18 UKRPOSHTA CASE STUDY Ukrposhta’s HQ in the heart of Kyiv, with its old and new fleet on display
T THE NEW MANAGEMENT DUO AT UKRPOSHTA HAS A FIRM STRATEGY IN PLACE TO TRANSFORM UKRAINE’S NATIONAL POST INTO AN ECONOMIC POWERHOUSE FOR THE COUNTRY. HELEN NORMAN AND HAZEL KING FIND OUT MORE
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June 2018
OF EVENTS
UKRPOSHTA CASE STUDY 19
TURN
In 2016, the Ukrainian government issued a call for Ukrainian professionals around the world to return home and help modernize one of the country’s largest state-owned enterprise – Ukraine Post, or Ukrposhta. Igor Smelyansky and Oleksandr Pertsovskyi answered the call and were appointed the post’s acting chief executive officer and chief operations officer in April and October that year, respectively. “I had spent over 10 years in management consulting with BCG and KPMG, as well as managing a few mergers and acquisitions and turnaround projects in the banking and energy segment, but when this opportunity presented itself, June 2018
it was hard to pass up,” explains Smelyansky. “I saw it as a once in a lifetime opportunity to make a simultaneously profound impact on the country, company and business segment.” Like Smelyansky, Pertsovskyi has big business experience and worked for postal and logistics giant Deutsche Post DHL Group in the Americas, Europe and Asia for more than six years, completing major restructuring programs and driving new business launches. He’s relishing the opportunity to modernize Ukrposhta and turn its fortunes around: “The thing I love most about this role is seeing the ‘before’ and ‘after’ of some of the transformation
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20 UKRPOSHTA CASE STUDY
RIGHT: Ukrposhta launched a new delivery fleet in 2017 BELOW: The post is introducing a new branch layout to increase efficiency BOTTOM: Ukrposhta provides services in all locations across the country
activities we’ve spearheaded,” Pertsovskyi says. “For example, we inherited a postal delivery fleet with vehicles that had been in service for well over 10 years – some have driven 2-3,000,000km [1,200,000-1,800,000 miles] and pretty much every other day needed repair and service. Now my heart starts beating faster when I see our new local delivery vans or line-haul trucks on the roads, as this is the result of the major fleet renewal program we have undertaken over the past 1.5 years.” Major challenges Ukrposhta was formed just over 25 years ago, when the former USSR was dissolved and Soviet postal service was broken down into parts. “Unfortunately, there hasn’t been much change at Ukrposhta since that time and, as with many postal services, the operator went from a monopoly to having to compete with private players across three main segments: postal, financial services and retail,” explains Smelyansky. The post is facing massive competition in the lucrative parcel delivery market, with private competitors holding around 70% of the market share. “Ukraine is one of the largest European countries, with over 26,000 cities and villages, the majority of which have fewer than 2,000 residents,” Smelyansky continues. That means the post finds it difficult to adequately compete with private providers as it has an obligation to deliver to all parts of the country, and roughly one-third of the country’s residents live in hard to reach places, according to Smelyansky. However, the management duo have tackled the issue of competition and service obligation head on, and while some other sectors have suffered at the hands of global competition, Ukrposhta remains a steady presence in all areas of Ukraine. Smelyansky
says, “When I started as CEO, Ukrposhta had around 11,500 branches, while the entire banking system had around 10,500. Now, just over 18 months later, we still have 11,500 branches, while the banking system shrank down to around 9,000. So we are often the last business standing in those small villages.” Another challenge was the minimum wage increase, which came in to force in January 2017. “The government’s decision to double the monthly minimum wage [to ₴3,200; US$122] increased our employee expense by around 35% in one year, resulting in a need to regroup and review our plans and investment targets,” explains Smelyansky. Corporate restructure Ukrposhta has undergone a number of restructuring steps since Smelyansky and Pertsovskyi were hired, and in early 2018, Ukrposhta became a public joint stock company, allowing it to “clean up the house, write off losses of assets which had been compiling all these years, and reassess the market value of over 1,300,000m2 [14,000,000ft2] of real estate,” Smelyansky says. The restructuring of the post also included replacing over 95% of the prior top management with “driven young professionals”, which in turn helped to rid the company of corruption and save over 20-25% on procurement costs year-on-year. “This also earned our company an image of one of the most reformed state-owned companies in the country,” says Smelyansky. “However, we have set out even more ambitious goals, both financial – tripling revenue in five years; we have already grown revenue
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June 2018
UKRPOSHTA CASE STUDY 21 HELPING SMEs DELIVER Ukrposhta is helping Ukrainian SMEs and micro-sellers to expand their global reach. “Via our trackable small packet product, Ukrainian merchants have hassle-free shipping to hundreds of markets and are among the most active sellers on Etsy.com, Amazon Handmade, etc,” explains Oleksandr Pertsovskyi. One SME that has benefited from Ukrposhta’s help is Ugears, a Ukrainian creator and manufacturer producing build-your-own wooden mechanical model kits. “They launched a very successful Kickstarter campaign that, to the founders’ surprise, attracted backers from 70+ countries,” Pertsovskyi says. “They trusted us with their very first deliveries to their first supporters, and since then the business has increased greatly. Now, on some trade-lines the company ships items in bulk to local distributors which is fine with us, as we are keen to help more and more rising business stars.” Ukrposhta is further growing its community of exporters via its E-Export School initiative, which provides educational online and off-line activities to help sellers enter overseas markets. “We are also introducing a special incentive program in Q2 2018 for merchants shipping worldwide where they can accumulate reward points and earn special discounts,” Pertsovskyi adds. TOP LEFT: Ugears’ Mechanical Stagecoach wooden model kit LEFT: Ukrposhta is embracing digital solutions with a mobile app and social media chatbots RIGHT: Oleksandr Pertsovskyi, COO, Ukrposhta
