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Post Office Limited — Strictly Confidential
POST OFFICE LTD BOARD MEETING (Company Number 2154540)
Meeting to be held at 9am on 25 September 2014
in the Boardroom at 148 Old Street, London EC1V 9HQ
Members of the Board will be asked to declare any interest that could give rise to conflict in relation
to any item on the agenda at the beginning of the item in question. All interests so disclosed will be
recorded in the minutes of the Board.
If the Chairman of the meeting deems it appropriate, the
member shall absent himself or herself from all or part of the Board’s discussion of the matter.
09.00
09.45
11.00
11.10
11.45
12.45
13.15
14.45
15.15
15.25
15.55
16.10
16.15
16.25
16.30
10
CEO's report
FS plan
BREAK
FS plan
Win in Mails including Network development
LUNCH
Business Transformation update
Financial Performance update
BREAK
Sparrow update
Insurance
Minutes of Previous Meeting and matters arising
Committee Minutes for noting
Status report update
Items for Noting
Update on Digital and SME
Audit Action Status Report Summary
Significant Litigation Report
Health and Safety Report
Sealings
Any other business
¢ Delegated authority for software contracts
e Authentication of the Company Seal
Date of next meeting: 29 October 2014
CLOSE
Paula Vennells
Nick Kennett
Nick Kennett
Martin George/Kevin Gilliland
David Ryan
Chris Day
Chris Aujard/Belinda Crowe
Chris Day
Alice Perkins
Alwen Lyons
Chris Day
Alwen Lyons
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CEO’s Report — September 2014
1. Introduction to this month’s Board and overall strategic priorities
Key issues for discussion at this Board:
As we discussed before the summer, we have a critical window of opportunity to shape
the business and put it on course towards commercial sustainability — “a defining 12
months” as I have described in recent staff communication events. The latest trading
results set out in the performance report underline the need for us to act rapidly to
address our competitive threats and reshape our cost base. Section 2 below outlines
the short-term actions we are taking this year to drive improvements in profitability.
In terms of the longer-term changes to the business, the first step is to finalise the
blueprint for our overall turnaround across both our revenue and cost plans. As the
table at Annex A sets out, the agendas for the next three Board meetings are designed
to get us to this milestone by the end of the calendar year, starting with the following
three items for discussion at this month’s meeting:
o FS strategy — as agreed at the June awayday, over the summer we have
conducted a detailed review (supported by McKinsey) of our financial services
strategy and the risks to our 2019/20 income projection. This has identified a risk
adjusted projection of £508m in 2019/20 (versus the £538m envisaged in the
strategic plan), with both downside risks and upside opportunities. This revised
figure still represents rapid growth of 9% pa, and therefore the key question the
Board needs to consider is whether we have identified the clear differentiating
attributes which will make us a credible alternative to the incumbent banks and
emerging challengers. Nick’s paper highlights the importance of our trusted
brand, our unparalleled convenience and accessibility (at a time when others are
retreating from the high street) and our multiple touch points with a broad cross-
section of the population. It also identifies the core capabilities needed to
leverage these attributes, including improved data analytics and customer insight,
stronger product propositions (moving up the value chain in certain areas like
insurance), the upgrading of both our digital and face to face channels and
investment in brand awareness. The next stage of work will be focused on
ensuring the FS strategy is fully aligned with the target operating model (TOM)
and underpinned by detailed delivery and financial plans for the next three years.
o ‘Win in Mails’ — this paper provides an update on the programme of work
discussed at the June awayday to respond to our competitors in the parcels
market by extending the network and simplifying product journeys. While the
cross-functional team at Bishopsgate has made impressive progress over the
summer in many respects and is expecting to open 176 new access points for
Home Shopping Returns by the end of this month, overall the programme remains
at critical risk at this stage because of the misalignment of commercial priorities
with Royal Mail. The slide pack sets out our plan to address this and we will
provide a further update on the latest position at the Board next week. However, it
is clear that this is going to remain a pressing priority for the business over the
next 6 months and will likely entail a significant renegotiation of the existing MDA.
o Business Transformation — the first stage of the programme (‘the current state
assessment’) concluded in July, identifying cost improvements of circa £100m pa
which are expected to be delivered over the next 18 months. As the paper and
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accompanying slide deck sets out, more radical levers will need to be pulled to
close the remaining c.£200m gap to our EBITDAS target by 2019/20, such as
restructuring the network, supply chain and branch support services, rebasing
agents fees (with all these measures facilitated by the simplification and
digitalisation of product journeys) and moving to a much smaller corporate centre.
We would welcome the Board’s initial views on these proposals at this meeting.
We will then report back in November on the final proposed TOM and associated
roadmap, also taking into account the discussion on risk appetite and capabilities
at the October ARC and Board and the further work that is underway to align the
network implications of our mails and FS strategies.
Assessing the overall implications for the business:
e There is no doubt that taken together our plans across FS, mails/network extension and
Business Transformation represent a major undertaking for the business, and are at the
riskier end of the spectrum in terms of corporate turnarounds (a view reiterated by
McKinsey and PwC). Therefore a key judgment for us to discuss over this and the next
two meetings is whether we are striking the right balance between ambition and
deliverability, consistent with acceptable risk parameters.
e On the one hand there is clearly a real risk that we do not act quickly and boldly enough
to tackle the competition and maintain our flight path to financial sustainability. But on
the other hand there is also the risk that we seek to do too much over a relatively short
period of time and thus stretch the business to breaking point. As we have discussed
before, most businesses tend to focus on either the cost or revenue side rather than
seeking to transform both at the same time.
e Even more so than other businesses, in addition to our capability to manage the
change we will also need to make a candid assessment (informed by dialogue with our
shareholder) about whether we are able to handle the overall level of stakeholder
‘noise’ that will inevitably be generated in response to our proposals. In particular, there
are clear risks with the NFSP in relation to network extension and agents pay and with
the unions in relation to job losses. These risks will materialise very quickly and we
need to be ready to handle the disquiet.
e Getting the speed of implementation right is therefore a critical judgment, and this will
be the major focus for the next stage of the Business Transformation Programme in
pulling together the overall roadmap for our turnaround. We will need to take a realistic
view of what is deliverable (and affordable within our investment constraints),
prioritising the levers that will deliver the biggest financial impact.
e The roadmap will also need to be sufficiently flexible to respond to developments along
the way: we are undertaking detailed risk and scenario planning (as the slide deck sets
out), but it is impossible to predict with confidence how events will unfold and how all
the various issues in play will interact with each other. We will therefore need to be
ready to adapt our plans as they are implemented, accelerating or decelerating
components as required.
Tracking and implementing the turnaround:
e While this dynamic approach is necessary, it also underlines the importance of having
clear milestones and KPIs defined for each of major change programmes, linked to
financial outcomes wherever possible. This will enable us to track the overall delivery of
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the turnaround and ensure that decisions to alter the pace of implementation one way
or the other are taken consciously with a clear understanding of the financial impacts.
e The Board clearly has a critical role to play in this oversight process, and therefore from
this month we are moving to a new format for the CEO’s Report which is designed to
provide greater visibility of progress against the milestones and KPIs for each of the
major change programmes, and also to position these updates in the context of our
overall strategy and wider developments in our external environment. It should be
noted that the final portfolio of change programmes and supporting metrics will not be
defined until we’ve reached the end of the design phase of Business Transformation in
November, but in the interim period we will be reporting on the deliverables we have
identified to date.
e The ten accelerators we discussed at July's Board have now been embedded across
the business as a tool for articulating the key principles and priorities of our overall
strategy. They were the central focus of our ‘Team Talk Live’ communications event on
24 July, which was attended by nearly 2,000 colleagues and sub-postmasters.
According to pre and post surveys, the event resulted in a 22.6 percentage point
increase (to 73%) in the number agreeing that “the senior management team
communicates a clear vision” and a 11.8 percentage point increase (to 84%) in the
number agreeing that they “support Post Office’s strategy and direction”. While the
accelerators were designed as a communications rather than governance tool, they will
be used to inform the final portfolio of change programmes which is defined in
November.
e The successful delivery of our turnaround will of course be predicated on strengthening
the organisation's capabilities in relation to risk management, a topic which we will be
returning to in more detail at the October Board and ARC. My view is that, culturally,
we are starting to make progress in this regard, as exhibited by the more mature
approach to risk identification and horizon scanning in the papers on FS strategy, Win
in Mails and Business Transformation’, but there is still further to go as I will set out in
October.
2. Commercial and business performance overview
e Overall performance: As the CFO’s Performance Report sets out, trading conditions
remained challenging in August. While the operating profit in the month was favourable
to budget, this was largely driven by the VAT recovery which masked the continued
underperformance on overall revenue. Income was £8m behind budget within the
month (increasing the year to date shortfall to £15.2m), with half of this attributed to
mails and retail, driven in particular by lower parcel volumes and slower than expected
progress with RM and retailers in growing our collection and returns volumes.
Government services and Homephone income is also behind budget, with Financial
Services the only pillar tracking ahead of target over the year to date (with income up
4.6% over the year to date compared with the same period last year).
e We have established a monthly ‘Sales Accelerator’ meeting (which I chair) to oversee
the options for closing this income gap over the remainder of this year, and this remains
* It should be noted that we have started to adopt a standard terminology for describing the status of our risks in business papers,
including for the Board. Risks are categorised as either ‘controlled! i.e. management are happy that the existing actions and controls are
sufficient to manage any risks, or ‘inadequately controlled’ where additional actions or plans are required to bring the risk back within
acceptable levels
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the priority area of focus for the weekly Trading Meeting. Kevin Gilliland and Neil
Hayward are also hosting a Sales Capability workshop on 18 September with senior
level attendees from across the business which will look at both short-term actions and
longer-term measures to increase sales performance.
e Mails initiatives: Our competitors have gained an additional 5 million parcels over the
year to date, consuming all of the growth in the overall parcels market and also taking
around 1 million items from us and RMG. This situation reinforces the importance of
our programme of work to regain our position in the parcels market, the battleground for
which will be won on both price and convenience as we discussed in June. The
separate ‘Win in Mails’ paper provides a full update on our initiatives to tackle the latter
imperative. On pricing, there is growing recognition within Royal Mail of the risks to
their own market share, as demonstrated by the increases to the size of 4% and 2"
class parcels which they will introduce on 20" October. This is particularly important for
our eBay tracked returns service, enabling us to capture a much higher percentage
(85%) of eBay sellers within the small parcels category, which undercuts the
competition. An additional promotion to price a 1-2kg 2"4 class small parcel at the
same size as a 0-1kg parcel will run from 20" October to 15" January, supporting our
volumes over Christmas. Taken together we expect these pricing changes to recover
around £2m of income over the remainder of this year.
e In-year cost reductions: even with the impact of these measures and other
opportunities to mitigate the shortfalls in telecoms and government services, on current
run rates we are likely to end the year significantly behind budget on overall income, as
Chris Day will explain in his update. We are clear on the importance of delivering a
year on year improvement in our underlying EBITDAS performance by March 2015,
both to meet our short-term targets and to establish the momentum needed to drive
forward the next stages of our turnaround.
e The delivery of in-year cost savings is therefore a top priority for the business, and we
have revised our target to £60m (up from £46m in the original budget) in order to offset
potential income shortfalls and protect our bottom line. In July we established a weekly
ExCo sub-committee (the Cost Reduction Group), chaired by Chris and which I attend,
to drive forward progress and agree the actions needed to deliver this target. The latest
position is that we have confidence in £36.5m of savings, a further £9.9m of proposals
are currently being validated leaving £13.6m still to find.
e To underline the importance of this work to the business, last week we communicated
to colleagues a number of measures which will be taken to address both staff and non-
staff costs, including:
© acontinued pay freeze for senior managers;
o aClearer focus in the PDR process on the delivery of cost reduction targets;
othe introduction of greater control on recruitment and the use of contractors, and
on discretionary spend such as travel and catering; and
© aprocess of engagement with key suppliers in order to negotiate better terms
wherever possible.
e These activities are being managed as part of the Business Transformation Programme
to ensure alignment with our longer-term cost reduction initiatives, and further detail on
the process is set out in the separate update paper from David Ryan.
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3. Update on key change programmes
As noted above, we will be reviewing our overall portfolio of change programmes (and
supporting metrics) as part of the next stage of work to define the roadmap to our target
operating model. This may result in some consolidation and restructuring of the
programmes set out below from November. The implementation of our FS strategy will also
be tracked as a distinct programme in future Board updates.
a) Crown Transformation Programme
Status overview: The Programme remains on track against the key targets within its direct
control, including branch transformations completed, training, staff cost reductions, self-
serve rollout, mergers and relocations. However, significant risks remain to the delivery of
a breakeven run rate by year end due to the wider revenue challenges facing the business.
An updated forecast for the Crown P&L will be produced for the October Board, alongside
the identification of what further mitigating measures are available on either the cost or
revenue side.
Programme KPIs: YTD 2014/15 FY
Target Actual Period Target Forecast
P&L run rate -£15.4m, Qi £0m
Number of branches transformed 223 PS 294
Number of branches franchised 26 PS 54 - 60
Customer satisfaction in transformed P4
branches 79% 85%
Queue time satisfaction 81% P4 85%
Key milestones ahead:
Milestone
Target date
Current status
All retained branches transformed
By end Nov 14
On schedule (currently ahead of plan)
70 franchises live By end Mar 15 Likely to be missed (16 currently at risk;
mitigations being pursued)
518 Self Service Kiosks rolled out By end Nov 14 On schedule
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b) Network Transformation Programme
Status overview: The programme is ahead of its key targets, including numbers of
contracts signed, branch openings and additional opening hours. The forecast financial
benefits are also higher than planned due to a greater number of locals being delivered to
date, and customer satisfaction continues to be high in converted branches. The year-end
outlook remains positive, however challenges remain to find suitable replacements for
leavers and to manage the risk around the ‘guided leavers’ process. A pilot is underway to
test this and has attracted no significant stakeholder reaction to date.
A key action for the programme is to define how we might use next year’s ‘cliff’ in the
context of the Network Development and the emerging Target Operating Model.
Programme KPlis YTD 2014/15 FY
Target Actual Target __ Forecast
Contract signed (cumulative) 78. 4029 i 4800
Branches Open (cumulative) 2952 3700
Customer Satisfaction (all branches) 97% 96%
‘Average increase in opening hours 68% 66%
Cost reduction (in-year cumulative) 577.3k 3,359k
Key milestones ahead:
Milestone Target date I Current status
4,800 contracts signed End March 15 _I Atrisk, but mitigations in place
3,700 converted branches open End March 15 _I On schedule
‘Compete first evaluation of guided leavers process I End Sept 14 I On schedule
Start cliff preparation work End Oct 14 On schedule
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c) ‘Win in Mails’
Status overview: The programme is established and focused on developing a compelling
commercial proposition to inform the full programme business case and the 400 pilots we
are planning to launch this financial year. Two new sites are now live offering home
shopping returns, and we expect this figure to increase to around 176 by the end of
September, exceeding our internal target of 135 by that date.
Risks to the programme have been identified and mitigations are in place. Of these, the
greatest residual risk lies with Royal Mail where work is in hand to align commercial
interests, agree product simplification and secure their support for the required IT
integration. The NFSP also retains the potential to disrupt the progress of the programme.
A full update is provided in the separate paper on this programme. A full set of forward-
looking KPIs will be developed as part of the finalisation of the programme business case.
Programme KPIs. End September 2014/15 FY
Target Forecast Forecast
New access points k 176 400
Key milestones ahead:
Milestone Target date Current status
135 access points live End Sep 14 Milestone at risk — plans in place
for 176 sites, but could be
derailed by retailer delays or
NESP opposition
400 access points live End Mar 15 Milestone at risk
Retailer tablet solution available in beta version End Oct 14 Milestone at risk
SSK tablet solution available in beta version End Mar 15 Milestone at risk
d) Business Transformation
Status overview: This programme is co-ordinating all cost reduction activities (both
operational efficiency and existing cost reduction actions) and reporting to ExCo on a
weekly basis. An assessment of 2014/15 change plan has been completed with
recommendations being implemented (e.g. pausing certain projects and aligning others).
Benefits are currently rated ‘red’ as the route to achieving savings not yet agreed.
A full update is provided in the separate paper on this programme.
Programme KPis YTD (week 24) 2014/15 full year
Target Actual Target Validated
Delivery of inyear savings Pcie sm MATS £60.07 BESS
Key milestones ahead:
Milestone Target date Current status
‘Current state assessment complete _I End July 14 Complete
Draft Target Operating Model End Sep 14 On schedule, Board discussion 25 Sep 14
Complete Transformation Blueprint_ I End Nov 14 ‘On schedule
End design phase End Nov 14 ‘On schedule
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e) Separation
Status overview: the programme reached an important milestone at the end of August with
the launch of the new Core Finance System. As expected there have been a number of
teething issues to work through but none of these are having a material impact on the
business. The new system will be particularly valuable for generating more granular
analysis of profitability at the level of individual products and branches.
An extension side letter is due to be agreed at the next MSA Board on the 24th September
with revised separation dates and penalty arrangements for the remaining IT workstreams.
The CSC contract supporting the separation of HR and Supply Chain (hosting and service
elements) is due to be signed in late September.
Programme KPlis YTD Full programme
Actual Target __ Forecast
Separation of IT systems. 12.6 256
‘Separation of Business Services 114 131
Finance — headcount reduction 12.5 275
‘NB The team will also be monitoring the number of post-launch incidents for the newly sey 1S such as Finance and HR.
Key milestones ahead:
Milestone Target date Current status
Facilities Management separation 1 Oct 14 On schedule
Grapevine separation 4 Oct 14 On schedule
HR Common Components separated End Jan 15 On schedule
eBusiness Release 5 live End Jan 15 On schedule
On boarding to ATOS helpdesk complete _I End Feb 15 On schedule
Networks site migration end End Feb 15 On schedule
f) IT transformation
Status overview: we will be announcing the preferred bidder for the End User Computing
tower in the week commencing 22 September, and will update the Board on the outcome at
next week’s meeting. We will then be seeking formal approval from the Board to award the
contract at the October meeting.
In terms of the overall IT transformation programme, the benefits and cost profile for
2014/15 remain on track. The milestones and financial impacts for future years are being
reviewed as part of the Business Transformation roadmap, to ensure alignment with our
target operating model and the capabilities needed to underpin our commercial strategies in
FS and mails.
Programme KPIs YTD Full programme
Target Actual Target __ Forecast
1 5
Towers Contracts Awarded
3” parties transitioned to Service Integrator (SI) 90 96
Sl operating model processes accepted 13 23
Financial savings £0 £25m
Updated programme milestones will be shared with the Board from November.
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g) People and engagement
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Status overview: The implementation plan for the people and engagement strategy will be
presented to the October Board, aligned with the requirements for workforce change
emerging from the Business Transformation Programme.
Key milestones ahead:
trade body
Milestone Target date I Current status
P&E team ready to support large scale I End Sep 14 On schedule. Documentation in place, aligning plans to
workforce change with toolkits, the timescales and plans needed to support Business
processes and support in place Transformation and also the FS and mails strategies.
P&E strategy implementation plan in October 14 On track for October Board meeting.
place and endorsed by the Board
Build sales capability across the whole Jan 15 On schedule:
network * cross-business steering group in place;
* focus over July and September has been on sales
coaching for branches ahead of peak season;
* Sept-Nov focused on review of sales capabilities
including through cross-business workshops;
implementation plan will be ready for Jan
ExCo/Board, including options for restructuring of
sales capability.
Ensure the NFSP reconstitutes as a Mar 15 Positive engagement continuing, but clouded by short-
term challenges related to network extension
Programme KPIs will be presented to the Board in October as part of the implementation plan.
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4. Market, political and external developments
e Continued progress of mails competitors: In July Paypoint reported an additional 1.2
million Collect+ parcels volumes over the first quarter of 2014/15, a 43% increase
compared with a year earlier (although to put this in perspective these additional
volumes are equivalent to around 5 days trading of our 2" class product). They also
noted that “there has been a small decline in Collect+ sites by 67 to 5,515, whilst we
have been planning the next stage of our network expansion, which will be in place
ahead of the Christmas peak.” Delivering its ambition to reach 7,500 branches during
the current financial year is likely to be dependent on landing a deal with one or more of
the major multiple retailers, reinforcing the urgency of our own plans.
e But also signs of potential consolidation in the market: Earlier this month it was
reported that Local Letterbox - a start-up which was due to open 500 ‘parcelpods’
across the UK in 2014 for posting, collecting and returning parcels - had ceased
trading. This underlines how competitive this market is and also how tight the margins
are, making it difficult for new entrants to secure a foothold without substantial financial
backing and a cost effective fulfillment solution.
e Click and collect growth: a report this week from Verdict, a research firm, found that
over two-thirds of shoppers in the UK have used a click and collect service, up from
51% in 2012. Verdict found that clothing and footwear accounted for over 50% of the
value of goods ordered using click and collect services. The report predicts an 82% rise
in the value of goods purchased via click and collect services to £6.5bn by 2019, but
with much of this growth coming in the grocery sector.
e Bank branch network consolidation: building on the recent news flow about branch
closures, a Deutsche Bank report last week claimed that the UK’s six largest banks
could close between 50% and 75% of their branches by 2024, leaving as few as 500
high street branches. This is obviously linked to the growing popularity of online and
mobile banking, with research from EY and the BBA last month highlighting that nearly
15 million apps had been downloaded in 2014 so far, at a rate of 15,000 per day.
However, the research also noted that high street outlets remain important for larger
purchases such as mortgages. The implications of these themes are picked up in the
FS strategy paper, including the importance of building our own digital capabilities but
also the continued relevance of our physical network both for selling our own products
and in providing a utility service to the rest of the banking sector.
e Lloyds exploring identity market opportunities: it was reported earlier this month
that Lloyds Bank has been working with Cabinet Office to explore whether banks could
play a role in verifying customers’ digital identities for other organisations in both the
public and private sectors. While this potentially represents a threat to our own position
in this nascent market, it is not surprising to see the Government exploring options to
diversify the number of potential providers and we never assumed that we would have
a monopolistic position in the income projections for identity services included in our
Strategic Plan. Of greater concern is the continued uncertainty about when the
expected volumes from Government will actually materialise, representing a risk to our
income figures in the next two years.
e Scotland: the political and media debate over the past few weeks has of course been
dominated by the Scottish independence referendum on 18 September. I set out our
broad approach to contingency planning in my email to the Board of 15 September, and
depending on the result we can discuss this further at next week’s meeting. Media
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speculation earlier this summer also suggested that Jo Swinson may join the Cabinet
as Secretary of State for Scotland following the referendum, although we do not have
any specific intelligence to support this suggestion.
Party conference season approaching: Labour will be holding their party conference
from 21 to 24 September, the Conservatives from 28 September to 1 October and then
the Liberal Democrats from 4 to 8 October. We will have a low key presence at each of
these events, taking the opportunity to promote the our modernisation story and also
keeping abreast of any emerging thinking on manifesto policies related to the Post
Office.
5. Other issues and updates
Update on POCA: discussions are continuing with DWP about signing a 7-year
renewal of the POCA contract under the Front Office Counter Services Framework. We
understand Ministers are keen to announce this extension by the end of September,
although the finalisation of the deal is complicated by a number of material issues which
could affect our in-year financial position related to the correction of service payments,
with both sides trading competing claims for reimbursement of under or over payments.
We are also looking to maximise our flexibility to alter the POca service after 2017 to
enable us to offer a lower cost solution which reduces demand for cash in the network.
We will provide an update on any developments in these discussions at the Board.
Industrial relations update: We have resolved the dispute with our managers in
Supply Chain following their acceptance of the pay deal we agreed with CMA Unite in
August. The deal is similar to that approved by Crown managers and is fully
funded. However, the situation with the CWU remains challenging. They are currently
undertaking a consultative ballot with members to endorse the rejection of our formal
pay offer for Supply Chain & Admin, the result of which will be declared on 1 October.
We have suggested that we use Acas to conciliate a speedy resolution, although this
has been met with resistance to date. Separately we are meeting the CWU next week
to seek to agree new incentives schemes for counter staff and Financial Specialists.
We will provide an update on the latest position at the Board.
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Annex A: Autumn 2014 Board meetings: overview of the sequencing of discussions
on key business strategy issues
25" September:
FS Strategy
Review of the overall FS strategy with an assessment of
the risks to the 2020 income target. This review will be
based on the current operating model assumptions, but
further analysis will be completed by October in light of any
relevant proposals emerging from the Business
Transformation Programme.
‘Win in Mails’/network extension update
Update on the first phase of work agreed at the June
awayday to simplify mails product journeys and extend our
network with new access points.
Business Transformation
Update on the conclusions from the stage 1 ‘current state
assessment’ and the savings that have been identified
through incremental reforms. Outline of the emerging
hypotheses for the target operating model to gauge the
Board's initial views on the major strategic trade-offs.
Digital and SMEs — noting papers
Update on plans discussed at June awayday
29" October:
NB risk items will also be discussed with October ARC — date tbc
Business risks —- CEO’s overview
Discussion on the organisation’s capabilities and key risk
exposures, taking into account the Kelly Report, the PWC
review conclusions and the proposed overall
transformation programme.
Risk appetite
Initial discussion with the Board to articulate the business’s
overall risk appetite (the discussion will reference the risk
judgments being made as part of the proposed TOM and
transitional roadmap).
People and engagement update
Update on the programme of work to implement the people
& engagement strategy discussed at the June awayday,
framed with reference to the Business Transformation
Programme and our other key commercial priorities.
FS strategy (including update on Titan)
Update on the implementation of Project Titan and also a
further update on the FS strategy review informed by the
conclusions reached to date on Business Transformation.
26" November:
Business Transformation
Recommended TOM (informed by the September Board
discussion) and the proposed roadmap to implement it.
Plan B scenarios
Outline of the potential ‘Plan B’ overall business scenarios
which would need to be considered if the key financial
assumptions for Business Transformation, the ‘Win in
Mails’ programme and the FS strategy do not materialise
as envisaged.
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POST OFFICE LTD BOARD
Financial Services Strategy Update
1. Purpose
1.1 The Financial Services strategy to 2020 was presented to, and supported by, the
Board in March 2013. This paper provides an update of the strategy and a risk
assessment by McKinsey & Co of the 2019/2020 projected revenues. It should
be read in conjunction with the accompanying presentation which provides full
details of the matters raised.
1.2 It is tabled for noting and support.
2. Background
21 Financial Services is a key component of Post Office’s business in a rapidly
evolving competitive market; it has key strengths but will need to overcome
various challenges to deliver its vision, strategy and profit.
2.2 Post Office Financial Services income has grown from £291 million in 2010/11 to
£311 million in 2013/14 and is targeting £332 million in the current year’. This
growth is despite falls of c£20 million per annum in revenue from the payments
business (predominantly over-the-counter transaction services).
2.3 In achieving these results the business has built foundations for future growth
consistent with the 2013 vision for 2020, including reducing the constraints from
the Bank of Ireland (Bol) contract, building specialist product and sales teams,
launching new products (including current accounts and MMR-compliant branch
mortgages) and strengthening the partnership and working rhythm with Bol (e.g.,
on pricing, product development).
24 In 2014/15 Financial Services will generate 32 per cent of Post Office’s gross
income, with a 66 per cent direct product margin and EBITDAS of £92.6 million
(including FRES profit share of £41m).
3. Proposed vision and sources of differentiation
3.1 The review has confirmed the thrust of the 2013 strategy and enabled the
Financial Services vision’:
“Post Office Money is the trusted choice for your finances and doing more
in life, offering unparalleled convenience and value”.
3.2 This vision reinforces the revised Post Office vision, incorporates learnings from
other challengers and anchors on elements that make it distinct from competitors
and compelling to core customer segments (unparalleled convenience, trusted
choice, access and proximity and value).
3.3 The vision and resulting strategy should enable Post Office to stand apart from
incumbent banks and emerging challengers. It does that through a brand that is
trusted, with wide access and multiple connect points with mass market
Including FRES profit share
Final words being market tested
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customers; this starts with the core payments business, and enables crossover
into other products.
3.4 Critically the strategy facilitates a multi-layered distribution model that leverages
Post Office’s advantage in physical presence with a shift to on-line for simpler
products. This reflects and supports the increasing digitisation of simpler
products, while complex products are sold face-to-face.
3.5 Post Office Money’s channel strategy comprises:
. Referrals and appointments captured in branches and on-line to create
interview appointments (nb 40 per cent of mortgage interviews originate
from an on-line enquiry) and leads for data analysis;
. Face-to-face sales of mortgages (through Mortgage Specialists — “MS”)
and other more complex products (eg current account and life assurance)
via Financial Specialists (“FS”) (and potentially “Protection” Specialists)
located in hub branches or visiting spoke branches;
° Face-to-face “virtual” sales via web chat and video conferencing to
centrally-based MS/FS with terminals in confidential rooms in selected
branches (enabling remote selling of regulated and advice products);
° Counter sales will continue for travel insurance, travel money and pre-
paid debit and applications fulfilment at a lower level including for savings
and credit cards;
° On-line introduction, sale and servicing of products, with simpler products
(eg credit cards and travel insurance), with motor insurance sold
predominately on-line;
. Selected products (including motor insurance and credit cards) will
increasingly utilise aggregator sites;
. Travel money (physical cash) will be increasingly sold on-line, but will
continue to be delivered largely in branch;
. Customer analysis within segments will drive direct sales through
assessing next likely product and “people who have one of those buy one
of these” analysis. The analysis will prompt direct/electronic mailings and
outbound calls of product offers/upgrades and/or introductions to an
MS/FS;
° Sales processes will either focus on single product sales (eg to “capture”
the customer) or cross sell from hook products (such as current account,
pre-paid debit and mortgages);
° Integration of all Personal Lines and Travel and emerging payments
products onto the Post Office Common Digital will enable a consistent
application process on-line and with FS/MSs, feeding directly into the
host application systems (Bank of Ireland etc); and
. Traditional payments and banking services (including the servicing of
Post Office current account and savings) will continue to be delivered in
branch.
3.6 Page 23 of the accompanying presentation provides the anticipated channel split
of the Post Office Money by 2020.
3.7 The plan anticipates that the number of MSs and FSs will increase towards 2020
however in the case of FSs this will only occur from 2017 and once the sales
performance has reached the target level.
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3.8 This strategy represents an extension and speeding up of the current direction
and will require increased support from Post Office IT. Financial Services and
the CIO are assessing the strategic and cost implications.
4. Risk-based disaggregation of 2019/20 revenue
4.1 The 2013 strategy for 2020 envisaged gross revenues in 2020 for Financial
Services of £538 million. This represents an increase of £227 million from the
2013/14 result of £311 million.
4.2 This increase, which is based on the current Post Office operating model, has
been disaggregated by McKinsey & Co into five categories of increasing levels of
risk, viz:
a) Momentum growth of core products (£56 million): - revenue growth from
the existing core products;
b) Binary outcome (£76 million): - revenue hinging on the outcome of the
negotiations to capture more of the insurance value chain (Hawk) and
associated revenue;
c) Material capability or business model build (£26 million): - revenue from
products sales (eg mortgages and current accounts) that requires a
significant capability upgrade current (e.g., sales force effectiveness,
linking POS data to CRM);
d) Early concept stage (£39 million): - revenue associated with propositions
that could be compelling, but are yet to be fully designed and/or tested in
the market (e.g., SME proposition, Investments);
e) High execution risk (£30 million): revenues deemed to have low
achievability (e.g., gaining share in competitive markets and Bol balance
sheet capacity).
4.3 Based on this risk assessment, one can see a path to revenues of £508 million
in 2019/20 if Post Office successfully delivers on the risks and outcomes
identified.
44 In addition, there are upside and incremental opportunities that have not yet
been sized (eg prepaid debit accounts, personal loans, digital payments hub).
5. Delivering the vision
5.1 The delivery of this vision and associated plans will be achieved through four
strategic building blocks, viz:
a) Focussed customer segmentation with increased insight; the customer
strategy will be a combination of satisfying the needs of mass market
customers that self-select, and targeting selected segments. This
capitalises on the access and affinity we have with these customers
through our distribution and brand, and very deliberately complements
that with 3-4 priority segments where we seek to increase our share of
wallet. For the priority segments, the approach is to lead with hook
products (e.g., mortgages, current account and pre-paid debit) tied to a
segment-specific product proposition. This customer strategy will be
supported by a focussed analytical capability;
b) Strong product propositions to meet customers’ needs; the product set
will expand to support the customer strategy, and will be achieved by
moving up the value chain (e.g., in insurance), digital extensions to
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existing products (e.g., e-postal orders) and new products (e.g., prepaid
debit and investments);
c) Customer-led physical and digital distribution strategy, which includes a
hub and spoke branch model, face-to-face sales of complex products,
online and contact centre for simpler products, underpinned by data
capture and referrals across the network; and
d) Upgraded capabilities, which includes a more visually distinct Post Office
Money brand, supported by enhanced capability through people
development, data analytics, straight through technology and marketing.
6. Key Risks
6.1
6.2
There are a number of risks to the delivery of the 2020 Strategy, including:
a) Delivery of key programmes: - the growth in insurance, both for sales and
value chain improvements is dependent on Titan (travel insurance new
business model) and Hawk (acquisition of Bol’s insurance business);
b) Sales capability — there is a risk that the new sales model cannot deliver
the required sales outcomes, particularly for Financial Specialists;
c) Regulation and sales compliance — Financial Services sales are heavily
regulated with the industry facing an elevated conduct and prudential
environment;
d) Bol’s ability to support the strategic growth plans — there is a risk that
Bol’s balance sheet mix, capacity and operational capability is insufficient
and cannot sustain the growth;
e) Competitor reaction — there is a risk that the strategy will provoke a direct
competitor response. Paypoint is a threat, particularly in bill payments,
with other players (typically digital) attacking sectors such as travel
money, money transfer and prepaid debit.
f) Target Operating Model — the Financial Services and TOM teams are
working together to understand the potential risks and opportunities from
the emerging target operating model and inputting as the final model
options are developed;
g) Staff retention — there is a near term risk of the loss of key executives,
reflecting the current and prospective condition of Post Office and the
buoyant financial services market.
The presentation sets out the mitigation actions to overcome/manage these
risks.
7. Next steps
71
FS Strategy
There are a number of areas of the strategy that are incomplete and will be
assessed over the forthcoming weeks:
a) Further deep-dive on the payments strategy;
b) Further analysis of the inter-relationship to/of the TOM;
c) Assessment of the IT requirements of the 2020 strategy;
d) KPIs to track progress towards delivery of the plan;
e) Detailed investment requirements;
f) Detailed 3-5 year profit plan; and
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g) Potential for offering fee-based community oriented services.
8. Conclusion
8.1 The Financial Services strategy represents an opportunity for Post Office to build
on the foundations established over the past two years and establish a
significant and profitable financial services franchise. It is built on understanding
customers’ needs, leveraging Post Office’s core strategic assets and shifting the
operating model to reflect changing customers’ requirements.
8.2 Successful implementation of the strategy will provide Post Office with a range of
options ahead of the expiry of the Bol contract in 2023 (nb intended direction will
need to have been decided by 2019).
8.3 There are, however a number of capabilities required to implement the strategy
and risks relating to its execution.
9. Recommendations
8.1 The Board is asked to note and support the paper and accompanying materials.
Nicholas Kennett
Director, Financial Services
September 2014
FS Strategy Nicholas Kennett Page 50f5 September 2014
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Financial Services strategy
Board submission
©
September 2014 Money
O
Post Office®
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Overview of materials tabled as part of Financial Services ey Money
Strategy update
1. Financial Services Strategy update paper Separate document
2. Supporting detail for Strategy paper Slides 2-28
3. Appendix materials Slides 29-80
4. Reading room Separate document
©)
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FS STARTING POSITION & MARKET CONTEXT
FS comprises 4 inter-linked product categories
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Income and DPC for 2014/15
Payments I
* Bill Pay (inc. payouts)
* Postal Orders
* Moneygram
I * Money card
ie eC! TD income I
60. oo id 2m
Travel
* Foreign
exchange (includes FRES profit share)
* Travel Money card
~
é
4
Banking Services
* 3'¢ party cash-based services
for customers of other banks
(personal and business)
© ATMs?
