Imagine it’s Wednesday and you want to mail something, and you’re used to seeing that mail delivered the next day. But things have changed. You can’t get to the post office until Thursday because yours has closed and the nearest one is too far away to make the trip today. The next-day mail now takes two days because 250 mail processing plants have closed, so your mail won’t be delivered until Saturday. But now there’s no delivery on Saturday, so your mail won’t be delivered until Monday (if it’s a holiday, make that Tuesday).
Scenarios like that one will cost the Postal Service some serious money. A lot of mail is time-sensitive — bill payments, periodicals, advertisements about sales — so longer delivery times can cause big problems and drive away business. Individuals, organizations, and corporations will be more inclined to use the Internet, or advertise in other venues, or have a private company deliver their periodicals. Customers will simply take their business elsewhere, and that means lost revenue for the Postal Service.
The Postal Service has presented three plans for downsizing to address falling mail volumes and declining revenues: eliminating Saturday delivery, closing post offices, and consolidating mail processing plants. It has prepared detailed reports on each plan for the Postal Regulatory Commission (PRC) for Advisory Opinions, and the PRC has issued its own reports on the first two plans and it's working on the third right now. There's plenty of material to look at if you're wondering whether or not these plans might succeed in balancing the books of the Postal Service. (Of course, re-amortizing payments to pre-fund healthcare benefits for future retirees would solve the problem with much less pain, but that’s another story.)
Each plan looks as if it could save some money. The cost savings from cutting jobs and downsizing the infrastructure are greater than the revenue losses each plan might cause. But that’s looking at the plans in isolation. The problem is synergy. What happens when all three plans are implemented?
Normally, synergy is seen as a positive phenomenon: it refers, for example, to when people work together and produce a result greater than the sum of their individual efforts. But synergy can also be negative, like when several economic problems interact with each other and cause a recession.
If all three plans the Postal Service is pushing were implemented, the danger is that this negative synergy would kick in, and the total revenue loss would be greater than the sum of the revenue losses incurred by the plans considered in isolation. The synergy effect could be so great, in fact, that the cumulative revenue loss would exceed the cost savings. Implemented together, the three plans could actually lose money and increase the postal deficit. Then what? More cuts, and more revenue declines? The Postal Service could soon find itself in a downward spiral that’s impossible to stop.
In the Advisory Opinion process for the Network Rationalization plan to consolidate 250 processing plants, the issue of cumulative effects has come up on several occasions. The Postal Service asked a market research firm to do a study about customer’s attitudes toward the various plans, and the study revealed that customers were very concerned about the change in delivery standards coupled with eliminating Saturday delivery and closing post offices.
Several witnesses in the case have also been asked about cumulative effects, and how revenue losses might be impacted if all three plans were implemented. The Postal Service has apparently not sponsored any quantitative research on the synergistic effect of implementing all three plans, so it’s hard to say exactly what those revenue losses might add up to. But we can look at the numbers for each plan and get an idea of what could happen.
Eliminating Saturday delivery
In its case for eliminating Saturday delivery, the Postal Service contracted the services of Opinion Research Corporation (ORC), one of the oldest and most respected marketing research firms in the United States. (You may have seen the name lately, since ORC partners with CNN to do election polling.) The goal was to develop estimates of how much revenue might be lost if there were no mail delivery on Saturday.
Rebecca Elmore-Yalch, Senior Vice President at ORC, testified before the PRC about her firm’s research. In her testimony she explained that ORC did two “parallel phases of research” — one qualitative and one quantitative. The qualitative research, conducted September 1 to 24, 2009, involved “drawing out participants’ attitudes, feelings, beliefs, experiences, and reactions” through focus groups and in-depth interviews with a variety of mailers, big and small. The quantitative research, completed in October 2009, developed forecasts of how the proposed changes would impact the volume of various types of USPS products.
Using ORC’s estimates of lost revenue, combined with its own estimates of cost-savings, the Postal Service estimated it would save $3.1 billion by eliminating Saturday delivery. As explained in its Advisory Opinion, the PRC questioned the numbers, did its own calculations, and concluded the savings would be more like $1.7 billion.
