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From: Andrew Stott BA/POCL
Date: 17 April 1995
Ref: ASH1236
MRS DUGDALE cc: (minute only)
MR HULL CAPS Mr Peaple POCL
MR KING Y Mr Riggs BA
MRS KELSEY Mr Stewart BA
MR K LAWRENCE CAPS Mr Wylie SSA
MR MILLER me
MR SELWOOD
MR BURKIN
MISS CLELLAND
MS CHALLIS
MEMORANDUM OF UNDERSTANDING BETWEEN BA AND POCL
I attach a copy of the final text of the Memorandum of
Understanding between BA and POCL which underpins our
programme and which has allowed the issue of the SSR.
2. The high-level joint objectives of the Programme are set
out in paragraph 4 (a re-statement of those approved by the
first meeting of the Steering Committee) and specific
objectives for BA and POCL, which the other party recognises
and supports, are in Annexes 1 and 2. All these objectives
are, of course, already reflected in the SSR.
3. Likely lead contractual responsibilities for the services
provided by the PFI supplier are in Annex 3, although this
depends to some extent on the suppliers’ proposals and it
remains the Programme’s responsibility to conduct the combined
procurement for all these contracts.
4. Other features of the agreement include a commitment to
ensuring that the services are provided at lowest value-for-
money cost to meet the business case and the programme
objectives of each; a definition of the ownership of the
benefit payment card and of the guidelines for its use; a
common aim of continually reducing the end-to-end cost of
benefit payment through post offices; an agreement that the
service contracts should have sufficient flexibility to all
for the migration of existing POCL services and the addition
of other non-BA products in the future; a commitment to
automate all post offices to some degree; and an agreement to
co-operate to rollout the POCL automation and fully implement
the card system of benefit payment at the earliest possible
date.
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5. This MOU and the SSR constitute the Programme’s baseline
for our customers’ requirements. Now we have to deliver to
it.
A Cc SToTT
BA/POCL Programme
Terminal. House.
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“BRINGING TECHNOLOGY TO POST OFFICES AND BENEFIT
PAYMENTS"
OF B BA AND
Purpose
1. This document summarises the business and commercial understanding so far
reached between the parties at paragraph 3 around the programme known as
"Bringing Technology to Post Offices and Benefits Payments" and so concerns
the procurement of "BA/POCL Automation” and associated issues.
2. As such, it underpins, and is consistent with, the Statement of Service
Requirement (SSR) and it is so dated in parallel with the SSR’s issue of
April 1995 to the prospective suppliers collectively known in this document
as CONSCO.
3. It has been reached following discussion between the following parties: the
Benefits Agency (BA); the Social Security Agency for Northern Ireland (SSA);
and Post Office Counters Ltd (POCL). For the purpose of this document BA
is used as the abbreviation to represent both BA and SSA (and other parts of
the DSS and DHSS (NI) respectively) unless otherwise stated.
Objectiv
4, All parties recognise and commit to the programme’s overall service objectives
which can be expressed as:
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© a fraud-free method of paying benefits at post offices that is automated,
has lower end-to-end costs than the current paper-based process, with
continuously reducing overall administration costs year on year;
© extending automation to POCL’s other client transactions, its products and
its support processes to improve competitiveness, increase efficiency, and
to enable greater commercial opportunities for POCL;
@ full and speedy reconciliation of benefits payments, with accounting
arrangements consistent with recognised accountancy practices;
@ an improved overall service to the parties’ customers.
5. In addition, there are detailed sets of objectives for BA and for POCL. These
have been issued with the SSR, and are at Annex I for BA, and Annex 2 for
POCL.
Status
6. This “Memorandum of Understanding" is not legally binding, but reflects the
clear intention of the parties at this stage of the project. It is intended to
represent clearly a summary of commercial principles reached to date so that
the various commercial arrangements between BA, POCL and CONSCO, and
BA/POCL and CONSCO and between BA and POCL can be organised around
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these principles once the reactions to the SSR are known from suppliers
(including their commercial proposals) and once full negotiation with any
chosen supplier then commences. Full commercial negotiations will also then
begin between the parties at 3 above. As such, this document should help to
avoid confusion as the programme develops, and also aid the supplier
evaluation process. It gives a clear statement of commercial intent by BA and
by POCL, without eliminating the necessary commercial flexibility that must,
at this stage, be inherent in the programme.
Having considered the programme objectives and the likely financial
consequences, the parties believe that, subject to appropriate commercial
responses, the project has every prospect of progressing. This belief is
founded on:
a, an expectation that, consistent with the service requirement,
tenderers will do all in their power to minimise equipping,
maintenance and services costs and hence prices;
db. an expectation that all parties will co-operate to achieve the full
benefit of the programme of work as rapidly as possible.
c. agreement that BA and POCL will eliminate unnecessary features of
service requirements, invite suppliers to put forward suggestions for
further tightening and economy, and consider these suggestions on
their value for money merit.
