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BA/HORIZON STRATEGY REVIEW
[BA/Horizon Strategy Review]
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11
BA/HORIZON STRATEGIC REVIEW
OCTOBER 1997
INTRODUCTION
Terms of Reference
The genesis of this report lies in a set of terms of reference written
by Paul Rich on 15 August 1997 and reproduced as Appendix 1.
Three specific situations were suggested for detailed scoping:
¢ What if BA pulled out of Horizon completely?
¢ What if BA pulled out of the BES (electronic card)
functionality and opted instead for OBCS ( bar coded foils)?
¢ What if BA insisted on waiting until Horizon was installed
throughout POCL's network before they will commit to
participate?
But there is a wider context that drove the work leading to this
report:
¢ The Horizon programme has encountered repeated delays and
setbacks. There is a need to clarify whether those delays have,
or are likely, to lead to a critical diminution of benefits for
POCL and BA/ Pathway. There was also a need to understand
what options might face the three partners should the
programme continue to hit turbulence.
¢ POCL has started to review its medium term strategy and the
role of Horizon within any new strategy needs to be clarified.
¢ Several scenarios were scoped to explore contingencies for all
parties including the option for BA of attempting to introduce
compulsory ACT or simply accelerating through
incentivisation the take up of voluntary ACT.
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1.2
13
14
21
22
23
Structure of Report
The report attempts to crystallize the key arguments which are
then detailed in a series of appendices. Further background data
has been collated into a reference file for future use. A
Management Summary at section 2 gives high line conclusions
which are then covered in more detail in section 5.
Team Composition and Modus Operandi
The team consisted of Dave Morphey; Dave Miller: Tim O'Leary
(consultant); Kevin Corrigan; Bernie O'Keeney; Nevhis Gardner
and Bert Bertoloni. Extensive interviews were held with a wide
range of managers spanning the commercial, financial and
technical aspects of the programme. The data used to arrive at
the conclusions has been checked back with appropriate
managers.
Perhaps inevitably this report becomes, in effect, a feed into some
further review activity highlighted in the Management Summary
and Next Steps.
MANAGEMENT SUMMARY
Horizon remains crucial to POCL's commercial strategy. It is
needed as soon as possible and requires the full functionality as
currently defined, or improved within acceptable time limits, and
is needed throughout the network.
BA cannot unilaterally pull out of the Horizon contract
framework.
It would be commercially unacceptable to both Pathway and
POCL to continue to implement Horizon without a formal and
continued commitment from the start on the part of BA.
Therefore any attempt by BA to withhold full commitment until
end of roll-out must be resisted.
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2.4
2.5
2.6
27
2.8
Business Strategy Review
PA Consultants report on the status of the programme and its
obstacles indicates that much improvement is needed in the way
in which the programme is managed but their conclusions do not
suggest the programme is fatally flawed.
Delay to the completion of Horizon certainly enables competitors
to attack POCL's share and continued erosion of income and
market share is inevitable. However, there has been no evidence
that delays within the broad timescales under review present any
market "show stoppers".
The impact of delays on business cases is variable. For POCL the
effect is to improve the NPV and ease the short term profit gap.
For BA and Pathway it is believed to worsen both the business
case and the impact on their P&L. However, if the original
assumptions are retained, eg full fraud benefit to BA, the cases
remain strong.
POCL has an affordability problem with the on-going non-BA
related costs of some £65 to 80m pa. There has been however no
financial benefits from the use of EPOSS and potential for vertical
integration built into the Business Plan as yet.
The delays give, potentially, an opportunity to scope the apparent
duplication of functionality between, for example, EPOSS and
TMS/TIP. Indeed EPOSS itself has been defined as a derivative
of ECCO Plus. There may be an industry standard generic
system, such as Global Store, that might be more reliable and cost
effective than developing EPOSS and AP as defined.
The Strategic decision for POCL to directly carry out data
handling to clients (rather than using Pathway’s PAS system)
could warrant a further analysis.
Provided the work could be done without further delaying
Horizon, there could be some cost saving achievable by re-
defining these functionalities.
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2.10 The ACT argument has been reviewed from the 92/93
assessment. The conclusions are:
(a)
(b)
()
Despite an improved Treasury case, driven by the avoided
Pathway charges, the net saving remains politically modest
at £130m pa (steady state) whilst the political challenges
remain considerable. A subsidy of some £288m pa would
be needed for POCL and that would still not guarantee the
network. Even with 500 Crowns and 4500 SPSO closures
POCL would still need some £200m pa subsidy with every
likelihood of further uncontrolled closures.
Were BA to pursue compulsory ACT it would be virtually
impossible for them to eliminate the "rump" of foil-based
beneficiaries which BA estimate at around 30% of the
market. POCL could provide a route, should ministers be
inclined to mandate both POCL and beneficiaries to
operate a kind of account, but only with a fully automated
on line network.
Accelerating the take up of voluntary ACT appears the
most likely option. This would almost certainly need some
form of financial incentive and the likely level of
penetration might only yield a saving of around £20m pa
by year 5. However it remains a tempting and politically
relatively pain free route.
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OVER-RIDING CONCLUSION
HORIZON IS ESSENTIAL TO POCL TO ACHIEVE SOME STABILITY
IN INCOME OVER THE MEDIUM TERM AND TO SUPPORT
FURTHER MARKET EXPLORATION.
BUT THERE IS INEXORABLE BUSINESS DECLINE, PARTICULARLY
WITH BA. THIS DECLINE IN VOLUME AND FOOTFALL IS
MASKED UNTIL 2005 BY THE BENEFICIAL CONTRACT "A" WHICH
PROTECTS INCOME. THE PRECISE SHARE AND LEVEL OF
VOLUME DECLINE WILL NEED FURTHER SCOPING.
THERE APPEARS AN URGENT NEED FOR POCL TO RETHINK ITS
VISION, STRATEGIES AND STRUCTURE SO AS TO BECOME FAR
LESS DEPENDENT ON GOVERNMENT BUSINESS BY 2005.
3 CONTEXT
3.1 Horizon was originally planned to roll out from June 97. It now
looks as if Jan 99 is the very earliest achievable start to roll out
and there remain some technical difficulties to be overcome.
3.2 The three partners, BA; POCL and Pathway, jointly sponsored a
review by PA Consulting who reported in Sept 97. A copy of
their report is at Appendix 2.
Broadly PA's conclusions are that the programme is more
complex than any party may have appreciated; that significant
improvements need to be made in the overall management of the
programme; that there are no easy solutions (including
withdrawal); that an attempt should be made to simplify or
descope the technical platform if possible and that top level
commitment will be essential to success. They do not conclude
that the programme is fatally flawed.
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3.3
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PA cite three "root causes" to the problems experienced to date:
¢ Conflicting agenda
¢ Marginal business cases
e PFI approach
They recommended a way forward based on a series of facilitated
workshops involving top management (CEO level) from each
partner. The first of these is scheduled for 23/24 Oct 97.
BA have had some considerable difficulty developing their CAPs
programme, essential as a data input to Horizon. They are also
under financial pressure on their PES budgets, no doubt
exacerbated by the lack of any financial benefits on either fraud or
admin savings to date (other than via ALPs). BA have formally
asked for financial help from both Pathway and POCL. Both
requests denied at time of writing.
Contract "A" between POCL and BA guarantees income to POCL
even if volume falls below prescribed "floor limits". This
continues to mid 2005 and must be seen by BA as an unhelpful
factor for them during Horizon delays. It could also impede any
major Government review of the Welfare system although there
are likely to be much greater considerations than POCL's
contract!
ACT remains BA's preferred route and they must be feeling an
even greater sense of frustration now than in 92/93 that
Government would not support the move to compulsory ACT.
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3.4 Legal and Contractual issues
POCL has separate contracts ‘A’ for counter services with Benefits
Agency (BA) and Social Security Agency (SSA) in Great Britain
and Northern Ireland respectively. The services provided by
POCL under Contract A are the provision of approximately
19,200 post offices and 65,000 staff and agents to encash benefits,
transport and arrange the money to pay out customers, enforce
manual and electronic stop notices, account and settle for benefit
payments, audit provisions, the distributions of leaflets to
beneficiaries and the provision of publicity space.
The key commercial advantages to POCL of Contract A is:
¢ long term relationship it provides with key core clients
* prices rise in line with RPI (but see 1% efficiency below)
¢ POCL has a minimum guaranteed income stream irrespective
of actual volume achieved through a floor mechanism in BA’s
contract and the minimum price arrangement in SSA’s
contract
¢ should volume increase, POCL’s income would increase
* compensation for the expected extra associated transaction
time of electronic benefit payments (either card or order book)
through higher unit charges, and
* excepting a change of Government policy or POCL not being
able to provide an outlet ina locality, BA and SSA will not
seek other outlets for paying benefits
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3.5
Key commercial disadvantages to POCL of Contract A is:
charges have a 1% year on year efficiency built into them
contracts with BA, SSA and Pathway now do not have
coterminous end dates
an uncapped risk for fraud exposure for electronic benefit
payments where POCL fails to follow the correct procedures
but there is a review checkstep should overall fraud rise to
£5m
a restriction on promoting POCL for benefit payments
a commitment to a good faith review and negotiation should
the network size fall below 17,339 in Great Britain or 580 in
Northern Ireland and
final months charge (May 2005) is on a per transaction basis
without any floor.
Attached at Appendix 9 is a description of the suite of contracts
between BA, SSA, Pathway and POCL.
Market Position
¢ Bill Payment: Competition is already rampant and likely to
increase. POCL has put in place a programme of APT
redeployment and an urgent scoping of the case for additional
terminals in order to keep abreast of market demands. This
will obviously continue until Horizon is available. Provided
delays do not become interminable there is not at present a
significant commercial risk from the current programme
projection.
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¢ Royal Mail: Some continued decline from their pursuit of an
alternative channel strategy. However most unlikely that this
client would walk away (even if allowed) and there are some
real benefits to Royal Mail from improved sales data via
EPOSS.
¢ Girobank: The main effect of delay is the knock on effect on
developing a POCL based personal banking offer. Corporate
deposit business would be fatally hit by a significant loss in
BA business but not unduly damaged by a delay to Horizon.
¢ National Savings: Very keen to develop their individual
accounts on an automated platform but now had to be put on
hold pending programme delays. This is a relatively small
(c£50m) contract but significantly profitable to POCL.
¢ DVLA: Shrouded in politics it is difficult to scope this one
accurately. Logic says that with an automated platform and a
willingness amongst ministers to see a thinning down of
resources in South Wales POCL should be in a strong position
to integrate vertically into this client. Delay is not helping but
is also not fatal at present.
¢ Bank of Ireland (B de C): Opportunity to bypass their UK
operation and streamline the flow of cash would be worth a
few million pounds to POCL. Delay puts this off.
¢ New Business Development: On line ticketing opportunity is
delayed as are any serious attempts to engage partners who
need an automated platform. More importantly perhaps the
focus on Horizon over the last twelve months has brought a
virtual halt to speculative business development.
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3.6
By
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¢ Year 2000: All clients, existing and prospective, are rapidly
becoming absorbed in the Year 2000 systems scare.
Considerable expenditure and specialist resource will be
directed to this inescapable scenario. This means there is
likely to be a fairly narrow window for POCL to develop
systems changes within clients! infrastructure before they
choose to divert the focus on to Year 2000. We may already be
too late to do much with clients until after the end of 1999 and
even then we may not be their highest priority.
Summary
Whilst no account teams have indicated potential "drop dead"
timescales for further Horizon delays it is clear that erosion of
existing business will continue and development of new
opportunities may now be delayed until after 2000. The bill
payment market is being addressed on a contingency basis but
would be greatly enhanced by universal availability of this
facility (provided clients were prepared to pay a premium for
using POCL).
Full functionality is still seen as essential even though financial
benefits have not yet appeared in the Business Plan. Some of the
£65 to 80m pa costs may need to be seen as strategic
infrastructure investment if POCL is determined to compete in
the High Street.
Generic Transactions
POCL’s Information Systems Strategy has for some time referred
to the potential value of defining generic transactions as a basis
for automating the front-end service.
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37
Business Strategy Review
These generic transactions could be defined as:
¢ in-payment
© out-payment
© personal details capture
¢ retail industry EPOSS (includes stock control data, means of
payment and integration of public/private side business)
¢ token management
Horizon as currently defined covers much of this ground but on
bespoke rather than generic basis. The implication is that future
new business, even simply additional clients, may prove costly to
bring on board.
There is evidence of “industry standard” systems used by major
retailers. Global Store, developed by ICL, is currently used by
Marks & Spencer for example.
It would be worthwhile to use the current delays to the
programme to re-examine whether a generic system such as
Global Store might prove cost effective/reliable than continuing
to develop EPOSS and AP.
Summary
BA cannot easily pull out of Horizon unilaterally and would
forego the opportunity of finally getting rid of foils if they did.
But they do have financial pressures and are likely to want to
explore any options that could save them money in the short
term. Horizon delay continues with even Jan 1999 looking at risk.
Such delay is painful to POCL but not fatal. APT extension
provides much needed interim support but is no long term
solution for this market. There remain questions around the fit of
Horizon with POCL's IS strategy.
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41
4.2
Business Strategy Review SY page 13 of 108 ~
POCL'S STRATEGIC DRIVERS
This section reviews the key drivers for automation in POCL,
some placed upon it by the Post Office Board and others
developed within POCL to address market/operational needs. If
the case for Horizon is to remain robust it must be seen to flow
from this logic pattern.
PO Board Non-Negotiables
At the start of the authorisation process the Board agreed the
following as, in a sense, their requirements of automation in
POCL:
e Acceptable business case for POCL and The Post Office.
¢ Customers perceive no material worsening of service.
¢ No damage to PO brand.
¢ POCL retains control of critical operations and key commercial
relationships.
¢ Capability for POCL to automate all clients and develop new
services.
¢ Automation of all post offices within reasonable time.
¢ Chosen supplier has financial and technical capability to
develop and deliver services.
