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~ poB(97)11th Cony N
7097/17 to 140 ee
POST OFFICE BOARD
Minutes of the meeting held on 9 December, 1997
at 148 Old Street, London
Present
Sir Michael Heron Chairman
Mr P Allen
Mr RC Close Managing Director Finance
MrJ E Cope Managing Director Strategy & Personnel
Dr D Grieves
Sir Christopher Harding
Mr AJ Roberts Chief Executive
Mr RC Adams Secretary
Mr S Childes Notes
Also Present
Mr R Dykes, Managing Director Royal Mail
Mr S Sweetman, Managing Director Post Office Counters Limited
Mr K Williams, Managing Director Parcelforce Worldwide
Others Attending
Mr A Williams, Director Communications and Corporate Relations for PO97/131
fr M Linsell, Assistant Managing Director Post Office Services Group, for item
PO97/131
IR RICHARD CLOSE = PO97/127
The Board congratulated Mr Close on completing 10
years service with The Post Office on 1 December 1997
SIR MICHAEL HERON = PO97/128
The Board Thanked Sir Michael for his Chairmanship
cover the past 5 years, paid tribute to his contribution
during a particularly eventful period, and wished him the
very best in his retirement
MINUTES OF PO97/129
PREVIOUS MEETING
November 1997
0 GRO
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The Board APPROVED the minutes of its meeting of 11
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MATTERS ARISING
POB(97)34
Post Office Staff
Superannuation Scheme
(POSSS)
(P097/123)
CHIEF EXECUTIVE’S
REPORT POB(97)85
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PO9T7/129
The Board noted the paper and in particular that the
Trustees of POSSS had met and agreed to a full
valuation of the Scheme in March 1998
PO97/130
The Board noted Mr Roberts’ report and the
presentation by Mr Close the main points from which
were that
Royal Mail’s profit in October had outturned at £76m
compared with a budget of £68m. Parcelforce had
outturned at a profit of £0.1m which was
disappointing when compared with the budget of £3m.
Counters’ profit of £13m was against a profit of £4m,
with the increase mainly the result of expenditure
savings;
although volume fluctuations within both Streamline and
Royal Mail National had occurred during the past year,
when volumes were combined the trend was very much
in line with budget;
in the first seven months of 1997-98, Royal Mail had
achieved a profit of £380m, compared with a budget of
£327m. To achieve its current full year forecast of
£532m the business needed to record a profit of £152m
over the last 5 months of the year, compared with a
budget of £199m. Potential benefits from the recovery
plan initiated earlier in the year when performance had
appeared more fragile, and the release of the Employee
Agenda provision, could increase profit to £581m,
Parcelforce had had a disappointing October with
income £2.1m below budget and expenditure £1m
above. Provisional indications were that November's
performance had improved with a profit of £2m
compared with a budget of £2.8m. This data was
still unconfirmed but could mean that October’s
result was exceptional,
Parcelforce’s cumulative
with regard to volume,
budget, driven by Standard
performance was above
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which was 6.7% better than the forecast decline.
However, both Next Day and PF48, the high unit
revenue streams, were well below budget and this poor
mix of traffic was reflected in the cumulative income
result which was £3.5m below budget;
when the Board agreed to set Parcelforce’s full year
budget at -£15m (PO97/57), it was based on the
business’ ability to halt and reverse what appeared to be
a downward performance trend. A reassessment of this
original judgement now indicated a balanced view that a
loss of -£25m was most likely, although still subject to
some downside risk
noted in discussion that
Parcelforce’s manpower in October was 800 above
budget and financially this equated to an additional cost
of approximately £1m per month. In assessing the likely
full year loss it was therefore important to establish
whether or not this increase would be carried for the
remainder of the year as a consequence of higher
volumes and service levels. Parcelforce’s productivity
levels were good and somewhat higher than those of its
competitors and in the business’ opinion its
uncompetitive cost base was of greater significance.
However, following agreement to its pay proposals
(PO97/118) the cost base would start to reduce and the
business’ competitiveness increase;
a useful indicator of Parcelforce’s performance could be
gained through a comparison of performance of the
packet stream within Royal Mail, although it would not
be possible to compare costing details as this information
was not available. A key issue with regard to packets
was price, with Parcelforce’s competitive position :
possibly being strengthened through the introduction in
1999 of format based pricing in Royal Mail. It was
recognised that for Royal Mail to increase packet prices
before the introduction of format based pricing would be
difficult given the level of profits currently being
achieved,
in an attempt to hold the full year loss to -£15m
a number of actions were planned, including a
meeting with the union which would highlight the
difficult trading position and seek support to proposed
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improvements. A strategic review of the business was
also to be undertaken together with a full
review by POEC in January. This would culminate in a
report to the Board in February which, notwithstanding
the LEK report submitted to Government, would set out
the strategic options for the business
noted further that
Counters’ original Government target was to achieve a
Return on Turnover of 2.5% which equated to a profit
of £30m. However, reduced income, whilst maintaining
the ROT at 2.5%, resulted in a target profit of £29.4m.
