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At the Postal Service, new reports reveal the strain of change

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“A change would do you good,” according to that noted management consultant, Sheryl Crow. But for the U.S. Postal Service, change has been wrenching,  particularly when it means shaking the habits acquired during years as a complacent semi-monopoly. A couple of recent reports highlight the rigors of reinvention for USPS leaders, not just in chasing new revenue and overhauling slipshod management practices, but in ultimately retooling their sprawling operation to survive in the digital age.

You might think, for example, that the Postal Service enjoys an inside track with its sister agencies in the federal government. Instead, it’s taking a beating from private-sector rivals in competing for a big part of agencies’ shipping business, according to  a review by the Postal Service’s inspector general. This is the piece awarded under General Services Administration schedule contracts that last year generated almost $337 million for participating shippers.

The Postal Service’s share of that pot amounted to $4.8 million, or 1.4 percent. Federal Express led with $190.1 million (56.4 percent), followed by UPS with $138.7 million (41.2 percent). If there’s any upside to be found, it’s that the Postal Service’s cut increased markedly from the year before. (It should be noted, incidentally, that the Postal Service got another $96 million worth of agencies’ shipping last year outside of the GSA schedule.)

In part, USPS prices just weren’t competitive, a fact that the inspector general blamed on a requirement that products like Express Mail and Priority Mail cover their costs (i.e., no using them as loss leaders to attract other business). But the Postal Service also didn’t bother to compete via the GSA schedule until 2009, eight years behind FedEx and UPS. “Consequently many federal agencies have long-term relationships with competitors and are reluctant to switch to the Postal Service,” the IG found.

Why were USPS execs so slow to look for customers in their own backyard? The report doesn’t give a reason, but they evidently just weren’t interested, lacking even ”a sales force or market strategy that targeted the federal sector.”  It has a sales force now, but the IG questioned whether the 13-member squad is adequate to meet agencies’ specialized needs.  In a written response, USPS executives acknowledged the need to be more nimble, but there’s obviously plenty of catch-up ahead.

Inertia of a different sort is evident in the findings of a separate IG audit that examined the Postal Service’s handling of its two largest advertising contracts, worth a combined $136 million in fiscal 2011. But for an organization in crisis, the Postal Service didn’t do a very good job of overseeing how that money was spent, the audit found. To take just one example, USPS officials signed off on almost $632,000 in “questionable” bonuses to the two contractors in fiscal 2011 and 2012 “even though the process for evaluating contractor performance was not clear.”

Also a problem: Keeping track of where money went and why. Some $4 million in invoices were missing from the contracting officer representative’s files and another $2.3 million worth of bills had not been certified properly. On the larger of the two contracts, the Postal Service went beyond the standard federal maximum to pay hourly rates of more than $302. While the agency was within its rights, the IG said, “the magnitude of these rates–particularly considering the Postal Service’s recent financial challenges–necessitated a corresponding amount of oversight to protect the Postal Service’s financial interests.” By the IG’s reading, that scrutiny was lacking; the relationship between the Postal Service and its ad companies was apparently so cozy that one of those firms was leaked a draft copy of the IG’s report. That no-no is under further investigation, according to the report.

Last fall, well before the report’s official release, the Postal Service had opted not to renew the larger contract with Michigan-based Campbell-Ewald (neither contactor is identified in the report, but the termination was reported in the advertising trade press). It has also redesigned its marketing and sales organization and is following up on the IG’s recommendations to improve oversight, according to a written response from Nagisa Manabe, who joined the Postal Service as its top marketer last year.

Of course, assuming that the IG’s findings are on base, the question is why it took so long to clean up basic business practices. At a time when management is pressing rank-and-file employees for concessions, these are the kinds of lapses that set the average clerk’s teeth on edge.

As Postmaster General Pat Donahoe frequently points out, he doesn’t have full command over the agency’s destiny. Congressional action (or inaction) will play a outsized role in the Postal Service’s long-term direction, not just in cutting costs but in finding new ways to adapt to a world that’s buying a lot fewer stamps.

This month, the Government Accountability Office released a handy overview of USPS efforts to boost revenue and move ahead with both new non-postal services and experimental postal products. The survey found plenty of ferment that so far hasn’t translated into a big effect on the bottom line. While the Postal Service is currently pursuing 55 new initiatives, most of them build on existing products and services, such as letting customers handle address changes through mobile phones. For fiscal 2011, non-postal revenue was $173 million. Nothing to sneeze at, but still a tiny fraction of that year’s total of $65.7 billion. And it’s hard to see non-postal income growing significantly without some help from Congress.

Under current (somewhat complicated) law, the Postal Service can introduce new non-postal products if they fall under the umbrella of something it’s already doing, subject to approval of the Postal Regulatory Commission.  Under the category of licensed retail products, for instance, post offices can sell items like stamp dispensers and framed postal art. But the Postal Service decided not to pursue more than two dozen other ventures, mainly on the grounds that they needed too much up-front investment or weren’t likely to be profitable.

USPS leaders see money-making potential in three other areas: Shipping alcoholic beverages, performing services for state and local governments, and selling non-postal services. But those would all require legislation, and involve knotty questions about competition with private business and other issues. In these times, however, lawmakers have a tough time dealing with relatively routine measures, let alone more complex ones. And those proposed new business avenues would be no cure-all. While postal leaders saw the potential to improve the agency’s financial position, the report said, “they emphasized that these additional innovations will not be sufficient to return USPS to financial solvency.”

Meaning more change–and more pain–lies ahead.

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