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Post Office Limited — Strictly Confidential
POST OFFICE LTD BOARD MEETING (Company Number 2154540)
Meeting to be held at 9am on 26 November 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
11.15
12.15
13.00
13.30
14.15
14.30
15.30
15.45
16.05
16.10
16.20
16.30
1
10
CEO report on Business Priorities
Business Transformation
BREAK
Business Transformation
Existing and Transformational Risks
LUNCH
Financial Performance Update
Update on the Bol / Post Office Long Term Contract,
taking into consideration Projects Titan and Hawk
POMS go/no go decision including Grant Thornton risk
assurance
BREAK
Updates from ARC, Remuneration Committee &
Nominations Committee
Minutes of Previous Meeting and matters arising
Committee Minutes for noting
Status report update
Items for Noting
IA Audit Action Status Report Summary
Significant Litigation Report
Health and Safety Report
Sealings
Update on State Aid Process
Any other business
Date of next meeting: 28 January 2015
CLOSE
Paula Vennells
David Ryan/Martin
Edwards/Martin George/
Nick Kennett/Kevin
Gilliland/Neil Hayward
Chris Aujard / David
Ryan/Mark Davies
Chris Day
Nick Kennett
Chis Aujard/Nick
Kennett/Mark Davies,
Associate Director, Grant
Thornton
Alasdair Marnoch
Neil McCausland
Alice Perkins
Alice Perkins
Alwen Lyons
Alwen Lyons
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CEO’s Report — November 2014
1. Introduction to this month’s Board and overall strategic priorities
Key issues for discussion at this Board:
e Since the early summer, we have been developing a turnaround plan to secure the
long-term commercial future of the Post Office. To achieve this, the Business
Transformation programme was mobilised in June 2014 and targeted with finding
£200m to £250m improvement in EBITDAS performance by 2019/20. At the
September Board, we discussed our core commercial strategies to ‘Win in Mails’, by
becoming the most convenient parcels retailed in the UK, and to establish the Post
Office as the leading challenger in financial services. And we focussed at the last Board
meeting on the underpinning capabilities and activities required to reshape the
business, and how we are managing change in our complex stakeholder landscape.
e Our discussions at the November Board will bring the design work on the turnaround
plan to its conclusion and discuss the proposed next steps to put in place an orderly
transition into implementation. The Business Transformation paper and associated
material in the reading room represents a significant body of work and I hope the quality
of the analysis gives you confidence in what we are undertaking, as well as a sense of
the opportunities ahead as we shape our future.
e The paper builds on the Board’s feedback on the initial Target Operating Model in
September and sets out the plan to transform the business (the Roadmap), bringing
together a number of significant in-flight programmes with new incremental initiatives.
The Roadmap has sequenced the delivery of each programme to achieve, over time, a
sustainably lower and increasingly variable cost base, and to deliver the required
EBITDAS outcomes within an acceptable risk profile.
e Given the potential for significant changes in the business over the funding plan period
(to 2017/18), we have defined three strategic levers that we will use to adjust and
recalibrate our plans so we are well placed to respond to opportunities, risks and
challenges as they arise. The levers are set out in more detail in the Business
Transformation papers and accompanying appendix. These include working with other
business partners (particularly recognising the critical dependency on our partnership
with Royal Mail), adjusting our channel mix, and strategic portfolio management to
ensure we are allocating our scarce capital to the areas of highest profitability and
return on investment.
e There are significant risks in executing any turnaround programme, and that is the case
for the Post Office. However, these risks should not deter us from action providing we
are confident we have identified the relevant risks and have appropriate contingencies
in place. The paper references the analysis of risks to successful delivery and the
associated mitigations. The paper also draws on work undertaken by PwC to assure
the assumptions underpinning the programme design and test the realism of the plan in
the Post Office context. We have incorporated the recommendations into the Roadmap
and the proposed transition activities, to ensure the organisation can subsequently
embark on implementation with confidence.
e The paper summarises the conclusions of the design phase, and seeks the Board's
support to start the transition activities and to stand up the necessary programme
governance and control framework. Given the scale of the transformation activity, tight
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central control is proposed with integrated ‘top down’ governance. It is also proposed to
return to the Board in Q4 2014/15 to confirm that sufficient progress has been made
during the transition period, to then support the recommendation that implementation
be progressed as an integrated portfolio of change from the start of the new financial
year.
Assessing the overall implications for the business
e We have used a range of scenarios to model the financial sensitivity to changes in
delivery of both cost out and revenue growth. At the top end of our central planning
range — the scenario that we are targeting to deliver — breakeven would be achieved in
2016/17 (in line with our June awayday expectations) with a significant surplus by
2019/20 (in excess of the Strategic Plan target). At the bottom end of this range,
breakeven would be achieved a year later in 2017/18. Both these scenarios would
represent a delay against the Strategic Plan expectation that we would achieve
breakeven in 2015/16, but nonetheless would still mark an historic achievement in
making the Post Office profitable, in spite of the very challenging trading conditions.
e The business transformation paper sets out how the Roadmap and glidepath have
been recalibrated to bring the funding requirements within the available envelope to
2017/18. However, our capital position will remain heavily constrained throughout the
plan period, leaving limited scope for us to absorb new risks or priorities. Discretionary
spending will therefore have to be very tightly controlled throughout the period. This will
require us to be ruthless in our prioritisation of activity and allocation — and de-allocation
— of resources.
e There is no doubt that delivering the Transformation Roadmap is a major undertaking
for the Post Office and presents significant risks. However, it should be remembered
that the ‘do nothing’ option is itself not without risk — on the contrary, given the market
and fiscal environment it is almost certain to end with the Post Office no longer being
viable in its current form, potentially forcing a more difficult restructuring. The judgement
for us is therefore about the robustness of the approach to managing and mitigating the
inevitable risks and challenges we will face over the coming months and years. The
analysis we have undertaken on strategic levers also means we are now well placed to
take advantage of opportunities to develop the business further in future.
e Finally, delivering the transformation will require significant changes to our culture. We
discussed this at the Board in October, and the People and Engagement Plan already
includes actions to embed a more commercial and customer-focussed culture, and to
develop our relationships with both the trade unions and the NFSP. We are now
considering how we develop a more agile and streamlined business and I have asked
Neil to factor this into his work on organisational design and development.
2. Commercial and business performance overview
Overall performance
e As the CFO’s Performance Report sets out, trading remained disappointing in October.
Operating profit in the month was £5.5m (£4.8m adverse the budget) bringing the year
to date operating profit to £29.0m, and increasing the year to date shortfall versus
budget to £23.4m.
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e Net income was £6.7m behind budget within the month and flat with last year. The
budget shortfalls were in mails and retail, and in telecoms. Year to date, the net income
shortfall was £31.5m, with two thirds of this attributed to mails and retail. Financial
Services remains the only pillar tracking ahead of target over the year to date (with
income 5.7% over the year to date compared with the same period last year).
Mails initiatives
e Whilst trading in the mails market remains fiercely competitive, in period 7 we did
exceed our performance for the same period last year and we will need to continue to
perform at this level during the vital Christmas period if we are to hit the revised
forecast of £345m at year end. This uplift in performance has been mainly driven by the
Sales Efficiency campaign in the agency network which completed training of 3,000
branches at the end of October. The average branch weekly uplift is currently running
at 6.5% against a revised target of 6.4% and the project remains on target to deliver an
incremental £3.5m of mails income. Delivery of our revised mails forecast is still
dependent on Christmas trading delivering at least £2m more income than for the same
period last year.
e As you know, last Sunday we launched the new Post Office Christmas marketing
campaign, marking a return to TV advertising at Christmas after a gap of 5 years. The
TV adverts are part of a wider campaign including: digital outdoor; in branch activity;
online search and display; and an extensive social media campaign utilising additional
celebrity content which also went live on Sunday.
e Initial reaction has been very favourable with the campaign receiving 14 online and
offline marketing trade and business press mentions to date. We sent 1.3m emails to
our customers on Saturday/Sunday morning inviting them to be the first to view the
advert, with an average 27% open rate leading to 23,200 clicks to You Tube with 15k
viewing the TV ad before it went live. The X Factor Ad on Sunday reached a minimum
of 9m adults and we saw a 17% year-on-year increase in visits to www.postoffice.co.uk
after the advert aired. So far on social media we have delivered 4.96 million
impressions of the Xmas ad copy via Facebook and Twitter, generating 31.6k additional
views of the TV advert.
FS initiatives
e Mortgage sales performance gained momentum in October. Run rates are still below
our plan but we remain on target for the year-end given over-performance earlier in the
year. Several new offers have been launched in order to be in a good place when we
go into the final quarter.
e Moneygram and banking and payments services continue to perform well. The Post
Office received very positive publicity on the back of Lloyds’ recent announcement to
close part of its branch network, with Vince Cable endorsing the important role we play
in particular to ensure banking and payment facilities are available to vulnerable
customers, and isolated, rural communities. We are leveraging this publicity by raising
awareness of our banking services in branch, with the service already available to 95%
of UK current account holders and discussions underway to increase this further. I have
also now written to Vince Cable to take him up on his offer to convene a roundtable for
us with the banks as we develop our banking services further, recognising that any
development of the service must be commercially sustainable and in line with our
business strategy to reduce calls on public subsidy.
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e Updates on Project Titan (travel insurance) and Project Hawk (delivering the insurance
buy-out option) are provided in section 3 and the related Board papers on our long-term
contract with the Bank of Ireland and POMS.
In-year cost reductions
e The in-year delivery of cost savings remains a top priority with our focus on delivering a
year-on-year improvement in our underlying EBITDAS performance by March 2015. We
are now on track to deliver over £50m of savings against our target of £60m, and
intensive work continues to close the gap including tight controls on staff and project
costs. More details are provided in the business transformation paper.
e As discussed at the last Board meeting, we have been developing a first wave of
headcount reductions to deliver around £15m of savings in 2014/15, and consultation
with staff will commence on the 24th November. The design for the second wave of
staff changes will commence in December, and should be complete and ready for
consultation from March onwards as Wave 1 completes. As we have discussed,
delivering this scale of change is likely to require compulsory redundancies and
conversations with the unions are well underway on this basis. We have also invested
significant management time in communicating with affected staff to ensure the case for
change is understood. Very positively, Unite (the largest union in the UK) has signed an
agreement which secures co-operation on Business Transformation — including
compulsory redundancy at 90 days if necessary — and a review of union Facility Time
as flagged last month in the IR Strategy paper.
e Discussions with CWU on Supply Chain and Admin pay have continued to be
challenging and the ballot for strike action resulted in a clear Yes vote. However, the
result was significantly lower than in previous ballots in terms of both the majority and
the turnout, reflecting the intensive investment in communication with staff over recent
weeks. We are continuing to engage with the CWU, have offered to use Acas to
resolve the dispute, and have contingency plans for strike action in hand. A further
update will be provided verbally at the Board — at time of writing, no strike action has
been called.
e To-secure savings from our non-staff costs, we held a Town Hall event on the 6th
November with our top 48 suppliers by spend. The event provided an opportunity to
outline to our suppliers the long-term vision for the Post Office, set out our financial
imperative to reduce costs and change ways of working, and to communicate a short-
term ask to negotiate on current terms and a longer-term ask for expertise and ideas to
save money and introduce new ways of working.
e Feedback from the event has been very positive, with suppliers keen to work with us
and suggest ideas and new ways of working. Information is currently being collated
and will be used to inform re-negotiations, which we anticipate will yield £10-£15m of
cost savings. We are also reviewing how we support our procurement team to ensure
they can act with confidence in progressing more radical ideas to save money for the
business.
3. Update on key change programmes
We have started to transition to the new roadmap, with some additional programmes now
reporting through to the Transformation Committee. This is in order to ensure clear,
integrated governance of all Transformational change activity.
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a) Crown Transformation Programme
Status overview: The programme continues to deliver in line with targets across branch
transformations, training (over 3000 staff trained), staff cost reductions (>470 FTE), SSK
rollout (>480 rolled out), mergers and relocations. However the current P&L run rate at the
year-end is forecasting a £2m loss primarily due to a £7m income shortfall. Overall
customer satisfaction and queue time satisfaction are meeting (or very close to) the target.
Programme KPIs: YTD 2014/15 FY
Target Actual Period Target Forecast
P&L run rate -£14.4m -£15.4m Qt -£2m
Number of branches transformed 278 P7 300
Number of branches franchised 30 P7 51-57
Customer satisfaction in transformed 83% P6 85%
branches
Queue time satisfaction 85% P6 85%
Key milestones ahead:
Milestone Target date Current status
All retained branches transformed By end March 15 On schedule (currently ahead of plan)
57 franchises live By end June 15 Will be missed (minimum 13 will not be franchised
under CTP)
518 Self Service Kiosks rolled out By end Nov 14 On schedule
b) Network Transformation Programme
Status overview: The programme remains ahead of target on both contracts and
openings. Transitional locals are progressing without significant adverse stakeholder
reaction although the workstream is time-consuming as decisions need to be made on a
case by case basis. The value for Money workstream has identified potential cost savings
that will be investigated further by the Business Transformation programme. Discussions on
the cliff are starting with the NFSP and co-ordinated via the P&E team.
Programme KPIs YTD (P7) 2014/15 FY
Target Actual Target Forecast
Contract signed (cumulative) 4,332 4,800
Branches Open (cumulative) 3,353 3,708
Customer Satisfaction (all branches) 97% 96%
‘Average increase in opening hours 68% 66%
Cost reduction (in-year cumulative) 852.9k 3,460k
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 (currently ahead
of plan)
Complete first evaluation of guided leavers process _I End Sept14__I Complete
Start cliff preparation work End Oct 14 Discussions started
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c) ‘Win in Mails’
Status overview:
The Ivy pilots continue to roll out but usage remains extremely low. Digital marketing has
been implemented and a range of other marketing and PR activities are underway to drive
up Home Shopping Returns volumes.
The greatest challenge for the programme remains securing support from Royal Mail at the
required pace. As the Board is aware, there was a Chair-to-Chair meeting between RMG
and POL to secure this support where two shared workstreams were agreed: firstly, to map
out the costs savings for both organisations from customer journey simplification; and
secondly, a joint commitment to secure a network with a major retailer such as McColls.
On the first workstream, agreement has been reached between POL and RMG on the
specifics of what needs to be delivered to support the extended trials, namely product
simplification (to allow removal of weighing scales), changes to operational requirements
(no segregation of parcels and RMG collections at the new sites) and requirements for the
technical solution. Work is progressing to understand where there is potential to remove
costs from both organisations — on the basis of simplification and changes to operational
process.
To the second workstream, the commercials for an interim deal with McColls remain to be
agreed and are expected to conclude by the end of November. However, this step is critical
as it will crystallise the cost implications of the above changes for both businesses, upon
which the operational agreements are dependent. Following commercial agreement, we
expect to secure an MOU with McColls by mid-December.
Programme KPIs. End October 2014/15 FY
Target Actual Target Forecast
New access points 152 ie 400
‘Average transaction volume per site 004 a tbe
Key milestones ahead:
Milestone Target date Current status
135 access points live End Sep 14 Completed
‘400 access points live End Mar 15 At risk pending outcome of RMG
discussions
Technical solution agreed with PO and RMG. Oct 14 Completed
RMG interim commercial agreement Mid Nov 14 Atrisk
First strategic partner signed End Dec 14 Atrisk
RMG agreement on final solution and End Mar 15 At risk
commercials
Rollout to first strategic partner April 15 Atrisk
5 strategic partners signed April 15 Atrisk
d) Business Transformation
Status overview: the design phase will be complete by the end of November having
delivered an ‘end state’ operating model design and transformation ‘blueprint’. Transition
business cases are now being prepared to manage the transition from a ‘design’ to a
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‘delivery’ structure and operational efficiency accelerators. Final recommendations will be
made to the Board in November to secure approval for transition into delivery.
Programme KPIs YTD (week 33) 2014/15 full year
Target Actual Target Validated
Delivery of in-year savings 263m £16.4m_ PP keO.OmE, —_£53.4m
Design Phase Key milestones ahead:
Milestone Target date Current status
Current state assessment complete _I End July 14 Complete
Draft Target Operating Model End Sep 14 Complete
Complete Transformation Blueprint I End Nov 14 On schedule
End design phase End Nov 14 On schedule
e) Separation
Status overview: The programme is delivering against the revised timeline within the MSA
Extension Letter, with significant milestones approaching before the end of the calendar
year for Contact Centres, and ebusiness and Networks by the end of the financial year. A
key enabler for eBusiness separation has recently been achieved with customers
requesting the www.postoffice.co.uk website now being served content and tools from Post
Office rather than Royal Mail. The majority of the business services have now been
separated, with all the remaining IT ones planned to be separated by the end of quarter 2
2015.
Programme KPIs YTD (P7) Full programme
Target Actual Target Forecast
Separation of IT systems 143 256
Separation of Business Services 120 131
Finance — headcount reduction 27.5 27.5
NB The team will also be monitoring the number of post-launch incidents for the newly Separated systems such as Finance and HR.
Key milestones ahead:
Milestone Target date Current status
Facilities Management separation 4 Oct 14 Completed
Grapevine separation 1 Oct 14 Completed
eBusiness Release 5 live End Jan 15 ‘On schedule
HR Common Components separated End Feb 15 ‘On schedule
BT on boarding to ATOS helpdesk End Feb 15 On schedule
complete
Networks site migration end End March 15__I On schedule
f) IT transformation
Status overview: Fujitsu have informed Post Office that they are withdrawing from the
Front Office procurement process. The programme has initiated a full impact assessment,
with a specific focus on managing the risk around continuity of service. We have
commenced discussions with Fujitsu to de-risk the Front Office execution by extending the
contract beyond March 2017. Our initial view is that a 12 months extension is required;
however we are testing this and looking at the commercial impact. The Board will have the
opportunity to review the programme in January.
The updated Business Case shows an increase in transition costs and the programme is
working with the finance team to minimise the exposure and to agree the most appropriate
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way to secure the funding. The increase is largely due to more informed bidder responses
to the procurements and changes to assumptions in the original estimates for the Network
tower. The latest costs and assumptions have been used in the Business Transformation
Roadmap and financial glide path. Mobilisation of the EUC delivery team is underway
following the award of contract.
Programme KPls YTD Full programme
Target___Actual Target___ Forecast
Towers Contracts Awarded 1 5
3” parties transitioned to Service integrator (SI) 90 96
Sl operating model processes accepted 20 23
Financial savings £0 £25m
Key milestones ahead:
Milestone Target date Current status
Mid term opportunities kicked off End Nov 14 On track
B/O contract awarded Paused pending alignment with Business Transformation
F/O ISFT End Feb 15 On track
Network ISFT End Feb 15 On track
F/O Contract awarded End June 15 On track
Network contract awarded End May 15 On track
EUC service commences End June 15 On track
PO IT fully separated End June 15 On track
g) People & Engagement
Status overview: The People and Engagement strategy and detailed actions for the next
12-18 months have been agreed by ExCo and the Board. The actions within the plan are
aligned to the accelerators and are underpinned by the business approach to risk
management. Short term focus will be on: 1, Stakeholder management (inc. NFSP, TUs,
RMG, BIS) 2,Supply Chain strike ballot closing on 18th November 3, Business
Transformation Wave 1 activity and management OD
Key milestones ahead:
Milestone Target date Current status
‘Compelling narrative for change Complete Complete
Making it easy crowd sourcing in place Complete Complete
P&E toolkit in place for supporting change Complete Complete
See Union agreement for new collective End Q3 On track
framework
Finsbury Dials seen as Business Support Centre _I End March 14 __I On track
New collective framework in place End March 14 On track
New Union representative structure in place End March 14 On track
NFSP new org in place End Jan 15 On track
Serve notice on current IR framework End Jan 15 On track
Existing IR framework ends End April 15 On track
No of reps reduced from 41 to 20 End April 15 On track
Workshop delivered re managing change End Dec 14 On track
Revised incentives & colleague offers in place End March 15 On track
Revised perf management process in place End March 15 _I On track
Sales capability plans agreed End Jan 15 On track
Revised agent framework approved End March 15 _I On track
200mail coaches in place End Nov 14 On track
‘Completion of guiding coalition End March 15 _I On track
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h) Titan
Status overview: this update reflects the whole programme but will move to Post Office
only deliverables (rather than POMS) from December to ensure clear lines of governance.
Contractual relationships with third parties for distribution and servicing are progressing
slightly behind plan but the programme anticipates all will be completed within the required
timescales. Key risks that PO board do not give authority to trade due to concerns over
readiness, and FCA do not provide authorisation within required timescales. Contingency
plans being developed for both to enable uninterrupted Travel Insurance sales. Costs and
benefits forecast are in line with business case.
Programme KPIs YTD (P7 cum.) Full programme
Target Actual Target Forecast
Contractual relationships in place 6 13
‘Systems in place 4 6
Staff in place 3 6
Key milestones ahead:
Milestone Target date Current status
‘Sign off of company formation Complete
FCA application submitted Complete
Web help contract signed Complete
‘Systems build complete End Nov 14 On track
POL Board approve POMS plan End Nov 14 On track
POL Board approve POMS to trade Mid Dec 14 At risk
FCA authorisation received Mid Dec 14 At risk
Initial trading (renewals) End Dec 14 On track
Live for new business End Dec 14 On track
Strategic system implemented End Aug 15 ‘On track
i) Hawk
Status overview: the Post Office and Bank of Ireland have agreed to appoint an
Independent Expert (IE) to provide a valuation of the insurance business as there is
significant variation between Post Office and Bank of Ireland valuations. FS will not be able
to confirm if anticipated benefits are achievable until the IE valuation is received and there
is a risk that the valuation may be higher than Post Office is prepared to pay. Support is
being provided by both KPMG and Linklaters.
Milestone Target date Current status
Appoint Independent Expert (IE) with Bol_I Start Dec 14 On track
Conclude IE valuation Jan 15 On track
‘Seek PO Board approval to proceed Feb 15 Contingent on valuation being in POL
Sign transaction agreements Mar 15 range
Hawk Implementation programme Dec 15
j) Financial Services Investments and Savings Negotiations
Status overview: Negotiations with the Bank of Ireland continue with Bol! IRRELEVANT
IThe key points under discussion are
IRRELEVANT
poe TRRELEVANT IRRELEVANT. I
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andi “IRRELEVANT
respond on latest!
2015/16
Programme KPIs
_Target___ Actual
Incremental increase in net Savings revenues a)
investments Negotiations IRRELEVANT Tg
Key milestones ahead:
Milestone Target date Current status
Savings negotiation End of Q3 ‘On track
Investments negotiation End of 4 On track
k) Financial Services Sales Effectiveness
Status overview: This Programme has been set up to achieve break-even sales volumes
in 2017/18 (10 sales per week per specialist as presented in the FS Strategy at the
September Board) and then go on to deliver 15 sales per specialist per week by 2020.
Phase 1 of the “Post Office Money Academy’ is due to go-live in support of broader Post
Office Money sub-brand launch. Priority training modules are on track but LMS (Learning
Management System) is still in design. We are working with L&D colleagues to launch with
an interim solution.
Detailed KPls are being developed.
Key milestones ahead:
Milestone Target date Current status
POM Academy Phase 1 launch Start Jan 15 Atrisk
POM Academy Phase 2 launch End Aug 15 On track
Salesforce Development Web leads End Jan 15 On track
Salesforce Development release 3 End May 15 On track
Salesforce Development release 3.2 Mid Sept 15 On track
Technology for Frontline Mid March 15__I On track
Hub and Spoke Mid Feb 15 On track
Data Enablement — Mortgage Income End Nov 14 On track
Data enablement — PID approved End Feb 15 On track
Data enablement — FAD codes Mid June 15 On track
4. Market, political and external developments
e Royal Mail interim results. Royal Mail’s CEO review put emphasis on the competitive
environment and the reduction in the rate of growth of the addressable UK parcels
market caused by the impact of Amazon’s own delivery network. Media coverage
picked up on Royal Mail's pleas for the universal service obligation to be revised and
calls on Ofcom to speed up its review of direct delivery competition
o Profit before transformation costs £279m. Positioned as an increase of £13m on an
underlying basis with Group operating profit margin after transformation costs
increasing by 70 basis points to 5.1%.
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o Revenue growth of 2% to £4525m; Letters revenue increased by 1% with volume
decline of 3%. Parcel revenue down 1% with volumes increasing by 2%. GLS
(European operations) saw revenues and volumes up 7%. The CEO’s review put
emphasis on the competitive environment and the reduction in the rate of growth of
the addressable UK parcels market caused by the impact of Amazon’s own delivery
network;
o Costs up 1% - emphasis on tight future cost control in rest of the year.
e Click and collect will rise in popularity as consumers look to keep costs down.
95% of UK consumers plan to use click and collect this Christmas according to a
Postcode Anywhere survey. Over two thirds cited the convenience of not having to wait
in all day for a delivery and to avoid the cost of shipping. Almost 80% of online
shoppers expected click and collect to be offered for free. Doddle, a third party
collection point, announced it opened six new stores in early November, and has
ambitions to open 300 collection points as part of its business plan. Meanwhile, Home
Retail Group announced plans to close 25% of its 323 Homebase stores and focus on
its Argos retail network. It recently refurbished its Argos stores in an attempt to adapt to
the digital age and offers a collection point for eBay parcels.
e Lloyd’s Bank and Metro Bank provide update on profit. Lloyd’s Banking Group
announced pre-tax profits of £1.6bn for the first nine months of 2014, down from £1.7bn
for the corresponding period in 2013. Further to this, it announced it would close 150
branches and cut 9,000 jobs over the next three years. Halifax branches will be
maintained. These jobs are likely to be replaced by its £1bn investment in digital
products and services. Metro Bank reported narrower losses of £9.4m in 2014 Q3, an
improvement on £9.9bn in Q2. Over a 12-month period Metro Bank has grown by
118%, driven by investment in infrastructure and technology.
e Telecoms industry competition will heat up as incumbents expand product
portfolios. BT’s mobile service is expected to launch in the first half of 2015. It has
been suggested BT's mobile subscriber cost could be as little as £5 a month, lower
than mobile subscriber costs of £14 to £20 at present for other providers. BT will benefit
from combining domestic data, media and voice services with Wi-Fi and wireless
roaming using the fixed-line and mobile assets it already controls. The launch of mobile
services will also see BT offer quad-play bundles featuring mobile, fixed-line phone,
broadband and television services, rivalling Virgin Media and Sky (triple-play).
Vodafone will be launching home broadband and pay-TV services in spring 2015.
Vittorio Colao, Chief Executive at Vodafone stated this was "more of a defensive,
reactive move" and is a response to BT's own expansion plans. “We will follow
whatever [BT] do and the level of aggressiveness in their pricing," added Mr Colao.
e Virtual ID is coming to the UK. Over 500,000 individuals are expected to begin using
a government-backed virtual ID scheme, called Verify, which will prove a user’s identity.
Verify will allow personal data to be stored online and applications for driving licences
and tax returns to be submitted digitally. Government said the new voluntary scheme
means an identity card would not now be needed, since a person can prove who they
are without one. People select one of five private providers under the Verify
programme, including Post Office and Experian, to complete an online security check.
Post Office is currently working closely with the Government Digital Service and our
technical supplier, Digidentity, to ready our Verify service for launch in January 2015.
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Annex A: Forward Board meetings: overview of the sequencing of discussions on
key business strategy issues
26" Novembet
Business Transformation Recommended TOM (informed by the September Board
discussion) and the proposed roadmap to implement it.
And outline the strategic levers to flex the plan to
opportunities, challenges and risks as they arise.
POMs POMs go/no go decision including Grant Thornton risk
assurance
BOI/Post Office contract and Update on the BOI/Post Office Long Term contract, taking
relationship into consideration projects Titan and Hawk
28" January:
Christmas trading and Mails Report on Christmas trading Update on the Mails
programme
Risk Appetite Agree the risk appetite statements and risk rating scores
as recommended by the ARC.
Sales Capability Progress update on work to build a world class sales
capability — using all the levers to identify, source, develop,
reward and incentivise the right sales behaviour.
Cyber Security Lunch with Tony Smith from the Centre for Protection of
National Infrastructure
SME & Digital Progress update on development in SME and digital
IT including Fujitsu Progress update on the IT strategy progress and the
relationship with Fujitsu
25" March:
1 year plan and budget Approval of 1 year operating plan and budget
Scorecard Approval of 2015/16 scorecard
3 year Business plan 3 Year Business plan
Business Transformation Progress update on Business Transformation, cost
reduction and run rate for 2015/16
Financial Services Progress update on FS delivery and strategy for 2015/16
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Annex B: Strategic communications timeline - November 2014 to February 2015
As discussed at the October Board, we discussed the risks the business faces in managing its complex set of stakeholders. It was
agreed we would keen the Board updated on key stakeholder events which are captured in the diagram below.
Feb: Possible
NFSP special
Nov 26: RMG Dec 3: Autumn Jan 19: NFSP conference on
USO evidence Statement Jan 5: PO access point network extension
to BIS select T Money launch agreement ends 7
committee . 7
I
I
Jan: Possible
Nov 27: “ -
Paula Jan 13: Possible ae i erga
meeting Jo Teamtalk Live event Soe on
Swinson (TBC) juture
November 2014 13
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POST OFFICE LTD EXECUTIVE COMMITTEE
Business Transformation Programme
1. Purpose
The purpose of this paper is to update the Post Office Board on:
11 The roadmap and financial flightpath identified as part of Stage Ill of the Business
Transformation design phase;
1.2 The levers we have identified to adjust or accelerate aspects of our strategy in order to
respond to the risks and opportunities that emerge as we implement our plans (‘Plan B’
options);
1.3 Our proposed next steps to effect an orderly transition to the implementation of this
roadmap; and
1.4 Progress in the delivery of short term sustainable cost saving.
The Board is requested, after review of this paper, to support the:
1.5 Business Transformation Programme recommendation to progress the transition activities,
noting the risks as set out in the paper and reading room deck
The Board is also asked to note the:
1.6 Proposed Transformation programme governance and control framework which will be
operationalised during the transition phase
1.7 Programme proposal to update the Board in Q4 2014/15 to confirm the transformation
programme plans and outcomes for 2015/16 and beyond, which will be summarised
alongside the three year plan and 2015/16 budget updates.
18 Business Transformation Programme design conclusions, as a key enabler to the
execution of the agreed business strategy and commitment to commercialise the business
2 Context
241 The November 2013 Strategic Plan set POL on the road to deliver a commercially
sustainable business by 2020 framed by our declared purpose and customer promise.
Since establishing this intent we have:
. Concluded the design phase of the business transformation programme and set
out the next steps to take an integrated portfolio of business wide change forward.
It should be noted that the current FTE and cost numbers at this stage are
directional and indicative — more detailed operational and financial plans will be
developed as part of the implemtation phase we are now commencing, as
described below;
. Started to develop an integrated narrative to engage our customers, staff and
agents in the process of the change we are going through to deliver our vision of a
modern, commercially sustainable Post Office;
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. Defined in more detail our core commercial strategies to defend our position in the
mails market by becoming the most convenient parcels retailer in the UK; and
establishing the Post Office as the leading challenger in financial services;
. Set out our People and Engagement strategy and action plan to support the
transformation of the business in line with the requirements of the POL
transformation programme and commercial strategies
° Developed a robust set of options to adjust our strategy to respond to the
numerous risks and challenges facing the business.
. Accelerated our business wide near term cost out planning and execution
. Delivered significant progress to date in three out of the six programme themes this
paper addresses: Network (NT & Crown), IT (separation), FS (sales).
3 Business Transformation - Design Phase Summary
3.1 The Business Transformation design phase, which mobilised in June 2014, targeted the
identification of measures to deliver a £200m - £250m! pa improvement in EBITDAS
performance by 2019/20 (measured against a ‘do nothing’ counterfactual which forecasts a
£141m EBITDAS loss in 2019/20 arising from income remaining flat and non-agents pay
costs increasing in line with inflation). Achieving this level of performance improvement
would enable us to reach our objective of commercial sustainability by 2020 in spite of the
significant trading challenges we face.
3.2 The programme was divided into three stages:
e A “Current State” assessment; which concluded at the end of July. It identified
potential near to medium term cost improvement of circa £100m which was risk
adjusted down to £89m at the end of Stage Il.
e Ahigh level “Target Operating Model” design stage; which concluded mid-September
outlining the measures that would be required to secure a further potential £100-150m
of business improvement.
e The Transformation ‘Roadmap’ stage, which concluded at the end of October with the
delivery of a high level implementation plan, financial projection, risk assessment and
mitigation plan.
4 Key Findings from Stage Ill
41 The majority of the key findings from Stage Il have been preserved in the roadmap and
financial glidepath set out at the end of Stage Ill.
4.2 Asummary of the key findings at the end of Stage II are set out below to recap on what
was discused in September:
. Restructure of the Crown and Agency network enhanced by a significant extension
in the number of outlets, in line with our ‘Win in mails’ strategy - albeit the original
plan has been refined significantly in order to maximize value for money and
live within the funding envelope we have available through to 2017/18. Key
changes have involved retaining a higher number of Crowns, mains and
community branches than in our ideal case.
‘ The £300m figure shown at the end of stage II included £70m of EBITDA improvement from contractualising our
social provision. This amount has been excluded from the analysis at this stage to enable a like-for-like comparison
of our underlying financial performance, although as noted below we will be conducting further work to update the
definition and funding arrangements for our social provision.
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. Execution of the Financial Services Strategy (via Titan / Hawk etc.) in line with the
plan outlined to the Board.
. Re-basing agent fee structures resulting from the radical simplification and
digitalisation of our products and customer experience.
. Restructure of supply chain and branch support activities. As described at the end
of Stage Il the current design stops short of outsourcing of supply chain and is
instead focused on optimising the existing operation. Note: as part of the work on
levers to adjust our strategy we are exploring the potential to reconfigure
some of our existing product set in order to better control cash demands on
the network in a way which might make it viable for a greater proportion of
branches to be self-funded (from their own retailer cash), and potentially
enabling an outsource solution within the plan period.
. Retention of a smaller corporate centre to drive strategy and policy, which owns
the POL Brand and licences it to our market facing businesses (e.g. POMS) This
may be extended to cover a number of commercial portfolio diversification options
which will be developed over the plan period
. Transformation of POL technology and digitalisation of the business (cloud
solutions, towers procurement and build out of Common Digital Platform) enabling
the migration from legacy systems to drive a step change reduction in operating
costs and by putting digital at the forefront of all we do.
