Postal Service: Performing Remote Barcoding In-House Costs More Than
Contracting Out (Letter Report, 09/13/95, GAO/GGD-95-143).
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-95-143
TITLE: Postal Service: Performing Remote Barcoding In-House Costs
More Than Contracting Out
DATE: 09/13/95
SUBJECT: Postal service
Comparative analysis
Postal service employees
Government employee unions
Cost effectiveness analysis
Mail transportation operations
Labor-management relations
Human resources utilization
Productivity
Operations analysis
**************************************************************************
* This file contains an ASCII representation of the text of a GAO *
* report. Delineations within the text indicating chapter titles, *
* headings, and bullets are preserved. Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are *
* identified by double and single lines. The numbers on the right end *
* of these lines indicate the position of each of the subsections in the *
* document outline. These numbers do NOT correspond with the page *
* numbers of the printed product. *
* *
* No attempt has been made to display graphic images, although figure *
* captions are reproduced. Tables are included, but may not resemble *
* those in the printed version. *
* *
* A printed copy of this report may be obtained from the GAO Document *
* Distribution Facility by calling (202) 512-6000, by faxing your *
* request to (301) 258-4066, or by writing to P.O. Box 6015, *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time. *
**************************************************************************
Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Treasury, Postal Service, and
General Government, Committee on Appropriations, House of
Representatives
September 1995
POSTAL SERVICE - PERFORMING REMOTE
BARCODING IN-HOUSE COSTS MORE THAN
CONTRACTING OUT
GAO/GGD-95-143
Remote Barcoding Costs
(240178)
Abbreviations
=============================================================== ABBREV
APWU - American Postal Workers Union
NALC - National Association of Letter Carriers
Letter
=============================================================== LETTER
B-261001
September 13, 1995
The Honorable Jim Lightfoot
Chairman, Subcommittee on Treasury,
Postal Service, and General Government
Committee on Appropriations
House of Representatives
Dear Mr. Chairman:
This report responds to your March 9, 1995, request that we compare
the direct costs to the U.S. Postal Service of contracting out for
remote barcoding services versus having the work done by postal
employees. You also asked that we identify various advantages and
disadvantages of using postal employees compared to contractors for
these services.
Remote barcoding is the means by which barcodes are added to
addresses on the mail that cannot be read by the Service's automated
mail processing equipment. Images of these pieces are transmitted
over telephone lines to off-site locations where operators read and
key in enough address information to allow the equipment to produce a
barcode. The Service began remote barcoding in 1991 at two test
sites operated by contractors. Following a July 1991 decision to
contract out all remote barcoding, the Service established 17 more
contractor-operated remote keying sites serving 25 postal facilities.
The American Postal Workers Union (APWU), representing postal clerks,
and the National Association of Letter Carriers (NALC), representing
city carriers, filed national-level grievances contesting the
decision to contract out. The arbitrator's decision, while upholding
the Service's right to contract out, also ruled that the remote
barcoding jobs must first be offered to current and interested postal
employees capable of being trained to perform the work. Because of
uncertainty about how to implement the decision, as well as a desire
to strengthen the labor-management relationship, in November 1993 the
Service agreed with APWU to bring the work in-house. The Service and
the union also agreed that only 30 percent of the workhours would be
from career, bargaining unit employees. The remaining 70 percent of
the workhours would be from transitional employees receiving lower
pay and limited benefits. In the Service's view, this mix of career
and transitional workhours allowed the jobs to be performed in-house
with an acceptable return on investment, even though it recognized
that the in-house cost would be higher than the cost of contracting
the work out.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
For a 36-week period, from July 23, 1994, through March 31, 1995, we
estimated, on the basis of Postal Service data, that in-house
barcoding of about 2.8 billion images cost about $4.4 million, or 6
percent more than if the images were processed by contractors. This
6 percent cost differential was based on an in-house mix of 89
percent transitional and 11 percent career employee workhours through
March 1995. On the basis of data provided by the Service, we project
that remote barcoding will eventually process the equivalent of about
23 billion letters annually. If other factors remain the same, at a
ratio of 70 percent transitional and 30 percent career workhours
required by the Service-union agreement, we estimate the cost
differential would increase to about 14 percent, or about $86 million
annually, not adjusted for inflation, to process 23 billion letters.
An unresolved issue between postal management and the union
representing transitional employees is whether these employees should
receive additional benefits. If the transitional employees had
benefits similar to career employees, we estimate that the cost
difference would be 28 percent, or about $174 million annually.
The Service recognized that the use of postal employees for the
remote barcoding costs more than contracting out. However, it
expected that the advantage of using postal employees would be
improved relations with APWU. The Service said that it is
disappointed in its progress with APWU in building productive
labor-management relations. In contrast, APWU said that the use of
postal employees is providing the opportunity for the Service and
APWU to cooperate in establishing and operating remote barcoding
sites.
BACKGROUND
------------------------------------------------------------ Letter :2
Remote barcoding is a part of the Service's letter mail automation
efforts that began in 1982. In the late 1980s, the Postal Service
determined that it needed a system for barcoding the billions of
letters containing addresses that cannot be read by the Service's
optical character readers. Remote barcoding entails making an
electronic image of these letters. The images are electronically
transmitted to remote barcoding sites where data entry operators
enter enough address information into a computer to permit a barcode
to be applied to the letter. The barcode allows automated equipment
to sort letters at later stages in the processing and delivery chain.
