The Postal Service Business Plan: the Result of Choosing a Government Business Model

The Postal Service today presented a 5-year business plan that it calls a Plan for Profitability. The plan represents the impact of the investment bank Evercore partners and clearly indicates that Evercore was required to develop a plan that maintained the financial and market restrictions of a quasi-governmental Postal Service. Therefore the plan differs significantly from successful plans for profitability of most foreign postal administrations. The two key differences are 1) the plan does not include an infusion of capital, mostly coming from private sector; and 2) the plan does not include the commercial freedom to fully exploit the value of the Postal Service brand or its human, physical or intellectual property assets.

Evercore’s influence appears to have caused the Postal Service to make three changes in its business plan:

  • The plan adds a net cash target for the Postal Service. Meeting that cash target is what drives the operating and rate changes proposed.
  • The plan includes rate increases for all mail classes. Up till now the Postal Service has been circumspect about the need for increased pricing and appeared to back off on the idea of an exigent rate increase. The price increase headline is a 5 cent increase in single piece First Class mail. However, the proposal includes an exigent rate increase and it appears that the Postal Service may become more aggressive in seeking rate increases in Standard Mail even if rate increases result in lower volumes.
  • The Plan includes an aggressive schedule for implementing reductions in service and employee head count. The decision of the Postal Service to implement the Network Optimization Initiative soon after the May 15 moratorium ends represents a clear example of the Postal Service taking an action that will generate substantial political heat that in previous years it would have deferred.

The Plan Depends on Congress Passing Legislation Similar to S. 1789

The plan depends on Congress to make changes in law that do the following:

  • Eliminate the Retiree Health Benefit Prefunding and incorporate Medicare into the retiree health benefit package;
  • Possibly set up a new retiree health benefit for current employees;
  • Allow the Postal Service to withdraw from the federal health benefit program and set up its own benefit plan for employees
  • Refund of the overfunding of FERS as identified in the Obama administration budget;
  • Permit the Postal Service to eliminate 5-day delivery;
  • Allow the Postal Service to implement a 5 cent single piece First Class mail rate increase without Postal Regulatory Commission review;
  • Allow the Postal Service to implement a rate increase without proving an exigent circumstances; and
  • Allow the Postal Service some modest expansion of the types of services that it can offer.

Most of these changes are included in S. 1789. The Postal Service legislative wish list adds significant price increases that are not included in the bill as it stands. Given that S. 1789 has already generated significant objections due to the service changes that it would allow; adding major increases in prices to the package would not appear to make passage of legislation any more likely.

What the Business Plan Missed because it Stuck With the Government Business Model

This Postal Service business plan, just like all plans that came before, started with the assumption that the Postal Service remains a quasi-governmental entity. As noted in the introductory paragraph, the business plan does not include two key parts of successful business models of foreign business administrations:

  • the introduction of private capital; and
  • The expansion of the product range that the national post can offer in order to exploit its band and its physical, human and intellectual property assets.

Why Private Capital Would be Interested: Brand, Real Estate and Pension Assets of the Postal Service

The Postal Service has three types of assets that have significant value for private investors. They are the value of its brand, the value of its real estate, and the value of its pension and retiree health benefit assets.

The Postal Service has tried to exploit the value of its brand but current legislation and regulatory decisions do not permit the Postal Service to create brand expansions that would brand products that other entities sell that are clearly linked to the Postal Service’s core services. These services include branded mailing supplies and there maybe others.

The value of real estate is obvious and the conclusion of the Network Optimization Initiative would provide a number of opportunities for real estate development that private sector investors might find quite interesting.

The value of assets associated with CSRS and FERS pensions and the retiree health benefit accounts are less obvious but much larger. Currently both CSRS and FERS accounts hold assets that exceed the expected liability and the excess assets are expected to grow each year for the foreseeable future. The overfunding in these accounts would be even larger if these funds could be invested in the types of assets that are commonly used by private sector pension funds. A privatized Postal Service could then remove some of the assets from these funds to improve its cash position as well as provide a dividend to investors.

