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COMMUNICATION WORKERS UNION
CIRCULATED TO THE 18/2000 (PE) ‘A’
POSTAL EXECUTIVE
ON 26 JANUARY 2000 B.71217
FOR CONSIDERATION AT THE
POSTAL EXECUTIVE MEETING
ON TUESDAY 1 FEBRUARY 2000
HORIZON WORKING GROUP : SUBMISSION TO THE PERFORMANCE
AND INNOVATION UNIT : POST OFFICE NETWORK
PE members will be aware from updates given previously that we have been extensively
involved in the above working group
The group was invited to submit a joint report to the Performance and Innovation Unit in
addition to the separate report that we submitted ourselves and documented separately to the
Postal Executive
Attached to this document is a copy of the Working Group submission. Although this
document is not exclusively the work of the CWU we had a significant influence on the final
draft. Therefore, as we have agreed to our name being appended to it, I am seeking the
endorsement of the Postal Executive to the document.
RECOMMENDATION: That the Horizon Working Group Joint Submission and
the actions of the Assistant Secretary be endorsed.
TONY KEARNS
Assistant Secretary
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JOINT SUBMISSION BY THE HORIZON WORKING GROUP TO THE
PERFORMANCE AND INNOVATION UNIT STUDY ON THE POST
OFFICE NETWORK
INTRODUCTION
I. The Horizon Working Group was established by the Secretary of State for
Trade and Industry following the Government's decision in May this year to
restructure the Horizon project, notably by discontinuing the Benefit Payment Card
element of the project, removing DSS/BA as a party to the contract, and revising the
contractual basis to that of a conventional procurement rather than the previous
private finance initiative (PFI) basis. The Government also agreed to contribute
substantially towards the capital costs of the project by allowing the Post Office to
liquidate £480 million of assets already held on their balance sheet. Ina parallel
decision the Government decided that the existing paper-based methods of paying
social security benefits at post offices would be phased out over a two year period
starting in 2003, and would be replaced by modern electronic means using the
existing automated credit transf tem (ACT).
2. Against an expectation that the Horizon platform would by 2003 have enabled
Post Office Counters (POCL) to substantially expand its commercial arrangements
with the banks, allowing bank customers to access their accounts at post offices both
before and after the changeover, the Government offered assurances that all those
benefit recipients who wished to do so would continue to be able to access their
benefits in cash at post offices both before and after the changeover. However, the
ability to deliver this commitment depends on the success of POCL in establishing
the necessary commercial arrangements with the banks,over which the Government
has no direct control. The Government stressed that there would be no change to the
existing methods of payment before 2003. POCL currently earn some £400 million a
year (about one-third of their total income) from carrying out this work on behalf of
the Benefits Agency
MEMBERSHIP AND REMIT
3 The Group is chaired by Alan Johnson, Minister for Competitiveness at the
DTI, with membership drawn from the main stal ers in the Post Office Counters
business, namely Post Office Counters Ltd (POCL) itself, the National Federation of
Sub-Postmasters who represent in excess of 14 000 of the nearly
18 000 sub-postmasters who run the vast majority of the network outlets; the
Communication Workers Union (CWU)
working in the 600 Crown Offices and in headquarters (and around 165 000
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non-management grades in the whole of the Post Office; and the Communication
Managers Association representing x thousand managers within the Counters
business.
4 The Group was given a remit to contribute to ensuring that the agreement in
principle between POCL and ICL (the system supplier) signed on 24 May was
carried through to a full agreement; to oversee the roll out of Horizon to all offices in
the network within the agreed timescale; to contribute to the smooth migration from
paper based methods of paying benefits to payment via ACT; and to contribute to
maximising the commercial potential of the Horizon platform and hence the future
viability of the counters network. The Group is therefore dealing with all the main
stakeholders in the project, and will particularly be looking to establish ongoing
dialogue with officials and Ministers in DSS as plans to migrate benefit payments are
developed in the run-up to 2003
Specifically, the terms of reference of the Group are
“In relation to carrying forward the work on the POCL/ICL Horizon project:
* to oversee the negotiations between POCL and ICL which will develop the
letter of agreement signed between the parties on 24 May into a Codified
Agreement governing the contractual relationship under which the project
will be taken forward, together with the consequential arrangements
between POCL and the Benefits Agency; and to facilitate solutions to any
problems which may arise;
* to oversee. to contribute actively to, and to facilitate solutions where
problems arise, the completion of the development phases of the Horizon
project, and in particular the smooth and timely roll-out of the system to all
offices within the post office network, and the subsequent satisfactory
migration of benefit payments from the present paper-based methods to
more modern, ACT-based, methods of payment accessible through post
offices; and :
* to contribute through ideas, contacts and other practical measures, to
maximising the commercial potential of the Horizon infrastructure and the
future viability of the post office network as a whole.”
