Donahoe, No Potter Clone, Quickly Making His Mark

With a radical management reorganization, including the break-up of the Intelligent Mail group, new Postmaster General Pat Donahoe showed once again yesterday that he won't just quietly follow in his predecessor's footsteps.

Exactly what the new structure means is not completely clear, but what is clear is that more change is coming.

"Today's actions and announcements are the beginning of a much larger process that will involve every level of the organization, including the closure of some Districts. As we continue our restructuring, we anticipate that Reduction in Force (RIF) and Voluntary Early Retirement (VER) processes will be initiated by the end of the fiscal quarter," Donahoe said in a memo yesterday to top Postal Service executives.

Because Donahoe was the right-hand man for his predecessor, Jack Potter, it was widely assumed that he would just follow in Potter's footsteps. But in addition to yesterday's announcement that includes a 16% reduction in the number of senior executives, the Donahoe-led Postal Service has already revealed an expansion of the Forever stamp concept.

What brought joy to many mailers yesterday was the apparent recognition that the Intelligent Mail program needs a management overhaul. Intelligent Mail has moved into the Information Technology department, with Thomas Day (who was Senior Vice President, Intelligent Mail and Address Quality), nowhere on the new organizational chart.

Perhaps the final straw was Day's recent article for Mailing Systems Technology, in which he made false claims about the use of Intelligent Mail barcodes, including that "both the sender and preparer of a mailing can be kept informed as the mailing is processed all the way to the point of delivery." Tracking an individual mail piece to the point of delivery is only available via the Postal Service's Confirm service, which existed before IM barcodes were implemented.

Related articles:

• Potter Quitting the Worst CEO Job in America
• Un-Intelligent Mail: Another Bungled Postal Regulation  

Millionaire Postal Executives Are Underpaid, Consultant Says

By government standards, the U.S. Postal Service's top executives, with their multimillion-dollar pension packages, are doing quite well. But their compensation is lagging further behind their counterparts in private industry, according to a USPS consultant.

"Towers Watson [a major management consulting firm] found that USPS executive base salaries are significantly below market when compared against published survey data of comparable jobs in the private sector," says the Postal Service's annual financial report, released today. "Moreover, the most recent assessment using 2010 data indicates that USPS executive salaries have continued to erode further over the past twelve months."

The same report says that Postmaster General Jack Potter, who is about to retire, ended fiscal year 2010 with pension benefits worth $4.4 million and received $798,418 in total compensation for the year. His successor, Deputy PMG Pat Donahoe, has pension benefits exceeding $3 million and received $481,088 in total compensation last year.

Two other postal executives also have pension packages worth more than $1 million. Because annual pay per person is capped at $276,840 annually, the Postal Service uses a variety of perks (such as spousal travel and employer-paid life insurance) and deferred incentive compensation to attract and retain top postal executives.

The annual report seems to lay to rest any ideas that Potter, who is only 55, is being forced to retire by the Postal Service's Board of Governors:

"Due to Mr. Potter's extraordinary leadership during the difficult and unprecedented economic challenges of 2010 and the results he achieved in implementing a number of process improvements that maintained service while lowering costs, his significant staff reductions, his development of a comprehensive plan to guide the Postal Service for the next decade, and his achievement of personal goals set by the Governors for the fiscal year, the Governors determined that it was appropriate to award the incentive compensation he is entitled to receive according to his contract."

Related article: Potter Quitting the Worst CEO Job in America.

Potter Quitting the Worst CEO Job in America

At the ripe age of 55, Postmaster General Jack Potter announced his retirement today from the worst CEO job in America.

Some will no doubt speculate about the reasons -- a coming change in Congress or perhaps the failure so far to notch any major political victories on such issues as rate increases, five-day delivery or retiree-benefits reform. But I have my own theory.

The job stinks.

By any measure, the U.S. Postal Service is among the top five employers in the country. Chiefs of any similar-sized private organization get at least 10 times as much compensation -- and far fewer complaints about how much they're being paid.

I've had my criticisms of Potter's Postal Service, but most of what's wrong seems to predate Potter. And change doesn't come easily to such a massively bureaucratic and complex organization. Laws, regulations, political forces, union contracts, and the inability to hire talented managers from outside the organization all tie the PMG's hands in a way that no private-sector CEO has to deal with.

Most CEOs have a board of directors consisting of fellow or former CEOs, investment bankers, high-powered lawyers, and others who can provide valuable guidance. But the Postal Service's board of governors is made up mostly of political hacks with little relevant knowledge or experience.

And then there's the Postal Service's other governing body, consisting of 535 politicians who drain billions from the USPS in pension and benefits funds to hide the size of the federal deficit, carp about how much money the Postal Service is losing, then scream "not in my district" whenever attempted Postal Service streamlining hits too close to home.

Want to launch a new venture? If you're the PMG, forget about the usual discussions of return on investment or marketing plans. First you have to figure out who might object and whether they have the political clout to block the path.

