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POB(99)3rd
PO99/23 to 36 POST OFFICE BOARD
Minutes of the meeting held on 23 March 1999
at Gai k Mail Centre
Present
Dr Neville Bain Chairman
John Roberts Chief Executive
Richard Close Managing Director Finance
Jerry Cope Managing Director Strategy & Personnel
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: Bob Peaple, Royal Mail Director Personnel &
Employee Development, for PO99/29
Robert Bishopp, Commercial Development Director, for
PO99/30
Rob Durrant, Counters Communications Director, for
Pog9g/31
MINUTES OF PO99/23
PREVIOUS MEETING
The Board approved the minutes of proceedings from
its meeting of 15 February 1999.
MATTERS ARISING PO99/24
POB(99)13
The Board noted the matters arising from the meeting of
15 February 1999
Parcelforce/Freemans (i) The uncertainty around the future of Sears was likely to
PO99/13 be resolved by Easter. In discussions with Sears’ CEO,
Parcelforce had been told that a business opportunity was
likely whatever the outcome, although the volume of
business was uncertain.
CHAIRMAN’S PO99/25
BUSINESS
(i) The Chairman had four key issues that would be
discussed during the course of the meeting:
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¢ the White Paper;
* Horizon;
* Hewlett Packard settlement; and
* Shaping for Competitive Success.
(ii) The Chairman still had concerns that across the
organisation areas of inefficiency and cost remained and
that the Board ought to address these ‘hidden’ areas to
determine, in broad terms, if a financial prize could be
fealised. In particular he highlighted losses from vehicle
damage that were self-insured and the £300million loss
highlighted in the Health & Safety paper.
(iii) Activities such as the Finance Excellence Programme
(FEP) and Competitive Overhead Strategic Structure
Programme (COSSP), were already streamlining some
inefficient or duplicated processes and the creation of the
Post Office Services Group (POSG) had also sought to
rationalise some inefficient practices. An update on how
these initiatives were progressing and the plans for
achieving future efficiencies, including those as a result of
Royal Mail's Divisional restructuring, could be presented
to the Board in April. A new Managing Director of POSG
had now been appointed under SCS and it would be a
useful opportunity for the Board to meet and understand
his priorities as well as hear from the present incumbent.
Action Update the Board in April on cost reduction initiatives
Richard Close such as COSSP and FEP, together with the
rationalisation activities underway within POSG and
saving options. Both the new and the old MD POSG to
attend.
CHIEF EXECUTIVE’S PO99/26
REPORT POB(99)14
(i) White Paper. Various drafts of the paper had been seen
and reviewed by The Post Office. Two particular areas,
the reduction in the Monopoly and the proposals for
financing commercial developments, were of concern and
would be the subject of further discussions with DTI
officials. The end of March publication deadline would not
be achieved, Stephen Byers, the Secretary of State,
having told Parliament recently that the paper would be
issued within the first six months of the year; May and
June were now the most likely dates.
(ii) Any significant reference to Counters in the White Paper
would need to address both the network and Horizon and
DTI officials were concerned that the White Paper would
be ready for publication before the outcome of the
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Horizon review was announced.
(ii) Shaping for Competitive Success, The top 80 managers
had now been briefed and onward communication was to
be cascaded down the line during the next two weeks.
The first series of appointments under SCS had been
announced and the 1 April implementation date of the first
phase was still on track. The CWU had been appraised of
the activities underway.
(iv) Hewlett Packard. Parcelforce had agreed a payment of
£3.6m in settlement for SAP implementation difficulties.
This payment was not conditional on maintaining a
working relationship with HP.
(vy) Royal Mail Pricing. The Secretary of State had agreed
Royal Mail's pricing proposals and rejected POUNC's
recommendation to reduce higher weight Second Class
prices and delay Presstream increases by 12 months.
Royal Mail would discuss with POUNC proposals on
compensation payments around lost mail.
(vi) Pay. Authority for employee pay awards was required
from DTI. The pay review for middle and junior managers
within Counters was due on 1 April and a settlement up to
a ceiling of x% on total pay bill would be sought. In
approaching the DTI for authority it was proposed that a
ceiling of y% be sought but that authorisation to use this
additional amount be reserved to the Chairman and Chief
Executive.
(vii) Communications Review. An interim report had confirmed
that savings of over £3m were achievable in the
communications budget for 1999-00. Under the proposals
staff savings of 220 posts were envisaged and it was
uncertain whether reductions would be achieved on a
purely voluntary basis. Both SCS and COSSP would
impact upon staff numbers and it was increasingly likely
that in the light of these initiatives The Post Office's
redundancy policy would have to be reviewed.
