Pushing the Envelope

t's Christmas in Whoville. Postmaster Lou Who is inundated with packages. It seems that Whoville residents waited until the last minute to send their holiday gifts and cards. And the increase in merchandise from Internet sites is incredible. Fortunately, Postmaster Who is prepared. He's getting help from many of his competitors. Private companies are teaming up with Whoville Post to sort packages and shore up its distribution shortcomings. Even the big bad Grinch is lending a helping hand.

Sound a little far-fetched? Not if you consider that the U.S. Postal Service is talking about teaming up with archrival FedEx to deliver packages. Some of the business partnerships have little to do with the actual movement of mail. Last July, for example, USPS announced a promotional campaign with Universal Pictures for the new Jim Carrey comedy, "Dr. Seuss' How the Grinch Stole Christmas." USPS will stamp a Grinch-related cancellation mark on every piece of mail during the holiday season.

But other alliances with the private sector are more a matter of survival in a fiercely competitive marketplace for mail delivery services. Postmaster General William Henderson announced in September that archrivals the Postal Service and FedEx were in talks to form a strategic alliance. The end result would have USPS carriers delivering FedEx packages and FedEx carrying Postal Service packages on its planes. This is not a first for USPS. In fact, the Postal Service actively seeks alliances and partnerships with private sector companies-most of them competitors. "The alliance system started with the fact that we do some things very well and we do some things not as well as the private sector," admits John Kelly, president of package business at USPS. "We have 3,800 retail locations. We don't need help there. We need help in long-haul transportation in both the air and ground. We need some help with our distribution capabilities."

Now, alliances are being forged out of necessity. By all accounts, USPS will see First-Class mail and revenue numbers drop during the next decade. According to the General Accounting Office, the volume of First-Class mail is expected to grow at an annual rate of 1.8 percent through 2002 (GAO/T-GGD-00-2, October 1999). The situation then takes a turn for the worse. GAO and postal officials predict that the Internet will siphon off an increasing amount of mail, particularly bills and direct-to-consumer advertising. The volume of First-Class mail could drop by nearly 2.5 percent annually between 2003 and 2008. The change would have "a significant impact on contribution (or margin) in an organization that is required by law to 'break even,' " according to a draft of USPS' strategic plan for 2001 to 2005. In fact, the agency is projecting more than $150 million in losses this year, its first year in the red since 1994. This after the agency cut nearly $1 billion in expenses in 1999.

Henderson explained the situation Sept. 19 before the House Government Reform Subcommittee on the Postal Service: "Traditional competition is much more fierce. Technology has created alternatives to the Postal Service that are extremely challenging. And leading foreign posts have been empowered by progressive governments that realize a contemporary postal model is needed for the fast-paced, rapidly evolving communications environment of the 21st century."

The Postal Service can ill afford to stand pat. According to its draft strategic plan, "new services and products during the next five years will be absolutely critical to the ability of the Postal Service to position itself for the future and to continue to finance the universal service mission." Beyond coming up with an e-commerce strategy, the Postal Service needs help in several distribution-related areas, as packages chief Kelly pointed out. As noted in the draft strategic plan: "Alliances and partnerships will also be an important part of the domestic package strategy . . . . The USPS has a real opportunity in the growing market trend for quicker, smaller shipments direct to customers." Instead of reinventing the wheel, USPS officials are turning to private companies for help, even if some of those allies are partially to blame for declining revenue and a dwindling monopoly. "Partnering allows you take advantage of a system that is totally proven," Kelly notes.

Quid Pro Quo

Some of the Postal Service's business partnerships are nothing more than public relations ventures. There's the sponsorship of Tour de France winner Lance Armstrong's cycling team. And the promotional campaign with Universal Pictures for the "Grinch" movie is a non-cash transaction. USPS is not paying Universal for the use of the Grinch logo, and Universal is getting free publicity.

"A central theme to the movie is the Whoville Post Office," says Azeezaly Jaffer, USPS vice president for public affairs. "They are letting us use a lot of their promotional materials. What better way to ride on the goodwill generated by the movie? People relate to the post office. We felt it was a good thing to do."

At the other end of the spectrum are business partnerships that allow competitors to take advantage of the Postal Service's mission of universal service. Emery Worldwide and Airborne Express have entered into such arrangements. The deals are aimed at shippers of high-volume computers and home electronics and other catalog and Internet products. They are a way for such carriers as Emery to break into the business-to-consumer market, an area where they haven't had the resources necessary to compete with market giant United Parcel Service, according to Rocco Sacci, spokesman for Emery. "Before, our customers were business-to-business." Through Emery's Parcel@Home and Airborne's @home service, the companies agree to drop large volumes of packages downstream at regional postal centers. USPS letter carriers then haul them the last mile to customers' homes and businesses. The deals are limited to parcels weighing up to 70 pounds.

