POLB(06)4"
POLB 06/58 — 06/78
Present:
Sir Michael
Hodgkinson
lan Anderson
Alan Cook
Peter Corbett
Ric Francis
Graham
Halliday
David Miller
In attendance:
Crispin Beale
Simon Carter
Jonathan Evans
Neil Owen
Sue Whalley
Eoin Daly
Apologies:
Allan Leighton
Brian Goggin
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Post Office Limited
(company no..2154540)
Minutes of the meeting of the Board
held at 148 Old Street, London
on June 28 2006
Chairman, Post Office Limited
IHumain Resources Director
Managing Director
Finance Director
Operations Director
Banking & Financial Services Director
Chief Operating Officer
Director of Customer Insight, Intelligence & Analysis (for
POLB 06/74)
‘Head. of Marketing
Company Secretary
Notes
Consultant, McKinsey for POB06/75
Consultant, McKinsey for POBO6/75
Chairman, Royal Mail Group
Chief Executive, Bank of Ireland
MINUTES OF PREVIOUS MEETINGS POLB(06)3"°
(a)
The Board approved the minutes of the Board meeting of
April 20" 2006. 5
MINUTES OF JV AND ASSOCIATE. COMPANIES
(a)
(b)
The Board noted the minutes of POFS Board meeting of 16"
— 19" May 2006;
the Board noted the minutes of the First Rate Exchange:
Services Board meeting of 6" April 2006;
RESIGNATION AND APPOINTMENT OF DIRECTORS
(a)
the Chairman reported the resignation of David Miller and
Graham Halliday as directors of Post Office Ltd, effective
from 31°' July 2006. The Board expressed their appreciation
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POLB06/61
ACTION:
Peter Corbett
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Peter Corbett
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for the excellent contribution they had made to the business;
(b) The Chairman reported that the appointment to the Board of
Sue Whalley had been approved by the Royal Mail Holdings
Nominations. Committee, and her appointment: would be
effective from 1° September 2006.
STATUS REPORT POLB(06)41
(a) The Board noted the report, and that all actions had been
completed. In addition the Board noted that:
(b) Luke March, Compliance Director Royal Mail Group had
agreed to join Post Office Ltd’s Compliance Committee, and
Peter Corbett would liaise with him about the meeting dates
etc;
. (c) a letter to HMG to outline the consequences of failing to
secure a long term funding arrangement had been drafted
by Peter Corbett. However, the Group Finance Director had
requested that the sending of the letter be postponed until
after the Group: Funding negotiations had been completed.
The concern was that the: letter may prejudice the.overallr °
deal. Peter Corbett emphasised :that these issues only* ~
impacted on the short term:funding arrangements rather-°
than the long term: The Board agreed that a'one page
document would be produced to outline the issues in:
relation to funding,.but would :not be.issued:without furthe:
discussion. Additionally; Peter Corbett:would.discuss: wit!
RMG the.possibility of accelerating: the treatment:of:the:SNP*. « -
going through Post' Office Ltd’s profit-and loss: account, °
recognising that there were likely to be tax issues at a Group
level which may make this undesirable from an overall
Group. point of view. An appropriate form of words would be
. considered for the letter to Government, to help ensure the
funding could be considered as part,of the P&L account.
CHAIRMAN’S BUSINESS
(a) Sir Michael Hodgkinson had no further matters to report.
MANAGING DIRECTOR’S REPORT
(a) Alan Cook explained that-the strategic plan would be
» discussed in detail later in the meeting.
FINANCE REPORT POLB(06)42
(a) Peter Corbett provided the Board with a presentation on the
Period 12 business perfortriance results; .
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Peter Corbett
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income was £0.4m higher than budget in the month due to
higher than budgeted performances on mails (£1.2m), BBC
(£0.9m) and Card Account, (£1.3m) offsetting adverse
variances on Home Phone (£0.9m), POFS (£0.8m), Bill
Payments (£0.3m), Lottery (£0.3m) and Banking (£0.3m);
total costs were £0.3m lower than budget in the month.