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d. that the parties will co-operate to deliver the service components as
economically as possible.
e€. an understanding that the overall business case for automating
benefit payments at post offices has a positive return to the public
sector.
ercial Roles ai onsibilities BA, and
8. BA and POCL recognise that the costs to CONSCO and to one another are
Significant, and commit to ensuring that the costs of the specification, design
and operation of the new services are provided at lowest value-for-money cost
to meet each others’ respective business cases and the programme objectives
and that opportunities to use and exploit further the services required for the
this procurement are encouraged and incentivised.
9. POCL and BA have an expectation that no fraud risk will arise from
CONSCO, commensurate with a value-for-money approach to risk elimination,
from the new automated benefits payment process. POCL and BA will need
to be satisfied that any residual liabilities are controlled and that practical
liability for fraudulent losses should rest with the service supplier, who would
usually be CONSCO, except where BA or POCL had failed to provide a
service on which CONSCO had expressly depended. Evaluation of proposals
from CONSCO will take this into account.
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10. Contracts between BA or POCL and CONSCO may be under an "umbrella
contract" between BA, POCL and CONSCO. This may cover issues such as
equality of treatment, information provided, programme implementation dates,
warranty and liability rules.
11. BA and POCL will each take the lead contracting role with CONSCO for
various components of service to be provided under the procurement process.
However, it is also agreed that for certain services, whereas one party will take
the lead role, the other party will have certain necessary rights to specify
security and service standards or requirements because of the interdependency
of the service components.
12. Agreement has been reached on the lead contractor by service components.
This is set out at Annex 3. It is recognised that this may need review and
change in the light of suppliers’ proposals.
13. In addition to those components under the procurement process, there are some
major projects which will interface with the programme procurement, but
which will themselves be probably supplied separately (eg CAPs by BA, and
possibly TIP by POCL). These will need to be managed successfully and
mutual assurances to BA, POCL and CONSCO (to be defined precisely later)
will need to be given.
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14. The Benefit Payment Card will be the property of and remain within the
control of the Secretary of State for Social Security. Consequently, BA will
lead on card management services in respect of the benefit payment card. The
branding in terms of text on and design of the card will be the subject of
discussion between BA and POCL, to take account of customer acceptability
and to make it clear, in normal circumstances, the card is to be used to cash
social security payments at post offices. CONSCO will not be permitted to
seek and arrange for the card to be accepted in retail outlets other than post
offices or BA offices in normal circumstances. If other outlets are required,
typically in emergency/force majeure circumstances BA will use their best
endeavours to agree such arrangements with POCL in advance of any
notification being given to CONSCO.
15. The contracts for the management and control of the use of the card will be in
line with Government policy on both maintaining a nationwide network of post
offices and in providing customer choice in the method by which they can
receive benefit payments and will not constrain the development of any
changes in that policy.
16. The card is intended for use as a benefit payment card and other related
benefit and social security purposes only. Where relevant and appropriate,
POCL will be given the opportunity to propose how its service could be used
for these other purposes. It is accepted that, in certain circumstances, eg
migration to a Government multi-purpose smartcard, there could be a need for
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revised contracts between BA and CONSCO and BA and POCL. Under such
circurastances, the commercial principles between BA and POCL, and
BA/POCL and CONSCO, as described in this memorandum, will need to be
carrled forward into new contracts, unless otherwise agreed by the parties.
The Secretary of State for Social Security owns all customer data relating to
benefit payment, including the NI number. CONSCO will have no right of
ownership or use of customer data by means of the service it supplies without
the express consent of BA and/or POCL as appropriate. However, BA will
welcome applications from POCL for use of non-sensitive information
contained on POCL infrastructure systems for use in POCL business, on terms
to be agreed. It is recognised that BA will be constrained by the requirements
of the Data Protection Act and by the overriding requirement to preserve
confidentiality of BA customers’ personal social security data. Data will also
be required for financial settlement and reconciliation and the precise
requirements will be agreed between BA and POCL.
ercial Principles BA/POCL a
18.
Without prejudice to BA’s right to market the system for payment of benefits
at post offices, POCL will control the rights for using and marketing the
services provided by the service provider in its post offices and must be free to
use these to transact business for any of its clients subject to implementing the
agreed security and service delivery safeguards for those clients (including
BA).
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19. BA/POCL contracts with CONSCO should match the contract lengths of any
contracts between BA and POCL, except in the case of BA’s card management
service contract with CONSCO which may be for a different period. If the
card management contract were to be recompeted, POCL would be involved in
the specification of any product changes and impact on the main contract
would be taken into account.
20. BA and POCL will consider opportunities, where efficient so to do, to multi-
source appropriate aspects of the systems during the procurement process, and
during and at the end of the contract.
21, Real competition for the future at the point of retendering supply will be
written into contracts with CONSCO, including arrangements to ensure smooth
transition in the event of a new supplier.
22. BA/POCL agreement on Intellectual Property Rights is carefully, and more
fully, described in the SSR (Chapter 8.4). In summary, rights are recognised
in certain defined areas (for example, outside the UK for CONSCO) and are
subject to relevant security, operational and commercial needs of BA and
POCL, and to ensure contimuity of service in any extraordinary operational
circumstances or at the time of retendering supply.
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23. The following contract structure between BA and POCL is likely to apply,
subject to proposals awaited from CONSCO.
