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TowardaNewBusinessModel forthe UnitedStatesPostalService SubmittedOct.5,2009by StephenCrawford,Ph.D.

VicePresidentforPolicyandResearch,CFED NonresidentSeniorFellow,Brookings SpecialGovernmentalEmployee,USPS

Itisnotthestrongestofthespeciesthatsurvive,northemostintelligent,buttheones mostresponsivetochange.CharlesDarwin BackgroundandPreview TheU.S.PostalServiceisindirefinancialstraits.Itrandeficitsof$2.8billioninFY 2008and$7.6billioninFY2009,anditprojectsa2010deficitofatleast$7billion. Thesedeficitswillincreaseitsdebtto$13.2billionbytheendof2010,leavingit only$1.8billionshortofthe$15billionstatutorylimitonitsborrowingcapacity. Finally,itscashflowisturningnegative.Clearly,thissituationisuntenable,whichis whytheGAOinJulyputUSPSonitslistofhighriskagencies. Themaincauseofthesedeficitsisasharpdeclineinmailvolumefromahighof 213billionpiecesin2006tofewerthan175billionpiecesin2009andalarge increaseinthepaymentsthatUSPSmustmaketoafundforitsfutureretirees healthcare.Thereasonsforthedeclineinmailvolumeare:1)thegradually increasingdiversionofbusinessandpersonalcorrespondencetoelectronicmail; and2)thecurrentrecession,whichhasledtomajorreductionsinmailings, especiallybysuchtraditionallybigmailersasthehousing,financialandadvertising industries.Thereasonfortheincreasedhealthcarepaymentsisarequirementin thePostalAccountabilityandEnhancementAct(PAEA)of2006thatstrikesmany observersasexcessivelyfrontloadedandaggressiveintermsofitstimeframe. ThePostalServicehastriedmightilytoeliminatethesedeficits.Unabletodomuch aboutvolume,ithasfocusedonreducingcostsbyautomatingandstreamliningits operationsandreducingitsworkforce.Andithasbeenimpressivelysuccessful. Since2002,astheUSPSsJordanSmallnotedinrecentHousetestimony,ithas achievedcostreductionsaveragingmorethan$1billionannually.Itreducedcosts by$2billionin2008,largelybyreducinghoursworkedby50million,andithas reduced2009costsbyaremarkable$6billion.Nevertheless,ithasnotbeenableto reducecostsfastenoughtomatchthedeclineinrevenues,inlargepartbecausethe costsofdeliveringthemailarerelativelyfixedintheshortterm. Ifitcannoteliminatethedeficit,USPSmaybeforcedtofileforanexigentrate increaseortoseekaCongressionalsubsidyone,forexamplethatcompensates USPSforthecostofprovidinguniversalservicesthatwouldnotbeprovidedina competitivemarket.1Neitherofthesecoursesofactionisasatisfactorysolution. Becausemorethan60%themailisnowcommercial,mailvolumeismoreprice sensitivethaninthepast,meaningthatincreasesinpostalpricesriskdefeating theirpurposebyfurtherdepressingvolume. Asforasubsidy,itisalwayspossiblethatthepublic,throughitselected representatives,willchoosetosubsidizethetraditionalhardcopymailsystemas 1AnexigentratehikeisonethatisabovetherateofinflationthatthePAEAmandatedasa
pricecapformarketdominantproducts.The2007estimatefortheadditionalcostof providinguniversalserviceis$7.6billion.(Cohen,McBride&Panzer,2008).

thepriceofmaintainingaffordableuniversalservice.Yet,thatseemsunlikelyand unwisewhenthecountryfacesunprecedentedfiscalchallengesandwhenmuchof thesubsidywouldgotosupportingthedeliveryofadvertisingmailakindofmail thatamajorityofmailrecipientsfindannoying(fordetails,seediscussionbelow). Inshort,thePostalServicefacesextremelyseriousshortandlongtermchallenges. TheobvioussolutionstotheshorttermchallengesaretheonesthePostalServiceis alreadypursuing.Toboostvolumeandrevenue,itisexperimentingwithvolume discountsandseasonalsales.Tocutcostsfurther,itisseekingpermissionto:1) modifyitsannualpaymentstofundcurrentorfutureretireeshealthcarebenefits; 2)closeorconsolidatesomeurbanandsuburbanpostalstationsandbranches;and 3)cutmaildeliveriesfromsixdaysaweektofive. Inresponsetothesecostcuttingproposals,therelevantHouseandSenate committeeshaveheldhearings,andtheunionsandmailershavestakedouttheir positions.ThePostalRegulatoryCommission(PRC),theUSPSOfficeoftheInspector General(OIG)andtheOfficeofPersonnelManagement(OPM)haveissueddifferent projectionsoftheretireehealthcarebenefitliability(basedondifferent assumptionsaboutthemedicalrateofinflationandthefuturesizeofthepostal workforce),andotherexpertshaveexpressedtheirviews.OnSept.15,theHouseof RepresentativesapprovedameasurethatshouldsavethePostalService$4billion thisyear.TheSenatehasyettoact,butthispaperassumesthatreliefisforthcoming. FiscalreliefandaneconomicrecoverywillbuytimeforthePostalService,butthey willnotsolveitslongtermchallengeofremainingaviable,selfsupporting institutioninaworldofdecliningmailvolumes.Thefundamentalproblemisthe PostalServicesbusinessmodelitself.AstheGAOcorrectlynotesinitsAug.6,2009 report,thatmodelhasreliedongrowthinmailvolumetocovercostsandenable USPStobeselfsupporting. Volumehasdeclineddramaticallythepastfewyears,andthePostalServiceprojects thatitwillcontinuedoingso,evenifthereisanuptickwhentherecessionends.Itis possiblethatvotingbymailandothernewdevelopmentswillslowdownthis decline,butmailvolumesarefallingaroundtheworld,anditwouldbeirresponsible nottoprepareforafutureofstillsmallerpossiblymuchsmallermailvolumes. ThePostalServicesproblemofdecliningmailvolumesiscomplicatedbythefact thatthepopulationoftheUnitedStatesisgrowing.Asthepopulationgrows,the numberofdeliverypointsexpandsbyabout1.5millionperyear.Theresultisthat dailyvolumeperdeliverypointhasfallenmorethan20%overthepasteightyears from5.9piecesin2000to4.7in2008.Yet,costsofdeliveringtoeachdeliverypoint arerelativelyfixed.Theremaybelessmailtosortinadvance,buttheactualdelivery takesasmuchwalkingordrivingasfaraswhenvolumeswerelower. Oneargumentforreducingdeliverytofivedaysaweekisthatitwouldincreasethe dailyvolumeperdeliverypointtoaprojected5.8justshyofthe2000levelof5.9.

Anotheristhatthepublicappearswillingtoacceptareducedfrequencyofdelivery. InaGallupPollconductedthispastJune,66%ofthosesurveyedfavoredreducing deliverytofivedaysaweek,whileonly38%favoredraisingstampprices.The unions,understandably,arenothappyaboutcuttingdeliveryfrequency,becauseit probablymeansfurtherreductionsinaworkforcethathasalreadybeencutfroma highof803,000in1999to623,000today.Mailersaremoreaccepting,inlargepart becauseoftheirconcernthatifUSPSdoesntrealizethesavingsinvolved,itwillseek anexigentpricehike. Onereasonthepublicmaynotbeoverlyconcernedaboutareductionindelivery frequencyisnotonlythatagrowingnumberofthemuseemail.Itisthatthe compositionofthemailhasshiftedconsiderablyoverthepasttenyears.In1998, firstclassadvertisingandstandardmailaccountedforaboutthesameproportionof totalmailvolumeasdidlettersandotherfirstclassmail.By2008,firstclass advertisingandstandardmailhadincreasedto60%,whilefirstclassmailexclusive ofadvertisinghadfallento35%. ThispaperarguesthatthePostalServiceshouldcutdeliveryfrequency,butthatit shouldalsoofferalternatives.Morebasically,itarguesthattherealchallengeUSPS facesistodevelopandimplementanewbusinessmodel,onethatenablesitto adjusttorapidlychangingmarketsandtechnologieswhilestillmeetingitsbasic obligationtoprovideaffordableuniversalservice.ItendorsestheGAOsadviceto restructureUSPSsoperations,networks,andworkforcetoreflectchangesinmail volume,useofthemail,andrevenue,butitalsourgesconsiderationofnew approachestopricing,ofnewsourcesofrevenue,ofanewbargainwiththe workforce,andoftheinstitutionalizationofopensourceinnovation.2Firstthough,it examinestheargumentthatitisnotnecessarytocutthefrequencyofdeliveryor makeothermajorchangeinthebusinessmodelbecausetherearewaystoboost volume. 2Inmakingtheserecommendations,theauthorwishestonotethatheisnotanexperton

postalserviceoperationsorbusinessmodels.Infact,heisnotanexpertonanythingso muchasageneralistwhohasworkedinmanydomains.Yet,expertsareoftensurprisingly wrongintheirpredictions;witnesstheintelligencefailuresregardingweaponsofmass destructioninIraqandthemistakesoffinancialregulatorsregardingtherisksofmortgage backedsecuritiesandderivatives.Inhismuchpraisedbook,ExpertPoliticalJudgment, PhilipTetlock,borrowingfromIsaiahBerlinsfamousprototypesofthefoxandthe hedgehog,arguesthatthefoxthethinkerwhoknowsmanylittlethings,drawsfroman eclecticarrayoftraditions,andisbetterabletoimproviseinresponsetochangingevents ismoresuccessfulinpredictingthefuturethanthehedgehog,whoknowsonebigthing, toilsdevotedlywithinonetradition,andimposesformulaicsolutionsonilldefined problems(fromtheinsideflapofthedustjacket).Thusencouraged,Ihopethefollowing contributessomethingusefultothecurrentdiscussionaboutthechallengesUSPSfacesand howbesttomeetthem.

