Post Office Limited — Strictly Confidential
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POST OFFICE LTD BOARD MEETING (Company Number 2154540)
Meeting to be held at 9.00am on 9 April 2013
at 148 Old Street, London, EC1V 9HQ in the Board Room
Network Transformation
BREAK
Strategy and Funding
Any other business
CLOSE
Present:
Alice Perkins (Chairman)
Neil McCausland (SID)
Tim Franklin (NED)
Virginia Holmes (NED)
Alasdair Marnoch (NED)
Susannah Storey (NED)
Paula Vennells (CEO)
Chris Day (CFO)
Gill Catcheside (Assistant Company Secretary)
Apologies:
Alwen Lyons (Company Secretary)
Kevin Gilliland
Sue Barton/Chris Day
Alice Perkins
In Attendance:
Kevin Gilliland (item 1)
Robin Nuttall, McKinsey
(item 1)
Sue Barton (items 1 & 2)
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Transforming the Post Office Network
Pre-read for Board discussion
9% April 2013
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Context for Phase Il
Context for design
* The approach to network transformation presented in this
pack, which involves introducing mandation to the network
transformation process, is the optimum commercial
solution for POL
We believe that this continues to be the right approach for
POL to deliver network transformation by 2020, taking
into account the counterfactual position, and the strategic
direction of the business
Our asks of you
* As the POL Board, we ask you
to:
*
~ Re-endorse this approach to
achieving network
transformation and our long-
term business objectives
°
However, there are significant challenges associated
with the delivery of this solution, particularly around
managing the potential objections from sub-post masters,
the NFSP, MPs and the general public
* Evidence-based assumptions have been used in the
design of this strategy, and these require further testing and
challenging in order to refine the financials and the
implementation path
~ Acknowledge the risks
associated with this approach, I
and the need for an adaptive I
strategy to combat these risks I
~— Input into planning the
mitigation of these risks, both
today and on an on-going
basis
* Next steps: We are already in the process of stress-testing
the potential risks and the assumptions made, in order to
develop contingency plans and alternative approaches for
different scenarios
@)
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This is our assessment of what it would take for the next phase of
Network Transformation to be successful from a commercial viewpoint
What we believe Why we believe t!
4.
Conversion to our set of models ~ Mains, Locals, Basics,
Community and Outreach ~ is essential to the viability of
the Post Office
2. Compulsion to convert or exit is essential for the success of the
transformation programme
3. We should ‘not offer ¢ a period of enhanced compensation for
leavers from a commercial point of view
4. We can convert the majority of Mains onsite and with existing
agents
5. Over 2,000 Locals would be viable businesses after conversion
and the majority could occur onsite with same agent
§. Post Office should adopt a strategic approach to partnering with a
set of convenience retailers (symbols and multiples), and
rebalance its network towards where customers are shopping
locally - i.e. towards multiples and symbols and away from
unaffiliated independents
7. We can find replacements for 3,200-3,700 leaver Locals
conversions, the majority of which would be offsite
8. Post Office sustainability should be the objective, rather than 6,000
conversions
9. There are several risks that could challenge the successful rof-out
of this model (including stakeholder reaction, multiples/symbols’
buy-in to Locals model, and technology risks) and to which POL is
developing mitigating strategies (including a robust comms plan)
Conversion to these models results in superior customer experience, a stronger
position against competition, a lower and more flexible cost-base and a Post Office
with higher and more robust profitability
As long as Core Tier Payment remains in place, most of our candidate Locals and
some of our Mains, will choose to stay as is
Enhanced compensation may encourage high-performing agent partners to exit -
the very partners we are striving to retain - and could be expensive (potentially
>£60m, and can be £140m i if becomes applicable to all leavers)
70% of our Mains would é either see an increase in income post conversion or a
borderline decrease and so are expected to remain viable
“40-50% of the ~5,300 candidates for Locals have solid retail businesses such as
convenience or general stores, forecourts and pharmacies, and the majority of
these, (~2000) are expected to convert on-site as viable branches
Risk of retailers (and specifically multiples) choosing to leave though expected to
convert under current plan, to be assessed and mitigated (point 9.)
Moving to compulsion in other geographies (e.g. Germany) has been followed by
large scale conversion rather than exit
Symbols and Multiples have been growing sales by ~10% p.a (and number of
stores by 4%) in recent years, while independents are on a steady decline
A strategic approach could unlock value for Post Office — retailers gain
access to a trusted brand and realise ~15% sales uplift from having Post Offices in-
store
3000 Locals sites have >1 retailer within 0.5 mile
Local model provides significant additional footfall and sales to retailers (20-25%
2dditional footfall in case StS) ac sce ce ee ht ht
We believe that achieving the 6,000 by 2015 will be extremely challenging, would
entail delivery risk and not necessarily align with POL's strategic aims
The network transformation involves a significant degree of change for our agents,
retail partners and other colleagues — as well as the deployment of new
technologies
Mitigating actions are being developed, including engagement with
multiples/symbols and a communications programme
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@ Six key operating models form the basis of the network, each of
which has a distinct purpose and delivers a specific customer need
Purpose
Value to
customer
Value to
retailer
Of which ~2,000 could potentially be Mails hubs Total network
(Locals structure with full Mails proposition and excluding Basics:
I additional store capacity e.g., through Post and Go) :
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0 The economics for the models are compelling and competitive
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Mains branch with fi Standalone Mains Locals model with a Basics model with
average retail branch average retail a average retail
Incremental retail
gross profit', £k
income from
POL/PayPoint, £k
Income retained after
commission, £k
commissions
Parcel Collection, £
Bil payment is
commission, £
‘Based on average customer sessions per model, 25% conversion of POL footfall into retail sales, average basket size of £5 and gross margin of 30%
2 0.5% of value of bill paid, capped at £0.13
a PayPoint with average
a reta
Source:POL internal agent pay and commission rate assumptions, PayPoint annual report 2012; Canada Post retail assumptions
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Already converted
@ This is the target state for the network in 2020 under
base case growth
Unconverted
Cannot be mandated
Of which ~2,000 (~1,000
of the smaller Mains and
~1,000 of the larger
Locals) could
potentially be Mails
_ hubs, with a Locals
structure complemented
_ by full Mails proposition
_ and additional store
_ Capacity
No retailers within
proximity of the outlet, or
very small community
branches. we can expect
some agents to convert
over time (e.g., through
1,568 _ churn)
(outreach)
+~2,000new II
basics
Source: POL data base; team analysis
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@ Under different POL growth scenarios the balance between models .
will shift
a Community and Outreach 0 Locals Co Mains including Crowns Potential Mails hubs
: me New product growth : : ‘
pen ou ategie : fails to come through 5 oe a“ Covert Downside
“ and online takes off
Scenario
Description
Network
~5,500-5,900 : I . : ~5,650-5,950
Mix
~3,500-3,800 : ~3,500-3,800
1 Potential Mail Hubs considered using total income from Mails per branch between £40k and £65k, comparable to average of 1315 Mails transactions per day
Source:Financial projections 2014-2020 from finance; 2013/2014 projection from pillarheads; Team analysis; Network team assumptions oN
\8)
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®) Mandation programme delivers greater and more robust
profitability for POL
180 Jandation - profits projections
160 = = = Voluntary - cost implication
440 ----= Voluntary — with foss of growth 1
120 Gain}
-_
100 -_
4
4 oF Range of lost
sales uplift ¥
80
60
40
20
-100
14 15 16 47 18 419 20
POL profits projections, (excluding NSP) 2013/14-2019/20, /
=m, I
The counterfactual facts — voluntary option versus mandation
* Cost base - the voluntary scenario would have a higher ongoing operating cost of
~£30m
Resilience to potential downturns -
~ POL’s cost base will remain largely fixed. This will make POL less resilient to
market downturns
- POL would be in an unfavourable position after losingthe economies of scale from
the growing branches (who would convert to variable pay) while continuing to
subsidise those that are uneconomic (who will not choose to convert) where there
are viable alternatives available
~ The compensation payable for exit would not be eliminated (removed in new
contracts according to government direction)
Loss of targeted sales uplift -
~ Competitive position - without mandation POL could lose growth opportunities to
competitors such as PayPoint and Collect+
~ Continuing Post Office operations in poor retail environments (not upgraded
through strategic partnerships, investment in converted branches and upgrade of
our agents pool)
~ Fewer incentives for our Agents to grow their business
Customer experience and brand - our unconverted branches would not offer
improved service for customers (e.g., longer opening hours, reduced queue times)
which is important to retain our market presence
Sum of the parts - Converting only ~4,500 branches would not be sufficient to
deliver the overall transformation effect and brand change, and so could impact
major retailer and government decisions (e.g., losing contracts, and not attracting
better retail partners) and not change customer perception of POL Mandation is time
critical as the retail Mails market decides on online channel strategies
NOTE: Total OPEX benefits calculated for Total Costs cover 7 year period 2013/14 -2019/20. Income projections were decreased, upper bound for revenue impact assumes that mortgages, POLO and insurance would decrease by 10% , Collection and returns decrease by 25%
from the base case. Lower bound for income assumes 10-20% decrease in all FS products, 70% decrease in Collections & returns and 25% loss of assisted digital from the base case with effect post 2013/14. More aggressive downward scenario is possible to develop (e.g.,
radical decrease in POL's share of parcel). Voluntary assumes 2243 mains (incl. Crowns) conversions and 2250 voluntary converted locals by 2020, mandation assumes 3000 converted mains (incl. Crowns) and 5300 locals by 2020 The financial impact of the conversions. in
a given year has been delayed by @ months from the mean number of conversion contracts signed in the previous year.
‘SOURCE: Financial projections 2014 -2020 from finance; 2013/2014 projection from pillar heads; Team analysis; Network team assump tions, Financial team and Payment and Remuneration team
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@
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©) We expect 70% of candidate Mains to be same-agent, on-site
conversions
# of outlets
Rationale
* ~700 Mains have been converted onsite this year
* Additional ~800 branches that would see an increase in
POL income and ~250 branches with borderline decrease
in POL income from conversion are expected to remain
Onsite 4.800 viable and majority of them to convert onsite
conversion : * Asmall number of branches (50-100) are expected to lose
a more significant share of their POL income, but are
sufficiently profitable/nave the retail business to ensure
viability may also convert
Onsite oe sh 8 fk bh ht HE i HF FH
new agent Expected leavers (~900):
. Small branches that will lose income if converted and that
Offsite . do not have the retail business to guarantee viability
conversion
I Churn/service issues
* Ashare of viable outlets that will be losing income are also
Existing Network expected to decide to leave
* ~70 franchised Crowns also included
+ Remaining Crowns are franchised and included in offsite conversion total or identified as ‘Special branches’ and not mandated
Source: Based on POL agents survey 2007 of rural outlets; analysing 2,000 agents of the 7,700 surveyed that are current existing Local candidates
dated 2007)
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@ Turning to Locals, many of the current branches for sale appear
to have substantial retail businesses ...
