Remote barcoding is a part of the Service’s letter mail automation efforts that began in 1982. In the late 1980s, the Postal Service determined that it needed a system for barcoding the billions of letters containing addresses that cannot be read by the Service’s optical character readers. Remote barcoding entails making an electronic image of these letters. The images are electronically transmitted to remote barcoding sites where data entry operators enter enough address information into a computer to permit a barcode to be applied to the letter. The barcode allows automated equipment to sort letters at later stages in the processing and delivery chain. The Service made a decision in July 1991 to contract out remote barcoding based on a cost analysis that showed that contracting out would result in an expected savings of $4.3 billion over a 15-year period. The Service’s analysis was based on the pay levels and benefits that the Service expected to provide at that time, which exceed pay levels currently expected for in-house work. In November 1993, the Postal Service reversed its decision to contract out the remote barcoding function as a result of an arbitration award. The Service expected that agreeing to use postal employees for remote barcoding would improve its relations with APWU. In 1991, the Service had determined that contracting out was appropriate because (1) the remote barcoding workers would not touch the mail and security of the mail was not at risk, (2) much of the work would be part-time employment and result in lower overall costs, and (3) technological advances in optical character recognition would enable equipment to read this mail and eventually phase out the remote barcoding. As detailed in our earlier report on the Service’s automation program, the Postal Service’s plans for remote barcoding have since changed—it now anticipates increased use of the method with no phase-out date. On the basis of the expected total work load equivalent to 23 billion letter images per year and a processing rate of 750 images per console hour, we estimate that the Service will employ the equivalent of at least 17,000 operators for remote barcoding. This is a minimum based on console hours only and does not take into account such other time as supervision, management, and maintenance. In November 1990, the clerk and carrier unions filed national grievances challenging the Service’s plan to contract out remote barcoding services. Subsequent to its July 1991 decision, the Service awarded 2-year contracts (with an option to renew for a 2-year period) to 8 firms for remote barcoding services for 17 sites. In late 1992, additional remote barcoding deployment was put on hold pending the outcome of the grievances, which ultimately went to arbitration. On May 20, 1993, the arbitrator concluded that the Service failed to honor certain contractual rights of postal employees. The decision required the Service to first offer the jobs to those postal employees who were interested in and qualified for the jobs before contracting out for the remote barcoding service. The decision did not require that the jobs be offered to new postal hires, and Postal Service officials believed that an option such as specifying a few sites to be operated by postal employees and contracting out for the remaining ones would have complied with the arbitrator’s decision. On November 2, 1993, the Service agreed with APWU that remote barcoding jobs would be filled entirely by postal employees. In 1994, the Service resumed remote barcoding deployment, opening 14 remote barcoding sites where postal employees are to provide services for 22 mail processing plants. In September 1994, the Service converted two contractor sites serving two plants to in-house centers. It plans to convert the remaining sites by the end of 1996 and to eventually operate up to 75 centers that would serve 268 plants and process the equivalent of about 23 billion letters annually. Based on cost data provided by the Postal Service, we compared costs incurred during a 36-week period from July 23, 1994, through March 31, 1995, for remote barcoding at the 15 contractor facilities (17 until 2 were converted to in-house operation on September 6, 1994) and the Service’s 14 in-house facilities (16 after September 6, 1994). We estimated that the total direct cost of processing 1,000 images averaged $28.18 at the in-house centers compared to $26.61 at the contractor locations, a difference of 6 percent. The cost difference was the greatest at the beginning of the period when the in-house sites were getting started and stabilized at about a 6-percent difference during the last 3 accounting periods (12 weeks). About 2.8 billion images were processed in the Service’s centers during the 36-week period. We estimated that processing these images in the in-house facilities cost the Postal Service about $4.4 million, or 6 percent more than processing them in contractor-operated sites. The 6-percent difference will increase in the future as required changes in the mix of employees staffing the postal remote barcoding centers occur. The Service uses both career and transitional employees, who earn different wages and benefits. Transitional employees receive $9.74 an hour, Social Security benefits, and earn up to one-half day annual leave every 2 weeks. The career employees start at $11.44 an hour and receive health benefits, life insurance, retirement/Social Security benefits, a thrift savings plan, sick leave, and earn up to 1 day of annual leave