United States Postal Service Five-Year Strategic Plan FY 1998-2002 To the President of the United States, the United States Congress, the Members of the Postal Community, and the American people: For eight months, the Leadership Team of the United States Postal Service and its Board of Governors have worked to craft a plan that will take this organization into its fourth decade and the 21st century. The Governors have endorsed this strategic document, mandated by the Government Performance and Results Act. Now I am proud to share it with you. The Postal Service's five-year strategic plan, which commences with the 1998 fiscal year, reflects a process of data-gathering, analysis, and decision-making that has taken place within the most challenging environment the United States Postal Service has experienced since its inception. Sophisticated competition, substitute technologies, globalization and heightened customer expectations have led us to direct the Postal Service onto a transformational path of process improvement, greater productivity and a commitment to product and service innovation. Only by traveling such a path - one that will take us to both revenue growth and cost containment - will the Postal Service's ability to achieve its historic mission of reliable, efficient universal postal delivery service be ensured. As our plan indicates, this journey begins with the establishment of goals that delineate the progress we intend to make to satisfy our customers, to improve our organizational effectiveness and to strengthen our financial viability. Predicting the future is a role perhaps better played by soothsayers than Postmasters General, but I believe that hard-copy communications will be a mainstay of the American economy in the decade ahead, and, in partnership with new electronic technologies, can grow dramatically in support of global commerce. That's a future where we can find success. Achieving these goals, and the new ones we set for ourselves over the next five years, is a prerequisite for that success. From now until 2002, the Postal Service will use a variety of metrics - percentage of on-time deliveries, revenue and market-share increases, labor costs, productivity analyses and customer surveys - to determine our progress towards these goals. We are confident that the data-driven results will showcase a transformation in the way we deliver and add customer value. The establishment of that value is the vision guiding our renewed sense of mission. My confidence in our ability to realize these goals is due in no small part to our two-year-old Malcolm Baldrige Award criteria-based performance management system - CustomerPerfect! This system raises our performance targets each year and assures that we guide our planning by listening to customers who are telling us to improve current products and services and to introduce new ones. So, too, is this plan a result of listening - to our employees, our business partners and our stakeholders and customers, the American public. In the year ahead, we will keep listening, for this plan is not a static collection of words on paper. It is - and will be - a living document that delivers us into the 21st century. Marvin Runyon Postmaster General United States Postal Service Board of Governors Tirso del Junco, M.D., Chairman Sam Winters, Vice Chairman Susan E. Alvarado Legree S. Daniels Einar V. Dyhrkopp S. David Fineman Bert H. Mackie Ned R. McWherter Robert F. Rider Marvin Runyon, Postmaster General and Chief Executive Officer Michael S. Coughlin, Deputy Postmaster General United States Postal Service Officers Management Committee: Marvin Runyon, Postmaster General and Chief Executive Officer Michael S. Coughlin, Deputy Postmaster General William J. Henderson, Chief Operating Officer and Executive Vice President Allen R. Kane, Chief Marketing Officer and Senior Vice President Michael J. Riley, Chief Financial Officer and Senior Vice President Other Officers: David C. Bakke, Vice President, Area Operations - Southeast Area Nicholas F. Barranca, Vice President, Operations Support William J. Brown, Vice President, Area Operations - Mid-West Area James A. Cohen, Judicial Officer William J. Dowling, Vice President, Engineering Mary S. Elcano, Senior Vice President and General Counsel Patricia M. Gibert, Vice President, Retail James F. Grubiak, Vice President, International Business Robert F. Harris, Vice President, Diversity Development Gene R. Howard, Vice President, Area Operations - Pacific Area Kenneth J. Hunter, Chief Postal Inspector John F. Kelly, Vice President, Area Operations - New York Metro Area Charles K. Kernan, Vice President, Area Operations - Southwest Area Robert Krause, Vice President, Core Business Marketing Clarence E. Lewis, Jr., Vice President, Area Operations - Allegheny Area Norman E. Lorentz, Vice President, Quality Yvonne D. Maguire, Vice President, Human Resources Joseph J. Mahon, Jr., Vice President, Labor Relations Henry A. Pankey, Vice President, Area Operations - Mid-Atlantic Area M. Richard Porras, Vice President, Controller Darrah Porter, Vice President, Strategic Initiatives Robert A. F. Reisner, Vice President, Strategic Planning Gail G. Sonnenberg, Vice President, Tactical Marketing and Sales Development Larry M. Speakes, Senior Vice President, Corporate and Legislative Affairs Jon Steele, Vice President, Area Operations - Northeast Area A. Keith Strange, Vice President, Purchasing and Materials Rudolph K. Umscheid, Vice President, Facilities Craig G. Wade, Vice President, Area Operations - Western Area James C. Walton, Vice President, Workforce Planning and Service Management John H. Ward, Vice President, Marketing Systems John R. Wargo, Vice President, Customer Relations J. T. Weeker, Vice President, Area Operations - Great Lakes Area Richard D. Weirich, Vice President, Information Systems Management Associations and Unions Hugh Bates, President, National Association of Postmasters of the United States Moe Biller, President, American Postal Workers' Union, AFL-CIO William Brennan, President, National League of Postmasters of the United States Steve Smith, President, National Rural Letter Carriers' Association Vincent Palladino, President, National Association of Postal Supervisors William Quinn, President, National Postal Mail Handlers Union Vincent R. Sombrotto, President, National Association of Letter Carriers, AFL-CIO Office of the Board of Governors Karla W. Corcoran, Inspector General Thomas J. Koerber, Secretary to the Board of Governors CONTENTS Letter from the Postmaster General.........................................................................1 Executive Summary ...................................................................................4 I. The Mission: Prompt, Reliable, Efficient Universal Service..............................................8 II. The Organization Today: The Postal Service and Its Environment..................................................................................11 Introduction......................................................................................11 The Organization..................................................................................11 Mail Volume.......................................................................................12 Products, Market Share, and Competition...........................................................12 The Workforce.....................................................................................13 Regulation........................................................................................15 III. Where the Postal Service Is Going: Goals for 2002....................................................17 Introduction......................................................................................17 Corporate Goal Categories: The Three-Voice Structure..............................................17 Voice of the Customer: Customer Satisfaction......................................................18 Voice of the Employee: Organizational Effectiveness...............................................19 Voice of the Business: Financial Performance......................................................20 The Growth Goal in Perspective....................................................................24 IV. Challenges and External Factors.......................................................................26 Regulatory Constraints............................................................................26 Technology........................................................................................27 Competition.......................................................................................28 Changing Customer Expectations....................................................................28 The Challenge of Performance Management...........................................................29 V. How the Postal Service Is Going to Get There: Organizational Strategies.................................................................................30 Introduction ..................................................................................30 Voice of the Customer: Establish Service Excellence and Create Unique Value for Customers..................................................31 Voice of the Employee: Establish a Performance Culture............................................33 Voice of the Business: Growth, Positive Net Income, and Cost Management for Commercial Viability......................................................36 VI. How the Postal Service Will Measure Its Progress: The Performance Management System.........................................................................41 The CustomerPerfect! Management System...........................................................41 The Annual Performance Plan.......................................................................42 Economic Value Added..............................................................................43 Process Management................................................................................43 VII. Consultations with Stakeholders......................................................................44 Outreach Processes................................................................................44 Stakeholder Responses.............................................................................45 Summary of Stakeholder Issues.....................................................................46 Incorporating Stakeholder Comments................................................................47 Appendix A: Stakeholder Involvement.......................................................................49 Appendix B: Economic Planning Assumptions.................................................................59 Appendix C: Postal Office of Inspector General Audits ..................................................60 Executive Summary The reinvention of the United States Postal Service is well underway. Driven by the imperative to meet customer requirements, the Postal Service has stepped onto a path of continuous improvement that leads, over the next five years, to growth, greater productivity, effective cost management and unique customer value. Transformational as this journey will be, at its end the Postal Service will remain the two-century-old provider of universal postal service at uniform rates for the American people and their businesses and institutions. Strategic planning is a critical part of this effort, and is a central component in the Postal Service's CustomerPerfect! performance management system. This system complements the Government Performance and Results Act of 1993 (GPRA) and supports the law's mandate to establish a set of measurable goals to uphold the Postal Service's mission and to define underlying strategies to achieve those goals. This five-year strategic plan describes the Postal Service mission, the goals the Postal Service expects to meet over that period, the strategies it will use to reach these goals, and the performance management system that will evaluate progress. In those strategies listed below, and described in detail in the plan itself, the core principle endorsed by the organization is that the customer value that the Postal Service's transformation creates will drive the growth that the organization requires to deliver reliable, secure, prompt and cost-effective universal service. Because the Postal Service has committed to continuous improvement, these goals and strategies will be under constant review. This strategic plan will be updated each year with the publication of an annual performance plan and an annual performance report, and every three years, or more often when needed, a new strategic plan will be published. The Mission The mission of the United States Postal Service is set forth in the opening paragraph of the 1970 Postal Reorganization Act: "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." That fundamental mission has not changed, and today is supported by a vision statement that Postal Service products and services will be recognized as the best value in America; that the Postal Service will evolve into a premier provider of 21st century postal communications; and that the Postal Service will be the most effective and productive service in the Federal government and markets that it serves. The organization defines its guiding principles - or values - as "People, Customers, Excellence, Integrity and Community Responsibility." The Goals The United States Postal Service's fundamental goals are to satisfy the customer, improve employee and organizational effectiveness, and improve financial performance. The Postal Service categorizes these goals as "voices" to emphasize that the Service is driven by and focused on data and input gathered from the marketplace and employees. The goal categories are Voice of the Customer, Voice of the Employee and Voice of the Business. The Voice of the Customer goal category centers on customer satisfaction and the achievement of superior customer value in targeted markets. The Voice of the Employee goal category focuses on organizational and individual effectiveness, or aligning human resources with business objectives by having the right people in the right place with the right tools at the right time. The Voice of the Business goal category focuses on financial performance to assure commercial viability and bottom-line results. Specific performance goals have also been established for each of the Voice goals. For each performance goal, indicators and performance targets have been set or are in development, and progress will be measured against them. The United States Postal Service's fundamental goals are to satisfy the customer, improve employee and organizational effectiveness, and improve financial performance. Voice of the Customer Goals. The corporate goal is to improve customer satisfaction by offering superior customer value in each market and targeted customer segment. Performance goals to achieve that broad goal are to provide timely delivery; to provide consistent service; to offer accurate service; to assure that service is affordable; and that the service is easy to use. Voice of the Employee Goals. The corporate goal is to improve employees' and organizational effectiveness by having the right people in the right place with the right tools at the right time to provide superior customer value consistently and ensure commercial viability in a dynamic market. Performance goals to achieve that broad goal are to ensure that employees demonstrate the required proficiencies for their assigned work; to anticipate complement needs and deploy people to meet organizational requirements; to ensure a safe work environment; and to enhance the workplace environment to improve relationships with employees. Voice of the Business Goals. The corporate goal is to improve financial performance to