Case Study: Digital Transformation of Ukrainian National Postal Operator: The Way to a Sustainable Future

This case describes the transformation of the national postal operator of Ukraine (Ukrposhta). The company needed to improve its technological backwardness, and problematic culture of post-soviet enterprise, introduce new services, deliver services to remote locations, and adapt to the changing environment Ukrainian economy.

The case is structured in five sections: (1) Company Background, (2) Overcoming Challenge of Culture, (3) Improvement of IT Infrastructure, (4) New Services and Early Transformation Outcomes, (5) Launch of Mobile Post Offices. At the end of each section, you will be asked a series of questions about how managers should overcome the challenges of transformation.

I. Company Background

Ukrposhta is the national postal operator of Ukraine and one of the biggest companies in Ukraine with over 60 thousand employees, over 10 000 post offices, and 25 regional branches. The company operates one of the biggest fleets in Ukraine and provides more than 50 products and services for individuals and business clients. Also, Ukrposhta conducts postal operations with more than 200 national postal operators of other countries.

The company was established in 1947 during the rule of the Soviet Union and reorganized in 1994 after its collapse. In the middle of the 2010s, Ukrposhta began to lose business primarily due to its technological backwardness. According to the Ukrainian Association of Direct Marketing in 2014 Ukrposhta had 45,1% of the domestic postal market and its primary competitor private company Nova Poshta — 15,6%. At the end of 2015 positions of these players have almost become equal: Ukrposhta fell down to 32,4%, while the share of Nova Poshta grew to 31,9%. Nova Poshta got ahead of Ukrposhta both by the number of mailing units and by the profit as well.

In 2016 a new era of Ukrposhta’s development began. Most of the senior management team members were replaced by new people and led by an experienced General Manager (Igor Smelyansky). Smelyansky came to Ukrposhta from the US, where he was headhunted while working for KPMG in New York, having earlier graduated from George Washington University Law School and received an MBA from Georgetown University. Smelyansky declared that he will turn Ukrposhta into an innovative business.

On March 1st, 2017 Ukrposhta became a public joint stock company. The same year, Ukrposhta presented its new branding. The main visual symbol of Ukrposhta became a postal horn or geolocation pin, which underlines the modern postal service.

Fig 1. The new logo of Ukrposhta

In March 2017, the government of Ukraine completed the reorganization of the company from a state-owned entity into a joint stock company.

According to Reforming Program, “Ukrposhta” had to solve the following strategic tasks:

1. Revenues increase.

• Increasing profitability and volume of services provided
• Developing existing sales channels
• Developing partner network
• Integration with consumers
• Standardization of services, products, and processes for their provision
• Creating a clear system of reporting and analytics
• Improving the quality of service at the site of the “last mile”
• Improving the speed and quality of customer service

2. Costs Optimization

• Introduction of new technologies
• Improving management system, reducing administration and management costs
• Controlling authenticity of the information, ensuring completeness and relevance of data records, and minimizing manual input.
• Developing optimal strategy of technical development of the company that provides rational spending
• Reducing the influence of human factors in production processes
• Developing human capacity in the enterprise

3. Technical reform

• The introduction of a unified centralized integrated platform
• The introduction of a unified payment acceptance IT platform in all automated post offices with full cycle management of services
• Automation of 6500–7000 jobs (all divisions of I-IV group)
• Creation of a safe, controlled and dynamic IT infrastructure of company resources management
• Automation of mail processing in DMPT, in particular, the transition from fully manual to automated sorting of parcels, packages, and small packages

4. Structure reform

• In the first stage, to build a vertically integrated company by setting up certain business units in certain spheres and make the transition to a divisional management model with the creation of macro-regions.
• In the second stage, consider the feasibility of establishing individual businesses on the basis of some specialized directorates, including the involvement of private capital that can work with both “Ukrposhta” units under the outsourcing scheme or agency agreements, and with any other companies.

Questions:

• What are the risks of not changing at all?
• What actions would you take to accelerate transformation reforms?
• How would you prioritize your action plan?
• How would you make the transformation strategy future-proof?

II. Overcoming Challenge of Culture

According to Smelyansky, the most difficult part of the transformation of the company was changing its culture. Many sorters, drivers, and operators of Ukrposhta behaved harmful to the organization, and many have been responsible for inventory shrinkage. In the early days, Smelyansky gathered a number of Ukrposhta managers into a meeting room overlooking the company car parking and asked them to point to a single vehicle parked outside that could be bought on their official salaries. An awkward silence followed. The gesture did not win him many friends, but he had made his point. Also, from the bottom-up people didn’t believe that the new top management team would not be corrupted too.

