U.S. Postal Service: Data Needed to Assess the Effectiveness of Outsourcing
Published: 2008-07-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. Postal Service (the Service) has a long history of contracting out postal functions, such as mail transportation, mail delivery in rural areas, vehicle and equipment maintenance, and retail postal services. However, postal employees also perform many of these same functions and unions representing these employees have concerns about the scope and impact of outsourcing. The objectives of this requested report are to assess (1) the circumstances under which the Service can outsource postal functions, how it decides to outsource, and the extent to which it has outsourced; (2) how the Service's management processes compare for contractors and postal employees; and (3) the results, including any savings, and key challenges related to the Service's outsourcing activities. GAO reviewed applicable statutes, collective bargaining agreements, postal processes and outsourcing data, and interviewed postal union and management officials.
section_title: What GAO Found
paragraphs: The Service has no statutory restrictions on the type of work it may outsource, but collective bargaining agreements with its unions impose some process requirements and limitations. When evaluating outsourcing proposals, the Service must consider five factors--public interest, cost, efficiency, availability of equipment, and qualification of employees--and determine whether outsourcing will have a "significant impact" on work performed by postal employees covered by collective bargaining agreements. If so, it must compare the costs of performing proposed work with postal employees and with a contractor, notify the affected union that it is considering outsourcing, and consider union input before making a decision. We could not determine the Service's total outsourcing contracts related to bargaining unit work, because the Service does not separately track these contracts. It did provide data on some outsourcing that has impacted work by employees of its four major unions in the areas of retail, processing, transportation, and delivery. The Service evaluates contractors and postal employees using similar suitability and performance standards, but uses different management processes. The Service recently revised its drug screening procedures so they are now similar for both groups. The Service manages contractors through specific performance requirements, as compared to Service policies and collective bargaining agreements for postal employees. Finally, the Service has mechanisms to evaluate performance and take actions related to performance problems for both, but does not compile performance data to permit comparisons between contractors and postal employees. The Service does not have a comprehensive mechanism for measuring results, including any actual savings; therefore, it could not provide information on the effectiveness of its outsourcing. Without cost-savings data, postal managers, stakeholders and Congress cannot assess the risk and value of outsourcing. Also, accountability for results is limited. The Service has stated that it will explore outsourcing opportunities, and postal unions are concerned that the Service's use of contractors for delivery service is growing as shown below. Proposed legislation to limit the Service's outsourcing is pending in Congress, which the Service says could limit its ability to contain costs. Key challenges include whether the Service and its unions can reach agreement on outsourcing issues through collective bargaining and whether the Service can provide analysis to substantiate the benefits of outsourcing.

section_title: Letter
paragraphs: The United States Postal Service (Service) continues to face the challenge  of generating sufficient revenue from a changing, less profitable mix of  mail while operating under a cap that limits price increases for certain  classes of mail to the rate of inflation. Obligations stemming from the  Service’s universal service mandate, to provide postal services to all parts  of the country, continue to increase the number of deliveries by about   1.7 million new addresses per year. Meanwhile, since fiscal year 2000, the  number of mail pieces delivered to each address and the average revenue  per delivery have decreased. To address these challenges, the Service  stated in its 2002 Transformation Plan that it planned to achieve cost  savings of $5 billion over 5 years, partly by improving operational  efficiency. Since then, the Service has reported achieving billions in cost- savings, improving productivity, and reducing its workforce by more than  100,000 employees. The Service set a goal to cut another $5 billion in costs  during fiscal years 2006 through 2010 by continuing to increase  productivity and improve operations. To achieve this goal, it has initiatives  under way to further reduce manual mail handling, increase the number of  deliveries for each mail route, and optimize its transportation and mail  processing networks.
Some of the Service’s efforts to control costs involve outsourcing. Service  officials have stated that through outsourcing, the Service seeks to  improve its operations and customer service as well as save money. In this  report, we use the term “outsourcing” to refer to services that are  purchased from external entities and that are also, or may be, performed  by postal employees covered by collective bargaining agreements, which,  as of the end of fiscal year 2007, included about 85 percent of the Service’s  685,000 career postal employees. The Service has a long history of  outsourcing postal functions, such as mail transportation services, mail  delivery in rural areas, contract stations for retail services, and vehicle and  equipment maintenance. However, postal employees also perform many of  these same functions and unions representing these employees have had  long-standing concerns about the impact of outsourcing on job security.  Current collective bargaining agreements, and accompanying memoranda  of understanding, between the Service and unions contain clauses that  specifically address outsourcing. At congressional hearings in 2007, the  unions representing city and rural carriers raised concerns about the  Service’s expanded use of outsourcing to provide delivery services,  including concerns about the Service’s oversight of these services and the  quality of services provided. Subsequently, the Service and its carrier  unions agreed to discuss the scope of the Service’s outsourcing. Currently,  the parties plan to complete these discussions by the end of September  2008. In 2007, bills were introduced in the House and the Senate that could  limit the Service’s ability to outsource. Service officials have said that  these bills, if enacted, could significantly impede their efforts to reduce  costs.
To assist Congress in understanding the Service’s outsourcing activities,  this report assesses (1) the circumstances under which the Service can  outsource postal functions, how it decides to outsource, and the extent to  which it has outsourced; (2) how the Service’s management processes,  including suitability (hiring and screening procedures) and performance  evaluation, for contractors compare to those for postal employees; and (3)  the results—including any costs, savings, or other outcomes—of the  Service’s outsourcing efforts and the challenges facing the Service related  to outsourcing.
To address the circumstances under which the Service can outsource  postal functions, we reviewed statutory and regulatory requirements and  the Service’s most recent collective bargaining agreements with its four  major unions. We focused our review on the Service’s outsourcing  activities related to major postal functional areas and the bargaining unit  work of its four major unions, including transportation, delivery, mail  processing, and retail functions. To determine how the Service decides to  outsource, we interviewed postal officials at Service headquarters and the  Southwest Area, employee union representatives, management  association representatives, and representatives of the National Star Route  Mail Contractors Association and reviewed relevant postal documents. To  evaluate the extent to which the Service has outsourced, we interviewed  Service officials at headquarters and in the Southwest Area and obtained  and reviewed documents related to the Service’s outsourcing efforts,  including 46 national-level outsourcing initiatives since 1996, as well as  proposed initiatives. In addition, we obtained, reviewed, and analyzed  information on outsourced transportation and delivery, including data  pertaining to routes and delivery points for the three types of carriers— city, rural, and contract delivery service. To compare the Service’s  management processes for suitability and performance evaluation of  contractors and postal employees, we reviewed the Service’s policies and  procedures related to hiring qualifications, screening requirements, and  performance evaluation for contractors and postal employees. To evaluate  the results, including any costs, savings, and other outcomes of its  outsourcing activities, we also reviewed the Service’s cost estimates,  relevant budget information, and available performance data for the  outsourcing projects initiated from 1996 through 2007. We requested  comments on a draft of this report from the Service and we discuss its  comments, which appear in appendix III, later in the report. We conducted  this performance audit from August 2007 through July 2008 in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: Background
paragraphs: The Service has a long history of contracting for mail transportation dating  back to the beginning of the Post Office in 1775. Since then, the Service  has contracted for mail to be carried by steamship, stagecoach, horse, rail,  airplane, motor vehicle, boat, snowmobile, and even mule train into the  Grand Canyon. In 1845, Congress passed legislation to reduce mail  transportation costs by moving from contracts with stagecoach companies  to contracts with individuals to transport mail by horseback. The routes  these individuals took became known as star routes. Most star route  carriers had 4-year contracts and traveled by horse or horse-drawn vehicle  until the early 20th century. In 1948, Congress allowed the Postmaster  General to renew 4-year contracts to star route carriers with satisfactory  service rather than requiring the contracts to be competitively bid.  Between 1960 and 1970, star route miles more than doubled. In the 1970s,  star routes officially became known as highway contract routes.
There are three different types of highway contract routes:    Transportation routes: Contractors transport mail between postal  facilities.
Contract delivery service (CDS) (commonly referred to as box routes):  Contractors deliver mail and provide services similar to those provided by  postal rural carriers.
Combination routes: Contractors provide a combination of mail  transportation between postal facilities and mail delivery services to  individual addresses along their routes.
