How the U.S. Postal Service can save itself

Mail handlers sort packages at a U.S. Postal Service processing and distribution center in Los Angeles.
Mail handlers sort packages at a U.S. Postal Service processing and distribution center in Los Angeles. (Ric Francis/associated Press)
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By Paul B. Carroll and Chunka Mui
Friday, July 23, 2010

The debate over potential changes at the U.S. Postal Service is like a fight over the dessert bar on the Titanic. Raising first-class postage rates and eliminating Saturday delivery won't matter much when the Postal Service hits the iceberg. And USPS will do just that, soon, unless there is a reimagining of its mission.

First, the broad question must be asked: Should the federal government continue to compete against the private sector? The U.S. Postal Service has been losing money for years, whereas competitors FedEx and UPS are thriving.

If the government is to remain in the delivery business, it must develop a workable plan for the digital age.

The Postal Service projects deficits of $238 billion -- roughly the current gross domestic product of Portugal -- through 2020. Raising rates slightly and reducing delivery would make tiny dents -- and that's the best possible outcome; in the worst, the changes would accelerate the service's problems. Meanwhile, the debate obscures the fact that digital communications are fast eliminating the need for mail delivery.

To understand what could happen to the Postal Service, look at Kodak, whose 130-year history includes the kind of dominance that USPS long enjoyed. Even as the long-term threat from digital photography became clear in the 1990s, Kodak temporized. It tinkered with its traditional film, paper and chemicals businesses, never acknowledging that digital would all but eliminate them. Kodak continually predicted growth, even as it fell from being one of the most profitable companies in the world to one that's essentially worthless.

The Postal Service, too, is looking at the future as a variant of the present. USPS, convinced of the long-term need for physical mail delivery, has been relying on increases in volume, according to a Government Accountability Office report published in April. Yet delivery volume for first-class mail fell 22 percent from 1998 through 2007, tumbled an additional 13 percent last year and was down 3 percent in the first half of this year despite heavy mailings from the Census Bureau.

Step one in avoiding Kodak's fate is for the Postal Service to acknowledge that its future will have almost no connection to the present. Anything that can be conceived of as information will, in time, be sent electronically. The Internet is faster, cheaper and more convenient for the sender and the receiver.

E-mail has already supplanted letters, but that's just the start. More people will send money via PayPal or other electronic services rather than mail checks. As is increasingly the case, people will download their movies and books, check their bills online, receive information about their investments electronically, and so on.

USPS's future lies in things that need to be delivered physically: shoes, computers and other objects. On those items, the Internet can't compete, and USPS has assets that could let it take on UPS and FedEx (which, unencumbered by USPS's declining business, are in splendid shape; UPS reported Thursday that its second-quarter profit had nearly doubled, to $845 million, from a year earlier).

To build a workable future, USPS can't incrementally change its present. To span a chasm, you can't build a bridge one stick at a time. Instead, USPS needs to start with the future and work backward to the present. It needs to forecast volumes for all types of its business five, 10 and 15 years out and design a business model that will thrive under those scenarios. Only then can it figure out what radical changes need to be made now. In other words, USPS needs to first design the whole bridge, then build it.

USPS must also monitor its various projections in coming years to see if it -- like Kodak -- is being too optimistic. USPS must be ready to adapt.

Defenders of the Postal Service argue that it is changing as fast as it can. They note that it has cut costs by more than $40 billion since 2002 and has reduced employment by 130,000 people since 2007, to 600,000. Radical change will face opposition from unions, big customers and its congressional overseers, who will feel enormous pressure to take short-term measures to protect jobs and have long acted parochially in opposing the closing of post offices and other service changes that could affect constituents. Consider that even changing the number of days of delivery requires amending a congressional statute.

Yet, those arguments are simply not enough. General Motors argued for years that it was improving quality and cutting costs as fast as it could in the face of huge obstacles. The market didn't care. GM's top speed wasn't fast enough.

To avoid the fates of Kodak and General Motors, the Postal Service must learn from their failures. It must start by convincing Congress and other stakeholders that it is in the middle of a full-blown crisis. It can either lead change or be overrun by it.

Paul B. Carroll and Chunka Mui are co-authors of "Billion-Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years" as well as principals in the management consulting firm Devil's Advocate Group.

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