BoostingVolumeanditsLimits ItisnodoubttruethattherearemeasuresthePostalServiceandothergovernment organizationscouldtaketoincreasemailvolume.ThePostalServicesrecent summersaleandvolumediscountsaregoodexamples.Bothappeartohavebeen quitesuccessful. Thereareatleastthreeotherpossibilitiesforboostingvolumeoratleastslowing itsdecline.Oneisvotingbymail.Thiswouldhelpbutisnotapanacea,forevenifall voterswererequiredtovotebymail,therearenotenoughballotscasteachyearto increasemailvolumesbymorethanonepercent.Moreover,votingovertheInternet mayreplacevotingbymailbeforelong.Nevertheless,theexpansionofvotingby mailhasbeenahelpfuldevelopment,andwhileitshouldnotbeencouragedsimply toassistthePostalService,itshouldbeencouragedifitisgoodpublicpolicyonits ownmerits. Asecondpossibilityistoconsiderrequiringotherfederalgovernmentagenciesto useUSPSratherthanUPS,FedExorotherhardcopydeliveryservicesunlessthere arecompellingreasonsnotto.IwassurprisedtolearnthattheGovernmentServices AgencyhadacontractwithacompetitorofUSPSforexpeditedmail.Iamtoldthat somegovernmentgrantmakingagenciesencouragegrantapplicantstosubmittheir applicationsviaFedExorUPS,presumablybecausetheywillbedeliveredtoa specificpersonratherthantoabuildingmailroomandthusaremorelikelytoarrive bytheapplicationdeadline.ItwouldseemadvisableforUSPStoexplorewaysto offerdeliverytoindividualsinbiginstitutionsratherthansimplytomailrooms. CuriouslythesameInternettechnologythathasundercutmailvolumethroughthe electronicdiversionhasalsoopenedupsomenewopportunitiesthroughthe expansionofpostalshippingbysuchonlineprovidersofgoodsasNetflix, Amazon.com,andeBay.Yet,theseopportunitiesappearfairlylimitedoverthelong run.OnecanalreadydownloadmanynewbooksandreadthemonaportableKindle reader.AndGooglehasscannedmostoftheolderbooksinmajorlibrariesin anticipationofmakingthemavailableonlinebeforelong.Similarly,Netflixplansto downloadfilmssoon,justasAppleandotherfirmsdownloadmusic.Finally,the shippingoflargerobjectsorderedonAmazonoreBayisahighlycompetitive businessinwhichUSPSstillfacescompetitionfromUPSandFedEx. TheCuriousCaseofDoNotMail:Athirdwaytomaintainvolumeistopreventthe passageofDoNotMail(DNM)legislation.Suchlegislationisbeingadvocatedby citizenswhowishtostopthedeliveryofunsolicitedadvertisingmail.Atleast19 statelegislatureshaveseentheintroductionofbillsthepasttwoyearsthatwould requirethecreationofstateDNMregistriesanalogoustoDoNotCallregistries. Noneofthesebillshaspassed,butDNMadvocatescontinuetopresstheirclaims thatadvertisingmailharmstheenvironment,rendersrecipientsmorevulnerableto identitytheftandconsumerfraud,andisatimewastingnuisance.

Directmailmarketers,theUSPS,andthepostalunionsrespondquitecorrectlythat theenvironmentaleffectisminimal(becausemostsuchmailisrecyclable),that fraudandidentitytheftarerare,andthatdirectmailismuchlessintrusivethan callsfromtelemarketers.Theyalsomakeamorequestionablepoint,arguingthat advertisingmailisacriticalfactorinthesuccessofmanybusinessesandnonprofits, especiallysmallonesandstartups,andthereforecontributestojobgrowthand communityprosperity.True,advertisingmailwouldnotexistifthosewhosendit werenotconvincedthatitsworththeexpenseandhelpsattractcustomers.Itis wrong,however,toarguethatbecauseadvertisingmailmayhelpstartupsget establishedandbecausemostjobgrowthcomesfromtheexpansionofsmall businesses,thereforeadvertisingmailisimportanttocommunityeconomichealth. Moststartupsarenewpizzashops,drycleaners,orsimilarlyuninnovative businessesthatpaylowwages,neveremploymanyworkers,takebusinessaway fromcompetingshopstotheextentthattheydosucceed,anddoverylittleto increaseacommunitysproductivity,exports,orwealth.3Mostjobcreationcomes fromthatsmallfractionofrapidlygrowingsmallbusinessesknownasgazelles, andgazellesalmostalwaysrepresentinnovationsintechnology(Microsoft,Google), businessmodels(WalMart,Southwest),orboth(eBay,Amazon).Finally,the couponsthatoftencomeinadvertisingmailtodayareincreasinglybeingdistributed online,especiallynowthatagrowingnumberofwebsitesaggregatethemand makeiteasyforpotentialcustomerstofindthosetheywantonline. ThemainreasonthatUSPS,itsunionsandthebigmailers,opposeDoNotMail registriesistheirrealisticfearthattheywouldleadtofurtherdeclinesinmail volume.USPSestimatesthatnationalimplementationofDNMlegislationwould placeapproximately$6billionofpostalrevenueatriskannually(2008Annual Report,p.24).AlthoughstateDNMbillshaverarelygottenoutofcommittee,the mailingcommunityfearsthatonceonepasses,otherstateswouldfollow.Some DNMopponentsthereforearecallingforfederallegislationthatwouldpreempt statejurisdictioninthiscase,doingsooninterstatecommerceorothergrounds. ThispaperdoesnottakeastandontheDNMissue.Thereasonithasgoneintothis muchdetailaboutitistomakeacriticalpoint,namelythatanorganizationthat justifiesitsmonopolyonpublicservicegrounds(bindingthenation,etc)has becomesodependentonvolumeregardlessofitspurposethatitfeelsforcedto justifyanddefendatypeofmailservicethat52%ofthepublicviewasabigor verybigintrusionintheirlives.4
3SeeTheIllusionsofEntrepreneurship,byScottShane(YaleUniversityPress,2008).

4AccordingtotheCongressionalResearchServiceReportonDoNotMailInitiatives,

(updatedSept.24,2009),a2003PewInternetandAmericanLifeProjecttelephonepollof 2,200adultsfoundthat19%ofrespondentsthoughtunsolicitedadvertisingmailwasa verybigintrusionintheirownlife;33%foundunsolicitedadvertisingmailabig intrusion,and29%saiditwasasmallintrusion.

USPSalreadydelivers45%oftheworldsmailinacountrythatconstitutes5%of theworldspopulation.Yet,itseekstomaintainmailvolumesinordertocoverthe relativelyfixedcostsofasystemcharacterizedbyexcessivecapacity.Thismakes sensefornewservicesthatmeetrealneeds,suchasreturningunusedmedications orelectroniccomponents,orservingasacomplimenttonewmarketssuchasfilms sentbyNetflix.Itmakeslesssenseifvolumeisincreasinglysustainedbymailthat doesnotmeetrealneedsandisnotdesiredbyitsrecipients. Thecounterargumentisthatadvertisingmailissustainingthesystem,andthat withoutitthesystemwillnotbeabletoprovideuniversalserviceatcurrentrates withoutpublicsubsidies(becausethefixedcostsaresohigh).Thatistrueifthe existingbusinessmodelistakenasagiven,butthebusinessmodelcouldchange. Thatmaybedifficultpolitically,giventheunderstandableinterestsofthesystems currentstakeholdersthemailers,unions,suppliers,andpublicinmaintaining thestatusquoofhighvolume,lowpostalratesandalargeworkforce. ButevenifthosecommittedtothestatusquocansquelchtheDNMmovement,they arehighlyunlikelytobeabletostoptheongoingdeclineinmailvolumes. Consequently,thePostalServicemustcutcostsand/ordevelopnewrevenue sources,andtodothatitmustdevelopanewbusinessmodelonenotpredicated onrisingvolumes. ChangingtheBusinessModelI:Pricing Lowerbusinessvolumeisnotalwaysproblematic.Somebusinessesmakehealthy profitsbytargetingthosesegmentsofthemarketthatarewillingtopayhigher prices.NewsweekMagazinerecentlyannouncedthatitisgoingtodoublethepriceof itssubscriptionsoverthenexttwoyears,knowingthatcirculationwillfallbut believingthattotalrevenueswillrise.Inshort,itisshiftingitsbusinessmodelfrom onebasedonlowmarginsandhighvolumetoonebasedonhighermarginsfroma smallerbutmorecommittedbaseofcustomers.Itisshiftingtovaluepricing. Starbuckshasmanagedtohavethebestofbothworlds,highmarginsandhigh volume,byfranchisingstoresthatreliablyproduceexceptionallygoodcoffee.It helpsthatmanyoftheirshopsarepleasantplacestorelaxandenjoytheexperience. Europeanpostalservicesdemonstrateavariationonthisapproach.Mailvolumes, evenafteradjustingfortheirsmallerpopulations,aremuchlowerthanintheU.S., butstamppricesaremuchhigher,enablingthepostalservicestocontinue providingtheirversionsofuniversalservice.IntheU.S.,however,thedefinitionof universalserviceincludesaffordable,andthe2006PAEAlimitspriceincreaseson USPSsmarketdominantproductstotheurbaninflationrate.

