Chapter 3
Discounts, Contracts or Subsidies?
INTRODUCTION
Throughout the 1980s and 1990s, corporations in the mailing industry and contractors have pushed to privatize the Postal Service through contracting to private business and through structuring rates to favor large mailers and private mail processing companies. At the same time, technical change has swept the USPS, as high-speed mail sorting equipment was perfected and put into operation. The new technology has made it easier to centralize and privatize mail sorting. As seen in the last chapter, postal policy has been to steer the benefits of technical and organizational change toward private industry. This chapter examines the ways that private businesses have benefited from recent changes.
Privatization, it turns out, requires a lot of public resources. In effect, the public subsidizes the "private" operations in many ways: through rate incentives, through public research and development, through USPS purchase of contractors' equipment, and through city and state financial "incentives" to private mail sorting companies. In addition, workers subsidize the private operations through working for low wages.
THE CLAIMS OF PRIVATIZATION ADVOCATES
Proponents of privatization claim that contracting of government services promotes economic efficiency for consumers, entrepreneurialism and technological innovation. They also claim that privatization frees the public from subsidizing industries, that share ownership is broadened, and that competition replaces monopoly. In addition, they promise that replacing public service provision with private will "depoliticize industries." That is the theory; reality, especially as seen in case studies of postal contracting, is considerably different.
Taxpayers, or, as is the case in postal contracting, ratepayers find that instead of subsidizing companies under public control, they are now underwriting private companies with little or no interest in meeting social goals. The results of contracts are public subsidies of many kinds to private industries and public subsidies to transnational corporations with near-monopoly power. The innovation or technological advancement in the postal fields has been sponsored and nurtured by the public, but the beneficiaries of the new technologies are often private. Rather than democratize economics through broad shareholding, the postal contractors have increased economic inequality, bolstering the wealth of investors or executives and drastically lowering the wages available to community members for mail-related work.
CONTRACTING AND "ATTRITION"
There are three major ways that privatization can be accomplished: divestiture, contracting, or attrition. With attrition, government allows private investors to step in to areas that were once the exclusive domain of the state. As one theorist notes, "Privatization by this sort of attrition depends largely on the lobbying skills of the private sector itself."
In the case of the Postal Service, and in the United States in general, contracting and attrition are the major ways that functions of government are transferred to the private sector. The mail presorting industry is an example of "attrition," though the term hardly does justice in explaining the way that government created and nurtured an industry, through two decades of postal rate discounting.
LOWER WAGES: A SOURCE OF PROFIT
E.S. Savas, Director of the Privatization Research Organization denies that low wages are a product or necessary condition of privatization. In a Wall Street Journal exchange, he stated, "It is a common fallacy to believe that the savings through competitive contracting come from lower wages. That is simply not true in the general case." He goes on to explain that private corporations tend to use more advanced technology than government does, so they achieve efficiencies and lower costs through use of physical capital instead of simply through lower wages.
In fact, lower wages are consistently an important factor in contractor profits from postal operations. Studies of extensive municipal and state contracting of services show wages consistently lower when services are contracted out. The charges by all proponents of postal privatization that USPS workers are "overpaid," Congressional hearing testimony about contracting, Postal Service cost studies, and GAO reports all indicate large wage differentials between public and private postal work. In the cases this chapter considers, lower wages are an important factor in a contractor's motivation to take on postal work, and profits are the ultimate goal.
On the other hand, union literature often claims that the purpose of privatization is to lower wages. This is also erroneous and assumes that the USPS will successfully cut costs by contracting out its operations. This chapter will show that the push for privatization is motivated by contractors' desire for profits (and the facilitation of this by postal managers and governors), not by public officials' desire to lower costs. Some of the postal operations that have been contracted out produce enough revenue to support high wages and profits; the fact that wages are lower reflect not only the contractors' desire to increase profits but also workers' limited bargaining power in a largely unorganized private sector. The postal contractors have been aggressively anti-union, largely in an attempt to keep wages low and profits higher.
RATE DISCOUNTS AND THE CREATION OF AN INDUSTRY
The growth of the private sector mail sorting industry is a result of rate discounts and policies recommended by special task forces and implemented by the Postal Service. It is a good example of the concept of privatization through attrition, as the growing private industry need not directly take over government facilities.
