Does Royal Mail Have the Solution to the US Postal Service’s Woes?

In our last post on the US Post Office, we asked will Darrell Issa save the US Post Office. Given that the US Post Offices need to identify immediate savings of almost 20 Billion plus (as it keeps bleeding red with losses of 15.9 Billion in 2012 and 3.2 Billion in the first two quarters of 2013), something needs to be done fast.

In response to this need, as chronicled in our last post, we noted how Darrell Issa, a Representative of California and chairman of the US House Oversight and Government Reform, signed off on H.R. 2748, the Postal Reform Act of 2013, designed to bring the United States Postal Service (USPS) to financial solvency with cost-cutting reforms and innovative new sources of revenue. While the plan had a couple of good points, SI’s conclusion was that it was not going to be enough to generate the savings required.

Not that Royal Mail is in much better shape. As per an article in the Economist last summer, chronicled in this SI post that asked who’s in worse shape, Royal Mail racked up a £s;10 Billion deficit in unfunded pension liabilities. They may have saved over 300 Million in the first phase of their Procurement Transformation, and may expect to save over 600 Million in the second phase of their Procurement Transformation, but that’s a far cry from the 10 Billion they need to save.

However, as per this recent article over on CNN Money on how
U.K.’s Royal Mail Goes Public, the British Government is planning to sell a majority of its take in the Royal Mail through an IPO (initial public offering) that will be one of the U.K.’s largest in decades. The sale will certainly help, but given that the postal service IPO is likely to be valued around £s;3 Billion, that’s less than 1/3 of the shortfall and not a quick fix.

Still, it might indicate the only solution for the U.S. Postal Service that is now losing an estimated 25 Million daily. Specifically, the US should consider selling the US Post Office to a private equity group that can do what private equity groups do – turn struggling businesses with a lot of profit potential around into profit making machines. There are arguments both ways on this topic, some of which are summarized in this Research Roundup, but given that the USPS did 65 Billion in Revenue in 2012, the potential valuation could easily be in the 200 Billion range, and any group that could raise that kind of equity could definitely afford to make up the unfunded liabilities. It’s an interesting thought.

Where Do the Savings Lie?

Inflationary times are back, economic growth is slow, the job-situation hasn’t improved much, employers would rather keep a job vacant nine years waiting for the perfect candidate over spending even a single dollar on training, and CFOs are being told to put pressure on Procurement to cut costs to the bone. In other words, despite all the talk in recent years about training, innovation, and value-generation, it’s still business as usual at review time.

You’ve beat your suppliers senseless, kept overhead to a minimum (not by choice, you weren’t allowed to replace people lost to attrition), done some automation and strategic sourcing, and put as much effort as you could into high-cost categories. As far as you’re concerned, you’ve squeezed all the blood out of the stone and there’s nothing left. And if you are a sourcing leader, that might be true for the categories you’ve been focussing on for 6 to 9 years and that you’ve strategically sourced 3 times in a row.

But is this all the savings to be had? Not by a long shot.

The first thing to remember is that costs fall into two categories: recurring and one-time. Recurring costs include human resources (employees and mid to long term contractors); raw material, component, and production costs; overhead; COGS (cost of goods sold), transportation, and insurance. If your organization is a leader in Procurement and Supply Management and seen as a value generator, then, in addition to reducing raw-material, component, and production costs, it works with operations to keep overheads and insurance costs low, works with logistics to keep transportation costs low, works with Sales & Marketing to keep COGS low using its expertise, and even works with HR to get contractors at competitive rates. (In other words, it’s directly or indirectly reducing every cost except salary, which it has no control over.)