assure commercial viability as a service provider for the worldwide movement of messages, merchandise, and money. Performance goals to achieve that broad goal are to grow volume from existing or enhanced products and services; to grow net income from new products and services; to control costs through re-engineering, decreasing rework and cycle time, process management, and substituting capital for labor; to control costs by achieving productivity gains; to use pricing as a competitive tool while keeping rate increases below the rate of inflation; and to restore equity. The Challenges There are a number of challenges and external factors that could affect the success of the five-year plan. Federal regulations set forth in the Postal Reorganization Act of 1970 prevent the organization from offering products and services with prices and characteristics that compare favorably with competitive offerings. These regulations constrain the Postal Service's ability to respond to rapidly-changing market conditions and to control costs. New information technology - the Internet and its World Wide Web, e-mail, electronic commerce and electronic data exchange - has fundamentally altered consumers' choices and expectations. Thirty-eight billion pieces of First-Class Mail and $6 billion are directly at risk to electronic diversion. New competitors, such as those that foster connectivity, privacy and security, convenience, and money or banking capabilities, will gain market share. A more sophisticated consumer is emerging in the United States. Because of the growing diversity of customer interests served by the Postal Service, consensus on what constitutes success is difficult to achieve. Finally, legislative reform has been proposed. The outcome of that proposal could alter the fundamental legal structure of the organization. The Organizational Strategies To grow through the creation of unique value represents an explicit choice. It demands discipline, priorities and a focus on customer requirements. Four core strategies drive the growth principle - commit to customer service excellence; practice aggressive cost management; become a 21st century growth company; and create unique customer value. All must be implemented in a manner that fosters alignment with the Voice goals. The Postal Service will implement these strategies by providing better operating performance and more effective management of customer contact operations. Employee effectiveness will be improved by focusing new resources on training, complement deployment and efforts to enhance the workplace. The organization will work aggressively to control costs through a combination of productivity gains, improvements to make best use of key human resources and unit cost management of all resources. Voice of the Customer Strategies. The principal strategies are to establish service excellence and to create unique customer value. The strategic efforts supporting this goal focus on improving operational performance. Specific strategies include a focus on improving transit time; redesign of customer contact and access through three major customer service channels - retail/residential, large mailers, and medium and small mailers; expanded use of information technology; consumer protection focus; and product and service innovation. Voice of the Employee Strategies. The principal strategy is to establish a performance culture while improving the quality of the workplace environment. The specific strategies include improving workplace safety; enhancing the workplace environment; leveraging diversity; enhancing employee skills; aligning human resources systems with organizational requirements; establishing an incentive compensation plan; performance management; and improvement of labor/management relations. Voice of the Business Strategies. The principal strategies are to promote growth; to generate positive net income; and to manage costs aggressively to ensure commercial viability and establish financial integrity. Specific revenue growth and positive net income strategies include organizational alignment and establishing "line of sight" to the customer; core business marketing; pricing; revitalization of retail and stamp services; expansion of parcel and expedited services; expansion of international mail; and new product and service innovation. Specific cost management strategies include the reduction of labor intensity; the reduction of cost per work hour; the reduction of transportation costs; focus on delivery; increased productivity; and an aggressive five-year $14.3 billion capital investment plan. The capital investment plan will concentrate resources in two broad categories: new technologies that produce labor savings or achieve cost avoidance, and customer service programs that generate revenue or enhance competitiveness in the marketplace. Under this plan, $5.6 billion would be spent on facilities; $4.8 billion on automation and mechanization; $431 million on vehicles; $933 million on retail equipment; and $2.5 billion will be spent on postal support equipment. Ensuring commercial viability and programs to protect revenue and restore equity will place the financial integrity of the postal system on a par with America's most respected business enterprises. The strategies will be periodically reexamined as part of the planning process. Strategic refinements will be published in future editions of the plan. Measurement and Management CustomerPerfect! is the Postal Service's Malcolm Baldrige Award criteria-based management system. Its annual planning cycle establishes Voice goals, performance goals, business strategies and measures of performance - both indicators and targets. CustomerPerfect! includes a number of features that are critical to balancing the multiple needs of senior management, line management, governance of the business and fair evaluation of performance. Outside professional research services are used to gather objective external service performance data on which to base evaluation. External measures of performance are used to provide a snapshot of the consumer's perspective on service, and internal process drivers are being developed to provide internal line managers with the ability to manage performance to improve against these measures. The Board of Governors receives periodic reports on the performance measures and reviews the match between the measures and the strategic direction of the organization. Finally, the performance measurement system provides a systematic ongoing process of goal setting, resource deployment and review so that there is an opportunity to make corrections and to improve over time. Economic Value Added (EVA) calculations provide the basis for incentive management. The EVA system is intended to provide employees with a clear and powerful measure of their ability to improve bottom-line economic performance. Finally, process management is being introduced to provide a data-driven, proven methodology for making improvements in all parts of the business, from the shop floor to top management. Consultation with Stakeholders As required by GPRA, the Postal Service engaged in consultations with stakeholders, including customers who ranged from individuals to large mailers. In addition to the extensive customer contact processes that are employed by the Postal Service in the course of everyday business to provide ongoing information about customer priorities, the planning process used media ranging from letters, Customer Advisory Councils and trade publications to the Federal Register and the World Wide Web to gather comments. The inputs and data collected in those consultations and in consultations with Congress, the National Performance Review and other Federal agencies have been incorporated into this plan. This planning process, now formalized by GPRA, will be the start of an ongoing consultation process in the future. In sum, this GPRA-mandated plan provides a concise description of the strategic direction of the United States Postal Service, one of the central institutions in American society and commerce. Steered by a 200-year-old mission to provide a communications infrastructure that can bind the nation together, the modern Postal Service performs the vital task of providing communications access to all Americans in every community while sustaining its operations in an economically self-sufficient manner. For the next five years the Postal Service will follow a path leading to performance goals shaped by this historic mission, and by the organization's best understanding of how to fulfill it in a complex, changing environment. Strategies guiding this journey will focus on achieving growth by providing increasing value created by offering customers excellent service at increasingly affordable prices. Progress will be measured in an organization driven by and compensated for performance. As certain and clear as this path is, the future is not. Ten years from now, this same environment may be transformed by technologies in their infancies today. Ten years from now, the United States Postal Service mission responsibilities may be met only by a new understanding of universal service, access, and how best to deliver them. A decade from today, the Postal Service may have embraced technologies and systems as dramatically different as jet airplanes and robotic package sorters would have seemed to the 19th-century letter carrier. Because this five-year plan is a living document, conceived to be flexible and adaptive to such environmental shifts, these challenges and external factors will be examined, weighed and - where appropriate - addressed in the years ahead. Ultimately, the philosophy underlying this plan, these goals, and their strategies is to create unique customer value as the Postal Service grows, improves and strengthens its financial foundation. This is a philosophy that embraces change. Because, in change, there will be opportunity for the United States Postal Service to serve its customers better. Mission "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 United States Postal Service's Statement of Purpose. I . Prompt, Reliable, Efficient Universal Service Two hundred and twenty-two years ago, before the thirteen colonies that became the United States of America had declared their independence, the Continental Congress created a postal system to help bind the emerging nation together, to support the growth of commerce and to ensure a free flow of ideas and information among its people. The Constitution of the United States stipulates that the Congress shall have the power to create a network, consisting of "Post Offices and Post Roads." That network has grown with the nation and fueled the country's expansion by providing universal communication services to a growing economy. In 1970, recognizing that the Cabinet Department charged with carrying out the critical responsibility of mail delivery was not operating in a reliable manner, the U.S. Congress passed legislation to establish the United States Postal Service. This new entity would be a redesigned government service, functioning as a responsible employer and fulfilling its basic mission through businesslike operation. This basic mission of the Postal Service was stated in the opening paragraph of the 1970 Postal Reorganization Act: Quote: 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).] In the quarter century since its creation, the Postal Service has expanded to serve the nation by incorporating advances in technology and human understanding that are developing at an ever-increasing rate. Binding the nation with prompt, reliable and efficient service while remaining a viable self-financing entity continues to be the mission as the Postal Service evolves. The historic role of the Postal Service has contributed to the modern perception of its mission. In many communities the post office is at the very heart of the town. Although retail activity may sometimes move to a mall out near the interstate, there is still great interest in keeping the post office open on Main Street as an anchor for the community. In addition to the post office's role as a vital part of community life, the letter carrier is a familiar presence in every neighborhood in America. The Postal Service has earned a trusted place at the heart of the nation and its economy, while financing its operations from its own revenue sources. (Footnote 1) Sidebar: Defining Mission Attributes * Universal Service - Access - Service to all communities * Self-Supporting * Reasonable rates Consistent with the statement in the Postal Reorganization Act, Postal Service management adopted a formal mission statement (included above as the "Statement of Purpose") and a statement of vision. This mission - articulated in law, the Constitution, Supreme Court decisions and 200 years of precedent - is a statement of the reason for serving the American people. The vision supporting this mission is to ensure that * Postal Service products and services will be recognized as the best value in America; * The Postal Service will evolve into a premier provider of 21st century postal communications; and * The Postal Service will be the most effective and productive service in the Federal government and markets that it serves. In addition, management has adopted guiding principles - or values - which define the character of the organization, committing it to "People, Customers, Excellence, Integrity and Community Responsibility." In the quarter century since its creation, the Postal Service has expanded to serve the nation by partnering with customers and investing in technology to service new customer demands that are developing at an ever-increasing rate. Binding the nation with prompt, reliable and efficient service, the mission of the Postal Service continues to evolve in anticipation of a changing communications marketplace in the 21st century. Once the Postal Service could offer a single network service that had virtually no competition, but today customers have many choices. The Postal Service - to fulfill its mission and remain a self-financing entity - must provide its customers with a competitively attractive alternative in addition to an increasingly productive one. By law, the Postal Service is required to provide mail service to all communities at uniform and reasonable rates. While the definitions of service required to carry out this responsibility are a subject of important ongoing discussion with customers, the intent of Congress is clear in reserving to the Postal Service the task of providing the nation's infrastructure for the delivery of hard-copy mail, both messages and merchandise. The actions of Congress since the creation of the Postal Service, the Supreme Court's affirmation of the Private Express Statutes, and the law that only the Postal Service can deliver to a letter box have established a broad and enduring special mission that is protected in service of the public interest. As recently as 1991, the United States Supreme Court reaffirmed the Private Express Statutes (Air Courier Conference of America vs. American Postal Workers Union, AFL-CIO, et al.), stating in its opinion that the Statutes "enable the Service to fulfill its responsibilities to provide service to all communities at a uniform rate by preventing private couriers from competing selectively on the Service's most profitable routes." The Postal Service's mission to provide services to every household and business in America has become even more important just as it is being challenged by new technologies. The electronic age's e-mail, fax, electronic data interchange and video have not yet led to a replacement for mail, or an electronic infrastructure with that capability. While the speed and convenience of new services are clearly appealing to some consumers, there are drawbacks to the new technologies. Issues of personal privacy, the reliability of the service and access to new services, among