A similar benefit could come from investing the retiree health benefit assets in stocks and bonds that are commonly used in the private sector retiree health benefit funds. Combined with a more current estimate of the actual liability for retiree health benefits and expansion of the use of Medicare to cover retiree benefit costs, the new investment policy could shift the retiree health benefit obligation form a severely underfunded status  to one that is either fully funded or  close to being fully funded.

Private sector management of the retirement benefit assets would provide another benefit to the Postal Service, lower operating costs.   With pension plans fully funded, the Postal Service would not have pension expenses and depending on future actuarial analysis may be looking at periodic cash transfers from the pension asset accounts back to corporate accoutns.  Private management of retiree health benefit assets, and a lower unfunded liability would significantly reduce annual costs of the retiree health benefits below the levels that the Postal Service has estimated in its new Business Plan.

Combining full access to brand, real estate, and retirement assets provide private investors with the potential of some quick profits while at the same time improving the capital structure of the Postal Service far more than the plan that the Postal Service and Evercore Partners just came up with.

Expansions of the Product Range: How the Quasi-Governmental Model Precludes Significant Revenue Growth

A key part of foreign postal administration’s successes come from their expansion into markets outside physical delivery of written communications. These administrations growth has come in four areas: parcels, communications integration, retail services, and e-communications.

While the Postal Service has delivered parcels for well over 100 years, its parcel business looks much more like a start-up than a mature firm. Competitive parcel volumes are now growing at double digit rates as the Postal Service becomes the core delivery service for home delivery of light weight parcels. This business needs significant capital investments to upgrade Priority Mail Service and expand the goPost parcel lockers. Given that on-line retail sales are expected to grow by 20% or more, the Postal Service’s parcel business could grow faster with proper investments. The business model provides little information about how the Postal Service will get the capital to make the necessary investments in its parcel business and therefore it is unclear if it will be able to grow its parcel business as much as it needs to replace declines in print communications delivery

A less regulated Postal Service would be free to offer services that integrate the last mile delivery into earlier or later steps in the print communications process. For example, the Postal Service could work with billers to improve payment processes by linking sortation of payments with transfers of checks to banks in the city where the mail is originally sorted rather than transporting the letter to the biller’s address. The current business plan does not touch on that subject due to concerns about a government entity competing with the private sector.

The key to retail services is expanding what is offered beyond traditional postal services. Providing other government services is a nice idea but the revenue associated with these services is likely to be insufficient to support the Postal Service’s retail infrastructure. Freeing postal retail outlets to provide the full range of services that Australian retail outlets provide could turn a money losing service into a money maker. A modern retail network would also include contract operations but again making contract operators successful requires the Postal Service to be able to offer retailers more than it can now and the Australian model again provides a good example of what a private investor would want to exploit. The problem with the Australian model is the potential conflict with private sector firms by a government sponsored enterprise.

Electronic communication extensions of the Postal Service’s physical communications services have been the topic of a number of United States Postal Service Inspector General Reports. However, potential competition with the private sector is the largest barrier from the Postal Service offering these services.

With the exception of parcel services, forcing the Postal Service to operate under a quasi-governmental business model creates a conflict with the private sector that precludes the types of brand expansions that are common in successful transformation to a profitable national post outside of the United States. This barrier is a key reason that postal reform legislation allows the Postal Service to expand into services that no firm that lobbies Congress could object too, and therefore services that are unlikely to generate sufficient revenue to make a noticeable difference in the Postal Service’s expected revenue.

Time for Fresh Thinking

The plan prsented yesterday is not much different from one presented two years ago for the simple reason that it continues to work with the assumption that the Postal Service must remain quasi-govenmental entity.   As such, the Postal Service’s new business plan illustates the limitations of the government business model and the operating, marketing, and pricing changes all have key opponents among postal stakeholders;  The plan offers:

  •  postal labor little more than massive job losses and reductions in compensation;
  • those on the wrong side of digital divide slower service and much higher prices; and
  • large volume mailers significant above inflation price increases and reduced service levels.

While any business plan is likely to result in significant unpopular changes, by sticking with the quasi-governmental business model, the Postal Service ensured that the changes are greater than they needed to be.

