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CEO’s Report — March 2015
1. Introduction to this month’s Board and overall strategic priorities
e Ahead of our final Board meeting of this financial year, I want us to celebrate the
unprecedented pace of transformation now underway across the business, and draw
confidence from this as we accelerate our turnaround plans further in 2015-16. This
report provides more detail on developments over the last month, but I would highlight:
o We have had a number of recent successes across our product portfolio: signing
the new POCa contract to safeguard the service for a further 7 years; reaching a
successful conclusion on the valuation of the general insurance business to support
our buyout from Bol; and launching the public trial of the Post Office’s identity
assurance service ‘Verify’;
o With the Board’s support, we have taken greater control of the Mediation Scheme
by closing the Working Group, and through adept stakeholder handling seen
negligible press coverage;
o Weare well ahead of targets for Network Transformation with 5,000 contracts now
signed and the 4,000" transformed branch opened;
co Iam personally delighted by the increases in positive engagement across both our
postmasters (up from 44% to 45%) and staff (up from 58% to 62%). This would be
worthy of celebration in any event, but is even more remarkable at time of very
significant change, and reflects both strong leadership and open and honest
engagement with our people;
o And finally, the move to the new Customer Support Centre in Finsbury Dials on the
16'" March has been a great success, with excellent feedback from staff and a real
buzz around the office. I am already seeing the benefits of the Group Executive
beginning each day around the ‘hub’ and I am confident this move will be a decisive
enabler of a more open, collaborative and agile working culture across the Post
Office.
Key issues for discussion at this Board:
e We have three substantive topics for discussion at the March Board meeting:
e Firstly, I have asked Nick to provide the Board with an update on how we propose to
exercise our option to buy the Bank of Ireland’s share of the joint insurance business
(Hawk). As you know, the Independent Insurance Expert (IIE) concluded that the
valuation of the Business is £43.9 million and, whilst 9.8% outside the Board mandate,
this is within the Post Office’s value horizon.
e The Board is asked for approval to allow management to proceed with the acquisition of
Bol’s share of the Business at the given valuation, and approval to negotiate potential
alternative structures with the Bol, which could allow us to utilise POMS to pursue an
investments strategy. Alice and I had a positive and constructive meeting with
Christopher Fisher and Des Crowley from the Bank on the 11 March, which confirmed
both their interest in continuing to work with us on general insurance and a shared
commitment to developing the broader partnership between POL and Bol.
e Alisdair will then talk us through the latest in-year financial performance followed by
leading a discussion to seek the Board’s approval of the financial plan and scorecard
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for 2015-16. At the Board in January we discussed a draft of the financial plan which
was designed to reduce the EBITDAS loss from £64m to £34m. The latest version of
the plan addresses the Board’s feedback, and is substantially more realistic than both
the previous year’s plan and the draft submission in January. Al and I have led
challenge sessions to review the assumptions underpinning income projections for next
year, and the Group Executive has reviewed the plan on two occasions. This version
sees a reduction in net income to reflect the removal of optimism bias and creation of
contingency, offset by additional cost reductions to retain the EBITDAS target at -£34m.
Whilst more realistic it is important to note that the plan remains challenging.
e The KPI scorecard builds on the changes agreed with the Remuneration Committee,
and includes financial targets focusing on EBITDAS, digital income, and refinements to
the customer satisfaction measures. The scorecard also proposes further changes to
the non-bonus related metrics to rationalise them in number, following discussion by the
Group Executive.
e Finally, Martin George and Geoff Smyth have prepared a paper to facilitate a Board
discussion on the strategy for our telephony business, and specifically our homephone
and broadband services. At the June Board Awayday last year we agreed to prioritise
the mails and financial services businesses, recognising that telephony, along with
government services, would be secondary pillars going forward. Given this, I wanted
the Board to have the opportunity to review the strategic options available to us for the
telephony business, and in particular whether it should be retained as part of our group
portfolio or divested to release capital and reduce management distractions.
e The paper provides analysis of a range of options and seeks the Board’s agreement to
retain and grow the business, at least in the short-term. This recommendation
recognises the positive (and growing) Direct Product Contribution the business
provides, with minimal funding requirements and a low impact on the network. We
could then resume talks with potential partners to discuss divestment and franchising to
our timetable and as they are allowed by the regulator.
