Make every post a winner

In the perpetual search for cost and efficiency savings there is one area that has only recently appeared in the business world’s sights – saving on postal costs. Until 2003, the only postal service available to all of us was that provided by Royal Mail, which had a 100 per cent monopoly of letter post – an arrangement that had been in place for more than 350 years. As a customer, you had no choice of mail operator, and there was very little - if any - scope to negotiate, either on price or on the type or quality of service you wanted.

Open market
In 2003, things began to change. Postcomm, the independent regulator set up by Government through the Postal Services Act 2000, opened the market for bulk mail. From that year, competing licensed operators were allowed to offer alternative services to customers sending more than 4,000 items of bulk mail at a time. Effective competition began in practice in 2004, when the first access agreement was signed by Royal Mail and new postal operator UK Mail. Then, on January 1 2006, the UK's mail market was fully liberalised. Any operator licensed by Postcomm can now collect and deliver any mail for any customer.

The effect of competition
Eighteen operators are now licensed and are beginning to offer a range of services. Many business customers are already benefiting from lower prices and greater choice, and also from better quality of service from Royal Mail, which has been prompted by the threat of competition to raise its game. Indeed Royal Mail has dramatically improved service quality for all its customers, so small business and residential customers are indirectly reaping some benefits from the introduction of competition. In the third quarter of 2006 the company easily exceeded its targets for 1st and 2nd class mail, which is in marked contrast to its rather dismal performance only two years ago.

In October 2006, Postcomm market research among business customers revealed that they perceive service quality to be high across Royal Mail and its new competitors, and that is as a result of competition:

• 20 per cent believe that their mail prices have reduced significantly;
• 38 per cent believe that the choice of services available to them have improved; and
• 34 per cent believe Royal Mail’s service quality has improved.

Access agreements
Our research also found that mail carried through Royal Mail’s access agreements increased dramatically during the year. Under access arrangements, an operator pays Royal Mail to have its postmen and women deliver their letters to recipients’ letterboxes. The usual arrangement is that a rival operator picks up mail in bulk from its business customers, then transports it to the appropriate ‘downstream’ mail centre in Royal Mail’s network, also sorting it if necessary. From that point, delivery is taken over by Royal Mail.

Typically, Royal Mail’s access service charges are around 13p per letter weighing up to 60 grams, so they still get the lion’s share of the revenue (typically about 16p per item) from this mail. Although there is only a small margin left for the new postal operators, they make their money by operating a highly efficient and customer-focused upstream service – often undercutting Royal Mail – and offering added value services such as later collection times and the tracking of mailbags in their care.

Royal Mail made 1.2 billion access deliveries last year, compared to 87 million the year before. Access now accounts for more than 10 per cent of Royal Mail’s total volume. That is why you may have noticed that, instead of the usual Royal Mail insignia or stamp, envelopes are beginning to arrive on your doormat marked with the insignia of TNT, DHL, UK Mail, and other postal companies.

Businesses send 87 per cent of mail in the UK, with domestic mail accounting for the remaining 13 per cent. Mail sent from businesses to customers – such as telephone bills, bank statements and advertising direct mail – is the largest segment, making up 60 per cent of mail volumes. The largest 500 companies account for 50 per cent of mail volumes, making the UK a highly concentrated postal market. Most of the new operators have targeted this big business end of the market, though they are starting to offer services to much smaller businesses too.

What this could mean for Government business
What all this adds up to is something that business and government mailrooms have not had before: a choice. With that comes the potential to secure better value for money. Although the fully open market is only a year old and Royal Mail still has a highly dominant position in the addressed letters market, we have found that competition has already prompted major business mailers to look more closely at their mail costs and to take advantage of the choices now available to them. Some have reduced their costs by using innovative products introduced since the market was opened. Compared with last year, twice as many businesses switched to Royal Mail’s top three competitors during 2005/6, while the proportion of businesses using other competitors was four times higher.

The UK government sector makes up a substantial chunk of the UK mail market. Increasingly, it is focusing on improving efficiency and we expect more government departments to explore competitive mail offerings. According to Improving the Efficiency of Postal Services in the Public Sector, a report by the National Audit Office (NAO), the public sector spends almost £650 million a year on post. Of this, around £250 million is spent by central government departments.

More efficient management and purchasing of postal services by the public sector could save an estimated £31 million a year by 2008/09, the NAO says, and many of these savings can be made quickly and cheaply by such measures as using non-urgent mail services, competitive tendering, reducing undeliverable mail and switching to more efficient mail products.

How can your organisation benefit?
The NAO estimates that government could save £8.5 million annually by 2008/09 through switching to alternative postal suppliers. But making savings on your post does not have to involve switching to another operator. Many public service organisations can make substantial savings by making simple changes within their own offices. The NAO suggests you start by asking a few questions:

• Are there specific deadlines for mail? If not, savings can be made by using longer delivery services such as 2nd class mail, two-day delivery from competing operators or Royal Mail’s Mailsort 3 service.
• Can your own mailroom do some of the sorting? Work-sharing agreements with your mailer can earn discounts of between 5 per cent and 46 per cent. This may involve using software to sort mail into postcode order, mechanical sorting, manual sortation or outsourcing the sorting. The Driver and Vehicle Licensing Authority (DVLA) now sorts more than 90 per cent of its mail and estimates it has saved of £3million a year through a mix of mechanical and software sorting.
• Could you use Royal Mail’s Cleanmail to reduce costs? This service requires only basic labelling to earn a discount.
• How are you paying for your mail? If you are spending more than £5,000 a year, it could be cheaper to use pre-printed Postage Paid Impressions envelopes instead of stamps or franking machines. 
• If you use Special Delivery, is it really necessary? Perhaps use of this premium service can be reduced.
• Do you offer free reply services? Does the take-up justify the cost?
• Have you considered the impact of Pricing in Proportion – Royal Mail’s new pricing system, which came into force last August? Since 21 August 2006, mail has been priced by size as well as weight. For mail weighing up to 100 grams it is cheaper to use a C5 envelope than a C4. At Postcomm we have reduced the size of printed material, where appropriate, so it will fit into C5 envelopes.

Help at hand
The NAO has put this and lots of other advice into a booklet: A guide to better postal services procurement, which can be downloaded from the NAO website at www.nao.org.uk/publications/index.htm

Another source of information for public sector organisations is the Office of Government Commerce Buying Solutions (OGCBS). It has just introduced a postal services framework which enables public sector organisations to check out services offered by a number of licensed mail companies, including Royal Mail, and identify their best options.

In a separate Postal Sector Market Report, OGCBS examines Royal Mail as the main supplier in the sector along with other licensed suppliers and provides information on their background, ownership and the services they offer. The OGCBS website address is www.ogcbuyingsolutions.gov.uk

Lastly, there is our own Postcomm website, http://www.psc.gov.uk where you will find a list and contact details of all the operators we have licensed. All are sources of valuable information for would-be cost cutters. After studying them, use the information you have gained to talk about prices and services with your mail supplier or suppliers. Now that you have a choice, you should be able to negotiate a service that suits your business better, or a lower price – or both!