History and Background
The United States Postal Service (USPS) is an independent government organization that generates income through mail services. It is currently the second largest civilian employer in the United States. Its primary task is to deliver mail around the country, at a standard price, regardless of geographic location. Over the last two centuries, the USPS has evolved into an efficient organization that financially sustains itself through its delivery operations. With a monopoly on the delivery of non-urgent mail, the USPS provides delivery service of about 40 percent of the world’s mail, or approximately 200 billion pieces of mail annually. Starting in the 1990s, the USPS faced increased competition from rival package delivery and courier services, as well as the Internet. Presently the USPS is facing a financial collapse. The USPS needs to undergo an essential and systematic change in order to maintain its significance in the 21st century.
On July 26, 1775, members of the Second Continental Congress appointed a Postmaster General giving birth to the Postal Department of the United States. The mission of the U.S. Postal Department was much the same as today, process and deliver first class and non-urgent mail to individuals and businesses within the United States. Congress passed various laws that grant the post office a “statutory monopoly” on non-urgent First Class Mail and the exclusive right to put mail in private mailboxes. Although these laws grant the USPS a market advantaged they also restrict its ability to compete with rival package delivery and courier services, as well as the technological innovations.
How it got started
The Post Office Department has origins in America dating back to the 17th century, when there was a need for mail between colonial settlements and intercontinental exchange of information with England. In 1775, the Continental Congress named Benjamin Franklin as the first postmaster general and chairman of a committee empowered to make recommendations for the establishment of a postal service. On September 22, 1789 the post office became a new government branch of the United States. At this time there were 75 post offices and approximately 2,000 miles of post roads. The USPS was critical to national welfare and pivotal in facilitating communications for military, congressional representation and newspapers. From the very beginning, the USPS financed operations from revenue it earned and Congress gave it a monopoly to be the only courier service to deliver mail.
Key points in evolution
The main focus and the efforts of postal officials from the foundation of the Post Office to the present day have been finding the best methods of transporting information and directing mail. For example, in 1791 George Washington stated that that the importance of the postal routes had increased because the country wanted to distribute knowledge of governmental laws. Also, between 1791 and 1861, the U.S increased from 3.9 million to 31.4 million square miles and postal roads grew from 1,875 to 240,595 miles. The Board of Governors of the USPS sets policy, procedure, and postal rates for services rendered. Of the eleven members of the Board, nine are appointed by the President and confirmed by the US Senate.
The nine appointed members then select the Postmaster General, who serves as the board’s tenth member, and who oversees the day to day activities of the service as Chief Executive Officer. The ten-member board then nominates a Deputy Postmaster General, who acts as Chief Operating Officer, to the eleventh and last remaining open seat. The USPS is often mistaken as a government organization but it is legally defined as an “independent establishment of the executive branch of the Government of the United States.”
The external environment elements that significantly influence the USPS are the United States political system, workforce unions, changing technology and market forces.
United States Political System
In 1970 the U.S. Postal Department evolved into the USPS through the implementation of the Postal Reorganization act. This act required the USPS to be a “self-sufficient organization within the U.S. Government”. It also added an additional regulatory body into its chain of command, the Postal Regulatory Commission (PRC), but did not make any modification to the Postal Department’s Board of Directors or regulatory congressional statutes.
The USPS Board of directors is charged with directing the USPS through the control of expenditures, reviewing practices, long term planning and setting policies and service standards. The PRC has 5 commissioners, appointed through the executive branch and confirmed by the Senate, who have the authority to reject, modify and approve any USPS initiated congressional recommendations. Since congress alone retains the authority to change USPS’ rates, service frequency and employee benefits, any market related changes from the Board of directors is routed through the PRC and congress for consideration.
Pressure from Unions
There are 4 unions representing around 90% of the USPS workforce: National Association of Letter Carriers, American Postal Workers, National Rural Letters Carriers Association and National Postal Mail Handlers Union. These organizations have successfully contracted collective bargaining agreements for its members for compensation and benefits that have come to exceed the USPS’ ability to maintain with its current revenues. These labor unions are very influential in weighing in on most of the decisions that affect the well-being of the USPS labor force. Presently USPS employees enjoy 79% coverage of their health care costs; the most of any federal agency.
