10
11
12
Post Office Limited — Strictly Confidential
POST OFFICE LTD BOARD MEETING (Company Number 2154540)
Meeting to be held at 09.00 on 18 April 2012
at 148 Old Street, London, EC1V 9HQ in the Board Room
Mails Update
Feedback on BIS FOoG Week and Next
Steps plus oral update on FOoG
Project Eagle
Break
Minutes of previous meeting
Minutes for noting
« — Sub-Committee Meeting
e FRES
Matters Arising
e Status Report
Director Appointments
Managing Director's Report including
Health & Safety Update
Finance/Performance Update
Vehicle Tender
Any Other Business
Close
Items for Noting
Significant Litigation Report
Post Office Ltd - Sealings
Communication Action Group Minutes
Berkeley Report on IT & C
Transformation
Attendees:
Alice Perkins (Chairman)
Neil McCausland (SID)
Paula Vennells (MD)
Chris Day (CFO)
Virginia Holmes (NED)
Susannah Storey (NED)
Alwen Lyons (Company Secretary)
In Attendance:
Martin Moran
Paul Brown
Lesley Sewell
Brian Deveney
POLB(12)52
POLB(12)53
POLB(12)54
POLB(12)4"
22"4 March 2012
FRES (12)1%
POLB(12)55
POLB(12)56
POLB(12)57
POLB(12)58
POLB(12)59
POLB(12)60
POLB(12)61
POLB(12)62
POLB(12)63
POLB(12)64
UKGI00011499
UKGI00011499
Martin Moran/Paul Brown
Martin Moran
Nick Kennett
Alice Perkins
Alice Perkins
Alice Perkins
Alice Perkins
Paula Vennells
Chris Day
Lesley Sewell/Brian Deveney
Susan Crichton
Alwen Lyons
Alwen Lyons
Lesley Sewell
UKGI00011499
UKGI00011499
POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)52
Board of Directors
Date of Board: 18" April 2012
Subject: Mails Strategy Update
Author/Sponsor:
Paul Brown/Martin Moran
Contributors / Presenters:
Paul Brown and Martin Moran
Decision Guidance Noting
For: x
Reference previous action point:
BACKGROUND AND CONTENT:
* To update the Board on the Mails Market & Strategy
« To highlight the progress since the signing of the MDA, including:
- Collections & Returns
- Small Business key initiative
« To explain future opportunities being considered in addition to the plan
RECOMMENDATION (if decision required) Date
Recommended by the Executive Team 03/04/12
Investment Appraisal completed or financial implications -
assessed and supported by the CFO
Additional presentation: YES/NO
UKGI00011499
UKGI00011499
Post Office Ltd — In Strictest Confidence
POLB(12)52
POST OFFICE LTD
Board Paper
Mails Strategy Update
Purpose
The purpose of this paper is:
14 To update the board on progress against the mails strategy. The mails
strategy and full update is attached at Appendix 1.
Background
21 Mails accounts for 35% of total Post Office Ltd (POL) income, 35% of profit
and 70% of customer branch visits. The successful development of this
product pillar is therefore central to the future health of the organisation. A
mails profit and loss statement is included at Appendix 2.
2.2 In March 2012 POL entered a new long term (10 year) Mails Distribution
Agreement (MDA) with Royal Mail Group (RMG). Within the MDA POL agreed
to full exclusivity with RMG thus emphasising the importance of both
organisations planning and delivering together to protect and grow mails
revenues.
2.3. POL has a well developed mails strategy which it must deliver to ensure that
planned revenues are achieved over the next five years and beyond.
24 POL and RMG are coming under increased pressure from competitors who
are looking to gain a foothold in the growth areas of the mails market.
Explaining the retail mails market
3.1 POL operates in what is known as the retail mails market, which breaks down
into four key sub-market categories and one critical customer group (Small
Business) as follows:
e Parcels — items that are too large to fit through a letter box and require a
higher rate of postage.
e Premium — items which require additional speed of delivery and or
security/compensation.
e Letters and Stamps - traditional social mail, stamp sales and some
transactional mail.
¢ Collections and Returns — collection services provided by outlets in the
event that items cannot be delivered at the doorstep (failed deliveries) or
were ordered online and a collections outlet was selected by the customer
for delivery (click and collect), and remote shopping returns.
e Small Business - supporting the mailing needs of our critical small
business customer base.
3.2. There are many interdependencies between the markets mentioned above;
the key points are listed below;
e Retaining small business customers is essential to maintaining market
share in the Parcels and Premium markets as 30% (£100m per annum) of
mails income is derived from this customer group.
e Parcels, Premium and Collections and Returns are the market areas which
are growing (6%, 1% and 20% per annum respectively) and are therefore
attracting the most aggressive competition. Competitors are using
UKGI00011499
UKGI00011499
Post Office Ltd — In Strictest Confidence
collections and returns to gain a foothold in the market which in future may
allow them to make a significant dent in POL’s Parcels and Premium
market share as they grow into fulfilment markets.
¢ Letters and Stamps are in decline (7% per annum) which is expected to
continue; it now represents only 10% (£32m per annum) of POL mails
income.
3.3 Our strategy focuses upon the Collections and Returns, Parcels and Premium
markets and Small Business customer group. It is essential that we make
strong progress in developing our strategy to ensure that the competition does
not reduce our market share in these key areas. The background of the mails
strategy is attached at Appendix 1.
4. Progress and milestones
4.1 POLis currently progressing well with delivering its mails strategy, a full update
on progress, milestones and new developments is attached at Appendix 1. A
brief summary is detailed below.
* Collections and Returns
POL has agreed a joint plan with RMG within the MDA to grow volumes in
this market. It is essential that both organisations deliver their
commitments in this area as the competition is most aggressive in this
market.
POL signed an exclusive contract with RMG on the understanding that
with a joint business plan and product proposition in place it would be able
to grow volumes considerably in partnership with the UK’s leading mail
distributor.
POL will deliver a network of 4,000 branches with extended opening hours
for collections and returns transactions over the next 12 months. This will
include a branch capacity model, storage solutions and extended hours.
RMG will deliver an improved returns product available through POL, an
application programming interface (API) to allow POL branches to be
selected as a collection point at the retailer's online point of sale and a
programme to transfer undelivered items of mail into POL branches rather
than through their own delivery office network.
¢ Small Business
POL has been developing some bespoke solutions. These include a pre-
pay membership account, followed by a full loyalty scheme later in the
financial year 12/13.
* Parcels and Premium
POL continues to play to its strength in this area supported by
developments for Small Business and Collections and Returns. POL is
also working with RMG to develop new products and re-engineer existing
products to maximise profit potential.
5. Future developments
5.1 POL is currently working on several future developments to the strategy. The
most important potential development in this area is automated Collections and
Returns points. This is covered in more detail in the presentation at Appendix 1.
UKGI00011499
UKGI00011499
Post Office Ltd — In Strictest Confidence
6. Risks, opportunities and interdependencies
6.1 Working exclusively with RMG to deliver the POL mails strategy presents a
number of risks and opportunities which are detailed below.
Risks
* Competition grows and reduces RMG’s market share therefore stunting
POL’s ability to grow in key markets like Collections and Returns and
impacting upon POL’s parcels and premium business.
e RMG are not able to deliver on the commitments made to grow the
Collections and Returns market share which is of such strategic
importance to POL. This would allow competitors to erode POL revenues
across all of the sub markets.
Opportunities
« RMG remains the dominant mails company and universal service provider
in the UK and as such offers POL the protection of growing and retaining
its volumes in an exclusive contract.
« RMG has relationships with most of the major retailers in the UK giving
POL direct access to help grow its Collections and Returns business.
« POL and RMG have incredibly strong and trusted brands which are
recognised as the safe, secure and trusted service for all mails solutions in
the UK.
« RMG offers POL the opportunity to grow its Collections and Returns
business rapidly through the development of joint product propositions and
the transfer of undelivered volumes directly into POL’s network.
Interdependencies
¢ Network transformation is critical to the ongoing development of the mails
strategy going forward. Development of key markets will depend upon the
additional convenience which this programme will deliver.
e The development of the broader self service proposition will be crucial to
delivering some of the future convenience and profitability plays within the
mails pillar.
¢ The pre-paid debit card platform and the wider IT roadmap are critical to
delivery across the mails strategy with particular focus on the online and
small business areas.
7. Conclusion
7.1 POL is confident that its mails strategy is sound and that good progress is
being made to date.
7.2 POL will need to ensure that RMG are held to the commitments made to
develop the strategically important Collections and Returns market. POL will
continue to operate at pace to ensure speedy delivery of its key strategic
propositions.
7.3. POL will also work to develop trials of new propositions and future
developments within its markets.
Martin Moran
April 2012
Mails P+L 2012-2017
Profit & Loss (£m)
Fixed
Variable
Total excluding Mailwork
Collections/Returns programme
Mails Income
Agents Pay’
Attributable Crown Time”
Product Team
Commercial Mails (additional)
Dangerous Goods
Share of Voice
Other contractual (tariff changes)
Managed Services
Network
Mails Direct Costs
Contribution
1 Agents Pay is assumed to remain at 43% of total Mails income
Post Office Ltd — In Strictest Confidence
2012/13
418
302.4
344.2
07
344.9
(148.3 )
(15.1)
(0.9)
(169.6 )
175.3
2013/14 2014/45 2015/46 2016/17
40.8 39.8 38.8 40.4
309.6 308.4 312.4 314.3
350.4 348.2 351.2 354.7
38 84 11.3 12.8
354.2 356.4 362.5 367.5
(152.3 ) (153.2) (155.9 ) (158.0 )
(15.5 ) (15.4) (15.6 ) (18.7)
(0.9) (0.9) 9) (09)
(0.2) (0.2) 2) (0.2)
(4.0) (4.0) (4.0) (4.0)
(05) (05) 5) (0.5)
(0.0) (0.0) (0.0) (0.0)
(0.3) (0.3) 0.3) (0.3)
(04) (0.4) (0.4) (0.4)
(174.1) (175.0 ) (177.88 ) (180.0 )
180.1 181.4 184.7 187.4
2 Crown Time is assumed to remain at 5% of Mails income
3. Network resource requirement to ensure Service Level commitments are met and payment of penalties avoided
UKGI00011499
UKGI00011499
Appendix 2
Aggregate
201.6
1547.1
1748.6
36.8
1785.4
(767.7 )
(74)
45)
(1.0)
(20.0)
(876.5 )
909.0
UKGI00011499
UKGI00011499
POLB(12)52
Appendix 4
Mails Update for the Post Office Ltd Board
April 2012
Strictly Private & Confidential
©)
Post Office®
UKGI00011499
UKGI00011499
Mails is the single most important category for the Post Office - it
generates 35% of profits, accounts for over 50% of agents pay and
delivers 70% of customer visits
PURPOSE OF TODAY EXECUTIVE SUMMARY
Where we have come from
* To provide an . Post Office’s mails income has been roughly flat for 5 years but showed significant
update on the mails growth in 2011/12
business progress . In mails we make an annual contribution of £27m from an income of £332m
to date . We have secured a long term contract with Royal Mail and are beginning to realise
* To give you an
insight into the
wider mails market
in which we operate
* To give you an
understanding of
our strategic
direction going
forward
opportunities to grow our mails business beyond Strategic Plan levels
What our opportunity is
. To play to our strengths and dominate in the retail parcels and premium markets
. To win and grow our market share in the expanding collections and returns market
. To retain and lock in our critical small business customer base
How we take advantage of the opportunity
. We need to meet three critical challenges:
- Develop our sales and customer experience model to meet the needs of
increasingly demanding customers (including improving digital channels and
in branch automation)
- Develop the UK’s most convenient and reliable collections and returns
proposition
- Develop our customer relationships with small business and improve the
value we add to their business models
. We have plans in place to deliver £1.79bn income over the next 5 years
(4)
Post Office®
Nar
IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
@
* Background
. Strategy
° Progress and milestones
° Future developments
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
Over the last 5 years our mails revenues have remained fairly static .
against a backdrop of falling letter volumes; we are now beginning to see
growth in revenues driven largely by online shopping trends
I I I I >
2007/08 2008/09 2009/10 2010/11 2011/12
£319m £318m £319m £319m £332m
Mails income
Mails income starting to
grow as declines in stamp
volumes have less impact
and are overtaken by
growth in parcels and
continued improvements in
sales capability
Launch of express
mails programme
to recognise
steady due to
declining stamp
volumes but
Declining stamp volumes
only partially offset by
: some market growth,
growth in certain better sales practices and balanced by
parts of the mails increased tariffs growing parcels
market and premium
business
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
We compete in several sub-market categories and for both consumer and
UKGI00011499
UKGI00011499
small business customers; we have developed distinct strategies that
address these differing market dynamics and customer needs
RETAIL MAILS MARKET SUB-CATEGORIES
CRITICAL TARGET SEGMENT
rcels Letters &
stamps
Collections and returns
Small Businesses
E-auction sellers
PREMIUM PARCELS LETTERS AND STAMPS
COLLECTIONS & RETURNS
SMALL BUSINESS
This market is in strong
growth. We must continue
to take advantage of our
unique position. We can play
This market is in marginal
growth and we are strong
within it. Our network and
sales expertise allows us to
This is the declining part
of our market although it
now only represents circa
A rapidly growing and
dynamic market where the
competition is gearing itself
to win market share. We
must be more convenient
Small business accounts
for 30% of our mails
income. We must create
a bespoke proposition
maximise opportunities to to our natural strengths in 10%. We must manage and have strong joint which makes this
match products to customer this area. decline through growth in duct oy ith important customer base
needs. other markets. Product propositions wi feel valued.
Royal Mail
(4)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
We have a strong mails portfolio with revenues coming from sub- °
market categories that are either stable or in growth having already
absorbed much of the impact of reducing letter volumes
Fixed Fee Premium Parcels Stamps C&R Other
£50m £87m Om £32m £10m £3
Market Growth = 0% : T +6% J -7% Fe
*Small business customers account for 30% of total income
Premium Parcels Letters and Stamps__I Collections and Returns Small Business
* collect @® TESCO collect#
® TNT announced plans to I They have 5k outlets and MORRISONS saw aw a ew ar Our fastest growing We must compete on
s open parcels shops _I a simple parcel offer. We I We are well protected by competitor with a convenience and value
supported by end to end I must compete strongly in exclusivity and the network to match our i i
¢ H a - : with the 400m items a
= delivery capability. This the collections and market is declining scale. We must ensure oan
© ‘ : , year franking industry.
Ss could cherry pick returns market to avoid across the board. The we match their
profitable urban areas
erosion here.
threat is minimal
convenience.
® I POL is growing in line with I POL is growing ahead of I Stamp volume decline is I POL is growing, but well POL has substantial
2 the market. This plays to I the market as this area_Iin line with broader market} below the overall market. I market share in the sub
= I ourstrengths as we can plays to our natural and now accounts for only Addressing this is a £5k market. It is essential
i ensure our customers strengths. It is vital we 10% of total POL mails strategic priority. that we retain and grow
® ' select the right products for I retain our market position income. our share in a competitive
= their needs market.
(5)
-_ We
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
@
* Background
° Strategy
° Progress and milestones
° Future developments
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
There are five key strands to the mails elements of the Strategic
Plan supported by some underpinning enabling activities
UKGI00011499
UKGI00011499
I
COLLECTIONS &
PREMIUM PARCELS LETTERS AND SeTURNS H SMALL BUSINESS
Focus on sales capability Develop channels and STAMPS Greateand deli POL I Develop propositions to
supported by a self competitive product Manage decline and a 8 a : rae I remain relevant to the
service offer to grow propositions to grow migrate to lower cost a luton t als Hee uy I _ Profitable small business
sales market share models the aa retail I customer segment
I
DEVELOPMENT CREATING AN CREATE AND i
I DELIVER ROLL OUT
ONE StL eo OF A ENTICING CAPACITY ! OF DROP &
SERVICE OFFER % VOLUMETRIC ONLINE MAILS MANAGEMENT I GO TO THE
i Np PRODUCT SOLUTION soLutions I I WIDER
° RANGE I NETWORK
]
I
DEVELOP AN I I
BUILD UPON CREATING AN OUT OF HouRS I I LAUNCH OF
OUR SALES ENTICING SERVICE FOR I I ; A SMALL
CAPABILITY ONLINE MAILS CUSTOMERS I I an BUSINESS
SOLUTION COLLECTING I y I Fe CLUB
ITEMS I
I
I
cee, DEVELOP AN DEVELOP AN tauncuan I I
Ze out oF HOURS OUT OF HOURS INTELLIGENT I I
ee SERVICE FOR ‘SERVICE FOR RETURNS I I ENHANCEMENT
CUSTOMERS CUSTOMERS PROPOSITION I { OF THE SELF
COLLECTING COLLECTING i SERVICE OFFER’
ITEMS ITEMS I
UNDERPINNING ACTIONS FOR ALL CATEGORIES
1. Re-engineer mails products and services, 2. Deliver network transformation, 3. Develop relationship with Royal Mail Va
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
NS)
UKGI00011499
UKGI00011499
@
° Background
° Strategy
e Progress and milestones
° Future developments
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
Strong negotiation of the Mails Distribution Agreement (MDA) fee
structure and opportunities stemming from market trends should allow us
to deliver revenues beyond the levels envisaged in the Strategic Plan
REVENUE PROJECTIONS MDA HIGHLIGHTS
+ RPI -1 on all variable fees; the
proportion of fees which vary with
volumes has increased, meaning
we have the protection of income
360 Collections & Returns, 12.8 increases which track RPI.
+ Fuller exclusivity with RMG
including a guaranteed collar;
350 ensures that we remain the
preferred retail partner of the UK’s
dominant mail distribution
company into the future,
+ A10 year deal which will enable
y us to meet the income projections
Efficiencies, -5.0 ahead of Strategic Plan
Property movements, -2.8 + Commitment from RMG to
320 support new and profitable
commercial programmes in two
key areas: Small Business
: : : : propositions and Collections &
2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 Returns
=e Strategic Plan =——=Revised Forecast (2012 review) £368m
370
Impact of new rates, 6.9
340
£335m
330
310
Financial Year
(9)
Y
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
We have accelerated our plans to develop a compelling Collections & ‘
Returns proposition that will compete in this market and challenge the
competition directly.
We have created a programme management team to ensure successful and timely
delivery of the Collections & Returns plan. This will deliver the following:
An Out of Hours solution available in 4,000 outlets including additional secure
storage which is accessible even when the Post Office side of the business is
closed, to be delivered by March 2013. This will enable us to compete directly with
other providers in this market including Collect+.
A Branch capacity model for the Network accessible via Royal Mail’s customer
facing API within this financial year. This will enable retailers to offer customers
Post Office branches as a delivery point as an integral part of their online checkout
process.
Atrial is planned for later in the Spring for an Intelligent Returns solution with
amazoncom. Amazon. If successful this will be rolled out across all Returns clients from the
~ Autumn, providing clients and customers with valuable MI which provides us with
a beneficial USP helping to retain this important customer group
4) Business development resource has been added to the POL mails team to start
working with RMG client sales teams to pitch POL solutions to potential retail
a>
clients.
A detailed project plan has been developed which gives confidence to the expected
timescales. a~
WO)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
Collections & Returns are central to the development of our strategy. We will
agree a full business plan with Royal Mail by September 2012. A substantial
amount of planning and initial delivery have already taken place.
JOINT COLLECTIONS & RETURNS PROGRAMME
Q4 11/12 Q112/3 —-Q212/13, 3.12/13 _ 04 12/13
& apenas H i i -
case approver { H H
' communications designed and produced
Branch capacity identified and model H
developed
-POL
Actions
Sourcing of storage, i Branch capacity moidel deployed and
‘olution
oo
Rollout of out of hours
i Out of hours solution developed
ee ee LL
Business case for RM API to H Rollout of API solution
support Click and Collect
of Click & Collect
iid
meio WPP from ITT confirming Returns TPA EAP SteH AOI Fo EA
. costs. Business case finalised
\ I Rollout of undelivered items to POL
'
; RM G Delivery to Neighbour
i; trial concludes and project i
Actions - for undelivered items i Deployment of Returns tracking at DO’s, Ml available to customers
to POL initiated ' 1 '
Business case for undelivered items transfer H i i
' H H i
Joint Volume Commitment (m) 11/12 12/113 13/14 14/15 15/16 16/17
Returns 14.0 16.0 18.0 20.8 23.5 25.5
Click & Collect 0.5 0.8 1.3 25 40 5.0
Failed Deliveries 3.5 47 9.0 15.5 eae 30.0
Total 18.0 21.5 28.3 38.3 49.7 60.5
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
Small Business - we have been working to develop a set of bespoke ‘
propositions that will enable us to retain our existing small business
customers and make inroads into the substantial franking market.
1. To retain income from customers who are at risk of
moving to competitors or alternative channels — this
A Small Business income is worth circa £100m per annum to POL
propositions team 2. Seek to grow small business income through winning
is now in place market share from competitors and alternative channels
specifically to including the franking market (currently 400 million items
develop and deliver per annum)
the key measures of POL will achieve this by focusing on small business
SUCCESS. customers who spend up to £5k per annum on mails
products and services
The Key Initiatives
Drop & Go Small Business Loyalty scheme ~
bespoke prepaid solution which enables small business} A tiered POL loyalty scheme aimed specifically at small
ustomers to avoid waiting whilst their mails are business customers with the initial focus on Mails
rocessed. products
Full rollout to the Crown Network (March 2012) v - Agency selection underway to scope customer requirements
Adaption of the service for use in the Agency Network + Solution designed and business case produced by Summer 2012
Rollout to a network of 2,000 Agency branches this year + Delivery of Loyalty scheme — by end 2012/13
(2)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE -
UKGI00011499
UKGI00011499
Ensuring that we continue to create compelling customer solutions in the growing ©
Parcels and Premium product markets is vital. It is an area where POL is the clear
market leader for retail customers, however competitors are looking to make
inroads into our market share
Our key activities in the Parcels and Premium markets are as follows:
Design and delivery of a Volumetric range of products where the postage is an
integral part of the price of the packaging. The customer can post any weight of
goods in the packaging for a fixed price. The solution will be trialled within this
financial year.