In 2007, the Service had nearly 17,000 highway contract routes, including  8,968 transportation routes, 6,708 CDS delivery routes, and 1,218  combination routes. The Service also contracts for air mail transportation  services with private contractors, including FedEx and seven commercial  airlines. In addition, it contracts for mail to be transported by rail and  boat.
The Service’s outsourcing of mail transportation and some delivery  services predates the ability of postal employee unions to collectively  bargain. The Service established city delivery services provided by postal  letter carriers on designated city routes in 1863, but did not initially extend  delivery services to rural areas. Eventually, the Service set up permanent  rural routes with postal rural letter carriers in 1902. The 1970 Postal  Reorganization Act authorized postal unions to collectively bargain with  the Service on employee wages, hours, and other terms and conditions of  employment. Subsequently, the unions negotiated for protection from  layoffs. The act provided for binding arbitration if an impasse persists 180  days after the start of bargaining, unless parties agree to an alternate  process. Four postal unions represent most non-management postal  employees and negotiate for them during collective bargaining:    The American Postal Workers Union represents various employees  including clerks, building and equipment maintenance employees, motor  vehicle operators, motor vehicle maintenance employees, and nurses;   The National Association of Letter Carriers represents carriers who deliver  mail on city routes;   The National Rural Letter Carriers’ Association represents carriers who  deliver mail on rural routes; and    The National Postal Mail Handlers Union represents mail handlers who  work in postal processing facilities.
The Service has separate bargaining agreements with each union and in  2006 or 2007 signed agreements with all four unions that expire in either  2010 or 2011.
The total number of career postal employees, as well as the number of  bargaining unit employees, declined 14 percent from 1998 through 2007  through attrition, as shown in table 1.
The Service achieved these reductions without layoffs but improved its  operational efficiency and productivity through increased automation and  other initiatives. These efficiency gains allowed the Service to operate  with fewer employees. According to the Service, there are significant cost  advantages to contracting for transportation services. For example,  although the service provided by the three different types of delivery— city, rural and contract—is generally similar, the Service states that there  are significant cost differences between them, primarily due to differences  in each of the carriers’ compensation systems. The systems for city and  rural carriers are collectively bargained between the Service and its  associated unions. Generally speaking, city carriers are compensated on  an hourly basis, which can include overtime; rural carriers are  compensated on a salary basis; and contract carriers are compensated via  a contract. Similarly, there are significant cost differences between  transportation provided by Service employees and highway contract  routes. According to the Service, its fiscal year 2007 costs for delivery and  transportation services provided by postal employees and contractors are  shown in table 2.
Furthermore, in the retail area, the Service establishes contract postal  units because they can provide the same service as a post office but at less  cost, since the Service does not incur building and operating expenses  associated with maintaining post offices. In 2007, 4,026 of the Service’s  36,721 post offices, stations, and branches—or 11 percent—were contract  postal units.
section_title: The Key Requirements Related to Postal Outsourcing, the Service’s Process for Making Outsourcing Decisions, and the Extent of Its Outsourcing
paragraphs: The Service has no statutory restrictions on the type of work it may  outsource, but union collective bargaining agreements impose some  limitations. Additionally, statutes and regulations authorize and guide the  Service’s outsourcing process. The Service follows its normal purchasing  procedures for all outsourced services but additional procedural steps are  required to comply with collective bargaining agreements in some  outsourcing cases. Through the collective bargaining process, employee  unions have reached agreement with the Service that resulted in changes  to its outsourcing decision-making process.  However, the unions have  also grieved a number of the Service’s decisions to outsource.  Overall, we  could not determine the extent of the Service’s outsourcing that has  impacted bargaining unit work because the Service does not separately  track the subset of transportation contracts that impact bargaining unit  work.  The Service did provide data related to some of its outsourcing,  including in its retail, processing, and delivery functions. Since 1996, the  Service evaluated 46 national-level outsourcing proposals under the  requirements of Article 32 and determined that 5 had a significant impact  on bargaining unit work.  The Service also provided data showing that  outsourced delivery service accounts for approximately 2 percent of all  deliveries.
subsections: section_title: Statutory Requirements and Collective Bargaining Provisions Related to the Service’s Outsourcing
paragraphs: Outsourcing is accomplished through the Service’s purchasing function  and statutes and regulations that apply to the Service’s purchasing  function also apply to outsourcing. Applicable statutes contain no  specific restriction on outsourcing, and specifically, 39 U.S.C § 5005  authorizes the Service to enter into contracts for transportation services.  Additionally, the Service may negotiate or enter into certain contracts  without competition. For example, the Service negotiated and awarded a  contract without competition to FedEx for air transportation services and  can renew highway transportation contracts without competition. In  addition, Congress has applied certain purchasing-related requirements to  the Service that apply to other federal government agencies but are not  applicable to private entities. For example, the Service Contract Act of  1965 requires some Service contractors to pay minimum prevailing wages  and benefits to employees.
Collective bargaining agreements with the postal employee unions may  impose limitations on outsourcing in certain areas. For example, the most  recent City Carrier’s collective bargaining agreement restricts the Service  from outsourcing delivery services in areas where only city carriers  provide mail delivery. Similarly, APWU’s collective bargaining agreement  restricts some contracts for custodial services based on the size of the  area to be maintained.
The Service’s collective bargaining agreements also each contain a  provision, Article 32, which establishes certain procedural requirements to  be conducted when making an outsourcing decision, but does not,  according to the Service and the unions, restrict the type of work that can  be outsourced. For example, Article 32 requires the Service to evaluate  how outsourcing proposals would affect bargaining unit employees and,  under certain circumstances, to notify the unions of its intent to consider  outsourcing and allow the unions to have input into the decision-making  process.
According to the Service, neither its purchasing regulations nor the  collective bargaining agreements restrict or limit a contractor’s ability to  subcontract work it is contractually required to perform or provide to the  Service. However, the Service may include provisions in a contract that  govern subcontracting. For example, a contract may require a contractor  to notify the Service of its intent to subcontract, thereby allowing it to  assess the qualifications of the proposed subcontractor with the same  criteria used to assess the contractor’s qualifications.
section_title: The Service’s Process for Making Outsourcing Decisions
paragraphs: The Service uses its purchasing process for implementing outsourcing  decisions and performs additional steps when required to comply with  procedures in Article 32 of the collective bargaining agreements.  Outsourcing is formalized through a contractual relationship between the  Service and the service provider, whether the provider is a large  corporation or an individual. The Service recently changed its purchasing  regulations and procedures to streamline its purchasing process and  create a more flexible, efficient, businesslike approach to purchasing.  The revised process covers all purchasing, including outsourcing, and is  divided into six general steps:  Identify needs.
Evaluate sources. This step includes developing a request for proposals  and soliciting bids.
Select suppliers. This step includes awarding a contract.
Deliver and receive requirements.
Measure and manage supply. This step includes managing contract  performance.
End of life.
GAO reviewed these changes in a report issued in December 2005 and  found them generally consistent with the principles and practices of  leading organizations. Accordingly, in this review, we limit our  discussions to portions of the purchasing process that are relevant to  outsourcing.
In addition to these purchasing steps, to comply with the Article 32  provisions, the Service must conduct two evaluations of outsourcing  initiatives under consideration. First, it must address five factors—public  interest, cost, efficiency, availability of equipment, and qualification of  employees—when evaluating the need to outsource. Second, it must  determine whether the outsourcing will have a “significant impact” on  work performed by bargaining unit employees. Service officials told us  that when making these evaluations, they do not use formal criteria and  none of the five factors carries more weight than the others. Further,  officials said that the five factor evaluation is similar to the type of analysis  performed to make other business decisions and that the collective  bargaining agreements do not contain specific guidance for performing the  evaluations and do not define the term “significant impact.” However, the  Service said that when determining whether a proposal has a significant  impact, at a minimum, the initiative must be national in scope. In addition,  the Service considers the material aspects of the initiative, including, but  not limited to, the number of employees, work hours and facilities  affected, the geographic distribution of the employees and sites affected,  and any other factor that provides insight to the particular determination.  Further, the Service said that no one factor will necessarily be  determinative and not all factors will necessarily shed light on every  project. If the Service determines that outsourcing will have a significant  impact, Article 32 contains additional requirements. Although the specific  requirements vary by agreement, the Service must always notify the  affected union of its intent to consider outsourcing and must consider  union input before making a decision. Conversely, if the Service  determines the outsourcing will not have a significant impact, the Service  may still have further actions it must take. Under its agreement with  APWU, the Service has certain notification requirements for highway  contract routes. In addition, if requested by the City or Rural Carriers, the  Service must provide information on contracted delivery routes in certain  circumstances.
