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Mr Paul Rich Department of
Development Director : Hrasle and Industry
soe. Py ae, mm
Post Office Counters Limited . 4 151 Buckingham Palace
3rd Floor . Road
King Edward Building I London SWIW 95S
King Edward Street :
LONDON ECIA 144 . Eaapisies
, 0171-215 $000
Direct line
fax
Your ref
ate 4 August 1998
Deo Buk
BA/POCL AUTOMATION PROJECT
Further to our discussion yesterday, I am now able to give you 2 more definitive statement of what we
are asked to do.
e
The main elements are:
- where POCL should be aiming to get to in ten years time. The assuniption is that whatever ©
decisions are taken on this project POCL will, in this period, face the challenge of losing its current
___ major source of income and customer flow... There.are broadly two ways it can:respond;---- --
* it can try to build on its strengths and win new business
©: it can try to cut costs by changing the size and shape of the network.
In practice, POCL will almost certainly have to do both and Ministers are now looking for a more
convincing and coherent strategy for achieving this than we have so far been able to give them.
- ‘what technology it needs to get there, In particular, if the benefit payment card were
dropped, what technology would POCL need to provide the services which are realistically
deliverable as part of its Jonger term strategy. Is it necessary, for example, to:
install the same equipment across the whole network, including part time offices?
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* Could offices with a low yolume of business be catered for with much simpler technology?
© How quickly could 2 generic banking/retail system be installed and what would it cost
compared to continuing with the Horizon system? What key functionalities would such a
system lack, and how might these then be provided?. . W 4
- how far POCL could reduce the costs of the network and, at the margin, what is the extra
social benefit HMG would be buying for the extra cost of any subsidy - explicit or implicit- which
might be put in. For example, we have very little information on what it costs to keep open the
marginal post offices and how much they are used - in particular it would be helpful to know what it
‘would cost to keep open those post offices which are located in areas which lack other local facilities
such as banks and shops;
We need to ensure that the paper you are helping us to prepare responds to the issues raised as filly as
possible. We would therefore be grateful for your considered views on these issues.
Copies go to Mike Whitehead and Isabel Anderson here.
Director-Posts
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THE FUTURE OF POST OFFICES OVER. THE NEXT 10 YEARS
The role of post offices today
1. Post offices matter to people - nearly 30m people visit 19000 of them every week.
They have an essential and popular role in UK life today; for example nearly 20 million
people choose to pick up their benefits at post offices today even though 16 million of
them have bank accounts. The infrastructure behind them plays a vital part in the
smooth operation of the UK economy; POCL handles £140bn cash pa of the total cash
turnover in the UK of £235bn. POCL has been a successful business to date; although
operating on slender margins, it has delivered its financial targets, maintained its
network and made significant service improvements in recent years.
The need for change
2. Society expects the status quo to continue, but the basis on which POCL is founded is
unsustainable for the future.. Government is seeking to re-cast its relationship with
citizens, new markets are developing and competition growing and there is greater
customer choice in service delivery as new channels open up, and pressure from
POCL’s Government clients to be free to use them. Ten years hence, post offices will
transact only such business as POCL is able to secure from willing buyers on fully -- -
commercial terms. POCL will rely on its ability to attract customers and partners
There is no option, therefore, to maintain the status quo. POCL recognises that,
embraces the need for change and is resolved to reshape itself for the future. That is
why POCL's Management Board acted to set a new strategic intent for post offices by
commissioning a major strategic review earlier this year, using the McKinsey
consultancy firm.
Why post offices have a future
3.__ Post offices’ unique selling points, its. competitive strengths, -will endure and-become-~ --~-~~--~~ -
2._. POSE olfices unig 8 PI
_ more important as markets develop despite significant competition. From research,
they are known to be the trust in which it is held by citizens, its unrivalled reach (over
95% of the UK population live within a mile of a post office compared with 60% for
banks/ building societies and 30% for supermarkets)and the abilityto deliver services
which matter to people (getting benefits, sending things and dealing with officialdom
are the services most associated with post offices).
4. The challenge for POCL is to apply these enduring strengths to new markets as they
develop. The major review it undertook provides substantial strategic analysis which
shows that, in the future, post offices can provide a trusted bridge between the financial
and technological haves and have-nots, and between a wide range of central
government, local government and commercial interests. With their social and
perceived “official” role, they represent an infrastructure which can be relied upon
when others, based on different aspirations, cease to exist, or decline to participate. .
Their existence keeps open the possibility of a proven delivery channel for many
services for either the Government or the private sector.
