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The ANAO examined whether Australia Post has developed and implemented strategies to improve the efficiency with which it meets its Community Service Obligations (CSOs).
Australia Post’s strategies to improve its efficiency have focussed on process optimisation and automation along with labour force flexibility, all with the objective of improving labour productivity.
Australia Post has been relatively slow in developing and implementing some of these strategies. In particular, Australia Post has not fully implemented its strategies to improve labour productivity, which were to be a key driver of the planned efficiency improvements.
Area for improvement
The ANAO made one recommendation to Australia Post aimed at addressing the delays in implementing, and realising the benefits of, its strategies to improve the efficiency of its reserved services.
Is Australia Post developing strategies to improve its performance in meeting its obligations?
Australia Post has identified strategies to improve its efficiency in delivering its reserved letters services, having regard to the regulatory and practical constraints faced by its business, and the need to generate support for policy changes impacting on the CSOs. These strategies have focused on reducing labour costs, through such means as process optimisation, automation, and reducing the number of penalty shifts worked. In addition, Australia Post has sought to better utilise its fixed delivery network to grow revenue from existing sources and develop new sources of revenue. However, there would be scope to assess the costs and benefits of providing letters infrastructure over and above the requirements of the CSOs.
Opportunities to improve efficiency
2.1 In competitive markets, firms can enhance their efficiency by reducing costs for a given output; increasing output for given cost; more closely matching output and pricing to demand; and ensuring that their business can adapt to changing market conditions.
2.2 As a GBE, Australia Post is required to operate efficiently, price efficiently and earn a commercial rate of return.16 As noted in Chapter 1, Australia Post’s letters delivery service is a regulated monopoly. Consequently, Australia Post faces a number of regulatory, commercial and practical constraints on its delivery of its letters service. These are detailed in Box 1.
Note a: For notified products, the Australian Competition and Consumer Commission must assess the proposed price increases for Australia Post’s notified Reserved Services under sections 95X and 95Z of the Competition and Consumer Act 2010. Notified services represent around 15 per cent of Australia Post’s volume of items delivered (that is, letters and parcels). The ACCC can object to any price increases proposed by Australia Post if it considers that the prices will exceed efficient costs (including an appropriate rate of return). The notified price then indirectly sets the baseline for Australia Post’s negotiation of other prices with customers.
Note b: Australia Post must charge a single uniform rate of postage for its letter service within Australia under section 27(3) of the Australian Postal Corporation Act 1989.
Note c: Australia Post advised that ‘transactional’ mail is relatively inelastic, and is the dominant volume segment. Volumes for promotional mail, which accounts for around 20 per cent of total letter volumes, are more responsive to changes in price.
Note d: Australia Post, Reform our Letter Service: Detailed Design Blueprint Effective 15 July 2014
Note e: People-related costs comprise costs related to staff labour, contract labour, corporate superannuation entitlements, licensees and contractors used for mail delivery services. This is discussed further at paragraph 2.32.
2.3 These factors have imposed some constraints on Australia Post’s ability, in the short-run, to determine its revenues, output, or quality (in terms of service standards) for its reserved letters business, and therefore to improve the efficiency with which it meets its obligations.
Australia Post’s strategies and programs to improve its efficiency
2.4 Given its cost base and regulatory obligations, Australia Post advised that its strategies, objectives and supporting programs to improve its efficiency in meeting its obligations have been shaped by a strong focus on building stakeholder support for major changes to its letters business. Key strategies, objectives and supporting programs are outlined at Table 2.1:
Table 2.1: Australia Post’s strategies and programs to improve efficiency
Future Ready was designed to reshape the enterprise to meet the challenges and opportunities presented to it, and to bring a stronger commercial focus. Its strategic objectives were to manage the decline of the regulated letters business; grow the non-regulated business and manage customers through the change; and support Australia Post’s staff, partners and the community during the process.
Post People First
Key workforce enterprise strategy designed to support career mobility and development by ensuring that staff have access to available jobs within Australia Post.
Reform of our Letter Services (RoLS)
Key program designed to reform the letters delivery service in response to declining letter volumes.
