USPS 5 Year Strategic Plan (Text version) UNITED STATES POSTAL SERVICE BOARD OF GOVERNORS Einar V. Dyhrkopp, Chairman Robert F. Rider, Vice Chairman Ernesta Ballard LeGree S. Daniels S. David Fineman Tirso del Junco, M. D. Ned R. McWherter John F. Walsh Sam Winters William J. Henderson, Postmaster General, Chief Executive Officer John M. Nolan, Deputy Postmaster General UNITED STATES POSTAL SERVICE OFFICERS MANAGEMENT COMMITTEE: William J. Henderson, Postmaster General, Chief Executive Officer John M. Nolan, Deputy Postmaster General Clarence E. Lewis, Jr., Chief Operating Officer and Executive Vice President Patrick H. Donahoe, Senior Vice President, Human Resources Mary Anne Gibbons, Vice President, General Counsel Peter A. Jacobson, Senior Vice President, Chief Technology Officer Allen Kane, Chief Marketing Officer and Senior Vice President John E. Potter, Senior Vice President, Operations Richard J. Strasser, Jr., Chief Financial Officer and Executive Vice President (Acting) Deborah K. Willhite, Senior Vice President, Government Relations and Public Policy OTHER OFFICERS: Karla W. Corcoran, Inspector General Nicholas F. Barranca, Vice President, Operations Planning and Processing Anita J. Bizzotto, Vice President, Pricing and Product Design Charles E. Bravo, Vice President, Information Platform William J. Brown, Vice President, Area Operations Southeast Area James A. Cohen, Judicial Officer William J. Dowling, Vice President, Engineering Jesse Durazo, Vice President, Area Operations--Pacific Area Patricia M. Gibert, Vice President, Retail, Consumer and Small Business Azeezaly S. Jaffer, Vice President, Public Affairs and Communications Danny Jackson, Vice President, Area Operations--Great Lakes Area Stephen M. Kearney, Senior Vice President, Corporate and Business Development John F. Kelly, President, Expedited/ Package Services Robert G. Krause, Vice President, eCommerce George L. Lopez, Vice President, Area Operations--Southwest Area Yvonne D. Maguire, Vice President, Employee Resource Management Gary McCurdy, Vice President, Area Operations--Allegheny Area Suzanne Medvidovich, Vice President, Area Operations--Mid- West Area Benjamin P. Ocasio, Vice President, Diversity Development Henry A. Pankey, Vice President, Area Operations--Mid- Atlantic Area Donna Peak, Vice President, Finance, Controller (Acting) Don W. Peterson, Vice President, Quality Michele C. Purton, Vice President, Treasurer (Acting) John A. Rapp, Vice President, Delivery Robert A. F. Reisner, Vice President, Strategic Planning Francia G. Smith, Vice President and Consumer Advocate David L. Solomon, Vice President, Area Operations--New York Metro Area Gail G. Sonnenberg, Senior Vice President, Sales Jon M. Steele, Vice President, Area Operations--Northeast Area Keith Strange, Vice President, Purchasing and Materials Rudolph K. Umscheid, Vice President, Facilities Anthony J. Vegliante, Vice President, Labor Relations Paul Vogel, Vice President, Network Operations Management (Acting) Craig G. Wade, Vice President, Area Operations--Western Area James P. Wade, Vice President, International Business John H. Ward, Vice President, Core Business Marketing John R. Wargo, Vice President, Strategic Marketing Kenneth C. Weaver, Chief Postal Inspector Richard D. Weirich, Vice President, Information Technology MANAGMENT ASSOCIATIONS AND UNIONS Moe Biller, President, American Postal Workers Union, AFL- CIO Joseph Cinadr, President, National League of Postmasters of the United States Charles E. Moser, President, National Association of Postmasters of the United States Vincent Palladino, President, National Association of Postal Supervisors William H. Quinn, President, National Postal Mail Handlers Union, AFL- CIO Steven R. Smith, President, National Rural Letter Carriers Association Vincent Sombrotto, President, National Association of Letter Carriers, AFL- CIO OFFICE OF THE BOARD OF GOVERNORS David G. Hunter, Secretary to the Board of Governors William T. Johnstone, Deputy Secretary to the Board of Governors TABLE OF CONTENTS Executive Summary Page iii Chapter 1 Mission and Vision Page 1 Chapter 2 The Changing Environment Page 7 Chapter 3 Postal Service Performance Goals for 2005 Page 19 Chapter 4 Organizational Strategies: Blueprint for Progress Page 33 Chapter 5 Consultation with Stakeholders Page 45 Chapter 6 Planning for the Future Page 53 Appendix 1 Postal Service Planning Process A1 Appendix 2 Projecting Electronic Diversion for First- Class Mail in the H. R. 22 Simulation Model A7 Appendix 3 Request for Comments A17 UNITED STATES POSTAL SERVICE FIVE-YEAR STRATEGIC PLAN FY 2001-2005 EXECUTIVE SUMMARY In an environment as challenging as any it has faced in its more than 200-year history, the United States Postal Service has developed a new strategic plan for the fiscal years 2001 through 2005. The vision, goals, and strategies described in this document support the Postal Service's historic mission to provide universal service that is prompt, reliable, efficient, affordable, and self-sustaining. The strategic direction and objectives also reflect a growing uncertainty about the future impact of emerging technologies, changing customer requirements, and competitors' actions on mail volume and postal revenues. The planning process, which has led to the formulation of the goals and strategies the Postal Service will pursue in coming years, has used a strategic framework outlined by the Postmaster General in a speech delivered in Nashville, Tennessee last spring. In his remarks at the National Postal Forum, William J. Henderson noted that the Postal Service would have to sustain the affordability of its services, grow both its business and the business of its mailing industry customers and partners, and restructure itself to become more flexible, more responsive, and more innovative. A high-performing, continuously improving, customer-focused Postal Service was the principal objective of the organization's previously published FIVE-YEAR Strategic Plan, which addressed fiscal years 1998-2002. That plan's strategic direction anticipated the factors that are fundamentally transforming the global postal industry: The growth of Internet communications and electronic commerce; the deregulation and privatization of foreign postal administrations; and the potential diversion of significant volume of several categories of letter mail to electronic channels. The strategic direction outlined in this plan goes further and responds to those drivers of change. As has been the case for the past three years, this strategic plan will be updated annually in compliance with the Government Performance and Results Act of 1993 (GPRA) with the publication of an annual performance plan and an annual performance report. Every three years, a new strategic plan will be formally updated, while Postal Service business environment reviews and strategies will be adapted as often as necessary. Mission and Vision The Postal Reorganization Act of 1970 defines the mission of the Postal Service. The law charges the Postal Service to bind the nation together through the correspondence of the people, to provide access in all communities, and to offer prompt, reliable postal services at uniform prices. The act was designed to transform the Postal Service from a bureaucracy subsidized with tax revenues into a businesslike entity supported by the fees (stamp revenues) paid by its users. Implicit in this mission is the expectation of the American public and customers in every sector of the economy that the Postal Service will provide affordable, readily accessible postal services and infrastructure, standing as a best-value service available in every community. Most customers view the Postal Service as a ubiquitous, trusted third party in American economic transactions, and they expect the organization to guard that role. The 1970 law also states that postal services are an essential government function, one that has been integral to the building of the nation. The delivery of postal services has supported development of national transportation and communication infrastructures, has linked urban and rural economies, and led to the creation of the country's physical address system. That historical mission, however, is challenged by forces shaping the future postal environment. The Internet marketplace reshapes the interaction between customers and service providers. Agile competitors are able to quickly respond to changing market demand. Substitute technologies compete with core postal products and services. The vision of the Postal Service for the next five years, therefore, is to become an organization that can improve performance and affordability, implement innovative ways to grow both its revenues and those of the mailing industry, and find flexible, responsive solutions to the challenges raised by technology and the seismic shifts in the global postal business environment. The framework for implementing the objectives and strategies to achieve the vision will be an improved understanding of the Postal Service's role as the "Gateway" to the nation's households and businesses. Within this framework, the Postal Service will develop mail originator and mail recipient services that take advantage of the organization's "last-mile" infrastructure- the retail and delivery services that represent the postal presence in every community. New and expanded products and services will build on the Postal Service's "brand"- the trust and security inherent in the postal system, as well as the notion of the "mail moment" that describes both the institutional role of the organization and the emotional attachment to it widely held by the American people. Sidebar * BIND THE NATION TOGETHER * PROVIDE ACCESS IN ALL COMMUNITIES * OFFER PROMPT, RELIABLE POSTAL SERVICES AT UNIFORM PRICES The Postal Environment Five aspects of the postal environment-regulatory, technology, customer requirements, competitor activities, and the postal workplace-are experiencing transformational shifts. The thirty year-old regulatory framework has been studied for five years by the United States Congress, and extensive testimony has been offered on its shortcomings. Home computer ownership, electronic communication networks, and the changing nature of personal correspondence threaten traditional letter mail, as well as bill payment and presentment. Customers-both major mailers and individual consumers-have more communication options and are demanding greater value and flexibility through the choices they make. Traditional competitors, such as UPS or FedEx, and emerging competitors-both deregulated foreign posts and alternative delivery services-offer most postal customers' alternatives or substitutes for virtually all postal products and services. Finally, employee satisfaction will be the key, in coming years, to achieving and sustaining the kind of high-performance, flexible, innovative, and responsive organization necessary to succeed in a complex business environment. Three years ago, the FIVE-YEAR Strategic Plan for 1998-2002 stated that the Postal Service would become a 21st-century growth company, finding opportunities in products and services derived from its core business, despite an expectation that overall mail volume growth would slow. Priority Mail, Advertising Mail, and International Services were all expected to grow. Today, those assumptions are in question. Even modest growth in delivery points, as delivery service is extended to new households and businesses with the growth of the economy, will require significant additional investments. But there may be less traditional volume, on average, for each delivery. Growth will continue to be part of postal planning, even as overall volume or volume in key mail categories declines. In 1999, during congressional hearings on postal reform, scenarios describing future mail volume declines were presented, based on assumptions widely accepted by numerous industry experts. Historic economic relationships linking growth in mail volume are challenged by such forecasts. The importance of this issue has led the Postal Service to conduct surveys, commission research, and to discuss the issue in detail with postal customers and industry experts. The results of these efforts suggest that the Postal Service's strategic planning will have to be flexible enough to take different possibilities into account. Performance Goals for 2001- 2005 Through a process of goal-setting and review, the Postal Service sets it's performance standards and measures their achievement. The Postal Service has developed a " balanced scorecard" approach that reflects customers, employees, and the fundamental financial health of the organization. In each of the three categories-or " Voices" the Postal Service has developed a broad goal statement, which is supported by performance goals, indicators, and annual targets for each of the coming five years. For the " Voice of the Customer," the five-year goal is to earn customers' business in a marketplace where they have choices by providing them with world- class quality at competitive prices. For the " Voice of the Employee," the goal is to foster an inclusive and welcoming workplace consistent with the values of fairness, opportunity, safety, and security; where everyone is given the knowledge, tools, education, and encouragement to be successful; and where everyone is recognized for and takes pride in his/her participation in customer and Postal Service success. The " Voice of the Business" goal is to generate financial performance that assures the commercial viability of the Postal Service as a provider in a changing, competitive marketplace and to generate positive cash flow to finance high-yield investments for the future while providing competitively-priced products and services. The Voice of the Customer FIVE-YEAR performance goals include timely, consistent with accurate delivery of all categories of mail, and achievement of high levels of customer satisfaction. The Voice of the Employee goals include the delivery of training to each employee, safety improvements, better workplace relations, improvements in diversity, and a high level of employee satisfaction. The Voice of the Business goals are to achieve net income, to invest in future improvements in service and productivity by making substantial capital investments, and to control costs by making productivity gains. It will be increasingly difficult to achieve results for the business goals involving financial self- sufficiency, net income, affordability, and continuing high levels of capital investment. Performance measures are developed through a process based on the Malcolm Baldrige National Quality Awards. This process, CustomerPerfect!, is an annual management cycle that begins with a service-wide review and evaluation of the performance during the prior year. The evaluation identifies priorities for improvement, based primarily on customer and market issues using comparative and competitive data. Goals and targets for improvement based on this analysis are set and incorporated into budget and program planning. Organizational Strategies The fundamental strategy of the Postal Service is to provide quality service at low prices. While continuing to build on the gains in service improvement, the Postal Service will focus new energy on issues of productivity and cost control. Value is determined by price as well as by quality, and providing value-the best combination of quality and price-is the foundation for the growth necessary to accomplish the fundamental mission of the Postal Service. The Postal Service has developed an integrated operating plan for the postal businesses and major goal categories across five broad areas of concern: Organizational infrastructure, work-force, pricing, revenue generation, and effectiveness of capital investment. Infrastructure strategies center on how best to manage the organization. They include initiatives designed to achieve breakthrough