News Analysis

Royal Mail report points to failure in digital adaptation

A report has highlighted the colossal failures of the UK postal service in mitigating its decline in the face of advances in digital media.

Aptly-named Saving The Royal Mail's Universal Postal Services Sector in the Digital Age, the report by Richard Hooper is the update of his Modernise or Decline report published in 2008. While the original report concluded that Royal Mail was under serious threat, the update says the maintenance of the postal service is even more precarious than in the 2008 findings.

Following the release of the latest report, business secretary Vince Cable has said he will press ahead with the privatisation for the postal service despite union concerns that the plans would disfigure the postal service and lead to higher prices.

Apart from regulatory issues and other problems related to the £10bn pension deficit, Hooper says the business needs to be completely modernised. He says the growth in online shopping needs better fulfilment for packets and parcels.

"At a time when the digital media continue to disrupt sector after sector at an ever quickening pace, sucking revenues and profits from long-established providers and long-established markets, doing nothing on the regulatory front is just not an option," says the report.

While the e-fulfilment market is growing, it is proving to be no simple matter for the postal service to address, says the report. The services, which overlap with offerings from express couriers, is highly competitive and puts huge pressure on costs, prices and profit margins.

The report goes on to illustrate the structural decline in the letters market, which has worsened both as a result of the recession and as a consequence of competition from the internet, e-mail, SMS and broadcasting. During the Royal Mail's most recent financial year, volumes dropped by 7% over the previous period. In terms of the average daily mail bag, in 2005 it contained 84 million letters, packets and parcel, down to 71 million items in 2010.

"Royal Mail, like all other traditional 'analogue' businesses, should also assume that the pounds in the analogue world often convert to pennies in the digital world. Physical mail is competing with 'free' digital communications. For example, letters requiring a 41p first class stamp or a 32p second class stamp are competing with e-mails that have a marginal cost of zero pence to send," the report adds.

Another issue is what Hooper calls the environmental time bomb, as companies find electronic communication alternatives in supporting carbon reduction commitments, according to the report.

Hooper's 2008 study said digital offerings were needed to keep track of customer demands and the 2010 update says little further progress has been made in that front. The author adds that the regulations the group has to follow when introducing new products are a significant obstacle.

The report maintains that Royal Mail's ability to access 28 million addresses daily presents big opportunities to develop new digital businesses in response to the erosion of its letters business. Hooper criticises the postal service for its lack of cultural change towards its customer base and says this remains a weakness in the progress towards full modernisation.

An excerpt of a letter to the Daily Telegraph by managing director at eBay UK Clare Gilmartin is mentioned in the report, which states that fewer than half of the online firms that sell through its website trust Royal Mail to meet their needs.

"Worryingly, a third [of said businesses] say Royal Mail's limitations hamper their growth. For a secure future, Royal Mail must address these concerns. More flexible delivery options, greater convenience for parcel collections and improved reliability are all essential to allay current fears," said Gilmartin.

This year there were significant changes in the Royal Mail's technology leadership. Chief information officer and technology director Robin Dargue quit the job in April to take up a senior role at supplier Alcatel-Lucent. Former Transport for London IT chief Yvonne Ferguson was then appointed as the new CIO in June.

Dargue had been hired in November 2007 to lead the £1.2bn technology programme supporting the group's transformation. At the time, he was quoted as saying one of his key goals was to invest in bespoke systems for the customer front-end.

The report says more cash is needed to fund the required changes at Royal Mail. A crucial point made in both of Hooper's reports is that the introduction of private sector capital into Royal Mail is strongly recommended, through a trade sale, a partner investment or a flotation in the stock market.

Private sector capital would speed up the process, says Hooper, bringing cash to fund the modernisation, as well as private sector disciplines into the group and encouraging the development of a more customer-focused commercial strategy and diversification for the digital age.

Despite the challenges, the report maintains there is still a positive future ahead for Royal Mail if the issues are addressed quickly and the opportunities new technology brings are embraced.

"A radical reform of Royal Mail's network is inevitable. The company has a plan to achieve this. But the pace of change needs to accelerate significantly," says the report.

"Unless Royal Mail can modernise faster, a forced restructuring under European rules is highly likely. That would be a costly and poor outcome for the taxpayer, for consumers, for Royal Mail and its employees," it says.

As part of its attempts to meet changing customer needs, Royal Mail has launched interactive stamps for use with iPhone and Android applications earlier this month. Earlier this summer, the firm has also Royal Mail has signed a six-year deal with Capgemini to introduce cloud computing technology to its IT infrastructure as a means to introduce new online services more easily.

Royal Mail has also launched a free website analysis tool to enable e-tailers to improve the buying experience of customers and reduce shopping cart abandonment. The postal service has also established its presence on Twitter, where service updates are posted during business hours and customer queries are answered.


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