The Post Office has a long history of discounting rates for customers who mailed large volumes of correspondence, periodical literature, or advertising. The post office granted rate reductions for bulk mailing early in its history through the "pound rate" offered to magazines and newspapers as early as 1879. The pound rate stimulated the mail order industry and initiated the use of mail for large scale advertising. Companies like Sears, Roebuck benefited immensely from the resulting opportunities for mail-order business. Letter mail, however, was charged at the per-piece rate until the decade after the Postal Reorganization Act. In 1976, with business increasing its influence over postal policies, the Postal Service began to offer discounts in postage for first class mail sorted into zip code order and bundled before being delivered to the postal processing centers for final sorting. These discounts began with minor rate reductions of 1 cent per piece. The discounts for presorted bulk third-class mail were introduced in 1979. Initially, the discounts were argued on the basis that pre-sorting saved work inside the post office. With postal wages rising to median wages for white males, private companies could hire people to pre-sort for minimum wage and make a profit on the process.
Discount rates for presorted first class mail have increased as a total monetary amount and as a percentage of the full first class rate since their introduction. The 1 cent discount on the 13 cent stamp of 1976 represented a 7.7% discount on the single piece first class rate. The discounts have deepened over the years. As of 1996, mailers that meet volume and preparation requirements could mail first class at a 9 cent discount on the 32 cent stamp, a 28.1% discount. Similar discount rates exist in the other mail classifications, and third class (now called "standard") discounts are deeper than first class. The lowest available rate is for "saturation" standard mail, what most Americans term "junk mail," which can be sent for just over 11 cents per piece.
These discounts have two functions. The first, and most obvious, is that they allow large volume mailers a far lower price than is available to individual consumers. The savings on a 100,000 piece mailing of first class letters at this rate is $9000. While individual households spend a small amount per year on postage, large mailers have a huge stake in lower rates. The second result has been the creation of private mail sorting companies. Though private companies are prohibited from delivering mail, they can collect mail from various mailers, prepare it in the correct order to qualify for the maximum discounts, and either deliver it to the Postal Service or have it picked up by the Postal Service. The rate discounts begun in 1976 provided the market for this industry.
The USPS' official term for private mail sorting is "worksharing." The Postal Service claims that the discount represents the cost savings provided by the customer's preparation of the mail. This claim does not withstand examination; in fact, the discounts function as subsidies for the largest mailers.
The 9 cent discount available on first class mail amounts to a discount of $90 per thousand pieces. The Postal Service claims that its own cost for automated mail sorting is $4 per thousand pieces. Mail can be processed to carrier sequence with 4 to 5 sorting sequences on automated equipment; therefore, the processing should cost the Postal Service roughly $20 per thousand, yet an additional $70 per thousand more than this cost is discounted. The Postal Service's 1995 Annual Report contains a similar analysis of cost "savings" for private presorting. Under the heading "cost avoidance," the report says that eleven digit barcoding by private mailers "is expected to generate savings [for the Postal Service] of $27 per thousand pieces." By the most generous estimate, an excess of $60 per thousand pieces over cost, or $6000 on a 100,000 piece mailing, is being discounted. Even the most thoroughly bar-coded and sorted mail must be sorted again by the Postal Service to merge with other mail.
Discounts of this sort represent millions in annual savings to advertisers, banks, utilities, and even city and state agencies. The rate cuts seem to violate the postal mission of providing uniform rates, because no discounts are offered for the home consumer in the current rate structure. If discounts truly reflected the amount of USPS sortation that mail pieces required, individual household bill payers would certainly qualify. Consumers return bill payments in pre-printed envelopes which require less sortation than any other kind of mail, since the envelopes contain an exclusive bar code for the firm, are directed toward a special sorting process, and are made ready for the customer early in the morning, avoiding street delivery. The Postal Rate Commission, which reviews Board of Governors requests for rate changes and holds hearings, has heard testimony for a bill-paying discount, but none has been instituted. The office of the consumer advocate for the Rate Commission, a nominal public "ombudsman" in the hearing process, had proposed a 12 cent discount for individual customers' return payments, yet the Postal Service has opposed such a rate in its proposals. Rate Commissioner Edward Gleiman accused the Postal Service of reneging on a promise to offer a return-bill discount and said a reduced price was workable.
"A CREATURE OF THE RATES"
The postal rate discounts provide an environment for the growth of the private presort industry. Presort businesses pick up mail from their customers, sort it to gain maximum discounts, and charge a per piece rate for sorting, generally 1 to 2 cents. By pooling the mail from many customers, presort businesses can qualify for the maximum discounts. Presort companies have existed since the 1976 discounts were begun, and in the early years, they were generally small businesses that sorted mail by hand. Often, sheltered workshops for the handicapped did such work. The sorting was done manually by the majority of the businesses until the mid 1990s, and retired postal workers sometimes started businesses of this type. A phone survey of 40 presorting business in western Washington State in 1990 revealed that only 3 used automated equipment and only 12 employed more than 15 people.
