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Is there a future for the postman?

Tough times ahead for national postal operators

But there are options, both in core activities and new business

The first goal must be performance

The postman and the local post office have been part of the landscape for more than a century. Even in the world s remotest areas, national postal operators have guaranteed - in return for an almost total monopoly - an affordable service for all.

But in the 1990s, the service on which Western economies in particular have grown to depend has become embattled, and threatens to turn into a liability. Complaints are rife - the post is variously held to be "unfriendly," slow, unreliable, and costly - and technology is eroding the market. Electronic mail has slowed the steady rise in business mail over the years, and the Internet will take yet more of this bread-and-butter business. To make matters worse, express operators and low-cost distribution networks have begun to capture a share of unprotected business, while regulators may end the post's monopoly in other areas. Hungry new competitors are baying at the door.

Some postal operators have responded pragmatically. They understand that their business is bound to shrink, and are therefore focusing on core activities such as business mail or consumer parcel deliveries. They have started to reduce costs, and are lobbying to raise public concern about the possible loss of the local postman and post office. But they have not stopped the erosion. Bit by bit, they are starting to see their most attractive business - such as "dense-delivery" areas or business parcels - poached by cost-efficient and customer-driven competitors. And as volumes have fallen, fixed costs per shipment have gone up, making it even harder for national operators to provide a low-cost service, and easier for competitors to win still more of their disgruntled customers.

If the erosion should continue to the point where national operators are left with nothing but the business no one else wants, governments may have no alternative but to step in. These operators would then have to depend on direct subsidies to support structurally unprofitable customers, such as outlying villages, and products, such as telegrams. In ten years' time, with their best business gone and their unique advantages of scale in delivery density, sorting automation, and other areas lost, such operators will be too weak to make a comeback. They will have disappeared from the high street and their workforces will have been devastated.

But although electronic mail, more demanding customers, and further deregulation will undoubtedly continue to heap pressure on postal operators, such a fate can be averted. First, however, operators' role and market will have to change.

A tougher world for postal operators

Postal operators are threatened by three seemingly irreversible developments:

Electronic alternatives

If electronic messaging keeps up its current momentum, the financial and business mail that represents nearly half of postal revenues today (Exhibit 1) will dwindle to almost nothing. The US Postal Service, for example, has seen a 33 percent drop in the volume of business-to-business mail in five years as a result of the wider use of faxes, e-mail, and electronic data interchange (EDI).
Exhibit 1

Postal market composition

              Customer          Postal            Typical
              need              services          proportion
                                                  of revenue

Business      Financial and     Financial mail    45%
              business          Business mail
              communications    Express

              Advertising       Unaddressed       30%
                                Direct mail

              Distribution of   Parcels           10%
              goods             Express

Individuals   Communications    Letterbox mail    15%
              to businesses
              and individuals

Corporations are not alone in using electronic mail. More than one-third of US households have a PC, while the number of people using the Internet worldwide is expected to grow from 45 million in 1995 to 200 million by 2000. Before long, sizable numbers of PC households will start using their computers to communicate. Indeed, it is expected that more than 30 percent of Americans and 15 to 25 percent of Europeans will pay discretionary bills by electronic means within ten years.

Electronic mail's share of communications will continue to rise with the standardization of the encryption algorithms that ensure the privacy of e-mail and EDI (allaying worries about confidentiality), and with the advance of digital techniques that allow the instant transmission of enhanced and personalized graphics. It is even possible that, despite the hunger for more and more communication, the total amount of paper mail will fall as electronic transmission takes over.

More demanding customers

The cost and quality of postal services have a direct bearing on the competitiveness of businesses that have to shift large volumes of mail and parcels. Not surprisingly, these customers are demanding cheaper and better services.

Where speed and reliability are vital, many businesses in regulated markets are turning to couriers that can handle their shipments at a competitive price. Couriers offering good service for a relatively low price already exist in Italy, Spain, and Greece, and carry mail that was once channeled through the post office. Where low costs are the priority, large mailers are asking postal operators for discounts that often exceed the operational savings that can be achieved by serving big customers. If the operators fail to oblige, they only encourage customers to mail fewer letters. Banks, for example, might send out statements less frequently; develop substitutes, such as electronic home banking; or turn to the post office's competitors.

Some companies have resorted to setting up their own in-house operators to provide a service tailored to their needs. In France, Yves Rocher responded to La Poste's repeated strikes by setting up its own mail-order delivery service, Distrihome. In Germany, seven leading mail-order companies and 19 magazine publishers joined forces to form AZD (Alternativer Zustelldienste) as a cheaper alternative to Deutsche Post.

