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POB(99)2nd
PO99/12 to 22
POST OFFICE BOARD
Minutes of the meeting held on 15 February 1999
at 148 Old Street
Present
Dr Neville Bain Chairman
John Roberts Chief Executive
Richard Close Managing Director Finance
Jerry Cope Managing Director Strategy & Personne!
Mike Kinski Non-Executive Member
Dr John Lloyd Non-Executive Member
Miles Templeman Non-Executive Member
Rosemary Thorne Non-Executive Member
Richard Adams Secretary
Scott Childes Notes
Richard Dykes, Managing Director Royal Mail
Stuart Sweetman, Managing Director Post Office Counters Limited
Kevin Williams, Managing Director Parcelforce Worldwide
Others attending: Vanessa Leeson, Director Organisational Capability for
PO99/19
lan McCartney, Minister of State, DTI, Frank Doran,
MP, Parliamentary Private Secretary, Martyn Baker,
DTI and Geoff Moore, DTI, for PO99/21-22
MINUTES OF PO99/12
PREVIOUS MEETING
The Board approved the minutes and separate record
of proceedings from its meeting of 12 January 1999.
MATTERS ARISING PO99/13
POB(99)1
The Board noted the matters arising from the meeting of
12 January 1999
Financial Summary: (i) Discussions with Freemans had not been concluded due
Parcelforce/Freemans to the uncertainty surrounding the parent company Sears.
(PO99/5(x)) Parcelforce was hopeful of developing similar
arrangements with other organisations and had already
been approached in this regard.
JAN McCARTNEY MP Pos9/14
(0) The Chairman would highlight to the Minister the role of
the Board and its Committees, seek an update on the
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White paper, which was not now expected until Easter,
and outline the role and format of the Strategic Plan.
(ii) DTI officials had indicated that they would want to see the
Strategic Plan in May, a month earlier than scheduled.
This would not give the Board sufficient opportunity to
input into the Plan and a compromise solution would
therefore be sought, possibly through the provision of a
draft Plan.
CHAIRMAN’S PO99/15
BUSINESS
(i) The financial performance of Royal Mail and Parcelforce
in December had been disappointing and whilst the early
signs were that January had improved, profit and cash
management performance needed to be raised in order to
meet agreed targets, particularly the EFL.
(ii) it was important that a change programme be developed
to generate, through new processes, reductions in the
organisation’s cost base. In the Chairman’s view given the
necessary investment, especially in IT, savings of £0.5bn
over 3 years should be possible. Coupled with this was
the utilisation of assets to improve the asset turn and
hence the ROCE.
(iii) The current financial difficulties highlighted the need for
reductions in the cost base and particularly headcount.
There was total executive commitment to achieve this
through the COSSP project, which would generate
savings of £400m, Shaping for Competitive Success and
the new productivity deal in Royal Mail. The need to
maintain or improve industrial relations was the only
caveat to achieving the proposed performance
improvement within a 3 year timescale.
(iv) Management capability to deliver was a key element to
the success of any change programme. Some changes in
the senior management team would probably be
necessary and the use of talented young internal people
as change managers could provide a powerful stimulus.
(v) An essential element of the Strategic Plan would be
discussions on the cost base and how savings could be
achieved. The Plan itself would be prepared in the
knowledge that the Regulator would use the data as an
aid to determining the RPI - x formula.
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CHIEF EXECUTIVE'S
REPORT (POB(99)10
(i)
(ii)
(iiiy
(iv)
(v)
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PO99/16
Financial Performance. The performance of Royal Mail
and Parcelforce continued to be of concern and in
discussing the individual Business Plans the Executive
were seeking to set tough but realistic targets. For the
achievement of targets in 1999-00, it was important that
the Businesses entered the new financial year at the
appropriate running rate levels.
Horizon. Both DSS and Counters had been excluded from
recent Treasury discussions with ICL and consequently
The Post Office had no reliable information of when or in
what form an announcement on the future of the
programme would be made. The Board expressed
extreme concer over this development.
