Year: 2007

Good afternoon, Mr. Chairman and members of the Subcommittee. I am pleased to be with you this afternoon to discuss one of the most difficult challenges faced by the Postal Service today – the need to balance rising costs within a rate structure defined by a price cap. By law, we are required to keep price adjustments at or below the rate of inflation for market-dominant products, over 90 percent of our revenue base.

In an ideal world, this would mean that our costs would not exceed the rate of inflation. Unfortunately, our costs are not governed by this same standard and many have been rising faster than the consumer price index.

Work-hour costs for our career employees have been growing at a rate above inflation. At the same time, First-Class Mail volume, which represents 50 percent of our revenue base, is declining. The number of addresses we serve is increasing by almost two million new households and businesses each year. This means that, on average – even with the recent rate change – we are delivering fewer pieces of mail to each address and average revenue per delivery is decreasing.

This is not a formula for long-term success. The challenge is to close the gap between prices and costs while maintaining quality service. The question is, “How do you do that?” As I see it, management can proceed along any of three paths.

First, we can continue to operate as we’ve been operating for more than three decades. After all, that brought us a level of success that no one could have imagined when the modern Postal Service was created in 1970. Service rose to record heights. We achieved our statutory “break even” mandate. And we reached unprecedented levels of efficiency.

The problem with this approach is that the ground rules have changed. To proceed along the path of business-as-usual would be inconsistent with our obligations under the Postal Accountability and Enhancement Act of 2006. With the statutory rate cap imposed by the Act, we no longer have the option of adjusting rates to balance costs, and we experiencing competition in all product categories, including First-Class Mail. We have to do more, much more, if we are to keep our costs in check, with overall growth no higher than the rate of inflation. Prudent exercise of our fiduciary responsibility demands that we intensify our focus on the business imperative of driving costs out the system. We cannot afford to do any less.

A second path to closing the gap between rates and costs would be the absolute expansion of cost-reduction strategies such as the outsourcing of work now performed by Postal Service employees – whenever and wherever possible. This would certainly be effective when viewed from a pure cost-management perspective. But business success is not solely a factor of reducing costs. It is also a reflection of the entire organization working cooperatively to meet the needs of its customers. Proceeding along this path, while potentially reducing significant direct costs, could come with the intangible – but just as significant – costs, of undermining this primary goal.

That is why I prefer a third path – working directly with our unions to confront the critical issues we are facing as an organization, such as improving service to meet the changing needs of our customers in the marketplace, as well as the need to increase revenue and reduce costs. By doing this, we can develop the solutions that can help us overcome them.

The tentative collective-bargaining agreement we reached with the National Association of Letter Carriers last week does this. It keeps the most important focus where it must be – on our customers – by helping us to improve service and operational efficiency. It provides our employees with a fair wage. And it commits both parties to growing the business. This is more important than ever, as we operate in a competitive environment in which customers vote with their feet, no longer bound by a monopoly that is meaningle