every 2 weeks. For the postal remote barcoding sites we reviewed, 89 percent of the workhours were generated by transitional employees. By agreement with APWU, no more than 70 percent of the workhours in these centers is to be generated by transitional employees. The Service is working toward this level, and transitional employee workhours are declining while career workhours are increasing as the Service converts and replaces its transitional employees. We estimate that had the required 70/30 ratio of transitional to career employee workhours been achieved for our comparison period, the in-house cost would have been $30.33 per 1,000 images instead of $28.18, for a cost difference of about 14 percent instead of 6 percent. The Service projects that remote barcoding will eventually barcode about 31 billion letters annually. With the remote computer reader expected to reduce the need for keying by about 25 percent, we estimated that remote barcoding centers will eventually process the equivalent of about 23 billion letters annually. If the 6 percent cost differential and the current ratio of 89 percent transitional and 11 percent career workhours were continued, we estimated the in-house cost for this volume would be about $36 million more per year, not adjusted for inflation. If the cost differential we found continues, using postal employees would cost the Service about $86 million more per year, or 14 percent, not adjusted for inflation, when the required ratio of 70 percent transitional and 30 percent career workhours has been achieved. Benefits for transitional employees that are more comparable to those for career employees were at issue in the recent contract negotiations between the Service and APWU. It is reasonable to expect that wage and other cost increases may occur in the future for both in-house and contractor-operated sites. However, if the Service and APWU agree that transitional employees will receive additional benefits, the character of the jobs held by these employees will change, and the transitional employees will become more like career postal employees. Therefore, we also estimated the in-house and contract cost for remote barcoding if the cost of transitional employee benefits were the same as the cost of career employee benefits. On this basis, our estimate is that the differential would be about $174 million, or 28 percent, not adjusted for inflation. Using images per console hour as a measure, we determined that operator speed was similar between the contract sites and the in-house centers during the 36-week period. Contract keyers processed an average of 756 images per console hour, and postal employees processed 729 per hour. Figure 1 shows that differences in keying speed were the greatest at the beginning of the period and were more comparable at the end of it. The number of images per console hour was the best available measure we had for comparing the output of postal and contract employees. However, certain factors that are important to measuring performance were not similarly applied by the Postal Service and contractors. For example, contractors can receive a bonus for exceeding 650 images per hour and incur financial penalties for falling short of 640 images per hour. The Service requires its employees to maintain the standard of 650 images per hour, but no bonuses or penalties are involved. Accuracy standards are similar but involve financial penalties only for contractors. The program that measures errors at contractor sites was not used at postal sites at the time of our review. The Service and the unions are in negotiations over what methods will be used to monitor the accuracy of postal employee operators. Additionally, productivity data of both postal and contractor sites can be skewed if mail processing plants served by the sites do not process enough mail to keep the operators busy and they continue to be paid. The plants can also make operational decisions affecting whether a full or partial barcode is required from the remote barcoding site. Although partial barcodes are quicker to enter, thus increasing productivity in a specific center, this partially barcoded mail will have to be sorted at a higher cost somewhere downstream. The Service did not have data to break out images processed in-house and by contractors by full and partial barcoding. In commenting on a draft of this report, APWU said that the period we used for our comparison is unfair to the postal-operated sites because they were just starting up, and productivity is typically lower during such periods. As shown in figure 1 above, postal images per hour were initially lower than the contractor’s images per hour. For this reason, we did not include data from any Service-operated center during its initial 12-week training period. Figure 1 also shows that postal employee processed images per hour exceeded the contractor’s images per hour in accounting period 4. The cost difference from accounting period 4 until the end of the period was smaller than during the entire period. However, the difference did not consistently decrease throughout the period. As indicated in table 1, the difference was greater in the last accounting period than the average for both the period we used and the period recommended by the union during which the images processed per hour had leveled off. We believe that our comparison of costs over the nine accounting periods is preferable because it minimizes the effects of one-time and short-term fluctuations in cost and performance. For