Suspension of the conversions programme impacted
on profit by £5m and current forecasts were for a full
year profit of £26m. An assessment of Counters’
risks and opportunities revealed potential improvements
of £21m, mainly the result of expenditure savings and
the provision for Horizon being disallowed by Ernst &
Young;
a key issue for Counters’ was its competitive position
with income currently being lost through a
lack of competitiveness in areas such as bill payments,
where the utilities were being forced by their regulator
to squeeze out costs and were therefore seeking
alternative, cheaper payment methods. The viability of
maintaining the network was a key issue for Counters’
and one that would need to be seriously considered
during the planing round,
The Post Office would at this point in the target cycle
normally be determining its negotiating strategy for
Government targets. However, with uncertainty over the
outcome of Government's Review, ACT, LEK,
Counters profitability and Royal Mail’s industrial :
relations and productivity, the opening of negotiations
would be delayed until the publication of the Review,
Government was not expected to oppose this stance
noted further Mr Roberts’ report and in particular that
de and Industry Select Committee had
been held on 24 November and without the output of the
Review to discuss, the Committee had covered a wide
range of diverse issues In general the Committee was
supportive of The Post Office’s commercial aspirations.
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the Commons Trai
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THE FUTURE OF POST
OFFICE HERITAGE
POB(97)86
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Mr McCartney, The Post Office Minister, refused to be
drawn on the outcome of the Review and provided no
information with regard to the EFL;
the Information Memorandum on Quadrant had been
issued to prospective partners on 10 November. A range
of bids had been received which were now being
reviewed by Schroders. A paper on the joint
venture would be brought to the Board in January;
Royal Mail’s international pricing proposals had been
announced on 8 December to limited media coverage.
An article in the consumer magazine ‘Which’ had
recently criticised a cross section of services offered by
The Post Office; this had been strongly and
successfully rebutted. The annual report by the Post
Office Users Nationa! Council (POUNC) had been
published on 28 November and a constructive
response to it was being prepared
noted in discussion that
with regard to the profit/loss figures reported to DTI,
Members were concerned that the numbers should
reflect the current assessment of the businesses’ likely
full year outturn. In view of this Members agreed that
Counters forecast of £33m should remain unaltered and
that Royal Mail’s should be increased to £540m,
reflecting potential savings opportunities. As far as
Parcelforce was concerned, Members agreed that the
-£15m forecast could not be sustained and considered it
prudent to revise this to -£20m, a figure Parcelforce
management still thought achievable, and importantly
was still lower than the loss recorded in 1996-97
Agreed that the following profit/loss forecasts be
reported to the DTI. Royal Mail £540m, Counters
£33m, and Parcelforce -£20m
PO97/131
The Board noted Mr Roberts’ paper and in particular
that
the disposal of KEB, within which The Post Office
museum was located, necessitated vacation of the
premises by the museum before October 1999 This
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therefore provided an opportunity for a fundamental
review of Post Office heritage and its future exploitation.
Heritage had been defined not only to include artefacts
and records and the achievements of individuals from
within the organisation, but also encompassed the
organisation’s role in education and the public life of the
country and local communities. It would also
incorporate The Post Office's film archive. Options for
the future management of The Post Office's heritage had
been considered by the Executive Committee at its
December meeting and the Board’s endorsement of their
recommended option, option 2, was now being sought,
the wholesale disposal or dispersal of the heritage
collection, which was viewed as an abandonment of the
organisation’s corporate history, had been rejected, as
had the minimum solution of relocating to a smaller site
which maintained the present collections and display.
This option offered little or no demonstrable payback
and would incur capital costs of £4m, with on going
costs unchanged at £1.8m,
with the help of external consultants, three options had
been developed with “soft” costings. Option 1
maintained a relatively traditional museum approach,
with a limited retail/catering operation and small audio
visual facility, This incurred a capital cost of £6.2m.
Option 2 encompassed a radical overhaul of the :
museum’s presentation through the use of interactive
gallery technology. It also incorporated a 150 seat
theatre/presentation arena, a conference facility with :
retail and catering space and incorporated a Group-wide
educational resource working with schools, places of
higher and further education, and local communities.
This option incurred a capital cost of £14.2m. The third
option was also the most radical, incorporating a virtual
reality facility and a commercial opportunity to generate
revenue streams which in the medium term would reduce
the revenue cost to The Post Office of managing the
heritage facility. This option had a capital cost of
£20.9m
noted in discussion that
om the sale of KEB was
nt of the heritage
nt intervention and
some of the income generated fr
to be set aside for the developme!
project; this assumed no Governme!