° Where the business case shows additional benefits, the transfer of operational
support activity into a business process outsourcing utility, if necessary, following
the ‘leaning’ of their current activity.
4.3 The Board also received an update in October on the People and Engagement Strategy
and how this work is aligned with and supportive of the Business Transformation, in
particular;
. The need for higher levels of engagement with and from our employees and
agents.
. Reshaping the organisation and the identification of new skills and capabilities
required to attract, develop and retain key staff to execute the transformation.
. Develop a commercially focused approach to our customer and agent relationships
to drive a more agile and cost effective way of working.
44 The main challenge in Stage III was to design a roadmap and financial glidepath that is
capable of supporting the delivery of POL’s EBITDAS target to 2019/20, and in so doing:
° Deliver over time, a sustainably lower and increasingly variable cost base with an
acceptable risk profile.
45 A set of design principles, based on the accelerators that were communicated to the
business, have been agreed that provide the framework for the Transformation:
. We will disaggregate major change programmes from business as usual activity
. We will prioritise resources and stop programmes that distract, optimising our
commercial portfolio across all four pillars and our channels mix.
e We will appoint a single point of accountability for each programme, supported by
dedicated delivery resources, quantitative KPIs and an overall delivery plan with
key milestones to track progress against;
. We will accelerate significant and complex programmes which are crucial to drive
benefit in and of themselves, or which enable the delivery of other business
benefits and key TOM attributes
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. We will invest in a number of crucial ‘enabling’ activities including Transformation
Management Office (TMO), Business Case and Benefit Management and Risk &
Assurance
. We will limit other change activity, outside of the programmes included in the
Transformation portfolio, to ensure we dedicate efforts and resources on major
value adding programmes
° We will maintain a focus on the key areas of Communications and Stakeholder
Management as we progress through this journey
46 The high level Transformation Roadmap comprises the continuation of a number of
significant existing in-flight programmes which have previously been discussed in detail
with the Board (such as our Mails and FS strategies, People and Engagement and
Network Transformation) supplemented by a number of new incremental initiatives which,
when taken as a whole, deliver the required business strategy and structural outcomes by
2019/20.
47 The transformation roadmap is structured into six themes to balance certainty of
outcomes, benefits, cost to deliver and risk. The six themes are owned by ExCo members
and are set out below:
Reduce central costs
Transform the organisation
Lean IT; via technology transformation and digitalisation
Reduce and variablise network costs
Win in Mails
Grow Financial Services
eevee
48 Within the six themes there are 13 discrete programmes as follows;
Themes
Reduce central costs ta. Near/Mid-term cost out
1b. Finance / HR transformation
1c. Network support transformation
1d. Longer term efficiency - continuous improvement
Transform the organisation 2a. Organisation Design and People Development
Lean IT 3a. IT transformation to significantly lower costs
3b. Digitally enabled business transformation
Reduce and variablise 4a. Network transformation
network costs 4b. Crown transformation 2
4c. Customer journey simplification
Win in Mails 5a. Network extension
5b. Commercial portfolio development
Grow Financial Services 6a. Financial Services portfolio delivery
4.9 Each programme within the six themes is summarised in a separate document lodged in
the reading room. (Appendix 1).
4.10 The high level Transformation Roadmap will undergo further refinement and development
during the transition into implementation, as the outcomes from the individual programme
design work is completed and calibrated into the overall delivery plan.
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4.11. At the end of Stage Il, we provided a summary of the key risks for the programme. Having
concluded Stage III, our view remains that the transformation of POL is a high risk, multi-
year undertaking with an uncertain outcome delivered against the backdrop of a very
challenging trading environment. In particular, the successful delivery of the transformation
is predicated on the following ‘need to be true’ criteria, all of which entail significant risk:
. The strategy and financial performance in all business areas is delivered in line
with current plans and we suffer no material customer attrition resulting from the
execution of the transformation plan;
° Government and other institutions (e.g. European Commission) maintain their
support for the significant changes proposed;
° POL will manage a significant volume of transformational change while
successfully discharging its ‘business as usual’ agenda;
° Large scale staff change will be driven forward in a complex and at times difficult
union environment;
° POL will attract, incentivise and retain top tier talent to drive the business forward
in a period of unprecedented change and uncertainty;
. Key partner interests (including Bol, Royal Mail and the NFSP) will be aligned with
POL’s to drive key changes forward;
. Legacy technology can be overhauled and transformed in a relatively short period
of time, leveraging the skills and experience of selected partners.
4.12 The risks are unlikely to materialise in isolation and we need to remain mindful of the
compound effect. We have prepared detailed risk assessments in Appendix 2. Given the
high level of delivery risk we propose to manage the risk by: prioritising cost out initiatives,
which have fewer external dependencies than revenue growth; ensuring strong execution
using appropriate partners; avoiding “stranded investment” by developing operational
plans and testing external dependencies early; and tracking and assessing delivery
centrally and course correcting where needed.
4.13 It should also be remembered that the ‘do nothing’ option is not without risk — on the
contrary, without embarking on this transformational change the Post Office faces the
prospect of accelerating market declines and increasing losses, set against the backdrop
of a fiscal environment which is likely to limit the ability and willingness of the Government
to support the business at historic levels of funding. We therefore believe that there is no
credible option but to continue with the transformation of the business that is already under
way — and which is already delivering steady improvements in underlying profitability.
However, clearly this must be underpinned by a robust and mature approach to managing
and mitigating the inevitable risks and challenges we will face over the coming months and
years.
4.14 We modelled financial sensitivity of the potential outcomes using the following scenarios:
° our ‘central planning range’, which is based on the following top and bottom case
scenarios:
o ‘full delivery’ (the green line in the chart below) - full delivery of the cost
out measures (detailed in the accompanying slide deck) alongside full
delivery of the risk adjusted FS growth plans agreed with the Board in
September (£508m revenue by 2019/20, equivalent to 8.9% annual average
growth) and our plans for defending our position in the mails market (resulting
in 1.7% annual average growth in mails income). These are the figures which
we will be targeting, while recognising the downside risks;
co ‘partial delivery’ (the yellow line in the chart below) - a 30% reduction in
the level of gross savings realised; network extension only serving to defend
existing mails income (which is assumed to grow at 0.6% pa overall); and FS
growth only reaching £460m by 2019/20 (i.e. all of the risks categorised as
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‘medium’ in the September strategy paper are assumed to materialise,
resulting in lower growth of 6.7% pa);
. the ‘do nothing’ scenario explained above (i.e. flat revenue position with non-
agents pay costs increasing in line with inflation) — this is the red line in the chart
below. (NB we have used these same base case assumptions to model the
incremental impact of the Business Transformation initiatives which are included in
the two other scenarios noted above).
4.15 These scenarios project a range of EBITDAS outcomes to 2020 which have been
compared to the November 2013 Strategic Plan illustrated on the graph below. As this sets
out, at the top end of our planning range (which we are targeting) we would deliver
breakeven in 2016/17 (one year later than originally envisaged in the Strategic Plan) and a
substantial EBITDAS surplus by the end of the decade which exceeds the figure
envisaged in the Strategic Plan. At the bottom end of our central planning range,
breakeven would be achieved a year later in 2017/18.
4.16 It should be noted that to enable a like-for-like comparison of underlying performance in all
of these scenarios we have excluded any benefit from HMG payments for our social
provision, although we are nonetheless carrying the net costs (estimated at £70m pa by
2019/20) of maintaining the Community branches. This therefore represents an upside
opportunity to our EBITDA performance (i.e. the figure would be uplifted by c£50-70m if we
were able to count the associated income from government as a service payment).
4.17 Amore detailed assessment of these scenarios and the implications are set out in slides
17-24 of the main deck.
£m 2019/20 performance
EBITDAS exit run rate Scenario Netincome Cost EBITDAS
aft Meets the criteria for adjusted financial
flight path set out in slide 24
2. Partial
initiative
delivery, Largely delivers criteria, but may need
stable another year to demonstrate track
base record of commercial sustainability
™ © © O
nothing’
60 counter- Fails to meet criteria — subsidy would
a
1445 1546 16/17 1718 18/19 19/20 fexastcll X have to increase and/or facing
managed decline
4.18 Underpinning the financial scenarios and roadmap is the expectation of significant cost
reduction. Based upon the high level plan we are projecting a 30% reduction in central
costs (£54m in 14/15 + £146m by 19/20) and a 16% reduction in agents pay (£74m), ona
like for like basis using the 2014/15 as the base for measurement. This equates to an
overall cost reduction of 26% and is illustrated in the table below:
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Costs £m Impact of 19/20 Impact of 19/20 Impact of 19/20 after cost
baseline —_ cost out after growth out and growth
i tives cost out initiatives
Central
costs 54 602 -146 456 129 585
Agents pay - 464 -74 390 15 405
4.19 Consistent with the significant reduction in costs the programme is projecting a reduction
in FTEs over the plan period. The projected ‘end-state’ FTEs is greater than originally
envisaged (circa 600-800 FTEs) primarily due to the in-house operation of the supply chain
business and the retention of a majority of the Crown branches.
4.20 The overall funding required to deliver our original preferred business outcomes (as set out
at Stage Il) totalled around £1.6bn, exceeding the funding envelope we have available.
We have therefore recalibrated the roadmap and financial glidepath, in particularly
reducing the numbers of Crown branches that are exited and identifying savings in the
projected NT expenditure, in order to bring the funding required within the available
envelope. The table below sets out this updated assessment:
2015/16 2016/17 2017/18 2018/19 2019/20
Available funding:
Government funding 280 220 140 60*
3
Total cumulative
funding envelope (incl 929 1,052 1,188 1,281 1,394
cash reserves)’
Required funding
Total cumulative programme 380 706 858 904 945
funding
Other essential capex 30 60 100 150 200
(cumulative)?
Total cumulative funding
needs 410 766 958 1,054 1,145
Headroom against
funding envelope
BIT 3 my
4.21 It should be noted that our capital position nonetheless remains heavily constrained over
the plan period, with limited scope to absorb new risks or priorities. Discretionary
spending will therefore have to be very tightly controlled throughout the period, with strict
disciplines in place to ensure that resources are only released once it has been
reconfirmed that: a) the initiative remains a priority within the context of our overall
strategy; and b) it is affordable within the context of our latest trading and balance sheet
position.
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5 Levers for adjusting our strategy
51 Given the potential for significant variation in the business and associated financial
outcomes over the plan period, we have defined three broad strategic levers that will be
used to adjust and recalibrate our plans to respond to new risks, challenges and
opportunities as they arise. The levers are integrated into the overall transformation plan
and are summarised below and set out in more detail in the accompanying slide deck:
° working with other key business partners — in particular given the critical
dependencies on Royal Mail and the potential limitations in their ability and/or
willingness to fully align with our strategic goals, it is appropriate for us to consider
the spectrum of options available to reduce this dependency. Inevitably there are
significant financial, legal and operational risks associated with some alternative
options, but they should be considered seriously given the existential risks we
would face in the longer term if it proves impossible to achieve the level of
alignment and performance required with RM;
° adjusting the channel mix and pursuing further cost savings — the proposed
target operating model already entails a substantial shift to lower cost and more
profitable branch operating models and greater use of digital and direct channels in
certain product areas such as insurance. Therefore the opportunities to go beyond
these existing plans within the next three years are incremental rather than radical
(particularly given that our strategies in both mails and FS have defined our branch
network as our fundamental USP). However, there are a number of options which
we are actively reviewing:
° in all scenarios we will dynamically manage the shape and size of our
branch network and face-to-face capabilities in order to respond to
evolving market conditions — for example there will be checkpoints
throughout the programme to test whether the business case still exists for
layering in additional costs associated with new access points and
Financial Service Specialists;
° we are exploring the opportunities to accelerate and enhance the way
we use direct channels to generate new sales growth — for example
depending on market conditions there may be a case for shifting some of
our incremental investment away from the branch network towards new or
existing products which are primarily sold online (insurance, home
services, IDA and associated digital services for public and private sector
service providers); we are also reviewing the scope to monetise our data
assets and sell advertising access to our digital media to other businesses.
The potential financial impact of these measures will be assessed as part
of the next stage of work to develop these ideas in more detail;
° we will also explore the scope for going further in reducing our cost
base, in particular in supply chain (as noted above) and in agents pay for
example through product rationalisation (stripping out low margin
products), accelerating work to change the tax status of agents and in the
longer-term further realignment of pay rates in light of evolving market
benchmarks (which are likely to continue falling).
. Strategic portfolio management — while we have now clearly defined our two
core pillars of FS and mails, there remain a number of commercial options we can
consider to reallocate resources both within these areas and across our other two
pillars of government services and home services. This needs to be an active and
on-going process to ensure our scarce capital is allocated to the areas of highest
profitability and return on investment. In particular, we are:
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° reviewing the strategic options within Home Phone and Broadband
(where there are credible options either to pursue EBITDAS accretive
growth or to divest of the business either through a conventional sale or
license arrangement, which could potentially release £40-70m of capital);
° monitoring the potential to acquire full ownership of FRES (depending
on how the current negotiations with Bol proceed) — this would deliver a
significant step-up i DAS of pa, but the significant upfront
cost (estimated at iffordable unless it can be
externally financed;
° exploring the opportunities to leverage our brand equity and
customer reach (both in-branch and online, particularly if we move into
IDA) to exploit new areas of growth that may become increasingly
important if we face declines in our traditional products. The income from
such initiatives is likely to be modest, but if they can be deployed at low
margin cost (for example through license arrangements with a third party)
they have the potential to be EBITDAS accretive;
° exploring the options to strengthen our proposition to host retailers,
recognising that we need to defend or grow these relationships in order to
fulfil our ambitions in the mails market, and;
° updating the definition and funding arrangements that underpin
POL’s ‘social provision’. This comprises the delivery of commercially
unviable services that drive accessibility for remote regions and
disadvantaged groups. Further work will be undertaken between now and
spring 2015 to define the precise options for what is ultimately considered
for inclusion within ‘social provision’ and to ensure that this part of the
business is treated as an integral part of the network going forward. This
work will include exploring the potential to move to a contractual service
payment to underpin this work rather than the current subsidy
arrangements, although it should be noted that there are pros and cons
with both options.
5.2 None of these levers provide a silver bullet to fully mitigate the risks we face. Therefore
given that income risk is skewed to the downside our top priority will be on accelerating the
reduction and variablisation of our cost base to ensure the business has the flexibility and
resilience to respond to a range of market conditions.
6 Transition to Business Transformation implementation
6.1. The transformation will require a ‘top down’ integrated governance and control structure to
ensure value is delivered in line with the plan. The proposed governance model consists of
a Chief Transformation Officer, supported by an enhanced Transformation Management
Office. All Transformation programme plans and commercial business cases will be
scrutinised by the Finance Committee and a new Enterprise Design Authority with ultimate
approval sanctioned and controlled by the Transformation Committee.
6.2 Each programme will be sponsored by an ExCo member who will be accountable for the
approved business outcomes, the associated benefits, cost to deliver and risk
management.
6.3 Asummary of the governance and control framework is provided in the supporting material
lodged with the Board in the reading room.
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6.4 There are a number of key activities required to be completed to set up the transformation
implementation for success and manage the substantial risks which have been identified.
They are summarised below:
* Progress all ‘in-flight’ programmes that are consistent with the high level roadmap, with
regular updates provided to ExCo and a revised Transformation Portfolio governance
forum;
« Further development of our integrated narrative to engage customers, staff and agents
in the change journey;
e Appointment of Programme Directors / Leads to ensure the overall transformation
portfolio of initiatives are progressed uniformly from 2015/16 onwards;
e Simplify the ExCo and SLP organisation with clearer roles and responsibilities by
completing the planned organisational re-design;
e Accelerate the development of the Transformation Management Office (TMO) and the
Risk & Compliance function so as to provide leadership support to the ExCo, as
recommended by the recent PwC report / McKinsey;
« Develop programme delivery and resourcing plans during H2 2014/15 for all initiatives
due to be progressed on the roadmap in 2015/16;
« Secure relevant partner support by adjusting existing partner contracts or contracting
new partners (as appropriate);
e Incorporate, as appropriate, the recommendations from the recently commissioned
Business Transformation assurance review performed by PwC which has been lodged
with the Board in the reading room;
e Demonstrate POL’s ability to deliver substantial near term cost efficiency by driving out
the targeted in-year improvements in H2 2014/15
6.5 The actions required to be progressed and concluded during the transition period, which is
expected to conclude by the end of 2014/15, will be monitored by the Transformation
Committee.
6.6 We propose a further Board update in the New Year, which will coincide with the 3 year
operating plan and budget update. The update will seek to confirm that sufficient progress
has been made during the transition period to support the recommendation for the
transformation implementation to be progressed as an integrated portfolio of change from
the start of the new financial year.
7 Inyear cost savings update
7A Stage I of the programme identified annualised cost saving opportunities in the order of
£100m (risk adjusted to £89m at the end of Stage II) to be achieved by the end of financial
year 2015/16.
7.2 The business is progressing these savings as part of an integrated business wide cost
reduction programme, governed by a sub-committee of ExCo. This sub-committee, the
Cost Reduction Group (CRG), meets weekly to assess progress and to agree actions as
appropriate
7.3 The programme delivery is broken down into phases with an initial priority on delivering
£60m of in-year savings in 2014/15 (up from the £46m in the budget)
. £53m is baked into the ExCo functional targets.
. A portfolio of cost efficiency savings have been identified, by ExCo function, to
deliver the required improvement
. A number of ‘business wide’ initiatives have been identified in the event that
functional savings fall short of targets. These include significant actions on both
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staff and non-staff costs, a number of which have been recently communicated to
colleagues.
74 The priority for 2015/16 will be on delivering further savings that, combined with the
savings delivered in 2014/15, deliver the original target of £100m of annualised cost
reduction.
75 Assuming the in-year savings for 2014/15 are delivered this will contribute £54m of
recurring savings. This is ahead of the £48m originally set as a target. The remainder
(£46m) currently comprise;
. Staff initiatives to be launched at the end of November will contribute a further
£15m
. A potential further £6m of Staff initiatives to be launched in the new year that will
require more detailed analysis and validation prior to implementation
. A further £10m - £15m of Non-Staff (Supplier) cost reduction initiatives arising from
the recent supplier ‘town hall’ meetings and further focus on those suppliers where
we spend over £100k per year.
. The Mid-Term initiatives originally identified in Stage I which have been analysed
further and adjusted down to £16m. These include a range of product
rationalisation, optimisation and automation opportunities across a range of
functional areas and in a number of cases cross functional change to release value
76 Delivery of the cost improvement is a business priority and recognised as a crucial first
step in the execution of the business transformation. The targets for the required cost
reduction will be factored into the three year plan and specifically the 2015/16 budget to
underwrite the £100m saving by the end of 2015/16.
8 Request
As set out in section 1 of this paper the Board is requested to support the:
8.1 Business Transformation Programme recommendation to progress the transition activities,
noting the risks as set out in the paper and reading room deck;
The Board are also requested to note:
8.2 Business Transformation Programme design conclusions, as a key enabler to the
execution of the agreed business strategy and commitment to commercialise the business;
8.3 Proposed Transformation programme governance and control framework which will be
operationalised during the transition phase; and
8.4 Programme proposal to update the Board in Q4 2014/15 to confirm the transformation
programme plans and outcomes for 2015/16 and beyond, which will be summarised
alongside the three year plan and 2015/16 budget updates.
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WITHOUT PREJUDICE, STRICTLY CONFIDENTIAL -— not for onward distribution
Work in progress draft
Becoming a commercially
sustainable Post Office
Business Transformation Programme — Stage 3
Board update
25th November 2014
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Executive summary
+ The November 2013 Strategic Plan set a path to deliver a commercially sustainable business by 2020. We have defined our strategies to
defend our position in mails and establish the Post Office as a leading challenger in Financial Services. However, achieving commercial sustainability
also requires a new operating model that right sizes our cost base to enable us to survive in a challenging market environment with a growing number
of low cost competitors, whilst remaining true to our purpose and brand promise throughout the transformation.
+ We have defined a new target operating model, with a streamlined corporate centre, franchise network and bulk outsourcing of transaction support,
resulting in a significantly lower cost base and FTE profile (~30% reduction in central costs’, moving from 6,132 to 4,105 employees).
+ Given Post Office’s assessment of its starting point, the transformation needs to be driven from the top-down, focusing on a small number
of significant change initiatives. The proposed roadmap is structured into six themes to balance outcomes, benefits, certainty of outcome and risk —
(1) reduce central costs; (2) transform the organisation; (3) lean IT; (4) reduce and variabilise network costs; (5) Win in Mails; (6) Grow Financial
Services. Within the six themes, there are 13 discrete programmes.
+ There are significant risks in transforming and sustaining the target business model, including major programme delivery risks, alongside a
number of reputational and operational risks that could impact our customers. These risks are unlikely to materialise in isolation, and so we also need
to be very mindful of the compound impacts.
+ We have tested the financial impact of the overall transformation using various scenarios. At the top end of our central planning range we
achieve breakeven in 2016/17 and an EBITDAS in 2019/20 of £153m. At the bottom end of our central planning range, we achieve breakeven in
2017/18. The plan is to drive for the top end, however we have a set of leading indicators to dynamically manage the plan if we come under pressure.
We have adjusted the programme funding requirements to keep within our existing envelope - but with headroom falling within £200m by 2017/18 our
scope to absorb new risks/priorities is limited
+ We have outline three broad levers to adjust our strategy to respond to the key risks and challenges, including (1) working with other partners;
(2) adjusting the channel mix; (3) portfolio management. None of these levers provide a ‘silver bullet’ to fully mitigate our risks. Given our income risks
are heavily tilted to the downside, our top priority will be on variabilising and reducing our cost base as quickly as possible to ensure the business has
the flexibility and resilience to respond to a range of market scenarios.
+ The transformation requires “top down” integrated governance and control to ensure the value is delivered in line with plan. The proposed
governance model consists of a Chief Transformation Officer, supported by an invasive TMO, Enterprise Design Authority and Transformation
Committee. We also need to ensure that we have a compelling story throughout our journey so we attract and retain colleagues and customers.
+ The next few months will focus on putting in place the critical success factors ahead of intermediate checkpoint reviews before
implementation, covering: (1) setting up the TMO; (2) recruiting delivery partners; (3) fleshing out the IT roadmap; (4) operationalising programmes;
(5) building MI capability; (6) delivering the 14/15 plan — in-flight programmes, Wave 1 organisation redesign, and in-year cost efficiencies
1 — does not include cost uplift from revenue growth initiatives
7
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Contents @
° Strategic context and target operating model
° Roadmap
¢ Analysis of financial impact
° Risk and mitigation
° Governance and controls
° Transition plan and partners
¢ Plan for near-term cost out to 15/16
¢ Appendix: Technology and digital
¢ Appendix: Additional financials
cy
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We have a clearly defined business model that articulates our
long-term source of competitive ae
* The work for the June awayday and September
FS deep dive has established clarity around two
core customer propositions with a symbiotic,
value-enhancing relationship:
The most convenient
mails & parcels retailer
IRRELEVANT
Your ability to challenge in FS is built on the '
' trust and customer reach which goes with I é
' being the UK’s number one mails retailer; ' The UK’s leading “ i
vy _ in turn, our FS product set diversifies our challenger in financial x
income base and strengthens our offer to . \
host retailers versus the competition. services “= J
I * The Business Transformation programme has defined the operating model (and roadmap) required to underpin
: these customer propositions, with the following key attributes:
!* ~30% reduction in central costs by 19/20 and variabilisation of network costs‘ — giving us greater
' financial and operational flexibility to respond to challenging and uncertain market conditions, while
' continuing to underpin our customer propositions
* Accelerating towards our aspiration for a fully franchised network of 20-30,000 outlets. This reaffirms the fact
that, first and foremost, we are a B2B business — while direct sales can broaden our income base
(especially in FS), it is our relationships with host retailers that are the prime source of our long-term
competitive advantage, and also the root of our social value (anchoring a retail presence and access to
! services in communities across the UK)
* The People and Engagement strategy has defined the change agenda for the next 18 months to enable our
__ Staff and key stakeholders to support us on the journey to achieve commercial sustainability ye
1 — Includes £54m cost reduction in 14/15 and £146m incremental cost reduction by 19/20, does not include cost increase Beat!
due to inflation and revenue growth initiatives
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Commercial sustainability requires a radically different 2
operating model to drive significant performance improvement
Net income Cost EBITDAS
Today [I
FY14/15 P6 ae asia “#0
2020 with no growth
(flat income, inflated cost) 924 1,065 -141
5 200-250 J
Risk adjusted I
2020 baseline ‘ 1,221 (1,292 -71 —
2020 strategic plan
target 1,240 120
1 ,360
£200-250m of cost-out may be required to close the potential for an EBITDAS gap
between the 2020 strategic plan target of £120m and the downside projection of -£71m at the
June board, leaving contingency in case commercial plan does not fully deliver
1 — June Board strategy figures (incl. Mails income at risk and Network Extension) adjusted for incremental FS income at risk, and
exclusion of £130m cost-out built into the June Board plans Fay
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The radically simplified target operating model delivers a
lower, variable cost base and 33% fewer FTEs versus today
Automate / lean Outsource / offshore
Target operating model
Business ne
management
Responsible for
delivery of
agreed 3 year
operating plan
Customer, Product, Businesses
Network management
Corporate
centre + People &
Strategy and Sens PIII devm't
policy function
setting direction
for the
organisation
Brand Strategy
Technology
Transformation management office
Operations Supply chain
Support to
business Contact centres
management Partner operations
and corporate
centre - bulk Finance operations
processes and
service HR operations
capability IT delivery
1 - Increase by 2,500 FTE versus indicative numbers at September Board. The main
sources of increase are: 1) partial closure of Crowns only (bottom 40%) and 2)
transformation of Supply Chain stopping short of outsource
Note: Does not include any FTE increase from revenue plans
Risk and
assurance
Ingoing hypotheses for target operating model design
= Radically simplified customer journeys, shifting to online
= Leaned business management and clear P&L accountability
= Shared Centres of Excellence for customer analytics, account
management and marketing across all business lines
= Transition to a lower cost agent network, closure of unprofitable
Crowns, revised agent pay structure, automated network support
= Integrated account mgmt and retail capability (single ownership)
= Talent development programme to attract, retain and
incentivise
= Licencing of the POL Brand to market facing business/portfolio
opportunities
= Top-down strategy setting with an integrated roadmap to 2020
= Enhanced risk and change management capability
= TMO configured to execute the transformation
= Cash supply chain transitioned to retailer cash where possible.
In the short-term, reduced demand for stock supply chain via
product simplification / digital migration (no stock supply
warehouse)
= All business transactional support functions moved to cloud
BPaaS offerings where available or outsourced
= Reduced business demand on support functions to focus on
high value services only
Total in-house FTEs: ~4,105 (vs. 6,132 today)!
Total costs: ~£1Bn (vs. £1.3Bn projection for 2020)
EBITDAS: ~£153m (vs ~£-141m projection for 2020)
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Target operating model has significantly different attributes to
todays ways of working
From
To
Organisation
and people °
6,132 FTE across organization in
2014/15
Lack of team structure, role definitions
and clear reporting lines with an inward,
incumbent mindset
33% reduction in headcount to 4,105 FTE
from cost-out initiatives’
New top team OD structure with cascade of
communications, strong central
transformation governance (CTO, TC) and
motivated, accountable colleagues
Processes e
Little use of automation (e.g., workflow,
case management, self-service)
Inefficient manual, duplicated and
uncoordinated processes
Little process MI (e.g., error rates)
Processes automated (e.g., self-service) or
semi-automated (e.g., workflow) where
possible
Streamlined processes with minimal waste,
Continuous measurement and
improvement
Data and
technology
Fragmented legacy IT systems that
struggle to meet digital business needs
and drive inconsistent reporting and
manually intense reconciliations
Transactional support functions heavily
insourced (incl. Finance service centre,
HR service centre, Network support)
Lower cost IT landscape that enables Digital
Mails and FS growth, and effective MI
reporting across POL
Off the shelf vanilla, industry standard
solutions where possible (e.g., Finance, HR)
Transactional support functions centralised
in low cost onshore location and
outsourced as utility
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1 —FTE increase of revenue growth initiatives to be worked
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We plan to achieve a ~30% reduction in central costs by 2019/20
Central costs
Cost, £m
BB Agents pay
e ¢
80 1,065 -221 ~30% reduction in
985 I 80 146 Lisi ee central costs,
74 845 nm driven by:
602 aoe = £146m reduction
455 due to cost out
initiatives
= £54m in year
savings in 14/15
464 390 405 already factored
into baseline
—___
14/15 P6 Inflation 19/20 Impact of 19/20 afterCost 19/20
outlook baseline costout costout impactof after cost
initiatives growth out and
— initiatives growth
Already incorporates £54m central cost
reduction in 14/15
rr
ie,
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Strategic context and target operating model
Roadmap
Analysis of financial impact
Risk and mitigation
Governance and controls
Transition plan and partners
Plan for near-term cost out to 15/16
Appendix: Technology and digital
Appendix: Additional financials
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The roadmap will be driven top down, focused on a
small number of change initiatives
Assessment — based on ExCo input Implications for transformation approach
= Leadership directed and outsider supported;
= Single programmatic focus to get the
“will” < © . organisation moving in one direction;
level’ . . .
= Aligned on a simple set of themes in support of
Resistant Willing a recognised need to change;
= Prioritised initiatives, boldly stopping initiatives
that distract attention and resources;
“Skill”
level ce
Implications on POL: For the transformation
Green Capable ‘ ‘ .
delivery to be effective, we will require:
« Amore top down, directive leadership style;
¢ Areal focus on delivering a limited number
Urgency © of substantive change initiatives, and;
« Abusiness-wide commitment to
Immediate Long-term successfully transform POL at pace.
1 —The only variation in survey results relates to the ‘will’ level of the organisation. The status of this dimension will be kept under review during the
transition to implementation.
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A number of principles have framed the shape and
sequencing of the roadmap
Disaggregate major change programmes from business as usual activity with separate
dedicated governance forums and supporting MI / control frameworks
Plot all major change on one roadmap to ensure an integrated view for prioritisation of
scarce management bandwidth, change capacity, funding and dynamic management of
delivery schedule
<
Create a top-down roadmap first and then translate into operational plans
Accelerate cost out programmes that deliver significant benefits, which are largely within
our control and are not dependent on external market factors or business partner engagement
(e.g., Royal Mail, Bank of Ireland)
<<
House all other change activity within a constrained “small change programme” budget
managed from within the overall Transformation Portfolio to retain control on overall
funding/spend and avoid destabilising core transformation programme plans
<
Appoint a single accountable executive (ExCo / SLT) and specific quantitative targets for
each programme, supported by dedicated delivery resources and an overall delivery plan with
key milestones to track progress against
EN
Put in place the critical success factors before we begin including TMO, Communications,
Stakeholder Management, Business Case and Benefit Management, Risk and Assurance,
Governance, Structures Control Framework and supporting MI
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The proposed roadmap is structured into six themes to
balance outcomes, benefits, certainty of outcome and risk
. Net
£m, FY19/20 impact income Cost EBITDAS Total
Theme Objective impact impact impact funding
* Reduce central costs by £79m by driving out near 0 79 79 113
Reduce central term opportunities, automating/ outsourcing,
costs simplifying the organisation and renegotiating
_.. Supplier contracts 2
Transform the * Redesign organisation, refresh performance 0 0 0 3
ganisation management, recruit top talent, build capabilities
* Move to lower cost towers procurement model, 0 22 22 185
Lean IT ; f 5 eae »
migrate from Horizon and deliver “IT enablers’
Red d Migrate 88 Crowns to lower, variable cost Agencies -38 120 82 528
2 meni Simplify customer journeys to reduce agent pay
VETEEL TLS Transition to new agent contracts?
network costs Introduce new Locals Lights format
Become most convenient Mails retails incl. 79 -64 15 50
opening 12.5k Access Points, SME proposition,
__.CRM and e-commerce development)
Become the challenger FS provider 177 -80 97 36
Critical enablers I ° Establish and operate transformation enablers incl. N/A N/A N/A 30
TMO / Comms / Portfolio Management / Funding
Additional * Provision for other essential capex and change NIA N/A N/A 200
funding costs (“small change budget”)
=> @& & <>
qT y
1 Some e-commerce development is enabled by "Simplify Customer Journeys" programme he
2 By variablising cost that is currently fixed, this initiative also provides future flexibility in addition to financial performance
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Within the six themes there are 13 delivery programmes*
Theme Programme Objective
* Capture near-term savings to be delivered by March 2016 by
1a: Near-term cost out leaning/centralising/stopping activity and renegotiating supplier contracts
Radtcatcentral 1b: Finance/HR transformation
costs
1c: Network Support transformation
* Drive year on year savings (continuous improvement) in our operations to
achieve target end state for the corporate centre
Transform the . * Review and refresh organisation design, recruit top talent, refresh performance
2: OD & people development management system, build capabilities and foster culture change
3.1: Lower costs * Move to lower cost towers procurement model to drive cost efficiency
Lean IT 3: Lean IT z 5 7 - *
3.2: Enable change ° Migrate away from Horizon and deliver “Digital enablers” to support overall
1d: Long-term efficiencies
transformation
* Transform 2,500+ branches to local model, complete transformation of
remaining mains and develop and introduce local light’
4a: Network Transformation
Reduce and
variabilise 4b: Crown Transformation 2
network costs
* Current base case envisions migration of 88 Crowns (40% that are deemed
unprofitable) to lower, variable cost agencies (primarily Mains)
: Simplify journeys to reduce agent time, agent remuneration and improve
convenience (partially enabled by Network Development)
. A * Maintain our Mails market share by opening up to 12.5k Access Points over 3
eine Eb LS GLES USTED __. years with targeted multiple retailers a
7 e * Become most convenient Mails retails incl. SME proposition, significant
Gb: GSE SURLY ecommerce development, and strategic portfolio management
4c: Customer journey simplification
6: Grow FS * Become the challenger FS provider in execution of agreed strategy
* Excludes ‘enabling’ activities for People, Change Management, Communications and Stakeholder Management
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The high level roadmap delivers the target state TOM by 2020
“These Programme 14/15 I 15/16 16/17 17/18 18/19 19/20
T T T T T
1a Near term cost out +£50m near-term ns ! ! ! 1
7 I 1 1
\ I 1)
‘1b Finance / HR transformation +£4m EBITDAS' IN 1 I I
Reduce central
costs I i) i] I 1
1c Network Support transformation +£8m EBITDAS' A ! ! !