_ * Payments,
SS 47.8% £82.7m
Personal Lines
(Banking & Insurance)
* Banking: Savings, Current
accounts, Investments & Cards
_ * Strong cross-
over between
Banking Services
& Payments and
between
Payments &
Travel customers
Banking Services
& Travel drive
foot fall into
branches
I © Personal Lines,
* Travel insurance _2 Lending: Mortgages & Loans Travel (&
~~ Insurance: Motor, Home, Life potentially
I Payments)
I Income I I_income [iEeNCr
os 6% a .6m 85.9% - — ii customer data
1 DPC = Direct Product Contribution
2 ATMs revenues based on original strategic plan; ongoing negotiations underway regarding POCA which could adjust these revenues
Numbers exclude Hawk of £2m and unassigned income target of £4.8m.
Source: 2014/15 Budget (>
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FS STARTING POSITION & MARKET CONTEXT PRELIMINARY YTD FINANCIALS
In 2013/14, FS delivered £311m in income at a 61% DPC and is Ey M
on track to deliver FY 2014/15 at a higher margin oney
FS has consistently grown & delivered a 61%
It is on track to deliver 2014/15 revenue ata
DPC' + 13% EBITDAS in FY 2013/14 I ]
higher margin
YTD? was 65% DPC and I
£m
20% EBITDAS
een +2.3% pap I
291 296 313 311 141 ; 139
P5 2014/15 PS 2014/15
2010/1 2011/12 2012/18 2013/14
YTD YTD Budget
1 DPC = Direct Product Contribution
2 Profitability reflects P3 YTD; assumption is that no material changes in past 2 months
All income figures include FRES
Source: Post Office Finance team
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FS STARTING POSITION & MARKET CONTEXT
Over time, income mix has altered significantly, with growth in Ey M
Personal Lines offsetting decline in traditional business areas oney
Post Office FS income change 2010/11-2013/14 [>] Key insights
FRES © PersonalLines- insurance { Payments
Mix has shifted towards growing personal
Travel {Personal Lines - banking Banking services lines products
a caer * Traditional payments and banking
smeeneeneeeen, 2.3% Pd. services have continued to decline
2013/14 %
296 313 * Mix has shifted away from these
291 32 5.0 declining businesses towards personal
29 31 lines banking products e.g., savings,
(3.3) loans, mortgages
38
Revenue growth has been further
262) underpinned by successful contractual
re-negotiations
87
* Revenue growth has been underpinned
by improved terms the Eagle contract
negotiation that came into force in 12/13
99 97 96 89 (3.4) soe
Reduction in 13/14 as a result of
contractual negotiations in NS&I &
2010/11 2011/12 2012/13 2013/14 banking mostly offset by Eagle contract &
Payments & new revenues in mortgages, ATM and
Banking insurance
Services share - iG eB ee
of total, %
Source: FS Finance team
(+)
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S STARTING POSITION & MARKET CONTEXT
Post Office Financial Services is different from a traditional
bank with high margin-based commissions
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Different economics from a bank
Bank Post Office
Typical + Large proportion of * Large proportion of revenues
revenue revenues stock-related flow related (sales
drivers * NIM commission)
+ Fees * Some revenue share
* Profit share (FRES
insurance, credit cards)
RoE C.12% High relative to a Bank
Trusted brand
Trust in UK financial
services industry,
Low capital requirement
Low balance sheet risk
Trust in Post Office, %
Source: POL FS management interviews; 2014 Edelman trust barometer — FS industry
2nd most trusted
brand in UK
Typical Bank has manufacturing, distribution and balance sheet while post
Office only has control over distribution
Bank Post Office
* Control over
branch and
online
channels
Different position in value chain
ree Marketing Under- Treasury Customer Cross-sell
oo & sales writing & ALM Service / retention
pricing
la
Bank vA Jf Sf f A SY
Post
Office fig a ”
(standal yf Y at w
one)
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> Money
Market —- Payments: Post Office-specific payments products
face challenges given declining demand & new technologies
Bill Payments Postal Orders
* Growth in Pre-Pay customers of 4.3% * Post Office product constitutes entire market
CAGR from 2008-2011 * Product is a secure cash based payments offer
Products * New products likely to be introduced that
combine credit and pre-payment ¢ Unbanked population shrinking rapidly
. Lower (CAGR 2003-11 of -12%) with current
* Aggressive competition from PayPoint, customer base <3m (1.5% of UK population) due to
with 80% of Pre-Pay & 54% of Post Pay demand growth in Basic bank accounts
Competitors markets * Product seen as old fashioned and has
j 1 4
* Payzone exit creates opportunity to gain little appeal to younger generations
share where retailers want 2 providers . : : ~
. * Digitisation of regulatory payments
* Post-Pay volumes declining as utilities I (e.g., visa, passport, DVLA) reduces use
incentivise consumers to pay via DD to Reducing cases a ;
Customers reduce costs to serve (e.g., DD & standing use cases * New technologies increasingly render
orders comprised 66% of regular payments non-mandatory use cases obsolete — e.g.,
in 2011 up from 50% in 2001) gifting, mail order, donations
* Govt. mandated smart meter roll-out may
Channels dis-intermediate physical top-ups, given
focus on top-up via app / online
1 Skopos Research 2009
Source: UK Payments Council ‘The Way we Pay’; Smart Metering Pre-Payment in Britain 2013 report
Additional threats to Payments caused by competitors, new technology & regulation re: Smart Meters & Basic Bank accounts
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FS STARTING POSITION & MARKE
Market — Partner Banking: FS has an opportunity given large .
banks are scaling back their physical footprint Ce) Money
Big 5 are reducing their footprint (>) Opportunities & challenges
X%_ 5-year
CAGR
* Exiting uneconomic locations has led to
Requirement pressure for ‘last branch in town’
9,429 9,263 9,343 9,165 8.859 for utility * Political appetite for a provider of financial
a 908 ar services to rural or other hard to serve
locations
HSBC 2
BARCLAYS fe
RBS Group
LLOYDS
BANKING
GROUP
* Other providers with large networks in
Competitive particular PayPoint may leverage existing
threats capabilities to provide banking services,
ED either to individuals or to small businesses
2008 09 10 11 2012
y play as Big 5 look to further scale back branch presence; action required to offset competitive threats
Source: British Banking Association database (7)
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POSITION & MARKET
Market — Travel Money: Modest growth with increasing
competitive pressures
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> Money
Market size and Forecast
UK resic
=m \Vorstcase “== Best case CAGR
2013-18
Base case
45 + —
xc eons”
an
2008 08 10 11.12 1314 15. 16
17 2018
* Base case scenario implies market contraction in real terms at -
1.8% CAGR 2013-18
* Forecast based on multiple factors including holiday destination and
resident purchasing power due to currency appreciation
2019/20 plan for Post Office Money Travel Money has belo
Overview of key dynamics
Increasing
competition
Increasing
comfort with
using debit
cards
abroad
Rise of all
inclusive
holidays
Pre-paid
ket growth; conservative approach sensible gi
Post Office leading player with 26% of market’
increasing competition e.g., Asda's planned market entry,
Sainsbury's £735k ad spend summer 2013/14 and growth in use
of price comparison websites e.g., 31% of consumers check rates
before purchase
ome Debitcard === Credit card Higher card
usage likely
to drive down
20 + Forex
10 ———— purchases
(0) . 2
2004 06 08 10 2012
Rise in all inclusive holidays during recession given value for
money & ability to control spending
While independent travel market expected to recover, potential
for further growth remains in all inclusive given 50% penetration
and 23% of remaining being open to possibility
Opportunity given low penetration of pre-paid cards & clear
misconceptions given fee concerns
1 Answer to question: ‘Which of the following did you use to arrange your foreign currency for your holiday abroad over the last 12 months?’
Source: Mintel ‘Travel Money’ report May 2014
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FS STARTING POSITION & MARKET CONTEXT
Market — Personal Lines Banking: Several emerging .
challengers are seeking to make their mark Ce) Money
Product/ segment High street attackers
focused
Extending financial
* EC mandated: divestment of Lloyds and
* SME focused: launch RBS branches, launched as separate
of SME focused high-street brands, initial IPO Retailer bank
banks; existing ¢ Greenfield: launch of 1% greenfield bank independent bank
players increasing in UK in 100 years enhanced ;
their branch footprint a, distributi del
ral ws istribution mode!
(J aldermore Incumbents TESCO ,
0 7 a
‘Handelshanken Biter ammnnerena I * Big 5: focusing on cost reduction, efficiency and enhancing
customer experience
* PaP lenders: launch » BGI ge SERBS @ BARCLAYS HSBC « * Specialist
of multiple P2P and * Building societies: strengthening market share for mortgages attackers: gained
pay day lenders and savings banking licence or
increasing competition
. acquired portfolio
in personal loan space
to strengthen
presence, e.g.,
Paragon and
Disruptive attackers Scoban gained
@ Funding Circle * Digital: Atom bank, to be launched as Britain's first all-digital bank banking Heenee
= in 2015 At®m PARAGSN
¢ Non banking players: innovative payment solutions for both retail adrmoney
and business e.g., Google launched business credit cards for /
Adwords, Paypal launched working capital lending
amazoncom Coogle PayPal
i= supermarket banks)
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FS VISION
FS sits at heart of Post Office’s strategic vision
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The most convenient Mails & e ding g Government Home
parcels retailer es provider Services Services
° We will be the number one We will be the leading * Seize the * We will become
e-commerce champion challenger service provider opportunities a major
* Our customers (both We will provide a credible from the challenger to
consumers and SMEs) will be alternative to banks that Government the larger
able to access our services at have lost public support Dae to provieess 4
a igita roadband,
an additional 15,000 - Our specialists will deliver ° Mona e the mobile. and
20,000 access points trusted, quality sales advice 29 ;
; ; 2 dually, ‘ decline of energy
* Our customer journey will on a wide range of financial traditional
be seamlessly integrated with products Government
technology and online We will internalise a greater income
offerings part of the value chain streams
* Transactions will be simple, / A
easy and fast
Source: June Board strategy update (40)
New
5
FS VISION
The vision set out in 2013 for FS in 2020 remains relevant
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> Money
5 MILLION
Personal FS customers
TOP 10 3.1% c.1%
UK Share in Share of
Mortgage Savings Current
lender accounts
Investing in our
brand to build
customers’
awareness of
our FS offer and
support
consideration
Using CVPs and
analytics to
understand
customer needs
and drive an
increased share
of wallet
Market-
leading
Net Promoter
TOP 5 2+ Score in key
Personal lines FS products customer
insurance per segments
broker customer
To deliver £538m income in
Ensuring our
products are
simple,
transparent,
and offer value-
for-money
Providing
unrivalled
access across
the full range of
channels with
simple and easy
customer
Journeys
Improving our
sales model to
build customer
relationships
and loyalty,
increasing
average product
holding
Branch access
within multi-channel
distribution
remains a USP,
delivering complex
sales and lead-
generation
Broaden our
reach to cust-
omer segments
through
competitive and
relevant
products and
services
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O
11
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FS VISION
FS updated vision & Money
I Oveniew LL — BCoreelements of Vision ts
Post Office _ ~~ * Customer: Open to all, targeted
he ak rm The Post Office helps make the at 3-4 selected segments (e.g.,
(dew) I). HMPONIE Binge im ite Rapper
’ ay ae _ © Product: Hook products for
ie choice for your finances and doing extensions
Weield more in life, offering unparalleled /
vision F
convenience and value’ ..
Channel: Branch remains a key
differentiator with strong online /
mobile presence
* Capabilities: Upgraded sales,
data, IT, marketing and people
model
. nal t ree (42)
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POST OFFICE FS 2020 REVENUE PLAN
Financial Services has an aggressive income aspiration, which Ey Mone
has been disaggregated based on risk Y
Overview of Post Office FS income trajectory © cy observations
gm
£470m
Under- Mort-
writing gages
£508m
538
* FS is a growth business
within Post Office, with
a growth rate in line with
a challenger business
? * Assumes current
a operating model
367 eo , i including:
311 56 sn Current Invest- — Full branch network
Core insurance -
revenues accounts ments ~ F2F sales via
. : specialists
(excluding
travel) ~ POCA
; * * Plan is based ona
2013/14 ‘Core 2019/20 Binary risk: Upgrade . Early » Veryhigh Original Further measured and prag-
actual business ‘Core Insurance incapa- : concept I risk (Net 2019/20 _ potential matic approach to
growth’ business revenue bilityor = stage : revisions — plan upsides building capabilities e.g.
growth’- dependent business : . to product (e.g., — Ramp up of F2F
some onHawk/ model; ’ plans: e.g., prepaid advisors only
execution Junction required ; : savings, debit occurs once current
risk, parti- : : investments, account, network of 223
cularly in . insurance personal advisors has hit
payments » etc) loans etc.) break-even
Lower risk productivity
Numbers may not add to rounding (ae
8)
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POST OFFICE FS 2020 REVENUE PLAN
Detail on 2019/20 product revenues by risk level * reson se) Money
Summary of changes to plan by product
Original Adjusted CAGR
Actual 2019/20 2019/20 2013/14-
Products 2013/14 plan plant 2019/20? Category description
Bill payments 37.8 29.5 ‘ -3%
Postal orders 24.6 16.0 -7%
Other payment services 4.0 16.1 26%
ATMs 31.4 32.3 0%
2019/20 ‘Core’ Banking services 57.4 608 1% * 2019/20 income is seen as part of core growth
business growth 9 : , ° (rather than having significant risk of achievement
some execution risk, Loans 0.2 5.0 61% attached)
particularly in Travel insurance 9.7 19.7 19%
payments Moneygram 16.3 20.3 10%
Travel money 24.3 32.0 0% ; \ ber isd dent deal bel
. {Income number is dependent on a deal being
Savings 56.7 76.6 2% —! executed, which in part depends on factors wholly
Cards 1.0 5.7 34% f outside the FS exec team’s control
Motor/Home insurance 2.2 65.9 69%
pinan) ack Other insurance products 6.7 17.0 9% Income requires significant upgrade to capabilities
Li Insurance underwriting income 4 10.0 N/A to deliver target e.g.,
New insurance products = 257 AST ee
Upgrade in capability Mortgages 48 112 24% - ang customer value propcetian I
Pr business mene Current account Lo cal 13.0 NIA Income currently uncertain given idea still at very
SME - 20.0 N/A
Eat cone-pl stage : early stage of development
Investments 08 20.3 69% * Typically reflects new/untested concepts
FRES 33.0 41.0 41.0 4%
Total 311.0 538.2 508.8 9%
1 Net of product revisions — 2 Assuming adjusted plan revenues for 2019/20
3 Note that total ‘Binary risk’ is higher on this page due to the fact ~£12m of low risk insurance revenue growth is included to show a full product view, but is
split into the ‘2019/20 Core’ bucket for the purposes of the previous page
(44)
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POST OFFICE FS 2020 REVENUE PLAN
FS 2020 aspiration has additional strategic upsides for
opportunities not captured within the plan
E& Money
Description
e
Pre-paid debit
account
Digital payments
hub — digitised
money!
E] =) e
Expansion of °
loans for low
income *
Acquisitions -
Banking services
utility play
Prepaid is the fastest growing payment method in USA and is projected to have double digit
growth and Issuer revenues of $9.8 billion by 2016
Traditional positioning of “when you can’t get a credit card” has given way to “the alternative to
checking accounts” and is targeted at a much broader audience spanning the credit
spectrum
Single hub for depositing and payment needs
~ Top up through linking to bank/debit card or top up with cash at the Post Office
~ Send money to friends/family, withdraw cash from Post Office, pay bills and integrate other
payments propositions e.g., MoneyGram
Potential to widen into digital wallet e.g., with driver’s license details also uploaded
Clear market precedent e.g., Moven
1.1m UK low income households need credit but are unable to borrow; more generally real
wages remain depressed vs. pre-crisis levels
Growing interest e.g., L.BG offering smaller loan sizes for shorter repayment periods
Exploring opportunities to acquire good quality books of business, particularly in the General
Insurance market to improve scale and associated margins
Post Office could seek to acquire Bol’s share in FRES which would allow Post Office to capture
the entirety or the FRES dividend (c. £35m pa), make use of tax losses and unlock other corporate
foreign exchange potential (Project Bounty)
* As banks continue to rationalise branches, Post Office is increasingly becoming the only branch
access point for customers.
1 Potential to expand on significant work already completed on digital postal orders (POGO)
Source: ‘Consumer credit and consumers in vulnerable circumstances’ FCA April 2014
a)
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POST OFFICE FS 2020 REVENUE PLAN
The delivery of the FS strategy provides Post Office with a Number M
of choices ahead of the current expiry of the Bol contract oney
Near term focus (>) Strategic options available
* Deliver FS strategy _ Post Office will need to decide in 2019
how it will in 2023:
* Build capabilities and bed down the ow it will proceed in 2023
operating model 4. Exit FS
* Achieve effective risk management 2. Continue as is
and governance a. With Bol (renew/extend contract
in 2023)
b. With a different bank partner
3. Form JV with banking partner,
potentially with an option to buy
partner's stake in a few years
4. Pivot to a purer distributor model
with multiple partners
’ 5. Increase ownership and control by
thoes: whol Sealda phen l building own balance sheet
3)
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BUILDING BLOCKS TO ACHIE
JE 2020 VISION
Achieving the 2020 Vision will require the delivery of four inter- .
related building blocks > Money
Overview
* Mass market customer base with natural affinity to low income, more branch-centric or older
customers
* 3-4 target customer segments based on segment attractiveness (including value) and Post Office
ability to meet their needs
* Enhanced economics & deeper customer knowledge by moving up value chain in specific areas
* Product innovation to partially offset decline of traditional business e.g., SME, PPD and to offer
compelling, customer-first propositions
* Hook products that support target customer segments (e.g., PPD, current account, mortgages)
* Integrated propositions that link several products for cross-sales e.g., Travel, Home, Over 50’s
Customer
°
Digitised customer journeys across all channels
* Shift from counter as sales channels to lead generator, with in-branch F2F sales with specialist
Vane advisors
* New remote capabilities including outbound calling, web-chat
Enhanced online capability
° Capabilities: Data (i.e., front-l line data capture, institutionalised capabilities, front-line tools),
technology (i.e., tablet tool for F2F), marketing (e.g., sub-brand, market budget) and people (e.g.,
Capabilities, F2F productivity, incentivisation)
ile * Dependencies: Network and capacity for Hub & Spoke sales model; commercial support e.g.,
Customer Management Roadmap; wider functional support e.g., product P&Ls
* Risks: Partner, conduct and key programmes e.g., Hawk
; \
Source: FS business team analysis v)
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BUILDING BLOCKS TO ACHIEVE 2020 VISION
Customer: Key insights
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E& Money
Customer
Product
Channel
Capabilities,
dependen-
cles & risks
Overview of customer needs
* Historically broad based mass market offer, with
strengths in older, low income and branch-loving
segments e.g., better performance in urban deprived
and urban inner deprived areas
Payments: Traditional payments products target un-
banked and under-banked
Travel: Travel Money has targeted younger segments
Personal Lines: Spike in older segments for some
Personal Lines products; most loyal customers also tend
to be older and less well off females by a significant
margin. However, recently, new products have enabled
FS to extend into new segments
~ Different customer profile for mortgages focused on
price-driven, online savvy and younger customers
-~ Online loan proposition has targeted higher income
customers
© implications for Post Office Money
* Need for mass market coupled
with multi-segment approach
* FS to go deep on a portfolio on
customer segments, which are
currently under-served or where
FS has product specific aspirations
e.g.,
~~ Over 50’s e.g. Silver Foxes,
Lavender Scented, Ruby
Weddings
— Women e.g. Pink Fizz,
Lavender Scented, Ruby
Weddings
~ Low income e.g. Lavender
scented, under banked/un
banked
— Younger first time buyers
e.g., Golden Boys
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18}
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BUILDING BLOCKS TO ACHIE 020 VISION
MPLE
Customer: Strategy is to adopt a mass approach, complemented
with 3-4 target segments through hook products
E& Money
Customer strategy
(>) Overview of customer segments - EXAMPLE ONLY
Underway: Detailed design and GTM for segment-specific propositions
Example Hook product's index relative
Products to market
Mass market Current a/c ]
customers that self-
. . * 3-4 focused
" Credit card (platinum
select Post Office ( ) 1 segments
Loans * Objective is to
Money maximise FS share
Mortgage 154 of wallet through
C+) segment specific
Savings 206 . hook products and
/ tailored product
3-4 priority segments Motor insurance I propositions
each with a hook Mass segments
roduct supported b with natural
Pp PP : y affinity to Post
a compelling Lavender Silver Office brand and /
segment-specific Segment name* scented Foxes True Blue or strong
oe som i woe ‘preference for
proposition Segment size in key features e.g.
the UK, adults, 5.1m 6.2m . Access
customers who self-select Post Office Money . convenience
1 Segment details are set out in the Reading Room la \
19
Nar
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2020 VISION
Product: Key insights
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> Money
Customer
Product
Channel
Overview © Implications for Post Office Money
* Each product category plays a unique role within the
portfolio
- Payments contribution to total income is declining;
key requirement will be to guard share via improved
convenience / opening hours (network extension) and
building new capabilities in digital payments; business
also drives footfall to branches
~ Banking Services has lower EBITDAS margin
compared to other product lines, with profitability
varying significantly by sub-segment; category also
drives footfall to branches
— Personal Lines is core growth engine for business,
almost doubling share of total income going forward
* Within Personal Lines, current product propositions
require further development terms of price or non-price
dimensions e.g.,
* Inits traditional business, Post
Office Money should continue to be
a strong player and selectively
innovate
* Create digital extensions of
products (e.g., electronic postal
orders) or digitising existing
products
* Develop compelling, customer-
first propositions (e.g., cards)
* Establish clear ‘hook’ products
* Launch integrated propositions
for cross-sales
* Explore utility service offering for
banks
Capabilities, — Price: Competitive within panel but not vs. market
dependen- leaders
cies & risks — Non-price: Products do not have clear differentiated
features as recognised by independent ratings firms
(on \
20
7
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BUILDING BLOCKS TO ACHIE
020 VISION . ~ .
EXAMPLES — NOT COMPRE
Product: Moving forward, Post Office will evolve its product in ,
3 different ways se) Money
Anticipated product innovation (examples only — not comprehensive)
* Prepaid is the fastest growing payment method in USA and is projected to have double digit
Prepaid debit growth and Issuer revenues of $9.8 billion by 2016
Innovation in * Traditional positioning of “when you can’t get a credit card” has given way to “the alternative to
new current accounts” and is targeted at a much broader audience spanning the credit spectrum
products * Investments market is under significant disruption since RDR made payment for financial advice
Investments mandatory, and regulation on annuities as default for pension schemes was scrapped
* Aspiration to enter with a disruptive online platform proposition, focusing on addressing those
_left in the “advice gap’ or investing pension money without use of an IFA
Competing Credit card Development of compelling, customer-first propositions (e.g., cards)
propositions
for existing * Project Hawk will allow FS to claim a larger share of the current Junction JV profit to invest in
insurance strengthening its insurance proposition, and non-renewal of Junction contract will reduce
product: administration costs and increase pricing power with underwriters (i.e., through ability to choose
from a panel rather than being limited to those specified by Junction)
Digital * Single hub for depositing and payment needs / /
payments hub ~ Top up through linking to bank/debit card or top up with cash at the Post Office
Digital -— Send money to friends/family, withdraw cash from Post Office, pay bills and integrate other
extensions payments propositions e.g., MoneyGram
of existing * Potential to widen into digital wallet e.g., with driver’s license details also uploaded
Products Digital * Product applications and processes being put through CDP, with credit cards as the first example
application
forms
(24
/
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BUILDING BLOCKS TO ACH
ISION
Channel: Key insights
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> Money
Customer
Product
Overview
Capabilities,
dependen-
cles & risks
* While FS is in line with market in that online is set to be-
come increasingly important, branches remain a critical
channel for driving sales at 58% of total income in
2019/20. The most significant channel shifts occur within
the Personal Lines category
~ Insurance: Increasingly digitising with up to 80% of
new sales online
— Banking: Shift towards branch caused by new branch
heavy products (e.g., Mortgages, current account);
within the branch channel, these are largely delivered
via F2F advisors and rely less on counter sales
New technologies (e.g., VC) and digital enablers (e.g.,
data capture) to enhance customer experience, increase
cross-sales & optimise sales processes; online / mobile
also to become increasingly key sales channels
The F2F staff are a critical component of the physical
distribution and while today they do not break even, the
business has a plan to helping them get there
~— MS: New hires at higher performance
-— FS: Achieving required productivity will involve a mix of
performance management, training, data, lead
generation, incentives & tools
© implications for Post Office Money
* Branches: Aspiration is to move
to a hub & spoke distribution
model, where customers can
access financial services advice
even when a specialist is not
located in their closest branch
* Contact Centre: Plan to create
outbound calling capability
driven by data capture in tail
branches; also plan to manage
more inbound calls to drive
cross-sales (Titan)
* Online: Aggregators will remain
the key channel for Post Office
online sales in insurance, but
ambition is to drive increasing
traffic to our website and create
optimised customer journeys to
drive conversion
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/
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BUILDING BLOCKS TO ACHIEVE 2020 VISION
Channel: Insurance increasingly sold online but new Personal Ey M
Lines products require greater F2F capability oney
Split of new sales volume by channel (% volume)! I) Counter’ ff F2F @ Online Mf Contact centre Other © x > #sales (volume)
Product 2013/14 2019/20
Moneygram
Postal Orders
Payments
and Banking —Post-pay
Services Pre-pay
Banking Services
Travel money
Travel .
Travel insurance
Credit Cards
Current account*
Savings
Home insurance
Personal
F Loans
lines
Motor insurance
126k
£3.6b
£1.2b?
Other insurance
Mortgages —eM £0.9b
Investments
1 Counter includes branch referred sales completed online/call centre where FAD code given by customer
2 Front book value
3 2013/14 insurance sales were one off spike for Motor
4 Conservative assumption as likely some current account applications processed at counter / CRMs
(8)
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BUILDING BLOCKS TO ACHIE
Channel: FS’ channel strategy is evolving with changing
customer needs while maintaining competitive advantage
ISION
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E& Money
Channel
Income?
Branch
counters
2014: £225m
2020: £278m
Branch
specialists?
2014: £5m
2020: £33m
Remote /
Telephony
2014: £14m
2020: £26m
Online /
mobile
2014: £28m
2020: £84m
From
Q-
Focused on processing payments for tradition business ioe
Sales of simple products via paper applications + life insurance
Low rate of counter referrals to specialists (~13%) °
Growth and stabilisation of new F2F network, with initial focus on .
delivering higher quality standards .
Significant variance in sales performance between top and bottom
performing sales staff *
Performance based incentive systems partially implemented .
(completion subject to final Trade Union agreement)
Inbound telephony (~10-15% of insurance sales) with outbound pilot .
underway
Limited service to sales functionality given no ownership of inbound °
call centre .
Videoconferencing trial underway
Limited website functionality — e.g., not all products available online, = *
room to improve customer journeys, especially cross-sell
Reliance on aggregators to drive volume for Personal Lines .
insurance products lies
Credit card process the sole example of a digital application process
applied in branch
Front-line focused on data capture and referrals via simple tools
to enable rapid form filling and/ or instant set-up via apps
Greater use of self-serve; limited use of paper applications
Fulfillment of some simple products (e.g., Savings), Travel
Money and Travel Insurance
Improved FS productivity, closer to market average
Significant proportion of leads to specialist advisers driven
through ‘hub and spoke’ model
FS to pair up with MS, where practical, to maximise x-sales
Incentive schemes embedded as a core element of a customer-
oriented culture
Increased use of remote VC / web chat capabilities for sales of
complex products e.g., mortgages, life
Outbound telephony for warm leads from counter & data analytics
Service-to-sales to drive cross-sales following move up value
chain for insurance sales
Simple website tailored to customers based on browsing
behaviour; full suite of products available for sale
PO Money homepage with single sign on; leads from main site
Full product details for insurance & investments. Simple digital
customer journeys accessible through multiple channels
(including F2F) with embedded cross-sell options
Selective use of aggregators to raise brand awareness and
deliver volume targets; however, increased focus on own website
1 Excludes Other Income: 2014: £39m; 2020: £87m (Mortgage intermediaries, FRES, insurance renewals); branch walk-through
2 Excludes impact of leads generated by FS & MS but executed in order channels
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BUILDING BLOCKS TO ACHIEVE 2020 VISION
Capabilities, dependencies and risks: Capabilities & Money
Data
Technology
Marketing
People
Capabilities,
dependencies
& risks
Overview of key capability requirements to deliver plan
Improve front line data capture in branches of customer information
Institutionalise data analytical capability to profile customers, understand their needs and I
anticipate their next likely product
Use front-line sales tools
Present customer overview to FS / MS and provide next likely product prompts
Implement tablet (or equivalent) sales tool to front line sales staff (FS & MS) with product
applications through Common Digital Platform
Improve customer database capability
Launch a visually distinct PO Money brand
Support to build customer awareness
Establish an annual marketing budget
Incentivise FSs, MSs to deliver effective (compliant) sales
Improve sales team productivity to drive personal lines banking products in particular through
training and recruitment support (e.g., FS Academy)
Implement Agency commission structure to reward and encourage sales and service activities
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BUILDING BLOCKS TO ACHIEVE 2020 VISION
Capabilities, dependencies and risks: Dependencies & Money
Network
dependency
Ensure POL
Group
provides
suitable
functional
support
Capabilities,
dependencies
& risks
Overview of key Group dependencies
* Branch network to:
~ Support sales of complex products through the Hub & Spoke specialist model, targeting
branches with the appropriate footfall/customer mix
~ Support POL’s largely cash based payments and banking business
* Invest in online offering which will be central to simple sales and customer servicing
Marketing
* Customer Management Roadmap, incl. Single Customer View
* Marketing investment & support, incl. test & learn new approaches, in addition to Bol & FRES
marketing contribution
* CDP: increased control, improved journeys, single customer sign-on Cross-functional product
and marketing initiatives, in support of CVPs
* Development & execution of a Post Office FS IT delivery plan (including coordination with Bol)
Rest of the business :
* Network: capacity and support for new products ;
* Finance: product P&Ls
* HR: recruitment support, in particular for Specialist roles and incentives
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BUILDING BLOCKS TO AC
Capabilities, dependencies and risks: Delivery risks
E 2020 VISION
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E& Money
Capabilities,
dependencies
& risks
Delivery of key
programmes
Sales
Capability
Sales
compliance
Bol ability
Competitor
reaction
Target
Operating
_ Model
Staff retention
Overview of key risks for POL to manage
Growth in insurance business is dependent on:
~~ Titan (travel insurance new business model)
~ Hawk (acquisition of Bol’s share of insurance)
Ability of business to deliver increased output from sales
people
Financial Services sales are heavily regulated and
mis-selling presents a key risk
There is a risk that Bol’s balance sheet mix, capacity
and operational capability is insufficient and cannot
sustain the growth required
There is a risk that the activities will provoke a direct
response from our competitors
Uncertainty on risks and opportunities from new
TOM
Near term risk of the loss of key executives,
reflecting the condition of Post Office and the
buoyant financial services market.
Mitigation
* Board mandate given
~ FCA application in progress
~ Negotiations underway with Bol
* Plans in place to exit and replace non-
performers and provide the tools, training
and incentives to support them
* With Bol, Post Office has a coordinated 3
lines of defence to manage conduct risk
* Negotiations progressing with Bol to
establish medium-term targets and
commissions
* Monitor key challengers and respond
accordingly.
* Working with TOM team to understand key
levers and implications
* Strategy being developed with HR
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NEXT STEPS & MILESTONES
Activities to be finalised & Money
* Further deep-dive on the payments strategy
« Potential for offering fee-based community oriented services
* 3 year profit projection
« Detailed investment requirements
* KPIs to track progress towards delivery of the Plan
« Further analysis of the implications on FS of the TOM
@)
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Appendix & Money
@)
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Appendix — Contents & Money
* Starting position & market context — Product specific
- Payments
-~ Banking Services
~ Travel
Personal Lines
* Vision / learnings from challenger strategies
° Building blocks to achieve 2020 Vision
— Customer
~ Product
- Channel
* Next steps & milestones
(8)
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FS is taking steps to enhance its business model se) Money
* Project Eagle deal in 2012 to renew partnership with BO! thereby generating higher income for Post Office,
through greater commissions and sale of POFS shares proceeds
improved * Additional savings as a result of the reduction in Post Office obligations that included:
commercial ~ New, lower minimum Crown and FS headcount requirements with estimated benefits of (£8m & 15.9m pa
terms respectively & cost avoidance of £16.7m)
- £15m pa marketing fund
-_ Significantly improved protection I for Post Office if Bank gets into financial trouble
. Project Titan, to be executed in Jan 2015, will enable FS to manage and control the value chain for Travel Insurance
via Post Office Managed Services (POMS) division. This will enable Post Office to offer more product propositions for
Upstream customers including an aggregator proposition that will broaden reach for increased premiums/profitability, whilst
position in increasing market share amongst the PO core customer base e.g. over 50's
value chain ¢ Project Hawk to occur in 2014/15 and will entail buying out the Insurance portfolio from Bank of Ireland. Taken
together with expiry of Junction contract, will give FS ability to drive cross-sell (via owned call centre) and establish
a ‘broker style model’, thereby increasing pricing flexibility
Sub-brand * Post Office Money sub-brand to be launched in Jan 2015 in order to change customer perception of Post Office as
an FS provider.