productivity, which would lead to between $3 and $4 billion in cost savings by 2005. The savings are projected to come from reduced administrative costs, better information systems, automation of flats and parcels handling, better use of transportation resources and operating networks, and standardization of operating systems. Workforce strategies include the implementation of improved safety programs based on Occupational Safety and Health Administration (OSHA) requirements, and the development of recruitment, training, communication, incentive, and other support systems. An existing incentive program, based on the "Economic Value Added" (EVA) concept widely used in the private sector, will be adapted and improved. Other programs will improve the suggestions process, leadership succession planning, and workplace relations. Revenue growth will come from strategies focused on "Gateway" opportunities: Core product improvements, including service, new features, and adaptations for specific customer segments; technology to access products and services; expanded retail initiatives; improved commercial sales management; improvements in international package services; expanded alliances and partnerships; introduction of eCommerce services; and better asset management. Finally, capital investment strategies concentrate on the development of an "Information Platform" which will enable the Postal Service and its customers to manage resources and interaction more effectively and efficiently; on facility and network optimization; and on automation, mechanization, and other equipment improvements. Consultation with Stakeholders As required by the Government Performance and Results Act (GPRA), the Postal Service has sought and obtained comments on the 2001-2005 FIVE-YEAR Strategic Plan. Five major stakeholder groups were identified and addressed: Employees, consumers, suppliers and business partners in the mailing industry, business customers, and postal policy experts. Over the last year, much of the content of postal publications and the publications of the different employee groups has addressed the issue of the changing business environment, and how those factors could affect the Postal Service. Public surveys from a number of sources indicate a high degree of satisfaction with the Postal Service. Meetings and discussions with stakeholder groups representing business customers, suppliers, and policy experts were also held. The Postal Service also sought comments through a notice in the Federal Register. Stakeholder responses ranged from concern about affordability to general satisfaction with the plan and the Postal Service. Specific comments were incorporated into the Strategic Plan to improve clarity or to respond to specific issues raised by stakeholders. Sidebar THE FUNDAMENTAL STRATEGY OF THE POSTAL SERVICE IS TO PROVIDE QUALITY SERVICE ATLOW PRICES. Planning for the Future The vision, goals, and targets of the FIVE-YEAR Strategic Plan are projected into a future environment whose uncertainty leads to three possible scenarios: A baseline case, where there are significant reductions in First-Class Mail volume and moderate Standard A Mail volume growth; a rapid diversion case, characterized by faster reductions in First-Class Mail volume and reductions in Standard A Mail volume; and a historical case, where there will be moderate mail volume growth based on traditional trends. These three "futures" are based on information developed for, and presented at, congressional subcommittee hearings and publicly reviewed by the Postal Service and the General Accounting Office in the fall of 1999. The case studies suggest that the migration of traditional mail to the Internet could take place at a rate resulting in complement dislocation which could test the fabric of the Postal Service and the mailing industry and challenge the organization's ability to deliver universal service. Consequently, the Strategic Plan also addresses possible strategic initiatives and objectives which might be warranted, were such diversion to occur. The baseline case assumes electronic bill presentment and payment alternatives will cause First-Class Mail volume to decline beginning about 2003. The goals and objectives of this plan reflect this baseline assumption and provide strategies to maintain a viable Postal Service in 2005, able to achieve its mission. The rapid diversion case assumes more aggressive mail volume declines, as electronic substitutes supplant not only bill payment and presentment, but also business communications and direct mail. Current productivity and service performance would be threatened under this scenario, since it would be increasingly difficult under the present regulatory structure to maintain the investment required to substitute capital for labor. Without unexpectedly large revenue increases from new products or services, significant price increases could result by 2005, creating additional competitor actions, workforce reductions, and a spiraling effect leaving the Postal Service unable to meet customer expectations or requirements. Cost reductions in excess of the planned $3 to $4 billion may be necessary to sustain the value equation-high quality service at low prices-for customers. Other strategic shifts under these circumstances could include revised service standards, adjusted prices, and postal network restructuring. The strategic change toward increased flexibility, innovation, and responsiveness is designed to prepare the Postal Service for this environment. The historical case assumes modest volume growth that parallels national economic growth, regardless of the expansion of new communication technologies. The models used to build this case are based on historical data sets and do not for the most part take into account future events. The continued postal emphasis on improvement in service quality and productivity in this environment would bring substantial benefits to customers. The strategies in this plan are designed to prepare the Postal Service to fulfill its mission and to serve its customers beyond the FIVE-YEAR period under any of the possible environments. If the impact of technology and competition is more rapid than currently expected, the Postal Service could face financial pressures that would require significant redefinition of the scope of service and role in the economy. A potential crisis involving the second largest civilian employer in the nation-a $65 billion enterprise and a mailing industry significantly larger in terms of revenues and employees-would be a concern for future policy makers. Today's Postal Service already plays a key role in supporting the "New Economy" as well as the traditional one. Internet corporations like Amazon.com, eBay, and Dell all rely on the postal network to reach their customers. It is this network-the Postal Service's physical infrastructure and its planned technology platform-that will serve as the foundation for its 21st century role: The "last-mile" gateway into every American household and business for messages, transactions, and merchandise. It is a vision that finds opportunity in transformation, and one that remains true to its historic mission to bind the nation together by ensuring that everyone, everywhere, has the same ability to communicate, regardless of technological change. Sidebar TODAY'S POSTAL SERVICE ALREADY PLAYS A KEY ROLE IN SUPPORTING THE "NEW ECONOMY" AS WELL AS THE TRADITIONAL ONE. Chapter 1 MISSION AND VISION The Mission: Historic and Still Vital America's postal system, established 225 years ago by a Continental Congress that was committed to create a communications network to bind the colonies together, was revalidated in 1970 by the Postal Reorganization Act. The legislation codified the historic mission of the organization: The United States Postal Service shall be operated as a basic and fundamental service provided by the government of the United States, authorized by the Constitution, created by an Act of Congress, and supported by the people. The Postal Service shall have as its basic function the obligation to provide postal services to bind the nation together through the personal, educational, literary, and business correspondence of the people. It shall provide prompt, reliable, and efficient services to patrons in all areas and shall render postal services to all communities. [Title 39, U. S. Code, Sec.101 (a).] The Postal Reorganization Act mandates that the Postal Service, unlike most other government agencies, must be self-supporting. The Postal Service achieved this status by 1982 and has been free from taxpayer support since then. This achievement was one of the first and most important results sought by the Postal Reorganization Act, and it is now taken for granted. Most knowledgeable postal observers believe it highly unlikely that Congress would return to subsidizing the Postal Service from tax revenues. Therefore, the need for financial self- sufficiency is an objective that underlies much of Postal Service strategic planning. In the early nineties, the Postal Service's management reviewed the mission and developed a Statement of Purpose: To provide every household and business across the United States with the ability to communicate and conduct business with each other and the world through prompt, reliable, secure and economical services for the collection, transmission, and delivery of messages and merchandise. The historic mission and statement of purpose both serve as the foundation for Postal Service strategic planning and for the vision, goals, and strategies outlined in this plan. Defining Universal Service and Public Service The task of reaching 130 million delivery points and providing access to the postal network in all communities has resulted in the creation of an enormous national institution. This network ranges from air transport to the furthest frontiers of Alaska in the dead of winter to mule routes descending to the floor of the Grand Canyon. It includes more than 38,000 post offices, stations, and branches located in almost every community in America. In many instances, the Postal Service is the visible, human face of the federal government and is part of the daily life of every American business and household. Universal service is currently defined to include concepts such as delivery service standards, products and services, access, and uniform pricing. Postal services include daily delivery, six days a week, except for designated federal holidays. Key rate categories, such as First-Class letter ail, are priced without respect to distance, so a local letter bears the same price as a letter carried cross-country- or even from Puerto Rico to Guam. Until and unless new legislation narrows the scope of the services that are expected by postal customers, the current understanding of universal service will continue to guide the Postal Service in defining its mission. The Postal Service will continue to study the issue of universal service to develop more specific costs and trade-offs and will engage in ongoing discussions with stakeholders about potential changes. Cooperation with Other Agencies The Postal Service also provides public services other than mail delivery and cooperates with a wide range of other government agencies to deliver these services. These activities are important elements of the mission of the PostalService, and their description fulfills one of the specific requirements of GPRA. The Postal Inspection Service works with the Justice Department and other agencies to protect consumers from fraud and the misuse the mails. The Postal Service provides such activities as passport services for the U. S. State Department, distribution of Census and IRS forms, the placement of recruiting information for the Armed Services, "wanted" posters for the FBI, and other activities of public interest. More recently, the Postal Service and the Consumer Products Safety Commission entered into an agreement to publicize product recalls in postal lobbies, and the Postal Service has worked with the Bureau of the Mint in the distribution of special coins. The Postal Service has been working with the Treasury Department to investigate the feasibility of ATMs at postal locations for the electronic distribution of certain benefits to citizens who do not have bank accounts. Certain services provided by the Postal Service, such as managing the physical address database for the nation, have been essential to the development of many local government services. Postal Service address management services have even been vital to the development of a wide range of private sector applications, including competitive delivery services. As a government agency, the Postal Service is expected to be at the forefront of public policy initiatives, such as workforce diversity, safety, customer access, and the design of environmentally sound vehicles and buildings. Congress has, from time to time, added new obligations to the Postal Service, such as the recent "semi-postal" stamp to generate additional funding for breast cancer research. The Postal Service also funds the operations of its regulatory body, the Postal Rate Commission. In developing a strategic outlook for the next five years, it is important to understand the extent to which the key compact that lies at the heart of the Postal Reorganization Act will be affected by current market trends. There is little evidence in 2000 that there will be any reduction in the intensity of stakeholder support for the public service function of the Postal Service. Yet the pressure of competition is challenging the traditional sources of postal revenue and, therefore, the ability of the Postal Service to maintain affordable prices. Generating Revenues to Support the Mission The universal service structure and the various public services are supported by the prices charged for the core business services of the Postal Service. Beyond service to the public, postal services play vital roles in the daily business and economic life of the country. To place the strategy of the Postal Service in context, it is helpful to review the business services the Postal Service provides its customers. * Billing and Payments System First-Class Mail is a critical part of a highly efficient national system for distributing bills and payments. Anyone, anywhere, can bill or pay anyone, anywhere. The Postal Service, banks, financial services providers, and equipment and technology providers have evolved a process that is familiar, easy to use, and has a high degree of consumer confidence and trust. * Business Communications and Personal Correspondence First-Class Mail also provides an important role in sustaining communications by creating and maintaining business or personal relationships. Although the volume of phone messages, facsimiles, and e-mails now dwarfs traditional mailed messages, hard-copy communications are still critical. Advertising mail is also a critical part of customer relationship management and marketing for a growing number of businesses. * Publication Distribution The historic availability of a relatively inexpensive and reliable national distribution service for subscription publications has created a national market for a diverse industry with thousands of different specialized publications. Since the earliest days of the republic, the avail- ability of newspapers, magazines, and other publications has been seen as a crucial support of the American democratic system. Congress deems this role of the postal system so vital that it mandates special reduced rates for several publication categories. While most periodicals have options that would allow them to bypass the Postal Service to reach their customers, many small publications do not. This important segment will be dependent upon a strong postal system for some time to come. * Retail Sales The Postal Service has helped create whole new industries-the mail order market and, more recently, the