Postal productivity targets need to be more aggressive

The following is a perspective by PostCom Vice President Kate Muth for the PostCom Bulletin. The views expressed are solely the author’s. PostCom welcomes alternative views from responsible parties.

Most industry eyes were on the Postal Service’s bottom line last week when it released its Integrated Financial Plan for Fiscal Year 2008. Industry scoured the plan and listened to commentary about it for any hint regarding the next rate increase. This is the first financial and operating plan designed to accommodate the way the Postal Service will operate under the Postal Accountability and Enhancement Act (PAEA).

Observers were anxious to see how much volume and revenue growth the Postal Service projects in FY 2008 and where it sees its costs are headed. PostCom members are eager to see a comprehensive revenue-generation plan from the Postal Service. Many would also like to see the USPS’ productivity growth increase significantly. It’s true that the Postal Service can’t rely only on cost-cutting to achieve prosperity, but it can boost its productivity target.

The Postal Service has set as its total factor productivity (TFP) target for FY 2008 a growth of 1 percent. This would mark the ninth straight year of productivity growth for the organization. In its FY 2007 integrated financial plan, released last year at this time, the Postal Service set as its total factor productivity goal an increase of only 0.6 pct. Its final number for FY 2007 should surpass that target, which is a good thing. But the target needs to be much higher.

The Postal Service’s performance of eight straight years of productivity growth is commendable. Indeed, given its history, eight straight years of growth is remarkable. The organization had struggled over the years to sustain productivity growth, seeing its TFP numbers jump one year, only to decline the next. From 2000 to 2006, the Postal Service had cumulative growth in TFP of 10.4 percent, an amount that surpassed the cumulative growth for the 30 years spanning 1970 to 1999 (cumulative growth of 9.3 percent).

But the challenge is greater as the Postal Service moves into the era of price-cap control on its prices. With its latitude to raise rates on its market-dominant products capped at inflation and volume increases remaining flat, the Postal Service will need to increase its productivity even more than it has in the past few years. It will have to set private-sector targets.

Postal Service Chief Financial Officer Glen Walker acknowledged that the Postal Service would have to increase its productivity as the organization moves under price-cap regulation. In a conversation with trade reporters after the September board meeting, Walker said TFP would have to move higher than current targets and certainly could not go down in a year. The Postal Service’s continued focus on work hours will be key to achieving productivity growth, he said.

A recent paper by Michael Schuyler from the Institute for Research on the Economics of Taxation (IRET) shows that the Postal Service’s TFP growth has been fairly similar to the private sector’s multi-factor productivity for the past six years. From 2000 to 2006, TFP grew on average 1.5 percent compared to a growth of 1.6 percent in multi-factor productivity for the private sector. But for the period 1975 to 2006, the Postal Service’s average productivity growth has been half of the private sector’s increase. See the full paper at http://iret.org/pub/ADVS-229.PDF.

Productivity is not a new topic in the postal world. It was a hot topic in the mid 1990s, when the Postal Service saw sizable decreases in TFP. But with the solid improvement over the past eight years, it has fallen off the radar screen a bit. Still, some in private industry have been quietly urging the Postal Service to step up its efforts and raise its goals.

The Postal Service faces competition and a price cap. It needs strong productivity to thwart both. I doubt anyone is suggesting that the Postal Service should set 5 percent as a TFP target in 2008. But 1 percent growth year-over-year won’t be enough to keep the Postal Service under a price cap. Unless, of course, it has a wicked revenue-generation plan up its sleeve. Industry would love to see that as well.