THE HORIZON PROJECT
5 The Horizon project was initiated under the previous Administration. Its
objectives were to automate the network of post offices in order to make existing
business more efficient and help to win new business; to provide a more secure and
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efficient way of paying social security benefits by replacing the existing paper-based
methods by a magnetic strip benefit payment card; and to provide the Department of
Social Security/Benefits Agency (DSS/BA) with the means to account fully for their
Vast programme expenditure.
6 The project was by any standard huge, worth some £1 billion, involving
automation in 19 000 post offices and 40 000 counter positions; and providing links
into DSS/BA and PO systems. The agreement to take forward the project on a PFI
basis was signed in May 1966 between POCL, DSS/BA and ICL Pathway as the
private sector partner. However it emerged over the next few months that the project
was necessarily of a complexity which had not previously been fully understood and
by February 1997 substantial revisions to the timetable for the project were agreed
by all the parties. Despite this there were further significant slippages and by March
1998 the project was almost two years behind even the revised timetable agreed in
February 1997. At the same time, ICL sought a change in contractual terms either in
the form of an extension to the contract (to allow them further time to recover their
costs) or increases in charges. At that point Ministers established an
interdepartmental working group comprising officials fom the DTI, DSS, Treasury
and CITU to advise on the way forward for the project. Intensive efforts over the
following 14 months involving substantial external assistance on technical evaluation
and commercial facilitation resulted in the decision by Ministers described at
paragraph I above.
THE NETWORK CHARACTERISTICS
7 Post Office Counters Limited is a wholly owned subsidiary of the Post Office.
It oversees the nationwide network of post offices, negotiating and co-ordinating the
contracts with Government bodies and other clients which provide business for the
network. The post office network comprises more than 18 500 outlets. All but 600
of these - the directly run and staffed Crown Offices - are run on an agency basis, the
Vast majority by private individuals. The network thus represents a partnership
between the public and private sectors, with subpostmasters investing over £1 billion
of their own money to provide the outlets which comprise over 95 % of the post
office network. In addition it is estimated that subpostmasters have invested at least
a similar amount again in the private retail businesses that operate in synergy with
the post office, often being dependent on the customer footfall attracted into the site
by the post office activity there. Around 85% of post offices share premises with
another retail business, enabling cost-effective operation of the post office through
shared overheads, whilst generating additional trade for the retail business through
the “footfall” effect of benefit recipients collecting their benefit cash at the post
office counter, and staying to make purchases from the retail side of the business.
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8 Although the post office counters network has been shrinking by some 200
offices a year for some years now, as subpostmasters leave and replacements cannot
be found, it remains the largest retail network in Europe. Statistics show that around
94% of the UK population live within a mile of a post office (99.9% within 5 miles),
compared to 75% for all banks and building societies combined and 32% for major
supermarkets. It is also estimated that 28 million people per week make around 45
million visits to a post office each week.
9. The post office network provides communities with access to a wide range of
services (some 170 products), of which the most important include access to postal
services, benefit payments, cash, banking and bill payment services, licensing and
other Government services and a range of other customer driven services (e.g.
lottery, bureau de change, insurance). Small businesses are also reliant on the
network e.g. 90 % of small businesses with less than 9 employees use the post office,
mainly for access to banking/deposit facilities, cash provisioning and access to mail
services. Around 25% of all notes and coins in circulation in the UK are acquired
across a post office counter.
10. Numerically rural post offices account for almost half the network (57% of
rural parishes have a post office, less than 10% have a bank or building society), yet
they account for less than 20% of the network’s turnover. The post office outlet is
particularly valuable in rural areas where neighbourhood village shops are only able
to survive in the face of retail pressures because of the income which operating a
post office provides. The village post office and store can provide a focal point in
the community providing access to cash and essential everyday items, an information
centre in areas where frequently other retail and banking facilities are absent. The
accessibility of such post offices is crucial to the least mobile sections of the
community - poor, elderly, infirm, mothers with young children, etc.
1]. As in rural areas, post offices in urban deprived areas pay a particularly
important role. Here also the post office is often the last remaining shop and
financial services outlet in a neighbourhood. The post office in such communities
can also act as a lynch pin in sustaining the local centre, having the potential to
generally increase the amount of trade of other shops located in its vicinity (a
somewhat wider manifestation of the “footfall” effect referred to above). Post
Office statistics show that 92% of deprived wards have a post office and, in more
than one third of the most deprived wards in England and Wales, covering almost
three million people, there is at least one post office but no bank or building society.
