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POLB 14(12")
POLB 14/143 ~14/157
POST OFFICE LIMITED
(Company no. 2154540)
{the ‘Company’)
Minutes of a Board meeting held on 26 November 2014
at 148 Old Street, London EC1V 9HQ
Present:
Alice Perkins Chairman
Neil McCausland Non-Executive Director
Tim Franklin Non-Executive Director
Virginia Holmes Non-Executive Director
Alasdair Marnoch Non-Executive Director
Richard Callard Non-Executive Director
Paula Vennells Chief Executive
Chris Day Chief Financial Officer
In Attendance:
Alwen Lyons Company Secretary
David Ryan Business Transformation Director (minute POLB 14/145)
Kevin Gilliland Network & Sales Director (minute POLB 14/145)
Neil Hayward Group People Director (minute POLB 14/145)
Martin Edwards Head of Financial Strategy and Planning (minute POLB
14/145)
Chris Aujard General Counsel (minute POLB 14/145, 14/147-14/148 &
14/156)
Nick Kennett Director, Financial Services (minute POLB 14/147 -14/148)
Paul Havenhand General Manager, POMS (minute POLB 14/147 — 14/148)
Jon Sperrin Partner, Grant Thornton (minute POLB 14/148)
Mark Davies Associate Director, Grant Thornton (minute POLB 14/148)
POLB 14/143 INTRODUCTION
(a) A quorum being present, the Chairman opened the meeting.
POLB 14/144 CEO'S REPORT
(a) The CEO introduced her report and focused on the following key
areas for discussion with the Board:
1. Business Transformation (BTr) was the main focus of the
Board meeting and the CEO explained the decision to present
a holistic view of the strategy including existing programmes
and incorporating the relevant parts of Plan B. She stressed
the need for good governance to oversee the BTr but was
mindful that this should not become over bureaucratic.
2. The CEO informed the Board that the Secretary of State (S of
S) had written to the major banks promoting Post Office as an
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alternative access point for their customers. A roundtable
debate was organised for week commencing 1% December at
which Nick Kennett would represent Post Office, to ensure that
any proposition discussed made commercial sense. The CEO
thanked Richard Callard and his team for their work in briefing
the SoS.
3. The CEO had briefed the Senior Leadership Team on the
Wave 1 headcount reductions and redundancies necessary to
deliver the cost reduction target of £53m. She was sure that
people were well briefed and realised the sensitive nature of
conversations they would have with their teams. The Business
had reached agreement with Unite on redundancy but the
CWU had as yet refused to meet the Business to discuss the
issue.
4, The CEO explained that Fujitsu had withdrawn from the
procurement process underway to replace the front office IT
equipment, and because of this Accenture had been included
back into the tender process. The CFO explained that the
Business was trying to extend the Fujitsu contract for a year to
give more time to move to an alternative provider. Any
renegotiation with Fujitsu added financial risk. The CFO
assured the Board that IP ownership was no longer an issue
as Post Office owned all the IP post 2008, and the key would
be managing the relationship as the Businesses exited the
partnership. The Board would be having a substantive
discussion of IT at its next meeting.
5. The supply chain CWU strike ballot had returned a yes vote
but with considerably lower support than ever before. The CEO
reported that Andy Furey had agreed to attend conciliation
sessions at ACAS but that this would not necessarily stop the
union calling a strike.
6. The CEO was hopeful that the DWP would agree the Post
Office Card Account (POca) contract before the 15”
ACTION: December. The contract being proposed was within the
Company mandate agreed by the Board and the Board resolved that
Secretary approval to enter into the contract would be granted by
correspondence.
7. The CEO recounted her meeting with four MPs to discuss the
Sparrow mediation scheme. She explained that the Business
intended to write to the MPs to explain the Business’ position
on denying mediation for criminal cases, and that this letter
may become public. The Business had taken further advice on
the likelihood of a Judicial Review, if JFSA withdrew from the
ACTION: process, and the QC’s advice was that the likelihood was low.
Belinda Crowe The Board asked for an update on where cases were in the
scheme.
8. The CEO explained that meetings were planned to discuss
ACTION: Network Transformation with the NFSP with the proposal to
Neil Hayward/ bring the ‘cliff’ forward in the plan. She promised to come back
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Kevin Gilliland to the Board in the New Year to discuss further.
The CEO suggested that she send a written update to the Board in
December.