* Online customer journeys being improved ¢ e.g., reduced question set, application completeness tool bar; credit card
i hide redesign has led to increased sales (from 93% to 215% of YTD target)
journeys * New journeys also being replicated for in branch FS advisors to offer live acceptance decision, lower error rates
and facilitate a compliant sales Process
. investment I in sales training/Academy/tools to boost FS productivity
Alea * Capture customer data to improve conversion
capabilities * Introduce new performance management and change incentive structure
* Drive lead generation through CRMs and online appointment booking, and investment in Post Office Money brand
Source: FS business team
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. epee E& Money
Post Office currently has low awareness & FS credibility
Aug -14 Target 2020
Awareness (FS) 10% 20%
Consideration (FS) 12% 35%
FS credibility 9% 50%
Sou Net Promoter Score +24 Top Quartile
(industry)
Easy to do business with (CES) ™1% Top Quartile
(industry)
Net Promoter Score “1 40%
Overall Brand LLC CUCU CL Le
Easy to do business with 27% 57%
43 month rolling month average May — Jul-14
Respondents may give multiple responses; base: All arranging product in last 6 months
Source: Customer strategy team data (22)
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Appendix — Contents
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E& Money
Starting position & market context — Product specific
~ Payments
-~ Banking Services
~ Travel
Personal Lines
Vision / learnings from challenger strategies
Building blocks to achieve 2020 Vision
— Customer
~ Product
- Channel
Next steps & milestones
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(8)
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Market — Payments: The UK remains a cash-centric market but Ey M
the importance of cash-based payments is declining oney
Electronict [% Card? [lf Cheque Mf Cash
Number of payments transactions, billion Value of payments transactions, GBP trillion
* Cash is dominant
+0.1% p.a. *0.7% p.a. XQ payment method,
-6.8% p.a. wt capturing 51% of
37.4 37.7 39.0 +1.8% pa. volumes in 2012 & 42%
79.4 NS by 2017; high share of
cash driven by usage
16% 18% 26%
by small & micro
merchants & P2P
29
Electronic payments
(CT/DD) expected to
sharply increase share
in volumes driven by
account-based
solutions targeting P2P
payments (e.g., Faster
payments, Pinglt)
2007 2012 2017F 2012 2017F
Traditional FS Payments business in decline given move away from cash
1 Incl. credit transfers and direct debits; 2 Incl. prepaid, debit and pay-later card transactions
Source: McKinsey Global Payments Map (34)
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Starting position — Payments: Historic performance
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E& Money
Post Office Payments income change 2010/11-2013/14
gm Bill payments © Other Payments
Postal Orders i ~ Money gram
—___mn I 7 Yo PA, meme
87 85 84 83
43 40 39 38
CAGR
2010/11-
2013/14 %
(4.3)
(4.7)
2010/11 2011/12 2012/13 2013/14
Payments
share of total, 30 29 27 27
%
Source: Finance
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Appendix — Contents & Money
* Starting position & market context — Product specific
- Payments
— Banking Services
~ Travel
Personal Lines
* Vision / learnings from challenger strategies
° Building blocks to achieve 2020 Vision
— Customer
~ Product
- Channel
* Next steps & milestones
(8)
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Starting position — Banking Services: Historic performance se) Money
Post Office Banking Services income change 2010/11-2013/14
© Personal Automated Deposits & Withdrawals
CAGR
2010/11-
2013/14 %
£m
Other Partner Banking
ATMs
99
46 '
26 of a
2010/11 2011/12 2012/13 2013/14
Banking
Services share 34 33 31 29 ~~
of total, %
Source: Finance
(15.2)
6.5
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©
Appendix — Contents
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E& Money
Starting position & market context — Product specific
- Payments
-~ Banking Services
- Travel
Personal Lines
Vision / learnings from challenger strategies
Building blocks to achieve 2020 Vision
— Customer
~ Product
- Channel
Next steps & milestones
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(8)
Starting position — Travel: Historic performance
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E& Money
£m
Travel share of
total, %
Source: Finance
Post Office Travel Money income change ;
Travel Money
Travel Insurance
2010/11
® FRES
2011/12 2012/13 2013/14
CAGR
2010/11-
2013/14 %
(1.8)
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Appendix — Contents
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E& Money
Starting position & market context — Product specific
- Payments
-~ Banking Services
~ Travel
~ Personal Lines
Vision / learnings from challenger strategies
Building blocks to achieve 2020 Vision
— Customer
~ Product
- Channel
Next steps & milestones
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©)
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Market — Personal Lines Banking: Wide-ranging innovations in ES M
recent years have contributed to industry transformation oney
Innovations Examples
12/3
CURRENT ACCOUNT
= Santander UK launched its ‘123’ offering in March 2012 offering innovative
rewards and interest rates
Barclays Features store was introduced in 2012 to enable customers
to personalize their current accounts online
Product .
innovat-
ion
« Major banks like Barclays and HSBC have embraced social media to HSBC >
inform customers about new products, taking feedback and provide value
added services a BARCLAYS
« Several P2P lenders have grown significantly in recent years relying on their
innovative business model
eure, " Wonga has emerged as the UK's biggest payday lender leveraging its
model unconventional business model
Funding Circle
Market is seeing several forms of innovation and winning propositions have succeeded in gaining share
)
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Market — Personal Lines Insurance: Markets returning to
growth but pricing pressure remains with threat of Ey Mone
commoditisation Y
Motor insurance Home insurance Life insurance
e
wom Worst case
15
2008 10 12 14
ter
sommes Best case CAGR
2013-18
Base case
4
16 2018
Extreme profitability challenges for .
most in the market
Online increasingly critical;
aggregator share has now over-taken .
direct internet leading to high levels of
competition °
Drop in brand loyalty (3/4 of motorists
shopping around for last renewal)
Increasing regulatory scrutiny e.g.,
Govt. ban of referral fees, FCA fines for
add-on aggressive selling
Innovation based on telematics & apps
omens Worst case
ON OMO
2008 10 12 14
CAGR
2013-18
ses Best case
Base case
16 2018
Market likely to pick up given
improvements in economic
performance and housing market
Cost of cover cheaper in real terms
than 20 yrs ago, measured by AA index
High degree of price transparency with
65% of consumers using aggregators to
research their policy and 41% using
aggregators as channel of arrangement
Within insurance, very different dynamics for each product segment, with increasing impact of aggregators
M
CAGR
2013-18
Best case
ommen Worst case
3
Base case
&
' @
0
2008 10 12 14 16 2018
* Recent growth coming in from higher
pension accumulation as a result of
introduction of auto enrolment
* Typically purchased with some sort of
advice (~68%), although the online
segment is beginning to grow, with
~26% bought through online channel
Bourne: Mintel reports, McKinsey , AA insurance price index
‘OS
Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
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Markets — Personal Lines Insurance: The aggregator channel
experienced high growth from 2003-09 but this appears to be Ey Money
slowing
Personal motor insurance channel development
Percent’
48 46 45 44
61 56
70 66
Other 80 75
channels
q
Aggregators
2003 04 05 06 07 08 09 10 11. 2012
Market size QD YD PD YD D@ © © DW @ @
Aggregator share likely to stablise
“4 Other channels include: Direct, Affinity groups, Brokers/IFAs etc.
2 Assumed first year penetration and assumed linear development to first actual observation in 2005
3 Datamonitor unit definition: Percent of new private motor GWP, validated as share of market with back-of-the-envelope calculations
SOURCE Wéieefionitor (2012), ABI (July 2013), Team BhaHEISTRICTEST COMMERCIAL CONFIDENCE
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Market - Personal Lines: While Digital increasingly an
important channel for sales, Branch remains key for :
specific products & Money
Channel of arrangement’, 2013H2
*S Absolute change since 2007
Mortgage Current Account Loans Savings Credit card Home insurance Motor insurance
53 85 67 t 1400 J 56
000
Face to face channels least likely to be used
be used
line with market
Current strategy to focus on online for Insurance and F2F sales for Current Account & Mortgages
4 Respondents may give multiple responses; base: All arranging product in last 6 months
Source: GFK Survey 2013; Mintel; expert analysis
(=)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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Market — Personal Lines: Older & lower income demographics
rely on branches more and branches remain key for affluent and
for the younger generation, especially for advice
> Money
Share of customers preferring branch by activity type, %, 2013 UK
Transactions
Simple sales
Complex advice
Service
In the UK, >90% of all customers (including affluent, younge
Less than 45 years Morethan45 years Less than £40k More than £40k
old old income income
20 31 26 27
50 66 61 56
58 70 69 57
46 64 58
SOURCE: McKinsey Distribution Consumer Research 2013, Europe
r gene
ration) still visit branches at least once a year
(45)
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IN THE STRICTEST COMMERCIAL CONFIDENCE
_/
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Market — Personal Lines: Market data suggests share of online Ey M
to rise but branches will continue to have a role oney
Share of online, % UK market
2013) 2017 MM 2020
I
72
61 66
57
35 40 40 40 43 40
33
29
29 26 27 23 27 50 25
17 oo 16 tan n "I
Current Savings Investments Consumer _ Transactions? Balance Complaints Others?
account account finance enquiry
Branches remain important especially for advice or more complex sales
1 Includes resolving a problem, change account details
2 Transactions does not relate to Post Office Payments business but typical banking activities e.g., deposits
Source: McKinsey multichannel survey: regression model
(4)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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. was . un . E& Money
Starting position — Personal Lines: Historic performance
Post Office Personal Lines income change 2010/11-2013/14. 7
em Loans ™® Mortgages
Cards 1 Other insurance
Home insurance Savings CAGR
i 2010/11-
1 Motor emt p.a. 2013/14 %
=a (10.1)
51 57
29 32
2010/11 2011/12 2012/13 2013/14
Personal Lines
share of total, a va a e
S : Fi
ource: Finance (a7 )
Nar
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
Appendix — Contents
POL00040271
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E& Money
Starting position & market context — Product specific
- Payments
-~ Banking Services
~ Travel
Personal Lines
Vision / learnings from challenger strategies
Building blocks to achieve 2020 Vision
— Customer
~ Product
- Channel
Next steps & milestones
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
@)
In updating the Vision, we have drawn upon learnings from
challengers, in addition to FS context & market dynamics
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> Money
Successful challengers don't initially go head-to-head with
established players — instead they go in with simple ‘non-
relationship products’ or target the un-served or under-served
Challengers keep it simple while offering clear points of
difference and innovation vs. market
Challengers have clarity over their hook product and use this
as a platform to cross-sell
Financial Services brand should build on parent brand for
maximum advantage
Many Post Bank and Retail challengers everege their unique
differentiator — i.e., their branch / store network..
. However, a compelling multi-channel offer is now just
‘table stakes’
Walmart >:
AO AE Ss
RO A a
El
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
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Postal banking players usually leverage large postal networks se) Money
Post Office only has a limited number of fully dedicated branches
FS branches as % of
Full Financial Services branches! Total Post Network total Post Network
Oh 275-300 900 30
~1,100 42,000 ~10
i
/ ome
// ~3,500 17,000 a0
if
i
if
1 Defined as branches with complete offering and dedicated staff (e.g., FS Branch Managers, Sales Advisors, etc.)
NOTE: Most of the players rely on the wider Post Office network; for example, Postbank leverages ~4,500 Post Offices, JP Bank leverages ~24,000 outlets, etc.
©)
SOURCE: Annual Reports
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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This vision seeks to capitalise on Post Office Money’s natural ,
P y > Money
competitive advantages
Trusted brand
Large distribution
network
High branch
footfall
Loyal customer
base
2nd most trusted brand in the UK with a loyal customer base
Similar levels of trust to other financial providers, including
customers’ own bank
Network size of 11,700 branches, with 99.7% of the UK
population living within three miles of a branch
Over 95% of the UK population use Post Office services, with
18 million customers visiting branches every week
Highly loyal customer base among the older generation,
especially females
Post Office®
©)
5
IN THE STRICTEST COMMERCIAL CONFIDENCE ~
Appendix — Contents
POL00040271
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E& Money
Starting position & market context — Product specific
- Payments
-~ Banking Services
~ Travel
Personal Lines
Vision / learnings from challenger strategies
Building blocks to achieve 2020 Vision
— Customer
~ Product
- Channel
Next steps & milestones
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
(8)
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Customer: FS tends to do well in less affluent areas @ Money
7] Personal Lines - insurance
WW Payments (@ BankingServices I Travel I Personal Lines - banking
Volume of products by branch location!
Average Crown Average no. of
footfall branches specialists
Number of / al §
branches
Rural 5726 602 0.3%
Urban
Deprived 706 1,607 71%
Inner
Urban 4083 1,446 5.4% 5.3
oan 632 1,876 8.9% 10.4 4
Deprived
1 Includes data on 11536 Branches 2 This is likely to be an underestimate, as it does not take into account income from previous ‘back book’ sales
Methodology: Income is calculated from volume numbers. The volume in each store is multiplied by a constant pound value estimate of the value of each transaction
The value of each transaction is assumed to be the same across the different locations; testing suggests this holds to within ~10% for the three products we tested
(Savings, Travel Insurance and Home Insurance)
Source: MI team
®
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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Customer — Personal Lines: FS has implemented a customer Ey M
segmentation that reflects consumers’ financial needs oney
Overview of segments
i
Younger --
Please note these segments are divided into 84 sub-segments
High income
Low income
Older
» Green Shoots: Under 25yrs; many single and living with parents;
7 frequently use ATMs, many have student loans. 3.9 adults.
© Pink Fizz: 25-45, often single people, propensity to London; many
have mortgages, borrow not save, use online banking. 5M adults.
Golden Boys: Upwardly mobile men aged 25-45, high earners;
majority have mortgages, manage finances remotely. 3.9M adults.
oO Red Brick: Well-educated 25-45 year old women; mostly home
owners with Mortgages and higher than average household
incomes. 4.4M adults
True Blue:45-55 year old couples and families. Incomes are usually
over £75,000. 6.2M adults.
Grey Days: Single or separated, typically aged 35-55. The incidence
of unemployment, or people unable to work, is three times higher
Plain Vanilla: 25-55 years, over half have no plans for their
retirement or expect to rely on the state pension. 3.7 M adults.
» Silver Foxes: Over 55, majority are retired. Concentrated in
London and the South East. Households earning over £100,000 is
high. High levels of savings and investments. 5.1M adults
i) Ruby Wedding: Older married people who have paid off their
mortgage. Household income £20,000 to £30,000. 4.8M adults
oO Lavender Scented: Older people often over 65. Often living
alone. Income typically £10,000 pa. 6.9M adults.
Source: CACI
Post Office®
(54 \
54 )
IN THE STRICTEST COMMERCIAL CONFIDENCE
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Customer — Personal Lines: Strengths in older branch
loving segment but new products have attracted new ey M
segments e.g., Mortgages oney
Analysis of current customer base
Savings Mortgages Credit card std Car insurance Loan
Fresco Segment Online Premier Distribu-
Description Saver CashISA Index Distribution Index Distribution Index tion Index Distribution Index
(Missing) 3% 4% 3% 1 1%
Green Shoots 3% 3% 1007) 2% 26 3% 37 2% 26 2% 23
Pink Fizz
Golden Boys
Red Brick
True Blue
Grey Days
Plain Vanilla
Silver Foxes
Ruby Weddings / 10%
Lavender Scented 6%
100% 100% 100% 100% 100%
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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Customer — Personal Lines: Those with highest cross-product ey M
holdings tend to be older and less well off oney
Product holdings of Post Office Money customers vs. UK adults (>) Key takeaways
ME 3+ product holders * Post Office Money is
Green Shoots 9 UK Adults successful at cross sell to
. . the older, female
Pink Fizz demographic in Lavender
Scented, Silver Foxes and
Golden Boys Ruby Weddings
Red Bricks * These three segments
span low to high income
True Blue groups, indicating that
Grey D success is driven more by
rey Days appeal to an age group as
Soave opposed to pure pricing
Silver Foxes * Lack of cross sell for lower
income segments like grey
Ruby Weddings days and plain vanilla is
particularly poor given the
like-hood of multiple F2F
touch-points in branches
(56)
Lavendar Scented
ar
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
Appendix — Contents
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E& Money
Starting position & market context — Product specific
- Payments
-~ Banking Services
~ Travel
Personal Lines
Vision / learnings from challenger strategies
Building blocks to achieve 2020 Vision
— Customer
-~ Product
- Channel
Next steps & milestones
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
(2)
Product: FS has 4 major product categories , the fastest
growing has the highest margin
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E& Money
Payments
* Traditional business
that is in decline (e.g.,
Bill Payments had a
-4.3% CAGR from
2010/11-2013/14)
Banking services
* 3° party services for
customers of other
banks e.g., cash
withdrawals, deposits
* Personal banking
Travel
JV to provide travel
money with FRES
which includes both a
commission and
profit share
Personal Lines
Core growth engine for
Post Office
Comprises of Banking
(e.g., savings) in
partnership with Bol and
Description * Growth of growing to 2020 (e.g., * Solid ~25% market insurance products
MoneyGram 4% CAGR for personal share expected to (excl. Travel)
(particularly given banking, and general continue in a broadly * Project Hawk can allow
newly negotiated spend card launch) but flat market Post Office to buy out
terms) slows overall business in decline * Travel insurance Bol share and grow
category decline (e.g., -13% CAGR for proposition significantly
Change Giving)
41
lobia 27 22 29 18 22 4g / Travel ac 47 Insurance
a: i 3 107 FRES 29 24 ~~ Banking
2013/14 2019/20 2013/14 2019/20 2013/14 2019/20 2013/14 2019/20
Margin, DPC 61 48 64 86
%!
EBITDAS 12 3 35 58
1 Based on 2014/15 full year budget (se
Source: Product P&L's Period 3; team analysis oA
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
Product — Prepaid card: In 2012, WalMart launched Bluebird, a near!
zero fee product and available online or via in-store terminals
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€ Money
Overview of Bluebird
e
Targeted as a replacement to traditional checking
offering all the benefits with less cost
~ Direct deposit
— Free ATMs
— No overdraft fees
~ Electronic bill pay
Cutting edge technology that includes digital P2P
transfers, mobile wallet, mobile app, sub account controls;
appeals to the technology savvy un-banked or under-
banked — a growing market given rising smartphone
penetration of this segment
Carries typical Amex credit card features
— Purchase protection
— Fraud protection
— Card replacement
— Roadside assistance
— Global Assist services
Sold via low cost labour model — i.e., terminals
The Prepaid Card
That's Right
For Everyone.
Loaded
with benefits.
Not fees.
PROTECTION’
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
Product — Credit card: In future, FS will develop product
packages tailored to specific customer needs
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E& Money
Example: Developing an integrated credit card proposition
Customer and market research underpins a product
strategy that caters to customer needs and leverages
Past Office strengths
jingle product remains too broad to
market
* — Recognition that Post Office's ci
effectively target a heavily segm
* Multiple products developed to better coverage of the market, and
target different Post Office custo
2int card Balance transfer
= Able to equip people card
Matched: With optics. They may 9% pT; A card that helps
TES¢O
flexibility I not plan te borrow or Smart astute people save
spend but it’s cost money as well as
reassuring knowing saving giving extra savings
they have a O%there through 0% purchases
Price 4
sen Travellers reward Low rate everyday
sitivity I 7s card "oe card
Rewards: Enhanced travel Low rate: [line with brand
Value-add Product not just focus- Simplicity 2880ciations, the low
sed on the spend R clarity. ‘te product provides
a peace of mind/con-
fidence in a product
that won't bite
abroad. Supple-
mented by rewards
element to drive better
everyday usage
Coulls & Indebtedness
* — Products integrated with addition:
customer outcomes where possi
Ww
Source: Credit Cards: Market & Segment Approach 2014-18
Ist Office offerings that match wit
g., Travel Money, Savings etc
a
>)
The resulting proposition has a clear target customer, and scope to leverage wider Post Office
propositions
Headline
* Pulse in and aout
month 0% BT market
* 2.98% BT fee
* Straight forward
borrower proposition
Age
Borrower
Commercial
+ Scale product
+ Mitigates interchanges
Income (Ke)
18 25 35 45 55 65+
i «Matched 0%
* — Spread the cost of
larger purchase
* Repeat offer rates
Flexible
Age
10 20 40 60 80 100+
* Everyday appeal
* Target offering
Income (K8)
18 25 35 45 55 65+
Low rate APR
No BT fee
Single low rate from
application, no 0%
Everyday
10 20 40 60 80
+ Everyday appeal
+ Target offering
100+
promo
Age Income (K£)
18 25 35 45 5! 20 4 60 100+
me ° «60% FX plus travels Leverage PO
rewards brand/bases
* Leverage PO assets * Deepen loyalty
Travel * Value add offerings-
rewards lounges/upgrades
Age Income (KE)
18 25 35 45 55 65+
10 20 40 60 80 100+
Card management
approach
* Typical entry
products,
optimise via
* Spend
stimulation
* — Credit limit
changes
* — Promotional
rates
* Back book /
additional BTs
+ Reprices
Targeted up-sell
to more engaged
products
* Deepen
product and
brand
engagement
Grow ATVs &
category
usage
* Xsell
additional fee
bundles
* — Reprices
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
(G0
@)
Appendix — Contents
POL00040271
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E& Money
Starting position & market context — Product specific
- Payments
-~ Banking Services
~ Travel
Personal Lines
Vision / learnings from challenger strategies
Building blocks to achieve 2020 Vision
— Customer
~ Product
~ Channel
Next steps & milestones
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
(2)
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Channel: FS is line with where the market is headed; while a Mone
share drops, branches remain central to approach Y
) FRES MH Other [@ Contactcentre { Online Branch-Crown / Branch - Agent Total branch
(2019/20 only)
Overall distributi hange by business area‘
Share of income (© ts
Banking services Personal lines —-insurance Personal lines ~ banking
100% = 311 100% = 89 93 100%= 9 119 100% = 64 132
- 9 /Ren- I
100
Travel? Payments 2013/14 2019/20
100% = 100% = 83 102 (Travel Online declining due to.
58 6! 4! insu- increasing F2F sales for
Other: an ea all 0 tance mortgages and savings, I
(offsets and higher savings '
68 93 branch I revenues for branch vs.
I depend — online products
- “ency een
2013/14 2019/20 2013/14 2019/20 2013/14 2019/20
1 Shares calculated through excluding fixed revenue streams - refers only to revenue directly generated through channels
2 Shares based sales splits, total revenue includes FRES; includes travel insurance
Source: Financial Services Template v3b_entire business; updated distribution splits from product teams; POL 2020 strat plan; team analysis
(8)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
Channel: Each channel will play a specific role across the
customer decision journey
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E& Money
Current
account
Mortgage
Loans
Savings
Motor / home
Life
insurance
Credit cards
Travel
Money
Branch used to generate
awareness via leaflets
Limited online advertising
CRMs!
Price comparison tables
and aggregators
In-branch materials
CRMs!
CRMs‘
Online aggregators
Counter staff
CRMs!
Online aggregators
Counter staff
Price comparison tables
and aggregators
CRMs!
FS directly
Counter staff
Price comparison tables
and aggregators
ATL spend
In-branch materials
Counter staff
FS
Inbound calling
Web-chat
CRM!
MS
Inbound calling
FS
Inbound calling
Web-chat
FS
Inbound calling
Web-chat
CRM!
Inbound calling
Web-chat
FS
MS
Web-chat
Inbound calling
Counter staff
FS to remain primary
sales channel
Online also plays a role
CRMs!
Online
MS (F2F or via VC)
Primarily online
Small share of FS sales
Primarily counters
Online and FS also key
CRMs!
Primarily online
CRMs'/FS
Primarily FS for life
cover
Over 50s at counter
Primarily online
Some FS sales
Counter staff
Some click and collect
online
Primarily via remote
channels
Counter / ATM used for
basic transactions
° Remote support
Remote support
Remote support
Via call centre and DM for
renewals
Via call centre and DM for
renewals
Via call centre
Travel Money Car
ups primarily online
Main channel is bolded
Key principles
.
FS to focus on
higher value
products e.g, life
insurance,
current accounts,
savings accounts
& loans
MS to focus on
mortgages but
also related sales
@.g., home life
insurance
CRMs to play
advisory role but
will perform
simple
introductory sales
where no
guidance is
needed
4 Customer Relationship Manager
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
(2)
Channel: Digital is critical enabler of a personalised sales
experience and consistent cross-channel processes
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E& Money
Current
accounts
Credit cards
Savings
Loans
Car insurance
X-Sell
Collect and use customer data
to enable personalised F2F
conversations, identify
relevant offers, develop
propositions that meet
customer needs
Provide data to front-line sales
channels to sell additional
products to the same customer
Personalisation
Implement optimised consistent
sales process across all channels
for each product
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
Channel — Branches: Overview of draft Post Office Money
Hub & spoke model (1/2)
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Future
Description
Future
products
available
Large Mains
300-400 ‘flagship plus’ branches acting as .
specialist advice ‘hubs’ in high footfall from
attractive population segments
Total population of 400- 600 specialist advisers *
Broader physical footprint where customers can
access Specialists by video-conference or
dedicated day in branch
Customer Relationship Managers in ~500
branches to perform simple sales and generate
referrals to specialists sales
Enabling commission structures between Post
Office and agency branches to ensure mutually
reinforcing activities across model
Full Consumer FS, Travel and Payment prod uct ve
range
°
Other Mains
Data capture and appointment *
scheduling with FS specialists
at counter
No CRMs in branch
All payments, and some simple *
products
Complex FS products may
require scheduling appointment
with ‘hub’ specialists
1 Includes 'Locals' and ‘Locals Light’ 2 Includes 'Basic Mails +' and Self-Service points
Locals' Access Points?
Primary role * Payments
as marketing focus via
brochures, unmanned
with data kiosks
capture
Travel Money * Payments
and only
Payments
Community
* Data capture
for outbound
calling
* Payments
only
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
(6s )
)
Channel — Branches: Overview of draft Post Office
Money Hub & spoke model (2/2)
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> Money
Number in Target
Role type Description Products sold 2019/20 productivity
* Trained specialists * Current accounts 400-600 ° 14 per week
/ / employed and trained Credit cards
lain by Post Office Personal loans
Specialist :
Savings accounts
(FS) ee
Life insurance
(Home/motor insurance)
° Trained specialists Mortgages 100-200 * 4 per month
Mortgage : .
ea employed and trained (Home insurance) (dependent
Specialist by Post Offi _ locati
(MS) y Post Office (Life insurance) on location)
Customer * Dual role with branch Mainly lead generation ~500 ¢ 4-5 per week
cK : management May sell simplest (not in
Relationship
M * Employed by agents products (e.g., numbers)
anager : : I
but with some Post current/savings accounts;
(CRM) :
Office training motor/home insurance)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE ~
Channel — Branches:
sales concentration
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Counter products have different levels of .
P > Money
Branches required to deliver, ‘house
Banking
services
Bill
payments I
Money-
gram
Travel
money
Travel
insurance
Overall
Network
80% of total nominal volume
@ Mains WM Locals ® Community
Other
90% of total nominal volume 100% of total nominal volume
0.7 11.4
While notionally,
payments volume
for most products is
concentrated within
the network, value
to customer comes
from being able to
access accounts
from multiple
locations
Scale of network is
also a critical part of
Post Office value
proposition to FS
partners
Methodology: For each product, plotted cumulative volume curve and counted the number of branches required to achieve 80%/90% of 2013/14 volume;
Compared with required volume increase to achieve 2019/20 plan
Source: Branch data base
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IN THE STRICTEST COMMERCIAL CONFIDENCE
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Channel — Branches: A number of personal lines products are Ey M
sold across a broad proportion of the network oney
Branches required to deliver, *
Main branchwith FS = Main = Local §% Community Other
80% of total volume 90% of total volume 100% of total volume
Savi 225 1,443 (Mra
avings Mes
Motor j
insurance PPAR are Ss it) 1,583
I Scale of
Home r network is
insurance 795 j also a critical
part of Post
Office value
Credit proposition to
cards FS partners
Life
insurance
Mort-
gages
Note: Some FS works across more than one branch
Methodology: For each product, plotted cumulative volume curve and counted the number of branches required to achieve 80%/90% of 2013/14 volume;
Compared with required volume increase to achieve 2019/20 plan
Source: Branch data base
a
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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Channel — Branches: Post Office Money will likely
need to both double number of mortgage specialists ‘
& drive productivity to reach mortgage targets se) Money
Number of mortgage specialists required to meet
2019/20 target, based on their monthly productivity*, #
Break-even sales per MS specialist per month’, #
I 5.3? Best performer
sales per month-
1.8? 3.6
42
412
3.5
28 2.52 — 75 percentile
22 : 7 . ““8 sales per month
<q 1.8 - Average
sales per month 212 190
Number of sales
Base
salary
Annual
Costs,
27.6
Base
salary +
30%
35.9
Fully Fully
loaded® loaded +
20%
margin®
43.5 53.5
required to
breakeven varies
across regions. E.g.,
North England
break-even 4.1
sales, and MS in
London is 1.9 sales
4 Number MS
Today (89)
1 Average income per product is £1050 calculated at 60bps on average mortgage value of £175k
2 Calculated for MS with >0 sales only. Assumes 80% of incomplete applications (marked ‘AppSubmitted’, ‘AppRecieved’ ‘AppReferred’ ‘AppOffered’) convert to completion since Jan 2013
3 Assumes: MS specialist cost to company of £43,480 ~ average salary = £27600, Cost to company additional 30%, average rent per specialist £450per month, certification costs £2200 per year
4 Includes 20% uplift given downtime for training, holiday and sick days
5 Based on 2014/15 YTD EBITDAS margin
Source: Team analysis
At Break
even sales
per month?
At Current
sales per
month
At Market
average
sales per
month
(69
69 )
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
Channel -—
Branches: Recent external hires achieve a higher
average value & volume than internal hires
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E& Money
Monthly mortgage applications ~
(internal v. external hires)’
Average I /
Value (£000
_per specialist
per month) _
Average
Volume (per
Specialist per
Percentage
achieving
>2.8 sales /—
month? (% of
total)
I 238
362
24
35
<6 months
6-12 months
>12 months
© Internal hires
10.0
0
External hires
Tenure comparison between internal ae
external hires, %
50.0
25.0
1 All applications in progress that have not been declined or dropped are included here. AlPs (Agreements in principle) that have been referred are included
2 Assumes: MS specialist cost to company of £43,480: average salary - £27600, cost to company - additional 30%, average rent per specialist - £450 per month,
certification costs - £2200 per year. Commission on mortgages is 0.6% of value
Source: MI team
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Channel — Branches: To recover direct costs, FS specialists Ey M
need to complete ~9-10 transactions per week oney
Credit Cards % CurrentAccounts [ff Savings [MM Homeinsurance ) Loans % Motor insurance Life insurance
Break even analysis
Product mix Avg. product
Break-even sales per FS per week, # % total sales income, £
116
/ 96
Current 78
product mix 6.0 68.4
10.5
87
2019/20 7A ’
projected 5.4 75.5
product mix I ~--<<--77+¢¢<¢-----3cov eee ete cence
Base salary Base salary+ Fully loaded’ Fully loaded +
9, 9, ins
Annual 30% 20% margin
Costs
£000's 21.3 Pal, 34. 42.2
Note: excludes costs associated with driving higher FS productivity (e.g. Academy, SalesForce)
1 Fully Loaded costs include £21k base salary; 30% increase for pension, HR, NI; £1,200 annual sales licence and £450 p/m for real estate
2 Average productivity per week for rolling twelve months; 3 Based on 2014/15 YTD EBITDAS margin ox
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Channel — Branches: Achieving planned revenue
targets in Personal Lines Banking requires an uplift .
both in absolute numbers of FS staff & their productivity se) Money
Required annual FS volume to achieve 2019/20 targets, Number of FS specialists required to meet target,
based on their productivity? I
thousands
494
45 8.7 14.0 16.4 —
1,252
(235)
0
(15) 647
402
343 Current
I number
< of FS:
223
Total Counter CRM Ms! Current Break Aspirational Market
volume sales per evensales salesper average
required week per week week sales per
week
1 Assumes no increase in FS sales from current 72 MS who also sale financial service products in 2019/20
2 Includes 20% uplift given downtime for training, holiday and sick days
Source: Team analysis
(72)
Nar
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Channel — Branches: While few FSs break even today, some ey M
positive signs exist oney
Quality (VMS) of sales performance continues to improve A large proportion of FS sales are truly incremental, even
significantly for savings
VMS ra
Savings Sales per week, YTD 2014/2015; Crown branches only
Wi Red & Amber & Green @ Fs Counter
25
0.3
Q3 a4 at a2 No FS (n=182) 1 FS (n=170)
25% of our FS specialists are close to break-even, with 7%
There are some indications of improving FS productivity already there
ailing 12 mo! 6 ;
Best FS in best week ex. Savings’ 26.0 sales/ wk 7% of FS' broke even
Avg. for Best FS* 10.8 sales/ wk 56
28 34
Avg. for top 1/3 of performers’ 6.6 sales/ wk 14
% of FS who improved productivity by 2 or 12%
more products / week ex. savings® ° <2 23 3.4 4-5 5-78 78-96 >96
4 Q2 data incomplete (first 2 months only); sample size of 74 shops
2. Calculated over the last 12 months (Aug 2013 to Aug 2014)
3. Last 30 weeks in 2013/14 v. first 20 weeks in 2014/15
Source: Video Mystery Shop; FS sales performance data (73)
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Channel - Branches: Performance of FS specialists does not a M
correlate with store footfall implying that capability matters oney
Productivity of stores by footfall
Footfall vs. store wide transactions
Productivity per FTE (YTD 2014/15)
300
250 -
200
150
100 I
50
fe) L
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
Footfall
No. of customers/year
Source: MI team, team analysis (a.
@)
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Channel — Branches: Investing over £4m to improve its sales ey M
capability, predominantly funded by ‘Eagle fund’ oney
Key actions impact on productivity p/w
* Concerted effort to manage out underperformers faster
Performance * New formal PDR moderation exercise in place 30
management * New incentive scheme that compensates FS specialists for sales .
Staff training * £.2-.3m investment in Academy to developlexecute i tial training and ‘continuing professional development
[Acadein\iScies * Clarity on role requirements to attain/ maintain competence + interventions to support ongoing development 20
i * Creation of consistent processes for sales of each product 7
tools * Investment of £.5m -£2m in SalesForce tool to support and digitise sales process
* £2-4m investment in data systems that enables FS to identify
Customer data ~ Next best product trigger for FS and Post Office customers 20
capture ~ Cross-selling opportunities for customers who are planning to make an FS purchase °
~ Knowledge of customer holdings to support relationship building
I * £,4-.5m investment in new lead generation r
Increased lead — Increasing tenure of FS allows them to establish deeper relationships with counter staff /customers 20
generation ~ Role of CRMs and data capture in “spoke” branches to increase leads i
— Online enables customers to book in branch appointments
I * £2m-4m investment I in ‘creation of Post Office Money brand and investment in in branch promotional
Post Office material to increase awareness and consideration of Post Office for financial services products 1.0
Money Brand :
£4.8-£10.8m total investment to increase FS productivity
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Channel — Branches: Plan anticipates growing FS revenues ES M
from 2017 & once higher productivity rates have been achieved oney
Principles for Financial Specialist roll out
= Critical to demonstrate improvement in FS
productivity before (i.e. 75% of FS specialists
above break-even) before further hiring can
commence
= New Finance Specialists will likely be in non-
owned branches
" Saturation in current Crowns
® Crowns likely to be repurposed
= FS can success in non-owned branches
= Branch manager and FS specialist already
have different reporting lines
" In interests of agency to attract more people
into branch through providing additional
services
= Cost of FS in non-owned likely to be similar to
: Plan for Financial Specialist roll out
I @ Main Crown
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Productivity 45
Per week 6.0 8.0 10.0 12.0 14.0
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Channel — Online: Substantial opportunities to improve our ey M
online channels to drive sales oney
Key actions
4 Increase brand awareness of Post Office Money online offering (~only 24% of our customers
are sure they can do business with us online, versus 53% for average bank)
2 Selective use of online aggregators to raise brand awareness and deliver volume targets,
particularly for insurance and savings products
Lead : 3 Develop Post Office Money as an online destination for FS products, in order to capture
generation customer data, enable cross-selling opportunities, increase margins
~ Full suite of products available for sale, with full product details for insurance,
investments and Forex; simple information (balances) to be available on Bol products with
click through for transactional data
— Invest in simple website tailored to customers based on browsing behaviour
4 Create consistent, optimised and simple online customer journeys accessible through
multiple channels to drive higher conversion rates (currently 2.6% for car insurance v. 6.6%
industry average)
Sales
fulfilment 5 Convert higher proportion of visitors to Postoffice.co.uk for non-FS related purposes;
— Post Office Money homepage with single sign on
— Link from Post Office main site for lead generation (via cookies)
~~ Build capability to make most relevant first offer
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increasingly important role
Outbound
Channel — Telephony: Contact centres will need to play an :
Money
Key roles
1 Data capture allows for targeted outbound campaigns around event-based
products, e.g. car/home insurance
2. In “tail” branches where “hub and spoke” is not fully present, counters
agents to capture requests for specific products, not available in branch,
and schedule outbound calls
1. Service inbound calls to be directed to partner call centres, in line with
current model
2 Initially, inbound insurance sales calls to be directed to Titan call centre to
Inbound
create opportunities for cross-sell
3 Over time, additional products to be added to Titan call centre, with
objective to handle all inbound sales calls from one Post Office controlled
location
4 Post Office also to develop central “web chat” team, to support online sales
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Appendix — Contents
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E& Money
Starting position & market context — Product specific
- Payments
-~ Banking Services
~ Travel
Personal Lines
Vision / learnings from challenger strategies
Building blocks to achieve 2020 Vision
— Customer
~ Product
- Channel
Next steps & milestones
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FS Sales Capability Programme se) Money
Q2 2014/15 Q3 2014/15 Q4 2014/15 Q1 2015/16
[ lan Talent EOS Action Plan & Leaving Business with Dignity NEW PIP Process
People Plan
Performance i i Progrannme®—
Management ue Cor r MS LIVE
fs Incentive Scheme Union Engagement aa 20
stattwrainingy FS Academy ee
Academy! aor
Salestools Gc acforoe Lead_ Social «Online _-Gamification .. Digital Journey #1
TrackingColabora Appointments “Product Holdints.