The Service made a decision in July 1991 to contract out remote
barcoding based on a cost analysis that showed that contracting out
would result in an expected savings of $4.3 billion over a 15-year
period. The Service's analysis was based on the pay levels and
benefits that the Service expected to provide at that time, which
exceed pay levels currently expected for in-house work. In November
1993, the Postal Service reversed its decision to contract out the
remote barcoding function as a result of an arbitration award. The
Service expected that agreeing to use postal employees for remote
barcoding would improve its relations with APWU.
In 1991, the Service had determined that contracting out was
appropriate because (1) the remote barcoding workers would not touch
the mail and security of the mail was not at risk, (2) much of the
work would be part-time employment and result in lower overall costs,
and (3) technological advances in optical character recognition would
enable equipment to read this mail and eventually phase out the
remote barcoding. As detailed in our earlier report\1 on the
Service's automation program, the Postal Service's plans for remote
barcoding have since changed--it now anticipates increased use of the
method with no phase-out date.
On the basis of the expected total work load equivalent to 23 billion
letter images per year and a processing rate of 750 images per
console hour, we estimate that the Service will employ the equivalent
of at least 17,000 operators for remote barcoding. This is a minimum
based on console hours only and does not take into account such other
time as supervision, management, and maintenance.
In November 1990, the clerk and carrier unions filed national
grievances challenging the Service's plan to contract out remote
barcoding services. Subsequent to its July 1991 decision, the
Service awarded 2-year contracts (with an option to renew for a
2-year period) to 8 firms for remote barcoding services for 17 sites.
In late 1992, additional remote barcoding deployment was put on hold
pending the outcome of the grievances, which ultimately went to
arbitration.
On May 20, 1993, the arbitrator concluded that the Service failed to
honor certain contractual rights of postal employees. The decision
required the Service to first offer the jobs to those postal
employees who were interested in and qualified for the jobs before
contracting out for the remote barcoding service. The decision did
not require that the jobs be offered to new postal hires, and Postal
Service officials believed that an option such as specifying a few
sites to be operated by postal employees and contracting out for the
remaining ones would have complied with the arbitrator's decision.
On November 2, 1993, the Service agreed with APWU that remote
barcoding jobs would be filled entirely by postal employees. In
1994, the Service resumed remote barcoding deployment, opening 14
remote barcoding sites where postal employees are to provide services
for 22 mail processing plants. In September 1994, the Service
converted two contractor sites serving two plants to in-house
centers. It plans to convert the remaining sites by the end of 1996
and to eventually operate up to 75 centers that would serve 268
plants and process the equivalent of about 23 billion letters
annually.
--------------------
\1 Postal Service: Automation Is Taking Longer and Producing Less
Than Expected (GAO/GGD-95-89BR, Feb. 22, 1995).
IN-HOUSE REMOTE BARCODING MORE
COSTLY THAN CONTRACTING OUT
------------------------------------------------------------ Letter :3
Based on cost data provided by the Postal Service, we compared costs
incurred during a 36-week period from July 23, 1994, through March
31, 1995, for remote barcoding at the 15 contractor facilities (17
until 2 were converted to in-house operation on September 6, 1994)
and the Service's 14 in-house facilities (16 after September 6,
1994). We estimated that the total direct cost of processing 1,000
images averaged $28.18 at the in-house centers compared to $26.61 at
the contractor locations, a difference of 6 percent. The cost
difference was the greatest at the beginning of the period when the
in-house sites were getting started and stabilized at about a
6-percent difference during the last 3 accounting periods (12 weeks).
About 2.8 billion images were processed in the Service's centers
during the 36-week period. We estimated that processing these images
in the in-house facilities cost the Postal Service about $4.4
million, or 6 percent more than processing them in
contractor-operated sites.
The 6-percent difference will increase in the future as required
changes in the mix of employees staffing the postal remote barcoding
centers occur. The Service uses both career and transitional
employees, who earn different wages and benefits. Transitional
employees receive $9.74 an hour, Social Security benefits, and earn
up to one-half day annual leave every 2 weeks. The career employees
start at $11.44 an hour and receive health benefits, life insurance,
retirement/Social Security benefits, a thrift savings plan, sick
leave, and earn up to 1 day of annual leave every 2 weeks. For the
postal remote barcoding sites we reviewed, 89 percent of the
workhours were generated by transitional employees. By agreement
with APWU, no more than 70 percent of the workhours in these centers
is to be generated by transitional employees. The Service is working
toward this level, and transitional employee workhours are declining
while career workhours are increasing as the Service converts and
replaces its transitional employees. We estimate that had the
required 70/30 ratio of transitional to career employee workhours
been achieved for our comparison period, the in-house cost would have
been $30.33 per 1,000 images instead of $28.18, for a cost difference
of about 14 percent instead of 6 percent.
The Service projects that remote barcoding will eventually barcode
about 31 billion letters annually. With the remote computer reader\2
expected to reduce the need for keying by about 25 percent, we
estimated that remote barcoding centers will eventually process the
equivalent of about 23 billion letters annually. If the 6 percent
cost differential and the current ratio of 89 percent transitional
and 11 percent career workhours were continued, we estimated the
in-house cost for this volume would be about $36 million more per
year, not adjusted for inflation. If the cost differential we found
continues, using postal employees would cost the Service about $86
million more per year, or 14 percent, not adjusted for inflation,
when the required ratio of 70 percent transitional and 30 percent
career workhours has been achieved.