(vill) Horizon. A proposal to continue the Horizon project had
been produced by Treasury following discussions with
ICL. The basis of the proposal to replace the Benefits
Payment Card with a Post Office benefit account into
which the Benefits Agency would transfer money by ACT.
Strategically the proposal was attractive but the longer
term financial impact had yet to be assessed. A final
report on the proposal was due with the Prime Minister by
the end of April.
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Action
Stuart Sweetman
Richard Close
(x)
&)
(i)
(xii)
(xiii)
(xiv)
(wv)
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The DTI maintained their support for The Post Office
although the DSS were pressing for the most cost
effective solution. Treasury continued to take the lead role
in developing the final report.
Financial risk remained pervasive although The Post
Office had made it clear to Stephen Byers that an
uncommercial proposal would not be acceptable
ICL and its senior executives remained in a precarious
position and it was difficult to see how the company could
survive should Horizon fail.
Counters had for sometime been developing contingency
arrangements to deal with alternative Horizon scenarios
but it remained clear that whatever the outcome some
form of automation was strategically crucial to the
business.
At this stage it was neither financially nor strategically
sensible to ‘moth ball’ activities on the project.
The National Audit Office would almost certainly review
Horizon and whilst The Post Office could not be
investigated by the NAO, it was important to ensure that
its reservations and concerns, particularly with regard to
Corporate Governance, had been accurately recorded.
The history of the project was complex and it was
important that Board Members, particularly Non-
Executives, were familiar with the key issues and events.
Agreed that the negotiating remit sought from the DTI for
both the POCL and Royal Mail 1 April pay award should
be y%.
Circulate a short chronological brief to Members which set
out the key events and issues that had occurred during
the course of the Horizon project.
Allow time at the April meeting to focus on the substance
behind the statistical information reported within the
Annex to the Chief Executive's report.
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FINANCIAL. PO99/27
OVERVIEW
(i) Profit for February was:
* Royal Mail £24m
« Parcelforce £(1)m
* Counters £(5)m
(ii) The current full year profit forecasts were:
¢ Royal Mail £484m
¢ Parcelforce £(20)m
¢ Counters £38m
* Post Office Group £608m
(iii) The increase in Royal Mail's profit forecast was a result of
forecast expenditure on REIMS not materialising and one-
off pensions benefits.
(iv) Operational costs in Royal Mail continued above budget
with the cumulative position £112m worse than budget. It
was important that Royal Mail reversed this adverse trend
when entering the 1999-00 financial year.
(v) Risk continued to outweigh opportunities within
Parcelforce and whilst the full year forecast loss of £20m
was being maintained, a further £4m loss was a real
possibility.
(vi) In the past two weeks Parcelforce had recovered £4.5m in
outstanding debt. Debts of £1.8m still remained in the
over 360 day category and this would almost certainly
have to be written off within the full year accounts. Debts
of £50m had been recorded last year which compared
with £60.2m forecast for this year.
(vii) A number of year end audit issues had been resolved
with Ernst & Young including confirmation that Parcelforce
need not write down fixed assets to the Profit & Loss
account and in principle agreement to the re-lifing of
computer equipment. The level of bad debt write-off
remained a concern.
(viii) Counters’ £5m loss in February was in line with
expectation, and achievement of the full year forecast
was not in doubt.
(ix) The full year Capital Expenditure forecast of £511m, was
just £14m below budget with actual spend mirroring that
forecast.
(~) The EFL was currently forecast to achieve the £310m
target with the £64m shortfall reported in February largely
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eliminated through improvements in working capital, but
achievement would be close run.
(xi) The post-completion audit for German Parcel would be
completed in the next few days and provisional
indications were encouraging. Controls over cash and
banking operations were now in place. Operationally,
volumes were 7% higher than last year.
(xii) The German CEO was currently considering the make up
of German Parcel’s supervisory Board and in particular
the possible recruitment of some of the owners of the
former franchisees.
(xiii) It was agreed that Richard Close would report to the DTI
forecast outturns of:
¢ Royal Mail £478m
« Parcelforce Worldwide £(20)m
* Counters £35m
Action (i) Update the Board in April on the ongoing strategic
Jerry Cope development of German Parcel.