RemovethePriceCap:Thiscaponpricehikesmakeslittlesenseforthreereasons. First,thePostalServicehaslittlecontroloveritscosts.Itisobligatedtodelivermail sixdaysaweektoagrowingpopulation.Risingfuelcostsareasubstantialcost driveroverwhichithaslittlecontrol,andthecurrentdeficitshavecurtailedits initiativestoinvestinmorefuelefficientvehicles.Buttherealissueislaborcosts. Nearly80%ofthePostalServicesexpensesareforlabor;muchofthatlaborishard toreplacewithcapital;andcompensationisdeterminedthroughnegotiationswith powerfulunionsandmandatoryarbitration. Theclassicsolutionistoincreaseproductivitythroughautomationthekindthat allowsautofirmstoproducethesamenumberofcarstodayas30yearsagowith halfthenumberofworkers.TheproblemisthatthePostalServicehasalready greatlyautomatedthepartofmailservicethatlendsitselftomechanization:mail sortingmostrecentlythroughtheintroductionofintelligentmailandthe machinesortingofflats.Itishardtoseehowitcanautomatedeliveryofhardcopy mailto150milliondeliverypointseachday.Andweknowthatitisveryhardto increaseproductivityinfieldsinwhichservicesareprovidedtoindividual customersoneatatime,fieldsliketeachingandnursing.Thatisoneimportant reasonwhyeducationandhealthcostshaverisenfarfasterthanthegeneral inflationrate. Second,thePostalServicesmonopolyonlettermailandexclusiveaccesstopost boxesdoesnotmeanthatitenjoysthenormalpowerofmonopoliestosetprices. ThefactisthatelectronicmailandtheInternethavegivenusersofthemailcheap andrapidoptionsforcommunicatingandpayingbills.True,atcurrentprices,many businessesandnonprofitscontinuetofavorhardcopymailforadvertisingand fundraising,buttheirusageisquitepricesensitive.Andsincestandardmailand firstclassadvertisingmailconstitutemorethan60%ofthemailtoday,thePostal Servicehasabuiltinincentivenottoraisepricesarbitrarily,leasttheycauseeven morerapiddeclinesinvolumethanwouldoccurotherwise. Finally,evenifthelegislatedpricecapwerelifted,thePostalRegulatory Commission(PRC)wouldstillhavetoapproverequestsforrateincreases,thus assuringprotectionofthepublicinterest.TheremaybemorethePostalService coulddo,evenwithincurrentlaw.AsPRCCommissioner(andchairdesignate),Ruth GoldwaynotedinSenatetestimonyAugust6th:Postalproductscontinuetobe shapedbyhistoricclassdifferences,largelyinplacesincethe1920sthatmaynot makesensetoday.Potentiallynewmarketscouldbedevelopedaroundhybrid productsthatcombinecharacteristicsbetweenclassesforexample,astandard mailproductwithguaranteeddateofdelivery. ThePostalServiceshouldgiveseriousconsiderationtothissuggestion,butevenifit makestherecommendedchanges,theywouldnotsubstituteforremovingtheprice cap.Tobesure,liftingthepricecapwouldnotsolvealltheproblemsthePostal Servicefaces,butitwouldfreeittotestthemarketinpromisingways.

RedefineUniformPrices:Arelatedissueisuniformprices.Thecurrent interpretationseemstobethatuniformmeansthatpostalratesmustbethesame forallletters,regardlessofthedistancetheytravel.Thatisbadbusinesspolicy becauseefficientpricesreflectrealcosts.Itisalsobadenvironmentalpolicybecause oneoftheexternalitiesintransportingmaillongdistancesishigherCO2emissions. Thispaperrecommendsanalternativeinterpretation,onethatdefinesuniformas chargingthesamerateforthesamedistancetraveled.Thereisampleprecedentfor suchashift.Inthe1930sand1940s,thePostalServicechargedaslightlyhigher priceforthedeliveryoflettersoutsideacitythanwithinit.Later,itchargedhigher pricesfordeliverybyair.Therationaletherewasthatcustomerswerevoluntarily payingextraforfasterdelivery,butthepricinglogicwasthesame:highercosts warrantedahigherprice.Andthecostofshippingpackageshasalwaysbeena functionofdistancetothedestinationaswellasweight. ThePostalServicemaynotwanttoestablishdifferentratesfordifferentdistances, giventheadministrativecomplexities,thoughitisalreadydoinginawaywithits destinationentrydiscounts.TheargumenthereissimplythatthePostalService shouldhavetheflexibilitytoaligncostsandpricesmoreeffectively.Aswithprice hikes,thePRCwouldstillbeabletoprotectthepublicagainstabuse. OfferFreePostOfficeBoxes:Theargumentforstructuringpricestobetterreflect real(marginal)costsappliesalsototherentingofpostofficeboxes.Atpresent,the PostalServiceprovidesfreedeliverytoresidentswholivelongdistancesfromthe postoffice,butchargesthosesameindividualsamonthlyfeetorentaboxatthe postoffice,eventhoughmostpostofficeshaveunusedrentalboxesandcouldadd morefairlyeasily.TheexplanationisthatundertheUniversalServiceObligation, thePostalServiceisrequiredtoprovidefreeresidentialdeliverytoall,butthatpost officeboxesrepresentdiscretionarysupplementalservicesforwhichafeemaybe charged.5 ThePostalServiceshouldconsiderofferingfreepostofficeboxestoanyonewilling togiveupfreedeliverytotheirhomeorplaceofbusiness,forclearly,itischeaper forthePostalServicetoputthemailinapostofficeboxthantodeliverit. Alternatively,itcouldofferfreepostofficeboxestothosewillingtovolunteerfor gettingthemaildeliveredtotheirhomeorbusinessone,twoorthreetimesaweek. Inshort,thePostalServiceshouldexperimentwiththemarketforalternative deliveryschedulesandpackages.Theycouldofferspecialincentivesstamps, shippingdiscounts,etc.tothosewhosavethemmoredeliverytime(becauseof 5Ruraldeliveryserviceisnotprovidedtocustomershomesthatarewithinaquartermile

radiusofthePostOffice,unlessthosehomesareonthedirectlineoftraveloftherural carrier.Customerswithinthisradiuswhosehomesarenotonthecarrier'slineoftraveldo nothavetorentaPostOfficebox.Theymayplacearuralboxonthecarrier'slineoftravel, ortheymayelecttoreceivemailfromaPostOfficebox(GroupE)withoutcharge. (P.O.250, ConsumerAnswerBook)

