U.S. Postal Service: Challenges In Improving Performance and Meeting
Competition (Testimony, 03/13/96, GAO/T-GGD-96-90).

GAO discussed the U.S. Postal Service (USPS). GAO noted that: (1) USPS
continues to have labor-management relations problems, its negotiations
with its major employee unions have gone to arbitration, and the number
of grievances filed increased by 31 percent from 1993 to 1995; (2) USPS
contracted for opinion surveys of its employees after one union accused
it of using survey results improperly during labor negotiations; (3)
USPS initiated an initiative to improve service quality and customer
satisfaction, but its unions are not participating in the initiative;
(4) USPS has had difficulty in reaching a framework agreement with its
unions and management associations; (5) USPS is losing market share in
certain lines of business because of the way it is required to set rates
and allocate revenues; (6) the rate-setting requirements also reduce
USPS flexibility in responding to market changes; and (7) USPS needs to
control the cost of its operations to remain competitive as a
full-service provider.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-96-90
     TITLE:  U.S. Postal Service: Challenges In Improving Performance 
             and Meeting Competition
      DATE:  03/13/96
   SUBJECT:  Labor-management relations
             Working conditions
             Government employee unions
             Collective bargaining agreements
             Customer service
             Job satisfaction surveys
             Mail delivery problems
             Postal rates
             Postal law
             Competition
IDENTIFIER:  USPS CustomerPerfect Initiative
             USPS Employee Opinion Survey
             
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Cover
================================================================ COVER


Before the Subcommittee on the Postal Service, House Committee on
Government Reform and Oversight

Release on Delivery
Expected at
9:30 a.m.  EST
Wednesday
March 13, 1996

U.S.  POSTAL SERVICE - CHALLENGES
IN IMPROVING PERFORMANCE AND
MEETING COMPETITION

Statement of Michael E.  Motley
Associate Director, Government Business Operations
Issues General Government Division

GAO/T-GGD-96-90

GAO/GGD-96-90T


(240203)


Abbreviations
=============================================================== ABBREV

  NALC - x
  APWU - x

U.S.  POSTAL SERVICE:  CHALLENGES
IN IMPROVING PERFORMANCE AND
MEETING COMPETITION
============================================================ Chapter 0


   SUMMARY
---------------------------------------------------------- Chapter 0:1

GAO's testimony addresses three major areas that continue to
challenge the Postal Service in providing prompt, reliable, and
efficient mail services, and thus hinder it from becoming more
competitive in the marketplace.  These include (1) improving
labor-management relations, (2) setting competitive rates and
providing competitive service, and (3) controlling operating costs. 

The Postal Service continues to have labor-management relations
problems similar to some of those GAO reported in 1994.  Three of the
four unions involved in the last round of negotiations were unable to
reach agreements at the bargaining table and had to rely on
arbitration to settle their disputes.  In addition, the number of
employee grievances filed and referred beyond the local management
and union levels has increased by 31 percent since 1993.  Although
other attempts to address employee concerns and improve teamwork are
under way, difficulties persist, and not all parties have made
commitments to new initiatives.  The Postal Service and employee
organizations have yet to meet to address GAO's recommendation that
they develop and sign a long-term framework agreement outlining
overall objectives and approaches for improving both processing and
delivery functions of postal operations. 

The Postal Service has lost market share to competitors in some areas
where it once essentially controlled the market, such as the Express
Mail market.  It continues to experience problems in competing
because of limited flexibility in changing rates and other factors
such as less reliable service and not providing certain "value added"
services that are provided by competitors.  Even in the international
mail area, where the Postal Service has greater flexibility in
pricing, its rate of revenue growth is well below that of its
competitors. 

The Postal Service's continued viability as a full-service provider
in the current competitive environment depends on, among other
factors, its ability to control costs.  Labor costs remain the major
portion of the Service's operating costs, and it has had limited
success in controlling labor cost growth.  From April 1993 to
November 1995, postal employment grew by 9.5 percent.  The Service
has efforts to constrain labor costs through a long-term $5 billion
automation program.  However, much of the savings produced from
automation have been offset by increases in labor costs.  Also, its
remote barcoding functions are now being performed in-house, which
will cost more than in the past, when this function was done under
contract.  In addition, internal control weaknesses in the Service's
system for the acceptance of bulk mail as well as some of the
Service's purchasing practices have added to its costs. 