Benefits for transitional employees that are more comparable to those
for career employees were at issue in the recent contract
negotiations between the Service and APWU. It is reasonable to
expect that wage and other cost increases may occur in the future for
both in-house and contractor-operated sites. However, if the Service
and APWU agree that transitional employees will receive additional
benefits, the character of the jobs held by these employees will
change, and the transitional employees will become more like career
postal employees. Therefore, we also estimated the in-house and
contract cost for remote barcoding if the cost of transitional
employee benefits were the same as the cost of career employee
benefits. On this basis, our estimate is that the differential would
be about $174 million, or 28 percent, not adjusted for inflation.
Using images per console hour as a measure, we determined that
operator speed was similar between the contract sites and the
in-house centers during the 36-week period. Contract keyers
processed an average of 756 images per console hour, and postal
employees processed 729 per hour. Figure 1 shows that differences in
keying speed were the greatest at the beginning of the period and
were more comparable at the end of it.
Figure 1: Average Number of
Images Processed by Postal and
Contractor Employees, From July
23, 1994, Through March 31,
1995
(See figure in printed
edition.)
Source: GAO analysis of Postal Service data.
The number of images per console hour was the best available measure
we had for comparing the output of postal and contract employees.
However, certain factors that are important to measuring performance
were not similarly applied by the Postal Service and contractors.
For example, contractors can receive a bonus for exceeding 650 images
per hour and incur financial penalties for falling short of 640
images per hour. The Service requires its employees to maintain the
standard of 650 images per hour, but no bonuses or penalties are
involved. Accuracy standards are similar but involve financial
penalties only for contractors. The program that measures errors at
contractor sites was not used at postal sites at the time of our
review. The Service and the unions are in negotiations over what
methods will be used to monitor the accuracy of postal employee
operators.
Additionally, productivity data of both postal and contractor sites
can be skewed if mail processing plants served by the sites do not
process enough mail to keep the operators busy and they continue to
be paid. The plants can also make operational decisions affecting
whether a full or partial barcode is required from the remote
barcoding site. Although partial barcodes are quicker to enter, thus
increasing productivity in a specific center, this partially barcoded
mail will have to be sorted at a higher cost somewhere downstream.
The Service did not have data to break out images processed in-house
and by contractors by full and partial barcoding.
In commenting on a draft of this report, APWU said that the period we
used for our comparison is unfair to the postal-operated sites
because they were just starting up, and productivity is typically
lower during such periods. As shown in figure 1 above, postal images
per hour were initially lower than the contractor's images per hour.
For this reason, we did not include data from any Service-operated
center during its initial 12-week training period.
Figure 1 also shows that postal employee processed images per hour
exceeded the contractor's images per hour in accounting period 4.
The cost difference from accounting period 4 until the end of the
period was smaller than during the entire period. However, the
difference did not consistently decrease throughout the period. As
indicated in table 1, the difference was greater in the last
accounting period than the average for both the period we used and
the period recommended by the union during which the images processed
per hour had leveled off.
Table 1
Comparison of Cost Per Thousand Images
for Various Time Periods
Contractor Postal
cost per cost per
1,000 1,000 Percent
Accounting periods images images difference
---------------------------------- ---------- ---------- ----------
FY 94: AP 12 & 13, and $26.61 $28.18 5.9
FY 95: AP 1 through 7
FY 95: AP 4, 5, 6, & 7 $26.72 $27.72 3.8
FY 95: AP 7 $27.88 $29.78 6.8
----------------------------------------------------------------------
Source: GAO analysis of Postal Service data.
We believe that our comparison of costs over the nine accounting
periods is preferable because it minimizes the effects of one-time
and short-term fluctuations in cost and performance. For example, we
are aware that contractor costs in the data included nonrecurring,
extraordinary payments by the Postal Service of $888,000 (or 0.87
percent of contractor costs) for workers' compensation claims at two
sites. The claims covered a period beginning before our 36-week
comparison period, but the Postal Service recorded the full cost in
the period paid. Time did not permit us to analyze the cost data to
identify and allocate all such extraordinary costs to the appropriate
accounting periods.
--------------------
\2 The remote computer reader uses the same basic technology as the
optical character reader but has more time to decipher an address
image than the optical character reader.
TRANSITIONAL EMPLOYEES
SUBSTANTIALLY REDUCE
IN-HOUSE COSTS
---------------------------------------------------------- Letter :3.1
The Service's use of transitional employees substantially reduced the
difference expected earlier between contract and in-house costs. In
its original decision in 1990 on obtaining remote barcoding services,
the Postal Service estimated that over a 15-year period it could save
about $4.3 billion by using contract employees. That estimate was
based on using existing career level 6 pay scale employees with full
pay and benefits.
Under the November 1993 agreement with APWU, only 30 percent of the
workhours are to be generated by career employees. This mix of
transitional and career employees at the level 4 pay scale makes the
Postal Service's cost closer to the cost of contracting out. The
return on investment was estimated at 35.7 percent to contract out.