Still, the industry was characterized as "an entrepreneur's dream" by a Wall Street Journal report written in 1989. According to the article, sorters were paid minimum wage, and start up costs were relatively low. In 1989, the National Association of Presort Mailers, an industry group formed in 1984, estimated there were 250 such companies in the nation.
New sorting technologies were key to both the growth of presort businesses and the possibilities for privatization of mail processing. Optical character readers (OCRs) and bar code sorters (BCSs) had been in development by the Postal Service since the mid-1960s, but the technology was not deployed on a large scale, due to problems with accuracy, until the mid-1980s. The OCR "reads" an address and translates it into a bar code, which it sprays on the letter. The BCS "reads" bar-coded letters, and both operate at speeds of up to 40,000 letters per hour. The largest manufacturer of these machines is ElectroCom Automation, currently a subsidiary of the German company, Siemens. Siemens also contracts with the Postal Service to provide the new mail transport system in large facilities.
In the late 1980s, the Postal Service encouraged the private presort companies to invest in OCRs and BCSs by cutting the discounts for non-barcoded, manually presorted mail. The larger presort companies began to buy the automated equipment in the late-1980s and 1990s, and the rate structure began to reward private mail processing more handsomely. The trend has been for the smaller businesses to close and for larger capital to buy out presorts and invest in this business.
The presort mailers have formed national lobbying associations and work directly with postal managers on local and national committees. They intervene in rate commission and Congressional subcommittee hearings, and they are members of the Postal Service's "special task forces," putting them in a position to recommend rate and procedural changes. As Ralf Seiffe, Chairman of Mailsort Chicago and Vice President and Treasurer of the National Association of Presort Mailers testified before a Congressional committee, "I am here today to talk about our industry . . . because we are a creature of the rates. No one is more interested in how rates are made and applied than we are. . ." The presort mailers have lobbied to increase their "worksharing." Their goals match those of postal management closely, and they have been successful, with the proportion of mail they handle rising. Currently, 48% of letter mail is barcoded outside the Postal Service; in 1991, 38.1% had been barcoded by private firms.
LOW WAGES -- AN ADDED INCENTIVE
Since their formation, the presort businesses have paid low wages. Objective wage data is difficult to get, because the industry does not have its own SIC code (it is included with mail advertising and mailing list companies), and Bureau of Labor Statistics household data for non-government mail clerks includes people who work in the mail rooms of businesses preparing incoming and outgoing mail. Still, the evidence is overwhelming that wages are very low and the industry boasts that it pays far below wages paid to USPS workers for virtually identical work. An industry survey published in Gale Research's Service Industries, USA, showed that average payroll per employee in these establishments was $16,574 in 1987. This figures includes the income of managerial and sales staff. By comparison, the USPS figure for the same year, excluding managerial costs but including employee benefits, was $34,424.
In a statement prepared for 1995 Congressional hearings, National Association of Presort Mailers director Robert Williamson said that USPS paid "wage rates more than 4 times that paid workers in the private sector." While Williamson's USPS figure presumably must include benefits, with USPS automation clerks earning a maximum of $17.51 per hour in 1997, presort businesses would be in violation of federal minimum wage standards to pay one-fourth of that. Still, presort wages have been stuck at or near minimum wage levels by most reports.
Seattle, Washington presorts were reported paying $4.25 per hour in 1992 and $5.25 to $7 by 1994. The March, 27, 1995 issue of Business Mailers Review reported presort wages in the range of $5 to $7.50 per hour. A report by an American Postal Workers Union observer in suburban Chicago lists $4.50 as the wage rate in 1994, and a union contract agreement with a New Jersey presorter in 1992 shows rates of $5.05. Bureau of Labor Statistics household data show extremely low wages for private sector mail clerks as well. As late as 1992, the private sector full time workers' mean weekly income was less than $300. This figure includes overtime. Private mail clerks earn half, or even less, of what unionized USPS clerks earn by these estimates (See Table 4).
THE GROWTH OF PRESORT INDUSTRY
In contrast to privatization advocates' ideal of small-scale entrepreneurs who compete with bloated government bureaucracies, some of the presort facilities employ nearly as many workers as do many USPS urban processing centers. The Chicago area's Advance Presort employs close to 500 workers; the Los Angeles area United Presort Services employs 600 workers. Recently, larger corporate partners including R. R. Donnelly, World Marketing, Inc., and Lockheed are acquiring presorts, and several chain operations have developed. Postal Services, Inc. is an Omaha based chain which is creating a national network by buying up mailing companies across the country. The company's 1994 annual sales were $50 million. Another chain called Presort USA was announced in the February 1995 issue of Business Mailers Review . Phoenix-based International Mail Processing Inc. has mail sorting operations in Las Vegas, Portland, Sacramento, San Francisco, and Seattle, as well as in its home city, and the company is part of a new Postal Service "prequalified wholesaler" program, under which the company passes certain standards for volume and quality and gets the ability to use the Postal Service logo in advertising. The program also means that the Postal Service can recommend the use of IMP to businesses that inquire about presorting.