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What the network might look like
5. IfPOCL is to have a viable future in an environment in which it contracts only with
willing buyers on fully commercial terms, it must have a fit for purpose network which
is competitive in price with alternative channels offering comparable service. At the
same time, it must maintain the qualities which underpin both its social value to the
nation and its commercial attractiveness, ie its reach into all types of community, town ,
suburban and rural. It is probable, however, that such an objective could be achieved
with a significantly smaller number of physical post offices than today’s 19000.
6. A possible network for the future might look like 700-1000 major post offices in the
largest centres, some 10000 to 12000 smaller sites in local high streets, urban
neighbourhoods, village shops and out of town centres, supplemented by some 5000 to
10000 electronic access points. Most of the reduction in physical network would come
from merging or closing redundant sites in towns and cities, together with natural
attrition in rural areas, The Post Office believes that a period of some 10 years would
be required to achieve such a transition in a way which meets customer expectations,
and does not destabilise the market in post offices or the small businesses associated
with them (subpostmasters currently have a £1bn stake in these). To provide customer
reassurance during the change, it would be best to define the network’s ubiquity in
terms of accessibility criteria rather than in terms of actual post office numbers. That is
important because market analysis projections show that some 75% to 80% of
transactions in the future will still be done in physical post offices using face to face
contact if customer aspirations are to be met. POCL estimate that these changes could
reduce network operating costs substantially; although there would be costs associated
with making them, they will almost certainly be significantly less than those associated
with uncontrolled change.
What they might do
7. _ Although competitive threats will increase, POCL will fight hard to retain the business... —
~~ “it currently has, as well as competing in new areas. Many services that post offices do
today will continue and be modemised in terms of their delivery; in addition, there is a
real opportunity for the Post Office to develop new services and markets based on its
strengths, and upon a better and closer understanding of its customers’ needs. This will
enable it to widen both its service offer to the customer.and to its client base.- -
8. . In-particular, analysis shows that there are three critical markets in which a future
POCL will operate: . ,
* in simple financial services and transactions, including offering a network to all
banks and financial organisations for simple banking services (eg taking cash out,
paying cash in, savings, bill payment) in a way that supports the bank’s strategies to
reduce the £4bn worth of bank branch costs they currently have. This will be the
"market into which benefit encashments will also migrate over time into universal
banking; :
* in providing a secure and trusted channel for citizens to transact with, and get
information to and from, all levels of Government (a ‘gateway to Government’) in
order to reduce the £9bn worth of costs across central and local Government
involved in providing simple information in a way that research shows is typically
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- perceived badly by the public at the moment. This will bring POCL into contact
with Government Departments which have not done business with it to date (eg .
Inland Revenue, Customs & Excise);
*. in being part of the Post Office’s overall complete distribution service so that all
"_ forms of mail and packages (physical or electronic) can be sent in an expert way at a
post office.
9. In addition, the Post Office will provide a world class infrastructure to underpin this re-
shaped network. This will consist of a suite of best-in-class systems to modernise key
business processes, such as logistics and processing transactions, and to provide fast
and accurate customer and management information. . This will enable POCL to:
* make its core operating processes far more efficient through technology (operating
savings of up to £50m pa are targeted in the medium-term assuming Horizon);
* continue to provide, to an even greater extent, the wholesale movement of cash
throughout the UK as a strategic, competitive service, in partnership with the private
sector;
* build a more direct relationship with, and understanding of, its millions of customers
to build new services in a way that meets modern needs drawing information and
advice perhaps, from many Government Departments (for example, in setting up a
. new business or finding out about benefit entitlement;
* offer a multi-service Post Office smartcard (see para 20 below).
10. The integrated economics of a transformed POCL in 10 years’ time are based on
prudent assumptions about the share and the size of the prizes it could gain from those
markets outlined above. The contribution ranges (c£400m to £700m pa before fixed
costs) represent the prospect of a healthier business than today’s, and a far better
prospect than if no change of strategic direction were taken.
11. The strategic direction is not only coherent, but based upon credible market analysis
and desire to change.
12 The Post Office is confident that its key competitive strengths will endure and be
relevant (see para 3 above). There is also good evidence to date that major
organisations in the market place find these strengths attractive: for example, in
banking, POCL has undertaken work with Lloyds TSB and the Co-Op bank recently,
as well as for its traditional clients, Alliance and Leicester and DNS. However, there
are some critical steps
* POCL needs to harness technology to make it fit to compete, both at outlet devel
post offices and within its infrastructure; .