2. Commercial and business performance overview
Overall performance
e Net income in February was favourable to budget driven primarily by the additional
revenue for the new POCA contract. Total expenditure also remains favourable to the
budget, meaning the £99m EBIT target is still within reach. However, the forecast
remains in line with the update to the board in January of £95m-£97m. Our focus for the
final weeks of 2014-15 remains on delivering income in line with forecasts and
maintaining tight cost control.
e The CFO’s Performance Report for this Board provides additional commentary on
performance across the pillars so these are not summarised here to reduce duplication.
3. Other updates of note for the Board
Sparrow
e As the Board will know, Post Office announced on 10" March that it had completed all
of its investigations under the Complaint Review and Mediation Scheme, and that it had
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decided to mediate all cases that had not been subject to a court ruling. In addition,
Post Office published a 187 page report detailing progress on the Scheme so far;
announced that the Working Group overseeing the Scheme was to close with
immediate effect and gave notice of termination to Second Sight.
e Despite extensive hostile briefing by JFSA, there has been limited media coverage. PA
ran a very short, balanced piece picked up by some regional media. There was a very
hostile piece in Computer Weekly that does not seem to have been picked up and has
now been amended to add more balance. In Parliament, James Arbuthnot attempted to
secure an Urgent Question on 11" March. This was rejected but he was called as the
first supplementary question at Prime Minister's Questions, suggesting that Post Office
had “sacked” Second Sight and were attempting to suppress their Part Two Report —
inaccurate on both counts. The PM committed Vince Cable to writing to JA and the
Sparrow team have provided material to BIS in support.
e The priorities now are to progress as many cases to mediation as quickly as possible.
Second Sight have also given us their updated draft of their “Part Two” Report which is
intended to assist in the mediation process. Post Office will respond to that draft
shortly.
e Iam sure the Board will wish to join me in thanking Mark Davies and Jane Macleod in
particular for their leadership in helping us take control of this agenda.
Digital income
e As mentioned earlier, the RemCo supported the proposal to include digital net income
as one of the bonus KPIs for 2015-16. This reflects the increasing importance of this
revenue stream for the business, with ambitions for 25% of net income to come from
digital channels by 2019-20. As such, I thought it important to provide the Board with a
short update on the work that is underway to secure this income, ahead of a fuller
paper to the Board in May.
e The Board has heard previously of the significant progress made in separating our IT
systems from Royal Mail, and of the successful creation of the Common Digital
Platform to give us full control of postoffice.co.uk. Work is already underway to grow
income generated from digital channels from 3% of net income in 2014-15 to 5% in
2015-16. This 5% assumed £6m income from online mail, but in the absence of a
defined launch plan, this has since been removed. When the Group Executive reviewed
these activities in January we asked the team to work up a plan to accelerate the
growth in digital, recognising the stretch to our 2019-20 ambition. The team are now
focussed on two streams of activity:
1. ‘Fixing the funnels’ to increase the proportion of online enquiries which result
in a completed application, with a particular focus on Financial Services. This
work includes improving our marketing to drive up visits to the website,
making the website better at getting customers into the application journey
and making it easy to complete the online application. We have already
increased the target for online income to £24m in 2015-16 compared to an
outturn forecast to be £15.5m in 2014-15 and early analysis suggests a
potential additional revenue of £2m (6 months’ worth of benefit) in 2015-16
from a further investment of £2.8m.
2. Aparallel stream of activity to ‘own the customer and drive usage of a Post
Office ‘MyAccount’ service. This service would allow customers to access
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their range of Post Office accounts, but more importantly drive cross-sell of
additional products. This is a longer-term strategic development, central to
delivering the FS strategy, and has the potential to return a further £3m
income in 2015-16. Over 5 years, an investment of c£23m is forecast to
deliver £70m additional revenue via this service.
We expect these initiatives in financial services will enable us to deliver the original
digital income target of 5% in 2015-16. And, once established, this focus can be
applied across all pillars allowing cross-selling throughout our product portfolio.
Engagement with the NFSP and Unions
We are reaching a critical point in our discussions with the NFSP relating to the MoU,
NT Cliff and Network Extension and I therefore wanted to update the Board on
progress. As part of the settlement we reached with the NFSP relating to the 2013 NT
funding, the Board endorsed the establishment of a 15 year agreement with the NFSP,
the agreement itself dependent upon the NFSP re-structuring their organisation and
supporting the Post Office in the delivery of NT, particularly elements related to
compulsion, noting that any network extension was excluded from the parameters of
the MOU. We have made good progress in the last 12 months in achieving delivery of
NT and moving the NFSP towards a position of supporting further business change
including our plans for Network Extension. This is in an environment where we have
yet to sign the Grant Agreement (GA) whilst maintaining our position of wanting to work
collaboratively but only in circumstances that are right for the business — this approach
has improved our position substantially.
