The stories reminded me that, for the last 21 years of my Pitney Bowes career, I dealt continuously with the encroachment of state capitalism in the postal sector.  In the late 1980’s and throughout the 1990’s, we successfully fought a series of battles with the U.S. Postal Service to keep it from becoming another entity with all the powers and privileges of the federal government, but with none of the regulatory constraints associated with federal government agencies.  Several senior postal officials aspired to create a power base similar to many government-owned entities, such as the Tennessee Valley Authority (which Marvin Runyon, the Postmaster General from 1992 to 1998, had led) or the New York-New Jersey Port Authority.

Fortunately, we defeated efforts by the Postal Service to regulate the mailing industry and compete unfairly with it at the same time.  The Postal Service leadership teams succeeding Runyon and members of his senior team generally tried to operate within the boundaries set by Congress. We had a very collaborative, and mutually respectful, relationship with the Postal Service during most of my tenure as CEO.

The story was very different outside the United States.  While we had similarly respectful and collaborative relationships with the postal officials in the UK, Canada, Spain, Denmark, and Norway, we had a variety of challenges with postal authorities in many other countries.

We saw three distinct challenges:

• Some postal operators, which had appeared to become privatized, acted in very anti-competitive ways in their own nations, and also secured rights and privileges from their national governments that stacked the deck against partners and competitors.  The most extreme example was Germany, during the leadership of Deutsche Post by Klaus Zumwinkel, who resigned in early 2008 for reasons unrelated to his work-related performance.  Throughout Zumwinkel’s 18-year tenure as CEO, Deutsche Post acquired companies all over the world, including a disastrous acquisition of Airborne, a major package shipper, and the worldwide operations of DHL.

In Germany, where Deutsche Post realized most of its profits, postal rates were exceptionally high (well above $.60 per piece), service was not exceptional, but competition was ruthlessly suppressed.  At the end of 2007, a few weeks before Germany had committed to open its market to full competition from within the EU, Zumwinkel successfully prevailed on German legislators to pass a law that created a minimum wage for postal sector employees only, a wage pegged at Deutsche Post’s minimum pay grade.  The immediate result was to destroy its two largest mailing competitors, since neither could secure labor cost advantages over Deutsche Post.

In Italy, Poste Italiane took advantage of complex and onerous labor laws to fend off competition, since these laws made part-time and temporary workers prohibitively expensive.

• In many countries, postal operators expanded into businesses in which the marketplace was amply served by the private sector, but in which the postal operators would immediately have a competitive advantage, because of the implicit protection from national governments.  Australia, Belgium, Ireland, China and New Zealand all started retail banks.  Japan had always had a sizable postal banking system which paid almost no interest to depositors, but which became a huge source of loans to projects favored by politicians.  Prime Minister Koizumi staked his political career on an initiative to privatize the Japan Post, not because there was ferocious opposition to privatizing the mail or package business, but because the heavy governmental control of the flow of bank loans would be jeopardized. He barely avoided receiving a vote of no confidence because his initiative upset the way government favors had been delivered for generations.

Postal operators have played heavily in the money transfer business (competing with Western Union), in retail government services, in the sale of greeting cards and stationery, and in the sale of gift items often transmitted through the mail.  Postal operators like Australia, China, Finland, and Sweden moved seamlessly into mail services businesses. In countries with a strong tradition of state capitalism, these postal operators were able to operate freely in more businesses in which they competed unfairly with the private sector.

• The postal operators often carried mandates and missions inconsistent with a business focused on cost-effective customer service.  France and Canada were prime examples of this problem, as were Japan, Spain, and Portugal. In these countries, postal operators were saddled with explicit and implicit requirements that they keep a minimum number of people employed, even if the demands of the business would not justify such employment.  For Pitney Bowes, the government employment mandates made many of our productivity enhancement tools unusable by these postal operators.  They could not improve their productivity, even if they wanted to, because they were fulfilling social mandates.  Postal ratepayers paid more, in the form of a disguised tax, to create a welfare system for workers who probably could not have secured employment at comparable wage and salary rates.