Over the years the USPS has transformed its operating model and is now set up and mandated to operate like a business entity generating its revenue through the sale of postal products and services. The largest issue with the current business model of the postal service is its lack of flexibility essential for a business in a dynamic market. Specifically the USPS has not been able to organizationally adjust to a large decrease in the demand for first class mail service has resulted in decreasing net revenue in recent years.
The USPS congressional charter came with both benefits and operating constraints. Among the constraints the USPS is obligated to provide a uniform price for its services regardless of the geographic location and dispersion of its customer base. The USPS is obligated to deliver six days a week to every mailing address regardless of its mail volume. Additionally the USPS is required to provide free mailing service to the blind and facilitate voting for overseas military personnel. A significant amount of the USPS’ operating costs comes from its requirement to pre-fund retiree health benefits (RHB) for future retirees.
The USPS is suffering from the combined effects of declining mail volume from new technology and increasing labor costs resulting in a loss of net revenue. These declines are projected to extend into the future. The addition of a significant number of new addresses in the United States each year increases the USPS’ operating costs although volume is decreasing.
Business Model – While the USPS has enjoyed the benefits of the monopoly on first class letter mail services that congress has bestowed, it has a stagnant business model that prevents the USPS from being able to adapt in the face of technological innovation and other market forces that affect its bottom line annually. The major source of revenue for the post office is the postage it charges for first class and non-standard mail. The advance of modern information systems such as email, smartphones, online banking, and other digital communications decreased the demand for traditional mail services. Compounding this issue is the basic economic principle of supply and demand. New technologies offer cheaper substitutes for the services that the post office provides.
Postal Workers – The USPS employs more than 500,000 employees making it second only to Wal-Mart as the nation’s largest civilian employer. While every employee is represented by a labor union, employees are legally restricted from striking. Labor Unions – The USPS unions are old, influential and politically connected. Collectively, these unions continually fight for increased employee pay, living allowances and health care benefits. Postal Regulation Commission (PRC) – The PRC serves as the middleman between the USPS board of governors and congress. The PRC can reject or modify requests before they reach congress for final approval.
Congress – Members of Congress exercise control over many aspects of the USPS operations including approving the markets for which it competes as well as representing the interests of its constituents whenever the USPS requests changes to its business model. Public Consumer – One of the mandates of the post office is to provide mail service of all addresses. The number of addresses has increased by nearly 18 million nationwide in the past decade and continues to climb as the country recovers from the past recession. A vast majority of the consumers are congressional constituents to whom member of congress are responsible.
The USPS monopolizes, via congressional mandates, the delivery of first class mail, non-urgent mail and small packages. As such it faces very little direct competition from other businesses. However, the USPS has seen significant decreases in its mail volume over the years. The decreased volume of mail is directly related to the global acceptance of technology and use of digital communications which displaced traditional USPS services.
The USPS full time workers cost the USPS 80% of its revenue. Although they still enjoy a monopoly on first class mail, they are in direct competition with smaller, more efficient, companies who deliver large packages and urgent letters.
What it Does Now – The USPS has improved its efficiency and effectiveness through both technology and reorganization. The USPS made significant investments in the late 1990’s in fuel efficient vehicles and new facilities as well as a $15 million advertising campaign to improve its image as a progressive and modern organization. A decade ago it took 70 employees one hour to sort 35,000 letters. Today in an hour, only two employees process an identical volume of mail. Though the number of addresses in the nation has increased by nearly 18 million in the past decade, the number of employees who handle the increased delivery load has decreased by more than 200,000 (Potter 2010a). It launched delivery confirmation service and priority mail in order to compete with competitors.
The USPS now operates more than 31,000 post offices and the largest vehicle fleet in the world, with an estimated 218,684 vehicles. What They Want to Do – Concerned with increasing costs and decreasing revenues, the USPS petitioned for the following changes: * Stop Retiree Health Benefits prefunding – in 2011 the prefunding amount exceeded net operating losses. * Retirement System Overpayment – In 2010 Government Accountability Office disputed overpayment freezing approximately $6.9 billion. * Delivery Frequency – Shifting from six to five days weekly delivery would save approximately $3 billion annually.