I I 1)
'
1d Long-term efficiencies Announce programme A £17m cost out A)
T T T T T
Transform the
organisation 2 OD & people development ) Capability building and next generation performance management }
OD 1 ‘OD end state’ 1 1 n 4
a es
1 \A_ Transition to CDP complete {
Lean IT 3 Lean IT Le t EN Enablers delivered = LL A
L I LJ i i)
n n n n 1
4a Network Transformation 4.3k locals A All locals A!
Reduce and ad z z bi I
variabilise 4b Crown Transformation 2 Initiate migration process AX Transition 44 Crowns AY Transition 88 Crowns A)
network costs i i i ri 1
i impli ‘i r Simplification of transaction Simplification of all
4c Customer journey simplification A Secure RM buy-in . pendscts cpmaplats A product journeys A )!
5a Network Extension <} - 6k Basic Matis+ “ZX - 12k Basic Matis? Zy-* TBC ------- Lx 12.5k-BasicMaits #-~---~- ~~~ -- 7 > \
T T T T 1
" ) Kick-off SME & eCommerce”
1
5b Commercial strategy I--.Decision point on GS & HS £32m income uplift AV £48m income upflit A)
[occccscseseesesd t———— t + + t
FS 6 Grow FS £27m revenue growth , ) £117m revenue growth £177m revenue growth? AN}
I i : : ; 1
1 Mid-term opportunities in Finance / HR and Network Support A A A A A
n n L n
Note: The ‘high level’ Transformation Roadmap will undergo further refinement and development during ‘transition’ into
implementation (eg Clarification and Transition States), as the outcomes from individual programme design work is completed
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The portfolio has a range of outcomes and financial impacts
£m, FY19/20 exit run-rate impact
Theme Programme Net income impact Cost impact — EBITDAS impact Total funding
1a: Near-term cost out 0 50 50 25
“Ceheoceeie) 1b: Finance/HR transformation -~ 0 4 4 15
GOSE 4c: Network Support transformation 0 8 8 28
1d: Long-term efficiencies
Transform . 0 0 0 3
2: OD & people development
4a: Network Transformation 0 35 35 445
Reduce and Jaen
variabilise 4b: Crown Transformation 2
network costs sei
4c: Customer journey simplification -30 61 30 12
5a: Network Extension
5b: Commercial strategy
ESTO «:crowrs 7 -80 7 36
Enablers Establish transformation enablers incl. TMO N/A N/A N/A 30
Additional Provision for other essential capex and
funding change costs
=> oo @& «aD
1 — See appendix for further detail aa)
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Each programme has been detailed and aligned with its owner,
and is summarised in Appendix 1
Executive summary Fact sheet
Financial plan
We will align a single senior point of accountability per programme, supported by dedicated
delivery resources, quantitative KPIs and an overall delivery plan, incl. key milestones to track
against
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Strategic context and target operating model
Roadmap
Analysis of financial impact
Risk and mitigation
Governance and controls
Transition plan and partners
Plan for near-term cost out to 15/16
Appendix: Technology and digital
Appendix: Additional financials
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The financial flight path in the November 2013 Strategic Plan 4
was set with the objective of delivering a commercially
sustainable business fit for mutualisation by 2020
Strategic Plan EBITDAS (£m)
_ a 120
100 94
50 30
, _
2019/20
2015/16 2016/17 2017/18 2018/19
-50
-61
-100
-98
-150
Financial 2015/16 2016/17 GU EINE SUED
A . March 2015 eas ‘ Track record of Subsidy
milestones ice x Breakeven in Crowns sane Nec commercial reduced to
Strategic Plan: sustainability £50m pa
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But as we discussed at the June away day, the more i
challenging market conditions that have emerged over the
last 12 months are forcing us to adjust our plans
Projected EBITDAS (£m)
120
94
64 a
54
30
2014/15 2016/17 2017/18 2018/19 2019/20
——Strategic Plan June awayday
In addition to the direct impact on profitability, the acceleration in competitive pressures over the past 12 months is forcing us
to take more radical action than we envisaged in the Strategic Plan just to defend lower income numbers (e.g. network
development and product simplification).
This inevitably has capacity implications (e.g. management bandwidth, IT constraints and ability to absorb stakeholder noise)
— making the delivery of our cost savings and overall turnaround more challenging and expensive.
By targeting a £200-250m improvement in EBITDAS (relative to a ‘do nothing’ counterfactual), the Business Transformation
Programme is seeking to close the gap to our Strategic Plan projections as far as possible, but given the challenging
market environment an adjustment to our financial flight path is likely to be necessary in almost all scenarios.
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Nonetheless, given the political uncertainty and continued
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austerity expected after the next election, we need to continue
working towards commercial sustainability as rapidly as possible
Key points on the public spending outlook:
All of the main political parties have
signalled a continued tightening of the
public finances after the next election.
With spending on health and education
likely to be protected, other departments
like BIS face substantial cuts — some
estimates suggest by as much as 40-50%
cumulatively between 2010/11 and
2018/19 (in real terms).
And with BIS facing substantial challenges
in other areas of its budget such as higher
education, science and technology, this is
likely to result in strong pressure to
reduce spending on the Post Office.
While our funding is fixed until 2017/18,
the incoming government will need to
hold its next spending review (SR) by
Autumn 2015 in order to set departmental
budgets for at least 2016/17 — and it may
choose to fix budgets up to 2018/19 or
2019/20 based on past experience.
Per cent of GDP
20.0 --
16.0 --
120 --
8.0 ~~
40 -~
0.0
Spending on public services (as a per cent of GDP)!
ac average annual real ssn)
14.9 14.2
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
= Other public services (including POL) m Education mi NHS (Health) —__—__
Projected spending after election
More generally, with polls suggesting an even closer result than the 2010 election, the political uncertainty remains high. A hung
parliament is a strong likelihood, and media reports have suggested that senior civil servants are even considering the prospect of two
general elections in swift succession, following the precedent set by Harold Wilson in 1974.
Added to this uncertainty is the ongoing debate around devolution of powers to Scotland and possibly other regions of the UK,
which could potentially impact on the way the Post Office is funded.
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1. Source: Office of Budget Responsibility, March 2014 Economic and Fiscal Outlook. Assumes continuation of the Government's
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Any recalibrated financial flight path must still meet some key
success Criteria to demonstrate progress towards sustainability
= While the pace of year-on-year improvements envisaged in the
Strategic Plan may no longer be achievable, we would
recommend that we should still be targeting a financial flight
path that delivers the following key outcomes and milestones:
¥ No reopening of the existing funding settlement up to
2017/18;
v__ EBITDAS run rate in March 2018 is consistent with a
declining subsidy requirement in subsequent years
(off the baseline of £140m in 2017/18);
v Clear year-on-year improvements in EBITDAS
throughout the plan period, with breakeven achieved
by 2018/19 at the latest; and
v¥ By 2019/20 we should be meeting the characteristics
of a financial independent organisation which we
defined in our Strategic Plan (see box on right hand
side). Reaching that goal will also increase the prospect of
us being viewed as ‘bankable credit’ by external investors,
giving us more flexibility to pursue alternative financing in
the absence of further HMG investment.
= Delivering these outcomes will ensure that we are not taking
undue risks in our assumptions around the availability of HMG
funding after 2017/18. And by continuing to make steady
progress towards commercial sustainability, it should give us a
better chance of securing the buy-in of key stakeholders to the
turnaround.
Defin
n of financial independence: key criteria
A strategy and market position that allows us to compete effectively
in our chosen markets — both now and in the future
The flexibility to respond quickly through corporate actions to
unforeseen changes in these markets.
An appropriate cost base and business model with the flexibility to
withstand revenue volatility
A robust track record of profitability at an EBITDA margin in line with
peers (typically 8-10% minimum in the retail sector — see chart
below’)
EBITDA margin not dependent on uncertain funding from HMG (so
subsidy should either be much smaller or moved to long-term
contract)
Sufficient free cash-flow to allow ongoing investment in the business
to maintain commercial competitiveness in a continually evolving
marketplace
Move to external financing of loan (not HMG) with quantum kept
within affordable limits
14%
12%
10% =
os =
.
4%
Food Govt services. WH Smith John Lewis
Post Office® Source: Rothschild; Food peer group includes
(>)
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We have modelled the financial sensitivity of different delivery ‘
outcomes using three scenarios: the first two scenarios
represent the boundaries for our ‘central planning range’
CENTRAL PLANNING RANGE
o
°
§
ge
Scenario oe
1. Full
delivery, 0% p.a
stable base
2. Partial
initiative 0% p.a
delivery,
stable base
6
es
B=]
=
o
°
o
°
3
3
o
[4
Reduce and
variabilise
network costs
Grow FS
A Programme
delivers impact
Description
Flat underlying business performance
* Allinitiatives deliver in full (in line with the financial
projections detailed in Appendix 1)
Flat underlying business performance
Commercial initiatives deliver partially:
* Network Extension only serves to protect existing
income (i.e. mails is flat rather than declining)
* FS reaches £460m in 19/20 (i.e. the ‘medium’ risks
detailed in September strategy paper materialises)
70% delivery of cost initiatives due to execution risks
3. ‘Do
nothing’
counter-
factual
Source: Stage 3 baseline and programme financial charters
Flat underlying business performance
Commercial initiatives do not deliver, e.g., due to
market conditions
No cost initiatives deliver, e.g. due to lack of political
support
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These scenarios show that our central planning range meets 5
the proposed criteria for an adjusted financial flight path
It should be noted that these figures exclude any payment for social provision but do carry
the cost of the community branches
£m 2019/20 exit run-rate performance
EBITDAS exit run-rate Scenario Netincome Cost EBITDAS
160 -
140 - 4. Full ® ©
120 I Strategic plan ae aa
100 I (for comparison) a aaa af Meets the criteria for adjusted financial
80 - 53 flight path set out in slide 20
60 - :
2. Partial
initiative
delivery, Largely delivers criteria, but may need
stable another year to demonstrate track
record of commercial sustainability
™O © ©
nothing’
-160 - counter- Fails to meet criteria — subsidy would
1415 15/16 «16/17. S«17/18 ~—«18/19~—«19/20 fageagetel X have to increase and/or facing
managed decline
base
This has been constructed assuming a flat revenue profile beyond 2014/15 with central costs increasing in line with inflation and
then layering in the impact of each programme initiative to 2019/20 (see appendix for details of each initiative)
@
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We have adjusted the programme funding requirements to keep
within our existing envelope - but with the headroom falling within
£200m by 2017/18 our scope to absorb new risks/priorities is limited
2015/16 2016/17 2017/18 2018/19 2019 / 20
Available funding:
Government funding 280 220 140 60* 50*
Total cumulative
funding envelope (incl 929 1,052 1,188 1,281 1,394
cash reserves)!
Required funding
Total cumulative programme 380 706 858 904 945
funding
Other essential capex
, 30 60 100 150 200
(cumulative)?
Total cumulative funding
needs 410 766 958 1,054 1,145
Headroom against
funding envelope
1 — Balance sheet modeling assumes the bottom end of our EBITDAS planning range as set out on slide 22. *Also assumes £60m/£50m of HMG funding
in 2018/19 and 2019/20, as per 2013 Strategic Plan assumptions. 2 — Provision for other essential capex and change costs (estimated).
23
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While we don’t believe we need to reopen the existing funding
settlement, we may need to explore alternative options for
financing investment after 2017/18 if free cash flow insufficient
Option: Potential quantum: Considerations:
ate * Could request £70m pa in + Dependent on wider pressures on BIS spending settlement, which are likely
bee peal 2018/19 and 2019/20 on top of to be significant
G g t aft £60/50m NSP already forecast
OCT CLES? while still delivering c10% pa
2017/18 reduction in total subsidy
2. Seek a loan (rather + Depends on affordability within * May be preferable fiscally for government as lending would not directly
than grant) from BIS capital budget — potentially impact target to balance the current budget.
9 £50-200m + Would still count as state aid (calculated as the subsidy implicit in the
Government to support
transitional investment
needs
interest rate compared with private sector lending) — but European
Commission may view the whole loan amount as subsidy if they believe
there is a high chance of it being written off
* Currently constrained by BIS to * Financing only likely to be forthcoming if we're seen as ‘bankable credit’
£50m of external borrowing and (see definition of financial independence in earlier slide) or there is an
3. Seek bank/external £50m in finance leases — but asset/income stream against which the loan can be secured — or if the
fi could seek to increase those banks believe there is an implicit guarantee from HMG.
EDTA) limits + Alternatively we could seek an explicit guarantee from government but this
would be viewed as state aid (and vim for taxpayer is poorer than a direct
loan but with the same credit exposure)
CTT eer lcmicieiiems ° Unlikely to be substantial + Not currently assumed to be a lead option — would require much closer
(e.g. from Royal Mail or commercial alignment with our key partners
Bol)
+ Limited assets available for * Options to be managed as part of ongoing strategic portfolio management —
disposal. Most significant see separate slide deck on ‘Levers for adjusting our strategy to respond to
5. Asset disposals standalone option is to dispose new risks and opportunities’
of the HPBB business - could
potentially release c£40m
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Strategic context and target operating model
Roadmap
Analysis of financial impact
Risk and mitigation
Governance and controls
Transition plan and partners
Plan for near-term cost out to 15/16
Appendix: Technology and digital
Appendix: Additional financials
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Programme delivery risks have been assessed bottom-up 2
using a 4-step methodology
An alternative lens —
mapping risk by needs to
be true criteria over time
Step 3 to enable integrated risk
Aconsolidated risk mitigation planning, e.g:
“heat map” by
* Engaging employee
programme, by eet
Step 2 theme, and by year Gngerieaeitieatee
We worked with was developed, . Securing Gov’ buy-in
each programme illustrating that year ° Negotiating with
owner to map risks one will be “make-it- commercial partners
eine I over time, or-break-it’, and that ° Designing IT roadmap
We defined ‘need- identifying decision isk is highest for ¢ Developing human
to-be-true’ criteria points and revenue growth capital
and mapped these ~~ gependencies / initiatives (outside of * Establishing robust
to programmes correlations our control) change management
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Programme delivery risk mitigations include central
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governance/control, operational planning, and testing external
dependencies early to avoid stranded costs
Risk of
Theme non-delivery Specific risks
Overall risks
* CWU or Unite industrial action
* Outsource partner issues in design and
transition
Reduce
central costs
Transform the
organisation
an IT
CWU industrial action
* NFSP resists agent pay renegotiation
* Royal Mail blocks customer journey
simplification
Dependency of technology delivery partners
Reduce and
variabilise
network costs
Grow * Bank of Ireland unwilling to accept changes
ancial * Existing exclusivity arrangement precludes
Services pursuing other opportunities
* NFSP blocks Network Development
* Royal Mail blocks Network Development
* Some initiatives not yet fully planned
Approach to
managing risk
Ensure strong execution using appropriate partners
to deliver required EBITDAS performance — slide 30
Lack of capacity and capability to
manage the volume and complexity of
change without disrupting BAU
performance
CWU/NFSP pressure disrupts BAU
performance and/or undermines public
and government good will
Government unwilling to support radical
outcomes of combined initiatives
Delay / failure in technology
enablement and delivery leads to
business caught in ‘no-mans’ land
Market pressures lead to demand for
further strategic initiatives to be
delivered on top of existing stretching
plan — accelerate portfolio
diversification to drive revenue growth
Prioritise cost out initiatives, which have fewer external dependencies than revenue growth
Avoid “stranded investment” by developing operational plans and testing external dependencies early
Track and assess delivery and course correct, by setting up strong central governance
Ultimately if transformation impact is not possible then need to consider alternative strategic levers
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In addition to delivery risk, there are a number of reputational
and operational risks that could impact our customers
Risk Risk level Mitigation actions
= Combination of media, CWU, = High; no way to fully mitigate = Putin place a robust stakeholder management
NFSP, local campaigns plan, monitor reaction and course correct
impact government
= High volume of change = High if not properly managed, due to high volume of = Establish central control/governance to coordinate
results in degradation in changes to products, processes and organisation and communicate change for front line
BAU performance structure being driven by multiple initiatives = Ensure clear operational delivery plans, risk
assessments and risk mitigations in place for
each initiative before embarking
= Organise front line change into coordinated waves
= Customers lose goodwill = High if not properly planned for, due to potential = Develop and action clear customer
due to perception that customer perceptions accentuated by media dialogue, communication plans showing how actions help
Post Office actions are not industrial action and political debate Post Office stay relevant to customers (e.g., by
in line with customer creating a more convenient branch network, better
values value products, and faster parcel drop-off)
= IT system transitions " High if transitions not properly managed due to = Use experienced partners, ensure extensive
result in temporary loss of complex landscape of legacy systems and changing testing and pilots, and structure KPIs into vendor
critical services vendors contract
= Customers react = Low; strong programme governance and improved = Drive customer communications with clearly
negatively to multi-format Network will minimise residual risk level differentiated brand and proposition for access
network points, and emphasise service and convenience
= Potential knowledge loss = Low; appropriate preparedness by teams can mitigate = Each function to develop knowledge retention
when employees exit risk level plans ahead of any wave of exits
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We also face the threat of disintermediation, which arguably
represents the biggest long-term risk to our business model
= While our business model has some intrinsic strengths, the fact that most of our products are sourced wholesale from single upstream suppliers leaves
us exposed to the risk of gradual (and possibly abrupt) disintermediation.
= This is particularly the case in mails. Separation from Royal Mail has its advantages, but it has also cemented our status as a retail intermediary.
There are no precedents for this split amongst other major national postal services, and so the long-term consequences are uncertain — particularly
during a period when new competitors and technologies are disrupting the traditional B2C (and C2C) parcels fulfilment model.
= These risks need to be central to our strategic considerations - there are some clear lessons for us from the Phones 4u experience as set out below.
nce
Case study: five lessons fi he Phones 4U expe
In September Phones 4u — a business with 5,500 employees, 720 outlets and £1bn of turnover generating EBITDA of £105m last year — was pushed into
administration by the withdrawal of its last two major suppliers, EE and Vodafone, leaving it with no real business. While the collapse was sudden, the
market shifts which led to it were gradual but seemingly unforeseen by the management and owner. There are five key insights we can extract from this
episode:
1. Adjust to changing consumer trends — Phones 4u’s business model was built on the fact that in the early days of the mobile market customers needed
a trusted intermediary to provide advice on the bewildering choice of tariff structures and handsets from different providers. But customers have become
much savvier over time and there is now less demand for this type of role. There are clear parallels in the way the parcels market is developing.
2. Beware of your suppliers developing their own channels - linked to this last point, a decade ago the network operators were disinclined to invest in
their own sales structures, but with declining margins in the industry over recent years they have become less willing to pay commission to a third party.
As a consequence they now have over 2,000 retail outlets of their own and are also investing heavily in their online capabilities.
3. Protect and invest in your source of added value — Phones 4U failed to keep investing in its network and capabilities to give it a differentiated
proposition in an increasingly crowded market. To survive as an intermediary you need to be clear on your USP - in our case it’s a combination of our
relationships with host retailers, our ability to source products from a range of areas (mails, FS, government and home services) and our IT interfaces
(either existing or under development). These attributes are not easily replicated, and thus provide ‘barriers to disintermediation’ — but they are certainly
not impossible to circumvent.
4. Financial flexibility is essential to survive in a low margin environment — Phones 4u’s debt burden, equivalent to four times EBITDA, left them with
limited wriggle room to renegotiate terms with suppliers. The equivalent burden in our case is our legacy of high fixed costs which if not tackled will limit
our ability to cope with margin squeeze by suppliers in the future. There is no long-term role for an expensive intermediary in a highly competitive market.
5. Income diversification can help offset supplier risks — Phones 4u was almost entirely dependent on the revenue derived from its suppliers, having
sold an insurance subsidiary (Lifestyle Services Group) last year that had offered a degree of income diversification. Our revenue base is more
diversified and building greater ownership of the value chain in areas such as insurance will further reduce our dependence on major suppliers.
@)
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We will use three broad levers to adjust our strategy to
respond to these various risks and challenges as they arise
Work with other
partners
Further cost out
and channel shift
Strategic portfolio
management
Description:
Explore working with other delivery partners and/or
upstream retail clients in addition to Royal Mail
We have less single-partner risk within FS, although Bol
is clearly critical to our growth plans in certain products.
The options here are explored in the separate Board
paper.
Proposed TOM already envisages a substantial shift in
the network mix, but scope to adjust the balance between
different operating models depending on market
dynamics.
We could potentially focus more of our investment on the
digital/direct business if branches underperform.
We're reviewing options to reconfigure cash intensive
products more proactively to reduce supply chain demand
Covers a range of measures to either accelerate growth
or withdraw from areas which are not closely aligned with
core strategy. Could include acquisitions in profitable
areas or divestments to release capital and capacity.
Need to particularly focus on options which could make
our offer to host retailers more attractive versus the
competition .
Considerations for use:
Breaking exclusivity with RM would be a significant
step with major legal (and operational) hurdles — would
only be appropriate to consider if it is clear that we
can't achieve adequate commercial alignment and/or
their own market share is under severe pressure.
In a low income growth scenario we would most likely
roll out fewer new access points and ‘Local Lights’ to
avoid spreading income too thinly. The Mains would
become more dependent on host retail to remain
viable, and it would also potentially strengthen the case
for accelerating Crowns divestment and managing
supply chain demand more aggressively.
Longer-term there may also be potential for further
recalibration of agents pay in line with market rates —
but dependent on achieving product simplification and
network reconfiguration first
Active portfolio management should be an ongoing part
of our strategy under any scenario, but becomes
increasingly important if current income growth
assumptions do not materialise as planned and we're
losing ground to competitors.
These levers are explored in more detail in Appendix 3
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Strategic context and target operating model
Roadmap
Analysis of financial impact
Risk and mitigation
Governance and controls
Transition plan and partners
Plan for near-term cost out to 15/16
Appendix: Technology and digital
Appendix: Additional financials
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The transformation will require strong, central governance
and control to ensure the value is delivered
®
Characteristics of POL transformation: Uncertain
outcome and significant cross functional dependency
Need strong central governance and TMO to...
= Detailed target state design needed for each
programme
= Complex cross-functional linkages across
channels, products, operations, IT, people and
engagement
= Constrained management capacity and
funding
= Mixed change capability with variable heritage
(staff/ contractor mix)
= Uncertain outcome depending on external
stakeholders and market conditions
Challenge programme leads to ensure the
design and delivery focuses on capturing the
value leveraging ‘Enterprise Design Authority’
Manage across functions and programmes
— Ensure the design is joined up
— Identify issues and mobilise functions to
work together
— Create integrated view of benefits tracking,
issues and risks
— Escalate tough decisions to ExCo
“Own” overall change sourcing, funding and
dynamically manage portfolio to prioritise
funding and capacity
Oversee sourcing of the right partners for
successful delivery and provide “SWAT team” to
remediate failing initiatives
Prompt strategic changes in the plan to respond
to external events
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Proposed governance and controls &
The proposed structure to support Transformation is summarised in the following pages:
The structure (Roles and responsibilities, Reporting, Terms of Reference) will be reviewed
during the transition phase and aligned with the other POL governance bodies
In addition we propose to:
1. Establish and populate a POL Design Authority (Business/Technology)
2. Establish and populate a Transformation Management Group
3. Accelerate the development of a Transformation Management Office to provide
effective portfolio management of the Transformation delivery led by the Transformation
Director
4. Accelerate the development of the risk/assurance function to support the TMO to
manage the Transformation delivery led by the Director of Corporate Services
5. Cluster relevant programmes under individual Ex-Co sponsors to create single
accountability and ownership for delivery of outcomes and benefits
®
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Proposed governance and controls
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®
ExCo
Transformation
Committee*
Transformation Committee — manages delivery and
course correction to manage risk
Finance Committee — review and challenge to
requests for funding prior to submission to TC for
approval
POL Design Authority owns ‘end state’ design and
transition states. Provides first line review for all
Finance POL Design initiatives to confirm alignment with target state
Committee Authority .
Transformation Management Group — day-to-day
Transformation management of Transformation Portfolios
Management
Group
* See below for detail
T : Ex-Co Sponsors — accountable for programme
ransformation outcomes and benefits
Committee
Programme Leads (Director/Manager) — responsible
u 1 for delivery of programmes consistent with agreed
EX-Co aie Terms of Reference
Sponsors TMO -— responsible for overall transformation
I portfolio management and related activities
(Business case, Benefits, Assurance, Sourcing,
Programme Reporting, Change Management)
Leads
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Strategic context and target operating model
Roadmap
Analysis of financial impact
Risk and mitigation
Governance and controls
Transition plan and partners
Plan for near-term cost out to 15/16
Appendix: Technology and digital
Appendix: Additional financials
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®
The next few months will focus on putting in place the critical
success factors for transformation implementation
A. Strong central governance supported by a CTO and TMO accountable for ensuring the
value is delivered across the whole transformation
NS
B. Appropriate partners in place by adjusting existing contracts or contracting new partners
C. Credible record of operational delivery by delivering in-year cost efficiency in H2 2014/15
and strong compelling change narrative in place
Robust IT roadmap describing what transformation programmes need from IT in order to
deliver their targets, architecture roadmap to deliver this, and partner strategy for delivering
SN WN
E. Programmes operational and pre-launch success criteria met: Teams mobilised and
operational plans developed and analysed to assess impact on risk and interdependencies
MI capability to track business / programme performance and enable effective decision-making
nN
...in addition to alignment of the Executive team, Board support and assurance from
completing the assurance review of Business Transformation outputs from stage II and III,
and securing Board support for the proposed way forward
Activity and milestones for the above will
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Parallel streams of activity are required to transition to
delivery, whilst addressing the “entry criteria”
Syndicate paper with ExCo Conduct BTr assurance I * Progress Plan B analyses I * Progress Plan B scenario
Secure board * — Resolve funding gap issue C Develop Plan B scenario ' }
decision * Write board paper \* Integrate feedback from Board !
CEO-1 OD tiblannantea * TMO up and running (meeting
TMO role and scope defined rhythm, people and tools)
Comms plan developed - incl a Comms plan launched
compelling narrative Incorporate assurance
Incorporate assurance recommendations
recommendations
* — Kick-off TMO capability-building
* — Ctd. internal comms
* New risk management
framework and tools in place
* Incorporate assurance
recommendations
* — Ctd. TMO capability-t building I
* Ramp-up comms plan at pace
* Embed risk capability in day-
to-day decision making
* Incorporate assurance
recommendations
A Setup TMO
1
1
1
'
1
1
1
1
1
1
1
Develop and agree options for
each delivery partner role
* — Kick-off procurement/
contracting process
* Finalise procurement/
Recruit delivery contracting process
partners
1
1
1
1
1
Re- validate business requirements! Develop and agree with ExCo I * Develop sourcing strategy
Develop IT Develop IT architecture roadmap I 2-3 migration paths, trading off {
1 1
1 1
1 1
a ‘Implement changes
roadmap Validate Back Office towers time, risk, cost
procurement value
Assign (interim) programme Finalise operational planning
Operationalise directors and managers * — Secure buy-in of key partners
programmes Kick-off operational planning i* Submit and evaluate resource
process requests by change
oat
evelop MI strategy — incl.
; design top team KPI
dashboard, identify data needs
Deploy change resources and
establish reprioritization criteria
Mobilise programmes — weekly
team reviews, management
updates etc.
pl perationalise new MI sys fem
gather data (customer, H as part of monthly ExCo
financial, operational, employee)
MI capability
i
7
1
1
1
H Progress in-flight programmes to completion H
Compete Wave 1 organisation redesign
i
7
Deliver in-year cost efficiencies \
i
'
14/15 operational
delivery
1
' A:
' TMO set up and two All programs
programs mobilised mobilised
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We anticipate four types of third party partner support will be
required to assist with the transformation journey
Design partners
Transformation
management partner
Ensures delivery against
targets
= Defines value drivers and
KPIs for each initiative
= Mobilises teams and
ensures appropriate
partners
= Ensures designs are
joined up across
programmes
= Escalates issues and
drives tough ExCo
decisions
= Manages internal
communications
= Delivers proactive “SWAT
team support’ to delivery
F A Implementation and
Detailed design partner ‘i
outsourcing partners Assurance partner
= Designs detailed end = Drives change once end = Assures programme and
state and execution plan state and plan agreed value delivery
for targeted initiatives = Optionally runs function if " Provides independent
= Drives ExCo to make needed line of defence in risk
tough decisions = Brings implementation management
= Brings targeted expertise expertise (e.g., lean), = Deliver key checkpoint
(e.g., cloud HR solution capacity, and scale assurance and deep dive
choice) reviews
Separation between design partners and
implementation/outsourcing partners helps optimise
capabilities and economics, ensure clear accountability, and
avoid conflict of interest
. nail P nor We will select the key partners to assist with the
aie prslensipaalerioen transformation during the transition phase
events
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Strategic context and target operating model
Roadmap
Analysis of financial impact
Risk and mitigation
Governance and controls
Transition plan and partners
Plan for near-term cost out to 15/16
Appendix: Technology and digital
Appendix: Additional financials
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Stage 1 output (4 August) identified £100m of near and
mid-term central cost saving
Cost, £m BB FTE cost Non-FTE cost
2 aa
15
48 100
15
Already delivering’ Near term? Mid-term Total
1 2 3
1 BAU only, excluding BTLI — FY15/16 run-rate
2 Already delivering initiatives de-duplicated
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initiatives and have line of sight to deliver at least £100m by
We are expecting to over deliver 15/16 run rate from 14/15 EE
March 2016
Cost, £m FTE cost Non-FTE cost
200
300
16
30 —————
54 ree
35
Already delivering! Near term? Mid-term Gap/ radical levers Total
1 2 3 4
1 BAU only, excluding BTLI — FY15/16 run-rate
2 Already delivering initiatives de-duplicated
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Progress in Financial Year 2014/15
majority of which are one-off in year savings but also include C./-« ne
latest target we have risk adjusted down t !RRELEVANT;
* The total expected recurring saving to the 2014 baseline from in-year activity ig IRRELEVANT _
Revised Total Gap to
Functional Area Target "On-Track" Target
Commercial Martin George :
Commercial- POOC Martin George
Finance Chris Day
Financial Services Nick Kennett
FS - POOC Nick Kennett I I R R E [ EVA N [
People & Engagement Neil Hayward ;
Corporate Services Chris Aujard
Network Kevin Gilliland
IT / Technology Lesley Sewell
Total
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Illustrative potential impact on central cost base to March 2016
(Staff, Non-staff and POOC) — final position to be confirmed
* Shows expected split by Function from the June 2014 baseline to 16_17 plus additional potential cross functional savings
* Excludes incremental cost of growth in Commercial and Financial Services
* Split by function is directional and doesn’t represent budgets or targets at this stage
* The initial 2015 _16 budget target set is slightly more aggressive and aims to build in £100m saving to the 2015_16 budget
£600
Function
£2 £05
£500 Ey
2014
£400 I
I Baseline]. 2016 .
Function
Commercial
Head Office (incl Bonus)
IT & Managed Services
Financial Services
Network
Crowns
Supply Chain
Other Network
£300
£200
£100
&m £41
2014 Baseline Cost Saving in 2014_15 Budget Incremental Full YearImpact Full Yearimpact In-yearImpact of In-yearimpact of 2015_16 _Full year Impact. Full year Impact
2016_17 Other Near &
2014_15 (net of Impact of of Wave 1 (incl of Non Staff (Top mid-term staff Non Staff (mid- ‘of mid-term staff of Non Staff Mid Term
BAU increases) 2014_15 Delivery 00) 30 Supplier) (Wave 2&3) tier) (Wave 283) (mid-tier) Opportunities”
iz of sight” to £88m saving by
Potential Run
Rate from April
2016
*Other potential near & mid term opportunities from the following (excludes in-year 16/17 savings from outsourcing);
1) Semi-automation across the business (c. £2m)
3) Optimise customer service journey (c. £2m)
5) Product rationalisation (c. £3m)
7) Staff wave 1 and OD — identified £16m but only £15m taken above (£1m)
(£5m)
2) Strategy for Swindon (c. £2m).
4) VAT vs NI on Agents pay (c. £4m +)
6) Contractual adherence on volume based contracts (£tbc)
8) Supplier engagement process - identified £15m only £10m taken above
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Strategic context and target operating model
Roadmap
Analysis of financial impact
Risk and mitigation
Governance and controls
Transition plan and partners
Plan for near-term cost out to 15/16
Appendix: Technology and digital
Appendix: Additional financials
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IT investment required to deliver our business outcomes is
spread across a number of programmes
Incremental IT funding
Theme Programme costs, £m IT requirements
1a: Near-term cost out 2 = No IT impact
15.0 = Maintain system resilience until outsourced
= Then move to BPO cloud-based services
1b: Finance/HR transformation
Reduce central
costs —_—
1c: Network Support transformation 2 = Move to self service and automated processes
1d: Long-term efficiencies
Transform the
hughes 2: OD & people development 7 = No IT impact
organisation Bosscn —
184.5 = £91m - Front Office migration from Horizon to CDP
' = £41m - Branch counter refresh
Lean IT) SB SEDO = £20m - Towers procurement and transition
= £32.5m - IT enablers incl. integration, security, CDP
4a: Network Transformation N/A! = Equipment and support for new branches
Reduce and = : .
variabilise 4b: Crown Transformation 2 N/A‘ = Equipment and network support for new Mains
network costs
is) pI
4c: Customer journey simplification
5a: Network Extension 14.5 = CDP, integration and branch counter equipment
5b: Commercial strategy 17.5 = Data and analytics, CDP and integration
6: Financial Services strategy 32.5) = Data and analytics, CRM, CDP and integration
Total
269 Early estates based on outside-
in view from IT team; being
2 Potential underestimate; programme financial charter allows for much greater investment aligned with programme leads
Source: Stage 3 programme financial charters
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Over £200m of the £1,143m funding capacity is related to
digital channel development
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Theme
Reduce central
costs
Transform the
organisation
Programme
1a: Near-term cost out
1b: Finance/HR transformation
1c: Network Support transformation
1d: Long-term efficiencies
2: OD & people development
3: Lean IT
Funding
related
Overall to digital
funding, £m_ channels, £m
Description of digital investment
25 -
= NA
185 124
= Horizon migration and IT enablers for digital
Reduce and
variabilise
network costs
4a: Network Transformation
4b: Crown Transformation 2
4c: Customer journey simplification
445 -
= NA
12 12
= Allow journeys to start online
5a: Network Extension
31 31
= Allow journeys to start online
5b: Commercial strategy 19 19 = eCommerce and SME propositions
6: Financial Services strategy 36 36 = Integrated digital customer experience
Enablers Establish transformation enablers incl. TMO 30 - = NA
Additional Provision for other essential capex and 200 - = NA
funding change costs
CL <> <_
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I SUBMITTING BY DIGITAL TEAM
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Digitisation of our business is central to delivery of the plan
®
Digital Enablers
Processes
transformed through
digital first approach
(transactions, comms
Simplified product
journeys (based on
knowledge of
customers) and
Increased focus on
online revenue
generation through
capability
Creation of rich data
set around customers
and operations
Reduced central costs
Data sets
and support) increased use of self- development and
serve in online marketing optimisation
channels and in-store
Outcomes
Reduction in FTE Increased customer Increased channel Increased marketing
(central) satisfaction contribution (income). efficiency.
