Are Royal Mail profits at expense of service?

Two years after the launch of Royal Mail's ambitious three-year improvement plan, the postal operator has turned in a profit. But its failure to meet 15 public service tests suggest a heavy price has been paid. By Curtis Brown

After Royal Mail delivered a #220m profit last week, chairman Allan Leighton said the result was "not good enough". He and millions of customers were let down by colossal failures in the first two years of a three-year improvement plan.

Regulator Postcomm is to launch an investigation into the collapse in the quality of Royal Mail's service, citing a #80m compensation package for business customers, plus the possible imposition of additional penalties (see News, page 2).

Last year, Postcomm issued Royal Mail with a #7.5m fine for failing to provide an adequate service for two of its prepaid business reply services (PM October 3) – music to the ears of 'new entrants' such as UK Mail, TNT and Deutsche Post.

There have been significant changes at Royal Mail since Leighton and chief executive Adam Crozier stepped into the breach. The shake-up has included the loss of 32,000 workers, scrapping of the second post, and a major organisational restructure of the marketing operation (PM January 10, 2003).

But such rethinks have not helped the postal operator to meet any of the 15 targets set by Postcomm. It was set the task of delivering 92.5 per cent of first-class letters on the day after they are posted, but reached 90.1 per cent, while a target of 98.5 per cent within three days for second-class mail fell shy at 97.8 per cent.

WWAV Rapp Collins Group chairman and chief executive Chris Gordon highlights fundamental problems that have yet to be addressed: "Leighton's somewhat aggressive management approach can make for an uneasy relationship with the workforce. Unless the union and management work together much better, they are going to find it difficult to make Royal Mail a customer-focused, flexible, efficient business.

"Leighton also needs to build a better relationship with Postcomm, rather than seeming to constantly blame it for getting in the way of him running a good business."

The management team inherited a company that had been run ineptly for years, stresses Gordon. "It's not helped by poor relations with unions, which will always hinder progress."

The imminent arrival of competition should force Royal Mail to address these issues. But Gordon comments: "The company seems bent on shooting itself in the foot.

"We have had reorganisation after reorganisation, when what is really needed is a period of consolidation and stability. Add to this the short-sighted proposal for size-based pricing, which threatens direct mail volumes and makes other media more attractive."

Postal watchdog Postwatch agrees that Royal Mail needs to start producing a competent service, especially after three years of failing to meet targets. Last year it was wide of the mark 12 times, and the previous year it missed four targets.

Postwatch chairman Peter Carr says: "This performance is part of a three-year decline in service, and cannot be waved away as the fault of unofficial industrial action in November. Profits must be invested to improve service results."

From June to September last year the delivery of first-class mail actually showed the best performance on record, with 93.1 per cent arriving the next day, ahead of target. Apologetic Crozier insists: "Prior to the strikes, many services were demonstrating a stronger level of performance than ever before.

"But I accept that our quality of service has not been good enough. Every letter is important and we are urgently working to improve our quality of service."

He continues: "Our priority is to address the issues that have caused service quality in some places to drop because of teething problems with our operational changes. Our postmen and women continue to do an outstanding job, and I am committed to improving performance and consistently meeting our regulatory targets."

Some industry experts question the ability of Royal Mail's recruits to fulfil the 'final mile' to letterboxes. Mailing house DPS Direct Mail's technical director David Laybourne explains: "Royal Mail is cutting delivery staff too deeply and placing too great a reliance on inexperienced, casual workers."

Channel 4's recent Dispatches documentary Third Class Post claimed thousands of letters go missing every week due to the 'incompetence and corruption' of postal workers.

Laybourne continues: "Getting mail to the millions of UK letterboxes is the problem, so service levels will be the same, or even worse, if the new entrants have teething problems.

"Casual workers often have poor geographical knowledge and struggle with address issues. In essence, they do not have the experience to rebuild the company."

Royal Mail needs to ask itself whether it is readopting bad management practice that hamstrung it in previous decades, and if it should treat staff who make a full-time commitment to the service more equitably.

Laybourne adds: "Would you get up at 4am for #12,000 a year? And would you resent a new boss receiving a hefty bonus within months of arriving?"

Despite political interference, Laybourne, for one, is happy that the company is grasping the nettle of modernisation. He concedes: "Overall, Royal Mail's direction is good. It understands its market and is prepared to make unpopular decisions, such as size-based pricing, to get its business model right."

Leighton remains the service's taskmaster: "The current reductions in quality, which are driven partially by the lack of a full recovery from the unofficial action, but largely by the massive modernisation changes required in the company, are not acceptable. But they are now beginning to improve, and are the key focus of everyone in the company."

In the past eight months, 17 divisions, including stamps, collectibles and international operations, have been rolled into a single letters division with a simple management structure.

The organisation has meanwhile demanded an apology from Channel 4, claiming it has evidence from clients that alleged theft by postal workers never occurred. And it has its first taste of profit in four years.

Royal Mail still faces major challenges, not least Postcomm's forthcoming investigation. But not even the demanding direct marketing industry expects a major transformation overnight.