Other beneficiaries of rate discounts include large firms that, rather than use presorts, have enough mail volume to set up in-house automated mail sorting operations. Fidelity Investments, the nation's largest mutual fund, is an example of such a firm. Fidelity opened its own in-house operation precisely in order to maximize the gains available from pre-sort discounts. The 2,000 workers earn a base of $17,000 to $19,000 a year and processed 140 million pieces of mail in 1995. Reporters said that employees often worked six- or seven-day weeks, 10- to 12-hour days. Most of the mail is trucked by the Postal Service to the nearby airmail facility for dispatch. Fidelity also received public subsidies in the form of free land from the state of Kentucky in exchange for the creation of 500 "new" jobs in 17 years, though the work would have been done by local USPS workers for higher wages had Fidelity not set up its own facility.
Eventually, by contracting to private companies, the USPS could privatize mail sorting, eliminating approximately 100,000 public sector jobs. Certainly, that course has been advocated by such diverse groups as the Heritage Foundation and the Progressive Policy Institute, and the Postal Service now officially promotes the use of these low-wage operations. The USPS has already contracted out mail processing on a temporary basis, making agreements with presorts in Denver, Phoenix, Santa Ana, and Portland to process regular fully-paid first class mail during peak times.
CONTRACTING OUT VIA REMOTE VIDEO ENCODING:
THE PUBLIC FUNDS PRIVATIZATION
While the nurturing of the presort business represents "privatization by attrition," large scale, direct contracting of labor-intensive postal operations has also been a feature of USPS operations since 1991, when the Postal Service announced it would contract out its Remote Video Encoding (RVE) operations. The American Postal Workers Union eventually won an arbitration award requiring the Postal Service to offer the jobs to USPS workers, and an agreement was negotiated to bring the work back in-house in 1994. The contracts awarded for RVE work, though, are representative of the types of postal contracts that are attractive to corporations in the defense, information processing, electronics, and transportation industries. The experience of RVE contracting is representative of the types of contracts USPS management is currently pursuing. The wages paid are typical of contracted postal work, and the public subsidies given to the contractor corporations show the considerable mobilization of public resources involved in "privatization."
The Remote Bar Coding System was developed as a new method of sorting mail pieces which cannot be "read" by the high-speed Optical Character Reader (OCR) -- mail that has handwritten addresses or interfering graphics. With remote encoding, a modified OCR, containing a video camera, captures the image of non-readable mail. An identification tag is sprayed on the back of the letter, the image is transmitted by phone lines to a remote location, and an operator at a video terminal keys an extract code. A computer programmed with address directories determines the correct bar code, and that bar code is transmitted back to the mail site and is applied to the letter on a second pass through a Bar Code Sorter. From that point on, the mail can be read by Bar Code Sorters.
The Remote system was designed to allow mail which would otherwise have to be hand-processed to enter the automated sorting stream. It also allows large concentrations of mail "images" to be built up in a single location; in other words, one remote keying site may process mail which is physically located in several different cities. While in some countries, video encoding is done close to the actual pieces of mail, the system was designed to allow distant operation. With manufacturing jobs in many countries being moved to low wage "export processing zones," the technological possibilities in this system mean that the mail can be processed outside the country. In fact, the private mail sorting companies have a parallel process, and there are remote video encoding plants in Mexico.
The RBCS technology is not unique to the United States. Remote systems have been installed in Canada, Australia, Sweden, Switzerland, and France. While in all other countries, the remote encoding operations were performed under public auspices, the U.S. Postal Service management initially decided to contract the operation out to private, for-profit corporations.
CONTRACTING OUT AND "SAVINGS"
The preliminary decision to contract the operation was announced in July of 1990, after a USPS study of the comparative costs of in-house versus contracted operations found that a substantial "costs savings" would occur if the RBCS was contracted to private business. Low labor costs for the contracted facilities were the only basis for the projected savings; in fact, the contract administration costs and the separation of the coding facility from the mail itself entailed high additional costs that would not occur if the work were to be done in-house. The Postal Service supplied all of the equipment to the contractor and had done all of the research and development on the process. The USPS also paid for all of the telecommunications interface.