It should be noted that the NFSP continue to push for additional funding using the
possibility of withdrawing support for NT and joining the CWU. Our approach has
reduced their demand position significantly and we will continue to press for further
agreement/concessions as we do not believe a merge with CWU is their preferred
outcome (though this risk cannot be ignored). Our approach remains well within the
mandate agreed with the Board and we will keep you updated on progress.
We have now also secured agreement from both Unite and the CWU to a new Post
Office pension arrangement which will be launched with effect from 1 April 2015. The
scheme will be called the Post Office Pension Plan and is applicable to all employees
who are currently in the Royal Mail Defined Contribution Plan.
4. Update on key change programmes
Work is well advance to establish the necessary governance, processes and capability
to implement our change programmes as an integrated portfolio. This includes strong
central governance led by the Transformation Director, and activity is now being
managed to an integrated plan through the Transformation Management Group.
Particular attention continues to be given to the implementation of the new Front office
solution given its business-wide impacts.
Revised reporting is being developed to manage the portfolio of change programmes
and it is our intention to introduce this for the Board in May. For this month, updates
are provided to the existing format.
a) Crown Transformation Programme
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Status overview: 292 branches have now been transformed with 4 more expected by end
of March, achieving the original target. Staff cost reductions, staff training and SSK
implementations are all achieving or exceeding targets. Around 19 branches will not be
franchised under CTP as no suitable partners have been secured. The P&L run rate for the
retained Crown estate at March 2015 is forecast to be around £3m loss with P&L break-
even run rate targeted for later in 2015.
Programme KPIs: YTD 2014/15 FY
Target Actual Period Target Forecast
P&L run rate ee -£7.6m P10 =e -c£3m
Number of branches transformed 2. 292 Pi 296
Number of branches franchised 46 Pu 51
Customer satisfaction in transformed 284% Pt 85%
branches
Queue time satisfaction 86% Pi 86%
Key milestones ahead:
Milestone
292 retained branches transformed
70 franchises live
505 Self Service Kiosks rolled out
Current status
292 complete, 296 transformed by end-March
On track to deliver 50
Complete
Target date
By end Mar 15
By end Aug 15
By end Mar 15
b) Network Transformation Programme
Status overview: The programme is on target against all key metrics, and end of year
targets have already been achieved for both contracts signed and branches open. The
programme continues work on implementation plans for the ‘cliff, including engagement
with the NFSP as discussed earlier in this report.
Programme KPIs YTD (P11) 2014/15 FY
Target___Actual__—Target__Forecast
Contract signed (cumulative) 5 4,886 “4,800. 4,950
Branches Open (cumulative) 3,894 é 4,000.
Customer Satisfaction (all branches) 97% 97%
Operator Satisfaction ‘G! 74% 75%
‘Average increase in opening hours 0" 70% 69%
Cost reduction (in-year cumulative) 056 3,170k 3,824k
Key milestones ahead:
Milestone Target date I Current status
4,800 contracts signed End March 15 I On schedule (currently ahead
of plan)
3,708 converted branches open End March 15 I On schedule (currently ahead
of plan)
Agent scorecard trial evaluation complete End of Mar 15_I On track
Cliff management — ‘Come on the journey’ letter End of Mar 15 I On track
Transitional locals — Final Tranche End of May 15_I On track
Cliff management — Notice of contract change End of Jun 15 I On track
Cliff management — Deadline for signing a contract I End of Dec 15 I On track
or CRP.
c) ‘Win in Mails’
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Status overview: The build of the Access Point solution continues, including the additional
products required by retailers. Taking the learning from the Ivy trials, the project has
decided not to trial a mails only solution in May 2015, but instead launch when the minimum
viable solution for McColl’s is available in spring next year. This will include a more
developed payments proposition to take on our main competitors.
The Win in Mails milestones and dates are in the process of being re-baselined following
submission of a new business case for 15/16 scope.
d) Business Transformation (Transition to Delivery)
Status overview: The programme is coming to the end of the transition phase to establish
the foundations and governance to commence delivery from April 2015: TMO Design,
governance bodies and thematic programmes.
