Strictly Confidential
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POST OFFICE LTD BOARD MEETING (Company Number 2154540)
Meeting to be held at 9am on 28 January 2015
in the Boardroom at 148 Old Street, London EC1V 9HQ
Members of the Board will be asked to declare any interest that could give rise to conflict in relation
to any item on the agenda at the beginning of the item in question. All interests so disclosed will be
recorded in the minutes of the Board.
If the Chairman of the meeting deems it appropriate, the
member shall absent himself or herself from all or part of the Board’s discussion of the matter.
09.00
09.05
09.30
10.00
10.30
10.50
11.00
12.00
13.00
13.15
13.45
14.30
15.00
15.10
15.25
15.55
16.00
16.05
Change of Directors
CEO report
Review of scorecard and Financial Performance
update
Initial discussions on budget, operating plan and
targets for next financial year
Business Transformation update
BREAK
IT Strategy including Fujitsu
LUNCH with Cyber Security speaker
BREAK
Risk Appetite
Update on Mails strategy
Network/ Channel update (including NT cliff)
IR - oral update
BREAK
Sparrow — oral update
POMS Director appointments
Minutes of Previous Meeting and matters arising
Committee Minutes for noting
Status report update
Board Sub Committees updates - Pensions, FS, ARC
(including ARC self-assessment) & Sparrow
Alwen Lyons
Paula Vennells
Alisdair Cameron/Neil
Hayward
Alisdair Cameron/David
Ryan/Neil Hayward
David Ryan
Lesley Sewell/Alisdair
Cameron
Tony Smith
Chris Aujard
Martin George/ Mark Siviter
Kevin Gilliland
Neil Hayward/Tom Moran
Chris Aujard/Belinda
Crowe/Mark Davies
Alwen Lyons
Alice Perkins
Committee Chairmen
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16.20
16.25
16.30
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Change of Registered Office
Items for Noting
e 1A Audit Action Status Report Summary
¢ Significant Litigation Report
e Health and Safety Report
e Sealings
Any other business
CLOSE - Date of next meeting: 25 March 2015 at
Finsbury Dials, preceded by a NED breakfast.
Alwen Lyons
Alwen Lyons
Alwen Lyons
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CEO’s Report - January 2015
1. Introduction to this month’s Board and overall strategic priorities
e We start the new calendar year on firm foundations as we accelerate our turnaround
plans; this report provides more detail, but in summary:
o we have made significant progress reshaping the business and reducing our cost
base. Thanks to the efforts of staff across the organisation, we’re now only £13k
from our target to find £60m of run-rate savings in 2014/15;
o we have also reached an agreement with the CWU on Supply Chain and Admin
pay — without prolonged industrial action — which secured the union’s co-operation
on Business Transformation, complementing the agreement with Unite;
o our first wave of staff efficiencies is well under way, and there is good progress
across the business in changing the way we work, in preparation for the move to
our new building at Finsbury Dials. The building has itself been designed to make
us work in a more open, agile and efficient way. The first teams move in 6 weeks’
time;
o growth in Financial Services is key and this month we have launched the new Post
Office Money brand. Project Hawk remains central to this and plans are underway
but timings are under pressure.
e Iam pleased to welcome our new CFO, Alisdair Cameron, and Jane MacLeod, General
Counsel, both of whom will be part of the new strategic Group Executive which I am
introducing from the 1°' February. This will help me lead the business with clearer
accountabilities and ensure effective decision making at pace. I am also reviewing our
executive governance arrangements to ensure we continue to step up our focus on
becoming a commercially sustainable business.
Key issues for discussion at this Board:
e We have four substantive topics for discussion at this Board meeting:
e Firstly, Alisdair will lead an initial discussion on the budget for next year. Building on
the business transformation analysis presented to the November Board, we have
developed next year’s budget with the goal of maintaining year-on-year improvement in
EBITDAS on our flightpath to commercial sustainability. The paper highlights areas
where we have challenged for income growth and continues our expectations of further
cost reduction.
e The paper also provides an interim update on our three-year projections which will be
refined as part of the work to produce a 3-year operating plan. This is intended to help
establish a stronger framework for medium-term financial and strategic planning, and to
strengthen the culture of financial management across the business.
e Secondly, I have asked Lesley and Alisdair to provide a paper updating the Board on
progress implementing our IT strategy. The Board has previously agreed a strategy to
transition the business away from its disparate legacy IT systems to a more secure
platform, which will meet the evolving needs of our customers and agents and, critically,
reduce and variabilise our IT cost base. The paper summarises progress to date and
the forward work plan, as well as recognising the significant risks to delivery. Lesley
will describe how we are mitigating the risk specifically around exiting Fujitsu as an
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incumbent supplier as we procure the new Front Office IT platform. The paper also
draws out the actions we are taking to improve governance of IT change and
integration with the wider business transformation programme.
We will then be discussing a draft risk appetite statement for the business. The
statement is an integral part of work to develop our risk management capability to
become compliant with the risk elements of the UK Corporate Governance Code by the
end of this financial year. The various statements attempt to capture our risk tolerances
across a range of dimensions and have been refined following very helpful discussions
at both the ExCo and ARC. Work is now in hand to embed the statement into business
decision making. The ARC approved the statement for discussion and formal adoption
by the Board. If adopted, it is proposed that the Board review the statement bi-annually
in the first year, and subsequently on an annual basis.
Finally, we will review progress on Winning in Mails. The paper notes that whilst we
have made good progress on the operational and technical elements of product
simplification and network extension, we have made no progress in securing the
necessary commercial agreements with Royal Mail. This is despite the best
endeavours of the team and engagement at the highest levels between our two
organisations, and we believe it reflects a fundamental misalignment in our respective
parcel strategies. We are therefore accelerating work on a broader commercial options
analysis, building on thinking from our Plan B options. In parallel we will maintain
engagement with retailers and the NFSP, however we propose to pause rollout of
further access points and concentrate in the interim on a cost reduction/margin
improvement approach. The options analysis will form the basis for a strategic review
of our approach at the Board in May.
2. Commercial and business performance overview
Overall performance
As the CFO’s Performance Report sets out in detail, December trading was below
forecast but showed an improvement on the same period last year. Net income was
adverse to budget across all pillars but the focus on cost reduction meant operating
profit in the month was favourable to budget, reducing the overall shortfall for the year
to date.
Our focus is now on securing the EBITDAS target of £99m over the next ten weeks. We
held a Teamtalk event with the SLT on the 13" January to brief them on the latest
financial performance and galvanise them and their teams to rise to this challenge.
Mails focus
Mails income in Period 9 was ahead of last year, driven by the extra day’s trading in
Christmas week and supported by the Christmas marketing campaign and Christmas
Makers out in branches. Home Shopping returns grew by 24% year-on-year,
outstripping the market, however this remains a relatively small proportion of our overall
mails income.
The focus is now on growing income through Q4. This includes more targeted training
for Post Offices and poorer performing colleagues in the bottom 1,000 branches. We
are also currently evaluating the potential for scaling up a planned online campaign
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targeting SMEs and eBay sellers to maximise the impact of the small parcel price
promotion.
FS focus
e Banking services continue to perform well and the ongoing positive publicity is helping
raising awareness of our services. Another round table with Vince Cable and the
banking community has been scheduled at the end of January, providing a further
opportunity to discuss how we might expand our partner banking offer on a basis which
is commercially sustainable for the Post Office.
e All preparations to launch the Post Office Money Brand have now been successfully
completed. The Post Office Money website has gone live (www.postofficemoney.co.uk)
and the nationwide PR campaign will ramp up from the end of January, with the first TV
advert airing on 1%' February. The new brand is being supported in the business with a
renewed focus on learning and development through the launch of the Post Office
Money Academy.
Telecoms focus
* The Telephony business increased Line Rental prices by £2.00 per month from 1°"
January, and reduced the Broadband package price by £2.00. As a result Broadband
Dual Play customers saw no increase in price, while our Home phone customers saw
the full £2.00 increase. This will raise £8 million in Annual Revenue/EBITDAS.
Notwithstanding this increase Post Office remains the lowest cost provider in the Home
phone market, and we have not seen any material increase in churn.
3. Other issues and updates
Industrial Relations
e The long-running dispute in Supply Chain and Admin is now formally settled. The
CWU's Postal Executive endorsed the 'negotiators' agreement' struck on the 23rd
December and the subsequent membership ballot resulted in a resounding 93.3%
'YES' vote, on a turnout of 64.4%. The deal which was agreed with the CWU remained
within the mandate agreed with the Board.
e The result means we will not need to negotiate on pay in Supply Chain and Admin until
shortly before April 2017. More importantly, this confirms the CWU’s co-operation on
Business Transformation, while retaining our right to make colleagues compulsorily
redundant.
e lam sure the Board would like to join me in thanking Neil Hayward and his team for
their hard work in landing this milestone agreement.
e Neil Hayward and the IR team have now started a review of the CWU’s Facility Time, in
line with the IR Strategy approved by the Board last year. The aim is to improve
relations between our two organisations and to reduce the cost of facility time to the
business. The team presented their proposals to CWU Representatives in
Bournemouth on 14" January and aim to have a new framework agreed by April 2015.
Our parallel review with Unite is on track to conclude with an agreement by the end of
January.
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Office move to Finsbury Dials
Significant work has been undertaken over the last 6 months as we prepare to move
out of 148 Old Street. The project remains on track to complete to agreed timescales
within the agreed budget, with savings being made on furniture and fit-out costs.
The Network Transformation team moves to its new site in Clapham with the first official
operational day scheduled to be 23 February. The remainder of our colleagues will
move from 148 Old Street to Finsbury Dials in a phased sequence between 9" March
and 27" March. Our next Board meeting on 25" March will be held in the new office.
Staff engagement is a key part of the project, including changing ways of working
(furniture, dedicated spaces etc) before we move. Most teams have embraced this
enthusiastically. We will begin weekly communication to ensure colleagues are well
prepared for the move itself. The new building and new ways of working should help us
become more agile, collaborative and ultimately more effective. New ways of working
include hot-desking, remote working and greater use of technology and we will draw on
lessons from trials over the last 6 months.
We are also preparing a stakeholder narrative, which puts potentially negative views on
the move and associated costs in the context of wider business challenges.
Government Services
PayPoint have challenged DWP on the use of the Front Office Counter Services
(FOCS) Framework Agreement. They have claimed it is an inappropriate contracting
vehicle for POca, on the basis that FOCS does not cater for Banking Services.
PayPoint have not challenged the award itself. This has led to a delay in DWP signing
the new POca contract with POL.
DWP have made a “robust” response to the PayPoint challenge and assured us this
presents a delay to the process rather than a serious challenge. BIS colleagues share
this view and have shared advice from the EU Commission confirming they regard
FOCS as a suitable contract vehicle for POca. The risk from a delay is that the £9.8m
additional POca revenue negotiated for 2014-15 may be at risk. Currently we regard
this risk as low but are monitoring the situation daily.
DWP officials have indicated they expect to enter into formal discussions on the Call-
Off Agreement later in January, confirming their intention to continue using the FOCS
Call-Off Agreement process.
Sparrow
We have now completed investigations for all cases in the Scheme. To date, we have
found no evidence, nor has any been provided by either an Applicant or Second Sight,
of either faults with the Horizon system or unsafe convictions, and we are not aware
that any convictions have been appealed.
The strategy agreed with the Board last summer has, not unexpectedly, resulted in a
concerted attempt by JFSA to use MPs and the media to apply pressure on Post Office
to mediate all cases. Although JFSA have said that they plan to stay in the Scheme,
we believe that they are gathering information through the Scheme to use in litigation
against us.
Media interest to date has been limited but unwelcome and distracting. The coverage is
being generated by a small number of journalists. We are taking a very proactive
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position in challenging journalists, combining legal and editorial approaches, including
to senior figures in relevant organisations. We will maintain our communications
strategy focussing on providing a firm, measured and proportionate response to key
audiences on the central allegation of faults within the Horizon system.
e We have been invited to attend an evidence session of the BIS Select Committee on
the 3 February, which will be an opportunity to state our case for the formal record.
e Mark Davies and Chris Aujard will provide a verbal update on Sparrow at the Board
meeting.
4. Update on key change programmes
Detailed updates are provided in separate Board papers this month for a number of the
change programmes:
a) Crown Transformation Programme
b) Network Transformation Programme
c) ‘Win in Mails’
d) Business Transformation
f) IT Transformation
To minimise duplication, this report summarises progress on the other programmes.
e) Separation
Status overview: The programme remains on track to deliver against the revised MSA
deadlines. Progress on migrating to a dedicated Post Office admin IT Network is
progressing well, and at the end of Dec 145 (of 352) sites have now been fully separated
from Royal Mail. The remaining sites are planned to migrate through Q1 2015. Our Contact
Centre estate is now also separated from Royal Mail, and the programme continues to
provide operational warranty support prior to handover into business as usual.
YTD (P9)
Target Actual
Full programme
Target Forecast
Programme KPIs
Separation of IT systems 143 256
Separation of Business Services 120 131
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
eBusiness Migration End Feb 15 On track
BT on boarding to ATOS helpdesk End Mar 15 ‘On track
complete
HR Common Components separated End Apr 15. ‘On track
Networks site migration end End Apr 15 On track
g) People & Engagement
Status overview: The Wave 1 headcount reductions are progressing in line with the plan
and will conclude at the end of March. We are now planning and designing Wave 2,
focussing on right sizing particularly the top and middle management layers of the
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organisation. ExCo consultations are underway and the review will look at all business
areas as well as cross-functional opportunities.
The Employee and Agents engagement surveys will be launched next week, and have
been brought forward this year to align with the performance review cycle. Top line flash
results will be available on 9" March.
A review of the DC pension scheme is underway, with the current consultation due to end
on 23" February. The revised DC scheme is on track for implementation by the 1° April.
Work is in hand to develop a vision for the transformed business which is compelling for our
staff, agents and customers. ExCo and SLT interviews are being conducted in January,
and an ExCo workshop will be held on 26" January. The project will also form part of an
SLT development day on 30" January, and the outcome of this work will be presented to
the Board in March ahead of a business-wide launch.
Key milestones ahead:
Milestone Target date Current status
Union agreement for new collective framework End Mar 15 On track
NFSP new relationship in place End Mar 15 Atrisk
Revised incentives in place End Mar 15 On track
Wave 1 complete/Wave 2 design starting End Mar 15 On track
Revised performance management process in End Apr 15 On track
place
People and Engagement plan/leadership End May 15 On track
capability and capacity update to Board
h) Titan
Status overview: a soft launch for renewals started from the 19"" December, and the full
POMS launch of new sales began on the 1st January. There were no significant issues.
Some minor issues were identified relating to the average length of handling times and
abandonment rates, and extra staff were recruited to mitigate this. We are on track to
finalise the two remaining contractual relationships by the end of March as planned, and to
secure the necessary FCA authorisation.
Programme KPIs YTD (P9 cum.) Full programme
Target Actual Target Forecast
Contractual relationships in place 1 13
Systems in place 4 6
Staff in place 5 6
Key milestones ahead:
Milestone Target date Current status
FCA authorisation complete End Mar 15. On track
Strategic system implemented End Aug 15 ‘On track
i) Hawk
Status overview: We are in the final stages of appointing an Independent Expert to
progress the negotiation on the Bank’s insurance business (Hawk). The team remain
confident of achieving the year-end deadline, subject to agreeing a valuation for the
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business. Alternative options are also being worked up on a contingency basis and will be
brought to the Board if required. This would inevitably impact some timings.
Milestone Target date Current status
Conclude IE valuation End Jan 15 Subject to delay
‘Seek PO Board approval to proceed End Feb 15 Contingent on valuation being in POL
Sign transaction agreements End Mar 15 range.
Hawk Implementation programme End Dec 15
i) Financial Services Investments and Savings Negotiations
Status overview: Negotiations with the Bank of Ireland continue with Bol rejecting Post
Office’s proposal on investments. The key points under discussion are: the need for market
soundings; agreeing a delivery model; assessing an altemative structure (linked to Hawk) to
exclusivity; and contractual control over Investments.
Savings negotiations for 15/16 have been concluded.
Programme KPIs ——
Target Actual
Incremental increase in net Savings revenues £0 - £12M £9m
Investments Negotiations £0.25m. nla
Key milestones ahead:
Milestone Target date Current status
Investments negotiation End Mar 15 On track
k) Financial Services Sales Effectiveness
Status overview: The Post Office Money Academy launched on the 19" January,
supporting the wider launch of the Post Office Money Brand. The projects currently ‘at risk’
are now being reviewed to establish actions needed to bring these back on track or re-
baseline the plans to ensure effective delivery.
Detailed KPls are being developed.
Milestone Target date Current status
POM Academy Phase 2 complete (expanding curriculum) End Aug 15 ‘On track
Salesforce development live (web lead to branch Mid Feb 15 On track (plan re-
appointment functionality) baselined)
Technology for Frontline live (upgrading core Mid Mar 15 At risk
mortgage system)
Hub and Spoke Pilot phase 2 launched (expanding reach Mid Feb 15 At risk
into agency and linking with FS/MS specialists)
Data enablement feasibility complete (developing a more Mid June 15 On track
agile reporting capability)
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5. Market, political and external developments
e Retail — Christmas Trading Reports. In 2014 customers spent £104bn on e-retail, a
14% growth on the previous year. During the Christmas Trading period (2/11 - 27/12)
customers spent £21.6bn, an increase of 13% on last year. These rates of growth are
being translated into the Home Shopping Returns market which has grown by c8% on
last year. Online e-retail now accounts for 24% of retail sales and next year is expected
to grow by 12% to £116bn. However, within these numbers are some interesting
emerging trends.
o Whilst the overall Christmas performance is in line with expectation,
December trading was only 5% up on last year. This is being linked to the rise
of Black Friday which saw 17% of Christmas sales happen in the w/c 23
November, with an estimated £810m being spent on Black Friday (alone the
biggest ever day for on line sales).
o Sales via smartphones and tablet devices recorded a 55% growth on the
same period in 2013. £8bn was spent via mobiles this Christmas, compared
to £5.1bn last year. 37% of online sales are now made on a mobile device; an
estimated 8.9% of total retail sales.
e City Link entered administration. The parcel delivery firm entered administration on
Christmas Eve. Administrator Hunter Kelly, of Ernst and Young, said, "City Link Limited
has incurred substantial losses over several years. These losses reflect a combination
of intense competition in the sector, changing customer and parcel recipient
preferences, and difficulties for the company in reducing its cost base."
e BT signals intent for mobile market with exclusive negotiations to buy EE. BT has
decided to pursue negotiations to buy EE for £12.5bn. The sale of the acquisition has
raised concerns about the potential control BT will have of Britain's airwaves. Barclay's
analysts estimated synergies would be worth £5bn. It is thought BT will use Wi-Fi
hotspots, new miniature masts and whole sale deals to use the EE 4G network to
undercut rival mobile operators. BT sees negotiations to buy EE as an accelerator for
its ambitions in the mobile market and ultimately its quad-play offering.
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Annex A: Forward Board meetings: overview of the sequencing of discussions on
key business strategy issues
25" Marc!
3 year Business plan
Approval of a 3 year business plan
1 year plan and budget
Approval of 1 year operating plan and budget
Scorecard
Approval of 2015/16 scorecard
Business Transformation
Progress update on Business Transformation, cost
reduction and run rate for 2015/16
Telephony Strategy
Board update on progress to date and strategic options
going forward
24* May:
Annual Report and Accounts
Performance payments
Approval of STIP and LTIP payments and performance
conditions
People and engagement
Roadmap for people and engagement activity for the next
12-18 months
Network update
Network and Channels update including sales capability
Working capital and subsidy
Review of working capital and approval of the strategy for
the next funding round negotiations
Win in Mails
Update on the programme to date and next steps
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POST OFFICE LTD BOARD
2014-15 Financial Performance and Scorecard
1. Purpose
The purpose of these papers is to update the Board on:
1.1. the financial performance in December 2014 and YTD;
1.2. the expected financial outcome for 2014-15; and
1.3. the expected outcome on the performance scorecard.
2. Results
2.1. I The performance for December 2014 and YTD and the implications for the full
year outturn are set out in the attached slide deck. In addition, the standard
performance reporting pack is attached, with the usual appendix available in
the Reading Room.
2.2. In summary, income continued below budget for December 2014. However,
income was slightly ahead of the prior year, including in Mails. Improved cost
focus started to deliver benefits and the YTD profit shortfall to plan narrowed
from £18m at the end of Quarter 2 to £13m. The business is on track to
deliver run rate cost reductions of £60m by the year-end.
2.3. The full year profit forecast has increased from £85m to £95m and the
business is seeking to recover to £99m during Q4, hitting plan. In addition to
delivering the core trading result, this requires the business to deliver a
number of one-off items, including the DWP signature on POCA. This has
been challenged by Paypoint and the impact if the contract is not signed is
estimated at £9.8m per annum for 2014-15 and 2015-16.
3. Recommendations
The Board is asked to:
3.1. note the performance and improved full year forecast; and
3.2. note that there are a number of key dependencies for this to be achieved.
Alisdair Cameron
January 2015
2014-15 Financial Performance Alisdair Cameron Page 1 of 1
and Scorecard January 2015
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OFFICE
2014/15
Financial Performance and
Scorecard
P9 YTD and Outturn Forecast
Alisdair Cameron
28 January 2015
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¢ December trading remained below forecast but was ahead of prior year
¢ The focus on costs narrowed the profit gap over Q3
¢ The business is forecasting it will hit the £99m EBIT budget.... with
contingency we are showing £95m
¢ There are some critical judgments to make and one-offs to capture
eo. and cost focus will remain intense to create momentum into
2015/16
Oo ———
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December Mails showed a slight improvement
on PY but remained adverse to plan
December 2014 December 2013
Net Income £m Actuals Budget Variance Actual Variance
(Yr On Yr)
Stamps (1st & 2nd Class plus other stamps) 65 Bb 1.0 6.3 01
Labels (4st & 2nd Class) incl RM Signed For I 10.7 12.7 (2.0) 10.6 o1
Home Shopping Returns 08 18 (1.1) 0.6 0.2
Mails Other 22.4 24.3 (1.9) 21.9 0.5
Total Mails & Retail 40.3 44.3 (3.9) 39.4 0.9
Net Income 2014-15 £m
P41 P2 P3 P4 PS P6 P7 P8& P9 YTD
Actual 349 281 29.0 351 265 28.0 362 31.5 40.3 289.5
Budget 36.9 293 31.7 372 305 $318 401 363 443 318.0
Variance (2.0) (4.2) (2.7) (2.1) (4.0) (3.8) (3.9) (4.9) (3.9) (28.5)
¢ Stamps and labels in line
with prior year, but £41m
adverse to budget - volumes
running behind expectations.
* Home shopping returns -
24% up year on year but not
meeting target
* Mails Other - favourable YOY
due to International postage,
but adverse to budget due to
£1.5m stretch task, £0.2m
Lottery and £0.2m Retail
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e e e * e
Financial Services had another difficult month
e
December 2014 December 2013 « Payment Services adverse: Gift vouchers
Net Income £m . Variance down £700k (€400k under-booked in Dec)
Actuals Budget Variance Actual nt )
: : rOnYr)I .. PFS-Lending (Mortgages and credit cards)
Bill Payment Services 2.8 27 0.1 3.7 (0.9) behind on sales
Payment Services 0.8 2.0 (1.2) 0.9 (0.1) ;
PFS-Savings 43 46 (03) 3.9 04 ¢ Travel Insurance - AON cost increase catch
PFS-Insurance 08 14 (0.4) 05 03 up £1m impact (expect to move to costs)
PFS-Lending 0.6 15 (0.9) 0.6 0.0 Offset by
vee pesrance nF i rn te rr * MoneyGram - highest sales on record
joneybram m, 7 ., 7 uJ
NS&I 20 02 18 03 17 « NS&l amended contract limit favourable
Other 10.3 10.9 (0.6) 107 (0.4) Underlying c£1m off plan in December
Total Financial Services 22.6 25.1 (2.4) 22.4 0.2
Net Income 2014-15 £m
P1 P2 P32: P4 P5 P6 P7 P8 P9 YTD
Actual 25.9 228 23.2 275 21.7 254 268 21.7 226 217.7
Budget 25.0 21.5 228 27.2 227 261 269 235 251 2208
Variance 0.8 1.4 0.5 0.3 (4.0) (0.8) (0.4) (4.8) (2.4) 3.1) ee
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Telecoms remained adverse to plan with a price rise
coming into effect in January
December 2014 December 2013
Reet Thicome © Actuals Budget Variance Actual Variance!