   STATEMENT
---------------------------------------------------------- Chapter 0:2

Dear Mr.  Chairman and Members of the Subcommittee: 

We appreciate the opportunity to participate in the Subcommittee s
oversight hearings on the U.S.  Postal Service.  My testimony will
address three major challenges facing the Postal Service:  (1)
improving labor-management relations, (2) setting competitive rates
and providing competitive services, and (3) controlling operating
costs.  These issues are not new and the Postal Service is pursuing
numerous efforts to provide more prompt, reliable, and efficient mail
services as mandated by the Postal Reorganization Act of 1970.  My
testimony is based on work we have completed over the past several
years or have under way. 


      LABOR-MANAGEMENT RELATIONS
      REMAIN A PROBLEM
-------------------------------------------------------- Chapter 0:2.1

In September 1994\1 , we reported that labor-management relation
problems persisted on the factory floor of postal facilities.  These
problems existed between Postal Service management and its four
unions representing postal clerks, city carriers, rural carriers, and
mail handlers.  These employees working conditions, including pay and
fringe benefits, are determined through collective bargaining.  In
recent years, the parties have had difficulties in (1) reaching
agreement at the bargaining table and have had to rely on arbitration
to settle disputes, (2) reducing the number of grievances elevated
beyond local union and management levels to higher levels, and (3)
working cooperatively to resolve critical employee morale and
teamwork issues.  The effects of these problems include poor quality
of worklife for many postal employees and higher mail processing and
delivery costs for the Postal Service. 

In November 1994, collective bargaining agreements with the Service s
four major unions expired, and negotiations of all contracts but
oneï¿½the National Rural Letter Carriers Association contractï¿½ended in
impasse, resulting in a need for arbitration.  The impasse for the
Postal Service and the National Association of Letters Carriers
(NALC) resulted because they could not agree on any of the 80
economic and noneconomic issues at the bargaining table.  Although
the American Postal Workers union (APWU) reached agreement on about
90 noneconomic issues, they did not agree on economic matters and
some related work rule issues.  The NALC and the APWU have
historically gone into negotiations together but, for the first time
since 1970, they negotiated separately.  Arbitrators have now made
awards in these cases.  The Mail Handlers Union and the Service are
still in arbitration, and the details will not be made public until
April 1996, when an award is anticipated. 

An indicator of deteriorating labor-management relations is that in
just 3 years--from fiscal years 1993 to 1995--the number of
grievances filed and referred to higher management levels for
resolution increased by 31 percent.  In fiscal year 1993, about
51,800 grievances dealing with disagreements or complaints related to
wages, hours, and/or other conditions of employment could not be
settled at the local level and had to be elevated to higher levels
for resolution.  In 1994, the number had grown to about 65,200 and
rose to about 73,300 in fiscal year 1995.  This was an increase of
over 21,000 grievances between 1993 and 1995. 

Improving employee attitudes, morale, and teamwork are critical to
better mail-delivery performance and customer satisfaction; and
Service efforts to make such improvements have been hindered by poor
labor-management relations.  For example, to identify employee
concerns and identify potential management actions, and improve the
quality of work life, the Postal Service administered an annual
Employee Opinion Survey to over 800,000 employees.  In 1995, when the
survey was to be done for the fourth year in a row, APWU and NALC,
representing over 500,000 employees, asked their members to not
respond to the survey.  Union officials said that the survey results
were inappropriately used against them in the 1994 negotiations.  The
Service responded that it did not introduce the survey results as a
basis for negotiations, but had used our September 1994 report on the
Service's labor-management relations in those negotiations.  Although
some employees did participate in the 1995 survey, the limited
results in some areas invalidated the national results to the extent
that the Service has abandoned the survey completely.  Because the
Service still needs to hear the "voice of the employee", it has
contracted with an outside firm to do telephone interviews with a
sample of employees at each organizational level. 

Finally, the Postal Service has recently initiated a top-down,
corporate-wide initiative called CustomerPerfect
, to improve service quality and customer satisfaction.  However, the
Postal Service has not gained the support of the labor unions and
they are not participating in this overall Service effort.  Further,
the NALC has asked their members not to attend training, sponsored by
the Postal Service as part of its CustomerPerfect
initiative, geared to build teamwork and team leader skills.  We have
reported\2 that the success of this initiative is in doubt without
the involvement and commitment of labor union leaders. 


