The Postal Service’s Big Hurry to consolidate 223 mail processing plants may be running into serious speed bumps. The AMP studies don’t add up to anything like what the Postal Service says it will save nor do they reveal where most of the 35,000 eliminated positions will come from.
Now there’s news of a market research study on potential revenue losses the downsizing initiatives may cause that the Postal Service chose not to tell anyone about — and that it still wants to keep under wraps.
News of this other research was first revealed back in February, in testimony by one of the Postal Service witnesses for the Advisory Opinion on the Network Rationalization plan being conducted by the Postal Regulatory Commission. Last week the Postal Service gave the PRC the data from this market research, along with a request to keep the materials “non-public.” The Postal Service is also saying that because the research was “abandoned” before completion, there are no calculations on lost volume and revenues to look at.
That's not sitting well with the participants in the Advisory Opinion process, and we're going to be hearing a lot more about this missing market research study. Next week, witnesses for the Postal Service will be cross-examined before the Commissioners, and the market survey is sure to come up.
In the meantime, today Congressman Gerald E. Connolly of Virginia filed a Motion for Termination of Non-Public Status with the PRC. The Congressman argues that "customers and policy makers should have the opportunity to review information on the likely revenue impact from these proposed reductions in service and facilities," and if the market research contains information that would help Members of Congress "to better understand the ramifications of these proposals," the material should not be classified as "non-public." As Congressman Connolly writes in his motion, "the public has a right to know about possible revenue impacts from these proposals."
The two phases of market research
In preparing its case to the PRC on the Network Rationalization plan, the Postal Service commissioned market research to determine how much the revised service standards and slower First-Class mail would affect mail volumes and revenues. The qualitative research was conducted in August 2011, using focus groups and in-depth interviews with mailers large and small. The quantitative research was done later, in October. The results were incorporated into testimony presented to the PRC in December, when the Request for an Advisory Opinion was submitted.
While the qualitative research took a broad look at various factors — closing post offices, eliminating Saturday delivery, legislative proposals to change the pre-funding of retiree health care, as well as the plant consolidations and changes in service standards — the quantitative research presented in the testimony focused solely on the change in service standards.
The research showed that mail volume would decline by 1.7% — nearly 2.9 billion pieces a year. Just to put that in perspective, the Boston Consulting Group (BCG) has projected that diversion to the Internet would cause mail volumes to decline 1.5% a year through 2020. In other words, the plant consolidation plan would impact mail volumes even more than the Internet.
This 1.7% decline in volumes translates to a revenue loss of $1.3 billion (2% of annual revenues). That loss is adjusted to reflect the lower costs of processing lower volumes, resulting in a net “contribution” loss of $500 million. That amount is then subtracted from the total cost savings of $2.6 billion that the Postal Service hopes to realize from the plant consolidations, leaving us with a net savings of $2.1 billion. [USPS-T-12, p. 22]
The accumulating evidence in the PRC’s docket on Network Rationalization suggests that the market research presented in December was actually the second round of quantitative research. The first phase was done months earlier, back in August or September, and rather than focusing solely on service standards, it encompassed the broader range of issues that the qualitative research examined, like the plan to close post offices and eliminate Saturday delivery.
The story on the market research and how the Postal Service prepared and shared the plan to optimize the processing network is worth examining in detail, so here are a couple of timelines to help put the pieces of the puzzle together.
Timeline #1: The Optimization Plan
Reconfiguring the mail processing network has been in the works for at least a decade. Previous efforts have included the Network Integration and Alignment (NIA) plan and the Evolutionary Network Development (END) initiative.
Over the past few years there have been many Area Mail Processing (AMP) consolidations. Something like 145 facilities were closed between 2006 and 2010, including nine major Processing & Dlstribution Centers (P & DCs). The PRC has asked to see all the AMP studies and Post-Implementation Review (PIR) studies for these facilities, and yesterday the Postal Service turned over the materials, but this material (USPS-LR-N2012-1/NP12) is classified as “non-public.”
Last summer, the effort to reconfigure the processing network intensified. In July 2011, the USPS Office of Inspector General came out with a report that envisioned a processing network consisting of 135 large P&DCs, about half the current number of 260.
By that time, however, the Postal Service was already well along in developing its own version of “network optimization,” and by August it was confidentially briefing industry insiders on the plan.
On August 10, 2011, for example, at the Industry Association Executives Monthly Meeting (where USPS executives meet with stakeholder representatives like Gene DelPolito and Art Sackler), twenty minutes were set aside for a presentation on “Network Optimization” by Chief Operating Officer Megan Brennan and David Williams, Vice President of Network Operations.
Over the coming weeks, there would be several meetings between USPS officials and industry stakeholders like the Direct Marketing Association (DMA) and the National Association of Advertising Distributors (NAAD) (as discussed in this email).