Reduction in Reduction in queues Operational
transaction Reduced attrition improvements
times/agent pay New income
opportunities
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Contents
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Strategic context and target operating model
Roadmap
Analysis of financial impact
Risk and mitigation
Governance and controls
Transition plan and partners
Plan for near-term cost out to 15/16
Appendix: Technology and digital
Appendix: Additional financials
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PRELIMINARY Z
Baseline scenario
2014/15 P6
forecast 2015/16 2016/17 2017/18 2018/19 2019/20
Supply Chain
/ = SC and other
i income
jnereases from
— IRRELEVANT ==
presentation
= Central costs
i increase with
Central costs
” -
z 2 7
PoOoc
Total central
cos inflation
: = Agent pay
(50)
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Backup: We plan to achieve a ~30% reduction in central costs by
2019/20
14/15 P6 19/20 Impact in
Cost, £m outlook, baseline —_ Impact of 19/20 cost of 19/20 after
In year incl. in- Inflation after cost out baselne income cost out and
savings by year uplift to inflation by end aftercost growth by income
end 14/15 savings 19/20 (c. 2.5%) 19/20 out end 19/20 growth
Chai
Other
Network
~30% reduction
in central costs,
driven by:
2 = £146m
8 reduction from
= cost out
£ initiatives
© §f Services i.
oO = £54m in year
14/15 already
factored into
baseline
Not yet
allocated’
Total central
costs
Agents’ Pay
Total costs
1 Additional £12m in 19/20 terms will be driven out by initiatives currently being scoped within programme 1a including review of stock supply chain, product rationalisation, and VAT/NI review
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Net income glidepath by programme
Net income, £m
2015/16 2016/17 2017/18 2018/19 2019/20
915 921 920 924 924
Baseline scenario
1a Near-term cost out 0 0 0 0) 0
Reduce 1b Finance/HR transformation 0 0 0 0 0
central costs. Pho a a ll al ee ee ee ET
1c Network Support transformation 0 0 0 0 0
1d Long-term efficiencies
Transform
the 2 OD & People
organi
Lean IT 3 Lean IT 0 0 0 0 0
4a Network Transformation 9 0 0 0 0
Reduce and
variabilise
ees ~~ ~~ ~~~ rn rn rn nn canner nnn nnnnnnnnn nnn cn nn cn nn cnn nn sewn cn ne
costs 4b Crown Transformation 2 A 4 5 7 3
4c Customer journey simplification i) t) 4 -19 -30
5a Network Extension e 7 27 29 32
5b Commercial strategy 5 16 32 48 48
6 Grow FS 27 57 47 152 177
Establish transformation enablers ind. = EET IS
TMO 0 0 ; 0 }
os 6 40050 °~COC~S i000 ae a
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Cost glidepath by programme
Cost, £m
Reduce
central costs
Transform
the
organ
Lean IT
Reduce and
variabilise
network
costs
2015/16 2016/17 2017 / 18 2018/19 2019/20
Baseline scenario 1,031 -1,048 -1,065
1a Near-term cost out 45 46 47 48 50
1b Finance/HR transformation 0 4 4 4 4
1c Network Support transformation te) 7 7 7 8
1d Long-term efficiencies
2 OD & People (e) 0 0 te) (e)
3 Lean IT 3 9 22
4a Network Transformation 1 22 31 35 35
4b Crown Transformation 2 4 4 17 21 24
4c Customer journey simplification 0 0 8 39 61
5a Network Extension 18 -24 -25 -26
5b Commercial strategy 4 -13 -26 -38 -38
6 Grow FS -30 -33 -66 -75 -80
Establish transformation enablers incl.
TMO. . . . . .
984 -997 1,024 1,011 -989
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EBITDAS glidepath by programme
Net income, £m
Reduce
central costs
Transform
the
organ
Lean IT
Reduce and
variabilise
network
costs
2015/16 2016/17 2017 / 18 2018/19 2019/20
7 F
Baselinescenario eS 107 oe “124 te 2 141 ae
1a Near-term cost out 45 46 47 48 50
1b Finance/HR transformation 0 4 4 4 4
————= ° OO 7 OS 8 a
1d Long-term efficiencies
2 OD & People (e) 0 0 te) (e)
3 Lean IT 3 9 22
4a Network Transformation 1 22 31 35 35
4b Crown Transformation 2 3 7 1 14 16
4c Customer journey simplification 0 0 4 19 30
5a Network Extension 4 3 5 6
5b Commercial strategy 4 3 6 10 10
6 Grow FS 3 23 50 78 97
Establish transformationenablers inc. ETT
TMO. . . - - .
-28 9 66 116 153
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Funding glidepath by programme
Funding, £m
Area
Reduce
central costs
Transform
the
organ
Reduce and
variabilise
network
costs
30 30 40 50 50
Baseline scenario
1a Near-term cost out 18 7 0 0 o
1b Finance/HR transformation 8 8 0 0 0
1c Network Support transformation 14 14 0 te) (e)
1d Long-term efficiencies
2 OD & People 1 4 0 te) (e)
3 Lean IT 84 71 29 te) ie)
4a Network Transformation 196 161 64 14 1
4b Crown Transformation 2 13 22 17 cn 7
4c Customer journey simplification 6 2 4 0 0
5a Network Extension 16 13 1 0 0
5b Commercial strategy 0 6 10 2 2
6 Grow FS 15 1 4 3 3
Establish transformation enablers incl.
TMO 9 9 8 4 ;
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Strictly Confidential
POST OFFICE LTD BOARD
PwC review of the transformation programme
1. Purpose
The purpose of this paper is to request the Board to note the accompanying review paper from
PwC on the Business Transformation Programme (“BTP”).
25 Background and context
With a view to assisting the Board in its consideration of the matters set out in the Board Paper
by David Ryan entitled “Business Transformation Programme”, due to be considered at this
November meeting, (the “David Ryan paper”), PwC were engaged in late October to undertake
a short and focussed independent review of certain aspects of the work of, and
recommendations made by, the BTP team. It was acknowledged by all parties at the inception
of PwC's engagement that, given both the extremely tight time scales and the “evolutionary”
nature of the BTP’s thinking, the outputs of any work undertaken by PwC would necessarily be
at a high level.
Against this background, the terms of reference agreed with PwC asked them consider, to the
extent they were able:
e Whether the plans (if any) produced by the BTP team to handover matters to the
Transformation Management Office were sensible (it should be noted that this aspect of
the work was predicated on the assumption that there would be a handover from the
BTP team to the another, distinct team responsible for implementation, with no
continuity of personnel);
e Whether the proposed high level implementation plan was well structured, identified
interdependencies, took account of appropriate timing, balances the need to accelerate
benefit release within funding, business capacity and capability constraints;
Whether the benefits, operating costs and funding requirements seemed prudent;
Whether (what was then referred to as) Plan B was credible;
Whether the proposed governance structures were robust and suitable;
Whether the assumptions underpinning the so-called “TOM” were realistic; and
Whether the TOM, if implemented as stated, would deliver the required cost saving of
£300 million by 2020.
The accompanying review paper presents PwC’s response to the above questions, though it
should be noted that not all matters above have been fully addressed. There were several
reasons for this, with the obvious one being that (perhaps somewhat inevitably given the
complexity of the subject matter and people’s busy schedules), there were delays in accessing
the documentation and data, with final versions of certain documents being produced relatively
late in the day. In consequence, PwC were given a somewhat compressed timetable to
undertake their review, being only able to look at the materials as they have become available.
That said, both the McKinsey and the PwC teams have worked closely since the documentation
settled down and, as you may see from David Ryan’s paper, where time has allowed, a number
of suggestions made by PwC in order to “de-risk” matters have been taken into account by the
BTP team; some of these are now reflected as items to be addressed during the so-called
“transition phase”.
PWC review of the transformation programme
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3. Brief comment of the structure of the report, the risks and macro themes
The PwC report is designed to be self-explanatory and tries to strike a balance between
commenting on the risk and other implications of the narrow core request set out in David
Ryan’s paper (which is “to progress the transition activities”), on the one hand, and the wider
strategic initiatives (being the 6 themes and 13 distinct programmes), on the other. The reason
for this approach is that, as commercial matter, it would clearly not be sensible to undertake a
review of the proposal to undertake transition activities on its own (which in any event is a
relatively straightforward exercise) if it were felt that the wider strategic initiatives were in some
way irrevocably flawed (which is not their conclusion).
On reading all the papers, it will be seen that there is (by implication or otherwise) a degree of
consensus in relation to the following propositions:
e That there are significant risks and/or adverse financial consequences associated with
whatever road POL choses to take (including for this purpose, the “do nothing” option).
« That agreeing to the narrow core request is in itself not something which would be
considered particularly risky.
« That any decision to start to implement, or to continue to implement (as the case may
be), the 13 programmes carries with it either significant or very significant risks - these
are referred to, and discussed, in both papers.
PwC do, however, go somewhat further and, helpfully in my view, frame a series of questions
(in section 3) that the Board may care to consider during its consideration of this matter.
Furthermore, there is a macro theme that surfaces in a number of places in their paper to the
effect that the transition phase will need to focus on developing a clearer vision showing how all
the various elements of the programme come together as a cohesive whole, rather than a
series of separate initiatives. By contrast, and somewhat reassuringly, no red flags, which might
cause the Board automatically to reject the work done to date, are raised.
4. Recommendations
The Board is asked to note the accompanying review paper from PwC on the Business
Transformation Programme.
Chris Aujard
20 November 2014
PWC review of the transformation programme
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Work in progress draft
Review of Business Transformation Programme
High-Level Themes
Board Discussion Paper
20" November 2014
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Table of Contents
1. Executive Summary
2. Background
2.1. The Post Office in 2020 — what will be the impact of the Business Transformation Programme?
3. Review of the Business Transformation Programme
4. Three Levers to adjust Post Office strategy
5. Review of Transformation Blueprint
6. High Level Risk and Mitigation Action Review ......
APPENDIX I — Documents Reviewed
APPENDIX II — Stakeholder Meetings
APPENDIX III — Our understanding of the 13 Business Transformation Programme Initiatives
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1. Executive Summary
This review is based on our view of the Business Transformation programme from documentation we have seen up to
the 17" November. We acknowledge that the work is continuing to develop and to be refined and therefore different
elements of the programme are evolving in real time. We believe however that our main conclusions and areas of
focus remain relevant throughout the Board approval process for the next phase of detailed design of the
transformation programme.
Itis evident that significant effort and analysis has been undertaken by POL and its business partners to understand
POL's current state and its need to achieve commercial sustainability by 2020. The current state has been validated
with several site visits and c.190 processes have been thoroughly documented. This has provided a detailed
understanding of how the business currently operates and some very useful insights have been drawn. Detailed
revenue, cost projections and assumptions have also been made which build a forecast for the future state of Post
Office 2020.
POL understands that it faces a declining revenue profile and a high cost base which is not sustainable going forward.
In this type of turnaround situation, all routes forward will inevitably contain significant risks.
In reviewing the available transformation programme documentation we have sought to put ourselves in the shoes of a
POL Board member. Four key themes have emerged that we highlight below. We have been advised that some of
these will be addressed in the next phase of the programme — the Detailed Design Phase.
Themes:
1. Asingle unified business case and integrated transformation programme still need to be fully defined and
developed. This requires a compelling narrative to set out the case for change and the organisation’s
response.
Our understanding is that the transformation journey for POL will combine the Commercial Strategy, the FS
Strategy, the 13 programmes that comprise what is termed the ‘Business Transformation Programme’ and the 3
levers (Plan B options) designed to respond to risks and challenges as they arise. To articulate the full programme
of change, these individual programmes, initiatives and interventions need to be brought together into a clear
Target Operating Model with a supporting Outline and a Detailed Business case incorporating detailed financial
modelling, a benefits plan and approach, and risk mitigation actions.
In this review we have focused on the proposed 13 business transformation initiatives which are focused on
achieving a cost reduction target of £300m (the Business Transformation Programme). The commitment to this
programme is strong as evidenced by ownership of different work-streams across a number of Exco members.
We have not reviewed the financial modelling that underpins this programme and therefore cannot make any
comment as to the validity of the assumptions used to calculate the potential savings, nor whether they are
achievable.
We have put together a high-level summary ‘picture’ of the impact on POL as a whole of the 13 programmes, so.
that it is easier to understand what the implications are for POL in 2020. We have also identified where we believe
there are interdependencies between the 13 programmes and what the potential impacts are on POL's business
model. We recommend that the next phase of detailed design develops this further to ensure that any unintended
consequences of change are understood and avoided.
The documentation we have reviewed has mainly focused on the cost reduction programmes. There are a number
of revenue generating initiatives and programmes in the two business strategies, as well as in the 3 levers
identified to adjust these’; the next phase of work should seek to bring these together more clearly into a fully
balanced programme.
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2. The environment and market conditions for POL are changing faster than anticipated. Further work is
needed to identify all potential options around the three levers (previously Plan B) and more cross-
functional working across POL to evaluate all options in light of possible impacts on other revenue
streams (e.g. changes to supply chain and potential impacts for financial services).
The ‘3 levers’ work provides good analysis of the challenges and options facing POL around revenue growth.
However, it does not yet reach a final recommendation. Continued assessment is required to identify the cost /
benefits of these ideas and potentially to further develop new revenue opportunities. Clarity is needed on how they
impact the business model and high level target operating model, for example:
e POL needs to make key decisions around its channel mix and future portfolio (e.g. SME and E-commerce
proposition). Before embarking on radical cost cutting the impact of cost reduction on the Post Office's ability to
generate revenue in the future must be understood.
e POL's relationship with Royal Mail is one of its greatest assets but also potentially a significant constraint to
growth. As already identified, redefining this relationship as one of the key mitigation options responding to
changes in the mails market; this therefore requires careful consideration before proceeding. More clarity is
needed on the detailed options for change which are thought to be still within the boundaries of the MDA.
e PwC has not seen the FS strategy documentation which went to the Board previously and therefore cannot
comment on this component of the business model. However, we can provide a point of view on the future of
the retail and commercial banking landscape in the UK over the next 3-5 years and the potential impact this
might have on POL.
3. The Transformation Blueprint is a high level plan which defines some of the next steps for transition of the
cost reduction initiatives from Design into Delivery. There are a number of key activities that need to be
completed as the programme moves into detailed design before it can transition into delivery. A
distinction should be made between those tives already underway and new programmes.
The 13 initiatives within the Business Transformation Programme should be brought together into a single
integrated portfolio and with a consolidated plan so that there is full visibility of their interrelationships and any
interdependencies.
We have identified a number of activities / documents that should be developed in the next, Detailed Design Phase
of work. This includes items such as a detailed resourcing plan, an impact assessment and the benefits
management mechanism.
For example: POL already recognises that the organisation does not currently have sufficient capacity or
capabilities in-house to deliver such an ambitious programme of this complexity and magnitude. At a high level,
indicative team sizes have been identified for each of the 13 programmes. A consolidated resource plan is required
to provide clarity of the skills and capabilities required to deliver the transformation, and a resource profile is
needed to show the volume and timing of resources required across the lifetime of the programme. This is
important to enable informed decisions about recruiting, training from within or ‘buying in' temporary support. In
such a large transformation, POL must fully understand the cost implications of different resourcing options, and
the timing of the resource needs in order to avoid delays or damage to benefits realisation.
Clear and effective governance is required to drive the portfolio forward at pace. This should include the creation of
a Design Authority to hold individual programmes to account and to preserve the Post Office 2020 vision.
A portfolio of this complexity which impacts staff, customers and other key external stakeholders requires a robust
change management strategy; this should include communications, stakeholder management, training and
development for staff and other targeted interventions to align POL senior leadership behind the change. A robust
strategy for union engagement will also be important to avoiding IR action if possible.
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4. The transformation programme by its very nature has a high risk profile. Some of the risks have
satisfactory risk mitigation strategies identified, but there are some gaps. Therefore the next phase of work
should seek to address this and put in place adequate steps to address these risks.
POL should not underestimate the cumulative impact of significant and multiple risks to delivering BAU services
when embarking on such large scale transformational changes concurrently. In considering these we acknowledge
that there is also potential adverse financial risk associated with the ‘do nothing’ option due to declining volumes in
the mails market and some government services, as well as competition in financial services and telecoms.
Robust risk management on a portfolio of this magnitude is essential. Further work is needed to model risks while
detailed mitigation plans need to be developed to provide assurance to the Board that the portfolio is realistic and
deliverable.
The proposed 13 transformation initiatives aim to achieve cost reduction of £300m, with a £1.1bn of Government
funding requirement. However the delivery risk associated with many of the initiatives is high and the barriers to
overcome are challenging. The programme will be sensitive to its low ROI (21%), however it should be noted that
this figure is supressed due to the low ROI on the network transformation programme which is already underway
and agreed with Government.
The main imperative is to take cost out to stabilise the Post Office while looking to grow revenue elsewhere in a
competitive market environment. We have not seen documentation that fully addresses the irreversible impact that
cost reduction will have on its ability to change tack or explore alternative sources of revenue in the future.
A number of the 13 initiatives have interdependencies with each other and also existing BAU initiatives which are
outlined at a very high level. A much clearer and more detailed understanding is required for the next phase.
The Business Transformation Programme has evolved at tremendous pace and it is important that all of the
organisation's leadership have the same level of understanding and commitment to the proposed changes.
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2. Background
Facing significant financial and competitive pressures in a rapidly changing market, and a new paradigm of being a
separate entity from Royal Mail, Post Office Ltd (POL) has identified its stated objective of becoming commercially
sustainable by 2020. This vision is supported by a strategy which comprises two core customer propositions:
1. The most convenient mails & parcels retailer
2. The UK's leading challenger in Financial Services
In May 2014, POL embarked on a Business Transformation Programme (BTP) to deliver this vision underpinned by a
streamlined and cost effective operating model. This programme identified a £300m gap for POL that would need to be
addressed. In recent months a radical cost reduction programme has been designed which contains 13 transformation
initiatives which will deliver the £300m saving and leverage £1.1bn of previously agreed Government funding. This
cost reduction programme represents the ‘TOM' that we have been asked to review.
In parallel, a separate project has identified 3 levers to adjust the strategy to respond to challenges and risks as they
arise (Plan B options) which threaten to undermine the strategic direction that has already been agreed.
Finally, there has also been work carried out to address the People and Organisational design of POL recognising the
current capability and capacity of the existing organisation versus the requirement for top talent to lead and drive the
immense amount of change required by the organisation over the next 5 years.
The Board will meet on 26" November 2014 where they will be presented with the Business Transformation
Programme and they will be asked to:
e Provide board alignment, assurance and support for the proposed way forward at the completion of Business
Transformation stage I and II
Approve next steps for transition to put in place the critical success factors for transformation implementation. We
recommend that the Board give careful consideration to the 4 themes outlined in the Executive summary and the
detailed findings contained in the remainder of this report.
2.1. The Post Office in 2020 — what will be the impact of the Business Transformation Programme?
One of the key themes in the detailed section of this report is the requirement to have a visual representation of how
the Post Office will change from the current state through to 2020. As part of the Transformation roadmap, 13 initiatives
have been identified to shape the future of Post Office and enable it to become commercially sustainable by 2020. A
number of these initiatives are already in progress (e.g. Network Transformation, Crown Transformation etc.) whereas
some of them will kick off before the end of 2014/15 (e.g. Finance/ HR Transformation). The diagram below is a
snapshot of POL's current state and target state that has been developed to understand the scale and scope of the
changes the organisation will go through. We have attempted to ‘paint a picture’ what we believe POL will ‘look like’ in
2020 if the full set of transformation initiatives are implemented to assist the Board in visualising the impact of the
transformation.
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Current State (2014) After Cost-out Initiatives Target State (2020)
l
[ 2020 Vision: Become commercially sustainable by winning in Mails & being FS challenger }
Customer f Key changes: focus on SMEs and e-commerce, invest in customer data & analytics and simplify customer journeys }
Product & Mails income £386m where Collections & Mails income £517m where Collections &
Services Retums and Retail services 3% of this income Retums and Retail services 27% of this income
Financial Services £279m Financial Services £456m
Telephony£124m Telephony?
Government Services £146m GovernmentServices? projected share of
income
Channels Crowns 300 Crowns 0-180 45
os —_————————__—__ 45%
Mains 3,200 Mains 3,500
Locals 4,800 Locals 4500 ay,
Local Light ° Local Light 4,500 .
Access Points 02,000 Access Points 12,500 5%
Community 3,500 Community 3,500 3%
Direct (online) ° Direct (online) 25%
People # of FTE # of FTE
Crowns 2,962 Crowns 1,767 Ene Sie FE rummbars nat
confirmed yet — number of
Otherfunctions 3,170 Otherfunctions 2,338 additional FTE to deliver growth
orm 6,132 Taal 4,105 strategies will be examined further
I Key changes: train employeesto execute new processes and upskill them to deliver new Commercial & FS strategies
Process [ Key changes: the majority of 190 processes to be modified for leaning, automation & outsourcing
Technology
Strategy and support other initiatives (e.g. Customer Journey Simplification, Network Developmentetc.)
Key changes: Migration to towers model, change in the platform and improved front-line capabilities to enable Commercial
Location i
{ Key changes: Support functions moving to a low-cost UK location and increasing footprint of agency network
Figure 1: Summary of main changes identified in Business Transformation Programme
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3. Review of the Business Transformation Programme
We have reviewed the material that has been provided on the Business Transformation Programme. We recognise
that the programme has continued to be developed and to evolve and therefore we have reviewed the material that we
have been provided with up to the 17" November. We also acknowledge that some of the findings that we have
identified over the past two weeks have already helped to shape the programme and that some of the issues were
promptly addressed.
There are a number of documents that have not been reviewed as these have not been available, such as the
economic model that sits behind the cost saving projections; therefore we have not tested the modelling or the
assumptions that underpin the programme.
The documentation that we have reviewed has often been brought to life through the ‘voice-over’ when presented, for
example by the Exco members to their colleagues. To aid clarity for this review we have summarised in Appendix 3 our
understanding of the 13 transformation initiatives.
In the table below we outline a number of themes that summarise our findings from the review of Business
Transformation Programme. We have included some questions that we might ask if we were in the Board's shoes to
provide comfort as to whether the transformation programme is fit-for-purpose, is deliverable and will not inadvertently
damage POL's future ability to grow revenue / move in a different strategic direction.
Theme
Seeing the big picture
The level of change proposed for POL is
significant. Different strategies, initiatives and
programmes all suggest a radically different
Post Office for its staff, agents and
customers.
Visualising what this looks like would bring
the impact of these changes to life and aid
decision making.
ard Questions
What do the changes
mean for the shape of
the Post Office?
What impact will
changes have on
people, process,
technology and
customer?
dings
We have not seen a visual depiction of the Operating
Model (As-Is and End State) that would help the
Board and other stakeholders understand the vision
and impact of changes on the organisation.
A traditional Target Operating Model is the conceptual
view of how the Post Office will operate in the future
and how its resources work together and are
deployed to achieve its strategy and serve
its customers.
Fit with strategy
Following the ExCo meeting on 13/11 we
gained a better understanding of how the
Post Office Commercial and FS Strategies,
the Cost-Out programme and ‘Plan B’ options
together form the full transformation
programme.
As these Strategies and programmes are
somewhat separate initiatives, POL must be
sure that in combination the actions that will
be taken in the transformation programme
will deliver the Strategic Vision for POL in
2020
Does the programme
allow us to execute our
overall strategy?
What do the changes
required for cost
reduction prevent us
from doing in the future?
What compromises
between strategy and
cost reduction have
been made?
The overall picture of how all the elements
(Commercial & FS strategies, Business
Transformation Programme — both on-going initiatives
and new programmes, ‘Plan B’ etc) fits together and
becomes a coherent modemisation programme is not
clear.
There are other elements that we expect to see that
are not mentioned such as a property strategy.
Without clarity of the programme, and simple ‘story’ of
how everything fits together, delivery of this
programme will be difficult, and there is a potential
risk that it will not provide a compelling case for
Government who are expecting a full ‘network
modernisation programme’ with a balance of revenue,
cost, people and operating model changes.
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Theme
Designing the full transformation /
modernisation programme
We have seen a number of elements of
revenue generating ideas and cost-out
initiatives, but as part of a full transformation
programme further detail is needed in order
to really test the validity of costs and benefits,
risks and issues and implications for the
organisation, franchisees, the public and
government.
Board Questions
What is the detailed cost
and benefit profile from
all the difference
programmes / initiatives
that would make up the
transformation
(modernisation)
programme?
ndings
At present there isn’t a formal business case for the
transformation programme.
An outline (and then detailed) business case based
on a holistic understanding of all elements of the
Transformation Programme is required. This would
clearly articulate
« What the programme is
«What the assumptions are
«What the cost of implementation is
« What the expected benefits are the profile of
when the benefits are expected to be realised
We would expect a business case to identify ranges
of costs and benefits rather based on different
assumptions.
Sustainabil
ty of the Change
The Cost-Out Programme has been created
to meet the Post Office’s vision of becoming
commercially sustainable by 2020. However,
in isolation from in-flight initiatives, and
without a holistic approach that flows from
the new business model that understands the
resources needed to deliver this, this may not
be sustainable in the long term, or sensible to
achieve the overall strategic objectives.
Do the cost reduction
initiatives impact current
or future revenue
opportunities?
What processes and
behaviour is changing to
ensure changes are
sustainable?
To implement change in such a way that it is
sustainable requires different methods and
techniques.
Consideration needs to be made as to how to
implement as it is as much about behaviour change
as it is about new methods or ‘forcing’ ways of
working through automation.
We would require more details on both the impacts on
people, and the approach to be taken to change
implementation in order to be reassured about the
sustainability of the change proposed in the
programme.
Focus on Strengths
The design of a transformation programme
should take a balanced view of strengths and
weaknesses of the current operating model
and organisational assets (in the fullest
sense) as well as consideration of the market
environment and forecast trends.
Have all revenue
opportunities and cost
reduction options been
identified and fully
evaluated?
In the material we have reviewed we have not seen a
sufficient exploration of the strengths of Post Office.
E.g. Recent work by Strategy&' identified that many
traditional physical retailers are underplaying their
positional advantage. We see many organisations
tushing to move to a digital offering at the possible
expense of making the best of the unique advantages
they already possess. To succeed in digital also
requires significant physical infrastructure.
Financial assumptions
A financial model and assumptions sit behind
the figures shown in the power point
presentations.
What are the core
assumptions and cost
drivers for savings?
What activity or
behaviour will actually
change to enable cost
saving of staff if network
is increasing?
We have not had sight of the financial modelling and
are therefore unable to comment on the veracity of
the assumptions contained within it.
We have seen some inconsistencies in the numbers
in the different versions of the documentation that we
have reviewed — figures have been updated in
different iterations but without an explanation as to the
evidence for the change.
1 Previously Booz & Company
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Theme
Understanding the journey
The narrative for changes underway and
planned at the Post Office has been largely
verbal in meetings and board sessions. The
story of change should be widely and simply
understood by stakeholders.
Board Questions
What is the narrative of
transformation?
How do conclusions flow
logically into the
decisions that are
needed?
ndings
Misunderstandings and the difficulty to carry out our
work has largely been due to the lack of a single,
digestible story of transformation. To do this kind of
transformation really requires a powerful articulation
of WHY things need to change and what it is that is
actually changing. This provides the basis for all
communications and engagement with staff, agents,
partners, government, stakeholders etc.
To provide comfort that the programme will achieve
the strategic vision for POL will require a better
articulation of the programme — what it is and how it
will deliver the desired outcomes.
Return on investment
The benefits case for transformation, whether
financial, social or to achieve core elements
of commercial sustainability needs to be
understood and explained. This is particularly
true where RO! is low and wider stakeholder
funding may be required. The 13 initiatives
provide a total benefit of £282m, but require
£1.1bn funding to deliver ROI of only around
13%".
Why is ROI low and is it
reasonable?
What confidence do we
have in revenue growth
and cost assumptions?
What are the benefit
dependencies?
A business case for each of the 13 initiatives is
needed to understand how RO! is calculated and
aligned between programmes to justify the level of
investment required.
Without exploring the supporting models to test
market assumptions and forecasts, we believe there
is significant risk that these will further contract and
affect returns.
Transformation knowledge and capability
Our greatest insight has come from our
limited opportunity to speak to those involved
in the programme. But, this pool of
individuals is small and the number of
permanent employees with a programme
perspective is minimal.
Who can provide
continuity and comfort
that knowledge is
sufficiently shared?
How are we sharing
knowledge in the
programme?
With the lack of single documented narrative of
transformation, much of the story of transformation is
‘in the head’ of key individuals in the programme who
are temporary or external to POL. This is a significant
risk and knowledge needs to be shared and
transferred across POL.
Risk Profile
Many of the initiatives carry a high degree of
risk — both delivery risk for example the
reliance on being able to change the nature
of agreements with core partners or the need
What is the worst case
scenario?
What is our mitigation in
worst case scenario?
The programme has an acknowledged high risk
profile and 3 main levers will be used to respond to
risks as they arise. Market conditions have already
moved significantly in the last 6 months, and the
ExCo already agreed on 13/11 that some of the
original ‘Plan B’ measures should be incorporated into
is Does this represent too
for Government support, and risk for the inuch Vek CrPOL? the main approach. This recognises the mitigation
organisation e.g. reputational risk. required in order to keep up with the sector and
All risks should have adequate mitigating competitive landscape change.
actions identified and planned. However, considering the programme's significant
delivery risk, we have not yet seen sufficient evidence
of risk mitigation and scenario testing.
People Impacts How are we Although this has been flagged by the Transformation
It is recognised that there is insufficient talent
and capability within the organisation for the
level of change required. We have not had
sight of the People and organisation design
and understand this has been conducted as
a separate programme of work. It is critical
that the output of this work is considered in
conjunction with Business Transformation
communicating changes
and staff impact?
Are we managing to
retain and attract talent?
Has TUPE been
factored in for migration
from crowns to local
team, PwC have not had visibility of the detail of
analysis or planning that has taken place. Upskilling
the organisation and attracting and recruiting new
talent to source new skills required to deliver the
strategy e.g. FS skills will be crucial.
Knowledge retention (e.g. the centralisation of sorting
at PostNL failed due to the loss of local knowledge
that was not properly captured before the organisation
2 The previous iteration identified 21% Rol
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programme and the levers which may be
applied as risks arise.
A lot of operational change is proposed as
processes are automated or outsourced. A
strength of the Post Office is the level of local
knowledge that makes sure the business
functions well on a daily basis.
agencies?
Will knowledge and
capability be lost if we
reduce the number of
crowns and move to
automated / outsourced
processes
moved to a new operating model) should also be a
core consideration during transition.
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4. Three Levers to adjust Post Office strategy (Plan B options)
‘Plan B’ was introduced to respond to the situation where the market conditions / competitive landscape worsened and
the assumptions underpinning the Strategy are no longer valid. This has now been developed into the identification of
three ‘levers’ which will impact on the future of POL.
These three levers (Plan B options) provide some positive risk mitigation. The next step is to agree these options and
embed them into the overall transformation programme so that they are included in the business case and target
operating model. At the current time, the three levers have not been worked through to the point at which concrete
conclusions have been made and recommendations are ready to be discussed and agreed.
Note: The documentation under review here continues to change.
Plan B lever oard Question: Findings
1) Working with other partners
What are the.core barriers
to resolve js} and POL I. ELEVAN:
corporate and strategic = IRRELEVANT.
misalignment? However, financial analysis of this scenario suggests there might be
. some significant impacts on volumes going through the Post office
IRRELEVANT I How can we validate the network.
respective strenaths of POL
ani. int=o) Robust evaluation and modelling is required before a strategy can be
negotiation? , as the repercussions of a wrong decision with regard
lationship could be very damaging and irreparable.
This_lever.considers
What is the risk of
disintermediation and who Despite some stated benefits of greater universality, in the medium
offers the greatest threat as I term with shifts in strategic direction elsewhere and the known
an alternative retail access quality of service and reputation of withe trigger for this lever
point? should be high. As customer journey options increase, there is a
significant, irreversible risk of disintermediation and we would like to
see more consideration of how this risk would be addressed in this
IRRELEVANT I
If some form of Plan A+
activity is needed in the
medium term, why isn't this
in Plan A?
2) Further cost out and channel shift
If income continues to If we choose a particular Aligning to strategic direction
show low growth to solution for revising our ;
undermine commercial channel mix, what would be I A comprehensive list of potential changes in the channel mix is
sustainability, the POL the implications on our identified but an impact assessment needs to be carried out to better
may reconsider its strategic objectives? understand the implications on POL strategic priorities.
recline dein the ral Do any of these proposed For example, we would expect to see the details of the ‘agency-
9 Solutions andernine the based sales structure’ for FS products as opposed to Crown sales as
but holier, delivery of our core an alternative solution suggests accelerating the Crown divestment.
reducing high cost propositions? Similarly, the role of Mains in the FS revenue growth is not clear
channels (Crowns, Mains) dunien saencer mileretion
and investing in digital. ig agency migration.