2A. There will be a new “transaction contract" (Contract "A”) to cover that part of
the service POCL supplies to BA for which there are not POCL/CONSCO
supply contracts in place. In many respects, Contract A’s pricing will cover
many of the costs associated with the previous and current “main” POCL/BA
contract. Pricing for this contract will reflect the factors in paragraph 36
below.
25. There will be a new "transmission contract" (Contract "B") for services POCL
supply to BA for which there will be an associated POCL/ CONSCO
contract(s). Pricing for this contract will reflect the factors in the paragraph 37
below.
26. Contracts "A" and “B" will run in parallel, be of matching lengths between
each other, and match the length of any joint BA/POCL "umbrella contract"
with CONSCO to cover issues that are the same to both contracts (see
paragraph 10).
27. It is possible that there will be separate contracts between POCL and SSA as
‘well as between POCL and BA, but it is intended to carry over all the
commercial principles and structures into both sets of contracts as far as
possible.
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Commercial principles between BA and POCL
28.
29,
30.
Contract "A" will be on a "closed book” basis; Contract "B" will require
sharing of volume and financial data relating to the benefit payment product
and totals, but not including specific data about other individual clients. It
may involve certification by POCL and/or by independent third parties, as
agreed between all parties. This is to ensure adherence to commercial
principles or formulae agreed between BA/POCL and to the basis of how
prices have been, and are to be, struck with CONSCO.
It is agreed that BA and POCL are stakeholders in the overall process for
benefit payment through post offices, with the common aim of continually
reducing its end-to-end cost. It is also agreed that BA and POCL have their
own other objectives, many of which are complementary, and all of which are
acknowledged as important by the other. These will be pursued in a spirit of
partnership but with respect to the legitimate aims of the two distinct
businesses.
Any commercial formulae and structures should aim to create incentives for all
parties (including CONSCO) to co-operate fully to fulfil the overall objectives
and to yield continuous financial advantage (year-on-year) both to BA and to
POCL.
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It is agreed that BA’s overriding interest is in the control, and cost reduction
of, a fraud-free benefits payment system. It is acknowledged that changes to
the specification of this process are primarily driven by BA’s needs (agreed by
POCL as appropriate) and so the costs and rewards of those changes primarily
Fiend toh slanted
32.
33.
fall to BA. POCL agrees to use its best endeavours to facilitate this within the
constraints of POCL’s other commercial obligations.
At the same time, POCL has a complementary aim of automating, where
appropriate, its other client transactions, products and support processes and
the costs and rewards of these initiatives (some of which are not yet fully
defined or agreed by its other clients) will fall primarily to POCL and/or its
other clients. It is agreed that the service contracts should have sufficient
flexibility to allow for the migration of existing services and the addition of
other non-BA products at appropriate points in the future. While the BA will
aim to co-operate fully with this, it expects this to be at no cost or benefit to
itself. If a BA contribution to these costs is not avoided, BA will expect an
appropriate share in subsequent rewards.
It is agreed that it is not within BA’s remit to become directly involved in the
running of POCL’s activities or services. Specifically, and taking account of
agreed clicnt requirements, POCL will retain control itself of its critical
business processes and relationships, such as:
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35.
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@ quality of service (queueing time and other customer charter measures) to
its customers
© contractual relationships with its agents (ie subpostmasters and franchisees)
@ contractual relationships with its clients
@ policy control of its network
® its reconciliation, settlement, and key infrastructure support, processes.
inter alia, this implies that POCL will continue to price for its services across
all its clients, and retain commercial confidentiality in so doing, but within a
pricing policy agreed with government to ensure no unfair cross-subsidy, and
within contractual frameworks that are equitable and which recognise the
relative importance of volumes, value and investments by different clients to
and across those parts of POCL’s costs structure that are relevant to them
(including an element of fixed costs which are common to all).
Exact pricing formulae cannot be agreed until proposals from CONSCO are
received, and after detailed negotiation between BA and POCL then takes
place.
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36. However, the basis for the pricing of Contract “A” will include recognition of
the following factors and cost elements:
a. A baseline equal to the overall price of the contract for 1995/96,
exchiding ESNS. The total sum payable for 1995/96 has been
agreed at £358m including POPOS, compensation for errors and
audit certificates as provided for in (g) below.
‘The baseline will therefore consist of the following key elements:
() _A fixed fee of £129.99m adjusted for efficiency discount
(-2%), RPI (3.4%) and the operational discount (£6.7m).
(ii) A variable fee of £144.41m based on an agreed and
contractual traffic assumption of 850.8m transactions at a rate of
16.75p per transaction, adjusted for the efficiency discount (-2%)
and RPI (3.4%).
ii) A financial charge of £81.83m on an agreed and contractual
tumover assumption of £49.85bn at a rate of 16.75p per £100,
adjusted for the efficiency discount (-2%).
(iv) A reduction of £0.23m in lieu of compensation and liability
claims (see ¢ (xii)).
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(vy) A fee of £2m, including VAT, for POPOS assuming a
network of 14,461 offices.