POCL's Key Strategic Drivers
Fig 1 illustrates the logic pattern for deriving the need for
Horizon based on a few essential requirements for POCL.
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Fig 1 Key Strategic Drivers
¢ Must lock in BA
Need Benefit Payment Card
¢ Must replace manual cash
account
Need EPOSS
e Must defend bill °
payment market
Need AP
e Need Horizon
e Need new revenue streams
Need platform for re-
engineering products
¢ Need common, reliable easy to
use solution
Need single office platform
(a)
Business Strategy Review
Locking in BA
BA represent currently some 30% of POCL's volume and income
and probably even more of its footfall. Income is protected to a
fair degree by Contract "A" which includes volume "floor limits"
below which POCL's income is unaffected. It is important to
recognise that at present BA business not only underpins a very
substantial part of POCL's income but the footfall drives
significantly the type of customer loyalty that supports bill
payment, stamp sales and other ancillary services.
To lock in BA requires a major change to their benefits method of
payment. Foils are expensive to produce, distribute, encash and
reconcile. Full benefits to BA of eliminating fraud, reducing
admin costs and accounting for public expenditure are only
available by full ACT, an electronic card system or a combination
of both. It follows that a key driver for POCL to retain a
significant proportion of its income and traffic over the next few
years is to provide BA with BES functionality and USABLE
THROUGHOUT THE NETWORK.
This in itself demands a platform virtually identical to Horizon.
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(b)
(©)
Business Strategy Review
Replacing the manual cash account
It will always be difficult to get a definitive statement on this but
there appears sufficient evidence that POCL's current accounting
system is not fully fit for purpose. Current systems are error
prone and incur significant costs to clean up the data before it
becomes management information, or used for settlement with
clients. The parallel automation projects, TIP/TMS, SAPCON,
SAPADS all need a source of electronic transaction data to enable
them to operate effectively and deliver the benefits in their
individual business cases. This is not to say that there might not
be alternative routes to achieving these functionalities but, given
the need for the platform for BA it remains logical to use that
same platform for EPOSS. This functionality appears to duplicate
part of that of TIP/TMS and there is a need to review that to see if
better value for money is achievable.
POCL has always suffered from slow, sometimes inaccurate
management information of inadequate granularity. The need to
squeeze out operational improvements both at outlet level and
within the Business' logistics requires a consistent, once only
capture of transactional data from outlets. The need to avoid the
complexities of dual information streams both for POCL and its
clients drives the conclusion that EPOSS is inescapable, albeit
further refinements might be possible if time permits.
Defending the bill payment market
The value of this market to POCL seems to be in three areas.
Income from clients as long as prices remain above LRMC;
Footfall that supports customer loyalty and ancillary transactions
(Note: this sector feeds from BA footfall but is also a generator in
its own right); Cash brought into the network and subsequently
used to make outpayments including BA benefits.
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By 2002/3 it is estimated to be worth some £185m income to
POCL assuming a Horizon or similar platform.
Competition is very active with PayPoint spearheading currently
the drive to divert footfall from post offices. POCL has the
ability, with an automated platform, of offering clients an
expanded service compared to PayPoint as well as wider reach
(although not opening hours).
The current platform represents a vital stop gap to keep POCL's
credibility in this market but the Hybrid platform on which the
service depends has a limited capacity and life.
AP functionality is essential to sustain market share and the
potential is needed to offer clients reach across the whole of the
network.
(d) New revenue streams
Indications so far are, not surprisingly, that significant new
opportunities such as a viable "low average value" account and
on-line ticketing require an on-line automated platform.
Certainly the MIS requirements of these new clients will assume
an EPOSS type facility to ensure both speed and granularity of
data.
Much of the sterling work done to date on business development
has had to base itself on "bespoke" solutions. The efficient way
forward has to be based on a set of powerful generic transactions
that would require minimum refining to support new services.
Not only is the conclusion that POCL needs an automated
platform but that platform needs to be "future proofed"
sufficiently to support new revenue opportunities.
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(e)
4.3
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A common, simple to operate and reliable solution
There is limited space on counters for multiple platforms and
relegation to back shelf, or even back office, causes unacceptable
delays to service in all but the smallest outlets.
The demand on front line staff is sometimes underestimated. On
the basis that we should make it easier for the clerk to get it right
than to get it wrong, any platform(s) installed must be simple to
operate and as error proof as possible. A single platform has
much to recommend it.
Whilst it would no doubt be feasible to have multiple data
streams feeding into POCL's back end systems this must
inevitably lead to potential delays and the possibility of errors.
Again the logic points to a single platform in each outlet.
The arguments for and against a common platform are more
difficult. Provided data flows remained identical and basic
operating procedures were common there could be arguments for
different, perhaps simpler and presumably cheaper hardware in
smaller outlets. The criticality of comparative costs and
timescales would need to be assessed.
In summary, a single platform throughout the network is
essential but it may prove commercially sensible to simplify the
hardware in small offices as long as functionality and ease of
operation are preserved.
Summary
¢ POCL's key strategic drivers do not conflict with, indeed are
complementary to, the PO Board non-negotiables.
¢ Each key driver points strongly to the need for a platform very
similar to Horizon
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¢ Equally strong indications are that full functionality is
required across the full network. This is explored further in
Section 5.
4.4 The picture emerges
Figure 2 illustrates the thought process that might take us from
current operations to the right decisions on the type and reach of
an automated platform.
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Horzion Baseline p>I Re-Design
and Test I
I Delays
Horizon: Delivery I_I le Roll Out >
Problems
Fail [Start Again} >
——
Full Compulsory [>
act) [>
BA ApparenUReal ——— =
Options 30% Rump a
Withhold Commitment
until after roll out POCL/Pathway Stance?
Continue but they
reopen Contract *A’ POCL Position? -
Network
L___ge Descoping Choices I}
Functionality BES Only a
OBCSOnly =[-———
BES+AP = I}———>
BES+EPOSS I}——_
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Sa
CONTINGENCY SCENARIOS
A number of scenarios were scoped to attempt to understand better the
implications of the right hand side of Fig 2. Only those scenarios that
survived the checks of relevance and materiality are included.
Roll out delays
Scenario 1, attached as Appendix 3, addresses the impact of further delays to
Horizon. The two specific timescales reviewed are: Roll out commences Jan
99, completion Jan 01; Roll out commences Jan 99 but reduced beat rate to
100 per week delays completion to late 2002/ Jan 2003.
The key implications are that the individual business cases change and
POCL continues to experience erosion of market share.
¢ POCL business case NPV improves with delay due to delayed Pathway
charges.
¢ BA business case is materially worsened but remains extremely positive.
However, it is understood that BA now argue that they can only take into
their case 20% of fraud savings. This would make their case now
marginal but contracts were signed on the basis of original fraud
treatment and indeed if BA do not get the benefit in their case there
would be a strong argument to suggest an additional case needs to be
factored in:- for the Treasury. Arguably for practically zero investment
they obtain over £100m pa fraud saving.
¢ Pathways business case deteriorates markedly with delays as far as we
can scope this. If their original assumptions were for a profit margin
greater than, say, 30% their case remains healthy.
POCL's erosion of business cannot be ignored as a factor but it has not
proven possible to put accurate metrics to this. The key message is again
one of pain but not fatality. So, the overall conclusion is that, whilst delay
hurts all parties there remains a strong reason to persevere with Horizon.
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5.2 Total Failure!!
This is regarded as a low probability but has nevertheless been reviewed
both as a failure before roll out and failure during. In the latter case it was
felt that the most likely situation might be that roll out has continued for
some six months when apparent "teething" problems become show stoppers.
Perhaps around 2500 offices would have been installed.
Appendix 4 deals with the former and Appendix 5 the latter.
Key implications are as follows:-
¢ BA would have reason to press for re- negotiation of Contract A. This is
likely to prove very damaging for POCL with almost certain removal of
the volume floor limits.
¢ There is an over riding need for the programme team to carry out a full
risk management assessment of both scenarios and to ensure plans are in
place to protect POCL's interest as far as possible.
¢ TIP/ADS/SAPCON etc will need a new data source. This may well
require a new and larger form of Cash Account, with all the error prone-
ness that implies.
¢ IfSAPADS were unable to continue an urgent replacement for CASM
would be needed.
¢ Dependent on the reasons for failure there would be, inevitably, a
detailed legal row over disengagement.
¢ POCL's STRATEGIC DRIVERS REMAIN RELEVANT AND WOULD
DEMAND THAT A SUITABLE ALTERNATIVE PLATFORM WERE
SOURCED AS QUICKLY AS POSSIBLE.
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5.3. Credibility Watershed for Pathway
Appendix 6 addresses the dilemma of whether to establish a cause and point
in time at which the decision is taken that Pathway are unable EVER to
deliver Horizon. The litmus test was whether an alternative path could be
defined that represented a better option than continuing with Pathway and
accepting further slippage.
The case for starting to explore alternative suppliers is seductive at first but
rapidly loses its appeal. Key considerations included:-
¢ Difficult to keep BA at arms length in the quest for a new supplier.
¢ Imperative to protect Contract A and not give BA the excuse to start re-
negotiation.
¢ If process has to be a joint POCL/BA quest then it would be constrained
by GATT and subject to considerable delays. A rough scoping of
timescales suggests five years to start of roll out may not be unexpected!
¢ There would be a protracted development period before we could be
sure that we have a viable solution.
e Anearly step in the process would be to place an advert seeking would-
be players. This public manifestation of loss of confidence in Pathway
would almost certainly start legal actions.
e Notwithstanding the above, some form of "pass/fail" hurdle might
galvanize ICL into increasing support for Pathway.
¢ This is a major PFI scheme and the present Government is very keen on
this method of private sector involvement. This demands care on the
part of POCL and BA but might also offer an avenue of support from the
PFI Dept within Treasury.
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The overall conclusion is that a full-blown, pass/fail hurdle carries too many
adverse risks. Instead it is felt that a "private" watershed based on Congo 4
functionality (BPS for child benefit, OBCS and CAPS interfaces) being
available for live operation by end March 98 would be realistic and
appropriate. Failure to meet this milestone would trigger discussions with
BA intended to lead to consultation with the PFI Dept of the Treasury to
gain any help from them. This might include any possible relaxation of PFI
"rules" to allow Pathway more flexibility to involve other players. Still high
risk in terms of Contract A.
5.4 The ACT Debate
Appendix 7 deals in considerable detail with this complex scenario. The
main task was to update the work done in 92/3 to assess the "Treasury
Case" for ACT. Key changes are that POCL now has an automated platform
defined and almost ready to run. Last time this option could only speculate
based on an extension of the APT platform. POCL also now has Contract A
which protects income substantially against rapid falls in volume. However
the assumption has to be made that whatever drove BA to gain Government
agreement to compulsory ACT would also give them cause to re-negotiate
this contract.
The three broad areas explored and highline conclusions are as follows:-
(a) Full Compulsory ACT
* Needs secondary legislation and considerable time to roll out. Using
DSS' views from 92/93 earliest start would be April 98 and steady state
reached in 2002/3.
¢ DSS! own estimate is that 30% of beneficiaries would remain with foils
either because they cannot get a bank account and/or the Government
would find it difficult to mandate private sector banks to provide a
suitable account.
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¢ This would still result in a loss of total income to POCL of the order of
16% from reduced BA fees and a further 6% from valued related
business.
¢ The Treasury case looks, prima facie, to be better than in 92/93 at £130m
pa at steady state. This is primarily because of the avoidance of Pathway
charges of around £127m pa. This is also after allowing for £288m pa
subsidy to POCL and SPSOs to try to avoid network closures.
¢ Without a commitment to subsidy POCL would probably need to close
500 crown offices and a further 4500 SPSOs would "self close" due to the
considerable drop in both income and footfall. This closure scenario
would lead to a further loss in related business leading to POCL being
some £200m pa in deficit AND an unstable network.
¢ The effect on Girobank would be devastating with nearly three quarters
of their corporate deposits no longer needed.
¢ Virtually all the political and socio economic difficulties scoped in 92/93
remain relevant.
¢ Conclusion
Whilst this scenario cannot be ignored the net gain to Treasury is
relatively modest and the political implications immense. It is as
unlikely to proceed this time as it was in 92/93.
(b) Accelerated Voluntary ACT
Always an option for BA this scenario explores the notion of incentives as
well as promotion. A judgment has to be taken on the level of penetration
BA could achieve beyond the current 1% plus. A realistic estimate, which
matches some embryonic work done in 92/93, suggests a rate of 3%.
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©)
This sort of pace would yield savings to BA by 2002/3 of less than £20m pa.
At this pace of change the assumption is made that Contract A continues, as
does Horizon. The main financial burden would fall on Pathway who
would lose volume and on SPSOs who would lose remuneration. POCL's
income would remain unaffected but of course at contract end in 2005
underlying volumes would be considerably lower.
Whilst the saving for BA would also need to fund incentives etc this option
remains attractive to BA with relatively low political profile.
Could the 30% foils ramp be removed?
Assuming again that ACT was made compulsory BA would still face a 30%
rump of foil beneficiaries which would present a growing problem of
potential fraud, admin costs of foil production and distribution together
with a likely increase in price from POCL.
It is most unlikely that the Government would wish to legislate to enable
them to mandate, say, Banks to run low average value accounts for this
customer group. Given the Banks and Building Societies would have
already taken on board the balancing 70% of customers they are unlikely to
be too keen either.
Government could of course mandate POCL to provide such accounts
perhaps by sub-contracting to A&L. However, without a platform that
enables each withdrawal to be verified the fraud risk would be
unacceptable.
The conclusion is that, aside from cooperating with Horizon, BA would find
it very difficult to shed the 30% and even then probably at a considerably
higher price than the manual system.
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5.5
5.6
5.7.
BA withhold commitment until Horizon rolled out
BA are currently contractually committed to Horizon. Without BA's
commitment at the start the case for both POCL and Pathway falls. The
development and installation costs would be little different, indeed it could
be argued that it is BA's software that is the most complete. For POCL and
Pathway to continue to develop AP, EPOSS etc and trust that eventually
BES would work satisfactorily would be speculative in the extreme.