We identified two different categories of outsourcing initiatives: (1)  outsourcing that was approved at the national level, was unique and  infrequent—occurring only 5 times since 1996, and had a significant  impact on bargaining unit work; and (2) outsourcing that was approved at  the field level, was purchased frequently and repeatedly, and, according to  the Service, did not have a significant impact on bargaining unit work.
subsections: section_title: National-Level Decision-Making Process
paragraphs: The Service has established guidelines for evaluating proposed  outsourcing initiatives and ensuring that certain factors are considered,  such as whether an initiative is consistent with organizational goals,  security, and integrity; offers a cost or service advantage; and will maintain  quality levels. Additionally, the guidelines provide a framework for  complying with Article 32 requirements. Overall responsibility for  outsourcing proposals lies with a sponsor, typically a Service  Headquarters Vice President. The sponsor’s responsibilities include  developing and presenting the outsourcing concept, conducting financial  and cost analyses, securing the necessary approvals, and ensuring  compliance with all labor agreements.
The sponsor presents the proposed outsourcing initiative to a Strategic  Initiatives Action Group (SIAG), an internal cross-functional group formed  to facilitate concept review and approval and ensure conformance with  Article 32 requirements. The SIAG includes representatives from Service  departments, including Labor Relations, Legal, Finance, Operations,  Supply Management and Communications, who assist sponsors of  proposed outsourcing initiatives with the various procedural steps  required for outsourcing at the national level. SIAG evaluates the level of  impact expected from the proposed outsourcing initiative by scrutinizing  the functions to be performed in the initiative. If the SIAG determines that  an outsourcing initiative will have a significant impact on work performed  by bargaining unit employees, the affected unions must be notified and  allowed to provide input into the analysis considered when comparing the  performance of proposed work by postal employees and by a contractor.  The final approval for an outsourcing initiative with a significant impact on  bargaining unit work, supported by an evaluation of the five factors, must  come from an approval board consisting of the Deputy Postmaster  General/Chief Operating Officer, Chief Financial Officer, and Chief Human  Resources Officer. If SIAG determines that national-level outsourcing will  not have a significant impact, the Service will still perform the cost  analysis that is part of the normal purchasing process; however, union  notification and input are not required. The final decision to outsource a  national outsourcing initiative that will not have a significant impact on  the bargaining units is based on an evaluation of the five factors  mentioned above and is made by management within the group that  proposed the initiative.
One example of a national-level outsourcing proposal that the Service  approved is a proposal to outsource certain functions previously  performed by postal employees at AMCs across the country. Under the  proposal, the AMC facilities would be closed and outsourcing would occur  in contractor facilities. In the process of making the outsourcing decisions,  the Service:    determined that the proposal would have a significant impact on    prepared a comparative analysis to document its consideration of the five    notified the affected unions at major milestones,    solicited and incorporated union input or responded in writing as to why  specific concerns were not incorporated, and   decided to proceed with the outsourcing proposal.
In providing input to this AMC proposal, the union disagreed with  assumptions underlying the Service’s estimates of several factors that  could affect the outcome of the analysis, including wage rates and  experience levels for both contractors and postal employees, and the level  of overtime required to perform the job.
section_title: Field-Level Decision-Making Process
paragraphs: Most outsourcing is performed at the field level using established  processes that include steps to comply with Article 32 requirements.  Service officials told us that field-level outsourcing typically is for contract  delivery, highway transportation, custodial and vehicle maintenance  services, and involves thousands of contracts. Generally, outsourcing at  the field level does not have a significant impact on bargaining unit work,  according to the Service, and consequently does not require  consideration of union input. For example, the Service has an established  process for contracting out delivery service that includes consideration of  the five factors but does not require union notification or input. However,  the City and Rural Carrier’s collective bargaining agreements require the  Service to provide cost information on contracted delivery routes in  certain circumstances if requested by the union. Further, APWU’s  collective bargaining agreement with the Service has additional  requirements the Service must meet when contracting out for highway  transportation services. In this case, the Service has an established  process set forth in a Service handbook, which incorporates steps required  under Article 32 for transportation routes that meet certain criteria. When  contracting initially or renewing a contract for a transportation route that  meets the criteria, the Service must perform a five factor evaluation,  including a cost comparison, notify the union, and allow the union to have  input into the outsourcing decision. The final decision to outsource is  made at the field level.
Table 3 summarizes the national and field-level outsourcing processes,  compares the requirements, and includes examples of outsourcing.
With the overall number of deliveries growing each year, on average, by  about 1.7 million deliveries, the Service has taken steps to minimize the  impact of these additional deliveries. For example, area and district  managers are expected to have a growth planning process in place,  conduct cost analyses on the type of delivery to provide, and examine the  feasibility of offering CDS service in lieu of rural or city delivery service,  consistent with the Service’s contractual obligations. However, the Service  must consider a variety of factors before assigning new deliveries to a  particular type of delivery, including the type of carrier historically used in  the area, Article 32 requirements, including cost, and projected population  growth. To ensure that these policies are consistently applied and the  appropriate factors are considered, the Service introduced a computerized  growth management tool. This tool standardizes the process that field  officials use to determine whether new deliveries should be assigned to  city, rural or contract carriers. For example, if a new delivery is in an area  served by city carriers, the address will likely be assigned to a city carrier  route. Conversely, if a new delivery is in an area that does not have  existing delivery service, the Service must compare the costs of each  different delivery type to comply with Article 32. The Postmaster General  has testified that the Service has been exploring the expanded use of CDS,  because it is one of the most cost-effective delivery modes available.
section_title: Postal Unions Have Disagreed with Some Postal Service Outsourcing Decisions
paragraphs: Postal employee unions have disagreed with the Service’s outsourcing  decisions including those related to the impact of proposed outsourcing  on bargaining unit work. To address disagreements with the Service,  unions have two options: formally grieving decisions using the process  defined in collective bargaining agreements or addressing concerns in  subsequent rounds of collective bargaining. For example, according to a  union official, the Mail Handlers grieved the Service’s determination that  outsourcing the processing of some military parcels did not have a  significant impact on bargaining unit work. In this case, the Service  notified the affected union at the local level, but not at the national level.  The grievance was eventually settled by an arbitrator, who, according to  the Service, decided that the initiative did have a significant impact but did  not reverse the Service’s outsourcing decision. In another example, APWU  grieved the Service’s 1991 decision to outsource certain jobs in remote  encoding centers, where employees manually read and enter address  information for addresses on letters that cannot be read by automated  mail processing equipment. A 1993 arbitration decision determined that  the Service did not violate Article 32 because the Service had considered  the five factors but also required the Service to offer jobs at these centers  to postal employees before contracting out such work.
The unions have also addressed concerns about outsourcing through  collective bargaining. The City Carriers’ current collective bargaining  agreement restricts the Service from outsourcing delivery services in areas  where only city carriers deliver mail. Previously, APWU and the Mail  Handlers agreed in a memorandum of understanding, applicable from 1998  through 2000, to a moratorium on most new, national-level outsourcing  that would affect their bargaining unit. In addition, the collective  bargaining process has resulted in modifications to Article 32 procedures.  For example, arbitration proceedings that followed collective bargaining  negotiations in 2000 changed Article 32 in each union’s collective  bargaining agreement to include a provision that the Service would meet  with the unions while developing its initial comparative analysis for  outsourcing proposals and include a statement of the unions’ views and  proposals in this analysis.
section_title: The Extent of the Postal Service’s Outsourcing Is Unknown
paragraphs: Overall, the Service could not provide information on the total extent of its  outsourcing activities that have impacted bargaining unit work because  the contracts related to bargaining unit work are not separately tracked.  Since 1996, the Service reviewed 46 outsourcing initiatives using its  national-level decision-making process and determined that 5 impacted  bargaining unit work, primarily related to retail and processing functions.  The Service approved and implemented all five initiatives but terminated  one in 2001. The Service did provide fiscal year 2007 expenditure data  related to the remaining four outsourcing initiatives, as indicated in table  4. In addition, the Service provided information related to its total contract  costs for transportation, but could not separately report on the subset of  transportation contracts that have an impact on bargaining unit work. The  Service’s expenditures for transportation contracts totaled about $6.5  billion in fiscal year 2007, which was about 8 percent of its total operating  expenses, while expenditures for outsourced delivery services totaled  about $220 million. Finally, the Service also provided information related  to the number of deliveries made by contractors. The Service said that,  through outsourcing, it seeks to improve its operations and customer  service, as well as save money, though not every initiative is expected to  achieve every goal. For example, it may be sufficient for a contract to  improve service, but not save money. Further, it said that contractors may  operate more efficiently than the Service in a number of ways including by  compensating its employees at lower rates than the Service and by  employing more part-time workers. The Service cited these reasons for  outsourcing in each of the five national outsourcing initiatives, as follows.