(b) Tim Franklin, Chairman of the Post Office Advisory Council (POAC),
informed the Board about the recent POAC meeting which had been
another great success. He explained that individual members of the
Council had given their time to help the Business on the SME
proposition and on Branding.
The Council had visited the Design Lab and St. James’ Church, West
Hampstead which includes a new Mains Branch. Tim Franklin and
Neil McCausland were both pleased to be involved in the POAC and
regarded it as a valuable addition to mutual ways of working.
ACTION: The Chairman asked Tim Franklin to consider how he could involve
Tim Franklin the Board in future meetings.
ACTION: (c) The Board discussed the announcements in the telephony market and
Martin George asked for a paper on the telephony strategy in the New Year.
POLB 14/145 BUSINESS TRANSFORMATION
(a) The Board welcomed Kevin Gilliland, Network & Sales Director, Neil
Hayward, Group People Director, David Ryan, Business
Transformation Director, and Martin Edwards, Head of Financial
Strategy and Planning, to the meeting.
(b) David Ryan summarised the developments in the plan since the Board
presentation in September. He explained that there were three phases
to the plan: understanding the baseline (how the business operates
today); identifying an end state design (delivering a £200-250m p.a.
EBITDAS improvement by 2019/20, not including payment for social
provision); and designing a plan for implementation. He explained that
the work had analysed the interdependencies and investment needed
to deliver the BTr within the existing funding envelope.
(c) David Ryan explained the six themes used to structure the BTr:
1. Reduce Costs
2. Transform the organisation
3. Lean IT
4, Reduce and variabilise network costs
5. Win in Mail
6. Grow FS
ACTION: David The Board asked for an update of what had changed in the plan since
Ryan the September Board presentation.
(d) Network
The main changes to the Network proposal were discussed. The
Board supported the move away from franchising the whole Crown
Office network and challenged whether, considering the return on
investment and the management effort required, any further
franchising made sense. Kevin Gilliland explained that 40% of Crown
branches still made a loss and that the proposal was to work on these
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individual branches when opportunities arose, and to keep franchising
as a lever to keep a focus on improvements in the Crowns.
Kevin Gilliland explained the rationale for the number of Mains
branches in the plan. The initial plan had suggested an end state of
2500 Mains. However, it was now believed that, after product
simplification and network extension, the most suitable and
commercial route for getting to the ‘ideal’ state would be through
working with agents to help them reduce costs and utilise their footfall.
(e) The Board discussed the ruling by HMRC on the tax treatment for
subpostmasters. Kevin Gilliland explained that this was not a problem
with the new Locals contract, but some existing subpostmasters with
Mains contracts would need to change and pay VAT instead of
ACTION: National Insurance. The Board asked for a note explaining the
Kevin Gilliland changes.
(f) Supply Chain
The plan proposed significant cost reduction in the supply chain but
retained an insourcing model. Kevin Gilliland explained that the
strategy had not changed with an aggressive focus on cost reduction
whilst still aiming to grow the business. He believed that before a
more radical solution could be considered the Business should drive
ACTION: through self-funding branches and retailer cash. The Board
Kevin Gilliland acknowledged the planned improvements but would prefer the plan to
include a business case for outsourcing as a future milestone.
(g) Costs
David Ryan presented the costs of BTr and explained the breakdown
of the £1.145 billion investment and its effect on EBITDAS, stressing
that the promised returns were prudent. He highlighted that the two
largest areas of spend were Network and IT transformation.
The Board discussed the overall return on investment of the proposed
changes. It was noted that the aggregate figures were distorted by
the low return for Network Transformation in absolute terms, although
these figures did not capture the wider financial benefits such as the
variabalisation of costs; the removal of contingent liabilities related to
future compensation payments; and longer opening hours for
customers. Network transformation also enabled the introduction of
stronger retailing skills which would provide a more sustainable
network and help to defend market share. Kevin Gilliland also noted
that the Business’ preferred compulsory approach would have
delivered a different return.
ACTON: The Board acknowledged that the IT re-platform would be expensive
Lesley Sewell but were surprised by the limited impact on cost reduction. The detail
of the IT strategy would be considered at the January Board
The Board challenged the size of the overall investment for what
appeared to be a small return. David Ryan explained that the aim of
his presentation was to give an overview of BTr and the plan to 2020.
ACTION: The Board were not at this stage being asked to approve any
David Ryan investment, and that the Business would return to the Board
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highlighting the significant transformation programme investment
proposals requiring Board approval.