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HORIZON UPDATE
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that the funding would affect The Post Office’s ability to
meet all its targets,
in the Chairman’s view, it was important to ensure that
the history and role of Counters was included within the
museum,
the possibility of locating artefacts etc. within an existing
museum had been considered but there had been little
external enthusiasm for this. Developing a stand alone
Post Office site through a joint venture remained a
possibility and would be explored further;
research had indicated that a central London site was the
ideal location for a museum and was in fact essential
should either option 2 or 3 be progressed. A charge to
visitors of £2 95 was proposed, this being comparable
with similar museums;
some Members thought it preferable to develop a
proposal that utilised technology to its maximum, as
proposed under option 3. However, generally
Members felt this option unjustifiable commercially and
considered option 2, which over time could be upgraded
to incorporate greater use of technology, the ideal way
forward
Endorsed
the Executive Committee’s recommendation of option 2
for the future management of The Post Office’s heritage,
and
further development work to build a full business and
investment appraisal case to go to MaPEC in June 1998
PO97/132
The Board noted the introduction by Mr Roberts and the
presentation by Mr Sweetman, the main points from
which were that
following a meeting between the three Managing
patil of the fi interested parties (POCL, ised
Agency (BA) and ICL Pathway), in October, which
been arranged in response to the independent cide wl
the programme by external consultants PA, further w'
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had been agreed and a further review meeting arr:
for 8 December; eee
at the review meeting a number of issues had been
discussed. It had been agreed that Horizon remained
the best way forward for all parties, notwithstanding the
financial difficulties to which the BA/DSS was now
exposed (PO97/120). Automation of the entire network
of offices had also been endorsed, although the
smallest 3,000 would be equipped with ‘scaled down’
technology. Additionally, POCL and Pathway had
agreed to work more closely together and Counters’
Managing Director had been tasked to identify a
Programme Director who would act as the prime contact
for the BA with Pathway. It had also been agreed to
disband the Programme Development Authority (PDA)
which until now had overseen development of the
programme,
with regard to the current situation, Pathway had
successfully achieved its latest milestone, with 205
offices now operating the card payment system. The
specification for Release 2, which was the bill payment
system, was due to be agreed during December, with
Pathway confident that it could be delivered by October
1998, although Counters felt that January 1999 was a
more realistic timescale. Live testing of the programme
was still planned for November 1998 to March 1999
with national rollout starting in April 1999. The
speed at which further commercial opportunities
could be developed remained a key concern with any
delay having a major impact on Counters’ commercial
position, Check steps had now been agreed which would
ensure closer monitoring of the programme,
even allowing for the BA/DSS Public Expenditure
difficulties, their financial case remained positive over
the long term. ICL Pathway were stretched financially
and to alleviate this were seeking to extend the period
of their contract by a further 5 years, should this not
prove possible it was likely that they would seek to
increase prices. Horizon remained central to the success
ent support to It was
of Counters and gaining Governm
crucial. A potential opportunity to improve the appeal
of the programme existed through Counters
involvement in ‘social banking’ which would seek to
bring the financially disadvantaged into simple
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financial/banking services. Counters saw this as a
migration towards new services, not the replacement of
existing ones. Given the risk of delay to the programme
and the development of commercial interests with other
clients, Counters was considering what generic products
could be developed i.e. banking;
(v) with regard to the future, the DSS would be passing a
report on the programme to the Permanent Secretary
at the DSS before Christmas and Counters would be
briefing Mr McCartney, The Post Office Minister. To
raise the profile of Horizon, lobbying of Treasury
officials was planned which would highlight its positive
benefits. Commitment to a new programme plan was
also needed from Counters, BA and ICL Pathway by
January 1998. Counters would continue scoping
discussions on ‘social banking’ and introduce by March
1998 the improved organisational functions needed to
drive the project through
noted in discussion that
(vi) influencing Government to support Horizon was crucial
and initiatives such as ‘social banking’ and the
development of electronic services across the network
could only help in this regard Opportunities to exploit
the recently announced ISAs (Individual Savings _
Account) would undoubtedly be sought, although it was
likely that Counters would look to handle transactions
on behalf of clients such as Girobank, rather than deal
directly with public sales
Thanked Mr Sweetman for his report
PREPARING FOR
ECONOMIC MONETARY
UNION WITHIN THE
POST OFFICE - UPDATE PO97/133
POB(97)87 Lo
The Board noted the paper by Mr Close and in particular
that
(1) planning for European Monetary Union Lauber :
I evaluating its impact across The Post Office, had been :
I based on the UK being one of the first wave of countrie
: to join EMU, and the recent statement by the
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POST OFFICE
UNAUDITED
ACCOUNTS FOR THE
HALF-YEAR TO
SEPTEMBER 1997 (i)
POB(97)88
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Chancellor, which ruled this out, in no way diminished
the importance of the activities being pursued,
it had not yet been possible to complete the systems
impact analysis as the industry standards that were to be
applied European wide had not yet been agreed. It was
hoped that information would be published in the spring
of 1998. Work had been carried out to identify the
number of systems likely to be affected, those where
action was already underway and those for which no
action had as yet been taken. Whilst encouragingly, 80%
of affected systems had already been identified for
action, it was a concern that a number of major systems,
such as Horizon and SAPCON (a financial accounting
system) within POCL, which were expected to replace
existing non-compliant systems, would, if delayed, leave
a number of systems in place and in need of urgent
remedial action
noted in discussion that
for The Post Office, the main areas of concern fell within
Counters, where EMU would impact upon the
processing of cash at counters, the operation of Notes
Held To Order, and Bureau de Change.