This measure is supported by 75% of USPS consumer base. * Change prices – Mandates currently cap the USPS ability to adjust to market conditions dynamically. * Restructure labor costs – Current collective bargaining decision do not consider the USPS financial health yet mandate compensation and benefits to be paid at levels comparable with private sector organizations with the burden falling on the taxpayers. * Consolidate infrastructure – A proposal in 2009 to close 3,000 postal outlets to reduce excess capacity yielded only a closure of 157 following consumer complaints and congressional intervention.
Lewis (2011) states that the USPS’ problems are a result of a restrictive business model and its inflexibility to operate in a dynamic market place. As stated earlier, the USPS response to this problem is a direct plan to cut expenses and increase revenues to overcome their mounting deficit. Although this plan does address the USPS’ immediate insolvency concerns, it fails to address their underlying issues. Through the use of Senge’s system approach and the McCaskey’s Organizational Design model, this paper will expose USPS’ root problems.
The USPS’ strategic issues are a loss of revenue due to declining mail volume, extensive costs due to a bloated and expensive unionized-workforce and the use of an outdated-legislatively constrained business plan. Their proposed strategy to mitigate these issues centers on cutting their expenses, consolidating infrastructure, renegotiating labor cost/employee benefits and increasing rates. In addition, the USPS intends to evolve their business plan to incorporate technological innovations. This strategy aligns with their long term goal of providing a “trustworthy, dependable, reliable and secure means to communicate on a national level” (Lewis, 2011), by implementing a long term sustainable business model that promotes flexibility and economic growth in a dynamic market.
In FY11 the USPS’ total revenues were $65 Billion dollars while their total expenses were $75 Billion dollars. Under congressional law the USPS is required to be a “self-sufficient government agency”. Under this direction the USPS is obligated to cover its costs without government assistance. The USPS does this by generating revenues from a monopoly market while operating more like a private business then a government agency. Its government backed monopoly advantage comes with extensive congressional restrictions on rates, delivery procedures and labor benefits. The USPS’ monopoly restricts the direct competition in the delivery of first class mail, use of specific delivery routes and personal mailboxes. It does not protect the delivery of urgent mail and large packages. FedEx and UPS are direct competitors in this market and have a competitive advantage due to their efficiencies, technological innovations and ability adapt to market needs.
Key Success Factors
The USPS’ key to success is their ability to meet their customer’s needs, generate enough revenue to cover their costs , maintain the flexibility to adjust in a dynamic market and optimize a scalable infrastructure that facilitates the efficient and economic delivery of their services.
There are multiple ways that mail is accepted into the delivery process. For the purpose of observing the USPS organizational structure, the simple method of customers placing the mail in their residential, or post office, curbside mailbox will be examined. In either case this process begins and ends with the customer sending or receiving mail at a mailbox. The mail item is received by the postal carrier, and then consolidated at the local post office, where it is inspected manually or automatically checked for correct postage. It is then routed to a hub for delivery to a particular region in the country. The mail is then sent to a final processing plant where it is sorted for the specific route for delivery. Finally the mail is sent to the distant end post office for delivery to the end customer.
The mail is moved in a linear manner between each node in the process chain. Along the interdependency continuum of the USPS’ functional units we observed a sequential relationship. Throughout the process each entity produces an output that is a necessary input for the next link in the chain. The USPS’ key to success in this linear process is the secure delivery of mail for a nominal fee. For their part, the workers must be honest and ensure mail is properly safeguarded as it makes its way through each step in the chain. The workers only have to be ‘good enough’ for their specific task in the process. This means that there is very little incentive for them to innovate or make improvements to the process from within. Any efficiencies gained, in any one link in the process, are not readily propagated throughout because of the sequential nature of the process.