Our Part of Tomorrow
Our Part of Tomorrow was designed to improve Australia Post’s customer focus, with a focus on digital and online markets. Its strategic objectives include: running the current business efficiently; implementing Australia Post’s reform program; accelerating Australia Post’s future in eCommerce delivery; and designing and scaling future eCommerce services.
Note: Further detail on the timing of Australia Post’s key strategies is included at Appendix 3.
2.5 Broadly, Australia Post’s strategies in respect of its letters service have focussed on:
- process optimisation particularly to increase labour flexibility and reduce costs;
- process automation to use better technology to reduce costs;
- obtaining better utilisation of its delivery network;
- obtaining regulatory approvals to increase the price of its regulated letters products; and
- contributing to the policy discussion on modifying the prescribed performance standards it is required to meet.
Each of these is discussed below.
Changes to service standards
2.6 Australia Post has recognised that two key drivers of the losses it has sustained in meeting the CSOs have been the formulation of the CSOs themselves; and the ongoing decline in letters volumes. Australia Post has put forward changes to the CSOs to reduce the losses from its regulated letters business. Australia Post’s key enterprise strategy from 2010–2014 was embodied in ‘Future Ready’, which was developed partly in response to declining letters volumes, which by 2008 were gathering momentum. This program ultimately led to the introduction of the RoLS program in 2014.
2.7 As part of this process, Australia Post made a number of representations to Government during 2013 and 2014, to build the case for more comprehensive changes to the reserved letter services. These included the:
- 2013–14—2016–17 Corporate Plan;
- Postal Services Review; and
- Advice Paper to the Departments of Finance, and Communications and the Arts.
2.8 Australia Post’s international obligations are also an important driver of its costs. As noted at paragraph 1.12, the Universal Postal Union (UPU) convention requires Australia Post to deliver inbound international mail on terms no less favourable than those applied to comparable items in the domestic service, increased by the time normally required for customs clearance. Australia Post works closely with the Department of Communications and the Arts (Communications) to manage its international obligations as a designated party under the UPU Convention. These obligations are the subject of lengthy multilateral negotiations, the main focus of which is to increase the level of Australia Post’s cost-recovery with regards to its international mail activities (that is, covering inbound and outbound international mail). In addition to the UPU, Australia Post consults with its international peers through regular forums such as Kahala to exchange insights and information17, executive field trips and internal monitoring of movements of international pricing and volume trends.
2.9 The outcomes in this regard are predominantly a function of the prescribed performance standards and cost recovery (that is, prices) applying to the domestic network. Domestic postage prices are not the only factor in determining cost recovery under the UPU; the framework for determining remuneration under the UPU also involves a formula for converting postage rates, as well as a ‘price cap’ on remuneration.18 However, supporting change to its domestic letters delivery obligations is one of the key ways Australia Post can manage the cost of meeting its obligations under the UPU.
Securing price increases
2.10 In respect of Australia Post’s ‘notified services’ (including much of the letters business) the Australian Competition and Consumer Commission (ACCC) assesses whether the proposed prices will exceed efficient costs (including an appropriate rate of return).
2.11 During the period from 2010–15, Australia Post sought and obtained regulatory approval for three increases to the Basic Postage Rate (55 cents to 60 cents; 60 cents to 70 cents; 70 cents to $1.0019) to improve the rate of cost recovery of its letters business. Notwithstanding these increases, prices still did not fully recover the costs of providing the services. Because demand for reserved letters services is relatively inelastic to price20, additional price increases in the Basic Postage Rate have increased total revenue and increased the financial performance of the letters business. However the ability to continually do this would be influenced by regulatory constraints, community expectations, and Australia Post’s objective of generating broad stakeholder support for its proposed changes.
2.12 During this period, Australia Post also negotiated a reduction of ACCC price oversight for ‘PreSort’21 mail in October 2011, which better enabled Australia Post to set more commercial and cost reflective prices for these products.
Leveraging the delivery network
2.13 As noted in Chapter 1, aspects of Australia Post’s delivery network are shared across both its letter and parcel delivery services. Accordingly, Australia Post’s strategies for increasing the efficiency of its letters delivery service have included pursuing economies of scale and scope across its delivery network. These strategies include:
- initiating the program to build our Future Parcels Network;
- launching the MyPost Digital Mailbox;
- acquiring StarTrack, Mail Call, MailPlus and SecurePay; and
- enhancing the retail network (with Superstores, 24/7 zones, Self-service terminals).