The terms and conditions will be part of a formal contract agreement
between the parties, and there will be a formal exchange of letters in
respect of the 1995/96 price. In the event that RPI, outturn traffic
or cashflow for the year differ from the estimates used there will be
no adjustment to the net fees.
Payment of the fee will be made by the mid point of each quarter, ie
the nearest banking days on or prior to 15 May, 15 August, 15
November and 15 February.
A revised forecast of the traffic and tumnover for 1995/96 will be
agreed between the parties by end February 1996 and used as the
basis of estimates for 1996/97 in the following way. The 1995/96
revised estimate of volumes of paper based and electronic traffic and
turnover will be updated to take account of latest trends and the
parties will agrec cstimates for these three variables before the end
of February 1996 for 1996/97.
The contract structure for 1996/97 until and including the last year
of POCL’s contract with CONSCO will be on the same basis as that
for 1995/96 but will also take account of the following elements
which are also reflected in Annex 4.
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(i) The electronic volume related fee per payment transaction for
1996/97 will be at a price higher or lower than the fee computed as
in a(ii) above to reflect an assessment to be negotiated before
1996/97 in the light of CONSCO’s proposals of the impact of the
electronic service on POCL’s costs.
(ii) —_‘In particular it is envisaged that the electronic service may
involve additional counter service time and there may be more
enquiries. The parties agree that they intend that the adjustment to
the unit price per transaction should be agreed before
implementation of the new contract with CONSCO and reflect the
estimated net cost of the differential impact of the electronic system
of payment compared with the manual system of payment. They
further agree that this initial assessment should be based on synthetic
simulation where possible and be jointly agreed but subject to
teview with live timings when available from the demonstrator and
pilot phases. The variable charge for electronic transactions will
take account of any transaction or service impact arising from
Contract B. The actual level of impact will be reviewed during the
demonstrator and pilot phases and will need to be agreed by both
parties. BA and POCL will also establish a baseline for other front
office activity eg enquiries, aborted transactions, against which any
impact can be assessed. Changes in back office activity resulting
from the revised BA product specification and changes which are a
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direct result of automation (such as receiving, stamping, storing and
distributing order books, preparing and checking stop lists) will be
taken into account in assessing overall impact.
(iii) The tumover fee for 1996/97 onwards will be computed by
applying the estimated tumover for 1996/97 to the unit rate of
£0.1675 per £100, less the appropriate efficiency discount (c vi)).
For the avoidance of doubt, it is understood that the tumover
estimate will be agreed between BA and POCL based on the
estimated actual cash passing through post offices, taking account of
benefit uprating, changes to benefits and switches to/from other
methods of payment on a best estimate basis. Accordingly, no
further adjustment for RPI is envisaged.
(iv) An adjustment will be made to the fixed fee in proportion to
the number of post offices automated and will be based on payment
of a £3m fee for full roll-out, as agreed between POCL, CONSCO
and BA, The adjustment will be subject to uprating for RPI and to
efficiency discount from the year in which it is payable, and will be
paid in the year following roll-out ie if 33% of post offices were
automated in 1996/97 then £1m would be paid as part of the
quarterly payments in 1997/98. The £3m adjustment will be an
ongoing annual addition to the fixed fee following completion of
roll-out to post offices.
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(v) The fixed charges will be adjusted to reflect the transition of
Girocheques to a card based product, so that a total of £14.74m at
1994/95 prices and subject to adjustment for efficiency and RPI is
added to the fixed costs in proportion to the stages in the transition,
with the total addition made when the final Girocheques are
transferred to the new system. The intention is to match in timing
as far as possible the additional costs to BA of the increment in
fixed charges with reductions in fixed charge from POCL to
Girobank and then reflected to BA.
(vi) _ Efficiency discounts will apply to the total fee less POPOS
and liability as follows:
%
1996/97 1% 00/01 1%
199798 1% ~~ 01/02 1%
1998/99 1% 02/03 1%
1999/00 1% 03/04 1%
The end date will align with the CONSCO contract which is not
expected to run beyond 03/04.
(vii) The efficiency discounts in the years following
completion of the roll-out of automation of post offices may be
increased, with a ceiling of 3%, depending on the growth of POCL
business income. This will be determined by reference to the
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increase in POCL income when compared with the business income
of POCL in 1995/96 (the base year) increased by the RPI factors
used for fee calculations. In making this comparison, income in
each year will be reduced by an amount equal to POCL’s payments
to CONSCO for counter infrastructure and transaction management
services in that year.
POCL will provide BA with provisional estimates of income and the
deductible payments to CONSCO within 2 months of the end of
each POCL financial year. Where these show that the thresholds for
triggering efficiency discounts bave been exceeded, this will be
reflected back into the fees for the most co-termimus year of
Contract "A" fee to be made by BA to POCL. Final adjustments
will be made following publication of audited accounts, again by
adjusting the next appropriate BA fee payment.
The efficiency percentages to be applied are as follows:
Less than 125% of base year 1%
125%-130% 1.25%
130%-135% 1.50%
13$%-140% 1.75%
140%-145% 2.00%
145%-150% 2.50%
above 150% 3.0%
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(viii) The RPI forecast for quarterly payment purposes after
1995/96 will be the outturn RPI figure for the last available quarter.
