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SUMMARY OF KEY FINDINGS OF HORIZON WORKING GROUP
REPORT AND KPMG REPORT
APPENDIX F
The Working Group’s report covers the three strands of work undertaken over the
last month: the negotiations between the public sector parties and ICL chaired by
Graham Corbett, KPMG’s analysis of fall-back options and the DTI response to the
five points in Stephen Byers’ letter of 10 September 1998.
KPMG tested the key assumptions underlying the value for money analysis of the
options previously presented to Ministers, namely: Option 1 - continuing with
Horizon; Option 2 - continuing with the project minus the benefit payment card and
Option 3 - cancellation of the project with an alternative technology platform
commissioned by Post Office Counters. Their work focused on analysis of the
fall-back options.
Value for Money Analysis
e KPMG?’s value for money analysis reached broadly similar conclusions to those
of the Treasury Working Group in their report to Ministers i.e. continuation
offers slightly better value for money than the fall-back options but that
there remain margins of error surrounding the modelling and risks
surrounding all of the options which have not been quantified.
Comment: However this analysis ignores the cost of the damage which Option 3
would do to ICL, to our relationship with Fujitsu, to inward investment from Japan,
and to the credibility of the PFI process, especially for projects of this type. If these
costs were added to Option 3, the relative attractiveness of Option 1 would be much
enhanced.
Post Office Network
e KPMG’s modelling under all 3 options assumed that HMG would still wish by
2009-10 to retain a network of around 80% of its current size (assumes managed
closure of 1,000 urban offices and the attrition of 2,200 offices); this would
necessitate the payment of a subsidy of £30m to the 6,000 most vulnerable
offices. The network is predicted under KPMG’s analysis to be loss making
under all options but with smaller losses under Option 1 than under Options 2
and 3.
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‘© The impact of income loss on the network modelled by KPMG is less severe than
that modelled by POCL.
ACT
e BA have prepared a programme for moving to ACT. Their preferred strategy
would be to see active promotion of voluntary ACT from April 2000 and
compulsory ACT migration benefit by benefit from October 2001 to October
2004. DSS Ministers have not taken any decisions on the frequency of payments
but for the purpose of this exercise some changes have been assumed. KPMG
suggest that that there is a risk that the costs of periodicity in the current
modelling are understated.
e KPMG from their research (which was limited given the timescale) suggest that
the banks view migration of all benefit recipients to ACT in 2-3 years as
manageable, although a significant increase in counter transactions might cause
the banks to review their charges for this service. The banks consulted were in
favour of post office customers continuing to use post offices for cash
withdrawals once they had moved to ACT, provided that post offices were by
then suitably equipped with the necessary facilities.
Comment: Whether such a migration could in reality be achieved will not, we
believe, be possible to forecast accurately until proper negotiations are undertaken
with the banks.
Alternative technology platform for Option 3
e KPMG believe that a full-function replacement for Horizon (minus the benefit
payment card but with banking functionality equivalent to a “manned ATM”)
would be unlikely to be significantly simpler or cheaper than Horizon.
e They have expressed concern that a simple swipecard facility in post offices
(BA’s programme for migration to ACT under Option 3 is dependent on this
being in place by October 2001) might not sit easily with POCL’s long term aim
to develop retail banking.
e They suggest that a lower risk option might be to postpone the move to
compulsory ACT until POCL have full banking functionality i.e. April 2004.
¢ They identify a risk that cancellation of Horizon might have an negative impact
on market perceptions and interest.
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Comment: As indicated in the Working Group report, a move to compulsory ACT
would be controversial unless POCL is able to offer at least a range of basic current
account services so that claimants can continue to collect their benefits at post
offices. If Horizon falls, DSS are likely to push for a rapid migration to ACT and
will not wish to wait until 2004.
Option 2
¢ KPMG have confirmed that Option 2 is technically and commercially feasible.
However, since development of the payment card represents the major element of
ICL’s costs to date, terminating the payment card by agreement might carry
almost as high a price tag as terminating the project as a whole..
DTI Response to Stephen Byers’ 5 Points - (Annex A)
Stephen Byers’ letter of 10 September asked the Secretary of State to take forward
with the Post Office a number of issues relating to the Horizon project and the
future of the business.
We provided to the Working Group with the assistance of the Post Office a note of
actions taken by POCL in recent months to answer the Expert Panel’s comments
about the need to strengthen POCL’s management of the project. These include
recruitment of external resources and retention of the services of PA Consulting to
advise on service management.
e The report indicates that the WG are broadly content that POCL’s actions were
making a difference.
We reported that DTI Ministers have strengthened the commercial focus of the
Board by the appointment of 4 new non-executive directors. We set out the actions
being undertaken by POCL to develop business propositions within their
commercial strategy with the help of McKinseys.
e The report comments that the Post Office Board has moved to strengthen
commercial management within POCL - although belatedly and that this was at
an early stage of implementation. A crucial issue was the balance between
internal development and external recruitment - in the Post Office the latter had
tended to dominate.
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We reported that the Post Office Board recognises the need for POCL to develop
strategic partnerships, detailed partnerships already in place and referred to current
discussion about a strategic alliance with ICL.
e The report comments that the Post Office have not moved very far in achieving
their aspirations and that there remains a lot of work to be done.
We reported that the Horizon infrastructure will be fully capable of supporting a
range of banking facilities that could accommodate various forms of social or
universal banking and broader account-like services.
e The report comments that POCL’s aspirations for developing retail and social
banking require a great deal more detailed development.
Our response on this issue sought to set out key issues to be addressed in future
work on establishing a more transparent funding regime for POCL. It reported the
results of preliminary study by Price Waterhouse Coopers on the social value of the
network and highlighted the issues which would need to be addressed in devising a
future subsidy regime.
e The report merely states that it has not yet been possible to fully consider
DTI/POCL’s work in this area and thus it it is not possible to comment on its
deliverability.
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DTI Posts Directorate
6.11.98
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