EXAMPLES
South Birmingham _
Asking price: £140,000
Independent/multipie/symbol:
Symbol - Londis
Retail offer: Convenience store
Retail turnover: £450,000
Post Office income: £50,000 incl.
lottery and external ATM
% total profit from POL’: 21%
Store size: 1,000ft?
Asking price: £385,000
Independent/multiple/symbol:
Independent
Retail offer: Cards and stationary
Retail turnover: £291,199
Post Office income: £15,500
% total profit from POL: 11%
Store size: ~800ft?
Asking price: £195,000
independent/multiple/symbol:
Symbol
Retail offer: Convenience store
Retail turnover: £858,000
Post Office income: £37,245
% total profit from POL: 9%
Store size: ~1,500ft?
Asking price: £289,000
Independent/multiple/symbol:
Independent
Retail offer: Off-license
Retail turnover: £104,000
Post Office income: £14,500
% total profit from POL*: 25%
Store size: ~600ft?
Source: Humbertons; http://www. business4sale.co.uk/Buy/Post -Offices-For-Sale-in-the-UK; hitp://uk. businessesforsale.com/uk/search/Post -Offices-for-sale, margin assumed at 20%
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of candidate Locals
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I... and this is supported by our broader analysis
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~50% of local agents have a meaningful retail
business and are expected to be viable
independent of CTP
Sample of candidate locals from Rural survey!
2007, %
100%
Convenience store
CTN
Grocery
Supermarket
Other viable
Meaningful
retail business
Cards
No retail
Other unviable
Majority of viable retailers are expected to opt to
convert versus leave, given the contribution of
POL to retail business
* For an average Locals retail business the value of
the incremental footfall from POL customers is
~£7k2. complemented with POL profit of ~£9k?
totalling ~£16k p.a..
« Given small space required for Local proposition
(1.5m?) this implies an augmented value of £10.7k
per year per square meter which is significantly
higher than any retail proposition
* 20-40% of ‘viable after conversion’ agents might
leave due to attractiveness of leaving package,
personal reasons or higher than typical fixed costs,
resulting in overall 60-70% leavers rate
Note: Meaningful retail business defined as convenience store, CTN, Grocery, Supermarket, and included in other viable: PFS, Off-license and General store
1 Using results for ~1,600 current Locals candidate branches based on POL survey of ~7,700 rural branches conducted in 2007
2 Assuming average footfall from POL customers of 800 per week, basket size of ~£5, ~25% probability of purchase and ~15% net profit margin
2 Average local commission income without fixed payment and ~35 % net margin
Source: POL Strategic Plan 2011-15; Funding agreement letter, Proximity Analysis , P&L model , Rural survey data 22/03/2007, Eurostat
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C5) The German example suggests that a compulsory process that
results with reduced and variabilised pay for smaller outlets can be
accomplished with few agent leavers
Few agents exited, even though smaller agents incurred a loss of up to
35% post office income and additional costs from extended opening
hours
Deutsche Post shifted its agents’ pay structure
toward variable and increased its postal desk
opening hours up to 24/7
Deutsche Post agent pay structure before and
after transformation
%
« Smaller agents incurred loss of income: The larger / higher traffic agents
were significantly better off than under the previous contract. In contrast,
lower traffic / rural agents received up to 35% lower total pay
100% 100%
+ Implementation through compulsion: There was no room
to negotiate the contract, nor to refuse it. Agents that did not sign the new
contract were exited. DP offered six-months compensation for acceptance of
the new contracts
+ DP communicated major benefits of a postal counter as the additional traffic
for the retailer and that Partners should not expect profit from providing
. postal services
Fixed
* In rural areas, municipalities often stepped in and took over running the
agencies with their own staff
20 I I Few agents left as a result of process: After significant resistance and
i threats, the vast majority of smaller agencies signed the new contracts
Before After
transformation transformation
DP also required partners to open postal desk
at same hours as retail side, going up to 24/7
Contracts review started in 2003, additional compulsory changes to opening hours were implemented in 2008
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@ We therefore expect 30-40% of Locals conversions to be same
agent on-site conversions
“Expected breakdown of onsite/offsite, Leavers/converted agents for candidate Locals,
# of outlets
Rationale
~5300 00 mmm cn ——
» 240 Locals already converted. An additional ~650 Multiples
assumed to be viable retailers are expected to convert
. + 50% of surveyed Local candidates seem to have significant retail
Onsite - - : :
S ‘ business, and therefore are likely to be viable in new model
ame “ ;
Agent (even if POL income decrease is not fully compensated by
additional retail income or through reduced costs)
» 20-40% of viable agents expected to leave due to attractiveness
Onsite of leaving package, retirement, service issues or resistance to
new agent change
Leavers (~3,200-3,700):
* Branches that do not have a significant retail business’ (e.g.
cards / stationery business instead of convenience)
* 20-40% of viable retailers also expected to leave:
~— Retirement (10-15% of viable)
~ Churn/service issues will drive additional leavers (assumed at
~ 10% of all viable agents)
~ Viable agents not accepting change in pay (15-20% of
assumed viable agents)
« Few leavers are expected to be commercial transfers
Offsite ~2,830-3,330
Candidate
‘ Based on POL agents survey 2007 of rural outlets analysing over 1,500 agents of the 7,700 surveyed that are current existing Local candidates
dated 2007)
©)
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© Geospatial analysis shows that the Local leavers are fairly evenly .
distributed across the UK
% branches in each region that are Outreach and I
Community branches, and so will not be
mandated by POL by 2020
% branches in each region expected to be Locals
candidate leavers by 2020
4
Source: POL geospatial analysis
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6) In replacing these Locals leavers, symbols and multiples provide a
sustainable basis for the future with strong sales growth and
higher sales per store
...Multiples and symbols also achieve a higher average
@ sales per store than independents, which means they are
able to maximise the incremental retail income generated by
Post Office footfall
Growth in the convenience sector is tilted toward multiples
and symbol groups, while sales in independent stores are
declining year-on-year...
Convenience sector sales by segment,
2006 ~ 2012, CAGR’, total Average sales per store, 2012 CAGR’, Sales
% of £ sales .% m per store, %
29,774
13%
: : Co-operatives 1.51
. 21,113
Co-operatives Y Convenience / 4.85
Convenience Y Multiples /
Multiples ' ae 468
Symbol 39% % Symbol 0.83
Groups Groups
Non-affiliated Non-affiliated
Independents “% 22% 24 Independents 0.34
2006 2012
‘CAGR 2006-2012
Source: IGD convenience retailers 2012
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6) POL is currently strongly over-indexed towards unaffiliated
independents, and so should use the transformation as an
opportunity to rebalance towards symbols/multiples
customer behaviour
Convenience sector store
numbers by segment POL share of outlets by agent type
% of stores % of outlets
100% 100% 100%
Co-operatives
Convenience 0
Multiples
Symbol
Groups
% 9% 9%
70-80%
Non-affiliated
Independents
Market - 2012 POL total network Suggested POL Target
2012 (including Mains) 2016/17 based on
strategic approach to
convenience and retailers
* Current number of symbols in POL network to be determined as it is not tracked based on difficult of gathering information, see page 17, further analysis required
Source:POL agent records
@)
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6) Partnering with symbol/multiple groups to replace the leaving
Locals agents represents clear value to both POL and the
symbol/multiple groups
Multiples and symbols with Post Office earn on average
15% more than stores without a Post Office
Value of multiples and symbols to POL
WHSmith case example (POL research’, 2013) — * Moving to multiples and symbols rebalances POL’s
Branch average revenue , £k network to reflect changes in customer behaviour -
towards shopping in multiple/symbol group convenience
4,549 stores
Multiples/symbols are more economically robust than
C+16%) independent retailers - sales of multiples/symbols have
grown at 10%/9% over the last 5 years, while independent
sales have fallen 2% in a sector with overall growth of 4.6%
Average POL driven
revenue
Multiples and symbols allow POL to realise operational
efficiencies - The central operations of multiples and
symbols enable POL to manage relationships with hundreds
Average branch of branches efficiently
revenue excluding
POL
° Added customer value/convenience - Better locations,
parking, stay open longer hours, have more customer
appeal, customer focused, clean/bright stores, and have
better sales skills
» Allow quick movement and roll-out
2011
1 Analysis based of WHSmith trading reports and feedback from branch visits
@)
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@ Geospatial analysis finds that our candidate Locals are well
covered by multiples and symbol groups
Number of retailers
locals, (#)
Presence of a
multiple/symbol group’
(%
100% = 4,817 —
1 other 4,290
retailer
2 retailers B95
3 or more
retailers
1 To estimate presence of multiples and symbols group certain categories were excluded, such as Public Houses, Garage ServicesCharity shops,
Baker shop, Juice Bars, Hairdresser, Jewellers, Delicatessen , Booksellers
Source: POL internal database; POL geospatialanalysis
)
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@ Key multiples, symbols and cooperatives have expressed interest
in the new Post Office models, and are well-placed to take the
opportunity
Number of Number of
Number — stores with stores within
Convenience of stores existingPO 0.5 m of a PO?
landscape Chains # # S # stores _ Appetite for new models .
Cooperatives ‘ Don't yet understand Local model and how it
601 The co-operative — ~4,250 518 3,500 might work for them, interested in P&G
3 4 1,427 71 ~1,000 * Tesco Express Interested in P&G,
including offer to pay for machine
$21 154 ~450 + One stop Committed to local model, but yet
to realise full operational efficiencies
7 ~
Multiples 48 2 450 + ASDA Interested in P&G, including offer to
3,04: art-fund machine
\ 302 - ~200 P
~500' 22 ~350
Wallrose 288! - ~200
GD 2,700 t ~2,000
2,511 {Challenge to ~200 There are challenges around identifying which
cytes serpin branches are affiliated with symbols — a
ena i S PAR 2.427 ~2,000 branch may apply for a Post Office as an
16,407 ® , opanca , independent, and align at a later date without
3 "
K : 2,224 on the right ~1,500 informing POL
Fexpress
I ~100
Y Martin M‘Coll 1,268 420 ~600 Martin McColl piloting Mains, andsuggest
P&G may be attractive though not yet
Convenience!
newsagents I Wiismith 618 84 ~500 convinced by Locals model
* Including non-convenience formats 2 Indicative number based on geospatialanalysis 3 Includes Londis, Budgens, Mace
Source: IGD Convenience retailing research; Company websites; POL intemal database; POL geospatial analysis
@)
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@) There are three key assumptions we have made in designing the
path to implementation
Options _ _. Considerations an .