--------------------
\1 U.S.  POSTAL SERVICE:  Labor-Management Problems Persist on the
Workroom Floor (GAO/GGD-94-201A and 201B (Vols.  1 & 2), Sept.  29,
1994). 

\2 U.S.  POSTAL SERVICE:  New Focus on Improving Service Quality and
Customer Satisfaction (GAO/GGD-96-30, Dec.  20, 1995). 


         RECOMMENDATIONS FOR A
         FRAMEWORK AGREEMENT HAVE
         NOT BEEN IMPLEMENTED
------------------------------------------------------ Chapter 0:2.1.1

The Postal Service has attempted to overcome the difficulties in
labor-management relations.  The Service agreed with the
recommendation in our September 1994 report that the Postmaster
General, along with the heads of the four unions and three management
associations, which represent general managers, postmasters, and
supervisors, develop and sign a long-term framework agreement that
outlines overall objectives and approaches for improving employee
working conditions.  The Postmaster General made an offer that the
Service, all four unions, and the three management associations
convene a summit and discuss a proposed framework agreement.  While
the associations agreed, three of the four unions did not agree to
attend a meeting at that time because they believed it would have
interfered with impending contract negotiations.  In our September
1994 report, we recommended that, if the parties could not reach a
framework agreement within 2 years from the date of our report,
Congress may want to reexamine any aspects of the employee and
management relationships that constitute barriers to reaching such an
agreement. 


      CONSTRAINTS IN SETTING
      POSTAGE RATES AND PROVIDING
      COMPETITIVE SERVICES
-------------------------------------------------------- Chapter 0:2.2

In the early 1970s, the Postal Service had essentially 100 percent of
the Express Mail market; by 1995, its share dropped to about 13
percent.  The Postal Service has also experienced a similar decline
in its share of the multibillion dollar parcel post market.  Unlike
its competitors, who can select the markets they serve and set prices
according to the demand for and cost of the services provided, the
Postal Service, by statute, is required to provide universal service
to all communities.  The Service is also constrained by law in
allocating costs among its various services and setting prices on the
basis of market conditions.  Noncompetitive postage rates, as well as
less reliable services, have contributed to the Service s reduced
market share.  Even in the international markets where the Service
has greater flexibility to set its rates, its volume growth has been
considerably less than that of its competitors because the Service
has not provided competitive prices and services. 


         POSTAL RATE PROCESS AND
         OTHER FACTORS CONSTRAIN
         RATE SETTING
------------------------------------------------------ Chapter 0:2.2.1

We previously reported\3 that the Postal Service is constrained both
by (1) the criteria in the 1970 Act specifying how the Service must
allocate costs and set postage rates, and (2) the length of the
typically 10-month process of changing rates.  These constraints have
the effect of reducing the Service's flexibility in responding to
changes in the marketplace.  We said that legislative changes to the
1970 Act's ratemaking provisions will be necessary if the Service is
to be more competitive. 


--------------------
\3 U.S.  POSTAL SERVICE:  Pricing Postal Services in a Competitive
Environment (GAO/GGD-92-49, Mar.  25, 1992; U.S.  POSTAL SERVICE: 
Postal Ratemaking in Need of Change (GAO/GGD-96-8, Nov.  15, 1995). 


         PRICE AND SERVICE QUALITY
         ARE FACTORS WHICH HINDER
         COMPETITIVENESS
------------------------------------------------------ Chapter 0:2.2.2

Although we believe postal ratemaking is in need of reform and
hinders the Service s competitiveness, even with reform the Service
could still find competing with private firms difficult unless other
improvements in price as well as service quality are made.  The
importance of service quality is exemplified in the international
mail market.  Our report\4 on international mail delivery, which we
issued this week, explains how the Postal Service, privately-owned
firms, and other postal administrations compete with one another in a
fast-growing international delivery service market. 