2.14 These strategies all seek to improve efficiency by utilising Australia Post’s network infrastructure to generate new sources of revenue or generate additional revenue from existing sources by: increasing network capacity to handle more mail (Future Parcels Network); bringing new revenue streams (MyPost Digital Mailbox, acquisitions) and attracting new customers; and increasing the average spend of existing customers (enhancing the retail network).
2.15 In April 2017, Australia Post announced its intention to merge its parcels, and letters and mail networks to form a new eCommerce Delivery Team. The aim of the merger was to streamline shared functions and costs to improve productivity, and to increase employment mobility for staff between businesses to increase labour utilisation. The merger builds on other efficiency initiatives to increase network utilisation such as using the letters and mail network to deliver small parcels, which commenced in 2013 for parcels up to two kilograms. Australia Post has shifted its strategic focus to an enterprise strategy called ‘Our Part of Tomorrow’, which commenced in 2015. Key objectives relevant to the efficiency of the letters business include:
- increasing successful first-time delivery;
- continuing the move to day-time processing shifts, away from night-time or overtime shifts; and
- installing world-class processing machines, with higher processing speeds and lower error rates.
2.16 Looking forward, Australia Post continues to consider the options to align the process and delivery systems and costs to declining volumes, including options relating to:
- product offering—further slowing down the regular product and price increases;
- further automation of mail handling and consolidation of the network;
- further adapting delivery modes; and
- leveraging new machine and information technology across the supply chain.
2.17 Australia Post still exceeds the levels of service required by the legislated performance standards in respect of the number of street posting boxes (more than 50 per cent above target) and the number of retail outlets (almost 10 per cent above). Australia Post has advised that services provided above the CSOs, and the cost/benefit analysis of these services, is largely driven by community expectations and population growth, including providing new services for growing areas, and the challenges in reducing services in declining demographic areas—particularly rural and remote areas.
2.18 The number of additional posting boxes over and above the legislated standards is significant (for example, 5 357 posting boxes above the standards in 2016–17), which may impose additional costs, notwithstanding post boxes can be used to provide non-reserved services (for example, delivery of some parcels).
Reducing labour costs
2.19 As noted earlier, the majority of Australia Post’s costs in maintaining its letters network are fixed, in the sense that the cost of maintaining the delivery network capable of meeting the CSOs is not significantly impacted by the volumes of mail moving through the network. The most significant cost of maintaining the network is labour costs.
2.20 Consequently, Australia Post’s key strategies to reduce its network costs have focussed on investments in the network infrastructure to optimise and automate processes; reducing the frequency of deliveries (while still meeting its obligations); enhancing workforce flexibility; consolidation of mail processing and delivery; and extending processing shifts through using a longer day time processing window, which enabled an increase in the volume of mail that was automated and also provided opportunities to reduce the number of hours worked at penalty rates. Together, these strategies are intended to deliver savings in labour costs through increased processing efficiency. The total savings from the network and labour force optimisation strategies under RoLs were anticipated to deliver a total of $339 million in savings, which in cost terms would be equivalent to an FTE reduction of nearly 3 500. This would represent around 22 per cent of total labour costs for the reserved letters service workforce.
2.21 In the context of agreeing changes to the reserved letters service delivery framework, Australia Post decided not to seek forced redundancies at the Award level for employees affected by the RoLS program. Australia Post subsequently reflected that decision in its Enterprise Bargaining Agreement, which is current until August 2020. Therefore, actual reductions in staff numbers, relating to the reserved letters network pursuant to the RoLS reform program, were to be achieved through voluntary redundancies.
Table 2.2: Reform our Letters Service—network and labour force optimisation strategies
Automation impacts in delivery
New machines at major mail centres will automate sorting of mail and reduce sorting times and associated labour costs.
Implementing the National Delivery Model (NDM)
Under the NDM, regular mail will be delivered every second weekday (as opposed to every weekday), reducing the time and cost of outdoor delivery rounds.