The Service implemented two of the five initiatives that impacted retail  and processing functions, Mail Transport Equipment Service Centers and  Corporate Call Management, about 10 years ago. The Mail Transport  Equipment Service Centers initiative was intended to establish a national  network of service centers for processing, repairing, and storing  equipment and supplies used to move mail, such as mailbags, trays, and  carts. The Service anticipated improving the availability and management  of the mail equipment, saving money, and improving efficiency at mail  processing facilities by reducing mail equipment administrative  responsibility. The Corporate Call Management initiative was intended to  establish national call centers to provide a single toll-free number that  would give customers access to postal services and information. The  Service anticipated improving customer satisfaction, saving money, and  improving efficiency by contracting with companies with demonstrated  success in call center operations. According to the Service, these functions  were previously decentralized and inefficient when they were performed  by postal employees at mail processing plants or at post offices.
Two other initiatives, Terminal Handling Services and AMCs, were  implemented more recently and impacted work in the processing function.  Mail that is transported by air needs to be delivered for a departing flight  operated under a contract with either a commercial airline or FedEx, or  picked up from an arriving flight. These activities are generally known as  terminal handling services. The Service outsourced these services to  various suppliers at about 60 airports where FedEx was providing air mail  transportation services under a contract with the Service. The Service  anticipated saving money, deferring large capital expenditures for facilities  and equipment, and improving efficiency by contracting with companies  that had demonstrated success in terminal handling operations. Similarly,  for the AMC initiatives, the Service outsourced, or plans to outsource, for  terminal handling services for mail transported by commercial carrier  flights at 20 airports. In 2004, the Service had about 70 AMCs located  across the country that processed mail arriving at and departing from  airports and performed terminal handling operations. However, the need  for these functions has decreased over time because of reductions in mail  volumes, excess processing capacity at other processing facilities, and a  reduction in the number of commercial air carrier contracts. The Service  scrutinized the functions performed at each of its AMCs and, as of June  2008, decided to close 20 and outsource the required terminal handling  services, retain 6 and continue operations with postal employees, and  close the remaining AMCs. The Service anticipated saving money, closing  facilities and improving efficiency by outsourcing with companies that had  demonstrated success in terminal handling services.
The final initiative listed in table 4, Priority Mail Processing Network, was  intended to be a pilot project to test whether the Service could improve  Priority Mail delivery performance by using a dedicated processing and  transportation network. The Service contracted with Emery Worldwide to  operate a network of 10 Priority Mail processing centers located along the  East Coast. The Service anticipated saving money and improving  efficiency by allowing the contractor to structure its workforce outside the  rules of the collective bargaining agreements. The Service ultimately  cancelled the contract because of problems with the contractor’s  performance and cost overruns and brought these functions back in-house  to be performed by postal employees.
The Service reviewed 41 other national-level outsourcing proposals and  determined they did not have a significant impact on bargaining unit work.  According to Service officials, many of these initiatives involve one time  activities such as preparing sites for installing and testing mail processing  equipment—activities required to obtain warranty coverage for the  equipment. For example, the Service contracted for site preparation,  installation, and testing of equipment for the Automated Package  Processing System, as part of the deployment of this system. Additionally,  the Service contracted with multiple suppliers for inspection, design, and  construction services to bring 27,000 leased postal facilities into  compliance with the Architectural Barriers Act, which requires equal  access for persons with disabilities. See appendix II for a list of the 41  outsourcing proposals that the Service determined did not have a  significant impact on bargaining unit work. Finally, the Service explained  that it has consistently maintained that contract postal units do not  constitute outsourcing because they are not referenced in Article 32 or in  any other provision of the collective bargaining agreements.
subsections: section_title: Mail Transportation Outsourcing
paragraphs: Although the Service contracts for most of its mail transportation needs,  only some contracted transportation services affect bargaining unit work  and are thus considered outsourcing; however, the Service was not able to  determine the actual value or number of these outsourced contracts. The  Service moves mail around the country using both contracted services,  such as highway contract routes and commercial air carriers, and Service- owned vehicles driven by postal employees. Only a portion of the more  than 17,000 contracts for transportation services are subject to the  provisions of Article 32 in the Service’s collective bargaining agreement  with APWU, which represents postal employees who are truck drivers. As  previously discussed, these Article 32 provisions apply only to contracts  for highway transportation routes that meet certain criteria: a value of  more than $100,000 per year for a fixed annual rate contract and not more  than 350 miles in round-trip length; an annual or non-annual rate contract  where estimated annual compensation will exceed $45,000; and no more  than 8 hours in operating time.
According to the Service, in fiscal year 2007 it spent about $3.15 billion on  contracts for highway transportation. However, to obtain the value or  number of contracts affected by Article 32, it would be necessary to  review each contract to determine the Service’s actual costs, which may  exceed the contracted costs if the contractor provides, for example, extra  trips or services.
section_title: Delivery Service Outsourcing
paragraphs: Data provided by the Service showed that outsourced deliveries represent  less than 2 percent of all deliveries. The Service contracts for delivery  services and all delivery contracts have an impact on bargaining unit work  and are thus outsourcing. The Service delivers mail to residential and  business addresses using employees, either city carriers or rural carriers,  or CDS contractors. The Service has data on the number of deliveries it  makes and the number of delivery routes. In general, the average number  of deliveries per route is greatest for city carrier routes and lowest for CDS  routes.
Since 1998, the number of deliveries made by all three delivery types (city,  rural, and contractor) has increased, but the proportion of deliveries made  by contractors has remained about the same, at 2 percent or less, as  shown in table 5. However, over the past decade, the number of deliveries  grew more for contractors, (39 percent) than for city carriers, (6 percent)  and rural carriers, (34 percent). Similar trends are evident in the number  and growth of routes.  Over the past decade, the proportion of routes  serviced by contractors has remained about the same, at less than 3  percent. However, the number of CDS routes grew about 23 percent, while  city routes declined by 2 percent and rural routes also grew by 23 percent.  A union official has expressed concern that, while contract delivery  service is a relatively small percentage of deliveries now, it could expand  rapidly because of continued new delivery growth. Table 5 compares the  change in total number and growth in deliveries and routes by type of  carrier for 1998 and 2007.
section_title: The Service Holds Both Contractors and Postal Employees to Similar Standards but Uses Different Processes to Manage Them
paragraphs: The Service evaluates contractors and postal employees using similar  suitability and performance standards, while holding them accountable  using different management processes. A key concern of some  stakeholders who may be affected by the Service’s outsourcing decisions  is whether contractors and subcontractors must have the same  qualifications or meet the same suitability and performance standards as  postal employees. To ensure that personnel are suitable to perform postal  work, the Service uses similar screening criteria to evaluate both  contractors and applicants for postal employment. Likewise, contractors  and postal employees performing the same type of work generally have  similar performance standards although the Service manages contractors  differently from postal employees.
subsections: section_title: The Service Uses Similar Criteria When Screening Potential Contractors and Applicants for Postal Employment
paragraphs: The Service uses similar criteria to evaluate the suitability of both  potential contractors and applicants for postal employment. The Service is  responsible for ensuring the security and sanctity of the mail and ensuring  a safe workplace for its employees. One way the Service meets this  responsibility is by evaluating the suitability of potential contractors and  applicants for postal employment. To do so, it investigates and verifies  their employment, criminal, and driving histories and requires them to  undergo an initial screening for drug use. In the fall of 2007, the Service  revised its drug screening procedures so that it had similar criteria to  evaluate both potential delivery service contractors and applicants. To be  considered for a contract or postal employment, individuals must meet  each of the applicable suitability standards shown in table 6.
