining under the RLA. It is presented below in its entirety. Readers interested in seeing all the questions in a list should follow the link the Airline Pilot's Association website.

What is the Railway Labor Act?
The Railway Labor Act of 1926 was the first major piece of labor legislation passed by Congress. Rather than applying to U.S. industry as a whole, the RLA applied to what was then the most critical piece of transportation infrastructure in the country – the railroads. The RLA was amended in 1936 to cover the emerging airline industry. At UPS, the mechanics, dispatchers, and pilots are the labor groups that are covered by the RLA.

What did Congress say was the primary purpose of the RLA?
Railroad management wanted to keep the trains moving by putting an end to “wildcat” strikes. Railroad workers wanted to make sure they had an opportunity to organize, be recognized as the exclusive bargaining agent in dealing with a company, negotiate new agreements and enforce existing ones. Both sides “won” with the passage of the RLA. Workers won the right to form unions, negotiate with the railroads and to have a grievance system imposed on the companies. The railroads won the right to keep commerce from being disrupted without going through a lengthy and complicated process.

Is the RLA the source of the “work now, grieve later” rule?
Yes. Congress decided that keeping commerce moving was vital to the public interest. As a result, Congress mandated that when disputes arise in the workplace, transportation workers covered by the RLA must “work now (i.e. transport the goods) and grieve later.” There are a few exceptions to this. Workers are not required to perform tasks that they reasonably believe to be unsafe. Workers are also not required to perform when the request is “clearly” a violation of the contract. (The courts have interpreted this to mean that if the company can make a reasonable claim that the contract justifies their request –regardless of whether they are right or wrong – then the employee should err on the side of performing the work, and grieving the incident later.)

What is the National Mediation Board?
The National Mediation Board is the federal agency created by the RLA to administer certain functions under the Act. The Board is primarily responsible for: (1) conducting union representational elections, and (2) supervising the mediation of contract negotiations. The Board is composed of three members appointed by the President. The law requires that at least one of the three members shall be from a political party other than that of the setting President. Currently, two Republicans and one Democratic comprise the NMB.

Who are the “mediators?”
The three presidential appointees who run the NMB employ a professional staff to assist them. Mediators are the staff members tasked by the Board with supervising the mediation of contract negotiations.

When do collective bargaining agreements expire under the RLA?
Under the RLA, agreements do not have expiration dates; instead they have amendable dates which are indicated within the agreement. IPA’s contract became amendable December 31, 2003. Until a mutually negotiated change is accepted by both parties to the agreement, the provisions of the original agreement remain in full force. This is commonly referred to as "status quo." Both the union and the company have a legal obligation to maintain the status quo until the process of the RLA has been fully exhausted.

How do parties initiate negotiations under the RLA?
The parties exchange notices of intent to change or amend the existing contract. These notices are referred to as "Section 6" notices. IPA and UPS have complied with this section by entering into a Letter of Agreement that provided for pre-amendable date negotiations and now post-amendable date negotiations.

What are "direct negotiations?"
Direct negotiation is the first step in contract negotiations under the RLA, during which the parties meet without the assistance of a NMB mediator. IPA has been in direct negotiations with UPS since October 2002 in the form of Interest Based Bargaining. Under our Letter of Agreement, these direct negotiations will continue until July 1, 2004. After that date, we will enter into mediation unless both IPA and UPS agree to extend the direct negotiations.

What is Interest Based Bargaining (IBB) and how does it relate to direct negotiations versus mediated talks?
IBB is simply a method of bargaining that is voluntary and offered by the NMB upon the request of the parties. IBB is a problem-solving method of negotiating which focuses on the common interests of the parties and finding mutually acceptable solutions to issues. A hallmark of IBB is a free flow of information exchange between the parties. A “facilitator” is appointed by the NMB to assist the parties in bargaining utilizing the IBB method. These services are made available to the parties based upon the NMB's resources and its judgment regarding the needs of the parties in each situation.

Will IPA and UPS continue with IBB when the negotiations move into mediation?
Maybe. If both sides request the continued use of IBB and the NMB agrees, then IBB could continue to be utilized for a portion, or all of, the mediated talks.

What happens if the parties cannot reach an agreement in direct negotiations?
If either party believes an agreement cannot be reached in direct negotiations that party can apply for mediation with the NMB. Upon application, the NMB will docket the application and assign a mediator to the case.

Can the parties file a joint mediation application?
Yes, parties may file jointly with the NMB for mediation services. If the parties jointly file, the NMB almost always immediately appoints a mediator. In our case, the LOA requires a joint application on July 1, 2004, which has been accepted.