We are working with Royal Mail to identify an alternative pricing model for large but
light items which are awkward to process and therefore costly, this will help manage
profit within both businesses. This is known as Project Bentley; a feasibility will take
place this year, the aim is to implement the changes next year (2013).
We are developing our proposition in the online space, looking at simplifying the
customer journey, testing whether we want to create our own Online postage solution,
and creating linkages with the online shop for customers looking for stamps and
packaging solutions
We will continue to work with colleagues across the business to focus on and grow
our sales capability, this will be through workshops, coaching and expansion of the
Express Mails Specialist role in branches. This will help to deliver an excellent
customer experience, driving increased sales and customer loyalty
a
\@)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
We have developed an implementation plan for delivering the strategy ®
and have prioritised those elements of the plan which will have the
greatest impact on our small business customers
2012/13 2013/4 2014/15
n + + >
Agree plan with RM ab , Deliver operational plan
i Deliver Branch Capacity i Capacity for Undelivered
Collections I outof Hours > 4000 outiets © Conversion Post Network Transformation 4
& Returns " 1 SSB ASTH! sn] expand Retailer Network &&
"Develop Joint Sales Strategy
i me } Develop Joint Marketing Strategy
Small bi Drop & Go > 2000 Outlets Ht an ey '
Business Scope SME Club ‘Deliver Club im "Rollout to Top 2000 Premier & Main Branches an “<n
' Develop Seller & Marketing Strategy i H
Lette rs Optimise Products & Services
& Stamps Post&Go Upgrades I
Parcels & ! Volumetric ee : Hl A SI mr
& Premium = = 2 Define Online Proposition 1 "Deliver Online Solution Hi S
(4)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
@
° Background
* Strategy
° Update
° Future opportunities
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
UKGI00011499
UKGI00011499
We are also considering future developments which are not currently
part of our plan. These include further automation, expanding our
convenience and utilising new technologies.
Automated collections and returns stations
ms We will look to enhance our existing self service model with automated
sa collections and returns stations based upon the success of other
European Posts
The German model: Packstation
+ First developed in 2001 by the Austrian company Keba
* There are now 2,500 Packstations across Germany with over 1m
registered users and the customer base growing rapidly
Other international solutions:
Post24 - available in 24 locations throughout Vienna with more
locations to roll out soon
SmartPOST - available in 46 locations throughout Estonia and rolling
out to Finland shortly
Supporting e-auction traders eBay solutions:
Gu We will look to develop a range of automated solutions to allow eBay
customers to pay for postage online but complete transactions in
branch. Opportunities could include:
+ Payment of goods upon collection in branch
* Production of postage label print through smartphone barcode
+ Management of customer address book and print of address labels
+ Link to online shop for packaging requirements
(16)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
POST OFFICE LIMITED EXECUTIVE SUMMARY
POLB(12)53
BOARD OF DIRECTORS
DATE OF BOARD: 18 APRIL 2012
UKGI00011499
UKGI00011499
SUBJECT: UPDATE ON BIS WEEK AND FOLLOW UP ACTIONS
AUTHOR/SPONSOR:
MARTIN MORAN
CONTRIBUTORS / PRESENTERS:
NONE
DECISION GUIDANCE NOTING
For: xX
REFERENCE PREVIOUS ACTION POINT:
BACKGROUND AND CONTENT:
THIS PAPER SEEKS TO SUMMARISE THE RESULTS OF OUR WEEK OF EVENTS AT THE BIS.
CONFERENCE CENTRE DURING WEEK OF 5™ — 9™ MARCH AND TO DETAIL NEXT STEPS BEING
TAKEN TO FOLLOW UP ON NEW OPPORTUNITIES
RECOMMENDATION (IF DECISION REQUIRED) DATE
RECOMMENDED BY THE EXECUTIVE TEAM 03.04.12
INVESTMENT APPRAISAL COMPLETED OR FINANCIAL -
IMPLICATIONS ASSESSED AND SUPPORTED BY THE CFO
ADDITIONAL PRESENTATION: NO
1.
UKGI00011499
UKGI00011499
POLB(12)53
POST OFFICE LTD BOARD
Feedback on BIS FOoG Week and Next Steps
Purpose
The purpose of this paper is to:
1.1
1.2
2.
241
2.2
3.1
3.2
Provide feedback on BIS FOoG Week, 5 - 9 March 2012
Outline next steps
Background
In December 2011, FOoG conducted a survey of central and local government
officials to measure their perception of Post Office. Over 2,600 (7% of sample)
completed the survey. The findings revealed:
« 4 out 5 believe the Post Office network is declining
e Officials rate digital services as most likely to support them achieve their
objectives — but did not associate Post Office with digital-based services
« Officials view Post Office as ‘trusted’, ‘secure’ and ‘community-based’ but do
not see it as ‘competitive’, ‘dynamic’ or ‘innovative’
These findings provided the basis to develop a measurable communications and
engagement programme, the objectives of which are to improve perception
around these key areas. The survey will be repeated towards the end of this year
to measure progress. One key element of this plan was to run a week of events
for civil servants in the Business Innovation and Skills (BIS) conference centre to
help address some of these perceptions.
Activities
FOoG organised a week-long series of nine seminars for civil servants. Themed
‘Delivering Public Services in the Digital Age’, the seminars addressed a range of
policy issues relating to the delivery of public services and featured high-level
government and Post Office speakers. Taking place at The Conference Centre,
BIS, London SW1, they were supported by a new, bespoke exhibition, a
reception, a working dinner (local government), a new video (shown at every
event) and new booklet.
Post Office communications focused on its strategy for investment and
modernisation and an end to closure programmes; innovation and ability to meet
the needs of Government in providing cost effective delivery of public services
supporting the digital by default agenda.
Promotional activities included emails to 35,000 civil servants (twice),
advertising and editorial coverage in Civil Service World (sent to 35,000 civil
servants) and individual telephone calls. This generated:
41
4.2
4.3
44
¢ 648 registrations (almost all civil servants from across Government, many
at senior levels)
« 485 actual attendees of which 70% were senior civil servants
e 2000 visits to FOoG events web pages during February
e 1000 visits to other FOoG pages during February (compared to a total of
200 visits to all FOoG pages in January)
e 17 national local government representatives and trade editors attended
the dinner
Activities/Current Situation
The events provided the opportunity for high quality engagement with senior
Officials. They generated the following new leads that are being actively pursued
by FOoG client directors:
Ministry of Justice
HMRC
Office of the Public Guardian
Identity and Passport Service, Home Office
Department for Transport
Food Standards Agency
Dept for Environment, Food & Rural Affairs
DVLA
Dept for Work & Pensions
Citizen Advice Bureau
Local police forces
The 648 new contacts will be added to an existing database of 1100 civil
servants, acquired from previous events, to form the basis for an e-marketing
programme commencing May 2012.
All individual opportunities are being followed up by our Client Directors and will
be added to and tracked through our sales pipeline. New opportunities have
emerged around train ticketing, the HMRC Valuations Agency, Job Centre plus,
Power of Attorney processing, financial advice and police administration services.
FOoG will be building on its experience and learnings from BIS Week to host a
programme of high level dinners and roundtables with Ministers, Permanent
Secretaries and senior officials, commencing in May with a roundtable for Chief
Information Officers. Other round tables will be focusing on some of the themes
discussed at BIS week with a smaller targeted audience.
Recommendations
The POL Board is asked to:
5.1 note the activities, outcomes and next steps
Martin Moran
April 2012
UKGI00011499
UKGI00011499
1.
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
POLB(12)54
POST OFFICE LTD
Project Eagle Nego' NS
Purpose
This paper provides an update to the Board on the negotiations and contract finalisation with
the Bank of Ireland UK plc (Bol) under Project Eagle. The paper seeks the Board’s support
of the position achieved and the granting of authority to management to proceed to signing.
At the Board meeting relevant executives from KPMG and Linklaters will be available to
respond to any questions on the valuation/termination arrangements and legal contract
respectively.
2.
Background
24
2.2
2.3
24
Post Office has been in extended negotiations with Bol to:
e Significantly improve the value Post Office gains from the relationship;
* Create an effective bi-lateral agreement with enhanced flexibility,
removing the complexities and inefficiencies of the existing joint venture;
e Implement effective termination rights for Post Office in the event of a
significant deterioration of the financial standing of Bol or its parent’;
« Remove various contractual obligations on Post Office that could restrict
flexibility in implementing Network Transformation (NTP) and impose
unnecessary investment requirements to receive Gamma payments?.
Bol is under no obligation to renegotiate the relationship with Post Office and
there are no mechanisms to force a contract renegotiation.
At its December 2011 meeting, the Board approved a mandate to enable
management to sign a Heads of Terms (HoTs) and conclude negotiations
(see Appendix 2).
In seeking to close the contract, Post Office sought confirmation from HMG
that, within the context of the wider agreement it would be supportive of Post
Office granting a three year extension to Bol to 2023. Post Office received
confirmation on 1% March 2012 from the office of the Minister for Employment
Relations, Consumer and Postal Affairs that he is content “for POL to proceed
with its current renegotiation of the BOI/POL 'POFS' JV, based upon the
renegotiated package”. In providing this response, the Minister gained input
from HM Treasury?.
Contract Status
3.1 Post Office and Bol signed HoTs on 29" December 2011, setting out the key
commercial and structural principles of the future relationship between the
Parties. The Parties have subsequently been negotiating the details to enable
these principles to become operational.
3.2 While the contract is still being finalised and some issues remain outstanding,
management is confident that the contract will be finalised in the next three
The current joint venture contract provides ineffective termination rights to Post Office.
Details of Gamma payments, obligations and potential constraints on Post Office are set out in Appendix 1
The key components of the departmental submission to the Minister are set out in Appendix 3.
1
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
weeks, that enshrines the position discussed at the December 2011 Post
Office Board meeting (subject to comments in Paragraph 4 and Appendix 4),
with some additional benefits to Post Office having been agreed during its
finalisation.
3.3 In competing the drafting a significant complexity has been the necessity to
migrate material components of the existing (Midasgrange) agreements into
the new contract. In the HoTs the Parties anticipated that matters where it is
silent (ie no new commercial or structural changes were envisaged), the
position established in the existing agreements‘ would continue.
3.4 This principle has proved to be very complex to navigate as the original
agreements were explicitly based on the primacy of Midasgrange at the core
of the relationship, assigning it critical roles, rights and obligations. Whilst
such obligations resided in Midasgrange, both Parties had some protection
through its governance and voting processes; migrating these rights and
obligations to either party without the protection afforded by the Midasgrange
voting structure risks, risks exposing the other party.
3.5 In addition the Parties are seeking to ensure a continuation of the contractual
structure between the existing and future arrangements to avoid the risk of
impacting Midasgrange third party contracts; of particular concern is the
Junction contract which has a change of control clause linked to the MSIA;
this could allow it to terminate the contract and enforce penalty and
termination payments. Linklaters will present to the Board their view of the
risks associated with this matter and the protection in place to ameliorate.
Key Matter Arising and Post Office Commitments
4.4 Appendix 4 sets out the key matters from the contract finalisation that were
not identified on the Head of Terms, required further negotiations or where
the terms to Post Office have improved materially. All other terms, except as
qualified in this paragraph 4 are as agreed in the Board meetings from
December 2011 to March 2012.
4.2 The HoTs removed formal commitments on Post Office, while establishing
more general intentions; in particular the HoTs:
e Removed the specific Gamma obligations on branch and FSSs*° numbers
(Appendix 1), thereby removing the risk of frustration on NTP and avoiding
the requirement to invest in un-necessary FSS capacity;
¢ Confirmed that Post Office will still receive the Gamma payments, despite
the removal of the obligations (and Post Office’s failure to meet the FSS
obligation);
¢ Stated that Post Office intends to establish 2,000 Main branches and that
Bol will seek a threshold number of branches selling financial services;
¢ Confirmed that Post Office is committed to enhancing its Financial
Services sales capability; the actual number of FSSs will be set by Post
Office to achieve the sales plan;
¢ Committed Post Office to invest £4.0 million annually to build its financial
services capability.
Shareholders Agreement, Manufacturing & Support Intermediation Agreement (MSIA), Intermediary
Agreement and various product Appointment Agreements and Product Appointment Letters.
Financial Services Specialists based in Crowns and dedicated to selling financial services products.
2
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
4.3 To close these issues and provide Bol some comfort as to Post Office’s long
term commitment to financial services, the proposed agreement confirms that,
Post Office will from 2012 to 2016 maintain at least:
¢ 1,000 branches capable of selling financial service products®. Post Office
currently exceeds this number;
« 200 sales representatives, dedicated to selling financial services products;
there are currently c375 FSSs.
44 From 2016 (ie after NTP) Post Office will maintain a minimum of 1,250
branches capable of selling financial service products. Such branches would
comprise Mains and Premiers (of which there are targeted to be 4,000), any
remaining Crowns and any unconverted Step Agency branches.
45 The threshold targets in 4.3 and 4.4 are both significantly below the levels
planned by Post Office through the NTP and the financial services sales
strategy’.
4.6 In the event of Post Office failing to achieve the target set out in 4.4 (only) and
that this is reasonably likely to have a material adverse impact on the
achievement of the objectives of the financial services business, Bol will have
the right to seek to re-negotiate the commercial terms to reflect the changes
to the business channel mix. In the event of a failure to resolve this issue, Bol
will have the right to terminate the contract®.
4.7 The branch and sales representative targets set out in 4.3 and 4.4 are not
onerous, being well within Post Office’s sales and retail strategies; they are,
however, a minimum needed to assuage Bol concerns that Post Office will
not continue to provide an effective retail sales capability for financial services
and are critical in closing the wider agreement. The removal of the Gamma
commitments, while Post Office will still receive the monies, will remove the
un-necessary investment in FSSs and risks of frustration on NTP.
Other Matters
5.1 Communications — a strategy is being finalised between Post Office, Bol and
the Department of Business, Information & Skills to manage external
communications once the contract has been signed; a particular focus is the
management of any negative reaction to the contract extension.
5.2 Shareholder Executive — The original agreement to establish the joint venture
with Bol required formal approval of the shareholder under the Articles of
Association of Royal Mail Holdings plc. The strategic and other changes
envisaged in the new contract will require shareholder approval under the
Articles of Association of Post Office Limited. This will be sought following
contract finalisation.
5.3 Tripartite discussions — In the discussions with HMG, Post Office proposed
establishing a tripartite working group comprising HM Treasury, the Financial
Services Authority and Post Office to monitor the financial standing of Bol and
In these branches Post Office will undertake sales conversations (a) in a face-to-face manner with
customers, enabling sales completion in branch, and/or (b) generating a sales lead for remote sales
completion; and/or (c) generating an application through the branch, mail, internet or telephone channel.
As presented and discussed at the March 2012 Post Office Board meeting.
This is the proposal with Bol: Post Office management assesses the likelihood of Bol terminating as very
low as it would leave it without a retail banking growth strategy
3
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
its parent and assess contingency plans in the event of a deterioration that
could result in a termination event. This group is being established under the
auspices of the department of Business, Innovation & Skills.
Business Case
6.1 The business case for Eagle including the implementation costs generates a
five year NPV of c£95 million. This is based on the current projected sales
growth (with only limited benefits from investment in the Financial Services
Sales Program), implementation and additional staff costs.
Recommendation
7.1 The Board is asked to note this paper, ratify the key terms agreed and
confirm its approval for management to proceed to signing.
Nicholas Kennett
Director, Financial Services
April 2012
Post Office Ltd — Strictly Confidential
Appendix 1 - Gamma Deed of Variation
UKGI00011499
UKGI00011499
In 2007 the Parties agreed a Deed of Variation to the original joint venture agreement. This
provided a staggered payment of £50 million to Post Office over six years and a six year
extension to the contract to 2020. In return Post Office made various commitments relating
to its capability to deliver branch-based sales of financial services products
To date Post Office has received all Gamma payments (£26 million) despite not fully meeting
the obligations. A further payment of £9 million is due in April 2012 for 2011/12. Subsequent
Gamma payments are: £8 million for 2012/13; £5 million for 2013/14; £2 million for 2014/15.
Eagle removes all Gamma obligations, but locks-in the remaining payments.
The key obligations on Post Office include:
Contractual obligations giving rise to Gamma payments (each comprising one third):
= Post Office must maintain at least 15 percent (but expected to be 20-40 percent)
of the customer area in each Crown for financial services activities. Bol
confirmed that this obligation has been delivered to date.
has
= Post Office must have completed a substantial refurbishment of the named
Crowns by the end of 2010/11. Expenditure was expected to be c£40 million.
Bol has confirmed that this obligation has been delivered.
= By 31% March 2009, Post Office must have at least 740 dedicated and specialist
Financial Services Specialists (FSS) in Crown branches. In each subsequent
year Post Office must maintain an average of at least two FSSs per Crown
branch. Post Office has never met this key obligation and neither the NTP or the
financial services sales programs anticipate this number of FSSs°.
Selected contractual obligations not linked to Gamma payments, but where Bol could
frustrate Post Office implementing NTP
= Post Office must maintain 373 (named) Crown branches.
= Post Office may, subject to Bol’s prior approval, substitute named Crowns with
ones of a similar quality (sales performing at no less than 97 per cent) in the
same town.
= From April 2012 Post Office can review the profile of the network:
- Post Office can review Crowns to assess their profitability;
- If the top 320 Crowns breakeven then Post Office can close up to 50 of the
lowest performing branches;
- _ If the top 320 Crowns do not breakeven then Post Office can close up to 50
of any Crown;
- Bol is not obliged to make Gamma payments until the review outcome is
agreed, with disputes sent to an independent expert.
= If Bol can demonstrate a loss as a result of the review then Post Office must
make good this loss (eg through reduced commission, extending the term or
exclusivity periods).
Payments have been received as Post Office has produced “cost equivalent” investment statements.
5
Post Office Ltd — Strictly Confidential
Appendix 2 — Negotiating mandate approved by the Board - December 2011
UKGI00011499
UKGI00011499
CURRENT AGREEMENT BOARD MANDATE slay, TERMS AGREED WITH Bol
POSITION
‘SAVINGS 14.7bps + 22bps 25bps, rising to 40bps (blended at I- _53bps for variable products
c28bps+) + 26bps for online savings
+ 14bps for fixed rate products
+ This equates to:
+ 25bps across the term if today’s mix of
savings remains constant; or
+ Blended 25bps rising to 28.2bps with POL
forecast mix of savings
INVESTMENT None + No additional investment Starting 3bps (equivalent to£4m [+ £4m per annum (flat through the term)
[unless revenue at least from savings commissionswith
24bps] 2.5bps increments, £10m cap)
CREDIT CARDS £15 [er card sold + £23 blend [sales and £25 per sale + 25bps on balances I* £21 per sale + 25bps on balances, equating to
balances] {£26 blend] £23.5 blend
MORTGAGES 10bps for lead generation] 30bps 45bps * 30bps for lead generation
[33bps (inc ‘profit share’)] + 40bps for branch completed sales
PERSONAL LOANS 400bps + 300bps 400bps * TBC
+ [300bps to start and then review when current
account launched]
INSURANCE 65%:35% split + Bolin Bol in — subject to showing value I+ 65%:35% split
Bank adding no value add + Bolin
Option to buy at'14 and’16 &no I. Bol to prove value it brings
extension beyond 2020
EXTENSION Nia + No extension <25bps 3 years, subject to min 25bps, withI~ 3 years (subject to HMG approval)
effective termination rights, HMG I. Bol (UK) to meet FSA Capital & Liquidity
approval required requirements as previously tabled at Board
CONTRACT 373 Crowns; 740 FSs + Removal of branch and FS Removal of branch and FS + Removal of branch and FS number obligations
RESTRICTIONS 15% floor space number obligations number obligations + Bol seeking threshold number for Mains and FS
minimum for FS + Gamma money paid Gamma money paid + Gamma money paid
Gamma
MARKETING FUND 50:50 through POFS + Bol to fund Bol to fund + Bol to fund £15m/annum through term
:__Above £15m shared 50:50 between POL & Bol
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
Appendix 3 — Key selected extracts from the submission to Minister Employment
Relations, Consumer & Post Affairs - these formed the basis of the HMG support of the
Contract extension
12. BOI and POL have agreed non-binding Heads of Terms, apart from one outstanding
issue regarding management of the insurance business. It is not expected that this will
alter the key points of the package set out in paragraphs 12-17. POL has been clear with
BOI that any formal agreement on that basis requires endorsement by Government,
because it includes an extension of three years to the existing term of the contract.
13. Services would be delivered through a revised structure, removing the complex current
management arrangements. The existing JV company would become a shell company
and POL’s share would be sold to BOI UK (for minimal proceeds). POL would then
contract directly with BOI UK for product manufacturing and distribution. BOI would
continue to provide some outsourced services, based on an arm’s length contract with
BOI UK.
14. Key components of the renegotiated package are:
Components presenting upside to POL:
o Revised commission rates which favour POL. The overall impact would be to move to
a blended rate of 25 basis points on the current savings business mix, rising to 28.2
basis points in 2016/17 on the forecast business mix. This compares to a rate of 15
basis points in 2011/12 (see paragraph 14 for more on the impact).
o The removal of obligations on POL to maintain specific numbers of Crown branches.
o New termination rights for POL linked to an event of serious deterioration in the
financial position of BOI UK or the failure of BOI (more details below).
o Competitive product pricing and standards commitments by BOI UK.
o A fixed £15 million annual marketing investment by BOI UK.
Components presenting upside to BOI UK:
o A three year extension to the existing contract, taking it to 2023.
oc BOI UK to continue to participate in POL’s insurance business (to note that POL does
not consider this to be a significant ‘give’).
o POL to invest £4m per annum to improve its financial services sales and business
capabilities (with investment incremental to the business plan).
o Limited commitments on branch capabilities.
15. POL forecasts that the revised commission rates alone would increase POL’s aggregate
personal financial services income in the period 2012/13 to 2016/17 from £200 million (in
POL’s strategic plan) to £301 million. This uplift does not take account of improvements
in sales effectiveness and product mix that are forecast to result from planned
investment into financial services. Including that uplift increases forecast aggregate
income further to £348 million over the period.
Details of the extension agreement
16. The revised agreement bases the granting of extension upon BOI UK's capital and
liquidity position. This would mean that extension would only be granted when BO! UK
has met its Core Tier 1 Capital and Individual Guidance Liquidity (ILG) ratio
requirements, with a 0.5% buffer above its minimum capital requirement to meet
regulatory requirements in a base and stressed scenario. Both of these requirements are
set and regulated by the UK banking authorities. BOI UK currently meets these hurdles.