others, remain to be resolved. Federal and state regulators are working to develop the policies that will govern electronic communications competition, pricing and service obligations. The future actions and investments of competitive providers of service cannot be predicted. Nor will mass-market consumer reaction to the new electronic information service choices be known in this decade. Sidebar: In many communities the post office is at the very heart of the town. Although retail activity may sometimes move to a mall out near the interstate, there is still great interest in keeping the post office open on Main Street as an anchor for the community. Nevertheless, in the emerging electronic age in which some segments of the population are changing the way they communicate and do business, the Postal Service's infrastructure must continue to innovate and respond to new customer requirements to meet the mandate of its mission. Customers are seeking new postal services that will make the core businesses easier to use. New reservation systems for mail entry that use smart forms provide an example of such a service innovation. Research and development to create new customer service channels may yield a platform for offering new electronic services if there is customer demand for such service, and if acceptable arrangements are made with the technology companies that develop and supply such services to the market. More certain is that the Postal Service's universal services are being offered in a communications market increasingly characterized by information "haves" and "have-nots." A small but growing segment of the American people has access to electronic services and shares the desire to use them. Another segment, much larger, either does not or cannot use these new forms of communications. The role of the trusted universal service provider will be increasingly important as the issue of access to information becomes more significant. The reach of the Postal Service is achieved by its broad extension through nearly 40,000 post offices, stations, branches and contract outlets, and 219,000 city and rural delivery routes into every community in America. The ability to provide access to all Americans is an essential characteristic of the Postal Service's presence in American life and the economy. In the electronic age, providing access to communications that are available to everyone at reasonable and uniform rates is a mission that will continue to be one of the most critical functions of democracy. During the comment and consultation process employed to develop this strategic plan, customers, unions and management associations, and the public were asked to comment on the importance of the mission of the Postal Service. Numerous comments were received that were consistent with that of a customer on the Blue Ribbon Committee advising postal management who said "...frankly, there is no alternative to the Postal Service. We stand or fall together." In the future, issues will continue to arise about the way in which the Postal Service should provide service, even if there is consensus that the service itself is critical. Beyond concerns for efficiency, some would like to be able to bid to serve commercially-attractive mail routes. Others would like to ensure that the Postal Service provides effective global service. The National Performance Review has suggested that the role of the Postal Service in an electronic age might include providing new trusted and secure services that offer citizens access to government. Others who seek to provide electronic marketing services have discussed the need to ensure that when orders are placed on the Internet, the Postal Service will offer a vehicle to deliver those goods. Whatever the outcome of such a debate, the fundamental mission of the Postal Service endures as it enters a new century and creates new ways to offer value to customers. The Organization Today II. The Postal Service and its Environment Introduction To frame the five-year strategic plan of the United States Postal Service properly, it is necessary to understand the organization's recent past and current business environment. The world's largest postal enterprise, and this country's biggest civilian employer, the Postal Service in the early nineties found itself facing stagnation and a mindset of entitlement, a situation common to many American businesses at the time. Declining service and customer dissatisfaction had led to mounting negative equity for its owners, the people of the United States of America. Today, restructuring and other transformational efforts have reversed those negative trends. The Postal Service operates with 100,000 fewer employees than 1987 baseline metrics suggested would be required to service and deliver current mail volumes. Net income totaling $3.4 billion has been earned in the 1995-1996 period. Service measures are at all-time highs. Customers now say they're more satisfied. This strategic transformation continues through the application of new quality management tools and the direction provided by organizational strategies aligned with customer needs, focused on creating customer value and driven by measured performance. In short, the Postal Service is well along on a path set forth by the Government Performance and Results Act (GPRA) - setting goals and measuring progress towards them. The Organization The size and scope of this unique government enterprise, the United States Postal Service - which is required to provide mail delivery and postal services to every community, business and residence in the United States, its territories, and its servicemen and women stationed overseas - dwarfs that of other global postal organizations. In 1996, the Postal Service delivered 183 billion pieces of mail, seven times the volume of the world's next largest postal organization, and 43 percent of all worldwide volume. Japan, second in volume worldwide, moves but six percent of all global mail. Domestic operations for the Postal Service include the 50 states and all U.S. possessions. Within this domain, all distribution activities and service commitments are mapped to a grid of 931 areas defined by their three-digit ZIP Code prefix. Among them, 16 ZIPs designate entry/exit points to military liaison delivery routes (APO/FPO) and 30 more designate government agencies, very large firms, or very large post office box sections. The workforce - 887,866 postal employees working in career and non-career, bargaining and non-bargaining, craft, supervisory, management and relief positions - operates and maintains a network whose backbone is 174 Processing and Distribution Centers, supported by 316 smaller Processing and Distribution Facilities and auxiliary networks for air and ground transportation. Thirty-four Airport Mail Centers, supported by 36 smaller Airport Mail Facilities and centered around the "Eagle Hub" in Indianapolis, Indiana, form the air sub-network. Through the Indianapolis facility, major markets coast-to-coast are provided service for Express and Priority Mail on the Postal Service's leased air fleet. Interconnection with the national railroad system is through a sub-network of 21 Bulk Mail Centers, supported by eight Auxiliary Service Facilities. In addition, the Postal Service and Emery Worldwide Airlines have completed a $1.7 billion (volume-variable) agreement to create a new transportation and sorting network for Priority Mail, serving the eastern seaboard from New England to Florida. Underpinning the mail processing network are nearly 40,000 local post offices, stations, branches and privately-operated retail units providing community access to the network and to delivery points. Approximately 126 million domestic deliveries of all types are served by the general and underlying local networks. Moving the mail through this network is a transportation system that includes the operation of 29 aircraft out of the Postal Service's Eagle Hub; a fleet of 202,224 postal-owned vehicles and 6,555 leased vehicles; contracts with 74 airlines, 11 railroads and a variety of ship owners and boat operators; and about 15,500 highway contract routes. This network is supported by agreements with international postal organizations. Mail Volume Table 2-1 on the next page shows the growth rates of the major products over the five-year period FY 1991-96. For the previous five fiscal years, mail volume growth has been modest - 10 percent, or 2 percent annually. Consequently, the organization has held a declining share of a growing communications market. Between 1988 and 1996, Correspondence and Transactions (C/T) grew explosively; yet the Postal Service captured only one-third of that segment's growth. The total C/T market grew $22 billion or 85 percent, from $26 billion to $48 billion, but the Postal Service piece grew only $8 billion or 40 percent, from $20 billion to $28 billion. As a result, its share of the C/T market decreased from 77 percent to less than 59 percent. Table 2-1. Mail Volume: FY 1991-96 (millions) Category: First-Class Mail 1991: 90,285 1996: 97,276 '91 - '96 % Change: 7.7% Category: Priority Mail 1991: 530 1996: 959 '91 - '96 % Change: 80.9% Category: Express Mail 1991: 58 1996: 58 '91 - '96 % Change: 0.0% Category: Periodicals 1991: 10,399 1996: 10,126 '91 - '96 % Change: -2.6% Category: Standard A Mail 1991: 62,430 1996: 71,859 '91 - '96 % Change: 15.1% Category: Standard B Mail 1991: 695 1996: 960 '91 - '96 % Change: 38.1% Category: Other Domestic Mail 1991: 669 1996: 424 '91 - '96 % Change: -36.6% Category: International Mail 1991: 793 1996: 999 '91 - '96 % Change: 26.0% Category: Total Mail 1991: 165,851 1996: 182,661 '91 - '96 % Change: 10.1% The five-year growth rate for First-Class Mail is particularly sluggish in this context - about 8 percent, or 1.5 percent annually. Standard A mail (formerly third class) has been higher at 15 percent (3 percent annually). Priority Mail has been a very successful product, with a five-year increase of 81 percent, or about 13 percent annually. Standard B mail (formerly fourth class) and International mail have also experienced healthy annual growth rates in the 5-7 percent range. Other domestic mail includes Mailgrams, free-for-the-blind mail and Postal Service penalty mail, which has been declining steadily in volume in recent years. Improved service and stable pricing resulted in only modest volume growth, as indicated in the above table. In 1996, the Postal Service achieved two successive record quarters of 91 percent on-time delivery of overnight First-Class Mail, a 15 percent improvement over three years. Since 1994, customer satisfaction improved by 15 percentage points. Classification Reform, the first major realignment of mail services since 1879, was implemented in 1996, and provides a market-based structure, offering increased economic incentives for mailers who prepare their mail for the most efficient, automation-compatible handling. Price increases have been below the level of inflation, including four years from 1991-1995 without a price change. In July 1997, a one-cent First-Class increase was proposed. An implementation plan will be developed by the Board of Governors after the Postal Rate Commission makes its recommendation. Through expanded delivery points, new products and services and better cost management, the Postal Service has overcome sluggish growth to generate a record net income of $3.4 billion in the 1995-96 period. That surplus restored the public's equity by more than half in the last two years - from negative $6 billion to negative $2.6 billion. Products, Market Share, and Competition While volume has grown, albeit slowly, the Postal Service's shares of several of the market segments of its businesses, in fact, are declining relative to its competition (see Table 2-2 below). These activities fall into six business categories: correspondence and transactions; advertising mail; package services; periodicals; international mail; and special services. Each represents a different business environment, so it is difficult to generalize about these trends and challenges. Table 2-2. 1996/97 Postal Business Summary Business Segment: Correspondence and Transactions Value to USPS (Billion $): $33.0 USPS Market Share (Revenue): 59% USPS Share Trend (1996/97): declining Business Segment: Advertising Mail Value to USPS (Billion $): $12.2 USPS Market Share (Revenue): 20% USPS Share Trend (1996/97): stable Business Segment: Package Services Value to USPS (Billion $): $5.6 USPS Market Share (Revenue): 15% USPS Share Trend (1996/97): declining Business Segment: Overnight (Express Mail) Value to USPS (Billion $): $0.7 USPS Market Share (Revenue): 6% USPS Share Trend (1996/97): declining Business Segment: Two Day (Priority) Value to USPS (Billion $): $3.4 USPS Market Share (Revenue): 45% USPS Share Trend (1996/97): declining Business Segment: Ground (Standard B) Value to USPS (Billion $): $1.5 USPS Market Share (Revenue): 9% USPS Share Trend (1996/97): growing Business Segment: Periodicals Value to USPS (Billion $): $2.0 USPS Market Share (Revenue): 84% USPS Share Trend (1996/97): stable Business Segment: International Mail Value to USPS (Billion $): $1.6 USPS Market Share (Revenue): 30% USPS Share Trend (1996/97): declining Business Segment: Special Services Value to USPS (Billion $): $1.8 USPS Market Share (Revenue): N.A. USPS Share Trend (1996/97): N.A. Business Segment: USPS TOTAL Value to USPS (Billion $): $56.3 Sources: USPS CRA Report, with segment estimates by A.D. Little, using Household Diary Study. What seems to be true for all categories, however, is that there is no market in which Postal Service growth is assured. Technological advances - the spread of the personal computer from large office environments to the home and home office; electronic commerce and electronic data interchange; rising customer expectations emerging from this new technology; pressure on the mailing industry to match the cost containment and pricing initiatives of its competitors - are all factors contributing to the strategic approaches of the Postal Service. The Postal Service today continues to provide a valued service, but in a market place that will clearly be transformed in coming years. Correspondence and transactions. The value of the Correspondence and Transactions (C/T) market is estimated to be about $48 billion annually. First-Class Mail accounts for $33 billion, but First-Class Mail volume is barely growing at an annual rate of 1-2 percent. Rate increases have permitted postal C/T revenue growth of 5 percent annually, compared to an overall C/T market growth of 8 percent and 16 percent growth in competing electronic alternatives. The Postal Service captured only 36% of new C/T market revenue between 1988 and 1996. (In 1996, fully 39% of the total C/T market went to electronic alternatives, and 2% went to traditional competitors.) First-Class Mail is a mature product, and, in recent years, virtually all of the growth in this market has gone to competitors, including electronic mail, facsimile, electronic banking, electronic data interchange, electronic funds transfer, electronic file transfers and even the telephone. The low volume growth during the past several years reflects the cumulative effects of electronic communications, downsizing and productivity improvements in commerce, increasing mergers and acquisitions in key mail-producing industries such as banking and retailing, and decreasing use of personal correspondence. Advertising mail. The Postal Service has become an increasingly important channel for the distribution of advertising material, primarily using Standard A Mail (formerly third class). Ad Mail has many benefits, including its targetability, flexibility, measurability, and effectiveness in generating responses. The Postal Service share of this market has improved from 18 percent in 1988 to about 20 percent, or $12.2 billion in the most recent fiscal year. Further increases in market