direct mail market. These industries changed dramatically over the last century, as new players replaced familiar firms.Today, mail complements and competes with broadcast and other print advertising to generate awareness and brand identity, to generate site traffic, and to make sales. * Global Services Even with the growing competition in the expedited packages and secure electronic document services, the postal enterprise is inherently a global communications medium. The Postal Service has historically made arrangements to exchange mail with other nations, even in times of conflict. The Postal Service has played a vital role in supporting armed forces deployed overseas through the Department of Defense, and has responded to the challenges of major actions such as Desert Storm and, more recently, in Kosovo. Sidebar THE BUSINESS ENVIRONMENTIS INCREASINGLY DYNAMIC AND COMPETITIVE. Business Summary Each of these business services was originally developed in an era where the markets were stable and customers had few, if any, alternative choices. The business environment is increasingly dynamic and competitive. As a result, the Postal Service will need to be much more effective and efficient in delivering services. Establishing a Future Vision: A Flexible, Innovative, and Responsive Postal Service The need to provide services in a highly competitive environment requires a strategic vision that embraces change. The traditional protections of the "monopoly" no longer offer much shelter to postal products and services. The vision at the core of this plan is that the Postal Service can continue to carry out its mission by becoming much more flexible, innovative, and responsive to customer needs, while improving its efficiency. This transformation requires internal and external change - to Postal Service operating processes and administrative procedures as well as long-term legislative reform. Strategic Framework: Gateway to the Household Increased flexibility, innovation, and responsiveness -- building on a foundation of improved service and efficiency-are the principles underlying the strategic plan. A framework for strategic alignment views the postal network as the "Gateway to the Household." This framework is a significant strategic shift in Postal Service perspective. Traditional postal policies tended to focus internally on "mailing dock to mailbox" issues. The Gateway strategic framework expands Postal Service attention to include its mailing industry partners and focuses on the mutual customers- the senders and recipients of messages, transactions, and merchandise. Figure 1 is a simplified "value chain" that describes this expanded strategic perspective. Figure 1. Gateway to Households ORIGINATORS 1. High volume mailers 2. Small businesses 3. SOHOs 4. Households RECEIVERS 1. Households 2. SOHOs 4. Businesses ("Gateway" Focus) OUTBOUND ORIGINATOR SERVICES Lead to ("Gateway" Focus) BUSINESS COLLECTION Lead to (Secondary Activities) PROCESSING & TRANSPORT Lead to ("Gateway" Focus) HOUSEHOLD DELIVERY Lead to ("Gateway" Focus) INBOUND HOUSEHOLD SERVICES ("Gateway" Focus) OUTBOUND HOUSEHOLD SERVICES Lead to ("Gateway" Focus) HOUSEHOLD COLLECTION Lead to (Secondary Activities) PROCESSING & TRANSPORT Lead to ("Gateway" Focus) BUSINESS DELIVERY Lead to ("Gateway" Focus) INBOUND ORIGINATOR SERVICES Lead to * (Secondary Activities) PRE-SORT DISCOUNTS * (Secondary Activities) DROP-SHIP DISCOUNTS * (Secondary Activities) HYBRID MAIL * (Secondary Activities) eCOMMERCE ORIGINATORS This strategic framework recognizes that the Postal Service is a trusted link between senders and recipients and that the effectiveness of postal services in meeting customer needs goes beyond internal operating efficiencies. It describes those specific processes that are most relevant to creating value for these senders and recipients, and where the Postal Service can best focus its efforts and resources. It indicates that "one size does not fit all" and creates a base for developing more customized services that meet the needs of different customers. Finally, the Gateway approach begins to position the Postal Service to take advantage of its unique retail and delivery infrastructure, or the "last mile," as its principal contribution to this value chain. Building the Brand: Creating Value in the "Mail Moment" The Gateway focus emphasizes what happens after the mail is delivered and on opportunities related to the "mail moment." Traditional mailers expect to send bills that will be paid, communications and periodicals that will be read, and advertisements that will generate responses. The value of the mail, and the Postal Service, as a channel or link between senders and recipients, is influenced by the emotional attachments, or "mail moments," experienced by customers as they receive mail that helps them or interests them. The experiences of customers, as mailers and recipients in both business and consumer roles, with the Postal Service as an organization and with services provided by the Postal Service, is the "brand," or the relationship that adds value to the link the Postal Service provides between senders and recipients. Figure 2, below, summarizes the attributes of the postal brand. The brand is a strategic asset to be managed carefully, and postal policies and programs must be managed with a view about their impact on the brand and its attributes: * Tradition: Familiarity, Awareness, Knowledge * Trust: Image, Confidence, Security * Scope: Relevance of products and services to customer needs * Reliability: Service performance and Quality * Affordability: Direct (postage) and indirect costs of doing business A brand's value will grow as its succeeds in meeting customer needs. Brands become a convenient and comfortable "shortcut" for customers faced with making decisions among many alternatives in competitive markets. The strength of the brand depends on the business environment and the kinds of forces shaping customer decisions in these markets. Figure 2. Postal Service Brand Attributes Roof: Gateway to the Household Pillars: Tradition Trust Scope Reliability Affordability Foundation: Privacy and Security * Universal Service * Value Equation The purpose for introducing the concept of branding to postal strategicplanning is to increase the visibility of higher- level or corporate attributes important to the customer that may be overlooked or taken for granted in a more product-oriented planning approach. A brand is more than the sum of its individual products or services, and, in the case of the Postal Service, represents some key elements of the mission that might not otherwise be addressed. In the complex business environment described in the next chapter, the Postal Service brand stands as an important potential competitive advantage. The Postal Service's vision-as a high-performing, flexible, and responsive organization delivering valued services through its "last mile" infrastructure-is aligned with its historic mission and builds upon the attributes and strengths that make it the leading postal administration in the world today. Chapter 2 THE CHANGING ENVIRONMENT Introduction: A Changing Market The environment of the Postal Service is changing rapidly, making organizational planning both challenging and dynamic. These changes challenge the foundations of traditional planning. There are five issues that are particularly important to the Postal Service's future, as outlined in Figure 3. Each issue represents trends that affect the ability of the Postal Service to achieve its goals and accomplish its mission. Each issue introduces uncertainty into the postal planning environment, and possible futures are described in the chart in order to facilitate discussion about the trends. It is not particularly critical to be able to precisely define each element of the future, but it is important to recognize how these trends will affect the Postal Service, as represented by the following questions: 1. What rules will define the future competitive marketplace? (Regulation) 2. What technologies will define the future economics of the competition? (Technology) 3. How will future customer demands be defined? (Customers) 4. What will the requirements of the future marketplace be? (People and Operations) 5. How will competitors respond to opportunities of the future market? (Competition) Figure 3. Business Environment Challenges PERFORMANCE * TECHNOLOGY - MAJOR UPHEAVAL - PHASED ADOPTION - LOCAL TECHNOLOGY ADOPTION * REGULATION - COMPLETE DEREGULATION - PARTIAL DEREGULATION - MINIMAL REFORM * PEOPLE/ OPERATIONS - ENTREPRENEURIAL - PERFORMANCEBASED - PATERNALISTIC * COMPETITION - FRAGMENTED - OLIGOPOLISTIC - MONOPOLISTIC * CUSTOMERS - SOPHISTICATED SEGMENT - VALUE-ADDED SERVICES - TRADITIONAL PRODUCTS The five questions describe forces of change. These forces can be represented in terms of several possible "stages" along a continuum of possible future outcomes. For example, competition in the mailing industry could range from markets or segments with no alternatives or substitutes for customers (monopoly), to limited choice (oligopoly), to highly competitive, with many choices (fragmented). Regulation and Public Policy: A Thirty- Year-Old Framework A detailed review of postal policy and performance in the mid- eighties by the National Academy of Public Administration concluded that the Postal Service had achieved an outstanding record in implementing the goals of the 1970 Postal Reorganization Act. However, the Postal Service created by that Act was constructed in an environment characterized by: * Stable, protected markets * Established products and services * Mature technology and business practices * Personnel and administrative policies and programs based on governmental procedures * Incremental increases in workload, service, productivity, and rates Many of these assumptions are no longer so valid as they were thirty years ago. Other industries in the United States, such as transportation, financial services, telecommunications, and utility services, face similar changes. Foreign postal administrations, also facing similar changes in their markets, have been deregulated, privatized, or otherwise changed significantly. The U. S. Congress has sponsored detailed and exhaustive hearings on the issue of postal reform. What has emerged are a variety of opinions on the future of the Postal Service held by different stakeholders. Most stakeholders share a consensus, however, on the need for a rate-setting process that is more flexible and more predictable, more rapid and less costly for all parties. Other reforms would create a pathway for new product development that would prevent possible cross-subsidies and ensure a level playing field. Some stakeholders suggest changes in the wage-setting process. As this plan is written, the discussions of policy reform continue and are likely to continue for some time, even if a new law is passed. Technology: The Driving Force of Change The Postal Service, like virtually every other large enterprise today, is adapting to the changes created by the development of the Internet. Figure 4 summarizes numerous studies by industry analysts who predict that, by 2001, virtually every business and most affluent households will have access to the services provided by this new communications channel. By 2005, 60% of all households will have a personal computer with access to the Internet. Most businesses and households will change their expectations, attitudes, and behaviors as they adapt to a network age. Most important, the introduction of the new technology is changing the economics of the mailing industry. Businesses will reduce document handling and transactions costs and will target customers with much more customized approaches. New business models and new firms will replace many of the traditional players in many markets. Since few companies have all the technological competencies required to compete, many will seek to improve their position by mergers, acquisitions, and by strategic alliances that shift with changes in technology and the market. Some traditional intermediaries may be eliminated while new value chains are created. Detailed studies of consumer decision making in the future suggest that consumers will change how they search for information, entertain themselves, shop, and conduct transactions. They will be attracted by the convenience and choice offered by the Internet but will be concerned about privacy and security. Cheaper Internet access devices and increased network carrying capacity will bring Internet services to even less affluent households, but for the next several years, at least a quarter of U. S. households will remain relatively untouched by the Internet. Information technology will also change the expectations that customers have of traditional products and services. Customers will expect more access and information and much better customer service. Interest in checking on delivery status from both the sender and the recipient is growing, and this interest reinforces the need for tracking systems. Firms will be expected to be more responsive and flexible. New technologically enhanced "help desks" and sophisticated customer call centers will be required to fulfill these new demands, supported by powerful database management and services such as order or item tracking. The cumulative impact of investments in information technologies has been credited by observers as a primary reason for the growth of productivity in the American economy, as firms have more timely and accurate information to manage operations, control costs, and improve service. Related technologies such as materials handling, logistics, and distribution have also benefited from improved information technologies. The flow of physical items from originator to recipient can be much more efficient. Firms that do not take advantage of these benefits will not be able to compete in the future. However, in an organization with the operating scope and scale of the Postal Service, system-wide investments are expensive. In the current regulatory structure, the ability of the Postal Service to finance massive improvements is limited. This limitation will be a major challenge for the Postal Service and the policy community to address in the future. Figure 4. HH Penetration and Use of Personal Computers and Online Services The chart is a line graph superimposed upon a bar graph. Bar graph - The first bar shows total American households, starting at about 100 million in 1997 and rising steadily to about 110 million in 2005 (Estimated). - The second bar shows households with a personal computer, starting at about 45 million in 1997 and rising steadily to about 65 million in 2005 (Estimated). - The third bar shows household that are online, starting at about 15 million in 1997 and rising rapidly to about 60 million in 2005 (Estimated). Line graph - The first line shows the penetration of personal computers into households, starting at about 45% in 1997 and rising steadily to about 60% in 2005 (Estimated). - The second line shows the penetration of online access into households, starting at about 20% in 1997 and rising steadily to about 55% in 2005 (Estimated). - The third line shows the penetration of online access into households with a personal computer, starting at about 40% in 1997 and rising rapidly to about 95% in 2005 (Estimated). Customers: Changing Attitudes and behaviors Several major studies indicate that both business and consumers are likely to be driven by their search for "value" in selecting services and service providers. They will seek the best combination of service, features, and other benefits for the best price. They will want choice, with the flexibility that will allow them to customize products and services. They will demand more timely, relevant, and detailed information as they consider their choices-and they are more likely to comparison shop while expecting superior convenience and