The Service's cost comparison showed that the 70-30 mix of
transitional and career workhours lowered the return on investment to
20.6 percent. Postal officials said this was still considered an
acceptable return. The Service estimated that using level 4 pay
scale career employees only would reduce the rate of return to 8
percent.
In commenting on a draft of this report, APWU pointed out that an
important reason for having postal employees do this work is that the
remote barcoding program, originally considered temporary, is now a
permanent part of mail processing operations, and thus eliminates a
reason for having contractors do it. This same rationale could be
put forth by APWU and/or the Service to eliminate the reason for
having temporary or transitional employees do the barcoding. If this
occurred, the cost of in-house barcoding would increase
significantly. We estimate that if all of the in-house workhours had
been generated by career employees at the pay and benefit level for
the period under review, in-house keying costs would have exceeded
contracting costs by 44 percent, or $267 million annually, based on a
full production rate of 23 billion images per annum.
ADVANTAGES AND DISADVANTAGES OF
USING POSTAL EMPLOYEES FOR
REMOTE BARCODING
------------------------------------------------------------ Letter :4
Service and APWU officials we contacted believed that a principal
advantage of bringing the remote barcoding in-house was anticipated
improved working relationships. Contractor representatives we
contacted believed there were a number of advantages to contracting
out, including lower cost, higher productivity, and additional
flexibility.
POSTAL SERVICE EXPECTED
IMPROVED RELATIONS WITH
POSTAL UNION
---------------------------------------------------------- Letter :4.1
The decision to bring the remote barcoding in-house was not primarily
an economic one since the Postal Service recognized it would cost
more than contracting out. Postal officials expected that using
postal employees for remote barcoding would improve their relations
with APWU.
On November 2, 1993, when the Service decided to use postal employees
for remote barcoding, the Service and APWU signed a memorandum on
labor-management cooperation. This memorandum was in addition to an
agreement signed by the Service's Vice President for Labor Relations
and the President of APWU the same day for the use of postal
employees to do remote barcoding in full settlement of all
Service-APWU issues relating to implementing remote barcoding. The
cooperation memorandum included six principles (see app. I) of
mutual commitment to improve Service-APWU relationships throughout
the Postal Service. It specified that the parties "must establish a
relationship built on mutual trust and a determination to explore and
resolve issues jointly."
The Postal Service's Vice President for Labor Relations and the
President of APWU said that relations improved somewhat after the
November 1993 agreements. The Vice President said that the decision
to use postal employees for remote barcoding was "a very close call,"
but the agreements seemed to have the effect of improving discussions
during the contract negotiations that had begun with the Service in
1994. He also said that APWU initially made offers in contract
negotiations that looked good to the Postal Service.
Subsequent to the negotiations, however, the Vice President told us
that he no longer believed that the experiment in cooperation with
APWU was going to improve relations. According to the Vice
President, APWU seemed to have disavowed the financial foundation for
the remote barcoding agreement by proposing to (1) increase
transitional employees' wages by more than 32 percent over the life
of the new contract and (2) provide health benefits for transitional
employees. The Postal Service believes these actions would destroy
the significance of the 70/30 employee workhour mix. Further, the
Vice President said that APWU continues to be responsible for more
than 75 percent of pending grievances and related arbitrations, which
had increased substantially from the previous year.
The President of APWU said that having the remote barcoding work done
by postal employees was allowing the Service and the union to build
new relations from the "ground up." He said that the cooperation
memorandum mentioned above was incidental to the more fundamental
agreement of the same date for postal management and the union to
establish and maintain remote barcoding sites, working together
through joint committees of Service and union officials.
LABOR RELATIONS PROBLEMS ARE
LONGSTANDING
---------------------------------------------------------- Letter :4.2
Poor relations between postal management and APWU and NALC, including
a strike, were a factor prompting Congress to pass the Postal
Reorganization Act of 1970. We reported in September 1994\3 that
relations between postal management and labor unions continued to be
acrimonious. When negotiating new wage rates and employee benefits,
the Service and the clerks and carriers have been able to reach
agreement six out of nine times. However, for three of the last four
times, the disputes proceeded to binding arbitration. Our September
1994 report detailed numerous problems on the workroom floor that
management and the labor unions needed to address. We recommended
that, as a starting point, the Service and all the unions and
management associations\4 negotiate a long-term framework agreement
to demonstrate a commitment to improving working relations.
Our follow-up work showed that the Postal Service and APWU are still
having difficulty reaching bilateral agreements. Following the 1993
cooperation agreement, the Postal Service and APWU began negotiations
for a new contract to replace the 4-year contract that expired in
November 1994.\5 No final and complete agreement could be reached on
all subjects in the negotiations, and the parties mutually agreed to
engage in a period of mediation. The Postal Service and APWU did not
reach agreement for a new contract, and the dispute has now been
referred to an arbitrator as provided for in the 1970 act.
Further, the Postal Service and APWU, as well as two of the three
other major unions, have been unable to agree to meet on an overall
framework agreement that we recommended to deal with longstanding
labor-management problems on the workroom floor detailed in our
September 1994 report. In response to our report, the Postmaster
General invited the leadership of all unions and management
associations to a national summit to begin formulating such an
agreement. APWU, NALC, and the National Postal Mailhandlers Union
did not accept the invitation, saying that the negotiation of new
contracts needed to be completed first.