What triggers will initiate the I Adjusting the channel mix in a robust way
adjustment of the proposed
channel mix? 3 broad levers for adjusting the channel mix to respond to low
income growth are proposed but a mechanism to ensure that the
Which lever is the most right lever is used as needed depending on the downside scenario.
appropriate one given a
There will also be an impact of these on the financial flight path
which needs to be drawn out to give Board the confidence that this
particular low growth
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scenario?
How will the suggested
channel mix impact our
financial projections?
lever can robustly react to downside scenarios.
What is the role of digital in
increasing our revenue?
Can our IT investments
flexibly deliver new digital
services?
Increasing role of 1
The growing role of Digital has now been recognised in the Plan A
toolkit, not just Plan B. But, it supports two core propositions due to
changing dynamics of consumer behaviour and its thinking needs to
be embedded to ensure sufficient investment in the required IT
capabilities and to accurately capture the IT architecture
requirements and roadmap from a broader range of digital offerings.
What are the resource
implications of ‘Plan B’
options? Do we have the
capability and capacity to
deliver these options if our
main plan cannot be
realised?
How does this impact our
cost base?
Alignment between Cost-Out Initiatives & ‘Plan B’ solutions
The impact of cost-out initiatives in Plan A should be taken into
account while deciding on the proposed actions in Plan B. The
resource and cost implications of these levers have not been clearly
articulated.
With a smaller proposed TOM, these solutions will put extra burden
‘on the downsized functions. For instance, making Mains viable in a
low income growth scenario expands the work of reduced Network
Support Teams following Network Support Transformation.
3) Strategic Portfolio Management
This sets out an ongoing
process to evaluate, adjust
and re-prioritise elements
of the product portfolio to
continually appraise
products and services
according to performance
and resource constraints.
If POL’s core market does
not deliver growth, new
markets and service
options will be considered.
Can our new Target
Operating Model allow for
the new products/ service
offerings to be added to our
operations quickly?
Will these new offering
require a different set of
internal capabilities?
Should this not be included
in Plan A?
Agile Operating Model for new income streams
The proposed portfolio management discipline provides a robust and
systematic way of evaluating new product/ service offerings,
however the implications of these new income streams on the TOM
should be considered in more detail. It is critical to develop an agile
operating model that will allow new product lines to be delivered
efficiently and effectively in a short time period.
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At PwC we use a framework to design large scale transformation programmes. This framework is called ‘Transform’.
Transform has been developed over a number of years based on our experience implementing large-scale
transformational change across a range of organisations and sectors. Through our knowledge of what works, and what
doesn't, we have developed this best practice framework which include all the activities and elements that need to be
in such a programme to successfully deliver change and achieve the expected benefits.
The Transform Framework - Life Cycle Diagram
Strategy & Design Construct > Implement > Operate &
Assess Review
programme and benefits ma
Customer Offering
Delivering
_—— Process
Technology
Scope- Information
specific
Modules Organisation
People Capabilities
Corporate Structure
aN
Figure 2: PwC’s Transform Framework
POL is currently in the Design stage of the five stages shown above. As the programme moves into a “Transition to
Execution” stage, the following areas should be addressed to enable a successful implementation of the 13 initiatives
through the Construct, Implement, and Operate phases.
1: Detailed Resourcing Plan The lack of a detailed resource plan will put undue
strain on POL; scarce skills will not be optimised;
and subject-matter experts will face competing
demands from different projects. In addition,
targeting gaps in skill and capability will be difficult to
achieve making the development of a compelling
business case to secure additional internal and
external resources more challenging.
An estimated team size for each of the thirteen programmes has
been indicated, but this has been difficult to test given the lack of
detailed rationale to explain the team size. Given the size and
scale of the POL transformation programme, a detailed resourcing
plan should be developed in Transition Stage to ensure that the
required capabilities and skill-sets are in place as well as sufficient
capacity for detailed design, build, and implementation of the
transformation programme.
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Key Areas
Potential Consequences of not addressing
2: Impact Assessment
We have not seen assessments of the impact of each initiative on
a range of aspects; including people, technology, business
outcomes, customer service, brand and reputation. The
implications of the initiatives on each Operating Model layer (i.e.
process, people, technology etc.) should be outlined to inform the
detailed design of TOM.
Without impact assessments of each programme
and any suggested changes to programmes, the
Board will be left making uninformed decisions that
may have unintended consequences on aspects of
the organisation or its ability to serve the customer.
3: Role Definitions
The delivery partner roles require more detail and explanation as
they are critical to the next phase of the programme. The rationale
behind the separation between design partners and
implementation and outsourcing partners is not fully understood.
Roles not clearly defined will lead to confusion, key
activities may fall between the cracks, and there will
be a blurring of accountability leading to an inability
to hold individuals and teams to account. Too many
delivery roles, potentially supported by a number of
different delivery partners will also increase the
management burden and lead to unnecessary
confusion.
4: TMO Design, Structure, and Set-Up
The role of the TMO is critical for the success of this
transformation. The main principles considered to set up a TMO
seem to be appropriate, but the size and shape of this function and
the roles involved should be defined further. For instance, two to
four liaison roles in the team may not be sufficient given the
demands from thirteen initiatives and the role of Head of Business
Analysis and Design needs to be better articulated.
Getting the shape, size, and functionality of the TMO
correct from the outset is critical to secure the
correct skills and expertise to form the team. A TMO
that cannot add value to programme teams but
merely appear to be an additional reporting burden
will quickly be side-lined by the business.
5: Risk Management Processes and Structures
Given a transformation of this size, it is critical to apply a rigorous
risk management discipline. We have not seen evidence of this
being in place. For example, risks do not appear to have been
modelled, so it is difficult to validate the RAG status. No risk
owners have been assigned, nor does there appear to be the
governance in place to support risk elevation in the organisation.
We would like to understand risk mitigation actions better. It is
important to develop detailed mitigation strategies in particular
around trade union actions and Government position and appetite.
Without a tight grip on risks and a robust risk-
management discipline, a transformation
programme of this scale will quickly become
unmanageable. The Board will have to take tough
decisions and they need to be able do so from an
informed position with a clear understanding of key
risks and associated mitigation plans otherwise risks
such as Trade Union and Government negotiations
are likely to become key barriers to a successful
outcome.
6: Benefit Management Mechanism
High-level financial benefits are identified to a varying extent for the
thirteen programmes. We have not had sight of the detailed
financial model behind the initiatives. Non-financial benefits such
as reputation and customer relations do not seem to have been
considered.
Benefits Management is a key area that needs to be planned and
resourced properly from the outset. We often find that in
transformation programmes of this type, this is not addressed and
as a result benefits are simply not realised.
Without a full appreciation and visibility of the
forecast of both financial and non-financial benefits,
it will be impossible for the Board to know whether
the programme is on course to deliver what is
setting out to do nor will they be able to hold
programme leads accountable for any failure to
deliver anticipated benefits.
7: Governance and Reporting
The proposed governance structure seems sensible, but further
work is required to lay out the details of the governance
mechanism, such as escalation routes and frequency of meetings.
Successful programmes have clear, robust, and
well-understood governance. Without this there is a
risk of programme proliferation and decisions being
made in silos with little control over the impact these
decisions will have on other parts of the portfolio.
Equally, overly complex governance will stymie
decision making and delay programmes
unnecessarily.
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Key Areas
Potential Consequences of not addressing
8: Communications Plan
As the programme moves into the ‘Transition to Execution’ stage, a
detailed communications plan should be in place to appropriately
engage with key stakeholders, including customers, employees,
Government, Union, agents, and partners such as Royal Mail and
Bank of Ireland.
Without an agreed narrative and robust
communications strategy, rumour control will take
over, and stakeholders will be unable to connect
with the change and understand how it will impact
them. In the worst case, this will lead to
organisational paralysis, significant staff and trade
union dissatisfaction, and adversely-affected
customers.
9: Change Management Approach
It is essential to have a clear understanding of the scale and scope
of the changes proposed. The impact that this transformation will
have on the organisation is huge and there should be an
appreciation of the challenges that lie ahead, in particular the
significant cultural shift from a public-sector mind-set to a private-
sector, profit-making one, as well as a recognition of the leadership
alignment issues both at Ex Co and in particular within the SLT.
Unless the change management is embedded in the
integrated programme management, the
transformation will not deliver the required cultural
shift properly within the organisation leading to a
loss of benefits. Staff will become disaffected,
translating into a reduction in customer service
standards. Without significant training and
development for the organisation on what and how
they will need to do in the future many of the
benefits will not materialise.
10: Portfolio Plan
As the programme moves into Detailed Design stage, we would
expect to see a high-level portfolio plan outlining the key activities
and the dependencies between the thirteen programmes and other
change initiatives. This should also include high-level assessment
of business as usual activities to ensure resource hot-spots are
managed properly.
Without integrated planning, people will struggle to
differentiate between business as usual and change,
not be able to understand the organisational
priorities, programme alignment will be lost, and
ultimately the transformation will fail to deliver all
intended outcomes.
11: Detailed Handover Plan
It is a good starting point to develop high-level next steps as part of
the Blueprint, but we would expect a detailed handover plan to be
in place to gain confidence over whether it could be implemented
against the financial backdrop before the Board are in a position to
make the go/no-go decision.
Confidence in the transformation journey is crucial
for minimising risk and increasing the chance for
success. Prioritisation, sequencing, alignment, and
similar decisions need to be consciously made at the
outset; not once it is potentially too late.
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6. High Level Risk and Mitigation Action Review
To pursue the 13 initiatives set out in the Business Transformation programme we have identified 4 categories of risk
that need to be considered. Alongside a summary of each risk, we also indicate whether we have seen evidence that
this risk is being mitigated from the documents in our review. Although there is some good analysis to identify risks,
this often does not always follow into mitigating actions. As such, this does not provide comfort of a comprehensive
view of the mitigation of risks, the interdependency of those risks and the impact that their mitigation will have on other
initiatives.
Itis critical to revisit key risk areas and develop detailed mitigation actions as part of the next stage.
D Rep o
programme akeholde Depende
Reduce 1a Near-term cost Pi Further funding
Central out due to delivery
Costs issues and
decrease in the
" capacity to
?. Financel as deliver revenue I >
ransformation growth
1c Network 3
Support Transf.
Mitigation PARTIAL NONE PARTIAL NONE
1d Long-term Medium volume I Adverse impact P 1a, 1b, 1¢, 3
efficiencies of change of Union actions
following from on the public
near-term cost- I goodwill
out initiatives
Mitigation NONE NONE PARTIAL NONE
Transform 2 OD & People Out of scope
the Development
Organisation
Lean IT 3 Lean IT High volume srupt a Failed IT Budget unable
and pace of IT OL services [EICNAC) to cope with
change to trigger negative [ements
enable other reaction n
initiatives
Mitigation IN PLACE IN PLACE NONE NONE
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Initiatives Delivery Reputational External Financial Key
(programme, Stakeholders Dependencies
people) (unions, Gov't,
NFSP)
Reduce & I 4a Network Team changing i t Changing scope I Replacement
variabilise Transformation and dependent of programme partners needed
network on evolving for agents 1c, 5a, 4b
costs models
Mitigation
4b Crown Agents required I Brand impact Likely union ig
Transformation 2 I to migrate from fewer disruption v
activity from Crowns in key jer
Crowns areas en
Mitigation
4c Customer Dependency on I Requires shift in I Royal Mail el 3, 5a,5b
Joumey IT and with other I customer support, NFSP Ipt iS
Simplification programmes behaviour action n
Mitigation
Win in Mails 5a Network Large change Sensitivity to Royal Mail Agent time can’t I 3, 4c, Sb
Development with pressure on I market and support, NFBP be easily
people capability I footfall action, retailer transferred to
to deliver negotiation benefit
Mitigation
5b Commercial »r visior Market Income not 3, 4c, 5a
Strategy ot defined, conditions drive elatic i underpinned by
-Te)=)(-) lower income operational
il plans
Mitigation
WininFS 6 Financial Needs at Bank of Ireland Competition with I 3
Services Strategy I substantial Y support required I big banks,
investment in Y i beyond 2023 market
people capability saturation,
sie bio et fies and training x reliance on POL
‘ ‘i ne. io es ra brand/branch
information menor
available for
review)
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Colour Risks — Description
High risk — high likelihood, high impact
Medium risk — medium likelihood, medium impact
Low risk — low likelihood, low impact
Text Mitigation — Description
In place Mitigation action in place that will reduce risk impact
Partial Mitigation action proposed, but does not seem to sufficient to offset the impact
None No evidence of mitigation action in place
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APPENDIX I —- Documents Reviewed
Documents
20131120 Strategic Plan November BIS
Submission FINAL
Documents
BTr end of Stage 1 summary
20140211 ExCo Paper 13 Feb 2014 v0_1TL Final
BTr Stage 3 Exco doc_v 02
20140226 Business Transformation_Board_Brief
v0 4 Final
BTr Stage 3 Appendix 1 - Programme scopes and
financials
20140320 Business
Transformation_Board_Brief_11
BTr Stage 3 Appendix 2 - Risk assessment
20140320 Business Transformation Board Paper
v21
BTr Stage 3 Appendix 3 - Delivery partners
20140410 BT Design Partner briefing v1.0
BTr Stage 3 Appendix 4 - TMO
20140508 Business
Transformation_Exco_Brief_Final
Business Transformation Design Partner ITT
20140604 POL Board Strategy PREREAD
Business Transformation Org Chart
20140605 cover memo_formatted
Business Transformation PID
20140605 Steering Group and SME immersion
final
Business Transformation Project Charter
20140702 Business
Transformation_Board_Brief_TOM_Final
Current state assessments by business area
20140702 Operating Model and Strategic Cost
Reduction
Exco working session 13 November v008 final
20140703 The 10 Accelerators
In-flight assessment validation deck
20141028 FINAL BTr Stage 2 Output_TOM Design
v2
Lean walkthrough documents
20141028 Appendix 1 - Initial perspective on TOM
attributes
Overall pain points
20141028 Appendix 2_Need to be true criteria
Process mapping output
APPENDIX II — Stakeholder Meetings
Nai Position Date of the Meeting Durati
David Ryan Business Transformation 04/11/14 4 hour
Director
Chris Aujard General Counsel 05/11/14 2 hours
Alison Thompson I Head of Change 06/11/14 30 mins
Layla Wildon Business Transformation 06/11/14 2 hours
(Corporate Services)
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Strictly private and confidential draft for discussion
APPENDIX III - Our understanding of the 13 Business
Transformation Programme Initiatives
Programme Plain English In- Key outcome for Potential consequence Commentary
Description flight POL for future revenue
growth
1a Near-term Delivering cost Yes I Reduction in Itcan enable further The programme requires major
cost out efficiencies through central costs by —_I revenue growth by investment due to the volume of
leaning/ centralising/ £14m to be releasing capacity through I redundancies and TUPE transfers.
stopping a number of delivered by efficient processes, Delivery of benefits in 2015/16 will
processes and March 2017 however this capacity be a significant challenge based on
renegotiating supplier increase shouldn't be fully I the volume of change that will be
contracts offset by redundancies required (e.g. new processes, new
ways of working etc.)
1b Finance/ HR I Delivering cost No I Reduction in The FTE reduction may —_I Proposed approach is aligned with
Transformation I efficiencies through Finance & HR potentially decrease the —_I current trends to make HR/Finance
simple & automated costs by £6m tobe I capacity, undermining the I processes efficient and cost effective
processes, delivered by ability to cope with the however, there are other operational
outsourcing March 2017 increased demand on performance improvement methods
transactional activities back office functions due _I to release 20% capacity without any
and centralising the to revenue growth IT investment that could have been
retained function in a strategies (e.g. new considered in this programme.
low-cost UK location income streams)
1c Network Delivering cost No I Reduction in The FTE reduction may —_I The Network Support requirements
Support Transf. I efficiencies through Network Support I potentially decrease the I of each format (Crowns, Mains,
simpler service costs by £8m tobe I capacity, undermining the I Locals, Local Light and Access
catalogues, automated delivered by ability to cope with the Points) should be mapped out and
self-service network March 2017 increased demand on carefully assessed to mitigate any
support, outsourcing network support functions I negative consequence of FTE
transactional activities due to Network reductions in the long-run.
and centralising the Transformation & Network
retained function in a Development programmes
low-cost UK location
1d Long-term —_I Building on near-term I No I Reduction in Any further FTE reduction
efficiencies cost out initiatives, central costs by I may adversely impact the
delivering further cost £17m to be capacity and capability to
efficiencies through delivered by 2020 I enable revenue growth
operational efficiency
improvements (e.g
lean/ automation)
2. OD & People Out of scope
Development
3iT Transforming IT Yes Reduction in IT IT delivery is very critical The development of IT Architecture
Transformation function to move to a costs by £44m to for the successful delivery I Roadmap is essential for the early
lower cost model, be delivered by —_I of revenue growth identification of IT requirements from
migrate away from 2020 and key initiatives (e.g. Network I each initiative. IT terms of reference
today’s Horizon and enabler for Development, Commercial I and findings need to be considered
improve front-line revenue growth as I Strategy). Any slippage in
capabilities to deliver it delivers new the programme's timeline
new functionalities functionalities would impact the financial
(e.g. simple, online glidepath — especially the
customer transactions) Tevenue growth
projections.
4a Network The transformation of I Yes I End state Potential risk to growth inI To maintain the capability and
Transformation I the Post Office's configuration FS services due to footprint of POL, agents need to
physical network to based ona reliance on Agency model_I accept new models and adapt to
maintain size and variable cost to sell complex financial new methods of service delivery
capability structure to meet I products. A wrong which may impact service levels. No
profitability and decision regarding match _I visibility of impact assessment
revenue targets _I of format versus location _I although configuration now more
andmovingtoa I may result in decrease of I conservative in its scope. Any
new model of revenue and profitability. I change in formats and agents
ha
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Strictly private and confidential draft for discussion
Programme Plain English Key outcome for Potential consequence Commentary
Description POL for future revenue
growth
3,500 mains, remuneration schemes should be
4,500 locals, 4500 based on a micro market analysis to
locals lights and understand future revenue potential
3,500 communities of micro markets as used by major
European postal operators in their
network transformation. In addition,
the definition of formats should be
expanded to have a better
understanding of what products/
services will be provided by each
format (ie. Mains, Locals, Local
Light)
4b Crown Transition to a lower, No I Reduced number I Unable to leverage bricks I Crowns form a core component of
Transformation I variable cost base by of Crowns and mortar for revenue the Post Office reputation and
2 migrating volume from (although this generating opportunities I therefore form a PR risk. Majority of
Crowns to nearby figure has been _I with less control over global postal operators Boards see
agencies tempered in recent I agents and brand. Itmay I own post offices as revenue drivers
iterations) also lower Post Office's in prospering metropolitan areas,
credibility for potential incubators for new services and
business partners as, products and simply part of their
generally agent based identity. These are lessened by the
networks are less stable I more muted programme of
then own networks. transformation now proposed but
cost remains high as does the
assumed migration of activity to
agencies that will take place.
4c Customer Reducing customer No I Fewsteps inthe I As agent transaction times I We would like to see more evidence
Journey activity and transaction process for mailing I decrease there may be a__I of piloting of changes to assess their
Simplification time required for POL of letters and deficit in capability in order I impact on customer experience and
agent parcels are now to I to carry out tasks and field I cost. The simplification of the
be carried out at I queries as required customer journey relies on a change
the counter but in behaviour and a time saving
through self-serve which will not directly equate to a
quantifiable financial benefit.
5a Network Opening up to 12,500 I Yes I Increasing the £64 additional income is I The locations of these additional
Development —_I access points with coverage of POL I expected (£51m Mails, access points should be
targeted retailers access points and I £13m Bill Payment) based I economically justified based on the
introducing new I on an average income per I customer needs.
offerings to offer I access point of ~£5k. This
an attractive assumes 4% annual mails
proposition to host I market growth which may
retailers not be realised due to
disruptions in the Mails
market.
Sb Commercial I This is the list of No I Itis difficult to An estimate of £30-50m I One would have expected more of
Strategy opportunities to grow understand the has been made by the £1.1bn funding to be directed
profitable revenue in impact on POL as I 2019/20. However, this towards developing revenue growth.
Mails references are income is not yet Within the levers for shifting the
made to key underpinned by details of I strategy (Plan B options) it would
themes and these I product offerings and make sense to invest in these areas
are not explained I operational plans eg. channels and products
in any more detail
e.g. SME, e-
Commerce, Gov't,
Home Services
and Digital
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Strictly private and confidential draft for discussion
Programme Plain English Key outcome for Potential consequence Commentary
Description POL for future revenue
growth
6 Financial This is one of the 2 Yes I Diversifies FS Strategy is focused on I PwC has had a lack of visibility of
Services key pillars of the POL products that POL I leveraged POL brand and_ I the FS strategy and the ExCo pack
Strategy 2020 Strategy and can offer branch network to has limited details of the FS strategy
vision and sets out consumers generate new revenue compared to other initiatives.
POL's ambition through branches I streams
to be a leading and networks to PwC has recently undertaken a
challenger bank by generate new Retail and Commercial Banking
2020 revenue streams survey and have included a number
of sound bites which we believe
would be relevant to the POL FS
strategy:
Positive indicators :
"50% of consumers use branch
network to open a mortgage,
savings account or current account”
“3 top drivers of choice for provider
are: product attractiveness and
price, convenience (branch location)
and perception of stability and trust
in brand”
“UK retail deposit and mortgages set
to grow to 2.7% and 7.8%
respectively by 2017"
“By 2017, Digital natives will be
dominant consumer segment
(240%)
Negative indicators:
“Despite media focus on challenger
banks, market share from the survey
suggests a low penetration”
©
Post Office®
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Strictly Confidential
POST OFFICE LIMITED
Performance Report
October 2014
Produced By : Financial Control
For Queries & Comments Contact : Sarah Hall or Kam Bassra
CONFIDENTIAL
Commercially Sensitive and not for onward circulation
information that is use damage in th
internal
in the Post Office.
Period 7 Performance Pack - Chris Day 26th November 2014 Page 1 of 13
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Strictly Confidential ®
(- >)
Contents
Page
Headlines 3
Profit & Loss Statement 4
CFO High Level Profit Outlook At Period 7 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 41
Transformation Overview 12
Transformation Overview 2 13
X J
Period 7 Performance Pack - Chris Day 26th November 2014 Page 2 of 13
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Headlines Strictly Confidential
October 2014
(Meattines >
Operating profit before exceptional items in the month was £5.5m, £4.8m adverse to budget, bringing year to date operating profit to
£29.0m and increasing the YTD shortfall versus budget to £23.4m (£36.0m adverse year on year, including NSP decrease of £23.9m).
Net income in P7 is adverse to budget by £6.7m and flat with last year. This reflects the continuing shortfall in Mails and Retail (mainly
labels and delayed rollout of ebay returns) of £3.9m. Telecoms was £2.9m adverse due primarily to lower customer numbers and lower
average revenue per customer. Government Services was £0.7m behind budget mainly due to fewer active POCA accounts than budgeted.
To achieve the FYF of £880m, net income for the remainder of the year needs to average no more than £2.7m adverse to budget each
month (and £3.4m better than prior year each month).
Net income year to date has worsened to £31.5m behind budget and £3.5m below this time last year (excluding NSP).
Total expenditure (before project costs) in the month was £0.7m favourable driven by the favourable subpostmaster costs relating to lower
income, but offset by higher staff and non staff costs.
‘Total expenditure (before project costs) year to date remains favourable to budget by £10.2m.
The £60m savings task remains challenging with £7.7m still to be underpinned and a further £1.5m still in the ‘hopper’ to be validated
(see page 7)
+ Subpostmasters’ Costs are favourable by £25.5m reflecting lower sales volumes and improved VAT recovery.
* Staff Costs are adverse by £2.5m reflecting under-delivery of savings tasks primarily in Supply Chain and Commercial
* Non Staff Costs are £12.8m adverse driven by a £10m provision for client compensation, £4.5m shortfall in savings delivery, £3.0m for
the Mails Segregation penalty payment accrual and other increased costs including postage. This is partially offset by increased VAT
recovery of £11.0m,
* Project One Off Costs are adverse to budget by £2.4m reflecting unbudgeted spend for Sparrow and the ‘Journey to 2020’ strategy work
CFO Forecast
The P7 CFO forecast remains the same as the half year forecast and projects net income of £880m (£45m below budget) and EBIT pre
exceptionals of £85m (£14m below budget). This includes a profit contingency of £5m (see page 5 for further details). Work continues to
identify and implement actions to recover the shortfall against target.
The task in the remaining 5 months is net income of £380m (compared to budget of £393m and prior year of £363m) and an EBITDAS.
loss of £8m (compared to budget loss of £18m and prior year loss of £38m).
Crown Profit
The YTD Crown profit is £8.8m 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. The Q2 CFO Crown forecast is a loss of £13.8m which is £4.9m behind budget. This
is aligned to the assumptions used in the business CFO forecast but excludes the contingency.
Network Transformation
The programme is ahead of plan at P7 both for contracts signed and branches transformed. The Mains model is performing well and the
performance of the Locals model continues to improve steadily.
Ne y,
Period 7 Performance Pack - Chris Day 26th November 2014
POL00149638
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Cumulative EBIT pre exceptionals
fm
110
90
70 5
50
30
10
-10
i
SF EFEEEESE
em Total Net Income - Budget to Actual Bridge
I __
— —
(19.7) (6.8) oO)
34
2014-15 Mails & Retail Financial Government Telecoms
YTD Net Services Services
Income
Budget
Financials
Other 2014-15
YTD Net
Income
‘Actual
Year to Date
Total Net Income (excl NSP) £m (Bonus 20%)
Operating profit £m (Bonus 25%)
Crown Profit (Loss) £m (Bonus 12.5%)
Non Financials
Queue time % < 5 minutes - Top 1k branches
NT Branches Transformed In Year (Bonus 12.5%)
Act Target__Var.
5001 I 5316
29.0 52.4
(14.2) (5.4)
778% I 83.1%
1,076 996
Page 3 of 13
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Profit & Loss Statement Strictly Confidential 4
October 2014
Current Month Prior Year Period Year to Date Prior Year YTD Full Year Prior Year
lem Actual Budget Variance I Actual Variance I Actual Budget Variance I Actual Variance Fancast Budget Variance I Outturn
TOTAL GROSS INCOME 878 65 en I 885 On I 5037 5937 5712 7s) I 9870 10319
[Cost of Sales (9.9) (9.9) (0.0) (10.9) 10 (63.6) (62.2) (67.5) 40 (106.8) (106.8)
TOTAL NET INCOME 719 84.6 (67) 777 03 5001 5316 503.6 G5) I 8802 9251
staff Costs (217) (208) (08) (22.2) 05 (246.0) (443.4) (1526) 66 (233.6) (2387)
ISubpostmaster Costs (15) (46.6) 54 (44.3) 28 (262.3) (287.7) (2641) 18 (455.6) (491.0)
Non-Staff Costs (25.7) (236) (24) (18.2) (75) I (4740) — (4582) (1476) (23.4) I (2806) (2735)
Depreciation (0.0) (04) 0.0 (0.0) (0.0) (03) (0.4) (02) (0.0) (0.6) (0.6)
Total Expenditure (pre POOC) (88.9) (91.0) 22 (4.7) (42) I 679.5) (689.7) 764.4) (15.1) I (970.4) (2,003.8)
IFRES - Share Of Operating Profits 28 27 0.1 2.6 0.2 26.6 26.2 25.3 13 35.0 35.0
EBIT - BAU 82) G8) Ga) Gay G7) _I (628) (34.9) (35.5) 07.2) 65.2) 3.7)
lOne off Project costs (POOC) (1.6) (1.3) (0.4) (2.9) 13 (13.5) (11.1) (18.7) 51 (19.7) (17.3)
IEBIT ~ Post Project Costs 19.8) (5.0) Ga) 73) (25) I (66.3) (43.0) (54.2) 2.4) I (74.9) (64.0)
[Network Payment 153 15.4 (0.1) 19.2 (3.9) 95.4 92 (23.9) _I 1600 160.0
IEBIT pre exceptionals items 55 10.6 (Ce ECE) (6.4) 52.4 65.0 (36.0) I 85.4 99.0
interest 06 (03) 09 04 02 2) 19 17 0.0 (8.0)
Impairment (39) (48.1) 42 (74) (68) (1328) (422) (38.2) I (4833) — (205.2)
[Exceptionals (incl BT) & Redundancy & Severance Costs (11.3) (14.3) 3.0 (12.0) O7 (137.6) 254 (143.7) (230.4) (216.1)
Government Grant Utilisation 0.0 0.0 0.0 188 (18.8) 170.0 148.0 22.0 170.0 170.0
Profit(Loss) On Asset Sale (02) 0.0 (0.2) 00 (0.2) 0.0 25 (25) 0.0 0.0
[Total Profit/(Loss) Before Tax 9.2) 22.3) 3. 42.0___(31.3) 9.2) 200.8 (496.8) I (458.6) (455.3)
Period vs. Budget (10 vs. Budget >\ (10 vs. Prior Year
Operating profit (EBIT) of £5.5m was £4.8m Operating profit (EBIT) of £29.0m was £23.4m adverse to budget. Operating profit (EBIT) of £29.0m was £36.0m adverse to prior
adverse to budget. year.
BAU was £5.9m adverse BAU was £20.9m adverse Like for like BAU adverse variance of £17.2m was mainly due to
. z + Lower net income of £31.5m due primarily to the continuing adverse income trend; Mails (£19.7m), .
Lower net income of 6.7m due primarily Eo specifically labels, Home Shopping Returns (HSR) and Lottery, Telecoms (£9.5m), Government Services ‘ower Staff cost of £6.6m driven primarily by a lower productivity
lower Mais SEB ang Betecoms come (€6.5m), mainly POCA, offset by favourable FS income (£1.6m), specifically banking, Premium Bonds and “ 7
* Higher staff costs of £0.8m in the month. This MoneyGram, + Lower Subpostmaster costs of £1.8m which are almost flat year
Rimmer dllerts Crewn py eared, ‘+ Higher staff costs of £2.5m mainly due to the savings task not being achieved (€2.4m from Supply Chain and II °° ¥°™
‘+ Higher non staff costs of £2.1m, driven by IT £0.6m from Commercial), the Crown pay deal and the CMA pay award, offset by a lower bonus accrual. Offset by:
savings task yet to be achieved. * Higher non staff costs of £12.8m, driven by the £10m provision for client compensation, impact of the * Lower net income of £3.5m. The variance versus prior year is
Offset by: centrally held savings task of £4.5m not being achieved, £3.0m accrued for Mails Segregation penalty driven primarily by lower Government Services income, mainly
+ Lower Subpostmaster costs of £5.1m due payment, It savings task yet to be achieved and higher postage costs offset by improved VAT recovery of Hea and Teccors et by hear ewe! aces
ower stmast . ir i joneygram, Mortgages, Savings and Insurance) revenue.
primarily to lower sales/ product mix. £1:1m (relating to the prior year) _
offset by: + Higher non staff costs of £23.4m due to £10m client
a compensation provision this year, increased IT costs (mainly
One-off Project Costs variance of £0.4.m fav. atlohe eal ataae nig Ntaenee income and sales mix (£16.8m), VAT recovery Horizon and ATOS) and higher marketing spend (including some
Below EBIT 3 id ‘9 pe switched from POOC) offset by improved VAT recovery.
The impairment favourable variance is mainly One-off Project Casts variance of £2.4m adverse mainly due to unbudgsted project Sparrow (PYF c. €7m) and I) Non like for like adverse variance of £18.8m was due to:
driven by lower than budgeted capex MNSRE GH ei aveay CONEURANGY totes * Lower Network payment of £23.9m, offset by
expenditure. Below EBIT * Lower project costs of £5.1m
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 II Below EBIT
contract set up payment incurred in 2013-14 but budgeted for 2014-15. Government grants have now been Included in grant utilisation this year is £77m of 2013-14
\ially tise \__ exceptional spend for which there was insufficient grant last year.
Period 7 Performance Pack - Chris Day 26th November 2014 Page 4 of 13
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CFO High Level Profit Outlook At Period 7
October 2014
£m
Strictly Confidential
Income JV Income Staff Costs 9° Non-staff POOC Costs. «NSP. EBIT
[Budget
925 3a a) 360 a
Mails and Retail
Mails
Lottery and retail,
Mais segregation penalty
Government Services
POCA
DVLA
IDA
Passports
Telephony
Homephone
Mobile & Energy
Financial Services
Staff Costs
Commercial
‘Supply Chain
CIP franchising
Non-staff cost savings
Marketing
Official Mail
Central
Release of contingencies
IRRELEVANT
Comments
FYF of £345m including £2m uplift for Christmas campaign
Camelot volumes(mssieI Health lottery fixed fee maasn Retail aman
Max penalty under MDA offziacs} assume negotiate down as in 13/14
(a) one-of from DWPLseSEaIIBOR
one-off change control for EVL'sm
Stil reliant on Cabinet Ofice committing to volumes
Non-receipt off
Volume upsides on tax discs and AEY(mistn
Delayed launc
Digital passports delay, partaly offset by paper passports volumes and price increase
Lower customer numbers and ARPUS, higher wholesale costs; partially offset by FJ claim
Launch delayed and budget included ‘stretch’ volumes. Proposition nat being launched this year
New Commercial structure does nat deliver budgeted savings task
£2m savings budgeted. IR delayed implementation of new ways of working
Risk from delays to franchising
Updated October forecast which includes €3 8m for Christmas campsign
Cheque pouches not budgeted=issPacsports check and send volumes
Release all of income contingency
[Trading forecast at P6
880, ES
Further Trading’ risks
Client Compensation
Additional Mails segregation penalty
Agents costs
Locale
NFSP members subs
Staff Costs
Central bonus release
Non-staff
‘Additional savings opps identified
VAT on RM IT chars
New IT services not budgeted
TT Savings task
IT Opportunities identified against task
Homephone discount
HR costs & Communications casts
Central task nat underpinned
Bank charges
Projects
Sparrow
Strategy consultancy
POOC savings (FS and Commercial)
Central
VAT recovery rate ~ prior year
VAT recovery rate ~ current year
CONTINGENCY
IRRELEVANT
[CFO Outlook at PB:
____IRRELEVANT
Period 7 Performance Pack - Chris Day
26th Novernber 2014
Max penalty under MDA islam] assume can negotiate down as in 13/14
Bonus provision reduced from 90% to 50% payout (assumes miss ETOBW, Income, Crawn profit)
Additional opps identified by the functions against the August cost target
££2.5m budget challenge achieved except VAT impact not covered
‘SSK maintenancelmanar}FRP support costs [musnmfujtsu Tier 2/3 Helpdesk £0,6m:; RM Projects PY depreciation charge
Savings task budgeted covered by opportunities below
££0.5m Staff Costs: £1.4m small change budget £1.7m IT Services supplier opps: £0.8m ATOS savings
££2m Horizon discount agreed as part of HPBB contract for POL not undertaking a compete procurement.