I was able to experience the ugly underside of state capitalism for over two decades.  It made me realize that the United States should think long and hard about migrating down the path these other countries have followed.  It also is a cautionary tale for large multinational corporations that aspire to compete fairly in major markets in which one or more of the competitors are state-owned or state-controlled enterprises, or in which the state considers a particular industry strategically important.

In this case, the employer is the Port Authority of New York and New Jersey, an entity created by a contract between New York and New Jersey and jointly owned by the two states.  This entity is not accountable to elected officers or voters, except for the indirect influence that elected officials from the two states sitting on its board of directors have on the entity’s operations.  Oddly enough, entities like the Port Authority were created over several decades in the 20^th century because elected officials believed that they would operate in a more business-like fashion and not be subject to the corrupting influences of elected officials trying to “buy” votes by bestowing favors on constituents. However, the lack of public accountability means that the customers of the Port Authority, namely those who travel in the New York Metropolitan area, will bear the brunt of the abuses of the pension system.

In one sense, it should be easy to solve this problem: abolish this “pension spiking” scheme in the next collective bargaining session.  However, we get a hint of why these kinds of schemes are so hard to uproot. A toll collector named Princesella Smith is quoted as saying: “I’m blessed. I have a great job, and, in this economy, it’s great that I can cover everything with my eight hours a day and overs.”

Executives and union leaders who both know that paying a toll collector like Ms. Smith $89,599 per year is absurdly excessive also have to confront the fact that, but for her oversized compensation package, she probably would be living in a much more difficult economic situation.  She is a human face to the problem of reducing the government budget deficit.  I found that, at Pitney Bowes and at other large organizations, no matter how well these organizations were managed and how tightly costs were controlled, it was difficult to bring pay into line with what made sense for customers.

The overpaid employee is a real person, often well liked and appreciated for his or her organizational commitment.  While I do not know how good an employee Ms. Smith might be, she is clearly doing a job, collecting tolls on the George Washington Bridge, that few people would choose to do if they had other choices.

Not only are overpaid employees often liked and appreciated, but senior executives often know the families of these employees and the tragedies and challenges the employees face.  At Pitney Bowes’ Connecticut operations, there really are no executives living in enclaves that totally separate them from coming into contact with ordinary employees.  I was highly likely to interact with company employees outside the office. When my second son was younger, the president of the Little League baseball program was a product manager at the company. Our housekeeper’s husband worked at the company. When we went to school events, we would meet parents who were company employees and whose children were friends of our children.

It is easy to blame militant labor unions for fighting to preserve the jobs of overpaid and under-skilled employees.  However, my experience is that these problems would exist in any organization in which executives, voluntarily or otherwise, build close personal relationships with people up and down the organization.

Over time, I developed the skill of confronting people I knew and liked, but who had to leave the company.  I had to convince them that it was not only in our best interest, but in theirs, that we were taking them out of a job, reducing their pay, or in some other way taking an adverse employment action.  I operated on the simple principle that if I could not look them in the eye across a table and justify what we were doing, the action was indefensible.  Thankfully, I never had to make the judgment that an adverse employment action was indefensible when I used that test.

When we teach senior executives to care about employees as individuals, then we create a different problem.  It becomes challenging to look those overpaid and under-skilled employees in the eye, meet them in the coffee shop and deli, see their families in the school events, or run into them on the street, and tell them that you either have to eliminate their job or reduce their pay to bring it into line with what the market pay should be for their job.

Think about the job of a postal worker who manages mail sorting machines.  At Pitney Bowes, we were able to employ and retain people who would do this work at about 1/3 the rate that the Postal Service was paying for the same work.  We were consistent in our pay practices with the real market for this job.  The Postal Service’s pay rates were artificially high, both because of a collective bargaining agreement, and because of the political pressure that postal union workers could bring to bear on elected officials.

The concept of a “living wage” is that people must earn enough in any job to be able to afford a standard of living above the federal poverty line.  However, what “living wage” advocates forget is that the “living wage” movement would result in fewer jobs and more expensive products.  As I look across our economy, I see many candidates for job eliminations if wages for that job get too high, not the least of which is the toll collector job.

When I go to large retail grocery stores and pharmacies, I am increasing seeing self-service stations, including some at the checkout counter.  When I go into bathrooms, I see electrical hand driers, which clearly replace the job of transporting and stocking paper hand towels. Postal sorting machines have replaced most postal clerks who sort mail.  Automated banking kiosks replace tellers, as other vending machines provide 24×7 service in place of retail clerks.