For the first six months in his chair, Smelyansky set as a top priority to eliminate the culture of corruption within the organization given that malpractice has penetrated all levels of the company’s hierarchy. Smelyansky wanted to create a company that is transparent in terms of corporate governance and which has an independent board director. This corruption-free approach has won him plenty of detractors as many state employees just lived off the state company. So, he was basically shutting down their businesses.

The Ukrposhta chief has made sure there is nothing in his past which can be used against him. Anyone looking into his history will find nothing but years of properly filed tax returns and an enviable academic and professional record. Also, he has taken steps to protect himself including installing 24-hour video and audio recordings in his office. Such measures were far from superfluous in a business and political climate like Ukraine’s, where rivals often try to blackmail one another by threatening to go public with compromising material.

The сentral idea of Smelyansky’s people management was to make himself surrounded by the right people. That’s why, within his own team, he has done plenty of hiring and firing. Smelyansky acknowledged that if the company is overhauled, everyone would need to learn to take more responsibility and show initiative. Achieving such an outcome was tough given the culture within the state sector: when employees did nothing, they couldn’t get penalized and there were many laws and procedures which helped do that.

Another tough challenge was the shortage of people. After years of political and economic instability in Ukraine, much of the labor force left the country. While the Ukrainian population in both urban and rural regions declined, Ukrposhta found itself in a situation where it was almost impossible to fill positions to substitute retired employees. Furthermore, in some regions, it was hard to hire senior managers who will lead 500 people, even for a good salary.

Questions:

• How would you change the organizational culture?
• What is your ideal and realistic timeframe to improve the challenge of culture?
• How would you know that culture change is occurring?
• If you were running this company how would you motivate others to follow you?

III. Improvement of IT Infrastructure

Confronting corruption, Smelyansky and his team began the process of bringing the vast Ukrposhta branch network into the digital age. With almost 71% of Ukraine’s population — online, postal service customers (both businesses and individuals) increasingly expect a modern, digital service. In fact, before the new management team, Ukrposhta’s branches annually received payments amounting to UAH 25 bln while making notes in a “paper notebook” and the data on each transaction were entered manually.

Fig 2. Ukrposhta’s paper notebook

Yet another example of technological backwardness: the national postal operator had 127 separate IT systems (1C, Atlas etc.) and 124 different payment systems which were not connected. The existing ERP system was not connected to the other systems. Sometimes it could take up to 15 minutes to open an email. All the software was purchased and serviced separately and had poor intercommunication. According to Ukrainian law, state-owned companies cannot purchase the same software twice. Thus, Ukrposhta could not buy another ERP.

The team accepted the challenge that it had to build a unique IT system having in mind that a quarter of Ukrposhta’s post office network is located in rural areas. Such as IT systems only being built by other postal providers around the world, Canada Post for example. Additionally, the system must be adopted for Ukrainian specifics of post-payment eCommerce, also it must be secure and be available for ongoing financial monitoring.

One more challenging component was equipment: almost 15% of 22 thousand computers were older than 20 years, and another 16% — were older than 10 years. To provide modern banking and postal services, having up-to-date computers was a necessity. Consequently, one of the first steps taken by Smelyansky in this direction was the procurement of 1,6 thousand new computers. Villages with populations over 2000 people received computerized offices for the first time. Moreover, computers, printers, cars — all these were purchased under leasing agreements which facilitated the procurement process and allowed us to save $750 thousand during the first purchase.

Also, there was a problematic task of preparing employees for new digital tools. Even minor innovations such as switching to parcel notifications in messenger Viber caused large misunderstandings. Employees even wrote to the top management on Facebook: “What Viber stands for? I will not give my parcels this way.” Despite the general skepticism, within the first 2 weeks, 49% of notifications were sent via Viber.

In March 2021 Ukrposhta and the IT-Enterprise company signed an agreement on the implementation of an integrated ERP system worth UAH 95.8 million. By the end of 2021 Smelyansky is expected to completely transfer all the processes of accounting and management of resources and flows of the company into a new unified system.

Fig 3. Post Office Improvement

Ukrposhta’s team expected that modernization of the postal infrastructure would significantly improve working conditions for the company’s employees: the new user-friendly front-end system will guide postal operators to offer more services and reduce the average 5 minutes of serving a customer to 30 seconds. The efficient processes will attract employees to jobs with competitive salaries too. In total, Ukrposhta plans to create more than 5 000 new jobs by implementing a new IT System. Also, it will strengthen nationwide infrastructure critical for major emergencies such as the COVID-19 pandemic.

Questions:

• What would be your strategy to modernize the digital customer experience?
• What would be your data location strategy? Public cloud? Private cloud on the premises?
• How can you develop a culture that is digital-ready?
• How would you increase the productivity of resources assigned to our digital transformation initiatives?

