09-10-98 = 13:18 FROM-KPMG GOVERNMENT CONS
kPme'
10th Floor
1 Canada Square
Canary Wharf
London E14 5AB
United Kingdom
To Aap aoe
S: Graham DSS
David Sibbick DTI
Isabel] Anderson DTT!
{Please copy)
Mark Gladwyn CITU
Jeremy Crump CITU -
(Please copy)
Geoff Mulgan NO. 10
Jonathan Evans POCL.
George McCorkell BA -
Chris Waod CO -
From Chris Nicholson
Department T&G, London-CW
Telephone
Fax
Date 9 October 1998
Subject BA/POCL Progress Report
Please find attached a4 page document.
The information in this fax
is confidential and may he
legally privileged, Iris
intended solely for the
addressee and others
authorised 10 receive it.
If you are not the intended
recipient, any disclosure,
copying, distribution or
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Ref
action taken in reliance on
its contents is prohibited
and may be unlawful.
Member firm of KPMG
International. The principal
place of business is at 8
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en/em/270
where a list of partners’
names is open to inspection.
KPMG is registered to carry
‘on audit work and authorised
to carry on investment
business by tha Institute of
Chartered Accountants in
England and Wales.
28a Ma
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BA/POCL Progress Report
KPMG were requested to examine 4 key areas of the fallback options for BA/POCL:
a) the impact on the network of the loss of BA income and associated footfall.
b) the timescale und costs of an alternative technology platform.
ec) the viability of pursuing Horizon without the benefit payment card,
d) the viability of an early shift to ACT including the impact on the banks.
in order to help establish the value for money of the alternative options, options 2 and 3.
a) The impact on the network of the loss of BA income and associated footfall
The critical assumptions
PO closure figures
Estimates of PO closures under the 3 options are of interest per se but are also significant
determinants of each of the key figures for:
- first round effect on PO profits.
. sub-postmaster compensation.
as well as logically affecting profits from banking (through in practice these figures have not
gone into the determination of POCL banking profits).
The figures for Post Office closures used in the original HMT report were derived from a
separate exercise which was not directly linked to the analysis of fallback options. POCL
analysed 2 scenarios of haw they might respond to a loss of BA business:
m Scenario A: Managed closure: The closure of 500 Crown Offices and 4,500 most
vulnerable sub-offices (vulnerability defined as offices most dependent on BA related
income). This process to be managed over time by POCL (8-10 years) to facilitate
™maximum migration of business from closing offices to those remaining open;
@ Scenario B; Unmanaged closure: The closure of 13,000 most vulnerable sub-offices, in an
unmanaged way ie, as a result of economic decision by sub-postmasters in the face of
dramatic loss of business, so reducing the possibility for POCL of migrating businesses to
other offices;
Under both scenarios there is a very similar “first round impact on POC profits” (contained
within this are a number of critical assumptions considered in Appendix 1) but a very different
impact on number of offices, sub postmaster compensation, and, by implication, potential for
banking business income.
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However POCL stress that:
~ these scenarios were not prepared for the purpose of examining Options 1, 2 and 3.
~ would not be how in practice they responded to the loss of BA business in each of the
options e.g. there is no logical reason why they would close Crown offices in Scenario A, not
Scenario B, and the most “vulnerable” offices to loss of BA business may in fact be the
offices most valuable to them in the context of their emerging banking strategy e.g. those in
tural areas.
POCL have therefore undertaken to model more realistic responses under the 3 options. Results
expected 9.10.98
POCE profit from banking
POCL’s estimate of profit from banking are critical to their case for being able to maintain a
nation-wide network of POs post-ACT in the absence of subsidy. POCL estimates of profit
from banking have been derived from a McKinsey study. The McKinsey study examined, in
the context of a vision for POCL in the year 2015, the potential profit from offering banking
services in response to hanks reducing substantially their branch network and to making
arrangements with POCL for customers to gain access to their accounts through sub-Post
Offices. This yields a potential contribution for POCL of £130-230M. The low point of this
range has been used for the contribution figure for Option 1.
The basis for the McKinsey assumptions are therefore different from a scenario where benefit
recipients are wansferred to ACT and a banking service is offered through Post Office Counters.
POCL stress that until a full banking strategy is developed, expected to take up to 2 years, it will
be difficult fully to assess the scope for banking profits. We have discussed with POCL the
feasibility of developing alternatives scenarios based on more developed assumptions but they
do not feel able to do this within the time available to KPMG are giving consideration to
alternative scenarios.
POCL consider that banking profits will be less under Options 2 and 3 because they do not
believe that by October 2001, when ACT implementation would begin, that they will have heen
able to:
- develop their banking strategy, and.
- specified their requirements, and.
- worked with Pathway or A.N. Other to develap a banking capability on Horizon, and.
+ negotiated and signed contracts with enough banks to ensure that a full banking service can
be provided through POCL, as ACT is implemented, in order that benefit recipients continue
to use the P.O., rather than being lost to the P.O.
The long timescales inherent in POCL’s contentions are a function of their placement within a
long term banking business strategy, and the assumption of existing timescales for development
of banking functionality on a automated platform. Our judgement is that under the
circumstances of Options 2 or 3 “going live”, the business imperatives may be such that POCL
May not have the luxury of such lengthy timescales whilst recognising that this may enhance
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implementation risk. We will continue to consider what alrernative assumptions might be
made, using our banking consultants,
Cost of banking technology
Given the very early stages of development of a banking strategy, all figures on the cost of
banking technology under Options I and 3 are very approximate.
Figures for Options 3 have been derived from what is known of the cost of the Horizon platform
in relation to the requirements for banking functionality and an automated platform but are
inevitably subject to large margins of error. KPMG banking IT consultants are working on
verifying/constructing estimates.
Figures for Option 2 contain £75M per annum assumed payment to ICL for the life of the
contract to generate a retum equal to what they would have got if the BPC had not been
cancelled. KPMG have sought figures on this matter from ICL Pathway.
Other key assumptions
Migration
POCL assume 50% migration of business is achieved from 5,000 P.O. closures under the
“managed closure” and “unmanaged closure” scenario it is assumed that there is no migration of
business from the further 8,000 P.O. closures. The assumption of 50% migration is based on
information from # small closure programme in the mid 1980s and more recent data on
relocation, though neither is particularly comparable, particularly in a non-BA environment as
typically it is easiest to migrate BA customers.
Footfall
Whilst footfall does not directly affect any of the figures in the VFM analysis it does underpin
POCL’s analysis of the vulnerability of offices to closure once BA income is lost. POCL’s
analysis assumes that where customers carry out transactions first in the Post Office and then
the private business side, then potentially at least those private sector sales are last they no
longer visit the Post Office. This is in our view an extreme assumption.
b) The viability of an early shift to ACT including the impact on the banks
Interviews with banks are programmed for week commencing 12 October to seek to check
DSS/BA assumptions. Project plan has been reviewed bur key assumptions largely concem
bank responses,
¢) Option 3 costings and timescale
See earlier comments under cost of banking technology.
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d) Option 2 viability
Having examined the high level architecture of ICL Pathway it would appear that Option 2 is
technically feasible. Indeed Pathway are actively marketing the system to overseas Post
Offices, without the Benefit Payment Card.
Information on Commercial feasibility will be obtained from ICL Pathway (see earlier).
pocl.doc
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