Even a "commitment to commit" at some future date would mean that
Pathway cannot recover any BA volume related charges until perhaps
2001/2. This would still render their business case weak.
This scenario might well be put forward by BA as a negotiating ploy but it
has no place in a partnership based multi-million pound scheme.
BA choose to renegotiate Contract A
Put simply, they cannot unless POCL agrees and/or defaults on its
commitments. This is why it will be essential to ensure that any changes to
Horizon that POCL elects to make are either neutral to the currently agreed
timescales or agreed with BA outside of Contract A.
Partial Network and Partial Functionality
Appendix 8 explores these two scenarios, the purpose of which is to identify
any opportunities for simplifying the program and/or reducing costs. Key
conclusions are as follows:
¢ To lock in BA an electronic payment method is needed. Thus BES
functionality is necessary and OBCS would simply prolong an out of date
and expensive paper based foil system.
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¢ It would remain problematic for BA to run two systems in parallel long
term. Thus the BES payment card has to be universal which means BES
functionality is needed throughout the network.
There is a possible exception to this. Very small offices, perhaps 4000 in
all, might be able to authorise benefits payments by phone and thus use
the customer's BA card without a Horizon kit. For other transactions
POCL would need to ensure that a suitable paper based method were
available. Cash Account and management information data would be
achieved by "buddying" these offices on neighbouring larger ones. This
option still needs detailed scoping to ensure the costs do not outweigh the
savings.
© Section 3 above details POCL's key strategic drivers which, in turn, lead
to the conclusion that full functionality is needed in order to ensure that
POCL can achieve its ambitions and that Pathway's volume assumptions
are realised.
¢ The option for POCL to operate EPOSS and AP in partial network
reduces POCL's market attractiveness and results in multiple data
systems. This is not insurmountable but would add to rather than
reduce the complexity of the overall solution.
e Conclusion
Horizon, or something very similar, is needed with full functionality
throughout the network. The exception may just be the smallest 4000 or
so offices but this is not yet fully scoped.
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6.1
(a)
(b)
()
(d)
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CONCLUSIONS
A synopsis of the over-riding conclusions is given in the Management
Summary at Section 2 above. In this section a wider set of conclusions is
discussed to illustrate the bigger picture.
Horizon and its strategic importance to POCL
POCL needs the Horizon platform (or something very similar)
primarily to lock in BA until 2005. This will protect income at a
relatively high and predictable level even if volume drops
significantly.
POCL also needs to provide a potentially universal access to
automated bill payment in the face of fierce competition. The
assumption has to be that clients will be prepared to pay a premium
above perceived market prices that will at least cover POCL's long run
marginal costs.
POCL's accounting systems are thought by some senior managers to
be not fit for purpose. Non-automated solutions could be found but
would require a restructured (larger) cash account and would still be
dependent on manual entry at every outlet. The EPOSS functionality
so far designed into Horizon is not quite retail industry best practice
and bases itself on ECCO Plus. However it does represent a
significant advance for POCL and would enable the financial benefits
built into business cases for TIP/TMS, SAPADS, SAPCON to be
achieved.
Whilst financial benefits for non-BA functionality have not yet been
fully scoped there is a need to recognise that part of this cost at least
should be seen as infrastructure investment to give POCL the
wherewithal to pursue its Commercial Strategy.
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(e)
6.2
(a)
Above all perhaps POCL needs to recognise that Horizon, for all its
strategic importance, will fundamentally just buy time. BA business
is in inexorable decline and even with Horizon the urge for BA to
accelerate ACT uptake will remain. Once Contract A comes to an end
in 2005 POCL will face a very significantly different financial as well
as footfall scenario. POCL has until then at the latest to review its
Vision, Strategies and Structure to enable it to thrive with greatly
reduced dependency on Government business.
Effect on POCL's P&L Account
In the early years of the programme continued delays not only
improve the NPV in the business case but also ease slightly the profit
gap problem. However, once volume starts to flow through the
platform, pathway charges start to take effect and there is a £65 to
£80m pa impact which is currently not covered by direct financial
benefits.
Since affordability of Horizon is a major issue for POCL it is vital that the
wherewithal is identified quickly to support the programme.
There is an urgent need to revisit business cases for the back end systems
and AP and EPOSS functionalities to establish a more rigorous identification
of savings and/or income streams. Ownership also needs to be clarified
both for the "projects" themselves and for the commitment to benefit
achievement.
There needs to be a clean set of plans for how savings/benefits supporting
the £65-80m will be delivered and by whom.
Notwithstanding the above there remains a need to recognise that some of
this expenditure is the "entry price" for competing more effectively in the
High Street. The task is as much one of finding ways to afford Horizon as it
is of identifying direct financial benefits.
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6.3 Outcomes of Options Explored
(a) PA Review
The key messages from PA's report are that:
¢ Significant improvements are needed to the way in which the
programme is managed, in particular recognising three partners have
different fundamental agenda.
¢ Options should be examined to identify any descoping opportunities to
simplify the platform and reduce costs.
¢ There is nothing in the report however to suggest that Horizon is fatally
flawed and indeed an early draft expressed the view that there appeared
No easy exit route for any of the three partners.
¢ A logical conclusion would therefore be that, subject to any realistic
changes that prove mutually beneficial, the task is now to re-affirm joint
commitment and move ahead to deliver the platform.
(b) Delays to Roll Out
Even delays to 2002/3, whilst painful to all parties, do not diminish the
strategic need for this platform. It will still be better to have the platform
late than not at all. For POCL the key tasks would seem to be:
¢ Sustain Contract A, giving BA no opportunity to re-open negotiations.
¢ Establish clearly with clients the "window of opportunity" to discuss the
automation of their products outside of the Year 2000 period of pre-
occupation.
¢ Identify more robust business benefits for AP, EPOSS and back end
systems together with "owners".
¢ Establish the level of duplication between EPOSS and TMS/TIP and
determine if any redesign is feasible without detriment to Horizon costs
and timescales.
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()
(a)
Horizon Failure
Whether established prior to or during roll out Horizon failure is one of the
most serious eventualities of this programme. POCL's strategic drivers
remain and therefore some form of Horizon equivalent will be needed
rapidly. It is arguable that BA will also need this unless Government is
prepared to mandate ACT. Even then, the "rump" of foil beneficiaries will
either need a secure payment alternative (Horizon equivalent) or be subject
to POCL up-pricing (market pricing argument). An alternative will
therefore need to be sourced either with BA as partners or independently. It
is arguable that by retaining BA as partners POCL might be better able to
sustain Contract A.
Robust risk assessment is needed by POCL together with contingency plans
for these scenarios. This will need to include what is done with the 2500 or
so offices that would have had Horizon installed before failure.
Credibility Watershed
The notion of defining a circumstance and timescale to determine whether
Pathway may NEVER be able to deliver Horizon is not straightforward. To
be truly a "watershed" there would have to be full commitment to starting to
source alternative suppliers. This would, contractually, need to involve BA
and thus the whole GATT process. It would almost certainly lead to
complex legal argument with Pathway, particularly if an advert were placed
(as it must) to attract interested parties. There would also be a time lag of
up to three years before we could have confidence in any new solution and
up to five years to the start of roll out.
The difference in end to end timescale to that of actual failure might be at
most some 15 months. The diversion of management effort across all parties
in the interim make this increasingly less attractive.
However there appears a residual benefit in setting an "internal" watershed
for Horizon, beyond which POCL and BA might seek assistance from the
PFI Dept of Treasury as to how Pathway could be helped to overcome their
difficulties, eg any relaxation of PFI modus operandi. The logical systems
criterion could be the availability of Congo 4 (BPS for child benefit, OBCS
and CAPs interfaces) for live trial by end March 98.
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(e) BA's Perceived and Realistic Options
The key options scoped are as follows:
¢ BAcould not unilaterally pull out of the Horizon contract framework.
They need POCL's agreement where, unusually for commercial contracts,
POCL is not constrained by a "reasonableness" clause.
There is nevertheless an issue for POCL in terms of the congruence of
Contract A with any agreed further extensions to the Pathway contract 1
to 3. POCL could find itself exposed by commitment to pay Pathway
beyond mid 2005 without a back to back mechanism to re-charge BA. In
addition any notion of leaving POCL beyond 2005 without the sort of
volume floor in Contract A could give significant financial exposure.
POCL needs to achieve an extension to the core of Contract A to match
any revised Pathway contracts but without re-opening negotiations as
such!
¢ BA could ( indeed already have in essence) seek to re-open Contract A in
order to ease the pressure on PES budgets. Provided POCL is not in
default either on mainstream contract issues or on Horizon there appears
no legal basis for BA to succeed. However a strong negotiating stance
needs to be maintained.
¢ Compulsory ACT. Undoubtedly this scenario would result in Horizon as
currently defined falling and Contract A being re-negotiated. This is dealt
with in detail in Appendix 7 and is a complex issue. However, the main
conclusions are that with a projected net benefit to Treasury of around
£130m pa after paying POCL and SPSOs an annual subsidy of around
£288m the financial case is marginal. Add to this the very considerable
political implications of mandating voters to have to use their bank
accounts to access benefits and the concept is no more likely to be
accepted by Government now than it was in 92/93. However it will
remain, no doubt, a negotiating ploy on the part of BA.
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(f)
¢ Accelerating voluntary ACT through promotion and incentives is a much
less politically sensitive approach. The best assumption the Team has
been able to make is that this could achieve a penetration of around 3%
pa compared to just over 1% now. This is likely to yield annual savings
to BA of around £20m pa by 2002/3 out of which they would have to pay
for incentives etc. There would be no specific requirement for POCL to
agree to re-negotiate Contract A so its income would remain intact.
Pathway would lose income through volume fall as would SPSOs should
POCL choose to recover via remuneration. The concept is not hugely
financially attractive to BA but might be worth pursuing in order to
achieve a lower volume level by the end of Contract A in 2005.
e Returning to the option of compulsory ACT, there remains the challenge
of the 30% "rump" of foil volume. It has not been possible to identify a
realistic option for BA to overcome this other than by cooperating with
POCL in a Horizon-like platform. Even then the pricing arrangements
would be fundamentally different.
Partial Network
Section 4 above drives the conclusion that Horizon (or something very
similar) is necessary across the whole network. Primarily this is to lock in
BA by enabling them to eliminate foils. This remains the over-riding
conclusion but the scoping work done suggest there may be mutual benefit
in not automating the smallest 4000 or so offices. These account for around
1% of total POCL business yet by their very size and location represent a
significant installation cost.
The sine qua non has to be that all BA beneficiaries are able to use their
plastic payment cards. The option is that these small offices could obtain
authorisation to pay by telephone for each customer. Volumes of customers
are such that this would probably not be perceived as a major service
deterioration ( PO Board non-negotiables). Other work would need to be
achievable on a manual basis but the cash account would be "buddied" on to
a neighbouring automated office. It is an option that needs further detailed
scoping before it can be considered realistic.
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(g) Partial Functionality
The PA report recommends that descoping options are considered. Partial
network was covered in (f) above. Partial functionality is explored in some
detail in Appendix 8. The key conclusions are:
¢ BES only would lock in BA in theory but the significantly reduced
volumes would make the Pathway case unsustainable and POCL's
strategic drivers would not be met.
¢ OBCS only would leave BA with foils and would therefore fail to lock
them in as well as denying POCL's other requirements. Volume remains
a crucial factor for Pathway.
¢ BES and AP alone would still fail to give POCL the ability to replace the
manual cash account and the opportunity to explore wider revenue
streams. Volume remains a crucial factor for Pathway who would need
to reconsider pricing.
¢ BES and EPOSS would leave POCL with the need for a multiple platform
in order to stay in the bill payment market. Volume might still be a
critical factor for Pathway. Wider revenue streams would also be
foregone.
¢ BES, AP, EPOSS but without further flexibility to integrate to clients!
systems would, perversely, meet most of the partners' requirements. But
it would still prevent POCL from securing wider revenue streams and
should be resisted, particularly given the overall conclusion that POCL
needs to redefine itself in a less Government sector dependent future.
The conclusion must be that full functionality is needed across the network.
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(h)
Platform Segmentation
Whilst the conclusions on network and function remain, it may be feasible to
consider different types of hardware particularly at the smaller end of the
network. This requires further scoping but should also be subject to the criterion
that POCL must not be seen as the partner that causes further delay to Horizon or
to its costs.
6.4
(a)
(b)
()
(d)
(e)
(6)
Next Steps
The following flow directly from the conclusions above.
PA facilitated workshops to achieve re-alignment and commitment to
Horizon. POCL will need to resist any attempts to use these workshops as a
backdoor means to re-open Contract A.
Alignment of Contract A timescales to match any extension to Pathway
contracts needs to be achieved without detriment to the volume floor
mechanism.
Business cases for AP, EPOSS, TIP/TMS, SAPADS, SAPCON and
confirmation of their operational "owners" need to be reviewed with the
requirement that financial benefits need to be realistically identified and
plans put in place to deliver.
Overlap between EPOSS and TMS/TIP needs to be quantified and a view
taken urgently as to whether there is scope for simplification and cost
reduction. This cannot however be seen to be the cause of Horizon delay.
The apparent option to leave the smallest 4000 outlets un-automated needs
to be scoped in detail to test its viability.
ABOVE ALL, POCL NEEDS TO SET IN TRAIN A FUNDAMENTAL
REVIEW OF ITS VISION, STRATEGIES AND STRUCTURE TO TAKE
ADVANTAGE OF THE WINDOW PROVIDED BY HORIZON. AFTER
2005 POCL CANNOT ASSUME ITS CURRENT HIGH DEPENDENCE
BOTH IN INCOME AND FOOTFALL FROM GOVERNMENT
BUSINESS.