What happens after the application is received by the NMB?
The application is first reviewed to ensure that it is completed properly, and if so, the case is then docketed.

How are mediators assigned to cases?
When an application for mediation is received, the Chief of Staff and Senior Mediators consult concerning case assignment. They consider a variety of factors, including individual work loads, mediator availability, schedules, desires of the parties, the history of a given mediator with the parties, mediator background, complexity of the case, and other factors.

What kind of background or experience do the NMB mediators have?
NMB mediators typically come from either labor or management backgrounds and have extensive labor relations experience in either the rail or airline industries.

During the mediation process, what is the role of the mediator?
The role of the mediator is to assist the parties with productive dialog on their issues. The mediator can and will use a variety of techniques to ensure this occurs.

Can the NMB determine where the parties will meet when they are in mediation?
The courts have held that the NMB has the authority to establish where the parties will meet while in mediation. Normally, however, the meeting site is mutually agreed upon among the parties and the mediator.

Can the NMB determine when and/or how often the parties will meet when they are in mediation?
Again, meetings are normally established by mutual agreement among the parties and the mediator, but during mediation the NMB does have the authority to dictate when the parties will meet, for how long they will meet, and when meetings will be recessed.

Does the NMB ever recess a case during mediation?
The NMB may recess a case for a variety of reasons. It might simply mean that either the parties or the mediator is not available for a period of time. It could also mean that the parties need time to think about their positions. Calling a recess is also a technique used by the NMB to put pressure on one, or both, parties to bring their proposals within a more reasonable range.

Instead of recessing a case, why doesn't the Board release the parties from mediation?
The RLA was designed to avoid strikes in the transportation industry that would substantially impact interstate commerce. In a typical year, the NMB mediates nearly 100 contract disputes in the rail and airline industries. If the NMB routinely released the parties from these disputes after only a few weeks or months of mediation, the public would be faced with 5 or 6 strike deadlines a month. This would be highly disruptive to the transportation system and contrary to the stated purpose of the RLA.

How long does mediation last?
There is no time limit for the mediation process. It can take just a few meetings, or several months, depending upon the complexity of the negotiations and many other factors unique to each contract negotiation. The NMB has the authority to decide when, and if, to end mediation. Under the RLA, the NMB ceases mediation efforts when it concludes that all reasonable efforts to reach a voluntary agreement through mediation have failed.

What is a "proffer of arbitration"?
When the NMB believes that further mediation efforts will not result in an agreement, it issues a proffer of arbitration, which is an offer to the parties to arbitrate any remaining issues.

Why doesn't the NMB make a proffer of arbitration when one of the parties asks for it?
Under the RLA, the NMB is responsible for making its best efforts to help the parties reach an agreement without resorting to self-help (e.g, lockout, strike). While it will listen to requests from the parties for a release, it is the NMB's responsibility to keep parties in mediation until it has expended all reasonable efforts to reach an agreement.

What happens if either party rejects the proffer of arbitration?
If either party rejects the proffer of arbitration, the NMB releases the parties from mediation and they enter a 30-day “cooling off,” or count down period.

What happens during the cooling off period?
During the 30-day cooling off period the NMB will normally call the parties back to the table for further discussions. While these talks can be called at any time during the 30-day time frame they are generally called at or near the end of the countdown period. These meetings are often referred to as "super mediation."

What if no agreement is reached during the 30-day cooling off period?
If no agreement is reached by the end of the 30-day cooling off period, the parties are free to exercise "self-help." This means that the carrier is free to impose its last offer, temporarily cease operations or engage in other self-help activity (e.g., hiring permanent replacements). The union is free to strike or engage in other self-help activity.

What is a “Presidential Emergency Board?”
During the 30-day cooling off period, the NMB makes a determination regarding the impact of a strike. Pursuant to Section 160 of the RLA, the NMB "notifies" the President that in its "judgment" the dispute between a carrier and its employees cannot be adjusted and "threaten[s] substantially to interrupt interstate commerce to a degree such as to deprive any section of the country of essential transportation service.” Once the President receives such notification, he may, "in his discretion, create a board to investigate and report on such dispute.” The NMB submits a recommended list of potential neutrals to the President. The PEB usually has 30-days to develop a proposed agreement and present that agreement to the parties for consideration. After the PEB delivers its proposed agreement, there is a further 30-day cooling off period.