XM Bilateral + To achieve our Locals conversion targets and to unlock the true value of POL to
negotiations multiples, we would need to create strategic partnerships with symbol groups
What is our multiple _ Strategic approach and mainstream multiples. This would require providing higher certainty of
available outlets to partners and shifting from a reactive, branch-by-branch
approach to a franchise strategy (e.g., by allowing our preferred partners to
exclusively bid on large bundles of target outlets). This has the potential to attract
widespread symbol/multiple interest and take- “up.
and symbols strategy? to convenience
retailers
of Regional . Divide the network into regions/areas. Phase trardionaton rollout 20 complete
B’4 Big Bang conversion (contracts signed) of 1,500-2,500 agents each year
How do we phase/time Regional implementation would: :
the “convert or leave” X By business ~ Reduce execution complexity and risk (High pace but phased and thoughtful
mandation / viability! Other allowing learning in process)
programme? business specific ~ Provide sufficient time to find the optimal replacements! (tovensure most viable
criteria network in target state)
- Align with multiples’ Isymbels’ reqit strategits
No. enhanced A purely commercial approach woul be unlikely to involve I an enhagted
compensation time compensation period, though a period of enhanced compensation with a credible
window time limit would have the advantage of encouraging early exit of unviable businesses
in significant volumes, and support the franchise strategy
Key risks in implementing an enhanced compensation period include;
~ Costly to POL (and the public purse)— additional 8 months compensation to
leavers during limited time window and applied retroactively could cost an additional
£50-70m (assuming a total of 1,500-2,000 leaving agents receiving enhanced deal)
~ Loss of viable agents due to the appeal of the enhanced compensation offer. Deal
would be more attractive to higher income agents (especially multiples)
~ Loss of time that might have been better used for mandation ©
Should we offer a time
window of enhanced
compensation for
volunteer leavers? x Limited time
+ How long is the time window with
window? J enhanced
» Whatis the compensation for
compensation level for volunteer leavers
volunteer leavers
during this time
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@) Mandation roll out starting in 6 months with no enhanced
“ compensation window could deliver targeted network conversion by
2016/17 and would require total of ~£750m
April 14 April 15
Ws Ws
April 2013
Vv. 9 months
April 16 April 17 April 18 April 19
We vs Ws vy
Key assumptions i
Conversion
process
Complete detailed planning of
mandation programme
~ Business case criteria
~~ Support for retailers
~ Partnership approach
Complete legal analysis
July 18, announce mandation
programme
Gather business plans and assess.
agents’ viability Commence mai
+ Roll out a cross network conversion mandation programme (excluding
community outlets) phased by region and driven by assessment of business
viability
~ Providing viable, agents will be asked to convert
— If not viable, the agents would be asked to leave/sell providing an
appropriate replacement is found
indation 6,000 conversions
Vv v
Conversion path 2013/14 201415 2015/16 = 201617 = 2017/48 ~——=»—-2018/19__ Total
Onsite 655 350 300 795! - - - - 2,100
Offsite 90 100 150 400 160 : E L 900
Total Mains 745 450 450 4,195 1 _ £3,000)
Onsite 240 100 200 «=—s«B 400218 : : 4,855
Locals Beier 215 150 350 700 1,050 980 - - 3,445
Total Locals 455 250 550 4,150 1,500 4,395 : L £5,300]
Total converted in year 1,200 700 4,000 2,345 4,660 4,395 : : 8,300)
Cumulative converted
Total Investment
{incl Crowns) £m
Total Compensation £m
Overheads £m
ee aes ee eee
i
Onsite conversions continue
in first half of 2013/14
according to current plans
On 1* of July we will
announce mandation
program which will be rolled
out starting Oct 2013. From
that point onward all
conversions and levers are
considered mandated
Leavers flow depends on
finding replacements for
Locals offsite conversions
and relies on relationships
with symbols and multiples
All leavers are compensated I
for 18 months (no enhanced I
compensation)
All expenditure is assumed
to be at contract signature
date. In practice some costs
are at branch opening
Offsite conversions may
result from service issues
which do not incur
compensation. For prudence
all offsite are compensated
£5m in 2013/14 investment
into Basics is not included in
core network transformation
;
;
Total NT spend em
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1 Including 300 Crowns onsite conversion, investment per Crown to be validated
Source: Network team compensation and investment assumptions; Network team conversion path, Team analysis
®)
@) Four options for rolling out mandation programme
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®
O Recommended approach
National
Commercially-driven
geographic regions
Politically-driven geograp!
areas
Specific criteria
submit business plans within the
first 3-6 months of the
programme
+ BPs processed and reviewed on
a first-come, first-served basis,
with conversions/leavers rolled-
out Strategically
Description
Allows national strategic offer to
be made to partners
Engages every PO in the process
from day 1
Creates atime lag between BP
submission and action
Likely to require significantly
greater central and local
resources
Mandate all relevant branches to
Phase mandation of areas within
a particular geographic region to
submit BPs, e.g. Area South East
1 in week 1, SE 2 in week 2 etc.
until SE region is complete
Roll-out conversions/leavers as a
phased process in close
collaboration with retail partners
Compelling regional strategic
offer can be made to partners
Manages central workload
Can sequence regions according
to partner priorities I
to different parts of the country
Cannot offer national view of
opportunities to partners
Potential for regional protest
campaigns
Requires local teams to relocate
Phase mandation of areas
of branches, spread across
different regions to submit BPs,
e.g. Area South East 1 would
start the process in week 1,
followed by Midlands 1 in week 2,
etc., until South East 2 would
begin in week 1
Manages local workload
Allows on-the-ground teams
to work within a specific region
Manages central workload
Cannot offer any ‘aggregated view
of opportunities to partners
Potential for organised protest
campaigns on an area-by-area
basis
Mandate all branches that fit a
specific criteria to submit a BP
regardless of geography e.g.
Mains candidate/ urban location
etc.
Sequence conversions and
leavers strategically to manage
capacity and replacement time
Allows POL to manage time
sensitivities in the network e.g.
replacement time to ensure
conversions are completed by
2014/15
Might carry more tisk for judicial
review
Creates a time lag between BP
submission and action
Little clarity for partners
Difficult to manage workload
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@s)
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The resulting network evolution during the implementation path
Number of brane
#000
v,000
‘D000
8.000
6.000
4,000
2,000
Basics a
Locals
Wl Urconverted Mains
BS Outreach/ No replacement
1 ‘i 4 1 1 Es ee) 4
0
2084/12
Cumulative
converted
Basics
1203 13/14
4415
18/16
1647
Number of converted outlets in year, #
@ Ofsite
are of
@ Onsite
18/16 16/17
0%
DR
network is/Multiples
201213 13/14 15/16 16117 18/19
1 Includes part of the 2012 conversion investment cost (agents who have signed the contract but not started any refurbishment work)
2 Estimated based on the Agents’ Remuneration difference vs latest P&L projections
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@
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8) Targeting 6,000 conversions by 2014/15 would be a stretch to the Ea
implementation plan and would require POL to make compromises
that are not commercially driven
) ° Forced to deliver “Big Bang” mandation (compulsion to leave or convert) of
Enhanced _ 4,000 agents in 18 months; a rushed process could push more of our viable
EyeiiteIiat.aI agents to choose to leave and would allow only limited learning and flexibility
—« Risk of sub-optimal replacement, or retention of unviable agents due to need
for ~2,000 offsite conversions within 18 months
« Front-loading conversion of on-site Mains in order to reach target, resulting in
a network without the flexibility to shift according to changes I in demand
. » Retaining all existing viable agents without involving Multiples and other
partners in potential replacement discussions (offering our partners the
opportunity to compete and replace only the least successful retailers)
Sub-optimal
multiples
ee
» Puts individual retailers in strong bargaining position versus Pot
. Large -scale disruption of 6,000 changes could cause significant customer
. and client disruption with associated service issues
Customer risk
®
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©) There remain several risks that could derail the successful roll-out
of this model
@ Stakeholders
Independent
agents
12)
Multiple and
symbol agents
C4) Technological
Ongoing risks
»- NFSP obstructs the progress, either by coordinating members to
refuse to submit business plans, or by mobilising agents and the
public to petition HMG
+ MPs/political parties unite in opposition to mandation in the run-up
to the general election in 2015
+ Local communities of SPMs mandated to leave the business
boycott the replacement multiple
+ Long-term negative publicity campaign for POL, conducted by
converted branches incurring loss of income
+ Multiples choose to leave the network and take compensation
when mandated to convert or leave
+ Asingle multiple running 1,000+ branches in the network uses the
threat of leaving to bargain with POL over commission rates etc.
+ Partnerships with symbol groups fail to achieve the operational
efficiencies expected
* EPOS integration is not delivered within a reasonable time frame
« New provider of Post & Go machines cannot make developments
and ramp-up production within a reasonable time frame
+ Conditions around the delivery ofvolumetrics with Royal Mail are
not acceptable to POL
Involve NFSP and SPMs in process throughout
« Engage stakeholders on narrative around network sustainability
and mutualisation agenda
+ Encourage/incentivise orrsite conversions to minimise public
perception of service disruption
+ Comms plan around cost of service provision, and impact of boycott
+ Provide retail support to branches who are expected to see
decrease in income to help them build enough retail business to
compensate for loss in POL income
* Consider additional compensation for onsite conversions
+ Engage existing multiples/symbols to understand appetite for
conversion and potential reaction tomandation. Ensure conversion
package is attractive to multiples/symbols
« Make clear business case for new models to multiples
+_ Link conversion to potential for expansion viaLeavers
+ Contractual restrictions about number of multiples branches from
one partner able to leave per year, justified by networkstability
* Work with NFSP to understand and support trade association shift
+ Identify priority symbols with high level of central control
Identify check-steps and carefully manage relationship with Fujitsu
. Engage with NCR on ‘strategic I plan and potential rokout at earliest
possible date
* Develop strategic plan for engaging Royal Mail and achieving
acceptable terms
j
j
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© There are several important activities to be completed before a Ea
~ public announcement can be made (e.g. July-2013)
Strategic approach _° Engage current and potential partners to identify wants and needs
to convenience * Develop a partnership strategy e.g., design an offer for preferred partners
retailers in accordance with Legal and commercial constraints, refine delivery
- “models to fit partner needs, shape POL team to enable relationship focus
with strategic partners, study other relevant cases (e.g. UK rail franchising,
2012 Olympics sponsorship)
* Complete detailed planning of implementation path. Stress test
implementation plan including implications on costs and conversion
targets, and taking into account lack of control around replacement and
opening of new branch timeline
Implementation
and network
planning
* Complete mapping of risks (Legal, execution, brand and etc.) and finalise
mitigation plan
i ° Identify resources required to deliver the implementation plan, including
Resources and I resources needed to support agents in business plan development and
Capabilities I viability assessment
In addition POL is developing the approach to stakeholder alignment , the
communication plan, and how this relates to the mutualisation agenda
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POST OFFICE LTD BOARD
STRICTLY CONFIDENTIAL
COMMUNICATIONS STRATEGY —
MAKING THE CASE FOR COMPULSION AND THE 2020 STRATEGY
Background
1.1. This document sets out a communications strategy aimed at supporting the process
of securing Government agreement for the McKinsey proposals for a switch to
compulsion in the network transformation programme. It comprises key messages,
target audiences and timelines.