On August 17-18, 2011, VP Williams gave a presentation to the Mailers Technical Advisory Council (MTAC) (the minutes are here). The copy of the presentation materials available on the USPS website is heavily redacted, and every page says, “CONFIDENTIAL – For Internal Review and Discussion Only.” Not that the contents of the presentation are still a mystery — they were subsequently incorporated into many AMP presentations at public meetings and the testimony before the PRC. You can see an un-redacted version of pretty much the same presentation here.
In his August 17 presentation, Williams ended with a slide indicating that the Postal Service would file with the PRC in October. After the meeting, several emails were exchanged responding to concerns expressed by the stakeholders, which you can see summarized here.
On August 31, Williams gave his presentation again, this time for the “Monthly Member’s Call” of the National Association of Presort Mailers, as indicated by this description of the presentation on the NAPM website. This version of the presentation materials is available for viewing only to members of the NAPM.
On September 6, the Postmaster General went public with the network optimization plan in testimony before Congress. In his presentation about how the Postal Service would save $20 billion a year by 2015, the Postmaster General explained that he planned to “streamline” the processing network by reducing the number of processing locations from 508 to approximately 200 and eliminating 35,000 positions in the processing workforce, thereby saving $3 billion a year.
On September 15, the Postal Service held a press conference to reveal the details of the network optimization plan to the public, but not before giving industry insiders a preview, as indicated by emails like this one.
On September 21, a description of the plan was published in the Federal Register under the title “Proposal To Revise Service Standards for First-Class Mail, Periodicals, and Standard Mail.” The description indicated that if the Postal Service decided to go forward with the plan, it would Request an Advisory Opinion from the PRC, as required by law.
At that time, the Postal Service was still telling the PRC to expect the Request for an Advisory Opinion in October, as we learned in the Public Representative’s reply to the Postal Service’s motion to speed up the PRC’s procedural schedule (p. 4).
The Postal Service eventually submitted the Request for an Advisory Opinion on December 5, 2011. On January 18, the Postal Service asked the PRC to accelerate its procedural schedule so the Advisory Opinion could be done by mid-April. The PRC turned down the request, and it looks like the Opinion will come out in September. The Postal Service plans to begin the consolidations in June.
Timeline #2: The market research
Back in July, at the same time the Postal Service was preparing to share the optimization plan with industry insiders, it contracted a marketing firm to do research about how much mail volume and revenue might be lost due to the changes in service standards.
The marketing firm was Opinion Research Corporation (ORC), a “leader in global market research” (as their website says). This is the same company the Postal Service used for market research on the Five-Day Delivery Advisory Opinion.
The dates on the contract with ORC (which you can download here) are hard to understand and there seems to be a page missing, but it looks like the agreement was drawn up on July 22, 2011, and signed on August 22. The Postal Service agreed to pay $228,200 for qualitative research, $435,095 for quantitative research, and $19,265 for written testimony, for a grand total of $682,560.
In testimony before the PRC, ORC Vice-President Rebecca Elmore-Yalch explained that the qualitative study took place August 9 to August 23, 2011, and the quantitative, between October 26 and November 8, 2011. As we now know, however, ORC also did quantitative research in August, possibly September, presumably in tandem with the qualitative research.
The dates thus indicate that first phase of the research on potential revenue losses was conducted in late summer, at the same time the Postal Service was briefing industry insiders on its plans. The research thus seems to have been an afterthought, rather than a key factor in deciding whether to proceed with the plan.
By late September, the Postal Service had decided to delay its Request for an Advisory Opinion until November, as we learn in a slide presentation included with an email dated Sept. 27, from Krista Finazzo, USPS Manager of Operational Requirements & Integration. The reason for the delay is not yet known.
On October 20, the Postal Service modified its contract with ORC and commissioned a “Phase 2” for Network Optimization research, with an additional fee of $248,985.
The phase-2 research took a different approach from the first phase, as we can see by examining the survey instruments. (The phase-1 instruments are here, and the phase-2 materials are part of Elmore-Yalch’s testimony.)
The first survey asked participants to describe their mailing behaviors in response to several changes in the postal system — closing post offices, eliminating Saturday delivery, and changing service standards for First-Class mail. The phase-2 research asked participants to focus solely on the service standard changes, and it had questions that enabled the Postal Service to factor out the influence of other changes.
The phase-2 research was conducted between October 26 and November 8, 2011, as Elmore-Yalch testified to the PRC. In mid-November or thereabouts, ORC gave the Postal Service the results and the marketing department ran the numbers. As Gregory Whiteman, Manager of Market Research at the Postal Service, explains in his testimony, the research indicated a projected loss of 2.9 billion pieces, a revenue loss of $1.3 billion, and a contribution loss of $500 million.