share will be strongly resisted by competitors of the Postal Service. Until recently, the Postal Service and its partners in the direct mail industry have been increasing their market share through improvements in database management and other targeting tools. During the past five years, for example, Ad Mail revenues have grown at about 5 percent annually. This relatively moderate revenue growth reflects postage and paper price increases, the lack of product innovations, the complexity of using direct mail and aggressive competition. Furthermore, one key advertising mail segment, the catalog industry, has reached a mature stage and is no longer growing as rapidly as it did several years ago. Major competition in the advertising market consists of traditional alternative media, such as newspapers, television and direct mail, with market shares of 22, 23, and 20 percent, respectively. World Wide Web advertising and cable television are entering this market with the ability to produce targeted advertising that provides visual impact and time-certain delivery. Today, newspapers and alternative delivery companies compete directly against mail for advertising dollars. One of the most dramatic strategy changes in recent years has been serious newspaper participation in alternative delivery in the early 1990s. Newspapers make up 70 percent of alternative delivery providers today. There are signs that this investment experiment to protect newspaper advertising revenue may not have been commercially successful, however, and that newspaper industry participation in alternative delivery may decline further in the future, unless new legislation changes the regulatory framework. Package services. Although the majority of package volume, especially in Express Mail and Priority Mail, consists of documents, most of the packages delivered in the United States are merchandise. The Postal Service is a minor participant in the business-to-business merchandise delivery market, which includes most of the national package volume. Priority Mail, the most successful Postal Service package product, has maintained a steady revenue growth rate of almost 13 percent annually over the last five years. However, while the overnight market continues to grow at double-digit rates, Express Mail revenue has grown only 3 percent per year. The inability to offer volume discounts, poor coverage of ZIP Codes for next-day service (73 percent versus 95 percent for the competition), and noncompetitive service performance have contributed to this lackluster growth. Parcel post volume grew rapidly in the first few years of this decade, due in large part to the introduction of worksharing pricing initiatives; however, there has been virtually no growth over the past two years. The major competitors in package services are continuing to make massive investments in marketing as well as in the aircraft, sorting terminals and technology needed to improve productivity and provide high-visibility, high-quality services. Competitors are also trying to garner more business from existing customers by offering them a broader menu of services, more rate options and value-added features. The development of information technology platforms has given the major package delivery competitors of the Postal Service the ability to offer information services and readily-accessible performance measures to their customers. As a result, current competition in this market is based as much on the availability of value-added features as on price. The Postal Service's inability to offer volume price discounts to large package shippers such as Land's End or L.L. Bean puts the organization at a competitive disadvantage. Periodicals. While Periodicals are an important market, the Postal Service carries this mail at rates that reflect its public service value. The domestic market for delivery of newspapers and magazines (including newsstand magazines) is estimated at 37 billion publications, of which the Postal Service has approximately a 28 percent share. The Postal Service delivers virtually all of the subscription magazines and a significant portion of non-daily newspapers. It does not participate significantly in bulk delivery of publications to retail locations. Alternative delivery remains a latent threat to Periodicals volume as well as Ad Mail. In 1996, there were about 370 firms delivering about 2 billion pieces of material through alternative delivery channels, of which 86 percent was advertising. There are signs, however, that alternative delivery is faltering. One of the two major national players, Publishers' Express, went out of business early in 1996. Alternate Postal Delivery (APD) is the only major intermediary firm remaining in the market. Newspaper delivery organizations could still represent a major threat, since they have the financial resources to sustain even a break-even delivery venture as a strategic investment. International mail. The international mail market is served by one of the Postal Service's strategic business units. In 1996, the International Business Unit (IBU) share of the traditional world international postal market was 30 percent, and accounted for $1.6 billion in revenue. While this market has been growing, Postal Service market share has been declining due to aggressive, open competition and technological obsolescence. Recent success in pioneering a global package consignment service has challenged the competition and shown the Postal Service can provide high-quality service. The structure of the international postal market has changed dramatically as a result of increased competition, which resulted from deregulation in transportation industries and suspension of the international postal monopoly. Deregulation allowed the entry of additional mailers into the market by reducing restrictions on transportation methods, which became more readily available and less costly. The suspension of the international postal monopoly on all classes of mail paved the way for increased competition in the Express Mail and parcel markets. Competition has also intensified due to the expansion of private delivery companies, re-mailers and even foreign postal administrations. The major express delivery companies are continuing to expand operations in Europe and Asia. Globalization of business communications has enhanced the value of electronic tracking and Internet services. The international posts in many industrial countries have become revitalized competitors that are improving the quality of the services they offer. Several posts have been granted commercial freedoms that allow diversification. Foreign postal administrations, such as the United Kingdom's Royal Mail and the Dutch and Danish Posts, have expanded their operations across borders in order to target non-domestic customers, and some are even investing in private delivery companies to increase their international business. For example, Netherlands' PTT Post recently purchased TNT Ltd., a major international delivery company. As the United States accounts for a substantial amount of the world's mail, Postal Service customers are being increasingly targeted by these competitive service providers. Whether the foreign posts become partners or competitors will likely depend on the verdict of the customers of their international mail and special services. Special services and retail products. The Postal Service offers more than 20 Special Services that can be purchased for a fee either separately or as an added feature to a core mail delivery service. Most of these services still conform to the original design and features that suited mailer needs in the much less competitive environment of 25 years ago. For more than 20 years, sales for some of the Special Services have thrived while others have diminished as long-term changes occurred in customers' mailing needs and expectations. For example, customers have increased use of Certified Mail at unprecedented rates to meet the legally-recognized delivery confirmation needs of an increasingly litigious society, while other services, such as Special Handling, have all but disappeared in a market with numerous speed and quality delivery options. The retail function is both a business and a channel of distribution, supplying the Postal Service product and service needs of consumers and small firms. Full-service retail is provided through a network of approximately 40,000 postal facilities. Stamps-only sales are available at 30,000 supermarkets and drug stores, 40,000 postal-owned stamp vending machines, and 10,000 automated teller machines (ATMs). Stamps are also available by mail order. Substantial competition from private mail and parcel franchises has emerged in recent years. Starting with a few hundred stores in 1980, this industry has grown to include about 7,800 commercial mail receiving agencies, such as Mailboxes, Etc. FedEx, United Parcel Service and other package delivery services have another 5,300 outlets that are focused primarily on business shippers. UPS also has contract arrangements with another 28,000 "agents." Together, these companies generate over $5 billion in revenues. The Workforce The size of the Postal Service - by Fiscal Year 1997's twelfth accounting period, there were 887,866 postal employees working in career and non-career, bargaining and non-bargaining, relief, craft, supervisory and management positions - underlines the fact that labor costs are an enormous part of the postal budget, currently 77.6 percent of total expenditures. In fact, the percentage of salaries and benefits in proportion to total expenses has decreased in recent years. Nevertheless, the Postal Service faces a continuing challenge to use that labor force efficiently so that it provides the best possible service at minimal cost per work hour. The vast majority of the workforce - 735,937 - are employed under the terms of 12 labor contracts. An October 1994 General Accounting Office (GAO) report on labor-management relations stimulated a high-level review of policy issues. That, in turn, has led to a "Summit" process under the auspices of the Director of the Federal Mediation and Conciliation Service (FMCS) that seeks a joint effort on their resolution. As part of the process, the Postmaster General will bring together postal executives and representatives from the four major unions and three management associations to discuss corporate issues and to develop a long-term (10-year) framework agreement to outline objectives and approaches consistent with the GAO report. Outstanding grievances remain a key workplace issue, and the Postal Service and major unions and management associations are working with mediators to improve that procedure. While progress toward agreement has been slow, the Postal Service heard again and again during this GPRA-related strategic planning process that organizational productivity is a critical focus of its customers. The Postal Service continues to support initiatives designed to make delivery operations more effective and cost-efficient, and to ensure that the right people are in the right places at the right times. The ability to improve workplace relations will be critical to the accomplishment of future cost containment strategies. Regulation The existing Postal Service ratemaking process is a form of cost-of-service regulation. Over the last 25 years, this regulatory framework has been characterized as stifling innovation, promoting inefficiency, and shifting the focus of management away from the customer. An alternative regulatory model, called incentive regulation, has been applied successfully in the railroad and telecommunications industries, both here and abroad. The experience with these industries strongly suggests that incentive regulation, if properly designed, can provide the framework for a more efficient and more innovative Postal Service. By allowing reasonable pricing changes to occur without extensive regulatory hearings, the Postal Service would be able to react more quickly to changing market conditions and focus more directly on the needs of its customers. The Postal Reform Act of 1997 (H.R. 22), introduced by Congressman John McHugh, House Oversight Committee Chairman, in January 1997 (who introduced a similar bill in 1996), contains a significant overhaul of the pricing mechanisms developed under the Postal Reorganization Act of 1970. The concept contained in H.R. 22 is a constructive attempt to apply incentive regulation to the Postal Service. The Postal Service's objectives for reform - to protect affordable universal service, create a true incentive to control costs and rationalize a ratemaking process that is complex, costly, time-consuming, and inflexible - will endure beyond any short-term policy debate. The need to assure that the authority and responsibility for the financial integrity of the Postal Service remain in the hands of the Postal Governors, and the need to retain the current Private Express protections as a mechanism to guarantee affordable universal service will also be enduring principles that will guide the effort to reform the regulatory process. Where the Postal Service is Going III. Goals and Objectives For 2002 Introduction The development of corporate and performance goals (Footnote 2) by the United States Postal Service will be of critical importance not only to ensure that it achieves its mission, but that it remains viable into the 21st century by effectively managing its costs, by responding to customer needs and demands in ways that deliver unique value and by promoting organizational effectiveness. The goals fall into three broad categories: customer satisfaction, organizational effectiveness and financial viability. These goals all relate directly to the viability of the Postal Service and affect all stakeholders. They were developed during a planning process that began a year ago; that utilized the new Postal Service performance management system; and that received contributions from employees and other stakeholders and public comment delivered at meetings, by mail, and through surveys. These goals will enable the Postal Service to align and focus its activities, core processes and resources to support mission-related outcomes, in particular its ability to fulfill its mission to provide reliable universal service. These goals guide the development of quantifiable performance targets that the Postal Service is introducing this year. These goals emerged from a process that was initiated as the Postal Service reversed the negative trends toward stagnation and service decline that seemed to characterize the organization only a few years ago. That process, whose development is ongoing, begins with an organizational review and evaluation of the prior year's performance. The evaluation identifies priorities for improvement and process owners set goals and targets for improvement based on this analysis. In the case of products and services for which no measures exist today, the ongoing strategic planning process will raise new priorities for consideration each year. Three successive years of record financial performance and improving service levels have reconfirmed the direction. While it is dangerous to predict the future, especially in dynamically changing markets such as those that characterize the communications industry, the goals described here seek to translate the organizational vision of growth and a reinvigorated Postal Service into concrete terms of performance. Corporate Goal Categories: The Three-Voice Structure Internally, the Postal Service refers to these three broad - or corporate - goal categories as "voices." This is to emphasize that they are driven by and focused on data and input - listening carefully to all elements of the organization - received through this strategic planning process. They are Voice of the Customer, Voice of the Employee, and Voice of the Business. The Voice of the Customer goal category centers on customer satisfaction