For settlement purposes a quarterly average RPI figure will be used
based on the actual monthly RPI as published in the monthly digest
of statistics (currently table 18.1) a publication of the government
statistical service. The series to be used is the Retail Price Index all
items. It shall be open to the parties jointly to agree a different
methodology to carry into effect an agreed intention to reflect actual
experience of prices as measured by RPI - all items on a quarterly
basis for fees due for that quarter.
(ix) I Where the relevant RPI rises above 8% per annum then the
% uplift will be reviewed taking account of the movement of
POCL’s main cost drivers and any anti-inflation policy of the
government over the period and any planned action will be agreed in
advance of the financial year in question.
(x) Accharge of £2m for POPOS has been agreed for 1995/96
and this will be uprated by RPI in subsequent years so long as BA
requires the service. Any additions to BA’s requirements for media
services over and above this baseline will be negotiated separately.
It is currently envisaged that BA will continue to use media services
provided by POCL throughout the contract period. We will use our
best endeavours to define this before the BA/POCL contract is
finalised.
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(xi) I Advance funding arrangements will be as per those set out in
the 1994/95 agreement between BA and POCL, but will be reviewed
between the parties by March 1997 and then again by March 1999
and March 2002. The aim will be to assess advance funding needs
as accurately as possible and keep the period of advance funding to
the level necessary to ensure cash is available in post offices for
payment of benefit.
(xii) The fee for 1995/96 allows for a payment of £0.23m
from POCL to BA as full and final settlement of claims for
compensation and liability for errors in respect of the paper based
payment system. A separate agreement applies in the event of
claims in respect of the ESNS service.
It is currently envisaged that BA, CONSCO and POCL will each
bear responsibility for fraud losses, errors or negligence directly
arising from scrvices within the respective parties remit or control.
The actual allocation of risk and its funding will need to be agreed
between the parties as part of a risk analysis which will form part of
the evaluation of CONSCO’s proposals.
The evaluation will have regard to the following principles:
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(2) BA/POCL aim to optimise the transfer of risk from the
public sector to CONSCO having regard to the impact on
Contract "B" pricing.
(b) POCL have set a design objective that, based on the fee
levels now envisaged, their exposure to fraud liabilities
should not exceed £1m in any year and £5m over the
contract period. BA will have regard to this objective in
supplier and system selection. POCL accept that BA cannot
undertake to protect POCL against failure of POCL to
operate the selected system if they have accepted the risks as
reasonable at supplier and system selection stage. POCL will
have a decisive role in confirming the acceptability and
operability of the system with the aim of minimising the
possibility of fraud within POCL. However, both parties
recognise that they will need to assess the risks and costs of
guarding against fraud at later stages in the procurement and
will need to be prepared to consider varying the terms,
including financial terms, now recorded in this Memorandum
of Understanding in order to satisfy all parties on fraud risks
and their control. This could include the setting of
appropriate limits on specified areas of potential liability.
a 11 April 1995
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(©) BA, POCL and CONSCO will co-operate to minimise
fraud and all parties are expected to provide for ongoing
monitoring of fraud levels. If fraud in any one month
exceeds £100k then all parties will be expected to agree and
implement appropriate remedial measures and cost sharing.
(d) Liability for the paper based system from 1996/97
onwards will not exceed £0.23m + RPI in any one year, and
will be reduced in accordance with the roll-out of the
automated system.
(©) Any claims for compensation/losses which are not
automatically verified or identified by the system will need to
be supported by timely proof/evidence and such claims will
exclude payments deemed to have been made under duress
which are linked to attempted or actual theft.
(xiii) In a situation of declining volumes of benefit transactions any
change on the overall charge will be capped at a maximum reduction
of 3% on the previous years price (excluding RPI on the latest years
fee). The base year will be 1995/96 but this will be adjusted to
allow for the increased income/volume arising from the transition of
girocheques.
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Each year, starting in 1996/97, a guaranteed “floor” charge will be
calculated which will be payable regardless of the actual volumes
and values of benefit transactions.
In general, the floor will be equal the previous year’s price less 3%
then uprated in line with the year-on-year changes in the RPI.
In years where there is migration of Girocheque transactions, the
floor will be increased by the following:
(a) A percentage of £14,74m equal to the percentage of
Girocheques to be transferred, reduced by cumulative
efficiency discounts from the year of migration and increased
by the change in RPI from 1994/95.
(b) —16.75p per girocheque transaction to be transferred,
reduced by cumulative efficiency discounts from 1995/96 and
increased by the change in RPI from 1994/95.
(c) 16.75p per £100 value of girocheque payments to be
transferred, reduced by cumulative efficiency discounts from
1995/96.
23 11 April 1995
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Annex 4 shows an example of how such a floor might apply.
Once the floor level has been calculated RPI will be added
back calculated as in paragraph c (viii) above.
(xiv) Invoicing of the fees will be such as to enable BA to settle
invoices by the middle of each quarter. During roll-out it is
assumed that the level of the fee will be as agreed at the start of the
financial year using annual volume and value forecasts. With roll-
out of automated systems and as improved financial information
becomes available, BA and POCL will move to the use of quarterly
estimates of fees based on actual volumes/value and RPI and with
final revisions based on year end outturn subject to the mechanism
set out at paragraph (x) above.
