Looking to recharge the Postal Service

"Postal Service Transformation Plan"

Some people think the U.S. Postal Service is broken. The agency has been losing money with no replacement in sight for those lost dollars as more people send e-mail and pay their bills online.

But just as new technology is hurting USPS, officials are also pinning their hopes on technology to revitalize the 225-year-old institution in the 21st century. Information technology has a critical role to play not only as a cost-cutting tool but also as the basis for a variety of new fee-based services that officials hope can offset the steep and continuing drop-off in the use of first-class mail, the agency's principal revenue source.

But that is not the only challenge facing the agency. Like their counterparts at many federal agencies, USPS officials also expect a potential workforce crisis that could dramatically affect their ability to deliver on this IT-heavy strategy: More than three out of five managers who work for the agency's chief technology officer will become eligible to retire by 2007.

The challenge to replenish these ranks weighs heavily on Robert Otto, USPS' CTO. Otto said he and his managers have been so busy trying to transform the agency during the past four years that they have had little time to prepare a new generation of IT managers to follow in their footsteps.

Otto, who arrives at the office daily between 4:30 and 5:30 a.m., has begun to worry that he will struggle to find enough qualified successors who will share the work ethic of his colleagues, who began their careers in the 1970s and 1980s.

"We want to get people involved in the Postal Service and to know it and love it like we do," he said.

Two faces of technology

A self-supporting, independent federal agency, USPS receives no yearly congressional appropriations. To fulfill its obligation to provide universal mail service, the agency adds about 1.8 million addresses to delivery routes every year, a cost that cannot be avoided. Since 2001, the more than 1,300 employees in Otto's IT organization have brought about changes that address these and other costs.

Among their accomplishments:

They replaced a 7-year-old infrastructure of outdated PCs and low-bandwidth networks with high-speed networks and desktop PCs running Microsoft Windows XP.

They adopted a standard 12-month accounting calendar and installed Oracle Financials to replace and improve old general ledger and accounting software.

They reorganized to remain agile, reassessing their practices every nine months to meet changes in the IT shop's workload.

They made all USPS applications accessible from a Web browser and reduced the number of commercial software packages agency employees use from about 1,000 to fewer than 400.

They built a data warehouse, one of the largest of its kind, and developed complex optimization models that use the data.

These and other technology changes have had significant consequences for USPS employees. William Burrus, president of the American Postal Workers Union, said the agency's use of automated mail sorting and labor optimization modeling has meant that thousands of postal employees have lost their jobs.

In the past five years, automation has eliminated about 8 percent of the entire USPS workforce in the bargaining unit that he represents, Burrus said. "We understand the need for efficiency, so we have never fought it," he said. Instead, he said, union leaders try to make a more efficient workplace benefit the employees who remain.

Staffing cuts have not affected all parts of the agency, however. In Otto's central IT office, the number of employees has remained stable, and Otto expects that to continue. He said he also has enough money to do what needs to be done. His budget for fiscal 2005 is $1.3 billion.

Otto said his biggest challenge is making things happen. In an agency of 706,000 employees, including 220,000 PC users, every IT change is arduous to manage.

And agency officials face other challenges.

"For the Postal Service to solve its economic problems, it needs to do a lot of things right," said Rick Merritt, executive director of PostalWatch, a group that represents small businesses and consumers and is often critical of USPS managers. "There will be no silver bullet."

Merritt said one of the challenges is discovering ways to get short-term returns on IT investments. Increasingly, he said, the unforeseen consequences of new technology make it unrealistic to expect long-term returns. For example, USPS officials invested heavily in handwriting-recognition equipment, he said. But new technology came along and changed people's habits, and now, fewer people address mail by hand.

Commercial software presents another challenge for USPS officials. Like many CTOs, Otto appreciates the economic value of commercial software. But that software can break when 220,000 employees try to use it. It happened when USPS officials purchased Microsoft's Exchange messaging software, Otto said. It also happened when they bought a retail software package from Retek.

In those and other instances, company officials made changes in their software codes to accommodate USPS' needs. If commercial software works here, it will work anywhere, said George Wright, manager of USPS' finance and administrative systems portfolio.

Agency officials have adopted a variety of efficient and cost-saving practices, most of which can be summed up in the simple messages that Otto regularly tells his employees: "Standardize everything, centralize anything that you can and simplify it." Those three philosophies work, he said.