and the achievement of superior customer value in targeted markets. The Voice of the Employee goal category focuses on organizational and individual effectiveness, aligning human resources with business objectives by having the right people in the right place with the right tools at the right time. The Voice of the Business goal category focuses on financial performance to assure commercial viability and bottom-line results. Achieving these broad goals will allow the Postal Service to continuously improve service, the workplace environment, and financial performance. The service goals will target growth markets while sustaining the core mission of universal service. The human assets of the company will be the focus of investment to ensure that they are well-trained, deployed and equipped in a timely manner. At the same time, the costs of service and investment in human resources will be managed to assure successful financial performance. These three goals support three critical elements of the Postal Service: service to the customer or the core mission, the employee on whom the quality of this service depends, and the financial base of the business that must match revenue and cost. The goals are illustrated in Table 3-1 below: Chart: Mission box has an arrow pointing to a Goals box pointing to a Strategies box. Table 3-1. Postal Service Goal Categories Goal Category: Voice of the Customer Goal Statement: Improve customer satisfaction by offering superior customer value in each market and customer segment that we target. Goal Category: Voice of the Employee Goal Statement: Improve employee and organizational effectiveness by having the right people in the right place with the right tools at the right time to consistently provide superior customer value and ensure commercial viability in a dynamic market. Goal Category: Voice of the Business Goal Statement: Improve financial performance to assure commercial viability as a service provider for the worldwide movement of messages, merchandise and money. These three goals, worded in this or similar form, have been the broad goals of the Postal Service since its inception. Concern for serving the customer, concern for the employee and concern for the bottom-line interest in the measures of business performance are the essential building blocks of the postal business. In an earlier day, when the forces of competition were not so apparent, the business goal might have been stated in terms of cost management. Today, however, whether or not the Postal Service is successful in offering customers services that are chosen over competitive alternatives, there must be a concern for matching revenues and costs. Therefore, this business goal is now expressed in terms of financial viability or net income. Another change has been the recognition during this past year that goals should be stated more clearly, both to frame the target and to provide a basis for measuring performance. The three corporate goal categories are further clarified by identifying subgoals (Footnote 3) or objectives. These frame the critical actions needed to achieve the goal. Voice of the Customer: Customer Satisfaction The performance goals of the Voice of the Customer are shown in Table 3-2 below: Table 3-2 Voice of the Customer Performance Goals The Goal: Improve customer satisfaction by offering superior customer value in each market and customer segment that we target. Performance Goal 1: Provide timely delivery Performance Goal 2: Provide consistent service Performance Goal 3: Provide accurate service Performance Goal 4: Assure that service is affordable Performance Goal 5: Ensure that the service is easy to use Performance Goal 1: Provide Timely Delivery. Over the next five years, the Postal Service will: * Increase or maintain overnight First-Class Mail on-time delivery to 92% in 1998 and 95% in 2002. * Increase 2/3-day First-Class Mail on-time delivery to 85% in 1998 and 92% in 2002. * Using the Priority-End-To-End service measurement system, develop targets for Priority Mail Overnight, Intra-area and Inter-area on-time delivery performance. Performance Goal 2: Provide Consistent Service. Over the next five years, the Postal Service will: * Develop and implement indicators and targets for consistency - e.g., carriers leaving and returning on time. Performance Goal 3: Provide Accurate Service. Over the next five years, the Postal Service will: * Using selected residential and business customer survey questions, for example, develop indicators and targets for accurate service. Performance Goal 4: Ensure that Service is Affordable. Over the next five years, the Postal Service will: * As an affordability target, keep a composite index of all postal prices below inflation through 2002 (see discussion in Voice of the Business section). Performance Goal 5: Ensure that the Service is Easy to Use. Over the next five years, the Postal Service will: * Improve performance against Ease-of-Use Indices, which use customer satisfaction surveys to measure how easy it is for customers to do business with the Postal Service. Ease-of-Use Index goals for four customer segments are shown below (based on a maximum index value of 1000): * Increase Residential Ease-of-Use Index from 690 in 1998 to 800 in 2002. * Increase Premier Accounts Ease-of-Use Index from 600 in 1998 to 800 in2002. * Increase Small/Large Business Ease-of-Use Index from 652 in 1998 to 800 in2002. * Increase National Accounts Ease-of-Use Index from 577 in 1998 to 800 in2002. The customer service goals and subgoals were derived from the customer satisfaction survey research that is conducted on behalf of the Postal Service by outside evaluation professionals. The five performance goals frame the core customer value strategy of the Postal Service. The strategy is designed to lead to value creation in each market served, through recognition of the customer's interest in both excellent and affordable service. The critical elements of the customer value strategy are its focus on improving service levels while lowering the cost per work hour and the number of work hours that are purchased. Many of the same goals and strategies employed to reduce costs (such as investment in capital improvements and in redesign) also improve customer service. By focusing on creating value, Postal Service business will grow. Careful management of this growth will result in the generation of net income that will be reinvested in programs that will sustain the cycle that creates value. The goals reflecting customer focus are the compass points by which employee and business goals will be aligned. Where achieving these goals requires it, human resources will be developed and financial resources invested to provide value. Recognizing the diversity of the markets and the needs that the Postal Service serves, the strategy will be to invest to develop the postal network in a manner that can be flexible and responsive to the demands of competitive markets. Voice of the Employee: Organizational Effectiveness The performance goals for the Voice of the Employee are presented in Table 3-3 below. Table 3-3. Voice of the Employee Performance Goals Goal: Improve employee and organizational effectiveness by having the right people in the right place with the right tools at the right time to consistently provide superior customer value and ensure commercial viability in a dynamic market Performance Goal 1: Ensure that employees demonstrate in the workplace the required proficiencies for their assigned work Performance Goal 2: Anticipate complement needs and deploy people to meet organizational requirements. Performance Goal 3: Ensure a safe work environment Performance Goal 4: Enhance workplace environment to improve relationships with employees Performance Goal 1: Ensure that employees demonstrate in the workplace the required proficiencies for their assigned work. Over the next five years, the Postal Service will: * Develop employee proficiency management indicators and targets by job category to improve from the baseline level to 90% by 2002. * Improve employees' knowledge of business goals from the baseline value (to be determined) to 90% by 2002. Performance Goal 2: Anticipate complement needs and deploy people to meet organizational requirements. Over the next five years, the Postal Service will: * Develop complement planning proficiency indicators and targets to improve productivity through improved planning. Performance Goal 3: Ensure a safe work environment. Over the next five years, the Postal Service will: * Ensure a safe work environment by decreasing lost workdays due to injury per 200,000 work hours to 2.13 in 1998 and 1.80 in 2002. Performance Goal 4: Enhance workplace environment to improve relationships with employees. Over the next five years, the Postal Service will: * Develop indicators and targets for enhancing the workplace environment to improve relationships with employees while developing the capability to survey employee attitudes.(Footnotes 4) The organizational effectiveness goals recognize that to put the right people in the right place, there will be a need to develop proficiencies that currently do not exist and to develop capabilities to do sophisticated complement planning. The investments in human resources anticipated by the needs for proficiency measurement and complement planning are bottom-line business-oriented, but there must be balance in these investments. The Postal Service has a responsibility to create a workplace environment that is characterized by respect for employees, which is illustrated most clearly by the concern for safety. Improving safety performance is a high-priority workplace performance goal. Another goal is to enhance the workplace environment through improvement of relationships with employees. As noted above, the Postal Reorganization Act created a management-labor dialogue that is framed by compulsory arbitration. The structure of the dialogue does not encourage mutual settlement of differences to achieve common goals because arbitration is guaranteed no matter how intransigent the demand. This is not to cast blame, for both management and labor face common challenges of growing competition and increasing customer demands, and both sides could better appreciate their mutual interests. In spite of substantial efforts to create a Summit meeting among postal management, unions and management associations, and in spite of much promising discussion, the benefits of day-to-day collaboration remain to be captured. Voice of the Business: Financial Performance The financial performance goals for the Voice of the Business are presented in Table 3-4 below: Table 3-4. Voice of the Business Performance Goals Goal: Improve financial performance to assure our commercial viability as a service provider for the worldwide movement of messages, merchandise and money. Performance Goal 1: Grow volume from existing or enhanced products and services Performance Goal 2: Grow net income from new products and services Performance Goal 3: Control costs through re-engineering, decreasing rework and cycle time, process management, and substituting capital for labor. Performance Goal 4: Control costs by achieving productivity gains. Performance Goal 5: Use pricing as a competitive tool while keeping rate increases below rate of inflation. Performance Goal 6: Restore equity Performance Goal 1: Grow volume from existing or enhanced products and services. Over the next five years, the Postal Service will: * Develop targets for volume growth from existing and enhanced products and services to increase net income. Performance Goal 2: Grow net income from new products and services. Over the next five years, the Postal Service will: * Develop targets to increase net income through growth in new products and services. Performance Goal 3: Control costs through re-engineering, decreasing rework and cycle time, process management, and substituting capital for labor. Over the next five years, the Postal Service will: * Develop targets for net income performance through cost control, utilizing investment strategies whose cost effectiveness will be determined. Performance Goal 4: Control costs by achieving productivity gains. Over the next five years, the Postal Service will: * Improve Total Factor Productivity (a measure of total resource usage efficiency, including capital) by an average of 0.5% each year from 1998 through 2002. * Improve Labor Productivity (a measure of labor resource usage efficiency) by an average of 1.0% each year from 1998 through 2002. Performance Goal 5: Use pricing as a competitive tool while keeping rate increases below rate of inflation. Over the next five years, the Postal Service will: * Keep a composite index of postal prices below inflation through 2002. Performance Goal 6: Restore equity. Over the next five years, the Postal Service will: * Restore equity to the full extent of rate case prior years' losses recovery allowances from 1998 through 2002. The Voice of the Business goals seek to drive performance to the bottom line. The essence of the customer value strategy described above is a focus on growth. During the next five years, most revenue is expected to come from core business lines that are recognizable today. To grow the business, the Postal Service intends to build business activities such as advertising mail, expedited and parcel delivery and international services. At the same time, the Postal Service will defend its threatened core business such as remittance mail, and also work to create new products and services that can respond to changing customer requirements. The fundamental measure of these growth goals is net income. The focus on the core business is reflected in the first performance goal. In addition to building business in traditional business lines, there is also net income to be generated from new products and services. While the initial focus of the financial goals is on generating net income through volume growth, this growth must be paralleled with a series of efforts to manage costs or there will be no net income improvement. Cost management strategies are discussed in Chapter V. There is also a need to ensure that this net income is based on fundamentally sound and improving postal economics. To track gains in productivity, measures of "Total Factor Productivity" and a less complex labor productivity measure will be used. These measures track the relationship between Postal Service outputs - volume and delivery points - and resource inputs. There are two other economic parameters that are tracked by the financial performance goals - the price of postage and the recovery of prior years' losses. Price increases will be kept below the rate of inflation. There may need to be small, periodic price increases even with exceptional cost reduction success and productivity gains, although this will be avoided if possible. Based on discussions with customers on postal legislative reform and in consultation on the strategic plan, small, predictable increases below the rate of inflation are clearly preferred. The goal is not to raise prices at all, so that customers could come to expect declining real postal prices. The Board of Governors is committed to approving rate increases only when absolutely necessary. But as a planning assumption, following disposition of the rate case filed in July 1997, further price increases of one cent in the year 2000 and one cent in 2002 are used for forecasting purposes.