customer service. Business customers of the future are likely to be leaner, flatter, and more focused organizations that are managed with more flexibility. Business processes not seen to their missions are likely to be outsourced. Decision-making is likely to be more decentralized and collaborative in most organizations of the future, enabled at least in part through technology. Segmentation based on industry or size alone will be less useful as a means of categorizing customers as companies cross traditional industry and geographic boundaries. Small businesses will be important in their marketplace since these smaller companies will increasingly drive the growth of the economy. All businesses, whatever their size, are likely to consider participating in the global market as a result of Internet communications and advanced delivery services that enable them to take advantage of a wider customer base. Most companies will react to changes in the market by developing strategies targeted at specific groups or even individuals. Finally, each market has unique issues and trends that will affect the business environment of the Postal Service. To understand the forces that are changing markets in which the Postal Service must compete in the future, it is helpful to consider the key segments of the Postal service individually. Financial Services, Telecommunications, and Utilities The outlook for continued traditional mail volume and revenues from this segment is uncertain. This segment has relied on two critical business processes: Bill presentment and payment using First-Class Mail; and direct marketing services, using Standard A mail. It is highly likely that First-Class volumes and revenues for billing and payment services from this segment will decline, while the outlook is more uncertain for direct mail services. Customers in this sector are still evolving in their responses to deregulation and technological changes that are reshaping their industry. In recent years there has been significant growth in marketing activities as these firms sought to differentiate themselves from new competitors, establish new brands, and create awareness for new products or services that they had not been allowed to offer in a regulated environment. Within these industries, firms are consolidating. As their offerings converge, price competition is becoming more intense and margins are threatened. Traditional financial services and business practices are being challenged by firms outside traditional industry boundaries which do not have the same cost structure or traditions. This challenge leads to renewed pressure to cut operating costs, particularly in the "back office" of the transactions and document processing functions at a time when new electronic services offer the opportunity to re-engineer operations in ways that will decrease reliance on the mail. Improvements in service speed, quality, the introduction of new features, and new pricing schedules could reduce the rate of diversion of First-Class Mail. At the same time, these firms are building responsive, cost effective relationships with customers. Given early difficulties with the effectiveness of Internet direct marketing, these considerations could lead to increased use of the mail as a complement to Internet marketing. Retail and Mail Order Postal customers in this segment are significant users of direct mail and Priority Mail. They also face the threat of being displaced by new players using new business models. "Brick and mortar" retailers and their established counterparts in the catalog business are rushing to adapt to challenges from new "direct to customer" entrepreneurs using the Internet as both storefront and catalog. Their customers are becoming more demanding and selective, and are interested in expanding their access to choice, convenience, service, and value. Among other things, they expect virtually instantaneous access all day long, every day of the year, prompt response, and options that may not fit current services offered by traditional delivery firms. They are increasingly resistant to shipping and handling surcharges and want reassurance on both ease of returns and the confidentiality of their transactions. Customers in this segment who have traditionally focused on skills such as merchandising, cost control, and marketing have learned that fulfillment, information management, logistics, and customer service are equally important to their success. Over the next few years, many of these customers will find that the successful formula combines some traditional physical facilities, online information and customer service, and integrated multi- channel marketing including mail to attract and keep customers. Manufacturers are becoming increasingly active in this segment. Manufacturers have traditionally relied on bulk shipments to wholesalers and retailers, rather than shipping direct to final purchasers, and they have not previously been considered major mailers. Some manufacturers, such as Dell, have created very successful business models using direct mail and direct shipment that others hope to emulate. The appearance of successful Internet companies making successful use of direct mail may offer precedents for future development. For example, one of the strategies used by America Online (AOL) in becoming the dominant player in their market was a relentless use of the mail to send disks with their offer to households. Advertising and Direct Mail The growth and increasing sophistication of the direct mail industry has been one of the dominant trends affecting mail volume for two decades. The effectiveness of other traditional advertising channels has been significantly affected by the fragmentation of audiences resulting from the availability of an increased number of channels and the growing variety of programming options available to consumers, especially those that enable audiences to avoid commercial messages. Since few television programs can consistently command large general audiences, advertisers are resorting to more targeted advertising approaches. This trend, supplemented by increased sophistication in building databases with individualized customer profiles, is expected to continue. There is increasing consumer resistance to "clutter," or the stream of advertising messages from all sources, and increasing concern about personal privacy. Marketers' concern with potential saturation is real. A second critical trend has been increasing pressure by advertisers to show measurable and cost-effective results. Cost per response has been replacing older indicators, such as cost per message. One of the responses by the advertising community is to build more integrated campaigns using multiple media channels. This multi-media approach has increased the importance of predictability and control for all media, especially direct mail. A third important trend has been the growth of the Internet as a new channel. Much of the excitement and experimentation in the advertising industry today involves the development of personalized, highly targeted and interactive communications intended for this exploding medium. Within limited advertising budgets, funds are being shifted from more established media. The countervailing trend of "dot com" firms recognizing the value of traditional media to drive traffic to their sites has mitigated the diversion of mail volume. However, long-standing relationships between advertisers and their service firms are being disrupted as the new channel diverts revenues and disintermediates traditional advertising industry value chains. In 1997, direct mail was a central growth product, a core business strategy for the Postal Service. Three years later, a combination of new competition and increased price sensitivity in a time of rising postal costs makes the future of this segment more uncertain and threatens what has been the driver of mail volume growth in the previous decade. The increasing importance of small businesses may provide an opportunity to increase direct mail volume. Advertising among this segment has often been limited to yellow pages, local newspapers, radio, and various kinds of cooperative mailing approaches, such as "shared mailings." The Internet and new design and printing technologies may create the "ease of use" and reduced cost for direct mail that has been lacking for this segment. Publishers and Printers Customers in this segment are facing a challenging dilemma. On one hand, many analysts are predicting that books, magazines, newsletters, newspapers, and even traditional formats for music and video will face significant declines in volume as readers are attracted to electronic media formats. New access devices will create an increasingly attractive way to carry content downloaded from the Internet. On the other hand, publishers are experiencing record profits from print advertising, even while overall circulation has not been increasing. Publishers and printers are responding by diversifying, especially into non- traditional markets. Virtually all are seeking a presence on the Internet, and many are promoting the variety of services they offer. They are also responding to a market that is demanding more specialized or even customized content. Publishers and printers are struggling to control their operating costs in this environment and are particularly sensitive to fluctuations in the prices of paper, transportation, and postage. The periodicals market is closely tied to success in serving a relatively limited number of households. In recent years, these consumers have had a growing number of alternatives in their search for information or for entertainment. In this competitive market, circulation growth is largely dependent upon the success of marketing and editorial initiatives in attracting and retaining subscribers. The recent controversy over sweepstakes as a primary marketing mechanism for publications and resulting legislation has had an adverse impact on subscription growth. Government and Non- Profit Government at all levels faces a number of challenges. The public is demanding more and better service from the government without additional tax support. Government must be more accessible and responsive to the diverse groups of citizens it serves, providing more specialized information and support. At the federal level, government agencies are mandated to move as quickly as possible to reduce paperwork and to adopt electronic billing and payment. A countervailing move is to require more frequent and detailed notification and involvement of different stakeholders and citizen groups. Non-profit institutions face many of the same challenges. Many are seeking alternative sources of revenue to supplement traditional fund-raising activities. They are responding to much more demanding constituencies who expect more of their contributions to be spent on the stated goals of the group instead of overhead activities such as fund-raising. Mailing Industry No discussion of the postal environment can be complete without consideration of the mailing industry. These firms are tightly linked to the Postal Service in extended "value chains" that provide the total mailing experience to mutual customers both the owners of the mail and the final recipients. These partners face the same challenges as the Postal Service in meeting the many and varied needs of the different customer segments. Although their interests are not always exactly the same as the Postal Service's and there are often considerable disagreements within the mailing community on some issues, these firms are highly dependent upon the continued financial health and continued market viability of the Postal Service. Yet many are not entirely satisfied with the level of consultation with the Postal Service, the fair and consistent application of rules and regulations, the timeliness, detail, accuracy of relevant information, the predictability of changes of postal policy-especially rates-and the responsiveness of the Postal Service to suggestions or feedback. All these concerns reduce the ability of the partners to plan effectively or to support their major partner on critical initiatives. The ease of use, quality, and value of the mailing process may suffer as a result. Consumers The next five years will see significant changes among consumer recipients and senders of mail. The post- war "boomers" will be reaching retirement age, but although many will move, most will be starting second careers in their new locations. This group will be the most affluent "retired" generation in history, and companies will respond with specialized programs targeted at this population and at their communities. Population growth will be greatest in the South and Southwest, and that population will be much more diverse. Companies will respond with "multi- cultural" and even multilingual programs. Furthermore, as the immigrant population increases, ties with friends and families will increase the demand for international services. According to some studies, much of the demand in the economy will be generated by a group described as "the new consumer." This segment is more educated (at least one year of college), with a higher level of income (above $ 50,000). Typically, these consumers have access to a personal computer and other devices at home and at work and are comfortable using the Internet for a wide variety of activities. They represent about half the population and are growing three times faster than other segments. Age and gender are no longer barriers to inclusion in this segment. This segment is increasingly time-constrained and usually consists of households with two incomes. They will demand convenience and ease of use. Among other things, there is growing demand for delivery services to meet their specialized needs. Delivery services have focused primarily on operational efficiency and are relatively inflexible to recipients. A wide variety of new delivery services are emerging to fill these gaps, and traditional providers are struggling to adapt. Groceries and a number of other items, including some categories of mail, may be delivered by these providers. Additional services will be offered, such as scheduled delivery and pickup, fulfillment and automatic replenishment, and return services. Specialized services will be developed for home offices. This consumer segment is also redefining demands for retail services, expecting greater convenience, access, choice, quality of service, and reduced price-the attributes of value. Sidebar THE POSTAL SERVICE MUST PROVIDE A BETTER VALUE, RELATIVE TO THE ALTERNATIVES, ON THOSE ISSUES MOST IMPORTANT TO CUSTOMERS IN EACH OF THE MAJOR MARKETS SERVED. Competitors: Targeting Critical Customer Segments and Markets Many observers are describing the next several years as a period of "hypercompetition." Businesses in all industries are facing direct and indirect competition that increasingly goes beyond traditional industry and geographic boundaries. The Postal Service has long existed and thrived as a protected monopoly. In recent years, with the introduction of readily accessible electronic services and the deregulation of foreign postal administrations, most postal customers will have alternatives or substitutes for virtually all products and services. The Postal Service must provide a better value, relative to the alternatives, on those attributes most important to customers in each of the major markets served. The Postal Service has significant competition in every major category of service. Not only is competition increasing, but competitive services are offered by world-class competitors. This recognition is not to discount the improvements that the Postal Service has made over the last several years, but to make it clear that the standards of performance required for success are very high and constantly increasing. Traditional Direct Competitors (Package Delivery Services) Traditional competitors