(Yr On Yr)
Energy 0.0 0.3 (0.3) 0.0 0.0
HomePhone /Dual & Broadband Customers} 3.2 48 (1.6) 41 (0.9)
Total Telecoms Services 32 5.0 (1.9) 4.1 (0.9)
Motoring Services 17 0.5 1.2 07 1.0
Card Account 4.0 49 (0.9) 43 (0.3)
Other Government Services 13 18 (0.5) 43 (0.0)
Total Government Services 7.0 7.2 (0.4) 6.4 0.6
Net Income 2014-15 £m
Telecoms P1 P2 P3 P4 P5S Pé P7 P8& P9 YTD
Actual 4.6 4.0 4.0 48 3.3 23: 29 3.2 3.2 S28)
Budget 5.5 4.5 4.6 5.7 47 47 5.8 47 5.0 45.2
Variance (0.9) (0.5) (0.6) — (0.9) (1.4) (2.4) (2.9) (1.5) (4.9) (4.2.9)
Gov. Servs. P21 P2 P3 P4 P5 P6é P7 P8& P9 YTD
Actual 10.2 9.2 9.6 9.3 74 74 8.5 71 7.0 Ua)
Budget 10.4 8.7 9.5 10.8 9.4 10.1 9.2 8.2 7.2 83.4
Variance _ (0.2) 0.5 0.0 (1.5) (2.0) (26) (0.7) (44) (01) (7.7)
Telecoms - income continues to
be behind on customer base and
ARPU
Motoring volume higher than
budgeted first 2 weeks of
December
POCA: fewer active accounts than
budget
Other Government Services -
adverse due to lower passport
volumes
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December’s costs benefited from focus and Ee
lower trading
December 2014 Prior Year Period
£m Actual Budget Variance Actual Variance
« Lower
Staff Costs (17.9) (18.7) 0.8 (20.3) 24 subpostmaster costs
Subpostmaster Costs (36.4) (44.8) 83 (38.1) 17 due'to lower sales in
Non-Staff Costs (26.4) (24.4) (2.0) (17.1) (9.3) the period and VAT
Depreciation (0.0) (0.1) 0.0 (0.0) (0.0) upside of £1.8m
Total Expenditure (pre POOC) (80.8) (88.0) 7.2 (75.6) (5.2)
One off Project costs (POOC) (1.7) (0.8) (0.9) (2.4) 0.6
=e °
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... leading to a claw back of H1 profit shortfalls
from £18.6m to £13.2m
Qi a2 Q3 Year '
£m Actual Budget Variance Actual Budget Variance Actual Budget Variance} Actual Bu
TOTAL GROSS INCOME 240.0 244.0 235.9 255.3 247.5 269.0 723.4 76
Cost of Sales (26.1) (25.9) (27.6) (26.4) (26.8) (27.2) (80.5) (7
TOTAL NET INCOME 213.9 218.1 208.3 228.9 220.7 241.7 642.9 68
Staff Costs (63.4) (61.9) (60.5) (60.6) (58.0) (58.0) (181.9) (16
Subpostmaster Costs (113.2) (117.1) (107.5) (124.0) (111.4) (131.6) (332.2) (3.
Non-Staff Costs (73.8) (70.8) (72.0) (63.8) (64.1) (71.4) (209.8) (2
Depreciation (0.1) (0.2) (0.1) (0.2) (0.1) (0.2) (0.4) ((
Total Expenditure (pre POOC)} (250.6) (250.0) (240.1) (248.6) (233.6) (260.9) (724.3) (7
FRES - Share Of Operating Prof 9.9 10.0 13.9 13.6 6.1 5.7 29.9 2
EBIT - BAU (26.7) (22.0) (4.8) (18.0) (6.2) (11.8) (6.8) (13.5) 6.6 (51.5) (4
One off Project costs (POOC) (6.6) (4.4) (5.2) (5.4) (5.1) (3.9) (16.9) (4
EBIT - Post Project Costs (33.4) (26.4) (7.0) (23.1) (11.6) (11.6) (12.0) (17.3) 5.4 (68.5) (5
Network Payment 40.0 40.0 40.0 40.0 40.0 40.0 120.0 12
EBIT pre exceptionals items 6.6 13.6 (7.0) 16.9 28.4 (11.6) 28.0 22.7 5.4 51.5 6
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Overall YTD performance is still behind budget PY
Year to Date
Prior Year YTD
£m Actual Budget Variance Actual Variance
TOTAL GROSS INCOME 723.4 768.3 735.2 (11.8)
Cost of Sales (80.5) (79.6) (85.2) 4.6
TOTAL NET INCOME 642.9 688.7 650.0 (7.2)
Staff Costs (181.9) (180.6) (193.6) 11.7
Subpostmaster Costs (332.2) (372.8) (337.3) 51
Non-Staff Costs (209.8) (205.7) (189.6) (20.2)
Depreciation (0.4) (0.5) (0.3) (0.1)
Total Expenditure (pre POOC) (724.3) (759.6)
One off Project costs (POOC) (16.9) (13.7)
EBIT - Post Project Costs (68.5) (55.3) (13.2)
Network Payment 120.0 120.0
EBIT pre exceptionals items 51.5 64.7 (13.2) 86.1 (34.6)
EBITDAS (68.1) (54.8) (13.3) (63.6) (4.5)
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Oe CErti‘Ctel
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The scorecard continues to show a mixed ;
picture
Key Perf 5 Current Month a) a)
ey Performance Indicators Act Target Var Act Target —Var_I Prior Year
Growth
76.4 824 688.7 6503
81 77 51.5 64.7 86.1
EBITDAS £m (44) (4.6) (68.1) (54.8) (63.6)
Free cashflow £m (32.2) (120.6) (276.0) 121.2
Customer
Customer Satisfaction** 85.8% 89.0% 89.0% 87.5%
28% 47% 47% 43.0%
Net Promoter score** 58 20 20 3
Queue time % <5 minutes - Top 1k branches 64.1% 620% 761% 80.6% 81.5%
Branch Compliance - Financial Services - basket of 11 measures 30 <=50 69 <=50 N/A
Branch Compliance - Inland Dangerous Goods 74.0% 80.0% 74.0% 80.0% TBC
Branch Compliance - International Dangerous Goods 87.0% 85.0% 85.0% TBC
9 58% 58% 58% 55%
Subpostmaster Engagement Index % (Once a year) 47% 48% 47% 48% N/A
Post Office Values the diversity of the workforce (Once a year 54% 66% 66% N/A
I(No.) % of BME appointments over total recruits at senior 100% % % 98%
leadership and senior manager
I(No.) % of Female appointments over total recruits at senior 50% 45% 45% 49.2%
leadership and senior manager
Modernisation
Crown Profit (Loss) £m
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2014-15 profit forecast has improved
close to plan
Q3 FYF
Q2 Q3 vs. PY PY
£'m Budget I Forecast Changes Forecast I Budget I Outturn Var
Mails & Retail 424 389 (4) 386 (39) 386 (0)
Govt 116 105 8 412 (4) 116 (4)
Telephony 62 53 (1) 52 (10) 46 6
FS 295 297 (2) 295 0 279 16
Other 37 37 ie} 37 0 40 (3)
Contingency (9) 0 (2) (2) 7 0 (2)
Net Income 925 880 (0) 880 (45) 867 d3
Staff Costs (239) (234) (4) (238) 1 (254) 16
Subpostmaster costs} (491) (456) 15 (441) 50 (448) 7
Non-staff costs (274) (281) 4 (280) (6) (265) (15)
Pooc (17) (20) (2) (22) (4) (26) 4
Expenditure (1,024) I (990) 10 (980) 41 (992) 13
Depreciation (4) (4) 0 (1) 0 (0) (0)
JV share of profit S65) 35 ie} 5) (e) 83) 2
EBIT before NSP (61) (75) 10 (65) (4) (93) 28
Network Payment 160 160 0 160 0 200 (40)
EBIT 99 85 10 Os) (4) 107 (12)
Q2 to Q3 forecast changes:
* Income - DWP new contract income
has offset reductions from trading risks
elsewhere
* Subpostmaster costs:
¢ £5m VAT recovery
¢ More for less through sales mix/ volumes
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However, we have to deliver significant es
income in Q4
PY.
ROY / FYF PY PY PY ROY /
£m YTD ROY EYF % YTD ROY Outturn Outturn
Mails and retail 289.5 96.5 386.0 25% 289.9 96.1 386.0 25%
Govt 75.7 36.3 112.0 32% 82.1 34.0 116.1 29%
Telecoms 32.3 19.7 52.0 38% 36.8 G2 46.0 20%
FS 217.6 774 295.0 26% 211.3 67.3 278.6 24%
Other 278 7.2 35.0 21% 30.0 10.1 40.1 25%
Net income 642.9 237.1 880.0 27% 650.0 216.7 866.7 25%
¢ Telecoms - 38% of the FYF in Q4, includes £2m price rise, £1m sale of old debt
and £2m for Fujitsu settlement
¢ Government - Q4 includes assumption of new DWP contract impact of £9.8m j
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We will maintain the focus on costs;
delivering the £60m planned savings
———s eee eee eee ee eee eee ee eee eee ee
~
Cost efficiencies 2014-15
Total efficiencies of 60m
track to be delivered
‘on tract ne livere VAT upaide
offset by DWP
Off track mostly in H1
forecast
N
Additional costs taken to
Includes:
Sparrow £5m
New IT costs £4m_
Postage costs £3m
Mails Segregation £3m
Strategy consultancy £2m
compensation
and contingency
Further cost efficiencies identified
A Staff£238m
( Non -staff£280m
Project Opex £22m
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In addition, there are significant risks and ES
some opportunities
¢ DWP contract challenged - £9.8m estimated profit impact
* £3m mails segregation penalty assumed - risk of £3m, opportunity of
£3m depending on outcome
¢ Fujitsu settlements of £7m requested - but only £2m in FYF
¢ Bonus achievement assumed at 50% - includes achieving engagement
index c£1.5m and profit cE3m
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We could therefore end up in a variety of
outcomes
With DWP Without DWP
EBITDAS £m High Low High Low
Outturn Ranges 103 93 103 93
DWP Impact (10) (10)
Forecast 103 93 93 83
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&
_“c_228€00606/ 8&3»
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All scenarios show progress year on year
for EBITDAS
2013-14 2014-15 2014-15 2014-15 2015-16
£m Actual Q3 low Q3 Forecast} Q3 High Budget
Operating Profit 107 83 95 103 95
Network Payment (200) (160) (160) (160) (130)
EBITDAS - reported (93) (7) (65) (57) (35)
Exclude one-offs:
Prior Year VAT upside (9)
Prior Year VAT upside 12 (12) (12) (12)
DWP compensation (4) 10 10 10
ATM rates provision 1 (2) (2) (2)
2012-13 bonus outturn higher than accrued a.
EBITDAS -adjusted (91) (81) (69) (61) (35)
<< ESCt—‘—tit
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... but likely to give limited bonuses in 2014/15
Measure Bonus IForecast I Budget Forecast bonus outturn
Net income £m 20% 880 925 945 Target unachievable - 0%
Operating profit £m 25% 95 99 119 Target possible - range 0%, to 25% for £99m, to c27% for £103m
Crown loss £m (run rate) 12.5% (2.0) 0.0 3.0 Target possible - range 0% to 12.5%
Easy to do business with 15% 27% 47% 49% Target unachievable - 0%
NT branches transformed 12.5% 1,942 1,650 1,750 Stretch likely - range 12.5% for on target, to c17% for full stretch
Target and stretch possible - range 0%, to 15% for on target, to 20%
for full stretch
Engagement 15% 58% 58% 60%
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Our focus is clear .... &
¢ Deliver income as forecast
¢ Maintain intense focus on costs, delivering at least £60m and future
momentum
* ExCo considering small growth accelerator investments
¢ Obtain DWP signature and Fujitsu settlement
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Strictly Confidential ©
Performance Report
December 2014
Produced By : Financial Control
For Queries & Comments Contact : Sarah Hall or Kam Bassra
ONFIDENTIAL
Commercially Sensitive and not for onward circulation
Period 9 Performance Pack 28th January 2015 Page 1 of 11
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Strictly Confidential
(~ )
Contents
Page
Headlines 3
Profit & Loss Statement 4
CFO High Level Profit Outlook At Period 9 5
Crown Profit & Loss Statement 6
Cost Management update 7
Cashflow Analysis 8
Business Scorecard 9
Network Transformation Scorecard - Mains 10
Network Transformation Scorecard - Locals 11
X S
Period 9 Performance Pack 28th January 2015 Page 2 of 11
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Headlines Strictly Confidential
December 2014
(Ceadtines
Operating profit before exceptional items in the month was £8.1m, £0.5m favourable to budget, bringing year to date operating profit to
£54.5m and decreasing the YTD shortfall versus budget to £13.2m (£34.6m adverse year on year, including NSP decrease of £30.0n).
~
Net income in P9 is adverse to budget by £5.9m, but £0.9m favourable to last year. This reflects the continuing shortfall in Mails and Retail
of £3.9m (mainly labels and delayed rollout of ebay returns). Telecoms was £1.9m adverse due primarily to lower customer numiers and
lower average revenue per customer. Government Services was £0.1m behind budget mainly due to fewer active POCA accounts than
budgeted. FS is adverse by £2.4m with shortfalls across all areas except savings. To achieve the FYF of £880m, net income for the
remainder of the year needs to average slightly above budget each month and £6.8m better than prior year each month.
Net income year to date has worsened to £45.8m behind budget and £7.2m below this time last year (excluding NSP).
Total expenditure (before project costs) in the month was £7.2m favourable driven by the favourable subpostmaster costs relating to lower
income, and the VAT recovery relating to improved recovery rates.
Total expenditure (before project costs) year to date remains favourable to budget by £35.3m.
‘The £60m savings task remains challenging but now with only £0.4m still to be underpinned, and with £1.2m in the ‘hopper’ tobe validated
(see page 7).
* Subpostmasters’ costs are favourable by £40.6m reflecting lower sales volumes and improved VAT recovery.
* Staff costs are adverse by £1.3m reflecting under-delivery of savings tasks primarily in Supply Chain and Commercial.
* Non staff costs are £4.1m adverse driven by a £10m provision for client compensation, shortfall in savings task delivery, {3.0m for the
Mails Segregation penalty payment accrual and other increased costs including postage. This is partially offset by increasedVAT recovery of
£12.0m relating to last year and £4.3m relating to this year.
* Project One Off Costs are adverse to budget by £3.3m reflecting unbudgeted spend for Sparrow and the ‘Journey to 2020’ straegy work.
CFO Forecast
The 03 forecast shows an improvement of £10m since Q2 to £95m (EBITDAS loss of £65m). This is driven by the anticipated newPOCA
contract and some further cost savings offset by further reductions in Mails revenue and a £2m reduction in FS revenue.
Crown Profit
The YTD Crown profit is £9.8m adverse driven by lower Mails income and higher staff costs and higher property costs due to tle delayed
savings for the new Facilities Management contract as shown on page 6. The Q2 CFO Crown forecast is a loss of £13.8m which is€4.9m
behind budget. This is aligned to the assumptions used in the business CFO forecast but excludes the contingency.
Network Transformation
The programme is ahead of plan at P9 both for contracts signed and branches transformed,
X
Period 9 Performance Pack 28th January 2015
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Cumulative EBIT pre exceptionals
Actual
90 Budget
&EEEEES
SEEPS
em Total Netincome -Budget to Actual Bridge
688.7 L_] —«
25) “G =
(7.8)
I
—
2014-15 YTD Mails & Retail
Net Income Services
Budget
Financial Government
‘Services
Financials
Total Net Income (excl NSP) £m (Bonus 20%)
Operating profit £m (Bonus 25%)
Free cashflow £m
Crown Profit (Loss) £m (Bonus 12.5%)
Non Financials
Queue time % <5 minutes - Top 1k branches
NT Branches Transformed In Year (Bonus 12.5%)
(12.9)
Telecoms Other 2014-18 YTD
Not income
‘Actual
Year to Date
Act Target___Var
642.9 I 688.7
515 64.7
(253.6) I (276.0)
37 I 9)
76.1% 80.6%
1,521 1,190
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Profit & Loss Statement Strictly Confidential °
December 2014
Current Month Prior Year Period Year to Date Prior Year YTD Full Year Prior Year
lem Actual Budget Variance I Actual Variance I Actual Budget Variance I Actual Variance Forest Budget Variance I Outturn
TOTAL GROSS INCOME 2 912 60) B46 06 723s 7683 7352 Gis) I 9870 10319 9794
Cost of Sales (8.3) (3.8) on (9.0) 03 (805)___(79.6) (85.2) 4.6 (106.8) (206.8) (112.7)
TOTAL NET INCOME 76. 82.4 6.9) 755 09 6429 688.7 650.0 7.2 8802 9251 8667
Staff Costs (79) (48.7) og (20.3) 24 (181.9) (180.6) (1936) 11.7 I (233.6) (238.7) (253.9)
ISubpostmaster Costs (36.4) (448) 83 (38.1) 17 (332.2) (3728) (3373) 54 (455.6) (491.0) (447.6)
Non-Staff Costs (264) (24.4) (2.0) (27.1) (9.3) I (2098) (205.7) (1896) (202) I (2806) (2735) (264.8)
Depreciation (0.0) (0.1) 0.0 (0.0) (0.0) (0.4) (0.5) (0.3) (0.1) (0.6) (0.6) (0.4)
Total Expenditure (pre POOC) (80.8) (88.0) 72 75.6) (52) I (7243) (759.6) 7209) (3.4) I (970.4) (4,003.8) 966.6)
IFRES - Share Of Operating Profits 19 18 04 15 O4 29.9 293 283 35,0 350 334
EBIT - BAU (20) 3.8) 16 14 9) I 15) (426) 2.6) 155.2) (43.7) (66.9)
One off Project costs (POC) a7) (0.8) (0.9) (2.4) 06 (16.9) (13.7) (21.3) (9.7) 73) (26.0)
[EBIT - Post Project Costs 2) (7) 05 (2.0) G2) (68.5) (55.3) 163.9) (74.9) (61.0) 2.97
[Network Payment 123 123 00 15.4 Gi) [12001200 150.0, 7160.0, 200.0
EBIT pre exceptionals items Ex TT 05 hk (63) [515 64.7 85.1 407.4
Interest 0.0 (03) 03 02 (0.2) 4.0 (18)
Impairment (120) (44.7) 27 (9.1) (29) I (1064) (266.4)
Exceptionals (incl BT) & Redundancy & Severance Costs I (177) (118) (5.9) (224) (66) I (442.4) (462.2)
Government Grant Utilisation 09 00 00 150 (450) I 1700 1700
Profit/(Loss) On Asset Sale 00 00 00 (0.0) 00
[Total Profit/(Loss) Before Tax 24. 9, 2.4 35. Goi)
—————
Period vs. Budget YTD vs. Budget YTD vs. Prior Year
Operating profit (EBIT) of £8.1m was £0.5mII Operating profit (EBIT) of £51.5m was £13.2m adverse to budget. Operating profit (EBIT) of £54.5m was £34,6m adverse to prior year.
favourable to budget eee Like for like BAU adverse variance of £9.0m was mainly due to:
BAU was £1.4m favourable: ok . ¢67.2m.Th 4
- postmaster costs of €8.3m due II * COWer net income of £45.8m due primarily to the continuing adverse income trend; Mails (£28 5m) Sear by laar Coteeananteniies inesina, Gai POCAa
eee eee ey neductmm and {I Specialy labels and Dangerous Goods, Home Shopping Returns (HSR), and Lottery, Telecoms (£412.9m) ee eel cote Monae Mon
tilled toilower saley ‘product mbtiani Government Services (£7.8m), mainly POCA and FS income (£3.2m), specifically stretch, Travel and insurance Telecoms offset by higher Financial Services (Moneygram, Mortgages,
T upside of £1.8m, oifeet by Barking, Premium Bonds and MoneyGram Savings and Insurance) revenue
+ Lower staff costs of £0.8m in the month. Hi 3 ts ie sat
nthe te mainly due to lower bonus aecruat, {I * Higher staff costs of £4.3m mainly due to the savings task not being achieved (E2.2m from Supply Chain and Higher non staff costs of £20.2m due to £10m client compensation
£0.5m from Commercial), the Crown pay deal and the CMA pay award, offset by a lower bonus accrual. Brovision this year, Increased IT costs (mainly Horizon and ATOS) and
Offset by: 0 higher marketing spend (including some switched from POOC) offset by
* Higher non staff costs of £4.1m, driven by the £10m provision for client compensation, £4,6m impact of the improved VAT recovery.
* Lower net income of £5.9m due primarily II savings tasks not being fully achieved, £3,0m accrued for Mails Segregation penalty payment, IT savings task
to lower Mails, FS and Telecoms income. yet to be achieved and higher postage costs offset by improved VAT recovery of £12m relating to the prior Offset by:
« Higher non staff costs of €2.0m, driven year and a further £4.3m relating to this year + Lower staff cost of £11.7m driven primarily by a lower productivity
primarily by higher marketing costs. Offset by: bonus and Crown savings
One-off project costs variance of £0.9m + Lower subpostmaster costs of £40.6m due primarily to lower income and sales mix (£26.0m), VAT recovery ‘* Lower subpostmaster costs of £5.1m which relates to improved VAT
adv, (€7.4m) and other small variances relating to NT changes. recovery.
Below EBIT One-off project costs variance of £3.3m adverse mainly due to unbudgeted project Sparrow (FYF c. £7m) and “ had ete averse arene even wee ite tes
‘+ Lower Network payment of £30.0m, offset by
‘The period variance is due tothe charge I] _Unbudgeted strategy consultancy costs, « Lower project costs of £4 4m,
for agents’ compensation provision being II Below EBIT
quarterly, budgeted monthly. Both impairment and exceptionals are under budget due to underspends in CT, NT and IT& Change, with CT I} Below EBIT
the largest variance £10m favourable. Although lower than budget, these are both twice last year’s spend. Included in grant utilisation this year is £77m of 2013-14 exceptional
spend for which there was insufficient grant last year. Exceptionals in
J Bist by a one of pension assumption credit of €102m,_ )
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CFO High Level Profit Outlook At Period 9
December 2014
‘Strict Confident
Comments
VF of £342 flowing Christmas trading
[Camelot volumes £3 5m; Health atery ied fee £0.4m Retail £0.4m
Max penalty under MDA of E6m, assume negotiate down to £3m as in 13/14
nciudes £9.8m from DWP. affect by E6m rng fenced: 24m death noted: £0.5m LIBOR
Jcrange contral income for EVL's £1 OF
Delayed launch na volumes, Assumes do not receive £m from GOS.