(Footnote 5) Economic uncertainties and the impact of future actions by Congress, the Postal Rate Commission and the Administration could affect the ability of the Postal Service to achieve this pricing goal. The goal is to offer customers the certainty that the highest prices they will face will still be below the rate of inflation. The achievement of these performance goals is assessed in terms of specific performance measures that are defined in terms of indicators and targets. Chapter VI contains a description of the management system developed by the Postal Service to achieve continuous improvement through an annual cycle of setting performance goals, deploying resources against those goals, measuring and rewarding performance, and evaluating and reviewing targets and performance. The specific targets that will be managed in this way are summarized in Table 3-5. Table 3-5. CustomerPerfect! Goals, Subgoals, and Five-Year Targets Goal: Improve customer satisfaction by offering superior customer value in each market and customer segment that we target. Subgoal: Provide Timely Delivery Indicator: First-Class Mail on-time EXFC overnight 1998 Targets: 92% 1999 Targets: 92% 2000 Targets: 93% 2001 Targets: 94% 2002 Targets: 95% Indicator: First-Class Mail on-time EXFC 2/3 day 1998 Targets: 85% 1999 Targets: 87% 2000 Targets: 89% 2001 Targets: 91% 2002 Targets: 92% Indicator: Priority Mail on-time 1998 Targets: Proprietary information 1999 Targets: Proprietary information 2000 Targets: Proprietary information 2001 Targets: Proprietary information 2002 Targets: Proprietary information Subgoal: Consistency Subgoal: Accurate Service Indicator: Selected customer survey (CSI/BSCI) questions 1998 Targets: Improvement targets to be set for future years 1999 Targets: Improvement targets to be set for future years 2000 Targets: Improvement targets to be set for future years 2001 Targets: Improvement targets to be set for future years 2002 Targets: Improvement targets to be set for future years Subgoal: Affordability Indicator: Price change vs. Postal price index 1998 Targets: Keep price changes below inflation 1999 Targets: Keep price changes below inflation 2000 Targets: Keep price changes below inflation 2001 Targets: Keep price changes below inflation 2002 Targets: Keep price changes below inflation Subgoal: Ease of Use Indicator: Composite Ease of Use Index 1998 Targets: 630 1999 Targets: 670 2000 Targets: 710 2001 Targets: 750 2002 Targets: 800 Indicator: Residential Ease of Use Index 1998 Targets: 690 1999 Targets: 740 2000 Targets: 760 2001 Targets: 780 2002 Targets: 800 Indicator: Premier Accounts Ease of Use Index 1998 Targets: 600 1999 Targets: 650 2000 Targets: 700 2001 Targets: 750 2002 Targets: 800 Indicator: Small/large business Ease of Use Index 1998 Targets: 652 1999 Targets: 700 2000 Targets: 740 2001 Targets: 780 2002 Targets: 800 Indicator: National Accounts Ease of Use Index 1998 Targets: 577 1999 Targets: 630 2000 Targets: 685 2001 Targets: 740 2002 Targets: 800 Goal: Improve employees' and organizational effectiveness by having the right people in the right place with the right tools at the right time to consistently provide superior customer value and ensure commercial viability in a dynamic market. Subgoal: Ensure that employees demonstrate in the workplace the required proficiencies for their assigned work. Indicator: Training in prescribed curriculum EAS 15 and over 1998 Targets: 97% 1999 Target: Replace with proficiency targets 2000 Targets: Replace with proficiency targets 2001 Targets: Replace with proficiency targets 2002 Targets: Replace with proficiency targets Indicator: Training in prescribed curriculum EAS 14 and below 1998 Targets: 97% 1999 Target: Replace with proficiency targets 2000 Targets: Replace with proficiency targets 2001 Targets: Replace with proficiency targets 2002 Targets: Replace with proficiency targets Indicator: Training in prescribed curriculum Craft 1998 Targets: 100% 1999 Target: Replace with proficiency targets 2000 Targets: Replace with proficiency targets 2001 Targets: Replace with proficiency targets 2002 Targets: Replace with proficiency targets Indicator: Proficiencies of automation maintenance and operations 1998 Targets: Pilot in 1998 1999 Targets: Improve from base to 90% over five years 2000 Targets: Improve from base to 90% over five years 2001 Targets: Improve from base to 90% over five years 2002 Targets: Improve from base to 90% over five years Indicator: Proficiencies of retail unit/process 1998 Targets: Pilot in 1998 1999 Targets: Improve from base to 90% over five years 2000 Targets: Improve from base to 90% over five years 2001 Targets: Improve from base to 90% over five years 2002 Targets: Improve from base to 90% over five years Indicator: Proficiencies of bulk mail acceptance unit/process 1998 Targets: Pilot in 1998 1999 Targets: Improve from base to 90% over five years 2000 Targets: Improve from base to 90% over five years 2001 Targets: Improve from base to 90% over five years 2002 Targets: Improve from base to 90% over five years Indicator: Supervisors of these operations and field PCES executives 1998 Targets: Pilot in 1998 1999 Targets: Improve from base to 90% over five years 2000 Targets: Improve from base to 90% over five years 2001 Targets: Improve from base to 90% over five years 2002 Targets: Improve from base to 90% over five years Indicator: Goal knowledge survey 1998 Targets: 90% 1999 Targets: 90% 2000 Targets: 90% 2001 Targets: 90% 2002 Targets: 90% Subgoal: Anticipate complement needs and deploy people to meet organizational requirements Subgoal: Ensure a safe work environment Indicator: Lose Workday Injuries/200,000 work hrs. 1998 Targets: 2.13 1999 Targets: 2.04 2000 Targets: 1.96 2001 Targets: 1.88 2002 Targets: 1.80 Subgoal: Enhance workplace environment to improve relationships with employees. Indicator: Indicator and employee survey in development for FY 1999 1998 Targets: Improvement targets to be set for future years 1999 Targets: Improvement targets to be set for future years 2000 Targets: Improvement targets to be set for future years 2001 Targets: Improvement targets to be set for future years 2002 Targets: Improvement targets to be set for future years Goal: Improve financial performance to assure our commercial viability as a service provider for the worldwide movement of messages, merchandise, and money. Indicator: Economic Value Added 1998 Targets: EVA targets to be determined 1999 Targets: EVA targets to be determined 2000 Targets: EVA targets to be determined 2001 Targets: EVA targets to be determined 2002 Targets: EVA targets to be determined Subgoal: Net income from existing or enhanced products and services Indicator: New net income indicators in development for FY 1999 1998 Targets: Gross income from targeted products 1999 Targets: Break-even plus $447 million prior year's losses recovery 2000 Targets: Break-even plus $447 million prior year's losses recovery 2001 Targets: Break-even plus $447 million prior year's losses recovery 2002 Targets: Break-even plus $447 million prior year's losses recovery Subgoal: Net income from new products and services 1998 Targets: $284 million above base forecast 1999 Targets: Break-even plus $447 million prior year's losses recovery 2000 Targets: Break-even plus $447 million prior year's losses recovery 2001 Targets: Break-even plus $447 million prior year's losses recovery 2002 Targets: Break-even plus $447 million prior year's losses recovery Subgoal: Controlling costs through reengineering, decreasing rework and cycle time, process management, and substituting capital for labor. Indicator: Expense reduction indicators in development for FY 1999 1998 Targets: Achieve target expense reductions in budget 1999 Targets: Break-even plus $447 million prior year's losses recovery 2000 Targets: Break-even plus $447 million prior year's losses recovery 2001 Targets: Break-even plus $447 million prior year's losses recovery 2002 Targets: Break-even plus $447 million prior year's losses recovery Subgoal: Controlling costs by achieving productivity gains Indicator: Total Factor Productivity 1998 Targets: 0.3% 1999 Targets: 0.5% 2000 Targets: 0.5% 2001 Targets: 0.5% 2002 Targets: 0.5% Indicator: Labor Productivity 1998 Targets: 1.0% 1999 Targets: 1.0% 2000 Targets: 1.0%% 2001 Targets: 1.0% 2002 Targets: 1.0% Subgoal: Using pricing as a competitive tool while keeping rate increases below rate of inflation Indicator: Price change vs. Postal price index 1998 Targets: Keep price changes below inflation 1999 Targets: Keep price changes below inflation 2000 Targets: Keep price changes below inflation 2001 Targets: Keep price changes below inflation 2002 Targets: Keep price changes below inflation Subgoal: Achieving positive equity 1998 Targets: Restore lost equity through recovery of prior years' losses 1999 Targets: Restore lost equity through recovery of prior years' losses 2000 Targets: Restore lost equity through recovery of prior years' losses 2001 Targets: Restore lost equity through recovery of prior years' losses 2002 Targets: Restore lost equity through recovery of prior years' losses Sidebar: THE DEVELOPMENT OF CORPORATE AND PERFORMANCE GOALS BY THE UNITED STATES POSTAL SERVICE WILL BE OF CRITICAL IMPORTANCE TO ENSURE THAT IT ACHIEVES ITS MISSION AND THAT IT REMAINS VIABLE INTO THE 21ST CENTURY. Also presented in Chapter VI is a description of how the Postal Service's incentive compensation system has come to embrace the concept of rewarding performance. The incentive system focuses on a smaller number of measures than presented in this chapter to provide clear incentives for achieving the performance goals. The most important of these measures is provided by the Economic Value Added (EVA) system. The EVA calculation determines net income and subtracts the cost of capital needed to achieve this financial performance. National EVA creates the funding from which performance incentives are paid. Performance against the measures of the goals discussed here makes it possible for an individual to receive a portion of the performance incentive funds. These financial incentives are clearly not the only form of recognition available, but they are central to creating a performance-based culture using pay for performance concepts. The Growth Goal in Perspective Before describing the challenges that must be faced and the strategies for achieving the goals, it is important to note that what is at stake with the growth strategy is an effort to fundamentally alter historic relationships. For most of the century, there has been a consistent relationship between personal consumption expenditures and mail revenue. The chart below illustrates this pattern. Chart: Total Mail Revenue Times 100 Compared to Personal Consumption Expenditures Line graph - Horizontal axis shows years from 1929 through 1995, Vertical axis shows Total Mail Revenue Times 100 (in dollars). The line shows a relatively stable line from 1929 through 1953 (beginning point about 80), a slight increase from 1953 to 1968, and a sharp increase from 1968 to 1995 (End point about 6,000). The line representing Personal Consumption follows the same trend as the line for Total Mail Revenue Times 100. Some warn that this pattern is already being altered by new consumer expectations for speed, convenience and the availability of new alternative services that may substitute for mail service (see discussion in Chapter IV). In the future, mail volume may not grow as quickly or as predictably. The Postal Service strategies that focus on driving mail volume growth even faster than the volume that would be "granted" by the economy are a bold challenge to the past. This growth strategy stems from both a decision to take a proactive approach to the uncertainties of a changing environment and from confidence that the value of the mail has been under-appreciated in many key sectors of the economy. Early experience with target market strategies has confirmed market interest in key growth products as well as a warm customer reception for Postal Service competition with delivery companies enjoying larger market shares in the expedited and parcel markets. To place the growth strategy in perspective, it is useful to review the current economic environment. Since the 1990-91 recession, the American economy has grown steadily but below the rates of previous decades. Based on the economic assumptions and forecasts from Data Resources, Inc. described in Appendix B, economic growth will continue to be modest through the year 2002, as it has been for the last five years.6 The assumptions and forecasts outlined in Appendix B were used to prepare a Postal Service volume forecast for the period FY 1997-2002. This forecast, shown in Table 3.6 below, assumes periodic price increases at the projected rate of inflation. It is included to provide a baseline for planning, but should not be considered an indicator of the frequency or amounts of future rate adjustments. Obviously, there are many inherent uncertainties in such a forecast, not the least of which are the potential for faster-than-expected diversion of mail transactions to electronic options and fundamental structural changes due to possible regulatory reforms. Table 3-6. FY 1997-2002 Volume Forecast (millions) Category: First-Class Mail 1997: 99,346 2002: 107,957 '97-'02 % Change: 8.7% Category: Priority Mail 1997: 1,059 2002: 1,222 '97-'02 % Change: 15.4% Category: Express Mail 1997: 61 2002: 67 '97-'02 % Change: 9.8% Category: Periodicals 1997: 10,326 2002: 10,410 '97-'02 % Change: 0.8% Category: Standard A Mail 1997: 76,531 2002: 87.576 '97-'02 % Change: 14.4% Category: Standard B Mail 1997: 988 2002: 1,187 '97-'02 % Change: 20.1% Category: Other Domestic Mail 1997: 397 2002: 282 '97-'02 % Change: -29.0% Category: International Mail 1997: 963 2002: 1,132 '97-'02 % Change: 17.5% Category: Total Mail 1997: 189,671 2002: 209,834 '97-'02 % Change: 10.6% With this forecast, the Postal Service can expect only moderate growth in overall volume - about 2 percent per year. The five-year growth rates of First-Class Mail and Standard A Mail are expected to be about the same as for the FY 1991-96 period. However, the corresponding growth rate for Priority Mail is expected to be lower (15 percent versus the earlier 81 percent), although successful implementation of the Priority redesign and delivery confirmation initiatives may permit Priority Mail to grow more quickly in the future. Express Mail growth is expected to be higher in the future than for the past five years (10 percent versus no growth), while those of Standard B Mail (20 percent versus 38 percent) and International Mail (18 percent versus 26 percent) will be lower. The purpose of creating a growth strategy is to generate higher volumes than those provided by the economy alone. Challenges & External Factors IV. Challenges and External Factors The GPRA legislation specifies that the Postal Service strategic plan include "...an identification of those key factors external to the Postal Service and beyond its control that could significantly affect the achievement of the general goals and objectives..." In this chapter, several major external challenges and factors are discussed - regulatory constraints, technology, competition, changing consumer expectations and management challenges. Regulatory Constraints There is a fundamental need to change the basic Postal Service model created more than 25 years ago by the Postal Reorganization Act (PRA). At the heart of the problem is the multitude of regulations that prevent the organization from offering products and services with prices and characteristics that compare favorably to competitive offerings. These regulations constrain the Postal Service's ability to respond to rapidly-changing market conditions and to control costs. They include the following: * The PRA requires financial break-even over time; in the law, there is no provision or incentive for achieving positive net income. * Changing prices requires about 16-18 months, starting with preparing the necessary documentation for the Postal Rate Commission, continuing with the 10-month litigation process, and ending with implementation of new rates. * Except for minor revisions, changing non-price product or service features typically requires about the same amount of time as pricing changes. * The pricing and/or classification outputs of the regulatory process are often quite different from the original Postal Service proposal. * Independent pricing proposals may be introduced by the legislative process. As an example, legislation was recently signed by the President authorizing a First-Class stamp that would sell for up to eight cents more than the current 32-cent stamp. The extra revenues would be earmarked for breast cancer research. * Wages and work rules, the major cost drivers, are determined through a mandatory binding arbitration process. * Congress determines Cost of Living Adjustments (COLAs) for Postal Service retirees. * The purchasing system tends to be more costly than private sector equivalents because it is subject to several statutes that affect contracting and public sector practices. * In addition to the regulatory framework established by the PRA, key elements of postal operations are also regulated by other Federal agencies, including the Merit Systems Protection Board (personnel decisions), the Department of Labor (workers' compensation), the Department of the Treasury (financing) and others. The current regulatory framework undermines effective management. Uncertainties about the outcomes of the various regulatory processes create a situation in which goals are tentative and management is often second-guessed. The legislative reform proposed by the Chairman of the House Oversight Committee, Congressman John McHugh, provides a basis for discussion of long-needed amendments to the basic model of 1970 and takes a significant step toward relaxing some of the above constraints. The Postal Service has responded to the Chairman's invitation for further discussion with mailer groups, unions and management associations and other stakeholders to craft reform legislation. Three principles are touched upon by the reform legislation. 