such as FedEx and UPS are now offering new residential delivery options. New foreign postal administrations who have entered the U. S. market, are contesting the package delivery market and have been open about their interest in serving U. S. customers in more fundamental ways. Theseforeign posts include the Germans, the Dutch, the British, and the Canadians. All are free to enter the U. S. market and even to offer services that would be regulated if offered by the Postal Service. New Market Entrants (Delivery Services) In addition to these traditional competitors, a new generation of alternative delivery options is being created to serve the "direct to consumer" market enabled by Internet shopping. New firms such as Webvan, Streamline. com, Kosmo, and Home Run are developing new ways to take products to the household. Alternative delivery firms are also delivering samples and coupons, and networks such as newspaper and bulk magazine delivery services can be reoriented to enter the mail market if market conditions change and alter the economics of home delivery. Redefining the Scope of Traditional Markets One of the reasons for this new competitiveness in the core postal markets is particularly important since it threatens to undermine the basic economics on which the Postal Service has built its business. The concept that the Postal Service is the local provider of service is eroded when competitors offer bundled services. For example, on UPSs web site today, it is possible for a catalog shipper to obtain a wide range of services beyond traditional delivery choices. UPS offers to manage inventory, to do order fulfillment, to manage logistics services, and to provide customer service. Such integration with customers threatens to undermine whatever advantages may have existed under the previously protected markets of the Postal Service. In the late 1980's and early 1990's FedEx demonstrated the capacity for selective focus supported by technological innovation to transform a traditional market. The introduction of tracking and tracing demonstrated that, in a marketplace that values information for purposes of scheduling, inventory management, and customer service, information becomes a feature as important as the delivery of the package itself. New Technologies and Indirect Competitors The rapidly evolving technologies associated with the Internet are likely to affect the traditional postal applications of sending statements or bills and receiving payments, and for providing information about products and services. The eCommerce companies are offering products and services that substitute for traditional postal services, redefine traditional service in new media terms, and even in some instances such as logistics services, alter the economic advantages once held by the traditional providers. A significant new channel has been introduced, and the impact will cause changes similar to the introduction of the telephone and television for businesses and their customers. Workplace Environment: Renewed Focus on Employees Public and private organizations responding to an increasingly competitive environment understand the need for increased flexibility, responsiveness, and innovation by investing in the people they employ. Studies have linked customer satisfaction with employee satisfaction. The competitive market demands that organizations demonstrate consistency in their ability to "surprise and delight" customers, an attribute that is only possible by tapping the discretionary efforts of employees throughout the workplace. One of the greatest challenges for organizations in the next few years will be to attract and retain valued employees. The economy is enjoying the longest peacetime expansion in history, and most forecasts expect this trend to continue for at least the next five years. This growth has led to record employment levels, and companies have had to react by adjusting their recruitment, education, incentives, and compensation programs. The tight labor market will be especially challenging for employers of skilled or technical workers. More jobs are expected to have an increased technical component as organizations invest in technology. In 2000, the majority of the new entrants into the labor market are women or minorities. The growth in the diversity of the labor pool will also require businesses to make changes in job design and employee support systems. At the same time that new entrants are changing the mix of the workforce, leadership development will become a significant problem in many companies as the current members of the "baby-boom" generation near retirement age. The traditional model of workplace loyalty, where workers remain with their organization for the entire career, has been changing for most companies for some time. Employees are shifting jobs more often and typically expect more flexibility and developmental opportunities. Postal Service officers and executives, for example, used to be developed almost entirely within the organization. The Postal Service must often compete with the private sector to fill these positions, especiallyin the professional and technical specialties. Furthermore, Postal Service officers, executives, and managers are being recruited by start-up firms, consulting firms, and even foreign postal administrations. The Postal Service must be able to do a better job of developing compensation policies that attract high quality employees, motivate their performance, and retain them to provide stability and leadership. Salary and benefits, of course, are a problem for the Postal Service as they are for many technologically-oriented government agencies. The incentives for innovation and risk must be balanced with the more traditional value of stability and the challenge of providing vital public services in a large, complex organization. Sidebar IN 2000, THE MAJORITY OF THE NEW ENTRANTS INTO THE LABOR MARKETARE WOMEN OR MINORITIES. For some organizations, the very definition of the workplace has changed. The ability to link employees through technology has created a category of workers described as "mobile" or not tied to any particular location. Others may operate primarily out of their home. More employees will be temporary or contract employees. The development of a new economy with a "virtual" workforce is only one way that the traditional lifetime employment model of the Postal Service is being challenged. The business community is addressing these challenges in a variety of ways. Some firms have achieved success through investing in capital equipment and information technology, out-sourcing, workforce reductions, or other initiatives aimed at gaining greater flexibility and commitment from their workforce. However, many industries are still struggling with labor-management relations. This struggle has been especially true for those organizations in the private and public sectors that have had to face significant structural change and the difficulties of "downsizing" or "right-sizing. " The expected decline in traditional postal workload will inevitably result in both restructuring and in a reduction in the workforce. For example, as mail processing is increasingly automated, employees may need to be reassigned from areas with declining workloads to growth areas in other parts of the country. Employees may face changes in location, career, or even postal employment. During this time, the workplace environment will be protected by applying values of respect, equity, communication, and involvement, and in continuing to build the partnership between labor and management that has proven increasingly fruitful in recent years. Discussion of the "people" strategy in Chapter 4 elaborates on this theme. Above all, the Postal Service must reinforce the message that change means opportunity for employees with appropriate skills and commitment. Summary: The Postal Service Must Respond to a Different Business Environment The Postal Service must operate as if there were no monopoly protections, because the competitive environment has reduced or limited the value of such protections. If the Postal Service is to be able to fulfill its mission of providing universal service and other required public services, its business services must be competitive and provide unique customer value in each of the markets it serves. Impact of Changed Assumptions: The Potential for Mail Volume Decline These changes in the environment lead to a significantly revised view of the future from that which might be drawn from the historical trend provided by traditional econometric models. As shown in Figure 5, by 2004, the substitution effect of the new technology is predicted to erode mail volume by about 2%. This apparently small change would have a significant impact on contribution (or margin) in an organization required by law to "break even." The expected declines are likely to be in the category of mail that the Postal Service handles most efficiently-First-Class bills and payments. The decline will vary significantly by market, application, and customer segment. For the first time, the Postal Service has adopted a planning assumption that the long-term close relationship between the growth of the economy and mail volume will change in the future, leading to declining mail volumes for First-Class and eventually even Standard A Mail. This planning assumption is the result of surveys, research studies, and detailed discussions with customers and industry experts. This analysis suggests forces that could threaten the foundations of the business model on which the Postal Service has been built since 1970. The competitive forces and customer requirements described in this chapter strongly suggest that the Postal Service must "re-invent" itself. The potential loss of substantial First-Class Mail volume creates a daunting challenge for the Postal Service. Figure 5 also demonstrates the uncertainty facing Postal Service planning. The econometric forecast, based on traditional assumptions about the relationship of mail volume to economic growth, suggests the possibility for continued growth. Postal management, however, has made the assumption that the future may not reflect the past and that those historic relationships may be changed. Moreover, most industry analysts-Forrester, Jupiter, Gartner, Killen Associates, PricewaterhouseCoopers, and others-clearly describe a future where diversion may be much sooner and faster than currently expected. Figure 5. Mail Volume Assumptions The chart is a stacked bar graph. Historical Trend 1998: N/A 1999: N/A 2000: N/A 2001: N/A 2002: 2 2003: 6 2004: 12 2005: 20 2006: 27 2007: 34 2008: 40 Baseline Scenario 1998: N/A 1999: N/A 2000: N/A 2001: N/A 2002: N/A 2003: 1 2004: 5 2005: 8 2006: 12 2007: 16 2008: 19 Rapid Diversion 1998: 197 1999: 201 2000: 207 2001: 209 2002: 212 2003: 215 2004: 213 2005: 207 2006: 200 2007: 193 2008: 188 Total 1998: N/A 1999: N/A 2000: N/A 2001: N/A 2002: 214 2003: 222 2004: 230 2005: 235 2006: 239 2007: 243 2008: 247 These management projections build upon work completed in the fall of 1999 in conjunction with the General Accounting Office and congressional oversight committees. The framework for this analysis is described further in an appendix containing a report published by PricewaterhouseCoopers. The traditional econometric model, assuming the historic relationship between mail volume and economic growth, shows total mail volume growing from 197 billion in 1998 to 247 billion in 2008. However, if an assumption of moderate diversion of First-Class Mail to substitutes such as Electronic Bill Presentment and Payment (BPP) and e- Mail is made, mail volume is affected beginning in 2002, with a loss of about 2 billion pieces and the loss grows significantly in 2008. Most external experts suggest a rapid diversion scenario, where diversion will occur more rapidly and will also affect Standard A volumes, as interactive Internet advertising reduces traditional direct mail and catalogs. In this scenario, mail volume is affected sooner and declines to about 188 billion pieces in 2008. Implications: The Case for Structural Transformation This assessment of the business environment raises a number of important considerations for the Postal Service, the mailing community, and the postal policy arena. In 1997, the Postal Service's FIVE-YEAR Strategic Plan presented a case for "continuous improvement." The basic theme was to become a much improved version of the Postal Service that was familiar to all stakeholders. The results of this strategy has made the Postal Service one of the great success stories of the 1990s objectively measured by improved results in service, customer satisfaction, and postal finances. The 1997 Plan did anticipate that there would be extraordinary changes in the business environment. Like many organizations, however, the Postal Service was unable to predict the speed with which the Internet has changed the American economy. The FY 2000 update to the plan recognizes that the Postal Service must respond much faster and more effectively to these changes. It is expected that over the next five years the Postal Service can sustain its viability by dramatically cutting costs and seeking new revenue sources within the current regulatory structure, if electronic diversion does not shift into high gear, leading to more rapid volume decline. However, if the next five years yield change in the postal markets that is indeed faster than currently anticipated, a number of issues will need to be addressed by postal management and stakeholders. Critical concerns involving the definition of universal service, the potential realignment of service standards, and the configuration of current operations and infrastructure will have to be reviewed to reduce costs and increase revenues. Increases in productivity at record levels and aggressive management of complement are already anticipated. If the volume decline becomes as drastic as some experts have forecast, especially in critical mail categories currently carrying the burden of contribution to institutional overhead, postage rates are likely to increase dramatically for the remaining mail volume, and other categories of mail would be affected. The pace of the eCommerce revolution is highly uncertain at this time. Predicting the impact on mail volume five years in advance is almost certain to be flawed. The evolution of market and customer requirements will increase the need for a more flexible, innovative, and responsive Postal Service. Sidebar THE EVOLUTION OF MARKETAND CUSTOMER REQUIREMENTS WILL INCREASE THE NEED FOR A MORE FLEXIBLE, INNOVATIVE, AND RESPONSIVE POSTAL SERVICE. Chapter 3 POSTAL SERVICE PERFORMANCE GOALS FOR 2005 Introduction: Evaluating Postal Performance There are a number of ways postal performance can be evaluated. The Government Performance and Results Act provides one framework. The goals and performance metrics that have been adopted by the Postal Service in recent years have played a central role in assessing and improving performance since 1995, and they have been subjected to extensive external and internal review. In concept, this quantitative performance assessment approach of the Results Act fits closely with the framework for goal setting that has been constructed by the Postal Service. The Postal Service has participated in extensive benchmarking of "best practices" and sought suggestions from customers, employees, and other stakeholders. The performance measures were established through a process based on the Malcolm Baldrige National Quality Award principles (The Assessment for Performance Excellence). This process, which has been named CustomerPerfect!, is an annual management cycle that begins with a service- wide review and evaluation of the performance during the prior year. The evaluation identifies priorities for improvement, based primarily on customer and market issues using competitive and comparative data, and process owners