In general, these suitability standards apply to contractors and their  employees or subcontractors who will have access to the mail or to postal  facilities. For example, if an individual CDS contractor delegates his or her  delivery responsibility to another person, such as a relative or an  employee, the contractor is required to notify the Service and this other  person is required to undergo the same screening process. However, not  all employees of a contractor are required to be screened. For example,  the Service requires companies providing terminal handling services to  ensure that all employees who have access to the mail are screened and  that measures are in place to limit access to areas where mail is stored or  sorted but does not require that all employees be screened. In addition to  these initial screening requirements, contractors who come into contact  with the mail are periodically re-screened. For example, CDS contractors  must be re-screened when their contract is renewed, which is typically  every 4 years. Once hired, most postal employees are not re-screened,  except for holders of commercial driver’s licenses.
section_title: Contractors and Postal Employees Have Similar Performance Standards
paragraphs: The Service holds both contractors and postal employees to similar  performance standards. In many instances, contractors are performing  essentially the same work as postal employees. For example, CDS,  highway contract route, and custodial contractors perform essentially the  same tasks as postal rural carriers, motor vehicle operators, and  maintenance employees. In these cases, where the work is directly  comparable, the Service expects the same level of performance regardless  of whether the function is done by a contractor or a postal employee. In  other instances, however, the work is not directly comparable, because  contractors are performing the work differently from postal employees. A  Service official told us that in these outsourcing cases, the Service  establishes performance criteria in its contracts, such as processing air  mail within specified time frames, to help it achieve overall goals, such as  delivering mail on time. For example, the Service contracted with terminal  handling service providers for work previously performed by postal  employees at AMCs. In its contracts, the Service establishes performance  criteria but does not specify how the contractor is to achieve them. To  further illustrate these performance standards, we compare the work  performed by CDS contractors and rural carriers, as well as by terminal  handling service contractors and AMC employees below.
subsections: section_title: CDS Contractors and Rural Letter Carriers Have Similar Performance Standards
paragraphs: Both CDS contractors and rural carriers perform similar delivery service  functions and serve similar geographical areas in meeting the  requirements of their respective positions. Upon reporting for work, CDS  contractors and rural carriers are expected to prepare and sequence the  mail for delivery to customers on their routes. Next, the CDS contractors  and rural carriers take the mail to their delivery vehicles. Both CDS  contractors and rural carriers furnish and maintain the vehicle equipment  necessary for mail delivery unless specifically assigned a Service-owned or  leased vehicle. CDS contractors and rural carriers proceed to deliver and  collect the mail along their assigned routes while meeting pre-designated  time delivery standards. Finally, CDS contractors and rural carriers return  to their respective postal facilities to hand-off the mail collected on their  routes. Both CDS contractors and rural carriers are expected to follow all  traffic safety laws and regulations while ensuring protection of the mail  from theft, mishandling, or damage.
section_title: Contractors and Air Mail Center Mail Handlers Have Similar Performance Goals in Terminal Handling Operations
paragraphs: As previously discussed, the Service outsourced some terminal handling  services to contractors. Formerly, postal employees performed these  services at selected AMCs across the country. After the terminal handling  responsibility moved to contractors, the performance expectations  remained the same, but the performance standards differ. Prior to  outsourcing, AMC postal employees were expected to carry out activities,  such as receiving, sorting and delivering mail to the appropriate air carrier,  to help the Service achieve overall delivery goals. Under the new  arrangement, contract workers perform similar activities with similar  performance expectations. Although the Service does not specify the  processes that contractors must employ to achieve these expectations, it  does set specific performance standards. For example in one contract, the  Service requires that the contractor receive mail from an air carrier and  make it available to postal employees within 1 hour. In another contract,  the Service requires the contractor to reach an on-time performance  standard 98 percent of the time. The Service includes similar performance  standards in its contracts with all terminal handling service providers.
section_title: The Service Manages Contractors and Postal Employees Differently
paragraphs: The Service manages and conducts oversight of both contractors and  postal employees, but uses different mechanisms. The Service manages  contractors through the terms of a contract, which generally includes  specific performance requirements, while the Service manages postal  employees according to established policies in handbooks and provisions  in collective bargaining agreements. Both methods provide specific  disciplinary procedures, including termination. Although some  stakeholders have raised concerns about the extent to which disciplinary  problems or criminal behavior may be an issue with contractors, data are  not available to allow a comparison between contractors and postal  employees.
subsections: section_title: The Service Manages Contractors through the Terms of a Contract
paragraphs: The Service uses contracts to define work requirements and performance  standards to monitor performance. Common categories for measuring  supplier performance are cost, quality, delivery, responsiveness, and  technology. To provide oversight, the Service administers contracts using  contracting officers and administrative officials. A contracting officer is  authorized to award, alter, and terminate contracts and ensures that the  contractor provides the services required under the terms of the contract.  An administrative official is responsible for ongoing contractor oversight  and monitoring, including    screening all contractors before hiring,    supervising the contractor’s operations daily,  investigating irregularities and complaints, and recommending establishment, discontinuance, or modifications in existing  routes.
For example, an administrative official, such as a Postmaster, is required  to document highway contract route performance, including contract  delivery service, on a daily basis and monitor such metrics as reporting  and departure times (for mail delivery) and deviations from the terms of  the contract, such as safety deficiencies and operational failures. If the  terms of the contract are not being met, the administrative official can  take the following disciplinary actions as needed:  1.  Review: the official reviews the irregularities, consults with the  contractor, and takes appropriate action.  2.  Conference: the official arranges a conference with the contractor and  contracting officer to discuss irregularities of a serious nature and the  need to immediately take corrective action.  3.  Written Warning: If the conference does not rectify the service  problem, the official warns the contractor in writing that the case will  be forwarded to the contracting officer if service does not improve  within 3 days.  4.  Recommendation: If service has not improved within 3 days, the  official forwards the case to the contracting officer with  recommendations on actions to take, which could include a  recommendation to terminate the contract.
The contracting officer has the sole authority to terminate the contract if  the terms of the contract are not being met.
section_title: The Service Manages Employees through Various Policies and Agreements
paragraphs: The Service manages employees in accordance with applicable collective  bargaining agreements, statutes, regulations, policies, and handbooks. To  discipline an employee, a supervisor must follow disciplinary procedures  set forth in each of the respective collective bargaining agreements. The  agreements state that no postal employee may be disciplined or  discharged except for just cause such as, but not limited to,  insubordination, pilferage, intoxication (drugs or alcohol), incompetence,  failure to perform work as requested, violation of the terms of the  collective bargaining agreement, or failure to observe safety rules and  regulations. The collective bargaining agreements set forth disciplinary  actions that the service may take when disciplining a postal employee,  including:  1.  Discussion: a supervisor discusses minor offenses; these discussions  are not disciplinary actions and are not grievable.  2.  Letter of Warning: a supervisor gives an employee a disciplinary  notice in writing explaining the deficiency.  3.  Suspension of 14 Days or Less: an employee may be suspended for up  to 14 days.  4.  Suspensions of More Than 14 Days or Discharge: an employee may  be suspended without pay for more than 14 days or may be terminated.  5.  Indefinite Suspension Crime Situation: an employee may be  suspended indefinitely if the Service has reasonable cause to believe  the employee committed a crime for which imprisonment could be  imposed.  6.  Emergency Procedure: an employee may immediately be placed in off- duty status when an allegation involves intoxication, pilferage, failure  to observe safety rules and regulations, or where retaining the postal  employee on duty may result in damage to USPS property, loss of mail  or funds, or where the employee may be injurious to self or others.