(xv) The pricing mechanism set out at paragraph (c (ii)) for the
flowthrough of any additional service time from Contract "B" is not
intended to be applied to any new transactions or services requested
by BA over and above those provided within the baseline agreement.
(xvi) The charges do not include provision for the storage/issue of
cards to customers which will be priced separately following
agreement between BA, CONSCO, and.POCL if appropriate.
24 11 April 1995
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(d) The financial model at Annex 4 reflects the factors, principles and
metrics described in the preceding paragraph. The figures are
illustrative in that the volume and value assumptions may vary. In
summary if the assumptions are correct then the total payments due
(excluding incentives) at constant 1994/95 prices would be as
follows:
£m
96/97 343.3 00/01 377.3
97/98 367.2 01/02 372.4
98/99 385.2 02/03 367.5
99/00 382.2 03/04 364.4
(©) Currently, the BA and SSA have separate contracts with POCL.
Unlike that for BA, the existing SSA contract runs to 31 March
1996 and is on an overall price basis rather than constructed around
a fixed charge and variable charges related to volume and value of
transactions. It will be necessary, therefore, for SSA to have a
separate Contract "A" with POCL which will start one year after but
terminate concurrently with BA’s contract "A" and which will start
from the baseline already agreed for 1995/96 between SSA and
POCL. The SSA will provide similar forecasts in respect of
payments at Northem Ireland post offices. The construction of the
overall charge will be for negotiation between SSA and POCL, but
it will apply as many of the principles from this paragraph as is
deemed practicable.
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(f) BA is intending to offer money incentives to POCL to encourage the
quick and efficient implementation of the new method of payment.
In particular, incentives may be offered for any or all of the
following:
. completion of roll-out of the infrastructure and
electronic equipment in all post offices by a given
time;
. the cessation of the need to use any Girocheques for
benefit payment;
. the complete cessation of all paper based methods of
payment in post offices;
. satisfactory operation of the new method of payment
in individual post offices.
It is intended that the maximum achievable value of these incentives
will be £10m in total and the conditions for payment will be
determined once CONSCO’s proposals are accepted. They will be
paid as additions to the annual fee, will be demanding but
achievable, will be designed to relate only to circumstances in which
POCL, its agents, contractors and suppliers can take responsibility
for achieving a defined result and will only be paid where both
parties agree the parameters for performance.
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(g) Audit reports and certificates will continue to be provided as detailed
in the 1994/95 contract and the 1994/95 value of £113k is deemed to
be included within the contract price. Additional and/or changed
requirements will be priced accordingly.
37. The formula for the pricing of contract “B" will take account of the following
factors and cost elements:
a Contract "B" between BA and POCL will be aligned with the
contract between POCL and CONSCO in terms of period and
pricing structure. Both BA and POCL expect the CONSCO pricing
structure to be based on the usage and intensity of usage by service
element. However the pricing structure may need to be changed in
the light of contract negotiations with CONSCO.
b. While the contract for counter infrastructure and TMS will be
between CONSCO and POCL it will take account of the views of
BA and adhere to the principles in this MOU. They will seek to
include reduced prices year on year to reflect both increased
efficiency and the increasing volumes as the automation project rolls
out. Both the POCL and BA commercial teams will have access to
relevant specifications, proposed costs and price mechanisms during
CONSCO negotiations and selection of the final supplier, subject to
commercial confidentiality.
27 11 April 1995
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BA and POCL will co-operate in dealing with CONSCO to ensure
that both parties can satisfy themselves that CONSCO’s costs are
apportioned fairly between CMS, PAS, TMS and counter
infrastructure, and within TMS and counter infrastructure between
service elements. CONSCO, through the terms of their responses to
the SSR and final bids, will be encouraged to base their charges on
a unit transaction per service element basis taking account of the
various items of equipment, software and transmission costs needed
to support each service element.
It is expected that charges will be calculated as the sum of BA’s
usage of each of the service elements used for benefit payment
related services. POCL will pass on to BA, without mark-up but
‘with respect to the management and audit fees described in (e)
below, its share of the charge as calculated by CONSCO based on
usage and intensity, such share to be monitored annually. Timing of
payments will take account of terms under Contract "A" and those
between POCL and CONSCO.
BA will agree with POCL a management and audit fee in respect of
POCL’s contract with CONSCO. BA will not pay for service
elements which are not used for benefit payments eg Postshops. BA
and POCL will meet the costs of any higher specification required
by themselves only. BA will also meet the net costs or receive the
28 1) April 1995
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net benefits of any impact on Contract “A”, eg transaction time and
reduced reconciliation activity.
POCL is committed to incorporating transaction services for other
clients via the CONSCO network, as soon as it can agree a
programme with its existing clients and develop new products and
services, In particular POCL is committed to using the EPOS
element of the service for all sales wherever practicable.
