OIG Blog Entries from March 2012

  • What is the appropriate pricing regime for the Postal Service?
    on Mar 26th, 2012 in Five Elements of a Postal Solution | 14 comments
    This is the fourth topic in our "Five Elements of a Postal Solution" blog series. Link to last week's topic. Link to today's recap. Link to Thursday's blog by John Waller. Link to Wednesday's blog by Jeff Colvin. Link to Tuesday's blog by Jessica Lowrance.
      Recapping the week - March 30, 2012 In the fourth week of our blog series, we asked three experts to give us their opinions on an appropriate pricing regime for the Postal Service. Our bloggers offered diverse ideas about a future pricing regime. Jessica Lowrance believes “eliminating the current concept of classes of mail is a natural step in streamlining operations and simplifying mail usage… [and]…it makes sense to adapt the product offering to how the USPS currently processes mail.” Jeff Colvin envisions “tailoring the price structure of bulk mail to the vast differences in delivery cost around the country.” Lastly, John Waller sees “current competitive market conditions warranting the exploration of a more flexible [price] cap with a narrower scope of application.” Although Waller identifies the need for a more flexible price cap, he thinks the current requirement has had positive results because “it has forced cost cuts and attention on developing new business models.” However, Colvin points out that “the price cap freezes prices at inflation, effectively removing an important tool companies ordinarily employ to achieve financial stability.” Both do agree that a future price cap should factor in a continued decrease in mail volumes. Lowrance’s blog differs by focusing on Postal Service operations and mail classes. She states, “The major differences within operations are when and where the [mail] piece is accepted and the service standards surrounding the class of mail. The Postal Service could rationalize its services by creating shaped-based products that followed many of the same regulations that exist today.” Comments to date on this week’s blog include varying ideas. Most agree there should be a responsible approach to increasing prices based on current market conditions. Others added that any Postal Service products or services that cost more than the revenue they bring in should be minimally priced at the breakeven level. We thank each of the bloggers for their comments and will continue to keep the blogs open for additional input from the public. In addition, we invite you to keep up with the Office of Audit’s latest work through the Audit Project Pages. This site provides a forum for you to share your ideas, comments, and concerns on our open audit projects. Next week’s blog series will examine the question: What should be done about the overfunding, overpayment, and other unfunded federal mandates? Back to top
      Guest Blogger John Waller, consultant on postal and regulatory issues - March 29, 2012
    John Waller
    The CPI cap requirement has forced cost cuts and attention on developing new business models. These achievements should not be lost in any new pricing requirements. But a CPI cap does not account for the impact of on-going volume and revenues erosion due to electronic diversion and economic downturns. Current competitive market conditions warrant the exploration of a more flexible cap with a narrower scope of application. Without annual pricing flexibility in excess of the CPI, the Service becomes dependent on exigent, breakeven or legislatively authorized price increases, with periodic rate shock impacts as in the pre-PAEA days. With more flexibility in the cap and more limited application, these impacts can be avoided through manageable, predictable, annual increases sufficient to ensure a financially viable Postal Service. Ideally, a new pricing policy would mimic PAEA requirements for competitive products as closely as possible. Market conditions will act as a restraint on unreasonable price increases given the competition that exists between postal products and the Internet, especially for commercial mailers. However, as a matter of public policy protection for the individual citizen mailer, a cap may still be warranted for single-piece letters and packages. While the cap could initially be applicable only to single piece letters and packages, a safety valve could be established for other products by authorizing the Commission to extend the cap coverage, if unreasonable prices or undue discrimination is detected. The recognition that excessive price increases could trigger a death spiral will keep the Service focused on cutting costs and developing new sources of revenue. The Service has exercised appropriate restraint with reasonable, but above CPI, price increases for competitive products. This pricing flexibility has allowed those products to remain affordable and profitable yet keep management attention on cost cutting and innovation. As with competitive products, it is reasonable to require market dominant prices to cover cost plus a reasonable contribution for institutional costs. If a product suddenly fails to cover costs, then a specific period of time could be required for returning the product to profitability before mandating price increases through the regulatory process. Pricing requirements should also foster workshare discounts to continue the privatization of upstream functions. At some point it may be reasonable to transfer most bulk mail products to the competitive category. But in the meantime, once a lean system is established, removing the cap for commercial products is a means of testing the feasibility and value of such a move. To the extent that a cap is retained, it should take into consideration the financial impact of the steady erosion in volume due to competing media. As volume declines, non-volume-variable costs in a lean postal system become a larger share of total costs and average unit costs increase even if input costs (labor, transportation, etc.) are under the CPI. The percentage of total costs that are fixed accelerates as volume becomes ever smaller due to the structure of street delivery. The cap should also allow for price adjustments to offset the loss of contribution due to the change in mail mix. Since 2006, Standard mail has become the largest component of volume with about 1/3rd the unit contribution of the previously dominant First-Class. Additionally, universal service requirements should be taken into consideration. The need for an above CPI cap can by mitigated by reducing legal constraints, such as a required 6-day delivery or mandated price preferences for certain products. If Postal Service requests for changes, especially in delivery innovations, are rejected, then the resultant impact on profit can either be subsidized or be incorporated in the cap to allow recovery of these costs through postage. A future cap should be less than CPI if volume trends turn around. When volume is growing, price caps less than the CPI are reasonable. The Service could propose the mechanics of a new cap with adoption requiring regulatory approval based on public hearings. To allow a capability to respond to new price impacts, a legislated cap could be a simple CPI plus an x factor to be determined by an expert body informed by public hearings. The legislation could specify certain factors that must be considered in future caps, such as volume per delivery point. Back to top