As banks and building societies continue to prune and rationalise their branch
networks and their customer base, the number of deprived wards and customer
segments dependent solely on the post office seems certain to continue to rise.
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12. _ A further significant statistic in terms of the potential value of the post office
network as a delivery channel for services which contribute towards achieving the
Government’s objectives in combatting various forms of social exclusion is that post
office customers in deprived urban areas carry out 33% more business at their post
office than the national average. As almost all adults visit a post office the post
office customer profile matches the population profile closely. The visit. profile is,
however, more weighted towards the Es (31% compared with 29%), older people
(24% for 65 plus as compared with 20%) and women ( 56% compared with 51%).
13. Distribution of pensions and benefits is a significant element of the business
transacted at post offices in these areas. The range of products available at post
offices makes them particularly well suited to meeting the needs of the socially
disadvantaged, for example schemes for easy budgeting for household bills through
traditional well-tried methods such as saving stamps (as well as their modern
replacement, the plastic card). As weil as providing access to cash - vital to those on
low incomes and/or who currently lack access to a bank account - post offices offer a
range of financial products aimed at this market including National Savings Pass
Book accounts allowing small sums of money to be saved, postal orders for easy
money transmission and more recently insurance products such as bill payment
cover, tailored for this market.
14 Currently around haif of Post Office Counters income is derived from its
contracts with Government departments and agencies, including the Benefits
Agency, the Driver and Vehicle Licensing Authority and the Department for National
Savings. By far the largest of these is the contract with the Benefits Agency which
runs until 2005, accounts for more than one-third of POCL’s total income, and
constitutes the UK’s largest single service agreement. In more than
8 000 post offices BA work accounts for 40% or more of the total income. The
impending loss of income from the BA, as a result of the Government decision to
migrate payments to ACT, will therefore be a significant blow to the finances of
POCL. The impending loss of income from the Benefits Agency adds sharply to the
case for securing some assurance of stability in the remaining public sector contracts.
15. The loss of benefits will also affect bill and budget payments which account
for some 15% of POCL's income. Around 45% of bill and budget payment
transactions are generated as a resuit of benefit encashment and there will also be
similar dependence on benefit transactions for some of the services highlighted
below. Other business includes Royal Mail/Parcelforce business which accounts for
around 20 % of POCL’s income. New services such as the sale of lottery tickets,
bureau de change facilities, insurance products and simple banking transactions for
banks other than Girobank generate about 10 per cent of POCL's business. It is this
successful provision of diverse products and services that the Post Office must be
looking to expand in future. It has already shown, with the National Lottery in
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particular, that it can deliver and has the ability to be competitive and flexible (in
terms of opening hours). The Government will be looking to capitalise on the
success of the network in delivering this, and recognises the role of the Post Office in
making the Lottery a success.
16. In summary, the Post Office network has significant strengths in terms of its
social and geographical reach. Over 95% of the outlets in the network operate using
the agency 'model' with its long-standing, successful track record of combining
private and public investment to make the continued existence of the overall network
possible. However this 'model' is underpinned in the agents' eyes by the perception
of a relatively stable ongoing income/footfall generation capability. Therein lies,
however, a vulnerability - because if agents’ confidence in that model is undermined
and they cannot see a viable future in operating an individual outlet they may be
forced to withdraw from operating post offices and the network becomes at risk of
collapsing.
A POST OFFICE SMARTCARD
17. Against the background of the Government’s decision on the way forward for
the Horizon project set out in paragraphs I and 2 above, and the network
characteristics described in paragraphs 7 to 16, the Horizon Working Group has
begun to examine the wider commercial potential of the Horizon platform. As noted
above, the Benefit Payment Card had from the outset been at the heart of the
Horizon project (and arguably a major cause of the delay and cost escalation), and
the decision to discontinue it changed substantially the nature of the project from a
technical viewpoint and also affected significantly the project's commercial potential.
18. The technical simplification which resulted from removal of the card, and the
contractual simplification which flowed from it, enabled a clear goal of equipping
every counter position at every Post Office throughout the land by Spring 2001 to be
set. However the decision to migrate all social security benefits to payment by ACT
over a two year period starting in 2003 not only stands to lose POCL some £400m a
year in revenue from BA once the migration has been completed, but the loss of the
Benefit Payment Card risks removing an important commercial opportunity which
the Horizon platform could otherwise have provided.
19. It had been considered that the Benefit Payment Card might become a
smartcard over time thus creating an important database for commercial application.