Part of the discrepancy had to do with interpreting ORC’s market research. The Postal Service estimated that it might lose $0.2 billion net revenue, but the PRC, looking at the same research, gave the numbers a different interpretation and said net losses would be more like $0.6 billion. In its response to the Advisory Opinion, the Postal Service stuck by its original estimates.
Despite all the effort to make sound estimates, it’s really anyone’s guess how much revenues would decline if Saturday delivery were eliminated. As the PRC wrote in its Advisory Opinion, “The confidence intervals for the Postal Service’s point estimates show that there is a large range of uncertainty between the upper and lower bound estimates…. This means that the Postal Service and the Commission cannot be very certain as to the exact magnitude of the revenue the Postal Service will lose if it moves to five-day delivery. This issue is inherent due to the uncertainty of predicting future mailer behavior, and an issue that the Postal Service made every effort to ameliorate through sound data collection.”
Given the uncertainty about projections, it should come as no surprise that in a report about the budgetary implications of proposed Senate legislation (S.1789) released earlier this week, the Congressional Budget Office (CBO) offered an even lower estimate of cost savings. The CBO said that if five-day delivery were implemented in 2014, the cost savings the first year would be only $300 million; then, as the Postal Service adapted to its new system, the savings would grow to $600 million in 2015 and $1.3 billion in 2016, but then they would decline to about $1 billion a year by 2020.
ORC's market research for the Saturday delivery case did not consider the plan in the context of plans to close post offices or consolidate processing plants, but the issue of cumulative effects did come up. In her concurring opinion for the Advisory Opinion, Commissioner Nanci Langley expressed this concern:
“Moreover, at the same time that the Postal Service is proposing to eliminate Saturday service, it is realigning its processing and distribution facilities throughout the country; continuing to adjust city carrier routes; and preparing to review over 2,000 retail facilities for closure. How will these realignment efforts operate in a five-day scenario; will these combined actions impact senders and recipients of mail disproportionately and without discrimination; and what is the Postal Service’s strategy to coordinate these different efforts?”
Closing post offices
When Commissioner Langley wrote that opinion in March 2011, the Postal Service was talking about closing 2,000 rural post offices. Subsequently, the Postmaster General announced they were looking at closing more like 15,000 post offices, about half the country’s post office.
The Postal Service started this summer with 727 offices initiated for study before July 2011 and many others that had been suspended; about 320 of these have closed and another 250 have been told they’ll close when the moratorium ends on May 15. Then came the Retail Access Optimization Initiative (RAOI) list of 3,652, many or most of which will start closing in May as well. According to the Deputy PMG, another list of 4,000 more is coming soon. Taken together, that’s over halfway toward 15,000, and other lists are sure to follow.
Segmenting the big plan into smaller components like this minimizes the synergistic impact. In terms of estimating potential revenue losses, it’s obvious that if you ask customers in a market research survey how they might react to closing 10% of the country’s post offices, it’s a lot different from asking how they’d react to closing half. And that’s one of the reasons the Postal Service is doing it this way.
Not that the Postal Service seems very worried about revenue losses. It doesn't even consider lost revenue when it does its cost-savings analysis for closing post offices. When it issues a Final Determination, for example, it calculates the cost saving by adding up the operating costs (typically rent and employee salaries) and subtracting the replacement costs (additional wages for a rural carrier or employees at another facility). Nothing is subtracted for lost revenue.
The Postal Service simply assumes that all of the revenue will migrate to another facility. Customers who rent a post office box in the closing post office will rent one in another post office, no matter how far away it is. The postage sales, money orders, and other sources of revenue will enter the system at another location — a post office, a CVS, online, wherever.
There’s a lot of evidence to suggest, however, that much of the revenue may be lost and not find its way to another USPS source. In fact, in its report about the RAOI, the USPS OIG criticized the Postal Service for failing to make an effort to include revenue losses in its cost-savings calculations.
For the RAOI, the Postal Service would not even make an official estimate of aggregate cost-savings for the Advisory Opinion. However, USPS spokespersons mentioned $200 million in annual savings. That's roughly in line with a 2008 George Mason study on the cost of maintaining various components of the Universal Service Obligation, including post offices. The GM study estimated that closing 9,200 small rural post offices would save around $586 million.
Both of those estimates are bigger than what the PRC calculated, however. Using data available from all the appeals it’s been reviewing, the PRC came up with a cost-savings estimate of about $100 million for 3,470 of the RAOI post offices (Advisory Opinion, p. 133).