It is clear that the business plan that the Postal Service has chosen is not the one that has worked in other countries. The plan avoids talking about either private capital or expanding the breadth of service offerings as neither are on the legislative table.    Introducing thinking about how private capital could be introduced and the product offerings could be expanded forces stakeholders to think about privatatization, an idea that is nearly as unpopular as the changes that the proposed business model introduced.   However, as this brief post notes, privatization offers significant financial advantages that could reduce the operating and price changes envisions by the Postal Service’s business plan.   Therefore, those who see the greatest harm from this plan need to see if the advantages of privatization could benefit their interests sufficiently to overcome long-held objections to the idea.

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10 Responses to “The Postal Service Business Plan: the Result of Choosing a Government Business Model”

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  1. John says:

    Donahoe is an idiot. His scorched earth proposals will lead to a situation where “the operation was successful, but the patient died”. He has shown no ability to think outside the box. The sooner he steps down and someone with fresh ideas steps up, the better.

  2. M. Jamison says:

    Mr. Robinson’s analysis is good such as it is but it fails in understanding the intent of this so-called business plan. For the last three years postal management has engaged in a game of public relations chicken, trotting out ever more dire predictions with really scary numbers. Close examination of the underlying numbers and assumptions most usually reveals that there is little validity and less substance to the numbers presented by the Postal Service.
    For the last twenty years it has been the dream of senior postal management to move towards a dream of privatization. The goal has been to shed post offices, employees and especially the idea of decent paying jobs. In place of a viable public service what is proposed is little more than a hand maiden to the direct mail and advertising industries.
    This newest proposal is little more than a prelude to privatization. The plan moves the Postal Service away from Federal benefit plans and dismantles enough of the network to make real service untenable. It is a plan designed to create failure and then, as Mr. Robinson speculates, the $326 billion of employee trust funds will be up for grabs.
    Much has been made of privatization in other countries but the results of those efforts are not shining successes. Basic services have often deteriorated and in most cases the public is worse off. In any event, comparing the USPS to posts such as Australia’s is a fool’s game. The American mail system is by several magnitudes the largest in the world, delivering far more mail to more addresses over a larger geographic range than any other system in the world.
    The rush to privatization also ignores the public good and useful presence the postal infrastructure has created, it ignores the fundamental premise for building a national post, and it sacrifices service and public utility for profit. The fact is that the current postal system is not failing nearly as bad as its management or industry insiders anxious to get their hands on the assets and trust funds would have us believe. Operations under a poor management that has neglected to present any real innovations have still broken even or better. Absent the egregious mandates imposed by Congress the system is relevant, repairable and remains an essential part of our national infrastructure.

  3. Liam Skye says:

    So the author notes that “The value of assets associated with CSRS and FERS pensions and the retiree health benefit accounts are less obvious but much larger. Currently both CSRS and FERS accounts hold assets that exceed the expected liability and the excess assets are expected to grow each year for the foreseeable future. The overfunding in these accounts would be even larger if these funds could be invested in the types of assets that are commonly used by private sector pension funds. A privatized Postal Service could then remove some of the assets from these funds to improve its cash position as well as provide a dividend to investors.”

    So he proposes that the pension funds should be raided and distributed to billionaire robber barons who he calls “investors,” eh? Well, that money belongs to both the postal service and the postal employees – you know, the people who PUT IT THERE. If there is to be any distribution of the pension funds it should be distributed to the true investors who PUT IT THERE.

    First they want to take away our health benefits which we have been promised and have earned – now this clown suggests that it would be a good idea to take our pension money that WE PUT IN THE PENSION FUNDS and distribute it to the first billionaire that comes along and asks for a piece of it.

    • Alan Robinson says:

      My key point is that the value of the asset is so much more than the liability that benefits could continue to be provided and the USPS would have enough capital to invest in the business. That would allow it to grow the business and continue to offer the wages and benefits that it has offered for years. Without that cash, the only option is cutting servcie and cutting compensation. Liam I don’t think you want the proposed business plan to be implemented. and neither do I.

      I also believe that any privatization has to include significant employee ownership. This would be between 1/3 and 1/2 of the business. So every employee from the lowest paid to the highest would be a shareholder and see the kind of bonuses that GM employees are seeing now.