POST OFFICE PO99/28
GROUP - 1999-2000
BUDGET POB(99)16
(i) The integrated plans and budgets had been reviewed and
endorsed by Group Executive POEC members. The
process was iterative with Businesses refining strategies
and numbers as reviews were progressed. This particular
budget round had proved difficult given the impact of
SCS, German Parcel and uncertainty around the EFL
flowthrough into 1999-00. It was important to maintain a
cost cutting culture through firm leadership and ownership
of budgets.
(ii) The key issues for 1999-00 had been identified as being:
I : e implementing SCS whilst maintaining ‘business as
usual’;
development of German Parcel;
Horizon;
Royal Mail's proposed growth above GVA(L);
Productivity - realising the expected benefits;
Industrial relations; and
closing the existing EFL ‘gap’.
(iii) Business budgets for 1999-00 were:
: ¢ Royal Mail £480m
: * Parcelforce £(13)m
e Counters £31m
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« SSL £2m
« POSG £1m
* Post Office Group £571m
Group profit after tax was budgeted at £368m against a
Government target of £360m. The Government target for
EFL was £70m.
(iv) Commercially the challenge for the organisation was to
manage the tensions that would result from gearing up for
greater competition whilst ensuring targets were achieved
during a period of major change.
(v) Three issues existed within Royal Mail's budget: volume
and revenue projections, achievement of productivity and
efficiency improvements and the reduction of overheads.
The 12 month growth figure for National was aggressive
and substantially above GVA(L), although a number of
one-off activities, e.g. Royal Wedding, millennium, the
introduction of ISAs, telephone code changes and
pension changes, would bring significant traffic increases.
(vi) Considerable savings from the 1998-99 forecast had
been budgeted in 1999-00, although the £50m forecast
from accelerating implementation of SCS was considered
optimistic. A more realistic estimate was between £20 and
£30m.
(vii) Parcelforce’s 1999-00 budget would be affected by any
increase in the 1998-99 full year loss over and above the
£(20)m currently forecast.
(viii) Improving income was Parcelforce’s main challenge and
in particular maintaining the upward trend in the Next Day
market which was currently relatively static.
(ix) Counters faced three key issues in the coming year:
maintaining ‘business as usual’ in the first year of its new
vision, the roll out of Horizon and related automation
projects, and delivering efficiency improvements.
(~) The budget had been prepared on the basis that Horizon
would proceed to plan and without further delay or loss of
value to the business.
(xi) Although Counters’ budgeted profit target was less than
that achieved in 1998-99, it had to be remembered that
historically actual growth in the business was small and a
significant proportion of the full year profit was from
interest. The current performance was also skewed
through savings realised as a result of delays in the
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Horizon project. During the course of the coming year it
may prove necessary for the Board to review and agree
an alternative more appropriate profit figure which allowed
greater investment in the Business.
(xii) The Business budgets resulted in an EFL ‘gap’ of £166m
and this would be closed through activities including:
* vehicle leasing;
« WAND financing;
¢ Girobank income; and
* working capital
noted further that
(xiii) The underlying profitability of the Group was £222m,
which, for the organisation to compete in an increasingly
competitive environment, would have to be improved.
(xiv) Royal Mail’s volume growth was considered by some
Members as ‘bullish’ and the business's ability to translate
this growth into income of £199m whilst increasing
manpower was questioned.
(xv) Improved utilisation of labour and the introduction of the
performance bonus scheme would drive out excessive
levels of overtime and thereby improve productivity.
Increases in manpower were related to delivery where
quality of service and achievement of the 0930 delivery
standard had to be maintained whilst volumes increased.
The increase in front line staff could actually have positive
consequences for industrial relations.
(xvi) The requirement for internal consultants, of which there
were significant numbers, was an issue Royal Mail would
be addressing.
(xvii) Royal Mail's risks and opportunities were balanced at
slightly over £110m, and were considered manageable.
(xviii) I Crown office conversions had been factored into the
budget with operational costs of £2-3m included.
(xix) The leasing of vehicles rather than outright purchase was
only being adopted to provide an EFL benefit. Price
advantages similar to those realised through the
business's normal bulk purchasing would be sought from
the manufacturer.
(x) Government had agreed that the costs associated with
SCS would be neutral against the Group profit target.
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(xxi) App roved the budgets and targets for 1999-00 and the
actions to close the EFL ‘gap’.
(xxii) Agreed that the budgets should be recast, within the
overall amounts set out in the paper, as reorganisation
was implemented in 1999-00.
Action (i) Circulate a note clarifying the manpower movements in
Jerry Cope Royal Mail and in particular the use of internal
consultants.