What happens if either party rejects the PEB's proposed agreement?
If either party rejects the PEB's proposal, the parties may, after the second 30-day cooling off period, engage in self-help.

Is there any circumstance in which the parties are constrained from engaging in self-help after rejecting a PEB's proposal?
Yes. It is possible for Congress to intervene and legislatively mandate a settlement. If this is done, Congress most typically would simply take the recommendations of the PEB and write them into law. This would mean that a contract would be legislated by Congress and no strike or no membership ratification would be allowed.

FedEx Ground and Contract Drivers

FedEx won a major victory last week in its efforts to retain its current operating model at FedEx Ground. The Internal Revenue Service (IRS) dropped its tax assessments related to FedEx Grounds use of contract delivery drivers for the years 2004-2006. This follows a similar IRS decision for 2002. FedEx expects that the remaining assessments that it contests or 2007 and 2008 will be dropped as well.

The action by the IRS should remove any immediate threat at the federal level to FedEx Ground's use of 15,000 contract drivers. The IRS's actions do not affect suits brought by a number of state attorney generals that FedEx Ground's use of contractors violates state labor laws. (For more information see: Labor Problems at FedEx Ground.)

The state actions have potentially wider consequences as most local and regional parcel carriers, express companies, and couriers use a contractor model similar to FedEx. The trade association of these firms, the Messenger Courier Association of America (MCAA) has had the issue of contract drivers as one of their top policy issues for number of years. Their briefing paper details their position on the issue.

How Does Labor Law Matter for the USPS?

Currently the Postal Service operates under a unique labor law that is contained in the Postal Reorganization Act. This is in contrast to its competitors that operate under provisions of the Railway Labor Act (RLA) (e.g., Federal Express) and the National Labor Relations Act (NLRA) (e.g., UPS, printers, pre-sorters, etc.). There are numerous differences among the three laws that can be grouped into three major areas:

• How the laws affect the ability of employees to organize and form unions;
• The process of negotiating contracts including the ability of employees to strike, management to lock-out employees, and requirements for binding arbitration and other methods to prevent strikes and lock-outs; and
• The process of handling employee grievances.

United Parcel Service is unique among the major competitors in the United States courier, express and postal market in that they have unionized employees that fall under both the RLA (its pilots and aircraft mechanics) and NLRA (its delivery drivers, over-the-road drivers, and distribution center employees.) and that it negotiates with a single union (the Teamsters) regarding employees covered under the different laws. Learning about the preferences of UPS and the Teamsters in negotiating contracts and handling grievances under the two private sector labor laws could provide some guidance about what the impact would be on management and labor if the Postal Service's labor law was changed. (The issue of organizing a union is not an issue as UPS operate a unionized airline.)

The one question that looking at UPS's experience with the RLA and NLRA would not answer would be what would happen if a new business model gave Postal Service unions the right to strike and binding arbitration was not required. The binding arbitration provision was included because mail was considered an essential service and Congress did not want to introduce the right-to-strike to any group of federal workers.

Public transit is an example of another service for which work stoppages could harm the economic well being of the communities affected. Public transit workers fall under variations of the RLA, NLRA and postal-like labor laws that affect contract negotiations and the ability of unions to call a work-stoppage or management to lock-out employees.

Recent negotiations in Philadelphia with SEPTA and Washington DC with METRO illustrate how the different processes affect the communities involved and type of contract employees receive from an employer with limited financial resources and the impact that settlements have on transit fares. In Philadelphia, a contract was signed after transit workers struck for 6 days. In Washington, a contract was imposed in a binding arbitration process that does not allow for a strike. While the strike was unpleasant, and forced thousands of people to find alternative ways to get to work, school and other destinations, there does not appear to any long-term affect of the strike in Philadelphia. In both cities, increases in compensation costs in the new contracts and lower levels of ridership due to the economy will likely result in higher transit fares.

The upcoming postal labor contact negotiations will be coming within a postal market environment that is more difficult than what transit agencies now face. In fact, the market environment is probably more similar to what transit agencies and their predecessor companies faced from the late 1950's though the 1960's as Americans moved to suburbs and switched from public to automobile transportation for most personal trips. In both instances, the change in the competitive environment forces labor and management into negotiations regarding changes in long standing contract provisions and expectations about pay increases and employee benefits. Determining whether the current method of negotiating contracts or alternatives used by UPS ground, UPS aircraft mechanics public transit workers in Philadelphia or public transit workers in Washington DC would ease the process of concluding negotiations successfully with the least harm to the mail market is now worth considering.