CRM Role Initial 60 in place and operational _»
Customer : iS
Data Capture
ferensea I HUD 6 Sooke (Agency Medel) 2. 2 COLCLCOnCeO EIS ee
Lead :
Generation = agency MeiAcy to _— —
Post Office I
Money brand
Business nn
Launch
_& signage
® Complete ro Dates TBC
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Strictly Confidential
POST OFFICE LTD BOARD
Winning in Mails and Network Development Update
1. Purpose
The purpose of this paper is to:
1.1.
Update the Board on the latest developments regarding Post Office Ltd (POL) plans
to win in Mails, including Network Development.
2. Background
2.1.
2.2.
2.3.
The threats we face in the Mails market from the likes of Collect+ and myHermes
continue to grow. Collect+ posted its first year of profit (£1.8 million) for the 52 weeks
ending March 2014, with record full year revenues of £34.1 million on a volume of
13.6 million parcels. Collect+’s parcel volumes have continued to grow in the first
quarter of 2014/15, with an additional 1.2m parcels reported on the same period last
year. If Collect+ continues to grow at last year’s growth rates for the next three years,
it will have profitable revenue of £240m and handle 74m items per year (equivalent
to 30% of our parcels volumes today).
In June, the Board reviewed the planned POL response to this growing threat. These
plans were centred on rapidly expanding the POL network through deploying low
cost parcels access points. This would enable POL to win the battle for convenience
which is developing in the consumer parcels market, evidenced by the rapid growth
of our main competitors.
Since then, our need to transform is only reinforced by our Mails business
performance. POL’s year-to-date Mails income is down (at the end of Period 5) by
£800k (0.6%) on last year and down by £10m (7%) on target. This performance is a
result of lower than expected parcels market growth, (1-2% compared to 5%) and
further losses (c.5m parcels year-to-date) to the main competitors.
3. What has been achieved to date
3.1.
3.2.
3.3.
We have made progress against our September targets. We highlight a few here and
a full brief is included in Annex 1: Winning in Mails (including Network Development).
Royal Mail Group (RMG) is integral to our success in Mails, including Network
Development and we have established an ongoing collaboration with them. Five
workstreams have been set up with specific objectives, outcomes, and jointly
accountable individuals. These are: (i) pricing strategy and commercial alignment
(including online) (ii) improving the customer journey and providing the right products
(iii) network footprint (iv) branch metrics and market trends and (v) marketing levers.
On Network Development, we are now clearer on the customer and commercial
requirements, and how to deliver them:
© Over half of POL’s parcels customers now consist of ‘returners’, ‘amateur sellers’
and ‘online hobbyists’, who appreciate convenience. A competitive Mails product
set that would serve their needs includes Home Shopping Returns, Click and
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September 2014 I Page 1 of 4
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Collect, and 1° and 2” class labels (with signed for). International and a tracked
product would further differentiate our offering, with add-ons like bill pay and e-
top up further strengthening our proposition. Customers would purchase products
online and choose a conveniently located access point for pick up or drop off.
e We have designed four access point operating models to deliver this proposition.
Each is operationally simple, with minimal training and requirements of retailer
staff and store space. The in-branch footprint is light and the technology options
evaluated include a Paystation solution (used for trials), a tablet solution or an
electronic point of sale (EPOS) integrated solution, as well as a self-service
option. To deliver this, we need RMG to collaborate, e.g., remove weighing and
segregation, waive collection costs, etc.
« We are testing and refining these preliminary models by (i) testing with strategic
partners and (ii) trials. We have shared our vision with 8 multiples, with 5
indicating strong interest. We have also spoken with independents (e.9., SPAR),
and held informal conversations with many others. These discussions position us
as a credible alternative to competitors and buy us time to refine our proposition
and secure RMG collaboration. We have also secured agreement to launch 177
trials by the end of September, 2 of which are already live.
e Finally, we have developed a first view of the size and shape of the 2020 network
and a ramp-up plan to reach it (informed by operational feasibility). While
indicative at this stage, it envisions an expanded network of 27.5k locations, with
no Crowns, 2.5k Mains, 9k Locals (including 4.5k ‘Locals Light’), 3.5k Community
branches and 12.5k access points. Based on this, the roll-out of the access point
network is estimated to have a positive NPV over 10 years (c. £23m), with a run-
rate EBITDA of £15m in 2020. It will incur one-off costs of c. £36m over the first 3
years, with payback within 6 years. However, this assumes a backdrop of stable
market conditions, which we know not to be the case. Against a ‘do-nothing’
scenario (see section 5.1) which assumes loss of existing business to
competitors and reduced scope for capturing growth areas, NPV is improved by
c. £50m and payback is within 4 years. Broader benefits also accrue to the
existing network, as we extend improvements (e.g., product simplification) to
Mains and Locals, reducing transaction times and simplifying formats. Over the
next months, we will evaluate this broader impact in more detail.
Assessment of current situation (including risks)
Success of our Winning in Mails strategy is predicated on a number of ‘need to be
true’ assumptions. However, we cannot gain certainty of all these assumptions at
this point. This constitutes material risk, of which RMG is foremost.
. Commercial alignment with RMG has not yet been achieved. One key risk is failure
to negotiate adequate payment for accept only in branch, as the market moves
online. Others include failure to waive restrictive operational and cost requirements
for large scale rollout. Until we do so, we will be proceeding at risk with retailer
negotiations. To resolve this, we have agreed in principle to re-shape the Mails
Distribution Agreement (MDA) to align commercial interests. If successful, this will
rebalance commercials in such a way that makes a simplified product range and
more convenient customer journeys commercially viable for POL and retail partners.
Another material risk is how Network Development will land with key stakeholders
including the National Federation of Subpostmasters (NFSP). Failure to bring the
NFSP onside could jeopardise on-going delivery of the Network Transformation
programme and create significant political turbulence, thereby halting delivery of the
strategic plan. Alignment with the NFSP has not yet been achieved, although the
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September 2014 I Page 2 of 4
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POL team has embarked upon a significant engagement exercise. Initially, this has
resulted in cautious NFSP support for limited trials and a clear understanding of the
competitive threats that POL, as well as its existing agents, face (including a full
understanding of the nature of the plan to respond to these threats). However, this
remains a fluid situation, and to date, has not resulted in concrete support for trials. A
verbal update will be given at the Board.
4.4. Finally, the economic case for Network Development is sensitive to market
pressures. Transaction volumes may fail to materialise, and margins may be
squeezed as service providers compete for retailer partnerships. We will mitigate this
via phased rollouts, adjusting our roll-out plans based on actual performance.
5. Consequences of not delivering the plan
5.1. The economics of the access point network reaches run-rate only in 2020, and there
is material delivery risk. However, we recognise that this is primarily a defensive
play. As outlined in the June Board paper, if we do not do so, our parcels market
share could decline from 96% today to 50%. We will also not capture the growth
areas of Collections and Returns. By 2020 we could lose up to £86m of Mails
income, which is the basis of the ‘do nothing’ scenario described in section 3.3. Post
2020, the loss could be greater if we fail to become the parcels retailer with the most
convenient network. The consequence of this is that we will not be in a position of
strength when the MDA ends in 2022.
5.2. Loss in Mails income could also have knock-on effects. Lower income will drive
greater cost reduction, which could reduce network size. This in turn impacts other
product areas, lowering income further and setting up a vicious cycle. In this
scenario, we would be entering managed decline.
6. Conclusion
6.1. On balance, we remain confident that this is the right action to take to become
commercially viable. We are aware of the risks as set out above and have plans to
mitigate them. Roll-out will be considered, committing investment in stages, with
clear decision points, so POL can be guided by learnings from trials (e.g., customer
satisfaction, ease of operations, etc). The next major decision point will be in March
2015, when we aim to have alignment with RMG and learnings from the initial 177
trials.
7. Next steps
7.1. We will continue to execute our RMG engagement plan over the next few months,
including a CEO meeting in September and a Chairman / CEO meeting in October.
These meetings will help resolve short term issues to enable the roll-out of simplified
product customer journeys and branch processes from November 2014, and set out
a timetable for the parties to complete renegotiation of the MDA by April 2015.
7.2. We will work towards agreeing a position with the NFSP prior to their special
conference in November. Ideally this will include agreement to proceed with the next
wave of trials in January 2015 and subsequent roll-out through 2015/16.
7.3. We will continue to engage with retailers to ensure that we remain competitive. In
parallel (subject to resolving key stakeholder challenges) we will refine our
proposition to suit the needs of emerging strategic partners (e.g., McColl’s).
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September 2014 I Page 3 of 4
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7.4. Finally, we will monitor and learn from initial trials and refine the commercial
proposition accordingly.
Recommendations
8.1. The Board is asked to note the update and actions set out above.
Martin George and Kevin Gilliland
18" September 2014
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September 2014 I Page 4 of 4
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Annex 1: Winning in Mails
(incl. Network Development)
Board update
18" September 2014
{
Post Office® YY
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RED IN JUNE ®
At the Board meeting in June we set out our strategy to win in
Mails
In June we highlighted the 7 key areas of activity to win in Mails: MM Areas that we are drilling into today
Deepen and align our relationship with Royal Mail in order to facilitate the delivery of our accelerated Mails
strategy
M4) 5)
2) ©, 6)
oii Network I Product simplification I Capturing Mails ' Becoming the leading Sales efficiency
evelopment eCommerce SME service provider
A Post Office access II Simpler and quicker I The one-stop shop for Drive sales by Prospecting,
point in the local transactions for e-commerce buyers _ developing Drop & Go communication,
convenience shop, the customers and agents, I and sellers, along each through prospecting __ conformance,
supermarket, the II resulting in cost _ stage of the journey — and offering collections — penetration, cross-sell
garage, the coffee shop I I reduction from ordering, to local SMEs and up-sell, tiered
[See Network _ fulfillment, payment, [See SME section for selling effort
Development section] I _ financial services, additional detail]
i collections, returns
Product Evaluate the scope to rationalise the breadth of our product offering to improve overall profitability and
rationalisation reduce complexity
Today, we will update the Board on progress on Royal Mail, Network Development, and Product Simplification.
The remaining areas are dependent on success on the first three areas of activity.
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We have made progress against our September targets ...
By Sept 2014 Progress made
_* Agree approach with RMG to Network * Established ongoing collaboration with RMG, with creation of 5 workstreams with
: Development and product simplification specific objectives, outcomes and accountable individuals
* Drive Sales Efficiency * Obtained RMG support for trials, e.g., no collection fee and weighing for returns
* Focus on winning big returns contracts (eBay) * Launched large scale frontline training and engagement programme for 4,000
Mails * Build on Click & Collect branches, up-skilling agents and Crown managers, with 500 branches completed
* Launch online Mails * Launched Returns service with eBay
* Develop alternative Click & Collect proposition if * Completed online Mails prototype. Built pipeline for further partnerships with RMG
required (Metapack) * Commenced integration of Metapack, which will catalyse RMG collaboration on
Click & Collect
_* Detailed economic impact analysis on existing * Assessed profitability of a access 5s points ‘and high level e economics of I Network
branches and agents Development
Network * Develop engagement process and narrative for * Engaged with NFSP, with initial support for trials. However, situation remains fluid
pevelon- : key stakeholders (e.g., Government (verbal update to be given at Board). Also engaged with SHEX.
ent : and NFSP) * Developed engagement strategy for key retail partners (independents and multiples)
_* C, 135 pilots of new branches and initiated conversations with 8 multiples and several independents within the
SPAR symbol group
* Oo k ilots by id Si ites all li
launch 177
* Launch digital Mails online service On track to launch online Mails for SMEs in October
Post Office WiFi, range of complementary * Post Office WiFi capability installed in 17 branches, customer facing WiFi live by
services early October
Pilot SME proposition to test ‘concept ‘of . Segmented ‘SME market, identified target customers and prioritised opportunities,
packaged products initially focusing on core mails offering :
* Develop business case for SME loyalty * Ongoing work to prioritise SME tactical activity, including business case for loyalty /
SME programme * Commenced deep dive on the opportunity areas (mails and FS) ‘
* Secure partnerships with key organisations such * Launched 15 pilots in June, resulting in direct sales and leads in Drop & Go, PSP,
as Federation of Small Businesses (FSB), and van insurance
British Chambers of Commerce (BCC), eBay * Ongoing planning with British Chamber of Commerce for a jointly marketed SME e-
commerce white paper in November
fo \
2)
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®
... however, risks remain, of which Royal Mail is foremost
Key risks _ - a i I
I . isalignment of commercial interests between RMG and Inadequately
: result in negative impact on POL performance and strategic plans. These include controlled
Royal Mail ; ~ Failure to negotiate adequate payment for accept only in branch, as market moves online
(Stakeholder risk) ~ Failure/delays to securing key agreements for Network Development, including:
= Expected pay rates from RMG to POL for products in access points
» Waiver of key operational costs, e.g., collection costs, cost of scales
a Enablers of operational simplicity, incl. i integration, @.g., no need for parcel segregation, no need for
_* Unfavourable external factors (eg, “market i henges product pricing) lead to lower than expected transaction . Controlled
Commercial
viability volumes, driving down profitability
(Market and —*= Lack of operational excellence and planning (e.g., location of access points, operational simplicity, etc.) lead to
lower than expected transaction volumes or higher cost, driving down profitability
* Note that RMG collaboration is a key enabler of operational simplicity (see RMG stakeholder risk above)
Insufficient engagement with NFSP leads to lack of buy-in, resulting in disruptions to existing programmes (NT) * Inadequately :
« Perceived threat of Network Development leads to lack of acceptance by agents and MPs, resulting in controlled '
industrial action, reputational damage and negative publicity i
_* Lack of timely engagement with SHEX and BIS result in delays to approval to deviate from 2020 plan, resulting *= Controlled q
in disruptions to plan timelines :
insufficiently attractive propositions (either due to commercial terms or complexity of operational requirements), . Controlled
operation risk) I
Stakeholder
engagement
(Stakeholder and
regulatory risk)
Retailer result in insufficient buy-in from retailers and / or consumers, delaying the programme
agreements Operational simplicity dependent on timely completion of product simplification solution build, and agreement » IInadequately
(Market and with Royal Mail controlled
technology risk Increased competition leads to higher demands from retailers, reducing POL margins « Inadequately
a Coe controlled
Competitor Market risk that competitors react to Network Development by moving more aggressively to secure position * Inadequately —
response (e.g., by lowering prices, filing anti-competitive challenges against POL), resulting in delays and or cost controlled
(Market risk) increases to programme
1 A controlled risk is one where management believes the existing control framework is sufficient to mitigate; an inadequately controlled risk i is one where the existing
control framework is not sound and extensive work is required to reduce the current risk exposure, and further actions are planned 3
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ALIGN RELATIONSHIP WITH ROYAL MAIL
Progress update: Align relationship with Royal Mail
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¢ Align commercial objectives with RMG and agree thi
* Full collaboration to simplify customer journeys and
What we need to achieve
ie value share for RMG and POL
extend the Post Office network
* Need to bring across the compelling rationale for RMG to support our Mails strategy (incl. Network Development), at all levels (incl. Board & CEO
What have we already achieved
¢ Established and held regular meetings
at the most senior level
* Held multiple working group and weekly
Trading meetings
¢ Identified high priority commercial
issues to be resolved jointly as well as
operational changes required for I .
Network Development
* Obtained agreement to waive
constraints for access point trials e.g.,
~ Weighing of Home Shopping ' *
Returns not required I
~ CRB checks not required I .
~ Collections secured at no added
cost
* Obtained agreement on reduced pricing I .
offers to customers on small parcels
¢ Established priority programmes for 5
workstreams
Align commercial interests both in short
term (2014/15) and beyond, or
understand need for alternative plan
Obtain provisional agreement on top
product priority issues (collections,
segregation costs, barcodes)
Agree and deploy a joined up customer
experience across our on-line channels
Deploy Network Development pilot sites
with simplified products
Ensure a great Christmas campaign to
drive sales
Share improved market and financial
data to inform current and future
decisions.
Deploy pricing changes for our
customers.
What will we achieve by the end of
2014/15
* Agree and put in place new commercial
arrangement
* Commence roll-out of Network
Development access points
* Commence preparation for price
changes at the beginning of April 2015
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er,
ALIGN RELATIONSHI
PW
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TH ROYAL MAIL
Royal Mail remains integral to our plans for both Mails and
Network Development
®
“Areas where RMG is
integral
Pricing strategy and
commercial alignment
(incl. online)
Improving the
customer journey and
providing the right
products
Network footprint
Branch metrics and
market trends
Joint marketing levers
Examples of collaboration required
Ensure commercial interests of RMG, POL and agents are fully understood and aligned, incl.
~~ Remuneration structures where required to help drive desired behaviours and associated sales
~ Potential for pricing innovation
Ensure we jointly meet customers’ needs by providing the right products through the right channels
using best in class customer journeys. We will do this by
~~ Identifying opportunities to re-engineer products and processes to deliver convenience
~ Sharing existing analyses of customer needs
~ Developing a single online journey, with aligned ownership
~ Optimising the user experience
Align and agree on the future size and shape of the network to meet customers’ needs, by
~~ Sharing existing analysis on network coverage and any identified gaps
~ Agreeing principles for network expansion
~ Aligning on the optimal footprint for network expansion including services required
Understand dynamics of changing sales volumes by product, and co-develop solutions, incl.
~ Obtaining data required to analyse product performance accurately at branch level
~ Identifying key drivers for customer behaviour
~- Monitoring and tracking changes in the market to identify opportunities and agree priorities
Coordination of marketing activity to support sales strategy and to help maximise revenues, incl.
focused activity for key products and services
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
POL00040271
ARGE SCALE NETWORK DEVELOPMENT: OPERATING MO
®
Progress update: Large scale Network Development
What we need to achieve
* Stress test our strategic direction for large scale Network Development, e.g., by designing the solution, modeling the economics, and engaging
with retailers, partner (RMG) and stakeholders
* Refine our commercial proposition and operating model based on trials and stakeholder engagement
* Make progress towards roll-out of additional 12.5k additional access points by 2020, initially via small-scale trials
: 0 _s What will we achieve by the end of :
What have we already achieved 2014/15 I
* Setup a comprehensive programme to drive * Agree commercial proposition outline * Achieve a network of 12,000 locations
delivery, resourced with cross functional for Network Development, incl. ] (of which 400 access points)
teams securing RMG collaboration * [Subject to NFSP agreement] Trial
¢ Designed 4 new operating models for access * Launch access point trials and monitor area flooding — area in SE London
points and modeled future size and shape of performance ] identified around 2 Crown franchises
entire network * Conduct quantitative customer : and field teams already briefed
* Developed detailed access point and network research * [Subject to agreeing commercial
economics I * Refine operating models and ] proposition outline with RMG] Secure
* Identified priority retailers, developed commercial proposition according to contracts with 2-5 priority retailers, to
messaging, and held over 8 formal sessions trials and customer research meet FY 15/16 roll-out aspirations
with multiples, with 5 indicating high interest’. * Reach agreement with NFSP on their — * [Subject to agreeing commercial
Similarly interest from independents? Also position towards full Network q proposition outline with RMG] Put in
held a range of informal conversations (e.g., Development place detailed operational plan to roll-
with Lidl) ] out c. 5000 access points in FY15/16
* On track to launch 177 access point trials on :
22nd of September, with 2 sites already live
* Conducted qualitative customer research to
ensure access points meet customer needs
* Engaged with NFSP and obtained initial
support for 177 trials; however, situation is
fluid (verbal update will be given at the Board)
1 Morrisons, Waitrose, McColls, Eurogarages, OneStop
2 SPAR, Blakemore, Alfred Jones, ISS, Nisa etc fn’
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
POL00040271
LARGE SCALE NETWORK DEVELOPMENT. OPERATING MODELS
We have developed a range of new access point operating
models, including a temporary model using Paystations for trials
RETURNS ON e { 8 : © : °
A PAYSTATION (IVY ONLY) _ BASIC MAILS PLUS ASSISTED SELF-SERVICE I SELF-SERVICE
Malls * Accept only * Accept only in store * Sale and accept in jae * Sale and accept
* Quick roll-out for project IVY * Large-scale roll-out for Network * Supports extension in high volume * Supports extension in high volume
Purpose Development with product offering at locations with limited staff capacity (e.g locations with no staff requirement (e.g
I least as good as competitors convenience stores with high staff large supermarkets with spare space)
i costs)
* HSRonly * HSR * HSR * HSR
* Click and collect * Click and collect * Click and collect
* — 1st/2nd with signed for * 4st/2nd with signed for * 1st/2nd with signed for
* Tracked (exact product tbe) * Tracked (exact product tbc) * Tracked (exact product tbe)
Products? + Billpay * Billpay
+ e-top up * e-top up
These two models can use similar technology, and have a similar cost base. The
difference is how they are deployed in store, and the corresponding changes to the
customer journey (ie. in mode! 3, customer can take complete entire journey in store)
* Online shoppers seeking quick drop off * Online shoppers and parcels senders * Convenience purchases at a more * Convenience purchases at a more
Gaeine: in convenience locations with extended seeking quick drop off in convenience accessible location with extended accessible location with extended
need _ opening hours locations with extended opening hours opening hours opening hours
* Customers who want to do billpay and
- - so sledop up es ou poe poe Boe eae -
Paystation and barcode scanner * Tablet with integrated barcode scanner, * Self-service tablet with integrated * Options include:
weighing scales and printer barcode scanner, weighing scales and ~ Self-service lockerbox
Technology* * ePOS integration possible? printer ~ Customer-facing tablet, with
intelligent drop box
~ _ SSK, with intelligent dropbox
These n new access point inodels will make whole gstate, ulti format (and product fange) partnerships with Fol more e attractive for retailers
1A version of this ‘operating model will be ready i in Q3 on a tablet with a limited range of the products using the unsimplfied existing customer journeys 2 Not exhaustive
3 ePOS integration is being examined as it is a key retailer requirement but costs are not yet confirmed. Assumption is higher development cost is balanced by lower per site hardware cost
and maintenance
4 All technology options for access points will be independent of the Horizon front end
©)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
POL00040271
LARGE SCALE NETWORK DEVELOPMENT. OPERATING MODELS
We are on track to trial 177 sites offering a reduced mails product set Ea
supported by Paystations; these will be branded ‘mini Post Office’
Retailer / Number
Partner of pilots Further details about trials
79 * Initially, all pilots will use a PayStation solution, until I
the end-state technology solution becomes available
stop 66
¢ The product set will initially be limited to Home I
Alfred Jones 19 Shopping Returns I
& 6 * Performance of trials will be monitored to inform the
refinement of operating models
woe . * Trial sites will be rolled out with a ‘mini Post Office’
Other 13 sub-brand, to better distinguish it in consumer’s
independents minds from regular Post Offices
Total 177
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
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LARGE SCALE NETWORK DEVELOPMENT. OPERATING MODELS
®
Basic Mails Plus is the operating model we have developed in
detail, which will support Network Development
Description
+ Acceptance only model for sending and collection of parcels, alongside bill pay and e-top up
+ Customer processes mails transaction online before dropping parcel(s) off at access point
+ Access point simply scans the barcode, issues CoP and stores parcel for RMG collection
+ Bill pay and e-top up allow significant scope for market share growth
Products Key elements __ Key operational considerations I
* Technological solution © Collections
— Simple and low cost (one-off and on-going) — RMG to collect
— Low training requirement — Most likely new access points will already
* Acceptance only for mails:
— 15/24 class (with signed
for add-on)
— Home Shopping Returns — Small in-store footprint; could be ePOS integrated / be on existing collection routes
— Click and collect — Easy to update software and open source _ © Segregation
— Tracked product — Minimum infrastructure requirements I — No segregation at point of acceptance
(possibly special i — Label printed in store (preliminary customer research ] — Segregation performed by RMG post-
delivery, but without suggests this could be a USP) collection
additional features, e.g., — Low operational requirements _ © Revenue protection
timed delivery, — Retailer cash with direct reconciliation : — No weighing or sizing performed at '
compensation cover, i — Could be low cost tablet and / or hand held terminal access point :
signature on delivery, — ePOS integration available for suitable major partners : — RMG to perform spot checks at mail
etc) * Agent pay ' plants
— International (Airmail) — Fully variable _ * Cash
— Market rate 4 — No cash required for mails as payment is
* Essential non-mails — Simple blended flat rate / taken online
services: bill pay and — POL should keep a higher percentage of retained margin _ — Retailer cash for e-top up and bill pay
e-top up relative to locals
* Product set to be competitive
* Short in-store counter transaction time
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
POL00040271
LARGE SCALE NETWORK DEVELOPMENT. OPERATING MODELS
On a run-rate basis, Basic Mails Plus will realise income of £5k,
with net profit margin of 24% for POL
POL product revenues Post Office Retailer ASSUMPTIONS es
Mails* 4,038 2,644 * Total mails trans.: 148 pM w. (Collect+: 49, Locals: 181)
+R. Home Shopping Returns 4,060 815 + "46 transactions per week per access point at 46pitrans.
* B. Collections 356 231 + 13 transactions per week per access point at 54p/trans.
* C. 1st/2nd Class Labels (incl. signed for) 2,295 1,501 * 60 transactions per week per access point at 66/43p
* D. Special Delivery 178 32 * 2transactions per week per access point at 196p
“©. International _ 450 66 + 4 transactions per week per access point at 80p
Financial Services 1,049 349 + Total FS transactions: 79 per week
* A. Billpay 984 302 + 76 transactions per week per access point at 25p
* B. e-top up 66 47 + 3 transactions per week per access point at 42p
Total Revenue 7 5,089 2,993
a product agent fees . "+ Assumes 35p flat rate per parcel, POL Locals rates for billpay and e-top up
= "Malis
* Financial Services
Total agent fees
POL product operating costs
* labour
~ Retailer Wages
~~ Ongoing Retailer Training
* Hardware Maintenance/Support
* Ongoing Operational Costs
Total Operating Costs
POL PRODUCT PROFIT (LOSS)
Retailer revenue uplift from footfall
Retailer Product Costs
TOTAL PROFIT (LOSS)
Upfront Investment
* Hardware
~» Upfront cost
* Tablet + secure docking station
+ Scanner & card reader
+ Label printer
— Access point commissioning (delivery)
* One-off Operational Costs
20s per standard mails transaction; 60s per special delivery transaction; 1.5 hrs
training for 10 staff each year; £10/hr staff cost
Assumes 2 yr lifetime for tablet (£100), 4 year lifetime for all other hardware
£28 on consumables, £365 online transaction costs, £25 asset management costs,
£18 user charging; £276 POL broadband cost (for retailer)
64% of customers are new to store, 50% make an in-store purchase; £3 average
basket size; 25% gross profit margin for retail (assumptions in line with Collect+
public data on revenue uplift
£200 for tablet, £100 for docking station
£48 for scanner, £31 for card reader
All hardware costs benchmarked to EUC
Off-site commissioning costs
Signage (£295), leaflets (£200)
Total Spirent investment
income
1 Assumes current MDA rates for Mails products, existing supplier rates for Billpay & e-top up Transaction. Volumes based on Network Gravity model accounting for 2020 Strategic Plan
“ mr ws
Post Office®
Does not include project cost , delivery team, shared services, central costs
(40)
Ce)
LARGE SCALE NETWORK D
/ELOPMENT: OPERATING MODELS
POL00040271
POL00040271
®
However, delivery of these operating models requires RMG
collaboration, reinforcing the risk highlighted earlier
Areas for collaboration
Proposed actions
Commercial alignment is ‘required for RMG and POL to work
together at pace to deliver Network Development
Online mails solution. Customers will need a clear online
channel to begin mails journeys. RM and POL must agree on
which online solution (RM or POL) is right for customers
Weighing and sizing items complicates and elongates the
process for customers and operators. It also increases
hardware / equipment
RM fee structures paid to POL do not drive the same
behaviours. Fees paid to POL do not support shared objectives.
Per transaction fees incentive POL to increase volume and RM
to increase revenues per item
Collecting parcels from new Post Office access points may
incur additional costs for RM who will look to pass these on to
POL
Track and Trace and labelling. Track and trace connectivity
and barcode generation capabilities will need to be established
to a specification that meets both businesses requirements.
This will allow RM to reduce stock label costs and give
customers and operators a simpler quicker transaction
Remove Isimplify back office processes. Back office
processes e.g. printing paper despatch reports for secure mail
handover is time-consuming for operators and may incur
additional hardware costs.
Segregating parcels takes up space and takes additional time
for retailer
Work with RMG at the highest level to agree on shared strategic benefits of
rolling out Network Development, and creating the right incentives for both
organisations to work together at pace to deliver ND
Agree ‘online solution to be offered
RM have agreed to remove the weighing requirement for Returns (for trial only).
Use trials as a test bed for not weighing (monitor impact on RM revenue) to build _
case for removing this requirement longer term..
Investigate other methods e.g. revenue protection elsewhere (e.g. at hubs or by
RM) and adopting a sampling approach
Map new locations against current RM collection points e. g. ‘pillar boxes,
business collections
Allow sub-postmasters to collect from access points (hub and spoke model)
Work with RMG to connect CDP to RM track and trace systems and enable
barcode generation
For Home Shopping Returns, track RM roadmap to ensure all these items
include an embedded barcode
Work with RM to understand underlying requirements and provide easier, lower
cost, and less labour intensive solutions which meet underlying requirements
Segregation of parcels is performed post collection by Royal Mail or at Post
Office hub.
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
POL00040271
LARGE SCALE NETWORK DEVELOPMENT. FUTURE NETWORK SIZE AND SHAPE
®
With these new operating models, initial network gravity modeling
suggests that we could have a 2020 network of 27.5k branches
Crowns I Mains _ Locals Locals Light? _ Access Points ' Community
Number of 373 I 3,627 )
2020 contribu-
tion margin’ (%) ‘
ue al <--~-~~_ Focus of this work
2020 net profit mm >
margin? (%) : ail,
1 Contribution = Income - Agent Fees
2 Net Margin = Contribution — Direct operating costs, branch losses, branch churn costs, POL central support costs
3 Locals Light will be a lower cost operating model relative to Locals, which will be SGEI compliant and extend our core network. It will have a reduced
product set, and utilise many of the simplifications developed in Access Points. We will develop this model in more detail in the next phase
Source: Network Development economics; Post Office Channel P&L (49 \
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
POL00040271
LARGE SCALE NETWORK DEVELOPMENT. FUTURE NETWORK SIZ D SHAPE
Over time, the network could shift away from Crowns and Mains
towards the new, lower cost models
Number of Post Office stores and access points
¥ Community “ Access Points Locals Light [Mf Locals [Mf Mains [if Crowns
96.209 26,844 27,500 :
24,947 3,500 3,500 Observations
3,500 * Product
I simplification, and
the shift of volumes
towards lower cost
channels (Access
Points, Local Light)
enables a reduction
in the number of
Crowns and Mains
3,500
* The pace of Locals
Light and Access
Point roll-out is
informed by
operational feasibility
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Source: Network Development economics
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
POL00040271
LARGE SCALE NETWORK DEVELOPMENT: ACCESS POINT COMMERCIALS
®
Based on current estimates, access points could deliver c. £64m
in income and £15m in net profit by 2020
Income -
0 0
0 0
0 ie} -2
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
4 Contribution = income minus agent pay
2 Net profit= income minus agent pay, minus direct operating costs (single site direct operating costs, branch losses), minus support operating costs (10% churn cost, POL central support)
Source: Network Development economics (44 \
XO
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
LARGE SCALE NETWORK DEVELOPMENT. ACCESS PQINT COMMERCIALS
POL00040271
POL00040271
Roll-out of the access point network will have a positive NPV of °
£23m, with payback within 6 years; against a ‘do-nothing’
scenario, payback will be within 4 years
EBITDA, Cashflow for new access points (excl. Locals Light), £m
EBITDA, Cashflow
oe ee EBITDA = Cashflow : Net profit margin — new access
20 points
;
Hi
10 —
i
i
‘
‘
t
t
i
A
i
3
: End of MDA
: with Royal
+ I Mail
i
i
i
i
i
13/14 14/15 '15/16 16/17 °17/18 18/19 19/20 ’20/21 '21/22 '22/23 '23/24 '24/25 Year
Observations:
The roll-out of the access point network
is NPV positive (c. £23m) over 10
years, with run-rate EBITDA of £15m in
2020. It requires one-off costs of c.
£36m over the first 3 years, with
payback within 6 years
However, this assumes a backdrop of
stable market conditions, which we
know not to be the case. In a ‘do-
nothing’ scenario, up to £86m of Mails
income could be lost by 2020, as
existing business migrates to
competitors and we have reduced
scope for capturing growth areas
Against this, NPV is improved by
c. £50m and payback is within 4
years
Broader benefit will also accrue to the
existing network as we extend
improvements (e.g., product
simplification) to Mains and Locals,
reducing transaction times and
implifying formats
1 NPV calculation assumes 12% discount rate, ‘14/15 to ‘24/25 cashflows, ‘19/20 cashflow of £15m constant until ‘24/25
Source: Network Development economics
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
@
POL00040271
POL00040271
LARGE SCALE NETWORK DEVELOPMENT: ACCESS POINT COMMERCIALS
The roll-out will incur one-off costs of c. £36m over the first 3 years
of roll-out, but secure a run-rate profit of c. £15m p.a. by 2020
gm 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Assumptions _
- 016 49.15 3231 5192 59.91 64.03 * 12,500 access points by 2020, generating £5k each, with 6 month ramp up for branch to realise full
tun-rate income. 14/15 assumes no billpay & special delivery as product set not yet developed
Agents Pay i - (0.10) (5.39) (19.00) (30.57) (35.31) (37.86) 59% of POL income from RMG paid to agents, relative to 61% in Locals & 76% in Mains
£613 per branch, incl. hardware replacement (£176), online transaction costs (£365), asset
Direct Operating caste > (0.25) (3.68) (7.35) (7.66) (7.66) (7.66) ,anagement (£25) consumables (£28), user charging (£18)
- (018) 0.08 596 1369 16.94 18.50 Assumes 33% of revenue realised in year, with full cost
10% ‘chum of branches at£1, 969 per branch, including sales team costs (£781), branch setup invest-
- - (1.18) (2.36) (2.46) (2.46) (2.46) ment (£1,167); equipment recovery from closed branch (£21) — does not account for equipment recycling
POL Support - (0.19) (0.50) (0.70) (0.70) (0.70) (0.70)
+ Ramp up to 18 FTE at £36k per FTE on average, split between contracts, payroll and contact centres
= (0.37) (1.59) 2.90 10.53 13.77 15.34
Bien oi invecient ~ (047) (653) (7.00) (058) . __ * £1,167 per branch inc. upfront hardware costs (£606), signage (£295); local mkting (£200); off-site
commissioning (£66) (see single branch P&L) _
Core team of 14 FTE’ , deployment ‘support team (3 to 15 FTE as needed), and non- resource cost
Program Implementation Team ~ (4.08) (1.67) (1. 57) (0.01) (0.01) (0.01) Oe e4 4m? over time
Program Control = (0.52) (0.60) (0.25) . . _? crperces, 7 FTE PMO team® and £180k including office space until Jan 2015 and other non FTE
eng evelopment ~ (439) (2.92) . . . + Gest to velop senso nt cit i cDP sofware ont on tablets until July 2015.