      • Really says:

        But what you are saying Alan is what the people who really know the post office have been saying all along. However, you are just beginning a conversation that is the end result of the pointed plan by the Service when they first started short staffing the window units in order to make customers use “cheaper” “alternative” retail services.
        You have to understand the bargaining unit employees position that this would be a bad idea for them and for the nation as a whole.

        Your article on one hand, bemoans the intention of the Postal Service to maybe raise standard rate prices higher than what is “required” to provide the service, while at the same time you make arguements that privitizing is the “smart choice”. You WILL NOT have a privitized Post Office that does anything but try to make a profit, and that profit does not only come with service reductions, but also with price increases. A privately ran Post Office will not provide your mailers with a constant, set in stone, “work share” discount even when that discount no longer makes sense. A standard mailing that is sorted to the enriched carrier route walk sequenced depth of sort qualifies for a major discount, even though, if that town is DPS’s by the USPS, that mailing will still have to be ran into that town’s daily DPS. That discount that the mailer received was worthless to the USPS, it did not save any work for the USPS. They just gave a lot of revenue away. No town that is walk sequenced by the Postal Service should be eligible for any work share discount above the 5-digit depth of sort. Yet, the mailers would cry that the Postal Service was trying to rip them off and threaten to stop using the Postal Service if they took their discount away, until the Postal Service gives in and leaves the current discounts alone. The mailing industry cannot have it both ways. A private Post Office that can be forced to provide service to their industry at a price that is equal to or less than what it costs to provide it is the ultimate fantasy.

        You and others like you like to yearly compare the bottom lines of the USPS, UPS, and Fed Ex and use this as a marker for how “broken” or “unprofitable” the USPS is. You do this, maybe purposefully, without considering how UPS’s and Fed Ex’s bottom line looks so much better. Bottom line for me is to take three pakages and mail them with each company with 2 or 3 day service to a town of any distance and see what you spend. And if it isn’t enough that the USPS is cheaper, far cheaper, the premium you paid for the service at UPS and Fed Ex allows for those companies to pay the USPS to deliver the most unprofitable destinations the final mile.

        You cannot compare the USPS to UPS and Fed Ex. They are able to be profitable because they can choose to charge you, the customer, for fuel reclamation charges and other charges, while also choosing to not provide service to unprofitable areas. This is what allows private companies to be profitable. The USPS cannot, and should not, ever be able to decide to not serve portions of our country. You, as a citizen who has the ability to do all of your business online, still need some kind of viable Postal Service that you can depend on. But, you do not have the option, in my opinion, of saying, as Mr. Issa like to do, that we cannot afford to provide that service to those people. Those people have a Constitutional Right to access to a National Postal Service. It is against Federal Law to take that away from “those” people. You do not “pay” for those people’s service. These blogs and web sites would seem to indicate that the Postal Service is the horse and buggy whip industry of the 21st century. But the massive amounts of people who live in rural America and do not have internet access and still need the USPS DO NOT have any voice on these web sites. When we, as taxpayers, are willing as a nation to subsidize broadband internet access for the entire nation, from the bottom of the Grand Canyon to the top of the Rocky Mountains, from the Pacific Ocean to the Atlantic Ocean, and from the Canadian border to the Mexican border and Gulf of Mexico, then I will stop advocating for the rights of rural America to have a Constitutional Right to access to the USPS.

        Whether or not the Postal Service’s current Network Optimization Plan is allowed by congress to proceed or not will depend on their ability to change the current Service Standards of 1-3 days for First Class mail to 2-3 days. The PRC has stated that they are scheduling the hearing in August and the PMG has already stated that he is not going to wait for the PRC’s written opinion. Federal law requires him to have a written advisory opinion from the PRC prior to intiating any changes that would affect the service standards on a national level. But he states that he is not going to wait. If he does in fact go ahead and reduce the level of service thereby violating Federal Law, what happens then? Should the PMG really be able to abrogate federal law and ignore the requirements that he must at least “listen” to the PRC prior to making changes that affects the nation as a whole?