ROYAL MAIL PO99/29
INDUSTRIAL
RELATIONS &
BUSINESS
PERFORMANCE
POB(99)15
(i) Royal Mail had worked hard over the previous three years
to recover from the Employee Agenda (EA) negotiations
which had resulted in severe industrial relations difficulties
(PO95/26). Relations with the union over the past 12
months had improved considerably and the development
and implementation of a number of new working practices
had successfully been introduced. These included a:
e Conduct and attendance agreement;
e Interim delivery agreement;
« Performance bonus scheme
(ii) Two elements of the original Employee Agenda package,
updated to reflect a greater emphasis on customer need,
had still to be introduced. The first was the Way of
Working package, which moved away from the Employee
Agenda revolutionary approach based on teamworking, to
an evolutionary approach based on:
* joint management/union/employee involvement in
changes to work practices;
* work time learning and team briefing;
* measurement and display in work areas; and
* ajoint business and commercial literacy campaign.
(iii) The final element to be agreed was on Pay and
Conditions and incorporated a shorter working week,
meal relief harmonisation and the introduction of a
unigrade postal worker.
(iv) Negotiations were currently underway on these remaining
agreements and whilst not without risk, Royal Mail's
negotiating team were optimistic that agreement could be
reached. It was recognised that key to the success of
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these agreements was management's implementation
and ongoing monitoring of them, something that in the
Past had not always been successful. To reduce this risk
a dedicated team of 1,000 managers working together
with the CWU would be employed on implementation.
(v) In contrast to the Employee Agenda, the CWU Executive
were generally supportive of the Packages being
introduced and crucially had the capability of gaining
employee support. A satisfactory agreement had now
been negotiated at the troublesome Princess Royal
Distribution Centre.
(vi) Under the shorter working week front line employees’
gross hours would reduce from 41 to 39.5 hours.
(vii) Communicating why change was needed would as
always be essential and it was important to ensure that
working with the union, only one agreed communications
message was issued.
(viii) Progress with work time learning would not be contingent
on implementation of the rest of the package.
(ix) Capability to deliver change was important at all levels
and ensuring the selection and appointment of
appropriate individuals would not only improve the
chances of success, but would also have the added
benefit of improving employee motivation.
I Thanked Bob Peaple and the Royal Mail Personnel team
for their excellent work.
I REGULATION - PO99/30
I STATE OF
READINESS IN THE
POST OFFICE
I POB(99)17
I (i) The Post Office could currently take advantage of a
regulator not yet being established by taking the lead in
I seeking to ‘persuade’ the incoming appointee of The Post
Office’s view of the market and commercial strategy. This
was a process successfully exploited by Deutsche Post.
I (ii) Some processes had already been developed to deal with
regulation and a single point of focus had been
I established into which expertise would be directed. An
I education programme for employees was also being
I developed.
I (ii) Which ever system of regulation was introduced it would
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have, from a Post Office Perspective, to be subject to
certain underlying principles. These were:
* the price cap (RPI-x) must be consistent with the
Government set profit target;
« the uniform tariff obligation must be clearly defined;
* the roles of POUNC and the regulator must be clearly
set out; and
* the regulator's scope must be limited to postal services
provided under the USO.
(iv) DTI had indicated that the regulator would be modelled on
OFTEL, OFFER and OFGAS and work on these models
had been undertaken. However, given that ultimately The
Post Office would still operate a regulated and non-
regulated business it was also sensible to study the model
used by the water industry, OFWAT.
Noted further that
(v) Given the importance of the pricing regime, it was
essential that sufficient focus was put into establishing
separate accounts for monopoly and non-monopoly
streams. This was an area in which more work was
needed and Ernst & Young were due to complete in July
a review of what still needed to be done. Improved cost
and contribution analysis was needed in many key areas
and the Ernst & Young review would helpfully inform what
further work The Post Office needed to carry out.
(vi) Pressure to open up the network to competitors was
almost certain and work on access pricing was fairly well
developed.
(vii) Informal indications from the DTI were that the initial
staffing level of the regulator's office would be 44 people.
Cost for this would be borne by The Post Office.
i (viii) European liberalisation would have an impact on The
I Post Office and it was important that the DTI did not press
I ahead too quickly with initiatives which might ultimately go
i beyond the measures introduced through EU legislation.
(ix) The positive aspects of regulation should not be
discounted, particularly the service benefits that
customers would expect to enjoy.
(x) The Post Office would be the most labour intensive
organisation to be regulated and the regulator would need
to understand why significant reductions in manpower
were not a realistic possibility.
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(xi) Agreed the approach to regulation that was being
developed.