theirlocation).Theycouldalsovarythepostofficeboxfeechargedtopersonswho donotsurrendertheirhomeorbusinessbox.(Theywouldhavetochargeeveryone thesamefeeforthesamesizebox,buttheycouldraisetherateifdemand outstrippedsupply,whichcouldwellhappenasmorepeopleaccepttheofferofa freepostofficebox(available6daysaweek)asasubstitutefordeliverytotheir homeorbusiness.)Thelargerthemeistoexperimentwithcustomization. Theinterestinpostofficeboxeswillgrowifthefrequencyofmaildeliverytohomes andbusinessesdeclines.Rightnow,thediscussionislimitedtoeliminatingSaturday delivery.Yet,thefactthat80%ofconsumersarepreparedtoacceptfivedayaweek deliverysuggeststhatmany,perhapsamajority,wouldbecontentwithevenlower frequencies,suchasthreedaysaweek.6Iwilldiscussthisinmoredetailbelow, includingthepossibilityofindividualsvolunteeringforreduceddeliveryfrequency. Thepointhereistonotethepossibilitiesforencouragingpublicwillingnessto acceptlessfrequentdelivery,whethervoluntaryornot.Thatismorelikelyifthey haveattractiveoptions. True,thesavingsondeliveryexpensesareminimalaslongasthepostalworkerhas totravelthatrouteanywaytodelivertomanyothersonit.Overtime,however,the numberofmailrecipientswhogiveupdeliverytotheirresidenceorbusinesswill rise,boostedbysocialcontagioneffects.Eventually,wholeblocksorstreetswill disappearfromthedeliverynetwork.Eachtimethathappens,thePostalServicewill realizesignificantsavings,andthelongtermcumulativeeffectcouldbeenormous. Thereisoneotheradvantagetoencouragingmorepeopletogettheirmailatthe postoffice.Ifpeoplecomeintopickuptheirmail,theyaremorelikelytobuyother productsorservicesthatthePostalServicesellsonsite.Therevenueimpactwould dependonwhetherthePostalServiceisabletooffernewproductsandservicesfor saleatitspostoffices,apossibilitydiscussedinthenextsection.Thepointhereis simplythatpricingcantakemanyforms,includinglossleadersthatincreasethe trafficinretailoutletsandexposecustomerstomanyotherpossiblepurchasesthat makemoneyfortheestablishment.Afreepostofficeboxcouldactasalossleader andthusrevenuegeneratoraswellasameanstoreducingdeliverycosts. Valuepricingraisesotherquestionsthatcannotbeaddressedhere.Forexample,a potentialdownsideofhavinglargenumbersofpeoplepickuptheirmailatthepost officeisthenegativeexternalities.Thereissocietalefficiencyfromthenumberof personhoursspentandtheamountoffuelconsumedtohavingthePostOffice deliverthemailintenminutestoeveryoneontheblockvs.someoneineach householdorbusinesstravelingtothepostofficetopickupthemail.Thus,themain pointissimplythatUSPSshouldinvestigatethepotentialthatvaluepricingoffers. 6MaryAnneGibbons&LindaKingsley,SustainingUniversalPostalService,PowerPoint

slidesforapresentationattheNationalPostalForum,May,2009,p.15. (The2009GallupPollshows66%favoringorstronglyfavoringdeliveryfivedaysaweek.)

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ChangingtheBusinessModelII:NewProductsandServices Tospeakofbusinessmodelchangesnormallymeanstospeakofnewvalue propositions.Classiccasesoffirmsthatthrivedbyvirtueofbusinessmodel innovationareMcDonald's,Toyota,WalMart,FedEx,Blockbuster,HomeDepot,Dell Computer,SouthwestAirlines,Netflix,eBay,Amazon.com,andStarbucks.Poorly thoughtoutbusinessmodels,ontheotherhand,explainthedemiseofmany dotcomsinthelate1990s. Manynewbusinessmodelstodayusetechnologyininnovativeways,especiallythe Internet.Googlegivesawayitsbasicsearchserviceintheexpectationofattracting enoughcustomerstomakeadvertiserspaythecosts.OtherInternetservice providersgiveawayabasicserviceintheexpectationofsellingattractiveupgrades orbychargingthehotels,airlines,orotherfirmstowhomtheyattractcustomers. ThePostalServicelacksthefreedomofprivatesectorfirmstoradicallychangeits valueproposition,buttherearenewservicesitcouldofferandnewwaysbywhich itcouldprovideexistingservices.Tobesure,itfacespressurestosticktoits knittingfromsomepowerfulquarters.Yet,thecurrentfiscalcrisismakeschange imperative,andthusrepresentsanopportunitytopressforgreaterfreedomto changethewayitdoesbusiness.Thissectionproposesthreenewwaystodoso.It doesnot,however,discusssuchpossiblenewretailventuresassellingsnacksvia vendingmachines(becausetheprofitswouldgotheblind,notthePostalService),or sellinggreetingscardsorpostcards(becausethePostalServiceisalreadyexploring thesepossibilities). Firstthough,itisusefultodistinguishbetweentwotypesofnewproductsand services.Onegeneratesadditionalnetrevenuebysellingnewproductsandservices, intheprocessleveragingtheexistingsunkinfrastructureandstaffcosts.The secondtypeservesasasubstituteforexistingservicesthatarenotprofitable,thus reducingcostsaswellasgeneratingrevenue.Thefirsttypeisillustratedbythefirst twoproposalsbelow,theothertypebythethirdproposal. FederalAgencyInformationOneStops:TheU.S.PostalServiceownsmostofits morethan32,000retailoutlets.Withmailvolumesandrevenuesdown,therehave beenseveralsuggestionsforrepurposingthisexistingandoftenunderutilized capacity.ThePostalServicedemonstrateditscapacitytoplayimportantotherroles duringthecrisisstemmingfromHurricaneKatrina,andnodoubt,postalworkers couldbetrainedtoplayalargerroleinemergencymanagement.Yet,suchevents arerare,sothequestionremains,whatotherpublicpurposescouldbewellserved bytakinggreateradvantageoftheexistingpostalcapacity. Onepromisingansweristohavepostofficesserveasmultipurposefederal informationonestopoffices.ThePostalServicealreadyhasapresenceinmost communities,sowhynotuseittoextendthepresenceofotherfederalagencies? Postofficesalreadyserveasplaceswherepeoplecanapplyforapassportand

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obtainfederaltaxforms.Yet,theycoulddomuchmore.Theycouldofferuser friendlycomputerstationsthatprovideinformationonavarietyoffederallyfunded servicesandbenefits,fromemploymentservicestoservicesforthedisabled,from foodstampstoPellgrants,andfromMedicaidtoMedicare.Thetakeupratefor manyoftheseservicesandbenefitsislowerthanintended,andthefederalagencies involvedspendlargesumstomakecitizensawareoftheirrightsandeligibility. ThustheymaybepreparedtopaythePostalServicetohelpthemwithoutreach. Librariesalreadyprovidesomesuchservicesthroughthecomputerstheymake availabletothepublic.Yet,farmorecouldbedone.Thefederalagenciesinvolved coulddevelopanintegratedsoftwarepackagethatfacilitatessuchsearching.The PostalService,inturn,couldtrainoneormorestaffateachpostofficetoprovide effectivehelptocustomersastheysearchforinformation.Theycouldalsoassist thosewholackcomputerandInternetsearchskillstodevelopthem,andtheycould advisethemaboutotherservicesofpossibleinterestandaboutthelocationofthe relevantprogramsclosestoffice.Accesstoinformationisofcriticalimportancein todaysinformationage,andthePostalService,anorganizationthathaslong specializedinthecommunicationofinformation,iswellsituatedtohelp. ThechallengeforthePostalServiceisnotsimplytogetotherfederalagenciesto cooperate.Itistogetthemtopayitforprovidingsuchservice,sincepresumablythe servicewouldbeprovidedforfreeoraverynominalfeetocustomers.Willthe federalprogramsthatarethebestcandidatesconsideritagoodvalueproposition, andwilltheWhiteHouseencouragethemtoparticipate?Theanswersare unknown,sothefirststepmaybetoaskOMBtoformaninteragencycommission thatincludesselectedoutsideexperts.Thechargetothiscommissionwouldbeto figureoutthecostsandbenefitsofturningpostofficesintofederalinformationone stopsandtomakerecommendationsfornextsteps,oneofwhichmightbeapilot projectinoneortwocities. PostalSavingsAccounts:InaspeechonApril14,2009,PresidentObamacalledon ourcountrytolayanewfoundationforgrowthandprosperityafoundationthat willmoveusfromaneraofborrowandspendtoonewherewesaveandinvest.On September5,heannounceseveralnewinitiativestoincreasesavings,including regulatoryreformsandlegislativeproposals. Oneproblemisthat16%offamilieslackbankaccounts.Researchshowsthatthey findnormalbankaccountsexpensive(especiallytheoverdraftfees),inconvenient, andinhospitable.Consequently,theycashtheirpaychecksattheofficesofpayday lenderswhochargehighfeesandpeddlesmallloansatexorbitantratesofinterest. Furthermore,lackingbankaccounts,theycannottakeadvantageofopportunities forthedirectdepositoftheirpaychecks,taxrefunds,orotherbenefitpayments (unemploymentinsurance,welfareanddisabilitypayments,etc.)muchless accumulatesavingsininterestbearingaccounts.