1.2. Itis closely linked to the delivery of messaging around our future strategy, which will
include any changes to our approach to network transformation. Through our
discussions with BIS, we need to give key politicians a compelling narrative around
which they can ‘own’ our strategy and build support for our proposals within
Government and, eventually, beyond.
1.3. The context for this is an extremely challenging economic climate and a fragile
political situation with a general election looming which will be hard to read. BIS
ministers will also be sensitive to the impact on the future of the Royal Mail,
industrial action in the Crown network and the way the proposals will be perceived,
firstly across the wider Government (and any potential for tension within the
coalition) and secondly by the Opposition.
1.4. Preliminary discussions with BIS officials have indicated both general support for
the strategic direction and questions about how the strategy, and particularly the
changes around network transformation, can be positioned with ministers. This
paper seeks to address this latter point.
1.5. Persuading ministers to compulsion within network transformation will be extremely
challenging. They have committed in Parliament and beyond to the process being
voluntary (see Annex C). We will only succeed in making the case for change if we
can support the compelling commercial case with a narrative which secures political
support (and highlights the nature of the alternative approach).
1.6. It is therefore critical that we focus on key policy drivers in order to secure traction
and support: such as mutualisation, localism (Big Society), social, digital and
financial inclusion, public service reform, support for small business and sustainable
communities.
1.7. The narratives in Annex A and the messaging in Annex B start to flesh out these
points. The commercial case and improved network sustainability - necessary to
protect the future of the Post Office — are at the heart of these approaches. They
also make some assumptions about commercial positioning in relation to the
network criteria, community post offices, the future development of our approach to
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mutualisation and the development of small business services. Developing the
narrative on some or all of these points will be crucial if we are to persuade
ministers to support our approach. It should be stressed that these annexes are
designed to address the network transformation changes alone: they do not go into
the broader strategy messaging (see point 2.1)
The success of this approach will also depend on preparing the stakeholder
environment in advance of public announcements, and showing ministers that we
have plans for communicating the changes and mitigating risks. A delivery plan is
included at Annex D.
Communications objectives and approach
2.1.
2.2.
2.3.
2.4.
2.5.
2.6.
27.
2.8.
2.9.
The aim of this communications strategy is to set out the top line messaging and
stakeholder activity necessary to secure support for the Post Office Strategy should
we decide to adopt a compulsory approach to network transformation
The approach taken is to combine the commercial case for the strategy with policy
drivers which are likely to offer Government a compelling case which can be used in
public to support the strategy.
We have a number of tactical approaches open to us in order to support this
strategic approach, including supporting media and stakeholder activity.
The overall transformation of the Post Office as a whole, and our journey towards
becoming a multi-channel business, must form of the basis of our messaging. We
need to position the strategy as building on the Coalition's commitment to the
business in 2010, not replacing it: we must avoid it appearing as a change of
direction.
Instead the tone should be one which accentuates a fresh surge of activity within
the context of this overall transformation: having stabilised the network, we are now
proposing innovative development of the approach to ensure a healthy — and
financially sustainable - future for the Post Office in a digital age.
The innovation within the strategy is embodied by our switch from channel business
to retailer - but we need to work hard to make this commercial concept ‘live’ for a
Government and political audience. We will do so by positioning the Post Office as
a commercial business with a social purpose, actively working to connect
communities while also providing essential services which help to make people’s
lives simpler.
This will require greater flexibility, both in terms of how we operate as a business —
therefore signalling organisational change — but also in terms of how we serve our
customers: taking our business to them and the places where they shop.
If therefore the themes at the core of the strategy are about stepping up the pace
and flexibility around transformation and innovation, we need to provide ministers
with totemic representations of this approach. Ministers will want to consider how
the ‘sell’ the strategy to the media and general public.
This is all the more crucial given how difficult it will be to persuade ministers to
support compulsion in the network. We need to build a story for ministers which
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allows them to support this change: this needs to balance economic necessity with
policy innovation.
Messaging
3.1.
3.2.
3.3.
Our key messaging will be contained within the executive summary of the Strategy
document. The messaging set out here is specifically aimed at showing how we
could position the move to compulsion.
Annex A sets out a proposed core script for making this case.
This messaging focuses on:
Value for money: this package of proposals reduces reliance on the taxpayer at a
critical time
High Street/rural renewal: we would need to make a commitment to High Street
renewal: a Post Office Promise or Charter to stay in communities and
commitments around support for the development of Community Post Offices
SME support and growth: we should ensure we are in a position to announce a
package of measures for small business alongside the strategy
The conditions for commercial sustainability as a step on the road towards
mutualisation: it is critical for political reasons that we keep mutualisation on the
agenda: we can do so by setting out the conditions — the stake in the ground - we
need to reach in order for mutualisation to be achievable
Stakeholder approach
44
42
43
44
45
There are two phases to this strategy;
Securing Government support: with BIS in the first instance, and beyond as
required
communicating the strategy to broader stakeholders
This paper focuses on messaging, positioning and tactics in relation to the first
phase of this process. The second phase will incorporate the messaging set out in
this first phase, with tactics designed to fit.
The key audience is BIS. Ministerial support will be critical to securing the changes
we need to make in terms of mandation. In order to win the support of BIS ministers
we need to present them with a strong case, powerful messaging and support (or at
least neutrality) from other stakeholders.
This therefore means securing the support of ShEx officials in the first instance, and
providing them with the case they need to persuade ministers.
Jo Swinson is the key minister and we are actively pursuing all avenues of
engagement: while the ShEx route is important, it is also critical that we try to
engage her through other routes: political allies, third parties etc... The same goes
for the Secretary of State. It is unclear how close an interest he takes in Post Office
issues — but we have engaged his special adviser and have an opportunity to set
out the case to her.
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46
47
48
49
4.10
4.12
4.13
4.14
4.15
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Ministers are likely to be extremely wary of mandation. The approach set out in
Annex A provides a narrative which may be enough to secure their support. It would
be crucial to tie this approach to a package of attractive new announcements (such
as a new package for small business).
But we are likely to be walking a very fine line — BIS ministers would be wise to seek
political cover from other departments (notably HMT, No 10 and the DPM) for the
move to mandation. If they do not do so, the strategy could unravel in the face of
political opposition (Coalition ministers will not relish the prospect of opposition
taunts suggesting they are strong-arming subpostmasters into unwelcome change,
particularly in the light of Parliamentary commitments around the voluntary nature of
Network Transformation).
We will therefore need to be in a position to provide BIS ministers with a way
through this issue. The narrative set out in Annex A seeks to do so, but we might
wish to consider further steps.
We could, for instance, bring Consumer Focus into our confidence. It has supported
Crown Transformation and — with the right level of engagement — might support the
move to mandation (although this would need to be carefully tested in advance of
any approach). If we were able to tell ministers that our plans were supported by
Consumer Focus it would make a big difference.
We may take the same approach with other key stakeholders such as Age UK and
the CAB. Others might include small business representative groups, CBI, High
Street Task Force etc...
The RMG angle is also critical: we would need to be in a position where colleagues
at RMG were briefed with the strong messaging around the necessity of this
change, and its impact on the future health of RMG. Clearly there is also a BIS
angle to this and we should seek BIS advice on approaches to the relevant minister.
The support of the NFSP would also be significant in persuading ministers to
support our proposals: but we should manage expectations around this. Should we
be able to secure NFSP agreement to the approach, this is likely to take the form of
silence rather than active support. There is also the risk that even neutrality from
the NFSP would not prevent vocal protests by ‘splinter’ groups of subpostmasters.
We should also use our growing support base in Parliament: we could hold
Chatham House briefings to outline the proposals to key MPs, such as the chair of
the BIS committee and possibly further (DCLG for example). Supportive briefings to
ministers from Lib Dem and Conservative MPs would also help build support for our
plans.
We will also be able to emphasise to BIS ministers how we are changing
perceptions of the Post Office through positive coverage around Network
Transformation so far. We are producing a booklet to support this work.
We could go a step further and seek to bring a big media player into the tent. This
would be a high risk approach. But we could use trusted contacts to set out (at the
appropriate time), the case for change and our broader agenda. In order to win this
support — and therefore a neutral stance in relation to mandation — we would need
to be prepared to give the relevant media outlet a strong story: probably in the form
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of a solid commitment at the heart of both the high street renewal and community
Post Office agenda.
4.16 Whether we take this step or not, we need to start shaping the views of key
commentators to prepare the ground for the new approach.
4.17 If we are successful in securing BIS support we should place the emphasis on BIS
to do the work necessary to secure broader government support. But we should
ensure that we are engaged in any process to do so: there is a significant risk that
BIS support alone will not be enough to secure the change we need.
4.18 If BIS does not seek to secure wider support for instance (and this is probably
preferable in terms of making the policy change we need), there is a risk of the
process derailing once it becomes public. While we will be able to present the
change in a very positive light, it will without doubt be portrayed in a negative light
by the media and some external stakeholders. Media coverage will focus on the
prospect of Post Offices being at risk as subpostmasters are forced out of the
business, and case studies will be used to support this and win public sympathy.
The move to mandation is a page one story — our objective would have to be to see
it through in such a way that it didn’t become a lingering issue.
4.19 Timing is critical to this latter point. We should choose the timing of any public
announcement very carefully so as to reduce the possibility of it dominating
headlines for a prolonged period. Further advice will follow on this area.
4.20 The CWU will seize on the changes to present arguments around the future of the
Post Office and will seek to use them to amplify their concerns around pay and
franchising. As noted above, we may be able to get the NFSP into a position of
neutrality but even this could change in the face of a significant media backlash.
4.21 If by this stage, wider Government stakeholders have not been engaged at a
political level, it will be all too easy for HMT, No 10 and DPM to distance them from
the decision and force its reversal. This would, of course, be the worst possible
outcome.
4.22 It is therefore recommended that we encourage BIS to secure broad Government
support for the changes and to do so in tandem with us (only Post Office can
explain in detail the reasons for the change and provide the messaging necessary
to support it).
4.23 Political support will be critical: while officials may support the logic of our proposals,
the potency of the Post Office to spark political reaction is significant: we therefore
need to work hard at a political level to secure the support we need.
Mark Davies
Communications Director
April 2013
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ANNEX A
The following script seeks to set out how we could try to sell compulsion to ministers,
with a view to how they might sell it on to other elements of government, Parliament and
the media.
There are a number of elements in this which need further discussion and detail, and
consideration, in the context of the McKinsey work. It should therefore be read as
indicative of the kinds of areas we might wish to explore to help secure support for
compulsion.
Positions in square brackets are suggested approaches which will require further
discussion.
The Post Office is stepping up its programme to transform its business as part of a new
strategy aimed at developing products and services into new areas of everyday life.
