White paper drafted by international financial advisory firm Lazard
WASHINGTON, D.C., April 17, 2012 — Successful revitalization of the U.S. Postal Service requires a strategic business plan that leverages the unmatched reach of its network, legislative action to relieve it of obligations no other business bears and shared sacrifice from all stakeholders, says the renowned international financial advisory firm, Lazard.
“While the Postal Service clearly faces enormous challenges, we do believe that its revitalization is achievable,” Lazard says in a white paper released on April 17. The paper, “Delivering Change to Revitalize an American Icon,” results from a due diligence investigation of the USPS commissioned in October 2011 by the National Association of Letter Carriers and conducted by a Lazard team with extensive experience in restructuring strategy.
Lazard outlined the basic elements of a reform plan that would aim to revitalize the Postal Service, rather than the approach being advocated by the Postal Service — an approach based on massive, and ultimately counterproductive, reductions in service. Lazard indicated that based on its analysis and experience, the Postal Service’s “shrink to survive” strategy will simply facilitate the decline of this vital American institution.
In addition, Lazard’s analysis of pending legislation (S. 1789) determined that, while the bill does not go as far as the Postal Service in proposing service reductions, the legislation still amounts to a stop-gap — not real — solution, because it does not fundamentally address the need for change in the way the Postal Service does business. And it too reduces service to the public and to America’s businesses.
“In private sector restructurings, successful turnarounds are generally premised on (i) a strategic plan that aims for a sustainable and viable enterprise and (ii) a management team and governance structure that is capable of executing that plan. Those two elements are developed first and then the necessary capital is secured. Unfortunately, this legislation provides the Postal Service with capital without either of these two elements being in place. Even worse, by adopting the Postal Service ’s proposals to reduce the quality and value of the services it provides to American households, it may actually accelerate the Postal Service’s decline,” Lazard said.
According to Lazard, a plan to revitalize the Postal Service should include:
- Better leveraging of the USPS delivery network to grow its parcel service business;
- Expansion of the kinds of products and services that the Postal Service is allowed to provide (this would require congressional action);
- Giving the Postal Service greater flexibility in pricing its products and services, some of which are notably underpriced compared to the cost of providing them (also requiring legislative action);
- Legislative action to address the burdensome – and unique – congressional mandate requiring USPS to pre-fund retiree health care for the next 75 years in just 10 years; and
- Shared sacrifice from of all postal stakeholders, rather than one-sided employee sacrifice.
The Lazard paper acknowledges that the Postal Service faces a financial crisis and must adapt to rapid technological changes that have reshaped — and are still reshaping — the way Americans communicate with others, primarily because of the Internet and its impact on the use of First Class Mail. On the other hand, some of those changes can stimulate new business for the Postal Service, Lazard said, such as increased delivery of packages ordered on-line.
“The Postal Service that results from these changes will have fewer employees, but will enhance (rather than degrade) the quality and value of the essential services it provides to millions of households and American businesses,” Lazard said.
The Lazard paper stresses that cuts in the number of employees and reductions in services alone can neither save the Postal Service nor enable it to adapt to the evolving needs of the American public and postal customers, both business and residential. On the contrary, they could destroy it by driving customers away and further reducing revenue.
“Similar to any successful private sector restructuring, the Postal Service requires a business plan based on a fundamental rethinking of the institution, top-to-bottom changes in its operations and culture and a first-rate management team and corporate governance structure to ensure that the plan is effectively executed,” Lazard advised.
In particular, Lazard noted, “a successful restructuring of the Postal Service must start with a plan to better leverage its unrivaled last-mile delivery network — a retail network that touches every city, town and neighborhood in America. Instead of focusing on shrinking its network and capabilities, thereby yielding its competitive advantage, the Postal Service needs an ambitious rethinking of its business model.”
“This analysis clearly shows it would be a terrible mistake for Congress or the Postal Service to rely on massive cuts in service to deal with the Service’s financial difficulties, which are real,” said Fredric V. Rolando, president of NALC. “Yet that’s exactly what they are doing. The Postal Service does need basic rethinking, but not heavy-handed, ill-considered slashes in employees, facilities and delivery services.”
Lazard based its conclusions on a review of publicly available data, including public testimony of the Postal Service’s leadership and the Postal Service’s own “Plan to Profitability,” and Lazard’s meetings with outside postal experts and users of Postal Service products and services.
Lazard’s findings reflected a full examination of the Postal Service’s “Plan to Profitability.” That plan has some reasonable assumptions and proposals, Lazard concluded, including repeal of a Congressional mandate that, since instituted, has led to a massive diversion of $21 billion of Postal Service revenues into a fund for future retirees’ health benefits.
But ultimately the Postal Service’s own plan is too focused on shrinking service to allow the agency to survive and therefore is unlikely to succeed — and will instead quite possibly worsen its business situation, Lazard said.
“The Postal Service’s proposed modifications — termination of Saturday delivery, a significant curtailment of ‘to the door’ delivery, and other reductions in service standards — could easily reduce demand by an amount equal to the alleged cost savings being discussed,” Lazard warned. Lazard noted that a Postal Service witness recently acknowledged at a Postal Regulatory Commission hearing that the combined effect of all the proposed cuts could reduce mail volume by 10 percent, offsetting almost all of the intended savings from the cuts.
Additional Information on Lazard:
Lazard is a preeminent international financial advisory firm that has long specialized in crafting solutions to address the complex financial and strategic challenges of its clients. It serves a diverse set of clients around the world, including corporations, partnerships, institutions, governments and individuals.
Lazard and its senior professionals have extensive experience in the reorganization and restructuring of troubled companies and have advised debtors, creditors, equity constituencies and government agencies in numerous complex financial reorganizations. Since 1990, Lazard’s professionals have been involved in over 250 restructurings, representing over $1 trillion in debtor assets. Lazard also has over 35 years of government advisory experience involving over 40 sovereign assignments.
Founded in 1889, the National Association of Letter Carriers (NALC) is the union of city letter carriers employed by the U.S. Postal Service. NALC has 284,000 members; about a quarter of whom are military veterans. It is affiliated with the AFL-CIO and with UNI, an international alliance of communications unions