17. POL would gain the right to terminate the contract at any time that BOI UK is below the
Core Tier 1 Capital or ILG ratios, as set by the FSA (or relevant regulating authority at
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
the time), or BOI is unable to provide the required core product manufacturing services
to BOI UK.
. Because BO! UK sources products and services from BOI, which are required for the
agreement between BOI UK and POL to function, POL is also requiring that BOI UK has
a contingency plan in place in the event of a failure of BOI, including meeting all related
regulatory requirements. Failure to have such a contingency plan or the failure of BOI will
both provide termination rights to POL.
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
Appendix 4 - Key Agreement Terms
The following are the key components of the Eagle agreement on which the Heads of Terms
were silent or incomplete or which arose from the removal of rights and obligations from
Midasgrange (see also Paragraph 4 above):
* Midasgrange valuation — The Heads of Terms identified that Post Office will receive 50
percent of the net asset value of the company at the Completion date in exchange for its
shares. Post Office is due to receive c £10 million (versus carrying value of c£5 million),
with adjustment for:
- Insurance assets and liabilities and other insurance matters not on the balance
sheet will be passed through as cash transactions through the management of the
insurance business to 2014;
- The balance sheet includes a provision for deferred tax losses of c£6.7 million;
while this is on the Midasgrange balance sheet, it is unlikely that the company would
have been able to utilise them for some time; similarly the ability of Bol to utilise the
tax losses is uncertain. As a result the Parties have agreed that the Post Office will
receive the benefit of these as they are realised, with Bol committed to ensure that
where reasonable these credits will be used;
- Redundancies incurred as part of the migration of staff into either Post Office or Bol
(the Heads of Terms anticipated that these would be deducted from the valuation).
= Valuation at termination — a critical issue has been to establish a valuation regime that
ensures that Bol is incentivised to continue to build the Books"° up to the Transfer Date
and that there is sufficient value available to interest new partners. The key principles
are:
- At expiry and the migration to a new partner the agreement envisages a three stage
approach:
1. All Books migrate to the new supplier;
2. The Books transfer at “par”, with all liabilities moving at face value and
loans adjusted for specific provisions and certain non-performing balances;
3. Bol is compensated for the loss of future value based on a discounted cash
flow of the net run-off value of the various Books in place at the time of
transfer.
- The process will be driven by an Independent Expert (IE) who will:
1. Establish the discount rate to use on the run off value of the books, based
on the prevailing market conditions,
2. Assess the run off profiles of each product portfolio based on the normal
run of business, including costs incurred and fees payable to Post Office.
- The payment to Bol cannot be less than zero.
- _ In the event of an early termination due to cause, one of two scenarios occur:
1. Where Bol can continue to operate normally, and is able to sell/service
products (a “Managed Termination”), the above methodology will apply
except that the payment to Bol can be less than zero and Post Office can
claim damages;
2. Where Bol can no longer provide a normal service (a “Distressed
Termination” e.g., insolvency or significant run), “par” cannot be protected
to The Books are the balances held on behalf of Post Office customers and loans extended to customers.
These will be transferred to the new partner in their entirety.
3
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
and Post Office will provide reasonable endeavours to maximise the value
to the Bank of the sale of the Books.
- AManaged Termination may become a distressed event.
Insurance — agreement as per the mandate agreed at the January 2012 Board meeting,
plus:
- Post Office has a one-way call option from September 2014 to acquire the
insurance businesses from Bol;
- The acquisition value would be assessed by an independent IE, based on an open
market price, including the value to Bol of its existing rights to 2020.
- Travel Insurance - Bol currently has the right to match the commercial terms of the
best proposal to Post Office to provide travel insurance. Post Office is planning to
go to the market in 2012/13, and this right would severely constrain achieving the
optimal outcome. Bol has agreed to relinquish this right.
Liability — while the Midasgrange assigns liability caps to Post Office and Bol of £125
million and £75 million respectively, Linklaters are of the view that these are not
enforceable. As a result both Parties are providing unlimited liability protection to the
other party.
- The agreement will establish a liability cap on each party.
Exclusivity — the details are still to be finalised. However, the Parties have agreed that
where Bol does not want to or is unable to provide a product or service (either itself or
through a 3% party) its right to exclusivity will fall away. Protections will be put in place to
give Bol comfort that Post Office will not “engineer” such a situation. This position is a
significant improvement of the current position to Post Office.
Deed of Repayment (DoR) — the existing contracts included provisions that enabled Bol
to reclaim Gamma monies in the event that the contract (and the extension to 2020) was
struck down. Bol sort a similar DoR for the new contract. Post Office did not accept this
new DoR, but the original one will continue, amended to take account of the removal of
Gamma.
Competitiveness — Bol has agreed that all products (features, services and particularly
pricing) will be benchmarked against leading providers by product and channel. Bol will
be required to price products against these benchmarks. This is a key win for Post Office
as it enables us to challenge the established financial services brands and provide our
customers with true value.
UKGI00011499
UKGI00011499
Post Office Limited — Strictly Confidential
Post Office Limited
(company no. 2154540)
Minutes of the meeting of a Sub-Committee of the Board
held at 148 Old Street, London, EC1V 9HQ
22"¢ March 2012 at 2.30 p.m.
Present:
Paula Vennells
Chris Day
In Attendance
Alwen Lyons
Susan Crichton
(a)
(b)
(c)
on p.
Managing Director, Post Office Limited (Chairman of the
meeting)
Chief Financial Officer
Company Secretary
Legal & Compliance Director (by telephone)
The Post Office Limited Board on 15" March 2012 had
appointed a Sub-Committee to the Board (the Sub-Committee),
comprising Paula Vennells and Chris Day, to give effect to the
legal requirements necessary for the transaction to go ahead to
move Post Office Limited to become a sister company of Royal
Mail Group Limited.
The Chair reported that:
i, Royal Mail Holdings plc (RMH), the Company's ultimate
parent company, and certain of its group companies
including the Company are undertaking a proposed
reorganisation (the Transaction);
ii. itis proposed that, among other things, the Transaction
include the transfer of the entire issued ordinary share
capital of the Company from Royal Mail Group Limited
(RMG) to RMH and the issue of one special rights
redeemable preference share of £1 in the capital of the
Company (the Special Share) to one of Her Majesty's
Secretaries of State; and
ili. the purpose of this meeting was to consider and, if
thought fit, to approve certain actions in respect of the
Transaction.
The Sub-Committee acknowledged the Transaction and
resolved that it is in the best interests of, and for the proper
purpose of, the Company to undertake certain actions in respect
of the Transaction, as far as they relate to the Company, and
that the Transaction would promote the success of the
Company.
A draft of a secondment termination agreement to be entered
into by the Company and RMG (the Secondment Termination
(a)
(e)
(f)
UKGI00011499
UKGI00011499
Post Office Limited — Strictly Confidential
Agreement) was presented to the Sub-Committee. It was
explained that this document recorded the fact that the existing
secondment arrangements were coming to an end and that the
termination of this arrangement would be a TUPE event, so that
all staff currently provided under this arrangement would
transfer from RMG to the Company. The Sub-Committee noted
that the agreement also included express wording to allocate
liabilities for the transferring staff between RMG and the
Company. The Sub-Committee approved the terms of the
Secondment Termination Agreement and authorised any
Director of the Company to execute the Secondment
Termination Agreement on behalf of the Company in the form
tabled or with such amendments as the person signing the
agreement may, in such person's sole discretion, approve (such
signature to constitute approval of any such amendment).
A draft letter from RMH to Secretary of State seeking approval
of the Property Transfer Scheme, was presented to the Sub-
Committee, together with a schedule of properties to be
transferred. The Sub-Committee noted the content of this letter,
which was to be countersigned by RMG, Royal Mail Estates
Limited and POL, and authorised any Director of the Company
to counter-sign on behalf of the Company in the form tabled or
with such amendments as the person signing the agreement
may, in such person's sole discretion, approve (such signature
to constitute approval of any such amendment).
A draft stock transfer form to effect the transfer of the 50,003
ordinary shares of £1 each in the capital of the Company (the
Ordinary Shares) from RMG to RMH (the Share Transfer) was
presented to the Sub-Committee. The Sub-Committee resolved
that, subject to the receipt of the duly executed stock transfer
form in the form, or substantially the form, tabled at the meeting
and the presentation of such document for registration in
accordance with the provisions of the Articles of Association of
the Company:
i. the Share Transfer be approved;
ii. the Secretary be instructed to register the Share
Transfer in the Company's Register of Members and to
prepare the necessary new share certificate, following
cancellation of the existing share certificate; and
ili. any two Directors or any one Director and the Secretary
be authorised to execute the new share certificate in
respect of the Ordinary Shares in the name of RMH.
The Sub-Committee noted that, subject to completion of the
Share Transfer, it was proposed that the Articles of Association
of the Company be amended to reflect the changes to the
(g)
(h)
(i)
UKGI00011499
UKGI00011499
Post Office Limited — Strictly Confidential
structure of the group pursuant to the Transaction, as well as to
reflect the implementation of the Companies Act 2006 and the
Postal Services Act 2011, among other things. The Sub-
Committee also noted that it was proposed that the Company
remove its objects clause together with all other provisions of its
Memorandum of Association in accordance with the Companies
Act 2006. A draft of the proposed new Articles of Association of
the Company (the New Articles) was presented to the meeting,
together with a note explaining the principal changes. The Sub-
Committee acknowledged that the adoption of the New Articles
in the form, or substantially the form, tabled at the meeting by
the Company and the deletion of the provisions of its
Memorandum of Association would require a special resolution
to be passed by its sole member at the relevant time.
The Sub-Committee noted that it was proposed that, following
the completion of the Share Transfer and in accordance with the
New Articles, one special rights redeemable preference share of
£1 in the capital of the Company (the Special Share) be issued
to the Secretary of State. A subscription letter signed by the
Secretary of State in respect of the Special Share was
presented to the Sub-Committee (the Subscription Letter). The
Sub-Committee acknowledged that the issue and allotment of
the Special Share by the Company to the Secretary of State
would require that the Company's sole member pass an
ordinary resolution to give authority to allot the Special Share
and a special resolution to disapply pre-emption rights.
The Sub-Committee discussed the shareholder approvals
required to effect the steps referred to above and it was
resolved that written resolutions of the sole member of the
Company to approve these steps be recommended. A draft of
the proposed written resolutions of the Company (the Written
Resolutions) was presented to the Sub-Committee. The Sub-
Committee approved the Written Resolutions and authorised
and instructed the Secretary, subject to completion of the Share
Transfer, to send the Written Resolutions (with any such
amendment as the Secretary may in her sole discretion
approve) to RMH (as the sole member of the Company at that
time) for execution and to send a copy to the Auditors.
The Sub-Committee resolved that, subject to the Written
Resolutions being passed, the terms of the Subscription Letter
be approved and that:
i. the Special Share be issued and allotted to the
Secretary of State;
ii. the Secretary be instructed to register the Secretary of
State as the holder of the Special Share in the
Company's Register of Members and to prepare a share
6)
(k)
()
UKGI00011499
UKGI00011499
Post Office Limited — Strictly Confidential
certificate in respect of the Special Share; and
ili. any two Directors or any one Director and the Secretary
be authorised to execute a share certificate in respect of
the Special Share in the name of the Secretary of State.
The Sub-Committee resolved that Paula Vennells and Chris
Day be and are hereby severally authorised on behalf of the
Company to sign and/or despatch all documents and notices to
be signed and/or despatched by it under or in connection with,
and to take any additional actions as are necessary or incidental
to carry into effect the Transaction, the purposes of the
resolutions referred to above or the transactions contemplated
thereby.
The Sub-Committee resolved that all actions taken by any
Director, officer (including the Secretary) or agent of the
Company in connection with the Transaction prior to the date of
this meeting be authorised, approved, ratified and confirmed in
all respects as acts of the Company.
The Chair instructed the Secretary to take the following steps,
subject to receipt of the duly executed Written Resolutions:
i. file the amended Articles of Association of the Company
and a print of the Written Resolutions with the Registrar
of Companies;
ii. prepare, sign and deliver to the Registrar of Companies
a statement of company’s objects (Form CC04) and a
return of allotment (Form SH01); and
iii. make all such other filings as are required in relation to
the resolutions passed at this meeting.
There being no further business the meeting closed.
UKGI00011499
UKGI00011499
In Strictest Confidence
FRES (12)1st
FRES12/01-13
FIRST RATE EXCHANGE SERVICES Ltd
(Company no. 04287490)
&
FIRST RATE EXCHANGE SERVICES HOLDINGS Ltd
(Company no. 04287534)
Minutes of the 55" meeting of the Board
held in the Boardroom, Eastcheap Court, 11 Philpot Lane, LONDON
EC3M 8BA on 23 February 2012
Directors present: In attendance:
Paula Vennells (Chair) Alwen Lyons — Company Secretary
Des Crowley
Kevin Gilliland Gary Fitton
Gordon Gourlay Bjorn Larsson
Andrew Hardie Jon Wood
Nick Kennett
David McGowan
Liam McLoughlin
Patrick Waldron
FRES12/01 WELCOME
Paula Vennells welcomed everyone to the meeting.
FRES12/02 MINUTES
(a) The Board approved the minutes of the meeting held on
12% December 2011.
(b) The Board approved the minutes of the Extraordinary
meeting held on 24° November 2011.
FRES12/03 STATUS REPORT
(a) The Board noted the update on actions from the previous
board.
(b) Click and Collect Feasibility: Paula Vennells supported the
development as right for customers and an effective way to
drive efficiencies, but stressed that the changes may not
be easy to achieve.
(c) I Wholesale: Meeting with Chris Day regarding wholesale
still to be organised.
ACTION: (d) Regional Sales Performance: Des Crowley asked for a
Gordon Gourlay/ report to the next Board meeting explaining the variations
Kevin Gilliland in regional sales performance and highlighting the
initiatives being considered.
FRES12/04
ACTION:
Gary Fitton
ACTION:
Gordon Gourlay
ACTION:
Kevin Gilliland/
Gordon Gourlay
ACTION:
Gordon Gourlay
ACTION:
Nick Kennett/
Gordon Gourlay
(a)
(b)
(c)
(d)
(e)
(f)
(9)
(h)
(i)
0)
(k)
UKGI00011499
UKGI00011499
In Strictest Confidence
BUSINESS REVIEW
The Board noted the MD Business update for January
2012, in particular:
The business continues to be on track to deliver PBT of
£84m, with margins and cost control offsetting the deficit in
sales.
Feedback from the market suggests that travel firms have
taken out as much capacity as possible and their
projections for 2013 are more positive. Gordon Gourlay to
keep the Board updated in future reports.
Quarter 4 Campaign: The quarter 4 marketing campaign
was producing good results. Liam McLoughlin asked how
the effectiveness was tracked. Gary Fitton reported that
the new ‘QR’ codes would make tracking easier. Paula
Vennells asked that future adverts be appended to Board
Papers, and ‘QR’ responses be reported to the Board.
Complaints: Customer complaints have improved
significantly in the month when compared with the previous
year.
TMC and IP: Sales of TMC and International Payments
are growing well, with levels of fraud showing no signs of
coordinated activity.
Average Ticket Value: ATV is increasing, which is an
important trend as next year’s plan assumes a 2% increase
in ATV. Gordon Gourlay advised that the exercise to track
the higher ticket band would be re-run to give the Board
comfort that the business assumptions were valid.
Product Competitiveness: Kevin Gilliland suggested that
the perception in Post Office branches was that the product
was not competitive. It was agreed that Kevin Gilliland and
Gordon Gourlay would produce a communication for the
Branches, highlighting the product's competitiveness in the
market.
NVQ Travel Training Programme: Paula Vennells asked
for the business to investigate sponsorship of the NVQ
travel training programme.
TMC Plus: The costs of developing TMC Plus have
increased significantly, although the business case
remains strong. Gordon Gourlay and Nick Kennett were
asked to investigate the costs and why the initial feasibility
was taking longer, and report back to the Board.
FRES Balanced Scorecard: The Board noted the balanced
Scorecard for January.
v
UKGI00011499
UKGI00011499
In Strictest Confidence
(I) The metrics used to measure market share were discussed
and Gordon Gourlay explained that a rolling quarter was
used, as monthly data can be volatile. Paula Vennells
asked that a check be taken with the monthly data against
ACTION: a similar position last year. Liam McLoughlin requested an
Gordon Gourlay on-line report to enable the business to see if the market is
moving away and the KPI’s are missing the trend.
(m) AQP Summary Tracker: The Board noted the Summary
Tracker for January.
(n) I KPMG are reviewing the cost base of the business, its
shape and structure. They have been given a challenge to
reduce the cost base by at least 10%. Gordon Gourlay to
ACTION: circulate the terms of reference to the Board and present
Gordon Gourlay the report at the next Board meeting. Consider whether
input from POL would benefit the review.
FRES12/05 FINANCE REVIEW
(a) Andrew Hardie introduced the Finance update for 2012;
(b) Year to date sales of £2.071m was 0.3% ahead of last year
and 4.3% down against budget. Margins were favourable
to budget by 0.21%. Cost savings continued and were
£0.8m favourable to budget. There are very few risks to
the PBT forecast at this stage;
(c) Nick Kennett asked if Return on Capital was an effective
ACTION: measure for the business. The executive team were asked
Gordon Gourlay/ to consider different measures, and bring them back to the
Andrew Hardie Board for consideration;
(d) The alignment of the Bricks and Mortar network and the
on-line offer through Click & Collect will be important to
deliver next year’s plan. Paula Vennells asked for a
ACTION: detailed joint paper to the next Board covering the
Gordon Gourlay/ technical and delivery processes, the costs/benefits and
Nick Kennett timelines.
(e) The Board noted the Finance report.
FRES12/06 BUSINESS DEVELOPMENT
(a) Jon Woods joined the meeting and presented his views on
future growth through third party non-Post Office partners,
with an aspiration of 20% of profit coming from non-core
activities
(b) The opportunity at airport sites was discussed and,
although the economics were challenging, the effect on
customer awareness could be significant.
ACTION:
Gordon Gourlay
ACTION:
Jon Woods
FRES 12/07
FRES 12/08
ACTION:
Gordon Gourlay
ACTION:
Gordon Gourlay/
Andrew Hardie
ACTION:
Andrew Hardie
(c)
(d)
(a)
(b)
(c)
(a)
(b)
(c)
(d)
(e)
(fy
UKGI00011499
UKGI00011499
In Strictest Confidence
The Board was supportive of the initiative but stressed the
need to ensure fire walls are in place to stop any conflicts
of interest between the Post Office and other banks and
retailers. Nick Kennett asked that these firewalls be clearly
documented to ensure no risk of cross subsidisation
Jon Woods would return to the next Board meeting to
report progress.
Paula Vennells left the meeting and the Chair passed to
Des Crowley.
WHOLESALE BUSINESS REVIEW
Bjorn Larssen joined the meeting and explained the
opportunity for working capital management which would
release £50m cash. The plan would be in three phases
with an initial short term drag on earning.
Liam McLoughlin asked for assurance that the plan would
not affect key staff retention. Gordon Gourlay explained
that retention action has already been taken and
succession plans were in place if any of the dealers did
leave.
The Board supported the Working Capital Management
initiative.
2012-13 ANNUAL OPERATING PLAN
The Board asked for the updated four year business plan
to be presented at the next Board.
Gordon Gourlay explained that the AOP was put together
before the engagement of KPMG on the cost review, so
there may be some further opportunities in the plan.
Proposed plan shows a PBT of £87m, with risk on
opportunities in a range between £84-89m.
The Board agreed that the shareholders would all want a
sustainable Business which optimised margin without
damaging the business.
Dividend: The Board recommended a dividend of £60m
subject to reviewing trading conditions and cash
throughout the summer, with a minimum value of £55m.
The Board requested a quarterly Investment & Capital
Expenditure Report.
Des Crowley requested a report to the Board on the tax
planning for the business.
UKGI00011499
UKGI00011499
In Strictest Confidence
FRES 12/09 PAPERS FOR NOTING
(a) Business Management Forum Minutes January 2012:
noted.
(b) Audit and Risk Committee Meeting Minutes February 2012:
noted.
(c) Risk Appetite Statement: noted, but the risk of tiger kidnap
procedures to be added to the risk register
(d) OFT Response to Travel Money Super Complaint: noted.
FRES 12/10 CONFIRMATION OF ARC CHAIRMAN
(a) Liam McLoughlin proposed David McGowan as the next
Chair of the Audit and Risk Committee. Kevin Gilliland
seconded.
FRES 12/11 AOB
(a) Nick Kennett informed the Board that Sarah Munro, Head
of Travel Services for Post Office Limited, had resigned.
ACTION: The Board acknowledged the good job she had done and
Gordon Gourlay asked Gordon Gourlay to send a note of thanks on behalf
of the Board
FRES12/12 CLOSE
There being no further business, the meeting was closed.
FRES12/13 DATE OF NEXT MEETING
(a) The next meeting of the FRES Board would be held on the
26" April 2012.
Post Office Ltd - Strictly Confidential
POST OFFICE LIMITED BOARD
Status Report
UKGI00011499
UKGI00011499
POLB(12)55
No. REFERENCE ACTION BY WHOM STATUS
1. Actions Appertaining to Governance
ta November 2011 To update the Board on the review of future Executive Team Paula Vennells In hand, to be discussed by Paula
POLB11/54(e) Structure and Accountabilities. Vennells, Chairman and NEDs to feed
into the individual Senior Executive’s end
of year PDR and future organisation
design.
1b January 2012 Susan to bring back a revised Governance proposal to the Susan Crichton Discussed at the March Board.
POLB12/06 (a) Board once she has met with the Chairman to discuss this
further.
1c March 2012 Resignation of Les Owen. TM01 form to be filed with Alwen Lyons Complete.
POLB 12/37 Companies House.
1d March 2012 Susan Crichton and Chris Day were asked to update and Susan Crichton/ I Complete. Revised schedule attached
POLB 12/40 circulate a proposal for Delegated authorities below SHEX Chris Day as Appendix A.
level.