      Guest Blogger Jeff Colvin, Director, U.S. Postal Service Office of Inspector General - March 28, 2012
    Jeff Colvin
    You hear it all the time. Question: What company, facing a precipitous decline in demand for its product, would raise prices? Answer: A state-owned monopoly, with a mandate to meet a multi-billion dollar service obligation. Question: What company, losing billions a year, would not raise prices? Answer: A business facing such powerful multi-modal competition that its captive market is slipping away like time into the future. So the Postal Service, and the $900 billion industry it supports is in a huge mess – but what’s price got to do with it? And what can be done, via pricing, to make things better? The problem is well-known. The Postal Service’s most profitable product First Class Mail was already battered by e-substitution, when the postal ship sailed into the greatest recession in recent memory. And it’s still taking on water, losing $1.3 billion in January 2012 alone, according to unaudited results filed with the PRC. January volume fell by 2.3% from last year. While there is some improvement in shipping services, there isn’t enough to make up for the gigantic losses in the letter market. Like it or not, the action is all in letters, and increasingly, in bulk letters. But raising the bulk letter price is not easy. The price cap freezes prices at inflation effectively removing an important tool companies ordinarily employ to achieve financial stability. Of course, Congress could soften its impact by loosening it to compensate for falling volumes, but it may not be enough. But Royal Mail and its regulator Ofcom recently concluded that even a cap watered down by such a volume-adjustment mechanism fails to provide for adequate pricing flexibility in labor intensive industries like postal. More importantly, the pricing problem is not strictly a legislative issue. The Postal Service says that it wants to raise the stamp price to 50¢, but is much more cautious when it comes to raising bulk mail prices. The worry is that demand might now be significantly more sensitive to price increases, because of e-substitution, than in the past. The jury is out on that one. The available research on what economists call ‘elasticity’ says First Class Mail, and even Standard Mail, are still pretty price insensitive, so much so that an increase in price would actually raise revenue and contribution. It may be that e-substitution to letters is more a trend, whose ebbs and flows depend more on technology and culture than on incumbent pricing. Still, the question is an empirical one, and short of the basic research on whether demand characteristics have really changed, the obvious test – raise prices and see what happens – does carry risk. So, what can be done with prices to improve the Postal Service’s bottom line? Let me offer a modest proposal. Why not tailor the price structure of bulk mail to the vast differences in delivery cost around the country. Delivery costs vary dramatically by ZIP code according to the density of the population. It would improve efficiency if prices tracked those differences. In fact, simulations indicate that, even keeping total revenue constant, adjusting prices to delivery costs, could increase contribution by $800 million by shifting volume from high cost to low cost delivery areas. It won’t solve the problem, but as they say, a billion here and billion there . . . N.B: The views presented in this blog posting do not necessarily reflect the views of the OIG or any other organization. They are the views of the author alone. Back to top
      Guest Blogger Jessica Lowrance, Executive Vice President for the Association for Postal Commerce (PostCom) - March 27, 2012
    Jessica Lowrance
    Today, the Postal Service offers an array of products that ultimately deliver a piece of mail from point A to point B. This original product has been sliced and diced to over 4,000 price points. From this price list, mailers pick the shape that best fits their mailing – a letter, flat, or package. Next, the mailers chooses a class of mail (First-Class, Standard, Periodicals, or Package Services/Parcels) based on rules and regulations established by the Postal Service. The Postal Service further distinguishes classes of mail by delivery or service standards. Additional services are available to mailers that occur pre- or post-delivery, especially if the piece is found to be undeliverable. Eliminating the current concept of classes of mail is a natural step in streamlining operations and simplifying mail usage. From my perspective, it makes sense to adapt the product offering to how the USPS currently processes mail. Today, shape influences how a piece gets processed and which machines are used to move the mail through the system. This, then, affects how much it costs the USPS to process the piece and ultimately the price of the service. In the eyes of a postal machine, a letter is a letter. The major differences within operations are when and where the piece is accepted and the service standards surrounding the class of mail. The Postal Service could rationalize its services by creating shaped-based products that followed many of the same regulations that exist today. Under such a revised product list, the Postal Service could offer a letter product that was differentiated further by where the piece was entered and the services purchased through the IMb. For example, if the piece contained a bank statement and the mailer wanted 1-3 day service, it would be entered at a facility that met those service standards as well as any presort and destination entry requirements. The Intelligent Mail barcode on the piece could indicate that it was sealed against inspection and would be automatically forwarded if the recipient changed addresses. If the mailer wanted or needed additional return services, it could indicate which services were requested via the IMb. The Postal Service would no longer have to be concerned with processing preferred over deferred service letters, as all letter pieces when processed would be processed together. This a la carte price offering would provide the mailing community with the opportunity to reach deeper presort levels and dropship further downstream in postal operations. Over time this should reduce upstream operations and postal costs. In order to move forward with this suggested alternative, the Postal Service would need to go before the Postal Regulatory Commission to change its mail classification schedule (MCS). This process would allow for interested parties to comment to the Commission on the Postal Service’s new product categories and how it translates to existing service performance reporting, pricing, and costing. Back to top