Driving the Customer Away

The Postal Service has many problems not of its own making. What it doesn't need are postal employees creating new ones that could drive its largest customers away. Mary Ann Bennett provides a detailed illustration of how that is happening today.

In her article, Ms. Bennett details how postal inspectors are using data gained from the introduction of the Intelligent Mail Barcode (IMB) to identify mailers associated with mail that did not meet standards even though the mailers had followed all proper procedures to ensure that mailing lists were updated to include the most recent move updates provided by the Postal Service.

She noted that mailers targeted are initial adopters of the IMB. The IMB allows the inspectors to identify the sender of the mail. Late adopters of the IMB are not at risk because the Inspection Service cannot find them. Given that the problems with move update exists for both early and late adopters of IMB, the IMB makes finding problems with mailings as easy for the Inspection Service as shooting fish in a barrel.

Unfortunately for the Postal Service, the Inspection Service's actions ruins any effort the Postal Service makes to improve its relations with its largest mailers as it tries to make a major shift in addressing and barcoding requirements. Once they were investigated and fined by the inspection service, the mailers, which Ms. Bennett wrote about, redoubled their efforts to shift their communications from mail to electronic delivery. The net effect of the Inspection Service's efforts was a loss in business and revenue far greater than the revenue recovered in their audits.

In many ways, the situation that Ms. Bennett describes, reminds me of the problems in customer service that led to the bankruptcy of the Converse company. In the 1960's and early 1970's, Converse was the dominant athletic shoe company in the United States with two of the biggest names in shoes, Chuck Taylors, and Jack Purcells. Converse was the official shoe of the NBA and many colleges. Converse lost its position in that period for a number of reasons. Most importantly its key customers, stores that sold its shoes, found the company difficult to deal with and its upstart rivals Adidas and in particular Nike easy to work with.

A survey comparing every factor affecting customer satisfaction, including payment terms, easy of sale, attentiveness of the sales rep, return policies, shipping speed, order accuracy consistently showed that Converse made the retailers life more miserable than its competitors. Over time, shoe stores decided that value of sales from stocking Converse shoes was not worth the hassle of dealing with the Converse company. Converse sales dropped, it lost its lucrative relationship with the NBA and eventually went bankrupt. In bankruptcy, Converse was bought by Nike, the upstart that beat it by offering a competitive product that retailers wanted because of superior customer service.

The Postal Service needs to take a serious look at what its Postal Inspectors are doing. Otherwise, it could end up like Converse, bankrupt and looking for a buyer.

Job Cuts or Wage Cuts

According to Hellmail, TNT, the Netherlands postal operator, and its unions are expected to agree to a new offer for its contract soon. The agreement results in pay cuts of between 2 and 3.5% and layoffs of less than 1,000 employees. Much of the pay cuts will come from a proposed reduction in Sunday pay.

Prior to the agreement TNT had placed on the table the possibility of laying off 11,000 employees. This proposal was made after the Union had rejected a 15% pay cut in March, 2009.

The driver behind the contentious negotiations is the rapid drop in mail volumes at TNT. TNT like all postal operators have been hurt by both a severe recession and declining demand due to electronic competition.

TNT's contract may present a framework for upcoming negotiations that the United States Postal Service have with their unions. The Postal Service faces similar economic and competitive challenges to what drove TNT to offer sizable pay cuts, threaten massive layoffs and eventually agree to modest layoffs and small cuts in pay.

The Postal Service differs in that it has not previously made as extensive an effort to streamline and optimize its network and has less flexibility in the use of full-time and part-time employees. Therefore it enters the upcoming round of labor negotiations needing significantly more contract changes that what TNT was willing to accept. Without binding arbitration, the US postal unions and the Postal Service, just like TNT and its unions, would have to make the choice between cutting jobs and cutting real compensation levels.

With binding arbitration, the outcome is less certain. However, given the difficulty of selling eliminating long-standing contract provisions to their members, postal unions and the Postal Service are likely heading toward an arbitrated contract agreement where an arbitrator will be asked to make the choice between jobs and compensation.

150 plants and 400,000 employees

On November 5th, former Deputy Postmaster General Michael Coughlin suggested that the Postal Service in order to survive must have a much smaller footprint with possibly 150 plants and 400,000 employees. He made his remark in response to a question of Representative Danny Davis at the hearing of the Federal Workforce, Postal Service and the District of Columbia Subcommittee of the House Committee on Oversight and Government Reform.