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1)
2)
3)
4)
5)
6)
8)
9)
LIST OF APPENDICES
Terms of Reference
PA Report
Scenario 1 - Horizon Delays
Horizon Fails - Prior to Roll Out
Horizon Fails - During Roll Out
Credibility Watershed for Pathway
ACT Debate
¢ Compulsory ACT
¢ Accelerated Voluntary ACT
¢ Eliminating the 30% "Rump"
Partial Coverage
e Partial Network
¢ Partial Functionality
Description of Agreements and Contracts
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TERMS OF REFERENCE
CONTINGENCY PLANNING FOR “BA PULLING OUT OF HORIZON”
SCENARIO
1. Background: Horizon
¢ Horizon is a jointly sponsored programme, through a PFI service
contracts supplier by ICL Pathway (ICL), by Benefits Agency (BA) and
POCL to automate the end-to-end method of paying benefits at post
offices, and transfer the associated payment fraud risk out of the public
sector as far as possible.
e For BA this programme:
* saves method-of-payment fraud (est £150m)
¢ gives potential administration savings by ridding the process of
paper
e links up to their integrated system for customer accounting and
payment (CAPs)
e For POCL this:
¢ helps lock in through a new 8 year contract (Contract A) its biggest
client (BA) against a threat to promote/compel other channels
¢ aims to automate all products and services at all post offices
¢ provides the new front-end automated capability to join up with a
new portfolio of systems around its core operating process, and
critical infrastructure processes (separately contracted)
e For ICL this:
¢ gives the opportunity for new revenue streams
e gives a high profile supply for the UK Government
e isa flagship project, monitored at Fujitsu level that could contribute
to wider strategic options for ICL in the stock market
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2 Status
¢ Contracts were let to ICL in May 1996. Original national roll out to post
offices, with automated benefit capability and electronic accounting at
point-of-sale, should have started in July 1997
¢ Fora series of technical reasons, the programme has been delayed by
approximately 12 months. All parties’ business cases have been badly
damaged
* Political confidence is low with DS, and serious questions are being
asked about continued commitment by their Ministers. POCL and ICL’s
commitment remains high, notwithstanding the difficulties. POCL
believe this is central to our strategy, and our business plan is built
around this
¢ BA have sought further commercial redress and help from both ICL and
POCL recently, notwithstanding the contracts already in place
¢ Ajointly-sponsored independent review to all thrée parties is underway,
through PA, and will conclude by 24 September 1997
¢ BA expect to have to go back to DSS Ministers by mid-September to
confirm commitment/abort/change scope
¢ PO Chief Executive and POCL CEC are alerted to the situation ona
confidential basis
3. The Task
¢ Contingency planning is now needed to consider what needs to be done
under the scenario of BA indicating their desire to pull out/withdrawing
suddenly from Horizon. This should include scenarios of:
¢ BA totally withdrawing from the project
¢ BA cancelling card payment services (BES), but retaining the bar-
coded order book service (OBCS)
¢ BA insisting on post office infrastructure being rolled out prior to
committing to automated services being introduced onto it
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4. The Scope
a) Overall
e Anoverall approach would be to consider:
what did we originally set out to do (see 1 above)?
where are we now (taking into account various reviews done
and stakeholders’ views)?
what is the best way ahead for us to aim at proactively?
b) Immediate
e However, in parallel and urgently, we need to plan our reaction to the
scenarios (see 3 above) to include:
a plan for the legal and commercial tactics we could adopt
having reviewed the various relevant contracts (what would be
the legal timetable, and what barriers could we adopt?)
a plan for lobbying and influencing all relevant stakeholders
a plan for internal and external communication
a plan to know what immediate/short term decisions we would
have to make around:
a) the remainder of our Automation Programme
(continue/ delay /change scope for each big project)
b) the immediate market-place needs for other post
office automation given APT and EPOSS
functionality would no longer exist
c) any immediate extra investment needed for
existing systems that will need to be in place longer
d) any changes to key operational processes needed
(e.g. cash account plans)
e) check-step to confirm there are no extra Year 2000
issues
e We would also need to consider:
Business Strategy Review
what would our 5 year business plan look like (high level) if we
simply accepted BA pulling out and did nothing to replace
all/any of Horizon (but carried on with the rest of automation)?
what would our 5 year business plan look like if we
implemented the short-term responses referred to above?
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c) Allittle bit later...
¢ And most importantly, what would the shape of another business plan
look like to reflect what's the best way forward to us longer term in this
scenario? This would need to relate to the work-in-progress on revised
business vision, and refreshed commercial and IS strategies
¢ This scenario planning could be valuable even if BA do not pull out and
could then be split as:
- without disturbing BA’s “Contract A” with us (desired)
: considering changing parts of “Contract A” if essential (not
desired)
d) How to implement this
¢ There are various ways in which how the immediate/longer term plans
could be deployed to consider too, including:
= involving ICL some way
- buying out the kit/subcontracting supply
* re-sequencing the automation programme and,
- approaching BA with a new commercial deal/a different
service offer
5 Timetable and deliverables
¢ Bullet point plans to cover “immediate issues” (4b above) are needed by,
say, mid-September, for CEC endorsement
¢ Bullet point options for the remainder (4c and 4d above) is needed by,
say, end-October as a first stage with a review of which options to pursue
thereafter as part of the business planning cycles
¢ Some quantification of scenarios, at business plan levels, will be needed
on options
¢ Consultancy assignment disciplines needed to run this in the time
needed
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6. Resources needed
¢ CEC level sponsorship (Steering Group set up?)
¢ High level consultancy-type skills to lead this ‘project’ (full time) with a
small core “virtual team” drain from POCL people
e POCL skills needed:
- BA/ICL contract/legal knowledge (core)
= market planning (core)
2 automation programme knowledge (core)
7 business planning (part time)
- IS knowledge (part time)
- risk management check-steps (part time)
¢ Virtual team rules apply in the short-term (first call on time etc)
¢ Consultancy budget needed (none planned - overspend needed to be
approved at CEC level)
Zs Next Steps
During week commencing 18 August 1997:
e Endorse/amend these Terms of Reference
e Agree timetable
e Appoint team and team leader (consultant if necessary)
e Agree budget
Paul Rich
15 August 1997
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Appendix 2
PA REPORT
THIS REPORT IS ON A RESTRICTED CIRCULATION AT THE TIME OF
WRITING, SO IS TEMPORARILY OMITTED FROM THE APPENDICES
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Appendix 3
Impact of Delayed Horizon Roll Out
1(a) Likely Outcome
Horizon roll out commences January 1999 with an average 200 per week
beat rate resulting in completion end 2000/2001. All releases assumed fit
for purpose as per current planning framework.
(b) Potential Outcome
Horizon roll out commences Jan 1999 but bear rate averages 100 per week so
completion is delayed to end 2002/Jan 2003. Again all releases assumed to
be fit for purpose and to time
(c) Both of these are scoped in terms of impact on, Business case, POCL
Business Plan, Legal/contractual issues, back end systems, action needed by
POCL and overall input on POCL Commercial Strategy.
2. Impact on Market Dynamics
(a) Any delay to Horizon is painful as it allows relatively uncontrolled erosion
of business. It also means clients will be preoccupied with Y2000 issues and
will be reticent about investing resource in their own system architecture
until post Y2000 resolution.
However, discussions with Commercial Business Centres indicates there are
no show stoppers for POCL as such. Horizon platform within even the
longer roll out programme is still regarded as essential to support POCL’s
ability to retain and gain profitable business.
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(b)
(©)
(a)
(b)
The bill payment market is an exception in terms of the urgency to have a
wide reaching flexible facility in the network. Current delays are already
proving painful and will leave competitors such as PayPoint with
comparatively softer target. However, plans are already in place to extend
the APT platform in advance of Horizon in order to meet individual new
client needs.
The over riding need is to lock in BA with a non foil based payment system.
Hence the card payment system remains a key functionality for POCL and
continue: to be irrespective of delay.
Impact on Back end systems
Jan 99 to Jan 2001 Roll out
There are no back end system show stoppers and there may even be
opportunities for modest cost savings by reviewing project implementation
timescales. However the usual considerations around standing down
project groups for comparatively short periods apply.
Jan 99 to Jan 2000
Again no show stoppers but a need to address some important issues.
* Should full TIP be put on hold pending completion of roll out? This
might save money but will make it more difficult to develop client
integration/ take on plans. Certainly it could be difficult to respond to
client urgent requests.
In any event, the TIP solution as defined would be several years old by
the date of implementation - would it still be fit for purpose? (Being
considered by ATSG)
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¢ Hybrid platform is likely to need at least partial replacement to continue
to support existing systems. This may be exacerbated by the likely
mushrooming of clients involved in bill payment following deregulation.
(janet Topham is currently exploring this).
¢ May need to reconsider migration strategy and adopt a policy of
migrating to new back end systems before roll out is complete. Hitherto
seen as high risk.
¢ SAP/ADS benefits would be delayed, perhaps critically. Work is
underway (by Logistics Business Unit) to evaluate implications of de-
coupling from Horizon Roll out.
¢ Whilst many clients are unlikely to wish to devote resource to integration
during their own Y2000 work, this delay provides an extended window
for clients take on prior to roll out completion.
¢ Need to understand better the impact for other legacy systems which will
need to continue until roll out ends.
(c) Conclusion
Horizon delay does not jeopardise back - end system development but does
make it more complex and increases risk of financial benefits
delay/ reduction.
4. Legal/Commercial Contract Implications
(a) BA/POCL Contract A
This contract is pivotal to POCL’s financial position. The volume floor limits
protect income to POCL in the event of faster than expected volume decline.
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(b)
We must resist any pressure to renegotiate this since it would be difficult to
sustain the same level of floor limits this time. Renegotiation, other than by
mutual agreement, would be triggered, for example, by a collapse of
Horizon.
Neither of the roll out scenarios considered here would have a materially
detrimental effect on Contract A for POCL because of the floor limits.
However, current contract timescales are likely to leave POCL witha
continued commitment to Pathway changes potentially well beyond the
May 2005 end date of Contract A. i.e. longer than currently agreed 4mth
period. For example Roll out A would expose a further 10 months and roll
out (b) a further 22 or 32 months.
It is worth noting however that, for BA, delays in roll out will lead to delays
in financial benefit realisation whilst remaining committed to paying POCL
at the guaranteed minimum.
Contracts 1 to 3
It is not possible for BA to seek unilaterally to terminate any or all of these
contracts.
Notwithstanding that any fatal flaw in the Horizon platform would make it
difficult to prevent termination, the roll out timescales considered here
would not be sufficient to support termination of these contracts.
Nevertheless the complications regarding non uniform extension of contract,
as mentioned above, still applies.
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(©)
Conclusion
Ostensibly there are no show stoppers in the contract framework from now
to end of roll out.
However there is exposure to POCL from two eventualities :-
¢ for whatever reasons (e.g. CAPS delay) contract 1-3 extend significantly
beyond the end of Contract A. POCL then pays Pathway for services
provided but there would be no back to back arrangement with BA for
Pathway charges or POCL mainstream services.
¢ The final month of Contract A reverts to a unit charge framework with no
floor limits. Any attempt by BA to extend this contract on that final
month basis will need to be resisted vigorously.
There is every likelihood that Pathway will need to successfully negotiate
an extension to their five year contract framework. POCL renegotiation
tactics should include a drive to realign contract periods to overcome the
anomalies highlighted above.
5. Impact on Business
(a) POCL Business Case
Delays in the start of roll out and/or a lower beat rate increases the NPV
due to Pathway charges being delayed
MaPEC April 1996 NPV
(Roll out Spring 97 - Spring 99) £65m
Current Case (August 1996) £136m
(Roll out July 98 - July 2000)
Delayed Scenario (1) £148m
(Roll out July 98 - July 2000)
Delayed Scenario (2) £178m
(Roll out Jan 99 - Jan 2003)
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(b) Estimated BA Business Case
£m fm fm NPV NPV
Fraud Admin I Pathway (6%) (12%)
(100% Charges
Savings)
Original 134 146 (123) £776m £587m
Current 134 135 (122) £543m £387m
Roll out 133 54 (122) £423m £293m
Jan 99 -
Jan 2001
Roll out 133 -—- o £392m £258m.
Jan 99 -
Jan 2003
Assuming only 20% of fraud savings are claimed by BA delay dramatically
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worsens their business case (although the rest of the Fraud savings still accrue to
the treasury).
£m £m £m NPV (6%) NPV
Fraud Admin I Pathway (12%)
(20% Charges
Savings)
Original 27 146 (123) £153m £100m
Current 27 135 (122) £30m 3m
Roll out 27 54 (122) £19m £31m
Jan 99 -
Jan 2001
Roll out 27 —- (122) (£40m) (£45m)
Jan 99 -
Jan 2003
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(c) Estimated Pathway Business Case
Because of the difficulties in modelling the ICL Pathway Business case an
estimate of their original expected margin was taken.
Depending on what their original assumption was as to the percentage
return of the project the Case B is in a varying state of health (i.e. if 40%
margin was taken, then the case still costs in, however if only 20% was
taken, the case is now marginal).
Net NPV Net NPV
Benefit/ (12%) I benefit/c (12%)
cost at ost at
20% 40%
Original Case £270m £146m £540m £308m
Current Case £126m £3m £397m £165m
Roll out Jan 99 - Jan £9m (£78m) £297m £84m
2001
Roll out Jan 99 - Jan (£105m) (£146m) £165m £16m
2003
6. Impact on POCL Business Plan (1997/8 - 2001/02)
(a) Roll out ending Jan 2001
1997/8 1998/9 1999/ I 2000/01 I 2001/02
2000
Original Business (26) (70) (77) (79) (77)
Plan Impact £m
Absolute (8) (15) (63) (86) (81)
Numbers £m
Variance from 18 55 14 @). (4)
Business Plan
£m)
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(b) Roll out ending Jan 2003
1997/8 1998/9 1999/ 2000/01 I 2001/02
2000
Original Business (26) (70) (77) (79) (77)
Plan £m
Absolute (7) (11) (33) (65) (76)
Numbers £m
Variance from 19 59 4 (4) @
Business Plan £m
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vis Impact on POCL Commercial Strategy and other supporting strategies
(a). Crucial to POCL’s Commercial Strategy is to safeguard for as long as
possible both the footfall and income from the largest client, BA. It
also needs the ability to develop opportunities with new and existing
clients based on improved (more efficient) operating procedures and
better management information.
