The mail man cometh.

After you master the economic value added measurement and post annual profits of $1 billion, what's next? The CFO of the U.S. Postal Service shares his ideas.

The U.S. Postal Service ended FY 1997 on target with a record 92 percent of local first-class mail delivered overnight. Mail volume grew by 4.1 percent, the highest level in nearly a decade, while managers and employees drove down costs. We got lots of attention. So how did we go from being a long-time money-loser and the butt of countless jokes to posting profits in excess of $1 billion three years in a row?

The answer is that we redefined ourselves, thinking, planning and working more like a business than a government agency. And, like many businesses, we began measuring our performance using the economic value added (EVA) formula, proudly making economic strides that few mainstream businesses can match.

We chose EVA because of its public successes with companies like Coca Cola and Briggs and Stratton. Only a small percentage of private industry uses it, so we're in the forefront. It's an innovative approach for a government agency to take and has been key to our turnaround. We focus on a small number of goals, such as service and cost reductions, and pay enough in cash incentives to 80,000 supervisors and managers to motivate behavior change. Private enterprise is asking about our success in pioneering its use.

The Postal Service is legally required to achieve revenues at least equal to costs plus an allowance for contingencies. Many long-term government employees interpreted this to mean either break even or lose money. In fact, in one survey, a majority of our senior executives thought it was wrong to even earn a profit. So we had net losses in 17 years and profits in only six between 1971 and 1994. This starved the company of cash for capital improvements and led to higher percentage price increases than is the case today.

Recent profits enable us to replace and update buildings, vehicles and technologies, and pay down debt to reduce costs. Profits, all of which are re-invested, also have set a tone for our workers to be more business oriented. Our sales people and field managers are asking for information on which products are the most profitable. That's especially ironic because, until recently, the Postal Service didn't use the term "profit."

Instead, like a government bureaucracy, we said "contribution toward costs" and "surplus" or "deficit."

The $3.2 billion we earmarked for capital projects involving facilities, vehicles and technologies in 1997 is double the average we spent annually over the past decade. Our plan calls for $17.3 billion in projects from 1998 to 2002. For example, in the past two years, optical character readers have gone from scanning less than 5 percent of handwritten addresses to over 30 percent, improving accuracy and speeding delivery.

We're spending enough now on capital projects that our people see we're serious about aggressively improving our capabilities. Our goal is to make it easier for good employees to do a better job.

Private-sector competitors, like Federal Express and United Parcel Service, are complaining about us, so we know we're becoming aggressive and successful. Federal Express is suing us over advertising that stresses our strengths and lower prices. (You know you have a competitor's attention when he sues you.) And Wall Street analysts are following our performance with an eye toward our future, perhaps in selling bonds, and are asking us to speak to their organizations about our impact in the marketplace.

One of a kind

As an independent establishment of the executive branch of the federal government, the U.S. Postal Service is unique. We simultaneously are and are not a business: We sell products and services to the public and compete in the marketplace against private enterprise. Yet we're regulated by Congress and our rates must be approved by the Postal Rate Commission, so we operate under particular constraints. We don't use tax dollars and, since 1983, have not received one penny in federal subsidies. Within our legal operating constraints, though, we're shaking things up.

Steadier rates, improved mail delivery, controlled expenses, a focus on customer value and an emphasis on the bottom line are clear indicators of our progress. While maintaining our Congressional mandate for universal mail delivery, we're becoming more flexible and competitive.

One way we're doing that is by focusing on overnight delivery in metropolitan areas; that service is hitting records. On-time delivery of first-class mail scheduled for overnight (about half of all first-class mail) continues to rise, hitting 92 percent recently (compared with 86 percent in 1995), as I mentioned. We are continuing to raise that bar and to improve delivery for longer-distance first-class mail scheduled for delivery two to three days after mailing. While one might think it would cost more to deliver mail faster, it's cheaper to deliver it right than to redirect it. And bad service results in lost business.

In addition, service in post offices is improving. Retail employees are better equipped to satisfy customer needs. We're fixing lobbies, adding explanatory signs, expanding self-service availability and introducing wide varieties of self-adhesive stamps. I attribute the steady improvement to the fact that we're paying bonuses based on financial results, safety, training and overnight mail delivery measurements. This is a major culture change.

Private practices

When it comes to making our money go further, we have lots of plans. For instance, our price increases are smaller, less volatile and steadier than before. We're keeping them below the rate of inflation, eliminating large rate shock and getting away from the pattern of a huge rate boost every three years (theoretically followed by a cycle of profit the first year, breakeven the second and loss the third). We're moving toward small, regular, perhaps eventually annual rate boosts that would have minimal customer impact. That's how most private-sector businesses redo pricing. Our small price increase proposal of July 1997, approved to take effect shortly (a penny for first-class stamps), reflects this new attitude. This is the smallest percentage increase we've ever asked for and it's below the rate of inflation. And we're using our profits to help minimize future price changes as a way to keep customers.