March 2012 The Board resolved that a sub-committee be formed to give Alwen Lyons Complete. Minutes included in April
effect to the legal requirements necessary for the Transaction
to move POL to become a sister company of RMG. Minutes of
the sub-committee to be circulated to the Board.
Board packs.
2. Actions Appertaining to IT & Procurement
Post Office Ltd - Strictly Confidential
UKGI00011499
UKGI00011499
2a November 2011 The Chairman requested a deep dive to be organised to cover I Lesley Sewell Asession is scheduled for the March
POLB11/62© procurement and governance. Board on Infrastructure (IT and
Procurement). Complete.
January 2012 The Chairman requested that the IT Board paper is clear with Mike Young will ensure that practical
POLB12/03 © practical language to highlight what the IT changes will mean
to the Business on the ground. A deep dive was suggested.
language is used in the IT paper and
arrange individual sessions with Board
members before the March Board.
Complete
Post Office Ltd - Strictly Confidential
UKGI00011499
UKGI00011499
2b
March 2012
POLB 12/28
The Chairman understood that Berkeley Partnership had
challenged the concept of the towers within the framework.
Lesley Sewell to take a further look at the different approach
suggested by Berkeley Partnership.
Lesley Sewell
Berkeley provided a useful summary of
the option to consider multiple
‘application’ towers, with the primary
benefits being: promotion of more
competition in establishing run cost of
new services, and enabling phased re-
procurement of each individual app tower
as they reach their individual end-of-life
(vs forced re-procurement under a single
run provider).
The report agreed that there is no ‘right
answer’ and support our stated
procurement approach of engaging in
competitive dialogue with suppliers to
discuss the most beneficial tower
construct. Single or multiple app towers
will be identified as part of this
competitive dialogue as best fits the
needs of the Post Office, particularly with
consideration to the existing Horizon
‘app’ tower and on-going evolution of
that platform to meet business
transformation needs in parallel to the re-
procurement activities.
A copy of Berkeley’s note on this subject
is tabled as a noting paper for the April
Board.
Post Office Ltd - Strictly Confidential
UKGI00011499
UKGI00011499
2c March 2012 Les Owen asked if the Service Integrator (SI) model had been I Lesley Sewell Deloitte are still to provide this material
POLB 12/28 successfully deployed in other organisations. Lesley Sewell to for detailed examples.
find a business who are already successfully using the SI and
similar structure to benchmark, including the retail/services By way of additional support to the SI
sector. model: the programme also recently held
a successful Market Engagement Day.
Much of the feedback received supports
the planned model in terms of use of an
SI layer (see attached for the summary
of feedback received from the suppliers
who attended the day).
We will also seek proven models via
Gartner as well as Deloittes
2d March 2012 The Chairman asked Lesley Sewell and Chris Day to provide a I Lesley Sewell/ This is being developed for submission
POLB 12/28 breakdown and explanation of the optimised expected cost Chris Day at the end of April.
scenarios for the Board.
March 2012 Horizon Update — Lesley Sewell to return to the Board with the I Lesley Sewell An agreed approach has been
POLB12/42 outcome of the tactical and strategic reviews and the options developed with both Fujitsu undertaking
available for the future. a tactical review targeting the specific
recent issues and an independent
organisation being engaged to establish
a strategic risk and resilience review
across Horizon and the broader Post
Office infrastructure. The Fujitsu tactical
review will report back mid-April; the
strategic review will provide initial output
mid-May.
3. Actions Appertaining to Financial Services
3a September 2011 Current Account: The target for introduction is 2013 but a full Nick Kennett In hand; target date should read 2012/13
POLB11/48(d) proposition needed to be presented to the Board. and will come to a Board in 2012 (July).
4
Post Office Ltd - Strictly Confidential
UKGI00011499
UKGI00011499
3b November 2011 The Chairman asked Nick Kennett and Kevin Gilliland to Nick Kennett In hand; on Board Agenda for March.
POLB11/56© present a joint paper to the Board in the New Year covering the Completed.
Financial Services future sales plan.
3c January 2012 Eagle Contract Termination: If the evergreen right was not Nick Kennett Ongoing as part of Eagle negotiations.
POLB12/10(c) negotiable then Nick Kennett was asked to ensure the
resolution period was long enough for POL to find an
alternative provider.
3d February 2012 Eagle: Target date of early March for signing the contract and I Nick Kennett Not yet signed. Expected to be
POLB12/24(a) Nick Kennett will bring the final agreement to the March Board substantially complete for review at April
Board.
3e March 2012 Neil McCausland suggested that the new FSR model be built Kevin Gilliland A designated desk situated in a quiet
POLB 12/30 into the Crown Trial, including branch incentives. zone for FOoG customers has been built
in to Phase 2 Birmingham.
We will be trialling the new FS strategy in
Birmingham. We now have Sales Force
in Birmingham and in June we will trial
the Hub and Spoke model initially for
mortgages.
3f March 2012 Les Owen and Nick Kennet to discuss an alternative proposal Nick Kennet To be included in submission to April
POLB 12/36 with regard to valuation of future proposal. Nick Kennet to Board
send a note round to the Board to summarise the discussion.
3g March 2012 Nick Kennet to relay to the Bank the Board’s disappointment at I Nick Kennet Complete.
POLB 12/36 the re-opening of discussions on FSR numbers, which they
thought had been settled.
4. Actions Appertaining to Network Transformation
Post Office Ltd - Strictly Confidential
UKGI00011499
UKGI00011499
4a December 2011 It was agreed that an updated Crowns plan be brought back to I Kevin Gilliland In hand, This will be part of the NTP
POLB11/69(d) the Board next year to cover the new economic model; presentation to the Board in March.
optimum self service vending; and the impact on Crown branch Completed.
numbers.
4b December 2011 The Board to be provided with 2-3 bullet points to explain the Alana Renner The Board will be alerted to and briefed
POLB11/69(k) facts in the event of adverse publicity or contact by MPs, local ahead of (wherever possible) any major
dignitaries or Subpostmasters. adverse publicity regarding the Post
Office. The Board will also receive a
brief ahead of any major news releases
to ensure they have key messages to
handle any high level enquiries.
Ongoing.
4c January 2012 Kevin Gilliland to include in his NTP update to the Board in Kevin Gilliland / In hand, will be included in the March
POLB12/03(a) March how the Business intended to prioritise the offices as the I Chris Day Board presentation. Complete.
models had very different commercial implications.
4d March 2012 Neil McCausland asked for reconciliation between the numbers I Kevin Gilliland/
POLB 12/29 in the Crowns paper presented by Kevin Gilliland and the Chris Day.
Crown P&L.
5. Actions Appertaining to Board Reports
5a November 2011 Paula stressed that queuing times was an area on which the Kevin Gilliland In hand, Kevin will bring this to the June
POLB11/57(e) Business focussed heavily and suggested a strategy paper (Paula Vennells) I Board.
comes to the Board on this topic.
5b January 2012 Chris Day to speak to Matthew Lester (RMG CFO) regarding Chris Day Ongoing — Chris Day to report back to
POLB12/06 (a)
‘Going Concern’ discussions as part of the Board’s
governance, and introduce the necessary reporting process at
the Board.
February Board.
Update 9" February — Chris Day
confirmed that POL’s Going Concern
status would be covered within the RMG
consolidation for this year. A paper
would be provided to the Board (May) on
the proposed Going Concern
process/external audit for FY 12/13.
Post Office Ltd - Strictly Confidential
UKGI00011499
UKGI00011499
6. Actions Appertaining to POL Remuneration
6a January 2012 LTIP: The Chairman asked that a proposal be brought back to I Matthew Starks —_I Work is on-going with New Bridge Street
POLB12/01(b) the Board based on the discussions to date (including higher to re-model the LTIP in line with the
ranges for CEO and CFO) with a gateway for Network feedback provided by the Board and to
Conversions; a small reward for achieving 90% of the financial establish the metrics with the Finance
target; but with the main bonus at 100% and significant team. The revised proposal will be
rewards for hitting stretch targets. It was agreed that the work represented to the board in March
needed to be completed as quickly as possible to enable a though, following a suggestion by Alice
proposal to the Shareholder before the end of the financial Perkins, this may be able to be
year. considered sooner, but outside a main
board meeting.
Extraordinary board meeting 29"
February. Ongoing
6b February 2012 PDR scoring — Les Owen requested two-dimensional matrix Pauline Holroyd I Session scheduled for May Board.
POLB12/20© rating performance and potential. Paula Vennells suggested
the inclusion of potential ratings for the Top Team in the
succession planning paper.
6c January 2012 Managers Pay 2011-12: Discussions are continuing with the Matthew Starks Update contained within Managing
POLB12/01(d) CMA and Matthew Starks will update the Board if there are any Director Update: POLB(12)19.
significant changes or the pay deal is agreed. Complete.
7. Actions Appertaining to Finance
Ta September 2011 Ongoing development of commercial finance capability is Chris Day Ongoing — process for recruiting Head of
POLB11/43(e) required. Commercial Finance underway.
7b March 2012 In relation to the 2012-13 Budget the Chairman suggested that I Paula Vennells/ I Ongoing — likely to require consultation
POLB12/38 Paula Vennells and Chris Day discuss the medium cost Chris Day with external specialist consultancies on
reduction challenge with the Executive Team to decide how
they will improve productivity without jeopardising the major
transformation programmes, and report back to the Board.
best practice prior to making
recommendations to ET/Board.
7
Post Office Ltd - Strictly Confidential
UKGI00011499
UKGI00011499
7c March 2012 Chris Day to circulate to the Board the updated budget figures I Chris Day The challenge and contingency has been
POLB 12/38 including contingency. done as set out in the Board paper for 15
March. Following the year end and as
intercompany balances have finalised
with Royal Mail there have been some
further minor amendments. A final
bridge from the 15 March Board paper to
final budget will be provided with the
Period 1 reporting.
8. Actions Appertaining to Front Office of Government
8a February 2012 The DVLA Tender would return to the July Board but Paula Paula Vennells Ongoing
POLB12/18(e) Vennells would keep the Board updated on any significant
changes should they arise in the interim.
9. Actions Miscellaneous
9a January 2012 Olympics: A noting paper to be brought to the March Board Mike Young On March Board agenda.
POLB12/03(d) detailing the work underway to mitigate any disruption caused
by the Olympics.
9b January 2012 Integrity of Horizon System: Susan Crichton to clear the audit I Susan Crichton Final amendments to report awaited.
POLB12/07
report with the external lawyers and, if possible, to give the
report privileged status and circulate it to the Board.
Post Office Ltd - Strictly Confidential
UKGI00011499
UKGI00011499
11. Actions Appertaining to Personal Injury Referral Fees
ia February 2012 Nick Kennett to investigate the flow of fees to ensure there is I Nick Kennett. Complete.
POLB12/25 no inducement of wrong behaviours.
March 2012 Neil McCausland to take ownership of this issue going Neil McCausland/ =I Ongoing.
POLB 12/32 forward to ensure the business was getting the required Nick Kennett
information and challenging Junction to ensure that the Post
Office was beyond criticism.
Post Office Ltd - Strictly Confidential
Propos uthorities to commit spend or implement change
ShEx Consent Required Under Articles of Association
SHEX > £50m
Authorise
Planned I Unplanned I Decisions with brands and risk impact
Spend I & Complex
Spend
Value Value Description
Carries significant risk (ERM score4).
Attract public and media interest
Board > £20m >10m Risk of impact on brand value
New product
Carries significant risk (ERM score 3).
Attracts local public and media interest
POLIC/ £5-20m I £0.5-10m__ I Impact on customer experience
ET Changes to products
CFO £1-5m I £0.25-0.5m Price changes
Director <£1m <£0.25m N/A
To be reviewed at the end of 2012/13.
10
UKGI00011499
UKGI00011499
POLB12/55
Appendix A
UKGI00011499
UKGI00011499
Post Office Ltd - Strictly Confidential
Planned Spend
Covers both bau costs of running the business and projects approved in the budget unless
deemed in the budget to be complex.
Includes: extending a product range, system upgrades, and property projects.
Examples:
Horizon releases
Rhino Doors cash centre security upgrade
Payment Card (PCI) security compliance
Marketing campaigns
eocee
Unplanned & Complex Spend
Spend not in budget and projects in the budget that were identified as complex.
Includes: product development, acquisition of new system, major capital spend
Examples:
IT Transformation
Channel Integration
Returns and Collections
Olympics
FOoG tenders
Change with Risk
Any activity that places business at risk (refer to ERM score).
Includes: change of supplier, compliance cases, and single person vehicles.
Examples:
« HomePhone and Broadband supplier selection
e PINpads
« Eagle
¢ Sale of credit cards in branch
Brand Impact
Significant issue that will be noticed by all customers and significantly impact a group of
customers.
Includes: completely new product, change to product, new branch model
Examples:
« POCA statement frequency,
Premier trial
Online retail shop
Cheque acceptance
Project POLO
NB some cases will fit under more than one heading.
11
UKGI00011499
UKGI00011499
POLB(12)56
POST OFFICE LTD BOARD
Appointment of Directors
The Board is asked to ratify the appointment of:
Virginia Holmes as Director of the Company effective 4" April 2012,
to approve the appointment of:
Susannah Storey as Director of the Company effective 18" April 2012,
and to authorise the Company Secretary to make all necessary filings with
Companies House.
Alwen Lyons
April 2012
UKGI00011499
UKGI00011499
POLB(12)57
POST OFFICE LTD BOARD
Chief Executive’s Report
Strategic Programmes:
1. Network Transformation (NT)
e¢ The programme remains on track to deliver 1200 new operating model formats by
the end of March 2013. Interest in the new models continues to gather momentum,
assisted by the national media launch, a further 50+ face to face events with agents
across the UK and a robust Post Office presence at the National Convenience Show.
The survey via Horizon on line has been reopened and agents are being encouraged
to tell us their views.
e Our approach to selection and prioritisation of branch activity was agreed at the last
POLB and initial engagement with volunteer Agents is on schedule to begin from the
middle of April. In preparation for this activity, a structured training course started on
the 26 March for a team of circa 80 Field Change Advisors. Training will equip them
to have meaningful conversations with Agents about the features and benefits of the
new operating models and their suitability for conversion, as well as a thorough
understanding of the end to end process for implementation.
2. Crowns
e Birmingham Premier Pilot:
o Overall sales performance is 119% (weeks 35-51), and 113% (weeks 40-51)
since we removed the additional support. Focus sales have been 108% and
102% (vs control branches 102% and 97% for the same period).
o Average queuing time for customers using counter services since go live is now
averaging circa 75% served in less than 5 minutes, with P&G migration averaging
76% of available Mails & Retails products. This compares to 39% prior to pilots.
o A full post implementation review is underway to identify savings that can be
realised from the additional P&G kiosks and identify key individuals who could
become ambassadors for the Crown Transformation Programme. Customer
research is also being completed to support phase two which will focus on longer
opening hours, more automation (ATM), improved point of sale and signage,
open plan travel positions, dedicated Government Services Front Office area.
Phase II will also trial the new approach to FS sales (appointments/FS advisor to
cover several offices).
e An additional 3 pilot sites are being sought (in addition to Chester and New Malden),
12 tactical sites will be implemented by the end of September to realise efficiencies
from the introduction of more P&G kiosks in high mails branches, and to further test
the assisted self-service model.
e Crown Transformation pay discussions with CWU have progressed well. We have
gained their support in principle to implementing a range of changes to reduce the
P&L deficit in exchange for unconsolidated cash payments, though they are
reserving their right to ask for some form of consolidated payment to be included in a
final deal. We have managed within accounting rules to accrue these payments in
the 2011/12 budget, this approach has the support of our external auditors. In
conjunction with the unions a process has been implemented to analyse the detailed
working practices of the Crown network, to identify specific areas where we can
increase productivity and reduce costs.
UKGI00011499
UKGI00011499
3. Front Office of Government
Agenda item
4. Efficiencies
A proposal for a structured 3 year efficiency plan, to evidence value for money to the
taxpayer of the spend to transform the Post Office network, will be submitted to the ET
late April and, if agreed, to the POL Board in May. Also, over the coming months, we
plan to investigate options for addressing the structural cost base of the business in the
medium term, and how this might be achieved without jeopardising the
implementation/execution of NTP and other major programmes.
5. Separation and Independence
From 1 April 2012 Post Office absorbed the workload associated with the first 66 of 129
services currently provided by Royal Mail. Union consultation on the TUPE process
concluded positively. Letters explaining the impact of the change of employer to Post
Office Ltd, effective from 2 April, were sent to the home addresses of all colleagues
week commencing 2 April. The programme continues to work on driving down the one-
off costs of separation and latest indications are that costs will be sub-£30m compared
with the original estimates of £36m to £46m. The like for like operational expenditure
following the cessation of all services from Royal Mail is anticipated to be £5m pa less
than the current inter-business charge.
6. Post Office Financial Services (Eagle)
Agenda item
7. IT Landscape
The IT&C Transformation programme continues to make progress with procurement
activities, organisation design and staff engagement well underway. Following POLB
approval of the business case on 15 March, a series of colleague and supplier
engagement sessions took place, with a Market Engagement Day held on
29 March with 40 potential suppliers to generate interest in the procurement and
provision of IT services. In parallel, we have shortlisted 9 -13 suppliers for each of our 3
call-off frameworks (IT Consultancy, IT Products and IT Solutions Delivery). Focus over
the coming weeks will be on finalising the organisation design and the release of OJEU
notices to commence procurement of our Service Integrator, Service Desk and IT
Towers.
Business as Usual Report:
1. Managers Pay
The Post Office Managers 2011/12 pay offer of £2.2m (average 1.5% with some rates
varying for certain grades/functions — see POLB12(06) for details) went to ballot on
28 March and has been accepted with 72% voting in favour of the deal. Pay talks for
2012/13 will commence soon.
2. Performance Assessment
The performance review process for managers has commenced. As at year end 81% of
individuals had submitted their self reviews and individual face to face performance
discussions are taking place. Peer comparison discussions are being held across
directorates with a target of 27 April for completion and scores to be submitted to HR
Service Centre. The ET will meet on 8 May to review the senior leadership population in
UKGI00011499
UKGI00011499
terms of performance and, for the first time also include a discussion on their individual
potential.
TUPE Transfer and Pensions
Both these processes happened successfully and in terms of the TUPE transfer this has
created no ‘noise’ or disquiet from any of our people. This is a very significant
achievement and is attributed to the intensive discussions that were held with both
unions over 5 months prior to the transfer and the communications issued to our people.
The pension scheme is now fully funded but there will be further work during this year to
implement a Post Office governance framework, work with trustees to conclude the
actuarial valuation and the deployment of new legislation in terms of Workplace
Pensions Reform.
NFSP
We have begun preparations for the NFSP conference in May where we anticipate
the main focus to be NT along with the new opportunities emerging from Front Office
of Government. The Terms of Reference for the re-constituted Strategic Partnership
Board will be agreed by the ET on 17 April, with the first meeting to be held on
23 April 2012.
Discussions have commenced with NFSP regarding the annual remuneration review.
Our offer is funded by a combination of accruals from 11/12 and revenue arising from
Mails tariff increases.
Quarter 1 — 12/13 Product Campaigns
Easter Travel Money — 19 March to 15 April
Multi media campaign (press, range of in branch material, direct mail and ATMs,
digital display and search) promoting specific currency deals which support our value
position: get a better rate on Euros & Dollars when you spend over £500 or £1000
and a series of weekly changing country currency deals such as best rates on
Turkish Lira.
Travel Insurance — 19 March to 15 April
Travel Insurance campaign using in branch and digital channels promoting the
opportunity to win Kindles when you buy our Annual Multi-trip and Single Trip policies
backed up by the customer peace of mind you get from the high quality of cover that
we Offer.
Premier cash ISA - 9 April to 20 May
Multi media (press, range of in branch material, direct mail and ATMs, digital display
and search) campaign promoting launch of Premier Cash ISA Savings product with a
best Buy 3.01% rate (top 3 in market).
Car and Home Insurance — 16 April to 20 May
A predominantly in branch campaign designed to build on the Q4 Insurance
campaign continuing to promote guaranteed to beat your renewal quote by £50 for
Home Insurance and Free Breakdown cover for Car Insurance plus 10% off for Over
50’s. The campaign will be supported by the BAU activity of direct mail, search and
aggregator.
HomePhone and Broadband — 21 May to 24 June
In branch, direct mail and press campaign launching the addition of the “Anytime”
package to our Homephone and Broadband product. For £4.50 per month customers
can make any number of calls at anytime throughout the day. We are also making
customers aware that we are up to £50 cheaper on line rental than TalkTalk and BT.
Ahead of this the new line provide offer will continue.
UKGI00011499
UKGI00011499
e Collectables and the Diamond Jubilee - 21 May to 24 June
A campaign aimed at Royal fans and lovers of national events promoting collectables
commemorate the Diamond Jubilee. We will be using Sunday supplements in
national newspapers during Jubilee weekend as well as direct mail to existing
collectors, email, branch posters, search, digital display, and PR. These products
have been on sale throughout 2011/12 and have already contributed £6.3m revenue
at 12% margin. The margin will increase this year to 20% as a result of improved
MDA rates.
Olympics
Preparations for the Olympics remain on track. Construction of the two Post Office
branches in the Olympic Park commences on 14 May. We are awaiting agreement from
our agent in Russell Square, who has provisionally agreed to extend opening hours into
the evening and weekends to serve the world’s media. Business continuity plans are in
place, working closely with RML, to minimise operational impacts and to ensure up to
date communications with customers. We are planning to deploy alternate working
arrangements for HO staff to reduce commuter traffic by 30% in line with Government
targets, with three ‘dry runs’ planned for 14 May, 12 June and 4 July.
Mails
Agenda item
Paula Vennells
13 April 2012
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
POLB(12)58
POST OFFICE LTD BOARD
Health & Safety Report
1. Purpose
The purpose of this paper is to:
1 Provide an update on safety performance.
1.2 Outline risk reduction activities.
2. Current Situation
2.1 Total number of injury accidents, year to date, is better than target at 6.8%
down on last year and accidents involving absence are also significantly
better than target at 32.8% down on last year. The per 1000 staff in post
comparison indicator, which takes account of head count fluctuation year on
year, is showing a similar decrease for absence accidents. Both Crowns and
Supply Chain are showing significant progress in embedding the safety
management system and thereby reducing accidents. The ratio of absence
accidents to number of heads remains significantly higher in Supply Chain
than in Crowns, this is an indicator of the different risk profiles associated with
the activities and tasks undertaken. The ratio of absence accidents to all
accidents has improved from 1 in 4.6 to 1 in 6.0. This indicates that, in
general, injuries from accidents are becoming less severe, accepting that
there were three exceptions that resulted in long absences.