from ₴4.6bn (US$175m) in 2016 to ₴5.4bn (US$206m) in 2017 – and qualitative, such as renewing infrastructure, creating a better work environment and becoming an attractive employer, and driving innovation in the postal segment.” The next step is to set up a “modern and comprehensive system of corporate governance”, which will include an independent board and make it easier for the management to discuss long-term strategies, according to Smelyansky. Ambitious plans The development of Ukrposhta will also rely heavily on investment, and the post has plans to spend US$500m (£368m) in the next five years. The money will be sourced from the post’s own income, borrowed funds and the sale of unused assets. “Certainly, we need some regulations to make it happen and the total amount will also depend whether the government would agree to guarantee some of that amount,” explains Smelyansky. The three main areas of investment will be in new sorting facilities (around six new locations are planned across the country), IT infrastructure and fleet renewal. According to Smelyansky, when he and Pertsovskyi took over the management of the post, only 20% of the 11,500 branches had a computer. “By mid-2018, every single village in Ukraine with more than 2,000 residents will get a computerized branch of Ukrposhta, although that will still only get us to just over 40% of branches,” he adds. In the last five months of 2017, the post acquired more new trucks than in the previous five years
combined, and the CEO intends to keep that level of investment going: “Our investment program is already in high gear and we are just getting started,” he says. Smelyansky and Pertsovskyi have been quick to implement the first phases of the post’s five-year transformation strategy (see Three pillars of development on page 23), with its Ukrposhta Express nationwide one- and two-day service being introduced in just four months. “The service uses the current physical infrastructure that was in place and designed for five- to six-day parcel deliveries – we just changed the processes, routings and controls,” Smelyansky explains. The service is currently achieving an 88-90% success rate in meeting express transit time targets, and will aim to hit 95% by the first quarter of 2019. According to Smelyansky, the customer acceptance was great, with shipment volumes growing more than 10 times from 40,000 items in April 2017 when the service was launched to over 600,000 Express shipments in April 2018. The post has also introduced courier services for door-to-door deliveries for major Ukrainian companies in a bid to enhance its service offering Oleksandr Pertsovskyi, Ukrposhta
IN UKRAINE, MORE THAN 70% OF RECIPIENTS OPT FOR PARCEL PICKUPS”
June 2018
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22 UKRPOSHTA CASE STUDY
and improve customer satisfaction. “In Ukraine, more than 70% of recipients actually opt for parcel pickups at post offices,” explains Pertsovskyi, “so unlike most of the postal operators that struggle to shift away from doorstep deliveries, we actually need to ramp up such capabilities.” Ukrposhta is also embracing digital solutions for customer service, and has launched chatbots on Facebook Messenger, Telegram and Viber to help customers track deliveries. The post has also added an ability for customers to name their shipments on its tracking apps. “Instead of a random shipping number, users can name a parcel ‘present for my wife’ or ‘my new shoes’ and see its delivery progress. This appears to be a simple feature, but customers love it a lot and it indicates that our company is changing, becoming more and more customercentric,” Pertsovskyi says. A major part of the development strategy will be to centralize back office functions and focus on business development functions at a regional level. “Currently, Ukrposhta is a matrix organization with regional and segment components. It will remain as such, with back office, operational and support functions gradually being centralized,” explains
ABOVE: A mobile post office will service rural areas ABOVE RIGHT: Additional training will improve customer service BELOW: Igor Smelyansky, acting CEO, Ukrposhta BOTTOM: New 54,000ft2 sorting center in Lviv
Diversification In a bid to drive further revenues,
Ukrposhta is looking to diversify into financial services and retail. The post currently receives around 40% of its income from financial services, primarily from pension distribution, money transfers and acceptance of communal payment. “Going forward, we plan to add Visa and Mastercard application services, current and saving accounts, and to serve as an agent for lenders and insurance companies. We have already started building both our insurance market place and lending marketplace, and believe it will fit nicely into our financial services portfolio,” Smelyansky says. In the retail space, Ukrposhta is designing a new branch layout that will enhance convenience for customers. “This is by no means an easy task. We are the largest distributor of retirement payments in the Ukraine – over five million retirees receive their pension through us – so we need to make sure our branches look and feel welcome both for younger crowds ordering and shipping from Amazon and Alibaba, and the more senior segment,” explains Smelyansky. New city branches will also be opened and all branches in areas with more than 2,000 residents will get internet access. Smelyansky adds, “The remaining rural branches [with fewer than 2,000 residents] will transfer to a movable office and local presence model, which would allow us also computerize the remaining areas of the country and provide all of Ukrainian residents with modern
OUR INVESTMENT PROGRAM IS ALREADY IN HIGH GEAR AND WE ARE JUST GETTING STARTED ” Igor Smelyansky, Ukrposhta
There are
11,500
post offices throughout Ukraine
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Smelyansky. He has also introduced an Operations Analytics and Quality control team to ensure the successful implementation and development of the post’s long-term strategy. “We introduced a ‘review every mistake’ mindset into a government-controlled organization that previously was very slow at admitting its own failures,” he adds.