12

Theseproblemsaremostpronouncedamongthe22.5%ofAmericanhouseholds and27.3%ofhouseholdswithchildrenwhoareassetpoor. 7Accordingtothe CFED8,ahouseholdisassetpoorifithasinsufficientnetworthtosubsistatthe federalpovertylevelforthreemonthintheabsenceofincome,duetojoblossor spousalabandonmentforexample,orifnormalincomeisconsumedbymedicalor otherabnormalexpenses. Thevalueofsavingsgoesbeyondprovidingacushiontoweatherhardtimes,for savingsarethefirststeptoacquiringassetsthatcanappreciate.Anditisthrough theownershipofappreciatingassetsahome,asmallbusiness,acollegeeducation, orstocksinaretirementaccountthatmillionsofAmericansachievefinancial securityandupwardmobility. AgrowingbodyofresearchdemonstratesthatmanypoorAmericansarecapableof savingaportionoftheirincomeiftheyhaveaplaceandencouragementtodoso. Andoncetheyaccumulatesomesavings,theytendtoadoptmorepositiveattitudes aboutthemselvesandtheirfutureandtoplanandraisetheirchildrenaccordingly. Inshort,itisinthepublicinteresttopromotesavingsamongthepoor,because savingsprovideacushioninhardtimes,makingrecoursetowelfareand homelessnesslesslikely,andtheacquisitionofappreciableassetsfacilitates movementintothemiddleclass. USPSisinagoodpositiontohelp,andintheprocesstodevelopapromisingnew sourceofrevenueforitself.Theideaistoofferpostalsavingsaccountsthatpaya modestrateofinterest.ThePostalServicewouldmakemoneybypoolingthefunds frommillionsofsmallaccountsandhiringprofessionalinvestmentmanagersto investthemoney.Theseinvestmentscouldbemanagedthewaymoneymarket fundsaremanaged,withtheFDICorsomefederalregulatoryagencyguaranteeing accountholdersagainstthelossoftheirprincipal.Thedetailswouldneedtobe workedoutwiththeTreasuryDepartment,banks,creditunionsandothers.Itwould bedesirabletoconductsomepilotsbeforetryingtogonationalwiththeprogram. Infact,thePostOfficeDepartmentofferedgovernmentbackedsavingsservices from1911to1966.9Thepurposewastoprovidesafesavingservicestomoderate 7SeetheCFEDs20092010Assets&OpportunityScorecard,ExecutiveSummary,p.9,at http://scorecard.cfed.org. 8Intheinterestoffulldisclosure,Iamafulltimeemployeeofanonprofit,CFED,that

promotesassetbuildingforlowincomeAmericans.CFEDhasnottakenapositiononpostal savingsaccounts,butdoessupporteffortstogettheunbankedbanked,doespromote individualdevelopmentaccounts,anddoeslobbythefederalgovernment.

13

depositorsandcommunitieswithoutbanks,andalsoto:offerimmigrantsthe familiarityofpostalsavingaccountscommoninmanyoftheirhomecountries; encouragethriftamongtheworking,poorandchildren;andposenocompetitionfor banks.Toplacatethebankingindustrysconcernslegislatorsbuiltinacapon depositsandrelativelylowinterestrates.10 Offeringtheconvenienceandreliabilityofthepostoffice,postalsavingsaccounts attracteddepositorswithoutanyadvertising,andtotalsavingsexceededonebillion dollarsby1933.ThesystemcontinuedtoflourishthroughtheSecondWorldWar, butby1948higherinterestratesandprovenreforminthebankingsectorbrought aboutadownwardtrendforpostalsavingsfromwhichthesystemdidnotrebound, andCongressabolisheditin1966.11 Nodoubtthebankingindustrywouldresistaninitiativetoreestablishpostal savingsaccounts.Tocounterchargesofunfaircompetition,thePostalServicewould probablyhavetoacceptlimitsontheamountofsavingsinanaccountandonthe interestrateoffered.Undertheseconditions,andgiventhenewworldofubiquitous ATMsandonlinebanking,demandforaccountsmightbequitelimited.Thus,itisfar fromclearthatthePostalServicecouldgeneraterevenuesinexcessofthemarginal expensesinvolved,thoughthelatterwouldbelow,sincethebuildingsandmostof theneededstaffarecostsalreadybeingincurredtoprovideotherservices.Thus, thispaperisnotrecommendingadoptionofanewpostalsavingssystem,butrather carefulinvestigationofthemarketforsuchservices.Italsorecommendsstudiesof similarsystemsinothercountries,andoftheexperienceoftheU.S.PostOfficeitself between1911and1966. Finally,thispaperrecommendsexploringthepossiblecaseforfederalsubsidiesfor suchasystem,oratleastforconductingthesuggestedstudiesandpilots.Foratthe endoftheday,theprimaryargumentforpostalsavingaccountsisnottogenerate revenueforthePostalService,buttohelpachievesuchexistingpublicgoalsasthe curtailmentofpredatorylending,thefacilitationofsavingsandinvestment,andthe movementofpoorAmericansoutofsituationsoffinancialinstability,familystress, anddependenceonpublicsupport.TheU.S.DepartmentsofDepartmentsofHealth andHumanServices,Agriculture,Treasury,andJustice,alreadyspendsubstantial sumstoachievesuchgoals.IfmodestexpendituresbythePostalServicewouldhelp thoseprogramsreducecostsorachievebetterprogramoutcomes,thefederal governmentshouldbeinterestedinfinancingthoseexpenditures. 9Theinformationandquotesinthisparagraphcomesfroma2006articlebyLynn
HeidelbaughthatisavailableonthewebsiteoftheU.S.PostalMuseum: www.postalmuseum.si.edu/museum/1d_PostalSavings.html


10Ibid. 11Ibid.

14

HybridServices:Recentadvancesinscanningandsecuritytechnologiesmakeit possibletoscanmailatthepostofficeoforiginandoffertheaddresseethechoice betweenelectronicandhardcopydelivery.EarthClassMail,Inc.forexampleoffers aservicethroughwhichcustomerscangoonline,viewcolorimagesofthefronts andbacksofmailedenvelopes,andthendecidewhichitemstohaveopenedand securelyscannedsotheycanreadthecontentsonline,andwhichitemsshouldbe recycled,shredded,archived,orforwardshippedtothemwherevertheyrelocated allwithafewclicksofamouse.12 ThemoneymakingSwissPostOfficealreadyoffersthisservice.Itistooearlyto evaluateitsexperience,butoneinterestingfindingtodateisthatthreequartersof themailendsupleavingthatfirstsortingcenterboundstraightforrecycling,either afterbeingscannedtoPDFordiscardedunopenedbycustomerschoice.13The implicationsareenormous.Itstandstoreasonthatmanysubscriberswouldagree toareducedfrequencyofdeliverytothedoor,especiallyifofferedaslightdiscount ontheirhybridservicefees.Theoptionofsuchaservicemightmakeitpossibleto winapprovalfordeliveringhardcopymailjustthreetimesaweek,whichinturn wouldgreatlycutdeliverycostsforlabor,vehiclesandfuelwhilealsoreducingthe environmentaldamagethathomedeliveryentails. Muchwoulddependonthedemandforhybridservice,whichinturnwoulddepend onthecostsofprovidingit.Initially,demandmightbelimitedtoprofessionalsand managerswhotravelalotandtakelaptopswiththem,andtobusinessesand individualsforwhomspeedydeliveryisimportant.Yet,asnumbersgrewand economiesofscalekickedin,itisconceivablethatalargeportionofthepopulation wouldsubscribe,justastheydotocabletelevisionandhighspeedInternetservices. WouldsuchaservicehelpthePostalServicebefinanciallyselfsufficient?Ifitledto threedayperweekdeliverytotheentirepopulation,theanswerisprobablyyes.If itpromptedmanypeopletosurrendertheirhomedeliveryboxesinfavoroffree postofficeboxes,itmight.Ifthenumberofsubscriberswashighandmanyofthem agreedtohardcopydeliveryathomeonlywhenrequested,itmight,giventhe potentialfordynamicrouting.Aswithsomanypossibleinnovations,itwouldbe importanttofieldtestvariousservicepackages. Oneconcernisthatsuchaservicewouldsimplyhastentheshifttoelectronic communication.Mosthardcopymailoriginatesasanelectronicdocumentthatwas laterprinted.Iftheprintedversionisdeliveredelectronically,whybotherwith andincurtheexpensesoftheintermediatestagesofprintingandscanning?Andif electroniccommunicationdisplaceshardcopymailing,whatfutureistherefor 12EarthClassMailstatementaboutitsserviceonitswebsite:www.earthclassmail.com
DeathoftheU.S.PostalService?intheMayJune2009issueofTheAmericanInterest.

13GeorgJensen(pseudonymauthorsnameunknown),GoingPostal:TheImminent

affordableuniversalservicetothosewhostilldependonhardcopymail?What futureisthereforthePostalServiceitself?