Costs of maintaining the programme were for Counters
relatively modest, at least until the system had been
successfully installed. Of real concern, particularly to Non-
Executive Members, was the exclusion of Counters from
discussions and the lack of Executive control that The
Post Office now had in the management of the
programme. Whilst for contractual reasons, suspending
the project was not an option, it was imperative that a
decision on the way forward was taken quickly and in
consultation with all interested parties. The presence of
tan McCartney at the Board provided an opportunity to
clarify his understanding of the situation.
Liberalisation. A new draft Directive on postal
liberalisation was expected shortly from the European
Commission. The position advocated by The Post Office,
a gradual and controlled reduction of the monopoly weight
and price limits, had appeared to be gaining ground within
the Commission. But Commissioner Bangerman, principal
sponsor of the new Directive, was pressing for a firm
commitment to full liberalisation in 2005 to be included.
The Commission were expected to decide on the issue in
early March, subject to the agreement of the Parliament
and Council of Ministers. The outcome would be relevant
to the White Paper.
Government White Paper. A first draft of the White paper
had been made available to The Post Office. Within the
paper four key issues had been identified: timing of the
monopoly reduction; the level of dividend payment; past
surpluses held in the balance sheet (gilts); and the degree
of flexibility on borrowing.
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(vi) With regard to the monopoly, DTI officials were proposing
a reduction to 50p with effect from the publication of the
White paper. This would be in advance of Europe, and
possibly in a different form; it would also be before any of
the other commercial benefits announced by the former
Secretary of State, Peter Mandelson, could be enjoyed.
On the dividend payment of 40% of post tax profits, the
Treasury's view was that this be regarded as a ‘floor’ level
with any excess benefit paid direct to Treasury.
Additionally, there was a proposal to re-structure the
Group balance sheet and strip out the past surpluses held
in the form of gilts, which in themselves generated
interest of £107m. Treasury were also opposed to The
Post Office having the ability to flex the £75m a year that
it had been agreed the organisation could borrow, over a
five period. DTI had proved reasonably receptive to The
Post Office's views.
(vii) The scope of regulation was an important factor within the
White paper and any ‘creep’ into the competitive areas of
Counters and Parcelforce would need to be avoided. As
currently envisaged the regulator would not regulate
competitors although he could issue licences to operate
within the monopoly area. Currently around 50% of
turnover would be within the regulated area. Regulation
could have a significant impact on the financial
performance of the Businesses and explaining the
financial impact to a regulator and officials was not always
easy. Mike Kinski had experience in this area and was
happy to offer any advice or assistance should this be
helpful.
(viii) The style and approach of the person appointed to act as
regulator would obviously influence the way in which the
interface with The Post Office was managed. Creation of
an independent regulator required primary legislation so
regulatory powers were expected to be retained by the
Secretary of State, the new regulator acting through a
Memorandum of Understanding.
(ix) \t would be useful for the Board to understand the key
regulatory issues.
(x) Project Fiona. The Chairman and Chief Executive had
held constructive talks with a major express carrier and
foreign postal administration over a potential collaboration
around a newly developed air hub. Kevin Williams had
held follow up talks on how the proposal could be taken
forward,
(xi) Lottery. lan McCartney was considering the competition
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Action
Jerry Cope
FINANCIAL.
SUMMARY
0)
(il)
(ii)
(iv)
(vi)
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law implications of The Post Office’s extended
involvement in the national lottery. The Post Office
temained optimistic that a positive outcome would be
forthcoming.
Bring a high level review of regulation issues to the March
Board.
PO99/17
The current full year forecasts were:
¢ Royal Mail £458m
¢ Parcelforce £(20)m
¢ Counters £38m
¢ SSL£3m
© Group Centre £94m
The current Group Centre forecast was £6m below
budget as a result of expenditure on Shaping for
Competitive Success and the Trusted Third Party project.
Profit for December was:
e Royal Mail £20m
¢ Parcelforce £2.7m
¢ Counters £24m
e SSL£0.4m
Cumulative Group profit stood at £447m against a budget
of £473m. December's actual results varied from those
provisionally reported last month (PO99/5), but not to any
significant extent.