Agreed £800k 2014-15, £200k to applied to change works and €1m for 2015-16
Savings identified from L&D budget €0.5m; offset by higher recruitment costs. Various savings identified from Comms budget
Budget tacks included in Cetra, including £m Official Mal. Included in Central budge, not underpinned by any initiatives
Run rate risk
Full cost estimate £5:3m covering mediation on ¢-140 cases. Only £0:3m considered exceptional
MeKinseys costs already incurred for Journey to 2020 wark {imaafor FS strategy work
Latest forecast from Commercial and FS. Assumes Project Wave delayed
Taken in HI
Total VAT recoveries of ¢£30m, budget already included €7m
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Crown Profit & Loss Statement Strictly Confidential
October 2014
Period Prior Year Period yTo Prior Year YTD Full Year Prior Year
lem Actual Budget Variance I Actual Variance I Actual Budget Variance I Actual Variance I G2 Forecast Budget Variance} Outturn
income and Distributions
Variable income EIS
= Mails
- Financial Services I
= Government Services
= Telecoms I
Fixed income
Gamma/ Other
Renewals and Retentions I
[Total Income including Gamma/other I
Branch costs -
~ Staff
= Property
~ Other branch costs
Infrastructure costs
Allocated central costs
[Total Expenditure
IV Share of Profits
[Statutory PBIT
IRRELEVANT
(Summary
Income:
Income is £5.1m less than plan.
‘At a business level this is predominantly driven by adverse variances in Mails, including Labels, Home Shopping Returns and Lottery, Government Services and Telecoms, with a favourable variance in Financial Services,
Line by Line variances are as follows:
Variable sales income ists! less than plan principally due to (i) Mails - Lower parcel volumes, Retail sales and Home Shopping Returns, (i) Financial Services - shortfall from Life Insurance, Home Insurance and variable
sales of Savings products. There is a corresponding upside in savings retention income due to the income guarantee with Bank of Ireland. Premium Bonds and Mortgages are also performing above target. (ii) Government
Services - predominantly due to higher Passport check & send transactions. However, there is a variance in ‘Other Income’ that partially offsets this due to an element of the Passports target being held centrally in Other
Income.
Fixed income is adverse due to lower than planned LIBOR rates for Card Account commissions
Retention income is adverse due to a lower customer base and Averaged Revenue Per User for HornePhone, partially offset by favourable Savings retention income.
Other income is adverse due to the delay or phasing of new products, predominantly Energy, Passport Check & Send (actual income in variable sales) is the other key driver. There was also a central Financial Services target
that is held here and being delivered within Financial services variable income
Costs:
Costs are £3.8m higher than plan.
Staff costs dverse primarily due to timing of the roll out of Franchising and the impact of the pay review settlement where associated efficiencies will be achieved in future months, this is partially offset by Crown
branches vacancies, mainly Financial and Mortgage specialist
Other branch costs are favourable to plan due to lower than expected losses although these may reverse in the coming months.
{mreteasrjadverse due to the delayed savings for the new Facilities Management contract, which started in October , however POL have not yet received an invoice from the new supplier.
"adverse due toa provision for client compensation, impact of centrally held savings not being achieved, accrual for Mails Segregation penalty and higher postage cost, partially offset by improved
VAT recovery rates.
Ne S
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Cost Management update Strictly Confidential .
October 2014
Progress since Pé update
Value and confidence
Delivery Assessment
The Cost Reduction Group (CRG) has continued to drive focus on cost management and coo
after further assessment of opportunities the gap between the in-year delivery of "line of
sight” initiatives and the total cost reduction challenge has reduced to £9.2m (from P6 & .c00
report of £14.9mn). Current Position (Week 32)
sows Devereds 126m Sone”
Original Cost Management Programme £34.2m brash nda
Additional Cost Challenge to achieve budget £ 6.0m
Central Stretch to achieve budget £ 5.9m wee
Total Budget Cost Challenge £46.1m oa
‘Additional Challenge from Q1 EBITDAS gap £ 7.0m 1
LPH H HS PHM PS LPS HST HHS SS SS 9 oe ee So 9 Po 4
02 underperformance adjustment £ 69m LI LLL LEE LILLE LE PLE ELE PEPE EEE EEE EES
Total Current Cost Challenge £60.0m “Saving stvested as dlvere from cussion with delvery lead nd France team to obain final atfcaton
Current “Line of Sight” forecast £50.8m
Gap to £60.0m £9.2m
£70,000
Delivery and governance
Regular 121 meetings continue to crive focus on in-year cost management opportunities £60,000 aaa
and delivery of existing initiatives. Central business wide opportunities identified during oon
September and October including the acceleration of McKinsey identified savings have .
provided further potential in-year value but more ideas are required to fill the current gap to £50,000
target. ,
Strategic initiatives for FY15/16 and beyond £40,000 Tem Green
The overall Programme has progressed through Stage 3, designing the financial alidepath to
(including €4.2m
Work is ongoing to: £30,000 Saving Agents Costs)
1) Identify 2 portfolio of incremental cost saving opportunities to achieve the £60m in-year
improvernent target placing all the cost saving initiatives under the scrutiny of the omnes
gatarame to ensure the expected improvement has the requisite effect onthe 2024/35 , isan [ivared
2) Ensure the benefits from these opportunities are sustainable in order to meet 2015/16 £10,000
EBITDAS targets, moving towards £100m of sustainable run-rate saving by
March 201
3) Delver the target operating model that will ensure the cot efficiency targets for the £0
programme (to 2019/20) are realised; Total "On-Track" Hopper Gap to £60mtarget 14/15 In Year Target
Period 7 Performance Pack - Chris Day 26th November 2014 Page 7 of 13,
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Cashflow Analysis
October 2014
fm YTD Cashflow (Cashtow >)
. . ° ° The £330m of government grant was received on 1st April which is the last payment of the 2010
funding agreement with BIS.
(214)
170 P7 cash outflow of £214m is £189m adverse to budget of £25m outflow.
a The adverse variance is mainly due to:
ce)
* Network Cash was £232m adverse mainly due to cash being increased in branches (133m
(57) II adverse) and cash centres (83m adverse) to mitigate operational impact of industrial action in
(80) Supply Chain. In addition DWP paid winter fuel payments in period 7 (usually paid in period 8). The
(544) other large adverse variance is in cheques (23m adverse) because of higher than expected
(118) premium bond sales (largely offset by client creditors below)
EBTOAS Cet SNatnrk Worng Cath Capel ——Reduntncy, Caefow before Network Go Rundng_Freecaehfow I I # Operating profit is £23m adverse to budget
snl tax, epandture provonsand Subs Payment
penions ote = * Working capital was £20m adverse
£m YTD Cashflow Variances * Client balances were £6m adverse comprising favourable variance from higher than expected
r : T Premium Bond (£19m) and Payout sales (£18m) offset by an adverse DVLA variance (£44m) again
due to higher sales.
(23)
Offset by:
(214)
* Capital and exceptionals continue to be favourable (capital £52m and exceptionals £39) due to )
ca
YTO Full Year
(32) £m Actual Budget Variance I es Budget
(20) = ‘orecast
. EBIT (66.3) (43.0) (23.3) 85.0 (61.0)
OBuipe Satna Neworce) Vingcapte Gaweaues pba TDA Working Capital 72.1) 565) (156) 495 270
im Client Balances 113 17.0 (6.7) (3.0) 17.0
Network Cash (234.1) (2.6) (231.5) (91.6) (57.6)
Network Cash (Capital Expenditure (80.4) (132.8) 524 (145.0) I (205.2)
£m Mar-14 P7 Government funding 330.0 330.0 0.0 170.0 330.0
Prior Year [ Opening I Actual Budget var Exceptional Items (117.9) (156.8) 38.9 (213.4) I (240.3)
Retail, Cash Centres 696 522 728 527 (204) I [Other (including interest and tax) 15.9 20.0 (4.1) (9.9) (9.9)
Bureau 70 58 68 53 (15) Operating Cashflow (213.6) (24.8) (188.9) (158.4) (200.0)
Cheques, debit cards 119 129 146 131 (15)
Network Cash
adroom (£m) 854 975
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Business Scorecard Strictly Confidential ©
October 2014
Key Perf Indicat Current Month YTD YTD Full Year 2013-14
ey Petrormance lnwcerers Act Target Var Act Target Var I Prior YearI Q2F'cast Target Var Outturn
Growth
Total Net Income (excl NSP) £m (Bonus 20%) 7719 84.6 500.1 531.6 503.5 880.0 925.1 866.7
Operating profit £m (Bonus 25%) 5.5 10.4 29.0 52.4 65.0 85.0 99.0 107.1
Earnings before TDA and Subsidy £m* (9.7) (5.0) (66.0) (42.6) (54.0) (74.4) (60.4) (92.5)
Free cashflow £m (236.6) 39.4 (213.6) (24.8) 196.8 (158.4) (200.0) 179.7
Customer
Customer Satisfaction** 86.1% 89.0% 87.1% 89.0% 88.0% 87.5% 89.0% 87%
Easy to do business with (Bonus 15%)** 24% 47% 26% ATh 44.2% 26% 47% 41%
Net Promoter score** 3 2 1 2 -2 05 2 (4)
Queue time % < 5 minutes - Top 1k branches 80.1% 87.0% 778% 83.1% 84.1% 775% 81.2% 82.1%
Branch Compliance - Financial Services - basket of 11 measures 90 <=60 80 <=60 N/A 110=> <=60 <=60 N/A
Branch Compliance - Inland Dangerous Goods **** * 70.0% 80.0% 70.0% 80.0% TBC 80.0% 80.0% TBC
Branch Compliance - International Dangerous Goods **** “ 80.0% 85.0% 80.0% 85.0% TBC 85.0% 85.0% TBC
People
Engagement Index % (Once a year April) (Bonus 15%)** 58% 58% 58% 58% 55% 58% 58% 57%
Subpostmaster Engagement Index % (Once a year)” 47% 48% 47% 48% N/A 48% 48% 45%
Post Office Values the diversity of the workforce (Once a year April)“ 54% 66% 54% 66% N/A 66% 66% 52%
(No.) % of BME appointments over total recruits at senior leadership and ox 1% ou % 11.5% nn ro “un
senior manager
(No.) % of Female appointments over total recruits at senior leadership and 33% 45% 10% 45% 53.8% 45% 45% 46%
senior manager
Modernisation
Crown Profit (Loss) £m (5) 05 (14.2) (5.4) (12.9) (13.8) (8.9) (25.7)
Crown Profit (Loss) Run Rate £m (Bonus 12.5%)* N/A N/A N/A (11.7) (6.7) N/A (2.0) 0.0 N/A
NT Transformations - contract signatures *** 0 144 4,168 3,944 2,113 4,800 4,800 3,246
INT Branches Transformed In Year (Bonus 12.5%) ie) 140 1,076 996 295 1,650 1,650 1,554
Bonus worthy metrics
* ITDA Interest, Tax, Depreciation, Amortisation.
** Monthly = 3 month average. YTD = 12 month average.
*** YTD and FY = cumulative including prior years.
**** 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’.
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Network Transformation Scorecard - Mains
Strictly Confidential
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°
October 2014 Reporting prior months data (i.e. one month in arrears)
Current Month % or She
branch
Actual Mains
Key Performance Indicators Actual Cantal Var Var Sample
ey Group ui 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 0 These agents receive a dedicated package and a
POL Total Income: Post vs Pre Conversion renewed focus on sales targeting and performance at
Branches live 6-12 months 4% (a)% 5% 382 547 the point of conversion. This is having a significant
fe fe branches.
Branches live 12-24 months (1ye_ (6% 5% 388 552 Impact on focus income for many Pranche
= = The foll ducts rf lar
Agents Remuneration: Post vs Pre Conversion blir lowing procucts are performing particularly
Branches live 6-12 months 4% (4)% 8% 518 547 Travel insurance
Branches live 12-24 months 6% (4)% 11% 812 552 casenort check ane send
- ash withdrawals
Agent Customer Sessions Growth bonds
Branches live 6-12 months 1% (3)% 5% 492 Insurance products
Branches live 12-24 months (0% (5)% 4% 466
In addition, these agents have increased their POL
Operator Feedback on Retail Sales Performance Th 155 earnings due to the improved sales and enhanced
Operator Satisfaction 81% 73 Mains pay rates.
Actual Note: the control group is based on those branches of
Actual Target var Sample similar size that have not yet converted.
Size
Average Increase in Opening Hours. 41% 20% 21% 1,550
Customer ICustomer Satisfaction 98% 90% 8% 30
Queuing Times dm 24s _<5mins_ 3m 36s 190
Customer
Customer Satisfaction,
extended opening hours and queue times all remain positive.
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26th November 2014
Page 10 of 13
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Network Transformation Scorecard - Locals Strictly Confidential
October 2014 Reporting prior months data (.e. one month in arrears)
Ave £'s
Current Month % per
branch
= Fear) (Toe >
- ‘ontroI At the point of conversion there is an initial dectine in
Key Performance Indicators Actual Group Var I Var I Sample I performance, as the branches settle and embeds the
Size operational changes. However this improves month on
LOCALS month and as they near the exit of the 6-12 month
category the run rate of performance is now higher
Finance Approved Investment per Local £000 Qa) 41) 0 0 than the control group. This is partially as a result of
Total Net Impact: Post vs Pre Conversion the activities that have been put in place to limit the
Branches live 6-12 months drop off in income and drive performance. Although the
impact on the Locals due to NSSIis stil having an
Income (oe (5) (4% I (26) 240] adverse effect on performance the underiying trend of
ea ‘Actual Fixed pay savings 930 other products is showing an improvement.
‘Actual Net impact 914
Branches live 12-24 months ‘As the better performing branches move through the
Income (10)% (14)% = 1% 26 183 categories this is reflected in the 1% increase in
‘Actual Fixed pay savings 919 performance for the 12-24 category
‘Actual Net impact 945
Customer Sessions Customer sessions/footfall continues to be strong so
Branches live 6-12 months 106 (2% 12%, 130 this should support the agents retail growth,
Agent Branches live 12-24 months 7% (3% 14% 190
Note: the control group is based on those branches of
(Operator Feedback on Retail Sales Performance I 16% 52 sirnlar size that have not yet converted less 5X to
Operator Satisfaction 19% 56 reflect lost products.
Actual
Actual Target Var Sample
Size
[Average Increase in Opening Hours 111% 80% 31% 4107
Customer Customer Satisfaction 95% 90% 5h 30
Queuing Times 55s _<5 mins4m 05: 274
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:
con more complicated products
+ Fixed pay has been reduced to zero for all converted branches, in line with the strategic plan
+ On average Lottery income has reduced by c. £60k p.a in these branches. Corrective action on how we minimise future risk is now being locked at, principally by improving the sales messages and focus of
the FCA’s when signing up the retailer as well as the LRM'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 cifferent ways or reduce their staf costs.
Customer
+ Customer Satisfaction, extended opening hours and queue times all remain postive.
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Transformation Overview
October 2014
RAG, cost and benefits based on full programme life
RAG in brackets indicates programmes view x
Overview used as part of Board Pack to update Board on Transformation progress josi
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New Transformation Portfolio category added to show status of the delivery of the 2020 EBITDAS strategic plan proposed in
iness Transformation Design phase. After we have implemented the Transition Plan this category will summarise the
yn across all programmes under the new Roadmap
Programme Time I Cost
Business
Transformation
(Design
Phase only)
Winning in
Mails
Network
Transformation
Crown
Transformation
Branch
Support
IT
Transformation
Period 7 Performance Pack - Chris Day
Benefit
Quality
Comment / Areas for Discussion
N/A
(A)
The design phase will be complete by the end of November having delivered an ‘end state’ operating model design and transformation
‘blueprint’. Transition business cases are now being prepared to manage the transition from a ‘design’ to a ‘delivery’ structure and
operational efficiency accelerators. Final recommendations will be made to the Board in November to secure approval for transition
into delivery. Quality measures amber status as quality measures not yet achieved.
The Ivy pilots continue to roll out but usage remains extremely low. Digital marketing has been implemented and a range of other
marketing and PR activities are underway to drive up Home Shopping Returns volumes.
The greatest challenge for the programme remains securing support from Royal Mail at the required pace. As the Board is aware,
there was a Chair-to-Chair meeting between RMG and POL to secure this support where two shared workstreams were agreed: firstly,
to map out the costs savings for both organisations from customer journey simplification; and secondly, a joint commitment to secure a
network with a major retailer such as McColls
On the first workstream, agreement has been reached between POL and RMG on the specifics of what needs to be delivered to
support the extended trials, namely product simplification (to allow removal of weighing scales), changes to operational requirements
(no segregation of parcels and RMG collections at the new sites) and requirements for the technical solution. Work is progressing to
understand where there is potential to remove costs from both organisations — on the basis of simplification and changes to
operational process.
To the second workstream, the commercials for an interim deal with McColls remain to be agreed and are expected to conclude by the
end of November. However, this step is critical as it will crystallise the cost implications of the above changes for both businesses,
upon which the operational agreements are dependent. Following commercial agreement, we expect to secure an MOU with McColls
by mid-December.
The programme remains ahead of target on both contracts and openings. Transitional locals are progressing without significant
adverse stakeholder reaction although the workstream is time-consuming as decisions need to be made on a case by case basis. The
value for Money workstream has identified potential cost savings that will be investigated further by the Business Transformation
programme. Discussions on the cliff are starting with the NFSP and co-ordinated via the P&E team.
The programme continues to deliver in line with targets across branch transformations, training (>3000 staff trained), staff cost
reductions (>470 FTE), SSK rollout (>480 rolled out), mergers and relocations - though current P&L run rate at year end is forecasting
a £2M loss primarily due to a £7M income shortfall. Quality measure moved to green status as customer satisfaction continues to
improve, with both overall satisfaction and queue time satisfaction meeting (or very close to) target.
Enterprise Case Management recommendations yet to be agreed at Business Transformation Steering group, once outcome is known
impact on Branch Support benefits will be recalculated. Activity to realise savings (C.£284K) from online training, brought forward from
next financial year are in flight and are aligned with the HR1 processes across Business Transformation.
TBC
Fujitsu have informed Post Office that they are withdrawing from the Front Office procurement process. The programme has initiated a
full impact assessment, with a specific focus on managing the risk around continuity of service. Discussions have commenced with
Fujitsu to de-risk the Front Office execution by extending the contract beyond March 2017. The initial view is that a 12 months
extension is required; however this is being tested considering the commercial impact. The Board will have the opportunity to review
the programme in January. The updated Business Case shows an increase in transition costs and the programme is working with the
finance team to minimise the exposure and to agree the most appropriate way to secure the funding. The increase is largely due to
more informed bidder responses to the procurements and changes to assumptions in the original estimates for the Network tower. The
latest costs and assumptions have been used in the Business Transformation Roadmap and financial glide path. Mobilisation of the
EUC delivery team is underway following the award of contract.
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Transformation Overview
October 2014
RAG, cost and benefits based on full programme life
RAG in brackets indicates programmes view
Overview used as part of Board Pack to update Board
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on Transformation progress
Programme Benefit I Quality
Comment / Areas for Discussion
Separation
The programme is delivering against the revised timeline within the MSA Extension Letter, with significant milestones approaching
before the end of the calendar year for Contact Centres, and ebusiness and Networks by the end of the financial year. A key enabler
for eBusiness separation has recently been achieved with customers requesting the www.postoffice.co.uk website now being served
content and tools from Post Office rather than Royal Mail. The majority of the business services have now been separated, with all the
remaining IT ones planned to be separated by the end of quarter 2 2015.
Update reflects whole programme but will move to Post Office only deliverables (rather than POMS) from December to ensure clear
lines of governance. Contractual relationships with third parties for distribution and servicing progressing slightly behind plan but
programme anticipate all will be completed within timescales. Key risks that PO board do not give authority to trade due concerns over
readiness, and FCA do not provide authorisation within required timescales. Contingency plans being developed for both to enable
uninterrupted Travel Insurance sales. Costs and benefits forecast inline with business case.
N/A as in negptiation phase
Investments
and Savings
Negotiations
N/A as in negptiation phase
IRRELEVANT
FS Sales
Effectiveness
TBC
This Programme has been set up to achieve break-even sales volumes in 2017/18 (10 sales per week per specialist as presented in
the FS Strategy at the September Board) and then go on to deliver 15 sales per specialist per week by 2020.
Phase 1 of the “Post Office Money Academy” is due to go-live in support of broader Post Office Money sub-brand launch. Priority
training modules are on track but LMS (Learning Management System) is still in design. We are working with L&D colleagues to
launch with an interim solution.
Post Office
Card
Account
(POca)
TBC
The Public Procurement project is currently on track. POL and DWP are working to conclude the BAFO (commercial discussions on
the content of the extended POca service) in support of the Ministerial announcement (end of November). The OJEU will commence
shortly after this decision. Contract award and implementation commencement are scheduled for end of Q3 15/16.
However, the overall RAG status for the continuation of the POca service is Amber for Time (the impact of slippage to the Ministerial
announcement causes a potential risk to the start of the new supplier service in April 2017). Benefits are Amber due to the uncertainty
regarding DWP decision to either extend the existing contract for 2 years or commit to a 7 year continuation.
Quality metrics are to be confirmed with the project.
Mobile
Proposition
(Wave)
TBC
Cost challenge has impacted on original timescales/benefits and has led to re-planning of key milestones and re-phasing of benefits.
‘Friendly user trials’ are currently on track for January 2015 and the National launch of pre-paid and pay monthly is now scheduled for
Q2 and Q3 2015 respectively. Cost status is Red due to the enforced delay which has extended the programme timelines and
increased overall costs - an increase of £300k is currently forecast. Benefits status is Amber as income generation is delayed until
15/16. Quality metrics are to be confirmed with the project.
People &
Engagement
The People and Engagement strategy and detailed actions for the next 12-18 months have been agreed by ExCo and the Board. The
actions within the plan are aligned to the accelerators and are underpinned by the business approach to risk management. Short term
focus will be on: 1, Stakeholder management (inc. NFSP, TUs, RMG, BIS) 2,Supply Chain strike ballot closing on 18th November 3,
Business Transformation Wave 1 activity and management OD
Period 7 Performance Pack - Chris Day
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POST OFFICE LTD
Post Office and the Bank of Ireland Relationship
Purpose
14 This paper provides an overview of Post Office’s relationships with the Bank of
Ireland UK ple (Bol), setting out the key risks and the controls and mitigating
actions that we either are deploying or can deploy and actions for the future.
1.2 The Board is asked to note the paper.
Summary
2.1 The Post Office — Bol relationship spans a wide range of businesses, viz:
e Personal Financial Services, through the Financial Services Joint Venture
Agreement (“FSJVA” or Eagle), which currently encompass:
a) Savings
b) Mortgages
c) Credit cards and personal loans
d) Current Account, and
e) General & Life Insurance
e Business and personal banking;
e ATMs;
« Travel money (through the First Rate joint venture);
*. _ a _.jnot in FS).
2.2 In 2014/15 these businesses.will.aenerate revenues (including FRES profit
share) to Post Office ofl
23 ie_relationship. established through, Eagle was born out of the need to
int venture that was generating limited
posed Post Office to risks it could not.
and put Post Officé if the position of a channel provider rather than partner.
The FSJVA addressed these issues and established a more effective and
clearer relationship.
24 The FSJVA was not able to remove the space for disagreement and dispute
between the parties but it gives Post Office much greater control and an ability
to require Bol to meet its obligations.
The relationship today
3.1 Over the past year as Bol has become more.financiallv_stable..asnacts. of.the,
_-Strateic_aims_of the parties have diverged. I
i IRRELEVANT This can be seen in
e The divergence between the size of I
Post Office’s customers; and ”
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¢ The significantly higher
3.3
3.4 The intent of a challenge would be to bring Bol back into alignment with the
agreed strategy.
The FSJVA
3.6 Since the establishment of Eagle the Post Office has experienced a significant
uplift in revenues and focus in Bol and Post Office on developing fit L
services. Tabl ighlights that FSJVA related income rose from; ;
(2009/10) to: RELEVANT! (2013/14), with a target of: IRRELEVANT! in 2014/15.
Table 1
Post Office FS income change 2009/10-2013/14
FRES [Ml Personal Lines - insurance Ill Payments
Travel ML Personal Lines - banking Banking senices
CAGR
—_—_n 2010/11-
2013/14
5a = 313 ait
32
or = 33 50
38 36 Ea at (33)
=
85
> ees
99 97 96 89 (34)
oro 2011122012113 -201314
Payments &
Banking
Services share I ®# se oa e8)
of total,
3.7 Some of the key successes that jointly we have delivered together include: the
creation of a qualified mortgage specialist sales force meeting the new MMR
requirements along with breaking into the mortgage market as a new provider;
delivering a leading online credit card application process; reengineering a
number of product processes; winning a significant number of industry
awards; establishing positive Net Promoter and Customer Effort scores; and
building an effective cross-party conduct risk and compliance capability.
3.8 However there are a number of areas of strategic concern and the following
sections provide an overview of the status of each core product:
3.9 Savings — this has been the leading business for Post Office with Bol, with an
agreed plan for 2014/15 to reach a book of £18 billion’ (and a goal of £30
Generating £51 million income to Post Office in 2014/15.
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© manage these divergent requirements in the parties agreed
a plan that enabled Bol to manage its needs while meeting Post Office’s short
and medium term financial targets, in particular:
a) Post Office to receive a minimum.
2014/15 (delivered);
b) Post Office would support Bol:
c) Bol. would provide pricing to support achieving an
qd)
3.12 Balances are now projected to be:
focused on fixed and on-line, rather than branch variable sales*. This would
have a material impact on Post Office revenues in 2015/16 (c£6-7 million) and
subsequent years.
3.13 We engaged with Bol to seek agreement on an interim solution while a longer
term solution is developed that enabled Post Office to meet its financial
targets and Bol its balance sheet flexibility. While Bol initially supported this
approach, it now has declined to proceed.
3.14 Post Office is therefore moving to
without Post Office agreement; this is a breach of the terms of the FSJVA.
We have raised this matter with Bol and reserved our rights.
3.16 Investments - The proposed move into investments was developed to provide
a competitive customer solution, while reducing the reliance on Bol’s balance
sheet. We have unfortunately been unable yet to agree a commercial
approach with Bol, with an apparent unwillingness to focus on this (seen as a
from its core business). This will be held over
3.17 Mortgages — whilst the establishment of the Mortgage Specialists capability in
Branch variable generate!
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3.19 Post Office’s own branch sales performance (mainly from lead generation)
needs to improve.
3.20 Credit cards, personal loans and current accounts; while there are inevitable
day-to-day issues these are generally working well, although there are delays
in launching products.
3.21 Insurance — through project Hawk, Post Office is exercising the option to buy
out Bol’s interest in insurance. The target is to conclude agreement by end
March 2015. Bol has indicated that it is keen to retain involvement in
insurance and we will assess a proposal. Early indications are that it is
unlikely to meet Post Office’s needs.
3.22 Service delivery - The Post Office-Bol Customer Delivery Forum conducts a
quarterly IT Stability review of IT incidents, customer impact, root causes and
determine whether there are concerning trends in systems or process
breakdown that warrant investment.
3.23. While this relationship generally works well and is collaborative, recent Bol
customer service has incurred a higher than usual volume of incidents. Post
Office has requested that Bol conduct a more detailed review of the incidents
and supporting network architecture to understand the root causes.
3.24 ATMs
3.25 The business relationship is working well, although with the contract due to
expire in 2022 and ATMs having an eight year lifespan, Bol is less
incentivised to invest — Bol has advised that it is keen to extend the
agreement. Post Office is reviewing its options but much of this is dependent
on the wider strategic development in the network and FSJVA outcomes.
3.26 Personal & Business Banking
3.27 This is a small part of the Post Office's banking services business and is
working well.
3.28 Travel Money
3.29 The travel money relationship is effective, with Bol being largely an investor in
the FRES joint venture.
3.30 We are, however, reviewing the commercial agreements as there is an
imbalance between the net revenues to Post Office and Bol. We are reviewing
our options and are preparing proposals to present to FRES and Bol in 2015.
3.31
approval prior to any such engagement.
3.32 Travel Insurance
3.33 Bol provides regulatory oversight for the travel insurance business, and has
been supporting the move to establishing POMS.
IRI EVAN
3.34
3.35
IRRELEVANT
partners Bol in mainland UK through i
and ATM replenishment to c.100 Bol ATMs. There
Office will also replenish ATM as an alternative to thei L
Post Office FSJVA controls
POL-BSFF-0008758_0121
44
4.2
43
44
45
46
47
2023
5.1
5.3
5.4
Risks
6.1
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The agreement with Bol is exclusive and runs at least until 20239.
Each party has clearly defined roles with Post Office leading on delivering an
effective sales network, creating and delivering marketing and sales strategies
and activities (including direct marketing and retention) and ensuring that all
products and services (including all customer interactions) meet Post Office’s
brand requirements.
Bol leads on manufacturing products to agreed specifications, providing on-
going servicing of the product (e.g., sending statements, paying interest,
managing the customer's account, making sure the systems work etc.),
developing pricing that meets the agreed benchmarks to deliver the business
plans, providing Post Office with the regulatory requirements for marketing
and selling products and managing 3” party product provider contracts.
In return for granting exclusivity, Bol has an obligation to manufacture
products Post Office requires and to meet the standards for those products to
enable us to compete in the market and achieve the agreed plans.
Bol also has a duty to ensure that, as far as reasonably possible, no
limitations on the growth of the Post Office book are imposed as a result of the
actions of Bol on non-Post Office products. It appears that Bol is failing to
meet this requirement.
Material failure by either party to meet any of the terms of the FSJVA can give
rise to a formal dispute and a requirement to make good the failure.
Ultimately, if not resolved this can lead to a termination event.
Additionally, Bol has to meet various prudential requirements, put in place to
reduce Post Office’s exposure to Bol getting into financial difficulties. Since
2012 Bol has consistently improved its financial condition and meets those
requirements.
However, it it is becoming clear that
particularly if Post Office were
With such a wide ranging relationship there is a risk that Bol may respond to
Post Office raising an FSJVA dispute by applying pressure in other aspects of
the relationship or raise a counter dispute (eg Post Office having less than
100 mortgage specialists in place).
Except insurance which expires in 2020 unless Post Office completes its option,
5
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6.2 There is a risk that Bol may seek to withdraw its interim support for the travel
insurance business. Bol however has a regulatory obligation which would
make this difficult; Titan also has contingencies in place.
6.3 There is a risk that Bol may seek to slow down the Hawk project. However,
the contractual process is already in train and Post Office has the right and
ability to force the pace.
Next steps
71 It is proposed to initiate a dispute in relation to the management of the savings
business with a view to concluding at a minimum a one year interim
arrangement. This would secure Post Office’s position for 2015/16 while giving
the parties time to agree a new long term structure.
7.2 These negotiations wou
the challenges from the j=
Iso assess the requirements to manage through
implications on Bol’s Treasury operations.
7.3 In the meantime management would seek to develop the investment strategy,
while concluding Hawk.
Recommendation
8.1 The Board is asked to note the paper.
Nicholas Kennett
Director, Financial Services
November 2014
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POST OFFICE LTD BOARD
Project Titan and Post Office Management Services (POMS) review of preparedness
by Grant Thornton
Purpose
The purpose of this paper is to assist the Board in making its decision on
commencement of trading of POMS, with a commentary on the Grant Thornton (GT)
review, of which a summary is attached, with the full version becoming available in
the reading room from 24"° November.
Background
The Board will remember that at its meeting on 26" October meeting, Nick Kennett,
Financial Services Director, and Paul Havenhand, General Manager POMS delivered
an update on the insurance transformation programme. It was agreed at that meeting
that the GC would provide an update to the November Board on POMS preparedness
for ‘go live’.
It was originally envisaged that the final version of the Grant Thornton review would
be available for dispatch along with the board papers on 20" November. In the event,
however, its production was delayed to enable Grant Thornton to review the most
recent evidence available from the project team.
Asummary of their report is attached (as at 21st November) and they have agreed to
provide an oral update at the Board meeting should there be any significant
subsequent developments.
The Grant Thornton Review
The risk team engaged Grant Thornton to undertake a review of the project teams’
work to the extent it related to matters relevant to operating in an FCA regulated
environment. The review areas were quite wide ranging covering governance and risk
management as well as important points of regulatory detail such as risk transfer
agreements and policies the regulator would expect to see in place.
The review was largely based on interview and sample checking undertaken in early
October, with an updated “re-review” as at 21° November.
The attached summary shows the position both as at October and as at November
21°, Progress has been made on the majority of the items reviewed in October and
further concentrated effort is required by the project team to deliver these
components for soft launch (Travel Insurance renewals 8 December) and hard launch
(new Travel Insurance business 1 January 2015).
Whilst all of the components reviewed by GT are required for operating in a regulated
environment, GT assessed items as either ‘critical’ or ‘essential’ for soft launch. For
this purpose the definitions are;
Critical - soft launch cannot proceed unless the component is in place
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Essential — soft launch could proceed without the component fully in place but would
require significant Board oversight and action, analysis, testing and/or development
immediately post-launch.
In addition, Grant Thornton includes in their overview the statement ‘the Project is
now at a point where equal attention needs to be given to a holistic view of
POMS, that considers how the entity will operate as a unified whole in an FCA-
regulated environment. For this reason, our overarching recommendation is
that the POMS' directors must continue to increase their level of engagement,
to ensure that the POMS Board and its committees formulate and deliver the
strategic objectives of the business supported by a suite of insightful MI that is
explicitly linked to POM's evolving risk management framework’.
We would agree that further work is required on governance and risk management
including the overall control and reporting structures so it is clearer how this will work
within the Post Office.
The balance of the report is largely self-explanatory.
Key Risks/Mitigation
The risks of going live have been extensively discussed by the Board and the FSSC.