One-time costs include expedited shipping, temporary/contingent labour (to address seasonal spikes, such as the surge in demand many retailers get around Christmas time), switching costs (when switching suppliers or raw materials), and one-time costs associated with recalls, settlements, and stock-outs (on the shelves and in the factory). Most Supply Management departments work with logistics to optimize and keep transportation in check to minimize shipping costs, work with HR to make sure temporary/contingent labour is sourced appropriately, and take switching costs into account when evaluating sources of supply, and this is a good start, but these one-time costs pale in comparison to the cost of a recall, settlement, or stock-out. Recalling a contaminated or unsafe product that makes it to the shelves can easily cost in the tens of millions of dollars, a settlement that results from a class action lawsuit can cost in the hundreds of millions (especially when legal costs are factored in), and a supply chain disruption that results in the assembly line for the key, or only, product line being shut down for months can bankrupt a company (and a number of companies have gone bankrupt as a result of serious disruptions in production). How much is your Supply Management organization doing to prevent these very costly incidents, which can wipe out years of savings, from happening? Remember, Supply Management has, or should have, the supplier relationship and be doing its utmost to insure quality (preventing recalls or lawsuits), supply management has (or should have) the visibility to detect shortages or stock-outs well before they happen (and is the only organization in the position to take action and locate another source of supply in time), and only Supply Management has (or should have) the cross-functional capability to address these issues.

So, do you know where the savings lie?

Homeland Security Turns 224 Years Old Today!

Everyone thinks the Department of Homeland Security (established by the Homeland Security Act by Congress in November 2002), which opened its doors on March 1, 2003, was the beginning of the U.S. focus on homeland security, but nothing can be further from the truth. The U.S. focus on Homeland security started on this day in 1789 when the U.S. Department of Foreign Affairs changed its name to the Department of State. The inward focus has continued and progressed since that day while the rest of the world still deals with foreign affairs.

PPM is important, but it should be done by a COE that functions as a PTO. Not a PMO.

Confused yet? Let me explain.

Late this spring, over on Spend Matters, Pierre Mitchell, noting that PMOs have failed in IT asked “Should We Really Use Them in Procurement”. This post, which followed Jason Busch’s post that asked” Does Procurement Need a PMO?” (Spend Matters Plus Content) offered may reasons why a PMO should be pursued in Procurement. However, in SI’s view, not one justifies the focus on a PMO.

A PMO, short for Project Mmanagement Office, is a group or department within a business, agency or enterprise that defines and maintains standards for project management within the organization. (Source: Wikipedia) This department, which strives to standardize and introduce economies of repetition in the execution of projects, sounds good in theory, but has often failed in practice, especially in IT. Why? Simply put, you can’t manage what you don’t understand — and IT projects, which are exceedingly complex in nature, can only be understood by the senior engineers, software architects, and developers capable of implementing them. They’re not going to be understood by a two-bit run-of-the-mill project manager whose background is a basic business degree and training on the PMBOK (Project Management Body of Knowledge). The few IT projects that succeed are those that are managed by former engineers, software architects, and/or developers that have been trained in basic project management (and not the other way around). It’s the same reason mathematicians (given enough Ritalin*) can make great (forensic) accountants, but accountants make bad mathematicians. (Who, when they see 2x + 2 will ask “two times what”.)

Similarly, there are some Procurement projects, especially in high-tech, medical, and automotive, that are too complex for an average project manager. These should not be managed by a project manager, but by a domain expert. However, they should be tracked and the appropriate resources made available by a Center of Excellence (COE) that functions as a Project Tracking Office (PTO). This COE would insure that the domain expert has the appropriate tools, methodologies, and processes at her disposal and the training to use them, as well as the necessary training in project management. In addition, it would focus on Procurement Performance Management (PPM) and, as Pierre Mitchell noted, act as a TMO — Transformation Management Office.

In other words, SI agrees with Pierre Mitchell in that there is a need for better Project Management, and in particular, Project Performance Management, in Procurement — but disagrees in the approach. We need to focus on the COE — not the PMO. It’s important that the focus is on excellence, not the mundane.

* Let’s face it, Accounting is pretty boring to a mathematician who might need a little help focussing on it for eight hours a day.