--------------------
\3 U. S. Postal Service: Labor-Management Problems Persist on the
Workroom Floor (GAO/GGD-94-201 A and B, Sept. 29, 1994).
\4 Along with four major labor unions representing clerks, city
carriers, rural carriers, and mailhandlers, the Postal Service has
three management associations that represent postmasters and
supervisors.
\5 The provisions of the existing contract remain in effect until the
Postal Service and clerks negotiate a new contract.
OTHER ADVANTAGES AND
DISADVANTAGES
---------------------------------------------------------- Letter :4.3
Service officials, union officials, and contractor representatives we
contacted cited other advantages and disadvantages of using postal
employees rather than contractors for remote barcoding. The Vice
President for Labor Relations said that the mix of transitional and
career employees may create some management problems. He said the
different types of employees receiving different wage rates and
benefits, but working side by side doing the same work at remote
barcoding sites, may create employee morale problems. However, he
also said that the career-transitional mix provided the Service with
the advantage of offering transitional employees opportunities for
career postal jobs.
APWU officials said that remote barcoding is an integral part of mail
processing and relies upon rapidly evolving technology, which they
believed should not be separated into in-house and contractor
operations because of a potential loss of management control and
flexibility. They also said that the decision to use postal
employees for remote barcoding was justified on the basis of cost
studies by the Service showing a favorable return on investment.
Contractor representatives cited a number of advantages to using
contract employees. They said that, for a variety of reasons,
contractor sites are less costly than postal sites. They believed
that contract employees operate at higher productivity rates because
contractors, unlike the Postal Service, can provide incentive pay
that results in higher keying rates. They also said that contractors
can exercise more flexibility in handling variations in mail volume
levels because of procedures for adjusting staffing levels on 2-hour
notice, as provided in the contracts. However, Service officials
pointed out that under the 1993 agreement with APWU, transitional
employees can be sent home without notice if work is not available,
but the career employees can not.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :5
Our objectives were to (1) compare, insofar as postal data were
available, the direct costs of contracting out remote barcoding with
the direct costs of having the work done by postal employees; and (2)
identify possible advantages and disadvantages of using postal
employees rather than contractors to do the work.
At Postal Service headquarters, we interviewed Service officials
responsible for remote barcoding implementation and contracting, as
well as those responsible for the Service's labor relations and
financial management. We met on two occasions with the President of
the American Postal Workers Union and other union officials and with
three representatives of remote barcoding contractors to obtain their
views on the advantages and disadvantages of using postal employees
for remote barcoding services. We visited two remote barcoding
sites: the contractor site in Salem, VA, and the Lynchburg, VA,
site, which recently converted to in-house operation.
We also reviewed, but did not verify to underlying source records,
Postal Service data on costs associated with remote barcoding done by
contract and postal employees. Further, we confirmed our
understanding of remote barcoding and verified some of our
information by reviewing the results of related work done in March
and April 1995 by the Postal Inspection Service. The Inspection
Service did its work at five remote barcoding sites (three
Service-operated, including one recently converted from
contractor-operated, and two contractor-operated) to compare and
contrast certain administration and management practices followed at
the sites. Details on our cost comparison methodology are contained
in appendix II.
A draft of this report was provided to heads of the Postal Service,
APWU, and the Contract Services Association of America for comment in
April 1995. Subsequent to the initial distribution of the draft, the
Postal Service provided us with revised cost data. We provided a
revised draft to the three organizations prior to completion of the
comment process, and the comments received were based on the second
draft.
We did our work from March through June 1995 in accordance with
generally accepted government auditing standards.
POSTAL SERVICE, APWU, AND
CONTRACTOR REPRESENTATIVE'S
COMMENTS
------------------------------------------------------------ Letter :6
The Postal Service, APWU, and the Contract Services Association of
America provided written comments on a draft of this report.
The Postal Service concurred with the information contained in the
report regarding the costs of remote barcoding in contractor and
postal operated sites and the reasons for bringing the work in-house.
The Service said that it had hoped that bringing the remote barcoding
work in-house would foster better relations with APWU. The Service
expressed disappointment that APWU continued to maintain an
adversarial posture that hindered progress toward improving their
relationship. (See app. III for the text of the Postal Service's
comments.)
APWU characterized our draft report as being inaccurate and
substantially biased. It also expressed the opinion that a report on
this subject is premature because the data necessary for adequate
evaluation are not yet available. More specifically, APWU said that
the draft report (1) overstated the cost of in-house barcoding, (2)
understated the costs of contracting out, (3) ignored important
considerations that favor doing the work in-house, and (4)
understated the significance of improvements in labor relations made
possible by the APWU/Postal Service agreement to do remote barcoding
in-house.
APWU criticized the draft report as being premature because we used
data from a period when postal remote barcoding facilities were just
beginning operations, while contractor facilities represented mature
operations, thereby overstating the cost of in-house operations. It
said that this mature versus start-up comparison imparted a serious
bias to our estimate of the cost differential. While we agree that
the longer the period of comparison the more preferable, a longer
period did not exist for the comparison we were asked to perform. It
is also important to note that we excluded from the 36-week time
period we used for our cost comparison the initial 12-week training
period that each in-house site experienced before becoming
operational.