Dita passports delay, partially offset by paper passports volumes ad price increase
Lower customer numbers and ARPUSs, higher wholesale cost: partially offset by FJ claim
Backdsted VAT recovery on broadband income. ta be aid in P10
Mobi launch delayed and energy not being progressed this year
Delve budget but not the €2m stretch target which was included inthe forecast
New Commercial structure does not deliver budgeted savings task
Jé2m savings budgeted IR delayed implementation of new ways of working
[24/15 agreed pay awards
ck from delays to franchising offset by lower Agents pay
Undated October forecast which includes £3.8m for Christmas campaign
[costs not budgeted, offset by income in Govt Services
Banking intermediary fees not budgeted + various YTD overspend
Jcreque pouches not budgeted £2.5m: Pazzport check and send volumes €1m
Release ll of income contingency / agents pay mix except €2m held for telecoms and £3m agents
ax penalty under MDA ic 6m, assume can negotiate down as in 13/26
IT profile ined pay savings
Not required
onus provision reduced from 90% to SOX payout (assumes miss ETDBW, Income, Crown proft)
Jaditiona opp identified by the functions against the August cost target, all taken to O2 forecast
[savings task budgeted covered by opportunities below
2.5m budget challenge achieved except VAT impact not covered
[SSK maintenance £0.9m; FRP support costs £0.6m:Fujtsu Tier 2/3 Helpdeck 0.6m: RM Projects PY
Iseoreciaton charge £0.7m
[c0 5m Staff Coss: €1.4m small change budget: €1.7m IT Services supplier opp: €0.8m ATOS savings
Ié2r Horizon discount agreed as part of HPBA contrac, assume nat going to receive the £0.8m
Iroreed €800k 2024-15, £200k to applied to change warks and £m for 2015-16
[Savings identified fram LSD budget €0.5m: partly offset by higher recruitment costs. Various savings
[denies from Comms budget. ll taken to 02 forecast
Various YTD overspend
[covered by saving in ther functions
ut cost estimate £5.3m covering mediation on ¢140 cases Only £0.3m considered exceptional
Mckinseys costs already incured for Journey to 2020 work + FS strategy work
Jonex costs which cannot be exceptionalzed
Latest POOC apex forecast of £15m
budget tasks included in Central, including €1m Oficial Mail and €3m BTP. Covered by savings in functions
Pravsion for prior year DWP ‘death notified
[Taken in Ha
[Total VAT recoveries of e£32m, includes £m for Broadband, Budget already included £7m
£m Income JV Income ST ABER Non-sta POOC Costs NSP EBIT
(aaa ee aa a60
Mais and Reta
Male (240) 24 a4 126)
Lottery and rete (ws) 29 29 as)
Mais epregationpealy eo) 60 80
Goverment Services
Poca (on oo on
ova 13 (om (ow 09
IDA eo 40 10 ao
Pazeporte 2) os os a3)
Teleshony
Homephone (64) os os 60
VAT on broadband 10 10 10
Mabie & Energy (6) 23 23 3)
Financial Services 00 00 00
Staff Cost
Com as) (8) as)
Supply Chan 23) (23) @3)
Supply Cain and admin pay awards an an an
CTP frachaing ea 22 00 00
Non-staff cost savings
Marketing 20 20 20
DVLA crest card fees 10) (20) ao
FS non-stafcosts 07) (7) on
Offi Mai 5) (3) 65)
Central
Project Uta - VAT on Agents 3202 30 30
Relace of contingencies / sles mic 20 50 50 120
tsa) 00038908 8
i at PP Sem es a 30
Further Trading rake
‘Adtional Malis segregation pealy oo 00
Agents costs
Lees 10 10 40
ESP members subs 15 a5 45
Staff Cost
Central bonus release 16 16 16
Nona
tional savings pps denied 10 27 37 37
TT Savings task 60 bo 0)
VAT on RMT charges 05) (05) 05)
New I services nt budgeted ea) (28) 8)
TT Opportunites Wentified against tack os 53 sa 58
Homephone discount 00 oo 00
HR & Communications costs 10 10 10
Corporate Series 05) (05) 05)
Procurement ak Finance) 10) (19) ao)
Projets
Sparrow 60 (50) 60)
Sategyconaitany as a8) as)
BTP (ope) 05) (08) 3)
POOC savings (FS and Commerc 2020 20
Central task nt underpinned (60 (60 60
Client Compensation (103) (203) (203)
VAT recovery rate ror year uo n0 no
VAT recovery rate ~ current year so 60 440 io
Person rate increase ao Cr) re)
Raease ATM rates provion 25 25 25
WHS provision release 18 13
CONTINGENCY 60) (50) 60)
(C0 Outlook at Pa oT a) ie [95
Period 9 Prtrmance Pack
28th anvary 2015,
Page Sof tt
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November 2014
Period Prior Year Period YTD Prior Year YTD Full Year Prior Year
Em Actual Budget Variance ‘Actual Variance Actual Budget Variance I Actual Variance Q1 Forecast Budget Variance Outturn
income and Distributions
Variable income
~ Mails 40 45 (0.5) 42 (0.2) 272 305 (33) I 300 (28) 39.2 39.2 00 39.6
~ Financial Services 23 25 (0.2) 24 0.2 23.9 25.1 (12) I 218 24 32.0 320 00 28.2
~ Government Services 11 14 (0.1) 13 (0.2) 15.1 141 10 157 (0.6) 181 18.1 00 219
= Telecoms O41 01 (0.0) 00 Ot) 07 10 (03) 06 O41 13 13 0.0 08
Fixed income 19 17 02 16 03 169 17.0 (oa) I 188 (19) 220 220 i) 253
Gamma/ Other 08 09 (0.1) 17 (0.9) 45 64 (17) 97 (5.2) 93 93 i) 128
Renewals and Retentions 14 19 (0.5) 18 (0.4) 13.6 15.4 (1s) I 145 (0.9) 175 175 oo 169
[Total Income including Gamma/other 11.6 12.8 (2.2) 12.8 (23) I 101.9 1094 (7.4) I 111.0 (9.1) 132.463 139.46 (7.0) 145.5
Branch costs -
~ Staff (7.2) (65) (0.7) (82) 10 (716) (69.6) = (20)_-I (81.2) 94 (88.8) (90.0) 12 (106.0)
~ Property (2.2) (28) os (29) 06 (226) (225) (04)_-I (31.3) 87 (29.5) (30.4) 06 (34.4)
~ Other branch costs (0.1) (0.2) 04 (0.3) 02 (1.8) (1.9) 01 (3a) 13 (2.4) (2.4) 0 (4.3)
Infrastructure costs (2.0) (2.0) 0.0 (3a) 41 (75) 47.2) (03) I (183) 09 (19.9) (20.6) 07 (22.4)
Allocated central costs (2.1) (1.0) (0.2) (0.4) (0.8) (10.3) (10.0) (0.3) (7.5) (2.7) (14.6) (14.2) (0.4) (13.6)
[Total Expenditure (22.8) (12.5) (0.3) (14.9) 22 I (223.8) (421.2) (2.6) I (442.3) 17.6 (455.2) (457.3) 24a (280.8)
JV Share of Profits 05 05 0.0 04 O41 81 79 02 82 (0.4) 9.0 90 00 96
[Statutory PBIT (0.7) 0.8 (4.4) (4.7) 1.0 (13.7) (3.9) (9.8) I (22.1) 84 (23.8) (8.9) (4.9) (25.7)
(Summary »
Income:
Income is £7.4m less than plan
At a business level this is predominantly driven by adverse variances in Mails, including Labels, Home Shopping Returns and Lottery, Government Services and Telecoms, with a favourable variance in Financial Services.
Line by Line variances are as follows:
Variable sales income is £3.9m less than plan principally due to (i) Mails - Lower parcel volumes, Retail sales and Home Shopping Returns, (i) Financial Services ~ shortfall from Life Insurance, Home Insurance and variable
sales of Savings products. There is a corresponding upside in savings retention income due to the income guarantee with Bank of Ireland. Premium Bonds and Mortgages are also performing above target. (ii) Government
Services ~ predominantly due to higher Passport check & send transactions. However, there is a variance in ‘Other Income’ that partially offsets this due to an element of the Passports target being held centrally in Other
Income
Fixed income is adverse due to lower than planned LIBOR rates for Card Account commissions,
Retention income is adverse due to a lower customer base and Averaged Revenue Per User for HomePhone, partially offset by favourable Savings retention income.
Other income is adverse due to the delay or phasing of new products, predominantly Energy. Passport Check & Send (actual income in variable sales) is the other key driver. There was also a central Financial Services,
target that is held here and being delivered within Financial services variable income
Costs:
Costs are £2.6m higher than plan.
+ Staff costs £2.0m adverse primarily due to timing of the roll out of Franchising and the impact of the pay review settlement where associated efficiencies are on going, this is partially offset by Crown branches vacancies,
including Financial and Mortgage specialist.
Other branch costs are on target
Property costs £0.1m adverse due to the delayed savings for the new Facilities Management contract which started in October
Central Costs are £0.3m adverse due to a provision for client compensation, impact of centrally held savings not being achieved, accrual for Mails Segregation penalty and higher postage cost, partially offset by improved
VAT recovery rates
X 7
Period 9 Performance Pack 28th January 2015 Page 6 of 11
POL-0024063
Cost Management update
December 2014
Progress since P8 update
Value and confidence
The Cost Reduction Group (CRG) has continued to drive focus on cost management and after
further assessment of opportunities the gap between the in-year delivery of “line of sight”
initiatives and the total cost reduction challenge has reduced to £0.4m (from P8 report of £6.6m).
This includes £7.4m of non volume related saving in the Agents Cost line of the P&L.
Original Cost Management Programme £34.2m
Additional Cost Challenge to achieve budget £ 60m
Central Stretch to achieve budget £5.9m
Total Budget Cost Challenge £46.1m
Additional Challenge from Q1 EBITDAS gap £ 7.0m
2 underperformance adjust ment £ 69m
Total Current Cost Challenge £60.0m
Current ’Line of Sight’ forecast £59.6m
Gap to £60.0m £0.4m
Delivery and governance
Regular 121 meetings continue to drive focus on in-year cost management opportunities and
delivery of existing initiatives. The weekly CRG reviews business wide opportunities and potential
acceleration of the 2015/16 BTP benefits into 2014/15
Work continues to ensure benefits are built into operational plans for the 2015/16 budget
submission.
Strategic initiatives for FY15/16 and beyond
The overall Programme has progressed through Stage 3, designing the financial glidepath to 2020.
Work is ongoing to;
41) Identify a portfolio of incremental cost saving opportunities to achieve the £60m in-year
improvement target placing all the cost saving initiatives under the scrutiny of the programme to
ensure the expected improvement has the requisite effect on the 2014/15 EBITDAS outturn.
2) Ensure the benefits from these opportunities are sustainable in order to meet 2015/16
EBITDAS targets, moving towards £100m of sustainable run-rate saving by
March 2016.
3) Deliver the target operating model that will ensure the cost efficiency targets for the
programme (to 2019/20) are realised.
Period 9 Performance Pack
POL00027422
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Strictly Confidential °
soom ont
Curent Postion
=: £282 Saving
£33.m Saving
variance:£S.6m
ast week
—onsrck This Week L
Revised sue pls 7m a2 Torget,
PPPEPP PEEP PEP PEEP PEP PPP PEPE PEPE PEE
£70,000
£60,000
£50,000
£40,000
£30,000
£20,000
£10,000
£0
including £7 4m
Soong agerts
Total "On-Track”
14/15 In Year Target
Hopper Gap to £60m target
28th January 2015
Page 7 of 11
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j Strictly Confidential e
Cashflow Analysis "
December 2014
6 YTD Cashflow
"Tl . * (Cashflow »)
The £330m of government grant was received on 1st April which is the last payment of the 2010
(55) I I funding agreement with BIS.
370
I P9 cash outflow of £254m is £22m favourable to budget of £276m outflow.
‘en 160 The favourable variance is mainly due to:
my * Capital and Exceptionals are £96m favourable to budget due to the following underspends; Capital
£60m, Crown Transformation £21m, Network Transformation and other programmes £14m,
cry Offset by:
ESITOAS Cente enng Capt Cptal_—‘adunang, Cahfow bere Netnrk Got Funding Fess tow I I ® Client balances are £34m adverse, driven by the December ATM balance being higher than was
con meonce NY Seaeeae Pee originally budgeted. This should be back to normal next period
* Working capital is £29m adverse, with higher than budgeted debtors, mainly Bank of Ireland and
£m YTD Cashflow Variances other banking partners.
* Operating profit is £13m adverse.
276) \ 7
— id YTD Full Year
(a3) 2) — £m Actual Budget Variance Forest Budget
™ esi 85) 53) asa) I 850 I (10)
TORU Opes NeweKCsh oting Cal Cleans optxond TDA Working Capital (938) (68.3) 1055) 95 270
ens iraniyNT) Client Balances (39.3) (6.0) (34.3) (3.0) 170
Network Cash (1453) (148.6) 33 (91.6) I (57.6)
Network Cash Capital Expenditure (106.4) (166.4) 60.0 I (245.0) I (205.2)
£m Mart4 Po Government funding 3300 3300 00 1700 I 3300
Prior YearI Opening I Actual I Budget var ___I [Exceptional Items (1442) (179.7) 35.6 I (213.4) I (2403)
Retail, Cash Centres 754 522 6% 686 6) Other (including interest and tax) I 138 173 (3.5) (9.9) (99)
Bureau 55 58 52 40 (22) I [Operating Cashflow (253.6) (2760) 224 I (458.4) I (200.0)
Cheques, debit cards 103 129 114 134 20
Headroom (£m) 854 677
Period 9 Performance Pack 28th January 2015 Page 8 of 11
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Business Scorecard Strictly Confidential ®
December 2014
Key Performance Indicators Current Month YTD YTD Full Year 2013-14
id Act Target. Var Act Target Var__I Prior YearI Q2F'cast. Target -Var_‘I Outturn
Growth
Total Net Income (excl NSP) £m (Bonus 20%) 76.4 82.4 642.9 688.7 650.3 880.0 925.1 866.7
Operating profit £m (Bonus 25%) 81 fs 515 64.7 86.1 85.0 99.0 107.1
Earnings before ITDA and Subsidy £m* (4.4) (4.6) (68.1) (54.8) (63.6) (74.4) (60.4) (92.5)
Free cashflow £m (32.2) (120.6) (253.6) _ (276.0) 121.2 (158.4) (200.0) 1797
(Customer
Customer Satisfaction** 85.8% 89.0% 86.8% 89.0% 87.5% 87.5% 89.0% 87%
Easy to do business with (Bonus 15%)** 28% 4Tk 26% 47% 43.0% 26% ATh 41h
INet Promoter score** 58 2.0 23 2.0 3 05 2.0 (4)
Queue time % < 5 minutes - Top 1k branches 641% 62.0% 76.1% 80.6% 81.5% 77.5% 81.2% 82.1%
Branch Compliance - Financial Services - basket of 11 measures 30 <=50 69 <=50 N/A 110> <=50 <=50 N/A
Branch Compliance - Inland Dangerous Goods **** * 74.0% 80.0% 74.0% 80.0% TBC 80.0% 80.0% TBC
Branch Compliance - International Dangerous Goods **** * 87.0% 85.0% 87.0% 85.0% TBC 85.0% 85.0% TBC
People
Engagement Index % (Once a year April) (Bonus 15%)** 58% 58% 58% 58% 55% 58% 58% 57%
Subpostmaster Engagement Index % (Once a year)” 47h 48% 47% 48% N/A 48% 48% 45%
Post Office Values the diversity of the workforce (Once a year April)** 54% 66% 54% 66% N/A 66% 66% 52%
(No.) % of BME appointments over total recruits at senior leadership and 100% % 12% 1% 98% 1% 1% 14%
senior manager
(No.) % of Female appointments over total recruits at senior leadership and 50% 45% 38% 45% 49.2% 45% 45% 46%
senior manager
Modernisation
Crown Profit (Loss) £m (07) 08 (13.7) (3.9) (22.4) (13.8) (8.9) (257)
[Crown Profit (Loss) Run Rate £m (Bonus 12.5%)* N/A N/A N/A (44.7) (6.7) N/A (2.0) 0.0 N/A
INT Transformations - contract signatures *** 115 139 4,622 4,226 2,407 4,800 4,800 3,246
INT Branches Transformed In Year (Bonus 12.5%) 44 70 15211190 148 1,800 1,650 1,554
Bonus worthy metrics
* ITDA Interest, Tax, Depreciation, Amortisation
** Monthly = 3 month average. YTD = 12 month average.
*** YTD and FY = cumulative including prior years.
9" POL are looking to hit 100%, and these target have been set for 2014-15 in recognition that marked improvement is required to reach 100%.
* Target is the year end exit rate.
“4 Measured annually with some additional ‘Pulse surveys"
Period 9 Performance Pack 28th January 2015 Page 9 of 11
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Network Transformation Scorecard - Mains Strictly Confidential °
December 2014 Reporting prior months data (i.e. one month in arrears)
Ave £'s per
Current Month % nie
branch
Control Actual I (Mains >)
Key Performance Indicators Actual Var Var Sample
Group Branches that have been converted to a Mains model
Size for more than 6 months have consistently out-
Finance Approved Investment per Mains £000 (42) (42) 0 0 performed the control group in delivering POL income.
or "Post vs Pre C These agents receive a dedicated package and a
POL CEC O TTS OSES Tre Orveroieil renewed focus on sales targeting and performance at
Branches live 6-12 months 5% (2)% Th 490 420 the point of conversion. This is having a significant
Branches live 12-24 months Ak (2 6% 493 771___]I impact on focus income for many branches
Agents Remuneration: Post vs Pre Conversion The following products are performing particularly
wel
Branches live 6-12 months 4% (2)% 6% 293 420 Travel insurance
Branches live 12-24 months 3% (5)% 8% 459 771 Cash withdrawals
=a Customer Sessions prow bonds: ts
m ju
y Branches live 6-12 months (1)% (4)% 4% 420 ,
Branches live 12-24 months (1% (6)% 5% 771 In addition, these agents have increased their POL
(Operator Feedback on Retail Sales Performance 7% 155 okantl the Impraved sales anil enhanced
Operator Satisfaction 81% 73
Note: the control group is based on those branches of
Actual similar size that have not yet converted.
Actual Target Var Sample
Size
Average Increase in Opening Hours 44% 20% 24% 1,550
Customer Customer Satisfaction 98% 90% 8% 30
Queuing Times 1m18s_ <5 mins 3m 42s 179 X 7
Customer
Customer Satisfaction, extended opening hours and queue times all remain positive
Period 9 Performance Pack
28th January 2015
Page 10 of 11
POL-0024063
Network Transformation Scorecard - Locals
Strictly Confidential
December 2014 Reporting prior months data (i.e. one month in arrears)
Ave £'s
Current Month % per
pranety Locals
Control Actual ‘At the point of conversion there is an initial decline in
Key Performance Indicators Actual Var I Var I Sample I} performance: asthe branches settle and embeds the
Group Size _ I operational changes. However this improves month on
LOCALS tmnt and as they near the exit of the 6-12 month
category the run rate of performance is now higher
Finance Approved Investment per Local £000 (a) (41) 0 0 than the contol group, This is partially as a resuft of
Total Net Impact: Post vs Pre Conversion the activities that have been put in place to limit the
Branches live 6-12 months drop of in income and drive performance.
Income (0% (8% 39 318
PL Actual Fixed pay savings 836
Actual Net impact 875 The 12-24 month category is still being impacted by
Branches live 12-24 months branches where there was a steeper decline at the
Income (7% (8% 42 228 _ I} Print of conversion
Actual Fixed pay savings 922
Actual Net impact 964 Customer sessions/footfall continues to be strong so
Customer Sessions this should support the agents retail growth
Branches live 6-12 months 7 (4% 11% 318
Agent Branches live 12-24 months Be (5K 12% 228 We: the contrat sed on those branches of
lte: the control group is based on those branches of
(Operator Feedback on Retail Sales Performance I 16% 52 group
similar size that have not yet converted less 5% to
Operator Satisfaction 75% 57] reftectiost products,
‘Actual
Actual Target Var Sample
Size
[Average Increase in Opening Hours 108% 80% 28% 4107
Customer Customer Satisfaction 95% 90h 5k 30
Queuing Times 67s _<5mins_3m 53s 232
POL.
‘on more complicated products.
Fixed pay has been reduced to zero for all converted branches, in line with the strategic plan.
On average Lottery income has reduced by c. £60k pa in these branches. Corrective action on how we minimise future risk is now being looked at, principally by improving the sales messages and focus of
the FCA's when signing up the retailer as well as the regional managers focussing on these messages for those already converted
Agent
+ Customer sessions indicate that retailers are benefiting from greater footfall that should support their retail growth.
+ The footfall is delivering quicker but lower value Post Office sales which in tum should allow the retailer to utilise theirstaff in different ways or reduce their staff costs.
Customer
= Customer Satisfaction, extended opening hours and queue times all remain positive.
Products such as bill payments, etop ups, cash withdrawals and moneygram have delivered growth for these branches - with associated footfall. This has been offset in income terms by poorer performance
Period 9 Performance Pack
28th January 2015
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Strictly Confidential
POST OFFICE LTD BOARD
Update on the 2015-16 Operating Plan and Three Year Operating Plan
1. Purpose
The purpose of these papers is to:
1.41 update the Board on the preparation of the 2015-16 annual Operating Plan;
1.2 set out the proposed approach to the three year plan and provide an interim
update on our latest financial projections through to 2017/18.
2. Background
2.1. The plan for 2015-16 is in development. A pack setting out the plan detail will
be circulated to the Board in February. Board members will be offered
individual review sessions prior to formal Board approval in March, both of the
plan and the associated performance scorecard.
2.2. At the meeting in March the Board will also be asked to review the first Three
Year Plan for the Post Office.
3. Budget - progress update
3.1. The attached slides set out the current financial expectations for 2015-16
relating to income, costs and cashflow, flagging some key questions on the
performance scorecard. The deck sets out progress in improving the
profitability of POL, the impact of the ongoing focus on costs and the
challenges, risks and opportunities in the recommended outcomes.
3.2. I The Executive Committee is recommending an EBITDAS target of (£35m),
delivering a year on year improvement of £30m to match the reduction in
Network Subsidy Payment. This requires savings in line with the Business
Transformation Programme, some of which are currently unallocated and
some allocated but ungrounded.
3.3. Further reviews of income, costs, capex and exceptional items are scheduled
with the CFO in the next 2-3 weeks. In addition, the Executive Committee will
finalise a recommended performance scorecard and bonus targets for 2015-16
4. Recommendations
The Board is asked to comment on:
4.1. the proposed financial shape and risk profile of 2015-16;
4.2. the questions relating to the 2015-16 scorecard; and
4.3. _ the proposed approach to the Three Year Plan set out in the slides.
Alisdair Cameron
January 2015
Update on the 2015-16 Operating Alisdair Cameron Page 1 of 1
Plan & Three Year Operating Plan January 2015
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2015-16 Plan
Early Sight
Alisdair Cameron
28 January 2015
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Purpose &
The purpose of this session is to get feedback from the Board on:
The emerging shape of the 2015-16 plan
Key risks and opportunities
Key questions relating to the 2015-16 scorecard
Next steps to finalising the plan
Proposals for the Three Year Operating Plan
—————————— CS
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The plans assume fairly flat Mails revenue in 2015-16
Net Income (£m)
% change
% change 2015-16
Mails Services £m 2013-14] FYF vs oe Plan to of
2013-14 2014-15
FYE
Parcelforce 22.8 (5%) 21.7 (7%) 20.2
Special Mails 103.9 3% 106.5 (6%) 99.8
Stamps & Labels 123.0 (4%) 118.5 (0%) 117.9
Home Shopping Returns 7.7 21% 9.4 19% 11.2
RM Fixed Fee 56.7 1% 57.1 (3%) 55.1
Other Mails 28.0 3% 28.9 23% 35.5
Sub Total Mails 342.2 0% 342.1 (1%) 339.7
Retail & Lottery 43.7 0% 43.9 (2%) 43.0
Total Mails Services 386.0 0% 386.0 (1%) 382.7
Sac €~—Ctl
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In Financial Services, income growth is driven through the new
POMS subsidiary
Net Income (£m)
Financial Services £m oe of % change
Personal Banking 69.9 75.9 9%
Banking Services 90.6 91.3 1%
Travel 24.7 24.9 1%
Payments 85.4 81.1 (5%)
Other 1.3 0.4 -
Fnancial Services - POL 271.9 273.6 1%
POMS 23.1 41.9 82%
TOTAL FINANCIAL SERVICES 295.0 315.5 7%
Note: 2014-15 insurance income has been restated against POMS for comparison
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Giving net income growth of £15m, as Telecoms pricing helps >
offset decline in Government Services
2014-15 2015-16 Government Services
£11m reduction in DVLA -
removal of paper disc, shift to
Forecast Plan Variance Direct Debit and reduced fees
per transaction
Net Income (£m) £10m reduction in POCA -
F ; reduced customer numbers and
Mails & Retail 386.0 382.7 (3.3) lower coramission onthe
Financial Services 271.9 273.7 18 balances
Government Services 112.0 101.6 (10.4) Partly offset by growth in
Telecoms 520 579 59 Passports and Identity work
Other 35.0 37.6 2.6 Telecoms
TOTAL POL NET INCOME 856.9 853.4 (3.5) os alien
POMS 23.1 41.9 18.8 £2m for 15-16 price rise
TOTAL Group NET INCOME 880.0 895.3 15.3 berg by £2m for continued
FRES - Share Of Operating Profits 35.0 36.8 18 srosion
Note: 2014-15 insurance income has been restated against POMS for comparison.
ae Ct‘ asi‘
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The cost base is being repeatedly challenged
2015-16 Total
Costs £m
Early indicators 1,032.7
First round of challenge 40.0
First Submission - 16th December ExCo (992.7)
Reduced Subpostmasters costs for challenge 47
Reduced Commercial non staff costs to meet target 2.2
Reduced Commercial costs to support income growth 40
Reduced FS costs to support income growth 05
Reduced FS non staff costs 0.2
Reduced POMS costs 24
9th January (978.7)
Further savings
Wave 2 savings - not yet allocated 4.0
Town Hall savings - not yet allocated 5.2
Reduced Scale costs to support income growth 25
Current Plan (967.0)
Overall cost reduction from First Submission 66 a see
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Staff costs improve in spite of investment in Financial Services. ’
FTE reduces by c. 1,100
Headcount
£m 2014-15 2015-16 2014-15 2015-16
Staff Cost by Function Forecast Plan Variance Current Plan Variance
Network (168.7) (153.4) 20.3 6,320 5,282 1,038
Financial Services & POMS (6.3) (9.3) (3.0)
Commercial (8.4) (8.0) 0.4
IT& Managed Services (6.3) (6.3) (0.0)
Bonus Payments (7.7) (13.8) (6.1)
Support Services (40.3) (35.6) 4.7 586 462 124
Subtotal (237.6) (226.4) 16.3 7,236 6,094 1,142
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... and subpostmaster costs improve in relation to income and
overall costs
2010-11 I 2011-12 I 2012-13 I 2013-14 2014-15 2015-16
Outturn I Outturn I Outturn I} Outturn Budget I Forecast Plan
£m
Net income 847.8 865.3 902.4 866.7 925.1 880.2 895.3
Subpostmaster costs - Variable (325.8) (327.2) (331.9) (320.9) (380.3) (337.6) (346.5)
Subpostmaster costs - Fixed (149.2) (155.7) (146.2) (126.6) (110.7) (103.0) (92.5)
Subpostmaster costs - Fixed / Total ratio 31% 32% 31% 28% 23% 23% 21%
Subpostmaster costs (474.9) I (482.9) I (478.1) I (447.6) I (491.0) I (440.6) I (439.0)
Subpostmaster costs / Net income ratio 56% 56% 53% 52% 53% 50% 49%
SaaS @ © ECe—t—‘—s—CtCC SF
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Non-staff costs increase because of POMS and IT investments
and lower VAT recoveries
&m 2014-15 2015-16
Non- Staff Cost by Function Forecast Plan Variance
Network (91.4) (84.2) 7.2
Financial Services & POMS (7.5) (21.2) (13.7)
Commercial (31.7) (28.4) 3.4
IT & Managed Services (126.8) (129.4) (2.6)
Support Services (34.2) (32.3) 1.9
VAT/ DWP not repeated 12.0 7.0 (5.0)
Unallocated challenge 5.2 Bie
Total POL Non Staff Costs (279.6) (283.3) (3.7)
Lae @ @«<EXEeri‘ésétC
Network
Facilities Management savings
£3.2m and property lease savings
£3.4m.