In contrast to the process for setting domestic postage rates, the
Postal Service has greater flexibility in setting international
rates.  Interestingly, the international-market research data we
reviewed showed that total international revenue for all carriers,
including the Postal Service, grew at the rate of 12 percent annually
from 1987 to 1992, but the Service s international revenue growth
rate was only one-half that rate, at 6 percent.  The Service lost
business to competitors because of its less competitive rates, less
reliable delivery service, and lack of ï¿½value-addedï¿½ services (such
as warehousing, inventory, and customs clearance).  In the domestic
markets, the Service faces similar difficulties.  For example, the
General Services Administration provides for the federal government s
delivery of overnight letter mail under a contract with Federal
Express awarded in 1990.  Although the Service does not provide a
service directly comparable to Federal Express, its Express Mail
(overnight) service is similar in many respects, and has a minimum
rate of $10.75.\5 In 1995 it had an on-time delivery rate of about 95
percent.  However, Federal Express provides overnight delivery of
letters under the contract for only $3.75, with a monthly on-time
delivery rate in 1995 ranging from 96 percent to 98 percent (this
excludes the months of partial government shutdown in November and
December). 


--------------------
\4 U.S.  POSTAL SERVICE:  Unresolved Issues in the International Mail
Market (GAO/GGD-96-51, Mar.  11, 1996). 

\5 This $10.75 rate could be lower if the Service could justify
volume discounts for the General Services Administration and other
large customers.  However, the Postal Rate Commission has said that a
volume discount not based on a cost savings to the Postal Service
would be contrary to the 1970 Act.  In the 1990 rate case, the
Service requested approval to offer volume discounts.  However, the
Postal Rate Commission disapproved the request because it did not
believe the Service had provided data to demonstrate that cost
savings could be realized from large customers. 


      INABILITY TO CONTROL COSTS
      AFFECTS POSTAL PRICES AND
      COMPETITIVENESS
-------------------------------------------------------- Chapter 0:2.3

The Postal Service s continued viability as a full-service provider
in the current competitive environment also depends on controlling
the cost of operations.  The Service is having difficulty in reducing
labor costs, as well as strengthening internal operating controls to
avoid waste and abuse.  Labor costs remain a major portionï¿½82
percentï¿½of the Postal Service s operating costs despite its 1992
downsizing efforts.  To meet increased mail volume and make
improvements during a downturn in customer satisfaction in 1994, the
Service hired additional employees.  As a result, Postal Service
employment increased from its downsized level of about 782,000
employees in April 1993 to about 855,000 employees in November
1995--a growth of 9.5 percent over that 31 month period. 

One major cost savings initiative undertaken by the Postal Service
was an attempt to take advantage of emerging technology and improve
operational efficiencies by implementing a long-term $5 billion
automation program.  This program includes the use of optical
character readers and barcodes to automatically sort and process
mail, which was to reduce mail employees labor work hours.  However,
work hours have increased and savings produced from automation have
been offset by increases in labor costs. 

As part of this automation initiative, in November 1993, the Postal
Service agreed with APWU that remote barcoding, which had been done
by contractors, would be done by postal employees.  This would be
performed by a mix of Postal Service employees, both transitional and
career.  In February 1995, we reported that the Service was not able
to barcode as many letters as expected using its optical character
readers, and no major breakthrough or significant technological
advances are expected in the near future.  As a result, the Postal
Service was relying on the more expensive remote barcoding function,
diminishing much of the anticipated dollar and labor savings. 

Later, in September 1995,\6 we reported that performing remote
barcoding in-house would cost more than if it were performed under a
contract.  This is primarily due to the fact that contract employee
costs were lower than the Postal Service s employees wages and fringe
benefits.  We estimated that, at the ratio of 70 percent transitional
and 30 percent career workforce required by the Service-union
agreement, the cost differential between Postal Service and
contractor barcoding would be about 14 percent or $86 million (not
adjusted for inflation) to process 23 billion letters annually. 
Furthermore, an issue still unresolved is whether the Postal Service
and unions will decide to have transitional employees receive
benefits similar to career employees.  If this were to take place, we
estimated that the cost difference would be even higher at 28
percent, or about $174 million annually.  As such, if all barcoding
was performed by career employees, we estimated that in-house
barcoding costs would exceed contracting costs by 44 percent, or $267
million annuallyï¿½thus, resulting in the Postal Service incurring
greater labor costs in this aspect of the automation initiative. 

