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Post Office Counters Ltd
David Sibbick Development Director
Director Posts
Room 3.18
Department of Trade & Industry
151 Buckingham Palace Road
LONDON 20 November 1997
SWI1W 9SS 54-35
De wr David,
RESPONSE TO YOUR REQUEST FOR BRIEFING ON HORIZON RELATED
ISSUES
Further to Vanessa Leeson’s letter of 13 November, and to our meeting last week, we
agreed to your request to send you some further briefing on the subject of Automated
Credit Transfer (ACT) and the impact of a compulsory approach by the DSS or HMT,
together with a summary of the recent independent review by PA of Horizon. This
note fulfils that request.
1. Automated Credit Transfer
No doubt you will recall that in 1992/93 a great deal of work was done by your
department, the DSS and Treasury. We refreshed recently, as a contingency against
the background of the BA/Pathway discussions, some of that original work and
updated it in the context of the current environment. Obviously an important area was
ACT and it became a stand alone Appendix to a wider confidential internal briefing
report on Horizon. This report has only been circulated to senior Post Office
Management. It concluded that Horizon remains central to POCL’s business strategy.
Ihave attached that Appendix as Annex A in its entirety. I’m afraid it is quite bulky.
However, the issue is complex and I thought you might find it helpful to have access
to the detail as well as the summary included below.
Clearly this is both a difficult and sensitive issue. We have not discussed this review
of ACT with the Benefits Agency, for obvious reasons, and would not be content for
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David Sibbick
20 November 1997
the report to be circulated beyond the DTI at this stage. The numbers quoted are our
best current estimates at this stage; absolute values are less important than the overall
message, of course.
The key points are:
ACT is perceived by BA as costing approximately 4p per transaction compared to
around 40p for the current manual product. Part of this price differential is
because banks do not pass on the cost of operating low average value accounts
with high transaction frequency directly to customers or to BA as yet. There is a
real possibility they may have to if banks were required to take on this type and
scale of work (assuming they would agree to do so).
DSS" own estimate from the work before was that some 30% of beneficiaries
would remain with foils despite compulsion of ACT. We have no reason to adopt
a different assumption at this stage (unless some form of social banking was
imposed on the whole UK population).
Steady state would take about 5 years to reach (again, a previous DSS
assumption).
There would be at least a 16% loss of total income to POCL from reduced BA fee
income, and a further loss of 6% from volume related business, assuming no
network closures with the possibility ofa further, and uncontrolled, spiral of
decline in volume thereafter (also see below).
The Treasury case looks, prima facie, to be better than in 1992/93 at £130m pa at
steady state only because BA would “avoid” Pathway charges of £127m pa.
However, this assumes a subsidy to POCL of £288m pa to try to avoid network
closures would have to be paid to sustain POCL’s existence as the type of
business as we currently understand it.
Without a commitment to a very substantial subsidy POCL would probably need
to close (not convert) 500 crown offices and a further 4500 SPSOs would also
have to close due to considerable income, volume and footfall drop. There would
be a further business loss of around 7% from these closures and POCL would still
need a subsidy of over £200m pa. The network would have become unstable at
this point, with both real and perceived loss of business for agents, and further
closures seem to us inevitable in an uncontrolled spiral.
[impact
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¢ Impact on Alliance and Leicester/Girobank would be considerable with nearly
75% of their corporate deposits business no longer needed (this would seriously
undermine Girobank’s profitability).
* Virtually all the political and socio economic difficulties scoped in 1992/93
remain relevant.
© POCL represents a significant part of the dynamics for cash distribution in the
UK. You probably know that we turn over the equivalent of the whole coin value
in the UK once each year across our counters. We have also played an important
part in the distribution of special coin issues on several occasions. I would have
thought it important, when EMU becomes a reality, that a network of automated.
post offices retains its critical reach strategically for the UK. Compulsory ACT
would, effectively, rule out Horizon as we know it and lead to an uncontrolled
series of office closures. There will also be an imbalance in the macro cash-
supply chain in the UK because of that.
* — Inaddition, the uncontrolled closure of the network would forego any possibility
of an automated network as part of a new ‘connected’ social infrastructure of the
UK that could allow easy electronic access to all UK communities, for both the
public, and potentially, the private sectors. We know these ideas are very much
developing in Government’s mind, and both the Post Office and ICL are very
keen to play a full part in this.
We have also scoped the notion of accelerated voluntary ACT, through incentives etc,
and the conclusion suggests this might well be a route that DSS/BA choose to take but
the impact and financial return for them is likely to be modest.
Finally we took a view as to whether BA could realistically avoid the 30% “rump” of
foil based beneficiaries. There are of course options but none will work effectively
without an on line validation service at each position. There is a feeling of deja vu
about this!