In particular, the introduction of smartcard technology would have assisted many
benefits recipients towards becoming socially and financially included by introducing
them to card based financial products and services. No other commercial or
Government application is currently known that could justify the Post Office
launching its own smartcard at this point in time. However, should such an
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application become apparent the wider business opportunities remain. Widespread
use of smartcards will require a secure, integrated, trusted and nationwide network of
acceptance points and the Post Office could be therefore well placed to fulfil this
future.
20. The Horizon Working Group therefore believes that the early identification of
an alternative major application which would justify the creation of a Post Office
smartcard as a basis for unlocking a further series of commercial opportunities could
play an important part in helping to replace revenue lost from BA. However this
window of opportunity may be strictly time limited, since despite the Post Office’s
trusted image and ubiquitous availability, there are likely to be overwhelming “first
to market” advantages.
WORKING WITH THE GRAIN OF WIDER GOVERNMENT OBJECTIVES
21. The Group has also been looking at two further key areas of activity in which
the existence of the Horizon platform can be expected to open up significant
commercial opportunities. The first of these is network banking, to which reference
has already been made. The second is the electronic interface between the public
and Government, government agencies, local authorities etc. The electronic delivery
of public sector services has been branded as “electronic government" or
"Modernising Government" but is referred to generically by the Post Office as
"Government Gateway". In looking at these, and in future at other areas of potential
commercial opportunity for the Horizon platform, the Group will be concerned to
look beyond simply the straight commercial potential for the Post Office, important
though that unquestionably is, and to explore in addition the extent to which such
developments could best be carried forward in a way which would work with the
grain of wider Government objectives rather than against it.
22. It is clear to the Group that a combination of the unique reach of the counters
network, the social groups who regularly use and trust it, and the potential of the
Horizon network combine to create a powerful weapon in the campaign against
social exclusion, particularly in the fields of financial, retail and IT exclusion; and in
the Government’s wish to communicate with citizens in a modern, convenient and
cost effective manner.
BANKING
23. The development of network banking facilities at post offices forms an
important part of POCL’s plans for the future, but is also key to the Government’s
plans to migrate to the payment of benefits by ACT from 2003. POCL already has
agreements in place with Alliance and Leicester Girobank, the Cooperative Bank and
Lloyds TSB. But these arrangements rely on slow and expensive paper-based
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transactions, which severely constrain the scope for any major expansion of POCL’s
network banking activities. The Horizon platform offers the promise of removing
that constraint, and opens up a scenario in which a combination of, on the one hand
® the apparent desire by the high street banks to continue apace with branch
rationalisation programmes, closing some and refocusing the remainder on selling
activities;
¢ yet at the same time wanting to enhance rather than reduce the service they are
able to offer their customers;
¢ whilst also at the same time needing to accommodate large numbers of new
accounts (powerfully driven by Government policies) of a kind for which they
might normally have little or no appetite;
and, on the other hand,
¢ the ubiquity of the nationwide network of post offices;
® its trusted image with the public, and especially that sector of it unused to, and
probably mistrustful of, the existing financial institutions and
* its long experience in carrying out a wide range of financial transactions on an
agency basis:
together with
* POCL’s need to find additional business to replace the revenue stream from the
Benefits Agency:
® the desirability of keeping as many benefit recipients as possible within the post
office system, not least to retain the “footfall” effect for the retail side of subpost
offices; and
¢ the desirability of maintaining as far as possible a balancing outflow (through
withdrawals from a large number of bank accounts) for the large inflows of cash
in the form of corporate deposits especially from small and medium sized
companies;
and
¢ the Government's need to honour its commitment that all benefit recipients who
wish to do so will be able to access their benefits in cash at post offices both
before and after the migration to ACT from 2003 - as well as securing a credible
means of ensuring that benefit recipients living away from the major
concentrations of banks and ATMs can in practice access their benefits in cash
without undue expense or difficulty;
begin to take on the appearance of - potentially at least - an extraordinarily
serendipitous fit.
3
24. The reality may be less clear cut. There are important questions of timing.
The longer Horizon is delayed, the more likely it is that the banks will have moved to
develop alternative solutions. There are technical issues still to be fully resolved
about the suitability of Horizon as presently configured to handle potentially very
large numbers of on-line transactions, and about the interface between Horizon and
the banks” systems. Perhaps above all lies the question of how much the banks will
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be willing to pay POCL for providing front-end banking on an agency basis,
especially if many of the accounts are of marginal profitability (if at all) for them.
25. I The Horizon Working Group will be pursuing these issues with POCL and
other interested parties over the coming months.