example, we are aware that contractor costs in the data included nonrecurring, extraordinary payments by the Postal Service of $888,000 (or 0.87 percent of contractor costs) for workers’ compensation claims at two sites. The claims covered a period beginning before our 36-week comparison period, but the Postal Service recorded the full cost in the period paid. Time did not permit us to analyze the cost data to identify and allocate all such extraordinary costs to the appropriate accounting periods. The Service’s use of transitional employees substantially reduced the difference expected earlier between contract and in-house costs. In its original decision in 1990 on obtaining remote barcoding services, the Postal Service estimated that over a 15-year period it could save about $4.3 billion by using contract employees. That estimate was based on using existing career level 6 pay scale employees with full pay and benefits. Under the November 1993 agreement with APWU, only 30 percent of the workhours are to be generated by career employees. This mix of transitional and career employees at the level 4 pay scale makes the Postal Service’s cost closer to the cost of contracting out. The return on investment was estimated at 35.7 percent to contract out. The Service’s cost comparison showed that the 70-30 mix of transitional and career workhours lowered the return on investment to 20.6 percent. Postal officials said this was still considered an acceptable return. The Service estimated that using level 4 pay scale career employees only would reduce the rate of return to 8 percent. In commenting on a draft of this report, APWU pointed out that an important reason for having postal employees do this work is that the remote barcoding program, originally considered temporary, is now a permanent part of mail processing operations, and thus eliminates a reason for having contractors do it. This same rationale could be put forth by APWU and/or the Service to eliminate the reason for having temporary or transitional employees do the barcoding. If this occurred, the cost of in-house barcoding would increase significantly. We estimate that if all of the in-house workhours had been generated by career employees at the pay and benefit level for the period under review, in-house keying costs would have exceeded contracting costs by 44 percent, or $267 million annually, based on a full production rate of 23 billion images per annum. Service and APWU officials we contacted believed that a principal advantage of bringing the remote barcoding in-house was anticipated improved working relationships. Contractor representatives we contacted believed there were a number of advantages to contracting out, including lower cost, higher productivity, and additional flexibility. The decision to bring the remote barcoding in-house was not primarily an economic one since the Postal Service recognized it would cost more than contracting out. Postal officials expected that using postal employees for remote barcoding would improve their relations with APWU. On November 2, 1993, when the Service decided to use postal employees for remote barcoding, the Service and APWU signed a memorandum on labor-management cooperation. This memorandum was in addition to an agreement signed by the Service’s Vice President for Labor Relations and the President of APWU the same day for the use of postal employees to do remote barcoding in full settlement of all Service-APWU issues relating to implementing remote barcoding. The cooperation memorandum included six principles (see app. I) of mutual commitment to improve Service-APWU relationships throughout the Postal Service. It specified that the parties “must establish a relationship built on mutual trust and a determination to explore and resolve issues jointly.” The Postal Service’s Vice President for Labor Relations and the President of APWU said that relations improved somewhat after the November 1993 agreements. The Vice President said that the decision to use postal employees for remote barcoding was “a very close call,” but the agreements seemed to have the effect of improving discussions during the contract negotiations that had begun with the Service in 1994. He also said that APWU initially made offers in contract negotiations that looked good to the Postal Service. Subsequent to the negotiations, however, the Vice President told us that he no longer believed that the experiment in cooperation with APWU was going to improve relations. According to the Vice President, APWU seemed to have disavowed the financial foundation for the remote barcoding agreement by proposing to (1) increase transitional employees’ wages by more than 32 percent over the life of the new contract and (2) provide health benefits for transitional employees. The Postal Service believes these actions would destroy the significance of the 70/30 employee workhour mix. Further, the Vice President said that APWU continues to be responsible for more than 75 percent of pending grievances and related arbitrations, which had increased substantially from the previous year. The President of APWU said that having the remote barcoding work done by postal employees was allowing the Service and the union to build new relations from the “ground up.” He said that the cooperation memorandum mentioned above was incidental to the more fundamental agreement of the same date for postal management and the union to establish and maintain remote barcoding sites, working together through joint committees of Service