Table 1 All Injury accidents and those resulting in absence (Cumulative)
0
350
300
250 + 2010/11 All
5 2011/12 All
3 200 2010/11 Absence
< 150 2011/12 Absence
100
50
ob
P1 P2 P3 P4 P5 P6 P7 P8& PI P10 P11 P12
Period
2.2 The number of days lost due to accidents is now showing a decrease of 7.7%,
year to date, following an increase during periods 5 to 9. The adverse spike in
performance was due to 3 long term absences related to accidents at work
compared to one long term absence during the same year to date period last
year. All three have now returned to work following active occupational health
service provider interventions. (Table 2)
UKGI00011499
UKG100011499
Post Office Ltd — Strictly Confidential
Table 2 Days lost resulting from injury accidents (Cumulative)
—e— 2010/11
we 2011/12
P1 P2 P3 P4 P5 P6 P7 P& PI PIO P11 P12
Period
2.3. Reporting of Injuries, Diseases and Dangerous Occurrences Regulations
(RIDDOR) accidents are down 21.1% year to date from 38 to 30. Crowns and
Supply Chain continue to perform favourably against the two bench mark
metrics — the retail sector for Crowns and a comparable CViT organisation for
Supply Chain.
2.4 The number of road traffic collisions (RTCs) year to date is showing an
improving trend from period 7 although having increased by 2.6% on last year
from 229 to 235 with the percentage of ‘at fault’ collisions showing a neutral
trend over the past 4 periods although up from 38.9% to 52.3% on last year.
(Table 3) While road traffic collisions account for less than 3% of the overall
number of injury accidents they have the potential for high impact in terms of
injury and loss. The activities to improve performance are identified in 3.1
below.
Table 3 Road Traffic Collisions (cumulative)
b
300
250
8 200
5 —+— 2010/11 All
3 450 —»— 2011/12 All
i
5 2 2010/11 ‘at fault’
5 400 >< 2011/12 ‘at fault’
50
0
P1 P2 P3 P4 P5 P6 P7 P& P9 P10 P11 P12
Period
25
2.6
27
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
Robberies on Post Office Cash and Valuables in Transit (CViT) crews are
down 43% on last year from 54 to 31, year to date. Physical injuries during
robberies, of which there have been 15 year to date compared to 21 last year,
remain relatively minor in severity. Fire arms have not played a significant part
in the majority of robberies with 3 robberies, year to date, being enabled by
the presence of fire arms compared to 18 last year. The activities that are
considered to be having a positive impact on the robbery risk are listed at 3.2
below.
Robberies on the Post Office network are 10.6% down on last year, year to
date, from 123 to 110. Burglaries are up 14.4% on last year, for the same
period year to date, from 125 to 143. Physical injuries sustained during these
incidents have increased from 31 last year to 39 this year but remain
predominantly relatively minor in severity.
The majority of accidents currently fall into three main categories: lifting and
handling, stepping and striking and outdoor falls, these are high frequency
events with, in the majority, relatively low impact. However the lower
frequency types of incident can carry the potential for very high impact, for
example, assaults and road traffic collisions.
Table 4. Types of accident
Assaults
Animals
Handtools
Lifting/handling
Objects falling
Stepping/striking
Falls outdoors
Falls indoors
Fire, Elec etc.
Vehicles RTA [4
Machinery [J
GAccidents
BAccidents with absence
°
20 40 60 80 100
3. Activities
3.1
.
Road Risk — Current activities to mitigate road risk are:
Road risk forum established to scope road risk reduction initiatives
Analysis of effectiveness of face to face training given to high risk drivers - top
50 -has indicated that accidents amongst this community have reduced
significantly
Eye sight checks for operational drivers in place
Technical accident reduction interventions on new vehicles e.g. Reversing
aids
Analysis and evaluation of data (e.g. risk profiles) to determine further
accident reduction interventions
Introduction of high visibility seat belt sleeves
3
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
e Safety team input to vehicle specification
¢ Safe driver of the year award introduced
e Weekly case conferences to ensure consistent approach to accident
investigation, follow up activity and sharing of best practice
3.2 CViT Robbery and Injury — The following factors and activities are considered
to be having a significant impact on mitigating the robbery risk:
e Active liaison activities with the police and increased police support activity
¢ Significant arrests - reducing the number of criminals involved in CViT crime
e Introduction of new deterrent technologies e.g. Smartwater — a solution that
contains a unique identifier that is released automatically in the event of a
robbery, spraying those involved and enabling identification of the individuals
involved in the robberies
« Reduction in opportunities for duress type robberies linked to the introduction
of single person vehicles
e Rigorous training/refresher training programme
¢ Rigorous compliance programme
¢ Migration of robberies towards services that Post Office is less exposed to
e.g. ATM robberies.
4. Residual Risks
Driving activities have the potential for high impact/loss and remain a risk however the
actions identified above are aimed at mitigating that residual risk.
5. Recommendation
The Post Office Ltd Board is asked to:
5.1 Note the overall improvement in safety performance
5.2 Note the risk reduction activities.
Simon Eldridge
27" March 2012
UKGI00011499
UKGI00011499
POST OFFICE LIMITED EXECUTIVE SUMMARY POLB(12)59
Board of Directors
Date of Board: 18" April 2012
Subject: Performance Summary — Period 12
Author/Sponsor:
Chris Day
Contributors / Presenters:
Decision Guidance Noting
For: y
Reference previous action point:
BACKGROUND AND CONTENT:
Full year operating profit of £61.3m was £25.8m favourable against prior year and £25.0m
favourable to the full year budget. This result was slightly below the Quarter 3 forecast but
within the expected range.
The March result was a loss of £16.2m which was £12.3m adverse to budget. This
included the anticipated acceleration in project activity with spend of £8.7m in the month,
£7.2m higher than budgeted for March. It also included an accrual for £5.5m for lump
sum payments to subpostmasters to maintain stability in the network through the
forthcoming transformation.
The full year cashflow outturn was an outflow of £15m which was £44m favourable to
budget primarily due to the improved profit and because the pension deficit payment was
not required. Net client balances have been favourable in recent months due to the
Santander and Bank of Ireland settlement amendments, but this has been offset this
month by higher Network cash in preparation for Easter.
The results are subject to audit and this is currently in progress. Key dates to finalising
the Post Office Limited accounts are:
20 April - Ernst & Young complete their audit work.
21 May — Post Office Audit Committee meets to review the accounts and
recommend them to the Board.
23 May — Post Office Board meeting — the Board will be asked to:
Review the accounts, approve and delegate signature to a sub-committee; and
approve the external message for the year end announcement (both Post Office
itself and Post Office content within the Royal Mail Report and Accounts).
Mid June onwards — expected announcement of Royal Mail results and signature
of Post Office Limited accounts. We expect to have to wait until Royal Mail is
ready to sign and announce before we can sign our accounts. Post Office external
communications will be prepared working closely with Royal Mail and made at the
same time as the Royal Mail results announcement.
RECOMMENDATION (if decision required) Date
Recommended by the Executive Team N/A
Investment Appraisal completed or financial implications N/A
assessed and supported by the CFO
Additional presentation: NO
UKGI00011499
UKGI00011499
POST OFFICE LIMITED
Performance Report
March 2012
Produced By : Central Reporting Finance Team
For Queries & Comments Contact : Sarah Hall or Kam Bassra
CONFIDENTIAL
Commercially Sensitive and not for onward circulation
This document S mercially sensitive info tion that is likely to cause dai e e nt of unauthorised disclosure.
It should not be co) ded in its e y D ess purp ind o le who understand the consequ
ho have signed a no ent.
p Team and Finance Pro hin the Post Of
Contents
Headlines 3
Profit & Loss Statement 4
Cashflow Analysis & Balance Sheet Summary 5
Project Costs (OpEx) 6
Project Costs (CapEx) 7
Net Income By Pillar 8
Net Income by Channel 9
Crown Profit & Loss Statement 10
Business Scorecard 11
Appendices
Staff Cost by Directorate 13
Non Staff Cost by Directorate 14
Non Staff Cost by Type 15
Car & Home Insurance Policies In Force 16
UKGI00011499
UKGI00011499
UKGI00011499
UKGI00011499
Headlines - as reported to Royal Mail Group against Q2 Forecast
March 2012
(Geadtines
* External revenue of £64.0m was £0.4m adverse to forecast in the period.
* Operating loss of £16.3m in the period was £8.2m adverse to forecast, driven primarily by project expenditure.
(Koy Messages >)
* Full year Cashflow was £44m favourable to forecast.
* Period 12 profit was adverse to forecast by £8.2m due primarily to £6.4m higher project spend.
Profit Target
Full year operating profit was £61.3m against the forecast of £51.4m, giving a favourable variance of £9.9m.
* Net Income was £1,045.3m which was £8.5m favourable to forecast.
* YTD people costs were £2.0m adverse primarily due to increased agents pay (includes accrual for lump sums to maintain stability in the Network).
* YTD non people costs were £1.8m favourable of which the main variances were; £1.4m from Staff & Agent related plus consumables; £1.0m from reduced spend on IT
contractors, Marketing and Legal fees; £0.9m lower compensation payments; £0.9m was property and facilities related and £0.8m other, offset by £3.2m adverse IT
expenditure
* YTD share of Joint Venture profits were aligned to the forecast.
* YTD IB expenditure was £4.0m favourable due to lower property and Official Mail charges.
* Project costs are aver spent at the full year by £3.3m.
Year on year the full year profit is £25.8m favourable mainly due to higher net income of £47.6m (which includes the higher Network Subsidy Payment of £30.0m), £5.5m
higher share from Joint Ventures profits, offset by £6.5m higher people costs, £6.8m higher non people costs (including IB), and £11.2m more spent on projects.
Cashflow
The YTD cashflow at Period 12 was an outflow of £15m against a forecast (and budget) outflow of £59m, favourable by £44m (Period 11: £47m favourable).
This variance was primarily due to:
* Contract amendment for Bank of Ireland (ATM) and Santander (both one day delay in settlement) have contributed £64m toward the overall variance.
Other variances;
* Profit £25m favourable, pension £22m favourable, dividend received £7m favourable, exceptional costs £6m and other variances net off to £6m favourable.
Offset by:
* Network Cash was £68m adverse (preparation for Easter funding and commencing build-up of Olympic coin holdings) and working capital was £18m adverse.
Focus Product sales (vs. Budget!
YTD focus product sales were adverse by £1.1m driven mainly by Travel Insurance and Bureau where the budget assumed a flat market but tough trading conditions and
competition are depressing volumes. There is also below budget performance on Telephony and in Life Insurance which had an ambitious growth target and, although there is
small growth year on year, it is not at budgeted levels.
Headcount
Headcount is 254 favourable to forecast (9 favourable to budget), due to people in place, (post recruitment) for the Network Transformation Programme taking longer than
expected. This has been due to delayed release from current roles and notice periods for external recruits. Also the renegotiation with Bank of Ireland not to recruit 440
LEinancial Specialists has created a variance and current figures stand at 350.
Page 3
UKGI00011499
UKGI00011499
Profit & Loss Statement
March 2012
Current Month Half Year Forecast Prior Year Period Full Year [_Half Year Forecast Prior Year Q3 FY Vs 03 I
Em ‘Actual Budget Variance I Forecast Variance I Actual Variance I Outturn Budget Variance I Forecast Variance I Outturn VarianceI Forecast Variance
External Income 502 512 0) 506 04) 540 38) I 6211 6176 6135 76 625.6 (0) I 6189
Interbusiness Income 28.9 273 16 248 42 27.0 20 358.6 348.3 3557 30 3456 130 I 3583
JTOTAL GROSS INCOME 791 78.5 07 75.3 38 81.0 (1.8) 979.7 965.9 969.1 10.6 9713 85 9774
Cost of Sales (10.0) (9.5) (0.5) (8.8) (1.2) (10.7) 08 (114.4) (120.6) (112.3) (2.1) (123.5) 94 (113.0)
[TOTAL NET INCOME 69.2 69.0 02 66.6 26 70.2 (1.4) 865.3 8453 856.9 85 847.8 176 864.1
IStaff Costs (22.4) (19.7) (2.7) (22.9) 06 (22.9) 06 (251.3) (247.9) (0.5) (252.8) 15 1.0)
lAgents Costs (62.4) (37.5) (5.0) (38.1) (4.4) (37.9) (4.6) I (4829) (478.3) (5) I (4749) (0) I 4768)
INon-Staff Costs (20.2) (13.4) (6.8) (18.1) (2.1) (9.8) (10.4) (149.2) (159.7) 18 (138.2) (10.9) (152.0)
linterbusiness Expenditure (6.9) (15.0) 81 (7.3) (6.6) (0.3) (84.9) (91.8) 40 (89.0) 44a (85.9)
Depreciation (01) 0.0 (0.1) 00 (0.0) (0.0) (0.4) (0.7) 02 (06 02 (0.7)
[Total Expenditure (pre POOC) (92.0) (85.6) (6.4) (86.4) (77.3) (14.7) (968.7) (978.4) 40 (13.2) (966.5)
POFS - Share Of Operating Profits Os 0.0 Os 00 13 (0.8) (0.6) 0.0 (0.6) 27 0.2
IFRES - Share Of Operating Profits 18 20 (0.3) 19 15 34.4 28.0 06 29 314
EBIT Pre Overhead Allocations 05) (14.6) (6.0) 8.0) 6.2) 172.6) (105.1) 12.5 24) 99 I (id)
Group Overhead allocations (0.9) (1.7) 08 (1.7) (1.4) (19.6) (20.4) 08 (16.7) (2.9) (20.4)
[EBIT - BAU ia 62) 5.2) I 9.6) 7) 22) 25.5) FER Ga) 69 I 25)
Network Transformation POOC (1.7) (0.9) {0.8) (0.9) 0.0 (5.6) (5.5) (0.1) 0.0 (5.6) (2.8)
One off Project costs (POOC) (6.9) (0.6) (6.3) (1.4) (1.6) (208) (12.7) (3.3) (15.3) (5.6) _I_ (20.6)
IEBIT = Post Project Costs Goa ave) a3) I ea 73) 16.7) (443.7) 99 I aaa) ay I aaa)
[Network Payment 138 13.8 00 13.8 115 180.0 180.0 00 150.0 30.0 180.0
JEBIT pre exceptionals & Pre Colleague ShareI G62) (3.9) as) I (ea) 43 as 363 EX] 35.625. 652
Interest {0.2) (0.7) os (1.9) (2.0) (4.4) (9.2) 21 (19.0) 14.6 (4.7)
Impairment (15.2) (2.5) (12.7) (4.9) (6.3) (36.2) (32.0) 02 (39.8) 3.6 (28.9)
Exceptionals & Redundancy & Severance Costs 417 or) 17 (0.9) (08) 03 (1.0) 43 (14.4) 147 (4.0)
Profit/(Loss) On Asset Sale o1 0.0 o1 00 (0.0) 13 0.0 11 44 (3.4) 0.0
(Colleague Share/ Business Transformation Payments (2.8) (6.0) 3.2 00 (0.4) (2.8) (6.0) (2.8) (0.4) (2.4) 00
[Total Profit/(Loss) Before Tax G26 3.4) 9.5) 5.8) G3) 295 way EU a7) 532 [27.6
feu Year Prior Year) >)
vo &™ Cumulative EBIT pre exceptionals & Colleague Share Full year operating profit of £61.3m was £25.8m favourable against prior year.
Like for like variances of £6.9m were mainly due to;
wo © Higher net income of £17.6m includes Mails £17.1m, Government Services £6.4m favourable, offset by Financial Services
£3.4m and Telephony £2.8m adverse
n4 * Higher FRES JV profits of £2.9m due to increased volumes and margin performance,
* Higher POFS JV profits of £2.7m due to higher sales,
60 4 © Lower staff costs £1.5m driven by Organisational Review reductions offset by pay awards and higher performance/ bonuses,
* Lower interbusiness expenditure of £4.2m.
50 Offset by;
© Higher non staff costs £10.9m higher, (Prior Year included £9m provision release relating to savings stamps)
407 © Higher agents pay of £8.0m mainly due to one off payment, and accrual for further lump sums to maintain stability in the
network.; and
ia * Higher Group overhead allocations of £2.9m.
20 Non like for like variances of £18.8m were due to:
* Higher Network Subsidy Payment of £30.0m, and
10 * Higher project costs of €£14.2m.
Business transformation payments of £3.4m were charged for Crown Transformation in the month but partially reduced by
0 the release of the unused Colleague Share accrual from the prior year
Po. P02_—=ss«POF-S POPS OHCSC“‘«é‘ TCSP
Page 4
UKGI00011499
UKGI00011499
Cashflow Analysis & Balance Sheet Summary
March 2012 Cumulative Cashflow was £44m favourable to budget primarily due to the improved profit and because the pension deficit payment was]
not required. Net client balances have been favourable in recent months due to the Santander ‘day c’ settlement and the Bank of Irelanc
settlement amendment, but this has been offset this month by higher Network cash in preparation for Easter.
36
YTD Cashflow £m YTD Cashflow Variances
a)
(6) 25
wesc
. i] wo
1
25) (a9)
Balance Sheet Cashflow
£m Mar-1I [Actual [Budget [Variance] the ful year cashflow outturn was an outflow of £15m which was £44m favourable to budget, (Period
oes o aR ye q 11: £63m favourable). This variance was mainly due to:
Cash 705 759 692 67 * Contract amendment for Bank of Ireland (ATM) and Santander (both one day delay in settlement)
Client Balances (156) 294) 228) (66) I [ave contributed £64m toward the overall variance
rade Creditors (246) (24) (253) 12 Ilother variances:
Pension dec (ah «asa (esa 94 I» Profi £25m favourable, pension £22m favourable, dividend received £7m favourable, exceptional
rovisions C
Fors Eunding fe i to (22) Ifeosts £6m and other variances net of to €6m favourable.
Net Assets Offset by:
© Network Cash was £68m adverse (preparation for Easter funding and commencing build-up of
Funded by Maree {Rega FButget _P VarFan ce II oiympic coin holcings) and working capital was £18m adverse
Loan (375) (377) (444) 64
(197) (334) (251) (83) Cash Management
* Retail and Cash Centre cash (manageable cost) - £67m adverse against budget, and
Cash Management Table £52m adverse to prior year, (preparation for Easter funding and commencing build-up ofI
£m Prior YearI Mar-11 Pi2 Olympic coin holdings).
Mar-11 I Opening [Actual Budget var I] Bureau (manageable cost) - £4m adverse budget and £7m adverse to prior year,
Retail, Cash Centres 562 562 614 547 (67) (preparation for Easter funding).
Bureau AT 47 54 50 (4) * Cheques and debit cards (customer driven) - £4m favourable to budget and £5m.
Cheques, debit cards 9% % m1 95 4 favourable to prior year.
Network Cash.
Supply Chain control of branch cash has been strong all year, but P12's overall total of
Bugarcomtenl 427 526 509 £759m is adverse to prior year and budget due to the build up to the Easter break
Page 5
UKGI00011499
UKGI00011499
Project Costs (OpEx)
March 2012 &
OPEX - Programme Expenditure By Directorate
Perea iz Current Month Fa Year T Orginal
a Rata I Fahtoath [Variance I [ummm —[Flantpath [Variance] I_ Approved _I I Requested
Network Hranstormation az270) ere) (247.4) 56240] 5490) —75.a)] I ease.al I 2.004.
crown 58) oof 58) wo} (320) @3} 380) oo
Network Other 464} ooo} 2536 $7.2) (3000) 442g (767.7) (50.0
Crown Transformation 732) ae (3435) 5730) (2520 (210) (2520)
FAC NETWORK [PEC] EL) NECTEN] (ITS BRT CEEEETO] Raa) (Coo
Operations Ir Property Ts} 18236) 1.5075) rT) 828-7) 738.0) I (7000)
security (230.3) 32) 4975] 618. (779 300} I G08.)