The corporations that were granted contracts for the video encoding were not small entrepreneurs but major electronics and data processing firms, primarily from the defense sector. Having grown accustomed to a steadily-increasing stream of federal dollars throughout the 1980s, defense contractors found later modest spending cuts difficult to endure. Mail-sorting work allowed companies with an overwhelming dependence on defense to put their political connections and information systems expertise to work. Martin Marietta is an example of this corporate cohort. According to a Financial Times article entitled, "Sword makers do not easily switch to ploughshares," "three quarters of Martin Marietta's business is with the Department of Defense and half the rest with other government branches. Its civil initiatives are mostly within the limits of that marketing niche: air traffic control, information systems, postal automation." Defense industry leaders Lockheed, DynCorp, Bell and Howell, Envisions, and ITT were prominent contractors.
The Postal Service paid approximately $16 per console hour to the firms, so their profits were dependent on how low they could get wages and other related costs. When possible, the contractors got other public entities--cities, states, and counties--to subsidize the operations in the name of economic development. Communities and states competed against one another to locate the plants, offering low wage rates, tax incentives and outright grants in order to lure the companies to their areas. Though the remote contractors replaced postal workers who operated letter sorting machines, they claimed to be bringing "new" jobs to communities. A West Virginia business journal said that economic development officials were "scrambling for a piece of this federal largess." When a Hagerstown, MD, economic development agency was approached by a bar-coding contractor, they decided to have the state undertake a new area wage survey so they could lure the contractor with lower labor rates. The state decided that previous surveys by the Bureau of Labor Statistics were incorrect due to a "large-firm bias." When the state determined a new "reasonable wage" for data entry, they were able to come up with a figure of $5.75 an hour.
REMOTE VIDEO ENCODING: SUBSIDIZED, POLITICAL CORPORATIONS
The practices of the remote video contractors show, contrary to the privatizers' claims, that the "efficiencies" in privatization are indeed in low wages, not in new technology. The companies relied on technical subsidy from the Postal Service, which had done all of the research and development, and had to purchase none of the operational equipment. This clearly contradicts privatizers' claims that the private sector is technologically "innovative" while the public sector is not. Finally, the companies received direct subsidies from state and local governments, controverting the privatizers' claims that public business is the only recipient of consumer or taxpayer "subsidy."
Contractors of this type don't always win bids through technical, ethical or financial superiority. DynCorp, for instance, had its share of contracting scandal, often using its political influence illegally. In 1987, DynCorp's subsidiary, Dynalectric, plead guilty to federal charges of bid-rigging in a contract with a Kentucky rural electrical cooperative and was fined $6.5 million. Dynalectric was also convicted of bid rigging in Atlanta in 1987 and was fined $1.5 million. In this case, the company conspired to rig bids on a $45 million federally funded sewage treatment project in Georgia. The Army considered debarring them, but eventually did not. In Canada, a DynCorp subsidiary was sued for $15 million by a subcontractor charging fraud, misrepresentation, and breach of good faith in a government project in Ontario. These problems led DynCorp to retain former U.S. Attorney General Benjamin Civiletti (of Watergate fame) as a special ethics counsel. He was placed in charge of setting up "educational programs for employees to teach them proper ethics."
DynCorp had attacked unions and their negotiated wage and benefit rates in previous contracts. When Local 6 of the International Longshoreman's and Warehouseman's Union in the Bay Area of California organized a DynCorp naval construction site in 1989, the company laid off union workers and hired new workers between projects, refusing to recognize the union's jurisdiction. Union activist Michael "Doc" Stevens said, "They wanted to get rid of the people who were active in the union -- everybody who was pro-union and spoke up." DynCorp slashed wages, sick leave and health and welfare benefits. The union finally won a legal settlement and negotiated a new contract.
DynCorp was given contracts valued at $180 million for four years and operated remote facilities in York, PA and Tampa, FL. In addition to the benefits from the postal contract, DynCorp received direct subsidies from the State of Pennsylvania, which offered nearly $3.9 million to DynCorp to locate in York. Pennsylvania Governor Robert P. Casey spoke at grand opening ceremonies for the plant, where workers earned $6.12 per hour. The state gave a $650,000 loan for facility renovation, $2.3 million worth of employment services (recruitment and training) and, from the city of York came a grant of $200,000 to build a "free public parking lot."
Unibase, which operated the remote encoding facility in Twin Falls, Idaho, shared a heritage of public subsidy and political controversy. Unibase was a contractor with prison systems to employ inmates in data processing activities, although they did not attempt to use prisoners to sort mail. Unibase had a controversial contract with the state of Ohio which gave the company the exclusive right to employ prisoners in data entry within the state prisons. The company paid the state the equivalent of $1.86 per hour for prisoners' work. In spite of this payment, the state lost money on the agreement in 1988-89. The prisoners themselves were paid from 35 to 42 cents an hour plus some "incentive" pay.