and union officials. Poor relations between postal management and APWU and NALC, including a strike, were a factor prompting Congress to pass the Postal Reorganization Act of 1970. We reported in September 1994 that relations between postal management and labor unions continued to be acrimonious. When negotiating new wage rates and employee benefits, the Service and the clerks and carriers have been able to reach agreement six out of nine times. However, for three of the last four times, the disputes proceeded to binding arbitration. Our September 1994 report detailed numerous problems on the workroom floor that management and the labor unions needed to address. We recommended that, as a starting point, the Service and all the unions and management associations negotiate a long-term framework agreement to demonstrate a commitment to improving working relations. Our follow-up work showed that the Postal Service and APWU are still having difficulty reaching bilateral agreements. Following the 1993 cooperation agreement, the Postal Service and APWU began negotiations for a new contract to replace the 4-year contract that expired in November 1994. No final and complete agreement could be reached on all subjects in the negotiations, and the parties mutually agreed to engage in a period of mediation. The Postal Service and APWU did not reach agreement for a new contract, and the dispute has now been referred to an arbitrator as provided for in the 1970 act. Further, the Postal Service and APWU, as well as two of the three other major unions, have been unable to agree to meet on an overall framework agreement that we recommended to deal with longstanding labor-management problems on the workroom floor detailed in our September 1994 report. In response to our report, the Postmaster General invited the leadership of all unions and management associations to a national summit to begin formulating such an agreement. APWU, NALC, and the National Postal Mailhandlers Union did not accept the invitation, saying that the negotiation of new contracts needed to be completed first. Service officials, union officials, and contractor representatives we contacted cited other advantages and disadvantages of using postal employees rather than contractors for remote barcoding. The Vice President for Labor Relations said that the mix of transitional and career employees may create some management problems. He said the different types of employees receiving different wage rates and benefits, but working side by side doing the same work at remote barcoding sites, may create employee morale problems. However, he also said that the career-transitional mix provided the Service with the advantage of offering transitional employees opportunities for career postal jobs. APWU officials said that remote barcoding is an integral part of mail processing and relies upon rapidly evolving technology, which they believed should not be separated into in-house and contractor operations because of a potential loss of management control and flexibility. They also said that the decision to use postal employees for remote barcoding was justified on the basis of cost studies by the Service showing a favorable return on investment. Contractor representatives cited a number of advantages to using contract employees. They said that, for a variety of reasons, contractor sites are less costly than postal sites. They believed that contract employees operate at higher productivity rates because contractors, unlike the Postal Service, can provide incentive pay that results in higher keying rates. They also said that contractors can exercise more flexibility in handling variations in mail volume levels because of procedures for adjusting staffing levels on 2-hour notice, as provided in the contracts. However, Service officials pointed out that under the 1993 agreement with APWU, transitional employees can be sent home without notice if work is not available, but the career employees can not. Our objectives were to (1) compare, insofar as postal data were available, the direct costs of contracting out remote barcoding with the direct costs of having the work done by postal employees; and (2) identify possible advantages and disadvantages of using postal employees rather than contractors to do the work. At Postal Service headquarters, we interviewed Service officials responsible for remote barcoding implementation and contracting, as well as those responsible for the Service’s labor relations and financial management. We met on two occasions with the President of the American Postal Workers Union and other union officials and with three representatives of remote barcoding contractors to obtain their views on the advantages and disadvantages of using postal employees for remote barcoding services. We visited two remote barcoding sites: the contractor site in Salem, VA, and the Lynchburg, VA, site, which recently converted to in-house operation. We also reviewed, but did not verify to underlying source records, Postal Service data on costs associated with remote barcoding done by contract and postal employees. Further, we confirmed our understanding of remote barcoding and verified some of our information by reviewing the results of related work done in March and April 1995 by the Postal Inspection Service. The Inspection Service did its work at five remote barcoding sites (three Service-operated, including one recently converted from contractor-operated, and two contractor-operated) to compare and contrast certain administration