While the hearing was about potential sources of new revenue, the question and the answer suggested that revenue generating options suggested by the panel will not generate the $3-5 billion in additional revenue that the Postal Service will need to be truly a viable enterprise. His answer further suggested that the Postal Service's current approach to cutting costs, while more effective than they have been in the past does not do enough to shrink the operating network down to either current levels of demand or even lower levels that are expected in the years to come.

Given former DPMG C0ughlin's experience, his response should be a considered a serious hypothesis about what a true redesign of the Postal Service would look like. His response raises an important question that opponents of shrinking the network will raise. Can the Postal Service maintain service levels if the network of processing plants shrinks to less than half of its current size?

To answer that question in the affirmative, and it can be answered that way, requires a major rethinking of the design of processing and transportation networks. If the Postal Service was to shrink to 150 processing facilities, two thinks would clearly change, the distance (and travel time) between processing facilities and delivery units would grow, and the time that mail is handled within each of the facilities must shrink.

For example, if the originating and potentially delivery facility moves from 10 miles to 90 miles from the delivery unit, then the time available for processing originating mail from open dump and cull to delivery point sequencing drops by 4 hours, assuming an average travel speed of 40 miles per hour. Fewer processing facilities means that facilities will be further apart, so critical dispatch times will likely be earlier to ensure on-time arrival.

Therefore the primary driver of 150 facility network would involve designing a facility that can handle turn-around times half of what they are today. Lower volume levels aid in cutting total sortation time. But new thinking about the use of automation and material handling systems must focus on reducing time as much as labor expenses. The 150 facility network would likely require larger facilities on average that can handle all of the sortation and material handling equipment that would be needed to cut handling time within each processing facility.

The 150 facility network would also require removing two key assumptions that drive all current network modeling. 1) Existing facilities must be used. The 150 facility network will likely have major processing facilities in locations further from population centers than current plants, with locations driven by access to the interstate highway system or major air facilities. It is possible that larger urban centers will retain some DPS sortation but only if it reduces total handling time. 2) The standard work shift within a plant is eight hours. The 150 facility network will likely have work for no more than 1 full time and 1 part time work shift. To the extent that DPS sortation remains close to delivery units, then that shift will likely also be part time. The proportion of full-time jobs could rise if divisions between crafts and all restrictions that prevent a person from having two different "jobs" within eight hours were eliminated.

The shift to a smaller network could have some significant management benefits. A smaller network is simpler to manage. While every node must operate as precisely as the finest Swiss watch, controlling variations from best practices would take less time to implement. Reducing time in plants requires a 6-Sigma, zero-defects, or whatever the current buzz-word is for eliminating errors that increase time and costs can be more quickly implemented in 150 facilities than in 350.

The shift to a network that is as much focused on reducing in-plant time reflects current mailer demand to both improve mail delivery reliability and reduce the time it takes to turn an idea into a delivery. Most importantly, the Postal Service has to be as reliable as e-mail when it promises a delivery date for all of its advertising customers to ensure that their direct mail campaign most effectively complements their broadcast, e-mail or Internet display advertising campaign.

There is one major drawback to implementing a 150 plant Postal Service, which is greater than the logistical and management challenge of shrinking the network; the elimination of 200,000 postal jobs at a rate between 20,000 and 40,000 per year in an implementation plan. Shrinking the network at that rate would create a far louder political outcry than even the first round of base closings. Shrinking the network at that rate would also create significant severance or early retirement costs and the Postal Service does not have the cash to pay them.

So this leads one back to Representative Davis's implied question: Can the Postal Service be saved? DPMG Coughlin's response illustrates that saving the Postal Service will require serious and unpleasant steps. The scale of the change that he suggests, as well as the limitations of revenue generating ideas of all stakeholders, should force Congress to think more boldly as they try to find a new business model and regulatory framework that can save the Postal Service.

The Future of the Postal Sector

Besides my presentation, the rest of the program is packed with speakers that should initiate the coming debate on future business models for the Postal Service. The topics cover viewpoints from many stakeholders, academics, comparable industries and should give attendees a good understanding of the challenges that the Postal Service faces in the years ahead. The workshop will cost $390 for those in the private sector and $200 for government and postal employees. To register follow contact the Center for Research in Regulated Industries. (The link is to the registration form.) The entire agenda is as follows:


Welcoming Remarks - Ruth Goldway, Chairman, Postal Regulatory Commission

The Future of the Postal Sector: the Elephant in the Room - Michael Crew, CRRI Professor of Regulatory Economic and Director – CRRI -