Horizon (and the BA/POCL Contract A) is an essential element in
achieving this ambition.
Either roll out scenario still support the medium term strategic
direction for POCL.
(b) Supporting strategies which may well need realigning include
¢ LS. Strategy. The present IS strategy appears to date back to a pre -
Horizon environment. There is obviously a need to develop an IS
strategy that takes account of Horizon as well as the emerging
Commercial Strategies and that can set priorities for support
systems.
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¢ HR Strategy: Strategy should remain intact but short term tactical
tasks will need addressing e.g. use of specialist resources during
intervening period of delay, recruiting/ training suitable numbers
of support staff for roll out, sensible exit packages and plans for
end roll out, future profile for recruitment candidates.
¢ Retail Strategy : Assuming their is a robust linkage between the
emerging Retail Strategy and the Commercial strategy, Horizon
might prove a constraint to the outlet formats being considered. A
decision will be need on how any totally new retail format can
input compatible data to the Horizon - TIP data flows.
8. Internal/External Communication and Stakeholder Lobbying
(a) Internal Communication
This is a much broader issue than just for those scenarios. Nevertheless,
there is a need for a positive but realistic message to be communicated soon
to the network. This may help to stem the growth of speculation.
Once the way forward is clear then a further definitive statement should be
followed by regular, relevant updates.
(b) External Communication
Until we are absolutely clear on the way forward it seems imprudent to
communicate externally other than on a very controlled level to clients.
(c) Stakeholder Lobbying
This should be reserved for eventualities that may lead to curtailment of
Horizon and in particular Contract A. In the scenarios scoped here there
would seem little point in lobbying Government at this stage
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Appendix 5
SCENARIO 9
HORIZON FALLS
Development work stops - contract termination initiated November 1997 -
project closed down May 1998. All parties acknowledge Horizon is dead
OPTIONS
¢ (a): Termination acknowledged in November 1997
¢ (b): Termination acknowledge in April 1998:
- Pathway development continues
- BA negotiations fail eventually
¢ (c): Live trial - fatal flaw:
- Decision to termination October 1998, close down
March 1999
FRONT-END
¢ Nothing in place or planned
BACK-END
¢ No automated feed into TIP/ADS/SAPCON. TIP to continue needs modified
cash account/ manual feeds ADS reduced benefits - CASM replacement Whole
Office View not possible
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SCENARIO 9
EXISTING SYSTEMS
¢ Continue and need to be supported and maintained including hybrid platform
¢ Market forces demand APT extension 6000 > 10000 Y2000 as currently need to
support larger volumes (is this sustainable customer service?)
CLIENT TAKE-ON
¢ DNS, Girobank, (bill payment)
- limited expansion
¢ RMcontinue to seek alternative channels
e BA:
- worst case Compulsory ACT > £250m? pa revenue loss
2002/3
= best case renegotiation Contract A
- ACT encouragement £50m pa
- Knock-on impacts e.g. on corporate deposits
LESS SIGNIFICANT
e DVLA -at risk medium term
¢ BBC - essentially bill payment
e Parcelforce - F.A.
e Passports - some network will do
e Bureau de Change?
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SCENARIO 9
NEW BUSINESS
e Insurance
¢ On-line ticketing
e EFTPOS
RESOURCING AND MANAGEMENT - COST REDUCTIONS
¢ Close down PDA
¢ Stand down regional support structures
¢ Curtail TIP & SAPCON
SAPADS??
Curtain development function
OFFSET INCREASES
e APT expansion
¢ TIP etc redesign/cash account modification and replacement
e Support for new logistics function
REPLACEMENT SUPPORT FOR
IS STRATEGY E.G. FUTURE AUTOMATIONI
PLATFORM)
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SCENARIO 9
FUNDING - IMPACT ON POCL
¢ Close down costs with Pathway (including legal fees)
¢ Closing down PDA - redundancy etc
¢ Standing down Regional Support (EVR knock-on)
¢ Beneficial impact on profit? Short term?
¢ Medium/long term hit on profit
e Fund of increase (revenue/capital):
- logistics (CASM v. Stock v. Tr. Stock)
- TIP/cash account
- IS Strategy
FUNDING - IMPACT ON BA
¢ Savings in PDA/ Pathway cost
e Reduced administration savings (keep foil)
¢ Reduce fraud savings
© Cost of achieving alternatives
¢ ACT debate
¢ Opportunity to radically revamp (short term) benefits structure (Frank Field)
© Cost savings from renegotiated Contract A £50-120m?
¢ CAPS costs exposed
FUNDING - IMPACT ON PATHWAY
¢ Raison d’étre disappears
e Exit costs (blow-back to BA/ POCL?)
¢ Negative brand impact
e Longer term impact on ICL? (What will Fujitsu do?)
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SCENARIO 9
BOX E: ASSUMPTIONS
¢ POCL wish to retain bill payment market position
¢ Continuing with back-end system replacements
© We don't lose existing clients in short/medium term
BOX F: IMPLICATIONS
¢ Impact on cash market programme and secure stock rationalisation
POCL could restructure sooner. (a) overhead; (b) network e.g. 5-8,000 outlets
Cost implications
Can we afford/do we need back-end system changes
How long will existing clients sustain a non-automated platform? E.g. When
do they proactively plan disengagement?
When does POCL face managed and unmanaged decline?
¢ No debit card facility
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Appendix 6
HORIZON FAILURE SIX MONTHS INTO ROLL-OUT
Introduction
Horizon commences roll out with all technical issues ostensibly resolved. As roll-
out progresses a growing awareness builds of potentially serious failures. These
might be purely technical or a combination of scale of operation and software
limitations.
This scenario assumes that at the six month point a decision has to be made that
further installations cannot proceed because the level and scale of failure is too
serious.
This paper scopes at high level the main implications and suggests preparatory
work that would appear necessary in order to mitigate some of those implications.
What would the network look like at six months after roll out starts?
Leaving aside London offices, the need to focus on critical mass, inter alia, will
mean that some of our larger offices will be part of the first six months batch.
The likelihood is that roll out rates (beat rates) would build over the first few
months and, given there might well be failures signalled on route, it is a
reasonable assumption that an average rate of 100 per week would apply. In other
words probably some 2500 offices will have been completed with full
functionality.
By inference part or all of that functionality could by then be exhibiting serious
enough problems to cause unacceptable service failures.
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Impact on Customers
BA card customers in particular would probably number some 1.2m by this stage.
Given the roll out parameters, i.e. by BA Local office areas there would be no
alternative method for customers to access their benefit particularly in busy offices
such as these.
Impact on other customers would depend on the level of penetration of product
development with clients; affect of longer serving time through revision to
manual working and potentially higher error rates.
Impact on Clients
All clients’ customers are likely to be adversely affected if only through serving
times. The level of commitment by individual clients, to, say, vertical integration
could render their operation at least temporarily unworkable. Of course there
would be loss of confidence throughout.
Impact on POCL
Front end operation becomes at best totally disjointed. Even when a contingency
solution is imposed it is likely to extend transaction times etc. The failure of BES
would be potentially damaging and exposure to e.g. fraud would need to be
quickly resolved.
Generally we would see an erosion of our customer base on many core
transactions e.g. Bill payment but also because ACT starts to look more customer
friendly!
An automation platform remains crucial to POCL’s commercial strategy and
therefore we would face the dilemma of whether to resolve the problem or rapidly
pursue an alternative.
Despite any protection that Contracts I and II may provide there is likely to be
significant exposure financially for POCL.
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Impact on BA
A major component of their strategic programme has failed. They have over
1million customers with ostensibly a worthless card and even by replacing
temporarily with girocheques, this could take a month to implement.
Impact on Pathway
Any financial exposure to BA would be passed across to Pathway and would
cause financial collapse. Most of their financial investment would have been
committed.
Conclusions and Recommendations
As with any “disaster scenario” the implications are enormous for all players but
particularly the supplier, Pathway.
The true added value of this kind of scoping is to highlight the need for risk
assessment and contingency planning. The following are therefore the key
recommendations:-
- A full risk management exercise for this scenario needs to be completed and
robust contingency planning conducted with appropriate ownership
assigned within POCL. It should be included in the Business Risk Register.
- A management process needs to be in place that can take “early warning”
signals from service monitoring and ensure that appropriate action is
commissioned including the point at which failure rates lend to suspension.
This is particularly important if the service management elements of the
programme are not yet running at full speed.
- Because the BES functionality is so critical and there is no ready full back in
large scale terms, there needs to be particular contingency development in
this area.
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Appendix 7
CREDIBILITY WATERSHED
Introduction
This eventuality is being evaluated in order to try to have a safeguard for POCL
should we find at any time that Pathway face a fatal show stopper which forces an
end to Horizon.
The two key areas of potential failure are (a) a major technological breakdown and
(b) operational inability to deliver successful roll-out..
The litmus test is whether we can identify an alternative path that represents a
better result than continuing to accept slippage on the present programme.
What would make us feel that Pathway cannot ever deliver?
Despite the current opportunity for Pathway to re-plan their operating milestones
and with the benefit of PA’s recommendations:
a) _ Accritical software release fails to achieve live trial operation in a
reasonable pre-determined timescale and/or
b) Absence of a comprehensive roll-out programme including details of
resource requirements and sourcing plans that appear robust, auditable
and credible
Practical Decision Criteria
The two key software releases that give evidence of Pathway’s ability to deliver
are:
Congo 4: BPS for Child Benefit; OBCS and interfaces with CAPS.
Currently scheduled for delivery into live operation by 3
November 1997
NILE2: APS; EPOSS; OBCS; Enhanced BPS.
Currently planned for live operation in June 1998. This
release is subject to Pathway re-planning in October 1997
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There would be logic in adopting Congo 4 as the litmus test given its significantly
earlier expected release and its criticality to BA as well as POCL
Implications of seeking an alternative supplier
a)
b)
°)
d)
It would be very difficult to keep BA at arms length in any quest for anew
supplier
It is imperative that we protect Contract A and not provide BA the
opportunity to seek re-negotiation
The process therefore would need to be a joint POCL/BA exercise and
therefore would be constrained by GATT and related procurement rules.
There would also be lengthy dialogue within BA and ostensibly between
Ministers
If this process were initiated in January 1998 a preliminary scoping suggests
that initial milestones might be in:
January 1998 - process commences with preliminary
discussions with BA
September 1999 - BA/POCL ready to place advertisement
in appropriate journals to solicit
interests from potential suppliers
January 2001 Sign contract with new supplier
January 2003 - Roll-out starts
January 2005
Earliest roll-out completion
Even if these timescales are inaccurate, the implications are:
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° We face at best a protracted development period before we can be
confident of having a working platform albeit with a completion date
beyond our current worst predictions
¢ Placing an advert (Sept. 1999) is a public demonstration of loss of faith in
Pathway no doubt leading to legal challenges. However, this provides a
further reality check against the position then reached by Pathway.
Should Pathway have convinced us of their deliverability we could
withdraw from the alternative route at minimal cost
Other Considerations
a) This is a PFI scheme and PFI is currently favoured by Government both as a
funding mechanism and access to project delivery expertise from private
sector
b) Our eventual approach will need to be defensible to Ministers given the
wide political ramifications. It will also need to be robust against challenges
from Pathway that BA and or POCL have contributed to failure
c) Our latest understanding is that the continuing delays are the result of
management processes and approach in Pathway particularly, rather than
any inherent technical fatal flaw. The implication is therefore that these
should be resolvable provided appropriate measures are put in place
d) The attraction of commencing an alternative path would give BA/POCL
some earlier start should, say, Fujitsu close down Pathway. This has such
wide-ranging implications (particularly Contract A) that it is not an over-
riding reason for pursuing the alternative path
e) __ It is conceivable that support could be obtained from the PFI department
of the Treasury to help identify ways in which Pathway can be
aided/ encouraged to deliver. This may include a more flexible
interpretation of the PFI rules
eer res: gata arias:
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Options and Recommendation
The three broad options appear:
a) Do nothing and persevere with current programmes
b) Adopt a watershed of Congo 4 available for live operation, say, March 1998.
Failure of this would lead to BA/POCL opening discussions with PFI
Department of Treasury to identify if they can be of help regarding
Pathway’s deliverability
c) Adopting, again, the Congo 4 trigger but leading to BA/ POCL
commencing discussions to plan for exploration of an alternative
supplier
Option (b) would provide both a low risk of external market exposure yet may
identify some helpful re-alignment within Pathway
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21
Appendix 8
The ACT Threat
Introduction
This report addresses the potential impact that compulsory ACT might have
on POCL and its operation. It builds on the analysis _ carried out in
1992/93 when a serious attempt was made by the DSS to move towards
compulsory ACT.
As with ‘.e arguments in 1992/93, slow compulsory ACT (ie only all new
beneficiaries) is regarded in Treasury terms as leading to a similar “steady
state” result as full compulsion, albeit taking 16 years to reach. It is not
therefore scoped in depth in this report.
However, a scenario of accelerated voluntary ACT, achieved through
vigorous promotion and incentivisation, is scoped as this would appear a
tempting, relatively low risk proposition for BA.
Summary and Conclusion
In 1992/93 a potential net benefit to the Treasury of around £70m pa was
demonstrated as the likely difference between full compulsory ACT and
POCL/’s proposal to use a basic automation platform enabling BA to use
Smart cards for payment.
The considerable political implications of wide network closures, continuing
subsidies for POCL/SPSOs and of course the concept of limiting customer
choice against a relatively “minimal” net benefit for the Treasury, helped to
secure support for continuation of voluntary ACT and an automated
platform for POCL.
This time the logical comparison is against Horizon
implemented as per the summer 1997 re-plan ie roll out October
1998 and ends summer/ autumn 2000.
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2.2
2.3
24
The overall “Treasury” case for full compulsory ACT shows a
substantially higher net benefit than last time up to £130m pa at
steady state. This is primarily due to the Pathway charges being “saved” by
BA.