* commercial relationships with both Government and the private sector need to be
: forged (eg with the banks);
I * the reshaping of the network needs to be evolved over time;
organisational capability to develop services, and to make change happen needs to
be enhanced (including relevant public/private sector partnerships)
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13. If these steps are taken carefully and in the right sequence then a managed transition of
change will happen that will be in the public interest - both for Government, and for the --
Post Office, and for the citizen as customer and taxpayer. This path is most closely ~
aligned to Option 1 in the Horizon Treasury Report. Options 2 and 3 are much higher
tisk, and likely to cost more and gain less strategically; because some steps will be out
of sequence leading to a probable spiral of decline and social disruption. For example,
there is no single benefit which has greater than 33% use of ACT at the moment, and
four benefits (Incapacity Benefit, Single Parent Allowance, the Social Fund and Income
Support) representing over 14 million entitlements; make no use of ACT at all. So, the
scale of change is challenging, and from customer research, is likely be very unpopular
‘if imposed; it needs to be planned in an orderly way with post office involvement to
make it work.
14. POCL needs the Horizon platform not only for banking services and benefit payments -
but also to enable it to compete for all of the markets and services outlined as part of its
future. The platform will play an important role in winning new services, automating °
current services, modernising processes through front-end data capture, and
understanding more about customers. A simple banking solution alone is not in itself
enough to keep the strategy coherent and economically credible. Banking will
represent an important part - but still a minority share (c40%) - of POCL’s total
business in 10-years time. However, without the banking business (including benefits
migration) the funding of the technology becomes unaffordable.
15. Moreover POCL needs a banking capability based on industry standards in order to
minimise development costs and risks and to interface with the rest of the banking
system; Horizon is future-proofed for this. This is because services that POCL would
need to provide to fulfil its banking ambitions are:
16. By contrast, a “simple generic” banking terminal (only.able to, handle debit cards such -
as
offer to the banks, and the key part that has to play in retaining customers. It is
_ imperative this is recognised in any planned transition to ACT.
17. In addition to the right type of banking technology POCL’s minimum requirements in
technology terms from Day 1 would also be to continue to maintain and extend its
current automated functionality for bill payment and electronic accounting. Practical
considerations mean that the only viable solution is a single system that covers both
banking and current automated functions. To seek to provide the capability through
Separate systems would create insuperable problems in terms of space at the counter as
well as prolonging lengthy and error prone processes. POCL also has a separate major
programme for its back end systems that are in urgent need of replacement and
modernisation. Work is already in hand to introduce world class systems which will
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cash and cheque deposit .
cash withdrawals on a stand alone basis (ie no purchase required)
account balance and mini statement provision
inter account transfers
and supporting and developing Corporate Banking Services (especially for small
business users) to fulfil its wholesale cash ambitions, 5 .
SOLO or ELECTRON) would not be capable of supporting POCL’s commercial
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enable significant efficiency improvements. These all pre-suppose the existence of
front-end, error free, data capture and accounting provided by a system such as
Horizon. Delay to delivery of the front-end system will result in additional costs for
maintaining hybrid systems and deferred cost savings from operational efficiencies. .
18. In addition POCL’s other clients such as DNS, DVLA also want to modernise and re-
engineer their products and services over the next few years and are looking to delivery.
of POCL’s front-end system to enable this activity.
In terms of future aspirations it will also provide: _
* the front-end data capture and the accounting system that will enable transactions 0
be carried out and recorded quickly, accurately and efficiently;
* the necessary information and support to enable staff to handle a wider range of
disparate transactions;
* an extensive communications infrastructure that can also support the introduction of
kiosks and possibly ATMs in post offices (though the front-end will differ to enable
effective customer interaction);"
* extensive data analysis building on its significant data warehousing and data mining
capability;
* a highly secure system and the capability to support a multi-application smartcard.
19. Implementing Horizon and the benefit payment card has the following strategic
advantages.
* the benefit payment card itself has considerable advantages to Government, DSS,
and the customer, in its own right:
— it is more fraud-proof than-ACT (it requires pick up of cash each time);
~ it is popular with customers (trial offices research documents this), whereas ACT
is typically not;
— it enables proper reconciliation for DSS and so will prevent its accounts being
qualified;
_.7@ it allows greater customer service options to beneficiaries that are popular.and.... .... - —.. ...
well-used (eg use of agents, being able to pick up cash at any post office securely,
being able to receive short term benefits easily);
— it is as cost-effective to the UK economy as ACT (simple 2p ACT costs ignore
the cost of getting cash into hands which if done in scale by the banks would
result in likely charges to those.customers least able to afford them);
— it avoids heavy exit costs from cancelling the service with ICL Pathway (in the
order of £250m legal claims:are likely).
* the Horizon infrastructure and equipment provides an integrated platform to help
enable the modemisation of all existing and future post office services and processes.
