Franchising The Mails
You could almost envision our $23-billion U.S. Postal Service lumbering a little faster and breathing a little harder this fall when MCI Communications Corp. turned loose a barrage of taunting commercials for its new, nationwide electronic-mail service, called MCI Mail.
Our ponderous postal pachyderm, with 670,000 employees, is clearly in for more and more private-sector competition, both in its traditional business of mail carrying and in various forms of new technology. Federal Express, Purolator Courier, Emery Air Freight, and the rest were only the beginning of this competition. MCI Mail signals the next round: privately operated, generally available electronic networks whose service is likely to get better and cheaper as time goes by. Electronics in data processing is, after all, the technology that has already brought us the fastest, greatest cost cuts in industrial history.
At least for the immediate future, private-sector electronic-mail competition will hit hardest at the postal-carriage trade. Increasingly, those who can pay for speed and convenience will buy it privately. But what if the door to competition is opened on the postal elephant's other, lower-price side? Suppose loca franchisees are given the chance to show what they can do with local mail-processing and delivery? There may be a real chance to carve some of that elephant flab into hundreds of good, small businesses.
What really promises to slenderize the biggest civilian bureaucracy of them all is the prospect of competition -- even a takeover -- by grass-roots entrepreneurs in the form of local franchisees. There are, after all, more than 465,000 U.S businesses operating under the franchise system. They deal in a wide and varied list of services. Processing and delivering mail looks like a snap compared to teaching languages, making pizza, providing nursery care, performing surgery, or preparing tax returns.
Such a takeover may never happen, but there is, at last, a responsible federal official in Washington calmly but loudly repeating, "Try it. You'll like it!" The vice-chairman of the Postal Rate Commission is a Kansas native named John W. Crutcher, a man with small-business experience that he got working in his family's investment company in Hutchinson. An articulate man in his mid-60s, he is a former lieutenant governor of his state, having served under both Republican and Democratic governors.
After working in the "Robert Dole for President" ranks, he signed up with the Reaganites. He received Senate confirma tion for his present post in March 1982. Less than a year later, he opened his campaign with a paper on "Privatizing the U.S. Postal Service," which he read at a Harvard University seminar. Last August, he made his case again in three speeches in California, one of them to the prestigious Commonwealth Club of California in San Francisco. This time, network television talk shows and some citizen attention followed.
Commissioner Crutcher began his analysis of the problem with the failure of the 1971 postal reorganization to deliver on the promise of lower costs. Since then, he pointed out, costs have shot up from less than $8 billion to what will soon reach $25 billion. By 1982, postal costs had risen 188%, compared to the rise in the cost of living, which was 152%. The first-class stamp had gone from 6 cents to 20 cents, to pay for the increase in costs.
Wages now account for about 84% of total postal-service costs. The average wage and benefits package of postal workers is up around $25,000 a year. According to Crutcher, that is "much higher than comparable federal civil servants' salaries and benefits. If postal-wage increases matched those of other (federal) government employees, the Postal Service costs . . . would be about $5 billion lower and the first-class stamp would be between 4 cents and 5 cents lower, with corresponding reductions in all other classes."
Two professors at the University of Pennsylvania's Wharton School found that "postal wages were about one-third higher than wages in the private sector for equivalent skill levels." This doesn't include the value of a "no layoff" contract clause. Add that benefit, Crutcher says, and "the U.S. postal worker may be the best-paid semiskilled worker in America and perhaps the world." How can that be, when the law says they are to be paid on a basis comparable to private industry?
"I was startled to read in the Wharton study," Crutcher said at Harvard, "that the 1981 postal labor negotiations narrowed the comparability mandate of the Postal Reorganization Act to two contracts -- the teamsters' and the auto workers'. These contracts cover approximately 1.8 million workers out of the 75.5 million total nonagricultural employees. In order to find a favorable formula [for postal workers], the vast majority of workers in the American economy were ignored."
One alternative to the problem of the Postal Service's bureaucracy is to experiment with more private enterprise. Let private companies bid for the mail-processing and delivery functions in each city and in rural areas. The federal postal service would assume about the same role as the franchisor in a hamburger chain -- enforcing standards, choosing the franchisees, experimenting with innovation to cut costs. At the national and international levels, the Postal Service would probably be one of the operating competitors, going head to head with MCI Communications, Western Union Corp., and other big companies.
"Who would benefit, and who would lose under this privatization scheme?" the commissioner asks. "Society would save about $6 billion a year, a very significant sum. Thus the ratepayer and the taxpayer would be the major beneficiaries. If $6 billion could be diverted from postal services to other forms of economic activity, the amount of goods and services we produce could be expanded, and we would all be richer. The losers under competitive changes would be the current beneficiaries of the inflated postal wage levels.