Transition Phase Key milestones ahead:
Milestone Target date Current status
‘Governance bodies operational End Mar 15 Design Authority Group delayed
pending the appointment of the Head of
Business Design
Transformation Management Office (TMO) End Mar 15 On track
operational
Delivery programmes operational End Mar 15 On track
Assess Success Criteria End Mar 15 On track
e) Separation
Status overview: The programme remains on track to deliver as expected and achieve the
agreed MSA target completion date. 257 sites have now separated onto the Post Office IT
Network, leaving a further 87 to separate.
Programme KPIs YTD (P11) Full programme
Target Actual Target ___ Forecast
Separation of IT systems. 148 256
Separation of Business Services 120 4131
Finance — headcount reduction 27.5 275
NB The team will also be monitoring the number of post-launch incidents for the newly separated systems such as Finance and HR.
Key milestones ahead:
Milestone Target date Current status
HR: Nemo Go-live End of Mar 15 On track
HR Common Components separated End of May 15 _I On track
Networks site migration end ‘Apr 15 ‘On track
f) IT Transformation
Status overview: The Front Office procurement remains on plan with three bidders (CSC,
IBM and Accenture) submitting proposals on time and the preferred bidder decision due in
April. Our ability to successfully complete the implementation by March 2017 remains a key
business risk and is the focus of significant management attention. Negotiations continue
with Fujitsu on potential extension mechanisms to ensure service continuity.
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The Back Office workstream has been re-started following conclusion of the BPO review,
and an impact assessment is underway. We are currently targeting procurement to start
from April and initial estimates for Contract Award late August.
Programme KPIs YTD Full programme
Target Actual Target Forecast
Towers Contracts Awarded 2 5
3” parties transitioned to Service Integrator (Si) 90 96
‘Sloperating model processes accepted 23 23
Financial savings £0 £25m
Key milestones ahead: * Dates re-baselined
Milestone Target date Current status
F/O Contract awarded End May 15 On track
Network contract awarded End May 15 On track
EUC Admin service commencement Mid May 15 ‘On track
B/O contract awarded End Aug 15 ‘On track
F/O Contract awarded End May 15 On track
Network contract awarded End May 15 ‘On track
EUC Admin service commencement Mid May 15 On track
EUC Admin service complete End Aug 15 ‘On track
EUC Branch service commencement End Nov 15 ‘On track
g) People & Engagement
Status overview: Executive sessions continue to develop the second wave of headcount
reductions focused on the management population. Consultation on the changes is
currently planned for mid-April to allow the process to conclude in July. Good progress has
been made in reviewing the facilities time for CWU representatives. This work remains on
track. The first of our Business Consultation Forums with the Unions took place this month,
involving the CFO and other senior leaders in attendance.
Negotiations with the NFSP on the MoU are reaching a critical stage with discussions
ongoing as referenced in Section 3. Work on the Post Office vision continues to develop
through engagement with the Group Executive as well as colleagues and postmasters. We
remain on track to present the Vision statement and approach to the Board in May.
Key milestones ahead:
Milestone Target date Current status
CWU facilities time review complete Apr 15 On track
POL vision sign-off May 15 On track
Grant funding for NFSP in place May 15 On track
People and Engagement plan/leadership May 15 On track
capability and capacity update to Board
Wave 2 complete July 15) Date re-baselined
h) Titan/POMS
Status overview: POMS commenced trading from 1° January with the business
performing to date as forecast. The FCA “minded to approve” has been received with
POMS targeting a stand-up date of 1° May (this is subject to Post Office Board approval).
The key management focus is to bed down the new processes and close off the
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outstanding issues from the Grant Thornton report to enable POMS to take up its FCA
authorisation.
At this meeting POMS will present its Plan for 2015/16 for Board sign off.
Programme KPIs YTD (11 cum.) Full programme
Target Actual Target Forecast
41 413
Contractual relationships in place
Systems in place 4 6
Staff in place 3 6
Key milestones ahead:
Milestone Target date Current status
Strategic system implemented End Aug 15 ‘On schedule
i) Hawk
Status overview: The IE (Independent Expert) provided a valuation purchase price for the
business within the expected tolerance. The Board will decide whether to proceed at its
March meeting. Benefits will be realised from effective valuation date (October 2014).
Milestone Target date Current status
‘Seek PO Board approval to proceed End of Mar 15__I On track
Initiate Hawk Implementation programme _I End of Apr 15 On track
Buy-Out complete: Early 2015-16 On track
j) Financial Services Investments and Savings Negotiations
Status overview: Savings negotiations concluded and benefits will be realised in 2014-15.