1. Preserve the Postal Service's historic mission of providing a fundamental, universal service to the American people at affordable rates. 2. Provide incentives for improved efficiency in the operation of the Postal Service. 3. Rationalize the ratemaking process by allowing small, below-inflation increases to go into effect without first resorting to protracted, adversarial, and expensive administrative hearings. Within the framework of these principles, the Postal Service has expressed interest in developing other elements, including: 1. Provision for prices of postal products to be indexed objectively to inflation in the resources used to produce them. 2. Establishment of safeguards to avoid large swings in pricing from year to year. 3. Provision that postal productivity growth should be at least as great as productivity in the nonfarm economy at large. 4. Enabling the Postal Service to change its prices so long as the changes do not exceed the economy-wide inflation and productivity standards reflected in an appropriate pricing index. 5. Enabling the Postal Service to earn a profit and to use that profit to re-invest in the business and provide performance incentives for management and officers. 6. Retention by the Governors of the Postal Service of financial responsibility and authority. Even if changes this extensive could be adopted, these principles and characteristics primarily relate to the ratemaking provisions of the reform discussion. By improving this process, the Postal Service can better control its prices and budget and align its operations, finances, and strategic planning. But there are other issues touched on by the proposed reform legislation that are important in creating a structure for the Postal Service that will help improve its management, which are discussed later in this chapter. These, for example, include the creation of a commission to address labor-management relations and the redefinition of Postal Service responsibilities to the Department of the Treasury in carrying out its banking functions. Technology As described in Chapter III, the Postal Service's current five-year volume forecast anticipates modest growth much like the past five-year period. A major caveat with this forecast is that postal revenue growth is assumed to be closely linked to growth in the overall economy, as in the past. Implicit in this assumption is the view that neither the introduction of new technology nor the expansion of existing technology will invalidate this economy-driven model of postal demand. Two practical considerations reinforce this assumption. First, although historic data show that significant electronic diversion of business-to-business mail has taken place in recent years and that noticeable diversion of household-generated mail has begun,7 it appears that growth in other sectors (e.g., business-to-household) has more than compensated for these losses. Second, electronic technology is in a state of rapid change, making forecasts of its effects on mail usage highly speculative.8 Chart: Rapid Growth of Electronic Alternatives The chart shows 4 technologies on a S-curve through the 4 stages of technology adoption. Growth: Electronic Commerce Takeoff: Electronic Banking and E-Mail Saturation: Fax Deployment of the electronic technology infrastructure is uncertain. Questions remain about which services will be made available to consumers (e.g., will e-mail be made available on a television set or a personal computer). The open questions concerning the nature of these choices may be less significant than those concerning the timing of the choices that will be available in the mass market. Uncertain, too, is whether the regulators and the courts will agree on the regulatory framework for the emerging electronic infrastructure. Finally, the major industry players have yet to reveal their competitive positioning strategies to implement telecommunications reform. Those who argue that mail service will continue to be critical to consumers during the next decade and that it will continue to be an essential element of universal service in the future make a compelling point. Even in the face of electronic competition, which is struggling to assemble a coherent "information superhighway," there is support for the argument that "there will always be mail." However, this optimistic view does ignore an important dimension of the emerging technology competition - consumer reactions. While it may not yet be possible for the mainstream consumer to reach the information superhighway conveniently from home, the new information technology has fundamentally altered consumers' choices and expectations. This new perception will place different demands on Postal Service products and services in coming years. If, as expected, technology shifts traditional mail services to new media, there will be a resulting impact on the organization. Even if the Postal Service develops into an agile service provider in this emerging marketplace by investing in technology, there will be implications for the structure and size of the organization. Technology-oriented companies have grown according to a different, smaller model than the Postal Service. Technologies such as e-mail and the World Wide Web are changing the way that at least some influential segments of the population communicate and do business. They could challenge the Postal Service to put forth new products and services in order to be relevant to the Information Age. Research and development programs are underway to develop methods to improve postal services and to make it easier for postal customers to use postal services. Such methods could provide a pathway through which core postal service to traditional postal customers can migrate into new electronic channels if there is customer demand for such service. These development projects are currently focused on bulk mail entry, meters and service to small offices and home offices. While those are all central to the current postal mission, they also anticipate an emerging 21st century marketplace. Competition The growing strength of the competitors to the Postal Service has been noted often in the media. Consider where United Parcel Service and Federal Express were 20 years ago. At the time, UPS was just organizing its package delivery business on a national basis and FedEx was just starting its operations. One immediate concern is that approximately 38 billion pieces of First-Class Mail worth $6 billion in revenues are at risk to electronic diversion. New competitors, such as those that foster connectivity, privacy and security, ease of use, and money or banking capabilities, will gain market share. Banks and utility companies are launching marketing campaigns to shift transactions traditionally carried by mail to electronic media. Electronic competition will be enhanced by the recent Federal government mandate that most of its payments will be made in the form of electronic fund transfers, which could reduce Postal Service revenues by about $500 million annually. Additionally, recent legislation allows other providers besides the Postal Service to provide legally valid times and dates for document delivery, such as tax returns sent to the Internal Revenue Service. As discussed in detail in Chapter II, the Postal Service faces a great deal of competition in all its product lines. However, so do banks, airlines, and the media as digital communications open new pathways to customers. The most significant driver of change will be the manner in which new choices affect customer perceptions of the current products and services. Changing Customer Expectations The potential impact of the "new consumer" on the demand for Postal Service products and services and the increasing difficulty in reaching stakeholder consensus on a definition of Postal Service success are two more challenges that must be faced by the organization before the five-year corporate goals can be realized. THE NEW CONSUMER There is growing evidence that a more sophisticated consumer is emerging in the United States. (Footnote 9) These "new" consumers are better educated. The proportion of adults in the United States with at least one year of college has been rising by about 3 percent per year, and is expected to reach 55 percent by 2005. New consumers have more discretionary income. Households with more than $50,000 of real spending power have been growing at a rate of about 3.5 percent a year, more than twice the rate of overall household growth, and are expected to reach 50 percent of all households by 2005. New consumers tend to be more experienced with information technology. While 46 percent of all U.S. households are estimated to have PCs at home (in 1997), the number increases to 74 percent for households with incomes over $50,000. These new consumers have distinct patterns of purchasing behavior. They prefer to examine a wide range of choices before making purchasing decisions. They are more likely to interact actively in decisions, and they will demand more information before making a purchase. This "new consumer" behavior pattern also applies to purchases of postal services. Today, consumers of delivery services increasingly expect delivery confirmation, even on postal products that are not priced to support such technology. Direct deposit of pay checks and direct debiting of mortgage payments are common. Technology has given the new consumers the opportunity to bypass the Postal Service network for certain applications. A more serious concern will be satisfying the new consumers' expectations for enhancements of existing Postal Service products and services. DEFINING SUCCESS Another challenge posed by this environment is determining what will constitute success. Customer interests served by the Postal Service are growing more diverse. These differing views are particularly apparent in the context of conflicting business goals among customer groups. For example, First-Class mailers and Standard A (formerly third class) mailers have contested the proper allocation of institutional costs to the two classes of mail since postal reorganization created the forum that made such arguments possible - the Postal Rate Commission. As another example, large newspapers and saturation "marriage mail" advertisers (e.g., Advo and Harte-Hanks) both use the Standard A Enhanced Carrier Route product for distribution of local retail advertising. However, since newspapers compete vigorously with the saturation mailers for advertising customers, these two customer groups have different views on the role and mission of the Postal Service. Conflicting demands may exist within a single company or industry. For example, banks are interested in preserving a healthy Postal Service because of their need to send and receive statements and deposits from their customers. But banks also operate in a highly competitive environment, and in time, entrepreneurial financial institutions may choose to diversify their service offerings to compete with the Postal Service, and may view with alarm any new postal services that compete with their existing and future lines of business. The long-distance telephone companies offer another example. These companies are among the Postal Service's largest remittance mail customers and are major users of direct mail advertising products. On the one hand, they are interested in improved First-Class and Standard A mail service; on the other hand, they are leading-edge technology companies and will undoubtedly play a major role in electronic commerce in the future. These conflicting business goals complicate Postal Service attempts to define success. The Challenge of Performance Management One final challenge is both an internal and external concern. The goal of improving the Postal Service's capability to carry out its mission is inextricably linked to the organization's legal structure. Many of the matters discussed in this plan involve the use of management tools, including the management system, the introduction of performance goals and measures, and the development of process management techniques. These methods for improving the way in which the current system operates cannot address those fundamental structural issues. To permit postal management to be effective, basic reform - as discussed earlier in this chapter - may be needed. Such reform will require, among other things, a revision of the basic statute under which the Postal Service operates. Not even the reform legislation, however, may go far enough in addressing fundamental management challenges. There is a need to significantly improve labor-management relations. The current arrangement is not helped by provisions in the basic postal legislation that require management and unions to go to compulsory arbitration. With such a structure there is little incentive to settle disputes. The fundamental confrontation set up by this arrangement permeates all aspects of the labor-management relationship. Following three years of successful financial performance, there may also be little apparent incentive to address fundamental issues that are difficult to resolve. But the competitive marketplace is moving quickly and the Postal Service is not able under current law to be a nimble competitor that can offer services to keep pace with the imperatives of increasing productivity and new service development.