    What is the appropriate pricing regime for the Postal Service? The pricing of postal products is critical to ensure value for Postal Service customers. Although, the Postal Accountability and Enhancement Act of 2006 streamlined the pricing and classification process, no significant changes have been made in almost 6 years. Additionally, law requires that all market-dominant product price increases to be tied to a Consumer Price Index (CPI) price cap. Is this an adequate pricing approach for a 21st century postal service? Are there other objectives that should be achieved with modern pricing? The Postal Service’s president and chief marketing/sales officer said ―”…when we make it simple to mail, our customers will do business with us.” However, mailers, employees, and the public do not always understand all of the prices the Postal Service offers. Stakeholders have noted that complex rates aren’t necessarily a bad thing for mailers and that most large mailers calculate their postage with a computer rather than paper and pencil. Is the use of computerized pricing by mailers a 21st century solution or a symptom of a disease? In fiscal year (FY) 2010 the Postal Service had more than 7,600 domestic prices with 2,361 prices (31 percent) not used in FY 2010 and another 1,237 (17 percent) used on less than 10 mailpieces. This means that nearly half of the Postal Service’s domestic prices were not used by customers at all or not used often. Today there are over 8,000 domestic prices for the Postal Service’s three primary product lines: letters, flats, and parcels, along with additional services such as insurance, delivery confirmation, and certified mail. Does it make sense to have so many prices or should pricing be simplified? Continuing pricing discussions include how to establish prices — a top-down or bottom-up pricing model? What pricing tools could potentially promote better efficiency and incentivize good performance? Are work sharing pass-throughs an efficient measure of costs avoided by the Postal Service? Is the CPI an adequate safeguard to ensure efficiency and financial viability for the future? We would like to hear from you about how the Postal Service should or should not redefine pricing in support of a lean and simple national infrastructure with a right-sized workforce in the 21st Century and beyond. For this week’s topic, we’ve also asked the following guest commentators to discuss this topic over the next three days: • Jessica Lowrance, Executive Vice President for the Association for Postal Commerce, on Tuesday, March 27. • Jeff Colvin, Director, USPS Office of Inspector General, on Wednesday, March 28. • John Waller, consultant on postal and regulatory issues, on Thursday, March 29. We hope you can join the debate. Please check in throughout the week for their thoughts, and share your comments along the way. On Friday, March 30, we will summarize and conclude the discussion on this important topic. Our Guest Bloggers
    Jessica Lowrance Jeff Colvin John Waller
    Jessica Lowrance Jeff Colvin John Waller
    Jessica Dauer Lowrance is the Executive Vice President for the Association for Postal Commerce (PostCom). She has been with PostCom for almost four years working with and representing business mailers to all postal stakeholders. Prior to joining PostCom, she was a pricing economist for the Postal Service. Dr. Jeffrey Colvin has published many articles on postal issues. After 23 years with the Postal Service, he is now with the USPS Office of Inspector General. John Waller is a consultant on postal and regulatory issues. Previously he was the Director of the PRC's Office of Accountability and Compliance. Back to top

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  • What Opportunities Exist for the Postal Service to Integrate Its Traditional Role in the Digital World?
    on Mar 19th, 2012 in Five Elements of a Postal Solution | 16 comments
    This is the third topic in our "Five Elements of a Postal Solution" blog series. Link to last week's topic. Link to Friday's recap. Link to Thursday's blog by John Payne. Link to Wednesday's blog by Dan Combs. Link to Tuesday's blog by Steve Ressler.
      Recapping the week - March 19, 2012 This week our panel of prominent commentators examines whether or not the Postal Service can integrate its potential digital role(s) with its physically-based business. The Postal Service has been a trusted third party intermediary since the eighteenth century. But now, in the twenty-first century, it faces unprecedented challenges. Digital technology is developing rapidly and changing the nature of communications and of many businesses, especially those based in brick and mortar. As a brick and mortar-based communications backbone of the nation, the Postal Service is doubly affected by the disruptive technologies of the digital revolution. While approaching the question from different perspectives, our guest bloggers are adamant: They all agree that there are multiple digital roles for the Postal Service in this brave new world. Further, they state that without taking on these new roles, the Postal Service will not survive. Among opportunities discussed are: oDigital communication and storage oDigital identification as well as digital and physical authentication oEnforcement against digital fraud oOther mobile applications to minimize customer time in Post Offices Tactically, they suggest that lessons can be learned from retail banking, which has responded to customer demand for more mobile applications, and the Internal Revenue Service (IRS), which partnered with private sector providers to help individuals transition to digital transmission of tax returns. Strategically, the Postal Service must become more customer-focused and work on short-term opportunities leveraging and protecting its traditional role, while looking for longer-term opportunities. Steve Ressler, Founder and President of Govloop.com, says that “the future is moving online” and that the health of the US Postal Service depends on its becoming a provider of trusted delivery solutions regardless of channel. He also advocates secure digital storage for sensitive information, an application which is being requested by some consumers now. Dan Combs, CEO of eCitizen Foundation, highlights new uses of the Postal infrastructure and the Postal Service’s legal standing in offering both secure communications and specific credentialing services. He stresses enforcement as being a unique competitive advantage. John Payne, CEO of Zumbox, urges the Postal Service to “remember the consumer”—and consumers’ needs for convenience—or face extinction. Comments on this week’s blog to have to date offered a range of ideas, but most have had a common theme: The Postal Service has to change with the digital age and take advantage of at least some of the opportunities that leverage its core strength as a trusted branch of government with a wide-ranging geographic presence and long history of delivering secure communications from point-to-point and person-to-person. However, not every commenter agreed that public-private partnerships are an effective tool for implementation or that the Postal Service culture can adapt to its potential digital roles. The OIG would like to thank this week’s guest bloggers for their key insights on digital issues. In next week’s blog we will discuss what should be the appropriate pricing regime for the Postal Service. Back to top