The approach is aimed at cutting the burden on the taxpayer while continuing the dramatic and
successful transformation of the Post Office network. The move underpins the future of the
Post Office — protecting it for the nation.
The ‘Post Office Promise/Charter’ approach will mean a review of the existing network —
backed by a commitment to ensure Post Office services continue to be delivered to strict
criteria, and a strategic approach which will guarantee Post Office services in key towns and
villages. The Post Office will commit to maintaining at least xxx offices across the UK.
The package provides enough funding to guarantee the ongoing provision of xxx existing Post
Offices in rural communities.
[The Post Office has also announced/is examining the creation of a fund and resource to
support communities setting up mutual Post Offices in addition to the existing 150 community
post offices across the UK].
It means continuing the existing network transformation plan, which has so far introduced xxx
new Post Offices with longer opening hours and more modern environments, but introducing a
planned approach which will mean new models will be introduced alongside compensation for
existing subpostmasters who leave the business.
This step is crucial to enable the Post Office to reduce its reliance on the taxpayer and secure
its future. The Post Office Promise/Charter will mean, however, that Post Office services will
continue to be provide, to the same levels, at the same number of outlets as at present.
The change is also crucial to enable the Post Office to compete in increasingly tough markets,
offering longer opening hours in order to be able to make a strong play in the collections and
returns market.
The Post Office also commits further to its role at the heart of communities, connecting
customers and small businesses with the vital services they need. [In doing so, working with
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Consumer Focus, it will review its existing mechanisms for overseeing the provision of Post
Office services in key areas.]
New approaches to support the growth of small businesses across the UK will also be rolled out
over the coming years.
[To ensure that subpostmasters and others running Post Office services have the support they
need to help their businesses to grow, the Post Office will investigate the creation of a new
independent trade body to represent subpostmasters.]
The new strategy also makes clear that the Post Office can only move further towards
becoming a mutual if and when the conditions are right - which means achieving economic
sustainability as a commercial business.
The new strategy will mean significant growth in the Post Office's financial services business,
investment in the digital capability of the Post Office and a drive to cut central costs and
introduce a leaner, more agile business model.
The alternative to this approach — a continuation of the voluntary approach to network
transformation — would hamper the Post Office’s ability to compete in increasingly competitive
markets such as collections and returns.
It would mean the transformation of network transformation would stall, meaning customers
would not benefit from improved environments and longer opening hours.
In order to maintain the network at the current size it would not be possible to reduce reliance
on the taxpayer. Without driving through the changes which have proved so successful so far in
terms of the new models, it will also be difficult for the Post Office to achieve a sales uplift in
new product areas such as financial services.
It also means that the goal of commercial sustainability is put at risk - meaning any future
aspirations around a mutual Post Office are put under pressure.
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ANNEX B
This sets out an overall view of how we could message the overall 2020 strategy to
Government.
1. Government investment and ambition, and strong leadership at the Post Office, has saved
the network for the nation and put this commercial business with a social purpose on
course towards a dramatic transformation.
2. Like all businesses it faces massive challenge — the fragile economy, the growth of digital
services, ever-tightening margins. But with challenge comes opportunity — and the Post
Office is determined to seize every opportunity to build on the solid progress it has made as
an independent business.
3. So we have a Strategic Plan which builds on our existing approach of growth,
modernisation and customer excellence, and which preserves our unique network and role
as Government's ‘front office’ but which also proposes some new innovations aimed at
enhancing the Post Office’s unique place in the social fabric of the nation.
4. We will continue to transform our network of branches, working with subpostmasters and
colleagues in our Crown branches to improve customer experiences, and will introduce
more flexibility, mandating subpostmasters to start this process so we can complete
network transformation as quickly as possible to deliver improved accessibility and service
for customers and also to get our business to a position of commercial sustainability, an
important step on the way to mutualisation
5. We will build on our proven record of success in moving into new markets by offering
consumers and small business men and women a wider range of essential services at key
moments in their lives (starting a family, moving house, students, travelling etc...) —-
particularly in financial services - through a multi-channel business: and do so in a way
which is fair and transparent at a time when trust in business can be hard to find.
6. We are making changes because we need the flexibility to be able to adapt to changing
retail environment — to develop in the places where customers are shopping and to position
the Post Office alongside strong retail businesses and the synergies this brings with longer
opening hours and improved service.
7. We will do our bit to support the rebuilding of the wider economy too: work with
Government to help reduce overheads in front office services, support the digital inclusion
agenda through innovative products and services, support, build and help connect local
communities, and radically review our structure to cut our central costs.
8. We will build on our mutual ways of working, work with stakeholders and the public to
define the public purpose of the Post Office.
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We believe our plan puts us on the right path towards a sustainable future for the Post
Office: our desire is to make a reality of the Post Office as a commercial business with a
social purpose: less reliant on the taxpayer but with a clear definition of our public purpose;
therefore underlining our unique position in society.
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ANNEX C
Government commitments around the ‘voluntary’ NT scheme
May 2012 - Norman Lamb speech to the NFSP Conference
Norman Lamb addressed the NFSP conference in May 2012. Part of the speech covered
Network modernisation where he said -
“The Federation has played a key role in shaping the structure and terms of the transformation
programme - in particular in ensuring its wholly voluntary nature and in the negotiations with
Post Office Ltd on the compensation and transitional remuneration terms for those who choose
to participate.”
September 2012 - written Parliamenta uestion response
In response to a written parliamentary question Jo Swinson highlighted the voluntary nature of
the programme -
Tom Blenkinsop: To ask the Secretary of State for Business, Innovation and Skills what
estimate he has made of the potential number of post office closures that will occur as a
consequence of the abolition of core-tier fixed payments to post offices. [119162]
Jo Swinson [holding answer 5 September 2012]: The Government has made a clear
commitment that there will be no programme of post office closures. This is supported by £1.34
billion funding to maintain a network of at least 11,500 branches, and also to modernise around
6,000 post offices by 2015 in a process known as Network Transformation.
This is a completely voluntary process, no sub-postmaster is being forced to change their
contract and for those who do not opt to change, we are not abolishing the Core Tier Payment.
It should be noted that Post Office Ltd has reported an encouraging level of interest in
converting to the new operating models under Network Transformation from existing sub -
postmasters.
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November 2012 — Jo Swinson letter to all MPs
In November 2012 Jo Swinson wrote to all MPs with a dear colleague letter providing an update
on the Post Office, including the award of the DVLA contract, the post office modernisation and
the moves towards mutualisation. As part of that letter Jo wrote -
“It is important to note that this programme is wholly voluntary and that no subpostmaster is
being forced to adopt either of the new models. The days of closure programmes are over —
the Post Office network is now at its most stable in over a quarter of a century.”
November 2012 —- Government response to BIS Select Committee
In November 2012 the Government submitted their response to the Business, Innovation and
Skills Select Committee’s report on ‘Post Office Network Transformation’. In that report they
said -
“It is also important to note that participation in the Network Transformation programme, which
begins this autumn, is wholly voluntary for subpostmasters.”
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ANNEX D
Delivery plan
This plan is aimed at providing BIS ministers with assurance that Post Office Ltd has
considered the positioning of the change to compulsion in detail.
It also sets out our proposals for key stakeholder engagement during the next six weeks.
Stakeholder engagement
Our proposed approach is to secure support from BIS in the first instance, playing in HM
Treasury to support.
In addition to regular meetings with our day to day Shareholder Executive contacts (primarily
Will Gibson and Tim McInnes) A series of meetings with key BIS officials are taking place over
the coming weeks: they include
- Howard Orme
- Mark Russell
- Anthony Odgers
- Martin Donnelly
We believe these meetings will help to prepare the ground for the policy change and provide us
with useful advocates for the change.
Ata political level, we propose that at this stage we restrict contact to ministers and advisers in
BIS and HMT.
Meetings are in the diary in April with:
- Danny Alexander (Chief Secretary to the Treasury — April 5) (Paula Vennells)
- Jo Swinson - Post Office Minister (April 30) (Paula Vennells)
This latter meeting is crucial. In this first phase of activity we are preparing the ground in order
to be able to present Jo Swinson with compelling arguments, a sense of stakeholder reaction
and evidence of a planned communications approach.
To support this approach we recommend further contacts with the following in advance of April
30:
- Tessa Munt (PPS to Vince Cable) (Paula Vennells and/or Martin Edwards/Mark
Davies)
- John Foster (Special Adviser to Danny Alexander) (Mark Davies)
We have a good relationship with Tessa Munt and would be able to have a frank, off the record
conversation with her in order to test the water and take her advice.
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We do not at this stage recommend seeking a meeting with Vince Cable himself. He is not
closely engaged in Post Office matters and it might be regarded by Jo Swinson as going over
her head. We should instead seek to engage him through Ms Swinson. We could, at the right
time, engage his special adviser, Emily Walch, with whom we have good links.
We believe that this is the right approach at this stage: we should be prepared to engage with
No 10 and the DPM's office at the right time, but believe it is important to first of all take BIS
through the proposals, with HMT input as necessary. Assuming we can secure support at this
level, it will then be important — as noted in the main body of this paper — to engage more widely
across Whitehall in order to ensure we have the fullest possible political cover for the changes.
Given the read across to Royal Mail, we will also want to consider playing in this angle at civil
servant level, probably through BIS officials.
We further recommend that we have Chatham House-style conversations, in advance of the Jo
Swinson meeting, with:
- Royal Mail
- Consumer Focus
- Age UK
- NFSP (subject to ongoing discussions)
The purpose of these conversations would be to seek support, or at least neutrality, for the
move towards compulsion, supported by the long term benefit for customers — a guarantee of
services continuing, with improved environments and longer opening hours.
Depending on the outcome of these conversations, we would then be able to give the minister
some assurance around the reaction from key stakeholders once the policy change goes
public.
We would also seek to present Jo Swinson with a further communications strategy which would
include:
- Further stakeholder engagement with a broad range of groups in advance of any
announcement e.g. CBI, Federation of Small Business, high street forums, rural and
community groups, Citizens Advice, Women’s Institute etc..
- A full media plan for announcement, including tactical considerations around timing
and leadership of press announcements (with the expectation that Post Office would
take the lead)
- Astrategic engagement plan for all MPs and local councils in advance of the
changes, to include Chatham House briefings, strategic segmenting of MPs by
region, potential interest in the issue, existing Post Office services, reactions to
Network Transformation etc...(including lessons learned from Crown transformation)
- A tactical delivery plan for changes following commencement of the new programme
including regional PR plans, advertising, door drops
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POST OFFICE LTD BOARD
April Board Strategy Session
1. Purpose
This paper provides the Board with a response to the actions arising from the Board Strategy
Session on the 27" February 2013.
2. Background
The Board met on the 27" February 2013 to discuss the Post Office Strategic Plan and
associated Funding Request. At this meeting, the Board raised a number of questions/ actions
~ these were summarised in a subsequent discussion paper — see attached Annex A. This
paper presents an update/ response on each question/ action.