15

Theseareimportantanddifficultquestionsthatdeservefardeeperexamination thanthispapercanprovide.Nevertheless,Iwillofferafewthoughts.Electronic diversionisadvancinginanycase,andevenstandardmailislikelytodeclineinthe faceofimprovedcustomertargetingtechniquesandelectronicoptions. Indeed,hybridmailmayspeedupelectronicdiversion,butitisworththerisk, becauseitwillfacilitatetheneededtransformationofUSPSintoamoreinnovative andadaptiveorganization.Thattransformationisunlikelytotakeplaceunlesssome newforceisunleashed.Itisunlikelybecausethemailersandtheunionsaretoo powerfulpoliticallyandhavetoobigastakeinthestatusquo.Ataminimum,the PostalServiceshouldexperimentwithhybridserviceinsomelocalities. ChangingtheBusinessModelIII:TowardaNewWorkforceBargain Tobesure,theunionsareinadifficultposition.Laborcompensationaccountsfor almost80%ofUSPSsexpenses,andtherecentdeficitsarecreatingimplicit pressureontheworkforcetoconsiderreductionsinpayandbenefits.Some observersarguethatmanypostalworkersarealreadypaidmorethantheir counterpartsintheprivatesector,thattheirjobsaremoresecure,andthattheir retirementbenefitsmoregenerous.Otherspointtothefactthatthecontributions ofpostalworkerstowardsthepremiumsfortheirinsurancebenefitsaresmaller thanthecontributionsofotherfederalworkers,andthatpostaljobsarehighly coveted,asevidencedbythenumberofapplicantsforeveryopening. Atthesametime,theunionshavecooperatedwellwithUSPSmanagementonthe neededdownsizingoftheworkforce.Overthepastseveralyears,thepostal workforcehasbeencutfromits1999highof803,000careeremployeestoacurrent figureof623,000.InhisAugust6testimony,PMGPotterindicatedthatfurthercuts areinstore,quitepossiblytoalevelof550,000.Todate,allthereductionshave beendoneviaattrition,andtheagedistributionoftheworkforcesuggeststhatthis willcontinuetobethecase.Thatdoesnotmean,however,thatthedownsizinghas beenpainlessforpostalworkers,forithasinvolvedmanyadjustments,including reassignmentstodifferentroutes,jobsandlocations. Thechallengeformanagementistocontinuetoworkwellwithitsunionsonfurther downsizingitsworkforcewhileobtainingreasonableconcessionsonwages, benefits,andworkrules.Inthepastpressingforconcessionshasleadto breakdownsinnegotiationsandthusbindingarbitrationascalledforbythe

16

relevantlaws.14USPSmanagementbelievesthatbindingarbitrationtendstoratify thestatusquo,asarbitratorsseektobalancethedemandsofthetwoparties. PostalServiceexecutiveshavetriedtopersuadetheunionsthatmailvolumesare notgoingtorecover.Theyhavetriedtoenlistunioncooperationinthecreationofa newpostalservicethatmayemployfarfewerworkersthanitdoesnowbutthatwill beviableinthelongterm.Itismyviewthattheycoulddostillmore.Intheprocess, theyshouldemphasizethattheonlyalternativeforUSPSistopursuecostcutting strategiesthatincludesharingthepain.Inparticular,thePostalServiceneedsto convincetheunionstoacceptproductivitybargaining,aformofcollective bargainingthatyieldsagreementsunderwhichpayraisesareconditionalon changesinemployeeworkingpracticesdesignedtoincreaseproductivity. Persuadingtheunionstoacceptsuchchangeswillrequirethetacitcooperationof Congress,theAdministration,andothers.Thatwillnotbeeasyatatimewhenthe House,theSenateandtheWhiteHousearecontrolledbyDemocratswhoenjoyed strongsupportfromthepostalunionsinrecentelections.Yet,Ibelieveitispossible intodaysclimateoffiscalcrisis.Note,forexample,thattheAdministrationhas madecertainkindsofstatefundingforeducationunderthestimulusbillconditional onnewteacherevaluationsystems(basedinpartonstudentachievement),even thoughsuchsystemsarestronglyopposedbythepowerfulteacherunions. TopersuadetheunionsandtheirpoliticalallieswillrequireUSPSmanagementto makeitscaseaggressivelynotonlytotheunions,theAdministrationandkey Congressionalleaders,buttopostalemployeesandthepublic.Toengageemployees andthepublicinanopendiscussionaboutthechallengesthetraditionalPostal Servicefacesandthepossibilitiesformodernization,thispaperproposesthatUSPS makeuseofthecollectiveintelligencetechniquesdiscussedinthenextsection. DefendersofthestatusquomaypointtothefactthatthePostalServiceisoneofthe lastplaceswhereminoritygroupmembersandthosewithoutacollegedegreecan achieveamiddleclassstandardofliving.Theanswertosuchargumentsisthatif thepublicwantstosubsidizeatraditionalpostalserviceanditsemployees,itsfree todosothroughtaxfinancedappropriations.Ifnot,itneedstofreemanagementto pressforadjustmentsthewaytheBigThreeautofirmsdidwiththeirunions.The argumenthereshouldemphasizethetensionbetweenprovidinguniversalservice withoutsubsidiesANDpayingpremiumcompensationtoalargeworkforce,noting thatitshardenoughforUSPStodoeitherwithoutraisingpricesfasterthan inflation,muchlessboth,andthatinatimeofdecliningvolumeperdelivery, somethinghastogive.
agreementshavebeenreachedvoluntarily,while14requiredinterestarbitration.
14OverthecourseofthePostalService'shistorywithits4majorunions,18national

17

MakingthecaseforchangeishardbecauseasubstantialportionoftheAmerican economyisoftensaidtobedependentonapostalservicethatofferstodays servicesattodayspriceswholeindustries,frompaperproducersandgreeting cardcompaniestononprofits,publishers,andretailerswhodependoncatalogsales. Yet,weknowthatsubsidiesdistortmarketsandthatendingthemnormallyyieldsa moreproductiveeconomythatprovidesmorehighpayingjobs,notfewer. Tobesure,theadjustmentprocesscanbeverypainful,andthosehurtbyitare muchmorevocalthanthoseunknownsoulswhowillgainfromjobexpansionin industriesthatbenefitfromtheshiftindemandawayfrommailersandtheir suppliers.Thatpainisastrongargumentforbetterunemploymentinsuranceand jobtraining,butitisnotagoodargumentforsubsidizingindustriesthatthemarket nolongerwillsustainattheirtruecostsofoperating. Indiscussinglaborissues,Ihavenotaddressedtherapidlyincreasingcostsof payingretirementandhealthbenefitstoretiredpostalworkers.Alreadythe numberofpostalretireesandtheirsurvivorsexceeds450,000.Withtheongoing downsizingoftheworkforce,thisnumbermaysoonsurpassthenumberofcurrent careeremployees. Therearenoeasyanswerstothechallengeoflegacycosts,andtheonlythought thispaperhastoofferisthis.IfthePostalServicecannotpayitsbills,Congresswill finditselfunderpressuretobailoutthesystemsothatitcanmeetitsobligations. ThatpotentialshouldhelpCongressandtheunionstoappreciatethenecessityof businessmodelchangesthatwillensurethePostalServiceslongtermviability. Thispaperhassuggestedthatonewaytochangethedebateaboutthatbusiness modelistointroducenewserviceslikepostalsavingsaccountsandhybridmail accounts,servicesthatwouldcreatenewbeneficiariesandunleashnewforcesfor additionalchange.15Thenextsectionexaminesamoresystematicandmodernway ofpromotinginnovationandadaptation. ChangingtheBusinessModelIV:OpenSourceInnovation Throughoutthispaper,Ihavealludedtotheimportanceofinnovationand adaptabilitywithoutdiscussinghowalarge,bureaucraticorganizationcandevelop suchtraits.Theshortansweristoopenuptheinnovationprocessandharnessthe creativityofemployees,customers,andotheroutsiders.Thisisrelativelyeasytodo withtodaysWeb2.0technologies,butitrequiresawillingnesstobetransparent andtakerisks. 15Ihavenotdiscussedothernewproductsandservices,suchastheexpansionofservices

forthesafedisposalorrecyclingofunusedmedicationsandoldcellphones,computersand relatedequipment,becauseUSPSisalreadylookingintothese.

ConsiderthecaseofAmazon.com.InthewordsofJohnKao,authorofInnovation Nation:

18

Amazon.comschiefexecutive,JeffBezos[shook]thefoundationsofbusiness whenheandhistopteamdebatedwhethertoinviteoutsiderstosharethe$7 billiononlineretailersmostvaluableassetahugedatabasecontaininga decadesworthofcustomerreviews,prices,salesrankings,inventories,and soforth.ThewasthetreasureAmazonhadspentmorethan$1billionto createandprotectfromcompetitors,thesecretsofitssuccessthatoutside entrepreneursandprogrammerswouldgiveanythingtoscavenge. Traditionalistswereaghast,butBezosarguedthatopeningupAmazonwas preciselythewaytocapitalizeonitsknowledge.Byallowingsmartoutsiders tosampletheinformationlikeagianthorsdoeuvretray,hereasoned, AmazonwouldinspiremanytobuildnewWebsitesthatcouldleadto potentiallyprofitablepartnershipsforAmazon.Hisinstinctwasdeadon. Morethantwohundredthousanddigitalforagershavesincerespondedtoan opendatasitecalledAmazonWebservices,whichwasstartedin2002. Aboutonethirdhaveusedthecompanysfreesoftwaretocreatehundredsof newmoneymakingWebsitesandshoppinginterfacesthatlinkAmazons eighthundredthousandindependentsellersandtheircustomers.Manyof thedigitaldevelopershavebecomeBezossmostambitiousbusiness partnersovernight.Whatwasanexperimentfouryearsagoisnowacore partofAmazonsstrategy.16 AccordingtoKao,Amazonsbreakthroughwascontagious.Hepointsinparticular tothesuccessofLinux,notingthattheworldwideprogrammersworking voluntarilytodevelopthisopensourcesoftwarehavesoldamajorityofU.S. companiesonthevalueoftheirworkwhichisgivenawayfree.Amajorityof U.S.businessesreportreplacingMicrosoftsWindowsserversoftwarewithLinux. PerhapsthemostenthusiasticswitchertodateisIBM,whichremodeledmuchof itsbusinessaroundopensourcesoftware.17 Itisnotonlyhitechcompaniesthataremakinggooduseofanopennetworkmodel ofinnovation.Proctor&Gamble,longfamousforitsinsistenceoninventedhere products,hasannouncedthatitwantstosourcethemajorityofitsinnovationsfrom outsideitscorporatewalls.The3MCompanyclaimsthatcustomercreated innovationshavebeeneighttimesmorevaluablethanthosecreatedby3Mitself. StaplesrunsanannualInventionQuestcompetitionfornewproducts.