Other companies will increasingly expect postal and delivery services that integrate seamlessly into their own operations, perhaps using EDI, and will wish to be able to outsource more of their logistics and communications. Private competitors are rising to the challenge, providing tracking systems for parcel and express shipments, for example, and sometimes sending customers facsimiles of recipients' signatures. They also offer closed packaging systems and will collect at the customer's door instead of from the post office.

Clearly, customers are no longer going to be satisfied with a service that merely gets the goods from A to B. Postal operators will have to offer value-added services as well, such as document handling, company mailroom management, spare-parts storage, and even assembly to order. And the more closely a logistics or communications provider works with its customers, the more important it will be to have international presence. Customers that operate around the world will require cross-border solutions with uniform service levels and product ranges throughout a region or continent.


The intensity of competition among postal services will depend largely on the extent of deregulation. Governments generally are supporting state monopolies less, and the postal monopoly is no exception. They realize that a monopoly limits a postal operator's incentive to be efficient, and that competition will be distorted as long as an operator can subsidize its deregulated business segments with profits earned in protected segments.

Governments have also begun to acknowledge the correlation between business success and the degree of independence a postal operator enjoys from regulatory and political bodies, and from civil service obligations such as lifetime employment guarantees and inflated retirement benefits. In Europe, publicly traded companies such as PTT Post in the Netherlands achieve the highest return on sales among postal operators, while state-owned post offices such as those in Spain, Austria, and Greece have been unprofitable for years [ILLUSTRATION FOR EXHIBIT 2 OMITTED].

As a result, some countries, including Sweden and Finland, have abolished their postal monopolies, and others want to confine the monopoly to fewer services. The European Union places a weight limit of 350g on letters that the post office alone may handle. So far, only Denmark (which has a limit of 250g) and Germany (which has a limit of 200g on regular mail and 50g on addressed mass mailings) have crossed this threshold. Big changes are thus still to come.

On top of this, and in line with deregulation in telecommunications, European and national regulators are thinking about opening up downstream access to postal networks. Competitors would be allowed to inject letters into the "last mile" of a regional distribution network for a charge of "cost plus" (about half of today's production cost), although in order to maintain the scale economics of distribution, postal operators might preserve the exclusive right to deliver mail. Such arrangements would enable new competitors to enter the market without having to make huge investments or suffer delivery-cost disadvantages, but still allow for differentiated tariff structures and value-added services such as storage or print and mail (whereby a company takes on the printing as well as the distribution of, say, a mailshot). Competitors would themselves perform other network activities such as collection, sorting, and transportation, possibly at lower cost.

But while deregulation will usher in better and cheaper services, it could also be accompanied by deteriorating service in remote areas, financial trouble for incumbent operators, and job losses. Lower personnel costs and more flexible working hours mean that private operators in some deregulated segments enjoy cost advantages of 30 to 40 percent, posing a serious threat to the existing service.

There is also the matter of public opinion. Post office closures are unpopular - so much so that when news spread in France that the government intended to rationalize postal services, it was forced to promise that it would not close a single post office.

Governments are therefore likely to want to proceed carefully. But whatever the pace of deregulation (and it will vary by country), competitors are waiting to snap up business.

New business roles for today's postal operators

The net result of these developments is that up to 90 percent of an incumbent postal operator's business is in danger. Financial and business communications will be simultaneously the victim of electronic alternatives and the target of competitors attracted by the large volumes that go from one sender to many recipients. Advertising and other mass mailings will be targeted by low-cost and specialist operators (although here too, volumes will eventually be hit by electronic alternatives). And goods distribution business will be vulnerable to private operators that have highly effective tailored networks and can offer value-added logistics services. The only area in which incumbents will retain the advantage is the "many-to-many" segment, where the need to make a large number of pick-ups per kilometer and to run an extensive network favor the monopoly holder (Exhibit 3).

Postal operators can respond to these challenges in two ways: by focusing on core traditional activities, or diversifying into new but related areas.


Although the two roles may seem different, postal operators could in fact consider both at the same time.

Traditional business

Whatever the extent of market and regulatory changes, there will always be demand for cost-effective and reliable letter delivery, while parcel delivery, boosted by electronic shopping trends, is certain to be a growth market. Postal operators' first task will thus be to achieve excellence in these two areas. Their survival and ability to develop a platform for expansion depend on it.