The largest job elimination trend, which particularly comes into play at this time of year, is the substitution of online shopping for retail purchases.  In past years, my wife frantically traveled from store to store to buy Christmas gifts.  Today, she sits with her computer and orders everything online.  While the merchants that deliver in response to online orders certainly employ people, fewer people are needed for online transactions, compared with their retail counterparts.

In essence, the labor union and “living wage” movements, whether they want to admit this or not, are hastening the elimination of the jobs they are trying to protect and enhance. They will win for a few years, but eventually the desire for consumers to get the highest level of convenience and value at the lowest cost will override the desire to protect someone else’s overpaid job.

• The near-term insolvency of the Postal Service was created by a Congressional action in the 2006 Postal Reform legislation which required the Postal Service to prefund all its retiree benefit obligations over the first 10 years after the legislation passed.  Why?  Since the Postal Service is off-budget, and it was getting its overpayments into the federal pension system returned to it, the artificially fast prepayment was a budget-balancing gimmick.  The Congress should have made the Postal Service prefund the retiree benefit obligations the way any private sector company would do so: over the expected 30-40 year life of the obligations.
• The longer-term problems of the Postal Service are driven by rapid and deep declines in mail volumes.  The Postal Service needs to reduce its cost structure much faster.  There are many good ideas that have been proposed for years, but that have not been adopted, such as the relocation of retail postal functions into convenience stores and supermarkets.  However, the Congress and the White House have to step aside and let the Postal Service take some of these steps.
• The Postal Service wants to reduce mail deliveries from 6 to 5 days.  I am not convinced that this step can be taken without damaging the growth potential of certain categories of mail.  What the Postal Service needs to consider is whether it needs to do 6-day-a-week to every address.  Sweden has variable frequency delivery, with 5 days in urban areas, three days in remote mainland rural areas, and two days to remote islands.  The Postal Services needs to begin delineating differences between profitable urban delivery routes and unprofitable rural delivery routes.
• On the flip side, the Congress and the Postal Service need to consider whether pricing for mail originating or being delivered to remote areas should be priced the same as mail traveling a few city blocks.  Uniform pricing has always been seen as a core feature of a communication system on which Americans have depended for political discourse, educational content management, charitable purposes, and other important social causes.  The broad penetration of the Internet makes many of the needs for uniform pricing less compelling.  However, to the degree that we continue uniform pricing, it can be for certain categories of mail, with others starting to move toward distance and cost based pricing.

There are some opportunities for cost reduction or revenue enhancement Leonard did not discuss.  Also, his comments about European and other international postal services reflect a lack of understanding of the degree to which governments supported unprofitable non-core services undertaken by their national postal services.  DuetschePost, for example, entered many non-core businesses and lost money in most of them, including disastrous acquisitions of DHL and Airborne.  The U.S. government cannot afford to bail out the Postal Service as it dabbles in non-core businesses, loses money, and exits those businesses.

There are still many revenue opportunities in the core business which, although no one of them will address the insolvency issue, collectively can help the Postal Service dig out of the deep hole in which it finds itself:

• The Postal Service has failed to educate its huge small business base on the e-Commerce opportunities available from marketing over a longer distance provides it.  Businesses often miss opportunities to market their services directly to consumers far removed from their local catchment area, simply because they do not know how to market their products and services remotely.
• The Postal Services has also failed to help businesses that normally do not use the mail start to grow their business through highly targeted direct mail marketing.  At Pitney Bowes, we showcased a New York Japanese restaurant in an annual report several years ago that used direct mail, instead of delivery of flyers by its delivery personnel, to reach out to occasional customers and to potential new customers to grow its business.  The restaurant not only grew its own business, but also became a direct marketer for other restaurants.
• The Postal Service and the mailing industry should be advocating a movement from face-to-face retail for both government services and voting to the delivery of services by mail.  Passports, licenses, and vital records should arrive by mail, so that labor-intensive and highly inconvenient retail operations can be shut down or scaled back.
• The Postal Service should promote voting by mail, rather than face-to-face voting.  Oregon does all its voting by mail, and Washington, California, and several other states do a majority of voting by mail.  In these states, ballots are sent in the mail and returned by the voters.  The Northeastern and Southeastern states are still laggards in allowing voting by mail, but this can add several hundred million dollars a year to mail revenues.
• Finally, the biggest need for product manufacturers is to build direct relationships with the people who use their products.  The retailer typically “owns” the customer and knows how the customer is.  However, there is nothing to stop manufacturers from building a parallel relationship with those who buy or use their products.  Kraft did these extremely effectively through a combination of Internet and mail-based systems years ago.