Financial Services & POMS
Includes increased marketing and
sales force licences.
Commercial
£3m travel insurance marketing
now within POMS.
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The full P&L shows POL funding the reduction in network payment
° ° ope
through improved profitability 201344 I 201045 I 2015-26
£m Outturn Forecast Plan
TOTAL GROSS INCOME 979.4 987.0 1,002.1
Cost of Sales (112.7) (106.8) (106.8)
TOTAL NET INCOME 866.7 880.2 895.3
Staff Costs (253.9) (237.6) (226.4)
Subpostmaster Costs (447.6) (440.6) (439.0)
Non-Staff Costs (264.8) (279.6) (283.3)
Depreciation (0.4) (0.6) (0.6)
Costs to Support Income Growth (20.8) (16.1) (16.0)
Project opex (5.2) (5.6) (1.8)
Total Expenditure (992.7) (980.1) (967.0)
FRES - Share Of Operating Profits 33.1 35.0 36.8
EBIT - before NSP (92.9) (64.9) (34.9)
Network Payment, 200.0 160.0 130.0
EBIT pre exceptionals items 107.1 95.1 95.1
Interest od (3.0) (7.0)
Impairment (115.6) (145.4) (160.9)
Exceptionals (incl BT) & Redundancy & Severance Costs (157.0) (209.8) (249.9)
Government Grant Utilisation 316.8 170.0 150.0
Profit/(Loss) On Asset Sale 3.4 0.0 0.0
Total Profit/(Loss) Before Tax 157.6 (93.4) (172.7)
[EBITDAS L_ 25) [ (4.3) [I (43) I
Note - impairment and exceptional items are early draft indicative figures which will be refined. —
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... delivering strong year on year progress in EBITDAS
2012-13 I 2013-14 I 2014-15 I 2015-16 I 2015-16
£m Outturn Outturn FYF Budget I Strat Plan
EBIT 94.2 107.1 OB Al 95.1 129.8
Deduct Network Payment I (210.0) (200.0) (160.0) (130.0) (130.0)
Add back Depreciation 0.4 0.4 0.6 0.6 0.0
EBITDAS (115.4) (92:5) (64.3) (34.3) 0.0
... albeit behind the Strategic Plan
<< @ « X EMEnui_— lui
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Current plans show net risk of £15m
Risks £m Opportunities £m
Annual Count - November 2014 count suggests £8m risk - TBC 8.0 Project Ultra (acceleration and additional) 10.0
Hawk (pro-rata if delayed) 8.0 Purchase of EE “Life Mobile Base” (MVNO) 6.0
Telecoms churn increases due to lack of investment (placeholder) 5.0 Additional ‘Town Hall’ savings 40
IdA income does not materialise 5.0 Bonuses budgeted at 100% achievement 4.0
Fujitsu risk to IT Plan 5.0 Other 16.7
Subpostmasters pay challenge to be underpinned 47 Postpone/stop mobile tbe
NS&l renewal 4.2 Wave 3 staff cost savings tbe
Other 16.2
Sparrow costs tbe
Total 56.1 ~~‘ Total 40.7
... creates a focus on landing the opportunities
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The early view of cash flow is within the funding envelope >
Cashflow (£m) 2014/15 2015/16
EBITDAS (64) (34)
<eiTon 4 ¢ The cashflow budget is
a subject to change
outturn in 2014-15
SpACEEING Catt SilFTinie “ ms e Assumes Hawk deal in
Underlying cash outflow ~~ (150) (175).
Working Capital (54) (407)
Total cash outflow ~ (204) (282)
Headroom at end of financial year 539.342. —
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ExCo has started to debate options for the 2015-16 scorecard
. 2014-15] 2014-15 ‘
Key Performance tndlcators Bonus % I Target ¢ The 2014-15 scorecard is shown for
reference
925.1
99.0 I r .
Earnings before ITDA and Subsidy £m* (60.4) ° Key questions/issues:
ee) * Is the income level for Mails
Customer Satisfaction** 89.0% commercially appropriate?
47h
Net Promoter score** 20 * Should we add gross margin as it
Queue time % < 5 minutes - Top 1k branches 81.2% * a
Branch Compliance - Financial Services - basket of 11 measures <=50 becomes available?
Branch Compliance - Inland Dangerous Goods 80.0% - *
Branch Compliance ~ International Dangerous Goods 85.0% ¢ What is the right customer measure?
People .
58x * Should we shift from contract
ISubpostmaster Engagement Index % (Once a year) 48% . .
Post Office Values the diversity of the workforce (Once a year April) 66% signatures to openings for Network
(No.) % of BME appointments over total recruits at senior leadership " Transform ation?
land senior manager
(No.) % of Female appointments over total recruits at senior leadership 45% e Should cashflow be a bonus-able
land senior manager. . . .
Modernisation measure given reducing funding?
Crown Profit (Loss) £m (8.9)
I Other comments/ questions?
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We will look to agree the budget for 2015-16 at the March Board &
Late Jan-early Feb
12 February
Mid February
25 February
25 March
CFO review meetings with functional directors
Final ExCo challenge session
ExCo signs off 2015-16 plan and draft scorecard
Circulate Budget detail to Board - individual meetings
available
Remuneration Committee review scorecard
Board meeting to approve the budget
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Three year operating plan:
proposed approach and interim update
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Objectives for the 3 year operating plan
v
* Key aim is to establish a stronger framework for medium-term financial and strategic planning across the
business, providing tighter control of our flight path to commercial sustainability. Specifically it should:
establish an updated bottom-up view of our 3 year financial projections (which have not been comprehensively
reviewed since the numbers for our Strategic Plan were prepared in Spring 2013);
identify, track and manage the key risks and opportunities to these projections, including the alternative levers for
driving profit improvements;
allocate and control the drawdown of capital from our balance sheet, ensuring projects are consistent with our
strategic priorities and funding constraints;
maintain live tracking of the subsequent benefits delivery of these projects, providing us with clear line of sight
through to the impact on overall EBITDAS;
provide an overarching view of our channels strategy (e.g. in terms of how we expect the split of income between
branch and digital to evolve over the next three years); and
identify where further work is required to refine and develop aspects of our strategy to respond to our evolving
market environment.
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Proposed format and contents
Updated P&L, investment and balance sheet projections for the next three years (with the first year aligned with the
annual budget), taking into account the latest market and trading data, the impact of the Business Transformation initiative
and the other strategy work underway.
A log of the material risks and opportunities to these projections, which should be quantified as far as possible to
enable us to understand the range of potential financial outcomes and to plan accordingly. As part of this we will identify
which products/business lines have been included in our base case projections and what options are being held on a
reserve list pending further exploration (with a clear timetable set for reviewing them).
i. A3 year balanced scorecard - identifying the financial, channel, people and customer metrics that define the organisation
we expect to build over the next three years, enabling us to track progress along the way.
iv. Our overarching milestones plan - identifying the key steps we will be taking to transform the organisation.
A concise narrative overview of our overall 3 year strategy - including a description of the key transition states as we
move towards our target end state design and what this means in terms of customers, channels and products.
The plan will be a living document which is updated annually to cover a rolling 3 year period, but also actively
reviewed within each year to reflect new information as it emerges (e.g. project benefits tracking).
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Key principles for testing the plan
* While the plan itself will be regularly updated, we would propose testing the outputs against some fixed principles that
define the acceptability of our financial flight path and are not subject to continual review.
* We will provide a recommendation to the Board on these principles in March, which are likely to build on the following
principles which were discussed with the Board in November (see slide 20 of the Business Transformation deck):
Y no reopening of the existing funding settlement up to 2017/18 (which requires close control of our overall cash
position);
Y clear year-on-year improvements in EBITDAS demonstrated throughout the plan period, with breakeven
achieved by 2018/19 at the latest; and
v the profit run rate and balance sheet position in March 2018 should be consistent with a declining subsidy
requirement in subsequent years (off the baseline of £140m in 2017/18).
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Interim update on the financial projections
£m 2014/15 2015/16 2016/17 2017/18
Q3 forecast draft budget projection projection
INCOME
FS incl POMS 295 316 363 432
Mails 386 383 373 371
Government Services 112 102 107 107
Home Services 52 58 Th 94
Supply Chain BE? Es 34 pS]
(Other 3 4 4 4
Income contingency 0 0 (25) (40)
Total Net Income 880 896 931 1,003
FRES profit share a6. 37 37 Ev
Net Income incl FRES profit share 915 933 968 1,040
COSTS
Agents costs (441) (439) (431) (441)
Staff costs (238) (226) (219) (227)
Non staff costs (280) (283) (324) (355)
Depreciation (a) (a) (4) (a)
Costs to support income growth (POOC) (21) (18) (48) (18)
Cost savings associated with income contingency 0 0 45 24
[Total expenditure (980) (967) (992) (1,042)
EBITDAS (64) (34) (9) 23
Key points:
+ Latest projections show us achieving breakeven in 2017/18, driven
by strong growth in FS and telephony offsetting the gradual losses
in mails and government.
+ Agents pay declines from 48% of net income in 2014/15 to 42% in
2017/18, as a result of NT, the shift in portfolio balance and
customer journey simplification.
+ Staff and non-staff costs are improved through the Business
Transformation measures, but offset by the costs of new income
growth (particularly FS) and inflation assumed at 3% pa.
+ Crowns savings have been scaled back to reflect a less extensive
franchising programme which delivers a better payback - a full
update will be provided in March.
+ A 30% contingency has been applied to the other savings measures
to reflect the level of delivery uncertainty at this stage.
* The income contingency line is a provisional allowance covering
around 25% of the aggregate impact of the following risks:
* more aggressive action by RM to reduce our fees;
+ failure to execute Hawk;
* further delays in the roll out of IDA;
+ slower growth in telephony (both HPBB and mobile).
* If all of these risks materialise then this contingency would be
insufficient and our ability to deliver breakeven by 2017/18 would
be undermined. We are reviewing and quantifying these risks in
more detail as part of the further work between now and Marc!
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This projection falls between the two scenarios for our ‘
financial flight path which we presented in November
— — — Strategic Plan —— Operating plan
100 = — — Scenario 1 November Board = = = Scenario 2 November Board
o*
80 7 a
- = -
60 aa ae
* *
40 7 oe
20 oor oF
) an
Apisas 77 2015/16 2017/18
NB There are significant differences between the modeling approach used for the operating plan and the November
scenarios (with the former based on more granular, bottom-up projections), so it is not possible to make direct comparisons
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In balance sheet terms, our projections suggest that we can continue to
deliver our non-binding target of £200m cash headroom at the end of the
funding period - but only just...
2015/16 2016/17 2017/18
Projected cash reserves at start of each year 539 342 180}
Cashflow from EBITDAS performance (34) (9) 23
Funding from HMG 280 220 140
Working capital movements (32) 5 13
Investments (411) (379) (155)
Projected cash reserves at end of each year 342 180 201
Key actions underway to improve balance sheet position:
¢ We are undertaking further work between now and March to de-risk the investment projections, identifying
which lower value programmes could be scaled back or stopped, and which areas need greater contingency
to allow for risks.
We are also conducting a review of our working capital management, which will report to the Board in May,
NB The cash reserve numbers shown in the table above differ from those presented at the November Board in that we have now takenthe
more cautious approach of excluding debtors (worth c£160m to the starting balance in 2015/16)- however these assets would in principle be
accessible if our cash position demanded.
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Next steps for progressing the operating plan
March: first draft of operating May: full draft of plan, taking
plan available, following into account the outputs of
January: agree approach and
provide interim update on the
further iteration with the the strategic projects listed
numbers
business below
Strategic projects underway which will inform the operating plan:
+ Mails strategy review (ToR to be discussed with January Board)
¢ Updated strategy for the Crowns, covering the opportunities across both cost and income to help maintain a positive
operating margin over the next three years (to be discussed with the Board in March)
* Review of the opportunities for expanding our business banking service, which will be progressed alongside further work
on our supply chain strategy given the interdependencies
* Development of full business case for our digital strategy, which will articulate in more detail our annual targets for
increasing the share of income generated from online channels alongside the associated financial implications
* Review of our strategic options in the HomePhone, Broadband and mobile market (reporting to March Board)
The operating plan will also be informed by the further work underway to develop the detail underpinning the Business
Transformation initiatives and the work with Commercial and FS to explore the scope for new income opportunities.
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Strictly Confidential
POST OFFICE LTD EXECUTIVE COMMITTEE
Transformation Programme Update
1. Purpose
The purpose of this paper is to provide the Post Office Board with an update on the actions arising
from last November's review of the Business Transformation programme. For ease of reference
the actions that were captured are summarised below:
14
1.2
1.3
14
1.5
Summarise any changes to the ‘end state’ design, since it was first outlined at the
September Board meeting
Highlight any investment decisions the Board is being asked to make in January
Assess the potential to accelerate the BPO of relevant central support functions
Extrapolate year on year cost savings, by function, based upon the current plan before any
uplift in cost to support business growth assumptions
Provide an update on Transformation governance and specifically who is taking the lead
on which aspects of the overall Transformation Programme
The latest position on each action is summarised below:
‘End State Design’
1.6
There have been no changes to the ‘end-state’ design presented to the Board in
November. However a number of initiatives are being progressed within specific
Transformation themes in Q4 2014/15 to validate aspects of the overall design. They are
summarised below:
. Reduce Central Costs — Consideration of the merits of accelerating the plan to
BPO central support functions aligned with a review of IT Transformation proposal
to outsource back office applications [BOAT]. A verbal update on progress will be
provided to the Board at the January meeting.
° Win in Mails / Commercial Strategy - A review of our overall mails strategy and
the potential ‘Plan B’ alternatives to the current partner arrangements, which will be
discussed with the ExCo in February and with the Board in May.
° Reduce and Variabilise Network Costs - The development of an updated
strategy for the Crowns beyond the end of this financial year, covering the
opportunities across both cost and income to help maintain a positive operating
margin for the network, which will be discussed with the ExCo and Board in March.
. Grow FS - An initiative being led by the FS team to explore the opportunities for
expanding our partner and business banking service. Alongside the additional
income this could generate, we will need to assess the cost implications for the
supply chain business, and compare the net EBITDAS impact against the
alternative options for reducing demand on cash services.
° Win in Mails / Commercial Strategy - Further work to develop a full business
case for our digital strategy, which will articulate in more detail our annual targets
for increasing the share of income generated from online channels, alongside the
associated implications for capex, opex and income. This is also due to be
presented at the March ExCo.
Transformation Programme David Ryan, January 2014 Page 1 of 3
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° Win in Mails / Commercial Strategy - A project to review our strategic options in
the HomePhone, Broadband and mobile market. This is due to be reviewed by
ExCo in February and the Board in March.
Investment decisions in January
1.7. The Board is not being requested to ratify any investment decisions related to
Transformation at the January meeting.
Extrapolation of Cost Savings:
1.8 The cost savings, as outlined in the Transformation roadmap in November 2013 will be
baked into the POL operating plan. The plan is scheduled to be reviewed and agreed with
the Board in March 2015
1.9 The plan will re-affirm our commitment to realise a minimum of £100m of annualised,
recurring cost savings by the end of the financial year 2015/16 which is integral to the
overall strategy to deliver a commercially sustainable business within the plan period to
2019/20
Transformation Governance:
1.10 As outlined in the November update to the Board, the transformation roadmap is
structured into six themes to balance certainty of outcomes, benefits, cost to deliver and
risk. Accountability for the business outcomes, benefits and costs associated with the six
themes is held by specific individuals, with each theme led by a member of the POL senior
leadership team [SLT]. The six themes and their sponsors are summarised below:
Reduce central costs — Alisdair Cameron
Transform the organisation — Neil Hayward
Lean IT; via technology transformation and digitalisation - Lesley Sewell
Reduce and variablise network costs — Kevin Gilliland
Win in Mails — Martin George
. Grow Financial Services — Nick Kennett
1.11 The overall Transformation will be managed by a small centralised co-ordination team led
by the Transformation Director, who is a direct report to the CEO. The search for a
permanent Transformation Director is underway. In the interim the role will be performed
by David Ryan.
1.12 The Transformation Director will be assisted by a small management team, comprising
leads for five related capability groups covering;
Business Analysis and End State Design
Portfolio Management and Reporting (including the oversight of ‘small change’)
Business Case and Benefits Management
Programme Assurance
Stakeholder Management and Communications
1.13 Assignment of individuals to key roles is well advanced and is expected to concluded
before the end of the transition phase (31 March 2015)
1.14 The cost of the central coordination team will be funded, in part from the rationalisation of
the existing POL Business Analysis and Change delivery capability and leverage capability
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from other areas of the business where appropriate (specifically Risk, Finance,
Communications).
2. Request
The Board is requested to note the updates provided to address the questions raised at the
November meeting in respect of Transformation.
David Ryan
21 January 2014
Transformation Programme David Ryan, January 2014 Page 3 of 3
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Post Office Limited Board
IT Strategy Update - January 2015
Purpose
The purpose of this paper is to update the Board on:
1.1 Progress against the key initiatives within the 2020 Strategy.
1.2 Progress on developing the IT Strategy and alignment with Business
Transformation (BTr).
1.3. The key risks, mitigations and contingency plans.
2. Background
2.1. The Board approved an IT Strategy in March 2012 and received subsequent
updates the last of these being in May 2014.
2.2 The IT Strategy, validated and fully aligned to BTr, is delivering benefits. We
have made significant progress in delivering our Separation and IT
Transformation objectives.
2.3. There are significant financial and non-financial benefits to delivering the IT
Strategy. However, there remain significant risks to be managed.
2.4 The material set out in the attached slide deck describes: the need to transform,
progress to date, the remaining plan, the status of future initiatives, governance
and the risk profile and mitigations.
2.5 The Board will receive a further update in March as part of the Operating Plan
and will be asked to award contracts to support the Front Office and Network
towers in Q1 FY2015/16.
3. Recommendations
The Board is asked to:
3.1 Note the progress against the key initiatives within the 2020 Strategy.
3.2 Note the progress on the IT Strategy and alignment with BTr.
3.3 Note the key risks, mitigations and contingency plans.
3.4 Note that we will come back to the Board:
+ March 2015 —~ Strategy update and alignment to Operating Pian
+ May 2015 — to seek authority for the Network Tower award
+ May 2015 ~ to seek authority for Front Office Tower award
Lesley Sewell
28 January 2015
IT Strategy Update Lesley Sewell Page 1of1 28 January 2015
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Contents
1. Introduction & Purpose
2. Why Transform? — challenges and opportunities
Our Transformation Journey — Progress update, roadmap, plan and financial model
4. Risks and Governance
5. Summary
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Introduction & Purpose
Our purpose today is to update the Board on progress to deliver our IT Strategy, specifically
to note:
* Note the progress against the key initiatives within the 2020 Strategy (slide 5)
* Note the progress on implementing the IT Strategy and alignment with BTr (slides 6-15)
* Note the key risks, mitigations and contingency plans (slide 16-18)
* That we will come back to the Board:
* March 2015 — Strategy update and alignment to Operating Plan
* May 2015 — to seek authority for the Network Tower award
+ May 2015 — to seek authority for Front Office Tower award
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Executive Summary
We have an IT strategy agreed with the Board to:
+ Separate our IT from RMG and build our own digital platform
+ Move to a streamlined and modernised IT architecture & supply chain model
+ Maintain continuity of service whilst transitioning services to the new model
This strategy delivers significant benefits in cost, capability, service continuity and customer experience
The case for change is strengthened by more focus on costs, an ageing IT legacy, availability of new and disruptive technologies
and rapid changes in customer needs
We have already achieved a great deal both in terms of outputs and outcomes and are learning as we go
Further significant investment is required over the next 3-5 years to complete delivery of the strategy
Future work will be complex, with significant risk — especially in simultaneously replacing front office hardware, software, supplier
and data centres
Mitigations are in place including integration through business transformation and tighter governance, supplier management,
business-wide pipeline management and plans for additional in house capability
Choices are still to be made about phasing and on rollout of further capability, all of which will be aligned with our Business
Transformation plans to create an integrated change portfolio
(3 \
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2. Why Transform?
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The challenge — an ageing infrastructure which we need to fix and align with
the new capability needed to enable our business transformation
CONTINUITY & COST
= Over 60 suppliers, contracts on poor
commercial terms and 80% expiring
= Key operational platforms at end-of-life
and could stop working
= Competitiveness has been killed in some
areas by IT costly to change and run
= Dated point of sale IT means we cannot
meet customer needs in the Digital Age
= AData Centre which is end of life
= Aheavy dependence on Royal Mail
Group systems and a need to separate
Addressing significant risk and cost
challenges to ensure we can continue to
deliver high quality, affordable, reliable
and secure IT services to our customers
Customer Relationship Management
Data, insight and analytics
Digital platform for customers
Digital for colleagues and branches
Enterprise Social for Digital working
Automation & Workflow platforms
Strategic infrastructure e.g. integration
New Mails access points
Marketing insight and analytics tools
Virtual FS advisors
Customer Journey Simplification
Branch Self-Service development
Business Transformation & Automation
Exploiting Digital Ways of Working
i Real Choices based
No real choice — We futwo bash
Must Press ahead with IT Ounehaires upon r er UuSsINessS
transformation eases’ cl ange
capacity considerations
4 4)
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3. Our Transformation Journey
What we have achieved so far: Our journey started with separation, transforming core
IT and securing business continuity whilst protecting operational service
The Board Approved What was delivered What'’s left to do
Separation of IT services
provided by Royal Mail Group
Secure service continuity for
Horizon
Implement a new IT Supply
Chain, Operating Model
Move from a fixed cost base
and reduce IT costs by 25%
Establish our digital
capability
Be agile and reduce the time
to market
Continuity Of Service & Cost
Significant successes - the heavy lifting for Separation
is now complete. We have separated core HR,
Building Security, Fleet and Property systems, built
a new Finance system, a new digital platform for our
eBusiness, new contact centres
An Horizon support agreement to March 2017 was
secured with Fujitsu. 30% of Data Centre refreshed
to sustain service.
Procurement of the new supply chain initiated. 5
contracts awarded and in delivery. Key capability in
place for Service Integrator and End User Computing.
Offshoring of call centre capability.
Delivered £8m of the £27m committed benefits and
capability uplift through the Systems Integrator (Atos)
Enablement
Strategic digital capability delivered by Common
Digital Platform (CDP).
Replacement of Self Service Kiosks in branch.