Increasing automation in Mail Centres
Investment in new machines will reduce manual work effort, reduce number of required operators per machine and improve throughput rates.
Shift alignment in delivery
This will drive savings by increasing the number of non-penalty shifts worked.
Renegotiating contract terms
Renegotiation of terms for delivery contractors is expected on more favourable terms for Australia Post.
Shift alignment in processing
This will drive savings by increasing the number of non-penalty shifts worked, with all regular mail to be processed during the day.a
Consolidating processing of regular mail
Consolidation of mail processing activities will reduce the number of Mail Centres from 15 to 4.
Consolidating Delivery Centres
Consolidation of Delivery Centres into existing sites to allow disposal of surplus centres.
Optimisation of vehicle selection for delivery rounds based on conditions, terrain and density (for example, using electric bicycles).
Street Posting Box optimisation:
Aligning the Street Posting Box clearance time (that is, cut-off times) with mail centre processing windows.
Note a: The projected saving from shift alignment in processing is targeted to have been achieved by the end of the 2016–17 financial year. The remaining figures in the ROLS blueprint document are cumulative savings over the four years, targeted to be achieved by the end of the 2018–19 financial year.
Source: Australia Post, 2014, Reform our Letters Service - Detailed Design Blueprint, p. 73, 111.
2.22 The total costs of the network reforms from the RoLS program, including transition, implementation and capital costs, as well as anticipated redundancy incentives, is estimated at $278 million.22
Other relevant corporate programs
2.23 A number of other, often broader, programs have been progressing simultaneously with the RoLS program. These include:
- Australia Post’s Post People First (PP1st) program, which is designed to support career mobility and development within Australia Post;
- work to support the ongoing commercial viability of the licensed post offices (LPOs), and through them the delivery network; and
- property portfolio rationalisations, which are ongoing.
Are Australia Post’s strategies comparable with relevant international postal agencies?
The strategies adopted by Australia Post to pursue changes to service standards, increase processing efficiency and reduce costs are comparable to postal agencies in other jurisdictions that are facing similar challenges. Australia Post commenced its implementation of these strategies later than its international peers, partly due to challenges in generating the impetus for change. The high fixed costs for operating Australia Post’s delivery network, combined with the long implementation times, have highlighted the need to take a strategic, long-term view and to generate stakeholder support well in advance.
2.24 There have been several benchmarking reviews of Australia Post’s performance in delivering its letters delivery service undertaken previously, which provide some evidence that Australia Post has improved the efficiency of meeting its obligations over time.
2.25 The two key reviews were undertaken by Economic Insights (on three separate occasions)23 and WIK-Consult.24
2.26 Economic Insights benchmarked Australia Post’s efficiency against six other countries based on Total Factor Productivity (production of output produced relative to inputs used) and Partial Factor Productivity (inputs of labour, operating expenditure and capital expenditure) parameters and found that the:
- results of the 2009 Productivity Report showed that most of the benefits from Australia Post’s reserved service productivity improvements over the past 12 years have been passed on to consumers in the form of real price reductions.
- 2012 Benchmarking Report concluded that for the unadjusted Total Factor Productivity results, Australia Post ranked second out of its peers.
- 2012 Productivity Report found that Australia Post Total Factor Productivity indexes have outperformed the market sector multifactor productivity over the last 15 years.
2.27 WIK-Consult found that:
- Australia Post’s efficiency in letter operations has lagged behind its international peers, with relatively poor performance in respect of efficiency improvements and cost savings between 2008–2014.
- Australia Post’s modernisation program, which will continue until 2018–19, envisaged savings that were conservative in light of international best practice, but ambitious in light of Australia Post’s past performance.
- Falling letters volumes are common to postal operators around the world, and given these operators are typically already some years ahead of the experience in Australia (in terms of when major letter transformation programs were implemented—between four and nine years before Australia Post’s RoLS program), there is scope to learn from their strategies and approaches.
- There were additional opportunities for Australia Post to increase efficiency and achieve substantial cost savings.
- Flexibility in work place arrangements are crucial to achieving the above outcomes.