Our overall conclusion is that compulsory ACT remains as difficult a concept to
implement now as in 1992/93 and would precipitate an inevitability of a spiral of
decline in the post office network, and a heavily subsidised POCL.
I think a key difference from the last time this option was considered is that there are,
this time, contracts now freely entered into (within the context of government policy)
/ooth
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David Sibbick
20 November 1997
both with ourselves, and with ICL Pathway, for a considerable period of time. These
commitments should not be ignored lightly, and, I am certain that ICL Pathway at
least would not be passive about walking away from them, and that subpostmasters
and Post Office staff would be very aggrieved, given that they have been advised
about the existence of these longer-term commitments.
2. Independent Review of Horizon
[also attach at Annex B a high-line view of the PA Report. Again, you will recall this
is sensitive and we would not wish to release the report itself at this stage as it was
commissioned by BA, ICL and ourselves with the express wish that the report should
not be circulated further.
The key points to emerge were that the programme was likely to take longer and cost
more than originally planned, bringing pain to all parties, because of its complexity
and scale but that it was feasible, and less difficult to all parties than termination, or
radical changes in scope.
Actions in train are strengthening of the programme’s delivery and management and a
review of some strategic options to consider if any are feasible or better than the
current shape of the project. As I said, the report did state that POCL had not
contributed significantly to delays to date and that we also needed to take steps to
strengthen our resources to ensure that position continues, and teamwork more closely
and ‘formally’ with ICL Pathway. These are in hand.
‘We are now seeking that our commitment to this programme, which is still central to
our business strategy, is matched by all other parties involved.
Thope this is helpful. If either you, or Mike Whitehead, need any clarification, please
let me know.
GRO >
Copy: Vanessa Leeson
David Morphey
Stuart Sweetman
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Annex B: PA Review of ‘Horizon’
Annex b: FA heview oC a
1.
.
Background
In September 1997, an independent and end-to-end (ie across all parties involved) review
of the programme was commissioned by the joint Programme Steering Committee, on
which the Chief Executive of the Benefits Agency (BA) and ICL, together with the
Managing Director of POCL, sit. It was conducted by PA Consultancy Group, and
results shared openly between all three commissioning organisations. The report is on a
controlled distribution only, with subsequent action being undertaken sensitively at this
stage.
DTI officials requested a high-line summary of this study in November, and that is the
purpose of this note.
PA’s Overall Findings
This is a world class programme of change, is highly complex, and a major business
venture for each organisation.
In this context, much has been achieved by all teams in highly demanding circumstances.
However, the programme is over-ambitious against its initial timescales and costs...
And it is still feasible - and likely to be the best forward option given the right
commitment and actions being put in place by all parties, but there are ‘strategic risks’
that could threaten it and undermine delivery.
PA’s overall conclusions
The programme will not be ready to roll out nationally to post offices before the
beginning of 1999.
Pathway’s original weekly national roll out rate of post offices could prove to be over-
ambitious.
Programme costs will increase as a result of delay, and there will also be foregone fraud
savings and business opportunities. .
Actions need to be taken to strengthen delivery capability across the programme.
Residual strategic risks remain requiring senior executive attention.
Termination would cause major difficulties for all organisations.
Root causes of delay to date revolve around the marginality of all parties’ business cases
(leading to questions about scope of network/functionality), the potential conflict in
agendas between BA and POCL (given BA’s ACT option), and structural problems
associated with the PFI nature of contracts to Pathway (for example, matters concerned
with ICL’s cashflow, the reality of complete risk transfer, and the level of sponsor
specification and assurance about supplier services/plans).
Changes in BA’s major internal feeder systems (“CAPS”) timescales were subject to a
different independent review at the end of 1997, and since action has been taken to
baseline these plans better, though a major replanning exercise is now under way to align
these with recent Pathway slippage. There is evidence of good steps taken by BA.
POCL has not contributed to delays to date; however, it needs to build on the action in
train to strengthen its resources both to help Pathway implement, and then take control of
running Pathway services, to ensure future success.
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* The Programme Delivery Authority (a team set up jointly by the DSS and PO to manage
Pathway with staff from both organisations under a Programme Director, resourced from
DSS) needs to slim down and accelerate its intended migration back to sponsors.
* Pathway under-estimated the amount of development time involved and, made more
complex by PFI arrangements, the clarification between requirements and assured
solutions, there needs to be a continuation of strengthening of its resources to match its
delivery ambitions, a recognition of its technical dependence on a small software
supplier, and better control processes put in place.
4. Action taken since
* All parties have agreed to act upon the review, in two major streams:
~ detailed and urgent action plans have been put in place by all organisations to
strengthen the programme, and shared between all parties, These cover many of PA’s
findings above.