We have enabled digital capability
Small changes in Q1
FY15/16 to complete
transition by June
Complete
2 contracts, Front
Office, Network to
be awarded
FY2014/15. Back
Office is pending a
strategic review
Transition the
remainder of the
Supply Chain
Build on CDP
through Business
Transformation
Transition to our
new Supply Chain
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On track. Good track record
of delivery for Separation —
one of the most complex
changes in Post Office,
protecting service throughout
Complete
Some ‘in year’ delays,
however benefits remain on
track
Some in year delays due to
procurement process
complexity, but controlled
On track
On track
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3. Our Transformation Journey ’
We are acting upon key learnings from the delivery of our IT
Transformation and Separation Programmes
Both IT Transformation and Separation have helped mature our approach to managing complex change
delivery. Anumber of key learnings are being taken into our planning.
ee ee
Strong governance to ensure timely decisions and challenge scope creep
Effective Business engagement and communications to manage change and mitigate impact
Incremental delivery to drive focus and early benefit realisation
Challenge to test and flex the delivery as we learn
Continually testing the business case and being prepared to stop
Securing key skills and resources; Post Office experience is critical and should be locked in - don’t
do as part of BAU
Strong dependency and release management as many changes overlap, impacting the same
suppliers, processes and colleagues
Risks to be actively managed — focus on delivering mitigations
Active management of our incumbent supply chain to minimise risk and cost escalation through
transition and exit
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3. Our Transformation Journey ’
Our vision — what it will feel like for customers, colleague and partners
For customers
Technology will be key to transforming customer experience across the channels,
propositions and branch models, potentially including:
+ Customer journeys start online, complete in branch
+ Self & assisted access to more services
* Convenience e.g. book a place in queue via mobile
+ Browse online catalogues in branch
+ New services e.g. digital passports, identity
+ Book an appointment online
+ Virtual FS advisor accessible in branch or online
For colleagues & branches For Partners & Clients
Digital tools will transform productivity & user Modern digital technologies will
experience for colleagues centrally and in branch allow Post Office and it’s clients
and partners to connect our
products and services seamlessly,
improving competitive advantage.
+ Branch communications move online, easier
to access and saving print & distribution cost
* Social tools enable collaboration across the
central and branch communities J
+ Branch learning moves online, to be ;
accessed via mobile, PC or tablet ry
+ Manual and repetitive tasks automated,
freeing colleagues up for higher value work
This means we can share data,
plug in new applications faster,
and join up customer journeys
e.g. from the Post Office website
across our partner sites.
~
a
YQ
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3. Our Transformation Journey
Looking forward; our roadmap shows a significant programme of work
covering IT continuity, enablers and business development opportunities
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portfolio plan as both develop
The roadmap and plan will align and
integrate with the Business Transformation
2015/16 —
Ramping Up
- Target Architecture
- Front Office delivery starts
- EUC & Network delivery start
- Customer journey design
- Network extension rollout
- Product & process simplification
- Select key platforms :CRM, Social, Data
- Back Office TOM & IT strategy decided
2012-14
Building
Foundations
— see Slide 5
2016/17 -
Building Momentum
- Horizon replacement deployment
- Network extension rollout
- Branch & HQIT refresh completes
- Analytics & Insight across products
- Next Best Action across channels
- Product digitisation progressing
- Social platform rollout commences
- Customer & SME portal & My Account
- Transactional functions — BPO / Cloud
- Digital customer journey development
- IT supply chain consolidation
- CRM capability build
2017-20 —
Reaching Maturity
- Advanced insight & analytics
- Full CRM capability
- Products across channels & devices
- IT supply chain is Lean
- IT & data shared across PO
- Legacy Horizon retired
- Integrated partner ecosystem
- Innovation capability
- Social tools for colleagues
Items in bold are ‘no choice’
and committed — we must
proceed from a cost, capability or
business risk perspective.
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3. Our Transformation Journey
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Delivering such a complex programme of change will require strong design
principles and governance
IT will be Lean and Mean working as a strategic partner enabling business outcomes
BUILD FOUNDATIONS, GROW TO FIT
IT platforms will be developed to our
minimum need, growing as we grow
ONE BUSINESS, ONE VIEW OF OUR
DATA
One Data Strategy; data sharing by default
WE WILL HAVE ‘VANILLA’ PROCESSES
We will buy ‘Off the Shelf’ Technology’.
DIGITAL BY DEFAULT
Digital will be the heart of this business
MORE FOR LESS IN EVERYTHING
We will seek to leverage partner capability
WE WILL DELIVER ALL IT FOR YOU
The IT function will take care of all
technology selection and delivery for POL
CAPABILITY TO BE OUTCOME DRIVEN
Enabling cost-out, growth or risk reduction
We will build once, use many times. No more ‘heavy’
IT
Business intelligence will gathered across channels,
products and business units
Customisation of platforms/solutions only when it
clearly enables growth, enables cost-out or mitigates
risk
So we will simplify, standardise and digitise our
business and our technology
We will exploit the value chain using partner and
supplier capability
Business IT needs are managed centrally and aligned
with IT strategy. Drive towards enterprise solutions.
Functional requirements driven from the business,
processes standardised across the operating model
New capability will have to be justified by the
EBITDAS impact and its enterprise wide benefits
Drives value for money.
Allows us to be more agility
We will be ‘right-sized’
To drive growth and cost efficiency
We are dependent on the business to
drive process efficiency
Our cost reductions a predicated on
digital, enterprise wide delivery
This drives value and builds
relationships
Business do not have to worry about IT.
Helps remove duplication.
Strategic platforms leveraged.
For us to deliver new capability or grow
a platform/service, the justification must
‘wash its face’
Post Office®
(2)
hoot
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3. Our Transformation Journey
®
Business transformation estimated an investment in IT of £269m across continuity,
enablement and business development, underpinning annual benefits of £180m
* Continuity — good level of certainty around direct benefits of annual IT cost reduction, and continuity of service
¢« Enablement -— reasonable confidence in level of spend, benefits will come through leverage in Business Development
¢« Business Development — Low level of certainty in cost and benefits as many requirements are not yet clear
Programme & IT Spend Summary Benefits
BUSINESS DEVELOPMENT:
Finance & HR I Programmes will spend son
around £14m on IT for
Network Support automation to cut costs Cost
Reduce central ge, ’ reduction
costs Lean IT - Horizon replacement }
Sel
=%
2
ce
GC)
Around
£180m of
CONTINUITY & ENABLEME
Lean IT - Branch & HQ refresh } Lean IT programme will spen: annual
: : around £184m to transform the ) benefits
Lean IT — Supply Chain & Risk ) / dependent
core IT architecture & supply
z chain to deliver enablers, cost
eee Lean IT - Enabling platforms } reduction and continuity
variabilise “Enablement
Customer Journeys I
BUSINESS DEVELOPMEN:
Programmes will spend
Commercial around £70m on IT to
drive income growth
on IT
Network Development
iL
Financial Services }
Total investment £295m for Annual benefits of £180m
Post Office®
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3. Our Transformatio urney —
We must secure continuity of our IT services and reduce the like for like cost base
by 25%. £152m of our investment secures our future
+ Delivering the following service change is based on BTr outcome and the cost estimates both approved and new.
+ Key outcomes will see a Front Office for a new counter application and supplier, modernisation of aged and end of life infrastructure,
enhanced security and streamlining of the IT operation.
2014-15 2015-16 2016-17* 2017-18 2018-19 2019-20
93.95m 43.05m 15.00m 0.00m 0.00m
5.80m 6.90m 13.60m 27.00m 27.00m
Procurement and + Front Office and IT + New Horizon + Migration tonew + Legacy + Maintain run
award of Front Office I Networks Towers deployment Front Office systems / state
Tower landed completes platforms
+ Branch counters removed + Execute on
Procurement and + Commence Horizon replaced + New IT Network further cost
award of IT Networks _—_ replacement complete + Replacement out initiatives
Tower + Commence outsource systems fully
+ Commence branch of back office + Extension of operational + Drive
Decision on route counter replacement current Fujitsu additional
forward for Back + IT Supply Chain contract fordata + Further automation
Office Tower + Complete Head Office consolidation centre consolidation
end user migration from (contingency) to reduce run
RMG identified
+ Conclude negotiation
with Fujitsu for service
extension 2017-18
The £152m has been calculated through understanding the ‘must do’s ‘ and committed spend. Front Office is critical and
consumes the lion’s share of the spend with standing up the Towers and refreshing legacy technology due to contract
extensions for contingency (Fujitsu) — Horizon replacement
* Post 15/16 Risk and Resilience is expected to be incorporated into the new IT supply chain contracts and not required as a specific investment (41
Not
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Post Office®
3. Our Transformati urney
There is new capability we must build to fulfil the business outcome. £32.5m is the
estimate and will be subject to approved business cases
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®
- Aset of new IT capabilities will need to be provisioned in order to deliver the projected business outcome.
2015-16 2016-17 2017-18 2018-19 2019-20
11.45m 13.95m 6.65m 0.40m 0.05m
Data Architecture + Analytics + Enhanced insights +» New Horizon fully + Holistic data for
enhancement and analytics deployed customer, products
Customer Journey and finance shared
Designs + Network extension * Next BestAction + Full CRM across all business
rollout integration into lines
Product & Process + Social Platform digital channels
simplification + Outsource designs deployment + Legacy manual
and + Advanced insight processes
Exploit automation commencement + Back Office and analytics automated
platform outsourced
+ Digital customer + Products fully + Majority of products
Analytics journey + Branch and HQ IT delivered across offered in digital
Architecture refresh complete channels and format online
+ CRM capability devices
Business
architecture
The £32.5m is based on IT assumptions of new and/or enhanced technology needs to support the business development
requirements as surfaced from BTr. IT will continue to challenge business requirements to maintain the annualised
savings delivered and control incremental cost increases.
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3. Our Transformation Journey 3
There are significant business technology requirements which support income
growth or cost out. £84.5m is the estimate and will be subject to approved business
cases
Business Development and Exploitation — circa £84.5m
+ The business programmes identified in BTr will exploit the new and enhanced IT capabilities
. Prioritisation based on major benefits and growth will be phased in concert with the business
Ops Year 2015-16 2016-17 2017-18 2018-19 2019-20
Spend Profile 38.00m 21.50m 14.00m 7.50m 3.50m
Commercial - Product Simplification
Simplify Customer Journey Iterative Activities
+ Simplify Products
Simplify Processes
+ Simplify Customer Journey —
contd...
+ New Products
Commercial - Customer Management Programme
Data: Customer Single View
+ Analytics: Deeper Insight and decision making + Simplify Processes — contd...
Outcomes Financial Services
New Products
Simplify Customer Journey
Simplify Products and Processes
+ More Access Points —
contd...
+ More Back Office automation
— contd...
Network Development
New Access Points
Back Office Automation
Simplify Customer Journey
The £84.5m is estimated and pending detailed alignment with business cases although the ‘what’ is known. The delivery
and benefits are front loaded else PO will not deliver the necessary change in order to stay viable or competitive. Once
the heavy lift (2015-18) and benefits are delivered, more of the same is required to remain current (2018-20)
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3. Our Transformation Journey 3
The investment of £269m has been profiled across 2015-20 and includes the benefits
from the IT Transformation programme on run costs. The wider business benefits are
yet to be fully determined
Change Spend - CAPEX 2015-20 Run Spend - OPEX 2015-20
110.00
300.00 90.00 ae
5 200.00 I § 7000 gems
= 150.00 I = 50.00
-: aeapn I & 3000
0.00 -- ‘ — 1 10.00 a
2015-16 I 2016-17 I 2017-18 I 2018-19 I 2019-20 I Total 10.00
= Fujitsu 20.00 I 20.00 40.00 2014-15 I 2015-16 I 2016-17 I 2017-18 I 2018-19 I 2019-20
mit Capability I 1145 I 1395 I 665 I 040 I 005 I 3250 Current 8820 7890 I 7780 60.10 I 60.10 I 60.10
iT Continuity I 93.95 I 43.05 15.00 0.00 0.00 152.00 ——New 4.00 14.30 14.30 7.50 9.10 8.10
mBusiness Devt] 3800 I 2150 I 1400 I 750 I 350 I 8450 ——Fujitsu_ I 0.00 9.00 9.00 34.50 0.00 0.00
—Total 92.20 I 9320 I 92.10 I 102.10 69.20 I 68.20
Key Points
* The investment spend is front-loaded to deliver early benefits, this drives a significant volume of change in 2015-18
Lean IT will reduce the cost to run technology, though with some cost added back in by new business requirements
Model assumes a simpler operating model, reduction in legacy systems, resulting in simpler and therefore cheaper IT
Fujitsu Estimated one off investment to support extension of Fujitsu data centre
There is much uncertainty around the requirements from the business programmes, may be somewhat lower or
higher
Many of the proposed changes are at the initiation stage and still require business case approval
©
Post Office®
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®
A number of significant projects have not yet been approved
Mobilisation
Continuity of
Service
Capability
Business
Development
Planning and Business
Cases
© A... and Demand Management @ ©
Recruit and Appoint OO
Award Front Office
= Front Office & Network - development
Award IT Network A J
Separation Start Rollout of new
___technology in Branch _ A
Customer
Digital
ee ee
Network Expansion Solution (Device and EPOS) i)
Agree % Design for:
approach to j -
Back Office A Data and Analytics A
> Product, Customer Journey and Process Simplification
Post Office®
ay
oe
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An IT programme of this scale does not come without significant risk,
requiring tight governance of business and IT change through the TMO
Theme
Risk of non-delivery
Specific risks
Mitigation Approach
Lack of Clarity of
Business
Requirements
Lack of Clarity of
Target Operating
Model (TOM)
Ih
Technology risk -
controlled
Supplier &
partner issues
Very High
Operations and
Technology risk -
controlled
Complexity and
Volume of Change
Current Risks
Business capability needs unclear
Lack of agreement across POL
Slow decision making results in spend on
obsolete technology
BPO uncertainty impacts Back Office IT
IT dependency on product & process
consolidation and simplification
No detailed TOM design impacts IT design
Business engagement on capability needs
Assumptions and hypotheses to be agreed
Prioritisation of decisions balancing time and
cost with benefits and risk
Back Office strategic review initiated
Assess IT impacts and considerations
Assumptions to be made and agreed
Revise IT strategy based on BO review
Complexity of the Front Office Transition
Incumbents may slow us or cause issues
Partner and client issues cause delays
Accelerate Front Office procurement
Fujitsu / Horizon extension (TSS2)
Supplier transition risk management strategy
Incentivise co-operation by leveraging contracts
Front-Loading of Change demand
Capability and capacity to deliver
Complex inter-dependencies
Delivering the IT Transformation delays
business change capacity
* Known risks around IT resilience
* Cyber Security risk footprint but will grow as
Digital extends across channels
Develop IT roadmap
IT Delivery plan and capability needs
Align to Transformation Portfolio
Governance through TMO to manage demand
Recruitment and retention strategy for key people
We are developing our Information Security
capability, and will address key resilience issues in
the Back office driven from the outcomes of the
Back Office strategy review
We have aligned our risk mitigations to Post Office risk appetite — for Operations, Technology & People risks
Post Office is risk neutral or risk averse
Post Office®
(Ge)
iw)
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®
To deliver a programme of this scale will require strong and integrated
change management, governance, people and capability
A significant increase in people
capacity, capability and skills
An integrated Business Planning
process & Transformation Portfolio
Product Process simplification
External stakeholders aligned
Strong Governance of change
management across the portfolio
Investment in good quality people, skills and
more capacity in-house to manage the
change, funded from the investment totals
shown
Integrated Business Planning, not just
centrally coordinated budgeting
Change Portfolio managed centrally by TMO
— currently being setup
Proactive pipeline & demand management
An effective Business Design Authority and
Governance Framework
Strong stakeholder engagement in our
strategy and transformation plans, we should
not commence work in areas where key
partners are not aligned
- Business & IT Design Authorities
- Transformation Management Group
- Transformation Committee and Exco
This framework is in development
Scale up to deliver he change
Ensure we have the depth and breadth of skills
required
Identify and manage dependencies
Avoid over-committing to change delivery
Drive to common solutions — build once, use many
Quickly resolve differences and get to 80/20
Leverage Standard IT to speed delivery and reduce
costs to build and run
Progress IT investment in product areas where the
dependency on 3" parties is significant, without the
risk of wasted investment
Ensure the oversight and decision making are
appropriate for high-risk and large scale strategic
change
Post Office®
(7)
©)
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®
Our Front Office supplier transition will be disruptive to our business, this was
anticipated and we have an approach to mitigate the risks and impacts
Background
Post Office is procuring a Front Office IT provider as part of IT Transformation. Fujitsu were part of that process, but
have now withdrawn, a risk we were always aware of and have planned for. We have 3 credible bidders for Front
Office - CSC, IBM and Accenture, and will be coming to Board in May 2015 to present the outcome.
Key elements of our Risk Mitigation plan:
- Proactive management of Fujitsu exit - Lead appointed and has started work
* Fujitsu service extension being negotiated, 6 months segments from March 2017 to Sept 2018
* Simplification of functionality, allowing us to use standard “ready-made” IT components for faster delivery
* The technology solution will develop and extend our Common Digital Platform rather than starting afresh
* Security and integrity will be key requirements in the procurement
* Potential incentives to new Front Office supplier to achieve faster delivery
* Close collaboration with our Communications team to manage external impacts e.g. Sparrow
* Selection of a capable supplier — all three bidders are credible, we will sign contract in May:
Summary of bidder proposals
Accenture csc IBM
Extend CDP, supplementing with commercial Partnering with Escher to implement the Propose extending CDP, supplementing with
off-the-shelf (COTS) components to fill gaps Riposte product which they claim can commercial off-the-shelf (COTS)
e.g. Point of sale. Current Horizon functions support 72% of the required functionality components including some proprietary IBM
replaced March 2017, further enhancements out-of-the box. Riposte will be integrated solutions. All requirements live by March
from April 2017 with CDP and rolled by November 2016 2017
{42 \
18
Post Office® te
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5. Summary & Next Steps ®
Summary
Key Points
The IT Strategy delivers key benefits; we have made significant progress in delivering our Separation, IT
Transformation objectives
We have made good progress in identifying the capabilities and approach to support BTr
A key dependency is simpler products and standardised processes across the organisation, without these our
benefits could be significantly eroded by building customisation into systems during transition
There remain significant risks to be managed. Q4 FY 2014/15 is the key period to establishing the plan and
mitigations, working closely with the Transformation Management Office (TMO)
The transition away from Fujitsu is technically and commercially challenging but can be managed. Action has
been taken to secure relevant expertise and to build an exit management and transition strategy
The Board is asked to:
Note the progress against the key initiatives within the 2020 Strategy (slide 5)
Note the progress on implementing the IT Strategy and alignment with BTr (slides 6-15)
Note the key risks, mitigations and contingency plans (slide 16-18)
Note that we will come back to the Board:
+ March 2015 — Strategy update alignment to Operating Plan
* May 2015 -—to seek authority for the Network Tower award
* May 2015 -toseek authority for Front Office Tower award
Post Office®
(Ge)
io
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Strictly Confidential
POST OFFICE LTD BOARD
RISK APPETITE STATEMENT
1. Purpose
The purpose of this paper is to:
1.1. Seek board approval for the risk appetite statement developed by the
Executive Committee (ExCo) and considered and recommended for
submission to the board by the Audit & Risk Committee (ARC).
2. Background
2.1. Defining an organisation’s appetite for risk is a fundamental part of the risk
management framework, setting the parameters for acceptable levels of risk
taking and identifying those areas where there is little or no appetite for risk
taking.
2.2. This definition of parameters, aligned to the Post Office’s strategic objectives,
provides a clear steer for management and improves decision making in the
organisation.
2.3. Setting the risk appetite is an intrinsic part of meeting the board’s obligation to
determine the nature and extent of the principal risks it is willing to take in
achieving its strategic objectives, as set out in section C2 of the UK Corporate
Governance Code.
3. Current Situation
3.1. The Post Office approach to developing its risk appetite statement began in
August 2014 with a presentation from PWC to the ExCo describing the
purpose of having a risk appetite statement and a proposed plan to develop
one. The ExCo tasked the risk function with developing a methodology for
articulating risk appetite and a straw man statement for review. This was
completed through a combination of researching accepted best practice and
input from individual in the business drawn from both ExCo and the Senior
Leadership Team (SLT) colleagues. Several iterations of the paper at both
ExCo and the ARC were required to get to the final version appended to this
paper for consideration.
3.2. The final framework introduced four levels of risk acceptance, ranging from
‘risk seeking’ through to ‘risk averse’. These definitions are explained in the
appendix to this paper (appendix A).
3.3. The framework also defined nine categories of risk. Whilst there is no
accepted standard for the number of categories we believe that the ones
selected cover the vast majority of risks that the business is exposed to.
These categories are set out in the appended paper, together with the Post
Office risk appetite statement for each.
3.4. Where possible, positive statements have been used to express appetite;
however, it should be noted that some of these statements deliberately set out
Risk appetite statement Chris Aujard Page 1of2 20/1/2015
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Strictly Confidential
to indicate unacceptable levels of risk and therefore the use of apparently
negative statements is unavoidable.
3.5. It is important to note that the risk appetite statement explains the level of
acceptable risk-taking in the organisation and should not be confused with, for
example, the commercial appetite for new business.
3.6. The debates at ExCo in developing this risk appetite statement were often
difficult and challenging. In the course of discussions tensions were identified
between different categories of risk and the willingness to take risk in each of
these areas. By way of example, the requirement of taking risks to achieve
growth (risk seeking) contradicted the appetite for risk taking in respect of the
social purpose of Post Office.
3.7. Once the risk appetite statement is approved by the board, the risk function
will co-ordinate a range of activities to embed risk appetite into the process
and procedures of the business. Examples of such processes are: investment
appraisal; business performance review; induction, appraisal and
development procedures. A detailed plan for implementation will be tabled at
ExCo by the end of this financial year.
3.8. I The board should also note that the articulation of risk appetite may change
over time and that it is common for different aspects of risk appetite to be
flexed up or down according to the strategic direction of the organisation at
the time; consequently, the risk appetite statement will be tabled for review by
the board on a six-monthly basis.
4. Recommendations
The Board is invited to:
4.1. Adopt the risk appetite statement as appended to this paper
Chris Aujard
20" Jan 2015
Risk appetite statement Chris Aujard Page 2of2 20/1/2015
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Appendix A - Draft Risk Appetite Statement:
Category of Risk I Risk Appetite Statement Potential metrics/indicators Proposed
Owner
Customer Post Office is committed to the fair treatment of its customers and, as a
consequence, has: -
The impact of c d Scope of Servi hi * Gilland
Post Office ¢ Averse appetite for taking risks which might result in failure to overage! and Scope OL Services te meet t I mary
activities on intain th f f ini ith commitment (as required by detailed metrics in
r maintain t je service commitment in respect of customers in line wit! POL entrustment letter), eg 11,500 branches and
customers in our social purpose and Government’s policy on subsidy. 99% of the population to live within 3 miles of a
terms of branch.
satisfaction,
service or To provide at all these branches, mails, basic cash
advocacy for and banking facilities, pay out services and bill
Post Office payment facilities;
. oo Martin
risk ite for di isfacti leted . Customer complaints levels (TBC either an George
. Neutral ns appetite for dissatis' faction relate to BAU services absolute count measure or % transactions © Nick
recognising that in a complex business there will be a level of measure) per month Kennett
dissatisfaction as part of the normal course of business of achieving
our commercial objectives. On line sentiment (social media commentary)
Easy to do business with metric
% of branches delivering to the required level
(from Insight team)
Customer advocacy measure (NPS)
B2B metrics
NPS
Martin
George
1
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Category of Risk I Risk Appetite Statement Potential metrics/indicators Proposed
Owner
_ ==: oo noe e Nick
Averse appetite for risk taking which would alienate or lose None specific- but appetite to be considered in Kennett
significant groups of profitable customers strategic planning and business decisions.
¢ Tolerant risk appetite for customer dissatisfaction caused by Martin
transformation, innovation and customer selection/profitability George
decisions. @ Nick
Kennett
¢ Neutral appetite for risk taking which would have a detrimental ° Kevin
impact on vulnerable customers. Post Office will take a balanced Gilliland
view, reflecting commercial implications of introducing safeguards
and controls to protect vulnerable customers and the needs of those
customers.
7 1 - inability j 7 i z * Alisdair
Financial Financial sustainability is a core goal for Post Office. Underpinning this Cameron
Exposures to are clear boundaries in relation to financial risk taking:
dit, liquidity,
cre - ‘aul "Y) I POL has:
pricing risks or
external ° Averse risk appetite for not having sufficient financial resources to © Govt. subsidy value
financial related ensure the continuity and sustainability of the company. This © Income from all sources
chine. especially relates to ensuring that sufficient funding is always © Cash and credit facilities monitored to ensure
available . or
loan remains below £950m cap and maintain
, A - sol eri oe £200m headroom
e Averse risk appetite for financial crime to occur within any part of C ducti hieved
the organisation © Cost re luction targets acl vieved ,
¢ Value of subsidy reduced in line with funding
, - Seat agreement
¢ Averse risk appetite for disruption to any credit facility © Value of leakage of assets (criminal instances)
Financial performance versus budget and prior
e Tolerant to risk-taking which will grow sustainable EBITDAS over year (Costs, Profit, Cashflow)
time
2
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Category of Risk
Risk Appetite Statement
Potential metrics/indicators
Proposed
Owner
¢ Seeking risk appetite for reducing dependence on subsidies over
time.