Ibupply Chain 07a] zero] 73.4 (3747 (3690) (603.0
Supplier Framework waa} = aessif 75 toa] 0400) (2.7593)
[rechnology Road Map 1216] (232.0) (1.0096) asa) 43123) (1,627.4
[TOTAL OPS Trea] [SPE] BEKELE) (ERIS BIER] Gaszn} [T1e.8963
[Commercial Government 595.6] isa] 1175] e974] 0.3843) (2695.6) I (1.9990)
Mais (eoo.2] (208.6) 8 1.599.0)] (1,689.2 (348ae I (1.7499)
Helephony 18663] 6147) 1552.6) 2524] —2as70f 0554] I wasz0f I 22100
birect w2s} aussi} a9 (666.0) att.) 545.3 (563.3)I I (1.5430)
Brand Deployment = Marketinf (189.1) oof (289.1) (299.1 oof 1139.) (563.3)] I_(1543.0)
FAL COMMEROAL I z Ta aes eosooI (oO A ea) [Trees) eo)
Financial Services [Financial Services (es6.2) (2596) (376.5) casa] (2729.8) 12764) I (1.3722)I I 3.4953)
FAL FINANCIAL SERVICES (1) NES) REY] (ORS) ERE] fama) [Teas
[Communications [Communications 227) of 2.7} 2.7) 00 za [ 3.4953)
FAL COMMUNICATIONS —_ an) Co] ea aml 09 Gaza) [Teas
other Finance (228.2) Toop 1962) 035) 1770) G19)
separation (s675)] —ag7a} 370.3) 29906] (0.0283) (950.0)
begat 06 (ssi) 274 (2060) (106.2) (206.2) oo
[TOTAL OTHER (CI) NESE) NE] (ELOISE) Tssen} I Tazeva
[Centra Held Budget [oertraly Held Za7} (2537) (670.2
lous Programmes Flow thro 2020/23 473] oof 473} 779) od
atal POL CoS ATTA) oTSSSTI I eeaaew I eaAwRAL (CEPI) I ECRZER
[Gient Funded 954) Co} 5.) Gai 0} oo
[rorat Pot poo Bris, asa wase2I [ee.c63.) a 253.2) ERPS) fl MEGERZETO)
30 (‘Key Points for OpEx Programme expenditure »)
Opex Period 12 Full year - £2.9m overspent vs flightpath of
os Programme Expenditure P12 / ee
20 Tim Actual ost Pa Telephony - £3.1m overspent - Q4 campaign underway
aFightpah and spend is increasing
E45 —Actual Yd’ Fest -
& Flightpath Yes Separation. - £1.9m overspent
Financial Services - £1.3m underspent
Direct - £0.5m underspent
Government - £0.5m underspent
Apr May Jun Jul Aug Sep Oct Nov Dec Jan
Feb Mar [Supe Framework - £0.5m underspent
Page 6
Project Costs (CapEx)
March 2012
CAPEX - Programme Expenditure By Directorate
UKGI00011499
UKGI00011499
Period 12 Current Month Full Year Ic Oniginally
jek I [Actuals [ Flightpath [Variance Outtum I Flightpath Variance Approved Requested
Network Hransformation (4,509.4) (2.3000)} (209.4) (3,609.9) (48679)I 1.2580) (4518.3)
Crown 0.0] 0.0) 0.0
Network Other 00 (2500) 2500 0 (2500) 2500 (133.0) [)
Crown Transformation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0)
[TOTAL NETWOK Tova] (5500) 706 ECD) Gaia] 15080) [ese (CSE)
Operations IT Property (1.17. (1,104.6) (68.0) (4,377.8) (5,885.0)] 1,507.2 (3.126.2) (6,185.0)]
Security (495.8)I 0.0] 495.8) 8) 0.0 (495.8) 0.0 0.0
Supply Chain (1,03 (3,594.0) 2,555.0 (1,738.2) (3,936.0) 2,197.8 846.0)I (1,890.0)
Supplier Framework 0.0] 0.0] 0.0 0.0
Technology Road Map (9.025.9)] (821.0)] {8.204.9) (18,448.5) (10,468.6)I (7,979.9) (11.450.8)I (8.085.3)I
[TOTAL OPS: {11,733.4)] (5.519.6)I (6213.7) (25,060.3)] (20,289,6)] {(4.770.7)] (18,423.0) (16.160.3)]
Commercial Government. (2,061.9)] (848.0)) {1.213.9) (4,570.0) 702.3 (1.507.5)]
Mails (18.7) 0.0 (18.7) (72.2) 944 (312.0)
Telephony (61.3) (90.0) (982.2)] 2178 (1,309.0)
Direct (9.7) (74.4)I (148.2) (852.9) 704.7 335.7)) (871.0)I
[TOTAL COMMERCIAL asi) Toi2) Bras) Tae] 179.2] I esene) Tara)
Financial Services Financial Services 0.0] (400.0)} (26.5) (405.9)] 379.3 0.0 (1,324.0)
[TOTAL FINANCIAL SERVICES: i) 00] (265) Tosa 3793) i) (REZ)
(Other Finance (149.4)] 0.0] (2,653.9) (2,769.0) 115.1) (2. (2,700.0)
Separation 0.0] 0.0 0.0
Legal a] 00 00
[TOTAL OTHER. (149.4) 0.0) (2,653.9) (2,769.0) 115.1 (2,700.0) (2,700.0)
Central Held Budget 00 (231.6) 00 (346.2) 346.2 00 0)
Old Programmes Flow thro 2010/11 375.5 0.0 375.5 876.6 0.0 876.6 0.0 0.0)
[Totat POL I {15,168.4) (8,773.7) (6,454.7) {36,246.8) (6420.4) 173.7. (27.103.8) (32,073.8)
405 Key Points for CapEx Programme expenditure
Capex
35 5 Programme Expenditure P12 Period 12 Full Year - £0.2m underspent vs
30 I flightpath of £36.4m.
Actual / Fest pd
25 5 Fiightpath Network Transformation - £1.5m underspent.
§ ——Actual Ytd/ F'est
20 Flightpath Ytd Property - £1.5m underspent
15
Supply Chain - £2.2m underspent
10
IT Roadmap - £8.0m overspent - £5m PIN pad
5 spend brought forward at a discount.
ol
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Page 7
UKGI00011499
UKGI00011499
Net Income By Pillar
March 2012
Period 02 Forecast Period Prior Vear Period Fall ear 2 Forecast YTD Prior Vear
Net Income (Em) Actual Budget] Variance I Forecast Variance I Actual Variance I Outturn Budget_[ Varance I Forecast Variance I Outtum J Varance
Mails & Retail 308 27 Ta 290 18 290 18 3875 3728 18 3838 37 3704 aa
Financial Services 187 202 a5) 24 7 254 65) 2615 2496 19 2573 42 264.9 64)
Government ServicesI 12.6 13.2 (06) 103 110 07 1357 1385 (2.9) 1352 04 1292 64
[Telephony 30 36 (06) 36 28 02 aaa 465 (51) 446 (33) 442 28)
Network Payment 138 138 0 138 115 23 1800 1800 00 180.00 0 1500 300
other 54 23 28 29 23 28 393 380 13 35.9 34 394 02
2,065.3. 1,025.3 1,036.9
Pilar Performance - Year on Year Variances
Mails & Retail Services vs. Prior Year Financial Services vs. Prior Year
a Mails & Retail Services ~ £17.4m Fav
a? 2 ge ora incesed pees om AMG ac fr ¢
26 13 —— i prices from RMG account for c
3 a ao i £6.4m,
I ka ew) i 2nd Class £5.4m - 26% volume
36
54 Eq I increase in labels
£m Ea Special Delivery £3.5m_~ primarily due to price
(29) increases
Lottery £2.6m - Tuesday draw has increased
62) volumes as have rollovers,
370
Financial Services - (€3,4m) Adv
NSBI (£5.2m) - Adverse due to NS&I moving
towards its own direct channel
- : " ” Zoro vio ors. aims ‘Potu Oras POFS Gown POFSinad’Poaon "OW BiPoynen” Tawer wear ‘ott v10I I ATMS £3.3m ~ Fav due to increases in volume
Flere Mam SeecetDewey —Leteny—nameenet operate Raat me ice Nancome et incomememet 7 cede Smee Poi cetoae nace Netweame I I as machines reach maturity.
pvt svt fo feet J) POFS online £3.6m = favourable driven by
= = < I higher competitive rate on savings products and
Government Services vs, Prior Vear Telephony Services vs. Prior Vear new products
Government Services £6.4m Fav
‘AEI £3.7m-~ One off payments impact, but
12 volumes remain below minimum guaranteed
25 03 02 = levels
eo oar (21) I a I Motoring £2.5m - Price has increased and £m
Telephony Services (£2,8m) Adv
£m £m Etop-ups £2.1m — Reduction in commission
rates accounts for £1.7m adverse variance.
Phone Cards €1.9m - volume reduction (44% of
previous year).
Page 8
UKGI00011499
UKGI00011499
Net Income by Channel All channels are performing ahead of budget, with only the Direct channel being adverse (by £4.6m full year)
March 2012 Full year Focus Product Income is £1.3m adverse and Standard Product Income is £17.3m favourable to budget, giving an overall favourable
income variance of £15.9m. Adverse variance on Focus products (-0.8%) were mainly due to lower Travel Money, Telephony and Travel product
sales, Standard products were 3.9% higher than budget mainly due to favourable income from Mails, Lottery and ATMs.
Em Month Full year
[Targeted Income. Actual Budget Variance Outturn Budget Variance
Focus Products.
Crown Offices 3.0 29 01 36.4 35.5 09
WHS 05 O5 0.0 65 63 0.2
Agents - Managed 48 48 0.0 58.9 58.6 04
Centrally Supported 42 42 (0.0) 52.2 52.4 01
Direct Sales 08 09 (0.1) 8.6 118 (3.2)
Central 0.0 0.00, 0.0 04 0.0 0.4
Focus Products Total 13.3 13.2 0.0 162.9 164.2 3
standard Products
Crown Offices 44 4.0 04 55.0 50.9 4d
WHS 0.9 08 O41 11.4 10.3 10
Agents - Managed 12.9 12.4 05 167.6 159.0 8.6
Centrally Supported 17.2 16.9 03 223.0 214.6 84
Direct Sales 06 07 (0.1) 6.2 75 (1.3)
Central 00 0.3 (0.3) 03 37 (3.5)
Standard Product Total 36.0 35.1 0.9 463.4 446.1 17.3
49.3 48.4 09 626.3 610.4 15.9
Other Income
Cash Services 18 19 (0.1) 218 24.3 (2.6)
Gamma 25 05 2.0 8.4 6.4 2.0
Fixed Income & Other 13.3 15.8 (2.4) 180.3 172.3 8.1
Retentions 2.2 25 (0.2) 28.5 31.9 (3.4)
Network Payment 13.8 13.8 0 180.0 180.0 i}
83.0 82.8 0.2 1,045.3 1,025.3 20.1
Centrally Supported Net Account Mgd Net Income Crown Offices Net Direct Sales Net WHS Net Income YTD
Income YTD (Em) YTD (Em) Income YTD (Em) Income YTD (£m) * (Em)
300 250 100 2s
100%
oO 524 200 101% ey 80 ECV 103%, 20
aso I 60 I 15.
150 05% 731 eee
100 baa 226.6 100) rz 159.0 “Og tos 201
50 so I 20 I ‘ 54 82x ey
0 1 0 : 1 0 : 04 : :
Actual Target Actual Target Actual Target Actual Target
Actual Target
mStandard —mFocus mStandard mi Focus mStandard mi Focus mStandard Focus Standard mFocus
* Both target and actual exclude lead
generation income
Page 9
UKGI00011499
UKGI00011499
Crown P&L
March 2012 Income is £0.5m favourable in the period and £4.9m (5.7%) full year.
The full year Crown adjusted P&L has outturned £9.8m (15%) favourable to budget and £4.4m (7.3%) favourable to prior year.
Staff costs are marginally favourable to budget but adverse to prior year.
Period Prior Year Period Full Year Prior Year
£m Actual Budget Variance [I Actual ___ Variance I Outturn Budget Variance I Outturn _ Variance
Sales Income - Focus 3.0 2.9 01 24 06 36.4 35.5 09 30.9 55
Sales Income - Standard 44 40 0.4 5.4 (1.0) 55.0 50.9 4a 56.2 (1.2)
Net Income 74 6.9 05 78 (0.4) 94.4 86.4 49 87.1 43
Staff Costs -FSS (0.7) (0.7) 0.0 (0.8) O14 (8.9) (10.6) 18 (9.9) a1
Staff Costs -Crown (9.0) (8.6) (0.4) (8.5) (0.5) (110.4) (109.7) (0.7) (108.1) (2.3)
Total Staff Costs (9.7) (9.4) (0.4) (9.3) (0.4) (149.2) (120.3) 14 (448.0) (2.2)
Crown/Branch/CS Property Costs (3.1) (3.2) 01 (2.8) (0.3) (41.8) (41.0) (0.8) (39.0) (27)
Crown/Branch/CS Losses/Gains and Other (0.3) (0.3) 0.0 (03) 0.0 (3.2) (4.2) 1.0 (4.0) 08
Cash Holding Costs (Lost Interest) & Foreign Currency Holding Cost (0.2) (0.3) 0.0 (0.3) 0.0 (3.0) (3.9) 0.9 (3.9) 09
[Total Non Staff Costs (3:6) 37) 0.4 (3.4) (0.3) (48:0) G94) 44 (46.9) (aay
Homephone Direct Costs (0.1) (0.2) 0.0 (0.1) (0.1) (1.9) (2.1) O14 (13) (0.6)
Other Direct Product Costs (0.7) (0.5) (0.2) (0.3) (0.4) (4.0) (4.1) 01 (2.6) (1.4)
Horizon (0.9) (0.5) (0.3) (0.7) (0.1) (6.8) (6.6) (0.3) (6.6) (0.2)
POL Cash & Stock Distribution Costs (0.3) (0.3) 0.0 (0.3) 0.0 (3.7) (3.7) o4 (3.7) O41
Network Equipment/Official Mail/Prism and HelpDesk Costs (0.4) (0.4) (0.0) (0.3) (0.0) (4.2) (4.6) 04 (4.5) 03
Network Admin - Channel Specific (0.4) (0.4) 0.0 (0.5) o4 (4.6) (4.4) (0.1) (6.7) 22
Network Admin - non-Specific (0.2) (0.3) 01 0.0 (0.2) (3.5) (3.3) (0.1) 0.0 (3.5)
Operations - Other Infrastructure Costs (0.3) (0.1) (0.2) (0.2) (0.1) (1.9) (1.7) (0.2) (1.4) (0.4)
Total Infrastructure Costs (3.2) (2.7) (0.5) (2.3) (0.8) (30.5) (30.4) (0.0) (26.9) (3.5)
Ut
[Total Expenditure Costs (46.6) (45.7) (0.8) (15.1) (5) (197.7) (199.9) 24 (492.9) (5.9)
DV Income 0.6 0.6 0.0 1.0 (03 9.2 83 0.9 8.2 1.0
EBIT - Targeted Profit (8.6) (8.3) (0.3) (6.3) (2.2) (97.2) (405.1) 19. (96.6) (0.6)
Total Allocated Costs (1.1) (0.8) (0.3) (0.3) (0.8) (3.5) (5.1) 16 (4.4) 09
Other Allocation of Non-Transactional Income 3.2 33 (0.1) 2.9 03 40.2 42.2 (2.0) 36.1 4a
P&L (6.4) (5.7) (0.7) (3.7) (2.7) (60.5) (68.0) 75 (64.9) 45
Allocations 28 0.9 19 02 2.6 12.6 111 15 14.3 (1.7)
IP & L_After Renewal Allocations (3.6) (4.8) 12 (3.5) (0.4) (47.9) 6.9) 9.0 (50.7) 2.8
Overlays (0.7) (0.8) O41 (07 (0.0) (9.4) (10.2) 08 (13.3) 3.9
Adjusted P & L (4.3) (5.6) 13 (4.2) (0.4) (57.3) (67.1) 9.8 (64.0) 6.7
Page 10
Business Scorecard
March 2012
Key Performance Indicators Current Month Full Year 2010-11
Act Target Var Outturn Target Var Outturn
Performance
Total Net Income £m 83.0 82.8 1,045.3 1,025.3 997.8
Focus product sales - Net Income £m (Bonus) 13.2 13.2 162.9 164.0 81.2
Average sales per FS per week (No.) 73 15.0 71 95 68
Direct Sales - Net income £m (Note 1) 14 13 148 19.3 16.4
IAll product contribution £m (Bonus) 478 57.6 657.1 640.0 NA
[Home and Car Insurance Policies In Force (PIF) (k) 364.0 350.0 364.0 350.0 410.0
Financial
Operating profit £m (Bonus) (16.3) (3.9) 613 36.3 35.6
Total operational costs £m (Bonus) (Note 2) (101.5) (88.8) (1,014.8) (1,017.0) (987.5)
Free cashflow £m (Bonus) (110.9) (91.5) (15.0) (58.9) (16.0)
Levels of cash in the network £m 759.2 691.6 759.2 691.6 703.3
Staff costs £m (22.4) (19.7) (251.3) (247.9) (252.8)
Agents pay to income ratio % 104.8% 94.7% 92.9% 95.5% 93.6%
Crown staff pay to income ratio % 122.4% 131.2% 120.8% 126.9% 135.5%
Outstanding Audit Recommendations* 0 0 0 ie) 1
(Customer
Customer Satisfaction 88.0% 85.0% 86.9% 85.0% 85.0%
Customer Complaints* 7836 7,712 89,514 90,000 87,539
Quality of Service % (Note 3) 95.2% 91.4% 93.8% 91.4% 86.9%
(Crown queue time Crown Branches < 5 minutes* 78.5% 78.7% 73.2h 75.0% 65.0%
Call centre 3D Measure (Bonus) (Note 4)* 100.3% 100.0% 105.2% 100.0% 107.5%
Effect (Bonus)* 84.9% 82.2% 83.5% 82.2% 80.1%
Impressions Count (Bonus)* 94.3% 93.0% 93.6% 93.0% 92.1%
People
IHYS engagement index % (Bonus) 58.0% 58.0% TBC 59.0% 41.0%
Headcount 7.198 7,807 7,198 7.807 7,782
Attendance % 96.7% 96.0% 96.4% 96.0% 96.7%
IRIDDOR Accidents (per 1k Heads) (Bonus)* O5 04 3.9 46 5.2
[Compliance Measure (Bonus) 93.9% 95.0% 94.3% 95.0% 91.9%
Strategy & Operations
Network Pilots/Trials Milestones Achieved 76.0% 100.0% 95.0% 100.0% NA
Front Office of Government Milestones Achieved 100.0% 100.0% 100.0% 100.0% NA
ATM availability % 96.3% 95.5% 95.9% 95.5% 95.5%
Website availability % 99.7% 99.8% 99.4% 99.8% 99.7%
Horizon Availability % 98.9% 99.8% 99.5% 99.8% 99.8%
Note 1: Direct Sales is shown excluding Lead Generation income
Note 2: Total Operational Costs is defined as: All Expenditure excluding Cost of Sales
Note 3: ofS target is the average of Retail Standards, Mystery Shopper and Call Centre results.
Note 4: Call Centre 3D target is based on achieving 100% of component targets. 2011-12 targets are more challenging than the previous year.
* These measures are not on the group scorecard
UKGI00011499
UKGI00011499
Page 11
UKGI00011499
UKGI00011499
@
Appendices
Staff Costs By Directorate
March 2012
YTD staff costs are £3.4m adverse to budget, driven by the
unbudgeted pay awards, and higher productivity payments partly
offset by vacancies.
Communications, (0.9)
Legal, (1.5)
Central Items, (5.0)
Commercial, (5.4)
Finance, (7.9)
£m
YTD Actual
POL Headcount P12
Actual I Budget I Variance
Finance 207 203 @
HR 115 126 1
Legal 21 15 (6)
MD 4 6 2
Commercial 88 78 (20)
Communications 17 0 (a7)
FS 21 (7 (21)
Network 5,385 5,486 101
Operations 1,937 1,893 (44)
Chairman's Office 3 0 (3)
[Total 7.798. 7807 9
Staff Costs
Human Resourc
rations IT, (
>
YTD Budget
Communications, (0.9)
Legal, (1.2)
Central Items, (4.6)
Commercial, (5.7)
Finance, (7.7)
UKGI00011499
UKGI00011499
Page 13
Non Staff Costs - By Directorate
March 2012
Full year non staff costs are £10.6m favourable to budget. This variance includes: the write back of the centrally held
WHS TUPE provision; lower spend on printing, stationary and uniforms; lower broadband connection charges due to
lower acquisitions; and lower losses.
Communications, (0.6)
Human Resource, (4.6)
Financial Services, (6.7)
Finance, (6.8)
Network, (9.7)
Operations IT , (110.9)
Central Items, 2.1
YTD Actual
Non Staff Costs
Communications, (0.6)
Central Items, (3.2)
Human Resource, (4.3)
Financial Services, (5.4)
Finance, (6.9)
Operations IT , (111.8)
YTD Budget
UKGI00011499
UKGI00011499
Page 14
Non Staff Costs by Type
March 2012
Collection, Delivery and
Conveyance Charges, (1.0)
Vehicles, (2.1)
Property Maintenance, (4.2)
Accommodation - Property
Facilities, (6.0)
Consultancy, Marketing and
Legal fees, (13.5)
Staff & Agent Related plus
Consumables, (7.4)
£m
Compensation, 2.3
Full year non staff costs are £10.6m favourable to budget, with compensation payments being the most favourable (release of
WHS TUPE provision), followed by other operating costs (lower broadband connection charges due to lower acquisitions), staff
& agent related consumables (printing, stationary and uniforms) and Finance (lower losses).
Collection, Delivery and
Conveyance Charges, (1.1)
Non Staff Costs
Compensation, (1.7)
Vehicles, (2.1)
Property Maintenance, (4.5)
Accommodation - Property
Facilities, (6.1)
Consultancy, Marketing and
Legal fees, (9.1)
Staff & Agent Related plus
Consumables, (13.9)
Finance, (17.6)
IT Costs, (78.8)
YTD Actual YTD Budget
UKGI00011499
UKGI00011499
Page 15
Car & Home Insurance Policies In Force
March 2012
UKGI00011499
UKGI00011499
Car & Home PIF Trajectory
450,000 - _
400,000 ~—————
—S_ SO
350,000 — —
300,000 - —_
250,000 ~————
200,000
150,000
100,000 ———_, — st i ii
OP OP EP PP SS PS PO ES EF
Actual PIF
Base Case Plan
Best Case Scenario
Worst Case Scenario
Contract Threshold
Page 16
Post Office Ltd — Strictly Confidential
POST OFFICE LIMITED EXECUTIVE SUMMARY
POLB(12)60
BOARD OF DIRECTORS
DATE OF BOARD: 18™ APRIL 2012
UKGI00011499
UKGI00011499
SUBJECT: PosT OFFICE LIMITED VEHICLES TENDER — RECOMMENDATION
TO AWARD
AUTHOR/SPONSOR:
MITUL SHAH (GROUP PROCUREMENT)
JULIAN TUBBS,
BRIAN DEVENEY
KATH HARMESTON
CONTRIBUTORS / PRESENTERS:
LESLEY SEWELL
DECISION GUIDANCE, NOTING
FOR: YES
REFERENCE PREVIOUS ACTION POINT:
BACKGROUND AND CONTENT:
THE PURPOSE OF THIS PAPER IS TO:
Ll REQUEST APPROVAL FOR THE AWARD OF 5 FRAMEWORK CONTRACTS TO MEET
Post OFFICE LIMITED’S CASH IN TRANSIT (CIT) AND MOBILE POST OFFICE
(MPO) VEHICLE REQUIREMENTS
1.2. ‘RECOMMENDATION TO AWARD’ APPROVAL ALREADY RECEIVED FROM POST
OFFICE SOURCING COUNCIL ON 21/02/2012 AND ROYAL MAIL GROUP
SOURCING COUNCIL ON 28/02/2012
1.3. AGREE WITHIN POST OFFICE GOVERNANCE AND DELEGATED AUTHORITY
WHO WILL SIGN THE CONTRACTS ON BEHALF OF POST OFFICE LTD
THESE FRAMEWORKS DO NOT COMMIT POL To ANY SPEND. ALL SPEND UNDER THE
FRAMEWORKS WILL BE SUPPORTED BY INDIVIDUAL BUSINESS CASES THROUGH NORMAL POL
IC PROCESS
RECOMMENDATION (IF DECISION REQUIRED) DATE
RECOMMENDED BY THE EXECUTIVE TEAM 03.04.12
INVESTMENT APPRAISAL COMPLETED OR FINANCIAL IMPLICATIONS I 03.04.12
ASSESSED AND SUPPORTED BY THE CFO
ADDITIONAL PRESENTATION: YES — DETAILED EXECUTIVE SUMMARY
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
POLB(12)60
POST OFFICE LTD BOARD
Post Office Limited Vehicles Tender - Recommendation to Award
1. Purpose
The purpose of this paper is to:
e Request approval for the award of 5 framework contracts to meet Post Office Limited's
Cash in Transit (CIT) and Mobile Post Office (MPO) vehicle requirements over the next five
years.
