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USPS Outsourcing Projects Fail to Deliver

(This article first appeared in the July/August 2003 issue of The American Postal Worker magazine.)

President Bush’s postal commission heard a lot about the virtues of “work-sharing” from a parade of mailing industry executives it invited to testify at its public hearings:

“There is no reason that the private sector should not collect and process mail from existing Postal Service collection boxes and process it.”

– Sudhir Aggarwal
National Association of Presort Mailers

The commission should recommend “removing low-cost postal transactions from the retail lobby.”

–Ken McBride
President, Stamps.com

“Standing in the way” of even more outsourcing, are the USPS “labor contracts in place that we must fully realize must be dealt with.”

– John Campanelli
President, RR Donnelley Logistics

The mailers failed to tell the commission, however, that several outsourcing arrangements that replaced qualified postal employees with low-wage workers cost the Postal Service billions of dollars. In Chicago, on April 29, APWU President William Burrus set the record straight: Invited to testify about the strengths and weaknesses of the current collective bargaining process, he took a few moments to talk about work-sharing.

“Time after time, when postal operations have been contracted to the private sector, cost increases and inefficiency have been the result. When the work is returned, costs decrease and efficiency improves,” Burrus said. He then provided the following examples of failed work-sharing projects, including those examined below.

Priority Mail Centers

After conducting a three-year study on creating a separate, outsourced network to improve delivery times, the Postal Service reached an agreement with Emery Worldwide in 1997 to process and transport Priority Mail.

Four years later, the Postal Service’s Inspector General’s office audited the contract and concluded that “Priority Mail processed through the network cost 23 percent more than Priority Mail processed by the Postal Service without a network,” and that Emery “was not meeting overall delivery goals.”

Furthermore, the auditors found that network subcontractors had abandoned Priority Mail in Seattle, rather than transport it to Alaska as required in the contract. The audit also said that the contractor did not perform security screenings as required in the contract. (IG reports DA-AR-99-001 and MK-AR-01-003).

In November 2000, the Postal Service and Emery agreed to an early end to the contract after the private contractor tried to charge 40 percent more than the USPS expected to pay. The work was brought back in-house the following January.

Ending the contract cost the Postal Service $66 million in termination fees and another $235 million as settlement for Emery’s claims of underpayments.

MTESCs

Another controversial private-sector endeavor began in 1998, when the Postal Service transferred some Clerk, Maintenance, and Mail Handler Craft work to a centrally managed, contractor-operated network of Mail Transport Equipment Service Centers. These centers supply processing facilities with mailbags, trays, sleeves, pallets, hampers, carts, and large rolling containers. By January 2000, 22 outsourced MTESCs were in operation.

From the outset, the project was troubled by allegations of poor performance and excessive costs. In its May 2001 audit of the project, the Inspector General’s office reported that the new network was plagued with difficulties such as “returning usable equipment to service centers for processing and reissue; hoarding equipment at user facilities because the network was not reliable; and trucks moving empty because the network was sub-optimized.”

Consequently, “the network was not delivering the right equipment at the right place at the right time, customers were still not satisfied, employees felt frustrated, and mail operations were still not optimized.” Finally, the Inspector General concluded that 10-year cost projections for the system exceeded the in-house operation it replaced “by more than $1.1 billion” (IG Report TR-AR-01-03).

The same report repeated findings from earlier audits showing that “equipment was invoiced as processed when work was not performed …containers were reported as repaired when no repairs were made … [and] serviceable equipment was improperly condemned and discarded.”

The Inspector General also found that the Postal Service “may pay up to $53 million more for services obtained under noncompetitive contracts” and that “the Postal Service paid a contractor $1.9 million for work not properly authorized, and is at risk of being charged an additional $11.2 million for other unauthorized work.”

Trucking Contracts

An audit revealed that the cost of keeping preventive maintenance duties in-house was vastly over-estimated.

In 2000, the Postal Service entered into a six-year contract with Transportation International Pool to lease 4,475 trailers to replace part of the USPS’ aging fleet of 17,000. The lease included a service agreement for preventive maintenance duties, rather than continuing to have that work performed in-house by bargaining unit employees.

In a questionable departure from normal contracting procedures, the Postal Service did not submit a Decision Analysis Report to the Board of Governors for approval, later claiming that the lease was not a “lease” but a service contract.

In March 2002, the USPS Inspector General’s office released a scathing review of the contract (IG Report TDAR- 02-002). The auditors found that in their outsourcing proposal, USPS officials “used an inflation rate of 22 percent for maintenance costs, instead of the Postal Service established rate of 2.8 percent” for labor costs. As a result, the cost of maintaining the trailers in-house was wildly overstated.

The decision to lease rather than purchase the trailers “will cost the Postal Service an additional $85 million over a 12-year period,” the Inspector General reported.

Worse still, APWU employees were not given a fair opportunity to show they could perform the maintenance work better and at a lower cost.

Below-Cost Postage Discounts

Whatever the total waste, the amount of money that the Postal Service has lost in failed attempts to outsource postal work is dwarfed by the amount it squanders by giving below-cost postage discounts to the mailing industry.

The APWU has demonstrated to the Postal Service’s Board of Governors, to the Postal Rate Commission, and to Congress, that these discounts exceed the costs that the Postal Service avoids by processing pre-sorted mail.

“The single most important step you could take to stabilize the Postal Service’s revenue and to protect universal service,” President Burrus told the commissioners in Chicago, “would be to prohibit work-sharing discounts that exceed costs avoided.”

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