Risks continued to outweigh opportunities in Royal Mail
with lower mails efficiency, Streamline volumes and risks
in the business’ emergency plan, together totalling £58m.
The emergency plan included ceasing discretionary
spend and restrictions on the filling of new and vacant
management posts.
Notwithstanding the action being taken by Royal Mail,
staff costs for the fourth quarter of the year were forecast
to outturn over budget. Non-staff costs were forecast to
outturn under budget and below the 1997-98 outtum.
Parcelforce’s cumulative performance compared with
budget showed income £10.4m below budget and
expenditure £7.8m above budget. These poor results
made the cumulative loss £20.6m compared with a
budgeted loss of £2.4m.
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(vii) Parcelforce’s income performance needed to improve
considerably, with the cumulative variance £10.4m below
budget and the full year forecast currently £5m below
budget.
(viii) Parcelforce staff costs had now been de-risked.
(ix) In order to achieve its full year forecast loss, Parcelforce
would be reliant on a number of one-off items: the SAP
settlement with Hewlett Packard; computer re-lifing; and
various income and expenditure adjustments.
() Four issues were likely to be raised by the auditors at the
year end: the increased bad debt write-off; potential fixed
asset impairment; the Hewlett Packard compensation
claim; and re-lifing of computer equipment.
(xi) Counters performance remained ahead of budget with
additional opportunities of £13m against risks of £2m.
(xii) It would be helpful for the Board to understand the
severity of the rest of year task the Businesses faced to
achieve their full year targets, compared with that in
1997-98.
(xii) The auditors had now agreed the pensions funding
assumptions endorsed by the Board in January (PO99/7).
(xiv) A £20m risk to achieving the EFL target of £310m still
existed with at present no obvious means to reduce the
shortfall having been identified.
(xv) The post completion audit statement for German Parcel
was expected to be completed by March. For The Post
Office report and accounts an estimate of the trading
performance would be used. Minimal disclosure of
information would be included within the accounts.
(xvi) {It was important that the Board had confidence in the
trading performance of the company and that the
expected performance was being achieved.
Noted further Richard Dykes’s presentation and that
(xvii) Royal Mail's provisional result in January was
encouraging with a favourable variance on core non-staff
expenditure. Expenditure in mails operations had,
following increases up to period 9, started to move I
downwards and it was important to ensure that this trend I
continued through into the next financial year together I
with the other disciplines the Business had introduced.
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(xviii) Meetings with the CWU and CMA had been held to
explain the financial difficulties Royal Mail faced.
Encouragingly, the unions had recognised the severity of
the situation and agreed, in principle, to tackle the
problem of high overtime levels.
(xix) Agreement to the introduction of a new performance
bonus scheme was expected shortly and this would go
some way to generating ‘real’ savings.
Noted further that
(xx) With no issues around the achievement of its full year
profit target, Counters was focusing its efforts on
delivering its change programme and maximising its cash
flow. The first conversion since the moratorium was lifted
was three months away. The external consultation
process had been improved. The CWU had still to
comment on their position and the stance they would
adopt on new conversions was therefore unknown. DT!
had been kept appraised of the situation.
(xxi) The general trading position across the parcels market
had worsened since the turn of the year although
Parcelforce’s Next Day volumes were still showing healthy
year on year increases. International performance
temained of concern. Staff numbers were close to
budget.
(xxii) A meeting to conclude the settlement with Hewlett
Packard was scheduled for the coming week with a £4m
payment the likely outcome.
(xxiii) It was agreed that Richard Close would report to the DTI
forecast outturns of:
e Royal Mail £478m
e Parcelforce £(20)m
e Counters £35m
Action (i) For the March Board provide an update on the
Richard Close performance against expectation for German Parcel and
the form of management report that would be introduced
to monitor performance
(ii) Circulate information on the financial task that the
Businesses faced for the remainder of the 1998-99
financial year, compared with 1997-98.