~» a facilitated strategic workshop to tackle the issue around root causes and strategic
risks involving the Programme Steering Committee members, was held in late
October this was conducted in an open and positive way under ‘Chatham House
Rules’. From this, a number of options are being explored, with impact statements in
each organisation commissioned around, for example, the place, scale and scope of
roll out and accelerating the simplification of relationships between all parties. There
are complex issues involved in all these and much cross-organisation work is in hand
towards this, but the programme plan is continuing in parallel (c200 post offices are
being equipped with a card payment release in November too, for example).
5. Next Steps
© Programme Steering Committee members will meet again on 8 December to review this
exploratory work, against current plans and for the possibility of termination, before
making recommendations on a way forward to Ministers/Boards.
* Within the Post Office, the Chief Executive (who personally runs a Counter Automation -
Steering Group with POEC members on Horizon anyway) and the PO Board are being
kept closely advised of developments. There is a PO Board meeting on 9 December, and
the Chief Executive is seeking a meeting with DTI Ministers on this matter following
that. There are obvious connections to the Post Office Review process, as well as Social
Security and ‘PFI’ policies, related to these issues.
POCL
17 November 1997
Scenario:
Complete Conversion of Benefit Agency Customers to ACT by 2004/05.
Note:
— This ‘new’ scenario, would certainly require primary legislation to require
banks to provide the service. Presumably, a decision to exit from Horizon
would be taken in parallel breaking the long term agreements in place.
— There would bea time lag effect between the legislation and its effect. It is
estimated that getting legislation for complete ACT would take a number
of years. Therefore, volume and income loss is low to begin with, large in
the 3-5 year time frame and less rapid as the remaining customers without
bank accounts are transferred in the final years.
Building on previous ACT work, in a scenario where all our BA traffic is lost
the following major areas of POCL business are impacted.
— NoBA volume or income at steady state
— No Giro Corporate deposits
— Severely reduced bill payment volumes
— Reduced lottery volumes due to reduced cash in hand in outlets
— Some reduction in Royal Mail work.
It is not difficult to see how this would quickly add to around 50-60% volume
and income reduction.
The earlier assumption was that following closure of 500 crowns and 4,500
there would be a loss of 7% of total business from closures and 6% from lost
foot fall/linked transactions. Clearly this scenario changes the scale of the
cliff face - from Beachy Head to the Materhorn.
We would need to close all crowns in order to save overheads and, although
there is bound to be considerable uncertainty of the size of the viable residual
network, it would be unlikely to be more than 6, 000 Post Offices in total.
This then impacts further on foot fall and volumes and the viable network
might decline further. Further network reductions would continue to reduce
volume and hence viability.
There is no evidence to suggest any smaller subsidy being required (£200m
per annum) even after the massive network closures. To sustain the network
and avoid closures a reasonable estimate would be that the related income
loss has now doubled (£125m—>£250m) requireing a total subsidy of around
£A50m.
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POCL estimate
(NB: the 2004/05 becomes the new “steady state” compared to our original
assumption 30% residual 244m transactions and £242m income).
2001/02 2004/05
Current view with Horizon:
Volume: 674m 636m.
Income: £390m. £396m.
Compulsory ACT:
Volume: 235m. 0
Income: £11im £0
Whilst the treasury case looks better with Horizon savings of £127m and
£200m, BA savings to POCL (but replaced by ACT costs) the required subsidy
has grown in excess of this.
Even if legislation was passed, it is difficult to envisage the banks charging
ACT for the less attractive customers at the same rate as their current
customer base. The banks would need to recover the costs of: i). ranning the
accounts and issuing stationery and cards (£25 per customer per year?); and
ii), the extra cash (circa £50bn per annum) for their own branches and ATM
machines.
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Have we misjudged the commercial value of ACT, '/Social Banking in this
context?
Assuming the total market for payments currently is worth £60billion pa, the
80% share by 2001/2 predicted by BA would be worth £48billion. If 10% of
this money was to remain in accounts for, say, ten days on average the
interest benefit would be of the order of £9.6million pa.
Of course there are issues around the cost of making cash available and of
transactions whether through ATMs or across a counter.
Dealing with the bottom 20%, if the money were even left for one night by ten
percent of beneficiaries it would generate around £0.24 million pa. If one
were to then link in a household budgeting concept, say accounting for 20%
of a family’s benefits, and arranged settlement with utilities after, say, 3
banking days there could be around £0.15million pa from this “rump” alone.
So from interest alone, £10m may be acruable to the provider of a social
banking product. Of course different numbers are determined by different
assumptions.
You see my point about us needing a new mind set in terms of seeing social
banking as an overall financial service concept rather than a necessary evil?
This is of course now with Dave Waltho, to whom I’m copying this note.
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