16JohnKao,InnovationNation(FreePress,2007),pp.16768. 17Ibid,pp.17172.

19

Allthisonlinecollaborationhasbeengreatlyfacilitatedbythedevelopmentofnew technologies,mostnotablyWikis.InKaoswords: WikisareWebsitesthatallowanyonetopostmaterialandedititinhisor herownlanguagewithoutknowingthecomplexprogramminglingorequired forpostingmaterialonline.Thewikissoftwaresremarkablefeatures spawnedthefreeonlineencyclopediaWikipedia,whichattracts45million visitorsamonth,manyofthemeagertocontributesomechunkofexpertise towhatnowweighsinat1.8millionentriesinEnglish,dwarfingthe EncyclopediaBritannicasmere120,000entries.18 Wikipediaiswonderfulexampleofthepowerandefficiencyofcollective intelligenceorcrowdsourcing.Corporationscantapintosuchintelligenceto solvespecificproblems,designnewproducts,ortestthemarketfornewservices andproducts.RecentlyNetflix,themovierentalcompany,offeredamilliondollar prizetothefirstpersonorteamthatproducedrecommendationsoftwarethatdida 10%betterjobthanitsinhousesoftware,Cinematch,ofpredictingthemovies customerswouldlike.Twoteamssurpassedthe10%bar,andNetflixhasdecided thatthecontestwassuchagoodinvestmentthatitisplanninganotherone.To quotetheSeptember21,2009articlebySteveLohrintheN.Y.Times,blog,Bits: TheNetflixcontesthasbeenwidelyfollowedbecauseitslessonscould extendwellbeyondimprovingmoviepicks.Thewayteamscametogether, especiallylateinthecontest,andtheimprovedresultsthatwereachieved suggestthatthiskindofInternetenabledapproach,knownas crowdsourcing,canbeappliedtocomplexscientificandbusinesschallenges. Therearenowacademiccentersthatfocusonhowbesttoharnessthewisdomof crowdsforparticularpurposesandunderparticularconditions.Onethatwarrants thePostalServicesattentionistheMITCenterforCollectiveIntelligence.Seein particularits2009publication:HarnessingCrowds:MappingtheGenomeof CollectiveIntelligence,byThomasMalone,RobertLaubacher,andChrysanthos Dellarocas.Theseauthorshaveconsultedwithmanymajorcorporations,andhave toldmetheyarewillingtoworkwiththePostalService. HowisallthisapplicabletotheU.S.PostalService,afederalgovernmentagency withamandatetodeliverthemailtoeveryone?Theansweriswellexplainedinits ownJune2008publication:BusinessEnvironmentAssessment:20092013.The authorsofthatreportacknowledgetheneedforanewbusinessmodelthattakes accountofrapidlychangingtechnologiesandmarkets.Theywiselycallforgreater emphasisonunderstandingcustomers,engagingemployees,miningdata,and practicingIBMstylecollaborativeinnovation.

18Ibid,p.174

20

Myimpressionisthattherehasnotbeenmuchmovementtoimplementthese suggestions.Thatisunderstandableinthecurrentcrisis,especiallygivenhow difficultitistochangelongestablishedwaysofdoingbusiness.Yet,acrisisisalso anopportunitytopushthroughneededreforms.Thus,thispaperrecommendsa crashprogram,drivenbythePostalServicesmostseniormanagers,toimplement theBEAsrecommendations. Morespecifically,itrecommendsusingthelatestcollectiveintelligencetechnologies toconductmarketresearchnotonlytoascertaintheaggregatelevelofinterestin newproductsorservices,buttoidentifyparticulardemographicandtasteniches, torefineproductsorservices,andtodevelopnewones.Forexample,askcustomers aboutreducinghomedeliveryinexchangeforfreepostofficeboxes;probetheir interestinhybridservicesunderwhatconditions,atwhatprice.Tobesure,there aresamplingissuestoresolve,butIbelievetheycanbeovercome. Onesimpleapplicationistostampdesign.Ratherthanpayingemployeestodesign stamps,sponsorconteststhewayThreadlessdoes.InThreadless,anyonewho wantstocandesignaTshirt,submitthatdesigntoaweeklycontest,andvotefor theirfavoritedesigns.Fromtheentriesreceivingthemostvotes,thecompany selectswinningdesigns,putsthemintoproduction,andgivesprizesandroyaltiesto thewinningdesigners.19Inplaceofroyalties,thePostalServicecouldofferto prominentlyfeaturethenameandphotoofthewinningdesignersonitswebsite. Thatwouldbeenoughtomotivatemanycreativeyouth.20 Bythesametoken,engagebusinessschoolprofessorsandtheirstudentsina contesttocomeupwiththebestnewbusinessmodelforthePostalServiceorthe bestwaytoinstitutionalizeopensourceinnovationthere.Thiscontestcouldbe judgedbyoutsideexpertsfromcompaniesandconsultingfirmsthatunderstand opensourceinnovationandtheconstraintsunderwhichthePostalService operates. Asforemployees,engagethemindiscussionsofwaystoimproveoperations.Once theleveloftrustisimproved,askthemalsoaboutworkrulesandthetradeoffs amongthevaluestheyplaceonvariousaspectsoftheirjobsandthecompensation forit.Ifcollectivebargainingagreementsrestrictsuchdirectmanagement communicationswithemployees,seekchangesinthem,offeringintheprocessto sharethefindingswiththeunions.(Irealizethatitseasyformetosaythat,much harderformanagementtodo.) 19Malone,LuabacherandDellarocas,HarnessingCrowds:MappingtheGenomeof

CollectiveIntelligence,(MITCenterforCollectiveIntelligence,Feb.2009)p.2.Seealsothe workofDavidBollier,authorofTheRiseofCollectiveIntelligence(AspenInstitute,2007).
20Forathoroughtreatmentoftheroleandstructureofsuchprizes,seetherecent

2009reportbyMcKinsey&Company:AndtheWinnerisCapturingthePromiseof PhilanthropicPrizes; www.mckinsey.com

21

Indoinganyofthis,itisimportanttostructureparticipation,includingtherulesand incentives,correctly,andtotesttheproceduresinsinglecities.Arecentexperiment inopengovernmentbytheWhiteHouseOfficeofScienceandTechnologydidnot goaswellashoped,inpartbecausetoomanycrackpotsparticipated.21Thisis wheregoodconsultantsoncollectiveintelligenceapplicationscanbeveryhelpful. ThegeneralpointisthatthePostalServiceshouldopenuptheconversationabout itsproducts,servicesandbusinessmodel.Suchanopeningupwillgenerate thousandsofnewideasforimprovingtheexistingsystem,andhelpdevelopforms ofmasscustomizationthatallowdifferentsetsofcustomerstooptfordifferent deliveryandservicepackages.Itwillhelpwithexploitingthefullpotentialof dynamicrouting. Openinguptheconversationwillalsoweakenthecurrentdominationofmailers andunionsinthepoliticsofpostalreform.Thosegroupslargelysupport maintenanceofthecurrentbusinessmodel.Tobesure,thereareimportant differencesbetweenandamongthem,andseveraloftheirleadersaregenuinely concernedtofindsolutionstothecurrentproblems.Openinguptheconversation wouldhelpbymobilizingbroadandtangiblesupportfornewideasthatotherwise willnotgettakenseriously.Itcouldevenleadtoaneedednationalconversation abouttheappropriatedefinitionoftheuniversalserviceobligationintodaysnew worldofdigitaltechnologiesandwirelesscommunications. ImplementingtheBEAsrecommendationsalongthelinesIhavesuggestedwill requirechangesinorganizationalstructureandanewOfficeofPostalInnovation. ThePostmasterGeneral,hisExecutiveCommittee,andotherswillknowfarbetter thanIhowtodesignthatoffice,buttheyshouldfirstinvestigatehowotherlarge firmshaveorganizedthisfunction.Clearly,itwillneedsufficientstaff,budget,and authority.Tobeeffective,itwillalsoneedconsiderablefreedomtoexploreandtest newideas.ThisOfficeofPostalInnovationshouldbeseparatefromthedepartments thathaveoverseenthedevelopmentofIntelligentMail,sortingmachinesforflats, andmorefuelefficientvehicles,forthemissionofthenewofficeislessan engineeringoneandmoreoneofdevelopingabetterbusinessmodel. ItisimportantthatanOfficeofPostalInnovationhasthefullbackingofthe PostmasterGeneralandbeheadedbyaseniorvicepresidentwhoreportstohim.It isimportantthatitsstaffnotbeboggeddownwritingreportsrequestedbyothers. Thestaffshouldconsistofcreativeandentrepreneurialindividualswhoare preparedtothinkoutsidetheboxandtousethelatestWeb2.0technologiesfor crowdsourcing.