and management practices followed at the sites. Details on our cost comparison methodology are contained in appendix II. A draft of this report was provided to heads of the Postal Service, APWU, and the Contract Services Association of America for comment in April 1995. Subsequent to the initial distribution of the draft, the Postal Service provided us with revised cost data. We provided a revised draft to the three organizations prior to completion of the comment process, and the comments received were based on the second draft. We did our work from March through June 1995 in accordance with generally accepted government auditing standards. The Postal Service, APWU, and the Contract Services Association of America provided written comments on a draft of this report. The Postal Service concurred with the information contained in the report regarding the costs of remote barcoding in contractor and postal operated sites and the reasons for bringing the work in-house. The Service said that it had hoped that bringing the remote barcoding work in-house would foster better relations with APWU. The Service expressed disappointment that APWU continued to maintain an adversarial posture that hindered progress toward improving their relationship. (See app. III for the text of the Postal Service’s comments.) APWU characterized our draft report as being inaccurate and substantially biased. It also expressed the opinion that a report on this subject is premature because the data necessary for adequate evaluation are not yet available. More specifically, APWU said that the draft report (1) overstated the cost of in-house barcoding, (2) understated the costs of contracting out, (3) ignored important considerations that favor doing the work in-house, and (4) understated the significance of improvements in labor relations made possible by the APWU/Postal Service agreement to do remote barcoding in-house. APWU criticized the draft report as being premature because we used data from a period when postal remote barcoding facilities were just beginning operations, while contractor facilities represented mature operations, thereby overstating the cost of in-house operations. It said that this mature versus start-up comparison imparted a serious bias to our estimate of the cost differential. While we agree that the longer the period of comparison the more preferable, a longer period did not exist for the comparison we were asked to perform. It is also important to note that we excluded from the 36-week time period we used for our cost comparison the initial 12-week training period that each in-house site experienced before becoming operational. In response to APWU’s comments, we clarified our text to more clearly convey that our comparison excluded the 12-week training period for the in-house sites. We also further analyzed the data to identify variances in costs during the 36-week period, especially the later part of the 36-week period, when in-house sites were more mature. This analysis showed that in-house operations were consistently more expensive than contractor operations. We noted that the in-house operations will become more expensive if the workforce mix changes to include more career employees and fewer transitional employees as is presently planned, and/or if the transitional employees receive increased benefits. We also qualified our estimates of future costs by pointing out that circumstances could change and discussing how that might happen. APWU asserted that the draft report understated the cost of contracting for remote barcoding because we ignored such potential costs as overruns by government contractors and future strikes by contract employees. We did not ignore the possibility of increased contractor costs. We limited our cost analysis to actual costs because we had no basis for assigning dollar values to possible future events, such as employee strikes and potential cost overruns by contractors. Instead, we provided a narrative discussion of such factors. We expanded our discussion of these factors in response to APWU’s comments. APWU also said that the draft report ignored important considerations favoring in-house operations, such as the importance to postal managers of maintaining full integration and control of the barcoding effort. APWU asserted that in-house operations are inherently preferable from a management point of view. We do not believe that this necessarily holds true. A broad body of work we have done in other areas shows some successes and economies that have resulted from contracting out certain activities by various federal, state, and local governments. APWU also said that the draft report understated the significance of improvements in labor relations made possible by the agreement between APWU and the Postal Service to perform remote barcoding in-house. APWU characterized the agreement as a cornerstone of the parties’ efforts to build a constructive and productive relationship and cited some examples that it considered to be representative of positive progress in efforts to improve the relationship between the parties. After receiving APWU’s comments, we revisited with Postal Service officials the issue of the effect of the agreement on labor management relations to assure ourselves that we had correctly characterized the Postal Service’s position. The officials confirmed that we had, explaining that while the Postal Service believed at the time that the agreement was reached it would have a positive effect, the Service now believes that