3. Addressing the Board questions/ actions
Action 1a:
Produce a simple and clear communication for the Vision which explains what the Post Office
will be in 2020
Response:
This has been addressed through two actions:
- Strategic Plan redraft which now includes a vision section that presents a clearer and
single view of the Post Office in 2020
- An internal and external communications version of the Strategic Plan which is being
produced by the Strategy and Communications teams. This will be completed once
plan approval has been obtained with BIS and shared with the Board in advance of
publication.
Status: on-going
Action 1b:
Set the context for the plan by emphasising the fast changing commercial environment in which
the business operates and the need for flexibility to build commercial success
Response:
This has been addressed in the Strategic Plan redraft.
Status: complete
Action 1c:
Highlight the importance of providing services for small businesses
Response:
This has been addressed in the Strategic Plan redraft and the inclusion of the SME
presentation pack
Status: complete
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Action 1d:
Ensure network story is clear with a vision of a sustainable network by 2020 and the journey of
how to get there from the network which exists today
Response:
This has been addressed in the Strategic Plan redraft and the McKinsey implementation pack
Status: complete
Action 1e:
Plan should redefine SGEI and access criteria with as few fixed points as possible, avoiding
targets which would restrict flexibility, e.g. network by office type
Response:
The Strategic Plan looks to limit the number of targets which are committed in relation to
network transformation. The definition of SGEI is related to State Aid discussions and
submission and will be addressed jointly with BIS as part of funding discussions. (See Action
6b)
Status: on-going
Action 2a:
Revisit the mails income plan to challenge for the overall ambition and pace on click and collect
Response:
There are three lines within the Mails Income Briefing pack that relate to the growing
opportunity associated with e-commerce. These are:
Ti2 723 SUES T4a5 15/16 ier? ime I 18/9 [_ 19720
Postage £89m £120m £120m £i2im I £122m I f£123m I £125m I £126m I £127m
labels
(covering
USO parcels)
Collections & I £8m fom 13m £20m 224m £40m £62m I £66m I £82m
returns
Retail 5m 10m 25m I £40m I £50m
services
Total 97m £120m 13am £i4im I f£i5im_I fi73m_I f£202m I £232m_I £250
‘Annual 33% 3% 6% 7% 15% 17% 15% 12%
growth %
As you will see from the table above, we are targeting significant growth in this market over the
plan period through to 2020. This starts off with relatively low levels of growth in the early years
with overall growth accelerating as we increase our service offering in collections and returns
and also ecommerce related retail services.
In considering the Board's challenge, we have reviewed all our underlying assumptions and
concluded that a stretch target for 13/14 and 14/15 is not appropriate. We are confident that the
overall ambition and assumptions about speed at which this market will develop are solid.
The table below shows the current market for collections and returns via a 3" party host, the
click and collect volumes are very small as this market has yet to be established. This is
because it is not yet embedded consumer behaviour, retailers are not actively marketing it as
they prefer in store click and collect and the revenue expectations of the 3° party hosts are too
high.
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Col
ions andRetums UK Outlets 2012/13
e
COMECHH oe
urns of Outs 251EAE
Collect+ are now consistently aiming their marketing at small business and C2C markets as
their click and collect product is delivering very little volume, this emphasises the importance of
our small business initiatives. POL aim to lead the growth of the click and collect market
through partnership with RMG, bringing forward any move to open the POL network to other
carrier's volume for click and collect risks pushing RMG volume to other mails retailers and
actually developing the market outside of POL. Furthermore POL would be putting at risk large
amounts of mails income in search of a relatively small part of the market without guaranteeing
additional volume from other carriers.
We believe that the overall ambition is aggressive and will require POL to innovate to influence
and create a market that does not currently exist to any significant degree. This will likely
involve POL working directly with retailers on click and collect hub and spoke operations to help
retailers cut distribution costs, POL working on ways to offer timed evening deliveries for
consumers/retailers and POL offering the more traditional collections hubs to support parcels
carriers in reducing their cost base as the parcels market continues to grow driven by the online
shopping boom.
Status: complete
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Action 2b:
Revisit the income projections to validate the percentage income growth and ensure
assumptions in the plan are realistic
Response:
All income projections have been reviewed and confirmed — no adjustment was required with
the pillar teams signing up to deliver their targets
Status: complete
Action 2c:
Provide a contingency risk provision within the plan
Response:
We have included an income contingency risk factor within the plan. This will be held centrally
with our overall P&L being adjusted accordingly.
To ensure that we continue to meet the commitments laid out in our previous Strategic Plan
submission, the contingency has been included from 14/15 onwards as follows:
£m 13/14 44/15 15/16 16/17 17/18 18/19 19120
Income as per Board
presentation 27th Feb ‘13 927 976 4,071 1,208 1,294 1,393 4,471
Central contingency -20 -40 -60 -80 -100 -120
Adjusted income 927 956 1,031 1,148 1,214 1,293 1,351
Required growth % 3% 8%" 11%" 6% 7% 4%
The total provision by 2019/20 of £120m represents ~21% of the growth forecast between
13/14 and 2019/20 (£562m).
*While the 15/16 and 16/17 income growth projections are significant, it should be noted that
these are related to the completion of the insurance transactions within the FS area. There has
been no adjustment to these.
Status: complete
Action 3a:
The model should be tested and the following questions answered:
e How resilient are the models in the proposed network to changes in total income,
changes to income mix and changes in channel mix?
« How would implementation cope with lower churn than expected (less applicants)?
e Can we consider a scenario where we could not mandate until after the general
election?
e Can we consider a scenario where we transform mandated offices first (get the bad
news done quickly)?
« How many people are we likely to have to mandate and what is the geographical
spread?
* What is the risk and implication of a judicial review?
This analysis should look at the new models and ensure they provide success for the sub-
postmaster and Post Office to ensure the network being proposed is sustainable
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Response:
After the February Board meeting, McKinsey were commissioned to complete Phase 2 of their
network transformation project. This has considered all of the above points. The detail of their
conclusions has been issued as a separate report. The high level points in relation to the
above questions are as follows:
e McKinsey are recommending six ‘store formats’ for our network. These have been
developed after consideration of the income projections contained within the Strategic
Plan and discussion with the Pillar teams. They believe that the economics of these
models are compelling and competitive for the Post Office and retailers.
e McKinsey have developed a target end state for the network using the income
projections from the Strategic Plan. This has been stress tested to understand the
implications of three alternative income scenarios. This has shown that Post Office will
be able to address any future income scenarios with these store formats. It will be the
responsibility of the network team to monitor any forecast changes in income mix and
adjust the network composition accordingly.
e In the previous report, McKinsey were proposing a solution which mandated only
‘leavers’. Having considered this in more detail, McKinsey are now proposing a solution
which would mandate all agents to enter into the transformation process. It is believed
that this approach will achieve the same outcome while being more politically acceptable
and also reducing the risk of judicial review. In this context, the shift to mandated
change will be communicated as soon as possible. Technically, under this new
mandated approach, Post Office would be compelling everyone who is not yet in the
assessment process.
e Geographical analysis of the leavers population has shown a relatively even spread.
Locals expected to leave are evenly spread with an overall average of 25% and no
individual region being above 28%. Branches that will remain make up to 40% of all
branches in Scotland, Northern Ireland and the South West with London only having
1%. Analysis has also shown that replacing 3,000 to 3,500 leaver local agents with
a multiples/ symbol group is a realistic target.
e Weare currently awaiting legal response on the judicial review point.
Status: awaiting legal advice on judicial review — all other actions complete.
Action 3b:
Produce a one page summary showing the targets and commitments made in the current plan
to: the Government, Brussels and internally.
Response:
Please see ‘Network Targets and Commitments Summary’ paper provided under separate
attachment.
Status: complete
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Action 3c:
Consider what BAU changes can be made to the network alongside the transformation plan for
inclusion in the strategy
Response:
We are currently working through the detailed implications of the revised network
implementation plan — as provided by McKinsey. Once this is complete, the Network and Pillar
teams will review jointly and at that stage, consider the need and feasibility of accelerating
changes as part of BAU.
Status: on-going
Action 4a:
Consider more radical cost reduction options for the plan including outsourcing?
Response:
Over the past six months, Post Office has taken action to transform the current tactical cost
reduction into a more strategic approach:
« Accenture presented to the ExCo explaining the alternative options for the structuring
and sourcing of support services. This provided a number of frameworks that could be
applied to Post Office.
« A Post Office cross functional team applied the Accenture frameworks to the Post Office
business to produce an initial view of possible alternative models and associated cost
savings.
« Capita has conducted a desk based review of a number of our support functions to
provide an independent view of possible options for delivery and also the possible scale
of savings.
While all of the above activities have highlighted opportunities, we have faced real challenges in
progressing. The reality is that we are midway through migrating our support functions and
systems from Royal Mail into Post Office and there is insufficient time to pursue a number of
these alternative approaches in the short term. The exceptions are:
« Supply Chain/ business of cash where the Post Office Supply Chain and Strategy teams
have continued to explore opportunities to improve the net value of this operation. We
are now taking forward three streams of activity. The first is a pilot to assess the
feasibility and cost savings that could be delivered through reducing the frequency of
deliveries within some elements of the network. The second is getting an externally
benchmarked view of the competitiveness of our cost base. The final element is
conducting a market assessment as to the opportunity for us to expand presence in the
external ATM provision marketplace — this will assess level to which we would be
competitive and the overall likely commercial return.
e Call centres where the internal team are in the process of migrating the internal call
centre support which is currently providing by Royal Mail to our own in-house operation.
In parallel with this, the team are conducting an end to end review of our call centre
requirements both internal and customer facing. The primary purpose is to develop a
view of our requirements which can then be taken to market. The team are working to a
timetable that would see a shift to an outsource model some time after the third quarter
of 2014.
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To address the broader question of how Post Office delivers significant reductions in our cost
base, we are now taking an alternative approach. Rather than start with the business today
and projecting forward — we are using the 2020 Strategic Plan to develop a picture of the future
Post Office organisation and then working backwards. This is proving to be a much more
valuable approach as it is driving discussion around our organisation structure, our franchise
model, and more fundamentally how we are building value in our business.
This work is being taken forward by a core working group of Paula Vennells, Chris Day, Susan
Crichton and Sue Barton. There will be a working session with the full ExCo at the end of April.
The desire is to move this work forward with pace to allow us to deliver a step change in
operational costs in 14/15. The inclusion of a 25% reduction in central costs within the plan will
ensure that the business remains focused and committed to drive this change through and face
what are likely to be some challenging decisions.
Status: on-going
Action 4b:
Align the reduced income risk contingency with cost savings that could be realised?