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PARCELFORCE Pogg/1a
DEBT RECOVERY
(POB(99)11)
(i) When Parcelforce’s SAP R3 finance system had been
introduced in February 1998, it became apparent that the
system was undersized by a factor of 7. This resulted in a
50% drop in performance and very quickly led to a
backlog of 130,000 customer dockets. This was
compared with a normal backlog of 5-6,000.
Consequently, customer invoices were issued late and
customer enquiries increased from 500 a day to 5,000.
(ii) At one stage debts totalled £98m but this had now been
reduced to £67m, with £41m under 30 days old, £11.5m
between 31 and 90 days old and £15m over 90 days old.
Efforts were concentrated on targeting the 700 customers
who accounted for £11m of the over 90 day old debt. 900
customers were now going through a legal process to
recover debts, half of whom had debts over 1 year old.
(iii) In total debts of £1.8m were now over one year old and it
was likely that the external auditors would seek to write
this off, together with a proportion of the £7.4m debt that
was between 181 and 360 days old. Potentially this could
give a write off of £4.3m. To counter this Parcelforce was
seeking to secure customer documentation that would
demonstrate that arrangements to pay were in place.
noted that
(iv) Considerable resource and effort had gone into debt
recovery with over 152 staff employed, excluding agency
staff, against the templated 100.
(v) Whilst some sympathy had to be felt for customers who
had been inconvenienced, there was a legitimate point
beyond which the withholding of payment was unjustified
and strong action had to be taken. Parcelforce had
established an escalation process to deal with this.
(vi) The SAP system was now operating correctly.
(vii) An independent review of the SAP system had attributed
a significant proportion of blame to Hewlett Packard
although Parcelforce had contributed to the difficulties by
seeking a number of system changes. Legally, it was
unlikely that full responsibility could be laid on Hewlett
Packard and a settlement of £4m was therefore
considered a sensible and reasonable outcome.
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SHAPING FOR
COMPETITIVE
SUCCESS
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(viii) Thanked Kevin Williams for his update and the efforts
made to recover the debt.
POS9/19
(i) Shaping for Competitive Success (SCS) was the biggest
reorganisation of The Post Office for 10 years. It had
been discussed in outline terms at the Board's July
Awayday at which time the Board had supported the
direction and scope of the review.
(ii) A number of pressures for change had driven SCS.
Internally these included: the manageability of a business
the size of Royal Mail, the need to focus more on markets
and customers, high unit costs, the slow pace of change
and turfism versus flexibility. External reasons for change
included: customer demand, the introduction of
commercial freedoms, regulation, new technology and
greater competition.
(iii) SCS had to fulfil a number of key criteria:
* support global ambitions;
¢ improve employee and industrial relations and
competitiveness;
allow flexibility for continuing change;
measure and reward success;
secure long term profitability;
be market and customer facing; and
above all produce focus on consistent delivery.
(iv) Nine different markets and the overlaps and boundaries
between the businesses had been identified and from this
the individual Business Units had been established.
Significant changes within these new units included the
creation of a stand alone international unit and one unit to
manage the top 50 (possibly) business customers.
(v) Value from SCS would be generated by: contributions
from new markets, although the extent of this could not
yet be judged; from greater rationalisation of support
services that could be shared across the organisation; the
reduction of overheads; the development of existing and
future core competencies; and increased fluidity of
systems infrastructure.
(vi) One off costs of £50m were forecast with annual savings
of between £30 -£40m to be generated.
(vii) Migration to the new organisation would not take a ‘big
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bang’ approach but would be phased from April 1999
through to April 2000. Built into the migration would be a
‘fire wall’ which would provide continuity between
managers and the operation of their teams.
(viii) A number of major issues still needed to be addressed by
the Executive Committee including: the organisation of
the IS/IT Supply Chain; the role and focus of the currently
separate sales functions; and the scope of logistics and
contract distribution.