Any Service disciplinary actions initiated against postal employees are  subject to the grievance-arbitration process provided for in their  respective collective bargaining agreements. Furthermore, if a disciplinary  action is later overturned, the Service may have to reinstate the employee  and provide restitution in the form of back pay.
section_title: The Extent of Disciplinary Problems or Illegal Activity by Contractors and Postal Employees Is Not Known
paragraphs: Although employee union officials have raised concerns about  contractors’ trustworthiness, we were not able to compare the extent to  which contractors and postal employees have had disciplinary problems,  because the Service does not centrally collect data related to disciplinary  actions. Unions have cited examples of irresponsible or illegal activity by  contractors that resulted in arrests or convictions, which they said could  undermine the public’s trust in the Service. But similar postal employee  activity has also led to arrest or conviction. Contracting officers document  disciplinary actions in individual contractor files and Service personnel,  likewise, document disciplinary actions in records for each postal  employee. These employee records are maintained at the facility where  the employee works and any disciplinary documents are removed from an  employee’s file after 2 years, unless the disciplinary case has not yet been  resolved or the employee has been cited in subsequent disciplinary  actions. However, the Service does not maintain a comprehensive  database of actions that have been taken against either contractors or  postal employees.
For disciplinary actions of a more serious nature, such as criminal  investigations, the Service investigates both contractors and postal  employees in a similar manner. For example, the Service treats the theft of  mail as a serious matter to be investigated regardless of whether the crime  is committed by a contractor or a postal employee. A contractor or postal  employee, if found guilty of mail theft, can be fined, imprisoned, or both.
section_title: The Service Lacks Data to Demonstrate the Results of Outsourcing and Address Challenges That May Limit Further Outsourcing
paragraphs: The Service lacks information and data about the results of its outsourcing  efforts that impact work by its bargaining unit employees, which could be  used to determine the effectiveness of its outsourcing and support future  outsourcing in the face of possible challenges. For example, the Service  does not know the savings related to its outsourcing efforts because it  does not have a process to evaluate the impact of outsourcing or to track  actual savings. Postal employee unions have expressed skepticism about  the value of outsourcing and have raised questions about the reality of  cost savings and implications of outsourcing on a variety of public policy  issues. Without data to demonstrate results, Service management,  stakeholders, and Congress are not able to assess the risk and value of  outsourcing, accountability for results is limited, and the Service is not  able to effectively address union concerns. In addition, the Service may  encounter challenges that include resistance from its unions to new  outsourcing initiatives and from legislation pending in Congress that could  limit its ability to outsource.
subsections: section_title: The Service Lacks Data to Demonstrate Results of Outsourcing
paragraphs: The Service does not collect information about the results or effectiveness  of its outsourcing efforts, which could limit its ability to determine  whether outsourcing is achieving expected efficiencies and to generate  support for future outsourcing efforts. For example, although the Service  has processes in place to measure Service-wide performance—to capture  savings and to measure operational efficiency improvements—neither of  these processes provides information about the effectiveness of individual  or aggregate outsourcing efforts or the extent to which outsourcing is  contributing to these improvements. Further, the Service has agreed in its  collective bargaining agreements to no layoffs for career bargaining unit  employees; therefore, when it outsources functions previously performed  by postal employees, those employees are generally moved to other  positions within the Postal Service, but the specific efficiency gains related  to these reassignments are not tracked.
The Service does not track savings resulting from its outsourcing efforts  and instead tracks savings of all its cost-reduction efforts on an aggregate,  Service-wide basis. The Service said it has a process where savings from  all identified cost-reduction efforts, including those involving outsourcing,  are removed from the budget during the planning process for the  upcoming year in support of its annual $1 billion cost-reduction goal. After  those budget reductions are made, if the Service does not exceed its  overall expense budget, it considers the overall cost-reduction goal to have  been achieved. The Service said that because of the complexity and  interrelationship of its many cost-reduction initiatives, it is difficult to  track actual cost savings from individual initiatives and that it would  require expenditures of additional resources to isolate the savings from  each initiative. The Service achieved its overall annual cost-reduction goal  in 4 of the last 5 years, but could not determine the specific contribution  made by outsourcing efforts. Similarly, the Service does not measure  whether outsourcing initiatives have resulted in more efficient operations.  Instead, the Service said it uses a measure called Total Factor Productivity  to determine the change in aggregate productivity, which is included in the  Service’s published quarterly financial statements and its annual report.  The Service has reported that it has increased its Total Factor Productivity  for 8 consecutive years, but could not demonstrate the extent to which  outsourcing contributed to that improved efficiency.
The Service has used a performance measurement approach on a previous  outsourcing effort and determined that it was not achieving desired  results. In the late 1990s, the Service sought to establish, as a pilot test, a  separate processing and transportation network for its Priority Mail  business segment in order to improve service and to be more competitive  in the marketplace. Ordinarily, Priority Mail was processed with other mail  and was not achieving the level of service performance the Service  desired. The Service awarded a contract worth more than $1.7 billion to  Emery Worldwide to create and operate a network of 10 processing  centers on the East Coast. In its contract, the Service established specific  performance measures, including (1) a 95 percent on-time performance for  the 2-day delivery of mail and (2) the use of a contractor reliability index,  independently verified, which measures contractor performance on each  of eight quality indicators. In 1999, the U. S. Postal Service Office of  Inspector General (OIG) reported that Emery was not achieving the on- time performance goal or other performance measures. The Service  eventually cancelled its contract and took over operations of the facilities  because Emery was not achieving the desired results.
Despite its previous use of such measures, the Service has not used them  in its most recent national-level outsourcing effort. In February 2008, the  OIG reported on its audit of the outsourcing of some operations at the St.  Louis AMC, which was part of the Service’s AMC outsourcing initiative.  The OIG found that, while Service management had generally complied  with outsourcing policy, opportunities existed to enhance guidance for  measuring results. Specifically, the Service had not established policies or  procedures for determining if outsourcing initiatives achieved intended  results and did not require a post-implementation review of outsourcing  initiatives. Further, the OIG report stated that without such a review, there  was no accountability or assurance that the outsourcing initiative achieved  anticipated results. The Service agreed with the OIG’s recommendation to  establish a post-implementation review program that compares  anticipated savings with actual results and stated that such a program  would be developed by March 31, 2008. In June 2008, the Service told us it  is working with the OIG to develop a review program but added that  reviews of all outsourced AMCs would depend on the results of its initial  reviews.
The Service did not indicate whether it would use a similar review for  other outsourcing initiatives, but the Service has begun to track one  indicator of outsourcing performance—cost savings. Service officials told  us that for the AMC initiative, the Service saved, or expects to save by  2009, about $117 million by eliminating facility lease and labor expenses at  AMCs. Not all of these savings are attributable to outsourcing activities,  however, because the Service also included the savings it realized by  closing some facilities.
Without complete information about the results of its outsourcing efforts,  Service management, stakeholders, and Congress are not able to assess  the risk and value of outsourcing and accountability for results is limited.  Specifically, the Service should be able to address the following questions:    Does outsourcing, either of a specific function or at an aggregate level,  save money? Result in increased effectiveness? Provide some other value?
What are the risks associated with outsourcing?
How cost-effective is outsourcing?
Is the level of satisfaction of customers served by contractors comparable  to those served by postal employees?
What impact does increased use of contractors have on the safety of the  mail, mail facilities, employees, and customers?
Looking forward, the Service is considering another major outsourcing  initiative involving its bulk mail processing network, which could impact  work done by two unions. Stakeholders may raise questions about  effectiveness, cost savings, and other anticipated outcomes. Responses to  these questions will be important to inform decision-making.
section_title: The Service Faces Challenges That May Limit Further Outsourcing
paragraphs: As it considers future outsourcing, the Service faces a number of  challenges, including differing messages from Congress and the  Administration on outsourcing and the potential impact of outsourcing on  its relations with its employee unions. Two bills pending in Congress could  affect the Service’s outsourcing efforts. H.R. 4236 would require the  Service to bargain with postal unions before it engages in outsourcing and  S. 1457 would limit the Service’s ability to outsource. Service officials say  outsourcing is a critical tool to help the Service meet its financial goals but  union officials oppose expanded use of outsourcing. Both the Service and  unions have indicated that the appropriate way to resolve issues related to  outsourcing is through the collective bargaining process. However, most  unions have said the Service would not negotiate with them on this issue  and have therefore sought congressional intervention. The Service agreed  in the most recent collective bargaining process to try and resolve its  differences on this issue with the two carrier unions.
subsections: section_title: Public Policy Issues Related to the Scope of the Service’s Outsourcing
paragraphs: Legislative and administration initiatives send differing messages to the  Service on the scope of its outsourcing effort, from initiatives that support  outsourcing as a means to reduce costs, increase efficiency, and improve  quality, to initiatives that question the value of outsourcing and propose to  curtail it. Support for the Service to operate more like a business dates  back at least to 1970, when Congress passed legislation that gave the  Service unique status as an independent establishment of the federal  government and authorized it to finance its operations through sales of its  products and services instead of appropriations. Congress also stated in  the 2006 Postal Accountability and Enhancement Act that the Postal  Service should implement commercial best practices in its purchasing  policies to achieve greater efficiency and cost savings by taking full  advantage of private-sector partnerships, as recommended in the July 2003  report by the President’s Commission on the United States Postal  Service.