The George Mason study at least recognized that revenue from post office box rentals might be lost, and it subtracted $26 million from the total cost savings, but that study did not include any other potential losses. The PRC estimate does not include any revenue loss. The Postal Service has apparently not done any studies on how much money is lost when a post office is closed, nor has it commissioned market research on the question.
In the UK, however, where they have closed over 7,000 post offices, there’s been ample opportunity to study the effects of closings. A report on post office closures in West Sussex, for example, found that almost two-thirds of customers said that they were doing less business with the Post Office as a result of the closures (download pdf here, see p. 12). Another study conducted in 2009 found that closing post offices resulted in a 12% loss in revenue — better than the expected 20% loss, but still a considerable amount.
Putting all these numbers together yields the following estimates. Extrapolating from the PRC's cost-saving analysis for the Advisory Opinion suggests that closing 15,000 post offices would save around $432 million. The Postal Service's figure of $200 million would extrapolate to about $820 million, and the GM numbers, to about $1 billion. Let's say total cost savings would be somewhere around $700 million.
Estimating revenue loss is difficult but not impossible. The Advisory Opinion indicates that the total walk-in revenue for the RAOI post offices was about $245 million (p. 129). (A much larger amount — almost $5 billion — was income from bulk and business mail, but most of that entered the system at retail annexes and would presumably not be affected by post office closings.) If the walk-in revenue number is extrapolated to 15,000 post offices, it comes to $1 billion in revenue. The UK study suggests 12% of that $1 billion would be lost, and the GM study suggests about $40 million would be lost in post office boxes alone. Let's say that total revenue losses would be about $160 million. That leaves us with about $540 million in cost savings from closing half the country's post offices.
Rationalizing the Network
In December, the Postal Service presented the PRC its plans for rationalizing the mail-processing network by consolidating about 250 plants, which would necessitate reducing service standards — no more overnight delivery of first-class mail, and more mail delivered in three days instead of two. This plan will clearly impact mailers, big and small, so the Postal Service again enlisted the help of ORC to help estimate how much revenue might be lost if the mail slowed down.
The research is explained in the testimonies of Gregory Whiteman, Manager of Market Research for the Postal Service, and ORC's Elmore-Yalch. The research had two phases: The qualitative research was done between August 9 and August 23, 2011, and for the quantitative research, the data collection was completed between October 26 and November 8, 2011.
The qualitative research used focus groups for consumers and small commercial mailers and interviews for larger commercial organizations. According to Whiteman's testimony, "The most significant finding [of the qualitative research] was that most consumers and small commercial mailers said that the changes would have limited impact on their mailing behavior," but that "the proposed changes could increase their use of the internet as an alternative." The larger mailers indicated that the changes would accelerate the shift to the internet and to competitors like FedEx and UPS. Overall, though, there would be "limited impact" on the large mailers, who were generally more interested in seeing the Postal Service rein in costs (which keeps postal rates down).
For phase two, Whiteman "worked closely with witness Elmore-Yalch to develop and prepare materials used in the quantitative market research." ORC conducted a survey of various types of customers and found that the changes in service standards would "divert mail volume to the internet and commercial shipping companies."
Using ORC’s quantitative survey, Whiteman estimated that the changes would result in revenue losses of $1.3 billion. Since lower volumes also mean lower costs, however, the Postal Service adjusted that revenue loss down to a "contribution loss” of $0.5 billion. Other testimony in the docket indicates that consolidating the 250 plants would produce cost-savings of $2.6 billion a year in labor, rent, maintenance, fuel, etc. The net cost-savings would thus be $2.1 billion.
Adding up the numbers
Now let’s look at all three plans together. The following table uses the various sources discussed above — the PRC’s Advisory Opinions, the USPS testimonies, and the studies done by George Mason and the UK. Note that the Postal Service tends to overestimate cost savings and underestimate revenue losses, so its numbers for the Network Rationalization plan will be contested, just as they were for the plans on five-day delivery and the RAOI, but this table uses them since they're all we have for now. The "net lost revenue" numbers refer to the "contribution loss." (As explained above, the total revenue loss is adjusted to reflect the lower costs associated with lower volumes. The total or "gross" revenue losses themselves are much bigger than the net contribution losses.)