The impact on POCL would be a loss of some 60% of BA
transactions representing c 16% loss of total business volume in
year 5 (steady state). Added to this would be a loss of some 6% of total
business from ancillary transactions lost through reduced footfall.
Without subsidies to POCL and SPSOs this could be expected to
drive “self-determined” closure of some 4,500 medium SPSOs.
POCL would find it difficult to restore viability and would need
to consider closure (not franchising) of some 500 Crown Offices.
The effect of both controlled and uncontrolled network closures
would be the further loss of some 7% of total business.
However, POCL’s then operating deficit might be around £199
million pa. But the network has by then become unstable and
further network closures, with ensuing loss of business, would be a high
probability.
The main political, social and wider economic impacts remain
broadly as in 1992/93:-
- Customers become greatly disadvantaged due to loss of
choice and this becomes exacerbated by any network
closures. The latter affecting not just BA beneficiaries.
- The Government would be seen to have been active in
producing some 17,000 plus job losses - unless
committing to very sizeable and ongoing subsidiaries to
POCL/SPSOs.
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28
- A serious disruption would result in the UK’s ability to
re-circulate coin. Either coin mountains would grow
and/or the Royal Mint would incur sizeable costs of
re-distribution.
- Girobank’s viability would be put in question as it would
have to withdraw substantially from the Corporate
Deposits market.
- There would be substantial and co-ordinated adverse
reaction from the NFSP, directed towards Government.
CWU might also become active if they perceive that the
future of Crown Offices is at risk
- BA would need some form of fraud control on the 30%
“rump” of foils business. This might well need to be a
form of ESNS across our remaining network - a very
costly proposition not scoped in detail here.
BA could wish to step up significantly their promotion of ACT,
even to the point of incentives. It is very difficult to estimate
just what rate of “conversion” could be achieved but consensus
within the POCL team is that a total rate of 3% per annum drift
to ACT is probably the best BA could achieve, even with incentives.
(Current rate is between 1 and 2% per annum). Annex III shows some
detailed analysis.
The increased rate of penetration would produce a maximum gross benefit
to BA of around £20m pa by year 5 (to maintain comparability with the
compulsory scenario). That gain to BA would be at the expense of Pathway
(reduced charges) and subpostmasters (cost recovery from reduced
volume). _ POCL's direct income would not be affected so long as Contract
‘A’ (POCL/BA) holds. The loss in related business would be relatively
insignificant in this time scale.
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2.6
2.7
2.8
A further consideration detailed in Annex IV is whether, having
introduced compulsory ACT to 70% of beneficiaries, BA could
find a way of eliminating the remaining foil-based transactions.
Unless the Government were prepared to mandate private
institutions and reluctant beneficiaries to operated conventional bank
accounts there is no straight-forward solution.
POCL could provide an ACT equivalent service in conjunction
with say, Alliance and Leicester, but would need on-line
automated network to do this and would no doubt wish to
reflect this in charges to BA.
In conclusion, whilst the Treasury case for compulsory ACT
appears stronger than in 1992/93 the maximum net benefit is
still relatively nominal when set against the politically
challenging implications of such a move. This option therefore
appears an unlikely one. The concept of accelerating ACT via
promotion/ incentives appears to have an appeal for BA but the
gross benefit is modest and would require continuous
expenditure of similar if not greater magnitude. This does not
indicate an option of complacency for POCL. Eventually the
continued impact of ACT will cause POCL to need to re-align
itself to a significantly changing market place. What this does suggest is
that a short term disaster scenario for POCL is
unlikely but POCL has a window of opportunity to re-align its
commercial and operational strategies.
Note: This form of scoping exercise is so dependent on
judgmental inputs that the specific numbers are less robust/
meaningful than the overall message.
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3. Direct Impact of Full Compulsory ACT
Annex I, table 1, shows the current projection of BA business volumes and
income, indicating a total POCL/Girobank charge to BA in 2002/3 of £415
million.
Table 2 indicates the projections for BA volumes as the result of full
compulsory ACT commencing April 1998. The fall in conventional foil-
based BA work represents a 60% decline from the current projection for
2002/3.
Table 3 illustrates the likely price (income) impact for POCL assuming
Horizon falls; Contract ‘A’ is re-negotiated; Green Giro migration from
Girobank to POCL continues but volumes fall to some 50% of current
projection for 2002/3. The impact is that BA could see a total
POCL/Girobank charge of c £252 million in 2002/3 compared to current
projection of £415 million.
However, if Horizon falls BA would not incur the estimated “steady state”
Pathway charges of around £127m.
3.1 POCL Impact
The direct loss of 60% of BA volume by 2002/3 reduces income
to POCL/Girobank of an estimated £163 million pa (equivalent to
approximately 16% loss of total business). Of this, the likely
recoverable cost from subpostmasters’ pay is:-
£163m x 0.78 (% share of volume) x 0.6 (recoverable costs)
= £76m pa
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3.2. Impact on BA
Annex II (Table 4) illustrates the direct costs/savings dynamics
for BA.
Under the current programme and contract, BA would expect to
make a running year saving by 2002/3 of £250m pa comprising £150m
of fraud saving and £100m of admin saving.
By moving to compulsory ACT, BA would make a running year
saving in 2002/3 of £475m pa comprising £163m from
POCL/Giro charges; £105m from fraud; £80m from admin and £127m
from Pathway charges.
3.3. Impact on Subpostmasters
Two principal effects. POCL would expect to recover cost savings from
subpostmasters’ pay for the direct business lost. This would be of the order
of £76m pa.
There would then be an issue of viability for many offices unless
a direct subsidy were made of a similar order.
Irrespective of subsidy the reduced footfall would impact on
private side business. This is difficult to scope but is dealt with
later in the report. It is worth noting that in 92/93 the Treasury
view was that only that element of profit loss on private
business should be considered in any calculation.
4. Indirect Impact of Full Compulsory ACT
4.1 The effect of reducing BA transactions by 60%, in addition to the
impact described in 3 above, would be to reduce footfall
throughout the network. If we assume an average of 1.5 BA
transactions per visit this equates to a drop in customer visits of
around 20%. This will, in turn, impact on customers’ decisions to use post
offices for related transactions.
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Using the latest Commercial Proposals (draft) estimates of
relevant product income for 2002/3 and an estimated reduction
due to footfall loss:-
Income Est loss due to foot-
£m 02/03 fall reduction
% £m
Financial Inpayments 186 -10 18
Savings 54 5 2
Corporate Banking 162 -30 55
Mails 270 2 5
Lottery 55 -10 5
£727m £85m = 12% loss
NB: Total income forecast for 2002/3 is £1414m so this product
range represents approximately 50% of total. Thus the indirect loss of
business is approximately 6% of total business.
4.2 However, the impact does not stop there. All SPSOs except the
very smallest outlets will face an income reduction of the order of 22% (16%
direct and 6% indirect) together with a corresponding reduction in private
retail earnings. Given the delicate balance that already exists for many such
outlets it is almost certain that a significant number will close because of, or
just ahead of, financial non-viability. We have estimated this to be of the
order of 4,500 (unless a direct subsidy were payable).
4.3 Furthermore, POCL would wish to address its cost base radically
and we have taken the view that POCL would elect to close (not
convert) some 500 of the remaining 600 or so Crown Offices.
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Assumptions on network segmentation costs:-
Type of Outlet —% of total
volume
%
Crown 225
FPOs 4.4
MSPOs 9.2
SPSOs (Large) 32
SPSOs (Med) 28.4
SPSOs (Small) 35
£
Average
Cost/BTH
45.4
32.7
29.2
30
42
68
Typical
no of outlets
600
) 900
)
3000
8000
7000
44 Assumptions on Network dynamics following compulsory ACT:-
L 500 Crowns handle approximately 20% of total business.
After closure some of this business is lost; the remainder
migrates to SPSOs and MSPOs approximately 75% and 25%
respectively.
2. 4500 Medium SPSOs would close due to loss of income
(we would expect small outlets to be “protected” by
remuneration mechanism and outlets near to closing Crowns
to benefit from migrated business). Again some business
would be lost and the rest migrate to other offices.
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4.5 Secondary impact assumptions on business volume (due to
closures)
2002/3 2002/3 further erosion
income due to office closures
forecast
after ACT
effect
£m
% £m
Fin.uicial Inpayments 168 -30 50
Savings 52 -20 11
Corporate Banking 107 -10 11
Mails 265 -10 26
Lottery 50 -10 5
£642m £103m = 16%
loss
NB: Based on total income forecast of £1414m this represents a
further 7.3% erosion of total business.
4.6 Total Impact on POCL Forecast Volume
Current assumption (Sept 1997) for volume in 2002/3 = 24.5m BTH
Thus: Volume loss due to ACT directly (16%) =3.92m BTH
Volume loss due to related transactions (6%) =1.47m BTH
Volume loss due to closures (7.3%) = 1.79m BTH
Total Volume Loss = 7.18m BTH
Residual Volume 17.22m BTH
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4.7 Other considerations on POCL income
POCL would face a rapidly declining network but one whose size
and location would, be out of control. This would impact adversely on POCL’s
ability to attract new clients until we could show an acceptable level of network
robustness.
However, two key areas of financial income can be scoped, albeit
loosely.
a) Reduction in outpayment for BA of the order implied would
reduce POCL’s need for cash by about £30bN pa. This in
turn would need to be reflected in the Girobank/POCL
relationship and, assuming the new partnership rates apply,
would mean approximately a £40m loss in gross profit of
which POCL might be expected to ‘share’ £20m pa.
b) Coin would still enter POCL’s network through the wide
range of inpayment services and some residual corporate
deposit business. The fundamental need for such coin (BA
benefit are rarely in “round” figures) would have reduced
so much as to lead to coin mountains re-appearing in POCL.
An estimate of interest loss (acceptable to Treasury in the
92/93 calculation) is £20m pa.
5. POCL Cost Recovery
5.1 For the purpose of this calculation, assume 5000 offices (500 Crown
: 4500 SPSOs) have closed.
5.2 500 Crown Offices closing would represent approximately 20% of
total volume (residual) = 20% of 17.22m BTH = 3.44m BTH.
Assuming this residual business migrates to MSPOs/large SPSOs
whose average cost of operation is c £30/BTH:
Cost recovery = 3.44m BTH x (45.4 - 30) = c £52m pa
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5.3
6.1
6.2
6.3
4500 SPSO closure: assume business migrates both to larger
(therefore cheaper) and smaller (therefore more expensive) outlets
in broadly equal proportions. Thus, no saving associated in
differential cost of SPSO network.
However, main saving would be from remuneration cost recovery
(a) Direct BA business lost (see 3.1 above) recovery = £76m pa
(b) Indirect related loss of business = 1.47m BTH x 0.78 x 0.6 x
£42 per BTH = £29 million pa
(c) Indirect loss of business from closures = 1.79m BTH x 0.78
x 0.6 x £42 per BTH = £35 million pa
Other significant relevant costs
Compensation payable to 4500 SPSOs, if proved that this was
directly caused by POCL;
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4500 at an average of £33K = £148m one off and spread over five years
to 2002/3. NB: This relates to approximately 10,000 job losses.
EVR costs of closing 500 Crowns (approximately 7,500 job losses)
would be £56m as a one-off cost.
The 30% “rump” of foil-based BA transactions would be heavily
fraud prone without a suitable at least ESNS. system.
Estimated cost of this is difficult to scope BUT would need to be
available throughout the network and could certainly be of the
order of £100m.
Running costs would then need to be added to the on-going costs
to BA and Treasury including interest and depreciation. Perhaps
£25 - 35m pa.
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7. Summary of POCL Income and Costs Dynamics
Loss of Income
POCL income loss at 2002/3 from BA/Green Giro
POCL income loss at 2002/3 from related business
POCL income loss at 2002/3 from network closure
POCL income loss at 2002/3 from Corporate Deposit
profit share
POCL loss of interest on coin mountain
Cost Recovery
£m
163
85
103
20
20
£391m pa
Cost recovery from SPSOs for BA and related volume loss —105
Migration from 500 closed Crown Offices to SPSOs
52
Cost recovery from SPSOs on business lost through closure 35
Plus:
(a) One off EVR costs of £56m
(b) Compensation to closed SPSOs, one-off, £148m
(c) SPSO private side “lost profit” subsidy c £4m pa
£192 pa
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8. The Treasury Case
8.1 Compulsory ACT with no PO closures: Estimate based on steady
state at Year 5.
Savings £ million
Savings to BA from POCL/Giro charges 163 pa
BA admin savings 80 pa
BA fraud savings 105 pa
Savings to BA from ceased Pathway charges
(BES; PAS; CMS) 127 pa
Total 475 pa
Costs
Cost to POCL of direct and indirect business
loss (163m + 85m + 40m) 288 pa
NB: This would represent the subsidy required
including £105m passed on to sub-
postmasters for PO business loss
Cost to BA of ACT transactions (580m @ 4p) 23 pa
Cost of ESNS system for 30% Rump of foils c 30 pa
Compensation to subpostmasters for loss of
private side profit 4pa
Total £345 pa
Net Benefit, Prima facie, to Treasury £130m pa
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Other Cost Considerations
(I) I ESNS- type system to prevent fraud in 30% “rump” may
need around £100m up front capital investment.
(Il) Set up costs for BA to implement compulsory ACT (DSS
estimate) £50m.
(II) If banking account charges for customers were to be introduced
and passed on to BA this would reduce the net benefit still
further eg if credits and withdrawals matched in terms of
frequency, a cost of 6p per transaction would eliminate the net
benefit to Treasury.
(IV) Even the level of subsidy indicated would NOT guarantee the
network since footfall loss would still hit subpostmasters and
growing loss of confidence from clients would put other
business at risk.