IV. New Services and Early Transformation Outcomes

Worldwide the spread of digital technologies negatively influences demand for conventional postal services (letters and periodicals). On the other hand, the rapid development of e-commerce and the increasing popularity of global online marketplaces (Amazon or Alibaba and etc.) is supporting the growth in domestic and international parcels. In this situation, the only way to keep postal services operational is to constantly increase the number of services provided. Currently, Ukrposhta provides 50+ types of services for both private and corporate customers. Main services include:

• Local and international correspondence and parcels delivery
• Financial services: money transfer services, different types of payments, at-home money delivery for over 74 million of pension accounts
• Subscription and at-home delivery of periodicals (over 500 million copies per year)
• Development and production of standard and art postal stamps, and envelopes production.

Understanding massive social responsibility and emergent need in the company’s transformation Smelyansky’s team started development of new services and processes. For instance, the team launched guaranteed express delivery the next day in cities with a population of over one million and delivery from online stores. Moreover, the team achieved about 30% less expensive express delivery than the competition. These and other efforts have produced striking increases in both revenues and postal traffic. When the new chief arrived in 2016, the postal operator was shipping 46,000 express parcels per year. By early 2020, this figure was 47,000 per day.

Fig 4. Ukrposhta Doubles Revenue in Five Years

Ukrposhta has almost doubled its revenue from 2016 to 2020. In 2020 the company has also been able to pay 50% dividends from its profits. Positive financial results and rapid transformation made it possible to secure funding from international financial organizations to substitute manual sorting centers with automated ones. Despite pandemic and quarantine restrictions negatively affecting Ukrposhta’s overall result Ukrposhta recorded increases in parcel volumes and revenues:

• Parcel volumes increased by 24.7%
• Small packages increased by 16.5%
• Revenues from small packages increased by 47%
• Revenues from parcels increased 42%

Though most of the company’s services are regulated. The company has an obligation to deliver pensions on behalf of the Pension Fund of Ukraine at the lowest market rates and often to the most remote locations. Meantime the company’s customer base reduces as many pensioners switch to being serviced by the banks, still, banks are available only in 3,9% of settlements in Ukraine and POS (point of sale terminal) — 9% of all settlements. In 2018, Ukrposhta obtained a license from the National Bank of Ukraine to transfer national currency without opening accounts. This enabled the company to provide cashless customer service by accepting payment cards.

In May 2021 Ukrposhta launched the process of acquiring a bank. The year before, the government of Ukraine allowed Ukrposhta to provide banking services. Own bank will resolve the problem of accessing the financial infrastructure by the rural population since Oschadbank (the base bank for the delivery of pensions to pensioners) does not have enough branches in such areas. Also, Ukrposhta’s team expects that the bank will expand the range of services provided to the customers and reduce operating costs for the company.

Questions:

• What other services will you offer to create additional value for the customers?
• How would you challenge new service offerings, if the ideas are worth the investment?
• How will a new service affect other services? Is the competition doing something similar?
• Where are opportunities for the company to influence new ways of collaboration with other organizations?

V. Launch of Mobile Post Offices

Since Ukraine is a country with a low population density (about 72 persons per km2) where 29.14 million people live in urban regions and the rural population amounted to 12.76 million live in villages with 2000 people and less the key element to Ukrposhta’s transformation strategy became the launch of mobile post offices. A mobile office is a full-fledged post office that comes to the user’s home with all the services provided by the mail, products, and during the coronavirus pandemic — even pharmaceuticals.

Fig 5. Demographics of Ukraine

By testing the mobile post offices concept Ukrposhta’s managing team aimed at improving the quality of postal, logistics, and financial services in villages with a population of up to 1,200 people. In 2018 the company launched a pilot in the Chernihiv region. This pilot delivered successful results including:

• wider service offerings and better coverage with the ability to reach even remote locations that did not previously have a post office;
• enhanced compensation and motivation packages for staff;
• strong economic results.

Fig 6. Mobile Post Offices in Action

Consequently, the company decided to expand this initiative to the whole territory of Ukraine, which required the acquisition and equipment of up to 1,900 additional postal vans and the development of local points of presence in larger villages to complement them. Following that in 2020 Ukrposhta, the Ministry of Infrastructure of Ukraine and the European Bank for Reconstruction and Development (EBRD) signed an agreement to provide a loan of EUR 63 million for the purchase of postal vans and upgrade of the company’s logistical infrastructure through investments in modern automated sorting hubs and an associated network of sorting depots.

The same year Ukrposhta launched 500 mobile offices, with the project set to be completed in 2021. By implementing the Mobile Offices project Ukrposhta expects to provide access to modern delivery services and financial services to the country’s rural population of 13 million people.