Looking at the three plans together, then, we see the following:
ESTIMATING THE COST SAVINGS FROM THE DOWNSIZING PLANS
($ in billions)
Closing 15,000 post offices
Net lost revenue
Data sources: For five-day delivery, the PRC Advisory Opinion. For closing post offices, the cost savings extrapolate from and split the difference between the estimates made by the PRC, USPS, and George Mason; the lost revenue is based on the UK and GM studies. For network rationalization, the numbers come from the USPS testimony for the Advisory Opinion. The synergy effect is a guess.
The table shows a "synergy effect" of lost revenue that is double the sum of the losses from each plan. It's simply a guess — it could be less, but it could also be much greater. Who knows what the cumulative impact of the plans might be? It's entirely possible that the revenue losses would be greater than the cost savings.
The recession caused revenue to drop $7 billion in 2009. These cost-saving measures could cause just as deep a drop, but unlike the recession, they would be permanent. Closing half the country's post offices and half the processing plants and eliminating Saturday delivery might be devastating.
Even if synergy doesn't drive lost revenue over the $5.6 billion in cost savings, the revenue losses are sure to wipe out a large portion of the cost savings and accelerate diversion to the Internet. That diversion will continue even if none of the plans is implemented, but the plans will clearly make matters worse.
None of these calculations of savings and lost revenue, it should be noted, considers revenue losses outside of the Postal Service's own ledger sheet. They don't include the 70,000 postal employees who will lose their jobs and their incomes, the shops and restaurants around a closed post office that will lose business, the economic impact on communities that lose a large processing plant. Those losses will be in the billions too.
Looking at the market research
While ORC’s quantitative research focused on the Network Rationalization plan in isolation, the qualitative research did consider the combined effects of the three plans. In her description of the qualitative phase, witness Elmore-Yalch explained that “to initiate discussions,” the focus group moderator provided participants with a “concept statement” that described “the fiscal situation facing the Postal Service and proposed changes to the network, legislation, and First-Class Mail service standards proposed to address the situation.” After reading the document, participants made notes about how they felt about various issues. The same document was also used to set up the interviews.
The concept statement reads as follows: “As a result of declining mail volume, the cost to continue providing this level of service is becoming unsustainable, contributing to major budget deficits for the Postal Service. In the past two years, the Postal Service has had budget deficits of over $8 billion and expects to have a similar budget deficit this next year.” (USPS T-11, p. 82, 83, 88)
The concept statement proceeds to say the Postal Service “is exploring several options” to deal with the deficit:
- Legislative reform to change government requirements to pre-pay health and pension benefits
- Eliminating Saturday mail delivery to homes and businesses
- Closing many small post offices while shifting retail access to alternative locations and channels
The document then describes the changes in service standards that would occur with the Network Rationalization plan — next day delivery will become two-day, some two-day will become three, etc.
The concept statement thus puts the service standards changes in the context of the other plans on five-day delivery and closing post offices, as well as legislation on funding benefits. Last week the Postal Service made public the ORC report about the qualitative research, which summarizes and quotes the comments of many participants. The responses show that customers were clearly sensitive to the problem of cumulative effects, and many referred to these options in their responses (although most didn’t really get the benefit issues).
One “major area of concern” identified by participants, says the ORC report, “was what this change in service coupled with the other changes in the service optimization plan would ultimately mean to customers” (p. 17; italics mine). Some participants expressed concern about eliminating Saturday delivery, and “many commented negatively on the ‘closing of smaller post offices.’ Even those living in midtown Manhattan worried that the post office they rely on might be considered small and thus could be on a closure list. In some instances the concerns were the inconvenience of having to travel to another Post Office. In others, the concern was the loss of jobs and the impact on the economy” (p. 18).