(ix) Communication was planned in 5 waves, was stakeholder
based and for affected employees would be handled on a
face to face basis. The CWU, CMA and NFSP were
involved in the process and had already voiced concerns
over the transfer of HGV drivers from Royal Mail to
Parcelforce and the possibility of further outsourcing of
services,
Noted that
() SCS was not the only major initiative that would generate
savings and improve performance. Initiatives such as the
Competitive Overhead Strategic Structure Programme
and Finance Excellence Programme were also targeting
considerable cost reductions.
(xi) Primarily the SCS work was being handled in house,
supported by advice from consultants from PA, ER
Consultants and PricewaterhouseCoopers.
(xii) Branding of the new organisation had to be linked toa
significant external change and as yet nothing specific
had been targeted.
(xiii) The timescale for introducing the organisation was
acknowledged as being tight but it would not be allowed
to influence the successful implementation of units and if
this required a delay then the timescales would be
extended.
(xiv) The cultural changes that would be demanded from the
new organisation were considerable and the need for
change would be emphasised to all managers having
responsibility for units within the new structure. Those
people who were unable to change would not be retained.
Thanked John Roberts and Vanessa Leeson for their
informative presentation.
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AUDIT COMMITTEE P099/20
REPORT
(POB(99)12x)
The Board noted the report and that in future internal
abbreviations and jargon would be avoided.
JAN McCARTNEY MP. PO99/21
(i) The Chairman welcomed lan McCartney, The Post Office
Minister at the DTI, and his colleagues to the Board.
(ii) The Chairman explained the role of the Board and that its
key focus was on:
e strategy;
* management development and succession planning;
« business budgets;
¢ ensuring that appropriate controls existed;
* monitoring Business performance against agreed
goals;
monitoring the health of the Business;
© reviewing and when necessary approving key projects;
and
* monitoring the management of The Post Office.
(iii) From a personal perspective the Chairman believed the
Board to be well balanced and experienced, independent,
empathetic but challenging. However, he did question the
extent to which Government and Whitehall acknowledged
the value of the Board and was concerned that
communication at ministerial level was too infrequent and
that the decision making process was slow.
(iv) Mike Kinski, as Chairman of the Remuneration
Committee, welcomed the opportunity to provide the
Minister with data on the remuneration of senior
executives within comparable external organisations and
develop opportunities to provide a less restrictive
remuneration package. He also expressed concern,
shared by the other non-executives, that the control and
direction of the Horizon programme no longer appeared
to be held within The Post Office.
(v) In response, lan McCartney agreed that the decision
making process and communications could also be
improved. He stressed the importance of the Strategic
Plan and the need for Treasury to be kept ‘on side’ as the
process developed.
(vi) The Minister would welcome some data from the
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DATE OF NEXT
MEETING
(vii)
(viii)
(x)
&)
(xi)
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Remuneration Committee and discussions on ways in
which improvements could be achieved. With regard to
Horizon, the strategic importance of the programme was
understood but DTI were also placed in a difficult position
having to deal with the political implications for other
Government departments. It was hoped that an
announcement on a way forward would soon be
forthcoming.
The White paper was under preparation and the Minister
was keen that it be concluded by the end of March. It
could not be publicised until the future of Horizon had
been determined
It was noted that
The new style Strategic Plan would be developed around
5 areas: an overview of the goals and targets; an
environmental scan (the hurdles to overcome); the
strategic response to overcome these hurdles; capability
and deployment and finally the financial and performance
projections. The DTI needed information on the key
objectives of the Plan in order to input and conclude the
White paper. The Post Office would be able to provide
this information within the DTI time frame.
The Chairman outlined the timetable for the Plan which
would be available in mid-June. A key part of the process
being the Board discussions on the evening of 7 June
and moming of the 8".
The Minister saw the role of the Strategic Plan as being
critical to The Post Office's relations with its shareholder.
He would be looking particularly for rigorous transparency
between investment in core and non-core activities. The
new style plan was an opportunity to persuade the
Treasury to adopt new perspectives.
The Minister was happy to look at and seek to resolve
discussions around the one year profit target.
The Chairman thanked lan McCartney and his colleagues
for their support.
PO99/22
Scheduled for 23 March 1999 at Gatwick Mail Centre.
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