In response to APWU's comments, we clarified our text to more clearly
convey that our comparison excluded the 12-week training period for
the in-house sites. We also further analyzed the data to identify
variances in costs during the 36-week period, especially the later
part of the 36-week period, when in-house sites were more mature.
This analysis showed that in-house operations were consistently more
expensive than contractor operations. We noted that the in-house
operations will become more expensive if the workforce mix changes to
include more career employees and fewer transitional employees as is
presently planned, and/or if the transitional employees receive
increased benefits. We also qualified our estimates of future costs
by pointing out that circumstances could change and discussing how
that might happen.
APWU asserted that the draft report understated the cost of
contracting for remote barcoding because we ignored such potential
costs as overruns by government contractors and future strikes by
contract employees. We did not ignore the possibility of increased
contractor costs. We limited our cost analysis to actual costs
because we had no basis for assigning dollar values to possible
future events, such as employee strikes and potential cost overruns
by contractors. Instead, we provided a narrative discussion of such
factors. We expanded our discussion of these factors in response to
APWU's comments.
APWU also said that the draft report ignored important considerations
favoring in-house operations, such as the importance to postal
managers of maintaining full integration and control of the barcoding
effort. APWU asserted that in-house operations are inherently
preferable from a management point of view. We do not believe that
this necessarily holds true. A broad body of work we have done in
other areas\6 shows some successes and economies that have resulted
from contracting out certain activities by various federal, state,
and local governments.
APWU also said that the draft report understated the significance of
improvements in labor relations made possible by the agreement
between APWU and the Postal Service to perform remote barcoding
in-house. APWU characterized the agreement as a cornerstone of the
parties' efforts to build a constructive and productive relationship
and cited some examples that it considered to be representative of
positive progress in efforts to improve the relationship between the
parties.
After receiving APWU's comments, we revisited with Postal Service
officials the issue of the effect of the agreement on labor
management relations to assure ourselves that we had correctly
characterized the Postal Service's position. The officials confirmed
that we had, explaining that while the Postal Service believed at the
time that the agreement was reached it would have a positive effect,
the Service now believes that its relationship with APWU has
deteriorated since the 1993 agreement. We added language to further
ensure that the final report presents a balanced discussion of the
differing views of the affected parties. (See app. IV for the text
of APWU's comments and our detailed response to these comments.)
The Contract Services Association of America believed we should have
put more information into our report regarding what the Association
said was a complete breakdown in the Postal Service's
labor-management relations. In view of our previous extensive work
evaluating the state of labor-management relations in the Postal
Service,\7 we did not evaluate labor-management relations; but at
various places in the report, we describe the various parties'
perceptions of the labor- management relationship. The Contract
Services Association of America also offered other comments and
technical clarifications, which we incorporated in the report where
appropriate. (See app. V for the text of the Contract Services
Association of America's comments.)
--------------------
\6 See, for example, District of Columbia: City and State
Privatization Initiatives and Impediments (GAO/T-GGD-95-194, June 28,
1995).
\7 GAO/GGD-94-201 A and B, Sept. 29, 1994.
---------------------------------------------------------- Letter :6.1
We are providing copies of this report to Senate and House postal
oversight and appropriation committees, the Postmaster General, the
Postal Service Board of Governors, the Postal Rate Commission, the
American Postal Workers Union, and other interested parties.
Major contributors to the report are listed in appendix VI. If you
have any questions, please call me on (202) 512-8387.
Sincerely yours,
J. William Gadsby
Director, Government Business
Operations Issues
PRINCIPLES OF MUTUAL COMMITMENT
AGREED TO BY THE POSTMASTER
GENERAL AND AMERICAN POSTAL
WORKERS UNION (APWU) PRESIDENT ON
NOVEMBER 2, 1993
=========================================================== Appendix I
"1. The APWU and the Postal Service hereby reaffirm their commitment
to and support for labor-management cooperation at all levels of the
organization to ensure a productive labor relations climate which
should result in a better working environment for employees and to
ensure the continued viability and success of the Postal Service.
"2. The parties recognize that this commitment and support shall be
manifested by cooperative dealings between management and the Union
leadership which serves as the spokesperson for the employees whom
they represent.
"3. The parties recognize that the Postal Service operates in a
competitive environment and understand that each Postal Service
product is subject to volume diversion. Therefore, it is imperative
that management and the Union jointly pursue strategies which
emphasize improving employee working conditions and satisfying the
customer in terms of service and costs. A more cooperative approach
in dealings between management and APWU officials is encouraged on
all issues in order to build a more efficient Postal Service.
"4. The Postal Service recognizes the value of Union involvement in
the decision making process and respects the right of the APWU to
represent bargaining unit employees. In this regard, the Postal
Service will work with and through the national, regional, and local
Union leadership, rather than directly with employees on issues which
affect working conditions and will seek ways of improving customer
service, increasing revenue, and reducing postal costs. Management
also recognizes the value of union input and a cooperative approach
on issues that will affect working conditions and Postal Service
policies. The parties affirm their intent to jointly discuss such
issues prior to the development of such plans or policies.
"5. The APWU and the Postal Service approve the concept of joint
meetings among all organizations on issues of interest to all
employees, but which are not directly related to wages, hours or
working conditions, such as customer service, the financial
performance of the organization and community-related activities. In
this regard, the APWU will participate in joint efforts with
management and other employee organizations to address these and
other similar issues of mutual interest.