Market
Exposure to
market changes,
competitor
activity,
reputational or
brand damage
Post Office acknowledges that it operates in increasingly competitive
markets and its attitude to risk-taking in these markets reflects this.
POL has:
e Tolerant risk attitude to pricing to drive revenue growth, but not to
the point at which it becomes non profitable
Subject to the above, POL has:
© Seeking risk attitude in the mails market where we will take on
competitors in markets and consider reduced margin to defend
market share
© Neutral risk attitude in government services and telephony market
where we will price competitively to retain market share
¢ Seeking risk attitude in financial services to gain profitable revenue
and market share.
© Averse risk attitude when it comes to diversifying Post Office’s
product portfolio or for business initiatives that may have adverse
reputational or brand impact.
¢ Market share data
© Spread/margin data
Competitive price position
Proportion of investment cases
rejected/approved
Martin
George
@ Nick
Kennett
@ Kevin
Gilliland
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Category of Risk I Risk Appetite Statement Potential metrics/indicators Proposed
Owner
Legal Post Office takes its legal and regulatory responsibilities seriously and
Regulatory consequently has:
Compliance Tolerant risk appetite for Legal and Regulatory risk in those limited I * FCA, ICO, or other regulatory formal censure —_I ¢ Martin
with circumstances where there are significant conflicting imperatives actions against POL/ BOI (in respect of POL George
regulations, law,
and any other
between conformance and commercial practicality
business) its subsidiaries or directors/officers.
¢ Nick Kennett
¢ Jane McLeod
external * Averse risk appetite for litigation in relation to high profile cases / * Basket of measures used for reporting to
oversight. issues Customer and Conduct Risk Committee
. . ae . . . . Leading indicators
e Averse risk appetite for ligation in relation to Financial Services . .
matters Risk of regulatory censure or action short of
this, such as requirement to undertake a
¢ Averse risk appetite for not complying with law and regulations or business change or undertake past business
deviation from business’ conduct standards
© Critical internal audit findings
© Qualified External Audit report (or significant
concerns in management letter) in respect of
legal/compliance
Neil
People Post Office is committed to safeguarding the wellbeing of its people ° Hayward
Capability and
capacity of staff.
Ethical
behaviour
including staff
misfeasance.
and therefore has:
e Averse risk appetite associated to the health, safety and wellbeing
of POL customers and colleagues in everything we do. This is
paramount to every aspect of POL operation. This includes; loss of
life, serious injury and non-compliance to regulation and policy
¢ Averse risk appetite for unethical behaviour including staff
misfeasance
Health and safety statistics:
¢ H&S incidents
e Near misses
© No. Claims per area
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Category of Risk
Risk Appetite Statement
Potential metrics/indicators
Proposed
Owner
¢ Neutral risk appetite for:
- Misalignment of people capability and capacity of staff
- Inadequate assessment of the necessary talent and capabilities
identified in order to build the learning and development plan
and resourcing strategy (employees & agents) to drive business
performance
- Insufficient people capacity to enable PO to effectively deliver
core services to customers.
H&SE breaches / Fines
© No. of H&S risk assessments (inc. projects)
completed
¢ No. of H&S annual objectives achieved
Engagement scores & indicators
e Amount of time a vacant position remains
unfilled
¢ Adequate processes and polies in place in
relation to employee conduct.
©To take to hire SLAs
© Cost per hire
¢ 100% compliance to vetting standards
Technology
Systems and IT
related risk;
stability, design,
implementation.
This also
includes IT
Security,
hacking, and
unauthorised
use of data.
Post Office is committed to exploiting technological benefits to achieve
market advantage. In recognition of this, Post Office has:
e Averse appetite for data loss/leakage that can lead to customer,
commercial or reputational damage
Incident Log — (any Severity 1 incidents reported
as detailed below)
Any recorded high risk event (Severity 1 incident)
that requires reporting to the ICO or FCA as per
ICO/FCA guidelines
1. No more than 4 Severity 1 incidents reported
¢ Lesley Sewell
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Category of Risk
Risk Appetite Statement
Potential metrics/indicators
Proposed
Owner
Neutral appetite for operational IT services
per month
2. Performance against agreed SLA’s (to meet
and/or exceed those contractually stated)
3. Less than 12 unique Risk Acceptance Notes
approved (by the ClO) during any one
financial year
4. Evidence of Service Acceptance Board (SAB)
signoffs for all changes that go live.
1. Severity 1 incidents reported by IT Service
Desk/Number of hours downtime — core
customer facing systems
2. Agreed SLAs in place:
Horizon Branch Availability
Post and Go Availability
Paystation Terminal Availability
AB Infrastructure Availability
Credence User (Online Day) Availability
Master Data Management
Vocalink
3. Risk Acceptance Notes approved as part of
Service Introduction/go live
4. Service Acceptance Board (SAB) Signoffs for
live
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Category of Risk
Risk Appetite Statement
Potential metrics/indicators
Proposed
Owner
e Averse appetite for inaccurate and unreliable processing of data.
1. Less than 1 per month live severity 1 incident
that relate to data inaccuracies
2. Remedial actions from 3rd Party Assurance
Reports (specifically Internal and External
Audit Reports) in relation to inaccurate and
unreliable processing of data.
3. Evidence of sign off of Test Reports and/or
Verification Reports from projects (one per
project)
4. Evidence of sign off of Business Readiness or
BAT in projects (one per project).
1. Number of severity 1 live incidents that relate
to data inaccuracies IT Controls in place
2. Audit Reports — Internal and External
3. Evidence of sign off of Test Reports and/or
Verification Reports from projects
4. Evidence of sign off of Business Readiness or
BAT in projects
Operations
Internal
processes and
operations
including
financial
reporting
processes,
Effective and efficient processes and operations are core to the long
term success of Post Office and therefore, Post Office has:
e Averse risk appetite for inefficient or ineffective processes that
result in: lost time, duplicated effort, and increased risk of financial
loss or errors in any part of its business or core processes
Averse risk appetite for inefficient or ineffective or prolonged
¢ Branch loss data
Customer complaints
© Calls to NBSC
¢ Branch loss data
¢ Lesley Sewell
Kevin
Gilliland
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Category of Risk
Risk Appetite Statement
Potential metrics/indicators
Proposed
Owner
governance and
control
processes and
oversight,
supply chain
management,
physical asset
management.
failure of, governance and control processes, critical financial
reporting processes, critical supply chain and business continuity
processes.
Averse risk appetite for any serious impact to the confidentiality,
integrity and availability of information, leading to financial loss,
business disruption, public embarrassment or legal consequences.
e Customer complaints
Calls to NBSC
© Strictly confidential information — no incidence
of loss reported. Severity 1 incidents reported
relating to customer and business information
Confidential information — no more than six
incidents of data loss per year. Severity 1
incidents reported relating to customer and
business information
The number of unauthorized accesses and/or
changes to critical. systems/data.
¢ Time to grant, change and remove access
privileges compared to agreed service levels.
Agreed SLA’s in place
Number of critical business processes/services
with outstanding Information/cyber risk
actions. Outstanding audit actions.
¢ Number of Information related audit actions
outstanding. Outstanding audit actions.
« Number of projects and change not following
the governance/gating process. Information
Security Risk Acceptance Notes.
¢ Number of outstanding non-compliance to
Information Security training requirements.
Training records.
© Security operations reporting requirements
outside SLA.
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Category of Risk I Risk Appetite Statement Potential metrics/indicators Proposed
Owner
Neil
Stakeholder Post Office is committed to engaging and involiving its key stakeholders f Jaints ft ind ° Hayward
Maj in support of its strategic objectives. Post Office has: * No. of comp) faints rom consumer/in lustry 4 I@ Mark Davies
ajor groups-e.g. Which, Post Office Advisory Council
stakeholders « Tolerant risk appetite to lose the engagement of any key
including: stakeholder in the process and for staying the course in face of © No. of incidents of significantly disruptive
opposition if in the wider interests of the business and its industrial acti
External commercial priorities industrial action
stakeholders, . - -
government, . © No. of negative media coverage instances
the minister, re
consumer © Frequency of criticism about POL from
futures, royal
mail
© Colleagues
© Agents &
retailers CWU
& CMANFSP
Shareholder Executive /Government
Significantly disruptive industrial action
¢ Employee engagement scores
e NFSP campaigning/lobbying against the POL
strategy
Corporate
Affairs
The relationship
of the company
toits
Shareholder
(BIS/
Government)
and to the
Post Office’s relationship with its shareholder is a key factor in
determining strategy and delivering success. Post Office has:
Tolerant risk appetite in taking forward its strategy in the corporate
affairs environment- as it is recognised that there will inevitably be
opposition and adverse comment — but if POL presents a clear, cogent,
confident case it can create the right environment for change
¢ Feedback from SHEX
© Other political indicators TBC
Mark Davies
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Category of Risk I Risk Appetite Statement Potential metrics/indicators Proposed
Owner
media, political
and
environmental
factors that
influence the
shareholders
direction to the
company
Appetite isk see! isk tolerant neutral/balanced isk averse
Approach
Risk taking vs. Post Office actively encourages Post Office is willing to take Post Office takes a balanced Post Office actively discourages
reward risk taking greater than normal risks approach to risk taking risk taking
Objective/negative I Willing to accept a significant Willing to accept some negative Potential negative impact and I Not willing to accept any
impact negative impact in order to impact in order to pursue objective given equal negative impact
relationship pursue objective objective considerations
Impact on residual
risk
Post Office will accept high
levels of residual risk in pursuit
of its objectives
Post Office will accept some
residual risk
Residual risk will be balanced
against potential business
benefits
Post Office will mitigate/treat
risks in order to minimise
residual risk
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POST OFFICE LTD BOARD
Winning in Mails Update
1. Purpose
The purpose of this paper is to:
1.1. Update the Board on the latest developments regarding Post Office Ltd (POL)
plans for Winning in Mails.
2. Background
2.1. At the June 2014 Board we presented a strategy outlining how POL would respond
to the growing competitive challenges and threats in the Mails market. At its core
this strategy centred on retaining Mails market share and improving margin to
create a commercially sustainable Mails business.
2.2. This was principally to be achieved by improving convenience through rapid
network expansion, particularly in urban areas, and radical product simplification
which would reduce costs in the existing network and make the creation of low
cost Mails access points commercially attractive.
3. Current market conditions
3.1. There has been a slowing of growth in competitor networks. Our activity in the
market (particularly our discussions with multiple retailers about network
expansion) has given us more time than we originally anticipated. Our main
competitor failed to meet its self-imposed target for expansion in 2014 and
potential retail partners are telling us that they are considering all providers before
deciding to enter into medium term contracts.
3.2. It has become very clear following engagement with most of the target multiple
retailers that our Mails access point proposition is most attractive to them, and
their customers, when combined with bill payment capability. This has
demonstrated that we must at least match the proposition provided by Paypoint
(Collect+) to be competitive. We know that MyHermes are paying retailers a fee
per parcel of at least twice Collect+ as a result of their lack of a bill pay proposition.
3.3. We still believe that convenience, particularly in urban population centres, is the
key battleground in the Mails market. POL will achieve this convenience through a
combination of network expansion (competing directly for the best multiple and
independent retailers), existing Network and Crown Transformation, new and
improved digital customer journeys and simplified products across its entire
network. POL’s current shortcomings in these key areas mean that we are still
losing volume share although the rate of loss has slowed considerably from
financial year 2013/14.
4. Development since September 2014
4.1. Since the last ‘Winning in Mails’ Board update in September 2014 work has been
progressing to simplify products and customer journeys as well as developing in
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branch technology to give POL the ability to develop new branch operating models
which provide the foundation for network expansion and help reduce costs in
existing branches.
4.2. A proposition has been defined which will provide the foundation for network
expansion through the development of low cost access points. This will form the
basis for reducing costs in the existing network through the deployment of
simplification and improved customer journeys. The proposition includes the
products which will be available in low cost access points and for Mails products
the digital channels through which they will be sold. This proposition is informed by
a substantial piece of customer research and has been agreed with Royal Mail
Group (RMG).
4.3. The capability will be launched in three phases. Phase one is mails only
acceptance where the products are purchased online in advance and dropped off
in store. Phase two will also see the inclusion of bill payment. Phase three is
planned to include mails purchased in store, cash withdrawals and foreign
currency. This capability, together with product simplification, provides us with the
opportunity to launch trials and support contracts with multiple retailers and reduce
cost in the current network.
4.4. The technical solution has been defined. The supplier (Ingenico) is engaged and
working on detailed designs for release of phase one (Mails products only) in
April/May 2015 and phase two (Mails products and bill pay) in November 2015.
The technical solution will be a new Paystation device which has the capacity to
deliver Electronic Point of Sale (EPOS) integration with multiple retailers systems.
This was assessed against, and selected ahead of, the tablet solution indicated in
the September 2014 update. The selection of Paystation was made based upon
the relatively low cost of the device compared to a tablet, combined with the
relative ease with which EPOS integration can be achieved and feedback from
potential retail partners on its simple usability.
4.5. Operational requirements have been agreed with RMG which include agreement
in principle to remove the need for weighing, sizing and segregating of parcels in
new access points. A joint online strategy has also been agreed with RMG
(although details of data ownership are still outstanding). These are both
significant steps forward as they allow POL to compete on operator and product
simplicity with its main competitors.
4.6. The solution has been designed with a view to the potential benefit of its use in the
existing POL network. Once this is achieved, the potential savings as a result of
shorter transaction times are substantial. A dedicated programme is now being
established in line with business transformation delivery to expand this
simplification work to include all product pillars, alongside product rationalisation,
refinement and new developments.
5. Current situation
5.1.We have achieved the roll out of 150 home shopping returns access points
(Project Ivy) which has provided us with some valuable learning points particularly
regarding training and branch support. However, it is clear that these access
points are not a commercially sustainable model as volumes are very low due to
the restricted product range and low customer awareness.
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5.2. It now appears inadvisable to expand the network to 12k outlets by April 2015 (as
per the conditional agreement with the Shareholder Executive) as we do not
recommend the roll out of any further access points which offer only the home
shopping returns product as they are commercially unsustainable.
5.3. The September 2014 update indicated that we expected agreement with the NFSP
to be reached by the end of 2014; this has not materialised and negotiations on
network expansion continue. It is believed that the NFSP are keen to reach an
agreement but at a cost to POL. An options paper is currently being considered by
ExCo along with a request for a negotiating mandate. The urgency of reaching this
agreement has lessened as the growth of competitor networks has slowed.
5.4. The gap between RMG and POL on the commercial terms combined with mixed
messages from RMG on their support for network expansion makes it unlikely that
we can deliver the original plans in a commercially appropriate way. Nonetheless,
RMG and POL agree that a sustainable future requires a combination of simplified
products, improved multi-channel customer journeys, a better retail experience
and more urban access. There is therefore reason to believe that a win-win
strategy can be negotiated. However, any such negotiations will be complex and
could escalate to cover the existence and terms of the Mails Distribution
Agreement (MDA). We do not have a sufficient understanding of RMG's strategy
or of the implications for our business and network to engage in such discussions.
5.5. We have therefore decided to slow down the broader discussions with RMG on a
variety of fronts while we build a negotiating strategy. This will require complex
modelling and as such we will build models that can be used in multiple 'game
theory’ iteration. This will be supported by appropriate third parties, including
people with more direct knowledge of RMG and other competitors. Draft Terms of
Reference for this exercise are attached at Annex 1.
6. Next steps
6.1. POL will reconsider its approach with RMG in light of the work described in Annex
4. An update on this work will be provided to the Board in March with final outputs
to be presented to the Board in June. This will allow POL to maintain momentum
with network transformation, product simplification and developing the access
point proposition while re-appraising its approach to the commercial agreement
with RMG.
6.2. POL will continue to develop low cost access points capitalising on product
simplification. The outputs of this work will be used to; agree contracts for new
access points with key multiple and independent retailers, trial an urban area
flooding exercise to assess the impact on POL and its competitors. We will also
pursue opportunities to deploy simplified products and customer journeys through
the existing network.
6.3. Negotiations will also continue with the NFSP with a view to getting agreement to
access point roll out by the end of March 2015. This will allow the team to
conclude memoranda of understanding and contracts with the first multiple and
independent partners.
6.4. We will not roll out any additional Ivy outlets and will recommence roll out of
access points once the full Mails proposition is ready in May 2015.
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7. Recommendations
7.1. The Board is asked to note progress in developing a low cost proposition and the
current situation with RMG and the NFSP.
7.2. The Board is asked to agree not to roll out any further Ivy trial outlets prior to the
launch of the full access point proposition in May 2015.
7.3. The Board is asked to agree the Terms of Reference contained in Annex 1.
Martin George
January 2015
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POST OFFICE LTD BOARD
Annex 1 — Terms of Reference for reviewing strategic options for the Post Office in
the Mails market and its relationship with Royal Mail
1. Background
There is currently a misalignment between RMG and POL’s commercial strategy in the
parcels market: RMG believe POL should increase convenience for customers primarily
through increased opening hours and improvements to the customer experience. POL’s
recent approach to improving commercial performance has been focused on network
extension and product simplification, as well as continuing with the Network Transformation
programme.
POL and RMG see “Online Mails” as an increasingly important channel to the individual and
SME market: one which potentially reduces RMG dependence on POL as well as associated
POL income as it moves from a ‘sale and accept’ payment to a significantly lower
acceptance fee. There is a risk that, if we cannot reach an agreed joint approach with RMG,
they will pursue an active campaign to push volume and income away from POL branches.
It is also noted that, more generally, RMG’s approach to POL is increasingly characterised
by a focus on cost reduction e.g. calculation of annual count, format changes for
International Mail from labels to stamps, mailwork renegotiation.
In light of the potential implications of these issues, it is timely to step back and assess the
options available to POL that best position us to achieve our objective of commercial
sustainability in the Mails market.
2. Key questions
Given the material financial risk to POL’s future business strategy, the Exco would like to
understand -
¢ What is our ‘unconstrained’ view of the market that POL could pursue?
To include:
o Avview of how the market will evolve (including competition)?
o Which market sectors should POL compete in (where do we have a right to
play)?
© Which elements of the value chain?
« What is RMG’s overarching strategy?
o What are RMG's priorities in terms of channels and market segments?
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What role do RMG see POL playing in their future?
What is their next best alternative to POL as a channel?
Where are our interests converging, opposing or neutral?
What value do RMG add to POL (and vice versa)?
How could we act as ‘one mails organisation’ and create “Win-Win” (e.g.
around product/journey simplification)? What would it take to do this? What
is the size of the benefit?
e Is the MDAa barrier to growth?
°
°
What more can we do within the existing MDA to create more value for POL?
What does our desired end state look like and what are the risks and
opportunities?
What would a rebalancing of the MDA mean in terms of P&L impact,
payments to postmasters? What do we each want? What do we offer?
How long would each option take to implement and what are the
dependencies?
Should we start again with a new MDA?
« What are the alternatives POL should consider if we fail to reach strategic
alignment with RMG? What are the financial and structural implications of
these alternatives?
To include:
°
°
°
°
3. Approach
‘As is’
Expansion without RMG support (‘expansion light’)
Renegotiate MDA
End exclusivity with RMG
The Commercial and Finance teams will use “Game Theory” to better understand RMG’s
strategy and develop “What if scenarios” to shape our thinking, negotiating tactics and model
impacts and outcomes. The deliverable will be a negotiating remit and ‘decision-tree’ of
possible outcomes and our potential response.
A thorough process of evidence collection and preparation will be undertaken with an
independent third party to help provide the best outcomes.
Key inputs will include a) market analysis — e.g. segmentation, growth, market size and
competitor analysis b) value chain analysis — where is value generated and shared across
RMG/POL/Agents.
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A review of existing initiatives, such as sharing of POL data from Horizon, will be undertaken
to avoid weakening our negotiating position.
4. Outputs
e Overview of strategic options available to POL and financial models, with
recommended way forward.
e Recommended strategic approach towards RUG
5. Interdependencies
e Impact of alternatives on the network
* Impact of alternatives on other product pillars
e Implications for Government
These interdependencies will be considered and addressed as part of the wider strategy and
planning work being led by Martin Edwards.
6. Timescales
Board to be updated in March.
Completion in advance of Board Strategy Away Day in June.
7. Sponsorship
Commercial Director — Martin George
Chief Financial Officer — Alisdair Cameron
8. Project Lead
Mark Siviter — Head of Mails
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POST OFFICE LTD BOARD
Network Transformation, Model Performance and Crown Transformation Q3 2014
1. Purpose
1.1. The purpose of this paper is to update the POL Board on Network Transformation,
performance of the new models and progress on Crown Transformation.
2. Network Transformation — converting mains and locals
2.1. At the end of Q3 the programme remains ahead of target for contracts signed and
branch openings for both mains and locals. At the 28" December there were 4,622
contracts signed (1,947 local, 2,675 main) and 3,579 branches open (1,440 local,
2,139 main).
2.2. Throughout Q3 branch opening rates have been consistently strong: despite the slow-
down in activity leading up to Christmas, an average weekly beat rate of 37 has been
achieved. Strong performance is set to continue in Q4. The end of year target of
3,708 (1,650 during the financial year) should be achieved in late January, with the
forecast at year-end now at 4,000 branch openings. The programme also remains on
track to beat the overall end of year target of 4,800 contracts signed: the year-end
forecast is now at 4,950 contracts signed.
2.3. Engagement with transitional local branches (those modelled as locals with poor retail
and facing compulsory exit) has continued throughout Q3, with 350 branches now in
the process. This is more than half the affected branches, with the remainder due to
enter the process in Q4. To date, the majority of postmasters have accepted that
staying as they are with limited or no retail will not be possible in the future as income
levels reduce and competition intensifies. As such, the majority have either chosen to
leave the business on a voluntary basis (40%) or develop a plan to improve their retail
business and convert (30%). A further 23% of branches have expressed an interest in
selling their branch or are in the process of appealing against their model
classification. For the remaining 7%, where the postmaster has not agreed to leave,
convert or sell, Post Office is proceeding to advertise the branch against the wishes of
the postmaster and seek a suitable alternative operator. The engagement approach
with branches — coupled with proactive engagement with MPs and other opinion
formers — appears to be working as the negative PR associated with transitional
locals so far has been limited, considering the number of branches involved.
2.4. To date there have been 236 applications to the Community Branch Fund (156 of
which have been approved and 38 completed), with many postmasters seizing the
opportunity to increase overall sustainability through improvements to retail and
added convenience for customers. 81 completed applications have now been
received for open plan improvements with 6 of these already implemented and
delivering additional opening hours for customers. 60 applications have also been
received for enhancements to the host retail offer with 42 of these already underway.
Other improvements made include new signage, increased storage space to
accommodate Click & Collect services, and improvements to accessibility in branch.
3. Introducing additional compulsion for the last groups of branches not yet engaged
with Network Transformation (the ‘cliff’)
3.1. The principle of the cliff, as agreed in 2013, was to add further aspects of compulsion
to Network Transformation in order to maintain the momentum of the programme
through to the end. Excellent progress has been made with NT: the forecast of 4,950
contracts at the end of this financial year compares with a predicted range in 2013 of
3,750 to 4,400 at this point. Indeed, 4,950 is fewer than 300 contracts behind the fully
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compulsory approach that was not pursued in 2013. It is therefore sensible to
accelerate the cliff if possible.
3.2. More than half of the remaining contracts needed to complete the transformation from
next year will not require additional compulsion: they are replacements for leavers
that will already be in process (either from volunteers or the transitional locals process
above). However, the cliff remains an important tool to complete the transformation.
There will likely be around 1,500 branches in scope for additional compulsion who
have not engaged with Network Transformation:
¢ 750 modelled as locals who have retail (600 indeps and 150 multiples)
e 450 modelled as mains who have retail (300 indeps and 150 multiples)
e 300 modelled as mains without a significant retail offer
3.3. The proposal is simple and straightforward:
e Notice will be served on these branches that they will be moved onto fully
variable main or local pay six months later (the optimum operational time
between announcement and action to allow branches to convert voluntarily).
e As per the approach and lessons learnt from transitional locals, we will take a
localised approach to engaging with agents and stakeholders. All 1,200
independent agents will be visited by the field teams soon after announcement to
discuss their individual circumstances and agree a timetable for each branch,
minimising the scope for misunderstandings and negative coverage.
Stakeholders will be engaged in the same time frame.
e Any branch who has not signed a contract or committed to leave by the deadline
will receive 18 months’ worth of their loss in pay (if any) in compensation at the
contractual change date (e.g. 1.5 times the loss of core tier payment for locals).
3.4. Branches have six months to engage again on realising the benefits of the investment
and compensation available to them through NT. We expect some to opt to leave for
26 months’ compensation, but most operators with retail will want to keep the footfall
and so should opt to convert. For branches modelled as mains without retail, we
expect most to leave.