Envisions, a San Diego engineering and data-entry company, also received public financial support from city and state government when the company contracted for video encoding plants in Oakland, CA and San Diego, CA. The Oakland plant employed about 400 people and received local and state subsidies. When Envisions chose Oakland as one of two locations for the encoding plant, executives held a news conference with Oakland Mayor Elihu Harris to celebrate 400 "new" jobs, even though the mail being coded was from Oakland, and the USPS facility was expected to downsize. The company announced that it expected to pay "$10 an hour in wages and benefits," but the actual dollar figure was $8.22 in San Diego and $8.67 in Oakland. Envisions executive Jim Haskins emphasized that Oakland was lucky to get the facility. He said that the company could have located its operations anywhere, since it is connected to the post office only by phone lines, but they chose Oakland due to the city's "strong recruiting efforts." These efforts included a $2.8 million state-funded job training package and tax breaks in the form of taxation on payroll, not revenue. The contractor was also subsidized through the Postal Service picking up its massive workers' compensation bill. Repetitive strain injuries had been a common feature of the keying facilities, and the Envisions plant in San Diego, with 375 encoders at any one time, had 145 workers compensation injury claims for Carpal Tunnel Syndrome in a year and a half. The Postal Service was compelled to cover the $1 million in insurance premiums because Envisions claimed it was not an "anticipated expense."
Twenty four additional contracts were awarded for Remote Video Encoding in 1992, and all went to companies with defense backgrounds. Lockheed Martin's "Lockheed Support Services" got contracts worth $81.4 million, Orkand, of Silver Spring, MD got $28.4 million worth, Envisions was awarded contracts worth another $20 million, and ITT got a $4 million contract.
LOCKHEED'S POSTAL SERVICES : GLOBALIZATION AND CORPORATE STRATEGY
A look at the entry of the aerospace-based Lockheed corporation into mail processing illustrates the potential markets available and the private benefits of postal contracting and privatization. Winning eight of the 24 contracts awarded in 1992 for Remote Video Encoding, Lockheed planned to keep up its "batting average" and open approximately 80 more sites, as the Postal Service initially announced that 250 keying locations were planned.
A Lockheed Support Systems brochure issued in 1992 advertised the company's United States postal operations and appealed to customers, "Let us assist you in seeking improvements for your country's postal service." In 1997, the company won a $46 million contract to supply optical character reading equipment to the Australian postal service. In 1998, another USPS contract worth more than $130 million was awarded to Lockheed for USPS Tray Management Systems in postal facilities. The tray management system is an internal railway that sorts, distributes and stores trays of mail. The company has hired former public officials it calls "subject-matter experts," and other contractors have challenged awards when they underbid Lockheed and still don't get contracts.
ARBITRATOR RETURNS ENCODING TO USPS WORKERS
The remote video encoding contracts were short lived, however. First, the American Postal Workers Union's grievances of the contracting of remote encoding jobs were taken to binding arbitration, and in 1993 the union received a favorable ruling that required the USPS to offer jobs created with new technology to the current workforce first. Second, the Service Employees International Union won an election and a successful contract in the Oakland encoding plant, bringing the wages to near-postal levels.
Initially, the Postal Service reacted by declaring it was only required to offer the work to current employees. If there were not enough "takers," the service would be free to contract out again. The contractors put up a weak fight to keep the work, possibly because union organizing could slash their profits under fixed-price agreements, and possibly because little of their own capital was sunk into the centers, with the USPS supplying all of the equipment. The union was able to turn the arbitration ruling into a negotiated settlement with the Postal Service in late 1993.
The settlement represented an unprecedented victory against privatization, reversing the trend of contracting out, albeit at a price. In exchange for bringing the work back "in-house," the union agreed that 70% of the workers would be "Transitional Employees," lacking health care coverage or "just cause" provisions for firing, and would be paid at a lower hourly rate than regular postal workers. The workers would, however, be part of the union's bargaining unit. APWU had considerable success in signing up the workers, even though the Postal Service is an "open shop" in which no worker may be compelled to join a union. In some facilities, over 90% of the workers joined the union.
The settlement was attacked by a group of House of Representatives Republicans and by the General Accounting Office, both of whom predicted that the USPS costs would soar. Postmaster Runyon defended the settlement, contending that USPS costs were "not substantially higher than when the work was contracted out."
UNIONS FACE MORE CONTRACTING
The return of the encoding jobs did not end large scale USPS contracting. In 1996, service executives announced that up to 7,200 jobs in "call centers" would be contracted out, and in 1997, the service awarded a contract for 10 "Priority Mail Processing Centers" to Emery Worldwide Airlines, which will employ 1,400 people.