2. Proposal
The Post Office Ltd Board is asked to approve the award of 5 framework contracts to the following 6
suppliers to meet Post Office Limited’s Cash in Transit (CIT) and Mobile Post Office (MPO) vehicle
requirements:-
Lot Description Framework Supplier
Provision of light commercial
4 vehicle chassis (up to QQ Mercedes-Benz (UK) Limited
7.5tonne) and associated a Peugeot Motor Company PLC.
services
Provision of light commercial
vehicle chassis (above
2 7.Stonne) and associated Q Mercedes-Benz (UK) Limited
services
Unarmoured cash in transit Q_ S.Macneillie & Son Limited
3 vehicle conversions and a Johnson Security Limited
associated services Q Leicester Carriage Builders
Armoured cash in transit Q_ S.Macneillie & Son Limited
4 I vehicle conversions and Q Johnson Security Limited
associated services Q Leicester Carriage Builders
5 Mobile Post Office conversions 3 Hohnson Sa eine 1s
and associated services Q Torton Bodies Limited
The contract duration for all of the contracts is 5 years from March 2012 with no extension options and
is consistent with the Sourcing Strategy approved by POL Sourcing Council on 5" October 2010.
Ceiling prices for all lots will be fixed for the first 12 months. Mini-competitions and eAuctions will be
used, as appropriate to drive business benefit. The intention of this contract award is to create volume
flexible contracts (with no minimum commitments) to meet the continued provision of vehicles to Post
Office Limited.
The estimated total contract value is up to £27m; which is based on an average of c£5m per annum for
CIT vehicle requirements, and up to £2m over the 5-year term for MPO requirements. This is the
maximum forecasted spend and is dependent upon actual vehicle demand. Expenditure through the
contract will be authorised via the normal delegated authorities.
3. Key Information
Framework contracts, with no minimum volume commitments to any bidders, have been applied with
all suppliers across all 5 ‘lots’. Under these contracts, POL has reserved the right to call off
requirements from any supplier in the respective ‘lot’ or to use mini-competition or eAuctions as
appropriate.
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
Under these framework contracts, vehicle chassis and cabs will be provided by the suppliers in Lots 1
and 2, as appropriate, with the cash in transit or mobile Post Office conversions being undertaken by
the Lots 3, 4 or 5 suppliers.
A RMG light commercial vehicle contract is still live with Mercedes until the end of June 2012, within
which it would be possible to order Sprinter chassis cabs up to a maximum of 7.5 tonnes. However the
POL contract for cash-in-transit security conversions expired in September 2010 with no ability to
further extend.
4. Summary of Procurement & Supplier Selection/Award Process
Is detailed in Appendix A
5. Potential Savings Over the Contract Life
Value will be created through the ability to run mini-competitions and e-auctions. Through other RMG
vehicles contracts, this has proven to keep suppliers motivated and proactive towards our business.
While it is currently hard to give precise and specific cost benefits of these contracts, based on the
current prices paid it is expected a saving of 13% could be achieved particularly for those vehicles
where POL will have its highest demand over the life of the contract.
6. Business Benefits
Is detailed in Appendix B
7. Risks/Mitigation
There is a risk that... Leading to... Mitigated by...
Volume leverage no longer exists due to I Benefits of volume leverage I Mini competitions and
a significantly reduced vehicle plan due I not being achievable eAuctions where necessary
to preserving cash and extending vehicle and appropriate
lives
Fixed ceiling pricing only secured for first I Possible price increases I Mini competitions and
year of 5 year contracts after this first year of I eAuctions where necessary
operation of the framework I and appropriate
arrangement
8. Recommendations
The POL Board is asked to:
8.1 Approve the award of 5 framework contracts to meet Post Office Limited’s Cash in Transit
(CIT) and Mobile Post Office (MPO) vehicle requirements
Lesley Sewell
Interim Chief Operating Officer
March 2012
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
Appendix A
Request for Information (RFI) — A RFI questionnaire was issued to a number of suppliers in February
2011 with capabilities spanning the scope of POL’s potential vehicle requirements. This was done to
gain a better understanding of current market capability, trends and innovation, to enable a more
informed approach to market at tender stage.
OJEU Notice and Pre-Qualification Questionnaire (PQQ) - Published simultaneously in April 2011.
A total of 42 bidders expressed interest across the 5 Lots, of which 29 returned a completed PQQ. 19
bidders were short-listed to the Invitation to Tender (ITT) stage. The procurement has been
undertaken under the Public Contracts Regulations (2006) under the Restricted Procedure.
Invitation to Tender (ITT)
The ITT was split into 2 stages — an Initial and a Final Tender Stage. Bidders had the opportunity to
provide comments to the proposed terms and conditions and for POL to clarify technical proposals at
the Initial Tender Stage. Bidders were then required to accept POL’s terms and conditions for the
applicable Lot at the Final Tender Stage.
The ITT was published in August 2011. 8 bidders returned a completed Initial ITT response and 6
bidders submitted completed a fully compliant Final Tender Responses. Responses were evaluated
against the award criteria weightings set out.
For the Final Tender Stage, no variations were made to the specifications issued at the Initial Tender
stage. Where variations to contract Terms and Conditions were made, these were independent of the
Bidder which provided comments, and all Bidders for the applicable Lot(s) were made aware of these
updates. No significant procurement risk is envisaged.
It was determined that all bidders who submitted Final Tender Responses, were technically competent
to provide POL with solutions to meet its business requirements against the relevant Lot(s).
The project has been governed throughout by a cross-functional POL Project Board, which has been
kept informed of progress and provided oversight to ensure that POL’s business requirements are met.
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
Appendix B
Key benefits to be realised through these contracts include:
e Assurance of Supply - Secured continuity of supply to POL over the next 5 years to support its
Cash in Transit and Mobile Post Office vehicle requirements. This will also save on current
ongoing maintenance expenditure of vehicles being utilised beyond their maximum life.
e Flexibility of Supply — Supply options for POL through the award of contracts through framework
agreements with multiple contracted suppliers, with no minimum volume guarantees. The
requirements have also included other vehicles that POL may require over the life of the
agreement including a 5T concept vehicle being developed
e Competitive Supply - The ability to run mini-competitions and eAuctions, as appropriate, to
ensure healthy competitive tension in the market place to further reduce prices (use consolidated
volume where possible to achieve this)
e Supplier Development - The inclusion of multiple suppliers, including those not previously used
by POL, but with capability to meet requirements demonstrated have helped to further improve
POL's reputation in the supply market
e Fixed prices — ceiling prices fixed for the first year of the 5 year term, with opportunities to reduce
vehicle prices by improvements of up to 13% over current prices paid to date. Annual vehicle
spend levels will be dependant upon requirements and limited to capital allocation agreed.
e Supplier Capability - which has been tested in the specialist vehicle conversion market and
ensured a market competitive offering
e Improved contractual terms - including penalties for supplier failure
MARCH 2012
POST OFFICE LIMITED MATTERS
- DISPUTE RESOLUTION
PRIVILEGED AND CONFIDENTIAL - CLAIMS OVER £500K OR THOSE OF A SENSITIVE NATURE
Horizon
claims
POL/HE/C
D
Rod Ismay of
POL
POL has received
notification of a total
of five (5) claims from
former subpostmasters
(SPMs) .
Each alleges wrongful
termination of contract
(based on (a) alleged
defects in POL’s internal
processes and (b) alleged
defects with Horizon).
Each is seeking damages
in the sum of circa
£150,000.
Four of the five claims
remain at the pre-action
stage (i.e. there are no
live court proceedings) .
Court proceedings were
issued in respect of the
fifth claim, but this
claim has been struck
out.
Shoosmiths assert that
they have consulted on a
further 85 cases, which
are all likely to raise
similar legal issues.
(1) Scott Darlington. Claim
rejected on the basis that
the SPMR admitted to and was
convicted of false
accounting. Responded to
Shoosmiths on the basis that
the SPM can have no claim
for wrongful termination in
circumstances where he had
repudiated his contract.
Last correspondence sent to
Shoosmiths on 14/12/2011.
Shoosmiths are yet to take
any further action.
(2) Julian Wilson. Position
as above,
Last correspondence sent to
Shoosmiths on 14/12/2011.
Shoosmiths are yet to take
any further action.
(3) Terence Walters. SPMR
admitted to false
accounting, but not
convicted.
Last correspondence sent to
Shoosmiths on 14/12/2011.
POLB (12) 61
Bond Pearce
(Gavin
Matthews,
Helen
Watson)
UKGI00011499
UKGI00011499
UKGI00011499
UKGI00011499
Shoosmiths are yet to take
any further action.
(4) Thakshila
Somaskandarajah. BP have
responded to Shoosmiths
stating that the claim is
time barred and cannot now
be pursued. No response to
this letter from Shoosmiths
to date.
(5) Lynne Prosser.
Proceedings were commenced
by Prosser in June 2011,
POL has been successful in
having this claim struck
out. Permission to appeal
has been refused.
Bond Pearce has been
instructed to pursue Prosser
for costs which are
c.£10,000.
POL/HF/C
D
Angela Van-
Den-Bogerd
has made
Equity
Act and under the Human
Rights Act alleging
disability and age
discrimination against
Shieldex Limited (the
franchisee of the branch)
and POL. Damages are
claimed, but the amount
is not specified. The
estimated potential
exposure (if the claim
succeeds) is likely to be
in the region of £6,000
to £18,000 plus costs.
If POL is found to be a
service provider under
the Equality Act and,
therefore, liable to make
reasonable adjustments
this is likely to have
implications across the
Network.
Particulars of Claim have
been served on both Shieldex
Ltd and POL. The Defence is
due on 2 April and is
currently being finalised.
POL needs to decide whether
or not to make a “Part 20
Claim” against Shieldex Ltd
for an indemnity in the
event that POL is found to
be liable for the actions of
Shieldex Ltd as its
principal.
It remains unclear what
steps Shieldex Ltd are
taking to defend the claim.
Bond Pearce have been
pressing the solicitors
acting for Shieldex Ltd in
an attempt to ensure that
proper steps are taken to
defend the proceedings.
In the event that judgment
in default is obtained
against Shieldex Ltd (should
it fail to file a Defence)
this will not directly
impact on POL, but it may
potentially make it more
difficult to settle the
claim.
Bond Pearce
(Tan
Newcombe,
Dan
Fawcett)
UKGI00011499
UKGI00011499
UKGI00011499
UKGI00011499
This document contains confidential information relating to Post Office Limited. It is intended for
the named recipients only and should not be disseminated further.
Review of Key System Controls
Horizon in Horizon
System
Controls Post Office Limited
Legally Privileged & Strictly Confidential
Assurance Review
March 2012
ST 20 AEDS NI NSE RENTS SEN PRES Internal Audit & Risk Management LL LT
Legally Privileged and Strictly Confidential
UKGI00011499
UKGI00011499
Context and Objectives
The Post Office Limited (POL) network of approximately 11,000 branches processes client and business transactions in excess of £100 billion annually. The
majority of transactions are conducted on behalf of third parties, for example, receiving payment for domestic utility bills and paying out from National Savings
accounts.
Customer transactions are captured on the Horizon (HNGX) electronic point of sale system in branches and transmitted to central systems (utility payment,
external banking and POL finance systems) throughout the day. Overnight, daily summaries are transferred into the central accounting system, POL SAP. The
translation process between the two systems is enabled by the Reference Data System (RDS). An overview of the component parts of the HNGX system is
provided at Appendix A.
The overall objective of the review was to provide assurance that appropriate IT management disciplines provide a stable IT platform, and that suitable internal
controls operate over HNGX transactions and the extraction of these for central systems. In the area of management disciplines the review assessed controls
over: access to software; change management; capacity monitoring; and system resilience and disaster recovery. With regards to internal controls over
transactions the review covered: master data controls; transaction data; SAP Middleware; and batch updates.
The review also assessed the degree to which actions to address the issues raised in the 2011 Ernst & Young (E&Y) Management Letter regarding the HNGX
control environment have been progressed by management.
ings and Conclusion
IT Management Disciplines and HNGX Transaction Controls
The following control weaknesses were identified:
1. System access: Access to HNGX in branches is by means of individual user accounts and passwords. However, particularly in sub-post offices, the same user
accounts and passwords are often shared between branch staff. The use of individual user accounts is not always practical, e.g. in the case of single
terminal branches where time would be lost continually switching between user accounts, and the number and geographical spread of sub-post offices
makes it difficult for POL management to ensure access controls are enforced.
Implication: The ability to identify an individual user responsible for inputting a transaction may potentially be compromised.
2. Resilience and Disaster Recovery: Fail-over from the live data centre to the back-up has not been tested since June 2009, although disaster recovery
arrangements were tested during the migration to the new system in October 2009. Testing of the business continuity plan has been scheduled for the 24
and 25" of March 2012.
Implication: The period of any inability to trade as a result of a major system outage may be greater than anticipated.
ST 20 AEDS NI NSE RENTS SEN PRES Internal Audit & Risk Management LL LT
Legally Privileged and Strictly Confidential
UKGI00011499
UKGI00011499
Continued
Key Findings and Conclusi
3. Master data: No audit trail exists for change requests received by Fujitsu from the Network Business Support Centre (NBSC). Not all 'approved' requesters
are documented or referred to on receipt of a change request. The membership of the Lotus Notes email groups, which are used to authorise the Master
Data Teams to make changes to standing data, is not known and has not been subject to recent review. One of a sample of 10 change requests was found
to have been handled via the “Fast track” process when it should have come through the normal process, resulting in reduced oversight of the change.
Implication: It is difficult to detect and prevent inappropriate changes being made to master data.
4. Transaction data: One of a sample of 5 monthly reconciliations between HNGX generated client transaction summaries and those created by the clients
themselves was found not to have a second level review signature. Period-end Senior Management review is not formally signed-off, although it appears to
be undertaken.
Implication: Transaction discrepancies may not be identified resulting in third party clients being undercharged or overcharged for transactions.
Conclusion: IT disciplines around functional changes and capacity monitoring were found to be appropriately designed and also operating effectively. However,
access to the system in branches, particularly sub-post offices, can be by means of shared accounts. In addition, fail-over from the live data centre to the back-up
centre has not been tested since June 2009. This requirement is of particular importance, as highlighted by an outage in the system in December 2011. Testing
of the business continuity plan has been scheduled for March 2012. Controls designed to maintain the completeness, accuracy and integrity of transactional data
flows within HNGX were effective, with minor weaknesses noted around manual processes for the validation of master data and transaction data. No evidence
was found of material discrepancies arising from these issues.
Control Environment: Some improvement required.
E&Y Management Letter 2011
The 2011 E&Y Management Letter identified a number of areas for improving HNGX and other POL IT system controls. This current Internal Audit & Risk
Management (IA&RM) review assessed the degree to which management action plans have progressed to address the issues which related to HNGX. Progress
has been made in completing the actions arising from the E&Y Management Letter. The E&Y recommendations that require most additional work relate to:
inappropriate access to software change management duties (incomplete segregation between software development and migration roles); the process for the
identification and resolution of incidents; the recommendations that POL undertakes an architectural review, configure passwords in line with policy and perform
periodic scan of passwords as part of a penetration testing schedule. The penetration testing originally planned for January 2012 has been postponed to March
2012 as the business had to prioritise a test to meet Payment Card Industry (PCI) compliance during January.
The findings, summarised in Appendix B on page 9, have been shared with E&Y and reflect our assessment as at the end of January 2012.
Manag nt Response
We agree with this report and its findings, and will act to progress the action plan within the agreed timescales — Lesley J Sewell
ST 20 AEDS NI NSE RENTS SEN PRES Internal Audit & Risk Management LL LT
Legally Privileged and Strictly Confidential
Access to Software:
Walked through and sample tested access
arrangements for branch, POL and Fujitsu technical
support staff.
Change Management:
Inspected testing and release management
processes, walked through and sample tested
completed changes.
ummary Findings - IT Management
Capacity Monitoring:
Reviewed and sample tested arrangements for
monitoring processing capacity.
Resilience and Disaster Recovery:
Inspected, walked through and sample tested
arrangements for ensuring resilience and disaster
recovery.
UKGI00011499
UKGI00011499
isciplines
HNGX access in branches, particularly sub-post offices, is often
via shared accounts. Access security controls over the “back
end” HNGX environment (including Credence / Tl) were found
to be effective, as were physical security controls.
Functional changes are initiated and progressed via agreed
processes and appropriately approved and tested prior to
migration to the live environment.
Transaction processing capacity, including processor
utilisation, disk space etc, is proactively managed and
monitored by Fujitsu including forecasting of future
requirements.
System design resilience is high with frequent failure testing of
individual components and sub-systems. “Warm” fail-over
arrangements exist between the two data centres, although
these have not been tested since June 2009.
Note: For details of systems and data flows, see “HNGX System Overview” at Appendix A.
ST 20 AEDS NI NSE RENTS SEN PRES
Legally Privileged and Strictly Confidential
Internal Audit & Risk Management
Master Data :
Inspected master data input process and data
validation routines and tested via walkthroughs and
sample testing of changes
Transaction Data:
Reviewed and sample tested arrangements for the
reconciliation and validation of transaction data.
ummary Findings
SAP Middleware:
Inspected data validation controls and tested the
reconciliation of inputs to and outputs from
Middleware (which translates HNGX data to POL SAP
readable format).
Batch Updates:
Verified data flows across key interfaces to assess
whether batch updates are completed accurately and
on time by means of walkthroughs and sample
testing.
UKGI00011499
UKGI00011499
Internal Cont
Minor weaknesses were found around: helpdesk-initiated
change requests; documentation and verification of
“approved” requesters; and use of “fast-track” requests. Data
validation routines have been designed and implemented
effectively.
Client account reconciliations are reviewed by team leaders
and balances >£400k are reviewed by second line
management. However, no formal senior manager sign-off
exists for month-end probity reviews.
A detailed functional specification has been defined and
agreed with Fujitsu, covering controls to validate the
completeness / accuracy of the interface to POL SAP. Controls
relating to data transfer between SAP Middleware and POL
SAP appear to be designed and operated effectively.
Effective batch processing / interface monitoring controls are
in place, automated and managed via Tivoli Workflow
Scheduler (TWS). Automated error alerts are raised by TWS to
the Service Management team who escalate to either the
Logica Application Management team or Fujitsu for resolution.
Note: For details of systems and data flows, see “HNGX System Overview” at Appendix A.
ST 20 AEDS NI NSE RENTS SEN PRES
Legally Privileged and Strictly Confidential
Internal Audit & Risk Management
Access to software
UKGI00011499
UKGI00011499
1. Complete an analysis of the potential misuse of individual Horizon user accounts and passwords in branches. Communicate to branch staff the requirement
that accounts and passwords must only be used in accordance with Post Office policy. Priority 2 (Dave M King —- May 12)
Resilience and disaster recovery
2. Agree with Fujitsu a date for full fail-over testing. Priority 2 (Lesley Sewell - Completed)
Master data
3. Develop and deploy a formal process for change requests identified and communicated by the NBSC Helpdesk. Priority 2 (Lesley Sewell —- May 12)
4. Confirm the current membership of Master Data Change and Property Projects Lotus Notes email groups, ensuring that only current team member
addresses are included. Priority 2 (Lesley Sewell —- May 12)
ASN AS AST
Legally Privileged and Strictly Confidential
No of
Importance actions Completed by Jun 12
Priority 1 - - -
Priority 2 4 1 3
Internal Audit & Risk Management
Susan Crichton, Legal and Compliance Director
Christopher Day, Finance Director
Kevin Gilliland, Network and Sales Director
Andy J Jones, Quality and Standards Manager
Dave M King, Senior Security Programme Manager
Neil Lecky-Thompson, Head of Programmes and Planning
John M Scott, Head of Security
Lesley J Sewell, Head of IT and Change
Paula Vennells, Managing Director
Mike Young, Chief Operating Officer
Alice Perkins, Chairman
Legally Privileged and Strictly Confidential
ulation List
Internal Audit & Risk Management
UKGI00011499
UKGI00011499
Derek K Foster, Internal Audit & Risk Management Director
Moya Greene, Chief Executive
Matthew Lester, Chief Financial Officer
Emily Pang, Chief of Staff
Peter Tansley, Head of Risk & Assurance
Ernst & Young
UKGI00011499
UKGI00011499
pendix A - HNGX System Overview
‘Transaction Corrections
ST 20 AEDS NI NSE RENTS SEN PRES Internal Audit & Risk Management LL LT
Legally Privileged and Strictly Confidential
UKGI00011499
UKGI00011499
pendix B - Update on Actions Arising
Summary Status
1 High Governance of outsourcing arrangement with Fujitsu: POL is responsible for the governance and risk and control Substantial
B frameworks and should have visibility and assurance over their design and operating effectiveness. progress made
2 High Segregation of change management duties: Inappropriate access should be revoked and roles for development and Further work
B migration to live environment should be segregated. required
3 High Change management process: All changes should be appropriately authorised, tested and approved prior to Substantial
B deployment to live environment. progress made
. ave es . . . ae . Substantial
4 High Privileged access: Privileged access to IT functions should be reviewed to determine whether it is appropriate.
progress made
5 Med Periodic POL-owned review of user accounts: To assist in the identification of inappropriate access and Substantial
potential segregation of duties conflicts. progress made
6 Med User administration: Review the current user access policy and strengthen the existing user administration process Substantial
within POL and third party service providers. progress made
7 Low Infrastructure logical security settings: Undertake architectural review and periodic scan of passwords as part Further work
of a penetration testing schedule. required
8 Low Password parameters: Review and update the Information Security policy and configure all applications in line with Further work
policy requirements. required
9 Med Access to generic privileged accounts: Review across all applications. Consider replacing with individual Substantial
accounts and implement monitoring controls. progress made
10 Low Incident identification and resolution: Regular review of the problem and incident management process to ensure Further work
incidents are identified, classified and resolved on a timely basis. required
The findings above reflect our assessment as at the end of January 2012.