3.5.In terms of timing, Post Office’s preferred approach is to serve notice on
subpostmasters as soon as practical after the election i.e. in June 2015. Delaying to
September 2015 — as per the intention of the 2013 agreement with NFSP and BIS —
or beyond has significant cost, at just under £2m in P&L impact per quarter's delay.
We have started to discuss this approach with BIS; subject to Board approval, it is our
intention to seek endorsement of the plans from the shareholder by the end of this
financial year.
3.6. It will be difficult and time consuming to try to secure agreement from the NFSP to
this proposal. Agreement is intrinsically tied up with the broader negotiations on the
NFSP’s future and network expansion. Slower or no agreement will increase the risk
that the current minister comes under pressure to prevent Post Office proceeding with
additional compulsion — or that a new minister post-election does so.
3.7. As well as the challenges of securing stakeholder buy-in, the other significant risk
stems from good retailers (independents and multiples) choosing to leave rather than
convert when they have to choose. This adds cost and generates a significant
replacement challenge. We will work closely with these retailers over the six months
after announcement to find a way to make the models work for them and provide the
benefits of Post Office footfall to their retail businesses.
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4. Network Transformation — performance of the new models
4.1. Since the last performance update in October, model performance has continued to
improve, especially in local branches where the converted branches are now
consistently outperforming the control group (+2% in December, up from 0% in
September and -8% in January 2014). Mains continue to outperform their control
group (+7% in December, +6% in September, +4% in January 2014). Customer
session growth also remains strong, as both models offer increased hours and
convenience.
4.2. We are beginning to reach the peak of improvement that can be generated by an
improved customer environment and hours alone, and so have begun the next phase
of performance improvement, focussing on individual branch performance. We have
developed an individual branch scorecard that we have sent out to a trial group of 50
branches. This balanced scorecard focuses on customer, remuneration and
performance metrics to help identify areas for each branch to improve. It also points
them to relevant training and promotion material online, giving them the tools to
improve in a cost effective way.
4.3. By focussing on individual branch performance in this way, we anticipate getting a
greater lift on overall performance through a low cost and repeatable mechanism. We
are currently taking feedback from the trial branches on areas to improve and refine
the scorecard before rolling it out more widely. The encouraging results so far have
been the ease of attracting volunteers for the trial (nearly 70 volunteers replied in one
weekend to an advert placed on Subspace online, with many claiming that such a
mechanism would be very beneficial to them) and the willingness for postmasters to
interact indirectly (through email and Subspace), rather than the traditional and
relatively expensive methods of direct visits.
5. Crown Transformation- Programme delivery progress
5.
.CTP plan to deliver a total of 302 physical branch transformations. Of this, 287
projects had completed prior to the start of the 2014 Christmas trading peak, in line
with plan. The remaining projects are running during Q4.
5.2. Also prior to the Christmas trading peak, over 3200 staff had been trained under the
two-day CTP training programme. This formally completes delivery of the CTP
training project and this has now transitioned into business-as-usual ownership.
5.3. Income performance in those branches that have completed transformation has
consistently outperformed that of non-transformed branches. On average, income in
transformed Crowns has been increasing 4.0% year-on-year (YoY), versus 0.5% YoY
growth in non-transformed branches. A particular highlight is the 16% YoY growth in
Financial Services income in the transformed branches, a growth rate that is over 1.8
times that of non-transformed branches.
5.4. Despite some positives on income growth, the breakeven plan has needed to evolve
over the life of the programme to shift increasingly from income growth towards cost
reduction. As a reminder, our starting point at the time of the October 2010 Funding
Agreement was a position of a c£50m annual loss in the Crown network, which we
had reduced to c£40m by March 2012. The breakeven plan has had to iterate since
then, and the changes since March 2012, when CTP was formally established, are
shown in the table below:
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“Plan B” signed off by
Benefits Plan as at March 2012 January 2013 POL Board
(£m) (Em)
Income growth 18 8
Staff costs 12 20
Property costs 4 4
Franchising 6 8
TOTAL (£m) 40 40
5.5. Over the three years of the programme, the total staffing of the Crown network will
have reduced from c3900FTE to c2600FTE, a reduction of 1/3, through a combination
of efficiencies enabled in retained Crowns and staff exiting franchised Crowns.
5.6. CTP has delivered a reduction in the retained Crowns’ staff cost base of £20m across
the three years of the programme. Against the target of ending 503 full time
equivalent (FTE) counter staff roles from retained Crowns across FY13/14 and
FY14/15, 500 roles have so far been removed, and the balance will be removed
during Q4. There has also been a reduction of 66FTE branch manager positions from
branch templates, in line with plan. Staff have exited the business under voluntary
redundancy (VR).
5.7. A large proportion of the staff saving benefit was enabled through the rollout of over
500 of the new generation self-service kiosks. The rollout is substantively complete
and support of the devices has moved into business-as-usual IT. Branches with the
kiosks are, on average, conducting 60% of their mails and retail sales through the
devices, as opposed to requiring customer interaction with a counter clerk. During the
peak Christmas trading period, over 2.5 million items per week were sold through the
devices.
5.8. New duty sets have gone live in branches, synchronised with both the transformation
of the branch and the exit of colleagues under VR. Customer satisfaction has been
closely monitored through Voice of the Customer feedback whilst the new duties
embed, with “rapid response” teams in place to resolve any teething issues. The
overall satisfaction score in the transformed branches was 82% during Q3, a level
marginally higher than before staff exits from the same branches began in April 2014.
The “acceptability of wait time” score in the same branches was 85%, which is the
same score as in April 2014 despite the staff exits in the intervening period.
5.9.Work to progress the remaining mergers and relocations within CTP’s scope is
progressing well. November 2014 saw branch relocations go live in central
Manchester and Edinburgh, as well as the closure of High Street Sutton branch, with
its services transferred into Sutton’s Grove Road branch. A relocation of the Crown
branch in central Glasgow is also planned by CTP for delivery during Q1 of FY15/16.
An eviction notice received for our King’s Walk (Chelsea) branch has resulted in a
planned force majeure closure in February 2015, on which a public consultation has
now completed.
5.10. In terms of franchising, of the 70 branches originally planned to be franchised:
e 31 branches have so far gone live as franchises.
e A further 13 branches are planned to go-live during Q4.
e Between 7 and 12 further branches are expected to have contracts signed by the
end of Q4, for go-lives in the first half of FY 15/16.
e 12 branches have so far been informed that they will be retained as Crowns.
Whilst applications were received for running these branches, none were able to
meet all three of the success criteria required for an appointment to be made
(suitable premises, credible business plan and successful interview).
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e In any other cases where a suitable franchise partner cannot be found before the
end of the programme, the most likely contingency will be to retain the branch on
a minimised staff and property cost base. This could be up to 7 further branches
retained.
A number of mitigations have been put in place to reduce the Crown P&L impact of
this gap, meaning that despite the fact that not all branches will be franchised, over
90% of the planned Crown P&L benefits associated with franchising will be realised
(c£7.3m of £8.0m).
6. Crown Transformation- Forecast Crown P&L position
6.1. Despite the programme's delivery successes and the outperformance of transformed
Crowns versus non-transformed, the rate of income growth budgeted this financial
year has not been achieved. Full year Crowns income is forecast to be £7m below in-
year budget. (A £7m outturn below budget would broadly align to a whole -business
outturn of £880m.) The primary drag is underperformance on mails, where income
has declined 2% YoY in transformed Crowns and 3% YoY in non-transformed
Crowns; against a budgeted 9% YoY growth.
6.2. The in-year shortfall on income will also impact the breakeven run-rate calculation.
This combined with the shortfall against franchising benefits, and the impact of
allocated costs of the central business not reducing to plan, would result, if
unmitigated- with the retained Crowns being at a run rate of an £8m loss at the end
of this financial year.
7. Crown Transformation- Programme response to forecast P&L position
7.1. A number of mitigations against the emerging income gap were mobilised during Q3,
some of which included new areas of programme scope. These are currently
expected to deliver £5-6m of additional run-rate benefit by March 2015 (down from
£6-£7m forecast in October):
e Changes have been made to the distribution of Financial Services (FS)
specialists’ costs between the Crown network and FS management teams. This
has reduced resource costs on the Crown P&L by £2.2m.
¢ Property maintenance budgets have been reduced and further reallocations of
property costs have been made for any space in Crown branches that is in use
by other parts of the business. This has delivered £0.9m of benefits.
¢ Further counter staff savings are being generated through the “Leaving the
Business with Dignity” programme.120FTE are planned to leave the business
and be replaced by new hires during February and March. The differential in cost
between leavers and new joiners will generate £0.6m of benefits.
e The force majeure closures completed at Albermarle Street (Mayfair) and
planned for Kings Walk (Chelsea) will generate £0.4m of benefits.
« Losses in those Crown branches which are not open to the public are being
significantly reduced. New contracts have being agreed with Royal Mail which will
eliminate POL’s losses for the two branches in The Royal Household. A bespoke
contract has also been agreed for the Post Office service in the Scottish
Parliament, which has eliminated that branch’s losses. With regards to the three
branches in The Palace of Westminster, a number of different options are in
negotiation with the Palace of Westminster authorities. These options have ShEx
and ministerial backing, and are designed to result in a break-even position. This
effect of all these changes results in £0.5m of Crown P&L benefits.
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« Four branches are being transformed into Post Office Concept stores, sponsored
by the Commercial directorate. This will mean £0.3m of costs off-charged from
the Crown P&L.
e New product launches during this financial year provide only a part-year income
effect in-year. The full-year effect of this income was previously expected to allow
POL to justify an additional £2m income flow-through in the run rate calculation.
Although the budgeting process for 15/16 is still in progress, it is clear that
business-wide income will be budgeted to grow less from 14/15 to 15/16 than
originally planned. In such an environment, it is not possible for POL to claim
such a significant upward trend in Crowns income in the run-rate calculation.
Income flowthrough is now expected to be a maximum of £1m, driven by UKVI
and Mortgage product growth which disproportionately advantages Crowns over
other channels.
e Further potential mitigations were assessed but discounted due to them either
being unachievable within the programme’s timeframes; or them requiring POL to
break public commitments about programme scope.
7.2. In the event that income targets for this financial year had been met, these additional
actions would mean the P&L of the retained Crowns would be at a runrate of a £4-
£5m profit by the end of this financial year. However, the current forecast is for this
run rate to be at a £2-£3m loss.
7.3. However, it should also be remembered that CTP’s franchising project delivers an
additional bottom-line benefit to POL that is not visible on the Crown P&L: the like-
for-like change in profitability of Post Office services at the 373 Crown locations that
existed at the start of the programme produces £2.5-£3m of additional profit from
franchised branches. We forecast that by the end of this financial year CTP will have
sufficiently improved the run-rate profitability of branches in these 373 locations to
eliminate all the Crown losses that existed at the start of the programme.
7.4. The retained Crown estate has grown income (+4%) whilst operating on a staff and
property cost base that has reduced by ~25%. We are developing a plan to optimise
the profitability of these branches. This will be through the delivery of additional new
initiatives to reduce costs by at least a further £2-£3m during FY15/16, whilst
achieving 15/16 income targets. Over £1m of the new savings required will come from
efficiency projects already identified and in train, with the balance primarily coming
from new changes to the network shape and staffing. The formal closure of CTP in
March 2015 means that the commitments made to staff and stakeholders at the start
of the programme regarding CTP’s scope come to an end. The expiry of these
commitments offers further flexibility in areas including staff redundancy, branch
mergers, closures, relocations and franchising.
7.5. The scope of changes to the Crown network shape under CTP was set out during
FY12/13. As we move towards FY15/16, the changed income position and the
availability of lease breaks or expiries beyond April 2015 mean that further changes to
the network shape to eliminate losses should be made in FY15/16 onwards. Although
no wholesale franchising programme is planned on the scale of CTP, it is likely that a
small number carefully selected mergers, relocations, franchises and closures will
assist in delivering this cost saving.
7.6. Furthermore, we are assessing the market for new technology to automate POCA
and business banking transactions, with a view to these being used in projects to
further increase branch profitability in 15/16 and beyond. This will build on our CTP
experiences with very quick customer adoption of new technology such as SSKs, and
our proven ability to reduce our staff cost base through technology enablers.
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7.7. These concepts form part of the development of the long term Crown strategy for
2015-2020 and a more comprehensive update on this will be shared with the March
Board. This will require a programme of investment (albeit smaller than CTP) to
generate further savings, and this investment will be sought as part of Business
Transformation.
Kevin Gilliland
January 2015
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POST OFFICE LIMITED BOARD
Status Report
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No. I REFERENCE ACTION BY WHOM STATUS
ta I May 2014 Draft necessary amendments to the Remuneration and I Company Secretary I To be circulated for approval.
POLB 14/65(f) Nominations Committees’ Terms of Reference to
enable it to make recommendations to the Post Office
Board on appointments to the POMs Board.
1b I May 2014 Deliver a separate and accurate P&L account and I CFO The new Finance system design
POLB 14/69(e) balance sheet for the Supply Chain Business. provides the functionality to provide
robust channel P&L’s, including one for
the Supply Chain business. We are
currently working on the Channel P&L’s
as part of the implementation,
prioritising the Crown P&L and Product
P&Ls before starting work on the
Supply Chain P&L. A balance sheet
could be constructed at this stage.
1c I September 2014 POLB I Provide clarification on the impact of the Common I Martin George To be included in the digital paper
14/114(a) Digital Platform on the Horizon system and any being prepared for the March Board
possible cost savings.
1d I November 2014 POLB Revert back to the Board in the New Year to discuss I Neil Hayward/Kevin Paper at January Board
14/144(a) the proposal being discussed with the NFSP to bring I Gilliland
the ‘cliff’ forward in Network Transformation.
te I November 2014 POLB Provide a paper on the telephony strategy in the New I Martin George March Board
14/144(c) Year.
mm D 2] Financial Services ma la il ly
2a I September 2014 Present the results of the six month trial where Post I Nick Kennett May Board
14/105(f) Office FS colleagues used Mains branches as their
base.
2b I September 2014 Analyse on present to the Board on whether the I Nick Kennett To be included in the FS forward
14/105(i) Business should focus more on the innovation of the agenda.
Status Report at 20 January 2015
Alwen Lyons
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pre-paid debit account rather than the current account
as on the effective hook for customers.
2c I November 2014 POLB Circulate the final Grant Thornton report to the Board I Chris Aujard/POMS Final paper included in the Board
14/148(k) before the ‘go’/’no go’ decision was taken. Subject to I Board Reading Room.
the Grant Thornton report giving assurance that all four
critical components of the review were complete
(green), the POMs Board to make the final ‘go live’
decision.
hhh ee "Business Transformation _ }»}»§»§}§}§ = = 2 2 CCC
3a I November 2014 POLB Provide an update of what has changed in the Business I David Ryan January Board
14/145(c) Transformation plan since the September Board
presentation.
3b I November 2014 POLB Provide a note explaining the changes to tax treatment I Kevin Gilliland January Board — as attached to the
14/145(e) for sub-postmasters. Status Report
3c I November 2014 POLB The detail of the IT strategy to be considered at the I Lesley Sewell January Board
14/145(g) January Board
3d_I November 2014 POLB Provide an extrapolation (by year to 2020) of the I David Ryan The benefits from the BTr programme
14/145(g) indicative cost profile of the business by function will be baked into the POL 3 year
(before the uplift in costs to support business growth) operating plan. The analysis of the
with a commentary on the key differences. The analysis future cost base will be provided as part
should include changes in relative costs, for example IT of 3 year plan update to the Board
in relation to people; and outsourced costs in relation to
direct costs.
3e I November 2014 POLB Discuss the progress on Digital at the March Meeting. Martin George March Board
14/145(h)
3f I November 2014 POLB Consider the balance sheet position in more detail with I CFO March Board
14/145(i) the Operating Plan and Budget in March.
3g I November 2014 POLB Provide an additional flight path between the ‘full’ and I CFO Action being taken forward as part of
14/145()
‘partial’ delivery projections after Christmas trading
figures had been obtained.
the 3 year operating plan. Initial view to
be provided in January followed by
further draft in March.
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3h_ I November 2014 POLB Provide a note setting out the precise basis for the I Chris Aujard Provided with the B48s — 28 November
14/145(k) promised funding through to 2018. 2014
3i I November 2014 POLB The Business to provide information on the clear I David Ryan See January Board update on
14/145(\) ownership and accountability of roles and a view of the Transformation
additional resource required.
3) November 2014 POLB Discuss the vision and change narrative at the January I Neil Hayward/Mark Update is provided in the CEO report.
14/145(m) Board. Davies To come forward in March.
3k I November 2014 POLB The final PwC report to be circulated to the Board for I Chris Aujard As available
14/145(n) their information.
31 I November 2014 POLB The Business to revert back to the Board in January, I David Ryan See January Board update on
14/145(0) addressing the points raised. Transformation
3m_ I November 2014 POLB Update the Board in December and include information I CEO December
14/145(p) on the 6 BTr themes in her report.
Ce I4. People and Engagement CLL
4a I October 2014 POLB Provide an update at the end of the financial year to I Neil Hayward May Board
14/130(e) review the People and Engagement roadmap for the
next 12 -18 months and the senior leadership training
and development.
4b I October 2014 POLB Provide a note on the relationship between Post Office I General Counsel Work is underway and a note will be
14/130(g) and subpostmasters. circulated to the Board when it
becomes available.
CC Riek LLL Ce Ce :
Sa I July 2014 POLB The ARC to review the Risk Management framework. General Counsel Draft went to October ARC. Final
14/90(h) version to be discussed at the January
ARC and Board.
5b I November 2014 POLB The ARC to discuss the PWC Post Office Limited Risk I ARC January ARC
14/155(b)
Management Capability Report Executive Summary at
the January ARC.
Status Report at 20 January 2015
Alwen Lyons
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6. Financial
6a_ I November 2014 POLB Provide a note explaining the financial effect of the I CFO The POCA contract has not yet been
14/146(c) POca payment once the contract was agreed. agreed. The estimated financial impact
is included in the Q3 forecast material.
6b I November 2014 POLB Have a separate session on working capital at the May I CFO May Board
14/146(g) Board
7. Miscellaneous
7a I October 2014 POLB Provide forward agendas for Board and Sub-Committee I Company Secretary Draft forward agendas for ARC, Board
14/129(d) meetings. and Pensions are attached. The
agreed forward agenda for the
RemCon is also attached. The FS
Committee forward agenda is to follow.
7b I October 2014 POLB Telephony contract to go to the Risk and Compliance I Chris Day/Alasdair To January ARC
14/131(h) Committee and then the ARC for a deep dive in the I Marnoch
New Year.
7c I October 2014 POLB Return to the Board to discuss ETDBW. Martin George Update 20/11: We are returning to
14/131(m) ExCo before Christmas to discuss how
we measure customer feedback and
then act on the insights. We will brief
the Board early in the New Year.
7d I October 2014 POLB Undertake an internal Board effectiveness review in the I Chairman March 2015 Board
14/135(a) New Year.
7e I November 2014 POLB Provide an update as to where cases were in the I Belinda Crowe Ongoing Board updates and Sparrow
14/144(a)
Sparrow mediation scheme.
Sub-Committee
Status Report at 20 January 2015
Alwen Lyons
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POST OFFICE LTD BOARD
Project Ultra: Voluntary contract change for traditional contract holders.
1. Purpose
The purpose of this paper is to:
1.1 Update the Board on recent taxation changes to Postmaster fees and the
potential benefits to Postmasters and the Post Office
1.2 Outline the details of a pilot which we are proposing to use to test how these
benefits might be secured at pace, along with analysis of the associated risks
2. Background
21 Postmasters on NT contracts and nationally managed multiples charge Post
Office VAT on their fees. Postmasters on traditional contracts pay income tax
and National Insurance Contributions (NIC) on their fees.
2.2 As a consequence of separation from RM, Post Office has had to negotiate its
own VAT recovery method with HMRC, as a result of which it can now recover
100% of VAT on agents’ fees (compared to ~30% under RM’s pre-separation
method) which is financially beneficial for Post Office.
2.3 Because it is not possible for us to recover any employers’ NIC, there is now a
financial benefit if agents charge VAT rather than Post Office being required to
pay employers’ NIC.
2.4 Postmasters benefit from a VAT contract in terms of cash flow, and as a
company Director, they also benefit from reducing their personal NIC deductions.
25 It makes sense to offer contract change now, as the mutual benefit is that
Postmasters can avoid employees NIC being taken from their fees, and help
Post Office to avoid employers NIC, by agreeing to contract with us as a
Partnership or Company, moving the relationship into VAT.
2.6 The National Federation of Subpostmasters have been consulted and agree that
company and partnership type relationships on a voluntary basis are a good
idea; analysis by Deloitte shows smaller sites will not financially be in any
different position than today (but will be better off than if the concession detailed
at 2.7 is removed), but an agent in an average size branch with remuneration of
£40k will be better off by £3k to £4k pa for almost no outlay; there are also
additional cash flow benefits for Postmasters.
2.7 HMRC are now reviewing a concession they introduced many years ago which
allows agents to treat their Post Office income as part of their retail business
income for income tax purposes. If, as seems likely, HMRC remove this
concession, it will be disadvantageous for Postmasters because they will not be
Project Ultra: Voluntary contract change for traditional contract holders.
Kevin Gilliland Page 10f3 20" January 2015.
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able to deduct their Post Office costs for income tax purposes. We are meeting
HMRC on 6" February to discuss this.
3. Activities/Current Situation
3.1 Although the mutual benefits are clear, this is potentially a large scale change
and very significant gain, so we need to ensure that we have a strong plan to
maximise the opportunity, informed by a small scale pilot; this pilot will tell us
about take-up, and will inform what additional resource / incentives are needed.
3.2 We will to write to 200 randomly selected Postmasters from our prime target
groups to test a range of pilot offers with different approaches to maximising
take-up, including NFSP involvement, wic 2! February. We will make a final
recommendation in time for scale-up from March, including any additional
financial incentives proposed to maximise our opportunity informed by the pilot.
3.3 Although we don’t yet know what level of uptake there will be, we have
calculated the potential for Post Office accelerated savings in the following way):
Number of sites on ‘traditional’ contracts at March’15:~6,000
Number of small sites we believe would only receive a marginal gain from
change so are unlikely to change: ~1,500
Number of sites left that are likely to change: ~4,500
Estimated uptake from a ‘whole estate’ offer is 10% of that: ~450 sites.
Net benefit from these 450 in 15/16 after NT impact: ~£0.67m
The typical accelerated saving at each site will be ~£250 per month for
each month up to NT contract change; the pilots will typically cost us
~£250, with a range of £60 and £500 to effect the different pilot approaches.
3.4 There are three unknowns to consider when estimating the potential accelerated
benefit for 15/16:
e Level of uptake
« Who agrees to change
e When they change
3.5 Note that this is an accelerated benefit because for the sites likely to change
will change contract in NT, and move into a VAT arena when they change - all
NT contracts are in VAT, irrespective of how they contract with us i.e. individual,
partnership or company.
4. Risks/Mitigation
44 Taxation is changeable; the VAT recovery method may need to be changed if
the business activity profile of Post Office changes, ‘though it is very unlikely a
change in VAT recovery will be significant enough to turn this benefit into a cost
for Post Office.
Project Ultra: Voluntary contract change for traditional contract holders.
Kevin Gilliland Page 20f3 20" January 2015.
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5. Recommendations
The Board is asked to:
5.1 Note the recent changes to VAT recovery affecting Postmaster’s fees, and note
that we are about to implement a small scale pilot to inform scale-up so we can
maximise our opportunity.
Kevin Gilliland
20" January 2015
Project Ultra: Voluntary contract change for traditional contract holders.
Kevin Gilliland Page 30f3 20" January 2015.