Administration.
21SeeAppendixAforanaccountofOSTPsinitiativeandasimilaronebytheVeterans

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InadditiontoanOfficeofPostalInnovation,Irecommendtheformationofanew advisorycouncilconsistingofoutsideexpertsonbusinessinnovationandre invention.Thoseexpertsshouldincludeseasonedexecutiveswhohavebeen intimatelyinvolvedincreatingandimplementingnewbusinessmodels,suchasthe recentlyretiredCEOofSouthwestAirlines,HerbertD.Kelleher,andAmazonsJeff Bezos.Itshouldincludeleadersfromconsultingfirmsthatadvisefirmsand governmentagenciesonhowtobemoreinnovative,suchasDavidSilverstein, authorofTheInnovatorsToolkit,andPeterSkarzynski,authorofInnovationtothe Core:ABlueprintforTransformingtheWayyourCompanyInnovates. Itshouldincludeacademicexpertsonbusinessmodels,innovation,andcollective intelligence,suchasHenryChesbroughoftheHarvardBusinessSchoolandThomas Malone,thedirectoroftheMITCenteronCollectiveIntelligence.Anditshould includesomeindividualswhoarefamiliarwiththeconstraintsthatgovernment organizationsface,suchasWayneClough,theformerpresidentofGeorgiaInstitute ofTechnologywhonowrunstheSmithsonianInstitution;MichaelCrow,thevery innovativepresidentofArizonaStateUniversity;andJohnKao,whohasworked withmilitaryandintelligenceexpertstodevelopmoreopenmodelsforcollecting andanalyzingvitalinformation. Finally,itisimportanttofosteracultureofinnovationinthePostalService,onethat permeatestheentireworkforce.Thatwillrequiremorethanjawboning.Itwill requireanewincentivestructurethatrewardsfreshideasanddoesnotpenalize reasonablerisktaking.Itmayrequireacertainamountofdebureaucratizingthe organizationofflatteningtheorganizationalstructureandloosingthetopdown, commandandcontrolsystem.Noneofthiswillbeeasy.Bureaucraciesarevery efficientatthemassproductionofthesameproductorservice;theirsystemsof standardizationandaccountabilityfosterhighlevelsofpredictableandprecise performance.Theyareespeciallyappropriatewhentheyaregovernmentagencies accountabletoelectedofficialsandtheirrepresentatives. Bigbureaucraciesarenotgood,howeveratnimblyadaptingtonewcircumstances. WhenIwasaboy,wehadaneighbor,amaninhis50swhowasretiredata surprisinglyyoungageforabusinessman.OnedayIaskedmydadthestory.Hetold methatthisneighborhadenjoyedgreatsuccessformanyyearsastheCEOofa companythatmadefountainpens.Butthebusinesseventuallycollapsedbecauseits leadershipdidnottakeseriouslythechallengepresentedbytheriseofballpoint pens.Thepointis:innovationistheonlyinsuranceagainstirrelevance.22
itstraditionalapproachtocollectinganddeliveringnews,butfacesdevastatingvolumeand revenuedeclines.Foradiscussionofitseffortstoadapt,seetheOct.6NationalPublicRadio storybyDavidFolkenflik:JeffJarvis:RewritingMedia'sBusinessModel(Again),
22TodaysnewspaperindustryfacesmanyofthesameproblemsasUSPS;itiscommittedto

http://www.npr.org/templates/story/story.php?storyId=113512103.

Conclusions

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Thispaperhasnotaddressedseveralissuesthatwarrantattention.Theseinclude thegovernanceofthePostalServiceandthepossibilityofprivatization(someof whichhasalreadyoccurredthroughworksharingandoutsourcing).Theyinclude thepracticeoflongtermscenarioplanningofthetypepioneeredbyShellOil.And theyincludetherisksoflosingthelastmileadvantagethatthePostalService currentlyenjoysifitchangesitsbusinessmodelinsomeofthewaysIhave suggested. Rather,thispaperhasfocusedonthemainchallengefortheU.S.PostalService, whichistochangeitsbusinessmodel.AsthemanagementguruPeterDruckeronce said,Thereisnothingquitesouselessasdoingwithgreatefficiencywhatshould notbedoneatall.ItismyviewthatthePostalServiceshouldnotbedeliveringever fewerpiecesofmailtoevermoredeliverypointseveryday.Byseekingtoreduce thefrequencyofdeliverytofivedaysaweek,itismovingintherightdirection,but itmustmovemoreboldlyandswiftlyifitistoprosperintheemergingworldoffar lowermailvolumes. Ihavemadesomesuggestionsforcuttinglaboranddeliverycostsandforcreating newrevenuestreamsviasavingsaccounts,hybridelectronicservices,andhaving postofficesdoubleasfederalinformationonestops.Perhapstheseideashavesome merit,butprobablynot,fortheyrepresentlittlemorethanthehunchesofone observer.Thekeytodevelopinggreatsolutionsistoharnessthewisdomofcrowds andtoinstitutionalizethecapacityforongoinginnovationandadaptation.

APPENDIX A: Selected White House Open Government Blog Items FRI, AUGUST 7, 6:08 PM EST Opportunities to Participate Posted by Robynn Sturm

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The Department of Defense is reviewing its Web 2.0 guidance and wants your help. New technologies - such as Aristotle, DoDTechipedia/Defense Solutions, and TroopTube - promise to quickly deliver the best innovation to the military, reduce duplication by connecting experts, and connect military friends and families with their loved ones. At the same time, new technologies bring new vulnerabilities. On July 31st, 2009, the Department of Defense launched the Web 2.0 Guidance Forum to inform a responsible and effective use of emerging Internet-based capabilities. You can share your thoughts, experiences, research and links through Thursday, August 20th. Also, dont forget to weigh in on the Federal Web Sites Cookie Policy Forum. The Forum has already received 70 comments, providing valuable perspectives, and will wind to a close on Monday, August 10th. Robynn Sturm is Assistant Deputy Chief Technology Officer FRI, AUGUST 7, 5:55 PM EST Data from Public Consultation on Open Government Posted by Michael Baldwin Thanks to everyone for participating in the public consultation on open government. Phase I, "Brainstorm," ran from May 21-28th and elicited 900+ ideas and 33,000 votes. Phase II, "Discussion," ran from June 3-21 and attracted more than 1,000 comments in response to 16 topics. Phase III, "Drafting," which lasted from June 22-July 6, resulted in 305 drafts by 375 authors, with 2,256 of you voting on those drafts. We are in the process of reviewing all these materials, as well as submissions we received via mail and email (posted online in "From the Inbox") along with input from government employees in order to prepare our report and recommendations. We invite you to help distill what weve learned. You can download the content from each of the three phases of public consultation here. We will post further updates as the review process matures. Michael Baldwin is an Office of Science & Technology Policy Student Volunteer from Harvard Business School.

Veterans Administration: It is this same belief in the ingenuity of the American people that guides the Administration's efforts to make government more effective, innovative, and open. Thus, on August 17th, the President turned to the front-line workforce to troubleshoot the backlogs and delays that have plagued the Veterans Benefits Administration. In his address to the Veterans of Foreign Wars convention, President Obama challenged them to "come up with the best ways of doing business, of harnessing

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the best information technologies, of cutting red tape, and breaking through the bureaucracy. The President turned to VA employees because he knows they have a unique ability to see what's going wrong - why the backlogs continue to grow, why the delays are so long, why the claims processes can be so confounding and with their own creativity and commitment would generate a mountain of ideas for improvement. Under the leadership of Secretary Eric Shinseki and Under Secretary for Benefits Patrick Dunne, the VA launched the "innovation competition", starting with a web-mediated idea management tool that made it easy, convenient, and electronically safe for VBA employees to submit their original ideas. The platform enables unprecedented levels of collaboration and comment, and even allowed participants to "vote" on the ideas they thought would have the greatest, far-reaching impact. The VA innovation competition will create a new channel for best ideas to rocket right to the attention of the President and Secretary Shinseki, and for the outstanding employee-innovators behind those ideas to get some serious recognition.