_Products developed post-July not sold through access points wee
Siesta ddaanend . (4.00) (4.22) (0.22) . os 60% ot acne poi a ot g. fe by 2020), ~11 visits es sign 1 branch (accounting for
Network modelling i - (0.05) (0.10) (0.10) (0.05) - - #2 FTE resources s required t to support network modeling during roll ‘out
Customer research - - Customer research costs ony, other marketing costs for in single branch P&L
Total one-off costs = (6.86) (16.22) (13.33) (1.06) (0.01) (0.01)
Total Cashflow - (7.2) (17.8) (10.4) 9.5 13.76 15.33
1 Procurement, leading Implementation, Communications, training, strategy, compliance, Marketing, legal internal, IT, Delivery Lead, In store usability, etc
2 E.g., Legal advisory, tracking and MIS, travel and other expenses, upfront training module, contract support, etc
3 Programme Manager, Programme Planner, financial Modeller, and 4 PMO Coordinators
4 Assumes 12% success rate for access point evaluations and 3 visits per successful site: initial assesment, supp, online app., and signing contract.
@)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
Source: Network Development economics
APLIFICATION
Progress update: Product simplification
POL00040271
POL00040271
®
What we need to achieve
Simplification of key product journeys to increase both customer and operator convenience, allowing POL to offer a compelling customer and
operator experience compared to other parcel providers.
°
Prioritised a list of products for
simplification, which will be delivered
through low cost, portable hardware
e.g. tablet using the Common Digital
Platform
Mapped product journeys — meeting
current constraints and ideal end-state
— and developed mockups (wireframes)
Started developing tablet solution
- Android and Windows tablet with
connected peripherals e.g. scales,
scanner, printer
Begun investigation of ePOS integration
options
Resolved some key design issues (e.g.
solution for postage label printing)
What have we already achieved
]
Build and complete tablet prototype,
offering a limited range of mails
products:
Home Shopping Returns
~ Click and Collect
- 1st and 2nd Class with/without
Signed For (purchased using Click
& Drop)
— Special Delivery by 1pm (purchase
using Click & Drop)
Technical and user testing of tablet
Begin live roll-out of tablet solution as a
trial (end October 2014) and validate
simplified journeys with customers
What will we achieve by the end of
2014/15
Further simplification of selected mails
journeys — a radical simplification for
customer and operator in collaboration
with Royal Mail e.g. removal of
weighing in access points
Develop online journey to rival
competitors’
Simplify the bill pay and e-top up
product journeys for customers and
operators (those products to be
included in access points)
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
POL00040271
PRODUCT SIMPLIFICATION
®
We are making good progress delivering simpler and quicker
transactions for our operators and customers
The new customer journey
At home At access point
Priority products for
simplification '
* Home Shopping
Returns
* Click and Collect
* Purchased via RMG
online journey:
~ 1st and 2nd Class
with / without * Customer chooses their postage
Signed For online using online portal (for
— Special Delivery sending products)
I © Customer is given a unique * Customer takes their parcel to the retail
i code per basket (not item) partner new access point
* Customer is emailed payment * Retail partner takes code, checks weight
receipt triggered by drop off and size, prints label and CoP
Today, we will have a demonstration of the products that we have already simplified.
Ongoing simplification is dependent on outcome of Royal Mail discussions on alignment of RM and POL online journey
Ce)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
POL00040271
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Strictly Confidential 2
POST OFFICE LIMITED
Performance Report
August 2014
Produced By : Financial Control
For Queries & Comments Contact : Sarah Hall or Kam Bassra
CONFIDENTIAL
Commercially Sensitive and not for onward circulation
This document contains commercially sensitive information that is likely to cause damage in the event of unauthorised disclosure.
t should not be copied or forwarded in its entirety unless for a specific busi se and only to internal people who understand the conseque
disck or to external people who signed a non-disclosure ai ment.
It is normally only circulated to the Senior Leadership Team and Finance Professionals within the Post Office.
Period 5 Performance Pack - Chris Day 25th September 2014 Page 1 of 12
POL00040271
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Strictly Confidential 2
‘4 >)
Contents
Page
Headlines 3
Profit & Loss Statement 4
CFO High Level Profit Outlook At Period 5 5
Crown Profit & Loss Statement 6
Cost Management update 7
Cashflow Analysis 8
Business Scorecard 9
Network Transformation Scorecard - Mains 10
Network Transformation Scorecard - Locals 11
Transformation Overview 12
XM J
Period 5 Performance Pack - Chris Day 25th September 2014 Page 2 of 12
Headlines Strictly Confidential
August 2014
(Geadtines >
Operating profit before exceptional items in the month was £9.2m, £4.5m favourable to budget , narrowing the YTD
shortfall versus budget to £4.1m (£13.4m adverse year on year, including NSP decrease of £16.9m)
Net income in P5 is adverse to budget by £8.0m. This reflects the continuing shortfall in Mails and Retail (mainly labels
and delayed rollout of ebay returns) of £4.0m although the performance was only £0.8m (3%) lower than last year.
Telecoms continued its adverse trend due to lower customer numbers and lower average revenue per customer.
Government Services was £2.0m behind budget mainly due to POCA, but also Passport Check & Send volumes.
Net income year to date has worsened to £15.2m behind budget and £2.1m worse than this time last year (excluding
NSP)
Total expenditure (before project costs) in the month was £12.11m favourable to budget including £8.1m of VAT
recovery upside reflecting the impact of the Post Office leaving the RM VAT group and the successful conclusion of
negotiations with HMRC.
Total expenditure (before project costs) year to date was £15.1m favourable to budget, including £16.5m of VAT
recovery upside (underlying variance adverse by £1.4m). The £16.5m VAT upside (E11m relates to the prior year) was
recognised in subpostmasters’ costs (£2.3m) and Non Staff costs (£14.2m). The £53m savings task remains
challenging with £1:1m still to be underpinned and a further £10m stil in the ‘hopper’ to be validated. Work is
underway on this as set out on page 7.
‘* Subpostmasters’ costs are favourable by £11.8m reflecting lower sales volumes.
* Staff costs are adverse by £2.8m reflecting under delivery of savings tasks primarily in Supply Chain and Commercial
‘* Underlying Non Staff costs, excluding the VAT upside, are adverse by £8.2m driven by shortfall in savings delivery
and the mails segregation penalty accrued in the year to date of £2.5m,
+ Project One Off Costs adverse to budget reflecting unanticipated spend for Sparrow, the Journey to 2020 strategy
work, and Business Transformation (spend is subject to review of accounting treatment).
The Commercial Committee supported by the weekly Trading Meeting is focusing on actions to drive income. The
weekly Cost Reduction Group is working to accelerate current year cost savings delivery, including the adoption of a
series of policy decisions to constrain H2 spend.
Cashflow
The YTD cashflow was an outflow of £42m which is £32m favourable to the budget of £74m outflow.
The favourable variance is driven by lower than planned expenditure on NT and CT programmes.
Crown Profit
Crown profit is £2.8m adverse driven by lower Mails income and higher property costs due to the delayed savings for
the new Facilities Management contract as shown on page 6. A reforecast will be provided after the half year.
Ne y,
Period 5 Performance Pack - Chris Day 25th September 2014
Cumulative EBIT pre exceptionals
POL00040271
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®
£m
110 Actual
90 annem Budget
70 -
50
30 -
10 —
Yi OS & Q 2 2
SEEK EEEEEERCSE
£m Total Net Income - Budget to Actual Bridge
Eng 7°. 20
(12.0) wees
374.6 (4.1)
356.4
. 2014-15 ° Mails & Financial Government Telecoms Other 2014-15
YTDNet Retail, -—_—Services YTD Net
Income Income
Budget Actual
Financials I Act Target_
Total Net Income (excl NSP) £m (Bonus 20%) 3564 I 3716
Operating profit £m (Bonus 25%) 245 28.6
Free cashflow £m (42.4) I (74.4)
Crown Profit (Loss) £m (Bonus 12.5%) (20.5) (7.7)
Non Financials
Queue time % < 5 minutes - Top 1k branches 768% I 814%
NT Branches Transformed In Year (Bonus 12.5%) 894 699 I 195 I
Page 3 of 12
Profit & Loss Statement
August 2014
Strictly Confidential
Current Month Prior Year Period Year to Date Prior Year YTD Full Year Prior Year
lem ‘Actual Budget Variance I Actual Variance I Actual © Budget Variance I Actual _VarianceI Fovsast Budget Variance I Outturn
TOTAL GROSS INCOME 70.7 78.4 77) (16) 401.4 415.6 (3.7) I 1,031.9 1,031.9 979.4
Cost of Sales (37) (63) (03) (44.7) (44.0) 16 I (1068) (106.8) (127)
TOTAL NET INCOME 62.0 70.0 18.0) 3564 3716 a) [9254 9251 866.7
Staff Costs (201) (49.6) (05) (206.2) (403.4) 4h I (2387) (238.7) (253.9)
ISubpostmaster Costs (352) (38.0) 28 (289.3) (204.0) 05 I (4910) (491.0) (647.6)
Non-Staff Costs (129) 27) 98 (418) (417.8) 29) I (2735) (273.5) (264.8)
Depreciation (0.0) (0.2) (0.2) (03) (oo) I (06) (0.6) (0.4)
Total Expenditure (pre POOC) (682) (60.4) 124 (407.5) (422.5) 20 I (4,003.8) (1,003.8) (966.6)
09 35.0 35.0 33.1
a)
7.3) (27.3)
FRES - Share Of Operating Profits 47 47. 1
lOne off Project costs (POOC) (1.6) (2.0) 04
IT = Post Project Costs. Ba) @.2) 45
Network Payment 123 12.3
interest 04 (02)
Impairment (117) 478)
Exceptionals & Redundancy & Severance Costs (105) 48.7)
[Government Grant Utilisation 00 00
Profit/(Loss) On Asset Sale 00 00
[Colleague Share/ Business Transformation Payments (1.4) 0.0
Period vs. Budget (70 vs. Budget
Operating profit (EBIT) of £9.2m was
£4.5m favourable to budget.
BAU was £4.2m favourable:
+ Lower non staff costs of £9.8m. driven
by the VAT recovery in the period
+ Lower Subpostmaster costs of £2.8m
due primarily to lower sales and product
mi
Offset by:
+ Lower net income of £8.0m due
primarily to lower Mails, POCA and
Telecoms income.
‘+ Higher staff costs of £0.5m in the
month. This is mainly due to the savings
task not being achieved
One-off Project Costs variance of £0.4m
favourable due to timing.
Below EBIT
The exceptionals favourable variance is
mainly driven by lower than budgeted
subpostmaster compensation.
Operating profit (EBIT) of £24.5m was £4.1m adverse to budget. (Excluding the £11m VAT upside relating to prior
year, this would be £15.1m adverse)
BAU was flat with budget:
+ Lower net income of £15.2m due primarily to the continuing adverse income trend: Mails (£12m), specifically labels
and Lottery, Telecoms (E4m), Government Services (£3m), mainly POCA, offset by favourable FS income (E2m),
specifically banking, Premium Bonds and MoneyGram.
+ Higher staff costs of £2.8m mainly due to the savings task not being achieved (€1.9m from Supply Chain and £0.5m
from Commercial) and the Crown pay deal.
Offset by:
+ Lower non staff costs of £6.0m, driven by the improved VAT recovery of £14.2m (£11m relates to the prior year).
The underlying variance exluding all of the VAT upside would be £8.2m adverse driven by the impact of the centrally
held savings task of £2.9m not being achived and £2.5m accrued for Mails Segregation Penalty payment,
+ Lower Subpostmaster costs of £11.8m due primarily to lower income and sales mix (7.9m), VAT recovery (£2.3m)
and other small variances including CTP budget opportunity.
One-off Project Costs variance of £4.0m adverse. This is mainly due to unbudgeted costs; £2.0m relates to
unbudgeted Business Transformation costs to date (FYF c. £7m - spend is subject to review of accounting
treatment), £1.4m relates to unbudgeted project Sparrow (FYF c. £7m) and £0.8m relates to unbudgeted strategy
consultancy costs.
Below EBIT
Both impairment and exceptionals are under budget due to underspends in NT, CT and IT& Change. Although lower
than budget, these are both twice last year's spend. The exceptionals budget also includes £8m ATOS contract set up
\ payment incurred in 203-14 but budgeted for 2014-15,Government grants have now been fully utilised
(28.2)
(41.6)
990
(64.0)
160.0
(x0)
B.
(205.2)
(216.1)
170.0
(29.2)
(39.6)
71.0
(25)
(205.2)
(216.4)
25
YTD vs. Prior Year
Operating profit (EBIT) of £24.5m was £13.4m adverse to prior
year.
Like for like BAU favourable variance of £0.9m was mainly due to:
+ Lower Staff cost of £4.4m driven primarily by Crown savings.
+ Lower Subpostmaster costs of £0.5m driven by improved VAT
recovery.
Offset by
+ Lower net income of £2.1m. The variance versus prior year is
driven primarily by lower Government Services income, mainly
POCA and Telecoms offset by higher Financial Services
(Moneygram, Mortgages, Savings and Insurance) revenue.
+ Higher non staff costs of £2.9m due to increased IT costs (mainly
Horizon and ATOS), marketing spend moving from POOC and
VAT on RM costs, offset by VAT recovery received this year.
Non like for like adverse variance of £14.3m was due to:
* Lower Network payment of £16.9m, offset by
* Lower project costs of £2.6m.
Below EBIT
Included in grant utilisation this year is £77m of 2013-14
‘exceptional spend for which there was insufficient grant last year.
Ne S
Period 5 Performance Pack - Chris Day
25th September 2014
POL00040271
PoL00040271
Page 4 of 12
POL00040271
POL00040271
CFO High Level Profit Outlook At Period 5 Stretly Confidential °
August 2014
£m Income JVIncome Sf = Agents Non staff POOC Costs. ~=«CONSP-—=Ss«EBIT.- Comments
Costs Costs
(239) ) ET
Mails and Retail
Mails (220) 239 13.9 (8.1) _ FYF of £354m. Deterioration from P4 of £8m based on run rate and delay
Lottery and retail (4.0) 25 25 (4.5) Camelot volumes £3.2m; Health lottery fixed fee £0.4m; Retail £0.4m
Mails segregation penalty (3.0) (3.0) (3.0) Max penalty under MDA of £6m, assume negotiate down as in 13/14
Government Services
POCA (05) 00 (0.5) Assumes £10m one-off from DWP
DVLA 23 (0.4) (04) 1.9 Volume upsides on tax discs and AEI £1.3m; one-off change control for EV
IDA (4.0) 05 05 (0.5) Delayed launch. Still reliant on Cabinet Office committing to volumes
Passports (22) 09 0s 14 (0.8) Digital passports delay, partially offset by paper passports volumes and pric
Telephony
Homephone (6.0) 03 09 12 (3.8) Lower customer numbers and ARPU's, higher wholesale costs; campaign
costs
Mobile (1.0) os 05 (0.5) Launch delayed and budget included ‘stretch’ volumes
Energy (3.0) 15 15 (1.5) Proposition not being launched this year
Financial Services
Premium Bonds 63 (2.5) (25) 3.8 Reflects max capped income under new NS&I contract
Banking and Payments 24 (1.2) (1.2) 1.2 Trading upsides
Postal Orders 33 (0.5) (0.5) 28 One-off adjustment to uncashed PO's 24 months to 12 months £2.3m; Tre
Mortgages 09 00 0.9 Trading and back book
Credit cards 13 (05) (05) 0.8 Trading and profit share
Moneygram 20 (08) (08) 1.2. Improved contract
Client funding 13 00 13
Life Insurance (3.0) 00 (3.0) Sales volumes £0.5m; additional commissions £2.5m
New product launches/trading (5.6) 20 20 (3.6) Investments £1.6m; Loans £1.3m; PSP £1.2m; PPDC £0.8m:; National Exp
Stretch target (69) 35 35 (3.5) Covered by opportunities above
Staff Costs
Commercial staff costs (1.8) (18) (1.8) New Commercial structure does not deliver budgeted savings task
Supply Chain staff costs (20) (20) (2.0) £2m savings budgeted. IR delayed implementation of new ways of working
Non-staff cost savings
Additional non-staff savings identified 80 80 80 — Nowincluded in the £53m of identified savings
Official Mail (3.0) (3.0) (3.0) Cheque pouches not budgeted £2m; Passports check and send volumes £1
Central
Release of contingencies 90 20 20 11.0 _ Release all of income contingency
(35400 Ga 216 34 0) 212 00 62)
[Trading forecast’ae PS 900 SS Cae t4s9) a7 aT .000) 609s]
Period 5 Performance Pack - Chris Day 25th September 2014 Page 5 of 12
POL00040271
PoL00040271
Crown Profit & Loss Statement Strictly Confidential <
‘August 2014
Period Prior Year Period YTD Prior Year YTD Full Year Prior Year
£m Actual Budget Variance Actual Variance I Actual © Budget Variance I Actual Variance I Q1 Forecast © Budget Variance Outturn
Income and Distributions
Variable income
- Mails 25 29 (0.4) 28 (03) I 144 157 (13) I 157 (1.3) 392 39.2 00 396
- Financial Services 26 28 (0.2) 23 03 138 143 (04) I 125 13 320 320 00 282
- Government Services 14 14 (04) 15 (0.4) 94 84 07 96 (0.5) 181 184 00 21.9
~ Telecoms 01 01 (00) 00 00 04 07 (03) I 03 4 13 13 00 os
Fixed income 17 18 (00) 16 O41 94 94 (03) I 101 (1.0) 219 219 00 25.2
Gamma/ Other 03 06 (0.4) 09 (0.6) 20 27 (07) I 42 (24) 93 93 0.0 128
Renewals and Retentions 20 19 01 17 03 77 78 (ot) I 35 (0.8) 175 17.5 0 169
Total Income including Gamma/other 10.4 115 (4.4) 10.8 (04) I 565 588 (2.3) I 62.0 (4.5) 139.5 139.5 0.0 165.4
Branch costs
- Staff (7.3) (7.5) 02 (9.0) 17 (42.9) (44.9) O41 (45.9) 40 (90.0) 0.0 (106.0)
~ Property (2.6) (2.4) (0.3) (2.7) O41 (1442) (433) (08) I (44.8) 07 (30.4) 00 (34.4)
- Other branch costs (01) (02) 01 (0.6) 05 (08) (aa) 03 (18) 10 (2.4) 0.0 (4.3)
Infrastructure costs (1.9) (1.8) (0.0) (1.8) (0.1) (9.8) (9.6) (0.2) (9.0) (0.8) (20.6) 0.0 (21.9)
Allocated central costs (06) (4.1) 06 (0.9) 03 6.9) (6.0) 0.2 (6.5) 06 (14.2) 00 (14.0)
Total Expenditure (42.4) (43.4) 0.6 (14.9) 25 (72.4) (71.9) (0.5) _I (78.0) 5.6 (157.3) (457.3) 0.0 (180.6)
JV Share of Profits 13 13 00 14 (0.4) 53 53 0.0 55 (0.4) 9.0 9.0 00 96
Statutory PBIT (0.8) (0.3) (0.5) (2.8) 2.0 (10.5) (7.7) (2.8) _ I (12.5) 1.0 (8.9) (8.9) 0.0 (25.7)
\
(Summary
Income:
Income is £2.3m less than plan.
Costs:
months.
Costs are £0.5m higher than plan
Staff costs £0.1m favourable primarily due to vacancies, mainly Financial and Mortgage Specialist, partially offset by the impact of the pay review settlement where associated efficiencies will be achieved in future
Other branch costs lower than plan due to losses being lower than expected although these are expected to reverse in the coming months.
Property costs £0.8m adverse due to the delayed savings for the new Facilities Management contract, now due to commence from October 2014.
Ne Central Costs are £0.2m favourable due to improved VAT recovery partially offset by business wide efficiency savings still to be delivered
Variable sales income is £1.3m less than plan principally due to (i) Mails - Lower parcel volumes, Retail sales and Home Shopping returns, (ii) Financial Services - shortfall from Life Insurance, Home Insurance and
variable sales of Savings products. There is a corresponding upside in savings retention income due to the income guarantee with Bank of Ireland. Premium Bonds and Mortgages are performing above target
although the Premium Bonds upside impacts on Other Income due to the income cap with NS&l. This is offset by (iii) Government Services - predominantly due to higher Passport check & send transactions.
However, the variance in ‘Other Income’ that partially offsets this due to an element of the Passports target being held centrally.
Fixed income is adverse due to lower than planned LIBOR rates for Card Account commissions
Retention income is adverse due to a lower customer base and Averaged Revenue Per User for HomePhone, partially offset by favourable Savings retention income.
Other income is adverse due to the delay or phasing of new products, predominantly Energy. Passport Check & Send and Premium Bonds (actual income in variable sales) is the other key driver.
Period 5 Performance Pack - Chris Day
26th September 2014
Page 6 of 12
Cost Management update
August 2014
Progress since P4 update
Value and confidence
Following the introduction of a Cost Reduction Group (CRG) and an assesment of new
opportunities, the gap between the in-year delivery of “line of sight" initiatives and the total
cost reduction challenge has reduced to £24m (from Pé report of £26.9m).
Original Cost Management Programme £34,.2m
Additional Cost Challenge to achieve budget £ 60m
Central Stretch to achieve budget £ 5.9m
Total Budget Cost Challenge £46.1m
Additional Challenge from Q1 EBITDAS gap £ 7.0m
Total Current Cost Challenge £53.1m
Current "Line of Sight" forecast £324m
Gap to £53.1m £21.0m
Delivery and governance
Governance of FY14/15 cost reduction initiatives has now been brought into the overall
Business Transformation programme and work is underway with the various initiative
owners to address the shortfalls versus budget and identify new opportunities.
Regular 121 meetings have been established and "deep dive” meetings will be carried out
with each business function during September to drive out further in-year opportunities to
close the gap. These opportunities are added to a “hopper” of high level ideas, which
currently stands at £10.1m of in-year value.
Strategic initiatives for FY15/16 and beyond.
The overall Programme is now progressing through Stage 2. designing the target operating
model (TOM).
Work is ongoing to:
1) Identify a portfolio of incremental cost saving opportunities to achieve the £53.1m in-year
improvement target placing all the cost saving initiatives under the scrutiny of the
programme to ensure the expected improvement has the requisite effect on the 2014/15
EBITDAS outturn.
2) Design the target operating adel, that will ensure the cost efciency targets forthe
programme (to 2019/20) are realised:
3) Craft design principles and develop business model scenarios in order to build a
compelling business case for the Business Transformation programme.
POL00040271
PoL00040271
Current Position (Week 23)
Delivered: £6.2m Saving®
Budget: €15.8m Saving
Variance: £9,6m
i
i
i
ae
1
POPPI IPI EEL EEE PEEP EE PETE TPT E PEPE OEP E TEESE
“Saving assessed as “delivered” from ciscussion with deliver leads and Finance team to obtain fina atifeation
I
£60,000
£50,000
£40,000
£30,000
£20,000
£10,000
£0
(including £4,.2m
Saving Agents Costs)
Seta
0 _—
_ _ I
—
Total "On-Track"
Gap to £53.1m target
Hopper 14/15 In Year Target
Period 5 Performance Pack - Chris Day
25th September 2014
Page 7 of 12
POL00040271
POL00040271
. Strictly Confidential ®
Cashflow Analysis ¥
August 2014
(Cashfow >)
£m YTD Cashflow
: . ‘I I The £330m of government grant was received on ist April which is the last payment of the 2010
43) (42)
Eq FE arg ageeren on is
P85 cash outflow of £42.4m is £32m favourable to budget of £74,4m outflow.
(112) a 100 The favourable variance is mainly due to:
(68) 4 © Capital and exceptionals continue to be favourable (capital £38m and exceptionals £31m) due to
lower than planned NT, CT and IT spend.
(58) ]
(372) . * Client balances are £33m favourable. £24m of this is driven by higher Premium Bond (NS&I)
- sales due to premium bond personal limits rising from £30k to £40k.
carrois Naowcrk Get Fung Frm cx fou
Payment © Working capital was close to budget.
Offset by:
fm __YTO Cashflow Variances * Network Cash was £67m adverse mainly due to higher volumes in cash centres (£44m adverse).
The other adverse variances is in cheque and debit cards (£41m adverse) are offset by the
69 42) favourable NS&l client variance.
7) /
© Operating profit is £4m adverse to budget.
3 4 7
Ea ° YTD Full Year
i —m Actual Budget Variance Budget
ID Buiget Operating rt forging en Bion: ceca) A EBiT 9.4) GD 1.0)
Brceptona many Working Capital (59.8) a4) 27.0
Client Balances 19.0 33.2 170
Network Cash (98.6) (65.9) (57.6)
Network Cash Capital Expenditure (95.6) 38.0 (205.2)
£m Mar-14 P5 Government funding 330.0 0.0 330.0
Prior Year I Opening Actual Budget var Exceptional Items (121.9) 30.8 (240.3)
Retail, Cash Centres 624 522 622 590 (32) Other (including interest and tax) (7.3) (8.4) 11 (9.9)
Bureau 95 58 80 86 6 Free cashflow before interest, tax 62.4) (79) 32.0 (200.0)
Cheques, debit cards 121 129 172 131 (44)
Network Cash
Headroom (£m) 854 975
Period 5 Performance Pack - Chris Day 25th September 2014 Page 8 of 12
POL00040271
POL00040271
Business Scorecard Strictly Confidential ©
August 2014
Key Performance Indicators Current Month YTD YTD Full Year I 2013-14
id Act Target Var_I Act _‘Target__—‘Var_IPrior YearI Target I Outturn
Growth
Total Net Income (excl NSP) £m (Bonus 20%) 700 [MMMM 3504 3716 358.5 925.1 8667
Operating profit £m (Bonus 25%) 47 I 265 28.6 37.9 99.0 107.1
Earnings before ITDA and Subsidy £m* (7.7) (43.0) (38.8) (46.5) (60.4) (92.5)
Free cashflow £m (42.4) (74.4) 233.1 (200.0) 179.7
Customer
Customer Satisfaction** 86.7% 89.0% 87.6% 89.0% 87.9% 89.0% 87%
Easy to do business with (Bonus 15%)** 25% 47% 27% 47% 447k 47% 41%
Net Promoter score** 1 2 ie) 2 -1 2 (4)
Queue time % < 5 minutes - Top 1k branches 81.8% 84.0% 76.8% 81.4% 82.5% 81.2% 82.1%
Branch Compliance - Financial Services - basket of 11 measures 70 <=60 84 <=60 N/A <=60 N/A
Branch Compliance - Inland Dangerous Goods **** * 64.6% 80.0% 64.6% 80.0% TBC 80.0% TBC
Branch Compliance ~ International Dangerous Goods **** * 86.7% 85.0% 86.7% 85.0% TBC 85.0% TBC
People
Engagement Index % (Once a year April) (Bonus 15%)** 57% 58% 57% 58% 55% 58% 57%
Subpostmaster Engagement index ‘%s (Once a year)** 45% 48% 45% 48% N/A 48% 45%
Post Office Values the diversity of the workforce (Once a year April)** 52% 66% 52% 66% N/A 66% 52k
(M0) of OME stpontmerts over total recruits at senior leadership and 14a, 4 10% 1% 95% 7” 11%
(No) of Female appointments over total recruits at senior leadership and I 4,» 45% Abe 45% 52.3% 45% 46%
Modernisation
Crown Profit (Loss) £m (0.8) (0.3) (20.5) (7.7) (14.5) (8.9) (25.7)
Crown Profit (Loss) Run Rate £m (Bonus 12.5%)* N/A N/A N/A (25.4) (44.4) N/A 0.0 N/A
NT Transformations - contract signatures *** 206 122, : 4,029 3,678 1,759 4,800 3,246
NT Branches Transformed In Year (Bonus 12.5%) 172 139 894 699 187 1,650 1,551
Bonus worthy metrics
* ITDA Interest, Tax, Depreciation, Amortisation.
** Monthly = 3 month average. YTD = 12 month average.
*** YTD and FY = cumulative including prior years.
**** POL are looking to hit 100%, and these target have been set for 2014-15 in recognition that marked improvement is required to reach 100%.
* Target is the year end exit rate.
** Measured annually with some additional ‘Pulse surveys’.
Period 5 Performance Pack - Chris Day 25th September 2014 Page 9 of 12
POL00040271
POL00040271
Network Transformation Scorecard - Mains Strictly Confidential °
August 2014 Reporting prior months data (i.e. one month in arrears)
Ave £'s per
Current Month % B
branch
Control Batu (Mains }
Key Performance Indicators Actual Group Var Var Sample Branches that have been converted to a Mains model
Size for more than 6 months have consistently out-
performed the control group in delivering POL income.
Finance Approved Investment per Mains £000 (42) (42) 0 These agents receive a dedicated package and a
Total Income: Post vs Pre Conversion renewed focus on sales targeting and performance at
POL Branches live 6-12 months 5% (0)% Z NEG, the paint of conversion. The is having a significant
: re
Branches live 12-24 months 1% (4)% 3 401 impact on locus Income tor many branches
Focus Income: Post vs Pre Conversion The following products are performing particularly
= = well
Agents Remuneration: Post vs Pre Conversion Travel insurance
Branches live 6-12 months 6% (4)% 466 Passport check and send
Branches live 12-24 months 6% (5)% 401 cs withdrawals
- rowth bonds
acer (Customer Sessions Insurance products
Branches live 6-12 months 3% (2)% 466
Branches live 12-24 months (ws (5)% 401 In addition, these agents have increased their POL
earnings due to the improved sales and enhanced
Operator Feedback on Retail Sales Performance 7h 146 Mains pay rates,
Operator Satisfaction 82% 93
Note: the control group is based on those branches of
Actual similar size that have not yet converted.
Actual Target Var ple: a D)
ize
Average Increase in Opening Hours 40% 20% 1,458
Customer {Customer Satisfaction 98% 90% 30
Queuing Times 1m 25s_<5 mins 246
Customer
Customer Satisfaction, extended opening hours and queue times all remain positive.
Period 5 Performance Pack - Chris Day 25th September 2014 Page 10 of 12
Network Transformation Scorecard - Locals Strictly Confidential
August 2014 Reporting prior months data (2. one month in arrears)
Ave £'s
Current Month % per
branch
Control Beet ie in t of th tial deci
: point of conversion there is an initial decline in
Rey Geormance ipaicatnts pel Group Veer Sample I I serformance: asthe branches settle and embeds the
Size operational changes. However this improves month an.
LOCALS month and as they near the exit of the 6-12 month
Finance Approved Investment per Local £000 (Cel eC) aa) category the run rate of performance is now higher
Total Net Impact: Post vs Pre Conversion than the control group. This is partially as a result of
Branches live 6-12 months te aves that have been matin place to int be
inched we (6 130 irop off in income and drive performance. The control
group has actually benefited from the increase in
POL Actual Fixed pay savings Premium Bond personal limits over the past 2 months
Actual Net impact where as the local operating model excludes products
Branches live 12-24 months that require payment by cheque. Without this impact
Income (10% (9% (ae I (26) 191 the converted branches would have outperformed the
Actual Fixed pay savings control group by a greater margin.
Actual Net impact The 12-24 month category is still being impacted by
Customer Sessions branches where there was a steeper decline at the
Cu: i
point of conversion
Branches live 6-12 months 10% (2)% 130
Agent Branches live 12-24 months 7% (3) 490 Costome sessions continues to bestrongso
u rt the agents retail growtt
Operator Feedback on Retail Sales Performance I 16% 52 ads
Operator Satisfaction 79% 61 Note: the control group is based on those branches of
Patan] I Siler S22 that have not yet converted less 5 to
ual
reflect lost products.
Actual Target Var Sample
Size
(Average Increase in Opening Hours 110% 80% 1029
Customer ICustomer Satisfaction 95% 90% 30
Queuing Times 53s _<5 mins 258
POL
+ Products such as bill payments, etop ups, cash withdrawals and moneygram have delivered growth for these branches - with associated footfall. This has been offset in income terms by poorer performance
on more complicated products.
+ Fixed pay has been reduced to zero for all converted branches, in line with the strategic plan.
+ On average Lottery income has reduced by ¢. £60k p.a in these branches, Corrective action on how we minimise future risk is now being looked at. principally by improving the sales messages and focus of
the Field Change Advisor's when signing up the retailer as well as the Locals Regional Manager's focussing on these messages for those already converted
Agent
+ Customer sessions indicate that retailers are benefiting from greater footfall that should support their retail growth
+ The footfall is delivering quicker but lower value Post Office sales which in turn should allow the retailer to utilise their staff in different ways or reduce their staff costs.
Customer
+ Customer Satisfaction, extended opening hours and queue times all remain positive
Period 5 Performance Pack - Chris Day
25th September 2014
Page 11 of 12
POL00040271
PoLo0040271
Transformation Overview
August 2014
POL00040271
PoLooo40271
Strictly Confidential ®
RAG, cost and benefits based on full programme life
RAG in brackets indicates programmes view
Programme Time Benefit ] Quality I Comment / Areas for Discussion
Contracts signed, openings and current quality measures ahead of target, though model profitability KPI to be agreed via revised business
Network case which is now due for completion in September. Guided Leavers pilot underway with no significant negative stakeholder reaction, with
Transformation
continued roll out of next stages agreed at programme Steering Group. Key action for the programme is to define clearly, discuss and
agree the ‘clif’, aligning to business strategies being presented to Board in September.
Crown
Transformation
The programme continues to deliver in line with targets across branch transformations, training, staff cost reductions, SSK rollout, mergers
and relocations - though P&L run rate £1M adverse at end of @1 (due to income and business wide cost savings behind plan). Therefore
an over achievement in last 3 quarters is required to achieve target. More focused income call to action required at Trading Board to
address Crown income shortfall. Customer satisfaction (queue times and transformed branches) both behind target but at P5 variance
from target improving. 16 of the 70 Franchise branches are at risk with the programme investigating options for alternative ways to
franchise or find further savings to cover the shortfall
Programme to produce a series of options, for October Transformation Committee, to achieve Crown break even run rate by March 2015
including close alignment with Network Development),
Branch Support
Programme continuing, rather than pause or integrate into Business Transformation to allow early savings to be realised and improve
efficiency of existing operation. This will create a more stable platform for any Target Operating Model (TOM) changes to be made. The
programme is investigating accelerating activity to bring forward benefits from 2015-16 into this year (potential additional £500K benefits)
Specific questions within Agent engagement index are proposed to measure Quality of the programme output
Core Finance System implementation and cut over successfully achieved to plan.
Extension side letter due to be agreed at the next MSA Board on the 24" Sept and includes incentives to separation dates for the
Separation remaining IT workstreams. The CSC contract supporting the separation of HR and Supply Chain (hosting and service elements) due to be
signed in late September.
ir Alignment between IT Transformation and Business Transformation programmes continues
Transformation
Revised business case produced but not yet submitted to Finance Committee, benefits and 2014-15 cost profile remain on track, though
there is a risk to the programme costs beyond 2014/15.
Network Development has significant dependencies on Common Digital Platform and Branch Counter Refresh with appropriate ATOS and
Accenture resource working within the Network Development programme. As a result of pausing the POL SAP upgrade a risk has risen
MT Enablers regarding Fujitsu's willingness to continue supporting POL SAP on the existing infrastructure until March 2016 — discussions have started
with Fujtsu. Transformation Committee agreed altemative governance reporting for IT Enablers portfolio.
TOM recommendations discussed at ExCo in preparation for Post Office Board meeting on 25 September A review of the impact of the
Business TOM on existing programmes to be undertaken prior to Board meeting. Programme co-ordinating all cost reduction activities (both
Transformation
Network
Development
Period 5 Performance Pack - Chris Day
operational efficiency and existing cost reduction actions) and reporting to ExCo on weekly basis. An assessment of 2014/15 change plan
has been completed with recommendations being implemented (e.g. pausing certain projects and aligning others)
Benefits red as route to achieving savings not yet agreed
Programme fully operational with focus on recommendations for September Post Office Board, a compelling commercial proposition to
inform the full programme business case and ty pilots (that are under development). A major risk for the programme is being able to
develop a commercially viable business case
Dependencies exist with Business Transformation for 2020 product lists and CDP to enable separation from legacy technology. Future
Network design underway and will need to consider impacts on other programmes particularly Network Transformation
25th September 2014 Page 12 of 12
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POST OFFICE LTD BOARD
Initial Complaints Review and Mediation Scheme (“the Scheme”): Update Paper
1. Purpose
1.1.