Occasionally, USPS officials make embarrassing computer mistakes, as they did recently in issuing $103 million in overpayments to employees. The agency's inspector general is investigating the case. But IT officials have been successful in completing many projects that have reduced operating expenses. In the past three years, USPS officials have cut $8.3 billion from the cost of operating their $68 billion business, largely through the use of automation and IT, Postmaster General John Potter said at a recent National Postal Forum in Washington, D.C.

Bringing in the cash

Despite clear directives for cutting costs, however, USPS officials could still fail in their transformation efforts if they cannot find ways to generate new income.

Burrus said he is opposed to new work-sharing agreements that allow large businesses to save money by handling certain mail sorting and distribution activities, sometimes at a loss to USPS.

"The Postal Service has invested more than

$5 billion in technology to speed up the processing of mail, and now it's giving discounts to mailers who perform some of the same work that would be performed on this new equipment," he said.

By allowing the discounts, USPS officials forgo $17 billion a year in income for the agency, Burrus said. Union officials were successful in getting language into pending postal legislation that would put a cap on such work-sharing discounts.

Other critics question whether USPS officials can generate any significant new revenue sources to replace declining dollars from first-class mail.

"They may be able to increase their business mailing volume to some degree to compensate for the amount of volume they're losing on first class," Merritt said. "But when that translates to actual revenues and contributions to institutional costs, I don't think it's going to keep pace."

USPS officials are more hopeful.

"We're working with IT to find opportunities to generate revenue by becoming quick, easy and convenient," said Nicholas Barranca, the agency's vice president for product development. IT and the Web are components of all new USPS products and services.

Some of those are beginning to appear in TV advertisements, but it is too early to know whether they are producing new revenue or simply redirecting it from traditional sources. USPS

officials have not yet conducted surveys to answer that question. But new products and services are gaining popularity with consumers and small businesses, Barranca said.

USPS' Web site, www.usps.com, has more than 1 million visitors a day. From that site, people can use the agency's Click-N-Ship service to print labels with prepaid postage. They can request a carrier to pick up their mail or packages on the next business day. Mailers can get delivery confirmation via e-mail. Officials at small businesses can view their shipping histories online.

"We're approaching $80 million in postage labels generated through Click-N-Ship this year," Barranca said. Since February, carriers responding to Web-based requests picked up about 1.3 million packages at homes or businesses in the United States. "We're hitting a demand out there," he said, "from small businesses and some home businesses."

Although the agency does not charge for next-day carrier pickup, USPS officials expect to generate new revenue from higher mail volume and intelligent-mail services such as Track and Confirm and others that are in various stages of development.

Intelligent mail, the ability to track mail using bar codes and identification numbers, eliminates the uncertainty many people feel when they mail packages or letters, Merritt said. "If the Postal Service implements things that make their product line more valuable to the consumers, it can't help but preserve more of its volume," he said.

Brian Moran, a partner at Accenture, said USPS' Track and Confirm is among the more ambitious intelligent-mail initiatives in the postal industry.

"This is for large volumes of mail — in many cases, even millions of pieces of mail — providing information about the entire mailing," he said. Mailers pay a subscription fee for the Web-based service.

Beyond intelligent mail, the new automated postal centers are another innovation that could help transform USPS, Merritt said. Agency officials said about 2,500 automated postal centers will be installed in shopping malls nationwide in time for the December holiday mailing season.

The compact computerized units, which are far more sophisticated than postal vending machines, were designed to perform most of the services that clerks provide at post offices during limited hours. From 1,200 automated postal centers installed earlier this year, USPS has collected $16 million in postage revenue, said Patrick Donahoe, USPS' chief operating officer and executive vice president.

Officials said the automated centers are another component in the agency's increasingly complex IT operational environment. Otto, whose conference room walls are covered with charts showing performance metrics, said he would feel better about the future if postal IT operations were far less complex.

"I've got 77 candidates who are in my succession plans, and we have to spend time mentoring them and preparing them for this," he said.

For Otto, the 12- to 14-hour workdays have gone by quickly.

"What we've been focusing on for the last four years is putting in infrastructure, delivering services, putting in new applications, getting rid of the old, taking costs out, making things easy for people, standardizing, self-service — all of those things," he said. "Now, I've got to focus a little bit more on the people side."