"It's really a marketing scheme," says Gene Del Polito, president of the Association of Postal Commerce, whose members include direct marketers. "All Emery and Airborne are doing is the same thing any parcel entity would do. These companies are pressed to find a quality ground shipment service." He adds, "You have people who are natural competitors saying, 'There are areas where we are not competitive. We can work together.'"

These last-mile arrangements are available to any private carrier willing to drop large-volume shipments at regional postal facilities. The carriers benefit in that they can promote their relationships with the Postal Service to shippers such as Amazon.com or Dell Computers as a low-cost alternative to UPS. The Postal Service likes last-mile agreements, which reduce costs because packages are presorted and delivered as close to the final destination as possible.

Strange Bedfellows

Unlike most federal agencies, USPS is in a position that essentially forces it to reach out to private companies. The 1970 Postal Reorganization Act transformed the agency from a subsidized bureaucracy to a businesslike entity. Instead of being federally funded, USPS became a self-supported entity funded by revenue from selling stamps and other mailing services. The agency receives a modest appropriation--about 0.1 percent of its mail revenue--to cover the costs of congressionally mandated discount services, such as mail to the blind and overseas voters. At the same time, USPS has the benefit of monopoly protection. It has exclusive rights to deliver First- and Third-Class mail to private homes and businesses. But having a government-sanctioned monopoly sometimes gets the Postal Service in hot water as it partners with private companies.

Take the proposed alliance with FedEx. At press time, details were still being hammered out, but the alliance likely would give the Postal Service access to FedEx's shipping capabilities. The company's fleet of airplanes and trucks would carry USPS Priority and Express Mail packages to regional postal facilities. In exchange, USPS would deliver FedEx packages to private addresses. Going beyond the Emery and Airborne alliances, however, the proposed deal would have USPS letter carriers picking up FedEx packages that customers are returning to Internet providers. And the possibility exists for FedEx to put drop boxes at post offices, a first for any private company. Kelly says USPS has been looking for a partner with a solid nationwide network to help move Priority and Express Mail packages more efficiently. The Postal Service relies on several carriers to deliver overnight packages, including commercial airlines. But a summer full of delays and flight cancellations caused severe headaches for USPS officials.

Deputy Postmaster General John Nolan told a Senate Government Reform subcommittee in September that relying on FedEx's air fleet would go a long way toward providing some relief. But the alliance drew tough questions from high-ranking GOP lawmakers. Rep. Henry Hyde, R-Ill., chairman of the Judiciary Committee, wondered if the alliance posed any antitrust violations. So too, did Reps. Dan Burton, R-Ind., and John McHugh, R-N.Y., who wrote to Attorney General Janet Reno in October about the proposed alliance. They suggested that the Postal Service's immunity from antitrust laws "presents difficult questions in the context of its proposed strategic alliance with FedEx-a private corporation that is fully subject to antitrust regulation."

The competition is worried too. "We have a problem with a government agency . . . reaching out to favor one private sector company over another," says Tad Segal, spokesman for UPS. "That should be available to anyone. Not just FedEx. Not just us, but to Emery or DHL or anyone." By law, the Postal Service cannot discriminate. It has to give every company a shot at forging a similar deal. PMG Henderson did just that at the September hearing, telling the subcommittee that his door is open and if UPS-or anyone else-wants a seat at the table, they are more than welcome. UPS officials were not swayed. Segal says UPS is not interested in an arrangement where it hands off packages to another party. Doing so would break the "seamlessness" of the delivery system, according to Segal. On the other hand, UPS is willing to talk about a situation where it has points of sale at post offices-something that has also been rumored in the FedEx deal. FedEx officials could not be reached for comment.

Whatever the outcome of the FedEx talks, Edward Gleiman, chairman of the Postal Rate Commission, says it makes sense for USPS to look at forming these types of alliances. "I look at it from the standpoint of dollars and cents," he says. "If there is a more efficient provider than the Postal Service, then they should do what is appropriate in terms of cost avoidance."

Damaged Mail

Like the FedEx alliance, the 3-year old partnership between USPS and Emery has been rife with controversy. Completely separate from the Parcels@home program, USPS in 1997 hired Emery to operate 10 Priority Mail processing centers. The centers transport, sort and distribute Priority Mail packages along the East Coast. It's one of the Postal Service's most ambitious partnerships. But Emery wants out of the 10-year contract and has filed suit to end it. Emery argued in U.S. Claims Court that the Postal Service is in breach of contract. In short, Emery says it is underpaid.

After winning the contract in 1997, Emery opened the 10 centers and hired more than 4,000 employees. But soon after operations began, it became clear that USPS had underestimated the amount of Priority Mail moving through the system. Handling the higher volumes cost Emery more money than it had anticipated, based on the contract. In 1998, the two sides signed a letter in which "USPS agreed to pay Emery an increased per-piece price and a provisional rate while negotiations for a fixed price are undertaken," according to court records. Emery argues that USPS failed to live up to its end of the bargain. In fact, company officials estimate they are owed more than $170 million.