Nevertheless, a considerable amount of work had
already been carried out and The Post Office was well
represented on a number of working groups established
by the Chancellor of the Exchequer
PO97/134
The Board noted Mr Close’s paper and in particular that
the accounts for the half-year to September 1997 had
been reviewed by the Board Audit Committee and Ernst
& Young, The results contained within the report were
the same as those previously reported to the Board
(PO97/118)
noted in discussion that
although Ernst & Young had been content with the
accounts, they had highlighted some concerns over year
end provisions which they would need to discuss -
further, They had also commented on the presentation
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Pre ention Programme
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‘CTS APPROVED
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Parcelforce’s results which they said should be
circumspect and realistic
AUTHORISED
the signing of the letter of representation
AGREED that
the half-year results be published in the format of
appendix 1 to the paper and that the publication date
be determined by the Chief Executive and Managing
Director Finance in liaison with the Director
Communications and Corporate Relations
PO97/135
The Board noted the paper by Mr Close and in particular
that
the proposal was for a programme of spending spread
cover 5 years to install business-standard security
equipment in approximately 4,000 sub-offices
with the highest exposure to robbery and burglary.
Previously, subpostmasters had had to contribute
towards the cost of equipment but under these proposals
the costs would be met by The Post Office and as such
the assets would be owned by The Post Office and
could be capitalised
noted in discussion that
the equipment would consist of high quality glass
screens with some higher risk offices also having rising
screens. These were metal screens which would rise up
from the counter providing protection to employees
from gun shots within seconds of being activated.
Similar equipment was used by banks and building
societies. Offices that did not have rising screens would
have ‘safe’ areas directly beneath the counter. The new
equipment, whilst providing a more secure environment,
was also designed to be customer friendly and allowed
for a more open dialogue between customers and
employees,
some Members were concerned that having identified a
problem, Counters could be criticised for the time
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taken to implement improvements. Counters recognised
this but had to balance the limited resources that were
available to it. The age and design of many of the
offices also meant that considerable planning and design
work had to be carried out before implementation could
occur. The action being taken was a positive and
welcome move and one that highlighted Counters’
commitment to the safety and well being of its
employees
Endorsed
(iv) I MaPEC’s approval of POCL’s programme to spend
£44.9m over 5 years
PO97/136
The Board noted the paper by Mr Close and in particular
DORSEMENT BY that
THE BOARD -
mingham Divisional (i) the increase in costs, which had doubled since the
\dministration original ‘in principle’ agreement had been given in 1996
ices POB(97)90 (PO96/43), was the result of sharp increases in office
rents in the Birmingham area, It had not been possible to
utilise a PFI as the level of risk that would be carried by
the scheme would be insufficient to qualify as a PFI
Endorsed
(ii) the leasehold acquisition of 49k sq.ft. of accommodation
at 3 Brindley Place Birmingham, at an annual rental of
£13m and an annual service charge of £0.2m,
(ii) the fit out of 3 Brindley Place, and subsequent transfer
of Midlands divisional ‘administration staff from the
existing accommodation , at a maximum cost of £3.7m,
(iv) _ the signing of agreements to dispose of the MLO at
Royal Mail Street for proceeds of £4m
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PO97/137
The Board noted the paper by Mr Close:
PO97/138
The Board noted the paper by Mr Cope
The Board noted the paper by Mr Cope
AGREED the re-appointment of Roy Chapman as
Chairman of Post Office Pensions Trustees Limited for a
three year period until 31 March 2001
PO97/139
The Board noted the paper by Mr Roberts and in
particular that
considerable effort and no little skill by Group Treasury
employees had reduced the balance of loans outstanding,
which had been inherited from Girobank at the time of
its sale in 1990, to just over £1m from an original total
of £115m
PO97/140
The Board noted that its next meeting was scheduled for
13 January 1998, at 148 Old Street
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