A money-losing business with an acknowledged need to downsize moves quickly, with many people working round the clock to implement buyout packages and to consolidate operations. But the Postal Service's downsizing efforts creak along, with each facility consolidation the subject of many months of study, public hearings, protests, and Congressional badgering.

And instead of encouraging people to retire to reduce operating expenses, the bureaucracy discourages them instead by offering incomplete, sometimes inaccurate, benefits information and notoriously slow payments.

To no one's surprise, Potter is being replaced by his right-hand man, Pat Donahoe, the deputy PMG and chief operating officer. My condolences, Pat.

Potter Knew of Bernstock's Sole-Source Contracts

The Postal Service's sole-source contracts with associates of former executive Robert F. Bernstock had the tacit approval of Postmaster General Jack Potter, according to documents published last night.

"Potter stated he was aware of Bernstock bringing in outside contractors to the Postal Service 'almost from the start because he needed to get an infusion of new thinking and talent as quickly as possible,'" says an investigators' report of a Feb. 4 interview with Potter. "Bernstock informed Potter 'he was considering using people he was aware of as consultants, who he personally knew.'"

The report and related documents from the USPS Office of Inspector General were made public last night by The Washington Times as part of its ongoing investigation into Bernstock's brief and controversial stint as head of marketing for USPS. The Times article published last night focuses on discrepancies among the accounts given by Potter and other key officials regarding Bernstock's outside work.

"Potter advised Bernstock 'the bottom line was to follow the Postal Service procurement rules, have lawyers review the contracts, and do not circumvent the Postal Service rules and regulations,'" the OIG report said.

"Regarding whether Bernstock hired friends as contractors, Potter thinks the term 'friends' is too strong of a word. He said, "'Of course Bernstock is going to go back to his pool of resources, like former colleagues, people he worked with and thought had good skill sets.'

"Potter said it is normal for 'some people to trail each other their whole career.' He believes Bernstock reached out to people with the skills he needed and does not have a problem with Bernstock hiring former colleagues."

Potter also said some of the contracts were turning out to be excellent deals for the Postal Service because it would have cost far more to use either USPS employees or traditional contractors like McKinsey to accomplish the tasks.

Related articles:

•  "What About Bernstock?" And Other Tough Questions for Postal Execs 
• Bernstock Gone But Not, Um, Quite Gone  
• Bernstock Just Won't Go Away

Postal Rate Cap Finishes Year in the Red

It’s official: The U.S. Postal Service will not be able to carry out the usual May increase in First Class, Standard, and Periodicals rates this year. And there may be a bit of good news for mailers next year as well.

With today’s release of the December Consumer Price Index (CPI), the Postal Service’s annual rate cap for the “market-dominant” classes is -0.36%. That's because lower gasoline prices and the economic recession caused the average monthly CPI in 2009 to be below 2008's average.

The law and regulations governing the CPI-based rate cap do not seem to anticipate such deflation. There is certainly nothing that requires the USPS to reduce rates by -0.36% even though the CPI declined. (Nor will there apparently be pay cuts for postal workers whose unions have cost-of-living adjustments in their labor contracts.)

What is not as clear is how the rate cap for 2011 will be calculated. Most likely it will be a matter of comparing this year’s CPI to 2008’s, not the lower 2009 number. That means that a steady annualized inflation rate of 3% this year would yield only a 1.9% rate cap for 2011, and a 5% inflation rate would mean only a 3.0% rate cap.

Under special circumstances, the Postal Service can institute "exigent" rate increases that violate the price cap. Postmaster General Jack Potter says he won't propose those this year, but the Postal Service's budget deficit might increase pressure for such emergency increases.

Related articles:

• Why Potter Is Freezing Postal Rates, And What It Means For 2010: Potter announced a 2010 price freeze for most classes of mail back in October.
• Can the Postal Service Still Afford Periodicals?  Why the Postal Service is like an airline with half-full planes.
• Will Postal Rates Decrease Next Year?  Laws and regulations governing the Postal Service ignored the possibility of deflation.
  

Why Potter Is Freezing Postal Rates, And What It Means For 2010

Postmaster General Jack Potter tried to restore mailers' confidence in the U.S. Postal Service today by announcing a price freeze for most postal rates in 2010.

"The Postal Service will not increase prices for market dominant products in calendar year 2010," Potter said in a statement sent to various customer groups late this afternoon. He was responding to "pessimistic speculation" that rates might increase as much as 10%.

"There will be no exigent price increase for these products," which include First Class, Standard, and Periodicals, he said.

"While increasing prices might have generated revenue for the Postal Service in the short term, the long-term effect could drive additional mail out of the system. We want mailers to continue to invest in mail to grow their business, communicate with valued customers, and maintain a strong presence in the marketplace."

Earlier in the day, the release of the Consumer Price Index virtually confirmed what had become increasingly clear in recent months -- that USPS will not be able to impose the usual inflation-based rate increases next year. Consumer prices have declined so much since 2008 that they will end the year in negative territory unless the Fourth Quarter annualized inflation rate exceeds 9%.

