Saturday, February 22, 2014

Postal Officials Don't Know Whether the FSS Is Saving Money

The U.S. Postal Service doesn’t know whether the Flats Sequencing System is reducing its costs and doesn’t seem to be trying to find out.

As a result, one major mailer is calling for hefty price increases on “Standard flats” (such as catalogs) that would presumably spill over to the Periodicals class (magazines and newspapers) as well.

Both postal officials and mailers have been hoping for several years that FSS would yield substantial decreases in the cost of handling and delivering flat mail. But only about 30% of flat mail is being processed on the football-field-sized machines, which are failing to live up to expectations and have led to a legal dispute between USPS and the company that built the machines.

“Based on available information it appears that [increased use of FSS] either lowered costs or left them unchanged,” the Postal Service recently told the Postal Regulatory Commission. But that conclusion, USPS acknowledged, was “determined in a simplistic fashion” based on comparing total flats-handling costs in FY2013 to those in FY2010, when it began installing the $1.3-billion FSS.

USPS told the PRC it has not done a head-to-head comparison of the cost of sorting and delivering FSS mail versus the primary alternative method, the older and less sophisticated AFSM 100 machines.

A year ago, the Postal Service said FSS had apparently increased the costs of handling flat mail because low machine productivity ate up the savings from automating some delivery functions. But it noted at the time that it was investing in productivity improvements to the machines.

FSS productivity, however, declined by 2% during FY2013, according to a recent USPS filing with the PRC.

USPS’s responses demonstrate “there is no reason to expect a meaningful reduction in the unit cost of handling flats as a result of deploying all 100 FSS machines,” Valpak told the PRC this week. “Accordingly, the only way for Standard Flats to achieve breakeven and become profitable is via significant rate increases, imposed without delay.”

Valpak, which uses Standard letter mail to send coupons and advertisements for multiple clients, is a frequent critic of Standard flats postal rates that allegedly subsidize Valpak’s competition. Valpak’s logic for advocating price hikes for Standard flats would apply as well to Periodicals flats; the Postal Service says it loses money on both types of mail.

A big wild card in the debate is whether a recent change in postal regulations will boost FSS productivity. Starting late last month, presorted flat mail going to FSS ZIP codes must be packaged in a manner that is optimal for the FSS operation. In theory, the change will decrease mail-handling costs without affecting delivery operations.

But that still leaves us with a troubling question: If USPS doesn’t really know how FSS is affecting its costs, how will it know whether to continue investing in and running the machines? Postal officials have typically brushed off such questions, responding that they have no choice but to automate the labor-intensive process of sorting flat mail.

Without good cost analysis, however, how will postal officials know whether all the “tiger teams” and machinery tweaks and changes in regulations are paying off? And how will they know whether to continue running the machines or to consign them to The Museum of Good Intentions Gone Bad?

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Sunday, February 2, 2014

The Postmaster General's Scandalous(?) Salary

What USPS's top executives were paid last year
The U.S. Postal Service reported Friday that Postmaster General Pat Donahoe received total compensation of $436,540 last year. Some people will see that as a shocking amount for a government employee.

But here’s the real shocker: The CEOs of the Postal Service’s two chief rivals, FedEx and United Parcel Service, at last report each earned more than 27 times what Donahoe made.

The most highly compensated postal employee in Fiscal Year 2013 was actually Ellis A. Burgoyne, the Chief Information Officer & Executive VP. His $230,000 salary, $233,000 pension gain, and $7,000 in other compensation gave him a total package of $470,000.

Top executives pay at FedEx
Burgoyne's counterpart at FedEx made 10 times that amount, and the CIO at UPS made nearly seven times Burgyone’s pay. Both FedEx and UPS have smaller workforces than USPS and generate slightly less revenue (though more profit).

From time to time some grandstanding Congressman (annual salary: $174,000, plus really sweet health coverage and pension deals) will complain that the PMG’s compensation is exorbitant and unfair. And then in the next breath he’ll opine that the Postal Service should operate in a more business-like manner.

That brings up a question we’ve asked before: Is the Postal Service a public service or a business? Should it be run by people with MPAs (Master’s of Public Administration) or MBAs (Master’s of Business Administration)?

Do you measure postal executives’ compensation on a fairness scale in comparison with other public servants? Or do you measure it on a competitive scale in relation to other business leaders?

Top executives' pay at UPS
One thing is clear: USPS cannot afford to hire executive talent from the private sector. A middle manager in information technology at FedEx or UPS would probably have to take a pay cut to become the Postal Service’s CIO or Postmaster General.

As a result, USPS executives will continue to be drawn mostly from people who have risen through the ranks. That’s not all bad because it means they understand the unique complexities of the Postal Service and how legislation and politics have boxed the agency in.

But it also means that, to access the private sector’s best thinking and technologies, the Postal Service will continue to be overly reliant on consultants rather than the experience of its own people.

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