The purpose of this paper is to update the Board on progress on the Scheme. It
supplements the updates the Board has had relating to the media reports
surrounding Second Sight's Part Two report.
2. Overall position
2.1.
Cases have continued to progress through the Scheme over the summer and, apart
from the issue of the Part Two report there was little other significant activity relating
to the Scheme over the holiday period. This was mainly due to the absence of the
Chair and his desire to keep Working Group calls to a minimum and reduce
possibility of contentious or substantive matters being raised until the Working
Group could meet face to face, which it did on 16 September. Unsurprisingly,
therefore, that meeting was significant in a number of ways as summarised in
paragraph 4 below.
3. Case progress
3.1.
3.2.
In line with our undertaking to keep the Board updated on the ‘mechanics’ of case
progression through the Scheme, the headline position is:
« There are now 124 cases remaining in the Scheme.
* 12 cases have been resolved outside of mediation.
« All outstanding case questionnaires have now been received.
« Post Office has completed its investigation of 73 cases, with a further 69
cases under active investigation.
« 37 cases are with Second Sight to review and produce a case report.
e Second Sight have produced 19 final case reports (which form the basis of a
decision on whether the cases should be mediated).
e Six cases are with CEDR to arrange mediation meetings.
e Three cases have been mediated (one settled, two not).
This progress has put us in a strong position to be more directive and assertive in
our approach with Second Sight, JFSA and at Working Group more generally.
This has been helped by the fact that we have found nothing in the 73 cases
investigated which has raised concerns about faults with the Horizon system, the
safety of convictions or Post Office’s liability for the losses being claimed by
applicants.
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4. Face to face Working Group Meeting (16 September)
4.1. Overall the meeting was broadly successful as far as Post Office was concerned
although it is clear that the Chair was doing all he could to avoid a situation which
might cause the Working Group to fracture. To this end he closed down
discussion of any matters that were not absolutely relevant to the matter in hand
to avoid confrontation where possible.
4.2. The substantive discussions centred on the nine reports completed by Second
Sight which required a decision of the Working Group on whether cases should be
mediated. We used this opportunity to get on the record some key points relating
to our approach to certain types of cases. In particular that:
e = Overturning a criminal conviction is a matter for the Courts and not mediation.
Our approach to consequential loss claims will be informed by reference to
legal principles.
e Wewill agree, in relation to the two ‘old’ cases considered (i.e. cases where
there is very little information available in our view to form the basis of a
mediation discussion), to % day mediation but with a view to assessing the
value of mediating such cases to inform decisions in the future.
4.3. Asserting our position on these points unsurprisingly provoked a response from
other members of the Working Group and JFSA announced that they would leave
the meeting at two points but, in the end, did not do so. However, notwithstanding
JFSA’s dissatisfaction with the positions we are adopting, we are confident that
they are the right ones, they are in line with the steer agreed with the Board and
are defensible should JFSA decide to make our position public. Indeed in
asserting our position we are being transparent and taking reasonable steps to
manage expectations.
5. Second Sight Engagement and Remuneration
5.1. As the Board is aware, a key issue we have been addressing is ensuring we
regularise Post Office’s engagement of Second Sight, which we did earlier in the
year by agreeing and signing a letter of engagement. We have subsequently
turned our attention to addressing with them our concerns about their productivity,
costs, quality of work and general engagement with Post Office. We have already
done this privately but we took the opportunity at the Working Group meeting to
expose and express more publicly our concerns at Second Sight's unacceptably
low productivity levels which, despite repeatedly assuring the Working Group has
been three cases a week, has in fact been less than half that.
5.2. We are now following this up more formally with a letter setting out our concerns in
detail and demanding a meeting to discuss the improvements we require. Second
Sight has already responded positively to our attempts to manage costs with a
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proposal which links payment to productivity. We will discuss this with them when
we meet.
6. Conclusion
6.1. The Board is invited to note this update and that we will provide a more detailed
oral update on 25 September.
Chris Aujard
Belinda Crowe
17 September 2014
Initial Complaints Review and Mediation Scheme: Update Paper
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POST OFFICE LTD BOARD
Corporate Insurance Programme 2014/15
1. Purpose
The purpose of this paper is to:
14
1.2
Share the output of a review of the insurance position and recommend the basis
for insurance renewal for the period 1 October 2014 to 30 September 2015; and
Update on the appointment of an in-house insurance and risk management
professional to manage the insurance programme, in light of the current cost
reduction programme.
2. Background
21
2.2
2.3
24
25
This is the third anniversary of the PO stand-alone Insurance Programme
following the split from the RMG insurance programme in September 2012.
PO has worked with insurers on the largest risks (Crime, General Liability and
Motor) in order to keep Insurance costs to a minimum whilst enjoying appropriate
cover to meet our risks.
An insurance review has been undertaken by Miller to ensure that key risks are
insured and to identify whether any enhancements to cover or premium savings
can be achieved now we have improved risk and claims information.
PO has had no major claims in the last 24 months (for reasons previously
discussed, the particular circumstances of Sparrow are highly unlikely to support
a claim under any of our existing policies). This has enabled us to be more
proactive with Insurers over pricing and coverage.
PO has built up discrete claims data over the past two years. Historically this
was an issue because it was not possible to separate PO from RM's data.
3. Key Insurance policies
3.1
The key corporate insurances currently in place are (more detail at Annex 3):
Crime
Directors and Officers Liability
Property Damage/Increased Cost of Working
Terrorism
Employers Liability
Public Liability
Motor Fleet (Commercial and Private)
Cyber Liability (specific Government Contracts only)
Professional Indemnity (Government Contracts only)
Personal Accident/Travel
Special Contingency
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4. Claims
4.1 This has been the second strong year for PO with regards to claims, with far
fewer claims notified than envisaged in the last 12 months.
4.2 It should be noted that PO now has clear claims procedures in place, with QBE
handling all liability and motor claims. This has led to a substantial drop in
amounts paid out in claims since RMG managed the process (see Annex 2).
5. Summary of Insurance Review
5.1. A review has been undertaken of all the major risks and relevant insurance
policies. Full details are contained in Appendix 1, however in summary, the main
findings of the review are:
e Our insurances are fit for purpose
* The cover must be suitable for POMS as well
« Some policies will not be renewed (Contractors All Risks)
e Looking at reducing deductibles where there is no impact on premium
e Leveraging our risk and claims data to reduce premium where possible
« Weare obtaining quotations for Professional Indemnity Insurance across POL
6. “In-House” Insurance Resource
6.1 As our risk profile changes it is important that, where possible, our insurances
are aligned to our risks. Whilst our insurance advisers and insurers provide
support to us with our day to day requirements, consideration has been given to
investing in a full time “in house” Risk and Insurance Manager.
6.2 A strong candidate has been identified but as the cost would be c.£100k pa it is
recommended that this decision is incorporated within Business Transformation,
because the identifiable benefits are considered to be lower than this cost.
Whilst, in theory, lower broker costs (currently c.£70k pa) could partially offset
this cost, the relatively complex nature of our cover (crime in particular) would
require us to retain most if not all of the broker's services.
7. I Recommendation
The Board is asked to agree:
7.1 Renewal of insurance policies as set out in Annex 1.
7.2 Future renewal authority is delegated to the Audit & Risk Committee.
7.3. That the decision of recruiting dedicated insurance resource is incorporated
within Business Transformation.
Chris Day
September 2014
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Strictly Confidential
POST OFFICE LTD - INSURANCE REVIEW - AUGUST 2014
RISK (currently
insured)
Insurer/
Premium
Covering Deductible
Additional Comments/Recommendations
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APPENDIX 1
Recommendation
PROPERTY DAMAGE [ZURICH [All loss or prysicel conage to POL JoBPIm each and [Property risks have Deen strongly managed Mistorically with no clainsIRenewal negotiations with holding Insurer Zurich continue
£134,620 proverties as declared including every loss _Irecorded. POL have worked with Insurers to upgrade Swindon's risk and we anticipate 0 6 X reduction in prenium on expiring
lbuitdings and machinery, stock and protection to help mitigate risk and bring into line with market [terms (circa 15% reduction against original 2013 prenium)
Jcontents and Increase cost of working standards. The coverage is essentially now catastrophe cover for __IReconmendation is to continue at Lovest premium.
(acon) po.'s larger locations. Continuing with this insurance should be set
lagainst POL's risk appetite to meet a total loss of a large location
(e.g.: Swindon).
TERRORISM POOL RE IThis provides the “buy back” coverage IGBPim Gach and IPOL could have a legitimate exposure through its parcel handling in IThe premium for Terrorism is based on a pure formula oF our
£52,821 [to loss or donage to POL properties aslevery loss feranch, as well as being seen as a Government/high profile target. sum insured (values). We are obtaining an alternative
? la result of terrorism. (This is lconsideration should be given as to whether this coverage is requiredIquotation from Lloyds which enables us to select the
Jexcluded under the standard property lacross the POL insured estate (Crown Offices) properties we wish to insure for Terrorism. Recommendation
lpaticies) jis t0 only insure our Locations above G6P5m in value (Large
loftices and Cash centres). We are anticipating that we could
lachieve at Least a 10¥ reduction in premium against 213
Jpremiun
CONTRACTORS ALL [ZURICH Ire Gs debatable whether POL need this coverage, which Is historic, [Recommendation 1s to NOT renew the pollcy this year,
66,478 Htypically when refurbishment or construction work is carried out, the
RISKS contractor would purchase the coverage on behalf of the Employer (in
lenis case POL).
EMPLOYERS Be [ability to employees For Injury or IGaP250R Gach Iihis Is @ statutory requirement. There Iss GBPSO willion Limit of [PO are entering year two of @ two year “Long Term Agresnant™
£251,750 disease arising out of, or in te — and every loss {indemity lwith insurer QBE. Whilst this would typically mean that the
LIABILITY lcourse of, their employment y rates would remain unchanged, we have persuaded QBE to
reconsider. Recommendation is to continue at Lowest
Jpremiun.
PUBLIC/PRODUCTS IQBE Tegal ability (loss Injury or lGBP250K each This policy has @ G5PSO million Linit of Tndennity, whilst there haveIas above
included Idenage) to Third Parties arising out Iand every loss [been few clains, it is important that coverage is maintained as it is
LIABILITY included ratsiness ectivities Y Loss Ieere that POL do have an exposure (and there is a requirement in @
lnunber of existing contracts that POL has this insurance).
MOTOR FLEET BE Tegal Liability for loss, danage, ~~ IGBP250K each Iihis Is @ statutory Insurance. Current policy ts "Third Party” ias-above
£484,632. injury or death to third parties and every loss {coverage only.
CRIME TLOvDS infidelity of Employees, all Property IGBPim each and [This is POL's largest Insurance spend and one that is managed le have reviewed our Insurance requirements with Supply
e8e8,780 I(2s in financial instruments) of POL Jevery loss lcarefully. This is a bespoke insurance that provides both First partyIChain, who have agreed that a reduction in limit to GBP40am
* lor any Third Party whilst in any POL (POL loss) and Third party Insurance for all cash and financial lis acceptable operationally and meets our risk exposure.
lorenises or in transit. Forgery and instruments. the Sank of England treat POL in a unique way in that [This has been agreed with the CFO. Given the nature of the
lalteration, counterfeit currency, POL are required to purchase insurance to the FULL VALUE of the bank Iinsurance, this reduction does not provide an equivalent
ldamage to cash carrying venicles, Inotes in circulation. Reduction in Limit to G8P40eq (From G8P6e0n) isIsaving on the preniun. It is anticipated that we would
lortices and contents, forged lappropriate for renewal 2016. lachieve a 5% reduction in premium spend for reducing the
securities and interest receivable and Limit and recommendation is to renew at that premium.
lor payable
DIRECTORS AND [08 [Covers the cost oF conpensotion claine his isa key risk and one that has been In place as a stand alone [we anticipate that renewal will be flat in terms of premium:
OFFICERS 68,900 nade against POL's directors and key coverage since 2013 (previously with RMS) Last year we had no retroactive coverage, however this year
i managers (officers) for alleged we have one year, meaning that this “tail” will negate a
LIABILITY lwrongful acts. laiscount. we continue to negotiate with insurers however st
should be noted that any discount would be below 5%.
lReconmendation is to renew at that premium.
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Chris Day
September 2014
Page 3 of 8
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RISK (currently — Insurer/
nsured) Premium Covering Deductible Additional Comments/Recommendations Recommendation
DIRECTORS AND IQ8E Covers the cost of compensation clains This 5-8 key risk and one that has Deen in place asa stand alone fue anticipate that renewel will be flat in terns of preniun
£68,900 [nade against POL’s directors and key coverage since 2013 (previously with RNG) last year we had no retroactive coverage, however this year
OFFICERS managers (officers) for alleged lwe have one year, meaning that this “tail” will negate a
LIABILITY wrongful acts. laiscount. we continue to negotiate with insurers however it
should be noted that any discount would be below 5%.
Recommendation is to renew at that premium
PROFESSIONAL Be Tegal Liability arising out of any I@BP250K each [To be reviewed against a POL wide policy. This is @ contractual fiegotiations have Ted to @ quote fron a Lloyds syndicate for
£36,362 [negligent act error or onission in theland every loss IPeduirenent. Was NOT purchased under RNG: Jce20ek for cover for Post Office inc PONS with a £10k
INDEMNITY (GOV course of business activities. this y excess up to €10m, It is recomended that this cover is put
CONTRACTS) linsurance provides cover for in place.
JGOVERNMENT CONTRACTS ONLY
PERSONAL IcnuBB I This policy provides Personal Accident Fihis is standard coverage but has an extension that provides Hide Tea email coverage within the portfolio and are
£4,038 and Business Travelcover, and extends payment to Sub Postnasters if they are injured or permanently lanticipating a flat renewal. This is a minimal insurance
ACCIDENT/TRAVEL jto include sub postnasters and their disabled as a result of @ hold up. spend against the benefit that is provided. Recommendation
substitutes and those who work under a jis to renew at current premium.
Hfranchise contract
CYBER LIABILITY [LIBERTY [ober Tiability Insurance covers both his coverage is purchased exclusively for the DVIA and Border Hints coverage does not renew until April 2015
lco5,400 [POL and contract partners against loss control Government contracts
? jor damage caused by hackers, viruses
jand data theft. This insurance
provides cover for the DVLA and Border
control contracts only
SPECIAL TEBERTY — ISanep end ransom. iis Ts @ historic Insurence, confidential in its nature but It is Ie are reviewing the possibility oF including this coverage
CONTINGENCY 11,872 considered that POL has a great enough risk to warrant the purchase. Iwithin the CRIME policy as well as looking at alternative
lstand alone quotations. Discussions are ongoing. Unlikely
Ito be any premium reductions on this separate policy as we
lare at minimum premium level for the risk
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Programme
Chris Day
September 2014
Page 4 of 8
RISK (not
currently
insured)
Covering
Strictly Confidential
Additional Comments/Reconmendations
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Recommendation
policy would include: wrongful
ltermination, discrimination, sexual
harassment, and retaliation)
BUSINESS Business interruption insurance covers Ime do not believe that POL nave an exposure at this time, owever — IReconmendation is risk retained by PO.
lthe loss of income that a business recommend that this be tested (Major loss scenario test) to identify
INTERRUPTION lsuffers after a major Property loss lif there any gaps/exposures.
PROFESSIONAL Tegal Liability arising out oF any las PO"s structure and business model changes, this coverage becomes Ie have had preliminary discussions with the Market who have
INDEMNITY - POL Inegligent act error or omission in the lnore relevant, both commercially and contractually. With the arrival Iindicated that a G8P 10 million policy with a G8Pim
- lcourse of business activities. lof POMS and replacement of BOI, there will be a perceived increase inIdeductible each and every loss would cost between GBP250-
WIDE risk around the financial products. 30¢k (However, PO would save GBP3SK premium by “rolling in”
lthe existing PI coverage within this). Recommendation is
lnisk retained by Po.
EMPLOYMENT Employment practices liability Iihis coverage should be considered if there are any major staf? or Iahilst we have not approached the Market for a formal
PRACTICES linsurance covers wrongful acts arising structural changes identified in the future as part of your long termiquotation, as a guide, we are advised that a GBP 5 million
lfrom the employment process (e.g. sstrategy. Whilst there may not be a risk at this time, it is one to [policy with 2 G8P15ek deducible each and every loss would
LIABILITY ltypical claims covered under an EPL lkeep on the radar. This risk would not be picked up under any other Icost circa GBP75k. Recommendation is risk retained by PO.
IPO insurance programme.
CYBER LIABILITY -
POL WIDE
lcyoer Liability insurance covers both
POL and contract partners against loss
Jor damage caused by hackers, viruses
Jand data theft
Ie believe that Data security and Data integrity is @ key risk for
JPO. whilst there are robust internal controls to manage this risk,
serious consideration should be given to purchasing some level of
insurance protection in the event of a major data breach or “cyber™
related incident
Ie are seeking an “indication” from PO's existing cyber
insurers for a POL wide policy. Initially, we are looking at
Ja quotation for a minimum GSP10m limit of indemnity. The
Jpremium should be balanced against the risk PO have within
lthe business. Recommendation to insure if premium not
Inaterially higher than existing cover.
PROPERTY DAMAGE
(assets below
GBPim)
AI Toss or physical danage to POL
properties including Buildings and
Inachinery, stock and contents and
ladditional cost of working (ACOt)
losses oF any PO property below GiPin not perceived to be business
lcritical with enough capacity within the network to use alternative
sites in the event of a loss. However, the aforementioned major loss
scenario test would identify the robust nature of this strategy.
IReconmendation is risk retained by PO.
Corporate Insurance
Programme
Chris Day
September 2014
Page 5 of 8
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APPENDIX 2
Claims recorded under the POL insurance programme are as follows: All other policies are claims free
Motor Fleet -
Claims Summa:
umber o Number
Number of of
Grand Total 360 £362,129.86 £302,880.74 £665,010.60
Employers/Public
Liability Claims
Summa
Po ber o Gro
Po Reco
a ed ed
7I £8,200 £0 £46,146 £46,146
17 I £33,961 £0 £140,539 £140,539
£360 £0 £20,394 £20,394
£10,352 £0 £43,252 £43,252
r 12 I £10,712 £63,046 £63,646 I
: ° 6 8 0 9 0
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APPENDIX 3
Brief synopsis of Insurance cover
1. Crime Insurance
1.1. PO historically has one of the largest stand-alone Crime policies in the UK
insurance market, insuring to a limit of £600m, and is a requirement for
membership of the Bank of England’s Note Circulation Scheme. The policy
covers all risk of crime including theft by employees. The policy carries a £1m
excess and is insured by QBE and others. This is PO’s largest external premium
spend. Following a review with Supply Chain, we are able to reduce this limit to
£400m for the forthcoming year saving a potential 5% of premium.
2. Property Damage/Increased Cost of Working/Terrorism.
2.1. PO has a Property Damage policy, insuring the full value of properties valued at
above £1m. There is a £10m increased cost of working limit. There have been no
claims.
2.2 Zurich is the insurer and there is a £1m excess on the policy. Pool Re insures the
Terrorism which mirrors the Property Damage policy.
2.3. We have obtained alternative quotations from several Insurers, the most
proactive being Travelers who spent a day at PO Swindon and subsequently
offered wider coverage, a training programme for PO staff at our insured sites
and a saving of 15% over the original 2013 premium. Our existing insurers
Zurich have subsequently offered a 11% rebate to reflect the risk improvement
activity at Swindon to close the premium gap. We are anticipating a further 6%
reduction at renewal. We are also looking at whether we are able to reduce the
£1m deductible without cost and introduce an aggregate limit to cap PO
exposure.
3. Combined Liability Insurance (Employers/Public Liability)
3.1 PO has a combined Liability programme from QBE, providing £50m of coverage
on both Employers Liability and Public Liability. This carries a £250k excess.
QBE handle the claims below the excess and is reimbursed by PO on a quarterly
basis. This is a relationship that works well.
4. Motor Fleet Insurance
4.1. PO has two motor fleets (Commercial vehicles and Private Cars) both insured via
QBE.
4.2 The policy is placed in the same way as the Combined liability (namely, with a
£250k excess with claims below the excess paid by QBE and reimbursed by PO
on a quarterly basis).
Corporate Insurance Chris Day Page 7 of 8
Programme September 2014
5. Direct
5.1
5.2
5.3
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tors and Officers Liability
This policy provides full cover for PO directors and officers where they are sued
as a result of a wrongful act, resulting from something that they are alleged to
have done while acting as a manager of PO.
In addition, the policy will respond if there is an investigation into an act that they
are alleged to have committed.
The policy currently has a limit of £60m. The insurance review looked at whether
reducing this limit to £40m (saving approx. £20,000 in premium) was viable. As a
large organisation, it is felt that the current limit of £60m is the minimum level that
PO should have and therefore should be retained.
6. Professional Indemnity
6.1
6.2
This policy was purchased to meet the Government Service Contracts
contractual requirements. The policy has a £10m limit and covers a breach of
professional duty by PO resulting in a third party loss. The policy covers Civil
liability, defence costs and expenses, libel and slander (committed by PO or any
person employed by PO). The policy has a £250k excess. QBE are the lead
insurer.
Our strategy, particularly in relation to our FI products, and the increased risks
this brings to the organisation, means that we should consider purchasing
Professional Indemnity insurance for the whole organisation. The review is
underway and insurers have spent some time with PO assessing the exposures.
7. Cyber Liability
7A
7.2
This insurance is purchased as a specific requirement for the DVLA and Border
Agency contracts and is a broad cover, extending to breach of privacy, extortion,
network security, as well as breach of data. This policy renews in April 2015
One of our key strategic risks relates to data protection and data integrity. The
Insurance review has identified that consideration should be given to purchasing
Cyber Liability across PO which would offer us a level of protection in the event
of a significant loss.
Corporate Insurance Chris Day Page 8 of 8
Programme
September 2014
POLB 14(7'")
POLB 14/87-14/102
Present:
Alice Perkins
Neil McCausland
Tim Franklin
Virginia Holmes
Alasdair Marnoch
Richard Callard
Paula Vennells
Chris Day
In Attendance:
Alwen Lyons
Sir Charlie Mayfield
David Ryan
Chris Aujard
Martin George
Kevin Gilliland
Neil Hayward
Nick Kennett
POLB 14/87
POLB 14/88
POLB 14/89
(a)
(a)
(b)
(c)
(a)
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Post Office Limited — Strictly Confidential
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held on 16 July 2014
at 148 Old Street, London EC1V 9HQ
Chairman
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Chief Executive
Chief Financial Officer
Company Secretary
Chairman & CEO John Lewis Partnership (minutes 14/87-88)
Business Transformation Director (minute 14/89)
General Counsel (minute 14/90)
Chief Marketing and Commercial Officer (minute 14/90)
Network & Sales Director (minute 14/90)
Group People Director (minute 14/90)
Director, Financial Services (minutes 14/90-91)
INTRODUCTION
A quorum being present, the Chairman opened the meeting and
welcomed Sir Charlie Mayfield, Chairman and CEO John Lewis
Partnership.
SIR CHARLIE MAYFIELD
Sir Charlie Mayfield explained the governance structure within John
Lewis Partnership and its effect on decision making and people
engagement.
The Board thanked Sir Charlie Mayfield for an excellent session.
Sir Charlie Mayfield left the meeting.
STRATEGIC AWAY DAY FOLLOW UP ON OPERATING MODEL
AND STRATEGIC COST REDUCTION
The Board welcomed David Ryan, Business Transformation Director,
to the meeting.
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Post Office Limited — Strictly Confidential
(b) The CEO reported that since the Board Away Day the Business had
taken the SLT population through a similar market analysis and review
of the mails strategy. The SLT now understood how the market was
changing and the challenges which the Business faced. The CEO was
pleased with their feedback and recognition that the Business had less
than a year to respond to this challenge with agility and pace. The
next stage of this cascade into the Business would take place on the
24" July when 2500 colleagues would hear the same message face to
face around the country, with the CEO key note speech transmitted
from London.
(c) The CEO shared the 10 accelerators which the Business had
produced to cascade the strategy. She explained that the actions to
support the accelerators had been finalised and targets with timelines
would be agreed by the end of July. The Board would be updated on
ACTION: the progress being made on: channel extension; mails; Business
David Ryan Transformation and People at the September meeting. The Board
recommended that the Business focus on 4 or 5 areas and make the
actions specific with commercial measures.
(d) The CEO promise, as part of her report, to review performance and
actions against the accelerators at each Board meeting starting in
September.
(e) David Ryan explained the actions being taken to deliver the cost
reduction target, the enterprise wide business and operating model
(TOM) and the 2014/15 incremental cost saving initiatives.
(f) I David Ryan reported that the in-year cost reduction challenge, which
had increased from £46m to £53m, was being managed by identifying
specific initiatives with an ExCo member who was accountable.
Weekly tracking and trend information would be available by the
beginning of August. It was recognised that the Business needed to
protect the costs which deliver revenue and accelerate these where
possible.
(g) David Ryan recognised the need to increase the cost reduction target
to help mitigate the likely shortfall in 2014/15 revenue and to that end
was planning to deliver a stretch target of £100m, within the next 12 to
18 months. The CFO and Board supported this approach and
emphasised the need to maintain and hit the EBITDAS target and to
ensure that the savings are sustainable.
(h) The Board discussed the work underway in the design phase for the
enterprise wide business and operating model, and debated the key
questions being considered by the Business. David Ryan explained
that the emerging model had three layers:
¢ alight corporate centre;
e amiddle core of operating companies; and
e an .utility provider for HR, Finance Customer contact etc.
Once the model was established it would be clearer which work could
be outsourced or done with a partner.
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(i) David Ryan assured the Board that nothing had emerged in the work
to date which should be put on hold whilst the TOM is finalised.
(j) I The Board had some questions about the emerging model and the
creation of separate operating companies and asked the Business to
ensure it considered the opportunities and risks of such a model,
including the risk that the interdependencies between the different
businesses might receive too little focus. The Board discussed the
ACTION: Public Purpose and how it could relate to the different operating
David Ryan companies and it was suggested that the POAC could be used to
input into this debate.
(k) The Board questioned whether the Business had the specific
capability to deliver the design. David Ryan explained that the
Business recognised the need to build its capability and to change the
organisation to deliver the change. PwC were commissioned to help
with this diagnosis and the change capability would be enhanced
before October.
(l) I The Board recognised the significant challenge to deliver the Business
Transformation alongside the 2014/15 scorecard targets. David Ryan
was asked to give the Board early warning if he saw evidence that
driving the transformation was putting the performance delivery at risk.
(m) The CEO explained David Ryan had two separate teams running in
parallel to drive in year savings and drive business transformation.
ACTION: (n) The Board thanked David Ryan for the work to date and asked for an
David Ryan/ update on the Business Transformation work at the September Board.
Company An early draft of this update should be shared with Board members in
Secretary with the offer of individual or group sessions to discuss the detail
before the Board.
(0) David Ryan left the meeting.
(p) The CEO explained that David Ryan’s contract ended in November
and that the Business was considering the right approach for the
delivery phase of the programme. The Board supported the Business
if it decided to extend his contact for an additional six months,
recognising that he was an expensive resource.
POLB 14/90 KELLY REPORT DISCUSSION
(a) The Board welcomed Chris Aujard, General Counsel, Martin George,
Chief Marketing and Commercial Officer, Kevin Gilliland, Network &
Sales Director, Neil Hayward, Group People Director, and Nick
Kennett, Director, Financial Services, to the meeting.
(b) The CEO introduced the discussion by explaining the process that the
Business had undertaken to consider the lessons learned in the Kelly
report with particular focus on risk management, culture and
governance. It was noted by the CEO that a great deal of work had
been undertaken over the past year to put in place appropriate
systems and structures for managing risk. The CEO highlighted
aspects of this work but recognised that further work was required,
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especially in developing a risk appetite statement.
(c) The meeting considered the outcome of the ExCo discussion and
agreed that the areas highlighted were the right ones on which to
focus.
(d) Neil Hayward, Group People Director, described his view of the
culture within the Business and its effect on how risk is managed. He
believed that, compared with other organisations, the Business: did
not lack realism; was beginning to focus on the right risks as viewed
through the Transformation Committee; was encouraging bad news to
be brought forward (again at the same forum); but did not always
close risks down effectively and did have some skills gaps.
(e) It was recognised that in some areas of the Business there was a
significant focus on delivery risk but that this is not consistent. There
was agreement that the risk appetite should vary depending on the
issue being considered.
(f) In this connection, the General Counsel reported that, as part of a
wider exercise currently being undertaken by PwC, work was about to
ACTION: re- commence on developing an articulated risk appetite statement; it
General Counsel/ was also reported that PwC would be assessing and benchmarking
Neil Hayward/ the quality of risk assurance activities across the Business. It was
Company anticipated that PwC’s initial report would be available by mid —
Secretary September, following which decisions would be made as to the areas
in which the assurance and risk framework would need bolstering.
(g) The Board was concerned that there seemed to be number of other
areas where further quick progress needed to be made. After some
discussion, it was agreed that it would be helpful for the Business to
consider its top 3 or 4 risk and assurance priorities categorised by
reference to the lessons learned from the Kelly Report and the
headings Culture, Capability and Governance. These would be
ACTION: presented back to the Board in September. It was anticipated that risk
General Counsel appetite would feature amongst this priority list, as would training and
formal clarity over delegated authorities and decision making.
ACTION: (h) The ARC was also asked to review of the Risk Management process.
General counsel
(i) I Chris Aujard, Martin George, Kevin Gilliland and Neil Hayward left the
meeting.
POLB 14/91 PROJECT HAWK
(a) Virginia Holmes, Chairman of the Board FS Sub Committee, (FSSC)
introduced the paper and explained that the FSSC had discussed the
Hawk mandate at a meeting on the 15" July and recommended it to
the Board.
(b) Nick Kennett reminded the Board of the 3 stages involved in the
insurance strategy. Hawk, the buyout of the Bank of Ireland (Bol) was.
the second stage and this mandate was to enable the negotiation to
start.
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(c) The Board considered the proposal and the possible scenarios,
including the likely approach by an Independent Expert.
(d) Virginia Holmes stressed that the final decision to agree a value would
revert to the Board.
(e) The Board
(i) Noted the update and the actions as set out in the paper;
(ii) Approved the requested mandate, and authorised
management to negotiate a buy-out of BOI’s share of Post
Office Insurance business at a cost not exceeding £40m; and
(ii) Noted that any agreement will be subject to Board approval.
(f) The Board wished Nick Kennett good luck for the negotiation.
(g) Whilst Nick Kennett was in the meeting the Board discussed the travel
Insurance issue raised in the CEO report.
(h) Nick Kennett explained that a problem in the travel insurance technical
sales process had led to customers being provided with the wrong
ACTION: policy. The Board were concerned by the delay in informing the FCA.
Nick Kennett The Board asked for a note explaining what had gone wrong, along
with assurance that the Bol had informed the FCA and that a
stakeholder and media plan was in place to manage the situation.
(i) Nick Kennett left the meeting
POLB 14/92 FINANCIAL PERFORMANCE UPDATE
(a) The Board received the quarterly report from the CFO. He explained
that the full year revenue forecast was now more pessimistic than
budget with a £15m gap emerging. He still remained confident of
hitting the EBITDAS target but believed the Business needed to
deliver more cost savings in order to make this achievable.
(b) The Board discussed the Mails forecast and whether enough was
being done to accelerate the new initiatives. The CEO recognised the
need to move quickly and explained that there were three areas of
focus.
1. The new sales initiatives discussed at the Board away day.
2. The effect of pricing which Royal Mail now recognised as an
issue and one over which they were willing to approach the
regulator, albeit in the autumn. In the meantime the Post Office
would extend the customer discount until September.
3. The structural changes in the market and the need to respond
through product simplification and network extension
(c) The Government Services income shortfall was mainly due to POca.
The CFO explained that negotiations were still underway to try and
resolve the position and that following a meeting with the Pensions
Minister (Steve Webb) and further meetings with HM Treasury, the
business believe DWP has accepted this offer (including the £10m for
ring-fenced customers). However, late in the day, HM Treasury have
decided they would like to take a portion of the POca overnight
balances (50% or c£1bn) into the Government Banking Service. This
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has delayed formal acceptance of the business’ offer and a
subsequent announcement by the Minister. The Business has a way
forward but DWP and HM Treasury need to agree how the additional
risk and any subsequent increase in price following the new HM
Treasury approach is budgeted within Government.
(d) The CFO explained that the Telephony gap was driven by lower
customer numbers and higher broadband usage, which was proving to
be an issue in the new contract. The Board asked for a note
ACTION: explaining the lessons learned, which the CEO said would be
Martin George available after the Risk & Compliance Committee had considered the
issue.
(e) The Board supported the Business’ approach to a prudent revenue
forecast but were disappointed that a £15m risk had emerged so early
ACTION: in the year. The Board asked the Business to continue to aim for
CFO/ £925m revenue but to increase its cost reduction target to mitigate the
Company £15m revenue gap and to provide a full update at the September
Secretary Board, inviting Martin George, Nick Kennett and Kevin Gilliland into
the Board for the debate.
(f) The CFO presented the Crown P&L and explained the effect of the
reduced revenue on the Crowns. The Board discussed the importance
ACTION: of hitting the breakeven target and the initiatives in place to deliver this
Nick Kennett target. The Board recognised the importance of FS growth to this
channel and asked for a note to update them on the FS incentive
scheme.
ACTION: CFO (g) The Business was asked to look at the accuracy of the cash flow
forecasting.
(h) The Board were disappointed by the scorecard results at the end of
quarter 1 and encouraged the Business to focus on the few things
which will have the greatest impact in getting performance back on
target.
POLB 14/93 CHIEF EXECUTIVE REPORT
(a) Tim Franklin, Chairman of POAC reported on a very successful
ACTION: meeting on the 1% July. Richard Callard agreed to discuss with Jo
Richard Callard Swinson her attendance at a future meeting.
(b) The CEO informed the Board that the Supply Chain Managers’ pay
had been agreed with the CMA, but that the CWU had learned no
lessons from the Crown negotiation and the Business were now
considering going to ACAS, and/or looking at whether it would be
possible to impose a pay deal, to prevent another protracted pay
negotiation. It was recognised that, although contingencies were
already in place, a supply chain dispute would be more disruptive and
difficult to manage than the Crowns.
(c) Sparrow was progressing with two cases now through mediation, one
of which had been resolved but the other where no agreement was
reached. The Business was taking opportunities to make things clear
to the working group, the first being that no consequential loss would
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be paid.
POLB 14/94 MINUTES OF PREVIOUS MEETINGS AND MATTERS ARISING
(a) The minutes of the Board meetings held on 21 May and 10 June 2014
were approved for signature by the Chairman
POLB 14/95 COMMITTEE MEETING MINUTES FOR NOTING
(a) The Board noted the minutes of:
e the Board Away Day held on 11 June 2014;
e the Annual Report and Financial Statements Sub-Committee
held on 18 June 2014;
e the Audit, Risk and Compliance Committee meeting held on 15
May 2014;
e the Financial Services Sub-Committee meetings held on 2
April and 10 June 2014;
e the Sparrow Sub-Committee meetings held on 30 April and 6
June 2014; and
¢ the Remuneration Committee meeting held on 13 May 2014;
POLB 14/96 STATUS REPORT
(a) The Status Report, showing matters outstanding from previous Board
meetings, was noted.
POLB 14/97 3MCOGENT CONTRACT EXTENSION
(a) The Board considered the request to extend the 3MCogent Contract
for the Application, Enrolment and Identification (AE!) infrastructure.
