A whole new package: Royal Mail Interview

Consider this. Your company has had a legal monopoly for 350 years. Your core products are regarded as public services, so the government retains rights to interfere in business decisions. Neither your managers nor your workforce hasever seen a competitor. Suddenly, the government abolishes the monopoly, handing the future of the industry to an untried regulator. The regulator starts licensing competitors, even before establishing a clear regulatory framework.

Meanwhile, you are left with a public sector operating culture, a strike-prone workforce and a legal duty to maintain expensive public services even as competitors start eating into your more profitable markets. How do you respond?

This is the problem faced by Royal Mail, the postal organisation of Consignia, formerly the government's mail and parcels arm and now a state-owned plc delivering letters and parcels and operating the nationwide network of post office counters.

"No one really knows what the outcome will be but it is possible that we get into a cycle of losing profitable markets and become financially weakened," says Gillian Wilmot, Royal Mail's managing director of business services and marketing.

Although the postal market has been hurt by electronic mail, it remains a huge business – Royal Mail employs 80,000 postal workers to deliver 80m items a day to 27m UK addresses. Tens of thousands more work behind the scenes.

The market is expanding by 2 to 3 per cent a year but entry costs are so low – in part because the law guarantees competitors access to Consignia's infrastructure – that Royal Mail fears up to 30 per cent of its market could be at risk.

That is, of course, the whole point of last year's Postal Services Act, which took effect in March as an alternative to privatisation, a politically unpopular course rejected by both Conservative and Labour ministers.

The new regime is intended to improve Royal Mail's often woeful services by means of a mixture of tight operating targets set by the regulator and the introduction of substantial private sector competition.

But from Consignia's point of view, the new regime raises enormous management questions, especially as the regulator has rejected calls to phase in competition in favour of rapidly licensing competitors in discrete geographical areas or business sectors.

This, says Ms Wilmot, is classic "cream skimming" of profitable markets, which could threaten the company's ability to meet its legal duty to deliver to all UK addresses at a uniform price – the "universal service obligation".

If competition steadily eats into Royal Mail's profitable markets while it remains responsible for delivering the USO "there will come a point where the numbers won't add up", says Ms Wilmot. "It is not a question of if, it is a question of when."

What to do? First, Consignia is moving quickly to slash 15 per cent from its cost base by 2003.

Second, it is rapidly changing the balance of its senior management team by bringing in people with outside experience. Ms Wilmot, for instance, came from Littlewoods, where she was retail strategy director. Other senior appointments include Marisa Cassoni, group finance director, formerly at Britannic Assurance; Paul Bateson, managing director for logistics and contract distribution, formerly operations director of TNT Logistics; and Basil Larkins, managing director of network banking, previously an Abbey National executive.

About a third of managers at managing director level and above are now from the private sector and the aim is to increase the proportion of middle managers with private sector experience to about 10 per cent as a "catalyst for change", says Ms Wilmot.

"We now have quite a nice balance of people who can bring skills and experience from the private sector but also people who understand the nuances of the business, which I can't possibly hope to do in so short a time.

"The new people bring experience that was not here before: for example, experience of massive change programmes. The majority of people have worked here in a business that has been relatively unchanged in structure, market and dynamics.

"There are some very bright and capable people who when you explain these implications get it instantly. But if they have not lived through it they will not understand without someone talking them through it."

Third, says Ms Wilmot, the public sector management culture has to change. The decision making process is being streamlined to give executives more project-management responsibility, abandoning the Post Office consensus-seeking style.

"Where things would have taken us three years before it is now taking us six months and that is very important because we have to be able to move very much more quickly in the new environment," she says.

Fourth, Consignia has accepted that it has to end a running battle with its workforce over a deal on new working practices, which cost tens of thousands of working days last year and severely damaged its quality of service.

Talks with union leaders are said to be going well and the number of local disputes has plummeted thanks to two one-month strike-free agreements since the beginning of August.

Fifth, the company must improve its product range. The aim, says Ms Wilmot, is to reduce the USO to the bare legal minimum by scrapping the second post and ending the commitment to early morning deliveries. That would require regulatory approval. But it would also make the workforce more flexible, saving money and opening opportunities for profitable premium services such as guaranteed early morning deliveries for businesses.

Significant new products are planned, including several aimed at business users. But the regulator is still consulting on the long-term framework for competition and will not rule until the spring on crucial issues such as access charges for competitors using Consignia's infrastructure.

This is probably the biggest issue of all, says Ms Wilmot, because operational decisions on new products must be made now so they can be launched before competition hots up – but the regulator is giving "no special favours" to the company in terms of how the new system will work.

That makes managing change very difficult, says Ms Wilmot. But decisions must be made, and quickly. "The alternative is that we become a much smaller basic service and private sector companies provide all the added-value services that the market requires. That would be a very sad scenario and we would have to employ a lot fewer people. This is not the scenario we want."

Copyright Financial Times Group