Internal operating controls are another critical element in avoiding
unwarranted costs.  For example, in January 1996\7 , we reported that
Service officials did not follow required procedures for seven real
estate or equipment purchases in order to meet what they, in some
instances, believed to be the need to expedite the procurement
process.  In some cases, the Service failed to resolve
conflict-of-interest situations identified--both real and apparent. 
For example, contrary to the advice of the Postal Service's legal
department, the contracting officer failed to resolve a conflict of
interest on the part of an individual who helped evaluate the
contract proposals and at the same time had a job offer pending from
the successful offeror.  As a result of the conflict of interest, the
award was set aside by the courts and a replacement contract was
awarded to one of the unsuccessful offerors.  The Service paid $10
million to the original winning offeror to settle its claim under the
contract, which was then set aside.  Also, the new contract cost $8
million more annually than the old contract.  Overall, we estimated
that in these seven purchases, the Service expended about $89 million
on penalties or unusable and marginally used property, portions of
which could be recovered if the properties were leased or sold. 

Another example of internal control weaknesses that we plan to report
on in the future involves the Postal Service s controls over
discounted bulk business mail.  This is a significant portion of the
Service s businessï¿½almost one-half of its total revenue of $47.7
billion is from such bulk mail.  The Service has a system designed to
verify postage due on bulk mail which enabled it to avoid losing
revenues of $168 million in fiscal year 1994.  However, the system
has internal control weaknesses that increase the risk that the
Service is losing significant revenue on discounted bulk mail.  For
example, while the Service has annually received billions of pieces
of barcoded mail--and the volume is expected to increase in future
years--acceptance clerks at mail processing plants do not have
adequate automated equipment to verify the readability of
mailer-applied barcodes.  Also, these clerks have not always done
required verifications because of the urgency to accept and deliver
mail. 


--------------------
\6 POSTAL SERVICE:  Performing Remote Barcoding In-House Costs More
Than Contracting Out (GAO/GGD-95-143, Sept.  13, 1995). 

\7 POSTAL SERVICE:  Conditions Leading to Problems in Some Major
Purchases (GAO/GGD-96-59, Jan.  18, 1996). 


-------------------------------------------------------- Chapter 0:2.4

Mr.  Chairman, this concludes my prepared statement.  I have appended
a list of our Postal Service products issued since January 1995.  I
would be happy to respond to any questions. 


GAO POSTAL-RELATED PRODUCTS ISSUED
JANUARY 1, 1995 THROUGH MARCH 12,
1996
=========================================================== Appendix I

U.S.  POSTAL SERVICE:  Unresolved Issues in the International Mail
Market (GAO/GGD-96-51, Mar.  11, 1996). 

U.S.  POSTAL SERVICE:  A Look at Other Countries' Postal Reform
Efforts (GAO/T-GGD-96-60, Jan.  25, 1996). 

POSTAL SERVICE:  Conditions Leading to Problems in Some Major
Purchases (GAO/GGD-96-59, Jan.  18, 1996). 

U.S.  POSTAL SERVICE:  New Focus on Improving Service Quality and
Customer Satisfaction (GAO/GGD-96-30, Dec.  20, 1995). 

Postal Employment and Barcoding (GAO/GGD-96-54R, Dec.  15, 1995). 

U.S.  POSTAL SERVICE:  Postal Ratemaking in Need of Change
(GAO/GGD-96-8, Nov.  15, 1995). 

POSTAL SERVICE:  Performing Remote Barcoding In-House Costs More Than
Contracting Out (GAO/GGD-95-143, Sept.  13, 1995). 

POSTAL SERVICE:  Mail Delivery Service in the Washington Metropolitan
Area (GAO/T-GGD-95-94, Feb.  28, 1995). 

D.C.  AREA MAIL DELIVERY SERVICE:  Resolving Labor-Relations and
Operational Problems Key to Service Improvement (GAO/GGD-95-77, Feb. 
23, 1995). 

POSTAL SERVICE:  Many Challenges in a Changing Environment
(GAO/T-GGD-95-93, Feb.  23, 1995). 

POSTAL SERVICE:  Automation Is Taking Longer and Producing Less Then
Expected (GAO/GGD-95-89BR, Feb.  22, 1995). 


*** End of document. ***