On December 5, 2011, the Postal Service submitted its Request for an Advisory Opinion, about two months after it said it would be ready. Along with the Request the Postal Service submitted testimony from a dozen witnesses and a mountain of data — but not the phase-1 market research on volume and revenue losses.
During the discovery phase of the Advisory Opinion process, which has just ended, there were several interrogatories that might have provided an opportunity to mention the other market research. The issue of “cumulative impacts” from various factors, like eliminating Saturday delivery and the exigent rate increase, along with the network optimization plan, came up several times, and each time, the Postal Service witnesses basically said they hadn’t considered the combined effects of these various proposals.
At one point, the interrogatories were so direct it was impossible to deny the existence of the other market survey. On February 13, Whiteman responded to interrogatories posed by Douglas Carlson about other research the Postal Service had done. [DFC/USPS-T12-9]
Whiteman acknowledged that “the Postal Service conducted another round of market research that addressed, at least in part, customer response to changes in service standards…. That research examined a much broader group of changes the Postal Service has examined as plausible responses to the financial challenges it faces.” These changes included “eliminating Saturday mail delivery to homes and businesses, closing many small Post Offices, shifting patterns of retail access to emphasize alternative locations and channels, and also service standards changes.”
Whiteman said that the results of this research would be submitted to the PRC in a form analogous to what he had included in his testimony for the second survey — a table with a breakdown of Volume, Revenue, Cost, and Net Contribution Changes, based on the data gathered from interviews and surveys with mailers. [USPS-T-12, p. 22]
Last week, the Postal Service did submit the results of the first round of research, but it has asked the PRC to keep the data “non-public” because of its “commercially sensitive nature” and because it has promised participants in the survey confidentiality.
The Postal Service also says that the research was “abandoned” before completion, so “no analysis of its preliminary quantitative results was pursued.” That apparently means the Postal Service was not curious enough to see what it had purchased from ORC for over $400,000, and it aborted the study before it learned how much mail volume and revenue might be lost as a result of its plans.
This presumably also means that there will be no table analogous to the one provided for the phase-2 research, in spite of what Whiteman said in response to the Carlson interrogatory, where he indicated that he would be submitting a “chart summarizing the results in a form that is comparable to Chart 1 of my testimony.” [DFC/USPS-T12-9]
Coming next: The witnesses are cross-examined
Next week, the Postal Service will present David Williams, Gregory Whiteman and Rebecca Elmore-Yalch as witnesses, and there will be an opportunity to ask them about the two phases of the market research. The APWU says its cross-examination of Whiteman will be “light to moderate,” while for David Williams, "it will be heavy.”
During the discovery phase of the Advisory Opinion process, the APWU and other interveners posed interrogatories to witnesses about the “cumulative impacts” issue, but the witnesses said they could not provide the information necessary to understand the combined impacts of the various initiatives. It looks like they are going to stick to that story.
On March 2, the APWU filed something called a “Motion to Compel a Policy Witness.” The motion argues that if Williams and Whiteman can’t answer the questions about cumulative impacts, there must be someone else in the Postal Service who can testify about the “interaction” of the plant consolidation plan and the other elements of the Postal Service’s business plan.
On March 9, the Postal Service opposed the motion, saying that it “has conducted no ‘combined impact’ analysis,” and it said the same thing in response to further interrogatories on the issue from the APWU. The Postal Service reiterated that the other market research was “abandoned before completion, with the result that no analysis of its preliminary quantitative results was pursued.” [APWU/USPS-5]
Today the APWU responded to the Postal Service’s reply to the Motion to Compel a Policy witness. The APWU begins by noting the Postal Service’s claim that no one has conducted any study of combined impacts, and the APWU then says: “This admission is alarming.”
The APWU points out that in its “Plan to Profitability,” the five-year business plan unveiled in February, the Postal Service emphasized the importance of implementing each of its initiatives: “Each element of the Business Plan must be completely and successfully accomplished to achieve requisite savings – initiatives are significantly interdependent.”
The APWU also notes that it’s not alone in its interest in “combined impacts,” and it cites several examples of interrogatories and requests for information that reflect concern about what would happen if the service standard changes happened in conjunction with eliminating Saturday delivery, closing post offices, and so on.
The APWU concludes by observing that the Postal Service “has chosen presently not to study the combined impacts of these initiatives, yet previously someone at the Postal Service agreed this was a task worth undertaking. The Postal Service has admitted that its intentions are to implement all of the initiatives, that it is in fact necessary and has acknowledged that many are interrelated. The Postal Service has presented savings totals from implementation of all of the initiatives; clearly someone at the Postal Service has thought about these issues and should be able to answer questions about them.”
Indeed, the Postal Service has a lot of questions to answer, and not just about the combined impacts of its various initiatives. The Postal Service also needs to explain why the phase-1 research was abandoned and who made the decision to abort the study before the calculations could be completed.