GOVERNMENT GATEWAY
26. A second important area of potential opportunity for POCL which the Horizon
platform can open up is the delivery of Modern Government or Government
Gateway applications on behalf of central, regional and local government. The Prime
Minister announced in 1997 that by 2002, 25% of dealings with Government should
be capable of being conducted by the public electronically. It has also been proposed
that, subject to certain exceptions, 50% of dealings should be capable of electonic
delivery by 2005 and 100% by 2008.
27. However although the potential here would appear to be enormous, there
remain at this stage very great uncertainties as to timing, as to the share of such work
post office counters might be expected to attract in competition with a multiplicity of
alternative delivery channels, and as to the value of the revenue streams that POCL
might generate from such work.
28. — Itis clear that the counters network has a number of powerful advantages as a
potential delivery channel for Government services. Its ubiquity and its trusted
nage have already been referred to, and when combined with the customer profile
described in paragraph 8, give the network an ability to reach large sections of the
community for whom electronic access would otherwise be denied or perceived to be
threatening
29. However, there is uncertainty as to the speed with which the Modernising
Government programme will come on-stream on a significant scale. There are also
predictions that very large numbers of households, including the C, D and E
socio-economic groups, may acquire access to the Internet through digital television
a great deal more quickly than predicted. although equally there are doubts about the
functionality of the early generation of set top boxes and whether many segments of
society will wish to transact with Government in this way.
30. Whilst detailed assessments have been made of the significant savings to
Government expected to flow from more modern ways of interfacing with the
citizen, the price which Government will expect to pay will in practice take account
of the prices charged by altemative delivery channels. It is believed that some third
party delivery channels may be prepared to deliver certain Government services
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without charge/at low cost, It is likely that such cases will involve the simpler
services for high net worth customers via only low cost electronic channels.
Although this commercial model may have very limited coverage there is a real
danger that it could be used as a benchmark for fee-setting. This could impact on the
economics of more universal multi-channel providers.
31. The Horizon Working Group is at a very early stage in its consideration of the
potential of Modern Government applications for the counters network, and is due
shortly to take delivery of a paper from CITU aimed at providing the Group with a
policy perspective.
32. Once again on Government Gateway the timing and sequence of events is
crucial. The Post Office network provides an existing, proven channel which
citizens freely choose to use in their interactions with Government. Indeed, half of
the work that post offices do at present is of this nature (albeit on an unautomated
basis). The value of such an existing proven channel for Government business was
clearly demonstrated in the recent passport crisis where the contingency use of post
offices was able to resolve public outcry at the passport backlogs last summer.
i)
3. Moreover research using the People’s Panel demonstrates that post offices are
the preferred location for one-stop shops for Government services. Banks and
supermarkets scored lower in this research for reasons such as staff knowledge, fear
of cross-selling and the potential for inconsistent approaches from different
companies. Proposals for alternative channels for Modern Government (such as
digital interactive TV), rely on volatile forecasts and speculation about the customer
preference for interacting with Government through such a channel which are
unproven at present.
34. In summary, there appears to be considerable potential in utilising the
counters channel as a route for Modernising Government and such an approach
could certainly help in the future retention of network. However, there remain areas
of debate around the Modernising Government agenda. There is a concern that if
such debate takes too long to resolve, the risk increases that the network is lost, only
for there to be the belated discovery that it provided a preferable and effective route
for Modern Government after all.
CONCLUSION
35. I The Horizon Working Group very much welcomes the work on which the PIU
has now embarked, and which we see as complementary to our own task. We
believe that the Horizon platform offers the counters network its best hope of a
viable longer term future, and we will work towards maximising that potential.
Whilst we hope that the results of our efforts will go some way to reducing the gap
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which will be left in POCL’s income when current annual revenue of some £400
million from BA begins to fall away from 2003 onwards, it is far from clear that
revenue from new commercial activities can bridge the gap fully, at least from the
outset. Setting this work in the wider context which forms the remit of PIU study
should serve to provide Ministers with valuable insights to assist them in the
decisions they will need to take on the future of the counters network.
36. The Working Group is also seized of the critical importance that the
timing/sequence of events/ announcements could have on the network. If any future
development of the network is to be an ordered, managed process, confidence in the
sub-office market must be maintained. The Working Group has already heard that it
may be 18 months before Benefits Agency plans for ACT are finalised. There is a
significant risk that there will be a hole in the timing through which the network will
fall. This could therefore happen before the positive actions, which might realise the
potential of the network for the nation and avoid the fall-out from the loss, can be
brought to bear
37. Weare, of course, happy to provide further information or clarification on our
work so far, and on the next stages of our programme. In any event we feel it will be
useful for our two groups to remain in touch and to exchange views and information
over the coming weeks.
Horizon Working Group
December 1999
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