"6. On matters directly affecting wages, hours or working
conditions, the Postal Service and the APWU recognize that separate
labor-management meetings involving only the affected Union or Unions
are necessary. The parties are encouraged to discuss, explore, and
resolve these issues, provided neither party shall attempt to change
or vary the terms or provisions of the National Agreement."
METHODOLOGY FOR COMPARING THE COST
OF IN-HOUSE AND CONTRACTOR REMOTE
BARCODING SITES
========================================================== Appendix II
SELECTION OF TIME PERIOD FOR
COMPARISON
-------------------------------------------------------- Appendix II:1
The Postal Service's fiscal year is made up of 13 4-week accounting
periods. The time period we selected for comparing the cost of
contract and in-house remote barcoding included nine accounting
periods (36 weeks) from July 23, 1994, through March 31, 1995. We
selected the July 23, 1994, date because this was the first day of
the first accounting period after the Service-operated remote
barcoding centers completed the 12-week training period for the first
system. We then included data on each in-house center for the first
full accounting period following the period in which the 12-week
training period was completed. We did not include two centers
(Lumberton, NC, and Laredo, TX) for the accounting period in which
they were converted to in-house sites.
IN-HOUSE SITES
-------------------------------------------------------- Appendix II:2
We determined direct costs incurred by the in-house centers as
reflected by the Postal Service Financial Reporting System and
contract records for the selected accounting periods. This included
all significant costs, such as the pay and benefits for employees and
on-site supervisors and managers (about 94 percent of the direct
cost), equipment maintenance, communication lines, travel, training,
rent, utilities, and supplies. To this we added factors for
Service-wide employee compensation not charged directly to any postal
operations. These included the Postal Service's payments for certain
retirement, health and life insurance, and workers compensation
costs, and increases in accrued leave liability due to pay raises.
According to Postal Service data, these additional compensation costs
ranged between 1.3 and 8.9 percent of direct pay and benefits for
transitional and career employees in 1994 and 1995.
Except for contract administration personnel, we did not allocate any
headquarters costs to the in-house or contractor sites. This was
because these costs were unlikely to be significantly different
regardless of whether the sites were contracted out or operated
in-house.
Postal Service area offices incurred some cost for remote barcoding.
Some area offices had appointed remote barcoding system coordinators,
who spent some time assisting and overseeing the postal sites. Their
level of involvement in the centers varied from area to area, and
data on the amount of involvement were not readily available
centrally. We did not attempt to estimate this cost because of the
lack of data and because we do not believe it would have been large
enough to materially affect our results.
CONTRACTOR SITES
-------------------------------------------------------- Appendix II:3
For the contractor sites, we used the actual contract cost to the
Postal Service, which included the full cost of the remote barcoding
services, except for equipment maintenance. We added the contract
cost of maintenance for the equipment at the contractor sites, which
was provided by the Postal Service to the contractors. We also added
the cost of Postal Service personnel involved in administering the
contracts, both at headquarters and at the facilities serviced by the
coding centers. The estimate of this cost was provided by the Postal
Service.
(See figure in printed edition.)Appendix III
COMMENTS FROM THE U.S. POSTAL
SERVICE
========================================================== Appendix II
(See figure in printed edition.)Appendix IV
COMMENTS FROM THE AMERICAN POSTAL
WORKERS UNION, AFL- CIO
========================================================== Appendix II
(See figure in printed edition.)
See comment 1.
(See figure in printed edition.)
See comment 2.
See comment 3.
See comment 4.
(See figure in printed edition.)
See comment 5.
(See figure in printed edition.)
See comment 6.
See comment 7.
See comment 8.
(See figure in printed edition.)
(See figure in printed edition.)
See comment 9.
(See figure in printed edition.)
See comment 10.
See comment 11.
See comment 12.
(See figure in printed edition.)
See comment 13.
The following are GAO's comments on the letter dated July 14, 1995,
from the American Postal Workers Union.
GAO COMMENTS
1. In light of APWU's view that the 36-week period we used was not
representative, we included an additional analysis in the report
covering shorter and more recent time periods. This analysis shows
that the cost difference varies depending on the period selected.
Using the most recent 4-week period, the cost for in-house keying was
greater than for the full 36-week period. However, because costs for
any given period can contain extraordinary payments, we believe
comparison periods should be as long as feasible to minimize the
effects of those nonrecurring costs.
2. APWU suggested that our analysis failed to recognize some of the
direct costs associated with the entire remote barcoding program,
including capital costs. The total cost of the remote barcoding
program was not the focus of our review. Our objective was to
compare the direct cost of performing remote keying services in-house
versus under contract. Where the cost to the Postal Service was the
same whether the work was to be done in-house or by contract, we did
not include such cost in our comparison. This methodology is
consistent with the Service's Guidelines for the Preparation of Cost
Data for Comparison With Contracting Out Proposals. Using this
approach, we did not include such costs as video display terminals,
keyboards, and computers, for example, that were provided as
government-furnished equipment to the contractors and also used at
postal-operated sites. Our report discloses in appendix II the cost
elements that we considered in our comparison and identifies cost
elements not considered.
3. APWU asserted that the draft report understated the cost of
contracting for remote barcoding because we ignored such potential
costs as overruns by government contractors. It is true that we have
reported on cost overruns incurred by government contractors.