its relationship with APWU has deteriorated since the 1993 agreement. We added language to further ensure that the final report presents a balanced discussion of the differing views of the affected parties. (See app. IV for the text of APWU’s comments and our detailed response to these comments.) The Contract Services Association of America believed we should have put more information into our report regarding what the Association said was a complete breakdown in the Postal Service’s labor-management relations. In view of our previous extensive work evaluating the state of labor-management relations in the Postal Service, we did not evaluate labor-management relations; but at various places in the report, we describe the various parties’ perceptions of the labor-management relationship. The Contract Services Association of America also offered other comments and technical clarifications, which we incorporated in the report where appropriate. (See app. V for the text of the Contract Services Association of America’s comments.) We are providing copies of this report to Senate and House postal oversight and appropriation committees, the Postmaster General, the Postal Service Board of Governors, the Postal Rate Commission, the American Postal Workers Union, and other interested parties. Major contributors to the report are listed in appendix VI. If you have any questions, please call me on (202) 512-8387. “1. The APWU and the Postal Service hereby reaffirm their commitment to and support for labor-management cooperation at all levels of the organization to ensure a productive labor relations climate which should result in a better working environment for employees and to ensure the continued viability and success of the Postal Service. “2. The parties recognize that this commitment and support shall be manifested by cooperative dealings between management and the Union leadership which serves as the spokesperson for the employees whom they represent. “3. The parties recognize that the Postal Service operates in a competitive environment and understand that each Postal Service product is subject to volume diversion. Therefore, it is imperative that management and the Union jointly pursue strategies which emphasize improving employee working conditions and satisfying the customer in terms of service and costs. A more cooperative approach in dealings between management and APWU officials is encouraged on all issues in order to build a more efficient Postal Service. “4. The Postal Service recognizes the value of Union involvement in the decision making process and respects the right of the APWU to represent bargaining unit employees. In this regard, the Postal Service will work with and through the national, regional, and local Union leadership, rather than directly with employees on issues which affect working conditions and will seek ways of improving customer service, increasing revenue, and reducing postal costs. Management also recognizes the value of union input and a cooperative approach on issues that will affect working conditions and Postal Service policies. The parties affirm their intent to jointly discuss such issues prior to the development of such plans or policies. “5. The APWU and the Postal Service approve the concept of joint meetings among all organizations on issues of interest to all employees, but which are not directly related to wages, hours or working conditions, such as customer service, the financial performance of the organization and community-related activities. In this regard, the APWU will participate in joint efforts with management and other employee organizations to address these and other similar issues of mutual interest. “6. On matters directly affecting wages, hours or working conditions, the Postal Service and the APWU recognize that separate labor-management meetings involving only the affected Union or Unions are necessary. The parties are encouraged to discuss, explore, and resolve these issues, provided neither party shall attempt to change or vary the terms or provisions of the National Agreement.” The Postal Service’s fiscal year is made up of 13 4-week accounting periods. The time period we selected for comparing the cost of contract and in-house remote barcoding included nine accounting periods (36 weeks) from July 23, 1994, through March 31, 1995. We selected the July 23, 1994, date because this was the first day of the first accounting period after the Service-operated remote barcoding centers completed the 12-week training period for the first system. We then included data on each in-house center for the first full accounting period following the period in which the 12-week training period was completed. We did not include two centers (Lumberton, NC, and Laredo, TX) for the accounting period in which they were converted to in-house sites. We determined direct costs incurred by the in-house centers as reflected by the Postal Service Financial Reporting System and contract records for the selected accounting periods. This included all significant costs, such as the pay and benefits for employees and on-site supervisors and managers (about 94 percent of the direct cost), equipment maintenance, communication lines, travel, training, rent, utilities, and supplies. To this we added factors for Service-wide employee compensation not charged directly to any postal operations. These included the Postal Service’s payments for certain retirement, health and life insurance, and workers compensation costs, and increases in accrued