Postal franchising is nothing new. Historically, postal service has swung back and forth between government employees and contractors. At one time, Wells Fargo carried more mail than the U.S. government did. "Community post offices" today are contracted to small-town and village retailers. In the countryside, "Star Routes," or privately contracted postal routes, are handled by nonpostal employees. A vast amount of postal transportation is contracted out to airlines, truck companies, and other private carriers that compete for the business.
Legal considerations and historical precedent wouldn't stop a major and rapid shift to franchising local postal service privately. What would stop it is politics and implicit social theory. We have more than 10 million unemployed workers now, and no one wants to add to that number with rash moves. Postal employment is a major road into the middle class for minority workers.
Don't these considerations make Commissioner Crutcher just one more Don Quixote? I am not so sure. Conditions are changing faster than ever in the business of delivering mail. Eighty percent of first-class-mail volume involves business, which is a lot less patient with waste these days in its own operation. Why should it let its hard-won savings be wasted elsewhere?
First of all, is Commissioner Crutcher on target about the feasibility and attractiveness of franchising? Bernard Browning, president of General Business Services Inc., of Rockville, Md., a well-regarded franchising enterprise with about 1,000 small business counselors, thinks that Crutcher is right.
"Would I bid on postal franchises?" Browning the new chairman of the National Small Business Association, muses. "Would our people recommend that other qualified people bid? I can't see why not, if the business conditions made sense. The employees? Well, I suppose in time there might be fewer of them, but I think they'd be better off. They'd share in profits or productivity incentives instead of having to make it all in this political imitation of collective bargaining. The customers would get more and better service, probably for less cost. And [business would] pay taxes."
But how can you expect that employees who are alleged to be overpaid won't fight tooth and nail to protect their status quo? Isn't there some way around their fear that this proposal all adds up to savings for everybody else at their expense?
Maybe the answer lies in that magic American phrase "a piece of the action." Certainly, minority groups and their leaders want more opportunity for entrepreneurship, beginning with equity ownership. Is there some way that could be worked into a business that was franchised for public service?
A good, working example of a usually public service -- fire protection -- provided by private business is Rural/Metro Fire Department of Scottsdale, Ariz. It provides service under contracts to municipalities to about 100,000 people in Scottsdale and 400,000 in other communities. It is cited in the Grace Commission studies -- which suggests ways to save government money by making some services private -- as saving Scottsdale taxpayers $2 million a year. Jim Bolin, Rural/Metro's vice-president for finance, thinks that may be an old figure; now it is closer to $2.5 million.
The founder of Rural/Metro, Lou Witzeman (see INC., August 1981, page 65) owned all of the company's stock when he was ready to retire. Witzeman groomed Ron Butler, a former fire captain from nearby Glendale, Ariz., to succeed him. A management team, made up of Butler and nine others, was in place by 1979, when Witzeman was ready to ease himself out.
About two-thirds of Rural/Metro's stock went into an Employee Stock Ownership Plan. By 1984, the ESOP's trust will have paid Witzeman for the stock out of earnings. In less-profitable companies with less-patient founders, a similar trust borrows money to buy the stock from the exiting owners. Witzeman sold 37% of the stock to the 10 key management people; he sold 63% to the ESOP for the 450 eligible employees.
If Rural/Metro continues to grow and prosper (its present growth rate is 30% compounded annually), the stock will become even more valuable. When an employee leaves, he or she can either have the stock or its independently appraised cash value. If the employee chooses to stay to retirement, the stock is part of a three-part benefits package consisting of Social Security, the stock or its value in cash, plus a share of a definedcontribution pension plan to which the company has contributed 80% and the employees 20%.
Suppose Congress ordered the U.S. Postal Service to select a sample of 50 processing centers and offices. And suppose an operating franchisee company was set up for each one, with two-thirds of the stock in trust for the employees at a price set by independent appraisal. And then bids were taken for the other third of the stock and a five-year management contract from people with franchise experience. Suppose, further, that the employees paid for their stock on the installment plan -- by working for really comparable wages, probably a third less than what they now earn.
A plan like this could wind up with several hundred or several thousand hard-driving small companies in place of the present setup. Would the employees be happy? Would the taxpayers? Could we find a way to make even the union leaders buy it?
Personally, I am with Commissioner Crutcher. If we don't try it, we will never know. At a minimum, we would have 50 yardsticks by which to judge the rest of the system, a good form of competition in itself.
But what about those massive unions and the politics? They may just be ready to learn something new. And if they aren't, there are at least as many members in the organized small business community as there are employees in the U.S. Postal Service. By now they, too, know a little about politics. TBut what about those massive unions and the politics? They may just be ready to learn something new. And if they aren't, there are at least as many members in the organized small business community as there are employees in the U.S. Postal Service. By now they, too, know a little about politics.