Incumbent operators may remain under an obligation to guarantee house-to-house service. If so, they will have to redesign the business to allow them to carry smaller volumes and improve service. In addition, they may, depending on their current strengths, decide to specialize by charging others to use parts of their business system. This might mean letting others use their transportation networks, or permitting their post office counters to sell financial services such as insurance.

New business

There are three ways of entering new business areas:

Horizontal diversification. Postal operators could diversify by handling heavier weights; providing express delivery and courier services; or offering value-added services such as check payment, closed packaging, and invoice collection. Several European postal operators have already clubbed together to form EPG, a group that defines international standards in the parcel business. Others have customized part of their business system to expand services such as night-time deliveries.

Vertical diversification. This would involve closer customer ties and hence the decommoditization of the letter and parcel business. Examples of vertical diversification include:

Hybrid print and mail services. A mailer sends a text to the post office by e-mail or disk, and the post office takes care of list management, local printing, and local delivery - saving time and the cost of transport and physical sorting. In Finland, 30 percent of "one-to-many" letters are delivered in this way.

Direct marketing services. The postal operator provides up-to-date addresses, response management, and consulting services. As well as forging closer links with customers, these services enhance direct marketing's competitiveness with other advertising media.

Value-added logistics services. Markets for value-added logistics services are growing by an average of 15 to 25 percent a year thanks to customers' wish to focus on their core business and transportation companies' desire to form deeper ties with customers. At this stage, most traditional postal operators are unable to offer such services. However, private operators are not much further ahead in the game, so this remains an attractive opportunity.

Regional expansion. Such a move would leverage a postal operator's skills, assets, and customer relationships beyond its political borders, affording advantages for operator and customers alike. A business infrastructure based on economic and geographic rather than political areas would give an operator economies of scale in sorting, line haul, and delivery, for example. For their part, customers could satisfy their international requirements by dealing with fewer suppliers and partners. They would also benefit from receiving the same services and quality wherever they do business.

Managing the transition

Postal operators' immediate problem, however, is less what role they should play than how they should manage the transition. If they wait to see which way things develop, they are likely to find their market share declining ever more rapidly. As in all fixed-cost, network-based businesses, increasing or at least maintaining volume is crucial to performance and costs. Once volumes start to fall, operators will find it difficult to cover fixed costs and impossible to fund the innovation and investments needed to turn the business around. At that point, service levels and volumes will deteriorate still further in a vicious circle.

Making the transition from public service to high-performing organization is a question of balance. The aim of a national postal operator should be to move into a "stable corridor" where its competitiveness keeps pace with that of newcomers [ILLUSTRATION FOR EXHIBIT 4 OMITTED]. Failure to improve performance and organizational effectiveness quickly enough will set off a downward spiral of declining volumes and rising unit costs. Racing ahead, on the other hand, could end up hastening deregulation, which might in turn pile competitive pressure on the incumbent before it is ready for it.


A postal operator should take three preparatory steps before it embarks on significant change.

First, it must understand the competitive situation. National post offices have traditionally been isolated from market pressures, but in future they will need to know what potential competitors are doing, what their cost structures are, what products they are offering and at what price, which customer segments they are targeting and how successfully, and key players' market shares. Benchmarking performance and costs against other postal operators and independent players worldwide is a good way for a national operator to start finding out whether it is behind or ahead of the game, and to assess how stable the "stable corridor" really is. This step is crucial to determining the size of the gap to be filled and creating a sense of urgency.

Second, to increase their freedom to act and instill a sense of purpose in the organization, postal operators should establish their independence. As long as the state provides complete protection for the business, there is little incentive to be efficient, to be customer and market driven, or to abandon privileges such as lifetime employment, generous benefits, and rigid working rules. Management and employees alike must feel that the company's future lies in their hands if they are to adapt to market realities such as the need for flexible post office opening hours, better-quality products, and tailored solutions.

Third, postal operators have to manage deregulation to ensure a smooth transition that benefits all parties: operator, customers, and government. An incumbent is usually well placed to influence policy makers and shape the development and pace of change so that it remains in the "stable corridor." The interests at stake - employment, continuation of universal service, and financial self-preservation should give a national operator sufficient grounds for a convincing argument. As in industries such as oil exploration, airlines, and telecommunications, relationships with the regulator should be the responsibility of a "heavyweight" manager. His or her success will have a perceptible influence on the organization's financial returns.