set goals and targets for improvement based on this analysis. The focus is on objectively measured output or results measures, rather than process or activity measures, exactly in conformance with the Government Performance and Results Act. Members of the Management Committee of the Postal Service serve as the Establish Committee that sets goals and targets and manages the entire resource allocation process. The Committee recommends performance targets to sustain and improve service and other critical indicators. The recommended goals and targets are documented in a preliminary Annual Performance Plan each February. The preliminary targets are adjusted in a phase of the process known as "Deploy." In this phase, operating functions and areas deploy resources (expense and capital budgets) in accordance with a balanced scorecard of performance objectives that will be used to evaluate performance during the " Review" phase. The results of this phase are documented in a final Annual Performance Plan, which is published in September. This process of goal setting and review is dynamic and reflects changes in the market, Postal Service performance, and resource availability. Measures are re-evaluated, improved, consolidated, and changed over time to reflect the environment, and new measures are introduced. For example, during the most recent planning cycle, the productivity indicators were reviewed and changed to provide a more complete tracking system for both Total Factor Productivity (TFP) and Labor Productivity. Five successive years of record financial performance and service levels have confirmed the validity of this approach. The performance goals frame the strategies that will be discussed in more detail in Chapter 4. The goals seek to translate the vision of a competitive Postal Service into concrete terms that can be measured and managed. Three Goal Categories: The "Voice" Structure The Postal Service has developed a balanced scorecard approach that reflects customers, employees, and the fundamental financial health of the organization. These three broad corporate goal categories are referred to as Voices of the customer, of the employee, and of the business. The three goals are supported by performance goals, performance indicators, and targets. In postal terms, goals are broad statements of direction. Subgoals narrow the focus to specific performance areas within each category. Indicators are measures of performance for the sub- goals, and targets are the specific levels of performance to be achieved on the indicator. This process is dedicated to continuous improvement-providing the best value in postal services in the world. The specific provisional targets for FY 2001- 2005 are summarized in the following tables. Additional information on the details of the CustomerPerfect! process is provided in Appendix 1, and the FY 2001 Annual Performance Plan provides more details, including a history of performance over the last three years, where data are available. Voice of the Customer (VOC) The first Voice, the Voice of the Customer, focuses on customer and market requirements. The challenge for the Postal Service is to allocate resources where the need for improvement is greatest and where the return on that investment is greatest. Voice of the Employee (VOE) The second "Voice," the Voice of the Employee, addresses the workplace environment and relations with the Postal Service workforce. The goal statement was changed to focus more on the voice of the employee, rather than the voice of management to employees. The new goal raises the overall workplace environment from a subgoal to the goal. It is also more results-oriented. * Provide Knowledge and Skills Training This revised subgoal focuses on the support employees need to be successful. Additional diagnostic indicators, such as Employee Proficiency Ratings and "Mystery Shopper" evaluations, will be used to supplement the training programs and assess their effectiveness. * Improve Employee Safety, Security, and Well-Being The subgoal was reworded to include security and well-being as part of the overall safety and workplace environment initiative. * Improve Understanding of Employee Issues and Concerns The VOE survey, along with other "listening" methods, will be adapted, improved, and integrated into the management process. * Ensure an Inclusive and Fair Environment with Opportunities for All Employees This subgoal recognizes the need to deal with changing needs and expectations of a diverse workforce. There needs to be a balance between the number of goals and the ability of the organization to effectively focus attention. Management will continue to seek to refine the goals and establish a structured hierarchy of goals that reduces unnecessary complexity and still achieves the objectives. The Postal Service recognizes that current Voice of the Employee indicators and measures need to be improved. An independent national commission- The Postal Service Commission on a Safe and Secure Workplace- reported in August 2000 that the Postal Service has made significant progress in improving workplace relations and needs to continue to invest in this area. The Postal Service will work closely with the Commission to review the findings and insights, to improve efforts already underway, and to initiate new activities as appropriate. As a result, the current "Voice of the Employee" subgoals, indicators, and targets for security, fairness, and workplace relations are likely to change in the next few months. Voice of the Business (VOB) The Voice of the Business focuses on the ability of the Postal Service to invest in its employees and to serve its customers. Results in this performance area have traditionally been the most closely scrutinized and publicly reported. Figure 6. Postal Service Corporate Goals and CustomerPerfect! Indicators and Targets Goal: Customer Earn customers' business in a marketplace where they have choices by providing them with world-class quality at competitive prices. Subgoal: Timely Delivery Express Mail Indicator: Express Mail on time (AM & PM) 2000 Baseline: Competitive (Proprietary) 2001 Target: Competitive (Proprietary) 2002 Target: Competitive (Proprietary) 2003 Target: Competitive (Proprietary) 2004 Target: Competitive (Proprietary) 2005 Target: Competitive (Proprietary) Subgoal: Timely Delivery First- Class Mail Indicator: First-Class Mail overnight on time (EXFC) 2000 Baseline: Fiscal Year Actual 2001 Target: 93% 2002 Target: 93% 2003 Target: 93% 2004 Target: 93% 2005 Target: 93% Indicator: First-Class 2-& 3-day mail on time (EXFC) 2000 Baseline: Fiscal Year Actual 2001 Target: 1% improvement over 2000 2002 Target: 91% 2003 Target: 91% 2004 Target: 91% 2005 Target: 91% Subgoal: Timely Delivery Priority Mail Indicator: Priority Mail on time measured by delivery confirmation (Origin & Destination)PQ 3,4 Only 2000 Baseline: Competitive (Proprietary) 2001 Target: Competitive (Proprietary) 2002 Target: Competitive (Proprietary) 2003 Target: Competitive (Proprietary) 2004 Target: Competitive (Proprietary) 2005 Target: Competitive (Proprietary) Subgoal: Timely Delivery Parcel Select Indicator: Parcel Select, as measured by delivery confirmation 2000 Baseline: Competitive (Proprietary) 2001 Target: Competitive (Proprietary) 2002 Target: Competitive (Proprietary) 2003 Target: Competitive (Proprietary) 2004 Target: Competitive (Proprietary) 2005 Target: Competitive (Proprietary) Subgoal: Timely Delivery Advertising Mail Indicator: Advertising mail on time percentage with required delivery window, as measured by Accuracy System 2000 Baseline: FY 2000 Actual 2001 Target: 98% 2002 Target: Established improved indicator 2003 Target: TBD 2004 Target: TBD 2005 Target: TBD Subgoal: Consistent Delivery Indicator: Provide consistent delivery D+1(ON, 2/3 Day) 2000 Baseline: N/A 2001 Target: Baseline 2002 Target: FY2001 + 0.5 2003 Target: FY2001 + 1.0 2004 Target: FY2001 + 1.5 2005 Target: FY2001 + 2.0 Subgoal: Delivery Accuracy Indicator: Accuracy of Delivery, as measured by Accuracy Delivery Index (ADI) 2000 Baseline: NA 2001 Target: Baseline indicators in FY2001 2002 Target: 5% reduction in error rate over SPLY 2003 Target: 5% reduction in error rate over SPLY 2004 Target: 5% reduction in error rate over SPLY 2005 Target: 5% reduction in error rate over SPLY Subgoal: Customer Satisfaction Indicator: CSM Residential Overall 2000 Baseline: NA 2001 Target: 94% Overall with Excellent Score of 31 2002 Target: 94% Overall with Excellent Score of 32 2003 Target: 94% Overall with Excellent Score of 33 2004 Target: 94% Overall with Excellent Score of 34 2005 Target: 94% Overall with Excellent Score of 34 Indicator: CSM Business Overall 2000 Baseline: NA 2001 Target: 91% Overall with Excellent Score of 23 2002 Target: 91% Overall with Excellent Score of 24 2003 Target: 91% Overall with Excellent Score of 25 2004 Target: 91% Overall with Excellent Score of 26 2005 Target: 91% Overall with Excellent Score of 27 Goal: Employee Foster an inclusive and welcoming workplace consistent with the values of fairness, opportunity, safety, and security; where everyone is given the knowledge, tools, education, and encouragement to be successful; and where everyone is recognized for and takes pride in his/her participation in customer and Postal Service success. Subgoal: Ensure that every employee is given the knowledge, tools, training, and encouragement to successfully meet the expectations of the position Indicator: Training including 4 hours mandatory on workplace environment EAS 15+, 20 hours Other EAS, 8 hours Craft, 8 hours 2000 Baseline: 97% of employee 100% of work units 2001 Target: 97% of employee 100% of work units 2002 Target: 97% of employee 100% of work units 2003 Target: 97% of employee 100% of work units 2004 Target: 97% of employee 100% of work units 2005 Target: 97% of employee 100% of work units Subgoal: Improve employees' safety, security, and well-being Indicator: Safety Program Evaluation 2000 Baseline: 3.0 2001 Target: 10% Improvement over 2000 2002 Target: % Improvement over prior year 2003 Target: % Improvement over prior year 2004 Target: % Improvement over prior year 2005 Target: % Improvement over prior year Indicator: OSHA Injury/Illness Rate (Replaces LWI indicator) 2000 Baseline: Baseline 2001 Target: 3% improvement over 2000 2002 Target: % Improvement over prior year 2003 Target: % Improvement over prior year 2004 Target: % Improvement over prior year 2005 Target: % Improvement over prior year Indicator: Motor Vehicle Accidents per million miles 2000 Baseline: 11.08 2001 Target: 5% improvement over 2000 2002 Target: % Improvement over prior year 2003 Target: % Improvement over prior year 2004 Target: % Improvement over prior year 2005 Target: % Improvement over prior year Subgoal: Improve workplace relations by building leadership skills and behaviors Indicator: REDRESS Availability 2000 Baseline: 100% available and 70% participation rate 2001 Target: 100% available and 70% participation rate 2002 Target: 100% available and 70% participation rate 2003 Target: 100% available and 70% participation rate 2004 Target: 100% available and 70% participation rate 2005 Target: 100% available and 70% participation rate Subgoal: Improve understanding of employee issues and concerns Indicator: VOE Survey Index 2000 Baseline: Percentage point improvements between 0.5 and 1.0% (by area) 2001 Target: Percentage point improvement between 0.5 and 1.0% (by area) Bottom end and threshold equal to Fiscal Year 2000 2002 Target: The Targets for Fiscal year 2002-2005 will be fixed based on trends of performance improvement 2003 Target: The Targets for Fiscal year 2002-2005 will be fixed based on trends of performance improvement 2004 Target: The Targets for Fiscal year 2002-2005 will be fixed based on trends of performance improvement 2005 Target: The Targets for Fiscal year 2002-2005 will be fixed based on trends of performance improvement Subgoal: Ensure an inclusive and fair environment with opportunities for all employees Indicator: Postal Executive merit Reviews 2000 Baseline: Included in Postal Executive Merits 2001 Target: Included in Postal Executive Merits 2002 Target: Included in Postal Executive Merits 2003 Target: Included in Postal Executive Merits 2004 Target: Included in Postal Executive Merits 2005 Target: Included in Postal Executive Merits Indicator: Representation of all groups in detail and special assignments Representation of all groups in succession plans Activities supporting affirmative action 2000 Baseline: Quarterly reviews Areas with Chief Operating officer Performance Clusters with area Vice Presidents HQ Officers with Relevant Management Committee Member 2001 - 2005 Target: Quarterly reviews Areas with Chief Operating officer Performance Clusters with area Vice Presidents HQ Officers with Relevant Management Committee Member Goal: Business Generate financial performance that assures the commercial viability of the Postal Service as a provider in a changing, competitive marketplace and will generate cash flow to finance high- yield investments for the future while providing competitively priced products and services. Subgoal: Achieve Net Income Indicator: Net Income 2000 Baseline: $100 Million 2001 Target: $150 Million 2002 Target: Achieve Average Annual Net Income Over Rate Cycle 2003 Target: Achieve Average Annual Net Income Over Rate Cycle 2004 Target: Achieve Average Annual Net Income Over Rate Cycle 2005 Target: Achieve Average Annual Net Income Over Rate Cycle Subgoal: Improve Overall VOB Performance Indicator: Achieve Capital Commitment Measured by Capital Budget 2000 Baseline: $3.4 Billion 2001 Target: $3.6 Billion 2002 Target: Average Annual Commitment of $3.5 Billion 2003 Target: Average Annual Commitment of $3.5 Billion 2004 Target: Average Annual Commitment of $3.5 Billion 2005 Target: Average Annual Commitment of $3.5 Billion Subgoal: Control Costs by Achieving Productivity Gains Indicator: 2000 Baseline: 2.1% 2001 Target: 1.5% 2002 Target: Improvement Over Prior Year 2003 Target: Improvement Over Prior Year 2004 Target: Improvement Over Prior Year 2005 Target: Improvement Over Prior Year Indicator: 2000 Baseline: 2.6% 2001 Target: 2.7% 2002 Target: Improvement Over Prior Year 2003 Target: Improvement Over Prior Year 2004 Target: Improvement Over Prior Year 2005 Target: Improvement Over Prior Year Indicator: 2000 Baseline: Improvement over hurdle 2001 Target: Improvement over hurdle 2002 Target: Improvement over hurdle 2003 Target: Improvement over hurdle 2004 Target: Improvement over hurdle 2005 Target: Improvement over hurdle Indicator: 2000 Baseline: Improvement over Threshold 2001 Target: Improvement over Threshold 2002 Target: Improvement over Threshold 2003 Target: Improvement over Threshold 2004 Target: Improvement over Threshold 2005 Target: Improvement over Threshold Explanation of Postal terms in Figure 6: PQ= Postal Quarter TBD= To Be Developed SPLY = Same Period Last Year EXFC = External First Class Measurement System D+1 = mail delivered no more than one day late CSM= Customer Satisfaction Measurement System OSHA= Occupational Safety and Health Administration (as a result of changes in the law, the Postal Service is now subject to the same safety and health regulations as the private sector) REDRESS= Resolve Employment Disputes Reach Equitable Solutions Swiftly revised dispute resolution process Note: Yearly net income target may be adjusted during FY 2001 based on changes in economic conditions and the results of the rate request currently before the Postal Rate Commission Voice of the Customer Performance Measures: Changes from Previous Plan The process for developing goals, subgoals, indicators and targets is evolutionary. Postal management has learned a great deal over the last three years as it has sought to develop a rigorous analytical approach to process and results measurement. During this time, the environment has changed, and Postal Service goals have been adapted. For