In Strictest Confidence
POB(O0) Ist
PO0d/1 to 11 POST OFFICE BOARD
Minutes of the meeting held at 148 Old Street
on 11 January 2000
Dr Neville Bain Chairman
John Roberts Chief Executive
Richard Close Group Finance Director
Jerry Cope Group Managing Director Strategy & Business
Development
Mike Kinski Non-Executive Member
John Lloyd Non-Executive Member
Rosemary Thorne Non-Executive Member
Jonathan Evans Secretary
Scott Childes Notes
Richard Dykes, Group Managing Director, Mails Services
Stuart Sweetman, Group Managing Director, Customer and Banking Services.
Kevin Williams, Group Managing Director, Distribution Services
Others attending: Robert Bishopp, Director Regulation, for POOO/6
Duncan Hine, Director Technology and Information
Systems, for POOO/7
Graham Cater, Director Group Personnel, for POO0/8
APOLOGIES Miles Templeman was unable to attend
SIR CHRISTOPHER It was with deep regret that the Board
HARDING noted the untimely death of Sir Christopher Harding,
who had served as a Board Member from 1993 until
4998, The Chairman, on behalf of the Board, had sent
a letter of condolence to Lady Harding
SCOTT CHILDES The Board paid tribute to the major contribution to the
efficient running of the Board made by Scott Childes
over the past 10 years. Scott was soon to move to
work with the Regulation Department on handling the
Postal Services Bill, and the Board wished him well for
the future
MINUTES OF POOO/
PREVIOUS MEETING
The Board approved the minutes and separate record
of proceedings of its meeting of 30 November 1999.
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The Board noted the matters arising from its meeting
held on 30 November 1999. No response had been
received from Ernst & Young to Rosemary Thorne and
Richard Close’s letter with regard to the reporting of
exceptional items in the half year accounts.
The PIU Study was due to report in March 2000.
POQOD/03
Alan Johnson MP, the Minister with responsibility for
The Post Office, was attending for the final thirty
minutes of the meeting. The Chairman intended to
raise the following issues with him:
¢ Postal Services Bill and timescale
¢ Industrial relations and WAND
* Horizon and the PIU
PO00/04
Performance. Income pressure in Royal Mail and profit
pressure in Parcelforce made achievement of the
£350m profit target difficult.
Envision. The performance of Envision, who
administered the BBC licensing contract, was of
concern with the forecast number of licences sold not
matching business plan expectations.
Given the current poor performance The Board called
for a review of future prospects for Envision at the
March meeting;
Industrial Relations. A revised agreement on the ‘Way
Forward’ had been agreed with the CWU Executive
Committee and a ballot of CWU members would be
held between 19 January and 7 February.
The revised agreement included a higher level of basic
pay, the retention of a Drivers’ allowance, enhanced
pay rates for Scheduled Attendance and the first 10
hours of overtime Monday to Saturday.
The importance of the deal had been stressed to the
CWU Executive and a joint communications campaign
would re-emphasise this to CWU members. Should the
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deal be rejected further discussions would not be held
and alternative ways of achieving improvements would
have to be sought.
Noted further that
South West Trains (SWT) had taken the unusual step
of implementing a pay award, with the agreement of
ASLEF and the TUC, although this was after the
members themselves had rejected the deal, This had
proved successful for SWT and restored the credibility
of the union in the eyes of its members.
It was questionable whether a similar approach could
work with an agreement that had many separate
elements and required the commitment of employees
to be successful. An alternative approach was
implementation on a regional basis which would isolate
those areas which rejected the deal. The Board would
need to consider regional implementation before it was
progressed.
Parcelforce had still to conclude its September 1999
pay award with CWU employees. The vulnerable
financial position and commercial difficulties facing the
business would be stressed to the CWU Executive
Committee although encouragingly both the General
Secretary and his Deputy appeared to recognise the
constraints within which Parcelforce had to operate and
were willing to consider innovative ways of working.
Industrial disruption over Christmas and the New Year
had badly affected customers in Fulham and Putney.
Putney had for a long period of time been a problem
area with the workforce being particularly disruptive
and the dispute had arisen as they’d refused to work
rostered Scheduled Attendances, Against the wishes of
staff additional resource was to be introduced into the
office and local management strengthened. The
dispute at Fulham had been over accommodation
issues and management assurances to deal with
employees issues had resulted in staff returning to
work. It was important that these reassurances were
acted upon.
Christmas. Royal Mail traffic had increased by 5.5%
over the previous year but disappointingly stamped and
metered mail had only increased by 2%.
Encouragingly, staff hours had only increased by 0.3%
over the same period as last year. However the overall
position fell short of forecast;
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Action
Stuart Sweetman
Richard Close
Richard Dykes
FINANCIAL OVERVIEW
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Parcelforce had achieved growth of 14% over the
previous year and “next day” volumes had increased by
30%, The business had been badly hit by the flu
epidemic with sick absence currently running at 25%.
Counters’ quality of service had been disappointing at
90.8% against a target of 95%. Income on sales had
held up well.