Similarly, the current and previous administrations have advanced  proposals to promote more efficient and effective government operations,  including outsourcing government operations. In particular, in 2001, the  Bush Administration launched the President’s Management Agenda to  focus attention on ensuring that the resources entrusted to the federal  government are well-managed and wisely used. The President’s  Management Agenda encourages opening federal commercial activities to  competition among public and private sector sources to achieve increased  savings and improve performance. These competitions are guided by  specific criteria in Office of Management and Budget Circular No. A-76.  Although the President’s Management Agenda does not apply to the  Service, it was one of many sources of information considered in the  Service’s 2002 Transformation Plan. The President’s Commission on the  Postal Service further recommended that the Service utilize outsourcing to  help it accomplish cost-reduction goals and improve efficiency.
However, as previously noted, recent legislative efforts could restrict the  Service’s ability to outsource. Bills introduced in 2007, and pending with  the appropriate oversight subcommittees, address the Service’s use of  outsourced mail delivery contractors.  S. 1457 seeks to limit the extent that  the Service could use outsourced delivery service, and H.R. 4236 would  require the Service to bargain with postal employee unions before entering  into certain contracts. Additionally, House Resolution 282, co-sponsored  by 255 members as of July 2008, expressed “the sense of the House of  Representatives that the United States Postal Service should discontinue  the practice of contracting out mail delivery services.”
Postal employee unions have questioned whether outsourcing actually  achieves its intended results. For example, the president of the Mail  Handlers described as false the Service’s assumption that it will save  money by allowing private contractors to perform work currently done by  postal employees. He further maintained that actual experience, such as  with Emery, has shown that outsourcing has the opposite effect, costing  the Service more than anticipated. In addition, he said that evaluations by  the Service that compare the costs of performing work with contractors  and with postal employees are incomplete and do not reflect the actual  costs borne by the Service. APWU officials told us the Postal Service  primarily uses wage factors as a basis for comparison. Since postal  employees are relatively well paid, according to these officials,  comparisons tend to find outsourcing to be less costly. Also, the officials  noted such comparisons exclude the value of other factors, such as the  higher levels of efficiency provided by a well-trained, dedicated career  workforce. In addition, unions have expressed skepticism over the value  of outsourcing, raising concerns about public policy issues related to the  Service’s mission or intended obligations as a government entity. For  example, the Service has not clearly defined the functions it considers  “inherently postal”–functions that should only be performed by the  Service–and whether these functions should be outsourced. All four  unions have questioned the wisdom of the Service outsourcing in what  they consider its core functional areas, such as delivery or mail  processing. Similarly, two unions expressed concerns that there are no  limits to the extent the Service could outsource: if it outsources one  delivery route, why not outsource all? They also noted that one impact of  expanding outsourcing would be to replace long-term career employees  with low-paid, no-benefit, non-career, and often transient workers. Finally,  the unions have also raised the question of whether the Service, by hiring  contractors, violates the public’s trust and expectation of safe, efficient  mail delivery or violates its responsibilities as an employer. For example,  the president of the Mail Handlers stated in recent testimony that another  impact of outsourcing is that the Service, which is currently one of the  largest employers of veterans and disabled veterans, would reduce the  number of job opportunities for veterans returning from combat and non- combat situations.
The current uncertain economic environment serves to exacerbate the  challenges facing the Service and contributed to lower than expected mail  volumes and revenues in the first half of fiscal year 2008. The Service faces  challenges such as generating mail volumes despite rate increases in May  2008; managing its costs in difficult economic conditions, and improving  operational efficiencies through accelerated cost reduction strategies;  maintaining, measuring, and reporting service; and managing its  workforce. In its Transformation Plans and congressional testimony, the  Service has acknowledged the value it places on outsourcing as a means to  reduce costs and increase efficiency and its intent to continue to pursue  outsourcing opportunities. The Service has a long history of outsourcing  mail transportation, delivery services and other functions, much of which  has been carried out within the framework of the Service’s collective  bargaining agreements with its employee unions.
section_title: Continued Outsourcing Could Impact the Service’s Relations with Its Employee Unions
paragraphs: Continued or expanded outsourcing by the Service could lead to problems  with postal employee unions as evidenced by public statements by union  officials. For example, the president of the Mail Handlers testified that  continued outsourcing by the Service would drive a wedge between it and  hundreds of thousands of postal employees. Postal employees are critical  to providing vital postal services to the American people and achieving a  successful postal transformation. The President’s Commission on the  Postal Service concluded that as valuable as the Postal Service is to the  nation, its ability to deliver that value is only as great as the capability,  motivation, and satisfaction of the people who make possible the daily  delivery of mail to American homes and businesses. However, we and  others have reported that adversarial labor-management relations have  been a challenge for the Service and its major labor unions.
In the past, we reported that autocratic management, persistent  confrontation and conflict, and ineffective performance systems often  characterized the Service’s organizational culture on the workroom floor.  These problems resulted in an underperforming organization with major  deficiencies in morale and quality of work life; huge numbers of  grievances with high costs for the Service and its employees; and  protracted, acrimonious contract negotiations. In our past reports, we  found that these conditions have existed over many years because labor  and management leadership, at both the national and local levels, have  often had difficulty working together to find solutions to their problems.  Under these circumstances, it was difficult for the parties to develop and  sustain the level of trust necessary for maintaining a constructive working  relationship and agreeing on major changes to maximize the Service’s  efficiency and the quality of work life. We are encouraged by recent  progress in this area, such as reports by union officials of better  communications, sharp reductions in the number of outstanding  grievances, and three of four major labor contracts that were successfully  negotiated between the parties without the need for binding arbitration. In  addition, the Service has improved its productivity, which the Service  reported has increased in each of the last 8 years.
However, continued or expanded outsourcing could be an impediment to  improved relationships. Recent actions by the unions continue to indicate  significant concerns about outsourcing. For example, in 2007, the Rural  Carriers filed a grievance alleging that the Service’s expanded use of  contract delivery service violated the terms of its collective bargaining  agreement. Similarly, collective bargaining agreement negotiations in 2007  between the Service and the City Carriers initially came to an impasse,  primarily because of union concerns over increased outsourcing of  delivery services. The parties reached an agreement, which was ratified by  the union membership, after the Service agreed to limitations on its ability  to outsource in certain areas served by city carriers over the life of the 5- year contract. In addition, the Service and union agreed to establish a joint  committee, including the Rural Carriers, to discuss a mutually agreeable  approach to the issue of outsourcing by March 2008. Because the  committee extended its reporting deadline to the end of September 2008,  the results of this effort are not yet known.