Crises can be disasters, or they can give rise to innovation that strengthens an organization.  For the sake of the American people, it is my fondest wish that the U.S. Postal Service not let this crisis go to waste, and that Congressional and White House decision makers give the Postal Service the support it needs to innovate.

If this sounds like the concern expressed about the “public option” U.S. health insurance reform proposal, there is a good reason: the issues are remarkably similar.  In the U.S., the U.S. Postal Service has largely avoided competition with the private sector, except in the area of package delivery, in which it competes with UPS and FedEx, express mail, in which it also competes with these same companies, and international mail, in which it competes with DHL, and, more recently, Pitney Bowes.

However, outside the United States, postal services actively compete in retailing banking with private companies.  In fact, in some countries, particularly in Europe, postal services also providing printing, mailroom management, and copying services in competition with companies like Xerox, Pitney Bowes, RR Donnelley, and Oce.

What has been the experience of the “public option” in postal service competition?  First, in the U.S., despite repeated efforts since 1970 to have elected officials let the U.S. Postal Service operate independently of political interference, the temptation has been too great for politicians to intervene politically quite often.  Elected officials have consistently stopped the U.S. Postal Service from closing facilities, even when they have gotten management and union buy-in for operational reasons to close a facility or relocate work.  This has been the case all over the world, not just in the United States.  Therefore, my first observation is that any “public option” health plan would not be able to operate as an independent insurance program; it would be subject to significant political interference.

Second, although postal services, including the U.S. Postal Service, are actually supposed to operate outside the federal budgets of the countries in which they are incorporated, and are supposed to have transparent financial reporting, politicians regularly help postal services when they are in trouble, and raid them like a cookie jar when the federal government is in trouble.  There is no financial transparency of the kind private companies must observe.  The best example of this is what happened with the 2006 U.S. postal reform legislation.  The U.S. Postal Service was forced to prefund its entire retiree medical program over 10 years, not because it is a good accounting or business practice, but because a front-loaded retiree medical pre-funding helped the Congressional Budget Office determine that the postal reform legislation was “cost-neutral.”  Many people believe that the U.S. Postal Service financial deficits indicate that it is being badly run; that is not the case.  It is simply being saddled with artificially front-loaded expenses to reduce the federal government deficit, since the Postal Service operates outside the federal government budget.

Third, despite repeated claims by elected officials that postal services would not necessarily compete unfairly against private sector companies, they have repeatedly violated competition laws, especially in Europe, where the national governments have permitted postal services to expand their businesses most liberally.  In fact, not only have postal services been given freedom to engage in largely unpunished predatory behavior, but they have used their political clout to get laws passed to make it extremely difficult for new competition to emerge.  In Germany, at the end of 2007, Deutsche Post lobbied successfully for a minimum wage law that only applied to postal employees, and that was set artificially high to correspond with Deutsche Post’s average wage.  One of Deutsche Post’s leading competitors went out of business almost immediately.

Fourth, the most expansive postal services with the broadest charters to expand into new businesses generally did not operate cost-effectively or deliver high-quality service.  The U.S. Postal Service runs a better operation than any other major postal service, in all likelihood, because it has the most focused charter and the least ability to expand.  There are good reasons to allow some degree of additional operating freedom for the U.S. Postal Service, but even a modest expansion would not make it anywhere near a Deutsche Post or a Japan Post in the scope of its businesses.

In Germany, a first-class letter costs .50 Euros, which is over $.70, even though the country is smaller and the service obligations for the same geographic footprint are no greater than they are in the United States.  What has happened in every country in which postal services have competed with more aggressively with the private sector is that their service levels have not been very good, they have not innovated in their core businesses as much, and they have become captive to other stakeholders, like unions, special interests in the legislative districts represented by powerful politicians, and non-governmental organizations.  Their customers have tended to suffer most.