Reviewing the interrogatories
The issue of synergy and cumulative effects has also come up many times in the interrogatories posed to the Postal Service witnesses. It's clearly on the minds of a lot of people. Here are a few examples:
One of the first interrogatories posed in the case was asked by David Popkin, and it described a couple of scenarios just like the one that began this article. What if my post office is closed, the mail takes an extra day to deliver, and there's no Saturday delivery? Popkin asked if the "combined effects of the outstanding USPS requests" would thus slow down the mail by several days as described in the scenarios. The Postal Service replied that the interrogatory "improperly characterizes" Saturday delivery as having been eliminated, but then acknowledges that the scenarios do establish that "some mail with a two-day service standard might not be delivered until five days after entry in a hypothetically constructed operating environment." [DBP/USPS-12]
The Greeting Card Association (GCA) asked Elmore-Yalch “whether, and if so, how, respondents and participants were made aware of (i) the potential reduction of delivery days from six to five per week, and (ii) the effect on speed of delivery of a possible combination of this reduction with the change in service standards at issue in this Docket.” In response, Elmore-Yalch cited the concept statement quoted above, which mentions eliminating Saturday delivery and closing post offices as options. [GCA/USPS-T11-1]
The American Postal Workers Union (APWU) asked Elmore-Yalch a related question: “Were consumers participating in the quantitative survey asked about their potential behavior if these changes in service standards were combined with the proposed changes necessary for 5-day delivery?” The answer was no. [APWU/USPS-T11-11]
GCA asked USPS witness David Williams about his testimony (p.16) that consolidating plants wouldn't have much impact on single-piece First-Class mail since the retail network "is unaffected by this initiative." GCA wanted to know if Williams had considered the “cumulative effect” on how volumes of single-piece First-class mail might be affected by the RAOI, eliminating Saturday delivery, reducing collection boxes, and/or an exigent rate increase. Williams replied that he had not considered any of these other factors in making his observation about single-piece mail. [GCA/USPS-T1-3]
GCA also asked the Postal Service to explain “the relationship, if any, between (i) the Mail Processing Network Rationalization plan and associated changes in service standards, as set forth in this Docket, and (ii) the plan to eliminate Saturday delivery.” The Postal Service replied basically that the feasability of hte Network Rationalization plan did not depend on eliminating Saturday delivery. Ditto for the relationship between Network Rationalization and the plan to close thousands of post offices. [GCA/USPS-1 and 5]
The National Association of Letter Carriers (NALC) asked Whiteman if the Postal Service, in its quantitative market research, sought “to make any estimate of how much volume, revenue and contribution it would lose if USPS implemented both (1) the end of Saturday delivery and (2) the change in service standards proposed in this case? If so, please provide these estimates and explain how they were calculated.” That interrogatory was answered today as follows: "The market research upon which the Postal Service relies in this docket examines mail volume changes arising from the service standard changes alone. The Postal Service has not undertaken similar research that isolates changes arising from the sum of service standard changes and the end of Saturday delivery." [NALC/USPS-T12-14]
PRC chairman Ruth Goldway, the presiding officer, asked Elmore-Yalch why, with respect to how much more or less business they might do with the Postal Service, customers in the quantitative survey were asked, "What percentage of this [decrease/increase] is solely because of the First Class mail service standards?" Elmore-Yalch responded, "The purpose of including this question was to ensure that any impacts on respondents' estimates for volume changes or how mail was sent was attributed exclusively to the proposed changes in First-Class mail serve standards while excluding any impacts resulting from collateral postal matters that gained significant media coverage at the time of the study" (such as the implementation of Five Day delivery). [POIR-1-19]
And finally, the APWU asked Elmore-Yalch, “How did the information obtained in the qualitative market research impact the current proposal to eliminate overnight delivery and close processing facilities? If this information did not inform the current proposal, what was the purpose of conducting this research with regard to this proposal and how has the Postal Service used the qualitative market research?” Elmore-Yalch replied that informing or impacting the proposal "was not an objective of the qualitative market research,” and she cited her testimony (p. 6) that the purpose of the research was “to evaluate how the proposed changes to First-Class Mail service standards would impact consumers and businesses.” [APWU/USPS-T11-4]
The interrogatories about the market research for the Network Rationalization plan raise a number of questions.
As implied by that APWU question about the “impacts” of the research on the proposal, one issue is the matter of timing. Versions of the consolidation plan were described in a USPS OIG report in July 2011, a USPS white paper in August 2011, and the Federal Register in September — all well before the quantitative study had even begun.