The process of contracting with phone centers illustrates the role of private industry in postal decision-making, the technical subsidies provided by the postal service, and the profits made on low-wage operations. Phone centers centralize phone calls made to tens of thousands of local post offices across the country into a single large facility. When customers call their local post offices in many cities, they are unable to get through and are now relayed to the call center. The call centers deal with customer questions ranging from postage prices and zip code information to requests for mail to be held during vacations. The Postal Service initially commissioned a study by the private industry consulting firm Telecommunications Resources International to analyze USPS telephone traffic in five major cities. Later, a team of "call management industry experts" was assembled to advise the Postal Service "on how to approach effective call handling and how to define such an effort."
The definition of effective call handling was provided by the contractors. A comparative analysis of cost published in March of 1996 showed that the USPS projected it could save $611.5 million over ten years by contracting the services. All of the savings came from the low market wages in the call center industry; the USPS study cited wages 37% lower than postal wages. Administrative costs were added to the contracting plan and lowered the projected savings to 35%. The study failed to take into consideration that local post office phones were answered by clerks who otherwise sorted mail, worked on counters, or were disabled and on light duty work. Phones were also answered by managers, who would be at the stations regardless of whether they were answering phones or not. There were no full or part time telephone positions being cut.
Regardless of whether the phone centers were staffed with USPS employees or contracted to a for-profit provider, the USPS planned to acquire, manage, and maintain all of the equipment. The Postal Service set up two "National Learning Centers" early in 1996 to test run the centralized call operations, staffed with some USPS employees and some agency temporaries. In August, 1996, the USPS claimed the decision to contract out the call centers was made on a preliminary basis, but Denver city officials had already been told of the opening of a private facility paying $8 per hour.
THE TELETECH CONTRACT
In September of 1996, the Postal Service announced a two-year, $65.7 million contract with Teletech Holdings, Inc. of Denver to operate the Denver center. The facility was expected to employ 1,200 workers and serve the western United States. American Postal Workers Union officials protested the decision and argued that it violated the union contract in the same manner that the remote video encoding decision did.
The contracting is a "customer service nightmare," according to USPS customer service specialist Diane Radischat, and is unlikely to really save any postal money. When postal patrons call a local number for their neighborhood post office, their calls are relayed to the Denver facility, where miscommunication and long delays often occur. Many patrons have long and familiar relationships with local postal staff and have been accustomed to being able to talk with employees or managers directly. They can no longer do this. Before the implementation of the new system, patrons could often call and request to pick up their mail or place a vacation hold the same day they wanted it to start; now, they must have three days' notice. Some calls are eventually relayed back to the local office, but the call center attempts to avoid this. As a local newspaper columnist in Pacific Palisades, California complained of her ordeal in trying to reach a local office, "How effective can this new system be if you have to call an 800 number and respond to a 'menu' just to reach the post office down the street?"
Teletech contradicts the pro-privatization stereotype of the small entrepreneur. Teletech Holdings had its initial public stock offering in August of 1996, the same month the USPS announced the "preliminary" decision to contract out the services. Teletech's initial offering price of $14.50 per share shot up to $40 by October of 1996, enough to put CEO Ken Tuchman on the "new billionaires" list of the Forbes Four Hundred (list of wealthiest Americans). When the stock price declined to $26, Tuchman fell out of the billionaire category, but still was credited by Forbes with net worth of $660 million as of October 1997 and owned 65% of Teletech.
Teletech is the dominant corporation in the call center business, as it also contracts phone services for United Parcel Service, General Motors and other major corporations. Some analysts credit Teletech's success to other corporations' downsizing. According to Denver Business Journal writer Henry Dubroff, "Teletech is a company that clearly has prospered as thousands of people have been let go from full-time jobs at major corporations." He provides AT&T's downsizing as an example; the company provided Teletech with 31 percent of its business in 1996. Teletech's revenue went from $50.5 million in 1995 to $263.5 million in 1996, with earnings per share going from 8 cents to 34 cents in the same period and employment jumping from 2,100 to 8,500. The company exemplifies the interests of transnational corporations in privatization and contracting, as it operates call centers in Australia, New Zealand, Mexico and Scotland.
Teletech pays lower wages than the corporations for which it contracts did, and it often gets public subsidies for locating call centers in communities. The company asked Houston, Texas for an abatement that would average over $27,000 per year for 10 years to locate there. It received incentives from Fayette County, Pennsylvania and recently opened a facility in Glasgow, Scotland with public incentives. British Prime Minister Tony Blair spoke at a ceremony announcing plans for the Scotland call center.