ACTION: (b) The Board felt that the business case presented a very optimistic view
Martin George of volumes and price and asked for an email explaining the case to be
circulated to the Board before the contract was signed.
POLB 14/98 PENSIONS COMMITTEE TERMS OF REFERENCE
(a) The Board approved the proposed revised Terms of Reference for the
Pensions Committee.
POLB 14/99 PROPOSED BOARD DATES FOR 2015
ACTION: (a) The Board asked for the proposed Board dates for 2015, to be
Company circulated along with the forward agenda items, and they would then
Secretary confirm their availability to the Company Secretary.
POLB 14/100 ITEMS FOR NOTING
(a) The Board noted the Significant Litigation report.
ACTION: (b) The Board noted the update on Cyber Security and Information
Lesley Sewell Assurance paper and asked for more granularity on issues and risks.
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(c) The Board noted the Health & Safety report.
(d) The Board noted the Report on Sealings and resolved that the
affixing of the Common Seal of the Company to the documents
set out against items numbered 1168 to 1191 inclusive in the seal
register was hereby confirmed.
(e) The Board noted the current status of colleague offers.
(f) The Board noted the current status of the End User Compute
procurement as part of the new Towers based IT supply chain.
ACTION: (g) The Board noted the Internal Audit Action Status report and asked for
Malcolm Zack future reports to include a commentary on any outstanding actions.
POLB 14/101 ANY OTHER BUSINESS
(a) The Chairman reported that the Board had received consent from the
Shareholder for the 2014/15 STiP and the 2014/17 LTIP schemes.
(b) The Board congratulated the CFO and Business on the publication of
the Report & Accounts.
ACTION: Company (c) The Company Secretary was asked to arrange a cyber-security guest
Secretary speaker to attend a future Board meeting.
ACTION: (d) It was agreed that the October Board meeting would be held at the
Martin George Post Office Design Lab at the Southbank University.
POLB 14/102 DATES OF NEXT MEETINGS
(a) It was noted that the next Board meeting would be held on 25
September 2014.
FS 14/37-14/39
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FINANCIAL SERVICES SUB-COMMITTEE
Minutes of a meeting of the Financial Services Sub-Committee of the Board
held at 148 Old Street, London EC1V 9HQ on Tuesday 15 July 2014
Present:
In Attendance:
FS 14/37
FS 14/38
Virginia Holmes (VH) Chair
Tim Franklin (TF) Non-Executive Director
Chris Day (CD) CFO
Paula Vennells (PV) CEO (by telephone)
Chris Aujard (CA) General Counsel
Nick Kennett (NK) Financial Services Director
Jonathan Hill (JH)
Charles Colquhoun (CC) Head of Corporate Finance
Paul Havenhand (PH) Head of Insurance and Travel
Mark Flenner (MF) KPMG
Alwen Lyons Company Secretary
Gill Catcheside Secretariat
(a)
(b)
(d)
(e)
OPENING OF MEETING
A quorum being present, VH welcomed everyone and opened the
meeting of the Financial Services Sub-Committee (“FS Committee”).
PROJECT HAWK
The FS Committee considered a proposal to enter into negotiations
to exercise Post Office’s contractual option to acquire Bank of Ireland
UK plc’s (BOI) share of Post Office’s insurance business (PO!) with
an acquisition value of up to £40 million.
NK advised that the Insurance Transformation programme comprised
three phases — Phase 1 was Project Titan, Phase 2 was the exercise
buyout option as set out in Eagle (Project Hawk), and Phase 3 was
the migration of other insurance businesses as contracts expire. It
was noted that the Business was seeking a mandate to start
negotiations with BOI for Phase 2.
NK reported that there were eight products within POI, as set out in
the paper, which were forecast to make a circa £14million profit in
2014/15 plus sales commissions of circa £10million.
The FS Committee was informed that the contractual option to
acquire BOI's share of POI, as set out in the Eagle contract, could be
exercised within a two year window commencing in September 2014.
It was noted that Post Office initiated the option process by
submitting a market value offer to BOI.
If agreement was not reached following negotiation, Post Office could
escalate the process to an Independent Expert (IE) who was jointly
appointed and paid for. NK advised that the Eagle contract set out a
clear escalation process to be followed, and that while the IE’s review
of value and terminal values would be very formulaic, the review of
Head of Risk, Banking Regulation & Strategy
ACTION:
NK/CD
(h)
(k)
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income flows and discount rates would be areas for debate.
Once the IE had concluded his investigation, a valuation of the POI
would be tabled to both parties; this valuation would be binding on
BOI, who were not able to decline to sell, whilst Post Office had the
option to either accept the valuation or not. If Post Office decided not
to accept the valuation, the option to buy PO! would fall away, and
could not be used at any other time — a “once only option”.
NK reported that as part of Project Hawk, Post Office would acquire
the Contracts of Insurance, predominantly from Aviva and Junction,
and 19 staff would transfer under TUPE regulations. It was noted that
these 19 staff, for which Post Office paid 50% of their costs, were
currently based at BO! Bow Bells House.
NK outlined the three scenarios based on different profit and loss
projections for POI for the period 2014/5 to 2019/20, as set out in the
paper. Scenario 1 was based on the budgeted performance of POI
over the next 12 months with incremental growth at a steady state
extended out to 2023. Scenario 2 was BOI’s five year plan which had
not been accepted by Post Office. NK advised that although the plan
had been tabled at the Joint Insurance Committee, Post Office had
provided no comment on, nor acknowledged any findings contained
within, the plan but had only noted it. It was noted that BOI’s five
year plan contained aggressive growth expectations. Scenario 3 was
a “common sense” view of BOI’s five year plan.
MF advised that the IE would probably apply a significant discount on
deliverability of new products, and would look at comparable deals in
the marketplace when reviewing market pricing. It was noted that
other products had a finite duration, with no value into perpetuity, and
so would be discounted at different rates accordingly. The
methodology used by Post Office would be clearly understandable to
the IE.
The FS Committee considered the financial projections, including
sales capability and volume drivers. It was noted that in Scenario 2
Motor and Home volumes were projected to double, and Life volumes
to triple. NK advised that Motor policies were increasingly moving to
an online platform, and that sales in branches were becoming more
of a challenge. It was noted that branches would be used for data
capture purposes for use by the call centres.
It was noted that Scenario 3 could be used as a basis of agreement
between Post Office and BOI. The FS Committee was advised that
Scenario 3 excluded those products that Post Office did not consider
to be part of POl’s responsibilities with a higher discount rate applied
to growth forecasts and new products. PV noted that the Business
needed to be confident that it was going to hit the volumes contained
within Scenario 3.
NK advised that Scenario 1 was being used for positioning purposes.
Post Office would open negotiations with Scenario 1 while BOI would
start at the Scenario 2 level — these were considered to be the “book-
ends”. It was agreed it would be useful to work up a Scenario 1(a) to
arrive at a value of circa £35million, which would help with
negotiations and give tactical support.
FS 14/39
(m)
(n)
(0)
(q)
(1)
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It was noted that Post Office had £20m of budgeted capital
expenditure for 2014/15, and that if a deal was reached at a level of
around £30-£35million this would be affordable for the Business.
It was noted that a request for approval of a mandate for negotiations
would be submitted to the Board on 16 July 2014. Subject to the
mandate be approved, the Business would prepare an offer letter to
BOI based on Scenario 1. The FS Committee agreed that as the
Board was being asked to approve a mandate for negotiations, at this
stage the detailed figures would not be circulated unless requested.
CD noted that the Business was focussed on concluding Project
Hawk by 31 March 2015. Once agreement had been reached with
BOI on a value, a full acquisition paper would be submitted to the
Executive Committee, and then the Board, for approval. This
submission would include detailed figures.
NK advised that Project Hawk was a standalone right for Post Office
under the Eagle contract. It was noted that other areas of strategy
being discussed with BOI included BOI’s balance sheet, commission
around the balance sheet, commitment to grow the business, the role
of investments, product capability and current accounts.
The FS Committee noted that BOI is likely to be keen to continue to
act as principal for Post Office to maintain the relationship and
continue its close involvement with Post Office. NK advised that the
combination of Projects Hawk and Titan would result in a large “box”
of product, pricing, capability and delivery, and that a positioning
paper on strategic intent would be prepared for discussion with BOI.
It was noted that BO! had shown a surprising slowdown in its
aspiration of growth for mortgages. It was considered that BOI! might
be thinking of investing in other areas to lessen its’ reliance on Post
Office business as part of its risk strategy.
The FS Committee:
(i) Noted the update and actions as set out in the paper; and
(ii) Agreed to recommend to the Board the proposed mandate to
exercise on a once-only basis the option to buy-out BOI’s
share of POI at a cost of up to £40million, with final
agreement subject to Board approval.
CLOSE
There being no further business, the meeting closed.
Strictly Confidential
PC 14/16-14/27 POST OFFICE LTD
PENSIONS SUB-COMMITTEE
Minutes of a meeting of the Pensions Sub-Committee of the Board
held at 148 Old Street, London EC1V 9HQ on Wednesday 25 June 2014
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Present: Virginia Holmes (VH) Chair
Chris Day (CD) CFO
In Attendance: Neil Hayward (NH) Group People Director
Natasha Wilson (NW) Head of Reward and Pensions
Harpreet Singh (HS) Pensions Adviser
Tim Giles (TG) Aon Hewitt (for items 14/19-14/20)
Ross Mitchell (RM) Aon Hewitt (for items 14/19-14/20)
lan McKnight (IM) RMPTL (for item 14/20)
Chris Hogg (CH) RMPTL (for item 14/20)
Alwen Lyons (AL) Company Secretary
Gill Catcheside (GC) Secretariat
PC 14/16 OPENING OF MEETING
A quorum being present, VH opened the meeting.
PC 14/17 MEETING WITH JOANNA MATTHEWS
VH gave a verbal update of her recent meeting with Joanna Matthews,
Chair of RMPTL. At that meeting VH had expressed the Committee’s
concerns regarding the delay in aligning the Plan’s investments with the
Statement of Investment Principles and the cost of this in return terms to
the POL section. VH advised that Chris Hogg, Chief Executive RMPTL
would attend today’s meeting to address the issues raised.
PC 14/18 COMMITTEE MEMBERS
ACTION: NH/CD
PC14/19
It was noted that Susannah Storey had resigned from the Committee on 26
March 2014, following her resignation from the Board of the Post Office on
the same day.
Committee outside of the meeting.
REVIEW OF INVESTMENT POSITION
TG and RM joined the meeting.
NH/CD would discuss future executive membership of the Pensions
The Committee considered Aon Hewitt’s overview of the Investment
Report.
TG reported on the asset allocation for the POL Section as at 31 March
2014. It was noted that the Section remained underweight in Property and
Private Debt as these were in the process of being drawn down, and
overweight in Liability-hedging assets, derivatives & collateral (LHA). This
position may lead to the Section underperforming significantly during
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periods where risk assets outperform.
TG advised that action had been taken in June to reduce the cash
exposure by moving funds into Investment Grade Credit (IGC) and some
hedge funds. TG highlighted that an investment in IGC would not yield
much more than Cash.
TG reported on a conference call with the RMPTL executive and Mercer to
discuss the use of a Diversified Growth Fund (DGF) to invest some of the
Section’s large cash holdings in growth assets pending draw downs, a
proposal which would meet the SIP criteria and which AON supported.
RMPTL and Mercer had yet to respond.
TG reported that the investment managers and the funds selected
appeared to be of good quality, but that the growth assets had not delivered
a high enough return, and that this would not be improved by investing in
IGC.
The Committee was concerned with the execution lag in aligning with the
SIP and the perception that RMPTL was not proactively taking advantage
of market conditions when timing investments, and therefore missing
opportunities to pick up much needed return for the Section’s assets. TG
advised that the RMPTL reporting did not show the execution lag and its
effects and that if this were reported it would help highlight the issue.
The Committee discussed the lack of a tactical overlay to the strategic
implementation. It was agreed it would be useful to have a formal metric to
monitor the execution lag with the Dollar effect stripped out, within the
Quarterly Investment Report (QIR). RM advised that were the Section to
have been fully invested in line with its strategic benchmark this it would
have seen a monetary benefit of £1-1.5m versus the actual position. It was
noted that the delay in investing in the Emerging Markets had worked in the
POL Section’s favour.
The Committee discussed the Plan’s exposure to currency fluctuation and
agreed there was a need to protect the Absolute Return through Dollar
hedging. TG agreed and noted that the Dollar was currently undervalued.
The Chairman stressed that the date of entry into the hedging market
should be carefully managed. TG clarified that the Lazards mandate for
Emerging Markets should remain in local currency.
It was reported that CD would be attending all future RMPP Investment Sub
Committee (ISC) meetings, which would provide the Committee with
greater insight into how investment decisions were implemented. CD would
provide an update of the ISC meeting that he was due to attend on 18
September 2014 at the next Committee meeting.
ACTION: CD
TG discussed attendance at a meeting held between the Post Office
Pensions team, AON, Chris Hogg and MN Services. TG explained that MN
Services had been retained by RMPTL to provide management information
(MI) on investments and the funding levels. The information output that
would be provided should provide greater clarity to the investments and the
information would be more up to date. However, it was noted that although
there were some improvements in the reporting and execution capability,
these would not be fully effective until the necessary infrastructure had
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been put in place. The Committee remained concerned about RMPTL’s
ability to respond in a crisis or actively manage market fluctuations. There
was also concern whether they had robust mechanisms in place to take
decisions quickly.
It was noted that the POL Section’s investment strategy included greater
risk appetite which RMPTL continued to be slow to implement.
VH thanked TG and RM for their report.
PC 14/20 INVESTMENTS
Chris Hogg and lan McKnight of RMPTL joined the meeting.
IM presented the QIR as at 31 March 2014 which was considered by the
Committee. The Section’s assets returned 3.6% in Q4, underperforming
the liability benchmark by -0.8% and the strategic benchmark by -0.9%. Of
this, the return seeking assets delivered 0.3% and the liability hedging
assets 3.3%. Over the last 12 months the return was 0.7%, an
outperformance of 3.1% versus the liability benchmark and 2.6% versus the
strategic benchmark.
VH explained that the Committee was interested in isolating the impact of
currency on the performance of the investments. TG suggested that the
easiest way to understand the effect would be to evaluate the performance
for the last two quarters of 2013/14 excluding the exchange rate effect.
IM advised that assets were converted to Sterling where underlying
investments were in Dollars and that Dollar exposure had not been
beneficial to the Plan over the year. It was noted that the negative impact
of not hedging currency over the previous quarters had been substantial,
especially in the Absolute Return funds. IM advised that following a risk
impact analysis, the ISC had agreed to hedge currency exposure with
effect from 1 July 2014.
The Committee supported the decision to hedge against currency exposure
but were disappointed it had taken so long to achieve as it was first
discussed last year. VH was keen to understand how the ISC worked to
reach this ‘in principle decision’ and how it would ensure that the tactical
entry points into the market of 1 July were effective. It was felt that the
process was onerous rather than mobile. CH advised that the ISC believed
the strategic decision to hedge currency was marginal, and that Black Rock
had not offered a definitive view. The Committee was disappointed that the
ISC seemed unaware of its conviction with regard to currency hedging
CH recognised the importance of the market entry point. He explained that
there were no parameters currently set which would trigger a re-evaluation
of the decision to enter the market on the 1“ July. However, if there was a
major economic event, CH assured the Committee the strategy would be
re-assessed and the ISC would be contacted by circulation for a quick
decision. The importance of market entry points in fulfilling investment
beliefs was recognised.
The Committee expressed its concerns that RMPTL was implementing
strategic decisions, but not proactively managing its tactical decisions. It
was highlighted that the Post Office considered RMPTL to be an active in-
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house fiduciary manager for the Plan’s assets and as such would therefore
expect it to be highly responsive to market movements as necessary.
VH advised CH/IM that the Post Office had concerns that Post Office
Section’s assets were not being actively and forcefully managed as the
position at 31 March 2014 was similar to the position on 31 March 2012,
and that decisions needed to be taken and implemented more quickly.
IM tabled a report of the rebalancing that had been carried out in June
2014. It was noted that Cash had been reduced, and that the underweight
in Property and Private debt was due to the staggered draw down of funds.
The Committee noted that the overweight in Cash had been reduced after
being out of alignment with the SIP over the last 24 months, but was
disappointed that the funds had been invested in IGC which was
considered little better than Cash for returns. WH highlighted that the
Committee had previously requested that Cash be placed in a DGF. IM
reported that the ISC had rejected this request as the allocation into a DGF
would have breached the Plan’s risk budget for the Post Office Section.
The ISC’s view had been that the only way of keeping within the risk
budget, and provide the liquidity required, was to invest in IGC. IM advised
that the funds in the IGC would be mainly drawn down by the end of 2014.
IM would circulate the paper on investing into a DGF which had been
ACTION: IM submitted to the ISC. IM will also provide the reasoning behind the ISC’s
ACTION: IM decision. CD/TG would reconsider the DGF proposal, and resubmit it to the
ACTION: CD/ ISC if they felt funds should be invested in a DGF.
TG
The Committee expressed the view that the Section’s assets were not
earning high enough returns from its portfolio. CH would involve TG in
ACTION: CH discussions regarding the risk budget over the next few months.
CH updated the Committee on a number of issues:
(i) A shared MI project was underway to enable better and more up-to-date
reporting on the investments and funding position and also to provide
greater transparency of the data the Trustee and the Employers;
(ii) Following the announcement in the 2014 Government Budget with
regards to how Defined Contribution pension benefits can be taken from
April 2015, the Trustees of the Royal Mail Defined Contribution Plan
(RMDCP) are looking to provide suitable communications to the members
about how the changes will affect the members and the choices that they
will have. The Trustees will be looking to start this process in the Autumn.
(iii) The Government has announced that they will be reviewing the services
at the Pension Service Centre for the administration of the RMSPS. This
will involve the services going out to tender under the public procurement
process. The project should be completed in 2017.
CH and IM left the meeting.
The Committee agreed that there was an urgent need to understand
RMPTL’s processes, priorities, and its governance structure. HS would ask
CH for RMPTL’s Committee structure, terms of reference, and attendees.
ACTION: HS This information would also include details of the feedback process to
Employers.
The complex asset structure of the Section’s assets was discussed, it was
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noted that due to the connection with Royal Mail and their Section of the
RMPP it allowed Post Office to have access to funds and investment
managers that would normally be excluded for pension schemes the size of
the Post Office Section of the RMPP. However, it was noted that the overall
governance costs for such a complicated investment strategy could
become prohibitive in the future.
It was agreed that VH would draft a note to Joanna Matthews detailing the
ACTION: VH meeting’s discussions and outcomes and initially forward it to CD for
review. The letter would be copied to IM/CH and all meeting attendees
when sent to Joanna Matthews.
TG and RM left the meeting
PC 14/21 MINUTES OF PREVIOUS MEETING AND MATTERS ARISING
The minutes of the meeting held on 5 March 2014 were approved for
signature by VH.
The actions list as at June 2014 was noted.
PC 14/22 COMMITTEE TERMS OF REFERENCE
The Committee received a proposal to revise its Terms of Reference
(TOR). AL advised that the Board had reviewed the TOR of all
committees, and the Pensions Committee had been asked to reconsider
its delegated authority within the TOR.
The Committee discussed the proposed level of delegated authority. NH
advised that the mind-set of the Business was to delegate authority
wherever appropriate and that he considered the Committee should have
confidence in the Business’ Pensions team and be able to make the
decisions and Board recommendations as proposed in the new delegated
authorities
The Committee agreed the revised TOR as set out in the paper for
recommendation to the Board.
PC 14/23 DEFINED CONTRIBUTION PENSION ARRANGEMENTS — SETTING OF
PRINCIPLES AND ASSUMPTIONS,
The Committee received a report on the proposed principles and
assumptions for the new Defined Contribution Pension Plan.
The Committee discussed the paper and the different types of
arrangements available. It was noted that the key assumption for cost
efficiencies should be balanced with that of a good member experience.
The importance of ensuring that all employees were helped to understand
the benefits of the new pension arrangement and how their investment
worked was highlighted. NW advised that one of the criteria a new provider
will be measured on is their online resources to provide this kind of
education. HS also reported that Post Office has been working on a
pensions’ educational programme that will be provided to all employees.
It was noted that currently the unions were not formally aware of the
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possibility of a new Defined Contribution pension arrangement.
The Committee tested the proposed timescale which looked challenging.
NW reported that the Pensions Team has already engaged with the IT
project team as the system changes were the area of most concern. NH
ACTION: NW asked NW to review internal resources to ensure there was sufficient
ACTION: NH budget/headcount to implement the new scheme. NH would raise the
visibility of the project with David Ryan, Business Transformation Director,
and at the Business Transformation Committee.
It was noted that ad-hoc Pension Committee meetings would be required
ACTION: GC for decisions on the type of Scheme wie 21 July 2014, and Pension
. Provider w/c 15 December 2014, which GC would organise.
ACTION: NW NW would provide regular updates at future Committee meetings.
The Committee expressed concern of the risk of no pension arrangement
being in place by 1 April 2015. HS stated that Post Office would be able to
continue in the RMDCP if no arrangement was in place. However there
would be a cost associated with remaining in the RMDCP as Royal Mail are
intending to change the default contribution level for new members of the
RMDCP. Post Office would have to make the same change if they
continued to participate. An employee salary sacrifice option was
discussed, NW stated that this option was yet to be agreed by the
Business, but once agreed the project would run concurrently with the
introduction of the new pension arrangement as it would provide cost
efficiencies.
The Committee was advised that NH was the Executive Committee (ExCo)
sponsor for the project, and that a paper was being submitted to ExCo for
information on 8 July 2014.
The Committee:-
(i) Agreed the principles and assumptions for the new Defined
Contribution Pension Plan as outlined in the paper noting the
discussion on key principles; and
(ii) Noted the timescales outlined in Appendix 1 to the paper.
PC 14/24 DEFINED CONTRIBUTION PENSION ARRANGEMENTS — SELECTION
OF PENSIONS ADVISER
The Committee noted the update on the appointment of Mazars to advise
the Post Office on selecting a new pension provider and to assist with the
setting up of a new Defined Contribution Pension Plan.
PC 14/25 PROFESSIONAL FEES UPDATE
The Committee noted the professional fees incurred to date for the
Scheme, and discussed the proposed fees for the next six months.
The Committee asked Sarah Hall to ensure that the Plan was getting value
for money on fees.
It was agreed that the fees proposed in the paper be approved.
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PC 14/27
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NEXT MEETING
It was noted that the next Pensions Committee meeting would be held on 8
October 2014 at 148 Old Street starting at 10am.
CLOSE
There being no further business, the meeting was declared closed.
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PC 14/28-14/32 POST OFFICE LTD
PENSIONS SUB-COMMITTEE
Minutes of a meeting of the Pensions Sub-Committee of the Board
held at 148 Old Street, London EC1V 9HQ on Tuesday 22 July 2014
Present: Virginia Holmes (VH) Chair
Chris Day (CD) CFO
In Attendance: Neil Hayward (NH) Group People Director
Natasha Wilson (NW) Head of Reward and Pensions
Keith Murdoch (KM) Head of Reward and Pensions designate
Harpreet Singh (HS) Pensions Manager
Phil Daniels (PD) Senior Client Manager, Mazars (part
PC14/30-32)
Howard Finch (HF) Director, Mazars (part PC14/30-32)
David Baker (DB) Chief Investment Officer, Mazars (part
PC14/30-32)
Alwen Lyons (AL) Company Secretary
Gill Catcheside (GC) Secretariat
PC 14/28 OPENING OF MEETING
A quorum being present, VH opened the meeting.
PC 14/29 COMMUNICATION WITH JOANNA MATTHEWS
VH advised that the letter sent to Joanna Matthews, following the Pensions
Committee meeting held on 25 June detailing the meeting’s discussions
and outcomes, had been well received. It was noted that VH had been
invited to attend the ISC meetings as well as CD. HS reported that the
IWG meetings were becoming more informative, and that the quality of the
information being received was improving.
The Committee was encouraged to note that the development of more
formal channels of communication was resulting in a higher standard of
information being provided to the Post Office.
PC 14/30 DEFINED CONTRIBUTION PENSION ARRANGEMENTS - SUMMARY
RECOMMENDATIONS ON PENSION TYPE SUITABILITY
The Committee received a report containing summary recommendations on
Pension Type Suitability for a new Defined Contribution Pension
Arrangement, together with a Defined Contribution Pension Scheme
Assessment Report.
NW advised that Mazars had been chosen as the Pensions Adviser
following a formal procurement process, in which they had prevailed on
both quality and quantity of work at considerably lower fees.
It was noted that Mazars had recommended the setting up of a Group
Personal Pension Plan (GPPP). The Committee asked that whichever type
of plan was agreed upon it took into consideration both employer and
employees’ needs.
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HF, DB and PD of Mazars joined the meeting.
The different types of Defined Contribution (DC) schemes, Master Trusts,
GPPP, and Occupational DC arrangements were discussed and HF
provided an overview of what was happening in the marketplace and the
impact of auto-enrolment. It was noted that a move to contract based
schemes (GPPPs), with no formal requirements for Trustees/governance
structures, was currently the most popular choice for companies. HF
advised that should Post Office wish to be involved in the governance of the
new arrangement this could be fulfilled through the Pensions Committee.
HF explained that contract based scheme providers were investing in
technology to be able to improve their offering for online access and
administration. This improvement would be beneficial to Post Office as it
geared up for auto-enrolment responsibilities in 2017. It was noted that
online access was a way of getting members more engaged with their
pension arrangements with the availability of webinars and provider intranet
sites that were easy to use.
PD outlined the reasoning behind the recommendation for a GPPP. It was
noted that GPPPs give more flexibility with setting contribution rates, allow
for the introduction of salary sacrifice schemes, greater investment choice,
and can be more flexible when it comes to taking retirement benefits. PD
advised that the flexibility enhanced the feeling that individuals had more
responsibility and control over their own pension.
The Committee discussed the benefits of a GPPP from an employee
perspective. HF highlighted that the concept of a GPPP was a long term
saving plan, which was portable (not linked to a particular employer) and
offered flexible retirement benefits (accessible between the ages of 55-75).
Online access would empower individuals with the ability to access
resources to increase their pensions knowledge and access to learning
material that would enable the member to understand their investment
choices.
It was reported that Master Trusts and Occupational DCs were not portable
and individuals could not continue to make contributions once they had left
employment.
HF advised the Committee that the current GPPP market was competitive
and that, with the potential transfer value, Mazars could negotiate very
good terms, with at least the same if not lower Annual Management Charge
(AMC) than currently charged by Zurich.
It was noted that the transfer from an Occupational DC to a GPPP was a
member choice and the assets could not be automatically be transferred to
the new arrangement, member consent would be required. HF
recommended that a communications programme be carried out to enable
individuals to make this decision. It was noted that financial advice could
not be given, but members would be given detailed information, including a
comparison of the existing and proposed arrangements, on which to be
able to make an informed choice. Members would be given around 3-4
months to make a decision and would need to submit a written request to
transfer.
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PD stated that providers of GPPP would price new arrangements on an
expected transfer rate of 50-65%.
The Committee discussed the transfer process and whether there would be
one bulk transfer or a series of smaller transfers. The Committee also
discussed the possible exposure to market risk. It was agreed that the
criteria for transfers should be included in the tender document and that out
of market risk was minimised.
AMCs for internal and external funds, passively or actively managed, were
discussed. Investment strategy with regards to life styling and target date
funds were also discussed. DB advised that investment platforms with
target date funds were limited. However, as long as a lifestyle strategy had
a number of small steps over a number of years the strategy could be
similar to target dated funds and achieve something similar, although this
could increase the costs.
It was a noted that with a GPPP alternative default investment plans could
be offered with descriptions of what the fund covered and who it might be
suitable for. More complex investment choices would not be included in
standard literature but would be available on request.
The level of communication with plan members was discussed. PD
highlighted that GPPP providers have to provide an annual statement and
suggested that providing an annual communication to members at the
same time explaining their statement would be useful.
The Committee reviewed the Governance structure required for a GPPP. It
was noted that the employer would need to retain a degree of control to
ensure that employees did not feel discarded. This would be considered as
part of the implementation planning process.
HF advised that Master Trusts were popular mainly due to low
charges/fixed AMC and were set up by employers who had been required
to provide a pension arrangement for its employees under auto-enrolment.
However, Master Trusts were generally of a fixed design and could have
Rules that are not beneficial to Post Office, for example they may prohibit
transfers in or out.
The Committee discussed the current approach of The Pensions Regulator
(TPR) to GPPP. It was noted that as a general principle the TPR was
encouraging better governance practice, similar to the Code of Practice set
for Occupational Trust based DC arrangements.
The potential risks involved with moving away from the RMDCP to a new
DC arrangement were noted.
Mazars’s DC Pension Scheme Assessment Report was noted.
The Committee agreed that Post Office should proceed with the setting up
of a GPPP arrangement for employees.
PC14/31 NEXT MEETING
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It was noted that the next Pensions Committee meeting would be held on 8
October 2014 at 148 Old Street starting at 10am.
CLOSE
There being no further business, the meeting was declared closed.
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POST OFFICE LIMITED BOARD
Status Report
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No. I REFERENCE ACTION BY WHOM STATUS
TEE iii
ta I May 2014 Draft necessary amendments to the Remuneration Commtiee Terms Company Secretary In progress
POLB 14/65(f) I of Reference to enable it to make recommendations to the Post Office
Board on appointments to the POMs Board.
1b I May 2014 Deliver a separate and accurate P&L account and balance sheet for I CFO In progress, subject to
POLB 14/69(e) I the Supply Chain Business. management review in October
qe I July 2014 The Board to be updated on the progress being made on: channel I David Ryan/Martin Update: September Board - for
POLB 14/89(c) I extension; mails; Business Transformation and People at the I George/Neil FS, BT & Mails
September meeting. Hayward October Board — for People
4d I July 2014 Consider using POAC to input into the debate as to how the Public I David Ryan UPDATE PROVIDED
POLB 14/89(j) I Purpose could relate to the different operating companies. UPDATE
17/9114: The programme communication and _ stakeholder
management plan will solicit views from a range of stakeholder
groups (including POCA) to build support and commitment for
the changes being proposed as we move to implementation.
te I July 2014 An update on the Business Transformation work to go to the I David September Board
POLB 14/89(n) I September Board. An early draft of this update should be shared with I Ryan/Company
Board members, with the offer of individual or group sessions to I Secretary
discuss the detail before the Board.
tT 2 Risk a lL lL
2a I July 2014 Make decisions as to the areas in which the assurance and risk I General Counsel/ PV will provide a risk update at
POLB 14/90(f) I framework would need bolstering in light of the results of PwC’s initial I Neil Hayward/ October Board
report. Company Secretary
2b I July 2014 Consider the Business’s top 3 or 4 risk and assurance priorities I General Counsel October ARC and Board
POLB 14/90(g)
categorised by reference to the lessons learned from the Kelly Report
and the headings Culture, Capability and Governance. Priorities are
anticipated to include risk appetite, training and formal clarity over
Status Report at 18 September 2014
Alwen Lyons
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delegated authorities and decision making.
2c
July 2014
POLB 14/90(h)
The ARC to review the Risk Management framework. UPDATE
17/9/14: Presenting to the Sept RCC. An adapted framework to
meet the changing requirements of the business with a view to
deploying by Dec 2014. This will be discussed at Oct ARC.
General Counsel
To Oct ARC.
3. Finane
i
July 2014
POLB 14/92(d)
Provide a note on the lessons learned from the lower customer
numbers and higher broadband usage under the new telephony
contract after the Risk & Compliance Committee has considered the
issue.
UPDATE 17/9/14 The original assumptions on broadband usage
were based upon using historical data, and did not account for
rapidly changing consumer behaviour. Broadband usage has
increased exponentially due to increased consumption of
streaming video including I player and You Tube, as a
consequence the usage triggered from the lower charging band
to the next highest. There was some evidence that this would
occur during last year's budget process, but it was not clear-cut,
and as a result a more optimistic projection was used.
In terms of customer numbers, the assumption was that the
migration would be smooth with little or no customer experience
problems. As a result the budget assumed, stable churn, and
continued sales growth through the branch network. In reality the
migration, and call centre volume issues, not only generated
higher churn, but more importantly reduced confidence within the
branch network resulting in a substantial drop in new business
sales. The fundamental lesson to be learned is to estimate
realistic volume assumptions and have a disaster recover plan in
place.
The common factor in both these assumptions was an over
optimistic budget view of the complexities of change within the
business.
Martin George
UPDATE PROVIDED
Status Report at 18 September 2014 Alwen Lyons
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3b I July 2014 Increase the cost reduction target to mitigate the £15m revenue gap I CFO/Company Action to adjust cost reduction
POLB 14/92(e) I and provide a full update at the September Board, inviting Martin I Secretary targets for top line
George, Nick Kennett and Kevin Gilliland into the Board for the debate. underperformance ongoing — see
Financial Performance update.
3c I July 2014 Look at the accuracy of the cash flow forecasting. CFO In progress
POLB 14/92(g) I
(2 (Sense a a 1 I
4a I April 2014 Provide more detail of the financial impacts of the proposed model for I Nick Kennett This will be covered in a paper to
POLB 14/49(b) I Project Titan. the Board/FS Sub-Committee to
Q3
4b I May 2014 The Business to submit a further paper in Q3 2014-2015 for I Nick Kennett This will be covered in a paper to
POLB 14/65(k) I ratification, prior to any market launch of the MGA services. the Board/FS Sub-Committee to
Q3
oo (6. Miscellaneous - I Co 7 oo _
5a_I April 2014 CFO to share the outcome of the Phomean Reuter report (on the I CFO The business’ commercial
POLB 14/51(e) I current position and a proposed approach to the Business’ relationship response to the Thomson Reuters
with the Co-operative Group) and the actions he decides to take with report will be taken to the next
Alasdair Marnoch, Chairman of the Audit Committee and the General ARC meeting.
Counsel.
5b I May 2014 An update note to be sent to the Board once the Facilities I CFO Awaiting final completion of the
POLB 14/71(b) I Management and Grapevine contracts were signed. Grapevine contract, after which a
confirmation note will be provided
to the Board.
5c I May 2014 Ascertain if the BBC Documentary broadcast could be timed for after I Mark Davies The documentary will not be
POLB 14/76(e) I the election. broadcast during purdah
5d I July 2014 Richard Callard to discuss with Jo Swinson her attendance at a future I Richard Callard Arrangements are being made for
POLB 14/93(a) I POAC meeting. Jo Swinson to attend the March
meeting.
5i July 2014 Arrange a cyber-security guest speaker to attend a future Board I Company Secretary I Arrangements are being made for
POLB meeting. a speaker to attend the November
14/101(c) meeting.
5j July 2014 A Board meeting to be held at the Post Office Design Lab at the I Company November Board
POLB Southbank University. Secretary/Martin
14/101(d) George
Status Report at 18 September 2014
Alwen Lyons
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POST OFFICE LTD BOARD
SME Proposition Strategy Update
1. Purpose
The purpose of this paper is to:
1.1. Update the Board on progress since June.
1.2 Provide timelines for delivery and content for November Board.
2. Background
21 Post Office has an estimated 2 million (40% of total market) SME's visiting the
branch network on a weekly basis and this customer group contribute 15% of
total revenue.
2.2 SME revenue is primarily driven through mails services, though limited customer
data is held due to the proportion of these customers registering for Drop & Go.
2.3 Other products and services are available for SME’s but have not historically
been launched based on customer/market need. As a result, Post Office does
not have a cohesive and relevant proposition for this market and are not
currently seen as a credible business services provider.
24 Given the size of opportunity and scope that Post Office has to win in this
market, a project was started in May consisting of four phases and follows a
proven and highly iterative framework to confidently deliver a proposition set;
based on customer needs, market opportunity, internal/partner capability and
commercial value.