So how could the research help “inform” the decision to consolidate plants if the decision had already been made? What if the research had shown that the idea was a money-loser? Even now, the Postal Service seems intent on proceeding with the plan no matter what the PRC Advisory Opinion says. It's in such a hurry to get started that it has asked the PRC to accelerate its procedural schedule. (That request was turned down by the PRC today.)
Elmore-Yalch explained that the purpose of the research was to evaluate how the changes would affect customers, but perhaps the question would be better posed to the executives of the Postal Service who commissioned the study: What was their intention in doing the quantitative research months after the plan was announced? For the five-day-delivery plan, the market research was done in September 2009, six months before the request for an Advisory Opinion was submitted in March 2010, which suggests that the research may actually have helped inform the plan. Why wasn't the market research on service standards also done much earlier in the planning process?
Another aspect of the timing of the studies may come under scrutiny. As noted above, for ORC’s research on five-day delivery, the qualitative and quantitative phases of the research were done in “parallel,” at roughly the same time period in September and October of 2009. For the Network Rationalization plan, however, ORC did the qualitative study in August 2011, and then began the quantitative study over two months later, in late October. Did it take that long to design the survey?
Some of the questioning has implied that the participants in the quantitative study may have been asked — or at least should have been asked — questions involving the effects of the changes in service standards combined with the effects of the other plans. The qualitative research done in August seemed sensitive to the synergy effect of combining five-day delivery, post office closings, and the service standards changes. Why didn’t the quantitative research do the same? If there was quantitative research on the cumulative effects, where are the results? As Elmore-Yalch's response to the Presiding Officer's query about the survey question indicates, the quantitative research tried to filter out "collateral postal matters" so as to focus "exclusively" on the change in service standards. Why wasn't the Postal Service as concerned about cumulative effects as the interveners seem to be?
One of the most important groups interviewed for the market research was the National Accounts — those who do more than $10 million a year in business with the Postal Service. There are about 236 of these accounts, and, according to Elmore-Yalch's testimony, since these accounts are so important, "every effort was made to maximize use of this sample" and to "maximize the number of completed surveys" (p. 25). However, one of the first questions they asked participants in this sample was, "Have you participated in a survey for the United State Postal Service in the last three months?" (p. 90). If the answer was yes, the interviewer asked to speak with someone else at the company or terminated the interview. Were interviewees who had participated in the qualitative survey excluded from participation in the quantitative survey, or does that question refer to other surveys? Why was this screening question included in the survey in the first place?
Another question that may be worth asking involves a difference in the concept statements used for the two phases of the market research. The document used for the qualitative research informs participants as follows: “Businesses using bulk First Class, Standard, or Periodical Mail may have access to fewer locations accepting this mail and potentially result in a need to transport this mail to a location different from the one you are currently using. Businesses using Standard Mail may have to transport their bulk mail to another location to take advantage of the available discounts.” (USPS T-11, p. 82)
The document used for the large commercial mailers participating in the quantitative research uses pretty much the same language, but then adds the following: “However, there is also the potential that these mailers may be able to achieve improved transportation efficiencies since the service areas of these facilities may be larger than they are currently. For example, if a mailer currently sends mail to two facilities which are consolidated to one, this can allow the mailer to prepare a larger mailing for deposit at the consolidated site, resulting in a reduction in the required transportation.” (USPS T-11, p. 100)
That additional paragraph makes it sound as if the Network Rationalization plan might actually end up improving service for customers. This could easily influence responses to the questions that follow, and make participants less inclined to consider shifting their business from the Postal Service to the Internet or private carriers. Why does that passage appear in the concept statement for only the quantitative study?
Perhaps some of these questions will be asked as the Advisory Opinion continues. We’re still in the discovery phase, where the participants ask and answer questions in writing. Ahead will be days of in-person testimony, with the witnesses being cross-examined by lawyers.
Much of the evidence in this case is extremely dry and technical, and the vocabulary is totally arcane and difficult to understand. But the Advisory Opinion on Network Rationalization may yet have its moments of courtroom drama, and it looks like we haven't heard the last of "cumulative effects." You don't need a weather vane to know which way the wind blows.
(Image credits: Lost business cartoon; Synergy graphic; New Yorker cover; Modesto, CA, post office, closed and for sale; Pinehurst, NC, post office, closed; USPS consolidation map; 2 + 2 = 5; focus group cartoon; question mark man; new USPS weather vane stamp.)