The Service and employee unions have indicated that the appropriate  means for resolving outsourcing issues is through the collective bargaining  process. For example, the Postmaster General testified that, “beyond the  specific subject of contract delivery, there is a bigger issue at stake. That is  the ability of the parties, the Postal Service and its unions, to resolve their  differences through the collective bargaining process. One of the most  important accomplishments of the Postal Reorganization Act of 1970 was  the extension of full collective bargaining rights to the postal unions. Over  the course of more than 3 decades, these have served our employees, our  unions and the Postal Service well. And, as we have seen, the process can– and does–work.” While most unions agree, they also stated that the  Service has not always been willing to discuss outsourcing in collective  bargaining negotiations. Some unions have already asked Congress to pass  proposed legislation that would require the Service to collectively bargain  with the unions on outsourcing proposals before they can be approved or  that would limit the extent that the Service could use outsourced delivery  service.
section_title: Conclusions
paragraphs: Although the Service has outsourced activities related to many of its key  functions, its employee unions are now challenging its ability to expand  outsourcing in areas where postal employees have performed or could  perform these activities. The Service views outsourcing as an important  strategy for achieving the cost savings it needs to operate successfully  under a regulatory price cap. But because the Service does not track, and  therefore cannot quantify, the actual results of its outsourcing activities, it  cannot document the effectiveness of its outsourcing results for Service  managers, stakeholders, and Congress. As a result, information to assess  the risk and value of outsourcing and accountability for results is limited.  Information on the effectiveness of outsourcing, including actual results,  costs, and any savings achieved, could be useful as the Service considers  additional outsourcing initiatives. Both the Service and its unions agree  that the appropriate way to resolve outsourcing issues is through the  collective bargaining process. A key challenge for both the Service and its  unions will be to reach agreement on outsourcing issues through  collective bargaining.
section_title: Recommendations for Executive Action
paragraphs: To improve management decision-making and accountability in this area,  the Postmaster General should, first, establish a process to measure the  results and effectiveness of Service outsourcing activities that are subject  to collective bargaining. This process should include tracking actual costs  and any savings, and comparing them with estimated costs and savings.  Second, to support congressional oversight, the Postmaster General  should include information on the results and effectiveness of these  ongoing outsourcing activities in its annual operations report  (Comprehensive Statement on Postal Operations) to Congress.
section_title: Agency Comments and Our Evaluation
paragraphs: The U.S. Postal Service provided written comments on a draft of this  report in a letter from the Chief Human Resources Officer and Executive  Vice President dated July 7, 2008. These comments are summarized below  and are included, in their entirety, as appendix III to this report. In  separate correspondence, the Service also provided minor technical  comments, which we incorporated, as appropriate.
The Service generally agreed with our finding that it does not separately  track the results of its outsourcing activities and with our first  recommendation that a process should be established to measure the  results and effectiveness of Service outsourcing initiatives that are subject  to collective bargaining agreements, including tracking actual costs and  any savings. However, the Service did not agree to implement our second  recommendation to provide information on the results and effectiveness  of these ongoing outsourcing initiatives in its annual operations report to  Congress.
The Service agreed to establish a process, for future national-level  outsourcing initiatives approved after July 2008, to compare the final  financial comparative analysis assumptions with actual contract award  data 1 year after project implementation. This step is commendable to  begin assessing the impact and effectiveness of outsourcing efforts,  specifically the cost savings achieved after 1 year. Our recommendation  was not limited to costs and savings associated with outsourcing, but the  Service did not commit to measuring other impacts, such as on service,  customers, or employees. We continue to believe these are also important  in a comprehensive assessment of the outsourcing efforts.
The Service did not agree to implement our second recommendation and  proposed instead to retain information it collects on its outsourcing efforts  internally. However, in order for the Service to effectively make its case to  use outsourcing as a mechanism to contain costs, we believe that the  Service must keep its stakeholders, including Members of Congress,  customers, employees, and the public-at-large, fully informed of the  merits, potential impacts, and the results of outsourcing. Several bills are  pending before Congress that would affect the Service’s ability to  outsource. In conducting oversight and making its decisions, Congress  would benefit from more data about the results and effectiveness of the  Service’s outsourcing activities that are subject to collective bargaining.  Without transparency regarding its outsourcing initiatives, postal  management, stakeholders and Congress are not able to assess the risk  and value of outsourcing and accountability for results is limited. Thus, we  believe that the Service should annually provide Congress with  information about the results of outsourcing activities as discussed  previously.
We are sending copies of this report to the Chairman and Ranking Member  of the House Committee on Oversight and Government Reform; the  Chairman and Ranking Member of the Senate Committee on Homeland  Security and Governmental Affairs; the Postmaster General; and other  interested parties. We also will provide copies to others on request. In  addition, the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff has any questions regarding this report, please contact  me at siggerudk@gao.gov or by telephone at (202) 512-2834. Contact  points for our Office of Congressional Relations and Public Affairs may be  found on the last page of this report. GAO staff that made key  contributions to this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives for this report were to assess (1) the circumstances under  which the Service can outsource postal functions, how it decides to  outsource, and the extent to which it has outsourced; (2) how the  Service’s management processes, including suitability (hiring and  screening procedures) and performance evaluation, for contractors  compare to those for postal employees; and (3) the results—including any  costs savings, or other outcomes—of the Service’s outsourcing efforts and  the challenges facing the Service related to outsourcing.
To address the circumstances under which the Service can outsource  postal functions, we reviewed statutory and regulatory requirements and  agreements with the Service’s employee unions. Specifically, we reviewed  applicable statutes and regulations pertaining to the Service, and the  Service’s most recent collective bargaining agreements, and accompanying  memoranda of understanding, with its four major employee unions—the  American Postal Workers Union (APWU), the National Association of  Letter Carriers (City Carriers), the National Postal Mail Handlers Union  (Mail Handlers), and the National Rural Letter Carriers’ Association (Rural  Carriers). In addition, we reviewed information on federal laws and  regulations applicable to most federal purchasing, though not required of  the Service, such as the Federal Acquisition Regulation, the Competition in  Contracting Act, and the Office of Management and Budget’s Circular No.  A-76. We focused the scope of our review on the major postal functional  areas—transportation, delivery, mail processing, and retail—that involve  outsourcing activities related to the bargaining unit work of the Service’s  four major unions. To determine how the Service decides to outsource, we  interviewed postal officials at Service headquarters and in the Southwest  Area, and representatives of employee unions, management associations,  and the National Star Route Mail Contractors Association. We reviewed  the purchasing procedures the Service uses to guide its purchasing of  specific services, including contracted services. We also interviewed the  Strategic Initiatives Action Group (SIAG), an internal cross-functional  group at headquarters that guides outsourcing through the decision- making process at the national level, and reviewed the group’s policies and  procedures. Finally, we discussed with Service officials, and obtained  information on, the Growth Management Tool, a new software tool the  Service can use in assigning delivery routes, including outsourced routes.  To determine the extent of the Service’s outsourcing, we interviewed  Service officials at headquarters and in the Southwest Area and obtained  and reviewed documents related to the Service’s outsourcing efforts,  including 46 national-level outsourcing initiatives since 1996, as well as  proposed initiatives. In addition, we obtained, reviewed, and analyzed  information on outsourced transportation and delivery, including data  pertaining to routes and delivery points for the three types of carriers— city, rural, and contract delivery service. We assessed the reliability of  Service data for inconsistencies and determined that the data were  sufficiently reliable for the purpose of this report.
To compare the Service’s suitability, performance evaluation, and  management processes for postal employees and contractors, we  reviewed the Service’s policies and procedures on qualifications, screening  requirements, and performance evaluation for contractors and postal  employees. We reviewed various Service contracts on Air Mail Centers,  highway contract routes, and contract delivery service and compared  contractual stipulations with applicable postal employee guidelines and  collective bargaining agreements by respective occupation. Finally, we  spoke with various Service national- and field-level officials about the  Service’s suitability, performance evaluation and management processes  for postal employees and contractors.
To evaluate the results, including costs, savings, and other outcomes  related to outsourcing, we discussed with Service officials the processes  and procedures currently in place for evaluating outsourcing activities. We  also obtained and reviewed available cost estimates, relevant budget  information, and available performance data for the outsourcing projects  initiated between 1996 and 2007.
We conducted this performance audit from August 2007 to July 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: National Outsourcing Initiatives Since1996 That Did Not Have a Significant Impact on Postal Unions
subsections: section_title: Automated Package Processing System
paragraphs: Singulate and Scan Induction Unit / Optical Character  Recognition Program  Hub and Spoke (HASP) Expansion/ Surface Transfer  Centers (STC)
Controls the movement of mail through surface transportation.
BMC Transition to RDC Concept (Regional Distribution  Center)
Automated Tray Handling System (ATHS)
Feeder Enhancer De-Stacker Retrofit (FEDR)
Flat Identification Code Sort Program (FICS)
Ventilation and Filtration Systems (VFS)
section_title: Appendix III: Comments from the U.S. Postal Service
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the individual named above, Teresa Anderson, Lauren  Calhoun, Elizabeth Eisenstadt, Brandon Haller, David Hooper, Brian  Howell, Karen Jarzynka, and Travis Thomson made key contributions to  this report.