8.2 Compulsory ACT with post office closures (steady state at Year 5)
Savings
£ million
Remain as in 8.1 475 pa
Costs
Costs to POCL of direct and indirect business
loss before closures £288m pa
Further business loss due to 5000 offices
closing £103m pa
Total income loss £391m pa
Less cost recovery:
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Crown business to SPSOs (500 closures)
saving £52m pa
BA business lost, recovery from SPSO
remuneration £76m pa
SPSO recovery from indirect business loss £29m pa-
SPSO recovery from business lost via
closures (SPSOs) £35m pa
Total cost recovery £192m pa
Net cost to POCL £199m pa.... 199 pa
Cost to BA of ACT transactions 23 pa
Cost of ESNS system (30% Rump) 30 pa
Compensation for SPSO private side profit loss 3 pa
£255m pa
Net benefit to Treasury £220m pa
Other considerations
In addition to the points made in 8.1 above;
(1) POCL would need to pass on a subsidy to (non-closing) SPSOs
of around £64m pa.
(Il) POCL face a compensation payment of c £148m (one off) to
closing SPSOs (10,000 job losses)
(III) POCL also face EVR costs of £56m for 7,500 job losses in
Crowns.
(IV) Even with a subsidy of £200m pa to POCL NETWORK IS NOW
UNSTABLE
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9.1
9.2
Other Impacts and Considerations
The coin mountain problem
POCL turns over the UK’s total coin usage once per annum.
If we remove 60% of cash in hand business at Post Offices we
create an imbalance on notes and coin coming in via remaining
corporate deposits; bill payments; DVLA; BBC; Royal Mail and
ability to re-circulate coin in particular.
NB: State benefits are rarely round numbers in pounds only.
Main impact for POCL is likely to be a coin mountain. 1992/3
evaluations suggested an interest loss of £20m pa. The main
action POCL could take is to cease/ severely reduce the cash
purchases from Girobank, see below.
Impact on Girobank
Loss of c£30bN corporate deposits would reduce Girobank
profit by at least £40m pa. This would prove critical and is
likely to spiral into decline as their credibility in the market
place deteriorates.
Unlikely to make much money from new personal accounts
since these would tend to be low average holding and high
frequency of usage.
NB: New partnership, profit sharing contract structure means
POCL will, arguably, bear more of the brunt than before.
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9.3 Impact on agents
In addition to direct loss of income there is a possibility that drop
in footfall/ BA traffic would have a proportional impact on their
private business.
1992/93 work suggested around £4m pa impact on the net profit
earned. This is probably still the best guess although it has
always seemed on the low side.
9.4 Impact on customers
= Lack of choice (politically difficult!)
- Inconvenience of no “cash in hand”
- Cost, in some cases, of operating a low value bank account
- Further inconvenience of network closures
9.5 Compensation
Ostensibly, POCL’s viability could be maintained via a direct
grant from Government or an indirect grant via RM and a reduced
Post Office EFL.
POCL would need (steady state) subsidy of £288m
of which, direct pass on to SPSOs would be £105m
plus SPSO private side £4m
to try to avoid office closures
With office closures POCL would need a
subsidy of £199million pa
but would probably have to pass on a
subsidy to SPSOs that didn’t close of
around £64 million pa
plus private side c £3 million pa
But we would still have an unstable network
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10.
10.1
10.2
Impact on BA
Positives
*
Compulsory ACT enables BA to operate a very inexpensive
(4p v 40p) distribution method for up to c 70% of
beneficiaries by 2002/3.
Fraud reductions commensurate with ACT roll out
Some admin savings (but c 250 million foils pa would
remain)
BA not “locked in” to POCL, except for 30% “rump” and
more freedom for major restructuring of the welfare system
Ability to reconcile accounts for 70% of market but for
remaining 30% would need some form of ESNS or similar
Negatives
*
POCL could/would up-price 30% rump
Some system (eg ESNS) needed to protect 30% rump from
fraud (but see also later treatment of this scenario in Annex IV)
ACT difficult to audit trail re fraudulent claims which are
said to account for over £1 billion pa
Pressure from banks etc to introduce account charges.
Political pressure from BA to bear these rather than
claimants
Secondary legislation needed - likely to draw public
attention and concern
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In Strictest Confidence
Table 1
Millions
ACT
97/8
98/9
99700
00/01
01/02
02/03
Current
Volume
Projection
(including
Automation)
Total Market
953.4
935.1
844.2
837.6
827.1
POCL
770.2
745.2
692
633.3
609.4
POCL Share
81%
80%
78%
76%
75%
74%
Income
Projection to
POCL (include
GG migration),
and
Automation
(Outturn prices)
354
355.6
361.6
373.1
378.3
377.6
Income to
POCL from
Green Giros
whether or not
migrated
(Outturn prices)
34-36
34-37
34-42
36-36
37-36
38-37
Total charges to
BA
390
391
396
415
415
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ANNEX I
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ANNEX I
Table 2
ACT
Millions 97/8 98/9 99/00 I 00/01 I 01/02 I 02/03
Volume
assumptions
with
compulsory
ACT reducing
POCL to 30%
share by 2003
(Commences *
April 1998)
Total Market 953.4 935.1 844.2 837.6 843.3 827.1
POCL 770.2 707.9 622.8 511.7 380 243.8
POCL Share 81% 76% 70% 61% 45% 29%
Green Giro
volume
Current decay 54 54.0 41.6 49.6 49.1 48.6
curve (Mill Tx) 100% 95% 89% 80% 64% 48%
Share
Revised (Mill 54 47.9 42.4 39.7 31.4 23.3
Tx)
Table 3
POCL Charges to BA
Assume re-negotiated contracts with BA, including Green Giro
migration, is based on 97/98 mix of fixed/ variable prices
Assume Finance charge varies with volume
£ million
Fixed (include GGs) 139.2 143 151.3 I 161.2 _I 164.4 167.6
Variable 135.2 126.7 I 113.8 I 95.3 72.2 47.2
Finance (include GGs) 79.7 73.4 64.5 53.7 41.4 28.7
POPOS etc 2.0 2.0 2.0 2.0 2.0 2.0
Green Giros additional fixed 47 Inc above
fee ed
@20p/Tx variable 10.8 9.6 8.5 WEI 6.2 47
Assumed Girobank fixed 18.4 19.7 15.8 14 14 15
charge to BA
Total £m 390 374.4 I 355.9 I 321.5 I 287.6 I 251.7
108
Table 4
Projected Benefits to BA from (FAST) Compulsory Act
(Outturn prices) £ million
97/8
98/9
99/00
00/01
01/02
02/03
Current POCL and
Girobank charges
Including
Automation
390
391
396
409
415
415
Assumed charges if
ACT (Fast)
introduced April
1998 (No
automation) inc
Green Giros
Fraud Reduction
with Horizon
- Platform
390
374.4
355.9
321.5
287.6
251.7
ALPS(?)
Admin Savings
100
100
Fraud Reduction
with Compulsory
ACT
30)
105
ALPS
40)
Admin Savings with
ACT (92/3 work)
33
52
Costs of ACT
implementation
(50)
Savings in Pathway
costs (PAS; CMS;
Rising
to
127
127
2+
SF
240
312
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ANNEX II
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In Strictest Confidence
Annex III
EVALUATION OF ACCELERATED VOLUNTARY ACT
1. Potential Methods for BA
* proactive promotion (ongoing cost of this to maintain effects)
¢ revised documentation (limited scope before this becomes overtly
“unfair”)
* incentivisation (probably needs to be c. £50 per person as a one-off cost)
2. Current ACT impact assuming Horizon continues
98/99 2002/03
Total market (million 935.1 827.1
transactions)
POCL share (million) 745.2 609.4
% 80% 74%
3. Compulsory ACT impact assumptions
98/99 2002/03
% 76% 29%
4. Accelerated Voluntary ACT assumptions
98/99 2002/03
POCL (million transactions) 738.7 554.2
% 79% 67%
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N.B.
a) Current ACT decay ~ 1% per annum; we assume
acceleration would triple this.
b) — Assume Contract A with BA holds up
5. Impact of acceleration
Impact of acceleration results in 55.2 million transaction loss at Year 5 below
current trend
6. Impact on POCL
a) Contract A “floor limits” on volume protect income to POCL. Thus
no direct income loss on transaction or finance charge. (Otherwise
this will have meant £11m off transaction price)
b) Impact on Financial Inpayments; Savings; Corporate Banking; Mails
and Lottery are estimated to be c. 1.5%. Approximately £12m
income. (Assuming 70% went through SPSOs there might be an
operational saving of 60% of 70% of £12m = £5m)
c) Drop in volume represents c. £4.5bn drop in cash requirement. Whilst
this does not affect the finance charge (because of Contract A), this
would otherwise be worth c. £9m in price reduction to BA. We would
expect to recover part of this at least from the Girobank contract
d) Reduction of 55.2 million transactions is likely to be worth c. 12p per
transaction to SPSOs. This equates to c. £6m cost saving to POCL
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7. Impact on Pathway
a) — Volume reduction 55.2 million x 10p (assumed transaction
charge) = £5.5m
b) CMS reduced charge of approximately £1m
c) Therefore Pathway lose £6.5m from a £130m (from BA) and
£65m (from POCL) contract. Although unwelcome, hardly
grounds for a threatened withdrawal!
8. Impact on BA
a) Reduced charge from Pathway of £6.5m p.a.
b) Extra cost of 55.2 million on transactions on ACT at, say, 4p ~ (£2m
p.a.)
¢) Net saving of £4.5m needs to fund promotional activity and
incentives
E.g. This represents 860,000 extra people adopting ACT. At £50 incentive
this will cost £43m as a one-off investment
9. Impact on Treasury
In addition to BA benefits:
a) £4.5bn funding would reduce to monthly in arrears (as already
happens with ACT). Assuming 2p per £100 per night as the interest
gained, this represents:
£4.5bn x 21 days x 8 = £51m
365 days 100
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Conclusion
Bi POCL remains protected on income as long as Contract A holds
2 POCL lost foot-fall effect is small and is offset by reduction in payment
overall to SPSOs
3. There must be a query on longer term impact on POCL
4. Pathway face a £6.5m reduction in income which whilst undesirable should
not lead to Horizon cessation
5. BA appear to make a relatively modest saving of around £4.5m from which
they have to fund promotion and incentives
6. However, Treasury could make c. £51m p.a. saving in “lost” interest
through the move to monthly payment in arrears
Key Message
There is a case for BA (pressed by Treasury) to pursue ACT promotion whilst
continuing with Horizon and POCL Contract A
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ANNEX IV
Could BA find a way of making ACT available and acceptable universally?
1. Introduction
This scenario assumes that BA have pulled out of Horizon and have
persuaded Ministers to go down ACT route. Previous BA view is
that a residual beneficiary group (could be 30%) will not wish to, or
be accepted by banks to, open a usable current account and therefore
not be able to receive benefits through ACT.
However, BA need to tackle this problem in order to avoid running the
fraud-prone order book system indefinitely.
2. The Customer Profile
May break down in two types:
a) Those who don’t need a bank account
° Elderly / disabled, who use POCL
° People who are totally cash orientated
b) — Those who can’t get a bank account
° insecure incomes, perhaps irregular periodicity
° bad risk customers
Those who are currently very cash oriented are likely to
continue to manage through cash as a means of organising
their affairs.
On the assumption that the unbanked/conscientious objector
stabilised @ 30%, we could deduce say 200-240 million
transactions pa, or perhaps some 3 million customers left with
foils after the cumulative effect of BA’s five year transition to
compulsory ACT (say year 2002-3).
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3. Options for BA
3.1
Did,
33
Mandate private sector banks to accept 30% “rump” of foil
beneficiaries.
(This is a most unlikely scenario, full of political banana skins
as well as carrying likely costs of account handling for
consistently low value accounts).
Mandate POCL to open and operate a form of account to enable
these beneficiaries to be removed from the foil-based system.
Identify any commercial “white space” opportunity within the
retail sector.
The latter two are scoped below.
4. POCL extended role
4.1
4.2
4.3
44
45
4.6
4.7
POCL could be mandated by Ministers to operate a form of
account for beneficiaries. In turn POCL would probably sub
contract to Alliance and Leicester to operate the accounts.
This would enable BA to ostensibly operate ACT throughout
and therefore eliminate foils.
The means of payment could be a cheque system BUT
OPERATED FROM AN AUTOMATED ON LINE PLATFORM
TO CONTROL FRAUD.
Smart cards for beneficiaries would be tighter but again would
demand an on-line automated system.
Since the 30% rump would be spread throughout the UK, the
automated platform would be required everywhere.
POCL would/could not contemplate a paper-based payment
system replicating the current BA foil with all its costs and
fraud propensity.
Conclusion: POCL could enable foils to be eliminated but only
through an approach not unlike Horizon.
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A new threat to POCL?
5.1 There is a competitive threat only just off the radar, which
already has some elements of a rival infrastructure in place: BA
could encourage a retail/ bank consortium to take on ACT for
“low network” customers.
° model could be Sainsburys/Royal Bank of Scotland
Sainsburys are cash rich from store operations. If they could
close the process loop with their banking partners, then:-
(a) reduce cost to themselves of corporate deposits
(b) provide mutual supporting commercial activity
footfall <---->customer retail access
(c) would have a platform to invade the “higher net
worth” customers in the (other banks) 70% of ACT
beneficiaries.
5.2 BA--- Bank --- Retailer as a business model that displaces
POCL distributor network
Royal
In Store
Bank of
BA ACT Scotland ATM Beneficiary
SWITCH
CASH In Store
Retail
BACK
ATM fit
processing,
I
Other Customers
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5.3. Conclusion:
Whilst this option could well materialise it is far more likely to
focus on the higher worth 70% ACT switchers than wishing to
concentrate on the 30% “rump”.
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and
ANNEX V
General Benefit of ACT to BA
BA pay high street banks to transfer a credit to a customer. This is
relatively low cost, (say 4p a transfer). If BA can:
(a) combine benefits onto a customer in their internal system
(b) continue to combine, streamline benefit groups, look at
periodicity
They can reduce the number of “credits-to-customer bank account”
they make. But this is a trade-off dependent on cash flow and interest
rates, and BA will probably send transactions to ACT on the due date.
(Just in time).
Note: If all (say 800 million) transactions were paid J.T then bank
charges (ACT) to BA approximately £32m pa.