We instituted cash-management techniques and freed over $5 billion trapped in different places by using sophisticated cash flow forecasting and good detective work. We replaced unneeded and costly cash on hand with lines of credit from the U.S. Treasury, which serves as our primary banker, obtaining two new short-term credit lines totaling $3.3 billion. This allows ready access to funds rather than reliance on longer-term debt for short-term needs. Now we operate some days with near zero cash. Since Oct. 1, 1997, we averaged $10 million in cash in our system, down from over $5 billion in 1992. It's unusual for a government entity to obtain Treasury lines of credit, but we were aided by the understanding of some senior Treasury officials who had come from the private sector.

We also support Congressional legislation that would ease some of our legal limitations - including allowing us to go to private credit markets for borrowing, to give us more flexibility and the type of financing vehicles we need. We believe borrowing, banking and investing could be more efficient outside Treasury and are paving the way by working with Standard & Poor's to establish our bond rating. Borrowing in the private markets also would give us the constituency for good long-term strategic management. J.P. Morgan is advising us on new ventures, financing and the sale or development of surplus real estate.

And we're cutting the total growth rate of our costs to do business to below 5 percent a year for the sixth straight year (3.4 percent in 1997). This is the most difficult part of our culture to change because postal managers are used to obtaining added spending authority. Fortunately, cash bonuses are building a strong constituency to fight spending increases. Other cost-reduction means include moderate labor contracts, more automation, a strong program to lessen overtime and sick leave and training in basic decision-making. In one innovative, money-saving program, every plant manager now has a credit card and can spend up to $10,000 without having to wait for approvals. The results are improved efficiency, money savings and better management.

The Postal Service's workers' compensation expenses also fell in 1997 by a half-billion dollars from 1996 as a result of implementing a comprehensive effort of reformed practices and increased management oversight, including more funding and staffing to investigate claims. We formed a task force to return to work all employees who are able to return, and to end compensation for those who are able to work but refuse valid job offers.

We didn't ignore our own finance department in cutting costs, either. In the finance shop, we dramatically reduced expenses by downsizing about 3,200 employees, doing the same amount of work or more with fewer people.

Finally, we reduced our debt outstanding by a whopping 40 percent - $4 billion - in four years. Strong net income and improved money management have allowed us to lower what we owe from $9.9 billion in 1992 to $5.9 billion at the end of fiscal 1997.

Branching out

We're also finding innovative ways to expand our core businesses of first-class, advertising and priority mail, and to enter new product lines. The latter two are high-growth areas and, with first-class mail, our big moneymakers. One new initiative is electronic money transfers. We're already in the paper money-order business, with $26 billion sold a year. Our international mail business has the potential to expand the reach of U.S. catalog companies overseas, thus adding to our revenues. We also aim to recoup business lost in the past (since last year's UPS strike, we've recaptured some parcel post business) and to slow mail diversion to electronic communication and to our competitors.

To that end, we've made it easier to do business with us. We're experimenting with and will expand post office expresses (small postal facilities in retail stores) that give customers more convenient hours and locations. We've gone from taking no credit or debit cards to being the largest receiver of such transactions in the country. We're also adding point-of-service terminals (new electronic cash registers) that will speed customer service and give us a real-time handle on what we're selling and where.

Like many firms, we're considering outsourcing some work, realizing that some jobs can be done better and cheaper by private contractors. We recently awarded a contract to Emery Worldwide to develop a new network for two-day delivery of priority mail among 10 East Coast cities, a turnkey operation in which Emery is providing transportation, labor, facilities and other enhancements we couldn't provide ourselves. The contractor saves us money on labor costs and has the speed and technical capability to improve service. We may expand this program nationwide.

But labor continues to be our single largest expense, nearly 80 percent of our total dollars spent. Salaries are good but we lose efficiency in disputes over work rules and other grievances. The legally required arbitration process for labor disputes is complex, expensive and time-consuming; we're hopeful it can be improved. Through mediation, more training for supervisors and an appeal to focus on beating our competition, our people will know that the long-term future of the Postal Service depends on it being a viable business entity. Part of our job in finance is to provide the numbers to promote that policy.

Culture change

In redefining our business and focusing on customer needs, we started changing the mindset of the Postal Service from the top down, saying, "Yes, we can make a profit." That might seem simple and obvious at a private company, but at a quasi-governmental agency with a history of acting like a government bureaucracy, such action was necessary. We still need to reinforce the idea that it's okay to earn a profit.

And we must change our culture further to help our employees be even more productive, mediating the conflict between the government mindset of spending every penny and the business view of spending as prudently as possible. We want to be able to focus, not on government budgets and spending, but on significant economic improvements and breakthrough performances.

We're just starting to operate like a business, but it's a meaningful start. We can produce value for the American people - who are, after all, our owners - by being more efficient and business-like by improving service and keeping prices down.

Mr. Riley is CFO and senior vice president of the U.S. Postal Service, based in Washington, D.C. Les Gapay, a Washington, D.C.-based writer, assisted with this article.