From the September 2009 issue of Treasury & Risk magazine

Delivery Pains at the Post Office

All finance executives are under the gun these days as they navigate the minefields of the credit crisis and a global recession. But even in the current environment, Joe Corbett faces a particularly nettlesome set of problems.

Corbett is CFO of the U.S. Postal Service, whose $70 billion in 2008 revenue ranks it as roughly the 25th largest U.S. company. But its revenue is suffering these days as mail volume, already under pressure from the long-term trend toward electronic communication, swoons amid the economic slowdown. In the first three quarters of the Postal Service's current fiscal year, mail volume declined by 20 billion pieces, down 12.6% from the same period last year. The Postal Service expects to have accumulated a deficit of $7 billion by its Sept. 30 year-end and estimates it will then face a $700 million cash shortfall.

"The financial problems are very, very serious," says Corbett, noting that the Postal Service also cut costs by almost as much, more than $6 billion this year.

Although the recent slump in mail stems from the recession, the Postal Service is not projecting a major rebound in volume when the economy recovers. In July, the U.S. Government Accountability Office (GAO) added the Postal Service to its list of high-risk federal organizations, citing the service's "serious and significant structural financial challenges."

Gene Del Polito, president of the Association for Postal Commerce, argues that increasingly, businesses are finding other ways to communicate with customers. American Express' announcement this spring that it would no longer send paper statements to business credit cardholders is an example. "There's going to be more and more mail coming out of the system," Del Polito says. The decline in volume doesn't mean the end of the Postal Service, he says; "it simply means you have to allow it to collapse its infrastructure and workforce to match."

The Postal Service--a self-sustaining organization that receives no financial support from the government--is mounting an effort to get itself back into the black. But Corbett argues that he is hampered by an uneven playing field because the Postal Service is burdened with requirements not imposed on other government agencies or private companies.

For example, a major component of the turnaround plan is the Postal Service's attempt to win some leeway on the big payments it's required to make each year for retiree healthcare. This year it is due to pay $7.5 billion for retiree healthcare, $5.5 billion of which goes to a trust to fund future benefits. No other government organization is required to pre-fund retiree healthcare, Corbett notes, and only about a third of corporations do any pre-funding.

"It's difficult to be a competitive business--and we're out there competing every day--when you have a funding requirement of 10% of your revenues to go into retiree healthcare and your competitors have no such requirement," he says.

At this point, Corbett is optimistic that Congress will give the Postal Service a break. The House already passed a measure, H.R. 22, that would reduce the Postal Service's retiree healthcare payment by $2 billion in the current fiscal year and $2.2 billion next year. A Senate version would cut $2.4 billion from this year's payment and $2.5 billion from next year's.

Cutting back on the retiree healthcare payments would take care of the cash shortfall the Postal Service is forecasting for year-end. More importantly, Corbett says, it would give the service time to restructure itself.

When it comes to that restructuring, the Postal Service is looking for more help from Congress: It is seeking congressional approval to deliver mail only five days a week. While the prospect of eliminating Saturday delivery may seem revolutionary, Corbett says the Postal Service's competitors, FedEx and UPS, change their delivery frequency to match the amount of business they're seeing. "When they have fewer packages, especially in the ground package business, they simply don't deliver as frequently," he says. "That's the way they reduce their costs."

"In our case, we're required to deliver to 150 million addresses, six days a week," Corbett adds. "Over $30 billion a year is spent because of that obligation and it's not one that we currently have the freedom to vary--we literally have to do that by law."

Business customers seem resigned to the prospect of five-day delivery. Jerry Cerasale, senior vice president of government affairs at the Direct Marketing Association, says that while his members were initially negative about the change, "as we look more at the financial condition of the Postal Service, we know that everything has to be on the table."

The congressional committee that oversees the Postal Service had expressed reservations about eliminating a day of mail delivery, but Corbett is encouraged that Congress "now has actually asked for a study on what this would look like." The Postal Service still faces a fight from its unions, which are vehemently opposed. In July, William Burrus, president of the largest, the American Postal Workers Union, told a Senate committee that closing facilities and moving to five-day delivery were "acts of surrender" that would "impede the Postal Service's ability to compete." Since there's not yet any legislation proposed in Congress related to five-day delivery, Corbett says the earliest any savings could result would be the 2011 fiscal year.

Meanwhile, the Postal Service continues to look for other ways to cut back costs, ranging from revamping its distribution system to reassessing the usefulness of more than 3,000 facilities. Corbett notes new machines for sorting larger pieces of mail, called flat sequencing systems, will let the Postal Service eliminate up to 20,000 employees in the next 18 months, just as large numbers of workers become eligible for retirement.

Corbett emphasizes the need to keep quality high amid the restructuring. "One of the reasons I joined the Postal Service was--I'm going to be 50 this year--I have never mailed a letter that didn't get where it was supposed to go," he says. "It's just quality that keeps people putting things in the mail."

He also notes that the Postal Service is not just cutting costs, but trying to grow revenue. It held its first-ever sale this summer, offering commercial mailers at 30% discount on business in excess of what they normally do at that time of the year. It also revamped its advertising, replacing a number of smaller initiatives with one big TV ad campaign that promotes priority mail, Corbett says. "Priority mail is about a $7 billion business for us and it's very important that we keep that going."

The financial shortfall isn't the only challenge on Corbett's plate. He's also facing a 2010 deadline for complying with Sarbanes-Oxley, an effort that involves a team of 550 people and potential modifications to 75 different systems. Corbett has charged one group within the SOX team with looking for ways to make the service's financial processes more efficient, and hopes that group will produce enough savings to pay for the SOX effort.

Corbett has served as CFO of both Intelsat, which operates a satellite network, and BearingPoint, the consulting company spun off by KPMG. In a parallel to his Postal Service challenges, Corbett took over as Bearing Point's CFO in 2005 at a tough time, when the company was going through accounting problems that eventually led him to conclude that it should recall and restate previously filed public financial statements.

Ray Winn, a partner at Deloitte & Touche who was chief operating officer of BearingPoint's public services practice at the time, says Corbett's leadership and problem-solving abilities helped bring the finance team back into alignment with the rest of the company. "He had 500-plus finance people," Winn says. "In his time there, morale improved and results started happening." He adds that Corbett came up with the plan for restating BearingPoint's financials that the company eventually adopted.

Corbett says that despite the long hours involved in his new job, it's an exciting time to be heading finance at the Postal Service. "The recession, even though it's much steeper than we thought, has given us the mandate to change structural problems with the Postal Service," he says. "When we come out of this, we'll be better positioned and more efficient than we've ever been."


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