We have received no substantive feedback from the FCA on the authorisation
application that was submitted on 31 July 2014. So it appears likely that the regulator
may take up to its maximum permitted time, i.e until 31 January 2015, to make a
decision on authorising POMS. In the interim, the POMS contingency plan will be
instigated. That is to use an alternative FCA regulated firm ‘Thistle’ to act as the
regulated Principal of POMS until authorisation has been received for POMS.
This does mean that any regulatory risk in respect of Tl renewals in December will be
owned by ‘Thistle’ but Post Office will still carry the customer and reputational risk of
any failings (similar to the current position with the Bank of Ireland).
Assuming authorisation is received, POMS will then carry the regulatory risk and in
the very worst case scenario, the Approved Persons (Directors of POMS) could be
liable to regulatory censure including fines.
Similarly, not going live also involves risk in that the immediate implications of a
delayed soft launch are that travel insurance renewals of annual policies coming up
for renewal in December (c6000 policies) will not be issued because there will be no
regulatory structure in place; as well as the potential loss of financial benefits in
delaying the launch.
Next Steps
The Grant Thornton review has focussed on POMS preparedness to “go live”. As can
be seen from the report (page 6) there are four ‘Critical’ matters marked as amber
that will need to be closed out (to green) before the project can go live.
The Titan Team is continuing its intensive programme to prepare for a live date early
in December 2014. As a result, it is expected that further progress will have been
made over the days next 10 days against the areas Grant Thornton has indicated
need additional focus.
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The Risk, Titan and GT teams are working closely to resolve these issues and ensure
that the ‘go live’ decision can be made within the required timelines.
Recommendation
It is recommended that the Board:
« Notes this paper and the GT summary conclusion; and
* Delegates the making of a final “go live” decision to an appropriate ad hoc
Committee in early December (eg comprising the POMS Board, the Post
Office CEO and a Post Office non-executive Director).
Chris Aujard
General Counsel
21 November 2014
Project Titan and POMS Chris Aujard Page 3 of 3
November 2014
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DRAFT
fe] Gra ntThornton This version of the
report is a draft. Its
. 5 ™ contents and subject
An instinct for growth matter remain under
review and its contents
may change and be
expanded as part of the
finalisation of the report.
Post Office Managed Services Ltd (POMS)
Protect Titan Review
As at 21 November 2014
Jon Sperrin
Partner.
Mark Davies
Associate Director...
T GRO.
© 2014 Grant Thornton UK LLP I Project Titan Review DRAFT I 21 November 2014
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DRAFT
Private and Confidential
fe] Grant Thornton
An instinct for growth’
Our reference: JS/MJD/POMS-Project Titan/141121
Financial Services Advisory
The Directors Grant Thornton UK LLP
Post Office Limited 30 Finsbury Square
London
148 Old Street Ec2P 2YU
LONDON
EC1V 9HQ
For the attention of Messrs Chris Aujard, General Counsel and Nick Kennett, Director of Financial Services www.grant-thornton.co.uk
21 November 2014
Dear Sirs
Project Titan Review
We have pleasure in enclosing our draft report in relation to our review of Project Titan.
We have undertaken this work in accordance with our Terms of Engagement dated 13 October 2014.
If you have any queries regarding this report, please contact me on
Yours faithfully
Jon Sperrin, Partner, Financial Services Group
for Grant Thornton UK LLP
Chartered Accountants
Momibor frm within Grant Thomton Intemational Lid
Grant Thomton UKLLP isa livtod lability partnorshiprogistorod in England and Wealos No: 0C307742,
Rogistored offce: Grant Thomton House, Melton Strect, Euston Square, London NW 2EP.
Ast of members is available for our rogistored offco.
Grant Thomion UKLLP is authorised and regulated by the Financial Conduct Authority
© 2014 Grant Thornton UK LLP I Project Titan Review DRAFT I 21 November 2014 2
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Contents
Section
1. Our approach
2. Our reporting format
3. Executive Summary
4. Summary Overview
5. Detailed findings by component:
Governance
Handover arrangements between Aon and POMS
Risk Management Framework
Financial and regulatory reporting
Management Information
Outsourced arrangements
Approved Persons' responsibilities
Policies and procedures
Call centre compliance and ethical behaviours controls
Financial promotions processes
Customer journey — policy literature and customer communications
Principal responsibilities between Bank of Ireland and POMS
© 2014 Grant Thornton UK LLP I Project Titan Review DRAFT I 21 November 2014
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Our approach
Purpose
‘This report sets out the findings of our review of Project Titan. It as:
on 1 January 2015.
sses POMS' preparedness for a 'soft launch’ in early December 2014, and a full launch
Our Approach
Our findings are based on a series of high level interviews with key project stakeholders and a limited review of selected documentation. The specific criteria
and documents you asked us to review were set out in our Letter of Engagement dated 13 October 2014. In this report we refer to those criteria as
‘components’.
In preparing this report we have not undertaken detailed testing to provide assurance that all of the current and prospective risks to which Post Office
Limited and POMS could be exposed have been identified and/or mitigated. Rather, you required our review to highlight potential deficiencies or areas for
improvement within the specific components you identified. We make appropriate recommendations in this report for resolution, next steps or further
testing in each of those components.
Where appropriate, we highlight any obvious gaps we identified, during the course of our interviews and the documents you asked us to review, in POMS!
preparedness. Where relevant we provide industry best practice recommendations that may enhance Project Titan.
The context of our ratings
Project Titan is currently ‘in flight’, with a number of work streams running concurrently. This is firmly reflected in the rating factors that we have used to
evaluate each of the specific components you asked us to consider. We use the following rating methodology in this report to provide our view of the likely
degree of effort required if Project Titan is to meet its soft and full launch objectives:
Rating Definition
Component appears on-track for launch, subject to our recommendations being implemented. Actions are either in place or in plan. There is evidence the
component will be delivered and signed off by relevant stakeholders
Launch can be achieved subject to our recommendations being implemented, but the component requires focused effort. Component may be in plan, but
there are concerns over the Project's ability to deliver within the time frame, stakeholder sign-off has not been obtained and/or evidence relies solely on
answers provided by the Project Team in interview, ie progress has not been validated or tested, or there is insufficient documentary evidence.
Component requires significant development pre-launch. Rating may apply where evidence was not found, not in plan, or the plan is unrealistic.
Component is not expected to be ready for launch or fundamental elements are missing.
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Our reporting format
Reporting format
‘This report sets out our findings for each of Project Titan's components. Our assessment of each component has two parts; ‘Overview! and 'Key
Issues'. These are described below.
Overview
Sets out our overall findings for each component to arrive at an overall rating of POMS' preparedness to go live as follows:
Component Our overall Overall
description findings The evidential basis of our findings Status Criticality
Description of the High-level overview I Commentary on the level and quality of information relied on Overall rating for the component Overall rating of whether the component is:
component under of our findings based at the time of our review and the level of information based on the definitions in slide Critical - soft launch cannot proceed unless the
assessment and what on the information provided to validate statements made in interview. 4. component is in place
merenenld inant prune. One of three criteria: Where the evidential basis is
see at 'go live’. . intervi ly this ; th Essential — soft launch could proceed without the
+ interview only iating, aivostriors Wark Mey bo '© component fully in place, but would require
* 5 i i i er significant Board oversight and action, analysis,
Irtaridem rel ennai navies required to demonstrate or testing and/or development immediately post-
+ documentation review only. validate progress. launch.
Key issues identified
Sets out key individual issues identified within each component, observations on the potential impact of those issues, and our recommendations for
action. The number and materiality of issues may vary between components.
Issue
Issue Impact/observation Resolution/action required Status
Description of the issue identified. Could be a Description of completed and planned actions and our Our recommendations for action(s) Overall rating for the individual
confirmation the element is in place, or an commentary and observations on the effectiveness of those issue based on the definitions in
identified gap requiring action. actions. slide 4 and commentary in
“Overall status" above.
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Executive Summary DRAFT
Overview
Our overall view is that Project Titan requires focused effort to be ready for soft launch.
Of the twelve components reviewed we rated:
* Four as 'Critical’ and ‘Amber’, Soft launch can be achieved subject to our recommendations being implemented, but the component will require focused effort.
* Five as 'Critical’ and 'Green’. These components appeared to be on-track for soft launch subject to our recommendations being implemented.
* Three as ‘Essential’ and ‘Amber’. In these instances soft launch could proceed without the component being fully in place and embedded, but the component will require significant Board
oversight and action, analysis, testing and/or development immediately post-launch.
Our overall ratings for each of the components we assessed are set out in our "Summary overview" overleaf. For comparison, the Summary overview sets out our ratings at 24 October 2014
alongside our ratings as at 21 November. This compatison illustrates the progress the Project Team has made. The ratings should be considered in line with our approach and reporting format
described on pages 4 and 5. In the body of this report we set out our detailed findings, and make recommendations to help the POMS Board demonstrate that Project Titan will be ready for soft
launch.
Out of necessity Project Titan has been principally task-focused. In common with all large scale projects there are many interconnecting dependencies and a significant reliance on third parties
performing in line with expectations and/or contractual obligations. In some areas delays in finalising contractual terms have had an impact on core deliverables. For example, at the date of this
report the agreement with the insurer underwriting POMS' products had not been signed. Whilst this may be a straightforward administrative matter any delays to contract completion, or in the
worst case scenario insurer withdrawal could have a materially disruptive impact on the Project.
"The scale and pace of the Project may have led to a focus on resolving individual issues. Whilst this is understandable, the Project is now at a point where equal attention needs to be given toa
holistic view of POMS, that considers how the entity will operate as a unified whole in an FCA-regulated environment. For this reason, our overarching recommendation is that the POMS'
directors must continue to increase their level of engagement, to ensure that the POMS Board and its committees formulate and deliver the strategic objectives of the business supported by a suite
of insightful MI that is explicitly linked to POM's evolving risk management framework, The FCA will expect to see the cultural ‘tone from the top' being clearly set early, so that POMS is able to
tangibly demonstrate that customers are placed at the heart of the business from the outset. We note that this engagement has increased over recent weeks, and have seen evidence that POMS
Board oversight and activity is intensifying now that Project Titan has transferred into POMS.
We also draw the POL Board's attention to the following observations that could impact delivery of the project:
Key person risk
The scale of the project means there are a number of tasks that need to be completed in a short timeframe. Some of these tasks are likely to be relatively straightforward to execute in isolation.
However, in aggregate there is a material volume of outstanding work that needs to be completed. A key observation of our review is that Project Titan is critically exposed to key person risk.
During our review we formed the view that Richard James and Russell Weekes are extremely capable experts. However, both are consultants rather than full time POL employees. If either or
both of these key people were unavailable the project could slip quickly, particularly if the pace of the project has meant that knowledge transfer has been limited. Given the project is about to
enter a crucial phase we recommend the POMS Directors formulate a clear plan to manage this risk in the event that it crystallises.
Delays in FCA authorisation
A key project dependency is FCA authorisation progressing in line with the project plan. We learned during our review that POMS would consider becoming an Appointed Representative of
Thistle in the event that FCA authorisation is delayed or unsuccessful. Whilst we were not asked to review this aspect we recommend that the POMS Board considers the viability of this option
from a practical and reputational perspective, and documents a clear plan setting out the key risks and the controls required to manage those risks.
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Summary overview — Overall status by component DRAFT
Status Status
as at as at
Component Summary commentary 24/10/14 = 21/11/14 Criticality
Governance The POMS Board was not sufficiently engaged by the Project Titan team until the POMS Board meeting on 19 November 2014. Critical
During this meeting an action was taken to transfer the project into POMS. To achieve readiness for soft launch the POMS
Board must now demonstrate its oversight of POMS is suitable, effective and appropriate for an FCA regulated entity.
Handover arrangements The arrangements in place to manage the handover will require close oversight by the POMS Board to mitigate any adverse Critical
between Aon and POMS customer, regulatory and/or reputational impact, particularly where this could arise from a disagreement between Aon and AXA
over regulatory responsibility for the ongoing management of Post Office policies.
Risk Management Key components of the risk management framework are in draft format and must be approved by the POMS Board before soft Essential
Framework launch. Immediately post-launch the POMS Board must begin iterative testing in a live environment, to demonstrate that the
framework is embedding effectively in practice, and is explicitly linked to POMS' developing risk appetite. To support this the
POMS Board must ensure a suite of MI and Key Risk Indicators is developed that identifies current and emerging risks across
the portfolio of POMS' activities, including outsourced activities.
Financial and regulatory Appropriate plans appear to be in place, but these cannot be robustly evidenced or demonstrated beyond statements made in Critical
reporting interview. The POMS Board is considering proposals from external suppliers to deliver this critical function, but no supplier has
been formally engaged
Management Information Detailed Management Information requirements are pending definition and development. Essential
Outsourced arrangements POMS' business model is critically reliant on outsourced arrangements. A number of key arrangements are yet to be finalised. Critical
Specifically soft launch cannot proceed without a signed agreement with the underwriter in place. This remains outstanding.
Approved Persons’ The training materials POMS plans to use for its Approved Persons are not sufficient in isolation to fully prepare POMS' directors Critical
responsibilities for the significant obligations they will be taking on. A plan is in place for POMS to enhance its Approved Persons’ training
regime.
Policies and procedures A number of policies are incomplete, but are scheduled to be completed by the week commencing 24 November Critical
Call centre compliance and The Project Team's description of the component's progress in interview and the significant volume of documentation provided Critical
ethical behaviours controls suggest the work stream is on track. However, call centre compliance and readiness has not been fully tested or objectively
reviewed. We noted a number of areas for immediate investigation in the Webhelp documentation provided.
Financial Promotions The documented procedures for financial promotions are less detailed than we would expect and provide insufficient guidance in Essential
processes a number of key areas.
Customer journey policy Policy documentation, process maps and Webhelp training material are in place. The policy booklet has not been completed, Critical
literature and customer but a plan is in place for this to be delivered in time for soft launch.
communications
Principal responsibilities The agreement governing arrangements between Bank of Ireland and POMS has been drafted, but has not been signed. Critical
between Bank of Ireland and
POMS
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fe] Grant Thornton
An instinct for growth
© 2014 Grant Thornton UK LLP. All rights reserved.
‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to
one or more member firms, as the context requires.
Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each
member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not
agents of, and do not obligate, one another and are not liable for one another’s acts or omissions.
grant-thornton.co.uk
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POST OFFICE LTD BOARD
Reappointment of Non-Executive Directors
1. Purpose
The purpose of this paper is to:
1.1 Recommend to the Board that Virginia Holmes and Alasdair Marnoch be asked
to renew their contracts when they are up for renewal in the new year; and
1.2 To request shareholder consent to re-appoint both non-executive directors to the
Company.
2. Background
2.1 Virginia Holmes’ term of office expires on 3 April 2015. Virginia acts as
Chairman of the Pensions Sub Committee and Chairman of the Financial
Services Committee.
2.2 Similarly, Alasdair Marnoch’s term of office expires on 22 May 2015. Alasdair
acts as Chairman of the Audit, Risk and Compliance Committee.
2.3 Shareholder consent will be required for both re-appointments to the Board, in
line with the Company's Articles of Association.
3. Proposal
3.1 The Nominations Committee recommends to the Board that both directors be
asked to renew their contracts for the non-executive positions and
chairmanships of committees for 3 years from the dates of expiry of the current
contracts.
4. Recommendations
The Board is asked to:
4.4 Recommend to the shareholder the appointment of Virginia Holmes and Alasdair
Marnoch to renew their contracts in line with the Nominations Committee’s
proposal.
Nominations Committee
19 November 2014
Re-appointment of Non-Executive Directors Nominations Committee Page 1 of 1
18 November 2014
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POLB 14(10")
POLB 14/127 -14/141
Present:
Alice Perkins
Neil McCausland
Tim Franklin
Virginia Holmes.
Alasdair Marnoch
Richard Callard
Paula Vennells
Chris Day
In Attendance:
Alwen Lyons
Mark Davies
Neil Hayward
David Ryan
Nick Kennett
Paul Havenhand
Kevin Gilliland
Lesley Sewell
POLB 14/127
POLB 14/128
ACTION:
CEO
(a)
(a)
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POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held on 29 October 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
Communications & Corporate Affairs Director (minutes POLB
14/128 - 129)
Group People Director (minutes POLB 14/128 - 129)
Business Transformation Director (minute POLB 14/128)
Director, Financial Services (minute POLB 14/133)
General Manager POMS (minute POLB 14/133)
Network & Sales Director (minute POLB 14/134)
Chief Information Officer (minute POLB 14/139)
INTRODUCTION
A quorum being present, the Chairman opened the meeting.
CEO’S REPORT
The CEO introduced her report and thanked the Board for convening
for the additional Board call on the 21" October. The CEO focused on
three key areas for discussion with the Board:
1.
There was agreement that the Royal Mail Group (RMG)
meeting taking place on the 30" October was vital and an
opportunity to debate the changes in the market and each
business's priorities. The Board recognised the changes
required by Post Office would require a radical restructure for
RMG, and asked the Business to ensure that if RMG was
committed to these changes they understood the aggressive
timeline that was required. The Board asked for an update
after the RMG meeting.
The CEO emphasised that, whilst the Business remained
committed to the existing plan, work was underway on an
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alternative plan (Plan B) which would include operating as an
aggregator for other mails providers. It was acknowledged that
this would need a renegotiation of the RMG MDA and that
whilst the Business did not start from a strong negotiating
position it needed to; protect sales volumes from RMG and not
trigger a renegotiation from them; and reduce the complexity of
the RMG product suits which would not switch easily to
another provider.Plan B was also dependent on changes to the
Network which would require Government support. The Board
asked if the Business had the right resource working on Plan
B. The CEO reported that she had approached Sue Barton,
Strategy Director, currently on a sabbatical, but that she was
unavailable until the New Year and that Martin Edwards was
currently leading this work. Plan B was on the agenda for
discussion at the November Board meeting.
3. The Board noted the improvement in the FS video mystery
shopping to 80% compliance, and asked the FS sub
ACTION: committee to continue to monitor. The Board asked for an
Nick Kennett update on the mortgage sales and pipeline to give them
comfort that the full year forecast was robust. The CEO
explained that from next month Financial Services would be
monitored as a key change programme in section 3 of her
report.
(b) The CEO updated the Board on Sparrow and an antagonistic
conversation with James Arbuthnot MP about the Business’ approach
to the Mediation Scheme. She reiterated that the investigations were
progressing well. The Business was refusing to progress all cases into
mediation, although it was offering to meet and go through each case
ACTION: with the applicant. The Chairman offered to reconvene the Sparrow
Chris Aujard Board Sub Committee if required.
POLB 14/129 CEO RISK REPORT
(a) The Board welcomed Neil Hayward, Group People Director, Mark
Davies, Communications & Corporate Affairs Director and David
Ryan, Business Transformation Director, to the meeting.
(b) IThe CEO introduced the risk paper and explained that the Business
intended to have the necessary systems in place before the end of the
financial year to enable it to comply with the UK Corporate
Governance Code as it applies to risk management and report this in
next year’s Report & Accounts.
(c) The CEO explained that her report focussed on the areas highlighted
in Sir Christopher Kelly's report on the Co-operative Bank, using his
themes of Culture; Governance; Risk Management; and Capability.
She believed that Capability was the biggest area of risk for the
Business followed by the Culture of the organisation. In many areas
these two themes were linked for example in risk management where
the Business was increasing its capability at a senior level to lead the
change in attitude and culture.
(d) The CEO reported that the recent PwC work to analyse the Business’
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risk management had concluded that the Business capability was
ACTION: ‘satisfactory’ in steady state but ‘inadequate’ as the Business moved
Chris Aujard into transformation. The Board asked for a summary of the report to
be circulated with the full report sent to those Board members who
were interviewed.
(e) The CEO recognised that, as the Business accelerated the
transformation and moved from design to implementation that the
structure of the transformation team would need to change. She
explained that the transformation office led by Alison Thompson would
move to work for David Ryan, who would then lead the whole
transformation agenda.
(f) The CEO assured the Board that the Business would only use
consultants when absolutely necessary and that the CFO monitored
this area. However, she recognised that especially in risk and change
there was an urgency to get these areas in the position to be capable
to deal with the transformation and this would need external resource.
(g) The CEO explained that enterprise risk, including the top 6+3
Business risks, would return to the January Board for discussion.
ACTION: (h) The Board asked for updated forward agendas for Board and Sub
Company Committee meetings
Secretary
(i) I The Board noted the Risk Report.
(j) I David Ryan left the meeting.
POLB 14/130 PEOPLE AND ENGAGEMENT UPDATE
(a) Neil Hayward, Group People Director, introduced the update on the
People and Engagement strategy, including the Plan for the next 12 —
18 months, changing the way that the Business works with the unions
and the NFSP and stakeholder analysis and critical path.
(b) The Board recognised the challenge of people engagement during a
period of significant transformation and cost reduction. Neil Hayward
accepted that this would be challenging but reassured the Board that
he had past experience of similar circumstances. He emphasised the
need for a compelling narrative to help people understand why the
changes were best for the organisation. Mark Davies explained that
the tone of internal communications had already changed and people
appreciated the honesty.
(c) Neil Hayward recognised that people needed to understand what the
Business would be in 2020. He acknowledged that, as yet, the
Business had not explained what a transformed and commercially
sustainable Post Office would be like. He recognised that people
would find the changes painful and agreed that the Business had to
remain honest and consistent in its communication and paint a
compelling picture of the future.
(d) The Board asked Neil Hayward if he was constrained by the resource
in his team and which areas he would like to accelerate work on. He
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explained that he kept the resource in the Industrial Relations Team
under review, but acknowledged that his two areas of concern were
refreshing the Senior Leadership Team which took a lot of his and Fay
Healey’s personal time and senior leadership development.
ACTION: (e) The Board asked for an update at the end of the Financial Year to
Neil Hayward review the roadmap for the next 12-18 months and the senior
leadership training and development.
(f) Neil Hayward explained that Wave 1 of the new organisational design
would be presented to the Nominations Committee on the 10”
November. He reported that the Business has also recognised that
retention may become an issue for specialist areas and that his team
was considering a very small number of people who may require
retention payments.
(g) The CEO emphasised the need to focus more on subpostmasters but
stressed the need to keep them as agents and not employees. The
ACTION: Board were concerned that these definitions should not be blurred.
Chris Aujard The CEO agreed and promised a note to the Board from the General
Counsel (GC) to give them comfort.
(h) The Board discussed and supported the proposed changes to
collective bargaining and was reassured by the Business’ plans. Neil
Hayward stressed the need to get down to the right level of
representation for the Business with a formula that reduces in line with
headcount.
(i) I The Board considered the detail of possible simultaneous CWU and
NFSP disputes and the likely reaction of stakeholders. Mark Davies
explained the worst case scenario and although he did not
underestimate how difficult it would be, believed the Business had the
capability to handle both the operational and media battles. The Board
asked for assurance that the Business could manage the operational
consequences of a strike. This issue would be raised with Kevin
Gilliland, Network Director later in the meeting.
(j) IThe CEO assured the Board that the plans were already in place for
Christmas and that any NFSP dispute was likely to be after the
Christmas period. Neil Hayward explained that the next contentious
point of negotiation with the NFSP was likely to be the Memorandum
of Understanding and grant agreement, the principles and price of
which he was still discussing.
(k) The Board asked Richard Callard for his opinion of the Minister's likely
response to any disputes. He explained that the Minister had already
been briefed regarding the CWU Supply Chain dispute and
considered it an operational issue in which she should not get
involved, although she was supportive of the Business and
understood the possible need to use compulsory redundancy. He
suggested that the relationship with the NFSP was more complicated.
The Minister understood the need to manage Network Transformation
within the current funding envelope, which would be impossible if
additional compensation was paid to subpostmasters for network
extension. He could not promise how the Minister would respond but
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promised the Shareholder team, ShEx and the Treasury support.
(1) The Board asked Richard Callard to ensure that any Ministerial
briefing made clear the financial consequences of failure. The CEO
explained that she had a meeting with the Minister in the next two
weeks at which she would be able to explain the position.
ACTION: (m) The Board asked the Business to refresh the stakeholder plan, and
Mark Davies produce a high level heat map/stakeholder grid to keep the Board
updated. The Chairman recognised that the Board does not have a
meeting in December but asked the CEO to keep the Board informed
and if necessary call an emergency Board meeting
(n) The Board noted the update on People and Engagement, and
supported the proposals presented.
(0) Neil Hayward and Mark Davies left the meeting.
POLB 14/131 FINANCIAL PERFORMANCE UPDATE
(a) The CFO presented a financial performance update for September
2014.
(b) He explained that his report would cover the changes in forecast since
period 5; the full year outlook including key dependencies and
assumptions for H2 performance; a year on year comparison of H1
performance; and external messaging for the interim statements.
(c) The CFO full year forecast for income had worsened from the £890m
in period 5 flagged by the CFO at the last Board meeting, down to
£880m, £45m behind budget and £13m up on the previous year. This
was driven by two areas where the CFO had taken a more prudent
approach to the forecast.
(d) The Mails income had been reduced to include a more realistic return
for the ebay and mails coaching initiatives, but still contained growth
for the Christmas campaign which the Business supported.
In addition Government Services net income had been reduced by
(e) £10m to recognise the liability for deceased customers. The CFO
explained that the Business continued to hope it can offset this liability
with the income for ‘ring-fenced’ customers but this had not proved
possible to date so it was necessary to recognise the liability at P6.
The Board discussed the possible pricing true-up issues and
supported the CFO’s prudent approach in recognising the liability
whilst not including any benefit for the undercharging for ring-fenced
customers.
The CEO assured the Board that the inaccuracies caused by the DWP.
(f) and Business systems had not led to any customer detriment.
It was noted that Government Services income was down 10% on last
(g) year at the half year and likely to be similar at full year.
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The Board were concerned about the effect of the new telephony
(h) contract. The CFO explained that a new plan was now in place which
had taken down the expected customer numbers as well as the
average revenue per user. He considered that there was still £3m risk
in the telephony numbers despite a price rise in January which should
ACTION: improve the position by £2m. The telephony contract was due to come
Chris Aujard/ to the Risk & Compliance Committee and then the ARC for a deep
Alasdair Marnoch dive in the New Year.
The CFO explained that significant challenge had gone into
(i) scrutinising the income numbers through a formal review process and
that the Commercial and FS teams were signed up to delivering the
new forecast.
The CFO reported the changes to the cost forecast and the current
(j) gap of £15m against the adjusted target of £60m required to protect
the original EBITDAS. He still believed the Business would get near to
the £60m target if one off savings such as releasing the bonus accrual
were included. However, the forecast had been reduced to include the
£45m he was certain the Business could deliver.
He stressed the importance of finding sustainable savings in the year
(k) and was hopeful the Business would get to near its adjusted target of
£53m, which was required to underpin the £100m cumulative
sustainable saving required by the end of 2015/16.
The CFO concluded that, taking into consideration the changes to
(I) income and costs, he had reduced his EBITDAS forecast to £85m,
including a £5m contingency. He explained that the likely year on year
improvement in EBITDAS (after allowing for material one off
adjustments) was circa £20m, which would deliver a projected
EBITDAS of circa minus £75m this year and a likely trajectory to
breakeven in 2 to 3 years’ time, rather than 1 year indicated in the
2013 funding request.
The Board was concerned by the status of the Business scorecard
(m) and asked specifically about the Easy to do business with (ETDBW)
decline and whether this was a reflection on cost cutting. The CFO
explained that very few front line jobs had been cut, but accepted that
there seemed to be a disparity between ETDBW and the customer
research undertaken after network transformation. The CEO explained
ACTION: that the two measures were very different and promised to return to
Martin George the Board for a discussion on ETDBW.
POLB 14/132 INTERIM REPORT AND CONDENSED FINANCIAL STATEMENTS
FOR 2014-15
(a) Mark Davies joined the meeting.
(b) The Board reviewed the Company’s draft interim report for the 2014-
15 half year.
(c) The Board agreed that the statement should explain the journey the
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Business was on and the turnaround taking place. It should show that
the Business is doing the right things and has taken some pain in the
first half of the year but that the rate of improvement is getting better. It
needs to explain the cost story, including necessary investment, and
why the Business needs to go harder and faster.
ACTION: (d) Mark Davies agreed to provide a revised draft for the Chairman and
Mark Davies CEO.
(e) Mark Davies left the meeting
POLB 14/133 PROJECT TITAN/POST OFFICE MANAGEMENT SERVICES
LIMITED (POMS)
(a) The Board welcomed Nick Kennett, Financial Services Director, and
Paul Havenhand, General Manager POMS, to the meeting and
received an update from the POMS Board on the insurance
transformation programme.
(b) Virginia Holmes, Chairman of the FS Sub Committee explained that
the FS sub committee had not had an opportunity to review the work,
although she had been called by Nick Kennett and the General
Counsel (GC) to take her through the paper with which she was very
comfortable. The area she had concentrated on had been the
contingency around the Thistle risk.
(c) Nick Kennett reported that the setting up of POMS was broadly on
track with Directors appointed, bank accounts opened and auditors in
place. He explained that the preliminary assurance paper from Grant
Thornton had identified two red areas of risk:
1. that the POMS Board needed to be seen to be managing the
Business with a clear structure for ownership and separate
roles and responsibilities from Post Office.
2. that effective run off arrangements between AXA and AON had
still to be agreed.
ACTION: Nick Kennett explained that the GC would provide a risk paper for the
. . November Board including the conclusions from Grant Thornton, to
Chris Aujard a "
enable the decision on commencement of trading.
(d) The Board discussed the two decisions needed to enable POMS to
trade and the contingencies in place. If (based on the Grant Thornton
advice) the GC could not give assurance that POMS was ready to
trade, the Post Office would contract with Collinsons in the interim
under an introducer arrangement as it did with Aon currently. This
would be at an additional cost of £100k to set up and £80k a month.
(e) If the FCA did not give approval to POMS but the Board agreed
commencement of trading the Business would use Thistle as an
intermediary at a cost of £70k to set up and £100k a month to run.
(f) The Board were given assurance that there would be no customer
detriment if the Business needed to use either of these contingencies
or with the setting up of POMS.
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(g) The Board also received a request to approve the POMS three year
business plan and discussed the growth assumptions. Paul
Havenhand explained the potential in the aggregator channel and the
minimal risk of packaged accounts.
(h) The Board:
e Noted the update from the POMS Board and that a final
decision regarding POMS’ commencement of trading would be
tabled at the November Board meeting for approval.
e Approved the POMS three year plan.
e Authorised the POMS Board to execute lead contracts with
underwriters that meet the risk threshold of a Standard & Poors
(or equivalent) rating of at least A-.
¢ Noted that the selected underwriter to act as the underwriter
lead was Great Lakes (a Munich Re subsidiary) with Collinsons
managing claims and Solid providing additional capacity (c.
20%) for non-standard policies.
(i) The Board discussed Project Hawk and
had written to the Bank of Ireland (Bol)! IRRELEVANT i
and had received their! ELEV, THe explained that”
the Business would nov io the Usé Of ain Independent Expert
(IE) to opine on the im The critical date for signing the Hawk
ick Kennett reported that he
ACTION: contract was 31° March 2015. The Board asked Nick Kennett to
Nick Kennett/ ensure the terms of reference for the IE specified the necessary
Chris Day timeline for the work and that progress would be made in agreeing the
shortlist, whilst he was on leave. The Board asked Chris Day, as
Chairman of POMS, to ensure this happened.
(j) Nick Kennett and Paul Havenhand left the meeting.
POLB 14/134 NETWORK UPDATE
(a) The Board welcomed Kevin Gilliland, Network & Sales Director, to the
meeting and received an update on Network Transformation,
performance of the new models and progress on Crown
Transformation.
(b) The Board were encouraged by the progress and thanked Kevin
Gilliland for the strong Network Transformation performance.
(c) The Board discussed Crown Transformation and the likely profit and
loss run rate at year end. Kevin Gilliland explained that the Business
may miss the breakeven target by 6 months but that the Crown
Transformation was still a remarkable turnaround. The Board agreed
and was sympathetic to the position and discussed the additional
actions which could be taken. The Board asked the Business to
ACTION: ensure that all legitimate actions were delivered including recognition
CFO/Kevin of the additional profit in the franchise network. Kevin Gilliland was
Gilliland asked to provide a narrative to explain the transformation delivered in
the Crown network to be used to support the year end run rate.
(d) IThe Chairman explained the earlier Board discussion, POLB 14/13 (i),
and asked Kevin Gilliland to reiterate his contingency plans in the
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POLB 14/135
ACTION:
Chairman
POLB 14/136
POLB 14/137
POLB 14/138
(e)
(f)
(9)
(h)
(a)
(a)
(a)
(a)
(b)
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event of Supply Chain industrial action, specifically to give the Board
comfort that the Business could manage both discontinuous and
continuous action with little customer detriment.
Kevin Gilliland explained the process of pre-funding the network and
the use of the rapid deployment force (250 trained managers) to
manage any difficult parts of the country.
He believed that continuous action was highly unlikely but in this event
the network would be pre-funded with the 3000 more remote branches
getting 5-10 weeks cash. He remained confident that the Business
could manage any action with little disruption to customer service.
The Board asked the Business to be ready to handle the PR around
any closed branches.
The Board affirmed its support for the approach to the Supply Chain
negotiations and any subsequent industrial action.
The Board noted the Network update.
Kevin Gilliland left the meeting.
BOARD EFFECTIVENESS REVIEW
The Board accepted the Chairman’s offer to undertake an internal
Board effectiveness review in the New Year. Alasdair Marnoch,
Chairman of the ARC, asked for clarification of Directors’
responsibilities specifically pertaining to POMS. Virginia Holmes
explained that as Post Office did not hold a banking licence the NEDs
responsibilities would not change. The Non-Executive Chairman of
POMS would be considered the responsible person.
MINUTES OF PREVIOUS MEETINGS AND MATTERS ARISING
The minutes of the Board meetings held on 25 September 2014 were
approved for signature by the Chairman.
COMMITTEE MEETING MINUTES FOR NOTING
The Board noted the minutes of:
e the Audit, Risk and Compliance Committee held by
correspondence on 16 September 2014; and
e the Financial Services Sub-Committee meeting held on 16
September 2014.
STATUS REPORT
The Status Report, showing matters outstanding from previous Board
meetings, was noted.
The Board noted the update on the Facilities Management and
Grapevine contract awards.
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POLB 14/139 END USER COMPUTING (EUC) CONTRACT AWARD
(a) The Board approved the award of the EUC contract to Computacenter
and authorised the CFO to execute the relevant contracts.