Questions:

• What risks associated with mobile offices do you see and how would you deal with them?
• Assuming the number of people living in rural communities will fall, how would you substitute the lack of people?
• How would you support mobile offices with digital transformation initiatives?
• Where do you think the company would find itself after five years?

Works Cited

1. “About Ukrposhta.” Ukrposhta, www.ukrposhta.ua/en/pro-ukrposhtu.

2. “Strategic Tasks in Postal Service.” Ministry of Infrastructure of Ukraine, mtu.gov.ua/en/content/strategichni-zavdannya.html. Accessed 1 May 2021.

3. Ukrposhta Logistics Development Board Report. EBRD, 11 Apr. 2020, www.ebrd.com/what-we-do/project-information/board-documents/1395294463372/Ukrposhta_Logistics_Development_Board_Report.pdf.

4. JSC Ukrposhta International Financial Reporting Standards Financial Statements and Independent Auditor’s Report. 31 Dec. 2019, www.ukrposhta.ua/doc/annual-reports/Ukrposhta_FS_2019_Eng_2606.pdf.

5. “Ukrposhta Doubles Revenue in Five Years.” Postal Hub Podcast, www.thepostalhub.com/blog/ukrposhta-ukraine-revenue-growth?rq=Ukrposhta. Accessed 1 May 2021.

6. ‌“Ukrposhta Implements Unified ERP-System instead of 80 Separate Ones.” Interfax-Ukraine, en.interfax.com.ua/news/economic/731024.html. Accessed 1 May 2021.

7. Viktoria Vlasenko. “Alternate Laughter and Tears: How Ukrainian Companies Try to Become ‘Digital.’” Innovation House, Innovation House, 12 Aug. 2017, innovationhouse.org.ua/en/statti/y-smeh-y-slezy-kak-ukraynskye-kompanyy-pytayutsya-stat-tsyfrovymy/. Accessed 1 May 2021.

8. “Population Density (People per Sq. Km of Land Area) — Ukraine | Data.” Data.worldbank.org, data.worldbank.org/indicator/EN.POP.DNST?locations=UA. Accessed 1 May 2021.

9. ‌“Cabinet of Ministers of Ukraine — Ukrposhta Raises EUR 63 Million from EBRD for Infrastructure Development, Says Vladyslav Kryklii.” Www.kmu.gov.ua, www.kmu.gov.ua/en/news/ukrposhta-zaluchaye-63-mln-yevro-vid-yebrr-na-rozvitok-infrastrukturi-vladislav-kriklij. Accessed 1 May 2021.

10. Fundamental Transformation Of Ukrposhta 2017–2021. Ukrposhta, www.flandersinvestmentandtrade.com/export/sites/trade/files/attachments/Oekra%C3%AFne_Hervormingen_Post.pdf.

11. “New Vehicles for Polish Post, Ukrposhta, and Croatian Post.” Postal Hub Podcast, www.thepostalhub.com/blog/new-vehicles-ukrposhta-polish-post-croatian-hrvatska-posta?rq=Ukrposhta. Accessed 1 May 2021.

12. PricewaterhouseCoopers. “Interview with Igor Smelyansky, Ukrposhta CEO.” PwC, www.pwc.com/ua/en/survey/2018/interview-ukrposhta-ceo-igor-smelyansky.html. Accessed 1 May 2021.

13. Wikipedia Contributors. “Demographics of Ukraine.” Wikipedia, Wikimedia Foundation, 26 Oct. 2019, en.wikipedia.org/wiki/Demographics_of_Ukraine.

14.‌ “Ukrposhta Doubles Revenue in Five Years.” Postal Hub Podcast, www.thepostalhub.com/blog/ukrposhta-ukraine-revenue-growth?rq=Ukrposhta.

‌15. “Ukraine: Urban and Rural Population 1990–2020.” Statista, www.statista.com/statistics/1006580/ukraine-urban-and-rural-population/. Accessed 1 May 2021.

16. “Ukrposhta Chief Moves to Clean up State Enterprise and Attract New Investors — Feb. 16, 2017.” KyivPost, 16 Feb. 2017, www.kyivpost.com/business/ukrposhta-chief-moves-clean-state-enterprise-attract-new-investors.html. Accessed 4 May 2021.

17. “Ukrposhta to Acquire Bank.” UNIAN, 17 May 2021, www.unian.info/economics/postal-services-ukrposhta-to-acquire-bank-11422036.html.

18. Couriers of Change: What Did Ukrposhta Team Do over Two Years of Reform?” AIN.UA, 25 Jan. 2019, ain.ua/en/2019/01/25/couriers-of-change-ukrposhta.