While hearings before the Postal Regulatory Commission (PRC) are usually pretty mundane events, something totally unexpected happened today.  The Postal Service revealed something it’s been hiding for months — the projected revenue losses its consolidation plan could cause. The numbers are something to behold.

The PRC was holding hearings for its Advisory Opinion about the Network Rationalization plan to consolidate over 200 mail processing plants and to reduce service standards in the process.  Gregory Whiteman, Manager of Market Research at the Postal Service, was answering questions about market research commissioned last summer to determine how much revenue might be lost if the Postal Service reduced service standards and slowed down First-Class mail.  Up until this moment, the Postal Service had been reluctant to say much about this research.  Instead, it has stuck to the testimony it presented to the PRC in December, which was based on a second round of research conducted in October.

The results of this first round of research will officially be released tomorrow morning, but at the hearing, Mr. Whiteman revealed that the research showed that First-Class mail volumes would drop a whopping 10.3%, and total mail volumes would drop by 7.7%.  That translates into $5.2 billion in gross revenue losses, and $1.9 billion in net contribution losses (the contribution loss figures in lower costs for lower volumes).  The breadkown for the market research numbers can be seen here.  (They also show a volume drop for periodicals of nearly 20%.)

Losses like that would wipe out nearly all of the $2.6 billion in cost savings the Network Rationalization plan hopes to achieve.  Given that the AMP studies suggest cost savings might be far less than $2.6 billion, the consolidation plan could easily end up losing more money than it saves.

These volume and revenue losses are significantly greater than the numbers provided in initial testimony for the PRC’s Advisory Opinion.  That testimony was based on the second round of research conducted by Opinion Research Corporation (ORC).  That research, which is a central part of the Postal Service's case for consolidation, said the service standard changes would cause a volume loss of 1.7%, a revenue loss of $1.3 billion, and a contribution loss of $500 million.

These new numbers provide circumstantial evidence that when the Postal Service saw the results of what we now know as the Phase-1 research back in late September or early October, it realized the numbers were devastating to their case for the consolidation plan.  It ordered the market research firm to stop the research before finalizing the numbers, and it began work on a new research survey, apparently designed to elicit better, less damaging results. 

For the new Phase-2 survey, the Postal Service made slight but significant alterations in the questionnaire, and it completely changed the “concept statement” (the prompt document that starts the interviews).  The new concept statement avoided all mention of the broader context of the Postal Service’s financial crisis and the proposals on the table to fix it — eliminating Saturday delivery, closing post offices, and seeking legislative reform — initiatives that had been referenced in the Phase-1 concept statement.  It also went into more detail about the service standard changes and made them sound less negative. 

At the hearing today, Mr. Whiteman was asked directly by Vice-Chairman Nanci Langley if the Postal Service had “abandoned” the research because of the negative results of the Phase-1 study.

“Most definitely not,” responded Mr. Whiteman.  He explained that when the Postal Service got the results from the Phase-1 survey, the qualitative research showed that customers were basically reacting to the other factors mentioned in the concept statement, like the big deficit, legislative reform, closing post offices, and five-day delivery.  So participants in the survey were reacting to a lot of things and not just the change in service standards.  That wasn’t a problem for the qualitative research because focus group leaders could guide people back to the main issue, the changes in service standards.  But the quantitative research was being conducted at the exact same time, so no one yet realized that a problem was developing in the survey method.

As it turned out, Mr. Whiteman explained, the Postal Service eventually understood that the way they had constructed the concept statement for Phase-1 was generating data that was “not reliable.”  The problem was not that they didn’t want the numbers they got, but rather that the research, constructed in the way it had been, was not “reliable or credible,” and could not be presented as testimony to the PRC.

Mr. Whiteman's testimony was substantiated by the testimony earlier in the day of ORC's Rebecca Elmore-Yalch.  She testified that the Phase-1 research, which she referred to as the "all-causes" research because it encompassed more than just the service standard changes, was determined by the Postal Service to be problematic because it contained too much "noise."  The other variables — closing post offices, eliminating Saturday delivery, etc. — were making it difficult to "tease out" the effect of only the change in service standards; hence the phase-2 study.

The explanation offered by Mr. Whiteman and Ms. Elmore-Yalch is certainly credible, but it's not going to put an end to the controversy these new numbers are sure to cause.  At this point, the Postal Service has a big problem, and we're not talking about its fiscal crisis.

First of all, there's the timing: It looks like the Phase-1 results came in at around the time the Postal Service was preparing to submit the Request for an Advisory Opinion, in October.  If the delay in submitting the Request until December was caused by the need to re-do the marketing survey, it lends an air of bad faith to the Postal Service's push to have the Advisory Opinion process speeded up, and it certainly gives a new twist to Senator Carper's criticism of the PRC for moving too slowly.

Then there's the issue of "cumulative effects."  The Postal Service says that it has not commissioned market research on the combined effects of its main initiatives — closing post offices, eliminating Saturday delivery, and reducing service standards.  That just raises the question, why not?  As the APWU has pointed out, the Postal Service says all the elements of its business plan are integrated, and the whole thing needs to be implemented to be successful.  If that's the case, isn't it important to commission research inquiring into the cumulative effects of its various plans?

At the same time, the Phase-1 market survey, while not constructed or intended to elicit responses about the combined effects of the three plans, does mention them in the concept statement, and it therefore provides some indication of what the cumulative effects of the plans might be. 

A volume loss of nearly 8% in the first year of the plan's implementation would be significantly greater than the 1.5% annual decline projected for the next few years by the Boston Consulting Group, and it’s almost as bad as what happened in 2009, when the recession caused total volumes to decline by 12% (from 202,703 pieces to 176,744).  It's hard to imagine why the Postal Service would want to implement a business plan that would cause volumes and revenue to drop so drastically.

The Postal Service will be officially releasing the numbers from the Phase-1 market research tomorrow morning.  The PRC has asked to see the raw data on which the numbers are based, but ORC says the numbers are too raw to release.  It would need to “scrub” the data first by checking for outliers and data entry errors — the step in the process that never happened because the Postal Service abandoned the research before it was completed.

Judging by questions from PRC Chairman Ruth Goldway at the end of today’s hearing, it looks as if the PRC wants the Postal Service to have ORC complete the data scrub so that the Commissioners can look at the data and draw their own conclusions about what the numbers show. 

In the meantime, politicians, the media, and industry stakeholders are going to have a look at that 7.7% volume loss and the $5 billion in revenue losses and wonder what the hell is going on in L'Enfant Plaza.

(For background on the market research study, see last week's posts on "The Case of the Missing Market Research Study" and "If at first you don't succeed, try revising the survey.")