25 In June we presented to the Board a hypothesis for our SME strategy based on
early stage insight along with the forecast commercial value for this segment
from 2014 - 2020.
3. Activities/Current Situation
3.1 The process we are following is highly iterative, keeping the customer at the
heart of our development. Below is a summary of the four phases of the project,
associated timings and what has been completed to date -
3.2 Phase 1 (complete) — the aim of this phase is to segment the SME market and
understand who our target market is, gather customer and market insight and
identify prioritised opportunities for the Post Office. Outputs of this phase are
detailed below and within the attached executive summary deck:
e Weill be targeting micro-businesses (<10 employees)
¢ Specifically focus on start-up, lifestyle and growth segments, with a
particular focus on the e-commerce vertical
e High level insight told us that SME’s do not see the Post Office as a
credible business service provider and that we must focus on getting our
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core mails offering fit for purpose before being considered for wider
products and services, meaning that pricing, engagement, acquisition
and servicing in mails must be the focus for 2014/15
¢ This will give us the platform and portfolio of customers to credibly deliver
a Financial Services proposition to the market
¢ Based on depth interviews with SME’s, market opportunity and internal
ideation, Mails and Financial Services were the areas prioritised
3.3 Phase 2 (complete) — The aim of this phase is to deep dive on the opportunity
areas (mails and FS), validating them from a customer and commercial
perspective and identifying concepts that can be tested with customers.
Components of this phase are detailed below:
Deep dive customer research on mails and FS with over 30 SME's
Proposition co-creation sessions with over 20 SME’s
Identify commercial opportunity for each area
Generate ideas and testing with customers to inform proposition design
Completion date — 12" September (debrief to follow)
eevee
3.4. Phase 3 — this phase will explore the concepts identified further, to design the
proposition features and benefits, define the customer experience and build a
business case. Outputs of this phase are detailed below:
¢ Stretch and build initial concepts and convert them to a detailed
proposition set in collaboration with Bank of Ireland and Royal Mail
e Bring the proposition to life through customer experience design
¢ Deliver a working prototype of the propositions using a combination of
visual storyboards, clickable wireframes and collateral mock ups to test
with customers
¢ Identify commercial implications and capability gaps (internally and
partners)
e Build a business case and identify cost drivers
¢ Completion date — 3" October
3.5 Phase 4 — this phase will build a more detailed prototype to validate with
customers, produce a detailed go to market plan and detailed business case
outlining investment requirements. Outputs of this phase are detailed below:
Identification of minimal viable proposition and detailed roll out plan
Go to market plan and implementation roadmap
Defined customer marketing, channel and distribution strategies
Fully functioning prototypes for the user experience and user interface
which will be fully tested and enhanced through multiple rounds of
customer testing in collaboration with Bank of Ireland and Royal Mail
e« 5 year commercial case, including investment requirements
e Project completion date — 31° October
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Commercial Impact/Costs
44 The proposition framework used for this project will be embedded into the Post
Office, removing the need to work with an external consultancy firm on future
proposition development and avoid any associated costs.
4.2 Detailed commercial impact and development costs will be determined through
the process and will form part of the final output at the end of October.
Key Risks/Mitigation
5.1 To be determined through the process and detailed in final output.
Recommendations & Next Steps
6.1. The SME proposition strategy work will be presented at the November Board
session for final approval.
6.2 The presentation in November will clearly articulate the SME proposition
strategy, the 5 year commercial impact, risks and dependencies, go to market
plan, delivery roadmap and fully functioning prototypes to bring the propositions
to life.
Martin George
3" September 2014
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POST OFFICE LTD BOARD
Digital update - September 2014
1. Purpose
1.1 The purpose of this paper is to give a brief update on progress against the digital
initiatives shared at the June board meeting.
2. Summary
2.1 Common Digital Platform: All activities aligned to ebusiness/RMG separation
on track.
2.2 Digital trials in support of branch of the future concepts mobilising Sept/Oct.
2.3 Design Lab at Southbank University opened.
24 Digital strategy work being scoped to align with key business transformation
programmes.
3. Activities completed
Update on key initiatives completed
Initiative Status Next steps
CDP Release 2 — Integration of I Completed in July. N/A
new content management
system. Delivery of core
architecture. CDP elements of
mails online.
CDP Release 3 - Full, Completed in August. N/A
production ready platform
released.
Southbank University Design I Opened in July and hosting I Fully operationalise Design
Lab stakeholders including Lab to act as working
Board members, ExCo, prototype branch of the
BIS, business teams. future.
4. Activities/Current Situation
Update on key initiatives in progress.
Initiative Status Next steps
Mails Online / Click and Drop I Final changes being made__I Soft launch to model office
from further customer Sept 15. Live to customers
testing. Oct, subject to Royal Mail
agreement.
CDP Release 3.1 - Separation I On track for go live Completion of testing and
of Rod Fishing Licences. 08/10/2014. business readiness steps.
Digital update - Sept 2014 Martin George Page 1 of 2 16 Sept '14
Confidential
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CDP Release 4 - Use of
www.postoffice.co.uk on the
Accenture platform before final
separation date from Royal
Mail.
Agreed with Royal Mail and
on track for delivery as part
of CDP Release 4 at end
October.
Joint management by Post
Office/Royal Mail
Separation team to engage
Capgemini and Accenture
to implement.
CDP Release 4 -
redevelopment and rehosting
of Post Office content and
standalone website tools on
CDP.
Content migration on track.
Completion of development
ready for testing.
Completion of business
readiness plan ready for go
live.
CDP Release 4 -
redevelopment and rehosting
of Branch Finder on Accenture
platform.
Development on track.
Some challenges re. fixing
issues with existing
implementation.
Assessment of underlying
data structures to ensure
accurate opening hours can
be displayed.
Wi-fi in branches
Installation of Wi-Fi
capability completed across
17 branches. Not yet live to
customers.
Customer facing Wi-Fi live
by early October.
Agree additional 8 locations
(including Supply Chain).
In branch queue management
Trail to be limited to Hitchin
branch in first instance.
Implement into Hitchin by
mid-October.
Network Development
Prototyping under way to
support extension and new
access points.
Working prototype due end
September.
New Initiatives
Status
Next steps
Completion of digital/omni-
channel strategy
Replanning to ensure
alignment with Business
Transformation and
Network development work
streams and mobilise late
September.
Align with Business
Transformation and
Network development work
streams and mobilise late
September.
Website and product
application optimisation
Proposals being put
together to improve
conversion rates of online
application forms
Target to begin work mid-
late September to drive in
year benefit.
Queue Sensing in-branch (2
suppliers)
Proposals currently being
agreed
Install into 20 branches by
end of October
5. Recommendation
5.1 No approvals needed.
5.2
Digital update - Sept 2014
A full update will be given at November board
Martin George
Page 2 of 2
Martin George
16 September 2014
16 Sept '14
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1b. 1A Aut Action Status Report Summary as at August 31st 2014 xix
Overall Summ: 31st 2014
Teta actions outstanding bid asa 30 June 2046 a i a! sare a aS te
Tnplomented by hg to August ote oO © 8 6 Po aliaad ennui ness arian
Actions added (audits and advisory) 18 1 W 3
Sipoceccedonendes a 5 Ther Abiey wot concent ced
Heider
<a > I
Carried Forward as at August 31st ‘Afull report will be provided as normal for the ARC.
‘Analysis of Carried forward
° i -yetto start ° [AS REPORTED AT THE JULY BOARD SUMMARY: - All of the red iter
rr ern poe woe ad aeRO Renan EE
Sere
Trends
Reported Implementations - total per reporting period
Reported
Implementations Total Red Amber Greer
apqqt
i
B aces
Banna
& to%e
gos
Implementation rates are steady with previous period which reflects
‘that most A work has been focused on ongoing higher rik projet
ssssurance work.
Dina Sora NW ROM Maat Mayaetd ayn
‘Month implemented
verde as at Total Red Amber
Sawat9 ar
‘Audit Actions - Overdues - Trending by month sae t3 woof :
Doren te Bb oT ox
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——r Soasm'a 6 8» ‘
© 7 rear) my o8 0
ares Note ir
ACTIONS HAVE Thea recommendstion sl etans he ORIGINAL agst
amber BEEN REBASED date sothat the busnes is fll aware stil aware the rks
wir New dentin the audit and these are sii pce.
TARGET DATES
© Green LATE 2014 and Most of these are in the following areas:
into 2015 to reflect LAN and deny Access Management -revsed dates Sept 1410
Tene mn mor ‘changes in March3s
= ‘expected SoftarsLensing ems presented but not considered
implementations compete enouhet for iA dose Management apreed 0
of towers finale. The Governance and Controle Manager ine the
basins in i 201, T have transeted ownership to senior
rember ofthe I tea.
5 IMPLEMENTATIONS in ul August 2004
[Main implementations were; More formalised review of FX
forecast accuracy by Treasury, review of banking tokens and pin
ads by Treasury, completion of various governance actions by
the FR project team as part ofthe new Finance sytem,
Improved testing ofthe contol in User Acceptance Testing
Age oats Dee-13 Fep-14 pear) unt rears
Implementations since Juy 2013,
Implementations achieved (from June 2013)
Tota
Implemenied §—inlog
Rs ated 2 1%
‘Amber Rated BR
Green rated 27%
Tota to date m 1%
1A logs the total actions agreed with the business and tracks
Limplementations since the final
transition from Royal Mail Ain June 2013
‘The total implementation ates above TOK forthe second
successive period which in ine with expectations.
September 2014
Strictly Confidential
POST OFFICE LIMITED MATTERS — DISPUTE RESOLUTION
PRIVILEGED AND CONFIDENTIAL — CLAIMS OVER £500K OR THOSE OF A SENSITIVE NATURE
PART (A) - CIVIL LITIGATION
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FON
CONTACT
Horizon claims POL/RW Belinda Crowe /IPOL has received various claims from I This matter will be the subject of a separate I Bond Dickinson
(aka “Project Angela van den I subpostmasters (SPMs) alleging defects in the I update to ExCo
Sparrow’) Bogerd Horizon system and POL's internal processes.
These allegations were initially made in 5
claims brought through solicitors Shoosmiths.
Similar allegations have been made by the
“Justice for Subpostmasters Alliance” (JFSA)
and advanced through SPMs' MPs.
Following discussions with James Arbuthnot
MP and JFSA, independent investigator Second
Sight Support Services Ltd (Second Sight) was
appointed in July 2012 to carry out a review
into these allegations.
On 08.07.13, Second Sight published a Report
finding shortcomings in POL's internal training
and support to SPMs on the Horizon system,
but no systemic problems with Horizon itself.
Following the Second Sight Report, on
27.08.13 POL launched a Mediation Scheme
(Scheme) aimed at resolving _ individual
complaints made about Horizon.
The Scheme received 150 applications,
which are being progressed under the
direction of a Working Group comprising
retired Court of Appeal Judge Sir Anthony
Hooper (as Chair), POL, Second Sight, and
JFSA.
Mediations have now been held for the first
three applications. The POL project team
continue to handle the applications in line
with the Board's direction to take a firmer
position, informed by its legal position and
tighter control over timescales and costs.
To date, no claim has been made against
POL in the civil courts, and no appeal has
been made against any conviction in the
criminal courts, following Second Sight's
Report.
Significant Litigation Report
Page 1 of 3
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Strictly Confidential
Employment POL/NM Colin Stretch Employment Tribunal has held a sub- I A former SPM has brought a whistleblowing I Eversheds.
postmaster to be an ‘employee’ at a I and unfair dismissal claim against POL.
Preliminary Hearing.
On 17.06.14, the Tribunal held that the SPM
was an employee of POL between 24.08.12
and 12.07.13, even though she had signed a
Temporary Sub-Postmaster (T-SPM)
Contract.
The Tribunal's finding can be confined to the
specific facts of this case, in particular to
specific pre-contract oral negotiations,
without which the Tribunal acknowledges
there would be no employment relationship.
As an “employee”, the SPM can now
continue with her claim that POL dismissed
her for whistleblowing. The Tribunal has not
yet determined whether or not the SPM was.
in fact unfairly dismissed. POL’s position is
that her T-SPM Contract was properly
terminated because of substantial rent
arrears.
External Counsel Eversheds are representing
POL at the substantive Tribunal Hearing
currently listed for November. In the
interim, Eversheds has been instructed to try
to settle the matter, however POL’s financial
offers (the latest being £15,000) have so far
been rejected
The SPM is active on social media and has
been making comments about the litigation
Significant Litigation Report
Page 2 of 3
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Strictly Confidential
This is being monitored and POL’s
Communications team is engaged.
Employment POL/NM Colin Stretch In addition to the claim noted above, there are I Significant claims continue to be monitored I Weightmans
two claims against POL proceeding before the I (both internally and with external counsel)
Employment Tribunals. Claims allege unfair I and risk assessed as they progress.
dismissal and disability discrimination.
POL’s Communications team is engaged in
The cases are being considered by External I the event these claims are of interest to the
Counsel and have yet to be valued. media.
PART (B) - CRIMINAL LITIGATION
PROSECUTION CASES
There are number of cases which could have been prosecuted (e.g. those with full and frank admissions to theft /fraud), but prosecutions were not
commenced to avoid adverse judicial comment.
Several cases have also been terminated while POL obtains an independent expert report on the Horizon branch accounting system (see below).
There are currently 14 cases which are being kept under review as to whether a prosecution (supported by an expert report) can be commenced.
EXPERT REPORT
New experts from Imperial College London have prepared a scope of work on which formal instructions and a protocol for requesting and receiving
information will be based
Appropriate individual confidentiality agreements will be prepared for both for the experts and POL employees involved in preparing the report.
It is envisaged that meeting/s to progress the report will take place with the experts, POL and Fujitsu in September and October 2014.
PROSECUTION POLICY
Former First Senior Treasury Counsel Brian Altman QC has drafted a proposed prosecution policy for POL.
Comments from POL stakeholders will now be sent to Brian Altman for review.
Significant Litigation Report Page 3 of 3
Confidential
POST OFFICE LTD BOARD
Health & Safety Report
1. Purpose
The purpose of this paper is to:
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-1 Provide an update on safety performance.
1.2 Outline risk reduction activities.
2. Current Situation
2.1 The majority of accidents fall into three main categories lifting and handling,
stepping and striking and outdoor falls. These are higher frequency events with, in
the majority, relatively low severity. The lower frequency types of incident can carry
the potential for very high impact, for example, assaults and road traffic collisions.
2.2 All safety KPIs for 2013/14 were met or exceeded for the fifth year running.
Performance during the first four months of 2014/15 indicates that at this early stage
of the year and despite the slight adverse performance in absence accidents and
days lost there is no current cause for concern that further reductions by year end
are achievable and in line with the 5% year on year reduction target.
Table 1 All Injury accidents and those resulting in absence (Cumulative)
300
250
o 200 —+— 2013/14 All
€ 2014/15 All
8 150
3 2013/14 Absence
2 400 2014/18 Absence
50
ot 7
Pi P2 P3 P4 P5 P6 P7 PB PQ P10 P11 P12
Period
2.3 Personal injury compensation claims are falling in line with the reduction in
accidents that result in sick absence. Comparison with a similar retail
organisation indicates that the Post Office claim rate is significantly lower in
both public and employer's liability and of those claims the ‘denial’ or ‘defence’
rate is significantly higher.
2.4 The number of days lost due to accidents is marginally adverse against target
however it is anticipated that the year on year reduction target of 5% will be
achieved. (Table 2 below refers)
Health and Safety Neil Hayward Page 1 of 5
September 2014
Confidential
Table 2 Days lost resulting from injury accidents (Cumulative)
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600
500
400
300
Days
eo 2013/14
ae 2014/15,
200
100
P1 P2 P3 P4 PS P6 P7 P& PO P10 P11 P12
Period
25 The total number of road traffic collisions (RTCs) for the first 4 months is up 19
on last year. While this is of concern it is believed that there continues to be a
more robust approach to the reporting of incidents, irrespective of severity, and
what appears to be an increase in minor damage incidents e.g. broken mirrors
and minor scrapes The number of incidents where the Post Office driver is ‘at
fault’ is also up compared to last year. (Table 3 refers) Road risk reduction
opportunities continue to be the subject of analysis at the Road Risk Forum with
a view to identifying improvement activities in addition to those already in place.
(3.1 below) Reversing incidents are currently a cause for concern and will be
the subject of additional attention. Injuries as a result of road traffic collisions
are extremely infrequent. Road traffic collisions account for less than 3% of the
overall number of injury accidents, however they have the potential for high
impact in terms of injury and loss. Currently the majority of incidents involve low
speed — less than 25mph.
Table 3 Road Traffic Collisions (cumulative)
250
200
$
2 is —+— 2013/14 All
5 2014/15 All
5 2013/14 ‘at fault
a 100
€ 2014/15 ‘at fault
S
= 50
ie)
P1 P2 P3 P4 PS P6 P7 PB PO P10 P1t P12
Period
Health and Safety Neil Hayward Page 2 of 5
September 2014
26
27
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Robberies on Post Office Cash and Valuables in Transit (CViT) crews are down
one on last year from 14 to 13 for the past 4 months. Physical injuries during
robberies, of which there have been 4, 2 more than last year for the same
period, remain relatively minor in severity. The level of use of firearms remains
consistent with last year with 2 of the 13 robberies enabled by the presence
and/or threat of use of fire arms and on no occasions were the firearms
discharged. Support for those affected by robberies is provided by trained
trauma supporters and professional support resources available through the
occupational health service provision. Risk reduction activities are identified at
3.2. (Appendix 1 — Significant Incidents refers)
Robberies and attempted robberies on the Post Office network, for the first four
months, are the same as last year — 29 — just over 62% were successful.
Injuries sustained during robberies are down from 5 to 1. Robberies take place
predominantly at sub post offices leaving Crown branches largely unaffected.
Supporting activities have been introduced to continue to mitigate this risk and
are identified at 3.2. (Appendix 1 — Significant Incidents refers).
3. Activities
3.1
3.2
.
°
.
.
°
.
Road Risk
Current activities to mitigate road risk are:
Road risk forum in place to scope and develop road risk reduction initiatives
and activities with guidance from insurer's risk management division.
Review of policy and guidance for non-operational drivers e.g. business car
drivers to ensure transparent reporting of accidents and driving behaviours
interventions
Analysis and deployment of interventions for reversing incidents to mitigate the
increased incidence rates
Technical accident reduction interventions on new vehicles e.g. Reversing aids
to reduce accidents
Analysis and evaluation of data (e.g. risk profiles) to determine further accident
reduction interventions
Safe driver of the year award to encourage responsible driving
Weekly case conferences to ensure consistent approach to accident
investigation, follow up activity and sharing of best practice
Robbery/Burglary Risk
Current activities to mitigate robbery and burglary risk are:
Active liaison activities with the police and increased police support activity
Liaison with Met. Police on the increase in gun enabled robberies
Introduction of new deterrent technologies e.g. DNA taggant — a solution that
contains a unique identifier that is released automatically in the event of a
robbery, spraying those involved and enabling identification of the individuals
involved in the robberies
Significant reduction in opportunities for duress type robberies linked to the
introduction of single person vehicles
Increased security support visits to Post Offices in ‘hotspot’ areas
Increased use of crime alert communication techniques to Post Offices
Piloting new point of transfer arrangements to reduce exposure
Fogging technology
Safe time locks
Increased use of surveillance vehicles
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September 2014
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« A three month ‘Crime stopper’ campaign in the West Midlands is in place,
aimed at reducing cash in transit robberies
3.3 Health and Wellbeing
Current activities to enhance wellbeing
* Second phase of visits to all Post Office sites to offer and encourage the use of
health check equipment that provides a wide range of indicators on physical
wellbeing. First phase of programme delivered 3681 health checks (Crowns
2486, Admin. 553 and Supply Chain 662). The anonymised data will be used to
develop future health and wellbeing campaigns.
Health and wellbeing ‘Team Talk’ modules
Health and wellbeing poster themed campaigns
Online wellbeing monitoring tool to support health check initiative
Roll out of mental health awareness programme
3.4 Safety
The Post Office occupational health and safety management system (OHSMS)
is certified by external auditors to the standards required by British Standard
OHSAS 18001.
3.5 Asbestos Management
Transfer of the ownership of asbestos management following separation has
led to a programme of actions to ensure that up-to-date surveys are available,
defined responsibilities post-split are clear and that an asbestos management
‘action plan’ is in place to ensure that these issues can be managed effectively
and in line with legislation. Legal Services have been engaged to advise on
responsibilities, particularly in relation to the agency network, and to ensure
arrangements for on-going management of asbestos are robust and risks
mitigated.
4. Residual Risks
44 Driving activities have the potential for high impact/loss and therefore remain as
a significant residual risk. However, the actions identified in 3.1 above are
aimed at mitigating that risk and improving performance.
5. Recommendation
The Board is asked to:
5.1 Note the overall safety performance
5.2 Note the risk reduction activities.
5.3. Note the residual risks
Neil Hayward
September 2014
Health and Safety Neil Hayward Page 4 of 5
September 2014
Confidential
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Appendix 4
Significant Incidents (Period 4)
Crowns and Network
Location Loss Circumstances Physical Injuries I Any further details
Filton SPSO, 2-3 £4,605 Thu 17/7/2014 12:20 Two men armed with a knife None No previous incidents
Church View, Filton, and large sticks entered the PO and forced all 4 staff
BS34 7BT. into the fortress area, using large knives the flip top
till drawers were forced open, all staff ok.
Lower Broughton £5,390 Fri 18/7/2014 10:00. Five men broke in to the rear of I Broken nose There have been four previous
MSPO, 21 Mocha the building, the branch was open and the counter incidents. 1 burglary September
Parade, Manchester, assistant who was working alone was punched and 2011. 3 attempted robberies, CViT
M7 1QE kicked and required medical attention for a broken August 2008, April 2011, branch
nose. Working cash was taken from the counter April 2012.
drawer.
Bloomfield SPSO, £396 Fri 18/07/2014, 20:54. Two males, one armed with a_ I None Three previous incidents, other
323 Beersbridge gun came in and threatened the clerk. She was burglary in March 2006, PO
Road, Belfast, BTS forced to hand over cash which was a mixture of PO attempted robbery in April 2010
5DY and shop money. It is believed there could have been and a retail armed robbery in April
a possible 3rd male outside the branch and they fled 2014.
on bikes.
Supply Chain
Belle Vale SPSO, £25,000 Fri 04/07/2014. Crew member was in the PO when 2 I Bruising
125 Belle Vale male assailants jumped over a wall and ran in to the
Road, Liverpool L25 PO. The Crew member was pushed to the floor and
2PE the cross pavement protection box snatched. Crew
member bruised by the fall.
Health and Safety
Neil Hayward
September 2014
SofS
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POST OFFICE LIMITED BOARD
Sealings 10 July 2014 —- 17 September 2014 inclusive
Register of Sealings
The Directors are invited to consider the seal register and approve the affixing of the Common Seal of the Company to the documents set out against
items numbered 1192 to 1222 inclusive in the seal register.
“The Directors resolve that the affixing of the Common Seal of the Company to the documents set out against items numbered 1192 to 1222 inclusive in
the seal register is hereby confirmed.”
Alwen Lyons
Company Secretary
17 September 2014
Register of Sealings Alwen Lyons Page 1 of 4
17 September 2014
POST OFFICE LIMITED
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Date 5 ., Company Number
17/09/2014 Register of Sealings 2154540
Seal Number I Date of Date of Persons Attesting Destination of
/ File Ref. Sealing Authority Description of Document To Document Document
1192 15/07/2014 14/07/2014 TR1 relating to 38 North Street Taunton TA1 1AB and land _— Gill Catcheside Jean Reynolds
adjoining 38 North Street Taunton TA1 1AB between POL.
and Primeco Limited
1193 15/07/2014 14/07/2014 Deed of Settlement relating to 38 North Street, Taunton, Gill Catcheside Jean Reynolds
TA1 1AB between POL and Primeco Limited i
1194 15/07/2014 14/07/2014 TR1 relating to 12 Quay Street Haverfordwest Dyfed Wales _ Gill Catcheside Jean Reynolds
i SA61_1AA between POL and Primeco Limited
1195 15/07/2014 14/07/2014 Deed of Settlement relating to 12 Quay Street, Haverford Gill Catcheside Jean Reynolds
West, Dyfed, SA61 1AA between POL and Primeco
Limited
1196 15/07/2014 14/07/2014 TR1 relating to land on the south side of St. Loyes Street, Gill Catcheside Jean Reynolds
Bedford now known as 2 Dane Street, Bedford, MK40 1AB
i between POL and Primeco Limited I
1197 15/07/2014 14/07/2014 Deed of Settlement relating to 2 Dane Street, Bedford, Gill Catcheside Jean Reynolds
I I I __MK40_ 1AB between POL and Primeco Limited i i
1198 16/07/2014 16/07/2014 Deed of variation of fulfilment service contract between Alwen Lyons John Willcock
i POL and Bank of Ireland (UK) pic. I
1199 21/07/2014 20/07/2014 Deed of settlement relating to 9 Bridge Street, Newport, Alwen Lyons Jean Reynolds
I Gwent, between POL and Peter John Welborn and Elaine
Miriam Tooke of c/o Knight Frank LLP, 55 Baker Street,
London, W1U 8AN for and on behalf of the landlords,
Hatton Park Properties 1 Limited and Hatton Park
Properties 2 Limited both in administration I
1200 23/07/2014 21/07/2014 Licence to carry out works relating to Units 51-53 Bennett Gill Catcheside Jean Reynolds
Precinct, Longton Exchange, Longton between Cougar
(Longton) Limited in liquidation acting by the Receivers and
POL
1201 25/07/2014 25/07/2014 Licence to carry out works relating to Post Office Ground Alwen Lyons Jean Reynolds
Floor, 15 Carfax, Horsham, West Sussex, RH12 1ER
between Bernard John Mullen and POL
1202 29/07/2014 25/07/2014 Counterpart Licence to Underlet relating to 30 Rectory Alwen Lyons Jean Reynolds
Register of Sealings Alwen Lyons Page 2 of 4
17 September 2014
POST OFFICE LIMITED
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Date 5 ., Company Number
17/09/2014 Register of Sealings 2154540
Seal Number I Date of Date of Persons Attesting Destination of
/ File Ref. Sealing Authority Description of Document To Document Document
Grove, Leigh on Sea, Essex, SS9 2HE between RSJ
i Finance Company Limited, POL and Matthew Fillary
1203 29/07/2014 25/07/2014 Underlease of premises at 30 Rectory Grove, Leigh on Alwen Lyons Jean Reynolds
Sea, Essex, SS9 2HE between POL and Matthew Fillary
1204 29/07/2014 25/07/2014 Rent Deposit Deed relating to premises at 30 Rectory Alwen Lyons Jean Reynolds
Grove, Leigh on Sea, Essex, SS9 2HE
1205 30/07/2014 30/07/2014 Licence to assign premises at The Post Office forming part I Alwen Lyons Jean Reynolds
of the premises known as Cheadle MSPO, 2 Rectory
Gardens, Cheadle, SK8 1BY between POL, Alan White
and Andrew Phipson
1206 30/07/2014 30/07/2014 Rent Deposit Deed relating to premises at The Post Office I Alwen Lyons Jean Reynolds
forming part of the premises known as Cheadle MSPO, 2
Old Rectory Gardens, Cheadle, SK8 1BY between POL
and Andrew Phipson I
1207 01/08/2014 01/08/2014 Licence to make alterations relating to premises known as_ — Alwen Lyons Jean Reynolds
101 East Street, Sudbury, Suffolk between Joyfax
I I Properties Limited and Post Office Limited I
1208 11/08/2014 08/08/2014 Sub-Under Lease between Ritchie Investments Lux SARL Alwen Lyons Jean Reynolds
and POL relating to U% and U6, Princes Mall Shopping
Centre, 3 Waverley Bridge, Edinburgh
1209 11/08/2014 08/08/2014 Lease of Ground Floor and First Floor premises at 3 Alwen Lyons Jean Reynolds
Henley Street, Stratford upon Avon, Warwickshire, CV37
6PT between POL and Toni and Guy North Limited I
1210 13/08/2014 12/08/2014 Counterpart deed of variation relating to Lease of Units 3,4 Alwen Lyons Jean Reynolds
and 5 Cassaton House, 45-48 Fawcett Street, Sunderland
between Halcyon Property Holdings Limited and POL
1211 13/08/2014 12/08/2014 Licence for alterations relating to the Post Office branch Alwen Lyons Jean Reynolds
being part of 67, 69 & 71 Victoria, Grimsby, between
Corncrake Properties Limited, Argos Limited and POL
1212 14/08/2014 14/08/2014 Lease by reference for premises at 79 Hampstead High Alwen Lyons Jean Reynolds
Street, London, NW3 1QL between POL and Seraphine
Register of Sealings Alwen Lyons Page 3 of 4
17 September 2014
POST OFFICE LIMITED
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17 September 2014
Date 5 ., Company Number
17/09/2014 Register of Sealings 2154540
Seal Number I Date of Date of Persons Attesting Destination of
/ File Ref. Sealing Authority Description of Document To Document Document
Limited
1213 18/08/2014 15/08/2014 Licence to Occupy relating to the branch forming part of Alwen Lyons Jean Reynolds
the premises known as Whitechapel DO/MSP/IND/OFF,,
206 Whitechapel Road, London, E1 1AA between Royal
i Mail Estates Limited and POL i
1214 29/08/2014 29/08/2014 Escrow agreement between Royal Mail Group Limited, Alwen Lyons Jean Reynolds
i POL and BNP Paribas
1215 08/09/2014 08/09/2014 Tenancy at Will of premises at Great Portland Street, Piero D'Agostino Jean Reynolds
London between Post Office Limited and LRK Associates
(London) Limited
1216 08/09/2014 08/09/2014 Licence to occupy and carry out works at Andover DO/CO, _ Piero D'Agostino To Jean Reynolds
32 Bridge Street, Andover SP10 1AA between Royal Mail
i Estates Limited and Post Office Limited. I
1217 08/09/2014 08/09/2014 Lease relating to The Post Office and The Market Hall Piero D'Agostino To Jean Reynolds
Building, Market Place, Wells, Somerset BAS 2RA between
I I __ Wells City Council and Post Office Limited. i
1219 11/09/2014 11/09/2014 Agreement for the Provision of Goods and Services Gill Catcheside Jacqueline Scott
relating to Soft FM Services - Lot 1 between Post Office
I Limited and Servest Group Limited. I
1220 11/09/2014 11/09/2014 Agreement for the provision of Services relating to FM Gill Catcheside Jacqueline Scott
Catering Services - Lot 4 between Post Office Limited and
I Servest Group Limited
1221 15/09/2014 15/09/2014 Licence for alterations relating to premises at 33 High Piero D'Agostino Jean Reynolds
Street, Shepperton, TW17 9AB between Cisto Limited,
POL and Tom O'Connor
1222 15/09/2014 15/09/2014 Agreement for the provision of goods and services relating I Piero D'Agostino Jacqueline Scott
to Hard FM Services - Lot 2 between Post Office Limited
and Norland Managed Services Limited
Register of Sealings Alwen Lyons Page 4 of 4
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Confidential
POST OFFICE LTD BOARD MEETING
Delegating authority for software licence purchases — September 2014
1. Purpose
The purpose of this paper is to:
14 Request approval for the Board to delegate its authority to approve software licence
purchases and associated support contracts containing uncapped liability to a group
consisting of the CFO (Chris Day), General Counsel (Chris Aujard) and ClO (Lesley
Sewell).
1.2 Software licence agreements and associated support contracts will be signed by an
authorised signatory under the ‘Post Office Procurement Delegated Authorities’ once
the contract has been approved by the CFO, CIO and General Counsel.
2. Background
2.1 The Board has delegated their authority to enter contractual commitments on its
behalf. This process is managed via the contract approval procedures and the
Contract Approval Form (“CAF”).
2.2 Any contracts with unlimited liabilities for Post Office must be approved by the Post
Office Limited Board.
2.3 It is standard industry practice for software agreements for “off the shelf” proprietary
products from large software vendors, such as Microsoft and SAP, to contain
uncapped liability clauses. Negotiation options with these suppliers are limited.
24 Requesting Board approval for each licence agreement with an uncapped liability will
burden the Board and add limited value, as these are market standard positions. This
will also add time to the process of getting the relevant licences in place.
25 Delays in seeking Board approval may result in cost increases if negotiated discounts
are time boxed by vendors.
26 In separating the software licence estate from Royal Mail Group, there is a large
number of “off the shelf” software licences that will need to be signed in the name of
Post Office Limited. There are 62 known software vendors whose products are in use
and new licence agreements will need to be signed.
27 This recommendation will result in software licence agreements being added to the
current list! of market standard, uncapped liabilities that have been delegated for
approval, as documented in the guideline document that accompanies the CAF.
3. Activities/Current Situation
3.1 Negotiations are currently underway and nearing completion with the large vendors
such as Microsoft, Oracle, SAP and Adobe. Each of their contracts contains, or will
contain either an uncapped liability clause or the contract will be silent as to any cap
on Post Office's liability.
* Category B Contractual Liabilities as documented in the Delegated Authority Guidelines.
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Confidential
Proposal
44 All agreed licence terms and associated support contracts with software vendors are:
¢ reviewed by internal and/or external legal counsel
¢ approved by Post Office Limited ClO, CFO and General Legal Counsel through
the signing of a CAF (including countersignature by Company Secretariat)
¢ signed by an authorised signatory within Post Office Procurement
4.2 Copies of the agreement(s) and CAF will be kept by Company Secretariat and a
summary of the contract(s) signed through this route are sent to Board for noting.
Commercial Impact/Costs
5.1 There is limited commercial impact in delegation of authority. In many instances Post
Office are already using these products through Royal Mail agreements.
Key Risks/Mitigation
6.1 There is a contractual risk that the delegated EXCO members may approve
uncapped liability positions that the Board would view as an unacceptable risk profile.
This is a controlled risk, mitigated through the need to secure the approval of three
nominated EXCO members and reported retrospectively to the Board.
Long term considerations
7.1 Software Asset Management will be implemented and managed via Atos as part of
the transition to the IT Towers. This will allow Post Office to optimise the use of these
assets and minimise risk of future liabilities arising from unlicensed software.
Communications Impact
8.1 There are no communication impacts beyond the IT procurement team who are
already aware of this proposal.
Conclusion
9.1 Delegated authority to approve software licence agreements containing uncapped
liability will not introduce any new material risks to Post Office Limited.
Recommendations
The Board is asked to approve:
10.1 A request to delegate authority to sign software licence agreements containing
uncapped liabilities to the ClO, CFO and General Counsel.
Chris Day/Chris Aujard/Lesley Sewell
16" September 2014
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Strictly Confidential
POST OFFICE LTD BOARD
Authentication of the Post Office Limited Company Seal
1. Purpose
The purpose of this paper is to seek the Board’s approval to revise those persons
with delegated authority to authenticate the fixing of the Company's seal.
2. Current Situation
2.1 The company seal is principally used to execute documents as deeds (most
commonly property documents). The Board receives and confirms the list of
documents executed by the company seal at each Board meeting.
2.2 On 31 October 2013 the Board approved that the affixing of the company seal
may be authenticated by any one of the following: a current Director of the
Company; the Company Secretary; the Assistant Company Secretary; the
General Counsel; and Piero D’Agostino.
3. Proposal
In light of changes to the Business and to meet the Business’ needs going forward, it
is requested that the Assistant Company Secretary is removed from the list of
persons authorised to authenticate the company seal and that the Deputy Company
Secretary is added.
4. Recommendations
The Board is asked to approve that the affixing of the company seal may be
authenticated by any one of the following: a current Director of the Company; the
Company Secretary; the Deputy Company Secretary; the General Counsel; and
Piero D'Agostino.
Alwen Lyons
Company Secretary
September 2014
Company Seals Alwen Lyons 25 September 2014 Page 1 of 1