Total costs for the year so far were £0.3m higher than
budget due to the timing and mix of agents product
payments as well as the timing of Marketing costs for the
Summer Campaign offset by lower cost of sales for Home
Phone and Retail as well as lower spending on non-staff
costs than planned;
the loss from operations after allocations was £21.2m in the
month, £0.5m worse than budget. This takes the cumulative
loss to £42.8m, which was £0.1m better than budget;
the. cumulative cashflow was. an outflow of £65.2m against.a
budgeted outflow of £201.2m (£136.0m favourable
variance). The most significant factor for this was a.timing
difference due to the effectiof the bank holiday on card
account withdrawals partially offset by a £37.5m adverse on
Mails Reserve funding because the first transfer was
budgeted for April, but had been delayed until Period 3;
the emerging position showed net risks of around £15m for
the full year 2006/07. Action was being taken to strengthen
mitigating actions against risks wherever possible and to
identify additional cost reductions to bridge the gap. Cost
reductions would be embedded into the budgets which
would be reissued following the faunch of the new
organisational design in September;
Audit Update: During June, Branch Audits had confirmed
two significant losses in branches:
(i) £300k was initially missing at Marlow MSPO. £186k
was discovered in bags at the back of the premises
but it was too early to determine the likelihood of
recovery for the remaining £114k. The-agent had
been suspended. It appeared to have. been a fairly
short, rapid rise in cash holdings at this. office. The
audit was triggered by routine indicators in the audit
tisk models (cash trends and transaction correction
levels).
(ii) £41k shortage was.found at Porteynon. This audit
followed on from the cash remittance enquiries that
were initiated after the major losses in February and
March where operations had been reviewing
branches who had failed to send back expected cash
returns. Following enquiries.and a visit, the audit was
requested and confirmed this loss;
(iii) in general, the business was getting better at
detecting fraud. Ric Francis explained that this was
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because there was now higher visibility of cash
movements. Peter Corbett stated that further
analysis was being conducted on an ongoing basis
to ensure these issues continued to be picked up
quickly.
POLBO6/65 SOLVENCY AND FUNDING STATUS POLB(06)42
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Funding discussions continued with Government including
formal weekly meetings. There had been no material
change to the cashflows previously discussed, although a
more robust split between "client" and "business" funds had
been incorporated into modelling which should reduce the
level of "business volatility" to £50m for forecasting and
planning purposes. The remaining volatility (total previously
used was an average of £170m with peaks of £250m) had
been separately classified as "client" and under
arrangements valid. until 2010, this could bé covered by the.
working capital loan;
formal weekly meetings had also been recommenced with
Government to discuss network transformation and all
related'issues including funding. POL/RMG was
represented by Martin Gafsen, Sue Huggins, Sue Whalley
and Peter Corbett;
discussions continued with-RMG and Government to
optimise both short and long term funding. This should
enable the Mails Reserve to be used as part of the overall
RMG funding solution.and have separate funding provided
for Post Office Ltd;
the.first quarter Social Network Payment of £37.5m had
been delayed from April 1st to June 2nd to assist in this
endeavour. The second slice of £37.5m was due on July 1“.
Alternatives sources of funding were being urgently
considered by RMG and Government - the fallback would be
to use the Mails Reserve as previously agreed by all parties;
December remained the target for the long term funding
deal, but there were many issues to be dealt with to ensure
this happened. A draft note had been prepared to outline to
Government the consequences of failing to secure a long-
term funding deal;
a particular sensitivity had arisen in relation to the Fujitsu
contract renegotiation. Fujitsu had requested that the
contract be signed before the conclusion of the long term
funding deal, but with a conditionality clause. This would
allow reversion to the old contract by February 2007 should
no funding deal be in place. A separate note was being
prepared on this to advise relevant parties, including
Government.
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FINALISATION OF THE STATUTORY ACCOUNTS
A timetable has been agreed for the finalisation of the POL
statutory accounts following deliberations by the Audit
Committee:on whether or not to adopt International
Accounting Standards for RMG subsidiary companies (to
avoid unnecessary work). The target.date was the end of
July 2006.
OTHER EXECUTIVE REPORTS
SALES & SERVICE REPORT. POLB(06)43
The.Board noted the report, and also noted that:
Sales: the primary focus for the Sales team during Q1 to
date had been the launch of Instant Saver. At the end of
Week 11, 42,896 accounts had been opened with total
balances of £293m - equal to 197% of target. A further
8,923 applications were awaiting processing with deposits of
£58m. The product has been very well received across ‘the
network in both Directly Managed and Agency branches;
Me ae tee BP
“we
Irrelevant
Rural Strategy: discussions with DTI about the future
Government policy towards, and funding of, the rural
network continued in conjunction with Group colleagues.
Pending a change from Government, the formal current
position remains that of ‘no avoidable closures’ and the
£150m pa Social Network Payment stays in place until
March 2008. Net rural closures in 2005/06 were reported at
149 which had maintained the low rates of recent years. In
2006/07 the intention would be to keep branches open in
line with Government policy whilst utilising the cheaper
service provision techniques that had been demonstrated in
the pilots;
Stakeholder: discussions continued with the DTI. on network
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ACTION:
lan.Anderson
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options; and the indications were that officials were stepping
up their preparations for‘a public consultation exercise.