International. Opportunities with Fedex had not been
progressed and appeared unlikely to be developed
further. UPS had signalled their continued interest in
developing a dialogue and this would be progressed.
PIU. The PIU Study team were aware of the issues
around the Postal Services Bill and the relationship of
their work on the network. A meeting with Mo Mowlem,
Minister at the Cabinet Office, was being arranged.
Liberalisation. The European Commission was seeking
to reach agreement on increased liberalisation through
a reduction in the letter weight step. Various scenarios
for achieving a reduction to 100grams had been put
forward. The Post office was working closely with La
Poste to try and limit any reduction to 150 grams.
Year 2000. With the exception of some minor
difficulties, all systems had continued to work correctly
and this reflected the enormous amount of work and
effort that had been put into the Y2K project, the cost
of which had been in the region of £80 - 85m.
Royal Mail Prices. There had been no Government
response to Royal Mail’s pricing proposals.
Review the performance of
$SL/Envision at the next Board meeting.
Consider, in the event of the Way Forward agreement
being rejected by CWU Members, the possibility of
implementing the proposals with the support of the
CWU Executive.
PooO/05
Provisional results for December, which had not been
reviewed by the Executive, were:
- Royal Mail £32m
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- POCL £22m (excluding Horizon)
- Parcelforce £5m {including Special delivery)
Royal Mail's December result was £20m worse than
budget as a result of reduced income, increased staff
and advertising costs.
A backlog of intra business invoices, cumulatively
£37m, had been identified and was being investigated.
The full year profitioss forecasts were:
- Royal Mail £421m
~ POCL £25m (excluding Horizon)
~ Parcelforce £(8)m (including special delivery)
Royal Mail's risks and opportunities remained balanced
between £10m and £20m, although December's
expenditure result would be of concern should it be
repeated in January.
Parcelforce’s £5m profit in December was the first
profitable result this year and only £1m below budget.
The financial impact of the strike at the London
Distribution Centre was estimated to have cost £1.3m
but was likely to outturn at £2m taking the full year loss
to £10m. It would be unclear until the end of January
how many contracts would not be renewed as a result
of the strike,
The Coventry Hub would take traffic from London once
it was opened in May. Some 200 jobs would be
removed from London operations with some
employees leaving and others being redeployed in
Royal Mail.
There had been an improvement in productivity over
the past two months.
A comparison of current debt compared with pre SAP
debt showed that performance had improved
considerably and was almost back to pre SAP levels.
Counters, excluding Horizon, continued to perform well
and on current trends a full year profit of £32.5m was
possible.
As stated in POOO/04(ii) above, the underlying
performance of SSL (Customer Management) was
disappointing with a full year loss of £{6)m forecast.
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STATE OF POST OFFICE
READINESS
FOR REGULATION
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Agreed that the following full year Group profit forecast
be released to DTI:
~ £340m (excluding Horizon)
POOO/E
To a great extent the form and nature of regulation
were dependent upon the content of the Postal
Services Bill, the core of which was due to be drafted
by 20 January to go before the Legislation Committee
on 25 January. First reading was scheduled for 28
January and Royal Assent by the end of July.
Parliamentary Counsel had already raised concems
over the viability of the timetable and it was therefore to
be considered at risk. The Post Office had provided
DTI with every assistance in preparing the Bill and had
no responsibility for any delay.
The principal issues around the Bill were:
- the disposal/sale of shares in Post Office pic, in a way
in which proper commercial freedoms could be granted
but which honoured the public statement by the
Secretary of State that this would only happen through
primary legislation.
- clarity in the accountabilities for setting financial
targets between the Secretary of State and Regulator.
- the criteria for borrowing for growth investments;
~ and, the report of the PIU study and in particular
Counters access criteria.
A number of other key issues had still to be resolved,
including the mechanism for changing the monopoly,
the USO obligations to be imposed on other licence
holders, the scope of regulation, penalties for service
performance, information gathering powers of PSC and
CCPS, powers, reconstruction of the balance sheet
and the consolidation of legislation.
noted further that
It was important to establish clearly before a regulator
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was appointed those areas for which regulation was
appropriate. It would assist Non-Executive Members to
see a simple summary sheet which highlighted those
areas which would be subject to regulatory control.
(vi) It would be prudent to review the way in which the
property portfolio was currently managed and how this
compared with other regulated companies.
(vii) it was estimated that on current levels of performance
The Post Office would have to pay penalties of
between £25m - £30m. It would be important to ensure
that the regulator had an appreciation of what
constituted a reasonable level of performance and
through improved information educate and advise
customers on what, in terms of service, was actually
possible.
(viii) Thanked Robert Bishopp for his helpful presentation
and informative report.
Action
Jerry Cope (i) Circulate a summary of the activities of The Post office
that would be subject to regulatory control
Jerry Cope (ii) Review how the treatment of The Post Office’s property
Richard Close portfolio could be optimised within a regulated
environment.