2.28 Australia Post acknowledges that it has been relatively slow in adopting automation strategies to improve the efficiency of meeting its obligations. In most other countries the major letter transformation programs began in the 2005–10 period, while Australia Post commenced its RoLS program in 2014. However, Australia Post has also expressed the view that:
- Transformations to the postal network were best made in conjunction with changes to the prescribed performance standards underpinning the CSOs, the latter of which required Government agreement. Designing and gaining support for these reforms took two and a half years, and there were significant stakeholder challenges in building consensus around the need for significant change.
- The fall in letter volumes had been relatively slower in Australia compared to some other countries, at least up to the point when the recent changes were developed.
- Australia Post’s network has some unusual features (for example, the small number of key mail centres) when compared to most of the countries that Australia was benchmarked against, and a customer base with relatively lower customer and mail density, and thus it is difficult to make static and absolute comparisons of efficiency across postal agencies; and
- Australia Post had limited capital at its disposal, particularly given the financial performance of its letter delivery service, and decided to focus more on growing the parcels business to offset the decline in the letters business.
2.29 As noted in Chapter 1, Australia Post’s options to increase the efficiency of its letters delivery service are impacted by the prescribed performance standards underpinning the CSOs. This is not unique to Australia. Further, the relatively late peak in letters volumes in Australia compared with overseas represented an opportunity for Australia Post to learn from the experience overseas. In particular:
- Changes to postal services in Australia requires engagement with numerous stakeholders, including: a heavily unionised workforce in a challenging workplace relations environment; rural and remote stakeholders; and licensed post offices. While changing postal services does have inherent challenges, it has been a highly sensitive issue in many countries. Many comparable postal agencies have managed to build support for the necessary changes more quickly. In most other countries, the major letter transformation programs began in the period from 2005–10, while Australia Post commenced its RoLS program in 2014.25
- The later, more modest fall in letter volumes in Australia compared to some countries may have reduced the urgency of Australia Post’s actions, but overseas experience also signalled the likely outlook in respect of volumes (which has largely been proven to be correct) and could have encouraged Australia Post to respond sooner.
- The unusual features of network (for example, low customer and mail density, the small number of key mail centres) did pose challenges, but other countries with similar networks undertook modernisation sooner. Differences in the operating environment faced by Australia Post compared with its international peers make static and absolute comparisons of efficiency difficult. That said, the WIK report draws its conclusions based on a qualitative assessment of where Australia Post sits on the modernisation path and the trend in operating cost performance over the recent past (that is, it compares the operating cost efficiency improvements each postal agency has made).
- A decision to pursue a growth strategy in the parcels delivery service would not of itself preclude a stronger focus on improving the efficiency of reserved letter services—indeed, a number of postal agencies internationally have done both. In addition, the business cases presented to Australia Post’s Executive Board supporting the investments in network optimisation have invariably shown very positive prospective returns on investment, including after accounting for potential voluntary redundancy payments in some cases.
2.30 The high proportion of fixed costs incurred by Australia Post in maintaining its reserved services delivery network, as well as the long implementation times required to implement changes to the network, highlight the need to take a strategic, long-term view of potential change, and to generate stakeholder support for those changes well in advance. Moreover, these changes were supported by positive internal rates of return.
Has Australia Post implemented its strategies effectively?
Australia Post is yet to realise many of its planned efficiency improvements. Australia Post’s workforce profile, combined with its decisions relating to workforce management, have created challenges in implementing, and realising the benefits of, strategies to improve efficiency, particularly in relation to penalty hours and overall staff numbers.
2.31 As outlined earlier, Australia Post’s cost base for meeting its obligations is largely determined by the requirements of the CSOs, rather than the volume of mail flowing through the network.26 The majority of the network costs are shared between the reserved and non-reserved services. For example, 96 per cent of reserved services costs are ‘attributable costs’ rather than direct costs.27
2.32 The overwhelming majority of the costs of operating Australia Post’s delivery network are comprised of labour costs which make up around 70–80 per cent of total costs for reserved services. Consequently, the ability of Australia Post to realise its efficiency improvements has depended on its ability to deliver the labour cost reductions envisaged in its corporate strategies. The primary strategy to address issues associated with efficiency of reserved services being the RoLS program, which was designed to achieve reductions in costs.