Various stakeholders had expressed concern that'the
consultation had not already started. Postcomm appeared to
be broadly supportive of a slimmer network, so long as there
were alternative forms of service provision if branches were
to close. Postcomm were also trying to put pressure on the
* DTI to forma view, and were holding a conference in July
for key industry players (including Alan Cook and Andy
Furey) to talk about the network. Postwatch were also very
keen to engage, and had been active in critiquing the rural
pilots. They were due to hold a closed session with
members of the Counters.Advisory Group (eg National
Consumer Council, Age Concern) on 22™ June to talk about
how they ‘should make their views on the network heard;
Age Discrimination Legislation: Jonathan Evans informed
the Board that the Company would need to ensure it was
. prepared for the consequences of the new age
discrimination legislation. The legislation would not just
apply to employees but would also include ‘office holders’,
and these could include subpostmasters. lan Anderson
undertook ‘to ensure that the implications of the new
legislation were being fully covered.
MARKETING &-DIRECT SALES: POLB(06)44.
* The Board.noted:the report and:in ‘addition: that:
Foreign:Currency: Foreign’ Currency:sales had.hit record
levels in May — 2% up‘on last-year's' récord: performance,
with 125,000 more transactions than at.the same time last
year. However this was still 6% below target. The summer
campaign was in full swing, and increased performance was
expected. The Commercial Package was still proving to be
extremely popular with 60 new branches applying last month
alone. Mike Hodgkinson stated that there were now many
new players moving into the currency market, including
Sainsburys, Asda, Tesco and Marks & Spencers. Simon
Carter clarified that Marks & Spencers were growing the
greatest share at Post Office Ltd’s-expense, and that the
Tesco proposition had so far had slow take-up;
Government Services: whilst the Government's procurement
process for the new ID. Card tender had been delayed until
September, a large number of discussions had taken place
with potential bidders including EDS, Siemens, Serco,
Vertex, Capita and Fujitsu, by a cross-Group team. Alan
Cook has been proposed as Group Executive Sponsor.
Whilst the value of the contract was now believed to be
lower than once suggested, it would still be a multi-million
pound opportunity for both Royal Mail Letters and Post
Office Ltd. All potential bidders were Keen to work with Post
Office, some on an exclusive basis. Separately IPS
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(previously UKPS) had identified 22 locations where remote
interview capability was required by February 2007. 20 of
these could be covered by existing branches, although this
may also involve the use. of some mobile vans;
BANKING.& FINANCIAL SERVICES POLB(06)45
The Board noted the report and in particular that:
Direct Payments: the RFI for a Simple Money Transmission
Service was sent to 23 organisations. 10 responses had
been received and five had been taken forward to stage two.
MBNA had:since been added given the representations that
had been made to the Chief Executive of RMG. The
relationship with James Plaskitt was positive and interest
had been expressed in Post Office’s proposal to minimise
the impact of card account closure on customers. Although
the campaign to migrate people from Card Account had
been less aggressive recently, it would continue to have a
significant impact on Post Office Ltd;
Compliance: National Savings & Investments (NS&Il) were
expected to formally submit evidence of alleged mis-selling
of Instant Saver ‘and of ‘rubbishing’ of NS&I products by 4
branch staff. Three cases were being investigated and it
had been suggested to NS&I that a fuller analysis could be
achieved by looking for correlations in data for sales with af
NS&l withdrawals or closures. NS&l were concerned ‘that
counter assistants were stepping over the line from giving a
information to giving advice;
et
Alliance and Leicester Renegotiation: £12m - £15m of risk i
had been identified, which was less than the risk currently
identified in the 5 year plan
Separate LINK Scheme: the draft agreement for a separate
LINK scheme was being considered by Camerons. The
scheme was scheduled to be in place for July, but it was
unclear whether the banks that supported the arrangements
would actually sign up to it. If this happened the OFT may
assign a task force to investigate, although under the new
APACS transparency model it was possible that these task
forces could be dispensed with. There remained potential to
do a deal with the banks who were nervous about large
numbers of ‘unbanked’ opening accounts. This would
require further analysis by KPMG which the DWP would be
required to fund;
Credit Cards: The colleague offer on credit cards was likely
to take place in July.
OPERATIONS REPORT POLB(06)46
The Board noted the report, and in particular that:
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Stock Programme: business cases had been approved for
system and security upgrades at Swindon, and the Hemel
warehouse functions would migrate to Swindon during
autumn this year. The migration of the Swindon call desk
activities to Royal Mail Sales and Customer Services:
commenced on 19 June and would be completed by July.