Because of the nature of change within the organization, and the employee compensation structure, their only incentive is to maintain the status quo. This analysis is represented in the interdependency/coordination mechanism model below. The analysis shows a misalignment between the levels of interdependence between the functional units and the coordination mechanism used. The USPS coordinates through rules and regulations. Using the systems approach of focusing on successes rather than the failures of the organization, we compared the USPS current coordination level to its closest successful competitor, FEDEX. As depicted FEDEX has a coordination level that aligns with it level of interdependency. The preferred and optimal approach is to align the organization’s level of interdependency horizontally with the coordination mechanism.
The USPS needs a higher coordination mechanism to match the current level of interdependence in order to facilitate efficiencies in the system.
Snowfall and showers may not be able to stop postal carriers from their appointed delivery routes, but their financial problems may halt at least 50% of all postal offices. The U.S. Postal Service, weakened by a public turning to digital communications, is down 22 percent in volume from just five years ago, a decline which is expected to continue, driven in part by rigid competition from carriers such as FedEx and UPS. The Postmaster General has responded with a list of cost-cutting proposals, such as eliminating Saturday delivery and closing up to 3,700 local post offices which would be replaced with automated centers operating out of local businesses. The Postmaster General has also proposed laying off as many as 120,000 workers, and pulling workers out of more costly federal pension plans.
Pre-funding retiree benefits has cost the Postal Service $21 billion in the last three years. The underlying issue is that all those moves cannot be made without congressional approval. In order to make these immediate and dramatic changes, the Postal Service would require access to its own funds as well as the authority to act as its own corporation. The transition from a government ran entity to a privatized organization requires Congress to give the USPS flexibility to take action and make changes without all the bureaucracy. The below modified Senge Model (Limit to Growth) demonstrates how the USPS is constrained from making changes. In short, the USPS is limited by congress to making quick and reactive changes that focus on the problem rather than the underlying issue.
Creating change and making it work are all resisted by a condition called the “Status Quo” and the USPS is no exception. USPS employees feel protected under the current unionized culture. They feel threatened by the prospect of losing benefits and are unwilling to pay the high personal price necessary for change. We have demonstrated that this change is necessary for the long term health of the organization. The real question is, “does the current status quo fit the new change requirements?” An organization in dire need to make radical adjustments to become current cannot be fixed with antiquated congressional imposed constraints.
Change Management Plan
The USPS acknowledges its need to cut costs and increase revenue. It believes this will fix the problems. USPS starts to address this by taking reactionary measures, but fails to take the necessary steps to address the root issue. We argue that there is a more fundamental problem within the USPS organization which requires a systems approach to identify and solve. Senge says “it is impossible to change the system from inside the system.” By “complicating up” the USPS management structure we identify the core problem and faults in its system. Due to the short time needed to enact this change we propose a top down approach that pushes change while mitigating assumed employee resistance such an approach will generate. Our plan uses the Lewin and Kotter models to shape the USPS organizational transition. Through the Lewin model we identify a three phase approach to address changes that simultaneously focuses on employee and organizational issues. Throughout each phase an information plan is propagated to employees to facilitate transition to the next phase.
The bottom line is that the USPS current costs of doing business outweigh its current methods of productivity. Without changing the strategic management model, the USPS will continue to lose revenue and be unable to react effectively to market demands. Its proposed cost cutting solutions only scratches the surface of the underlying problem of restrictions on organizational management and coordination. Our uses validated organizational change models. We justify our plan which uses the Lewin model and shows a close association to Kotter’s organizational change model. Our plan leads the USPS to long term success, maintains its relevance in today’s market and allows it to make appropriate changes through periodic reevaluations.
Lewis, T., Montgomery C., Shuler, J. , (2011), The US Postal Service , Naval Postgraduate School, Monterey, CA.
Senge, P., (1990), The Fifth Discipline, Doubleday Publishing, New York
15May 2012: http://about.usps.com/news/national-releases/2011/pr11_124.htm>
15 May 2012: http://www.cato.org/pubs/journal/cj31n1/cj31n1-9.pdf 19 May 2012: http://www.referenceforbusiness.com/industries/Transportation-Communications-Utilities/United-States-Postal-Service.html