The Board asked the Business to reconsider its approach and strip
out the major programmes. which were already underway, as business
as usual, leaving BTr to focus on fundamental change. The Board
asked for priority to given to initiatives based upon their relative return
on investment and consider areas where we can leverage partners to
execute business outcomes at their risk if this enables management
to focus on fundamental change.
David Ryan presented the potential central cost reduction to March
ACTION: 2016 and an overview of the 30% central cost reduction by 2020. The
David Ryan Board asked for an extrapolation (by year to 2020) of the indicative
cost profile of the business by function (before the uplift in costs to
support business growth) with a commentary on the key differences.
The analysis should include changes in relative costs, for example: IT
in relation to people; and outsourced costs in relation to direct costs.
(h) Innovation and Growth
The Board discussed the channel mix and the 25% target for digital
transactions. Kevin. Gilliland explained the change to a digital mails
Journey, which would mean that a significant part of the mails income
would be for accepting mails items already purchased online. The
Board asked for more clarity on innovation and growth and ‘the CEO
ACTION: suggested that would form part of the Operating plan to be brought to
Martin George the Board in March. The Board would also discuss the progress in
digital at the January Meeting.
(i) Cash
The Board discussed the balance sheet position, including working
ACTION: capital, and stressed the importance of controlling the risks to the
CFO cash reserves. It was agreed that this would be considered in more
detail with the Operating Plan and Budget in March.
(j) EBITDAS Flight path
The Board discussed the flight path of the three proposed scenarios. It
was agreed that the ‘do nothing’ scenario was untenable as the
counter-factual and it was suggested that the June awayday plan also
be highlighted.
David Ryan explained that the ‘full delivery’ projection assumed that
the FS strategy was delivered in full (reaching £508m of income by
2019/20), alongside full delivery of other cost savings and revenue
growth initiatives identified as part of the Business Transformation
Programme (with an underlying assumption that ‘base’ income would
remain flat and costs would increase in line with inflation). The
‘partial delivery projection’ included a 30% reduction in cost savings, a
lower projection for FS growth (reaching £459m income by 2019/20)
and an assumption that network extension would only serve to defend
existing income rather than deliver any incremental growth.
The Board asked for an additional flight path somewhere between the
ACTION: ‘full’ and ‘partial’ delivery projections. The CFO expected the initial
CFO budget for next year to be discussed at the January Board, by which
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time Christmas trading would provide a clearer view of the possible
EBITDAS, and help define the additional flight path.
(k) Funding
The plans assumed no change to the funding agreement. Richard
Callard suggested that it was unlikely that the current funding
agreement would be reopened but that the Business needed to be
ready with evidence to support any request for the continued social
subsidy after 2017/18. This would be required in time for any
ACTION: spending review undertaken by a new government. The Board asked
Chris Aujard for a note setting out the precise basis for the promised funding
through to 2018.
(l) Governance
David Ryan described the proposed governance and controls to be
put in place . including the development of a_ transformation
management office (TMO), which he would lead, to provide portfolio
management of the transformation. He explained that the TMO
needed 4 or 5 additional people in key positions to add more rigour
and challenge.and help drive the Transformation.
Neil Hayward explained that the Business already manages -large
scale programmes and that many of the senior people who would
deliver the 6 themes in the strategy were already in place. However,
he recognised the need to increase the Business knowledge and
expertise in 3 or 4 specific areas. The CEO agreed that, as part of the
ACTION: next phase of BTr, the Business would provide information on the
David Ryan clear ownership and accountability of roles, and a view of the
additional resource required.
(m) Vision
The Board agreed that a clear vision and change narrative would help
ACTION: explain what the Business was trying to build for customers and staff.
Neil Hayward/ This would generate an emotional engagement with the end state and
Mark Davies help emphasise the importance of BTr. The CEO agreed and
suggested that this be discussed at the January Board.
(n) PwC Assurance
Chris Aujard introduced the PwC interim report, which highlighted their
view of the BTr risks. He gave some comfort that the programme
teams had identified many of the risks highlighted by PwC. The
biggest risk highlighted had been the lack of a clear vision, an area
which the Business was now addressing. Chris Aujard acknowledged
that all parties agree that the project carries significant risk and needs
ACTON: appropriate governance and that the final PwC report would be
Chris Aujard circulated to the Board for their information.
(0) The Board noted the work to date and asked the Business to come
ACTION: back in January on the points raised.