Feasibility studies were underway to scope other cost
saving and efficiency measures such as in-branch secure
stock destruction rather than return to the warehouse; an
“Our Range" brochure to promote many products in one
12/16 page brochure, rather than individually, for smaller
non commercial branches; electronic ordering from
branches of secure and transaction stock products;
-Horizon $90: the S90 release of Horizon had-now been fully
deployed.
HUMAN RESOURCES REPORT POLB(06)47
The. Board noted the report and in addition that:
Industrial Relations: the climate remained fragile due to the
pay impasse. A national consultative ballot was due to be
opened on 14 June concerning pay;
Have Your-Say::‘I enjoy working here’ for 2005-06 closed at
58% which was:down 4% on'last year. May 2006 returned a
figure of 57% which was down 2% ‘on May 2005. Response”
rates were also falling (64% — down 3%). Alan Cook
explained that the results.reflected the uncertainty: people
were feeling as the strategic plan had not yet been
communicated.
MARKETING BUDGET
Peter Corbett provided an update on the marketing budget:
which had been incorporated into the strategic plan. The
budget of £20m was confirmed as agreed.
HORIZON UPDATE
Ric Francis. provided an update on Horizon Next Generation;
RM Holdings Board would consider the business case on 2™
August; .
the contract negotiations were proceeding to plan and the
new contract was expected to be ready by mid July.
Slaughter and May had recommended the inclusion of a
conditionality provision so that if long term funding was not
securéd within a reasonable time the new contract would
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Crispin Beale
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revert to the existing terms. Fujitsu. were currently invoicing
in accordance with new contract. This would provide.a
saving of £8m in 2006/07, as envisaged in the budget;
PWC had been appointed by Group Tax to provide a formal
legal opinion on outsourcing some further services to Fujitsu
associated with Horizon. This would have the added benefit
of transferring some of POL’s capital losses to Fujitsu. This
would be treated as a separate business case and was not
expected to delay the progress of the new contract.
CUSTOMER SATISFACTION INDEX REVIEW
Simon Carter introduced Crispin Beale; Director of
Customer Insight, Intelligence & Analysis, who provided a
presentation on the proposed revised CSI measure:
the current system included a lot of subjective measures
which were hard to influence, including reputation, customer
service, usage, minimalisation of dissatisfaction, service,
satisfaction with new products and new product customer
service;.
the new measure included some of the elements of the the
current solution, but there was more emphasis on the
objective measures. In addition, there were service
elements included, which were needed to counterbalance
the-drive forsales. The target would likely be harder to
achieve; but it would be easier to influence the result;
the Board agreed that the new CSI proposal would. be
presented to the Remuneration Committee chaired by David
Fish. Data would be provided to justify the target, together
with example graphs. The effect of the queuing levels on the
overall CSI score would need to be demonstrated, and the
information should also be prepared. with a view to
discussing with Government.
STRATEGIC PLAN POLB(06)48
" Alan Cook introduced Sue Whalley and Eoin Daly of
McKinsey. A presentation was provided which outlined the
Post Office Ltd’s strategic plan. It.was explained that'the
purpose of the discussion was to consider any last.
amendments before the plan was submitted to the Royal
Mail Holdings Board for consideration.
During the discussion, the Board agreed a number of
amendments including the following additional slides to
illustrate:
(i) the scale of the aggregate loss of income from
Government business, such as Card Account,
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passport and DVLA;
(ii) . the scale of the change of the business mix over the
7 years, excluding the last 2 years;
(iii) how automation may be able to help with issues
faced by the bill payments business, and that this
would be considered in detail in the autumn;
(iv) . a chart would be produced ‘to show the likelihood of it
being viable for a zero fee ATM;
(v) that a possible mobile phones venture would be
considered in September;
(vi) the potential benefit that would be realised of
processing ID cards through Crown Offices;
(vii) extended stationery was best solution for additional
retail;
(viii) the probabilities of the potential net risks and
opportunities would be made clearer.
The Board further agreed that before presentation to the
RMH Board, a summary would be provided foreach section.
To confirm each element:of the plan a large ticklist of all
section summaries would also be provided.
The Board agreed the strategic plan, subject to the above
amendments. to the presentation.
SEALINGS POLB(06)49
"The directors approved the affixing of the common seal of
the Company to the documents set out against item number
77/06 and 109/06 inclusive in the seal register.
ITEMS FOR NOTING POLB(06)50.
The Board also noted the SPV business case which had
been approved by the Executive Team.
CLOSE
There being no further business, the meeting was closed.
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