TECHNOLOGY & POOO/7
INFORMATION SYSTEMS
IN THE POST OFFICE
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systems being deployed was considerable with
individual businesses developing their own systems
with little technical commonality. For example,
within the finance function nine separate systems
existed.
(i) The majority of Post Office systems were:
- functional rather than process based applications;
- duplicated functionality across business applications;
- created many point solutions;
- reactive rather than proactive with regard to business
needs; and
- lacked global visibility to world class suppliers and
customers,
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(iii) The current situation meant it was costly for Business
Units to maintain and upgrade individual instances of
SAP, made exploitation of investment in the technical
infrastructure difficult and worked against the
integration of systems and exploitation of information.
(iv) The Post Office Enterprise Model was fundamental to
the development of The Post Office IS Strategy,
providing as it did a blueprint for the integration of
information systems across The Post Office. An
essential element of the strategy was the delivery of
core back office functionality, such as finance and HR
systems, which when established would enable the
delivery of a wider set of business applications.
However, the ultimate requirement was to have a
system which provided customers with value,
performance and timeliness.
Wy) The strategy comprised of these design principles:
- IS systems should be organisationally independent;
- processes should be harmonised;
~ generic access channels should be developed for
customers, for use by all businesses (SPICE);
- industry standard software would be used wherever
possible;
- the overall architecture should reduce the complexity
of systems interfaces;
- information about key business entities to be
managed as a group wide asset; and
- operate a consistent information security policy.
noted further that
(vi) The Post Office used 50,000 computers and had one
of the biggest mainframes in the UK;
(vii) Outsourcing had previously been contemplated, but
was not considered appropriate. This mirrored the
approach of a number of major companies. Where
appropriate a number of relationships with external
suppliers, such as Fi, were being developed.
(viii) It was important that as The Post Office developed an
business strategy that it was compatible with that of it
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MANAGEMENT
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main IS strategy.
Seeking work for third party customers was not
something The Post Office was looking to develop.
Thanked Duncan Hine for his informative report and
presentation.
Poon
The development for senior managers of The Post
Office below Executive Board level was overseen
through the Group Centre management development
framework. The top 150 managers were know as ‘Top
Y’, comprising the Managing Directors, their direct
reports and direct reports to other Group Centre
Managing Directors
The framework provided an effective and coherent
process for filling Business Unit Managing Director
roles and ensured that managers with the right
capabilities were available at the right time. It aiso
aimed to create an environment which attracted and
retained talented and committed managers.
The framework was comprised of five elements:
- a succession planning process overseen by the
Executive Board;
- an appraisal and development system;
~ a development architecture;
- an approach to managers of tomorrow, and
- reward and remuneration.
Currently The Post Office was only just keeping pace
with what was required and had a base of managers
who were no longer suited to the business’ new
commercial and strategic role. Remuneration levels
and the lack of any share schemes deterred young
external high calibre recruits although pension benefits
were in certain instances an attractive feature.
Phantom share schemes and improved pension
packages were being considered.
noted further that
Recruiting high quality managers nearing the end of
their careers could in certain circumstances provide a
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Action
Jerry Cope
AN UPDATE ON THE
HORIZON PROGRAMME
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good avenue of resource.
Of the top 150 managers only a handful did not have
named successors although in marketing and change
management resource was thin.
The performance of senior managers against
objectives and the values of the organisation were
linked to pay and bonus awards
Although the number of female mangers was.
increasing it was disappointing that the number of
managers with ethnic minority background was low.
A scheme to recruit 4 to 6 young ‘high flyers’ each year
had proved successful with a great deal of time and
effort being spent on a small number of people with
quickly realisable, very high potential. These individuals
were university educated and usually aged in their late
twenties. The programme had been running for three
and a half years and the first four managers were now
ready to enter ‘Top Y’.
The Board acknowledged the value of a scheme such
as this and welcomed its continued success.
Members of the Remuneration Committee would
welcome the opportunity to review the succession
plans for the top 30 senior managers in The Post
Office.
Thanked Graham Cater for his informative report.
Circulate to non-executives an updated succession
plan covering the top 30 Post Office managers/posts.
POOO/9
The roliout of Horizon was due to recommence on 24
January. A great deal of work had been undertaken to
rectify difficulties identified in three areas:
- system stability;
- accounting integrity; and
- the provision of support to offices
Although as yet uncertain, it was anticipated that these
issues would not prevent rollout recommencing.
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(i) Financial performance was being monitored against the
revised budget.
(ii) Given that the programme was expected to
recommence rollout, it would be helpful for the Board to
understand what marketing opportunities were now
being considered.
Action
Stuart Sweetman The March Board to review the current status of
marketing for the programme, together with an update
of the financial position of the programme.
COMPETITIVE OVERHEAD P000/10
STRUCTURE STRATEGIC
PROGRAMME POB(00)8x
{i) The Board noted the report and in particular that net
recurring benefits were forecast to be £365m by
2001/02.
DATE OF NEXT MEETING POOO/11
The next meeting was scheduled for 14 March 2000.
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