ST 20 AEDS NI NSE RENTS SEN PRES Internal Audit & Risk Management LL LT
Legally Privileged and Strictly Confidential
UKGI00011499
UKGI00011499
UKGI00011499
UKGI00011499
Post Office Ltd — Strictly Confidential
POLB(12)62
POST OFFICE LTD BOARD
Sealings — March 2012
Seal Register
The Directors are invited to consider the seal register and approve the affixing of the
common seal of the company to the documents set out against items number 777 to
785 inclusive in the seal register.
“The Directors resolved that the affixing of the Common Seal of the Company to the
documents set out against items number 777 to 785 inclusive in the seal registers
are hereby confirmed.”
Alwen Lyons
Company Secretary
April 2012
UKGI00011499
UKGI00011499
POST OFFICE LIMITED
Date , a Company Number
Register of Sealings
11/04/2012 9 9 2154540
Seal Number Date of Date of Persons Attesting Destination of
[File Ref. Sealing Authority Description of Document To Document Document
777 / POLUJMR 01/03/2012 29/02/2012 I Enfield Post Office - 27 Church Street, Enfield, EN2 6AQ Andrew Poole Jean Reynolds
Engrossment of a Lease for sealing/authentication on behalf of Post Office
Limited
Gade Enterprises Limited
Parmiit Signh Dev
Sandra Gammage
778 / POLMR 01/03/2012 29/02/2012 I Dingle CO, Post Office Unit within Supermarket at 340 Park Road, Andrew Poole Jean Reynolds
Liverpool, L8 4UE
Engrossment of a Licence to Alter for sealing/authentication on behalf of
Post Office Limited.
Somerfield Stores Limited.
779 / POLUJMR 01/03/2012 29/02/2012 I Ellis Street Car Park, Kirby in Ashfield, Notts, NG17 8DA Andrew Poole Jean Reynolds
Engrossment of a Licence to Occupy in duplicate for sealing/authentication
on behalf of Post Office Limited
Ashfield District Council
780/ 05/03/2012 05/03/2012 I Franchise Post Office Northfield Branch Neil Owen Denise Reid (Alva Leigh Doyle - Bond
ALG/AL6/364065, 2x Release of Obligations Agreements Pearce)
781 / 08/03/2012 06/03/2012 I Franchise Post Office Northfield Branch between POL and Robini Limited I Neil Owen Denise Reid (Alva Leigh Doyle - Bond
ALG/AL6/364065, 1, Franchise Agreement sx2 Pearce)
2. Personal Agreement x4
3. Supplemental Agreement x2
4. No Plans Letter x2
782/ 12/03/2012 09/03/2012 I Franchise Post Office Palmers Green Branch Neil Owen Denise Reid (Alva Leigh-Doyle - Bond
ALG/AL6/364065, 1. Franchise Agreement dated 1 March 2012 x2 Pearce)
2. Supplement Agreement x2 and
3..No Plans Letter x2
784 30/03/2012 30/03/2012 I Underlease for Post Office premises as part of 12 Quay Street, Haverford I Alwen Lyons Jean Reynolds
West, Dyfed,
SA61 1AA
785 30/03/2012 30/03/2012 I Licence to Underlet - 2-4 Gatton Road, tooting, London, SW17 0SQ. Alwen Lyons Jean Reynolds
Date 11/04/2012 Registered Office: 148 OLD STREET, LONDON, EC1V 9HQ, ENGLAND Page 1
In Strictest Confidence
POLB (12)63
Post Office Limited
(company no: 2154540)
Notes of the Post Office Commu: ions Action Group Meeting
Present:
Alana Renner
Martin Moran
Kevin Seller
Mike Granville
Nick Kennett
Stuart Taylor
Apologies:
Paula Vennells
Kevin Gilliland
Sue Huggins
Shane O’Riordain
Guests:
David Gold
Alice Dickerson
David McConnell
POLCAG01/03
POLCAG02/03
held at 148 Old Street, London
on 14" March 2012
(AR) Communications Director (Chair)
(MM) Commercial Director
(KS) Head of Government Services
(MG) Head of Stakeholder Relations
(NK) Director of Financial Services
(ST) Head of Post Office Relations RMG
(PV) Chief Executive
(KG) Network and Sales Director
(SH) GM Network Services & Transformation
(SOR) Communications Director RMG
(DG) Head of Public Affairs RMG
(AD) Public Affairs Manager RMG
(DM) Communications Manager
Previous meeting Notes
The notes from the previous meeting were agreed.
Previous Action Points
Post Office Integrated Comms’ Plan - Action — the
CAG asked that AR arrange for the IC Plan to be shared with
ET members on a monthly basis as a noting paper for the
performance review meeting. - Completed.
Civic Agenda Conference on the 9 March - Action - PV
and MM to decide who attends on behalf of Post Office. -
Completed
Post Office BIS Week Programme - Action - KS to prepare
a briefing note for PV - Completed
Action — AR to let PV have sight of the visuals for any
displays being used. - Completed
Post Office Annual Parliamentary Report Approach -
Action — MG/ AR to start work on preparing a draft report
and bring this back to a future CAG meeting — Ongoing,
update at April Meeting
UKGI00011499
UKGI00011499
POLCAG03/03
POLCAG04/03
In Strictest Confidence
Financial Services Update - the CAG asked NK to consider
the various options and advise on the approach to be adopted
at the March meeting. Completed (in verbal update)
Network Transformation Programme Communications -
Action — The CAG asked AR to ensure that the MPs letter
arrives on the day of announcement within Westminster and
Devolved Gov't buildings. - Completed
Action — The CAG asked ST to send a copy of the
stakeholder engagement plan to MM and KS, to ensure that
client groups are picked-up as part of the briefing process.
Completed
RM Tariff Update - Action - The CAG noted the latest
position and asked for an update at the March meeting.
Completed (in verbal update)
Royal Mail Modernisation Conferences - Action —
PV asked that SOR feedback that a Post Office slot should be
included in the conference programme.
Completed — Moya’s interview to include reference to
separation and network modernisation programme.
Post Office Integrated Communications Plan
The CAG noted and reviewed the Integrated Communications
Plan (March — June 2012). The meeting offered the following
observations;
- Paula / Nick Kennett’s meetings with Personal Finance
Editors should take place after the Project Eagle
announcement.
- A detailed production timeline has been prepared for the
briefing document required for Paula’s appearance before the
BIS Select Committee on the 15 May. KG flagged that the
timing of any subsequent report from the Committee, if it
contained significant issues, could pose a potential risk to the
planned start for roll-out of the NT programme.
- The CAG asked that the Postal Affairs Minister and the
Perm’ Secretary be added to the invitation list for the
stakeholder dinner programme.
Action — DM to add these stakeholders to the list.
- On the internal communications section, the Vision Launch
event will take place on 24 May at Earls Court, London.
Attendance at Party Political Conferences / Working with
Think Tanks
The CAG noted the suggested approach to working with
Think Tanks as a vehicle to make the presence at Party
Political Conference more effective and compelling. NK
raised the issue of how Post Office addresses the risk that the
chosen think tanks may produce report content about which
we are uncomfortable. KG, whilst stating his broad support
for the approach, asked how the business would evaluate if
UKGI00011499
UKGI00011499
POLCAG05/03
POLCAG06/03
POLCAG07/03
UKGI00011499
UKGI00011499
In Strictest Confidence
attendance at a Party Conference represented value for
money. The CAG discussed this challenge and felt that,
whilst difficult to quantify specifically, the benefits derived are
around stakeholder contact, lead generation, profile, and
critically in the first year post separation, then having a
presence was a political imperative.
In summary, the CAG endorsed the broad approach to the
working with Think Tanks proposal; however details of the
final costs and subject themes need to be circulated.
Action — DM to circulate details following the CAG meeting
with a view to members raising any issues prior to work being
commissioned.
Projects Alaska, Eagle, Polo (Verbal Update)
NK provided a verbal update on key FS-related projects.
Alaska — the mail out to those savers affected by the change
to the BOI decision to draw back from the Irish Guarantee
Scheme took place with minimal customer / external
stakeholder interest.
Polo — there have been no significant developments since the
last meeting. A range of options are still being considered in
respect of the best approach to managing external
communications surrounding this project.
Eagle — the internal and external communications are being
finalised. The latest expected timing of any announcement is
late April.
NT Programme Communications Wash-Up
AR shared a media / external stakeholder digest pack which
summarised the coverage and reaction to the national NT
announcement. There has been a limited reaction from MPs
immediately following the media launch. The launch
generated broadly neutral national media print coverage.
National broadcast, along with regional print and broadcast
coverage, was overwhelmingly positive, as was coverage in
trade titles. MG shared that the NT Stakeholder team are
preparing to meet local stakeholders. KG reminded the
meeting that is crucially important how we prioritise this
contact. MG responded by saying that those stakeholders
already identified as requiring early engagement are EDM
signatories, BIS Select Committee and other interested MPs.
KG asked for a NT External Stakeholder engagement grid to
be prepared.
Action — the CAG asked MG/SH to work up an engagement
timeline for politicians.
Post Office Separation Communications
AR shared with the CAG the high level approach taken and a
copy of the agreed Post Office Separation Communications
Plan. SH asked for clarification on what communications
about Post Office separation are being provided to colleagues
that work at the House of Commons Post Offices.
Action — AR to check approach and advice SH.
POLCAG08/03
POLCAG09/03
POLCAG10/03
POLCAG11/03
POLCAG12/03
In Strictest Confidence
Corporate Responsibility Report Approach
The CAG noted and thanked Alice Dickerson for her
presentation around a suggested approach to a standalone
Corporate Responsibility report. NK asked how we take the
suggested approach forward. AR — stated that the approach
will need to be integrated into the wider CR Strategy being
prepared by Pauline Holroyd.
Action — AR to ensure that the proposal is shared with
Pauline.
RM Tariff Changes (Verbal Update)
DG provided a verbal update on the forthcoming tariff
announcement. The CAG was informed that consumer
prices had yet to be confirmed. It was felt by RMG that the
BIS Select Committee hearing had been helpful in clarifying
the message of an OfCom approved price range rather than a
specific focus on a specific tariff for 2"? class stamps. Further
details of the discounted stamp scheme for Christmas 2012
are being worked-up in conjunction with Post Office
colleagues. The scheme will benefit an estimated 5.3m
vulnerable customers. The tariff announcement will be
supported by a comprehensive range of customer, colleague
and stakeholder communications. This will include a national
door drop to all addresses. The expectation is for tough
headlines.
April Meeting Agenda
The CAG noted and agreed that the following items will be
added to the April meeting agenda;
- Presentation on the Post Office Marketing Strategy
(Stewart Fox-Mills)
Other suggested items for future agendas include;
- Update on Select Committee approach
- Review of NT pilot lessons learnt
- Approach to attendance at the NFSP Conference
Agenda Standing Items
The CAG agreed that the following should be standing items
on future meeting agendas;
- Integrated Communication Plan Update (Alana
Renner)
- FS Update on Projects Alaska, Eagle and Polo (Nick
Kennett)
AOB - None.
Close.
UKGI00011499
UKGI00011499
UKGI00011499
UKGI00011499
POLB (12)64
Noting Paper
IT&C Transformation — “should the Service Integrator be in-house or outsourced?”
Berkeley’s independent view — for Mike Young (POL COO)
Context
IT & Change are seeking POL Board approval in March to establish an IT&C Transformation
Programme and invest £13.4m to deliver it over the next four years. During initial discussions
with the Board, the Board has raised questions about whether the ‘Service Integration’ (SI)
function within the proposed future IT supply chain model should be outsourced or in-house.
POL has asked Berkeley to conduct a brief review of the IT&C Transformation proposal and
business case and provide an independent view on whether the SI function should be
outsourced or in-house. As part of conducting this brief review, POL has also asked Berkeley to
highlight any other general observations and/or risks.
This note summarises for Mike Young (POL COO), Berkeley’s response to the question,
highlighting a number of general observations and risks. These have been discussed and
refined through conversations with Lesley Sewell (Head of IT & Change) and Neil Lecky-
Thompson (Head of Programmes and Planning, and IT&C Transformation Programme Lead).
Mike intends to feedback, as appropriate, the key conclusions from this brief review to the IT&C.
Transformation Steering Group on Monday 5" March, the Executive Team on Tuesday 6" March
and POL Board on 15" March.
1. Should the Service Integrator be in-house or outsourced?
As part of answering the question, two important factors have been considered:
(a) desired role of the Service Integrator
Service Integration is a relatively new market offering that is gaining popularity. As a result, its
precise definition is also taking shape and hence the term can mean different things to different
people
In the case of POL, Service Integration is about having the tools and human capability required
within an IT department to manage multiple outsource providers. The skill sets required are as
follows (taken from POL Sourcing Plan):
Service Integrator
Bull enero
REET Continual Service
Deployment Mgmt II__ improvement
STRICTLY CONFIDENTIAL
UKGI00011499
UKGI00011499
(b) availability of required capability within the timeframe
Lesley and Neil have explained that there is currently a lack of capability in-house to fulfil the
required Service Integration role (as set out above).
POL’s proposed approach is to buy-in (outsource) the Service Integration function. In the
long term, IT&C’s strategy is to bring the Service Integration capability back in-house within POL.
They believe there is insufficient time to build this capability in-house within the timeframe
available to deliver the IT&C Transformation programme plan and business case. Therefore,
they have identified the need to outsource the Service Integration function in the interim,
procuring this in a single procurement along with Service Desk and staff augmentation.
Berkeley supports POL’s assessment and proposed approach to outsource the SI
function in the interim, with a view to bringing it back in-house in the future. We
understand the extended role that POL expects the Service Integrator to perform and the lack of
capability in-house to fulfil this role in the interim. We support the need to buy-in these skills in
the interim. There are many ways POL could go to market to buy these skills. Procuring an SI
service and staff augmentation together is as good a way as any.
We have discussed two specific risks that need to be mitigated:
¢ Transferring current POL capability to the Service Integrator and expecting an
uplift in capability: under the proposed SI procurement approach, there is a view that
35 internal staff currently involved in similar ‘service integration’ activities will TUPE to
the Service Integrator and the service will then be provided back to POL for £2-3m pa.
The expected SI run cost broadly equates to the salary cost of the 35 TUPE individuals
and the procurement encourages the supplier to retain these people. Hence, there is a
risk that the same people will be doing the work as now, albeit via an outsourced
Service Integrator with the benefit of their leadership, methodology and tools. POL
should assure themselves that this procurement is going to deliver a capability upgrade
and not simply move the same capability from within POL to the supplier.
e Maintaining multiple supplier / procurement mechanisms to augment internal
capability: there is a risk that the SI is unable to consistently provide the quantity and
quality of people required. We recommend POL ensure they maintain multiple
supplier/procurement mechanisms through which to augment their internal capability
and avoid being locked down to just the SI. These multiple mechanisms should also
offer a range of seniority / capability at a range of price points so POL can bring heavier
hitting resource to bear on the more challenging problems / pieces of work. This is
already part of POL’s plan.
We suggest that, in responding to the POL Board, the proposed scope of the SI function is set
out for them along with a summary assessment of current capability against it.
2. Other observations — the ‘tower’ structure
The one area that prompted much discussion with Lesley and Neil was the architecture of the
service towers and whether there should be a single Applications tower as currently planned (see
Appendix 1), or multiple Application towers (see Appendix 2). There is no “right answer’ in terms
of how to arrange the towers.
Single Applications tower (as currently planned). A single Application tower has been
proposed for reasons including:
e Single procurement of a single prime supplier, resulting in less OJEU effort;
e One prime vendor responsible for all applications and their integration;
STRICTLY CONFIDENTIAL
UKGI00011499
UKGI00011499
e One supplier to hold to account when things go wrong.
Migration from current incumbent suppliers to this single Applications tower will be phased over
time in line with contract terms and the business transformation agenda.
Multiple Application towers (possible alternative). Creating multiple Application towers would
enable some different benefits:
e Increased supplier competition on price, especially for the run costs of applications
created post initial contract award;
e Increased supplier competition on quality and sophistication of the solutions procured;
POL would be in a better position to buy business outcomes and solutions to complex
problems rather than just application requirements;
* The dominance of a single monopolistic supplier is reduced.
By way of an example and to highlight some of the implications of the different tower structure
options, Appendix 3 sets out an illustration of how POL could move from their current state ERP
systems to the target state under each of the two different tower configurations.
Consolidation of non-Application towers. If a multiple Application towers model was to be
followed, it may make sense to consolidate some of the existing non-application towers, e.g.
e — Split the Networks tower into WAN and LAN and then consolidate into other towers:
co Include WAN in the Horizon (POS) tower to preserve end to end SLAs with
remedy that can be enforced;
o Include LAN into the Workplace tower so that all office on premise work sits with
the same supplier;
e Service Desk and Service Integration could be combined (and effectively are now in
POL’s proposed future IT supply chain model);
« Workplace and Service Desk could be combined, increasing first time fix on office based
user calls.
Because there is no “right answer’, we don’t believe a recommendation to change the tower
structure is appropriate. However, we hope the discussion has been ‘food for thought’ and
provides a basis for IT&C to review and challenge their current approach to the tower structure,
particularly as they engage in competitive dialogue with potential suppliers during the
procurement process. Taking some time to review and challenge the current approach to the
tower structure should not prevent POL from progressing with their current plans of seeking POL
Board approval for the business case and starting to engage the marketplace.
24 March 2012
STRICTLY CONFIDENTIAL
UKGI00011499
UKG100011499
Appendix 1 - POL’s proposed future IT supply chain model (‘tower’ structure)
POL Tac
2
5
3
3
3
S
sDevelprnent, tng and ‘Servet
rranterance ofl appheatons hardware
o8 ‘nfsctrvctare
‘Herzen foftoace
+e “Maintenance
eBusiness oysters
Appendix 2 - illustrative alternative ‘tower’ structure used to prompt discussion
STRICTLY CONFIDENTIAL
UKGI00011499
UKGI00011499
Appendix 3 - illustrative example of how POL could move from their current state ERP
systems to the target state under each of the two different tower configurations
“Single Applications Tower”
scenario
“Multi Application Towers”
scenario
Current State
Let's assume for this example that current legacy ERP is effectively split in 3:
- Product and branch reporting (supplied to POL by CSC?);
- HR (supplied to RMG by CSC and shared with Group);
- Finance (supplied to RMG by CSC and shared with Group but separate
instance to HR).
As part of transformation, a new POL ERP is envisaged. Planning and
managing the migration of these 3 systems to a new platform will be complex,
especially given RMG separation and incumbent supplier contracts nearing
term.
Pre-
Procurement
POL devise a migration approach
including sequence of migration
given RMG separation and
incumbent supplier contract expiry
with the support of the Service
Integrator. POL document
functional, non-functional and
migration requirements and tender
new SAP platform to IT solutions
framework.
POL document the current state, the
challenges/constraints and the desired
outcomes with the support of the
Service Integrator. POL invite multiple
suppliers to propose a costed plan to
cover creation of the platform, migration
from legacy systems (including the
legacy vendor work under sub contract)
and the running of the platform until its
natural end of life. This is considerably
less onerous for POL than thinking
through the solution options internally.
Pricing during
Suppliers are encouraged to follow
Suppliers consider multiple ways of
procurement I the POL migration approach and working through the constraints and
price on that basis (only one challenges of migration in order to
migration approach is considered by I achieve the business outcome specified
the suppliers). The build and by POL. Each supplier selects what
migration of the new ERP is they believe to be the best approach
competed and the price reflects the I based on criteria indicated by POL.
competition. But around half the The full lifecycle cost of the platform is
TCO is run cost and this is sole subject to competitive pressure.
sourced through the single
Applications Tower vendor.
Supplier The best application provision The best all round proposal wins in
selection proposal wins. Costs are a factor terms of quality of application, migration
but only the build cost is known. approach and total lifecycle cost.
Delivery There is a risk that the POL The supplier owns the migration
proscribed migration approach is
flawed (internal capability is weak).
If flaws are encountered, the
supplier demands a CR to
accommodate extra work.
approach being followed and is
accountable for making it work.
Live running
POL need to novate the new
Each major Applications tower has its
STRICTLY CONFIDENTIAL
UKGI00011499
UKGI00011499
application into the Tower provider.
Once done there is a single provider
for live support and maintenance of
all applications. Run costs priced
under monopoly conditions.
Enhancements costs are managed
through reviewed rate cards,
benchmarking and the like.
own provider. Run for the lifetime of the
system has been procured up front in
the initial contract award. Run costs
have been priced under competitive
conditions. Enhancements costs are
managed through reviewed rate cards,
benchmarking and the like.
Contract term
When the single tower provider
reaches contract term, POL are
forced to re-tender all support and
maintenance for all applications at
the same time. Different
applications are at different stages
of their life. Some are new. Some
are overdue tech refresh. The
vendor holds stranded assets (kit,
licenses) that have a monetary
value that is now hard to extract.
POL IT&C workload has a 2 year
boom, 6 year “low” cycle to POL
forcing use of external resource for
client side work during the peak
years resulting in reduced internal
capability.
Each tower reached contract term in its
own time. The contract term of each
tower has been set by the vendor in the
original proposal to minimise the value
of stranded assets. Where tower
contracts are extended with the same
provider, likely there is a tech refresh or
equivalent project that help re-launch
and re-invigorate the supplier
relationship. In most cases the tower is
re-competed in the market and
replaced. POL IT&C have a steady
stream of Applications Tower re-
tendering and re-specifying work over
the long run. This enables POL to build
a stronger internal team of consistent
size over time.
STRICTLY CONFIDENTIAL