Response:
The income contingency has been provided for at a central level rather than at individual pillar or
product level. We have therefore used a central assumption to reflect this in our costs showing
it as a separate item in our P&L statement. This has been set at 60% of the contingency
income allowing for the fact that all of the costs are likely to be variable. This means that the
income contingency impact on EBITDAS is 40% of the full contingency
In addition to the above factor, McKinsey have updated their modelling of agents’ compensation
to align with their proposed revised roll-out of Network Transformation. The impact of this is
two-fold:
1) As we are planning on rolling out fewer Mains branches, there will be a saving in agents
compensation - this will be delivered in the early years of the plan
2) As the branches that are not converted will continue to receive fixed pay to support
them, there will be lower savings in the later years of the plan
The combination of the introduction of the income contingency factor and the changes in the
agents’ compensation profile compensate for each other and therefore the net impact on
EBITDAS is initially relatively small. However, later in the plan the income contingency input
does flow through to the profit line, as can be seen from the table below:
£m 13/14 1415 1516 16/17 17/18 18/19
EBITDAS as per Board presentation 27th Feb “98 “61 0 57 103 134
Central income contingency -20 -40 -60 -80 -100
Costs related to income contingency 12 24 36 48 60
Changes in Agents pay with new rollout profile 8 15 20 24 "
Adjusted EBITDAS -98 -61 0 53 92 105
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Action 5a:
The Board asked that no link be made in the plan between Mutualisation and funding at this
stage. Ownership should not be considered until the business is financially sustainable.
Response:
This was discussed at the March Board meeting and additional clarity given. As a result the
funding ask will include short term funding along with the need to shift our network subsidy
payment on to a contractual basis. This latter point will be linked to the achievement of Post
Office commercial sustainability and will NOT be linked to mutualisation.
Status: complete
Action 5b:
Organise a Board engagement event for key stakeholders
Response:
This was discussed at the March Board meeting. The suggestion was that this was picked up
as part of Board meeting scheduling.
Status: on-going
Action 5c:
Ensure that the Minister is not surprised by the mutualisation and network position in the
funding document
Response:
BIS have been briefed on both of these topics and are managing Ministerial messaging
accordingly. An initial meeting has already taken place between BIS and McKinsey to allow BIS
to ask questions and understand scope of work. An additional meeting will be organised when
the work is concluded.
Status: on-going
Action 6a:
Produce a counter factual case to show the costs of voluntary network transformation to help
prove the case for a mandatory option
Response:
McKinsey’s analysis has indicated that if we continue with the voluntary programme, our
network conversions by 2020 will be limited to ~4,490 (~2,240 Mains and 2,250 Locals). This
compares with a conversion level of ~8,300 under the mandated option. This is the basis for
our counter factual case.
The counter factual case facts:
e Government funding: as we are converting a smaller number of offices in the voluntary
scenario, this will reduce the level of required Government Investment funding by
around £320m. While on the surface this could be seen by Government as an
opportunity, it is in reality a risk. Under this option, a significant proportion of the
network would remain on the higher fixed cost operating model. Our calculations
suggest that the voluntary scenario would have a higher on-going operating cost of
~£32m. This would impact our future NSP funding. Through discussions with BIS we
understand that this shift will be unattractive as they would prefer to be investing in
transforming the business to make it sustainable rather than subsidising to keep it
running.
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« Market competitiveness: with a smaller number of converted offices, we will lose a
significant proportion of the commercial value of the conversion programme. Indeed
with less than 40% of our network transformed, it is questionable whether the market
impact that was envisaged for the programme could be delivered. Most significantly :
o Our cost base will remain largely fixed and unchanged. This will make us less
resilient to market downturns and over time less competitive in the transactional
markets which still account for a significant proportion of our income;
o Our agents will have less incentive to grow their business. The reality is that
under the voluntary programme, it is our best agents who will look to transform
their branches as they have the opportunity to gain from the transition to a
variable pay model. Post Office will therefore be in the worst possible situation —
losing the economies of scale from the growing branches while continuing to
subsidise those that are uneconomic.
o Our branches will not offer customers the improved service which we believe is
important to retain our market presence. All our research is showing positive
outcomes for our customers. Longer opening hours, low queue times and
improved satisfaction. Without these it is unclear whether we will lose growth
opportunities to competitors such as PayPoint and Collect+. If this risk does
materialise, it would increase the shortfall highlighted in funding section above.
The fundamental point in our counter factual case is that without a move to mandation, it is
impossible to see how commercial sustainability could be achieved. This is the key point
around which we will build our counter factual case for BIS.
Status: on-going. McKinsey are currently developing a counter factual case for inclusion in our
Strategy Workbook.
Action 6b:
Consider redefining ‘post office’ in relation to SGEI and access criteria ensuring as much
flexibility as possible
Response:
Access Criteria:
At the moment, Post Office, with our current network of 11,500 branches, comfortably meets
the HMG's 2007 Access Requirements. As our current network transformation plan is based on
a principle of “no closures” and with conversions expected to be either on-site or within 0.5
miles of an existing branch, we believe that we will continue to meet these requirements going
forward. There is therefore no immediate need to revise the access criteria. However, should
Government want to get to a position where the NSP is reduced, then this will need to be
revisited.
Definition of a Post Office:
We do however believe that there is merit in seeking a change to the definition of a post office.
HMG's Access Requirements are specific in defining access relative to proximity to a ‘post
Office outlet’. If we can gain flexibility within this definition, it is likely to open up opportunities for
us to reduce the cost of our network provision and possibly even increase the size of our
network. We are currently considering the value of redefining a ‘post office outlet’:
¢ to include Basics models,
e to limit the cash and banking requirements of a proportion of the network to allow
assisted self-serve machines to function as a Post Office, and
«to identify a proportion of the network (~3,500 branches) as outreach and community
branches, with any reasonable adjustments to minimum services to make these
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branches viable for POL going forward and to reduce the requirement for NSP.
If HMG accepts the new definition, the Access Requirements could potentially be met
with a smaller network of higher cost Mains and Locals branches, with Basics, assisted
self-serve, and outreach/community models making up the rest of the network.
To make these changes, we would need to address all three sources of the definition of
a Post Office, i.e. SGEI, the HMG/POL Funding Agreement and POL's Strategic Plan.
Action status: on-going
Action 6c:
The cash-flow statement and P&L need to be redrawn once the network decisions have been
finalised
Response:
See P&L and Cash Flow statements which have been provided under separate attachment.
Action status: complete
4. Conclusion
This paper provides the Board with a summary position on each of the key actions. Where
additional papers are referenced these will be issued as separate Board papers.
Susan Barton
April 2013
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Post Office Profit and Loss 2013-20 (£m)
2013/14 = 201415 2015/16 = 2016/17 2017/18
Net Income (inc. Profit Share)
Total Mails 41s 413 425 448 482
Total FS 27 292 319 392 au
Total GS 116 131 158 174 173
Total Telephony
Total pillar income
Other
-Other income
-Supply chain
Total income exc FRES
-FRES profit share
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2018/19 2019/20
515 546
487 48a
190 206
Total Net Income (INC FRES)
-Income contingency 20 49 -60 -80 -100 “120
Total Net Income (INC FRES and
after income contingency)
Agents Pay -480 -492 -505 “527 “543 “579 -606
Staff Costs “254 “202 -228 -222 22D “219 “216
central -58 “52 -a7 “44 44 “a1 “a4
supply chain “a7 “a7 “a7 “47 a7 “a7 “47
other “106 “14a “135 132 “138 “131 “128
Non Staff Costs -298 -295 “322 -382 -405 -a50 -486
ing business costs 294 273 -262 -253 -248 -245, “245
TT running costs “81 1 “67 -66 -66 “66 -66
Central (incl. Interbusiness) “83 “75 -69 -64 63 -62 62
Supply chain -48 -a7 -47 “a7 “a7 “a7 a7
Other “81 -80 -79 -16 “3 -70 -70
New income costs 0 -22 -60 -129 -156 -205 -2a1
Non IT costs 0) -20 “54 -120 “148 -196 -232
New IT running costs ° 2 6 8 8 9 9
Total Costs
~ Costs related t
ome
contingency 2 24 36 48 60 2
Total Costs after income
contigency
EBITDAS -98 “61 ° 53 92 105 15
NSP 200 160 130 80 80 80 80
EBITDA “102 — a aes 195
EBITDAS
NSP
EBITDA
Capex (tangible
and intangible)
Other cash
movements
Operating cash
{outflow)/inflow
Reserves, Provisions
& Exceptionals
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Post Office Cashflow Statement 2013-20 (£m)
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
-98 -61 i} 53 92 105 115
200 160 130 80 80 80 80
102 99 130 133 172 185 195
-168 -216 -162 -69 -62 -53 47
6 7 7 7 7 7 7
“72 -124 -39 57 103 125 141
236 87 118 135 88 3
non NSP
funding 215 170 80 80 ij is} oO
Underlying cash
inflow/(outflow) -92 41 -78 2 16 122 141
Working
Capital
Total Cash
inflow/(outflow)
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Post Office Board:
Funding and Finance
February 2013
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Funding and finance background briefing
This includes the following:
* Investment summary
* — Cash-flow summary to 19/20
* Key funding milestones
We have also included:
* areminder of our previous funding submission
* an overview of the change in depreciation treatment that will be needed during the plan period.
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y considerations
Network Subsidy Payment
* Should we increase beyond 2017 to £80m (from previous level of £50m) given the larger number of ‘unconvertible’ offices?
* Should we try to make this a more formal, long term payment or continue with the current calculation?
Funding Network Transformation (“non-NSP”)
* In addition to the NSP the 2010 plan projected a further requirement of £80m in each of 2015/16 and 2016/17 to complete the
transformation by converting the remaining offices. Should we ask for this funding (as expected by BIS & Treasury) or offer to pay for it
ourselves out of cash reserves? This is linked to the headroom points below.
Headroom
Historically Post Office has included headroom (contingency) of £200m in its funding requests. This has been accepted by both Shareholder
and Post Office for almost 10 years. Post Office reserves are currently £290m above £200m Headroom.
* Should use these reserves to reduce our funding request ? If not then we will need a strong case to retain and reinvest it in the business
and we may potentially need examples of what we may use these for.
* Should we retain them a contingency fund for Network Transformation? We may want to set aside funds to allow flexibility in delivering
network transformation
Working Capital Facility
* Post Office will require a facility to fund working capital. The current facility of £1.15bn (providing backed by security) is available to
2016. Not regarded by EC as state aid. This needs to be extended but as security has been a maximum of c£1bn (and frequently lower)
we could reduce the limit, potentially to as low as £750m, with no financial impact on Post Office. Historically ShEx have regarded
reducing the limit as important so this could be a valuable “give”.
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nderstanding our additional investment requirements
IT capex — systems >
replacement/upgrade
including Horizon and CSM
and new systems required
to grow the new income
streams e.g. CRM.
Network capex — discussed
further in the channel
section.
Other capex — includes
general replacement capex;
increase in 14/15 driven by
Financial Services new
income streams, principally
£15m for the insurance
business buyout from Bank
of Ireland and £9m for an
insurance contact centre.