However, our reports citing contractor overruns were based on
after-the-fact evaluations of actual contract costs compared to
estimated contract costs. In addition, many instances of cost
overruns occur when the scope of work is not well defined and deals
with advanced technologies. This does not appear to be the case in
remote barcoding where the scope of work is well defined. In
addition, it would not be appropriate for us to speculate about the
future cost that might be incurred by the Service's remote keying
contractors.
4. APWU said that our draft report ignored important reasons for
having postal employees do remote barcoding, citing as one reason
that the remote barcoding program is no longer considered temporary.
While the point that the remote barcoding program is no longer
considered a temporary program would be a valid consideration in a
decision on whether to contract out, it was not cited by Postal
Service officials in any records we reviewed or in our discussion
with Service officials as a reason for having postal employees do the
work. Rather, the reasons were related primarily to anticipated
improvements in the Service's relations with APWU. We estimate that
if all of the in-house workhours had been generated by career
employees at the pay and benefit level for the period under review,
in-house keying costs would have exceeded contracting costs by 44
percent, or $267 million annually, based on a full production rate of
23 billion images per annum.
5. APWU said that our analysis did not take into consideration
several contractor costs that could be passed on to the Postal
Service. APWU said that it and several other unions were prepared to
organize contractor employees and that even moderate organizing
success would change the results of our cost analysis. As an
example, APWU pointed to one contractor site where the contractors'
employees received health benefits. APWU apparently did not
understand that we had in fact included these health benefit costs in
our comparison. We agree that potential future costs could affect
the cost differential if they occur; however, we have no basis for
anticipating what the dollar value of such costs might be. Thus, we
used actual cost data when available and discussed in narrative
fashion possible changes in circumstances that might affect future
costs.
6. APWU said that while our draft report observed that contract
employees can receive a bonus for exceeding 650 images per hour, we
did not estimate the cost impact of these potential bonuses. The
costs for contracting out that we used in our estimates included the
cost of actual bonuses paid to contractors for exceeding the standard
of 650 images per hour and thus include the cost impact of this
factor. We had no basis for estimating how bonuses may change in
future periods.
7. APWU stated that the draft report failed to analyze barcoding
error rates. The cost for contracting out that we used included
penalties assessed against contractors for exceeding the maximum
3-percent error rate. We revised the text to clarify the reason that
we could not compare error rates of postal employees and contract
employees.
8. We recognize in the report that APWU believes that the agreement
to bring the remote barcoding in-house has improved labor relations.
However, the report also recognizes that this view does not agree
with the Postal Service's view. Moreover, the Postmaster General has
recently said that it is clear that the collective bargaining process
is broken. We deleted the word rarely and revised the text to
reflect that the union has gone to interest arbitration three out of
nine times. We made no judgments about the attitudes of postal
employees. Rather, our report attributes to a Postal Service
official the comment that a potential employee morale problem could
result from the mix of transitional and career employees.
9. APWU said that the draft report was a biased document requested
by a Subcommittee of the Committee on Appropriations for political
reasons, including pressure to affect collective bargaining
positions. The Subcommittee has not suggested to us in any way what
the results of our analysis should be. We approached this assignment
like all others, attempting to meet our customer's legitimate
oversight needs in an objective, independent, and timely manner.
10. APWU stated that our initial draft was flawed. As explained in
our Objectives, Scope, and Methodology section of this report (see p.
12), subsequent to the initial distribution of a draft of this
report, the Postal Service provided us with revised cost data. We
provided a revised draft to APWU prior to completion of the comment
process. We considered the comments of APWU in preparing this
report. We received APWU comments in two meetings, both of which
were attended by the APWU President, other APWU officials, and
outside legal and economic advisers to APWU. APWU also provided
written comments on a draft of this report, which are included in
full.
11. APWU stated that the draft is still flawed, biased, and largely
invalid. We believe that the data included in our report provide a
fair (and best available) representation of the actual cost of
operating remote barcoding sites by the Postal Service and by
contractors for the periods indicated. As stated in the report,
future cost differentials will depend on the circumstances at that
time.
12. APWU believed that our use of a Postal Service analysis
performed in prior years was misleading. We included the Service's
1990 cost estimate because it led to the decision, followed until
1993, to use contractors for all remote barcoding services. We
revised the text to reflect that the original Postal Service estimate
was based on level 6 employees and that currently level 4 employees
do the work at in-house sites.
13. In summary, APWU said that our draft report was inaccurate and
substantially biased. APWU urged us to ensure that the final report
is sufficiently balanced and appropriately qualified. We reviewed
the draft report to further ensure that it presented the results of
our analysis clearly and with a balanced tone. As discussed in our
preceding comments, we added information and language where we
thought it helped to clarify the report's message or the positions of
the affected parties.
(See figure in printed edition.)Appendix V
COMMENTS FROM THE CONTRACT
SERVICES ASSOCIATION OF AMERICA
========================================================== Appendix II
Now on p. 11.
(See figure in printed edition.)
Now on p. 6.
(See figure in printed edition.)
Now on p. 10.
Now on p. 10.
Now on p. 10.
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
James T. Campbell, Assistant Director
Anne M. Hilleary
Leonard G. Hoglan
Loretta K. Walch