Action 0) Consider more fully the OFWAT model of regulation.
Jerry Cope
DEVELOPMENT OF A PO99/31
NEW SOCIAL POLICY
FOR THE POST
OFFICE POB(99)18
(i) The paper represented the first output from the review of
Social Policy as applied across The Post Office and made
recommendations specifically on the management of
charitable giving.
(ii) The current approach to charitable giving had no clear link
to The Post Office’s Purpose Direction and Values (PDV),
and each business pursued its own initiatives in an ad-
hoc and unco-ordinated way. Historically, The Post Office
had adopted a philanthropic approach to charitable giving
and a key aim of the social policy review was to move
progressively away from this approach to one that
established a framework of social policy building on
charitable giving, community investment, commercial
partnerships and basic business responsibility. Four
underlying principles had been developed to support the
new purpose and approach: initiatives must be anchored
by The Post Office's PDV; they had to be applied
consistently across The Post Office; employee and agent
involvement in community affairs should be supported;
and activities had to be measurable,
(ii) Education currently accounted for 70% of the £2m budget
and it was relatively easy for applicants seeking funds to
make some form of link to educational issues. A much
tighter set of definitions of what would be supported was
required and three broad areas had been identified:
People, Business and Community, all of which were
interconnected. Under the banner of these themes, five
Group-wide themes had been developed which would:
connect ‘People’
* using the written word through education
« using technology through education
connect (small) businesses
* with their customers in the community
connect local communities
* by bringing them closer together and helping sustain
them
connect people, businesses and the community
to those entering the world of work (especially the
disabled).
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(iv) Many of the applications received for funding did not
relate to The Post Office themes and this work, which
tended to be reactive, accounted for a great deal of time
and effort. A more professional, streamlined approach
could be achieved through the introduction of a
‘tendering’ based process under which our support for a
Particular activity would be advertised and organisations
invited to tender for our support. Additionally, a one stop
shop for applications, possibly located within the voluntary
sector, was recommended, supported by the
establishment of an applications database. A focused
publicity campaign which promoted the new approach
was also recommended. Activities would be monitored
and the results measurable.
Noted further that
(v) External research indicated that public opinion of what
themes organisations should be supporting mirrored
those being proposed.
(vi) The tendering approach had been seen to operate well
for Barclays and provided a clear focus for external
organisations, schools etc, of just what The Post Office
supported.
(vii) The Post Office was viewed as a benchmark for other
companies and the implementation of the Social Policy
was seen as the first step to further enhance this
reputation.
(viii) Employee secondments provided an important
development opportunity and within Counters graduates
were being given a six month posting within a charitable
organisation.
(ix) Agreed that the Social Policy would draw directly upon the
PDV and that the themes would be as described in
paragraph (iii) above.
(¢9) Agreed that a tender based approach should be trailled,
that steps to establish a ‘one-stop’ shop for applications
for charitable support should be taken, and that
consideration should be given to this being within the
voluntary sector.
AUDIT COMMITTEE PO99/32
REPORT POB(99)19x
(i) The Board sought reassurance that progress on the
Birmingham accommodation project was being
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maintained.
i
i
I
I
(ii) Action to improve the financial controls within Royal Mail
National was being progressed.
(iii) It would be helpful if future reports could highlight those
issues that the Board needed to Pay specific attention to.
(iv) The Committee wished to see an analysis of the amount
being spent with external consultants.
Action (i) Update the Board via Matters Arising on the progress
Richard Close made with the Birmingham Accommodation project.
Rosemary Thorne (ii) The Committee should in future highlight those issues
that the Board should pay specific attention to.
Pops 7" PO99/33
SUPPLEMENTAL
DEED & POSSS 28"
SUPPLEMENTAL
DEED POB(99)20x
(i) Agreed that the POPS 7" Supplemental Deed and the
POSSS 28" Supplemental Deed could be executed.
HEALTH & SAFETY PO99/34
MANAGEMENT
POB(99)21x
(i) The work carried out under the review and the
recommendations that had been made were noted
Action (i) Circulate information on the legal costs associated with
Jerry Cope the defence of compensation claims.
APPOINTMENT OF A PO99/35
DIRECTOR TO
ROYAL MAIL US INC.
POB(99)22x
(i) noted that Chris Powell resigned from the Board of Royal
Mail US Inc. with immediate effect.
(ii) Agreed that David Walker be appointed a Director of
Royal Mail US Inc. with immediate effect.
DATE OF NEXT PO99/36
MEETING
Scheduled for 27 April 1999 at 148 Old Street.
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