      Guest Blogger John Payne, CEO of Zumbox - March 22, 2012
    John Payne
    Remember the Consumer! For most people, their relationship with the USPS is as follows: 1.The USPS puts some unknown quantity of mail into your mailbox six days a week 2.You periodically check your mailbox 3.You sift through your mail, pulling out the important items and trashing or recycling the rest 4.Rinse and repeat The really sad thing about the process above is that it hasn’t improved . . . . ever. In fact, if anything, we simply have more unwanted mail to deal with today, which just exacerbates the problem. In an age where consumers are demanding that more information be delivered digitally, across multiple devices, can the USPS improve the aforementioned experience? For the USPS to stay relevant in the digital age, the answer has to be YES. The USPS needs to think more about what the consumer wants, and let that line of thinking dictate future product strategy. Today’s consumer wants to visit the post office less (or any store, for that matter), and do more on the go, at their convenience. One industry that has similar features, and has embraced this line of thinking, is the retail banking industry. The retail banking industry has seen its customer base demand more and more products that keep them away from branches. It is natural to fight this change, but the retail banking industry has instead, developed extensive mobile applications to help its customers reduce their visits to branches. A recent report from comScore supports this view. Today, you can deposit checks, pay bills, transfer money, check balances, etc., all from the comfort of your phone. While the USPS has a mobile application, it is generally limited to shipping information, or looking up the nearest post office location. With all due respect, 99% of my interaction is with my USPS delivery representative at my home. If the USPS wants to spend time on mobile applications, or new features on their website, ask this question first, “how is this feature materially improving the consumer experience?” A recent article with the title “Three keys to saving the U.S. Postal Service” misses the mark as its three keys are all non-consumer centric. In contrast, an opinion piece in the New York Times summed it up nicely. “Like other retailers, the Postal Service needs to sit down with its customers and talk to them about how it can serve them better, then come up with new, innovative products and services that will be competitive in today’s marketplace. If it does not do this, it will not survive, whether it cuts costs or not.” Back to top
      Guest Blogger Dan Combs, CEO, eCitizen Foundation - March 21, 2012
    Dan Combs
    Answering the title question requires a couple of precursor activities. First is accepting that any separation between the digital and physical worlds is artificial and misleading. There are numerous reasons that we want the physical and digital worlds connected, for instance enforcement. When someone does bad things in the digital part of our world we want to be able to find the physical person responsible. The two, the physical and digital, for some time to come, are inextricably bound together. Second, the “traditional role” of the Postal Service needs re-conceptualization. While the Postal Service receives and delivers physical packages, letters and others, this concept is too narrow and simplistic to capture the value provided by the Postal Service. More appropriate would be a concept that includes creation and operation of an infrastructure for secure, enforceable communication among the U.S. population. Based on the above, the Postal Service is faced with a number of opportunities. The focus here is on near term opportunities building on existing work or capabilities. There are a number of gaps and needs between the physical and digital portions of our world. Currently, one area of particular focus is the identification and authentication of individuals. Generally, this involves the collection and verification of information, attributes about an individual, issuance of perhaps a credential or token such as a password or smart card, and some activities binding or connecting the token to the holder. The Postal Service has an organization, personnel, infrastructure, enforcement capability, and current operations to meet several related needs. Some of these are as follows: 1.Intake and/or Registration 2.Attribute verification 3.Binding of attributes to individuals 4.Enforcement Intake and registration: current practices often include the checking of physical documents in a person’s possession, sometimes the scanning of documents, collection of a picture or other biometric, and the checking of this and other information. The Postal Service has lots of physical infrastructure, established locations that could serve well to play some role in intake/registration processes for credential issuance perhaps building on current Passport related services. This infrastructure could fill a gap by providing a trusted institution that is relatively very accessible for the U.S. population. Attribute verification: much work is underway to develop the means for verification of attributes of individuals, the connecting of those attributes to individuals, and use of such attributes in transactions. One critical attribute is the address, especially connecting a physical address to an individual or transaction. The Postal Service acts as an authoritative source for U.S. addresses and could well provide address related value added services for digital interactions. It also does not seem a huge leap to anticipate that there may well be a need for parallel capabilities for virtual addresses, particularly when a connection between a virtual address and a physical address is desired. The Postal Service seems well suited to take advantage of opportunities to provide address-related services and to play a part in attribute verification. Binding to individuals: often there is a desire or requirement to take some measures to ensure that an attribute, a document, or a credential is connected to a particular individual. One way of doing this leverages an in-person visit. For instance a person appears at a physical location, perhaps presenting a document such as a birth certificate claiming it as his or her own, or a credential is delivered to the individual, for example the driver’s license issuance event. During these in-person appearances something may be done, such as the taking of a picture or fingerprint, as evidence that a particular person was there, that helps to connect the individual to the documents and transaction. The Postal Service has a substantial infrastructure distributed across the country, personnel conducting similar activities currently, a supporting organization, and other related capabilities. Enforcement: the digital portion of our world is a difficult environment for many enforcement organizations. Often their scope and capabilities are inappropriate for pursuing and prosecuting digital crimes. The Postal Service has a long history both of developed law and enforcement capabilities that snare criminals. Recently, the Postal Service has performed with distinction in operations and collaborations to identify, pursue, capture and prosecute criminals using digital means in their criminal activities. This is a vital need for the future growth and operation of the “digital world.” The Postal Service is particularly, if not uniquely, qualified to fill this need. These are a few of the opportunities available to the Postal Service, based upon existing operations and capabilities. Building upon these could well lead to further business opportunities consistent with the traditional role of the Postal Service as updated for our changing world. Back to top
      Guest Blogger Steve Ressler, Founder and President of GovLoop.com - March 20, 2012
    Steve Ressler
    Fix My File Cabinet Please As I write this in my home office, my file cabinet is staring right at me. The file cabinet is a mess - it's bursting at the seams with financial statements, health records, stock certificates, property taxes, and gobs of receipts. If you are like me, you are always fighting a losing battle trying to keep it organized. In 2012, I do not want to live like this - I want to live in a digital world and I want the USPS to help me solve my file cabinet problem. I no longer want to receive important information in paper but at the same time I'm never quite sure how to handle sensitive digital information. Do I just store my tax pdfs just on my hard drive? What if it fails or I'm not properly backed up? I do not want to just store my health record in my Dropbox or iCloud and I'd rather not be tied to just one provider. Should I email my property tax statement to my broker when putting my house on sale - how do I know if he received it? Do I feel comfortable knowing that my email provider may be reading the contents of the document? In the end, where's my trusted solution - where's the equivalent of my online savings box (trusted and secure) and registered mail? The USPS should be in the business of providing the American public with trusted delivery solutions regardless of channel (digital or print). The future is moving online and USPS can play a great role as an official convener. There are lots of companies that are starting to address these problems but they lack the mission of USPS - which is creating trusted, official solutions at affordable prices. USPS does not need to even build all the tools themselves - they can model their efforts off of IRS e-filing where government created an ecosystem of trusted private sector providers to help transition individuals to electronically submitting their tax statements at affordable prices. Good for government, good for business. So how do we make this happen? If you've read Clayton Christensen's book The Innovator's Dilemma, you know innovation is hard and often the biggest roadblocks are internal in your own office. The USPS's future depends on becoming digital postal solution provider so they need to invest it - create a team of 20-30 folks, get them authority to make partnership decisions, locate them outside of DC, and give them a grand mission that is true - help make USPS relevant in the digital age. Back to top
    What Opportunities Exist for the Postal Service to Integrate Its Traditional Role in the Digital World? This is the third topic in our "Five Elements of a Postal Solution" blog series. The Internet and the digital economy are fundamentally changing the worlds of communications, transportation, and commerce. Since the dot-com boom and bust of the early 2000s, the digital economy has continued to grow at a staggering rate, as both consumers and businesses adopt electronic processes across multiple channels. New digital technologies have been “disruptive innovations” for traditional businesses. These disruptions to business models, in combination with the great recession of 2008 to 2009, have had a significant impact on postal organizations all over the world, resulting in an overall decline in the volumes of personal, business, and advertising mail. As the digital revolution rages on, Americans need to consider what role the Postal Service should play in this evolving environment. Over the past 237 years, the Postal Service has provided a secure, universally accessible platform for physical commerce and communications. Can the Postal Service extend its trusted role as an intermediary to the digital realm? Should the Postal Service help consummate a match between consumers and application developers through a Postal Service sponsored digital platform? If so, which types of applications should the Postal Service in collaboration with government and private sector partners offer? One of the Postal Service’s advantages has been its geographic reach and physical platform. How can its digital role be integrated with the physical one? We’ve asked the following guest commentators to discuss this topic over the next three days: •Steve Ressler, Founder and President of Govloop.com, on Tuesday, March 20. •Dan Combs, CEO, eCitizen Foundation, on Wednesday, March 21. •John Payne, CEO, Zumbox, on Thursday, March 22. We hope you can join the debate. Please check in throughout the week for their thoughts, and share your comments along the way. On Friday, March 23, OIG will summarize and conclude the discussion on this important topic. Our Guest Bloggers
    Steve Ressler Dan Combs John Payne
    Steve Ressler Dan Combs John Payne
    Steve Ressler is the Founder and President of GovLoop.com, a 50,000+ member “Knowledge Network for Government,” which utilizes social media to connect public sector stakeholders and encourages the sharing of best practices and innovative solutions across all levels of government. Dan Combs is CEO of the eCitizen Foundation, a non-profit organization that promotes and develops Citizen-Centered Solutions. Previously he worked on the GSA’s e-Authentication Initiative and as Director of Digital Government for the State of Iowa. John Payne is CEO of Zumbox, a digital postal system connecting large transactional, financial and government mailers to consumer households for the delivery and storage of digital postal mail via the Internet. Back to top

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  • What would an optimized Postal Service infrastructure look like in the 21st century and beyond?
    on Mar 14th, 2012 in Five Elements of a Postal Solution | 10 comments
    This is the second topic in our "Five Elements of a Postal Solution" blog series. Link to last week's topic. Link to the March 13 blog by Cliff Guffey. Link to the March 14 blog by Alan Robinson. Link to the March 15 blog by John Callan. Link to the March 16 recap. The Postal Service Network of the Future The Postal Service has proposed to reduce its network of post offices by more than 3,200 and consolidate over 250 mail processing locations. The goal is to optimize Post Office locations and streamline the processing network to better align with mail volumes that have declined more than 20 percent over the past five years. The Postal Service’s infrastructure was built to handle a mail volume of over 213 billion pieces. It is driven by a Congressional mandate for 6-day delivery to every delivery point, First-Class Mail® overnight delivery service standards in local areas, and a Post Office network viewed as a community infrastructure. The Postal Service estimates that streamlining/optimization would generate over $3 billion in annual savings to help reduce the losses that topped $5.0 billion in 2011. Much of the projected optimization savings is associated with reducing the size of the workforce as approximately 80 percent of the Postal Service’s costs are employee related. The Postal Service is subject to collective bargaining and must follow its union agreements in any downsizing effort. More than 480,000 members of the workforce are covered by union contracts with binding arbitration frequently used to settle contract negotiations. In certain cases, these contracts have no layoff provisions and the ability to cross craft employees from one function to another is limited. Many community leaders especially from small towns and rural areas have voiced significant concerns about elimination of needed postal services in their neighborhoods. Others have raised concerns regarding downsizing of needed jobs in the midst of an economic downturn. However, it is difficult for the Postal Service to justify a network built for mail volumes that are significantly higher than the current volumes being processed. It is also difficult to envision a future scenario in which mail volumes approach the numbers needed to support the infrastructure that is in place. Finally, in the digital age, the services needed by communities are evolving and the infrastructure for the 21st century may need to change to meet those needs. We would like to hear from you on what an optimized Postal Service infrastructure looks like in the 21st century and beyond? For this week's topic, we’ve also asked the following guest commentators to discuss this topic over the next three days:
    • Cliff Guffey, President, American Postal Workers Union, on Tuesday, March 13.
    • Alan Robinson, President, Direct Communications Group, on Wednesday, March 14.
    • John Callan, Director, Ursa Major Associates, LLC, on Thursday, March 15.
    We hope you can join the debate. Please check in throughout the week for their thoughts, and share your comments along the way. On Friday, March 16, OIG will summarize and conclude the discussion on this important topic. Our Guest Bloggers
    Cliff Guffey Alan Robinson John Callan
    Cliff Guffey Alan Robinson John Callan
    Cliff Guffey is President of the American Postal Workers Union, which represents 220,000 employees in the clerk, maintenance and motor vehicle crafts. Alan Robinson is the President of the Direct Communications Group. He has thirty years of experience helping firms and government officials deal with the regulatory, policy, marketing, and management issues associated with changes in competition within transportation, parcel delivery and postal markets. His thoughts on the challenges facing the Postal Service can be found at the Courier Express and Postal Observer. John Callan is Managing Director of strategy consultancy Ursa Major Associates, LLC, focusing on the growth opportunities and transformational challenges in the postal-parcel-logistics space. He is also the founder of The PostalVision 2020 Initiative designed to envision the American postal ecosystem of the future. Back to top
      Guest Blogger Cliff Guffey, President, APWU - March 13, 2012
    Cliff Guffey
    The Postal Service’s infrastructure should serve its mission: to bind the nation together through the personal, educational, literary, and business correspondence of the people; to provide prompt, reliable, and efficient service to patrons in all areas, and to render postal services to all communities. The Postal Service’s infrastructure supports a $1 trillion mailing industry, employing almost nine million people, and accounts for six percent of our nation’s economic activity. It continues to be an engine of commerce, with over $65 billion in annual revenue. It also serves the American people. Approximately 55 percent still receive hard-copy bills and statements; nearly 40 percent don’t have broadband access, and 28 percent have no Internet access at all. The Postal Service’s financial crisis has been caused primarily by an act of Congress that imposed annual payments of $5.5 billion from the Postal Service to the federal Treasury. If the Postal Service is to survive, Congress must correct this underlying cause of the USPS financial crisis. If Congress fails to do so, the Postal Service plans to slash its network and delay mail delivery. However, these actions would lead to the demise of Postal Service rather than solve its financial problems. In addition to getting legislative relief from its burdensome payment obligations, the Postal Service also must develop new sources of revenue and a new business model that takes into account changes in communication. The modern postal network must: • Be capable of satisfying customers who want quick delivery – including overnight delivery; • Be capable of notifying customers what is headed to their mail boxes; • Permit customers to re-direct mail to a work location, a vacation spot, or a parcel locker; • Allow senders and receivers to track and see their items in transit – in real time; • Be capable of converting electronic messages to hard copy and vice versa; • Be nimble, flexible and quick to recover when natural disaster strikes. This requires a network of facilities capable of providing overnight service, quick re-delivery and convenient customer pickup in every part of the country. Retail outlets should remain close to consumers and located conveniently to win more business. The Postal Service’s transition to the digital age will require substantial capital investment. But it will result in a more efficient, low-cost and agile service that can serve those living in the digital world and those left out. The USPS must offer: A One-Stop Shop for Many Government Services – The Postal Service should leverage its network of retail outlets to provide other government services. The USPS already provides passport services. It also could provide driver’s licenses, Social Security cards, business licenses, veterans’ services, etc. Email Addresses for Everyone – The Universal Service Obligation – the Postal Service’s mandate to provide affordable service to every citizen — should be extended to email. The Postal Service maintains the most complete database of delivery points in the country. If every delivery point were assigned an email address, the Postal Service could provide delivery by hard copy or email to any address in the country – securely delivered – backed by the fact that tampering with the mail is a federal offense. It could provide a uniform system for forwarding email if a user changes email addresses. Electronic Bill Payment – The Postal Service is already in the money order business. Why not electronic bill payment? The convenience and security of paying bills through a local post office, for those without computers, is a natural fit. Your Neighborhood Office, Everywhere –The Postal Service could leverage its retail network to provide computer terminals and high-speed Internet access for rent by the hour or by the minute. Paper to Digital Conversion Services – The USPS should offer digital conversion services. Mailers could send correspondence (either paper or digital) through the USPS to be delivered digitally, or to be printed and delivered in hard copy. Expansion of Parcel Delivery Services – As the Internet has grown, there has been tremendous growth in the need to deliver products that have been purchased online. The USPS is already a major parcel carrier and is well-positioned to leverage its network to compete for a growing share of this market. Back to top
      Guest Blogger Alan Robinson, President, Direct Communications Group - March 14, 2012
    Alan Robinson
    Link to the full version of Alan Robinson's blog. In trying to define an optimized Postal Service infrastructure, I was stuck at trying to define what “an optimized Postal Service infrastructure” meant. The problem that I had was not with the mathematics of optimization which is focused on either cost minimization or profit maximization but with four sets of constraints that affect the formulation of an optimization model. These constraints are: • Customer service needs which determine product characteristics; • Labor management constraints that impact operating costs; • Capital spending constraints that limit options for infrastructure optimization; and • Regulatory constraints which modifies a market-driven optimal network to reflect political considerations. While in the future, the Postal Service’s customers are going to need a postal infrastructure that offers both physical and digital delivery, this post will focus on the physical delivery infrastructure. The information infrastructure that would be needed to either provide coordination between digital and physical delivery of different documents or transform a digital document into a physical one or visa-versa that an optimal Postal Service should offer will not be discussed. Customer Service Needs--The service needs of the Postal Service’s customers have six dimensions: 1. Access to services in a convenient manner; 2. Delivery to a location that satisfies the needs of recipients documents and parcel; 3. The speed that a document or parcel must be delivered from point A to B; 4. The reliability of a promised delivery commitment; 5. Information on delivery status and reliability provided on a real time or near real time basis; and 6. A price that makes the service financially viable. In determining the optimal infrastructure, customer service needs set the product characteristics offered at particular prices and the volume of mail and parcels that the infrastructure must handle. However, as customer needs constantly change, communications access, processing, transportation, and delivery infrastructure will need to be re-optimized on a regular basis. Labor-Management Constraints-- As labor costs will always represent the majority of operating costs, any deviation from competitive levels of employment costs raise the cost inputs of optimization models and force an optimization modeler to generate a sub-optimal infrastructure to serve customer needs at prices the Postal Service can charge. Restrictions in management flexibility to schedule employees and use full and part-time employees affect the choice of access, processing, and delivery operating plans that can minimize operating costs and meet customer needs. The greater the flexibility available the broader the set of customer needs can be met at the same cost level. Therefore these restrictions influence which customer needs the Postal Service designs its infrastructure to meet and makes it difficult to justify a bigger infrastructure that can provide a higher level of service to some or all customers. Capital Constraints-- The issue of capital constraints on the Postal Service infrastructure can be illustrated by the network optimization that the Postal Service plans to implement in May, delays in implementing its information architecture, and delays in replacing its delivery fleet. In all cases, capital constraints have resulted in a sub-optimal solution. For example, the Postal Service’s network optimization used only existing facilities and existing equipment. A green field optimization would have continued to use many existing plants but in many parts of the United States a new or expanded plant would have provided the proposed service commitments at a lower cost or even better service commitments at the same or lower operating costs than what were possible using only existing facilities. Regulatory Constraints-- The Postal Service’s regulatory constraints come from both laws set by Congress and regulations set by the Postal Regulatory Commission. Regulatory and legal constraints have adversely affected both cost and revenue related factors that enter into analyses of the Postal Service’s optimal infrastructure needed to serve real customer needs. Regulatory and legal constraints also slow needed infrastructure adjustments as market demand changes. Conclusion -- The optimal Postal Service infrastructure is not an ideal infrastructure. It reflects the level of service that the Postal Service can offer at set prices and costs and still generate a return sufficient to allow it to be self-sufficient. As such, the Postal Service cannot maintain an infrastructure that offer all customers exactly the level of service that they want but must try to provide an infrastructure that meets the needs of customers that it believes are most likely to require its services for the next decade or more. The optimal Postal Service infrastructure is not static as customer needs continually change. Demand for the various services that the Postal Service offers change over time. Demand for many existing services is expected to decline over the next decade. The service and other product characteristics demanded by customers for current products will evolve as alternative communications and parcel delivery options develop. Labor-management, capital availability, and regulatory constraints all have the effect of making the Postal Service infrastructure sub-optimal for both meeting customer needs and ensuring that the Postal Service’s financial goals are met. To the extent that that these constraints can be relaxed, the Postal Service’s infrastructure will move closer to an optimal level. Back to top
      Guest Blogger John Callan, Director, Ursa Major Associates, LLC - March 15, 2012
    John Callan
