MarketLine Blog

The Royal Mail Privatization: Predictably the first wave of job cuts is announced

Royal Mail is one of the oldest postal services in the world and has been a nationalized industry for most of its history, funded and scrutinized by the UK government. However in recent years the organization has been targeted by successive governments as one that could potentially be pushed down the path towards privatization and certain decisions within the organization have been implemented to help towards that end game.

In the fourth quarter of 2013 the government decided to float the company on the stock market, with the help of Goldman Sachs and UBS, despite strong protests from sections of the public and employees. When the company was floated it immediately gained a great deal of interest and in December 2013 the stock price had risen 77.3% since it was originally floated leading many to suggest that the company was heavily undervalued upon its flotation.

However the company announced today (March 25, 2014) that it intends to make job cuts as it attempts to achieve gains in efficiency. The first round of cuts is numbered at 1,600, mainly affecting staff from backroom and management positions, further cuts have not yet been announced but this is a typical pattern to announce in stages. Many observers will see this as having been highly predictable since the beginning of the privatization process, as many UK and international attempts to privatize state monopolies result in large rounds of job cuts in order to make “efficiency savings”.

Efficiency savings can be misleading as a phrase because it conjures up an image of a company which is haemorrhaging cash and which desperately needs reigning in economically. But as the company made over half a billion pounds in profit in 2013 and is by far the leading player in the UK, it seems odd therefore, that further cuts might be necessary to make the company fiscally sound.

A further oddity in this process is that the “transformation” of the business, which seems so far to consist of the reorganization of processes and cuts to staff, are costing the company large amounts of money. In fact so far the reorganization has cost £230m, which is £70m more than expected, perhaps this is a major short term threat to profit in the 2014 financial year, considering that those costs are half of the last years income.

The word “efficiency” then in this sense is more directed towards shareholder’s needs, following the recent change of hands, than following the previous agenda of being a national service provider. Shareholders expect improvements in efficiency, which can guarantee dividends in future financial years, so the management is following a common template as such to achieve this. It remains to be seen whether these cuts will prove to be worth the human consequences of redundancies and will keep the company financially strong.

To read our case study on the Royal Mail privatization click here.

To read the Royal Mail Company Profile click here.

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