The crucial factor is the average value of a credit, which would make it
cost effective to aggregate and pre-pay small amounts of benefit to
save the 4p. txn charge ..... not a very big prize however .....
Conclusion .... the high txn charge from POCL makes it attractive to
aggregate benefits and periods to reduce transactions. This would
not drive to the same extent under ACT.
ACT allows BA to outsource functions/ problems to the bank/ retailer
° the number of customer “drawings” on the account is invisible
to BA, and does not impact cost to BA.
° the link to Banks is electronic/secure and fraud in transmission
is assumed to be eliminated.
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° the service with banks allows the banks systems to combine
benefits to customers ... that is, the functionality of CAPS (for
payment) is outsourced but BA may still want CAPs to take
“whole customer” views, and scrutinise for probity etc.
° However, reconciliation of “benefits due” to benefits
transmitted becomes 100%. Benefits drawn is not an issue.
4. So far, the “value of a customer” is assumed to be positive for the High
Street bank (positive average current balances, cross-selling opportunities
etc), even after the marginal cost of ATM transactions, internal accounting
and processing and crucially, the sourcing and handling cost of cash is taken
into account.
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Appendix 8
OUTPUTS FROM SCENARIO DEVELOPMENT MEETING
10 September 1997
SCENARIO 7
PRELIMINARY ASSESSMENT
7a OBCS ONLY:
e Same kit, only one service
e Maybe start (3 months?) earlier - training less
e Less complex, more robust (?)
e Gives back-end nothing - no replacement of cash account
© Doesn't replace other systems and takes up large footprint
e Non-BA clients - irrelevant
e For BA:
= meets most of fraud reduction
- gives account reconciliation (next release)
- doesn’t permit major infrastructure savings
- but reduces PAS/CMS charges
i BA & POCL retain archaic payment system
e For BA & POCL:
= query on long-term relationship
= BA start actively seeking alternatives
¢ Scaled down management - easier service management
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SCENARIO 7
PRELIMINARY ASSESSMENT
7a OBCS ONLY: FINANCIALS
¢ Unit cost from Pathway would rise (2x?) negating some of BA avoided cost
EFFECTS
e BA:
e Pathway:
likely not to save much from Scenario 1
some development savings
lower volume, not fully offset by higher prices
little strategic benefit
¢ POCL: (Tactically OK, long term nasty)
difficult negotiation - likely decline from Contract A
(£20m?)
£65-80m pa saving on EPOSS/ AP
£10m AP catch-up
have to maintain existing systems
no back-end benefits (e.g. ADS)
no strategic benefits
other lost auto-dependent benefits
more difficult to develop later
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SCENARIO 7
PRELIMINARY ASSESSMENT
7b OBCS & AP ONLY FUNCTIONALITY - DIFFERENCES FROM 7a
e Start times similar to Scenario 1 (otherwise similar to 7(a))
e Existing APTs released
e Benefit for bill payment clients
FINANCIALS
e Pathway unit costs not rising as much
e BA:
- bit better - Scenario 1, at best
e Pathway:
- Better returns but < Scenario 1
e POCL:
- replace Hybrid platform
- trading off cost of AP investment and maintenance against
Pathway charges increasing due to overall volume
reduction - threatens bill payment business for POCL
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SCENARIO 7
PRELIMINARY ASSESSMENT
7c OBCS/AP/EPOSS
© Kit; timescales; training broadly as Scenario 1
¢ Slightly less complex (no CMS card)
¢ Feeds TIP/ADS therefore benefits protected
¢ Replaces other systems
¢ Enables bill payment development
¢ Non bill payment/BA clients - no value (except Royal Mail?)
e For BA:
5 gives fraud protection
: account reconstruction
. No major infrastructure savings
- teduce PAS/CMS costs
= archaic payment system
e For BA & POCL:
- long term problems remain
e For POCL:
= no Hybrid residuals
= bill payment OK - but price?
- Royal Mail postage of books protected
e Pathway:
= volume reduction from Scenario 1 - but some development
cost saving
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SCENARIO 7
PRELIMINARY ASSESSMENT
7c ASSUMPTIONS
POCL still pick up Pathway EPOSS charges therefore no positive business case
impact
No strategic “other client” benefits
Possibly small Contract A effect (e.g. loss of cards)
7d B.P.S. ONLY
Same kit, one service
Start same time, training earlier
Slightly less complex overall (no EPOSS)
No back-end benefits
No “non-BA” client benefits
For BA:
- fraud plan delivered
- reconciliation
- infrastructure and order book savings
- may have to pay increase charge per unit
For Pathway:
- reduced volume
- savings in AP/EPOSS development
For POCL:
- lock in BA
- otherwise disadvantage
- cost as per 7(a)
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SCENARIO 7
PRELIMINARY ASSESSMENT
7(a) - 7(d) - CONCLUSIONS
¢ Anything less than full functionality reduces Pathway volume, and therefore
increases unit costs/ charges
e Without EPOSS we seem to have price benefit (c. £65-80m illusory?), but lose
back-end benefit and bear cost of hybrid systems maintenance as well as lose
strategic opportunities
¢ Any single “part-functionality” looks questionable but... part functionality in
segmented network may have a solution, needs scoping
¢ After scoping (crudely) does not appear viable
ae Seay — S fae Smee ct ae
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CAR PARK ISSUES ARISING FROM OUTPUTS ON
12 SEPTEMBER ‘97
e How would it be different without PFI?
e What “transaction” is captured by EPOSS?
e Work already done on automating non-cash account offices (Mena)
e ADS WIP on manual data capture (Pete Curtis)
e Reference data status
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PARTIAL HORIZON NETWORK
Implications
So What?
Dual system (foils + cards) for
BA:
- admin savings + fraud
savings diminished but some
saving on Pathway charges
Probably unacceptable to BA -
at best accelerates ACT
Need to restructure cash
account to maintain accounting
integrity:
- two back-end systems
unacceptable
Probably unacceptable to POCL
May be possible to “buddy”
smallest 4000 (1% of business)
onto automated offices
therefore card throughout
Subject to Pathway savings in
roll-out and service support
(POCL’s share to cover extra
costs)
DUAL SYSTEMS INCREASE OPERATING COSTS
WITHOUT SUFFICIENT OFFSET IN HORIZON COSTS
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Options explored included OBCS only; OBCS + AP; OBCS + AP + EPOSS;
EPOSS only; BPS only
Implications
So What?
¢ OBCS % BA locked into foils
therefore ACT inevitable
- Horizon platform (two costs)
remain
- Card development/ running
cost savings
- implication Pathway unit
charges escalate
Probably not acceptable to BA
unless mandatory ACT
Not acceptable to POCL
(inflexible; ACT risk) and does
not lock in BA
e EPOSS only
- Horizon costs etc
- no flexibility
Loses BA lock in - unacceptable
¢ BPS only - unit cost from
Pathway!!
Unacceptable to all
VERY EXPENSIVE SOLUTION TO THE
WRONG PROBLEM
aa
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DESCRIPTION OF THE AGREEMENTS AND CONTRACTS
1 Purpose of this Paper
The purpose of this paper is to describe in outline the suite of contracts between DSS, ICL
Pathway, POCL and SSA.
2s Preamble
In August 1994, Department of Social Security (DSS) and Post Office Counters Ltd (POCL)
placed an advert in the EC Gatt journal to procure Computer and Data Services to automate post
offices and benefit payments. The services provided by ICL Pathway in the three Related
Agreements as the titles to the contracts state cover the provision of computer and data services
through various individual services. Of themselves they do not provide nor substitute for the
services POCL pr: .:des to DSS and Social Security Agency (Northern Ireland) (SSA) under
Contract A.
3. 2.1 Contract 1 - The Authorities Agreement
Is jointly held by DSS and POCL (The ‘ Authorities’) with ICL Pathway (the supplier). It’s
principal aim is to provide a seamless set of IT data services for DSS and POCL e.g. that the
services and infrastructure provided works from end to end. The charging schedule for
Contracts 2 and 3 is also held here.
4. 2.2. Contract 2 - DSS
Agreement AGREEMENT AND CONTRACT STRUCTURE
Is for the provision of a Card Management
Service, CMS (to produce and get cards to
beneficiaries, place stops on them, ensure
they are only used by the authorised
holder) and a Payment Authorisation
Service PAS, which holds details of a
person's entitlements until encashment is
requested at a post office.
5. 2.3. Contract 3 - POCL
Agreement
Is for the provision of an automated Post Office network infrastructure (to be known as
‘Horizon’). The network will be connectable to other POCL systems and client systems (e.g. BA)
via a ‘switching’ service known as Transaction Management Service, TMS. At each post office
outlet the following electronic services are to be provided:
Benefit Encashment Service (enabling a payment card holder to encash benefits),
Automated Payment Services (enabling customers to pay bills, recharge utility meter
tokens etc.) and
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Electronic Point of Sale service (to facilitate post office outlet accounting)
Since the award of contract in May 1996, DSS has placed an order through its Contract B with
POCL for POCL to exercise an option under contract 3 for ICL Pathway to provide an
Order Book Control Service (to check the validity of an order book). An early version of
this has already been delivered.
POCL has the option to procure further optional or additional services from ICL Pathway e.g.
Mail Services and Smartcard Services.
6. 2.4 — Status of SSA contracts
Due to an oversight in the original EC Gatt advert aa _
for the PFI procurement, SSA do not have a direct ssa. a — ae
contracting relationship with ICL Pathway. ours I ———— 5
Through a Service Level Agreement with DSS, i X a. P
DSS will procure PAS and CMS services for SSA ot Aatanaton Cater Aton WES
in Northern Ireland. SSA do have a Contract A — ETT bs sacs sgemencanen i
for Counter Services and a Contract B with POCL Poct o_O ony
to pay for IT data services provided in Northern id
Ireland.
, 2.5 Contract A
The services provided under Contract A by POCL to DSS and SSA are the provision of
approximately 19,200 post offices and 65,000 staff and agents to encash benefits, transport and
arrange the money to pay out customers, account and settle for benefit payments, audit
provisions, the distribution of leaflets to claim benefits and the provision of publicity space. The
provision of electronic stop notice systems at post offices.
8. 2.6 Contract B
ICL Pathway will be charging POCL for all the services it provides under contract 3. DSS and
SSA have agreed to pay the charges that relates to benefit encashment data and its transmission.
(Note, Only DSS will be paying for OBCS as it is not required in Northern Ireland). Contract B is
structured so as POCL receives payment from DSS and SSA in time for it to pay ICL Pathway.!
9. 3 CHARGES AND FURTHER DESCRIPTION AND DETAILS OF
CONTRACT B
POCL procures and pays for the following services from ICL Pathway (the Related Agreements
Contractor) :-
' Note AP charges will be covered through existing client contracts as APS replaces current POCL iT systems. It is
expected that as other POCL clients re-engineer their products they will also pay the charges POCL incur from
Pathway potentially through their own ‘contract B*
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1) Benefit Encashment Service (BES)
2) Order Book Control Services (OBCS)
3) Automated Payment Services (APS)
4) Electronic Point of Sale Service (EPOSS).
In order to provide assurance to DSS and SSA that POCL is only recovering the charges levied
for the electronic services ordered by DSS (i.e. no cross subsidy between BES/OBCS and POCL’s
other services) openness was built into the overall charging structure of contracts 1, 2, 3 and B.
10. 3.1. Charges, Discounts and Guarantees in the related Agreements
Both DSS and POCL have provided money value guarantees to ICL Pathway (under contracts 2
and 3) as part of the private finance initiative contract. There are 3 guarantees,
* aCMSand PAS guarantee by DSS to ICL Pathway under contract 2
* another POCL services guarantee (APS, EPOSS) to ICL Pathway under contract 3 and
* aBES/ OBCS guarantee by DSS to POCL under Contract B which is passed through to ICL
Pathway under Contract 3.
The charges are levied monthly by ICL Pathway and are based on the usage of the equipment,
network and communication infrastructure provided. Each transaction that POCL performs uses
different elements of the Horizon platform, e.g. an order book check uses the bar code reader, a
card payment uses a card reader, both use the transaction and stock recording element of the
processor. The various bits of the equipment and communication network each have a
predetermined ‘service point’ score. Therefore each transaction carries a certain number of
service points according to what bits of the system the transaction makes use of.
Depending on how many points are used in total within a year, the price of each service point
varies according to discount bands of usage (the more points, the lower the cost).
In summary, subject to meeting the guarantee payments, the charges are based on usage of the
system (calculated by multiplying the number of transactions by their service points value). If
enough use is made of the system, the price per service point is reduced.
3.1.1 Adjustments
Adjustments to the charges for either guarantees or discount bands is made on the final invoice
of the year.
11. 3.2 Charges under contract B
Charges to POCL from ICL Pathway under Contract 3 are invoiced separately
1) for BES and OBCS
i) for DSS data to GB post offices
ii) for SSA data to Northern Ireland post offices
2) Other POCL Services
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A summary of the invoices is also provided by ICL Pathway to POCL in order to calculate
Discounts.
Under Contract B, within 7 days of POCL receiving an invoice from ICL Pathway, a copy of it
together with the BES and OBCS detail pages is sent to DSS. POCL then prepares its own
invoice and sends it to DSS for the BES and OBCS elements. DSS then pays POCL at least one
banking day prior to the day that POCL is required to pay the total ICL Pathway invoice.
12. 3.3. Back to Back issues
In a similar way that the BES/ OBCS guarantees are passed through Contract B there are other
pass through rights and obligations in Contract B. If either DSS or POCL suffers a loss which it
is unable to pursue through its own contract with ICL Pathway but it is available to the other
party, then Contract B provides for the former to act un its behalf in pursuing the grievance. The
extent of liability is limited to that which the acting party can extract from ICL Pathway.
Likewise should ICL Pathway seek redress from either DSS or POCL and the reason for the
default lies with the other party, the failing party is liable to the other under Contract B.
There is nothing in Contract B that prevents the payment of benefits to individuals. Should the
parties decide to cancel Contract B, although the option to terminate Contract A accrues, both
parties could agree to continue contract A and manual methods of benefit payment continue.
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Customers
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