The unit costs for any POCL client (including BA) will reflect any
additional costs caused by specific client needs. Where additional
costs in excess of £100K are created as a result of one client’s needs
impacting on other client's business (eg on its security), then the
additional costs will be bome by the client whose needs have caused
the impact. This will be achieved by modification to the relevant
client’s pricing mechanism. Where such costs are incurred outside
the scope of POCL’s contract with CONSCO or of Contract “B"
activity, POCL will have the right to receive an independent
assessment of the costs claimed by the affected client.
BA and POCL will provide forecast volumes of transactions through
the services provided by CONSCO. If the contract with CONSCO
provides for volume discounts, for either overall usage or
specifically for BA usage, then such savings, when they apply, will
be reflected in the fees outlined above.
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i. BA and POCL will co-operate to ensure forecasts to CONSCO are
realistically based, volume risks to CONSCO are minimised where
appropriate and that usage intensity is minimised in relation to
service requirements. BA and POCL will co-operate with each other
in respect of communications with CONSCO, but having due regard
for our respective commercial confidentiality.
38, The concept behind both sets of contractual factors is to aim towards an
equitable and fair price that is commensurate with, and provides incentive
towards, the respective business case needs of the BA and POCL, and the
programme’s overall objectives.
39. It is agreed that all post offices will fall under the scope of the automation
programme; however, the exact number of counter positions to be covered
(and how they will be) is yet to be decided and this decision will be informed
by CONSCO proposals.
40. The roll-out of the programme will have regard to maximising the commercial
returns for BA and POCL, consistent with the overall programme objectives.
Technical and Service Delivery Issues
aL 41. Both BA and POCL will ensure that proposals from CONSCO are
implemented in a way that is consistent with their respective information
systems strategies (but not necessarily to pre-determined standards for IT).
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42, Both during the procurement process, and during its implementation, BA and
43.
45.
POCL are committed to pursuing opportunities in areas which the procurement
either will, or may in part, enable. This may lead to other investments,
procurements or improvement projects for directly or indirectly associated
processes, either by CONSCO or other appropriate future suppliers. BA and
POCL commit to apply security and service delivery standards as agreed to all
new services.
BA and POCL will co-operate to ensure that the card system of benefit
payment is fully implemented, phasing out the existing order book, at the
earliest possible date. This will need to have particular reference to early
achievement of savings, costs, customer acceptability and operational
feasibility.
. It is BA’s intention to transfer benefit payments currently paid by cashcheque
at post offices to the new automated system as quickly as possible. BA and
POCL will co-operate to ensure the smooth phasing out of the current cash
cheque method of paying benefits at post offices at the earliest possible date
with full and proper regard to the existing contracts with Girobank.
BA and POCL will continue to co-operate on interim measures to reduce
instrament of payment fraud, including the constructive consideration of
proposals from suppliers.
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46. BA and POCL will co-operate to ensure regular and joint review of the
programme to identify areas of risk to the programme in its development,
implementation and operational stages.
47. BA and POCL will seek to ensure that arrangements are in place to enable full
and proper inspection and audit arrangements during the programme’s
development, implementation and operation to secure the delivery of the
programme’s objectives.
Way Forward
48. For evaluation purposes of CONSCO, BA and POCL will agree criteria which
have regard to the objectives at paragraphs 4 and 5 above.
49. This document will be the basis for further discussion and negotiations, leading
to the contracts involving BA, POCL and CONSCO as described in it, during
the CONSCO proposal and negotiation phase of the programme.
Signed and Dated:
For Benefits Agency for Post Office Counters Ltd For Social Security
Agency
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D
ANNEX 1
BA OBJECTIVES
The automation of the benefits payment service through post offices is seen as a
major element in the re-engineering of the overall administrative processes and the
attainment of the BA Business Vision. All objectives will embrace that Vision and
in particular the payment system through post offices will:
(a) provide 2 method of payment which ensures payment of the right money, to
the right person at the right time;
(0) provide a fully secure system that eliminates fraud as far as possible and
controls residual liabilities;
(©) provide improved systems to detect and monitor unauthorised activity and
supply evidence to support prosecution of illegal action;
(a) provide full accounting and reconciliation facilities;
(©) reduce current administration costs, secure the lowest value for money cost
for the provision of the new service and provide for continuous improvement
in value for money throughout the period of the contract,
(f) provide an efficient customer service which is accepted and understood by
them, BA staff and POCL agents and staff,
(g) provide flexibility to cope readily with any future changes affecting benefits
* Or customer base and to adapt to developing needs of customer service,
accounting or security;
(h) be consistent with the Government’s aim of encouraging the use of
automated credit transfer (ACT) on a voluntary basis while continuing to
provide the option of payment at a post office for those who prefer it.
(i) _ enable all of a person’s benefit entitlement(s), to be paid in one transaction
using a single token or card for the identification of all benefits;
@ ensure that any token or card identification system can migrate to a multi-
purpose smart card;
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BA OBJECTIVES (contd)
(K)_ encourage the use of the National Insurance Number (NINO) as the prime
reference number for communications between the BA and its customers,
their employers, or other Government Agencies;
() _ use IT systems that are robust, as far as possible already proven, and secure
against fraud, unauthorised access and disasters, are capable of development
and interface with existing systems.