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POST OFFICE LIMITED BOARD
Future Dates and Proposed Agenda Items
Meeting /
Action
Date Proposed Agenda Items
Board
25 March CEO report
Main items:
Approval of 1 year operating plan and budget
Approval of 2015/16 scorecard
Telephony Strategy
Sparrow — Branch Improvements
Board Effectiveness Review
eoeceee
Updates:
e Financial Performance, including Crown
Transformation year end
e Business Transformation
e Sparrow
Board
21 May CEO report
Main items:
¢ 3 year Business plan - Mails Plan B
¢ Annual Report and Accounts (to be discussed at the
ARC on 20 May)
e Approval of STIP and LTIP payments and
performance conditions (to be discussed at the
RemCom on 13 May)
e People & Engagement road map next 12-18 months
e Network & Channels update including Sales
Capability
¢ Working capital
Updates:
¢ Financial Performance
¢ Win in Mails Update
Financial Services
Board Sub-
Committee
TBC e Final approval of the Annual Report and Accounts
Board
Awayday(s)
17-18 June I 17" Post-Election strategic review ( possible slot for new
Minister)
18" to be decided possibly
Market review &Strategic plan
FS deep-dive including POMS
Digital
Board
15 July CEO report
Main items:
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e IT strategy
¢ Business Transformation
Updates:
¢ Financial Performance
Sparrow
Board
22
September
CEO report
Main items:
e Risk (after discussion at the ARC on 10 September)
e Win in Mails Strategy
Updates:
¢ Financial Performance
¢ Business Transformation
e Sparrow
Board
28 October
CEO report
Main Items:
¢ Network &Sales
e Financial Performance update, including Half Year
results
Updates:
¢ Telephony
« Government
FS/POMS
Board
25
November
CEO report
Main items:
¢ People and Engagement (half year review)
¢ Interim report and accounts (to be discussed at the
ARC on 10 November)
Updates:
¢ Financial Performance
¢ Win in Mails
e Sparrow
eBusiness Transformation
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POST OFFICE LIMITED AUDIT, RISK AND COMPLIANCE COMMITTEE
Future Dates and Proposed Agenda Items
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Meeting /
Action
Date
Proposed Agenda Items
ARC
20 May
Minutes and actions of previous meeting
1A status of agreed actions
Annual Report and Accounts
External Auditors’ report on the Annual Report and
Accounts
Audit Planning Report 2013/14
Whistleblowing policy
Board
27 May
Annual Report and Accounts
Committee update
ARC
21
September
Minutes and actions of previous meeting
IA status of agreed actions
Insurance Review
Risk update
Board
22
September
Risk update
Committee update
ARC
10
November
Minutes and actions of previous meeting
IA status of agreed actions
Financial statements — half year
Auditors’ report — half year
Annual Evaluation
Annual Review of Terms of Reference and IA charter
Review and approval of the External Audit plan
Board
25
November
Interim report and accounts
Committee update
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PENSIONS SUB-COMMITTEE
FORWARD AGENDA
Recurring Items
Occurrence Item
Standing Items Minutes of Previous Meeting and Actions List
Investments
« Review of Investment Position by Aon Hewitt
e Report on Investment Subcommittees (ISC and IWG)
e Investment Report from RMPP Trustee (currently presented by lan
McKnight)
Report from GPP Governance Group
Pensions Forum update
Professional fees update
Future Agenda Items
Any other business
Annually Proposed Subcommittee dates for following year
Committee Effectiveness Review (including review of Terms of Reference)
MEETING AGENDAS
Meeting Date Agenda Items
Board 28 January 2015 Board update 28 January 2015
[41 March 2015 Standing Items, plus:
1. Defined contribution scheme update
2. Committee Effectiveness Review (including Terms of
Reference)
Board 25 March 2015 Board update 25 March 2015
Board 21 May 2015
26 June 2013 Standing Items, plus:
1. Defined contribution scheme update
2. Proposed Subcommittee dates for 2016
Board 15 July 2015 Board update 15 July 2015
Board 22 September 2015
I October 2015 Standing Items
Board 28 October 2015 Board update 28 October 2015
Board 25 November 2015
I 3 December 2015 Standing Items
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POST OFFICE LTD REMUNERATION COMMITTEE
Future Dates and Proposed Agenda Items
Meeting / Date Proposed Agenda Items
Action
Remuneration I 25 February I Executive Remuneration Framework — submission to ShEx
Committee Finalisation of LTIP (2015/18) measures
Finalisation of STIP (2015/16) measures
Draft DRR
Board 25 March Ratification of LTIP and STIP measures 2015/18 and
2015/16
Ratification of submission to ShEx
Submission April Submission to the ShEx for the Executive Director
Remuneration Framework 2015/16
Remuneration I 12 or 13 DRR approval
Committee May (TBC) I Outturn of STIP 2014/15
Outturn of LTIP 2014/15
Board 21 May Board
Ratification of STIP and LTIP outturn 2014/15
Remuneration I 8 July Matters arising from the above
Committee
Remuneration I 3November I Executive Framework
Committee
Future dates and proposed agenda items Keith Murdoch Page 1 of 1
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POST OFFICE LTD BOARD
Change of Registered Office
41s Purpose
The purpose of this paper is to:
1.1 seek approval for the change of registered office for Post Office Limited (the
Company);
1.2 seek written consent for the change of registered office for Post Office
Management Services Limited (POMS); and
1.3 ask the Board to note the change of registered office for Postal Services Holding
Company Limited (PSHC).
2. Proposal
24 On 23 March 2015, it is proposed that the Company will change its registered
office from 148 Old Street London EC1V 9HQ to 20 Finsbury Street, London
EC2Y 9AQ as part of Project Slaid. This change of registered office requires
Board approval.
2.2 POMS and PSHC also need to change their registered offices from 148 Old
Street London EC1V 9HQ to 20 Finsbury Street, London EC2Y 9AQ, consistent
with the changes made by the Company. PSHC will change its registered office
by a written resolution of its Board of directors.
2.3. Within article 4 of POMS’ Articles there are specified powers reserved to the
Company which preclude POMS from undertaking certain actions without written
consent of the Company. Pursuant to that article, the Company is requested to
provide written consent to POMS to change its registered office.
3. Recommendations
The Board is asked to:
3.1 approve the change of registered office for the Company;
3.2 provide written consent for the change of registered office for POMS in the form
annexed, giving a duly appointed director or company secretary authority to sign
the consent.;
3.3 note the change of registered office for PSHC; and
3.4 authorise the Company Secretary to make all necessary filings with Companies
House.
Alwen Lyons
20 January 2015
Change of registered office Alwen Lyons Page 1 of 2
20 January 2015
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Annex 1
Written Consent to Post Office Management Services Limited (POMS) pursuant to POMS’
articles of association (the Articles)
[ ] duly authorised for and on behalf of the board of directors of Post Office
Limited hereby consents:
1. To the change of registered office from 148 Old Street, London EC1V 9HQ to 20
Finsbury Street, London EC2Y 9AQ pursuant to Article 4.3 (G)
Date
Change of registered office Alwen Lyons Page 2 of 2
20 January 2015
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Aust Acton Sits Repa Sura a Deconbe 02014 asx
as at December 31st 2014
Total Red Amber Green
‘otal actions outstanding biwd.as at 31st October 2014 87118018
Implemented by Mgt -Nov- Dec 2014 @ 2
‘Actions added (audts and advisory) 2 09 0 0
‘Supeteeded 6 42
conection @ 2
sk accept management a 4
CCartied Forward as at December 31st a a CT
Anis of Caries forward
‘Overdue - Werk in progress es oF
Not yet due 8 w 3
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Reported implementations - total per reporting period
0 =o
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30
a
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15
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o
‘Month implemented
Total Red Amber Greer
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POST OFFICE LIMITED MATTERS — DISPUTE RESOLUTION
PRIVILEGED AND CONFIDENTIAL — CLAIMS OVER £500K OR THOSE OF A SENSITIVE NATURE
PART (A) - CIVIL LITIGATION
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Horizon claims POL/RW Belinda Crowe /IPOL has received various claims from I This matter will be the subject of a separate I Bond Dickinson
(aka “Project Angela van den I subpostmasters (SPMs) alleging defects in the I update to ExCo.
Sparrow") Bogerd Horizon system and POL’s internal processes.
These allegations were initially made in 5
claims brought through solicitors Shoosmiths.
Similar allegations have been made by the
“Justice for Subpostmasters Alliance” UJFSA)
and advanced through SPMs’ MPs.
Following discussions with James Arbuthnot
MP and JFSA, independent investigator Second
Sight Support Services Ltd (Second Sight) was
appointed in July 2012 to carry out a review
into these allegations.
On 08.07.13, Second Sight published a Report
finding shortcomings in POL's internal training
and support to SPMs on the Horizon system,
but no systemic problems with Horizon itself.
Following the Second Sight Report, on
27.08.13 POL launched a Mediation Scheme
(Scheme) aimed at resolving _ individual
complaints made about Horizon.
The Scheme received 150 applications,
which are being progressed under the
direction of a Working Group comprising
retired Court of Appeal Judge Sir Anthony
Hooper (as Chair), POL, Second Sight, and
JFSA. 110 cases are still being progressed
through the Scheme or are being scheduled
for mediation.
Mediations have been held for the first 7
applications. A further 9 mediations are
currently being scheduled. The POL project
team continue to handle the applications in
line with the Board's direction to take a
firmer position, informed by its legal position
and tighter control over timescales and costs.
To date, no claim has been made against
POL in the civil courts, and no appeal has
been made against any conviction in the
criminal courts, following Second Sight's
Report. There has however been significant
recent media activity, on which POL’s
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January 2015
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PART (B) - CRIMINAL LITIGATION
PROSECUTION CASES
There are number of cases which could have been prosecuted (e.g. those with full and frank admissions to theft /fraud), but prosecutions were not
commenced to avoid adverse judicial comment.
Several cases have also been terminated while POL obtains an independent expert report on the Horizon branch accounting system (see below).
There are currently 14 cases which are being kept under review as to whether a prosecution (supported by an expert report) can be commenced.
EXPERT REPORT
New experts from Imperial College London have prepared a scope of work on which formal instructions and a protocol for requesting and receiving
information will be based.
Appropriate individual confidentiality agreements will be prepared for both the experts and POL employees involved in preparing the report.
Meetings to progress the report are taking place between the experts, POL and Fujitsu.
PROSECUTION POLICY
Former First Senior Treasury Counsel Brian Altman QC has drafted a proposed prosecution policy for POL. Brian Altman has reviewed
Comments from POL stakeholders and return the Draft for further consideration and approval by POL.
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POST OFFICE LTD BOARD
Health & Safety Report
Purpose
The purpose of this paper is to:
1
1.2
Provide an update on safety performance.
Outline risk reduction activities.
Current Situation
21
2.2
The majority of accidents fall into three main categories lifting and handling,
stepping and striking and outdoor falls. These are higher frequency events with, in
the majority, relatively low severity. The lower frequency types of incident can carry
the potential for very high impact, for example, assaults and road traffic collisions.
Performance up to and including P8 for 2014/15 indicates that ‘all accidents’ are
tracking on target and are forecast to outturn on the 5% reduction target. Absence
accidents are tracking adverse to target and as a result of two relatively weak
periods are now unlikely to achieve target reduction at year end. However severity
of the accidents, measured by ‘days lost’, is currently well ahead of target and
forecast to outturn ahead of the 5% reduction target.
Table 1 All Injury accidents and those resulting in absence (Cumulative)
300
250 aa
° 200 —— 2013/14 All
= = 2014/15 All
§ 150 ‘
3 = 2013/14 Absence
3 10 2014/15 Absence
50
0 et
P1 P2 P3 P4 PS P6 P7 P8& PS P10 P11 P12
Period
2.3 Personal injury compensation claims remain at a low level having reduced
significantly from previous years and in line with the low number of accidents
that result in sick absence. Claims involving members of the public have also
reduced. Comparison with a similar retail organisation indicates that the Post
Office claim rate is significantly lower in both public and employer's liability and
of those claims the ‘denial’ or ‘defence’ rate is significantly more successful.
The insurance year runs from October to September.
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The number of days lost due to accidents is currently well ahead of target and
forecast to outturn ahead of the 5% reduction target. (Table 2 below refers)
Table 2 Days lost resulting from injury accidents (Cumulative)
600
500
400
e 300
200
100
25
oe 2018/14
—e 2014/15
P1 P2 P3 P4 PS P6 P7 PB PO PIO P11 P12
Period
The total number of road traffic collisions (RTCs) up to and including P8 is up
35 on last year. The number of incidents where the Post Office driver is ‘at fault’
is showing an increase of 11 compared to last year. (Table 3 refers) Road risk
reduction opportunities continue to be the subject of analysis at the Road Risk
Forum with a view to identifying improvement activities in addition to those
already in place. (3.1 below) Reversing incidents remain a cause for concern
and have been the subject of specific improvement interventions. Injuries as a
result of road traffic collisions are extremely infrequent. Road traffic collisions
account for less than 3% of the overall number of injury accidents, however
they have the potential for high impact in terms of injury and loss. Currently the
majority of incidents involve low speed — less than 25mph — and relatively low
levels of damage.
Table 3 Road Traffic Collisions (cumulative)
250
200
a
2 —— 2013/14 All
& 150
S$ = 2014/15 All
5 400 2013/14 ‘at fault’
2 = 2014/15 ‘at fault’
2 50
}
P1 P2 P3 P4 PS P6 P7 P8& PY P10 P11 P12
Period
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26 Robberies on Post Office Cash and Valuables in Transit (CViT) crews are down
four on last year from 27 to 23 for the past 8 months. Physical injuries during
robberies, of which there have been 6, 1 less than last year for the same year
to date period, remain relatively minor in severity. The level of use of firearms is
down 1 on last year with 4 of the 23 robberies enabled by the presence and/or
threat of use of fire arms and on no occasions were the firearms discharged.
Support for those affected by robberies is provided by trained trauma
supporters and professional support resources available through the
occupational health service provision. Risk reduction activities are identified at
3.2. (Appendix 1 — Significant Incidents refers)
2.7 Robberies and attempted robberies on the Post Office network, up to and
including period 8, are up 4 on last year to 67 of which 55% were successful.
Injuries sustained during robberies are down from 12 to 10. Robberies take
place predominantly at sub post offices leaving Crown branches largely
unaffected. Supporting activities have been introduced to continue to mitigate
the robbery risk and are identified at 3.2. (Appendix 1 — Significant Incidents
refers).
3. Act
ies
3.1 Road Risk
Current longer term activities to mitigate road risk are:
¢ Road risk forum in place to scope and develop road risk reduction initiatives
and activities supported by the risk management division of our insurers
¢ Analysis and deployment of interventions for reversing incidents to mitigate the
increased incidence rates, including yard assessments and technical accident
reduction interventions on new vehicles e.g. Reversing aids to reduce accidents
¢ Analysis and evaluation of data including risk profiling to identify drivers who
need additional support and to determine further generic accident reduction
interventions
e Safe driver of the year award to encourage and reward responsible driving
e Weekly case conferences to ensure consistent approach to accident
investigation, follow up activity and sharing of good practice
e Programme of driving and road risk communications to raise awareness of
current and emerging risks
3.2 Robbery/Burglary Risk
Current activities to mitigate robbery and burglary risk are:
e Active liaison activities with the police to understand ‘at risk’ areas and to
deploy surveillance teams
e Increased use of ‘advertising’ on vehicles of new deterrent technologies e.g.
DNA taggant — a solution that contains a unique identifier that is released
automatically in the event of a robbery, spraying those involved and enabling
identification of the individuals involved in the robberies
e Trialling new point of transfer arrangements to reduce exposure at Post Office
counters - the majority of robberies take place at the point of transfer which in
Post Office’s is the counter where there is ready public access. The new
arrangements allow for the cross pavement protection box to be emptied / filled
in a secure location.
¢ Significant reduction in opportunities for duress type robberies linked to the
introduction of single person vehicles — single person vehicles eliminate the
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opportunities for Supply Chain employee duress type incidents which
historically have been the most violent and likely to involve injury.
3.3 Health and Wellbeing
Healthcare interventions:
« Second programme of visits to Crown branches, Supply Chain units and Admin
offices to offer health checks using equipment that provides a wide range of
indicators on physical wellbeing. The anonymised data is used to develop
future health and wellbeing campaigns and target interventions.
e The programme of visits is supported by an online ‘Wellbeing Zone’ health
check tool as a ‘self- help’ option
e Ongoing campaign of communications to promote a range of different wellbeing
issues
¢ Wellbeing events to promote general health, exercise and dietary initiatives
¢ Mental health awareness workshops — absence occurrences related to mental
health conditions as a percentage of all absence occurrences at P8 are down
from a high in P5 of 18.62% to 13.05% in P8. Mental health conditions remain
as the single most common cause of sick absence days as a percentage of all
sick absence days at 27.21%.
3.4 Safety
The Post Office occupational health and safety management system (OHSMS)
is certified by external auditors to the standards required by British Standard
OHSAS 18001.
On 13 November 2014, the Sentencing Council opened its 14 week public
consultation on draft guidelines for corporate manslaughter and health
and safety offences. If implemented, the guidelines will mean that large
organisations convicted of corporate manslaughter may face increased fines of
up to £20 million with those convicted of fatal health and safety offences facing
fines of up to £10 million. Updates will follow in due course.
4. Residual Risks
4.1 Driving activities have the potential for high impact/loss and therefore remain as
a significant residual risk. However, the actions identified in 3.1 above are
aimed at mitigating that risk and improving performance.
5. Recommendation
The Board is asked to:
5.1 Note the overall safety performance
5.2 Note the risk reduction activities.
5.3 Note the residual risks
Neil Hayward
January 2015
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Appendix 1
Significant Incidents (Period 8)
Crowns and Network
Location Loss Circumstances Physical Injuries I Any further details
Rishton SPSO £30,000 Fri 07/11/2014 17:25 A male entered the branch, The SPMR No previous incidents.
Rishton when the female SPMR opened the secure area to received injuries
BB1 4JZ take a parcel, she was physically assaulted and and received
forced back in to the secure area back room. A treatment at
second male came into the branch and they emptied I hospital but was
the contents of the safe £30k. The SPMR managed _I subsequently
to activate the alarm, the men fled. released.
Batlers Green £10,249 Tue 25/11/2014, 16:45 Two masked males armed None
SPSO with a gun forced their way into the secure area and
Radlett took £10,249. No damage, alarm activated, no
WD7 8NF CCTV.
Supply Chain
Location Loss Circumstances Physical Injuries I Any further details
The Broadway £14,000 Thurs 13/11/2014, 14:50. A crew member entered None
SPSO The Hyde the PO to deliver/collect coins. On 2nd entry to PO
West Hendon on handover of cash from PM to crew member, a
London male snatched the pouch containing £14,000 and ran
NWS 7AA out of shop, Another male stepped out causing
disruption and blocking the exit.
Childwall Valley Ave I £Nil Tues 11/11/2014 Two males followed the crew Chipped bone in I A Police patrol gave chase to the
SPSO member into Branch and attacked him with bats with I elbow and broken I two assailants, one was caught
Liverpool nails; the crew member was injured and received a thumb. and the other has left a large
L25 1PZ chipped bone in his elbow, and a broken thumb. A amount of evidence which the
member of the public informed Police that the two forensics are analysing.
assailants had made off in a white van.
Send Money India I £Nil Fri 21/11 12:25 Crew member returning to his vehicle I None Loss £23,000 later recovered by
Wolverhampton following collection, he was approached by two the Police. Two people arrested.
WV2 3DR males, he was hit on the helmet with a hammer and
the i-Box was snatched.
Health and Safety
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January 2015
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POST OFFICE LIMITED BOARD
Sealings 19 November 2014 — 20 January 2015 inclusive
Register of Sealings
The Directors are invited to consider the seal register and approve the affixing of the Common Seal of the Company to the documents set out against
items numbered 1241 to 1261 inclusive in the seal register.
“The Directors resolve that the affixing of the Common Seal of the Company to the documents set out against items numbered 1241 to 1261 inclusive in
the seal register is hereby confirmed.”
Alwen Lyons
Company Secretary
20 January 2015
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Date . . Company Number
20/01/2015 Register of Sealings 2154540
Seal Number Date of Date of Persons Attesting Destination of
/ File Ref. Sealing Authority I Description of Document To Document Document
1241 21/11/2014 19/11/2014 Underlease of Unit 39, Kingsway Shopping Centre, Piero D'Agostino Jean Reynolds
Newport, Gwent between Kingsway Investments LLP and
Post Office Limited
1242 21/11/2014 19/11/2014 Licence to Alter relating to Unit 39, Kingsway Shopping Piero D'Agostino Jean Reynolds
Centre, Newport, Gwent
1243 24/11/2014 24/11/2014 Amendment of the Authorised Officer for the Escrow Alwen Lyons Jean Reynolds
Agreement dated 29 August 2014 between Royal Mail
Group Limited, Post Office Limited and BNP Paribas SA,
London branch
1244 01/12/2014 01/12/2014 Transfer deed relating t A Alwen Lyons Jean Reynolds
Limited and
Harklam Estates Limited
1245 09/12/2014 10/12/2014 Agreement for Sale of property at 90 High Street, Stockton- I Alwen Lyons Jean Reynolds
on-Tees, Cleveland, TS18 1AD between Post Office
Limited and The Council of the Borough of Stockton-on-
Tees
1246 10/12/2014 09/12/2014 TR1 relating to 90 High Street, Stockton-on-Tees, Alwen Lyons Jean Reynolds
Cleveland, TS18 1AD between Post Office Limited (the
transferor) and The Council of the Borough of Stocktor-on-
Tees
1247 10/12/2014 08/12/2014 Section 278 Agreement by Letter relating to the proposed Alwen Lyons Jean Reynolds
development at The Post Office, 19 Grove Road, Sutton,
SM1 1DX between TfL and Post Office Limited
1248 10/12/2014 08/12/2014 Underlease of premises at First Floor 199/201 High Street I Alwen Lyons Jean Reynolds
Southend SS1 1LL between Post Office Limited and Think
Business Sales Limited
1249 10/12/2014 08/12/2014 Licence to underlet for First Floor 199/201 High Street Alwen Lyons Jean Reynolds
Southend-on-Sea, Essex between Threadneedle Pensions
Limited, Post Office Limited and Think Business Sales
Limited
1250 22/12/2014 17/12/2014 Licence to Underlet Part of the premises at Chorlton Post Alwen Lyons Jean Reynolds
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Date . . Company Number
20/01/2015 Register of Sealings 2154540
Seal Number Date of Date of Persons Attesting Destination of
/ File Ref. Sealing Authority I Description of Document To Document Document
Office 543 Willbraham Road Manchester M21 9PP
between Post Office Limited, Napcom Limited,
Nazmathassanali Hudda, Paul Coughlin and Post Box
Cafes Limited
1251 22/12/2014 17/12/2014 Licence to carry out works at Prestwich DO/CO/GAR, 2 Alwen Lyons Jean Reynolds
Kingswood Road, Manchester, M25 3AA between Royal
Mail Estates Limited and Post Office Limited
1252 22/12/2014 17/12/2014 Licence for alterations for Colchester CO, North Hill, Alwen Lyons Jean Reynolds
Colchester
1253 22/12/2014 20/12/2014 Lease relating to Dartford CO, 19 Hythe Street, Dartford Alwen Lyons Jean Reynolds
1254 29/12/2014 24/12/2014 Agreement for Surrender & Lease relating to Ground Floor I Alwen Lyons Jean Reynolds
premises, 35 The Broadway, Mill Hill, London, NW7 3DA
between Post Office Limited, Jayesh Apabhai Patel, Rita
Patel, Nayna Patel and Sohini Patel, Supertex Trading
Limited and Dhrupesh Patel
1255 29/12/2014 24/12/2014 Deed of Surrender of lease at Ground Floor Premises, 35 I Alwen Lyons Jean Reynolds
the Broadway, Mill Hill, London, NW7 3DA between Post
Office Limited and Jayesh Apabhai Patel, Nayna Patel and
Sohini Patel
1256 29/12/2014 24/12/2014 Sub-underlease by reference relating to premises at Alwen Lyons Jean Reynolds
Ground Floor Premises, 35 the Broadway, Mill Hill,
London, NW7 3DA between Post Office Limited and
Dhrupesh Patel
1257 29/12/2014 24/12/2014 Underlease by reference relating to premises at Ground Alwen Lyons Jean Reynolds
Floor Premises, 35 the Broadway, Mill Hill, London, NW7
3DA between Dhrupesh Patel and Post Office Limited
1258 29/12/2014 24/12/2014 Deed of Surrender of Lease at Ground Floor Premises, 35 I Alwen Lyons Jean Reynolds
the Broadway, Mill Hill, London, NW7 3DA between
Supertex Trading Limited and Post Office Limited
1259 12/01/2015 09/01/2015 Lease by reference relating to premises at Berwick upon Alwen Lyons Jean Reynolds
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Date . . Company Number
20/01/2015 Register of Sealings 2154540
Seal Number Date of Date of Persons Attesting Destination of
/ File Ref. Sealing Authority I Description of Document To Document Document
Tweed FPO, 9 - 13 West Street, Northumberland, TD15
1AS between Alan Galloway and Sheila Galloway and Post
Office Limited
1260 14/01/2015 14/01/2015 Lease of premises known as Ground Floor Shop 12 and 14 I Alwen Lyons Jean Reynolds
The Broadway, Debden, Loughton, Essex, IG10 3SU
between Epping Forest District Council and Post Office
Limited
1261 19/01/2015 19/01/2015 Underlease of premises at Unit 1, The West Building, Alwen Lyons Jean Reynolds
Clifton Road, The Arcade, Littlehampton, BN17 SAA
between Post Office Limited and Iridium Estates Limited
Register of Sealings Alwen Lyons Page 4 of 4
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