I am very concerned that a broad-based public option for health insurance will have all of these pathologies.  It is too tempting for elected officials to twist and bend a public agency to their special needs in order to have a pot of money for their re-election campaigns.  The Japanese started down the privatization road because the Japan Post bank, like its counterpart in China Post, started making bad loans to fund infrastructure projects in the districts represented by powerful elected officials.  It is bad enough that banks and other financial services institutions were motivated by greed to make a number of bad lending decisions all over the world.  It was worse when postal services made bad lending decisions out of fear of offending those who regulate them.

It would be even worse if we changed our health care system to make capital investment and operating decisions subject to the whims of whatever elected officials had the most oversight responsibility or power over a yet-to-be-created public health insurance plan.

• What universal or public services do we expect of major communication media?

With respect to mail, postal services around the world all have a variety of what are called “universal service obligations.” They are expected to maintain a network that allows every citizen in their country to transact business, to deposit mail into collection boxes or at a conveniently-located post office, and to receive mail at a designated home or business address 5-6 days a week all year. Additionally, their governments expect them to subsidize charitable and educational organizations, to charge affordable and uniform prices for mail originating from individual citizens and to be large employers and anchors for rural communities. In the U.S., the Postal Service also absorbs an enforcement responsibility for obscene, offensive, and fraudulent material that gets sent through the mail. In recent years, Congress has deferred its payments to the Postal Service for the mandates imposed on the Postal Service to subsidize certain categories of mail and certain types of users, such as non-profits.

All this costs a great deal of money and puts mail at a competitive disadvantage as a communications, delivery, and advertising medium. By way of comparison, Internet service providers can be selective in whom they serve, do not have social obligations, get to charge whatever they want, and can maintain facilities and labor forces appropriate to their mission. Moreover, Congress has provided subsidies to expand Internet coverage through its Rural Utilities Service broadband program.

Prior to the 1984 break-up of the AT&T telephone system, the telecommunications business had many social obligations, but these have been largely discontinued. For example, for national defense and national emergency reasons, AT&T was expected to maintain a robust infrastructure that was expected to function in a variety of national emergency environments and to maintain uptimes well in excess of 99%. Last year, as a result of flooding in our town, telephone service was down for three days, an inconceivable situation before 1984.

So how does this affect us? Think about a potential pandemic situation. The U.S. Postal Service has successfully tested its ability to get vaccines delivered in communities within a matter of hours, with even half of its workforce disabled. On the other hand, a report of the U.S. Department of Homeland Security issued in December, 2007, indicated that the Internet and the nation’s telecommunications network would be utterly unable to function if one-third of our population stayed home.

Ironically, the reason the Internet would fail in a national emergency is the inability to control recreational use of the Internet by homebound schoolchildren playing or downloading videos, a commercial and social networking use that is celebrated as one of the benefits of this wonderful communication medium.

The Internet, created by the U.S. Defense Department to be available for national emergencies, has not been stress-tested for a wide range of emergencies and probably would not be available or successful, largely because of the huge bandwidth consumption from multi-media video and game applications, and social networking sites. Internet broadband capability would not likely be able to withstand the stress placed on it if a significant part of the population switched to using the Internet, rather than a face-to-face communications process.

If Internet service providers were required to meet universal service obligations like postal services, the pricing on Internet services would be a great deal higher, and there probably would be non-uniform pricing based on usage. This type of pricing existed with some of the providers in the 1990’s, when Internet usage was low, but everyone rebelled against constraints on usage, so the Internet went to a flat pricing model in the U.S., with some countries maintaining some degree of gradation based on bandwidth required.

However, I am very confident that, because electronic communications bears no meaningful public service obligations and no share of costs required for national emergency capability, we are creating a highly un-level playing field between physical and electronic communications.