leave liability due to pay raises. According to Postal Service data, these additional compensation costs ranged between 1.3 and 8.9 percent of direct pay and benefits for transitional and career employees in 1994 and 1995. Except for contract administration personnel, we did not allocate any headquarters costs to the in-house or contractor sites. This was because these costs were unlikely to be significantly different regardless of whether the sites were contracted out or operated in-house. Postal Service area offices incurred some cost for remote barcoding. Some area offices had appointed remote barcoding system coordinators, who spent some time assisting and overseeing the postal sites. Their level of involvement in the centers varied from area to area, and data on the amount of involvement were not readily available centrally. We did not attempt to estimate this cost because of the lack of data and because we do not believe it would have been large enough to materially affect our results. For the contractor sites, we used the actual contract cost to the Postal Service, which included the full cost of the remote barcoding services, except for equipment maintenance. We added the contract cost of maintenance for the equipment at the contractor sites, which was provided by the Postal Service to the contractors. We also added the cost of Postal Service personnel involved in administering the contracts, both at headquarters and at the facilities serviced by the coding centers. The estimate of this cost was provided by the Postal Service. The following are GAO’s comments on the letter dated July 14, 1995, from the American Postal Workers Union. 1. In light of APWU’s view that the 36-week period we used was not representative, we included an additional analysis in the report covering shorter and more recent time periods. This analysis shows that the cost difference varies depending on the period selected. Using the most recent 4-week period, the cost for in-house keying was greater than for the full 36-week period. However, because costs for any given period can contain extraordinary payments, we believe comparison periods should be as long as feasible to minimize the effects of those nonrecurring costs. 2. APWU suggested that our analysis failed to recognize some of the direct costs associated with the entire remote barcoding program, including capital costs. The total cost of the remote barcoding program was not the focus of our review. Our objective was to compare the direct cost of performing remote keying services in-house versus under contract. Where the cost to the Postal Service was the same whether the work was to be done in-house or by contract, we did not include such cost in our comparison. This methodology is consistent with the Service’s Guidelines for the Preparation of Cost Data for Comparison With Contracting Out Proposals. Using this approach, we did not include such costs as video display terminals, keyboards, and computers, for example, that were provided as government-furnished equipment to the contractors and also used at postal-operated sites. Our report discloses in appendix II the cost elements that we considered in our comparison and identifies cost elements not considered. 3. APWU asserted that the draft report understated the cost of contracting for remote barcoding because we ignored such potential costs as overruns by government contractors. It is true that we have reported on cost overruns incurred by government contractors. However, our reports citing contractor overruns were based on after-the-fact evaluations of actual contract costs compared to estimated contract costs. In addition, many instances of cost overruns occur when the scope of work is not well defined and deals with advanced technologies. This does not appear to be the case in remote barcoding where the scope of work is well defined. In addition, it would not be appropriate for us to speculate about the future cost that might be incurred by the Service’s remote keying contractors. 4. APWU said that our draft report ignored important reasons for having postal employees do remote barcoding, citing as one reason that the remote barcoding program is no longer considered temporary. While the point that the remote barcoding program is no longer considered a temporary program would be a valid consideration in a decision on whether to contract out, it was not cited by Postal Service officials in any records we reviewed or in our discussion with Service officials as a reason for having postal employees do the work. Rather, the reasons were related primarily to anticipated improvements in the Service’s relations with APWU. We estimate that if all of the in-house workhours had been generated by career employees at the pay and benefit level for the period under review, in-house keying costs would have exceeded contracting costs by 44 percent, or $267 million annually, based on a full production rate of 23 billion images per annum. 5. APWU said that our analysis did not take into consideration several contractor costs that could be passed on to the Postal Service. APWU said that it and several other unions were prepared to organize contractor employees and that even moderate organizing success would change the results of our cost analysis. As an example, APWU pointed to one contractor site where the contractors’ employees received health benefits. APWU apparently did not understand that we had in fact included these health benefit costs in our comparison. We agree that potential future costs could affect the cost differential if they occur; however, we have no basis for anticipating what the dollar value of such costs might be. Thus, we used actual cost data when available and discussed in narrative fashion possible changes in circumstances that might affect future costs. 