(Footnote 10) To carry out the postal mission of universal service and financial self-sufficiency, such issues will have to be addressed, even in the absence of a crisis. How The Postal Service Is Going To Get There V. ORGANIZATIONAL STRATEGIES Introduction Previous sections of this plan outlined the corporate and performance goals for the next five years. In this section, the Postal Service describes the strategies to reach its goals for customer service, organizational efficiency and workplace enhancement, and net income growth and cost management. These strategies incorporate the following approaches. The Postal Service will improve service both by providing better operating performance and more effective management of customer contact operations. Employee effectiveness will be improved by focusing new resources on training, complement deployment and efforts to enhance the workplace. The organization will work to aggressively control costs through a combination of productivity improvements, efforts to make best use of key human resources and cost management of all resources. Four Core Strategies: * Commit to quality customer service * Practice aggressive cost management * Become a 21st century growth company * Create unique customer value These concepts are organized around a core vision of providing customer value. This approach seeks to develop a customer value strategy that targets growth. This strategy has as its premise the notion that growth is driven by creating value for customers. Value is created by continuous improvement of service and driving costs out of the system to achieve affordability. Creating value and individualizing it for each customer will provide the basis for sustained growth over time. This is the formula. Its principal components are: * Achieving Service Excellence * Aggressive Cost Management * Creating 21st Century Growth, and * Providing Unique Customer Value Voice Goal Strategies * VOC: Improve Customer Satisfaction -Timely delivery -Consistent service -Accurate service -Affordability -Ease of use * VOE: Align Resources -Required proficiencies -Anticipate complement needs -Safe work environment -Enhance workplace environment * VOB: Improve Financial Performance -Grow volume from existing or enhanced products and services -Grow income from new products and services -Cost controls -Pricing as a competitive tool -Restore equity A growth strategy represents an explicit choice. The Postal Service seeks growth to meet the expanding requirements and specialization demanded by customers today. Sustaining the Postal Service mission as the universal service provider - offering a uniform service at fair and reasonable rates - requires a proactive vision of improving service, not standing passively and taking what private providers of service leave behind. A strategic component centered on growing the growth businesses will focus on the rapidly expanding Priority Mail and package businesses, the growing advertising mail businesses and international mail. A defend the core business component focuses on the threat of new competition, both from traditional competitors and from new electronic competitors that have been entering the market at an increasing rate, and the danger that threat poses to universal service. A create new and enhanced products and services component centers on the transformation of core products and services. New products and services will range from additional features for existing products, such as packing customers' packages or offering postage on-line, to innovations such as providing a secure way to transmit money orders electronically or new card-based services that use stored-value and smart-card technology. Organizational strategies will be reviewed periodically as part of the planning process. Strategic refinements will be published in future editions of this plan. Sidebar: IMPROVE CUSTOMER SATISFACTION BY OFFERING SUPERIOR CUSTOMER VALUE IN EACH MARKET AND CUSTOMER SEGMENT THAT THE POSTAL SERVICE TARGETS. Voice of the Customer: Establish Service Excellence and Create Unique Value for Customers The Voice of the Customer corporate goal is to "Improve customer satisfaction by offering superior customer value in each market and customer segment that the Postal Service targets." The strategic efforts supporting this goal focus on improving operational performance. Significant resources are being devoted to the improvement of management practices throughout the network and are most visible in the process management investments being made in virtually every performance cluster. Because customer service and productivity are mutually reinforcing strategies, outcomes here affect the Voice of the Business goals and targets as well. The Postal Service strategy for this customer goal is to bring in new customers and revenue by demonstrating commitment to increased customer service. On-time delivery is the first and most powerful driver of customer satisfaction. TRANSIT TIME FOCUS The most basic strategy of the Postal Service in 1996 and 1997 has been to drive overnight delivery performance from the high 70s to 92 percent on-time nationally. 92 percent is not a performance score for a high-value, highly profitable express product targeted at a limited number of addresses like that of postal competitors. This on-time performance score measures a universal service delivered in Manhattan neighborhoods, Alaskan villages and Gulf Coast rural areas six days a week. Improvement of this score has demonstrated the effectiveness of focus as a management tool. In 1998, the on-time performance goals are being broadened to focus on two- and three-day service and on Priority Mail. Major network investments are being made to make this expanded target feasible. REDESIGN OF CUSTOMER CONTACT AND ACCESS Specific outreach and system improvement programs include the development of a tactical sales force using modern sales and marketing methods, a concept of sales partnering, new bulk mail acceptance processes and new payment systems. The Postal Service plans to increase customer satisfaction by improving customer contact through three major customer service channels - retail/residential, large mailers and medium and small mailers. Retail/residential. The retail channel supplies the product and service needs of consumers and small firms. It serves as the principal method for these customers to buy and use Postal Service products and services and to deposit mail. The retail channel is also a major delivery point for the 14 million customers who receive their mail though post office boxes and caller service. Eight retail program strategies, ranging from human resource management to product development and technology deployment, will improve the delivery of value to retail customers. The strategies relate to networks and standards; staffing; products and merchandising; inventory and distribution; technology and information; and locally-based planning, partnering, and communication. Significant elements of these strategies include post office lobby redesigns, expanded hours of operation, counter technology improvements, clerk training, alternative access, new stamp programs and better career support. Large mailers. Large mailers have built critical business processes around the use of the mail. They mail large volumes on a frequent, regular basis and have invested heavily in plant and equipment or third-party service relationships to support these functions. To provide a single point of contact, Postal Service account managers or representatives are assigned to these mailers. Excellent service is a key priority. The Postal Service strategy for the large mailer channel is to be a trusted advisor and business partner, providing postal solutions and service that raise satisfaction levels and help customers achieve their business objectives. The organization will leverage business relationships to retain and develop future business by creating higher levels of customer satisfaction. Program strategies include development of managed accounts, new acceptance processes and creation of new customer contact networks, such as establishment of business customer service centers and support of technical advisory groups, such as the Mailers' Technical Advisory Committee. These strategies are designed to build improved relationships and to provide new technology-based systems that will make it easier for customers to do business with the Postal Service. Medium and small mailers. Medium and small mailers represent the bulk of the customer base of the Postal Service. Most do not have a dedicated Postal Service account manager. Mail is an important part of their operations, but their mail volumes are much smaller than those of large mailers. While their mailing needs may be relatively less complex than large mailers, their knowledge of postal programs and services, and their ability to use them, are also less sophisticated. Many of these mailers do not make significant use of the products that have been targeted for growth - Priority Mail, advertising mail and destination-entered parcel post. The Postal Service strategy for this customer segment is to bring in new customers and revenue by demonstrating commitment to increased customer service. Specific outreach and system improvement programs include the development of a tactical sales force using modern sales and marketing methods, a concept of sales partnering, new bulk mail acceptance processes and new payment systems. INFORMATION TECHNOLOGY Expectations from business and private citizen customers of the Postal Service will be increasingly shaped by what they see is available from competitors and service providers on the World Wide Web. They will expect complete tracking capabilities and a full set of business transactions that can be completed on their personal computer at the office or at home. The size and diversity of the postal customer base will present technical challenges and will demand that Postal Service solutions be not only easy to use but also as rich in function as those of its competitors. Recognizing that Postal Service product offerings are much more diverse than those of the competitors who are setting market standards, the Postal Service will make major investments to enhance traditional postal services. These investments will take place throughout the network. The Postal Service recently announced a commitment to build a new integrated, managed network service. Other information technology program developments include a computer system that can more fully support retail and delivery activities, corporate call centers to create state-of-the-art call answering and customer response, a delivery confirmation system and a Web site to support both Internet and Intranet services. The Year 2000 problem. The turn of the century, when 1999 becomes 2000, could have a major impact on computer hardware and software, including those that support Postal Service employees, vendors and customers. Any system that shares, manipulates or takes action on data based on a date has the potential for failure or inaccuracy. To ensure that all Postal Service systems will operate smoothly until and through the turn of the century, with every system giving correct results when processing dates in the year 2000 and beyond, the Postal Service has established a corporate-wide Year 2000 compliance program. The objective of the program is to complete all Year 2000 compliance projects by September 13, 1998, the end of the 1998 fiscal year, with test and certification efforts completed by March 1999. A corporate-wide Year 2000 team has developed an inventory of application programs, supporting infrastructure and equipment that is being analyzed to determine which items are susceptible to known or potential Year 2000 date processing problems. For items with known or potential date processing problems, compliance projects will be planned and completed, including changes in infrastructure, where needed. Testing and certification will ensure that all application programs, infrastructure and equipment will be Year 2000 compliant. Computer security. As technology evolves, so do the opportunities to misuse it. To protect customers and employees from unauthorized access or alteration of computer data bases, the Postal Service has strengthened its computer security program. Over the next five years, the emphasis on computer security will continue. The recently-implemented Inspector General function in the Postal Service will add further visibility and focus. The Postal Service has developed and implemented a comprehensive policy and technical strategy for Internet access. All Internet traffic must pass through a secure gateway that prohibits direct access to Postal Service data from external sources. All Postal Service computer applications that support external access must undergo an extensive audit and security review to assure there is protection from unauthorized outside intrusion. A security certification program for all Postal Service computer applications (internal or external) that deal with data deemed "sensitive" has been implemented to ensure the integrity and confidentiality of such data. Computer security is a priority in developing the technical architectures and designs for major Postal Service-wide technology programs such as the new point-of-sale retail equipment (POS-1) and the implementation of delivery confirmation devices for carriers. A secure electronic payment process is being developed as a part of these efforts. CONSUMER PROTECTION Maintaining the sanctity of the mail is a critical component of the core mission of the Postal Service and a key element of providing customer service. The Inspection Service and the Law Department work together to protect consumers and businesses from fraud schemes and lotteries conducted through the mail. In addition to providing obvious benefits to the public, the consumer protection activities of the Postal Service enhance the integrity of the mails for the benefit of legitimate mailers. In the next five years, continuing emphasis will be given to the more "traditional" fraud schemes, and the Postal Service will also address the growing problem of schemes advertised over the Internet that have a mail component. PRODUCT AND SERVICE INNOVATION Product and service innovation strategies fall into four areas: the redesign of expedited mail with an immediate focus on the Priority Mail service; the development of financial services; the development of electronic services; and the establishment of strategic business units to provide a new customer focus. The development of new revenue will be discussed in more detail as part of the Voice of the Business strategies, but it is also an important component in executing the Voice of the Customer strategies, since such investments often improve operational performance of the postal network and make the mail easier to use. Sidebar: IMPROVE EMPLOYEE AND ORGANIZATIONAL EFFECTIVENESS BY HAVING THE RIGHT PEOPLE IN THE RIGHT PLACE WITH THE RIGHT TOOLS AT THE RIGHT TIME TO CONSISTENTLY PROVIDE SUPERIOR CUSTOMER VALUE AND ENSURE COMMERCIAL VIABILITY IN A DYNAMIC MARKET. Voice of the Employee: Establish a Performance Culture The Voice of the Employee corporate goal is to "Improve employee and organizational effectiveness by having the right people in the right place with the right tools at the right time to consistently provide superior customer value and ensure commercial viability in a dynamic market." The strategies and programs described below are designed to achieve this goal. They fall into three broad strategic categories: Sustaining Core Commitments to Shared Values; Implementing the Performance Management Culture; and Improving the Workplace Environment. SUSTAINING CORE COMMITMENTS TO SHARED VALUES Improve workplace safety. A comprehensive safety and health action plan has been developed and implemented to assist field units to achieve established targets and to meet or exceed legislative, regulatory and contractual requirements associated with occupational safety and health. This approach includes: inspections; accident investigation; reporting and analysis; training; promotional and recognition programs; joint labor/management committees; development of standards and policy guidance; occupational medical services; and effective claims management. The measures described in the discussion of goals and performance measures reflect the commitment to continuous improvement of the safety goal. But the commitment to safety is more than numbers and management of operations; it reflects a core value of commitment to employee well-being. This strategy has been effective in reducing and controlling losses and in making Postal Service safety performance compare favorably with private industry. Leverage dive