As we start to think about the implications of a gradual evolution from physical and face-to-face communications to remote, Internet-based communications, we need to address broader societal needs, particularly those arising in a national emergency, that will be less capably addressed as a result, and, more importantly, address the unlevel playing field we have created between mail and other forms of communications. Congress either should subsidize social obligations imposed on the Postal Service, or it should demand that Internet service providers and Internet users pay a fee for comparable social obligations, such as the requirement that the Internet be usable in the event of a national emergency, or that the Internet be available for non-profits at reduced rates. We should have a consistent policy across communication media for social obligations in terms of who pays for them.

The survey reveals that consumers greatly overestimate the environmental impact of direct mail. Eleanor and I discussed the implications of this survey and how the industry can implement new technology and other initiatives to reduce the environmental impact of mail. We also discussed how industry leaders can work to improve the public perception of mail, and grow the value of mail as a medium in the long-term.

Listen to the Podcast

Why has it been so difficult? Postal issues are indicative of challenges governments all over the world have in effecting fundamental reform:

• While the broader public may benefit, the benefited individuals and businesses are focused on many issues. Those who might be harmed in the short term, in this case, postal workers, are highly focused, well-organized, and often very militant. They will react far more negatively to reform than the benefited public will act positively. Therefore, in the short run, elected officials find reform very risky.
• Competition, privatization, or other reforms are often disruptive in the short run, but beneficial only in the longer term. Politicians are much more likely to think in the short term because election cycles are relatively short.
• The disruption when reform does not work perfectly, which is often the case, is usually a highly-visible media event, whereas improved service quality does not create the same media opportunities.

The U.S. actually made some good decisions in effecting postal reform. We left a great deal of discretion to an independent regulator, and took a great deal of the heat from elected officials. Europe, on the other hand, has issued broad guidelines, but has left postal reform squarely in the hands of elected officials and regulators in each of the member countries. Some countries have dealt with more of the issues through the decisions of elected officials; others, like the UK, have had more active regulators.

In the UK, the market was opened to full competition in January, 2006. Royal Mail lost significant market share in terms of direct access to mailers, since many bulk mailers now deposit their mail with consolidators. While the Royal Mail continues to get some revenue for the mail that consolidators deposit downstream into its network, it has lost significant revenue in so short a time period that it has not been able to reduce costs at a proportionate rate. It decided to make changes to help it be more competitive, but is now experiencing a series of strikes from the Communications Workers Union. I would hope for a negotiated solution, but one thing is clear: the outcome cannot result in other postal services shrinking from the reform that has to take place.

In other markets, governments are experiencing great difficulty confronting reform, particularly in Southern Europe. While France is committed to opening its market in 2011, the market opening was pushed back from the 2009 deadline set forth in the 2nd directive.

Germany may open its market as early as 2008, but the rules governing that market are still unsettled to a degree because Deutsche Post has demanded an industry-wide minimum wage standard to level the playing field among all competitors.

Many national postal services are far more diversified than they were a decade ago, and are still not very profitable in the non-core businesses. If these postal services were publicly-held companies, or if they were in fully competitive markets with effective competition law enforcement, or if governments imposed financial discipline and accounting transparency, much of this diversification would be stalled or even reversed.

As TNT has become truly publicly-held, it has divested the logistics and the mailroom management businesses, and has made a more focused effort to define its core competencies. I believe all the major postal services will, over time, develop more focused and integrated business models than they have today. I also believe that we will see more partnerships emerge with private sector organizations that will reshape the industry and create a more vibrant sector.

However, given how long this has taken and how difficult it has been, it is clear that governmental reform is an extremely challenging task. For companies trying to do business with government during a period in which reform is contemplated or underway, they will find risks to be much higher than those they face in selling to private sector customers.

For example, technology suppliers have multiple choices on how to allocate research and product development dollars. The continued postponement of dates of any government reform initiative in any sector creates a level of risk that diverts development of best-in-class solutions away from government, particularly from smaller technology suppliers. For projects that require payment and performance bonds, the bonding company costs increase as project risk increases. I have also noticed specifically in the transportation arena that constructing transportation infrastructure has gotten astronomically more expensive with any project delays because of the fast-escalating cost of commodities like steel, nickel, and aluminum, oil-based plastics.

Both elected and appointed officials need to understand that predictability and speed of execution are extremely important in government reform projects, and that, even though the reform effort can theoretically be improved by slowing it down or modifying it, these changes in timing and direction have their own negative unintended consequences.