June 2018
UKRPOSHTA CASE STUDY 23 THREE PILLARS OF DEVELOPMENT Pillar one Development of the parcel business, both local and international. Ukrposhta has a 70% market share in the international delivery segment in Ukraine, and aims to focus on deeper integration with companies such as Alibaba and Amazon for imports, and Amazon and Etsy for exports. In the internal market, the post currently only has a 20% market share, but hopes to grow this to 30-40% within two to three years and compete with private service providers. The country’s parcel market itself is booming with 20-30% annual growth.
Pillar two
postal and financial services.” The moveable office will consist of a van with three staff members that will travel to and from the rural villages. Ukrposhta is also keen to explore the delivery of medical supplies and food to rural areas. Smelyansky explains, “With so many villages and low population density, medical delivery is a big task both for the government and pharma companies. Our moveable office project will allow us to successfully manage more complex tasks, such as medical supplies delivery. As we equip our movable offices with a fridge, we can deliver both fresh food and medical drugs. On return journeys, we can pick up fresh organic products from farmers and deliver them to the big city stores, thus allowing us additional streams of revenue while helping small and medium business in rural areas to reach new consumers.” Embracing automation Ukrposhta is making both
short- and long-term improvements to enhance its sorting centers and the technology within them. The post is currently building a new sorting facility near Lviv in Western Ukraine. “This 5,000m2 [54,000ft2] hub will serve as a gateway for our postal exchange with Western Europe that is set to grow 20-30% per annum for the next four to five years at least,” Pertsovskyi explains. The post is also putting together a tender for a logistics study, which will aim to address the question of whether it should continue to run a network of 30+ sorting hubs and 80+ depots, combined for letters, periodicals and parcels, or switch to a model with four or five state-of-the-art sorting facilities with detailed ZIP code sorting and reduce the number of nodes in the logistics system. Pertsovskyi says, “The answer is not trivial, as there are a number of constraints to take into account, such as some regions near the borders have extreme labor shortages, as workers opt for jobs in the EU, some have seasonal labor fluctuations, some regions are notorious for their awful road conditions, and so on.” The post will look to invest heavily in automation technology to ensure efficiency and quality of service
Development of financial services. According to Igor Smelyansky, banks are only present in about 6% of the 26,000 cities and villages in Ukraine, covering a maximum of 65% of the population, so a large portion of the population living in rural areas (10-15 million residents) do not have access to basic financial services and e-commerce. Ukrposhta has already received a license from a national bank to provide current and savings accounts, and hopes to open up the burgeoning e-commerce market to those who currently have no access at a competitive price.
Pillar three Retail. Ukrposhta is already selling over US$60m (£44m) of consumer goods every year, and by growing its computerized network and payment system, hopes it can create its own marketplace that will serve rural areas. “My ideal situation would be where someone in the village orders a microwave from us, we earn a commission on the sale, on delivery and an agency fee on processing a consumer loan for such a purchase,” says Smelyansky. “So, as we can see, our three pillars nicely complement each other and reflect Ukraine’s specific needs to ensure our strategy is well grounded in local conditions.”
Ukrposhta employs
76,000 people The post handles
186.5 million postal items every year
June 2018
improves, and this will impact its personnel strategy. “We need to look at changing the mentality of our 76,000 employees to ensure they value every single customer equally. By investing in automation, we’ll be able to hire fewer staff but pay them more, and I think that a change in financial motivation, lots of training and an influx of new employees will help improve our service offering,” Smelyansky says. A challenge for Smelyansky and Pertsovskyi is to get government approval on some of the improvements they want to make to Ukrposhta. “Some of our initiatives depend on either government or parliament action, so we hope that will happen as soon as possible so we can ensure our plans stay on track,” Smelyansky continues. “From the beginning, I wanted to make Ukrposhta more business-like and less political and government dependent. I plan to do it going forward, although with mandated universal postal service obligations, we certainly need government support on some of the issues.” n
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