Remarks of Louis Giuliano, Chairman, Board of Governors, U.S. Postal Service, at Association for Postal Commerce (PostCom) Board of Directors Meeting, Washington, DC

Today I want to focus my remarks on the key issues facing the Postal Service and what we’re doing about them. Then I would also be glad to take some questions.

In talking about these issues, I want to highlight three major points.

First, we need speed and flexibility in decision-making and other actions, both within our organization and across our regulatory landscape, so we can respond effectively in a very dynamic business environment. Second is the vital importance of our entire action plan. Third, I need for all of you to continue participating in the process by giving us your thoughts and ideas so our implementation can be timely and effective.

The issues that confront us are clear. On the revenue side, we face the long-term challenge of electronic mail and the Internet and the short-term challenge posed by the worst economic decline in decades, both of which have driven mail volume down.

On the cost side, we, like many long-established organizations in this digital age, face challenges that arise from a dynamically changing and competitive marketplace. Our primary revenue generator, First Class Mail, is declining at an accelerating rate. While other areas may grow, this change has a significant financial impact.

These matters compel us to dramatically improve our internal processes. In addition, we face the issue of costs that are imposed externally by our legislative and regulatory oversight authorities.

I wish I could say that the Postal Service has met these challenges perfectly. Clearly, no organization has, and the Postal Service is no exception. All too often, we have been slow to adapt to change. We need to do better, and we need to do it faster. The management team is aware of this need and is driving to accelerate its response to change while maintaining universal service and high rates of on-time delivery.

But let me add that we not only need to embrace change internally, but externally as well.

For far too long, our oversight authorities have imposed mandates and restrictions that make it difficult to adapt to change.

Moreover, the oversight process itself needs to move more quickly on making critical decisions.

Now I’d be remiss if I didn’t stress the substantial progress that has been made over the years at the Postal Service.

On the revenue side, for example, recent initiatives such as our Priority Mail Flat Rate box have been very successful. Year-over-year revenue of the Flat Rate Boxes is up 82%.

However, the fact remains that our most significant improvements have been — and must continue to be — on the cost side of the business.

Over the years, through process improvements, we’ve reduced business costs dramatically.

Last year alone, we reduced these costs by $6 billion. We reduced work hours by 115 million, which is the equivalent of 65,000 full-time employees, a bigger number than the entire workforce of more than 80 per cent of Fortune 500 companies today.

Here’s what I want to reiterate about these improvements: The Postal Service didn’t start on this journey only yesterday. We began a decade ago. We began the process of improving performance in every arena.

By any measure, it’s been a strong success, producing unprecedented service improvements, solid productivity growth, and more than $16 billion in cumulative cost reductions. And we are not finished yet. We are striving for another $4 billion in 2010.

Over the past decade, we have had far better service despite having 180,000 fewer employees – and nearly 210,000 fewer by the end of this fiscal year — and far more delivery points. In quarter after quarter, our customer satisfaction ratings have remained in the 90s.

A big reason is our on-time performance. Currently, the nationwide on-time percentages for overnight, two-day, and three-day Single-Piece, First Class Mail are 96%, 93%, and 90%, respectively. Five years ago, the on-time delivery scores for First Class Mail were 95%, 91%, and 87%.

For the past five years, a key factor in these gains has not been automation. Instead, it has been the improvements in processes which have taken unnecessary capital, labor, and capacity out of the equation. Taking waste out of the system has enabled us to remove these costs while still improving on-time delivery and customer satisfaction.

Now let me say a word about process improvements versus revenue growth.

While both of these strategies are essential over the long haul, only process improvement initiatives are capable of bearing fruit immediately. Revenue initiatives can take years to pay off and in most instances, require an upfront investment. And in today’s economy, with demand having fallen precipitously, growing revenue is a difficult proposition indeed.

In this whole process, time is our enemy. The longer we wait on making changes, the more the situation will deteriorate and the more draconian the solutions will have to be in the future.

It is this sense of urgency that led us to our March 2 meeting and to the plan we’ve unveiled to secure our future.

Speaking for the Board of Governors, let me say that I fully support management’s plan in its entirety.

It’s based on the reality that there is no one quick or easy solution to our Postal challenges. It’s a balanced, comprehensive approach which includes many solutions rather than just one or two solutions entailing a disproportionate contribution on the part of some stakeholders, but not others.

As we noted on March 2, without this plan, we face a projected cumulative loss of $238 billion by the year 2020.

We estimate that this loss can be reduced by $123 billion over the next decade through the actions of management in areas over which it has control.

But if the Postal Service is to remain a viable organization, we have to deal with the remaining $115 billion gap as well.

For starters, we need to address the retiree health benefits issue and the $75 billion Civil Service Retirement System overpayment matter.