IT capex
Network capex
Other capex
FY13/14 FY14/15 Mf FY15/16 ff FY16/17 I FY17/18 — FY18/
FY19/20
yy
£
a
ov
a
>
2
>
2
x
ov
a
cs
Oo
250
200 -;
150»
100 »
50 +
1a/1s
BIT Capex
15/16
8 Network Capex
16/17 As
8 Other Capex
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P&L summary to 2020
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Net income (inc. Profit share)
Total Mails 415 413 425 44g 482 515 546
Total FS 277 292 318 392 424 437 484
Total GS 116 134 158 374 173 290 206
Total Telephony sa 68 94 119 137 145 150
Total pillarincome 858 904 996 1132 1,213 2,307 1,386
Other 39 “@ a 43 aa 44 “4
-Other income 8 8 8 8 8 8 8
Supply chain 31 32 34 33 37 37 37
Total income exc FRES 995 248 1,038 1473 1257 1,352 1.430
FRES profit share 32 3 33 35 7 44 a
Total Net Income (INC FRES)
Income contingency
Total Net Income (INC FRES and after
income contingency)
Costs
‘Agents Pay 480 “a2 50S “827 $43 606
Staff Costs 254 242 228 “222 “222 219 216
central $8 52 47 “44 44 “42 ah
supply chain 47 47 “47 a7 47 47 “7
other “146 “ung “435 -432 Bert “431 “128
Non Staff costs 294 “298 “322 382 -405 “450 486
Existing business costs 294 273 262 253 248 245 245
IT running costs
Central (incl. Interbusiness)
Supply chain
Other
New income costs
Non IT costs
New IT running costs
Total Costs
-Costs related toincome
contingency
Total Costs after income contigency
EBITDAS
NSP
EBITDA,
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Cash Flow to 2019/20
EBITDAS
NSP
EBITDA
Capex (tangible and intangible)
Other cash movements
Operating cash (outflow)/inflow
Reserves, Provisions & Exceptionals
non NSP funding
Underlying cash inflow/(outflow)
Working Capital
Total Cash inflow/(outflow)
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
-98 -61 ie} 53 92 105 115
200 160 130 80 80 80 80
102 39 130 133 172 185 195
-168 216 ~162 -69 -62 -53 -47
6 7 7 7 7 7 7
-72 124 -39 87 103 125 141,
236 87 - 118 - 135 88 3
215 170 80 80 is] 8] ii)
“92 41 -78 2 16 122 141
226 53 -112 105 -5 -25 30
134 a2 +190 I 107 ii Sy a7.
Key milestones
15/16 EBITDAS (Earnings Before Interest Tax Depreciation And Subsidy) neutral before subsidy
16/17 Operating cashflow positive after NSP
17/18Operating cashflow positive before subsidy
19/20 Fourth year of positive cashflow
NB Cashflows above include NSP funding after March 2017 at £80m/annum, which reflects the increase above the 2010 Funding
Agreement profile to recognise the greater number of ‘unconvertible’ branches
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The financial challenge is considerable if we are to meet Rothschild’s report financial
conditions required for mutualisation
Scale of the financial challenge
O oy ~ — nang
50 eg
G1
-100
OB
450 “119 420
2014/12 2042/13 2013/14 2014/15 Step 1 Step 2 Step 3
Break-even Absorb Financial
Depreciation independence
Summary of the Rothschild Report
“Commercial sustainability” will ultimately drive long-term “financial stability”, assuming POL has an appropriate capital
structure at the point of transfer from Government ownership. As a standalone, independent entity, a mutualised POL
must, in principle, be able to access third party capital as Government may no longer be available as a “lender”
To be considered a “bankable credit”, POL must have as a minimum:
— Astrategy and market position that enables POL to compete effectively in its chosen markets
— An appropriate cost base and business model with the flexibility to withstand revenue volatility
Free cash flow to allow on-going investment in the network to maintain commercial competitiveness
The freedom and ability to respond quickly through corporate actions to unforeseen changes in its markets
A robust track record of profitability and cash generation
A viable long-term future
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Annexes
A reminder of 2010 funding ask - though Post Office Ltd only has funding agreed to
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2014/15, there was a plan and funding requirement established to complete the network
transformation in the following two years
Year
covered I}: 2011/12
NSP 4}
Equity
Total
March 2010
Funding Deal }
+ EBITDA exc NSP in Oct 2010 Funding agreement
10/11 (£118m)
11/12 (£149m)
12/13 (£125m)
13/14 (£97m)
14/15
15/16
16/17
17/18
(£60m)
nil
£56m
n/a
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As Post Office moves to a cash generative position, our current practice of impairing
assets will need to be evaluated and changed
Background Impact of Impairment vs Depreciation
* We have historically written off almost all assets upon
purchase, with only a small depreciation recognised on
c£150m.
* This is because Post Office had operating losses (until 2008/09),
net cash outflows from operating activities and a high reliance
on NSP
* As we become sustainably cash generative and less NSP reliant,
this will no longer be possible
* There are two approaches when we cease impairment as
shown below — Outcome A and Outcome B
* In the last board financials, an approximation of Outcome A
was used, with depreciation charge of £100m
Capex
All the assets that have Impaired assets are not * Post Office is likely to cease impairment in 2016/17 when sustainable cash
historically been impaired reinstated and depreciation inflows are generated.
ised on th is charged ital i i
are recognised on © Be arge en any capital * There are two possible outcomes from this under accounting rules
balance sheet at their expenditure going forwards. . . . I noe
revised carrying value — with This means in 2016/17, only * The impact this may have is likely to be £25m that year increasing to £58m in
depreciation charged on Capex from that year 19/20
these assets going forwards. (€100m) will show + This is just an accounting change and makes no difference to funding
This value, in 2016/17 is depreciation
like! be “£250 requirements
ikely to be ™ m
y * For consistency sake future financial analysis will show EBITDA
Initially Outcome A was assumed to be the correct
accounting treatment — further analysis and case studies
make it almost certain Outcome B will be used
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File note:
Meeting between Sue Barton, Will Gibson & Tim McInnes
27/03/13
Context:
The meeting was organised at Post Office’s request to ensure alignment of expectations on the
Strategic Plan submission, in terms of:
e Document format
« Engagement between the Post Office and BIS teams prior and subsequent to formal
document submission
e Timetable for funding discussions and agreement
e Level and duration of funding request.
Key points from discussion:
1.
The Post Office strategy submission will comprise two documents. The first will be a word
document setting out the high level strategy and funding request. The second will be a
supporting workbook of presentation material that provides the working detail behind each
element of the strategy. The workbook will be built from the material that has been
prepared for, and shared with the Board, e.g. the income papers.
We will do a page turn on the documents with BIS in advance of our formal submission.
This will allow us to ensure the documents cover the areas required, to highlight additional
information requirements as soon as possible in the process, and to provide the context
around the submission with key strategic messages.
BIS will use independent advisors to support them in this process: The tender process to
appoint these advisors has started but has not yet concluded. The advisors will work
alongside them reviewing our plans and submissions providing an independent perspective.
This is the approach that has been used previously.
After plan submission, there will be a series of joint Post Office & BIS sessions: these will
allow BIS and their independent advisors to do a deep dive into each area of the strategy.
Historically these have tended to focus on the financial elements of the plan. We will look to
establish the schedule and agenda for these meetings in the next couple of weeks so dates
can be blocked out of diaries and there is not unnecessary delay between submission and
the first meeting.
10.
11.
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There is a desire on both sides to conclude this process quickly: Post Office highlighted a
desire to move this process forward quickly. This was agreed by BIS. BIS is working to a
timetable that would see the first year of funding (as a minimum) being signed off by the
end of June.
Post Office is to submit a strategy with financials through to 2020 with an expectation that
the first two years will be approved in this funding round: the BIS team have had
discussions within BIS and Treasury on the necessity for a funding deal which extends
beyond one year. Asa result there is a strong belief that as a minimum we will receive a two
year funding deal.
The concept of long term funding/ contractualisation of the network subsidy payment is
understood to be a necessary part of the creation of a commercially sustainable Post
Office: the Rothschild report has been shared informally with BIS team and they therefore
understand the need to move funding on to a more contractual and long term basis. Raising
this as part of the Post Office strategy submission and funding request would not be an issue
and was encouraged. No certainty around whether this would/ could be considered as part
of this funding approval process.
BIS have not and are not planning to develop their own definition of commercial
sustainability: BIS see this as a Post Office responsibility and are not planning on
commissioning work in this area. Post Office confirmed that it will formally share the
Rothschild report once it has been updated to reflect the latest financial projections from
the 2020 Strategy. It was agreed that there may be value in agreeing the possible
parameters for continued Government support in advance of commissioning this update, for
example, would Government be prepared to lend to Post Office on commercial terms or is
complete financial independence a necessity.
BIS are using a working assumption that the Post Office funding request will as a minimum
be in line with the previous plan submission: the previous Strategic Plan included an
indicative funding ask of £210m for 2015/16 and £160m for 2016/17. BIS are assuming this
will be our minimum “ask”. Internally they are managing expectations that we may need a
greater amount. Post Office has not given any indication or response to this, stating that
until the McKinsey work is complete, it is impossible to provide a view.
Post Office funding ask must continually reduce over the plan period: as stated above,
there is an expectation we may ask for more funding that was originally envisaged in our
previous strategic plan submission. However it is essential that any request is below our
2014/15 funding of £330m. As a general point, BIS would like to see a funding request which
had a downward trend from the £330m over time. BIS also stated that from a messaging
perspective, investment funding is a more positive story than subsidy payment.
The need to move the network programme on to mandation is understood: the BIS team
understand the need to move the network transformation programme to mandation. There
was joint recognition of the challenge around this but BIS confirmed the Minister has been
briefed on the high level story and believe there was understanding and acceptance. The
request is that Post Office build the ‘story’ around this in the most positive light, focusing on
12.
13.
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the value and benefit of the transformed network rather than the negatives of the status
quo. Albeit the negatives will be needed within the analysis. There was consensus that if
mandation was not achieved through this process, it would be disastrous for the Post Office
goal of commercial sustainability. Statistics, quotes and sound-bites around the success of
the new models will be helpful in selling this story.
The definition of commercial sustainability will need to be agreed jointly: agreeing the
definition/ parameters of commercial sustainability was accepted as a key foundation step
for mutualisation. As highlighted in (8) above, BIS are not developing their own view of this
and are expecting Post Office to lead discussion. There was an understanding that joint
agreement on the final definition would be required. Post Office did not conclude the point
on this needing to then be made publically available but this is now being followed up by
email.
Commercial sustainability has to be the priority for the plan as without it Post Office
cannot deliver on mutualisation: Post Office tested out the messaging on mutualisation
explaining that the business priority had to be commercial sustainability as this was a key
step on the journey to mutualisation. This was agreed and understood.