13 August 2008

USPS Outsourcing

Unbossed notes a recent GAO report critical of the United States Postal Service's inability to determine cost savings associated with out sourcing.

What Is Outsourcing?

This makes me wonder what precisely constitutes United States Postal Service outsourcing. The most important form of outsourcing by the U.S.P.S., although not everyone recognizes it as a form of outsourcing, arises from its preferential rates for bulk mail, from pre-sorting rates, and from zone rates for mail deliveries.

Typically, the person who wants to send lots of mail employs a commercial mail house that uses information in a customer database to print form letters, in the order required to obtain pre-sorting rates, at a local printing shop in the same postal zone as the postal zone where the mail will be delivered.

There is no doubt that pre-delivery outsourcing practices encouraged by bulk rates save the postal service money. Pre-sorted, single zone bulk mail is much cheaper for the postal service to handle because the post office doesn't have to do as much with those items of mail. The ability of mail houses to merge the process of printing the actual item to be delivered to customers, and the process of preparing it to be mails, is also inherently more efficient than doing the tasks separately. Properly designed, a bulk mail printing job can be done in pre-sort order with proper postage for no more money than a bulk mail printing that is prepared for mailing separately.

For the customer, this minimizes per item mailing costs. For the postal service, this eliminates most of the long haul transportation costs, and most of the sorting burden involved in getting mail from the sender to the individual postal worker who will actually deliver the mail.

Wage Issues In Outsourcing

Government monopolies are relatively easy to unionize. You only have to campaign to get union recognition once, and the entity will likely stay unionized forever. While they can outsource to some extent, they can't go off shore. They are subject to political control and protected by civil service rules that limit the most ruthless union busting activity.

The postal service pays its average employee about $62,000 a year, which isn't bad, considering that about 6 out of 7 of those jobs are relatively low skilled, non-supervisory jobs as clerks, as mail handlers, as mail carriers, as truck drivers, and for janitorial and handyman work. In exchange, the U.S.P.S. gets reliability, consitency, a well qualified work force, and an important jobs program that provides honest work for military veterans who have preference for the jobs which significantly impacts the nature of the work force.

Since the Post Office is run as a government owned non-profit that seeks to simply break even over the medium to long term, we also have the comfort of knowing that none of the user's fees paid to maintain the postal system go towards shareholder dividends or fat pay packages for senior executives. Top U.S.P.S. executives make decent incomes, but they are chump change compared to the lavish compensation packages afforded senior executives in private industry in enterprises of this scale. Thousands of dollars per employee of above market rate compensation to postal service employees is basically payback for the costs avoided by not having to pay excessive compensation to Wall Street and senior management.

The high skill level and reliability of postal employees, also allows the U.S.P.S. to have a quite low percentage of supervisors and managers relative to a typical private enterprise.

The Post Office's pay structure looks more like a typical publicly held Japanese or European company, and less like a typical American company.

In the private sector, retail service jobs comparable to that of clerks, mail handling jobs comparable to that of factory workers, truck driving jobs, delivery jobs and building services jobs pay considerably less and come with fewer benefits. Private sectors jobs tend to have more turnover, less qualified workers in these kinds of jobs, and less job security. Often, they are non-union jobs and of course, they don't come with civil service protections.

Our current economy has lots of people who are able to fill jobs that aren't highly skilled, like most postal jobs and comparable work; but such jobs are increasingly scarce, because many of these kinds of jobs have been sent abroad and because technology has eliminated many less skilled jobs. Even within the postal service, robotic kiosks are replacing a significant share of work once done by clerks from a modest price compared to the payroll costs involved in employing a clerk.

The Economic Importance of Accurate Bulk Rates

If bulk mail and pre-sorting and zone discounts accurately reflect the cost savings associated with those kinds of mail, then it is up to the private sector to decide if it is more cost effective to have the sorting and transportation functions done by the postal service, or if it is more effective to have those tasks done either by a third party mail house, or an in house bulk mail operation.

Of course, if bulk mail rates are set too low, private mail houses will end up doing jobs that could be done cheaper by postal service employees. Similarly, if bulk mail rates are set too high, people who want to send mail will have printing of the items and the mailing of the items done separately, even though this is clearly less efficient.

What Outsourcing Matters Most?

I suspect that when the GAO is talking about outsourcing, that they are really talking about contract post offices, the outsourcing of express mail services to Federal Express, and the like. But, the importance of "traditional" outsourcing by the U.S.P.S. is really trivial in magnitude compared to the importance of the invisible pre-post office outsourcing that occurs as a result of bulk mail rate structures.

Bulk mail accounts for more than half of the items delivered by the postal service, and about a third of postal service revenue (the statistics cited don't segregate out first class and priority mail which receives a pre-sorting, but not a "standard mail" discount, such as credit card and utility bills). So, bulk and pre-sorted mail effective outsources something on the order of $20 billion of postal business each year, based upon the cost of having the postal service do the work.

By comparison, U.S. Postal Service Express Mail, which is basically outsourced to Federal Express, is a little less than a $1 billion a year business, and franchised post offices are a pretty small percentage of the total number of post office locations and also tend to have lower volume than a typical publicly owned post office.

Yet, no one is seriously proposing that the United States Post Office get into the bulk mail printing business, as it would have to in order to realize these economies for its customers.

Do we need another tier of bulk rates?

To my knowledge, there is also no rate structure currently in place to provide additional bulk rate savings for commercial mail houses that not only sort bulk mailing by route, but also sort mailing from multiple customers with different items into consolidated route packages which are also pre-sorted by address. Multi-bulk mailer intra-route pre-sorting would save the people who actually deliver mail a great deal of time. It would also open up the possibility of allowing individuals and small businesses to electronically transmit individual mail items to a mail house for printing and mailing off site for something less than the ordinary first class postage rate, if basic rules on paper size, paper type and numbers of pages were adhered to by the small mailer.

This new tier of postal rates would promote mail house industry consolidation by creating an advantage that only the largest mail houses could benefit from, but would only do so because the economies of scale involved are real.

Increased incentives to use bulk rates would, of course, also undermine postal unions by reducing the amount of work done by postal workers in favor of mail house workers. But this concern would be mostly mitigated, if unions managed to unionize most major mail houses.

Then again, maybe we'd be better off if Congress rethought the mission of the United States Postal System and expanded its mandate to include the mail house business as well. After all, the U.S.P.S. is set up like a utility or cooperative, so it can secure economies of scale without the abuses associated with private sector monopolies or restraint of competition.

1 comment:

Ishani said...

Outsourcing is definitely here to stay. This article really shows us the wide gamut of sectors where outsourcing is being put to use. Another article at http://outsorcerer.com/blog/?p=53 is an interesting read on the precautions to be taken while planning to outsource.