New Business Models for Tough Problems - Alan Robinson, President, Direct Communications Group

Lessons of the Great Recession from Electric Utilities - John Caldwell, Chief Economist, Edison Electric Institute

Operational Responses to Mail Volume Declines - Patrick R. Donahoe, Deputy Postmaster General and Chief Operating Officer, United States Postal
Service

The Future of USPS from a Union‟s Perspective - Fred Rolando, President, National Letter Carriers Association

USPS in Good Times and Bad: Results from an Aggregate Economic Model - William Miller, Economist, Postal Regulatory Commission

The History of Tomorrow - David C. Williams, Inspector General, Office of Inspector General, United States Postal Service

The Voice of the Customer - Jody Berenblatt, SVP Global Postal Strategy and Enterprise Operations, Bank of America

Public/Private Relationships – Creating a Successful Postal Alliance - Carl W. Asmus, Vice President – International Market Development, FedEx Service

Optimal Value-Added Discounts in the Future of the Postal Service - Paul Vogel, Deloitte and Touche

Managing Declining Demand: Lessons from the Railroads - David Levy, Partner, Venable LLP, and Matthew Field, Associate, Venable LLP

The Future of the Postal Service: Mail and Environment
Larry Buc, President, SLS Consulting, Inc.

Future Business Model for USPS - Mary Anne Gibbons and Linda Kingsley, Senior Vice Presidents, General Counsel and Strategic
Planning, United States Postal Service

Q&A/Concluding Discussion - Michael Crew

Eight Challenges for a Postal Business Model

The recent economic challenges have forced nearly every country to rethink its national postal operator's business model and the regulatory framework within which the national postal operator must conduct business. On November 20th, I will be making a presentation at a workshop on the Future of the Postal Sector that will

• detail these challenges,
  
• illustrate how various postal operators and other entities have dealt with these challenges, and
• identify and critique potential business models that may be chosen for a national postal operator.

As a preview of my presentation here are the eight challenges that I believe the Postal Service must handle under all potential business models ranging from government department to full privatization.

1. Maintaining Mail’s Importance to the Economy – The mail industry is responsible for over eight million jobs and $800 billion in economic activity. The business model can accelerate or retard economic growth depending on how well it serves customers that need mail delivery.
2. Minimizing Financial Risks to the Federal Treasury – At the end of the third quarter of 2009, the Postal Service’s obligation to the Treasury for debt, retiree health benefits and workers compensation payments is $ 72.7 billion.
   
3. Ensuring Financial Self Sufficiency – Since the passage of the Postal Reorganization Act, financial self sufficiency has been an objective of postal policy but was never defined much beyond the concept of accounting break even. While the Postal Accountability and Enhancement Act (PAEA) has as its objective that revenue and retained earnings of the Postal Service should be sufficient to endure financial stability, the current operating losses and limited cash reserves suggest that the Postal Service faces a significant challenge of being truly self sufficient.
4. Adjusting to New Market Realities Serving Wholesale Customers – With the decline of the Postal Service’s business handling transactions and correspondence, both the Postal Service’s ability to provide universal service and its financial viability will depend upon meeting the service needs of its wholesale customers that send 500 or mail pieces at a time and will in the future generate more than 70% of revenue and 80% of the volume that the Postal Service handles.
5. Adjusting to New Market Realities Serving Retail Customers – Over the next decade the Postal Service will see demand from retail customers declining below the 30% of revenue it is today. Adjusting the retail interface and operating network serving these customers creates significant financial, operating and political challenges.
   
6. Adjusting Operating Costs to New Competitive Realities – The market realities of serving postal customers requires a leaner processing and transportation network that matches the demand for mail service and a modernized retail network that provides better access at a lower cost.
7. Funding Transition and Modernization Costs – Rationalizing Postal Service operations to reflect new market realities in wholesale and retail markets will require substantial cash outlays to cover the costs of right-sizing the network and workforce, modernizing the retail network and optimizing the processing network. The business model must find ways to raise this cash when operating losses, retiree health care payment schedules, and debt to cover prior-year losses provide few options
   
8. Creating a Workforce for the Long Term – The new market realities and the operating and retail networks that serve them can provide good jobs for postal employees. However, the existing civil service based employment law framework, labor agreements and consultative requirements with management associations all reflect significantly different market and operating realities and the labor-management environment that existed four decades ago. Furthermore, the existing employment compact provides employees from top to bottom few rewards for dealing with the pain associated with transitioning to new market realities.