2.33 In addition, Australia Post’s implementation of its strategies have been impacted by:
- the composition of Australia Post’s workforce; and
- Australia Post’s workforce management policies.
Australia Post’s workforce
2.34 Australia Post’s workforce has:
- a significant proportion of permanent and full-time employees, with the majority of employees contracted under the Enterprise Bargaining Agreement and its terms and conditions;
- an average age of 50 years old in the Letters and Mail Network with high average tenure (16 years) and low levels of turnover; and
- historically had a low reliance on voluntary redundancies which made up 2.2 per cent of staff exits between 2014–15 and 2017–18, compared to natural attritions (voluntary retirements and other staff separations) which accounted for 16.1 per cent of total staff departures.
Figure 2.1: Australia Post staffing composition (full time equivalent)
Source: ANAO analysis based on Australia Post data.
Workforce management policies
2.35 The original Postal Service Optimisation business case underpinning RoLS envisaged a cost of $122 million and a reduction in staffing numbers of 1 417. The original announcement of Government policy to support the reforms did not rule out involuntary redundancies to meet the efficiency objectives of the reform program. However, in March 2015, the (then) Managing Director of Australia Post made a commitment that Australia Post ‘would not force redundancy on our people who are directly impacted by operational changes.’The Managing Director made the commitment in the interests of minimising potential disruptions across the business as a whole (including through any industrial action); as well as minimising any negative impacts on key stakeholder groups, including its employees. However, this commitment was not the subject of formal prior approval from the shareholders; from the Board; or formal consideration at executive management level.
2.36 At the time, Australia Post had taken the view that securing broad stakeholder support would be necessary to underpin the changes required as part of the RoLS program. Australia Post considered its commitment—regarding redundancies arising from operational changes – was necessary to achieve this outcome.
2.37 In early May 2015, Australia Post’s Board endorsed the commitment to no forced redundancies at the Award level for staff affected by the RoLS program. This was subsequently confirmed nearly a year later, in March 2016, when the Government issued its Statement of Expectations (SOE) to Australia Post, which reiterated the commitment to no forced redundancies for the life of the reform for award-level employees impacted by the reforms.28
2.38 Australia Post’s decision not to use forced redundancies in implementing RoLS informed key workforce management programs, including its redeployment program, retraining and employee support, the approach to enterprise bargaining and its engagement with the key labour unions.
2.39 A significant focus of the RoLS program is to decrease the number of hours worked at penalty rates in distribution centres by reducing the number of employees working night shifts. The 2016–17 to 2019–20 Corporate Plan notes that the shift alignment process has been successful. Australia Post has noted that shift realignment, together with the introduction of a ‘priority’ and ‘regular’ letters service from January 2016, is a significant step in securing savings in the longer term and providing a longer processing window, which Australia Post anticipates will allow greater levels of automation in the near future. However, there is no evidence to show that this initiative has materially reduced the number of penalty hours worked, or achieved the intended cost reductions.
The Dandenong Letters Centre (DLC) was analysed by the ANAO for two pay runs in the four years from 2014–17 to compare ordinary rates with overtime and penalty rates before, during and after the shift alignment process. The analysis considered the proportion of time that employees spent working at ordinary rates, overtime rates (for example, overtime 1.5 times, overtime 2.0 times) and penalty rates (for example, public holiday rates, shift penalty at double time) on average.
The analysis shows:
Whilst there is no material decrease in the proportion of overtime and penalty hours to normal hours, it is noted that based on the ANAO’s analysis there has been a 3 per cent ($184 639) cost saving at DLC between 2014 and 2017. Staff numbers reduced by 25 per cent (239 employees) from 2014 to 2017. However significant increases in overtime costs incurred by existing staff offset a large portion of the reductions in base salaries.
Original labour cost savings targets – Reform Our Letters Service (RoLS)
2.40 The original target for the RoLS program was documented in the 2014 Reform our Letters Service- Detailed Design Blueprint. This targeted:
- headcount reductions of 3 178 by FY19; and
- savings of $339 million by FY19.
Subsequent revisions to labour cost savings targets
2.41 The target was subsequently revised in 2015 following further validation of the Blueprint. The key points were: