• on Mar 23rd, 2015 in Post Offices & Retail Network | 31 comments

    Reshaping a postal network doesn’t happen overnight. Especially one built to handle mainly letters and flats and not the tremendous anticipated growth in parcels. The Postal Service is attempting to tackle realignment in two phases, playing out over 4 years.

    Phase one was completed in 2013 and resulted in 141 consolidations for an expected cost savings of about $865 million. To achieve full cost savings, however, the Postal Service also had to reduce service standards for First-Class Mail. Phase two, which started in January and will run through late summer, calls for consolidating 82 mail processing facilities and eliminating most overnight delivery of First-Class Mail. It will also change service standards for Periodicals Mail. All other products will stay the same.

    The Postal Service launched its overall consolidation plan in 2012 to adjust the size of the network and workforce to the reduced demand. The plan calls for fewer processing facilities and for machinery to operate longer and more efficiently. Total mail volume has declined 27 percent since its peak in 2006, and single-piece First-Class Mail – primarily correspondence, bill payments, and greeting cards – has been hit even harder. It has declined by more than half in the past decade.

    Speaking at the February Mailers’ Technical Advisory Committee meeting, postal officials said they are confident consumers will not notice the service standard changes. Surveys suggest most people don’t know what the service standards are, but they do care when their mail arrives in their mailbox. So the Postal Service is working to ensure consumers receive their mail at the same time each day. They also reminded people that consolidation doesn’t necessarily mean closing. Some facilities could be repurposed for other services.

    Business mailers have generally supported efforts to eliminate excess capacity and reduce costs, with the exception of those whose business model depends on overnight service. But mailers also worry that some costs could be shifted to them. Unions have opposed the consolidation plan, arguing it downgrades service and delays mail at a time when the Postal Service should be stepping up its efforts to compete with digital communications. As for consumers, the Postal Service may be right that they won’t really care – unless they notice a change in delivery performance. It’s also worth noting that service standards are not changing for Priority Mail or Package Services, so the Postal Service should be able to satisfy customers’ growing demand for packages.

    Are you concerned that network consolidation has resulted or could result in mail delays? Or do you think network rationalization is necessary to reduce costs? If you oppose consolidation, how do you recommend the Postal Service better match its capacity to demand?

  • on Feb 16th, 2015 in Finances: Cost & Revenue | 24 comments

    What if your credit card company told you: “You will charge a million dollars on your credit card during your life; please enclose the million dollars in your next bill payment. It’s the responsible thing to do.” Doesn’t seem quite right, does it?

    Well, that’s what the U.S. Postal Service’s requirement to prefund its long-term pension and healthcare liabilities is like. The Postal Service is required to pay the full estimate of its liabilities, currently estimated at nearly $404 billion, even as that estimate moves around and is based on assumptions that are highly uncertain and can frequently change over the life of the liability. Our recent white paper, Considerations in Structuring Estimated Liabilities, evaluates these assumptions and other considerations and shows the Postal Service is closer to being fully funded, or potentially overfunded, when certain assumptions are reasonably adjusted or considered.

    First, let’s look at current funding levels. The Postal Service has set-aside cash totals of more than $335 billion for its pensions and retiree healthcare, exceeding 83 percent of estimated future payouts. Its pension plans are nearly completely funded and its retiree healthcare liability is 50 percent funded – much better than the rest of the federal government. But getting to this well-funded position has been painful. The Postal Service’s $15 billion debt is a direct result of the mandate that it must pay about $5.6 billion a year for 10 years to prefund the retiree healthcare plan. This requirement has deprived the Postal Service of the opportunity to invest in capital projects and research and development.

    As things stand now, retiree healthcare, pensions, and workers’ compensation are unfunded by about $86.6 billion. But our paper says any discussion of unfunded liabilities should take into consideration assets that could be used to satisfy the liabilities, such as real estate. The Postal Service’s real estate assets have a net book value of $13.2 billion. But fair market value of these properties is estimated as high as $85 billion. Neither is factored into the Postal Service’s ability to meet future liabilities.

    In addition, the liabilities are not exact or static amounts and they require certain assumptions, such as interest rates and demographic inputs, to estimate the future costs of these programs. For example, interest rates are at historic lows. Even slightly higher interest rate assumptions would reduce or eliminate the estimated liabilities.

    Our paper details how different assumptions and considerations would affect the liabilities. Basically, if the Postal Service’s real estate assets were considered and one other assumption adjusted, the long-term liabilities would be overfunded.

    Mandating 100 percent prefunding of future liabilities that are frequently changing and highly uncertain could unnecessarily damage the Postal Service, inflate prices, and overfund future liabilities.

    Share your thoughts on our paper. Do you agree or disagree with the overall premise of the paper or have additional insight to share? 

  • on Nov 11th, 2013 in Strategy & Public Policy | 10 comments

    Innovation is a hallmark of the digital revolution yet for many companies innovation remains hard. The popular book The Innovator’s Dilemma notes that companies often either ignore a disruptive technology or if they recognize it, they try to manage it like their traditional business. The book says companies need to recognize the disruptive technology and then set up a separate unit to manage it.

    The U.S. Postal Service finds itself struggling to innovate in a rapidly changing communications market. Yet, stakeholders agree that innovation is necessary to transform the Postal Service into a 21st century provider. The Postal Service has indicated a willingness to try new things, as allowed under the current law, but the time it takes new ideas to become a product or service is often too long in this fast-changing market. Some stakeholders have suggested the creation of a small, dedicated innovation unit that would have the authority to make partnership decisions and the flexibility to bring innovative products and services to market quickly. The major postal reform legislation now before Congress includes a provision that could essentially lay the groundwork for such a unit.

    The Postal Service actually tried small, cross-functional business units in the late 1990s. It had an international business unit that was given considerable autonomy and an Expedited Package Services (EPS) group located completely outside of headquarters in Atlanta. The EPS group was given freedom to pursue new partnerships and parcel services. Insiders might argue over how much of the credit EPS deserves, but in its short life, a number of package services were revamped or unveiled, including Parcel Select, Carrier Pickup of residential packages, and the groundbreaking contract with FedEx to provide airlift for Priority Mail. These separate units probably had some flops too, but innovation means taking risks and being allowed to fail occasionally.

    Do you think a small, agile, cross-functional “innovation unit,” led by a chief innovation officer, would help the Postal Service launch new products and services? Or does a dedicated innovation czar create a bottleneck that is inconsistent with the spirit of having innovative thinking permeate the entire organization? Would an “incubator” or “innovation lab” approach be better? What institutional changes might be needed to promote innovation? Does the current regulatory environment allow the Postal Service enough latitude to innovate effectively?

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