Postal Service officials could not be reached for comment on the litigation, but the agency argues in court filings that the 1998 agreement was not enforceable and did not constitute a valid amendment to the original contract. The agency also argues that by filing suit, Emery did not give the mediation process time to unfold. "Why USPS took such indefensible positions, at that posture, is a mystery to this court," Senior Judge Reginald Gibson wrote in an Aug. 25 opinion. Gibson did not let Emery out of the contract, but agreed that USPS is required to negotiate a new price based on the 1998 agreement.

Expanding Customer Base

Though USPS' Kelly suggests that the Postal Service does not need help with its retail operations, the agency continually looks for ways to expand its customer base.

In 1998, the Postal Service joined forces with one-time competitor Mail Boxes Etc., a chain of shipment and packaging stores. Under the pilot project, 250 Mail Boxes Etc. franchises in 11 urban areas were allowed to offer selected USPS services. The stores were already able to sell stamps-at a marked up price-and accept USPS mail and packages. The agreement expanded those services to include offering certified mail and insurance services that until then were available only at a post office. Mail Boxes Etc. also can sell stamps at face value.

Kelly says the alliance is a way to bring postal services to more people in more convenient locations at more convenient times. He notes that many Mail Boxes Etc. stores keep longer hours than post offices; some are even open on Sundays.

In March, USPS expanded the pilot test to 700 additional locations. The plan is to eventually roll the test out to all 3,000 Mail Boxes Etc. locations. "In many ways it makes sense," says William Kovacic, a professor at the George Washington University Law School, who monitors USPS. "There is no reason for [the Postal Service] to own and operate as many retail outlets as they have now. At a much lower cost, they could contract them out."

But the alliance is not without skeptics. Rick Merritt, executive director of Postal Watch, a USPS watchdog group based in Virginia Beach, Va., questions the timing of the initiative. While Mail Boxes Etc. and USPS were talking about an alliance, the agency was drafting rules that would dramatically change the way mail and parcel centers are regulated. Mail Boxes Etc. is the nation's largest chain of such stores. "What you have is a situation where the Postal Service is operating two types of organizations: one that is a federal entity with full regulatory powers and, on the other side, one that acts like a private entity" making business decisions, says Merritt.

That is the nearly constant criticism of USPS alliances: Here is a government agency reaching out to form alliances with the very entities it regulates. It will dog USPS nearly every time it enters into an alliance. "The concern is that by using its status as a government entity, it's displacing private firms," says Kovacic. "As long as it is state-owned, there will forever be suspicion when postal goes into the private sector." As Kovacic and others point out, though, the agency has little choice but to find new friends in old enemies.

With a Little Help From Their Friends

he U.S. Postal Service is well-versed in forging business alliances. The agency has sought help from all walks of life to boost its retail operations, improve delivery services and venture onto the World Wide Web. Here's a sampling of the Postal Service's many business partnerships:

Global Express Guaranteed: USPS teamed up with DHL Worldwide Express Inc. in April 1999 to offer this international service, formerly known as Priority Mail Global Guaranteed. Initially, the alliance was aimed at documents only. In October 2000, it was expanded to a full package delivery service. It offers date-certain delivery to more than 200 countries and territories worldwide. USPS handles the packages domestically and DHL provides international transport and delivery.

Parcel@Home: USPS and Emery Worldwide partnered to make it easier for high-volume computers, home electronics and other catalog and Internet shippers to reach consumers. Emery drops large volumes of packages downstream at regional postal centers. Letter carriers haul them the last mile to customers' homes. The deal is limited to products weighing up to 70 pounds.

@home:A 'last-mile' delivery partnership with Airborne Express. It's structured the same as Emery's Parcel@Home.

Priority Mail processing: In 1997, USPS hired Emery to transport, sort and distribute Priority Mail packages along the East Coast. Emery opened 10 processing centers and hired thousands of employees. Now, Emery wants out of the 10-year contract, saying it's underpaid.

Mover's Guide and change-of-address notification: In 1993, Targeted Marketing Solutions Inc. (now called Imagitas) took over responsibility for printing and mailing change-of-address forms to movers. It also created the Mover's Guide, which provides moving tips and direct-to-consumer advertisements from move-related companies. The partnership won a Hammer Award for reinventing government in 1997 and saves USPS millions of dollars a year.

Stamps: Faced with declining stamp sales, USPS in 1997 launched a retail partnership with Warner Brothers. Not only did Bugs Bunny and Daffy Duck become hallmarks on stamps, but a promotional tie-in also had USPS selling Looney Tunes shirts, baseball hats, ties and wrapping paper.

PC Postage: Linking with Stamps.com and E-Stamp, USPS allows customers to apply for digital certificates allowing them to purchase electronically stored postage.