6. APWU said that while our draft report observed that contract employees can receive a bonus for exceeding 650 images per hour, we did not estimate the cost impact of these potential bonuses. The costs for contracting out that we used in our estimates included the cost of actual bonuses paid to contractors for exceeding the standard of 650 images per hour and thus include the cost impact of this factor. We had no basis for estimating how bonuses may change in future periods. 7. APWU stated that the draft report failed to analyze barcoding error rates. The cost for contracting out that we used included penalties assessed against contractors for exceeding the maximum 3-percent error rate. We revised the text to clarify the reason that we could not compare error rates of postal employees and contract employees. 8. We recognize in the report that APWU believes that the agreement to bring the remote barcoding in-house has improved labor relations. However, the report also recognizes that this view does not agree with the Postal Service’s view. Moreover, the Postmaster General has recently said that it is clear that the collective bargaining process is broken. We deleted the word rarely and revised the text to reflect that the union has gone to interest arbitration three out of nine times. We made no judgments about the attitudes of postal employees. Rather, our report attributes to a Postal Service official the comment that a potential employee morale problem could result from the mix of transitional and career employees. 9. APWU said that the draft report was a biased document requested by a Subcommittee of the Committee on Appropriations for political reasons, including pressure to affect collective bargaining positions. The Subcommittee has not suggested to us in any way what the results of our analysis should be. We approached this assignment like all others, attempting to meet our customer’s legitimate oversight needs in an objective, independent, and timely manner. 10. APWU stated that our initial draft was flawed. As explained in our Objectives, Scope, and Methodology section of this report (see p. 12), subsequent to the initial distribution of a draft of this report, the Postal Service provided us with revised cost data. We provided a revised draft to APWU prior to completion of the comment process. We considered the comments of APWU in preparing this report. We received APWU comments in two meetings, both of which were attended by the APWU President, other APWU officials, and outside legal and economic advisers to APWU. APWU also provided written comments on a draft of this report, which are included in full. 11. APWU stated that the draft is still flawed, biased, and largely invalid. We believe that the data included in our report provide a fair (and best available) representation of the actual cost of operating remote barcoding sites by the Postal Service and by contractors for the periods indicated. As stated in the report, future cost differentials will depend on the circumstances at that time. 12. APWU believed that our use of a Postal Service analysis performed in prior years was misleading. We included the Service’s 1990 cost estimate because it led to the decision, followed until 1993, to use contractors for all remote barcoding services. We revised the text to reflect that the original Postal Service estimate was based on level 6 employees and that currently level 4 employees do the work at in-house sites. 13. In summary, APWU said that our draft report was inaccurate and substantially biased. APWU urged us to ensure that the final report is sufficiently balanced and appropriately qualified. We reviewed the draft report to further ensure that it presented the results of our analysis clearly and with a balanced tone. As discussed in our preceding comments, we added information and language where we thought it helped to clarify the report’s message or the positions of the affected parties. James T. Campbell, Assistant Director Anne M. Hilleary Leonard G. Hoglan Loretta K. Walch The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Summary: Pursuant to a congressional request, GAO compared the direct costs to the U.S. Postal Service of contracting out for remote barcoding services versus having the work done by postal employees, focusing on the advantages and disadvantages of using postal employees for these services. GAO found that: (1) in-house barcoding would cost an estimated 6 percent more than using contractors, based on a mix of 89 percent transitional and 11 percent career employee workhours; (2) the cost differential is expected to increase to 14 percent annually to process 23 billion letters, based on an union agreement of 70 percent transitional and 30 percent career employee workhours; (3) if transitional employees receive benefits similar to career employees, as the union has requested, the cost differential would increase to 28 percent or $174 million annually; (4) using postal employees for barcoding would result in improved relations with the union; and (5) the postal union believes that using postal employees for barcoding provides the opportunity for the Postal Service and the union to cooperate in establishing and operating remote barcoding sites.