Congress must revisit the mandate to pre-fund retiree health benefits, which costs us more than $5 billion a year. The costs for these benefits should be paid after employees retire and become eligible for them, not while they’re still on the job.

And, as it revisits this mandate, Congress should consider the fact that the Postal Service has overpaid the Civil Service Retirement System by $75 billion. We would like that money transferred to the Retiree Health Benefits Fund.

But in order to close the gap fully, our Board strongly agrees that management will need a new set of tools that will enable it to respond successfully.

In today’s business environment, it won’t be sufficient to move in the right direction. We will have to do it faster.

Simply stated, the Postal Service must work in a regulatory environment that allows it to take swift action.

To that end, management is making several proposals.

One of these proposals is a move to a 5-day-a-week delivery schedule.

Combined with our other initiatives, 5-day delivery seems to be a reasonable tradeoff for most customers in light of the size of our budget gap. Moreover, our 5-day delivery plan reflects the valuable input received from more than 40 meetings with mailing industry participants. As a result of these meetings, the Postal Service made significant changes to the original proposal to fit the needs of as many mailers and mail service providers as possible.

We also propose expanding access to our customers by serving them where they already shop. That means expanding automated and online options and partnering more with retailers, while having greater leeway to close or consolidate Postal facilities that are redundant.

Next, we want more flexibility to grow our revenues by aligning pricing with market realities and by faster introduction of a broader range of products to respond to rapidly changing customer demands.

Let me say a few words about pricing.

While we believe the price cap should cover market-dominant products as a whole, not by class, we have no interest in seeking the complete removal of price caps. Our aim is to keep prices as low as possible. We recognize that for the biggest part of our volume, we’re not competing with Federal Express or UPS, but with the Internet, print ads, TV and radio. We also know that maintaining low prices increases the probability of success for the long term.

And we must address the issue of costing and how it impacts our pricing. A strict adherence to cost coverage might not be optimal in terms of profit and loss. Pricing needs to consider P & L impact across all products, competitive and regulated.

Regarding the bringing of products to market, we need to reduce the time that it takes the Postal Service to implement customer contracts. Every contract should not be considered a new product that has to be reviewed by the PRC.

Simply stated, once negotiations are completed, customers should see their agreements implemented right away.

There shouldn’t be a waiting period. If we want the Postal Service to keep its customers and to be able to attract new customers in today’s competitive marketplace, this is essential. It’s the way business is done.

Our plan also requires significant changes regarding flexibility in assignments for all of our employees. If we are to handle the rapid fluctuations in business activity, workforce flexibility is absolutely critical. This year we begin labor negotiations with our major unions and we will try to adjust the contract to reflect market demands and the Postal Service’s financial condition.

The final proposal in our plan would streamline our oversight. We have too much overlapping governance which clearly reduces the speed of decision-making. Again, if we want the Postal Service to move more rapidly and aggressively, we need the same for our oversight authorities.

We need to find ways to successfully carry out the appropriate mandates and to change those not effective in serving the mission of the Postal Service or the needs of the American people.

So what have we done recently to advance these goals that make up our plan?

On the revenue side, in the competitive package business, we’ve signed more than 30 pricing contracts with customers, increased shipping options with more flat-rate envelopes and boxes, and concentrated our modest ad budget on a campaign that includes direct mail as well as other media.

On the mailing side, we have implemented four growth incentive programs for First Class and Standard Mail, and plan to propose more with our exigent filing. We also are working hard to increase the use of mail by small and medium-sized businesses.

We also believe that when it comes to further revenue growth, there’s a vital role to be played by Intelligent Mail Barcode applications. I believe IMb holds significant potential for improving new products that have not yet been defined. One recently announced new endeavor will enable greeting card customers to buy cards with postage included for a single price. The card producer pays the Postal Service when the card is actually processed.

This is but one example of the value that Intelligent Mail can bring to the Postal Service and the entire mailing industry in the years ahead.

We continue to focus on process improvements and in creating a dynamic, flexible workforce. We will continue to work with our oversight authorities to try to achieve the flexibility and speed of reaction time.

In the end, if the Postal Service is to overcome its challenges and secure its future, nothing is more important than having the maximum flexibility and speed that is critical for success. If we are going to self-fund like a business, we need to make decisions and take actions like a business while maintaining our universal service obligation.

That is what management’s plan addresses, in all of its components – each of which is vital to our Postal future. That is why it must be taken in its entirety.

Looking ahead, I am hopeful that all of you who have a stake in our future will continue your participation by sharing your ideas with us as we move this plan forward.

This will help ensure that in the coming years, the Postal Service will remain a vital driver of the American economy, an integral part of every American community, and an institution that delivers the greatest value to its customers of any comparable post in the world.

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