David Ryan
(p) The CEO agreed to update the Board in December and include
information on the 6 BTr themes in her report.
ACTION: CEO
(q)_ Chris Aujard, David Ryan, Kevin Gilliland, Neil Hayward and Martin
Edwards left the meeting.
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POLB 14/146 FINANCIAL PERFORMANCE UPDATE
(a) The Board received the financial performance update for October
2014.
(b) The CFO reported that, despite income being below target.in period-7,
the. mails performance had improved and.delivered year on year
growth. He remained confident in hitting the £880m income and £85m
EBITDAS forecasts. If the POca contract was agreed there was the
possibility that the outturn would be higher, which would also. have a
positive effect on the Crown P&L.
(c) The Board asked for a note explaining the financial effect of the POca
ACTION: CFO payment once the contract was agreed.
(d) The CFO was confident of delivering the cost reduction target of
£53m.. Over. £50m of this saving would be sustainable, but he
acknowledged that there was very little discretionary spend left in this
year’s budget. He was also optimistic that the Business would reach
its cumulative £100m target by March 2016.
(e) The CEO explained that the Business was bring forward Wave. 2 of
the management structure changes with further headcount reductions.
Tight cost control was now in place with the Cost Reduction Group
which she attended and the CFO Chaired.
(f) The CFO still believed that the Crown P&L would miss breakeven by
around £2m, although Kevin Gilliland remained optimistic. The final
outcome would depend on the Christmas trading. The Board asked for
a reconciliation of the breakeven run-rate for the current position and
ACTION:CFO the full year forecast.
ACTION:CFO (g) The Board asked for a separate session on the working capital at the
May Board.
(h) The Board noted the financial performance update.
POLB 14/147 POST OFFICE AND BANK OF IRELAND RELATIONSHIP
(a) Nick Kennett, Financial Services Director and Chris Aujard, General
Counsel joined the meeting.
" IRRELEVANT I
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“IRRELEVANT _
(d)
(e)
(f)
(g)
(h) The Board thanked Nick Kennett for his update and wished him good
luck in the negotiations.
POLB 14/148 H
(b)
* ” potoo00063
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(c)
(d)
(e)
it)
(g)
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ACTION:
Chris Aujard/
POMS Board
POLB 14/149
POLB 14/150
POLB 14/151
(i)
@)
(k)
(a)
(b)
(b)
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Irrelevant:
how yore orev sreceery —
UPDATE FROM THE AUDIT, RISK AND COMPLIANCE
COMMITTEE
Alasdair Marnoch, Chairman of the Audit, Risk and Compliance
Committee, gave an update to the Board on the last Committee
meeting, the main business of which had been the Interim Report and
Accounts.
He explained that the next meeting in January would discuss the
Business Risk Appetite and Statements, which would then be
considered at the January Board.
Irrelevant.
(a),
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(c)
(a)
(e) 1
Om I I
(b)
POLB 14/153 MINUTES OF PREVIOUS MEETINGS AND MATTERS ARISING
(a) The minutes of the Board meeting held on 29 October 2014 were
approved for signature by the Chairman.
POLB 14/154 COMMITTEE MEETING MINUTES FOR NOTING
(a) The Board noted the minutes of:
e the Audit, Risk and Compliance Committee held on 21 October
2014; and
« the Pensions Sub-Committee meeting held on 28 October
2014,
POLB 14/155 STATUS REPORT
(a) The Status Report, showing matters outstanding from previous Board
meetings, was noted.
(b) The Board noted the PwC Post Office Limited Risk Management
ACTION:ARC Capability Report Executive Summary, which would be discussed at
the January ARC.
POLB 14/156 ITEMS FOR NOTING
(a) The Board noted the IA status report summary as at 31 October.
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ACTION:
Kevin Gilliland
POLB 14/157
(b)
(c)
(d)
(e)
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Post Office Limited — Strictly Confidential
The Board noted the Significant Litigation report.
The Board noted the Health & Safety report.
The Board noted the Report on Sealings and resolved that the
affixing of the Common Seal of the Company to the documents
set out against items numbered 1131 to 1240 inclusive in the seal
register was hereby confirmed.
Chris Aujard joined the meeting.
The Board noted the update on the State Aid
The Board asked for a note to explain the commission rates paid
to a subpostmaster by Paypoint and Post Office.
DATE OF NEXT MEETING
It was noted that the next Board meeting would be held on 28 January
2014.
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