privatize

US Post Office: A Turnaround Candidate?

by tomgray | on Jan 02, 2012 | 1 Comments

The United States Postal Service (USPS) is technically bankrupt, with liabilities exceeding assets by $14 B in 2010. It might be entertaining to speculate on how we could apply private-sector turnaroundtechniques to make lemonade out of this lemon!

In 2010 USPS lost $8.5B on operations including a $5.5B payment to pre-fund retired employee health benefits. Its borrowing capacity, limited by law to $15B, will be reached this year.

First class mail, which represents about half its revenue, has fallen by 45% since 1998 and 19% 2010 vs. 2007. From 2009 to 2020, it is expected to fall 37% more. At that point, unless things change, the Postmaster General (USPS CEO) expects an annual loss of $238B on operations! So what is USPS doing to offset this decline in its core revenue?

The law says it cannot introduce new products unrelated to delivery and shipping. The law says it cannot raise stamp prices beyond an inflation-based price cap. The law says it must deliver 6 days per week, to every mailbox in the country: 151 million, growing by ¾ of a million annually. The union contracts provide for above-market wages and benefits growing much faster than inflation, and these are 80% of costs.

With volume spiraling down and revenue options limited, management has addressed costs: automation to eliminate the jobs of these expensive employees, and asking for approval to close about 12% of the 31,000 post offices in the country and eliminate Saturday delivery. Naturally, it would also like to increase postal rates.

On the plus side of the ledger, USPS has an infrastructure that reaches all of America. What could it be used for? In other countries, the Post Office sells financial products, operates banks, and charges higher postal rates. In some other countries, the government decided to privatize the Post Office, selling it to private interests and using the proceeds to retire debt. Could that work here?

Might one spin off just the delivery part (with most of the people), and keep the sorting/shipping infrastructure as a wholesale backbone? If the delivery function was privatized, would there be one delivery entity per city, or one for the country, or seven regional entities like the AT&T breakup, or would the number of delivery entities be unlimited to foster competition? Is it better to spin off both delivery and backbone, but do so separately? Would the USPS delivery assets be auctioned, or assigned to successors? What about the employees? Would the bankruptcy process be used to void union contracts or retiree health benefits in this process? Could bankruptcy be used by an “independent agency of the executive branch” which is not a company? Would the feds keep a “golden share” to ensure that the public interest was protected?

Or should the USPS sell access to its monopoly, that is, allow others to deliver or stuff documents into to mailboxes marked US Mail? Or should it just shed employees by changing to a pickup rather than a delivery service, with delivery available for an extra fee?

What about it, turnaround experts? How would you use turnaround techniques for a technically-bankrupt USPS?

Tom Gray is a management consultant and Certified Turnaround Professional (CTP). He led the Ameritech team in negotiating the privatization of Belgacom, the Belgian telephone company. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

 

 

 

Turnaround for the Post Office (USPS) Requires Privatization

by tomgray | on Jan 02, 2012 | No Comments

USPS is in a death spiral: the pace of cost cutting cannot keep up with the pace of decline in the volume of business. See US Post Office: A Turnaround Candidate?  A turnaroundexecutive would quickly see the need to change the business model…but to what? Consider privatization while creating competition at the same time (liberalization).

The Postmaster General has proposed a short-term package: no pre-funding of retiree health care; close 12% of post offices; 5 day delivery; raise prices. The problem is that this is just more of the same: the downward spiral continues, while the cumbersome governance of a politically-appointed board and need for congressional decision-making ensure decisions are too little, too late.

Others have proposed that the USPS nation-wide infrastructure be used to sell banking and insurance as in Europe, but many balk at government agencies providing financial products directly to consumers. No such role for government has ever been contemplated in America, and besides, government’s reputation for financial acumen and customer service is hardly the best!

Imagine America meeting its postal needs without all the inefficiencies of the public sector! Government can ensure the availability of quality postal services to citizens without operating the function itself. We have the world’s best telecom services, the world’s best medical services, the world’s best retail markets, etc. without depending on government employees and agencies to operate them. How does that happen? The government provides a framework to guarantee quality performance, and then private entities organize capital and provide services for a profit.

The process would follow the privatization model used at least since the 1990s, when privatization became the trend in smaller European countries seeking cash for debt and progressive management of state-owned industries. Government decides what to sell, creates a process and assigns implementation responsibility.

The government’s investment bankers do a valuation and create a draft plan of reorganization, and invite bids. The bidders negotiate terms, performance standards, and price, meeting with all stakeholders including unions. A bidder is chosen based on their plan to add value, and the price they offer.

Envision the USPS sorting/shipping backbone sold to one entity, which becomes a regulated monopoly required to accept from and deliver to all local mail providers on equal access terms.

Then two local mail service licenses for each market area are sold at auction: the winners are licensed to deliver mail to boxes marked US Mail, or sell such access to others, subject to performance standards. The local operators sell stamps and access services to consumers, and agree to perform delivery services for the wholesale backbone. A system of inter-entity fees for services is established, as the telecom companies did when AT&T was partitioned in 1984.

Start-up local operators are permitted as well. A competitive market is encouraged. Licenses can be bought and sold; local operators could even sell franchisees the right to operate certain post offices.

The initial local operators are entitled to bid for USPS local assets in their territories (post offices, vehicles, etc), but need not buy them. Current postal employees are assigned to the initial local operators, but they lose civil servant status and must renegotiate union contracts. The federal government transfers their pension balances and retiree healthcare balances to the new local operators, and the employees are entitled to those balances but not to further contributions, which would be subject to new contract negotiations.

Local operators and the backbone operator would be free to enter any business they chose, and free to price services without limitation unless the regulator decided competition was ineffective in a particular market area.

While this is not a bankruptcy, the “fresh start” is similar, as are the cancellation of contracts, transfer of pension funds, auction of assets, and invitation to new operators with new financing.

For America, the tired Post Office function would be rejuvenated with new energy, new products, flexible governance, and market-based compensation. America would also have a new model for divesting government operations to professional owners and managers whose main business is profit from adding value, rather than seeking re-election.

What do you think? Is privatization the right way to turnaround the USPS?

Tom Gray is a management consultant and Certified Turnaround Professional (CTP). He led the Ameritech team in negotiating the privatization of Belgacom, the Belgian telephone company. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com