Postal operators will stave off the threat of competition and build a platform for the future only by becoming more competitive. To do this, they must nurture a market-oriented business system, superior products, operational excellence, and a high-performance culture. Few operators can boast all of these strengths at the same time.

A market-oriented business system. The traditional postal operator is usually organized around functions and geographic areas, which take little account of customers' needs. It should therefore reorganize itself around customers and products [ILLUSTRATION FOR EXHIBIT 5 OMITTED]. The reoriented business's next task is to address marketing, market research, new product development, customer service, and account management all functions that are typically undeveloped in monopolies.

To institute this degree of change requires managers who can inspire and guide. Almost without exception, postal operators that have been transformed successfully have undergone an extensive blood transfusion, with experienced outside managers introduced at nearly every level.

Superior products. Many postal operators' products have been developed in response to regulatory and political considerations, rather than market demand. As a result, product portfolios are unnecessarily complicated and customers do not get what they want. One European post office had more than 400 national and 1,000 international categories of letter price. A drastic reduction down to four main categories made the range more transparent and convenient, led to better prices, and stimulated volume growth. It also eased sorting operations and cut the number of customer inquiries and complaints.

Operators should take advantage of market research methods to understand customer needs better. Questions such as what the most attractive performance/price tradeoff is for parcel deliveries (how much customers are willing to pay for delivery to be made an hour earlier, for example, and whether the price premium is the same if delivery is moved from 12 a.m. to 11 a.m. as it is if the time is moved from 9 a.m. to 8 a.m.) can be determined by conjoint analysis and field tests. Competitively priced products will influence the operator's market share and profitability dramatically.

Operational excellence. The experience of the world's best postal operators shows how far products, operations, marketing, and sales processes can be improved. Operational costs can be reduced by up to 45 percent within postal concession and social constraints and while universal service is maintained; professional marketing and sales programs can yield sales growth of between 10 and 20 percent.

The best European postal operators are 30 to 40 percent more efficient than the average, according to benchmarking exercises, but they still have a cost handicap of 20 to 40 percent compared with potential competitors that enjoy more flexible workforces, lower unit costs (because they do not bear the same obligations in terms of pensions and fringe benefits), and tailored operations unhampered by outdated systems and infrastructure.

To achieve operational excellence will therefore involve most postal operators in reappraising many of their key functions. The first functions to receive attention should be:

Network design and automation. Postal distribution networks are still often based on the manual sorting techniques and transportation infrastructures developed in the 1950s or earlier. This leaves plenty of scope for improvement. Complexity can be reduced by creating dedicated networks for lower-quality mail, eliminating sorting steps, building multi-purpose mail processing plants, and using advanced automation - all of which can help halve transportation and sorting costs. Network optimization enabled one operator to reduce the number of mail sorting centers from almost 1,000 to less than 100, and raise the share of machine-processed mail from 24 to 80 percent. Transportation capacity was cut by about 70 percent, leading to capacity use of 60 to 65 percent, up from 20 to 30 percent.

Redesigning the post office network can also lead to substantial savings, especially if commercial constraints can be lifted. Given the increased mobility of country dwellers, it is no longer necessary for every village to have its own post office. Postal outlets can instead be situated at local shopping centers or on main roads, and very few still need to be operated by postal employees. Instead, the service can be offered by a convenience store or gas station, bringing the bonus of longer opening hours.

Capacity management. Regional customer demand varies from day to day, especially in the letter business. To meet every eventuality, sorting centers tend to keep extensive and expensive reserve capacity. Yet forecasting systems, joint planning with large customers, and the use of production control systems that enable the flexible reallocation of staff between different work fields can greatly reduce the level of reserves needed, and save at least another 10 percent on sorting and transportation costs.

Operational excellence will also depend on excellent sales and marketing not skills that postal monopolies have previously needed. Decisions have always been driven by policy - by rules on price restrictions, for example rather than by demand. From now on, postal operators will have to fight for customers and market share rather than simply waiting to process the orders that land on their desks. The rewards for doing so can be swift, however: one large European operator introduced a systematic sales stimulation program and saw its business-to-business revenues rise by 10 percent within a year.

A crucial strand of sales and marketing policy will be deciding prices and discounts. In many countries, pricing and discount procedures have been set by the regulator, but postal operators will soon have greater leeway in determining them within universal service and fair competition obligations. Careful planning and control will be vital; without them, giving sales staff the freedom to discount can lead to steep falls in profit. Too often, salespeople discount "straight to the bottom" to boost volume. An appropriate incentive system (often not allowed in a regulated environment) will be an absolute prerequisite to steer and motivate the salesforce.