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ANNEX 2
POCL OBJECTIVES
The POCL objectives can be summarised as follows:
@)
)
©
@
©
©
®
(h)
®
@
&)
®
(m)
@)
to provide continued customer choice of services available at post offices and
be acceptable to customers;
to retain and strengthen POCL’s clear branding links with its customers;
to maintain POCL’s customer base;
to support government policy of a nation-wide network of post offices;
to be capable of introduction in all post offices,
to retain and enhance POCL’s commercial and financial integrity;
to improve overall efficiency and cost effectiveness for POCL and its clients;
to support and help agents in the development of their private business;
to be acceptable to staff and agents;
to facilitate automation of other areas of POCL infrastructure, eg accounting
and distribution, and support wider business information needs;
to retain and gain new business by improving quality of service to all clients;
to provide the flexibility to meet a diverse range of existing and potential
client needs and applications;
to provide long term stability for the Post Office network as a retail outlet
for benefit payments;
to adopt a flexible and efficient approach to IT systems and adhere to
industry standards so as to secure the benefits of development in IT and retail
sectors, thereby achieving value for money and faster delivery of new
products and services;
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POCL OBJECTIVES (contd)
(0) to retain customers’ trust in the integrity of POCL and improve the quality of
service to customers;
(p) to facilitate the provision of added value services, eg card and/or token issue
and management, which will enhance POCL’s service offering;
(q@ to ensure the migration of appropriate automated systems without any
reduction in service levels;
() to be a key enabler in helping improve POCL’s competitiveness, in meeting
its business partners’ needs, and enhancing future business viability.
These factors should be read in conjunction with the details set out in the
prospectus information pack.
36 11 April 1995
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ANNEX 3
ANTICIPATED LEADING AUTHORITY FOR BA/POCL AUTOMATION
CONTRACTS
Activity Supplier Contracted to © Consequential Issues
CAPS ITSA BA { Both principals and
{ CONSCO need to be
TP POCL POCL { assured of inputs/
{ outputs, not rights
{ of inspection
CMS (benefits) CONSCO BA POCL to have a right to agreed
security and service standards
PAS CONSCO BA POCL to have a right to agreed
security and service standards
CMS (other CONSCO POCL BA to have a right to agreed
cards) security standards
POCL - Strategic CONSCO POCL BA to have a right to agreed
Infrastructure security and service standards
(TMS, Counters
Interface, Oper’
Supp’ Services)
NETWORK MANAGEMENT
CAPS-CMS, CONSCO BA POCL to have a right to
CAPS-PAS, agreed security standards
CMS-PAS, CMS-DOs
CMS-POs, CONSCO BA and/or Depends on who is assigned
PAS-TMS POCL the lead role
TMS-POs CONSCO POCL BA to have a right to agreed
security standards
OTHER CONSCO POCL BA to have a right to agreed
LINKED POCL SYSTEMS security standards.
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ANNEX 4
Assumptions in the Dlustrative Spreadsheet
The spreadsheet assumes:-
@ RPI:
That RPI increases by 3.4% each year, with a base year of 1994/95.
Benefit uprating
The spreadsheet assumes that benefits are uprated by 3.4% in 1995/96
and 4% in each subsequent year.
Volume trends
The spreadsheet assures a decrease in the volume of payments,
primarily due to combination, of 13.96% by 2002/03, with 5% step
changes in each of 1997/98 and 1998/99 and 1% per annum in later
years, the 1995/96 base of 850.8m transactions.
Value trends
‘The spreadsheet assumes that there is no underlying change in the value
of benefits paid through post offices.
Former girocheques
In 1994/95 there were 80m girocheques, with a value of £7.5bn. The
spreadsheet assumes that 50% of former girocheque payments migrate
to the new system in 1997/98 (equivalent to 38m extra transactions on
the system in line with 5% volume drop) and the other 50% in 1998/99
(equivalent to 72m extra transactions on the system with a 10% volume
drop). No drop in values of girocheques is assumed and values are
inflated by 3.4% per annum from 1995/96.
38 11 Apnil 1995
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ANNEX 4 (contd)
° Network installation
The spreadsheet assumed that 33.3% of post offices due to be automated
are automated by the end of March 1997, 66.7% by the end of March
1998, and all by the end of March 1999.
+ Additional volume-related charge for electronic payments
The spreadsheet assumes a net additional cost of 2.79p per transaction as
a result of introducing the automated system. At this stage, this is
purely illustrative of the net effect of changes which might result from
the automation of benefit payment. This will include counter
transaction time (eg increases due to receipt, printing/signatures at the
counter), changes in back-of-office activities related to benefit payments
(eg ceased activities such as no longer receiving order books),
new/changed activities in outlets (such as enquiries and abortive
transactions), and changes in benefit payment related administrative
costs elsewhere in POCL.
The table at the cnd of the spreadsheet shows that with these parameters
the 3% floor on year-on-year reductions in the total payable would not
be triggered. The table also illustrates the minimum floor levels if the
floor provisions had to be applied in every year of the contract from
1996/97 to 2002/03.
39 11 April 1995
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