    It’s now no surprise to anyone that the U.S. Postal Service is losing money due to e-substitution of First Class Mail. The Postal Service has informed Congress about this crisis and its projected rate of decline in volume through 2016. PMG Pat Donahoe has proposed a Plan to Profitability to radically down-size its infrastructure in order to right-size its capacity to serve a diminishing if not vanishing core product demand. As painful as it is for employees, customers, and for literally all of us, including Congress, he must be permitted to move on this plan immediately to prevent an otherwise inevitable “bail-out”. The Postal Service will survive this crisis one way or the other. As a federal government entity, it must. It must continue to ensure that society’s needs for services that ‘bind the nation together’ continue to be met. During its 237 year existence those needs have been re-interpreted and the means by which it has met those needs have been re-invented, time and time again. Its underlying infrastructure has been re-designed many times to adapt to technological change and it’s now time for yet one more transformation. Beginning with Constitutional authorization to Congress to “establish post offices and post roads,” our federal government has constructed a platform upon which mail and parcels are collected, transported and delivered through a vast network connecting virtually every business and household in America. As mail volume has constantly increased over the past two centuries, the Postal Service has accommodated this growth by constructing thousands of retail outlets and processing facilities, installing a vast array of automation equipment, acquiring and operating thousands of vehicles and employing hundreds of thousands of skilled workers. And yet, the USPS has not met all of the nation’s needs on its own. In fact, today’s Postal Service like the U.S. Post Office before it, greatly depends upon the private sector to help it achieve its objectives. In the 1800’s mail carriage and delivery in rural areas was contracted out to Star Route agents who proudly delivered with “Celerity, Certainty and Security.” The romanticized Pony Express was a private contract venture that rarely failed to deliver on its motto that the “Mail Must Go Through, even though it failed to deliver profits to its investors before it went out of business in only 18 months. Contracting transportation and delivery to private sector firms has become a time-honored tradition for the Postal Service that continues today. FedEx, for example, provides air transportation for mostly Priority Mail and earned $1.4 billion in doing so in 2011. Not long after the subsidized U.S. Post Office became the profit-oriented U. S. Postal Service in 1971, it introduced an innovative “worksharing” concept that enabled the private sector to bear some of its cost, share some of its work, and thereby earn some of its potential profit as well. This unique postal partnering practice began with address automation and letter presorting in the seventies while affording private sector partners with significant discounts. It was eventually expanded into other postal processes such as consolidation and drop shipping and has enabled the emergence of dedicated private sector worksharing industries such as presort bureaus and parcel consolidators. Worksharing works. By enabling the private sector to take on more of the work that the Postal Service must otherwise do itself, it reduces its own dependence on the high infrastructure costs of processing and transportation. It encourages the profit-motivated private sector to invest in innovation and technology in order to improve service offerings and performance. It transfers more of the risk of capital expenditure and potential loss to the private sector, along with their opportunity for profit. In an optimized network environment, the Postal Service should do only what it does best and does better than anyone else. It should continue to provide residential delivery service for a diminishing stream of mail and a growing stream of parcels coming from its worksharing partners, like FedEx SmartPost, UPS SurePost and other smaller consolidators. While as a platform, it should enable these and a large and growing number of private sector neighborhood retailers, print and mail service providers, bulk transporters, software providers and digital innovators to come to the party, take on more of the burden and business risk and hopefully earn more of the profit Back to top
      Recapping the week - March 16, 2012 In the second week of our blog series, we asked three more experts to give us their opinions on important challenges facing the Postal Service: What would an optimized Postal Service infrastructure look like in the 21st Century and beyond? Our bloggers provided insightful views of an optimized infrastructure. Alan Robinson identifies four constraints that would prevent an optimal network: • Customer service needs which determine product characteristics. • Labor management constraints that impact operating costs. • Capital spending constraints that limit options for infrastructure optimization. • Regulatory constraints which modifies a market-driven optimal network to reflect political considerations. Cliff Guffey agrees with the need for capital investment and believes “it will result in a more efficient, low-cost, and agile service.” However, John Callan sees the Postal Service transferring capital expenditures to the private sector through the idea of worksharing. Specifically, “by enabling the private sector to take on more of the work that the Postal Service must otherwise do itself, it reduces its own dependence on the high infrastructure costs of processing and transportation.” In regards to regulatory constraints, Cliff Guffey calls for relief from the mandatory obligation to prefund retiree health benefits in order to maintain the current infrastructure. John Callan wants Congress to permit the Postmaster General to go forward with his “Plan to Profitability,” which includes substantial downsizing of the current infrastructure. Cliff Guffey and Alan Robinson agree that in order for a future Postal Service infrastructure to remain optimal, it would require a high degree of flexibility to change quickly according to customer needs. Cliff Guffey offers a number of revenue generation ideas based on current customer needs that would leverage the Postal Service’s existing retail network. Alan Robinson notes “customer needs constantly change. Communications access, processing, transportation, and delivery infrastructure will need to be re-optimized constantly.” John Callan differs on flexibility stating, “The Postal Service should do only what it does best and does better than anyone else. It should continue to provide residential delivery service for a diminishing stream of mail and a growing stream of parcels.” We thank each of these bloggers for their comments and will continue to keep the blogs open for additional input from the public. In addition, we invite you to keep up with the Office of Audit’s latest work through the Audit Project Pages. This site provides a forum for you to share your ideas, comments, and concerns on our open audit projects. Join us for next week’s blog series when we will examine the question: What opportunities exist for the Postal Service to integrate its traditional role in the digital world? Back to top

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