  4. GaryW says:

    Privatization is a fool’s game, Mr. Robinson. In all cases, “investors” come in and place very little of their own money at risk due to the available money and assets that have already been built by the employees that preceded the privatization. Employee ownership will soon be reduced from the “generous” 1/2 to 1/3 share of the business to a pittance because the employee share is never enough to offset the decision-making capability of the new owners’ shares. If you think the pay and benefits will ever be remotely close to what they were (especially if you leave that decision up to the “investors”), you are close to insanity, Mr. Robinson. Look at our airline industry where this concept originated and let me know how many airlines are still owned by its employees, where they are being paid generous bonuses for their labor.

    This is merely an attempt by our “political leaders” and the corporate puppet masters they serve to destroy an institution that has served the American people very well over the last two hundred years. All in the name of unfettered profit. There is nothing different in what these people do than a junkie under a city bridge. They chase the profit made by working people and absorb it all in an attempt to create a new royal class that leaves more and more of this country’s wealth in the hands of their idiot, inbred children who did absolutely nothing to earn it. For a prime example of this, look at the $100 million trust funds soon to be enjoyed by the Romney boys whose only note-worthy accomplishment in life is to serve their country by working to get their father elected to the Presidency – Mitt’s own words – you can’t make this stuff up.

    The problem in this country, as I see it, is the willingness of otherwise competent, caring working people to engage in the fantasy of becoming one of the upper 1% by sacrificing their own futures. In any other time and culture, these actions would be called what they are: THEFT. If I took these same business principles and applied them by promising elderly people, I would repair their roof in exchange for the equity they have in their home, I would be arrested. The difference is the magnitude of the theft. Once it goes into the millions or billions of dollars, it is called a “Business Plan.”

    Postmaster General Donahoe should be fired. Immediately. And the authors of this “Business Plan” should be languishing in prison.

    There is only ONE solution. End the $5.5 billion dollar theft of the Postal Service’s assets by the U.S. Congress, return the over-payments we’ve made (and you’ve acknowledged) and get the hell out of our way and let us do what we do best – move the mail. And when the corporate caused recession is over, the mail volume will return and we will do so.

    • Alan Robinson says:

      I have always thought the challenge is trying to figure out how to unlock the value of the assets that the USPS has that Congress won’t let it use. The overfunding of pensions and the miscalculation of retiree health benefit obligations are two examples of assets that the the USPS should have to invest in the business that Congress takes away.

      I am convinced that the only way to get Congress to give them up is to pay them for it and the only way to pay Congress for the assets is to recapitalize the assets using more standard investments.

  5. David Rink says:

    Robinson’s second to last sentence, “However, as this brief post notes, privatization offers significant financial advantages that could reduce the operating and price changes envisions by the Postal Service’s business plan,” contains at least two errors. First, the word “brief” cannot be used to describe his post. It is too long and sounds more as if, in a puffed-up way, he is listening to himself talk the whole way through. Secondly, I think he means, “envisioned”, as the word “envisions” appears to be a typo. Hence, this is another reason why I think his brief post is too long and pompous. He needs to slow down, say less, and spell correctly.

  6. Realitybuffer says:

    I think everyone agrees that Congress is holding the Postal Service hostage. What you are suggesting, is that congress is blackmailing the Postal Service. The true agenda in my eyes is “contracting out” This is how privatization in the US works. You create a new subsidiary of a larger firm (like say, Haliburton) and give them the contract for processing and delivering the mail. They pay low wages and benefits (if any) and the difference between what they pay the contract employees and what the current unionized workforce earns is all profit for the main contractor. The cost of the service ultimately goes up and the incomes of the workers go down because the contractor wants more profit. Not at all what privatization in a normal country is like. This is currently how the pentagon operates for the most part and they are all licking their chops on capitol hill in anticipation. Privatization of Deutsche Post was very successful in many ways. They have turned into a global powerhouse. There is no way that the lobbyists for the competition (UPS and FedEx) are going to let the Postal Service become another Deutsche Post on their home turf.

  7. KC says:

    There is little doubt that radical reform is needed in Postal management structure. The current Board of Governors deserve to be sacked, replaced by postal employees who could then take over the company in an Employee Stock Ownership Plan, regulated by the Postal Regulatory Commission ( as they seem to be the only ones capable of telling the truth).

    Give the employees the incentive to make the company prosper, and they will.

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