Mailers feared USPS would try to close its budget gap -- probably $3 billion for the fiscal year just ended, or $7 billion if you count Congress' "forgiveness" of a bogus retirement-health payment -- by seeking exigent (emergency) rate increases.

Potter's statement did not clarify whether he was referring to all market-dominant rates or to the average rates for each class. Postal officials have subsequently put out the word that "no increase means no increase," meaning that no rates in the market-dominant classes will change.

But Potter's statement made clear that he understands the two dangers of an exigent rate increase:

1) In the short run, higher rates would suppress mail volume, but, as explained last week in Potter Doesn't Want to Hike Postage Rates in 2010, savings from such volume reduction would be minimal. The combination of lost business and slim cost savings could wipe out any gains from the higher prices per mail piece.

2) An exigent rate increase would signal to mailers that the Postal Service is unreliable and that they can no longer count on rate increases being capped by inflation. One exigent rate increase would lead to expectations of more in the future. That would accelerate mailers' efforts to replace mail with cheaper electronic substitutes -- for example, customer incentives for on-line bill payment.

So how does Potter intend to close the budget gap? He's been making numerous speeches and giving interviews touting elimination of Saturday delivery, which would save up to $3 billion annually, as one option. That would result in elimination of about 40,000 career employees positions, which could be done "through attrition because we have a lot of folks right now who are eligible to retire and who we could incent to retire,” Potter said last week in a radio interview.

Continued downsizing is clearly in the cards. Just last week, USPS announced possible consolidation of nine more processing and distribution centers. Nearly 40 such Area Mail Processing studies are in the works, along with the possible closing of hundreds of post offices.

Postal officials are looking into new revenue streams, and Potter's statement today mentioned that they want "to grow the mail through innovative incentives like the Summer Sale and contract pricing."

And, inevitably, the issue of the retiree-benefits shell game will be on the table. Officially, it's called a pre-payment of retiree health benefits, but in actuality Congress is forcing USPS to overfund a benefits account by more than $5 billion annually in a way that makes the federal deficit look smaller. Without those payments from the supposedly independent and off-budget Postal Service, USPS would have been profitable until fiscal year 2009.

Congress may end up facing a choice between ending that accounting game and allowing the Postal Service to eliminate Saturday delivery. Or the Postal Service could do an end run around Congress and end Saturday delivery on its own, as explained in How USPS Could Bypass Congress on Saturday Delivery.

Potter Doesn't Want to Hike Postage Rates in 2010

Postmaster General Jack Potter has been telling mailers’ groups in recent days that he does not plan to raise postal rates next year, a reliable source tells Dead Tree Edition.

Worried that price increases would backfire and cause mail volumes to drop further, Potter is telling mailers that any increase in 2010 would be “very small,” the source says. Mailers are interpreting that as at most 2% to 3%, which would mean a one-cent increase in the price of the First Class stamp.

In a question-and-answer session today at the National Press Club, Potter said a decision about rate increases would not be made until after the first of the year and noted that such increases can be counterproductive if they reduce volume. He also hinted in a radio interview Tuesday that "exigent" (emergency) rate increases were not in the plans.

"If you think about the price of a First Class stamp being capped at the rate of inflation, you can do your own math," Potter said on The Diane Rehm Show. "Figure out what inflation will be between now and whatever date you pick and that's likely to be where the price of a stamp will be."

By law, USPS can increase rates for most mail classes each May by the previous year’s average change in the monthly Consumer Price Index. But with the CPI still below where it was a year ago, USPS has almost no chance of being able to institute such inflation-based price increases next year. (The annualized inflation rate for the rest of this year would have to be about 6% for USPS to get any inflation-based price increases in 2010.)

That has led to fears that the Postal Service would institute exigent rate increases to close its budget gap, which Potter said today was more than $3 billion in the fiscal year that ended Sept. 30.

“Without a big change in the way we’re required to do business, we’re likely looking at a deficit of more than $5 billion – for years to come,” Potter told the National Press Club today. Among the possible changes he mentioned were five-day delivery, reducing costs, ending the pre-funding of retiree health benefits, entering new businesses, and government subsidies. But not price increases.

Increasing postage rates by about 7% would close the $5 billion gap -- if it didn't hurt mail volume. But large rate increases in recent years, such as one for lightweight catalogs, have caused mailers to shift marketing money away from mail to less expensive digital formats like email and Web marketing.

Even a small exigent rate increase could undermine confidence in the Postal Service, thereby hastening that exodus from mail. And because most of the Postal Service's costs are fixed regardless of volume, less mail hurts USPS revenues far more than it reduces costs.

For more information, please see:

• Deflation Will Keep Postal Rates In Check -- Maybe: How declining costs in the economy as a whole are hindering USPS's ability to raise prices.
  
• Postal Officials Ponder Emergency Rate Increases: More information on exigency-based rate increases.
• USPS Playing "Let's Make A Deal": Why special price discounts like the Summer Sale are profitable for the Postal Service
  
• Can the Postal Service Still Afford Periodicals?: Even low-priced mail is profitable at the margin for USPS.