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.