example, the Voice of the Customer goal was revised to reflect a greater emphasis on the choices postal customers have in the market. Other developments include: * The Consumer Advocate has added an external analysis and validation to the current processes to ensure that what is reported is what is experienced by our customers. The causes for the gaps will be identified and addressed. * The Postal Service currently uses two measures of Priority Mail service performance. One measure, based on data from the recently implemented Delivery Confirmation Service, pro- vides information on individual customer shipments. An external measure, based on sampling and seeded test pieces, measures end- to- end service. The Postal Service will test the use of the Delivery Confirmation data as a measure, comparing performance with the baseline data collected in Postal Quarters 3 and 4 of 1999 (the quarters for which data are available). Final determination of the appropriate measure for goal setting will be made in FY 2001, although both systems will continue to be used. * In this year's Establish phase of the management cycle, the need for a new indicator to measure service performance for Standard A and Periodicals Mail was discussed. Currently, an internal system is used to measure delivery within requested windows for only a small portion of Standard A and Periodicals Mail. The need to build better indicators is clearly necessary if we are to satisfy the need of our advertising and periodicals customers in the future. * After several years of improvement in overnight First- Class Mail service performance, the operating system has stabilized at bout 93%. This service level will be a national threshold or baseline requirement. Further incremental improvements will be achieved by focusing on individual geographic operating areas where such levels have not been attained. All of the indicators and targets are under continuous review. Over the next several years, technology will enable the Postal Service to develop service performance measurement systems for all major categories of mail and for any new services introduced to the market. Other adaptations to Voice of the Customer goals include: * The performance goals for "consistency" and "accurate service" were combined into a more general performance goal, "reliability to customers." It was felt that the revised goal statement better reflected the set of measures that were most important to consumers (including consistent and accurate service). * The performance goal for "ease of use" was not included because it is being re-evaluated during 2001 using customer feedback. The plan is to extend its scope so that all customer contact points are included. In the meantime, this measure will remain as an option for the field to use to evaluate specific field programs. * The performance goal for "develop best value criteria" was not included as a distinct goal because the Postal Service has determined that customer perception of value is actually part of the overall perception of performance. A variety of performance goals are already reflected in the list of VOC measures and targets. The Postal Service has introduced the concept of the " Brand" in this Strategic Plan to further address this issue. *The "explore customer needs" performance goal was dropped because the exploration of customer segmentation schemes was completed during 2000, and this segmentation is now being used by the Postal Service to evaluate programs. * The "explore concept of customer loyalty" performance goal was changed to "improve customer satisfaction." It was felt that the revised goal statement provided a sharper focus on the measures that most affect customer loyalty. Voice of the Business Performance Measures: Changes from Previous Plan The financial health f the Postal Service, as an organization dependent upon generating revenues from services provided in competitive markets, is an issue of critical concern. * Net Income This subgoal reflects a comprehensive approach to revenue generation, whatever the source. It combines two subgoals from the previous plan. This subgoal may be revised based on changes in market and economic conditions and upon the finaldecision of the Board of Governors in adopting an integrated financial plan. At this point, this goal should be considered to be a preliminary statement subject to change. However, it is a priority goal; and as an indicator of the bottom line, net income has been used as a shorthand measure of the overall success of the Postal Service, in spite of the legislative mandate that postal rates should break even over time. * Controlling Costs by Achieving Productivity Gains This subgoal also incorporates the general cost control subgoal from the previous plan. In this way, productivity goals, or the hurdle rates, are set realistically on the threshold of the prior year' s performance. Adjustments are made to remove the impact of non- controllable influences. The productivity achievements of the past several quarters have been notable in comparison with historic performance. But this record will have to be sustained in the next several years to reach the performance levels required by tightening budgets. * Keep Rate Increases Below the Rate of Inflation This subgoal is currently defined in terms of average postage during a rate cycle. However, an average may conceal rates for certain categories of mail that indeed increase faster than inflation, as in the most recent rate increase proposal. The use of an average figure instead of product- specific rates and the definition of an appropriate index of inflation may need to be adjusted to better reflect market conditions. In fact, comparisons with relevant competitor rates may be a more appropriate indicator in specific markets. Given these issues, this subgoal has been removed pending the development of appropriate revisions to the indicator. The simplification of "Voice of Business" goals and an increased focus on bottom-line net income performance should lead to a more businesslike and accountable corporate framework. * Restoring Original Equity The "restore original equity" subgoal was felt to be somewhat redundant, since achieving positive net income in any year would contribute to restoration of equity. Therefore, this subgoal has been incorporated into the overall net income goal. Summary: Continuous Improvement But Increasing Difficulty Achieving these goals for each of the voice categories will be extremely challenging in the expected environment. However, by 2005 stakeholders can expect that the Postal Service will: * Be more reliable and accurate * Be easier to use * Have a higher level of customer satisfaction * Be a better, safer place in which to work It will be increasingly challenging to achieve results for the business goals involving financial self-sufficiency, positive net income, keeping prices reasonable and competitive, and continuing to invest capital to build the future. Verification and Validation: Ensuring Accuracy The specific Postal Service systems and processes used as indicators and measures of performance are listed below. Many of the surveys or systems cited are conducted for the Postal Service by independent firms. Over time, however, the Postal Service is developing automatic "in process" measures that will be more accurate, timely, and cost-effective to replace some of these indicators. * Transit Time Measurement System (TTMS), conducted by PricewaterhouseCoopers, currently is used to track First- Class Mail service and Priority Mail. * Customer Satisfaction Measurement System (CSM), conducted by Gallup, is a comprehensive survey of both business and consumer customers. * Employee Opinion Survey, conducted by an independent firm, supports measurement of the VOE goal. * Training data are obtained by the Local Employee Training System (LETS) and the National Training Database. * To assess employee proficiencies, the Opinion Research Corporation has been retained, and a "Mystery Shopper" program has been developed. The Gallup Organization (CSM) summarizes customer responses to specific questions related to technical knowledge, consistency, courtesy, and helpfulness. These studies focus on the primary customer contact personnel at Retail and at the Bulk Mail Entry Units. * The National Accident Reporting System collects accident and injury data, using the criteria used by other large organizations. Data will be reported in a format to comply with OSHA requirements as a result of recent legislation subjecting the Postal Service to OSHA oversight. Numerous audits have been conducted by the General Accounting Office, the Office of the Inspector General, the Postal Inspection Service, and others as part of ongoing efforts to verify and validate data related to Postal Service performance goals. An abbreviated list is provided in Figure 7 as illustration. Financial Auditing: Ensuring Accountability Postal Service financial statements are audited on an annual basis in accordance with generally accepted auditing standards and the standards for financial audits contained in the Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that an independent audit be planned and performed to obtain reasonable assurance about whether the financial statements are free of material mistatements. Postal Service audits have been conducted by the firm Ernst and Young, LLP, and are reported in the Postal Service's Annual Report of the Postmaster General. Figure 7. Sample Audits of Postal Performance and Measurement Systems PERFORMANCE GOAL Provide Timely Delivery AUDITOR Office of the Inspector General Report * Survey Results of South Florida District EXFC Test Mail 12/23/98 * Survey Results of the Atlanta District AUDITOR Inspection Service Report * National Audit of EXFC, 4/30/98 * Piority Mail, 3/17/99 PERFORMANCE GOAL Accurate Service AUDITOR Office of the Inspector General Report * National Change of Address Audit, 3/31/99 PERFORMANCE GOAL Workplace Relations AUDITOR Office of the Inspector General Report * Effectiveness of Grievance Arbitration Procedures, 3/26/99 PERFORMANCE GOAL Improve Safety, Security, and Well- Being AUDITOR Office of the Inspector General Report * Accident Reporting Process, 3/31/99 * Sensitivity Clearance Procedures, 3/31/99 AUDITOR Inspection Service Report * Management of OWCP Issues, 8/10/98 * Injury Compensation and Safety, 8/11/98 * MVS Driver Drug Screening, 10/23/98 PERFORMANCE GOAL Improve Understanding of Employee Issues AUDITOR Office of the Inspector General Report * Status of Management Actions Taken for Inspection Service Report of Labor Management, 09/30/98 * Supervisory Knowledge of Union Contracts, 9/30/98 PERFORMANCE GOAL Ensure an Inclusive and Fair Environment with Opportunities for all Employees AUDITOR General Accounting Office Report * Diversity in High-Level EAS Positions, 2/26/99 PERFORMANCE GOAL Improve Overall VOB Performance AUDITOR General Accounting Office Report * New Product Development AUDITOR Office of the Inspector General Report * Marketing New Products, 9/30/98 * Cash Management, 3/18/99 AUDITOR Office of the Inspector General Report * Postal Retail Stores, 9/15/98 PERFORMANCE GOAL Control Costs by Achieving Productivity Gains AUDITOR Office of the Inspector General Report * Total Factory Productivity, 9/30/98 The list is indicative of the scrutiny that postal performance and measurement systems receive. In most cases, the basic program was found to be accurate, reliable, and competently managed. Recommendations for improvements, where necessary, have been adopted in each case. The Postal Service Board of Governors formed an Audit Committee to review the financial reporting process, ensuring the soundness of the accounting and control practices and the integrity of the financial statements of the Postal Service. As part of that responsibility, the committee also reviews other related issues as appropriate. The Committee also recommends to the Board of Governors, subject to Board approval, the selection of the independent public accounting firm responsible for the external audit and oversees compliance with the terms of the contract. Since 1997, the Audit Committee recommended, and the Board approved, changes in the charter necessary to recognize the shift in audit responsibilities from the Postal Inspection Service to the Office of the Inspector General, as established by Congress. The Committee meets regularly with postal management, the Inspector General, the Inspection Service, the independent auditor, and the General Counsel to assess the progress of the work and to ensure the independence and objectivity of internal and external audit programs. Performance and Accountability: Linking Measures to Results The Postal Service has implemented a group incentive plan based on financial performance measured by the concept of "Economic Value Added" (EVA), and based on the achievement of performance targets established by the three voices of the CustomerPerfect! planning process. Over 84,000 EAS and PCES employees participate in this program. This represents most non- bargaining employees of the Postal Service. The EVA program rewards results for long- term, sustained financial performance and continuous improvement in customer service and the workplace environment. "Value" is created or added by generating revenue, holding down operating expenses, and managing the cost of capital. The higher the value, the larger the potential incentive payment, and the incentive payments may be increased by exceeding targets. The EVA and target performance is reported throughout the year. Final results are calculated at the end of the fiscal year. Once EVA is determined, it funds the incentive pool. Actual performance, by unit, is compared to the targets, and payment amounts are determined. Management reviews the targets selected for inclusion and determines the weighting of each indicator on an annual basis. Currently the program is as shown in Figure 8. The EVA concept will continue to evolve over the next five years. Certain goals and the associated targets will be considered "thresholds," that is, performance that must be achieved as a minimum before consideration is given for any other targets in a category. Specialized EVA measures will be developed for HQ and other support employees. Provisions have also been made to exclude "non- performing" employees from benefiting from group performance rewards. Figure 8. FY 2000 EVA Program VOICE Customer (1/3) INDICATOR EXFC ON NATIONAL TARGET 93.0% WEIGHTS TOTAL = 100% Threshold for VOC PERFORMANCE CLUSTER EMPLOYEES 100% PC Service INDICATOR EXFC 2/ 3 Day NATIONAL TARGET 88.7% WEIGHTS TOTAL = 100% 16.7% PERFORMANCE CLUSTER EMPLOYEES 100% PC Service INDICATOR Priority Mail (using PETE) NATIONAL TARGET 87.0% WEIGHTS TOTAL = 100% 16.7% VOICE Employee (1/ 3) INDICATOR VOE Survey Index NATIONAL TARGET 58.8 WEIGHTS TOTAL = 100% 16.7% PERFORMANCE CLUSTER EMPLOYEES 100% PC Index INDICATOR Safety Program Score NATIONAL TARGET 3 WEIGHTS TOTAL = 100% Threshold for LWI PERFORMANCE CLUSTER EMPLOYEES 100% PC Score INDICATOR Lost Workday Injury ( LWI) Rate NATIONAL TARGET 1.9 WEIGHTS TOTAL = 100% 16.7% PERFORMANCE CLUSTER EMPLOYEES 100% LWI VOICE Business (1/ 3) INDICATOR Net Income (National) Productivity Improvement over Threshold NATIONAL TARGET $ 100 Million WEIGHTS TOTAL = 100% 11.11% PERFORMANCE CLUSTER EMPLOYEES 1/ 3 National Net Income WEIGHTS TOTAL = 100% 11.11% PERFORMANCE CLUSTER EMPLOYEES 1/ 3 Area Productivity improvement over hurdle WEIGHTS TOTAL = 100% 11.11% PERFORMANCE CLUSTER EMPLOYEES 1/ 3 PC Productivity improvement over threshold Source: Postal Service Publication 330, March 2000. Chapter 4 ORGANIZATIONAL STRATEGIES: BLUEPRINT FOR PROGRESS Introduction: Providing Value in a Competitive Market The success or failure of the Postal Service will depend on the value it provides to customers who have choices in sending and receiving bills or payments, business correspondence or personal