20. The benefit payment card also provides a smooth path to the part of the POCL’s
strategic direction that ties the components together for the customer, and that will
enable services to be delivered securely and in a trusted way for Government and the
private sector. That is a smartcard, branded and run by the Post Office. Such a card
would;
7 * ‘be given to all benefit card holders to create an ‘instant’ new 20 million customer
base and so achieve critical mass for such a card;
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~ 23. In terms of the consequences on n post offices, POCL’s ¢ cost structure is typltal o of that of
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* beconnected to all banks’ standards (eg VISA, MONDEX) to enable cash
withdrawal in the reshaped post office network and at other outlets for many banks;
* have encryption technology developed for Royal Mail electronic mailing services
that provides very high levels of security for an electronic ‘digital’ signature so that
it can be used with confidence to allow the citizen to interact confidentially with
various parts of Government for eg information and advice, licences, personal
medical histories, or as voluntary identity card;
* be able therefore to be used to combat other larger types of fraud (eg benefit
entitlement fraud or housing benefit fraud) as well as method of payment fraud;
* . be useable for future postal services;
* beused as the key to-establish customer relationships and customer loyalty with the
Post Office;
* beused to form partnerships with other retailers through joint use or joint branding
of the card. ,
21, In time, and with the kick start of the benefit payment application, there is a strong
likelihood that the Post Office card would become as natural for most citizens to use,
and have equal access to, as the post office network is now - but for a much greater
" variety of services and partners, and not exclusively at post offices.
The other suggested options on Horizon (Options 2 and 3)
22. Strategically, these options (cancellation of Horizon in part or in whole and a quicker
move to ACT), would lead to the uncontrolled decline in network, at dissonance with
society’s expectations, arising from the sudden loss of business or customer footfall
likely to arise from them, or extensive overt subsidy. In reaching a decision, it is
important to recognise the serious and far reaching consequences, and the high profile
nature of it. Short term budget considerations are not enough in themselves - and these
may well not provide net savings anyway when the consequential costs of termination
are taken into account.
a network business, with the majority of its cost fixed or semi variable by volume and
number of outlets. That allows it to support the marginal outlets within the nationwide
network and still make a modest profit. The smallest 4000 to 5000 post offices
(typically in rural areas where other banking or shopping facilities are absent) perform
less than 2% of POCL’s business and therefore could be said to lose POCL around £20
to £30m which it absorbs within its total business cost structure. Such a regime,
however, only works effectively at the margin. It relies on the main core of POCL’s
network remaining viable so as to meet the non recoverable elements of infrastructure
cost. If volume, income and customer footfall in that core network were to be subject
to sudden and unmanaged fall and itself become unstable, then the number of offices
_ Tequiring support is likely to rise in inverse proportion to POCL’s ability to support it.
In those circumstances, confidence in the sub post office market would collapse, and
POCL and Government would face the prospect of uncontrollable network decline. In
effect, instead of managing and reshaping the network, we would be into an unmanaged
spiral for which it is difficult to predict an end point, and from which large job losses,
and compensation claims by subpostmasters would result.
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_.28. This direction is in the public interest, and should:set the framework for Government
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24. Not only would there be serious damage to the post office network, and an inevitable
decline in customer footfall and probably service in post offices, POCL credibility in the
marketplace to attract replacement business - or indeéd alternative technology partners
- could be seriously undermined. In effect, the Post Office brand would be damaged.
25. In'terms of technological capability the other options offer, the inadequacy and lack of
affordability has already been set out above. In addition, the timing would be out of
step with what POCL would need to retain and replace customer footfall and business.
26. POCL has also considered the option of having reduced levels of core functionality
across different parts of its network (as part of a joint study with ICL and DSS earlier
this year). The conclusion was that no worthwhile cost savings could be achieved via
this route because:
* only 3000-5000 out of the total 40,000 serving positions would be: candidates for
« such a reduction and therefore any savings would be at best a proportion of 7% of
total equipment costs in post office; -
* the added complexity of having to develop and support two different systems would
add costs and delay delivery, which would more than outweigh any cost savings;
* the alternative would not have provided the detailed data capture capability needed
for POCL’s back end process and therefore additional cost would be incurred in
supporting ongoing manual accounting;
* it was considered undesirable to identify 5000 small rural offices as having a reduced
* service, and therefore a high risk of potential closure.
Summary
27. The strategic direction the Post Office has set out for the future of post offices is one of
growth and managed change for its network and its commercial relationships, There is
a real opportunity for post offices to create an exciting future if that is grasped now.
policy to bring post offices and their services, as part of the modernised Post Offices -
into a role in the next century where they will help deliver solutions for UK citizens in
dealing with everyday life .
- 29, That transformation, given serious commitment by all involved, is not only manageable,
but also credible, coherent and attainable. The best strategic route for the Government
is Option 1 for Horizon and is recommended as the Positive way forward and a
strategic signal of intent for post offices.