Teletech has also been aggressively anti union. The company fired Miguel Guzman, a former "quality coach" in Tucson, Arizona, for union activity. "Teletech outright said I was fired for organizing, which is actually against federal law," he explained. Teletech has attempted to discourage union activity by warning workers in Denver that if costs are too high, they may lose their postal contract. The USPS Board of Governors, however, renewed it for three more years in March of 1998.
CONTRACTING THE FASTEST-GROWING CLASS OF MAIL
Postal contracting is not the service's attempt to divest itself of marginal or money-losing operations, as is currently the trend in the private sector. The sorting and transportation of the fastest-growing category of mail, Priority Mail, is being contracted to one large firm. According to the 1997 Annual Report of the Postmaster General, Priority Mail, the $3 and-over expedited parcel category, is the fastest growing class of mail, with 14% growth over 1997. Though some of the 1997 growth was attributable to that year's two- week Teamsters Union strike against United Parcel Service, Priority Mail has been aggressively and successfully promoted as an alternative to higher-priced services of UPS and Federal Express.
The decision to contract Priority Mail involved private sector executives. A special task force, the "Priority Mail Redesign Team," was assembled in 1995 to "recommend comprehensive service improvements," and the group's report was approved by the Board of Governors in November of 1995. The USPS then pursued cost studies based on the way that the team had configured a new system: without using existing postal facilities or taking their current operational costs into account.
Then, on April 24,1997, postal officials announced that Emery Worldwide Airlines had been awarded a $1.7 billion, 58-month contract to operate 10 Priority Mail Processing Centers in the eastern United States. If the ten centers are effective, Emery may eventually operate 50 centers nationwide.
Emery's $1.7 billion postal contract compares with its pre-contract annual operating revenue of $1.5 billion. It is a subsidiary of CNF Transportation (formerly Consolidated Freightways); another CNF subsidiary, Menlo Logistics, will operate the centers, with Emery flying the mail and CNF trucking between centers and airports. Emery will employ about 1,400 workers at the centers, and the contract is one of the largest in postal history.
The American Postal Workers Union has filed a grievance against the contract, and the National Association of Postal Supervisors has also protested. According to Federal Times writer Chet Bridger, the conflict over the Emery contract "could be a watershed battle over the future of postal labor contracting."
The Postal Service decision was not driven by cost-cutting. A Postal Service study found that the priority mail processing could be done in-house for $0.5 million less than through contracting; the American Postal Workers Union produced another study that showed in-house operations could save $2 million. The Postal Service then denied that cost savings motivated the contracting and explained that the decision to contract was based on service, not cost, since Emery's contract requires a 96.5% on-time delivery standard. A year earlier, however, USPS spokesman Frank Brennan argued to The Washington Post that postal management was considering contracting out the operations as "the most cost-effective way" to move the expedited mail.
Neither cost nor quality improvements were realized as of early 1998 with five centers running, and off to a "rough start," according to Federal Times. The centers were reported "swamped" in their first months of operation, and five other centers scheduled to open were "on hold" as of February. Emery did not anticipate the Christmas mail volume, and its centers in Springfield, Mass., and Kearny, N.J. had to direct mail back to Postal Service processing plants.
CONCLUSIONS
No internal crisis compels the Postal Service to contract out operations or to set up discounts to direct processing to private companies. In each case looked at above, the USPS assembled a team of private industry interests to study and recommend changes. In each case, the decision to contract was made over union objections and without other public review or input. In each case, lower market wages were a basis for contractor profit and the beneficiaries were stockholders of transnational corporations or, in the case of presort mailers, rapidly expanding and merging national corporations.
In no case was the contractor the source of any capital intensive efficiency. "Efficiency" was achieved only in terms of lower labor costs per hour of work achieved. Often, delays and customer inconvenience resulted from the contracting or outsourcing. The use of internal industry task forces and corporate directors to make fundamental decisions about the USPS' direction paid off for the private sector mailing industry, but not for workers, either USPS or private sector, and not for the residential customer.
The public subsidized the privatized operations in many ways. First, postal ratepayers had funded research and development on technical and operational methods used. Second, postal ratepayers had funded the physical equipment in the cases of video encoding and phone centers, so that contractors had small start-up capital costs. Third, citizens and taxpayers of states and municipalities funded training costs and tax abatements for contractors, and fourth, working class communities subsidized the contractors by working for wages that were often below urban poverty levels.
Rather than "decentralizing" or "democratizing" the economic activity of a large government industry, private contracting and attrition build the political and financial power of corporations with monopoly, or near-monopoly power in the global economy.