Designing and positioning new products is another area in which monopoly holders lack experience. Many postal operators have inconsistent ranges. One marketed three similar parcel services under three different names, and charged prices ranging from $4 to $20 for the same type of shipment and performance. As customers grow skilled in cherry-picking and competitors offer more differentiated products and services the better to skim the market, such anomalies will have to be swiftly corrected. If the necessary expertise is lacking, the only answer is an infusion of outside talent. Many postal operators have started to attract top sales and marketing people to their organizations.

A performance culture. Changing operations, procedures, and systems is essential - but not enough on its own to achieve world-class standards. Postal operators do not come from a performance culture. Most have hierarchical organizations that afford little room for entrepreneurialism; often, middle and lower managers are protected from external pressures and given only limited responsibility for day-to-day activities.

In a deregulated industry, these managers will have to be empowered - but not before a performance culture has been implanted. Giving freedom and authority to the front line before it takes root could lead to disaster. Consider, for example, the centralized systems most postal operators employ to assign delivery districts and define productivity standards across the business. These systems are rigid and insufficiently differentiated by region and type of work; they also prevent tradeoffs being made between cost and quality in specific situations. But allow them to become too elastic, and quality would suffer in some regions. Changing and differentiating the metrics would help, but not really solve the problem. A profound change in attitude and behavior is required.

The organizations that do best at bringing about this type of change seem to start with a new broom at the top. The Netherlands' post office, for example, has recruited more than half of its executive board, including the CEO, from outside the industry. Once change has been accomplished at the top, the next stage is to inculcate the new culture throughout the organization, using a mixture of hard and soft measures to drive home the message without destabilizing the business. Hard measures include introducing new measurement and control systems, "delayering" to emphasize markets and products rather than functions, beefing up skills through training and by hiring fresh talent, and setting profit and operational targets. Soft measures include changing the incentive and promotion system (no more tenure, but promotion on merit), supporting entrepreneurialism (making mistakes is possible), or applauding unorthodox solutions (to shake the postal culture's dogged conventionality).

Sweden and Finland have shown what can be done. As a result of massive cost cuts and competitive pricing, the postal operators of both countries have maintained their profitability, continue to command dominant market shares, and are leaders in introducing electronic communications.

... then grow

Only when core activities improve and the performance culture puts down roots should postal operators turn their attention toward growth within and beyond their original business. Opportunities abound in fresh geographic areas, in new technologies such as data management and remote printing, in related activities including storage management and internal postroom operations, and in the logistics flow management of goods and information.

Initially, postal operators will have to rely on their core business to provide financing, management capacity, sorting centers, transportation networks, and warehousing. Strong customer relationships built up under the postal regime will be crucial to development.

Growing requires a further set of skills, however, and postal operators should be aware that yet again they face a change of culture and the challenge of mastering unfamiliar techniques. Managing an international company with multiple cultures and languages will be one new experience. Expansion will bring others. If growth involves acquisition, expertise in negotiation and postmerger management will be called for. And what were "mono-business" companies will have to become "multi-business" players, skilled at operating units of different sizes and levels of maturity.

This increase in managerial complexity can be successfully dealt with only if the core business is fully under control and management capacity has been strengthened by the addition of outside talent, the transformation of the organization, and the adoption of a new role for top management as the company's strategic controllers or architects, not just its operators.

Finally, postal operators will have to learn to be innovators. Following trends and responding to competitors' actions will not be enough. Successful players will lead the way in innovation and practical technology, rapidly introducing new products and services.

The next decade will be crucial for postal operators across the globe, although change is likely to come fastest in the West. Those that are willing to adapt and take on challenges may expect exciting times. Those that are not will disappear, or shrink to become providers of basic and probably subsidized services. For most operators, the situation is not critical thus far. But for those that fail to act, it will rapidly become so. Their volumes will decline, their most attractive business will vanish into competitors' hands, and their post offices will shut for the last time.

Bernard Bot is a consultant and Ivo Bozon and Pierre Girardin are principals in McKinsey's Amsterdam office; Carl-Stefan Neumann is a principal in the Frankfurt office.
COPYRIGHT 1997 McKinsey & Company, Inc.
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Title Annotation:managing postal services
Author:Bot, Bernard L.; Ivo, Bozon J.H.; Girardin, Pierre A.; Neumann, Carl-Stefan
Publication:The McKinsey Quarterly
Date:Sep 22, 1997
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