Comment on Consignia & Postcomm from The Observer
IT’S A VERY British tragedy. A combination of conservative ideology and near complete ignorance of how organisations are changed is set to lay the universal British postal service low. We are to enter a brave new world in which the rich, businesses and city dwellers will enjoy a first-class postal service and the rest of the country will be consigned to second- and third-class status.
Regulator Postcomm’s conviction is that Consignia (the former Post Office) is so organisationally dysfunctional that allowing competitors to attack the profitable part of its postal business within eight weeks will cure it of its ills. Letter delivery operations lost Consignia pounds 317 million last year; few plan to enter this unprofitable market. But those losses were more than compensated for by the profits made on the 30 per cent of its turnover based on bulk mail and parcels- for-business customers. Postcomm’s view is that if those profits are threatened and business lost immediately, with the rest threatened in two years’ time, Consignia will transform its overall efficiency. Moreover, nobody should be worried that this will endanger our universal postal service; it will regulate to ensure that that does not happen.
You need to reflect on this logic for only a second to realise how disconnected from any organisational reality it is. Private-sector competition is seen as alchemic. In this universe, the private sector does not cherry-pick, and the cross-subsidy between operations inherent in any universal public service is irrelevant to the success or failure of the organisation delivering the service. There are no economies of scale and nothing inherently stupid in imagining that two networks are more efficient than one. By this logic, we should have two national road systems side by side to provide competition.
THIS IS NOT TO deny that Consignia has profound organisational problems. As Lord Sawyer observed in his report on six mail distribution centres last summer, the unions’ first reaction to any slight is to come out on strike almost immediately. And managers quickly resort to bullying and throwing the rulebook at their staff, hardly the high-trust atmosphere of an effective organisation. It sounds like a workplace hell, although since the Sawyer report there seems to have been an improvement.
In fact, Consignia does not perform that badly compared to other European postal services. It is as at the less expensive end of the spectrum (only Ireland and Spain have cheaper first-class letters), and has kept prices down over the last five years. Next-day delivery rates for first-class delivery have fallen, but Britain gets its universal postal service on the cheap and, on top, pounds 93 million was paid to the Treasury last year as a special dividend.
The business model underpinning an universal service is quite simple – cross-subsidy is integral to its overall success. The idea that exposing individual parts to competition – inevitably the obviously profitable – will raise the efficiency of the whole is thus ludicrous. As Consignia loses market share to entrants who do not have to bear the fixed costs of providing an universal service and who can thus price accordingly (even while Consignia is compelled to carry their mail at a fixed price), so its revenues will shrink. But it will still have to support the same fixed infrastructure of mail distribution centres, delivery vans and the rest.
Its only options will be to cut its fixed- cost base, so weakening the service, or raise prices. Some of the gap can be met by redundancies and increased operational efficiencies, but any businessmen facing this conundrum will know that Consignia will have to cut its bone and marrow as well as the fat to survive. What a brilliant stroke by Postcomm.
The question that should preoccupy the Government and the regulator is not to wreck the business model that underpins universal provision, but how to preserve it while radically improving