Investments negotiations have been on hold until Hawk negotiations have been concluded
and will now commence subject to Board approval.
Programme KPIs 2015/16
Target Actual
Incremental increase in net Savings revenues £0 - £12M £9m.
Investments Negotiations £0.25m nia
k) Financial Services Sales Effectiveness
Status overview: Work continues to drive up the performance of Financial and Mortgage
Specialists (FS/MS) building on the launch of the Post Office Money brand. This activity
includes:
e Work to recruit and retain a population of 100 Mortgage Specialists;
e Developing stronger performance MI to at every level to drive more and better
referrals from the counter, and increase cross and up-selling;
e Developing an agency model for driving FS sales through two sales pilots, both of
which are now well established and showing early successes in terms of increased
sales revenue.
Key milestones ahead:
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Milestone Target date Current status
Salesforce development live (web lead to branch End of March 15 I On track
appointment functionality)
Technology for Frontline live (upgrading core Mid Mar 15 At risk
mortgage system)
Hub and Spoke Pilot phase 2 launched (expanding reach Mid Mar 15 ‘On track
into agency and linking with FS/MS specialists)
Data enablement feasibility complete (developing a more Mid June 15 ‘On track
agile reporting capability)
POM Academy Phase 2 complete (expanding curriculum) End Aug 15 On track
5. Market, political and external developments
Third party parcel access point market growing
e DPD is set to open 2,500 PickUp stores as part of its parcel shop network on 1st June
2015. Numark Pharmacies, a network of 3,000 independent pharmacies, has been
named as its first retail member. DPD say their aim is to have a DPD PickUp point
within ten minutes of “most people in the UK”. In 2013, DPD announced it extended its
partnership with myHermes ParcelShops for HomeCall Returns, its own return service
At the time of the agreement there were 3,000 myHermes ParcelShop locations which
has now grown to ~5,000. In 2013, DPD delivered 1.6m parcels a week. Doddle also
announced plans to open 70 more locations in railway stations and shopping centres
taking the total number to 100 by the end of 2015. Doddle has already signed up
retailers such as Amazon, Asos, Charles Tyrwhitt and Misguided.
Amazon Logistics set to expand
e Amazon Logistics is set to expand after successful Sunday deliveries. Sunday
deliveries quadrupled from last year. Amazon Logistics currently uses 45 different local
and national delivery firms. The service is currently free for its subscription paying
Amazon Prime customers. According to the head of Amazon UK, Christopher North,
“Amazon Logistics is not about replacing a carrier, it is about complementing”. Amazon
UK has not revealed what portions of its products are delivered through Amazon
Logistics, but it is understood to reach close to 50% some weeks. North insists Amazon
has no interested in pushing all its deliveries through Amazon Logistics. He stated, “The
answer is you want to spread your volumes across multiple partners. You don’t want to
have a single point of failure.”
Competition in the challenger bank space grows
e Virgin Money is set to launch its current account nationwide by April 2015 after
launching in Northern Ireland and Scotland last year. Tesco announced plans to grow
its share of the current account market to rival its credit card business. However, both
face a challenge in winning customers over with only 3% of accounts being switched
since reforms were introduced according to the Yorkshire Building Society.
e TSB announced pre-tax profits of £134m in 2014, up 2.3% on the previous year. It
added 0.5m new accounts in 2014. Understanding the challenges to get customers
switching, it is exploring the option to raise its share of the current account market from
4.2% to 6% through acquisition.
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Annex A: Forward Board meetings: overview of the sequencing of discussions on
key business strategy issues
21° May:
Annual Report and Accounts
Win in Mails Update on the programme to date and next steps
3 year plan Review options for our 3 year operating plan
Digital Approval of in-year and longer-term priorities for increasing
digital income
New Government paper Debate options for a paper making the case to a new
administration for continued investment in/support for the
Post Office
Front Office Approve award of the Front Office contract
Crown strategy Approve Crown Strategy
Banking Services Update on the new utility banking service
Cost acceleration Initial discussion of the more radical options for reducing
areas of uncompetitive spend
17-18th June Away Day:
Win in Mails Agreement of the Mails strategy
IDA Agreement of the commercial strategy for identity
assurance
3 year plan Agreement of the 3 year plan
Plan B Review of Plan B options for generating additional income
Network and channels Review of network and channel strategy
New Government Paper Approve paper making the case to a new administration for
continued investment in/support for the Post Office
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