messages, magazines, advertising, and packages. Value is defined as the effectiveness of postal performance on issues that matter to customers- timely, accurate delivery and other attributes of service. A second element of value is efficiency, or the total cost of doing business with the Postal Service and its mailing industry partners. Customers weigh the performance and cost of postal services against alternatives to make their decisions. The fundamental strategy of the Postal Service is to provide quality services at low prices. Over the past several years, the Postal Service has significantly improved its service, as measured by both overall customer satisfaction levels and by specific service performance measures such as the External First- Class (EXFC) measurement system. However, the affordability of many postal services is at risk due to rising costs. While continuing to build on the gains in service improvement, the Postal Service will focus new energy on issues of productivity and cost control. Value is determined by price as well as quality, and this value is the foundation for growth- the only way to achieve the revenues necessary to accomplish the fundamental mission of the Postal Service. The previous chapter described the measures used to judge results associated with service performance under " Voice of the Customer." In this chapter, the "Blueprint for Progress" focuses on the strategies that will be used under the existing regulatory structure in order to achieve results in spite of the challenges created by more competitive and price- sensitive markets. Chapter 6 will address the issues and strategies associated with changing the regulatory environment to better enable the Postal Service to continue to create superior value in competitive markets in the future. Blueprint for Progress: Postal Service Strategies for Providing Value The Postal Service will build upon the success of the last several years, employing strategies to address the central problem that the Postal Service will face in the next five years- the expectations that increases in postal revenue from volume growth will not be sufficient to maintain the financial health f the organization. The Postal Service has developed an integrated operating plan for the postal businesses and major goals across five broad areas of concern: 1. Managing the Organization (Infrastructure) 2. Supporting the People 3. Improving Pricing 4. Increasing Revenue Generation 5. Ensuring Effectiveness of Capital Investment These strategies will provide a "Blueprint for Progress" that can carry the Postal Service over the next five years while new initiatives that will better position the organization for the future are developed. These strategies balance the customer, employee, and business objectives reflected by the "Voices" in the CustomerPerfect! management process. 1. Managing the Organization (Infrastructure) The size and scope of the Postal Service organization responsible for universal service across a country as large as the United States, with over 130 million household and business customers, has led to the development of an infrastructure that includes thousands of buildings, sophisticated mail processing equipment, a complex logistics network, thousands of vehicles, hundreds of thousands of employees, and an extensive administrative support system. Some aspects of the Postal Service, such as retail and delivery, are central to both the provision of universal service and to the vision of delivering competitively superior services to house- holds. Rising costs of labor and other services, fuel and other supplies, together with volume decline in key mail categories, threaten the ability of the Postal Service to keep prices affordable. The Postal Service will continue to refine definitions of fixed and variable costs. Traditional planning assumes some costs, such as labor, are variable as volumes increase. However, these costs may not be so easy to reduce as volumes decline. Since cost containment is a key strategy, the Postal Service must improve the documentation and explanation of its cost structure. The Postal Service will also increase the effectiveness of its programs to contract with the private sector to provide services. For example, the Surface Air Management System (SAMS) will be used to replace air transportation services with less expensive ground transportation without disrupting service. Breakthrough Productivity The Postal Service will achieve "breakthrough" productivity amounting to between $3 and $4 billion in cost savings by 2005. This achievement includes efficiencies in administrative activities, purchasing, transportation, and operations. Each of these advances will be measured by the contribution made to the overall cost reduction target. Sidebar THE POSTAL SERVICE WILL ACHIEVE BREAKTHROUGH PRODUCTIVITY AMOUNTING TO BETWEEN $ 3 AND $ 4 BILLION IN COSTSAVINGS BY 2005. * Administrative Activities The Postal Service is conducting a detailed and systematic examination of the administrative and support structures and processes. Overhead costs will be reduced through careful reorganization, realignment of field and support activities, outsourcing of activities where justified, and by eliminating programs that are duplicative or that do not add value to customers or employees. The target reduction is about $100 million a year. The Postal Service will use web-based document management, databases, and information systems to reduce paperwork and cycle time in its purchasing operations and will leverage its purchasing processes to obtain better prices for services, equipment, and supplies. The target reduction is about $ 100 million a year. * Operations The Postal Service will implement information systems ("Information Platform") that will provide more timely and accurate data on operations to improve both service performance and efficiency. The Postal Service will apply what has been learned over the last few years from investments in process management training to extend proven operational methods nationally. Particular attention will be paid to those facilities and operations that consistently and significantly do not meet expected productivity standards. The bulk of the planned reductions some $700 million a year, will come from productivity increases in the Postal Service processing system. This includes the savings anticipated from investment in technology. * Technology and Equipment The Postal Service has invested heavily in automated equipment to reduce the costs of handling letters. While further improvements are possible, the forecasts of volume declines in this category will reduce the relative return on significant further investments. Other categories of mail have not been subject to the same substitution of labor with equipment, even though they represent products expected to continue to grow. Flats (non-letter-sized mail) and parcels, in particular, are targeted for automation to reduce costs and improve service. The movement of mail from machine to machine has also been a labor intensive process. The Postal Service is implementing tray management and other advanced materials handling systems to reduce these costs. These investments in technology are expected to contribute to the cost reductions in operations. * Networks The Postal Service is a complex operating system of closely interconnected information, transportation, and processing networks. The Postal Service will focus on significantly reducing multiple handlings of mail and on implementing more efficient distribution schemes. The Postal Service, as one of the largest purchasers of transportation services in the nation, has significant opportunities to lower its transportation costs, even as it redesigns delivery programs to provide more consistent, reliable, and flexible services adapted to the various customers and communities served. The Postal Service expects to save another $100 million a year in transportation costs. 2. Supporting the People: Balancing Workforce Management and Workplace Relations In markets characterized by competition and customer choice, service improvement and cost reduction are keys to providing value and survival. Postal Service employees are well aware of the competitive environment and the challenges of the future. The Postal Service will succeed only in partnership with them and their union or association leadership. While many employees feel very strongly about their role in the historic mission of "the mail must go through, "others do not see how their efforts contribute to results desired by customers and required in the market. The Postal Service must develop recruitment, training, communication, incentive systems, and other support systems that more clearly help employees to see the connection and participate effectively. The "Blueprint for Progress" recognizes that the Postal Service has a long way to go to more effectively balance efficient management of the enterprise with the creation of a workplace that is safe and meets employee needs for dignity, respect, and opportunity. The strategic programs described below will be evaluated on their contribution to improving the working environment and achieving business results. Sidebar THE CREATION OF A WORKPLACE THAT IS SAFE AND MEETS EMPLOYEE NEEDS FOR DIGNITY, RESPECT, AND OPPORTUNITY. * Compensation A compensation system based solely on government schedules and "time in service" seniority may not be appropriate in a more competitive environment. The Postal Service is already facing problems recruiting, motivating, and retaining employees, especially in the technical, professional, and managerial categories. The Postal Service has implemented an incentive program, based on the "Economic Value Added" (EVA) system widely used in the private sector, to motivate performance among its supervisory, managerial, and professional employees. This program is closely tied to achieving specific results set by management. This program will continue to be developed and improved as a key part of the compensation process. Performance- oriented programs will also be adapted and introduced to the unions and the craft employees through the bargaining process. Negotiated compensation and benefits packages will also reflect the increased diversity of the workforce and their needs, as well as the patterns set in other highly unionized industries. The Postal Service will also use more sophisticated data systems to efficiently balance workload and staffing; and that will provide managers, employees, and support staff with accurate and timely data to more effectively respond to employee concerns. * Suggestions The Postal Service is bound by extensive work rules and other regulations that hamper flexibility and innovation. Individual and team suggestions for improvements are not easily evaluated, processed, rewarded, or widely communicated and effectively implemented through the organization. Over the next several years, the Postal Service will redesign and re-energize the suggestion program to make it more effective in motivating innovation, creativity, and employee commitment and in generating service improvements or cost reductions. * Succession The Postal Service faces potentially serious problems in replacing large numbers of experienced managers as the post World War II "baby- boom" generation reaches retirement eligibility. Supervisors, managers, executives, and officers will require new and different skills from those of the past, with a premium on technical skills and the ability to communicate effectively with a more diverse workforce. The Postal Service will refresh its talent pool, in greater competition with the private sector, for these leaders of the future, through the use of improved recruitment and development programs. Such programs include the Associate Supervisors Program (ASP), the Career Management Program (CMP), the Advanced Leadership Program (ALP), and the Management Intern Program. * Workplace Relations A solution to the need for improved workforce relations must be found if the Postal Service and the associated postal jobs are to survive in the more competitive world of the future. The Postal Service must gain increased flexibility in its workforce, reduce grievances, EEO complaints, and the costs associated with processing them, and it must generate more commitment and discretionary effort from all of its employees. The Postal Service must be more sensitive and responsive to the diversity of its employees and provide superior employee assistance and communications programs. The Postal Service has created a specific program, Workplace Environment Improvement (WEI), to focus on workplace relations issues. A fundamental element will be the use of the Voice of the Employee Survey and other initiatives to listen and respond to employee concerns. Its importance is suggested by the approval by the Board of Governors to use an indicator based on survey results as a compensable indicator of management performance in FY 2000. A second set of indicators supplements the VOE Survey, and includes grievances, arbitrations, and EEO complaints. The Postal Service is implementing improved programs and information systems to track and manage these processes, reduce the cost of handling these cases, and provide data to assess the effectiveness of resolution. Examples include Resolve Employment Disputes Reach Equitable Solutions Swiftly (REDRESS), Alternate Dispute Resolution (ADR), and the Diversity Reporting System (DVRS). Safety represents a third set of indicators and measures that reflect management commitment to improving the workplace environment. The organization will be evaluated on compliance with Occupational Safety and Health Administration (OSHA) requirements and will focus on creating a safe place in which to work. * Complement Management The Postal Service will use the flexibility under current and future labor contracts to manage labor costs. Among the tools available to management are attrition, effective use of contracting services, and the careful use of overtime and casual part-time workers instead of hiring new employees. 3. Improving Pricing: Keeping the Postal Service Affordable and Competitive For the last several years, the Postal Service has been successful in keeping price increases below the rate of inflation. The Postal Service must continue to transform itself into the supplier of choice for high-quality, low-cost products and services. The Postal Service must remain affordable-bringing down internal costs and restraining price increases. This is the only way to survive, as key segments of letter mail volume migrate to electronic alternatives or other competitors. While the measures and indicators may become more specific, the goal will continue to be to keep postal prices reasonable and affordable. * Grow Competitive Products Product prices must be set so that products maintain their viability in more competitive markets. The Postal Service will continue to introduce new features and seek other classification changes or improvements to increase the value of competitive products. New products will also be introduced. Sidebar PRODUCT PRICES MUSTBE SETSO THAT PRODUCTS MAINTAIN THEIR VIABILITY IN MORE COMPETITIVE MARKETS. * Improve Pricing Flexibility within the Current Structure Pricing flexibility will become increasingly important. The Postal Service and the Postal Rate Commission have been making use of existing procedures for experimental products and services in order to respond more quickly to customers needs, as in the recently approved "Ride-Along" rate for periodicals and the Mailing Online service. Innovations such as Negotiated Service Agreements (NSA) can be developed within the current framework of the law. The Chairman of the Postal Rate Commission recently acknowledged that the current law would accommodate an NSA for which only a small number of mailers can qualify, such as the non-letter-size bulk business reply mail classificati