POLB 14/140 ITEMS FOR NOTING
(a) The Board noted the Cyber Security update.
(b) The Board noted the Significant Litigation report.
(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 1123 to 1230 inclusive in the seal
register was hereby confirmed.
POLB 14/141 DATES OF NEXT MEETINGS
(a) It was noted that the next Board meeting would be held on 26
November 2014.
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POLARC14 (4"")
14/31 - 14/36
POST OFFICE LIMITED
(Company no. 2154540)
(the Company)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE SUB-COMMITTEE held
on 21 October 2014 by conference call.
Present:
Alasdair Marnoch Chairman of Committee
Neil McCausland Senior Independent Director
Tim Franklin Non-Executive Director
In attendance:
Alwen Lyons Company Secretary
Chris Aujard General Counsel (GC)
Chris Day CFO
David Mason Head of Risk Governance
Malcolm Zack Head of Internal Audit
Gavin Lambert Chief of Staff
POLARC INTRODUCTION
14/31
A quorum being present, the Chairman of the Committee opened the
meeting and welcomed all those present.
POLARC MINUTES OF THE LAST MEETINGS AND MATTERS ARISING
14/32
(a) The Committee approved the minutes of the meetings held on 15 May
2014 and 16 September 2014 for signature by the Chairman of the
Committee.
(b) The Committee noted the actions list dated 17 October 2014.
POLARC RISK APPETITE STATEMENTS
14/33
(a) The GC introduced the risk appetite statement and explained that the
Business intended to have the necessary systems in place before the end
of the financial year to enable it to comply with the UK Code of Corporate
Governance as it applies to risk management and report this in next
year’s Report & Accounts. The enterprise wide risk management system
incorporating the risk appetite would be used to understand and highlight
risks as the Business moved in business transformation.
(b) IThe GC noted the importance of providing metrics and tolerance ranges
for each element of the risk appetite statement as a practical guide for the
Business, and recognising that the statement provided was only the first
draft, asked the committee members for their input.
(c) The ARC was encouraged by the developing risk management
framework, but still had concerns about the time taken to get all the
components established in Post Office.
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(d) Specifically around the risk appetite statement the business was asked to:
1. Focus on more actionable statements with clear
metrics behind each element.
2. Ensure the overall framework was established before
populating each individual dimension
3. Reconsider the ratings used as ‘Receptive’ was
considered too neutral for the 4'" rating, and ‘cautious’ and
‘minimal’ were too similar to enable clear differentiation .
(e) The Committee members considered the risk categories in the statement
and suggested ‘customer’, ‘commercial partners’ and ‘change’ could also
warrant consideration as separate categories. They proposed that the
high level general statement of appetite needed to be supplemented by
more detail.
(f) The Committee gave the following specific feedback for each area:
Markets: They suggested that ‘markets’ should be differentiated to show
more detail for the different markets in which the Business operates as
well as any proposed new markets. The Business should be keen to take
on risk in the markets in which it is established (either ‘receptive’ or
‘hungry’) but it should be much more cautious when entering new
markets. They agreed that the Business should focus on their existing
markets rather than committing investment to diversify. Lower profits
would be acceptable to maintain revenue in mature markets, but not to the
extent that this would be loss-making. The Committee understood why the
Business would be neutral about Government contracts, given the recent
history, but still felt enthusiastic about this market if conditions were right.
Einancial: The Committee agreed that the sub categories were too narrow
and that the Business should consider wider financial risk. It suggested
highlighting appetite for asset/liability management; cost reduction;
efficiency; and anything which might drive profitability through financial
constraints or measures. It was thought that this was an area where the
Business could be much more specific. All three members were ‘hungry’
to be free of subsidies.
Legal/regulatory: There was general support for this area although
simpler language would be helpful when describing high profile matters.
People: The Committee recommended inverting the statements. For
example ‘hungry’ for getting the right people with the right skills. They also
asked the Business to consider including a specific reference to unions
within the people section of the risk appetite.
Technology: There was general support for this area but the Committee
though that as a business incorporating financial services, the risk
appetite for any data inaccuracies should be ‘averse’.
Operations: no comments.
Stakeholder: Impressed by statement around the potential to ‘lose
engagement of a key stakeholder’ and considered this one of the best
statements in the paper.
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(9)
ACTION: Corporate affairs: they acknowledged the importance of this dimension
DM/GC over the coming months and had no concerns with the wording.
The Committee agreed that the draft appetite statement was a good
ACTION: starting point and directionally correct. The Chairman suggested that the
Gc (h) Business take the specific feedback from the Committee, but to focus on
a detailed redraft of the Market dimension for presentation at the
November ARC meeting.
(i)
The Committee agreed to bring the risk appetite statement to the January
Post Office Board Meeting.
The GC reminded the Committee that PwC were undertaking a review of
the risk framework and business change management capability. Their
(j) report would be tabled at the Business’ Risk and Compliance Committee
in November. The change management assurance would be incorporated
into the Business Transformation work for the November Board.
GC also reported that the Business would review its top risks again in
January.
POLARC INTERNAL AUDIT UPDATE
14134
(a) The Committee received an update on the Post Office Internal Audit
activity and key outcomes from June to September 2014.
(b) Malcolm Zack reported that there were no major issues with the
implementation of the new finance system which went live in September.
The remaining written assurance report on IT General Controls would be
provided at the final programme board. He stated that the programme
aimed to formally close down in the next week, although internal audit
would continue to monitor.
(c) Malcolm Zack reported that the audit of Benefits Realisation had found no
serious issues, but had highlighted a number of process points
specifically around tracking financial and non-financial benefits through to
conducting PIRs. The CFO agreed that the report raised valid concerns
around the culture of the business and accountability. He assured the
committee that the Business was working to tag benefits to programmes
and ensuring the right people were accountable
(d) Malcolm Zack reported on the audit of the Business Continuity planning
and noted that the overall plan was not yet complete. He explained that
work was on-going and needed the business continuity manager to brief
the ExCo and SLT, so that they were aware of the key steps to take in an
emergency. The business aimed to address this by the end of the
ACTION: calendar year. The GC would bring an updated on the major
Gc incident/disaster recovery timetable to the ARC in January. It was agreed
that the ARC would continue to monitor.
(e) The Committee noted the outcomes of the recent audits and reviews and
the current and upcoming work.
(f) I The Committee noted the amended Internal Audit 2014/15 plan.
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ACTION: (g) The Committee noted the status of audit recommendations and actions
Mz and requested that where actions were rebased that the new timeline be
included to show a more accurate RAG status.
(h) IThe Committee asked if internal audit were considering a value for money
audit of Network Transformation. Malcolm Zack stated that this was not
currently in the plan. The CFO assured the Committee that he was in on-
ACTION: going discussion with the NAO to ascertain if they were likely to audit BiS,
GC which they are not, and how the Business could best evidence value for
money.
(i) The Committee was given assurance that the Internal Audit resource with
the addition of PwC support was adequate providing the financial level of
PwC support was maintained as per the co-source arrangement.
(j) David Mason and Malcolm Zack left the meeting.
(k) I The GC explained that Malcolm Zack had handed in his notice and would
be leaving the Business on the 31 December. It was agreed that the
ACTION: possible interim replacement be invited to attend the next ARC. It was
Gc agreed that when a new candidate is identified that they would meet the
Chairman of the ARC as part of the interview process.
POLARC DATE OF NEXT MEETING
14/35
The date of the next meeting is 10 November 2014.
POLARC CLOSE
14/36
There being no further business, the meeting was declared closed.
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PC 14/41-14/43
POST OFFICE LIMITED
{the ‘Company’)
PENSIONS SUB-COMMITTEE
Minutes of a meeting of the Pensions Sub-Committee of the Board
held at 148 Old Street, London EC1V 9HQ on 28 October 2014
Present: Neil Hayward (NH) (in the Chair)
Virginia Holmes (VH)
Chris Day (CD)
Richard Callard (RC)
In Attendance: Keith Murdoch (KM) Head of Reward and Pensions
Natasha Wilson (NW) HR Consultant
Harpreet Singh (HS) Pensions Manager
Alwen Lyons Company Secretary
Larissa Wilson Secretariat
Phil Daniels (PD) Senior Client Manager, Mazars
PC 14/41 OPENING OF MEETING
A quorum being present, RC and CD nominated NH to act as Chair of
the meeting in VH’s absence.
PC 14/42 DEFINED CONTRIBUTION PENSION SCHEME
The Committee welcomed PD to the meeting and received a
recommendation from Mazars that the Company should appoint Friends
Life as the Group Personal Pension Plan provider from 1 April 2015.
PD explained the tender process behind Mazars’ recommendation,
which had involved inviting ten providers to participate in the market
tender exercise, nine of which responded (AEGON did not respond) and
were assessed against the following criteria:
e Quality (Business Requirements), accounting for 80 per cent of
total weighting:
o Implementation
o Administration/Information Security and Data Protection
o Communications
o Investments
o Technology
e Pricing, accounting for 20 per cent of total weighting:
o Range of funds offered
o Default options
o Individual funds
The shortlisted providers (Friends Life, Legal & General and Zurich)
were then interviewed by representatives from Mazars Employee
Benefits and Post Office, including union representation.
PD reported that both Friends Life and Zurich had very good responses
at tender and interview stages. One of the factors which differentiated
the Friends Life tender had been the quality of the proposed member
communications, including access to their pension details from their PC,
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tablet and mobile phone. Both companies highlighted the extensive
library of pensions information they had online. Friends Life also
demonstrated a strong commitment to the Company offering a dedicated
helpline, retirement options and pre-retirement seminars at no additional
cost. Friends Life had made it clear that Post Office would be a very
valuable client to them and that they would be willing to work with the
Business and the unions to help member engagement.
Friends Life had offered a good range of funds at competitive prices, if
90-95% of employees opted for the default option this would be provided
at a 40% reduction compared with RMDCP charges. The Committee
discussed the tender process and were satisfied with how it had been
conducted and that it followed the spirit of the Public procurement
process in the fact that it was conducted openly, fairly and transparently.
The Committee requested that the providers’ updated scores after the
interview stage be added to the Mazars recommendation paper.
ACTION:
PD/HS
VH joined the meeting.
The Committee discussed the importance of market commitment and
the financial strength of Friends Life and Zurich. The Committee
considered the current financial strength ratings from Standard & Poors
(S&P) and Moody’s, with Friends Life’s S&P rating of A- and Moody’s
rating of A3 being lower than Zurich’s S&P rating of AA- and Moody's
ACTION: PD/HS rating of Aa3. The Committee requested clarity over the significance of
these ratings from Mazars.
The Committee discussed the solvency ratios for both providers. PD
reported that both had adequate solvency ratios under Solvency I, with
Friends Life at 193% and Zurich Group at 270%. VH challenged the use
ACTION: PD/HS of Solvency I ratios and asked Mazars to provide Solvency Il ratios as
these new requirements would soon be more appropriate and were more
stringent.
The Committee considered the funds available and the investment
performance of Friends Life’s default fund. PD reported that the fund
had only a short track record as it had been set up fairly recently in
readiness for auto-enrolment, its return to date had been at 9.1%
ACTION: against a bench mark of 7.6%, with volatility at 7% against a benchmark
PD/HS of 12%. PD agreed to provide comparable statistics for Zurich and
statistics for the consolidation phase of both providers’ default solutions.
RC questioned whether Friends Life would offer value for employees as,
aside from the default option, some of the options were more expensive
compared to other providers. HS and NH assured RC that it was highly
likely that the majority of employees would opt for the default option,
which had a very competitive annual management charge (AMC) of
0.27%. It was also explained that the other funds presented may not
necessarily be selected, although funds with higher AMCs may provide
higher returns. PD explained that members would have the opportunity
to change their options as often as they wanted and emphasised the
significant increase in fund options that both Friends Life and Zurich
offered in comparison to the current scheme.
VH raised questions regarding how Post Office’s employees would hold
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their interests in the Friends Life funds and the transfer process from the
existing RMDCP scheme into the new scheme. PD clarified that Post
Office would be part of the pooled fund and that employees would be
allocated units of this fund. Under the bulk transfer process members
would select their options before a designated cut-off date and be
transferred at a designated transfer date. The funds would be valued as
at the cut-off date for selection and Friends Life would pre-purchase at
95% with the result that out-of-market risk would apply to only 5%, with
most transfers taking place within 24 hours to reduce out-of-market risk.
Friends Life was also willing to transfer members on an individual basis,
although these transfers would not be pre-purchased. VH emphasised
the importance of agreeing a minimum bulk size with Friends Life. The
Committee also considered the importance of proper communication
with employees and NW assured the Committee that the Business would
be working with the unions to ensure that people understood the
ACTION: process.
PD/HS
VH requested clarification on the status of any outstanding Resolution
issues that Friends Life had with the FCA and PRA.
The Committee supported Mazars’ recommendation to appoint Friends
Life as the Group Personal Pension Plan provider from 1 April 2015 in
principle and authorised the Business to proceed to discuss the
recommendation with the unions.
The Committee agreed to recommend the proposal to the Post Office
Executive Committee after the Business’s conversations with the unions
and the receipt of the information requested during the meeting.
It was noted that any decision to appoint a defined contribution scheme
provider would be subject to a consultation of the Post Office members
of the RMDCP scheme.
PC 14/43 CLOSE
There being no further business, the meeting was declared closed.
28.10.14 Pensions Committee Page 3 of 3
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POST OFFICE LIMITED BOARD
Status Report
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14/106(h)
postmaster to join the network extension development
No. I REFERENCE ACTION BY WHOM STATUS
ta I May 2014 Draft necessary amendments to the Remuneration Company Secretary I To be tabled at Remuneration
POLB 14/65(f) Committee Terms of Reference to enable it to make Committee on 10" November
recommendations to the Post Office Board on
appointments to the POMs Board.
1b I May 2014 Deliver a separate and accurate P&L account and I CFO In progress, subject to management
POLB 14/69(e) balance sheet for the Supply Chain Business. review in October
Update - The new Finance system
design provides the functionality to
provide robust channel P&L’s, including
one for the Supply Chain business. We
are currently testing the Channel P&L’s
as part of the implementation, and
should be in a position to report these
for the end of November.
1c I September 2014 POLB Provide clarification on the impact of the Common I Martin George To be included in the digital noting
14/114(a) Digital Platform on the Horizon system and any paper being prepared for the January
possible cost savings. Board
1d I October 2014 POLB Provide an update to the Board after the RMG meeting I CEO Update: 2/11 - Paula sent an update on
14/128(a) on 30 October. RMG by email.
2a I September 2014 POLB Provide a paper for the Board, ahead of the I Martin George Paula sent an update on RMG by
14/1061 Chairman/CEO with RMG in October, highlighting the 3 email.
or 4 issues which needed to be resolved and showing
these issues and opportunities from the perspective of
both Businesses.
2b I September 2014 POLB Encourage the NFSP to take up the invitation for a sub I Kevin Gilliland
Work in progress. (Next meeting with
NFSP is 24” Oct). UPDATE: 18/11 -
Status Report at 20 November 2014
Alwen Lyons
Page 1 of 5
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team.
Current position from NFSP is that they
will not engage in detailed discussions
relating to Network extension until the
MOU is signed. Therefore further
consideration of a spmr being placed at
Bishopsgate will not be made (by either
party) until the detailed discussions on
NE take place.
2c I September 2014 POLB_ I Prepare a 3 year operating plan to confirm the detail of I CFO November Board
14/106(i) the network extension work.
UPDATE -— This will be picked up
through the Business Transformation
roadmap which is coming to the
November Board, this will include
network development/extension.
tS Fineitcial Services oo oo ...........
3a I September 2014 The Business to identify the critical leading indicators I Nick Kennett This will be included as part of the
14/105(e) for monitoring changes in customer behaviour and Three Year Plan being presented to the
circulate to the Board. November Board.
3b I September 2014 Present the results of the six month trial where Post I Nick Kennett May Board
14/105(f) Office FS colleagues used Mains branches as their
base.
3c I September 2014 Prepare a Bol paper outlining the Post Office and Bol I Nick Kennett Paper going to the November Board
14/105(h) positions on initiatives through to 2023, and the effect
of the relationship on short term performance and
longer term strategy.
3d I September 2014 Analyse on present to the Board on whether the I Nick Kennett Update 19/11: Will revert to the FSSC.
14/105(i) Business should focus more on the innovation of the in the New Year.
pre-paid debit account rather than the current account
as on the effective hook for customers
3e I October 2014 POLB Provide an update on mortgage sales and pipeline to I Nick Kennett Update 21/11: SEE APPENDIX 1
14/128(a)
give the Board comfort that the full year forecast was
robust.
BELOW
Status Report at 20 November 2014
Alwen Lyons
Page 2 of 5
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3f I October 2014 POLB Provide a risk paper for the November Board, including I General Counsel November Board
14/133(c) the conclusions from Grant Thornton, to enable the
decision on the commencement of trading of POMS.
3g I October 2014 POLB Ensure that the terms of reference for the independent I Nick Kennett/Chris Update 19/11: Timelines specified and
14/133(i) expert engaged as part of Project Hawk specified the I Day work progressed
necessary timeline for the work and that progress
would be made on agreeing the shortlist whilst NK was
on leave.
: 4, Business Transformation . oa ee
4a I September 2014 POLB The Board to receive the full Business Transformation I David Ryan/Neil November Board
14/104(c) proposal at the November meeting, which would I Hayward
include the stakeholder and IR plan.
__IS.PeopleandEngagement L Lo L LL Lo co
5a_ I October 2014 POLB Provide an update at the end of the financial year to I Neil Hayward March 2015
14/130(e) review the People and Engagement roadmap for the
next 12 -18 months and the senior leadership training
and development.
5b I October 2014 POLB Provide a note on the relationship between Post Office I General Counsel Work is underway and a note will be
14/130(g) and subpostmasters. circulated to the Board when it
becomes available
5c I October 2014 POLB Refresh the stakeholder plan and produce a high level I Mark Davies UPDATE 18/11: My recommendation is
14/130(m) heat map/stakeholder grid to keep the Board updated. that we include the heat map/grid in the
CEO report to the Board every month
and circulate to ExCo each week, with
a monthly stakeholder slot at ExCo.
Re LLL ee
6a I July 2014 POLB The ARC to review the Risk Management framework. General Counsel Draft went to October ARC. Final
14/90(h) version to be discussed at the January
ARC and Board.
6b I October 2014 POLB Provide a summary of PwC's report on the Business’ I General Counsel Summary attached. Full version
14/129(d)
risk management and circulate to the Board. Send the
full report to those Board members who were
circulated to the interviewed Board
members.
Status Report at 20 November 2014
Alwen Lyons
Page 3 of 5
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interviewed.
7. Miscellaneous
7a I July 2014 POLB Arrange a cyber-security guest speaker to attend a I Company Secretary/ I January Board
14/101(c) future Board meeting. Richard Callard
7b I July 2014 POLB A Board meeting to be held at the Post Office Design I Company In the New Year
14/101(d) Lab at the Southbank University. Secretary/Martin
George
7c I September 2014 POLB I The Business to work with ShEx to update the Minister I Belinda The CEO wrote to the Minister on 14
14/109(e) on the Post Office position regarding the investigations, I Crowe/General October
the Scheme and Second Sight as part of Sparrow. Counsel/Richard
Callard
7d I October 2014 POLB Provide forward agendas for Board and Sub-Committee I Company Secretary In progress. Board schedule attached.
14/129(d) meetings.
7e I October 2014 POLB Telephony contract to go to the Risk and Compliance I Chris Day/Alasdair To January ARC
14/131(h) Committee and then the ARC for a deep dive in the I Marnoch
New Year.
7f I October 2014 POLB Return to the Board to discuss ETDBW. Martin George Update 20/11: We are returning to
14/131(m) ExCo before Christmas to discuss how
we measure customer feedback and
then act on the insights. We will brief
the Board early in the New Year.
7g I October 2014 POLB Provide a narrative to explain the transformation I CFO/Kevin Gilliland
14/134(c) delivered to the Crown network to be used to support
the year end run rate.
7h I October 2014 POLB Undertake an internal Board effectiveness review in the I Chairman
14/135(a)
New Year.
Appendix1 — Mortgage Update (Action 3e)
At the end of October across all channels we had completed £1,102m against a target of 973m YTD. Combining the income generated from
these completions with the back book income we receive, as at end of October we were approximately 113% of target.
Status Report at 20 November 2014
Alwen Lyons
Page 4 of 5
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However, since August our applications pipeline has reduced significantly, initially as a result of having to withdraw products due to BOI’s
processing problems, but more recently due to a non-seasonal slowdown in the housing market which has reduced market volumes.
Consequently, we have seen our pipeline of business reduce significantly to £342m, of which approximately £290m will complete by the end
of the financial year.
To address this we have introduced a more tactical approach to pricing which has seen a more frequent refresh of products. This has enabled
us to maintain a continuous best buy presence over the last few weeks which has resulted in a 20% increase in ‘web leads’ (November over
October) for our Mortgage Specialists which is driving an increase in activity levels. With the direct channel we have a strong focus on
aggregators and affiliates linked to our price competitiveness. Our product range also includes a strong re-mortgage proposition in-addition to
the movers and first time buyers ranges. We will continue with this approach into the new year when mortgages will also benefit from a strong
focus in our Q4 campaign.
We are confident that the more tactical approach to managing products / rates and continued marketing focus will help us to drive applications
and grow the pipeline to ensure we achieve our income budget of £7.3m by the financial year end.
Nick Kennett
21 Nov 2014
Status Report at 20 November 2014 Alwen Lyons Page 5 of 5
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MANAGEMENT
IN CONFIDENCE
www.pwe.co.uk
Post Office Limited
Risk Management Capability
FINAL REPORT
November 2014
IRRELEVANT
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Contents
1 Executive Summary Bf
2 Structure of the Report 6
3 Summary Findings & Recommendations 8
4 Enterprise Risk Management Detailed Findings &
Recommendations
POL-BSFF-0008758_0159
MANAGEMENT
IN CONFIDENCE
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: Executive Summary
Scope
PwC was asked to carry out an independent review to look at the extent to which
Post Office Ltd (POL) has the appropriate risk assurance arrangements in place
across both the organisation and its change portfolio.
We were asked to do this in the context of POL having a good historic track record
of delivering individual programmes of change — however it is now facing
unprecedented levels of change as it transitions from the public sector to the
commercial sector over the next few years.
We carried out a strategic diagnostic comprising of 35 interviews, attendance at key
governance meetings including the Transformation Committee and Risk &
Compliance Committee, undertook a document review and close working with POL
colleagues.
We were asked to present our findings in a practical, forward looking way to assist
POL with direction on where and how to improve.
Our terms of reference and details of interviews are included in Appendix C and D.
Context, Constraints and Key Assumptions
POL combines a strong brand and a passion for safeguarding it’s future, with the
very real challenges of putting its operation on a much stronger commercially and
financially viable footing. This is not an organisation in crisis but an organisation in
transition.
At the time of writing this report, although we were able to discuss in general terms
the extent of change facing the organisation (from short term turnaround to get
costs under control to medium term transformation plans to deliver on the 2020
Strategy), we have not been privy to detail around the ‘Business Transformation’
Programme. We have therefore made the simple but reasonable assumption that
POL face a significant amount of change in the name of ‘Business Transformation’.
POL is still operating in the context of being public sector, by legacy if not by
destination, with the additional complexity of running two quite different
businesses — mail and financial services and with a network that is increasingly
integrated with the retail sector (e.g. through the supermarkets).
In agreement with POL, we have therefore benchmarked POL against what we
would expect to see in place to manage the risks associated with a commercial,
FTSE 250 organisation,
Recognising that POL is only just starting its transition journey, we didn’t expect
POL to meet all of the standards expected of a FTSE 250 company. However, we
believe this benchmark has been useful in highlighting a number of short term.
recommendations that POL needs to action as well as setting out some longer terms
considerations if POL aims to mature their approach to the management of risk.
Approach and What You Told Us
PwC used its Risk Maturity Framework to assess POL in terms of where it is now
and where it aims to be in terms of delivering on its 2020 Strategy. Our maturity
assessment rates organisations on a scale of 1 to 5.
The next page provides a range of direct quotes from our interviews ~— these are
some of the things you told us — and we provide them as a powerful illustration to
support our subsequent analysis as set out in the rest of this report.
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' Executive Summary
The following statements were taken from interviews with stakeholders. They reflect some of the opinions that have informed our Findings.
“The word risk seems to have
“The Post Office have
We don’t want a strong brand but
Board to manage risks there is a lack of
by lists” understanding of our
negative connotations to people
and they do not understand the
benefits and the value that
sound risk management can
risks.
ExCo/ “We need a central f ti i
Programme a a : s pect acentra ate 10
nere is a need for a can provide support, direction
Sponsors/ FORMAL nraceRe rOTdeTine and ‘challenge’....helping to
Programme risk appetite if only to shape how risks are reported
Directors ensure everyone is on the and managed through ensuring
the central understanding of
risk”
same pa
POL-BSFF-0008758_0161
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' Executive Summary
The Maturity Journey
All organisations evolve and mature over time. POL is a new organisation, having
recently separated from RMG, and to that extent it is still working to establish a
clear identity and purpose. It is not surprising therefore to find that it is taking time
for POL to develop the appropriate checks and balances needed to manage risk or
indeed the change lifecycle and assurance gates to ensure the effective management
of more complex change. Historically POL has a good track record of delivering
individual programmes and has managed both ‘run’ the business while ‘changing’
the business.
POL has not been complacent and there is a good level of awareness of the need to
mature as POL ups its ambitions, with a number of steps already taken to appoint
key personnel, review and strengthen governance structures and processes. ‘This
review is an example of that awareness and intention to build out and mature over
time.
In many ways, in steady state, the current arrangements would broadly suffice —
although we have been able to make a number of, hopefully helpful, suggestions to
target and expedite further improvement. However, given the POL change
mandate, which we have assumed to be fairly radical, the delta between where POL,
is and where it needs to be is even bigger. This report establishes the ‘as is’ baseline
and makes recommendations which POL need to action in order to accelerate the
improvements to risk management needed to support business transformation to
deliver the 2020 Strategy and associated transformation plans.
The Strategic Areas Where Focus is Required
Based on our assessment there are a number of inter-related areas where POL,
needs to apply strategic focus to accelerate it’s level of maturity.
a)
3)
4)
Culture and behaviours: If POL is still finding its identity, it is not
surprising to find that POL is still working to establish a clear culture and
norms, There isn’t yet a clear ‘POL way’ of doing things. Investment of time,
particularly with the senior leaders in the organisation is needed to work this
through, if they are to provide a strong and consistent narrative throughout the
POL transformation journey.
Governance: Although the Board and committee structure is fit for purpose,
there is a lack of clarity around roles and responsibilities which undermines the
ability for the governance structures to effectively operate. For example, we
found little evidence of colleagues holding one another to account.
Working in a complex transformation environment: Requires a stable
culture, agreed norms, clear accountabilities and indeed a governance structure
that supports decision making. It also requires senior leaders to do the right
thing, work in a matrix structure and deliver the strategic agenda over and
above their functional responsibilities. Addressing the two previous points
would reduce the risks posed in relation to business transformation.
Equipped for Business Transformation: POL has the systems and
processes in place to manage small scale change and risk within individual
functions, It needs to equip itself with the vision, culture, processes, people and
systems to deal with complexity and stress the organisation will undertake as
part of Business Transformation. As part of our recommendations we have
identified the need for POL to:
+ Better define its risk appetite and the common framework as to how it will
manage risk across the organisation
+ Equip itself with the right tools and processes including a common change
language, the improvement in Management Information and upskilling of
its change capability with the experience of undertaking transformational
change
iy
POL-BSFF-0008758_0162
Board and Sub Committee Dates
'0L00149638
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Last Updated : 20/11/2014
26th loth 10th 10th 12th
November
09.00hrs to 17.00hrs 12.00hrs to 14.00hrs 14.15hrs to 15.45hrs 15.45hrs to 17.15hrs 09.15hrs to 14.00hrs
December 3rd 3rd
13.30 hrs to 15.30hrs 10.00hrs tp 12.00hrs
28th 12th
January
09.00hrs to 17.00hrs 10.30hrs to 12.30hrs
25th 25th
February
09.30hrs to 11.00hrs 11.00hrs to 12.30hrs
25th 3rd 11th 19th
March i
09.00hrs to 17.00hrs 15.00hrs to 17.00hrs 10.00hrs to 12.00hrs 10.00hrs to 14.00hrs
April
21st 27th 13th 13th
May s
09.00hrs to 17.00hrs 12.00hrs to 14.00hrs 13.00hrs to 14.30hrs 14.30hrs to 16.00hrs
17th & 18th 3rd 26th
June
(Timings TBA) 10.00hrs to 12.00hrs 10.00hrs to 12.00hrs
15th 8th 8th Ast
July e
09.00hrs to 17.00hrs 10.00hrs to 11.30hrs 11.30hrs to 13.00hrs 10.00hrs to 14.00hrs
August
September 22nd 16th (via Phone) 9th
09.00hrs to 17.00hrs 16.00hrs to 17.00hrs 10.00hrs to 12.00hrs
28th 15th Ast
October .
09.00hrs to 17.00hrs 12.00hrs to 14.00hrs 10.00hrs to 12.00hrs
25th 10th 3rd 3rd 4th
November
09.00hrs to 17.00hrs 12.00hrs to 14.00hrs 10.00hrs to 11.30hrs 11.30hrs to 13.00hrs 10.00hrs to 14.00hrs
9th 3rd
December "
10.00hrs to 12.00hrs 10.00hrs to 12.00hrs
POL-BSFF-0008758_0163
PoLo014s638
IAA Acton Status Report Summary as at October S16 2014 xs
Status at October 31st_2014
tie tet hana
Totalactons oustanding tidasatstat aust oe arg “Ty ORE
Implemented by Mgt - Sept- October 2014 (8) “ “ @
enn, nice awoke sre sasson) 22 2 %
Sipoecseaeended ; 3
Cared Forward asa October 3st
sos nia vat
Ore wrt ‘
Sr ess * « = =
ocr ee
Trends
Reported Implementations - total per reporting period
ea
Amber
trend amen mov
ame a
Bases
‘Month implemented
om Tota! Red Amber GreenI
[srg ts 2 ° al
[sent ont 13 2 sd
ow Fe 14 % 6 6 4
Jar aoe 14 3 4 al
Jayne 14 3 2 3
Lisy- Aug 18 5 yom
[serox 4 3 1 41 dd
Jcumuiatve 14 a oo al
Implementation down in period, mainly because of ewer items that
reo yet due and known revsd target dates fractions
Audit Actions - Overdues - Trending by month
6 Tot
so =
40
30
rena mh mov
Py m
0
°
Auge13—Ocb413 eet Dori Junte Aut Oats
Implementations sine Juy 2013
~ E Laal
[Seen Ey ca o wr
ie cs co 768 =
ag of Son tee se
Total Red Amber Green
‘StAug 13 mo 4 4 2
crac a 8 8 5
20Feb8 a oT on 1
soap o 8 w 6
souunté 8 8 2» “
rag 14 38 oT "
sVoats 78 io
IMPORTANT
NoTE-IT “The recommendations log il retin the ORGINAL target
[ACTIONS HAVE I date otha the busines te fully aware Ris atl aware ofthe rks
BEEN REBASED —_lentiledinthe audit and these ae sili place.
WITH NEW
TARGET DATES Rebasing of detes for some T actions due to ter than planned
TATE 2014 and ‘ower mplementatons. Some items however in identity an
Into 2016 0 reflect ces Management and software lensing are ust overdue with
eae delays in management action o changes in ower.
"
‘The 1 Govemance and Controls manager poston vacated in uly
Implementations
be, 2014 has not been filed, Responsibites passed toa senior
‘member ofthe CO team.
Implementations in period ae within Genes Realstion,
‘Business Continuity and minor issues in HR
Implementations achieved (from June 2013)
Tot
Impemoves neg
Red ate 33 eo
‘be Rated wor 64%
‘Grea ated ot 4%
Tota toate 197%
"Alogs the total actions agreed with the business and tracks
Implementations since the fa
‘Wastin from Royal Mail iAin une 2013
‘The toa implementation rate was above 70% during the sumer,
however theres sight lp below ongoing target evel duet the
lower implementation rates in September andthe adtion of
avait ations rom recent aus. A numberof these however (20),
rent yet due. So implementation rate should recover above
target ine after the ew yea,
POL-Berr-cccsves_o164.
November 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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CASE NESS I IPTION
HOLDER _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. 127 cases are still being progressed
through the Scheme or are being scheduled
for mediation.
Mediations have been held for the first 4
applications. A further 8 mediations are
currently being scheduled. The POL project
team continue to handle the applications in
line with the Board's direction to take a
firmer position, informed by its legal position
and tighter control over timescales and costs.
To date, no claim has been made against
POL in the civil courts, and no appeal has
been made against any conviction in the
criminal courts, following Second Sight’s
Report.
Significant Litigation Report
November 2014
Page 1 of 3
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Employment
POL/NM
Colin Stretch
Legal Privilege
: Legal Privilege I
}) Eversheds
Significant Litigation Report
November 2014
Page 2 of 3
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I Legal Privilege I
Employment. POL/NM Colin Stretch
Weightmans
Legal Privilege I Legal Privilege
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.
Meetings to progress the report are taking place between 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
November 2014 Page 3 of 3
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Confidential
POST OFFICE LTD BOARD
Health & Safety Report
1. Purpose
The purpose of this paper is to:
a 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 Performance during the first six months of 2014/15 indicates that 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. The reduction of all injury accident incidents is
currently ahead of target.
Table 1 All Injury accidents and those resulting in absence (Cumulative)
300
250 ca
9 200 We —— 2013/14 All
=e —=— 2014/15 All
S 150
3 ~-= 2013/14 Absence
2 100 2014/15 Absence
50
° eee
P1 P2 P3 P4 P5 P6 P7 P8& P9 P10 P11 P12
Period
23 Personal injury compensation claims have fallen significantly in line with the
reduction in accidents that result in sick absence. Claims involving members of
the public have also reduced. Comparison with a similar retail organisation
indicates that the Post Office claim rate is significantly lower in both public and
employer's liability and of those claims the ‘denial’ or ‘defence’ rate is
significantly more successful. The insurance year runs from October to
September. (Table 2 below refers)
Health and Safety Neil Hayward Page 1 of 6
November 2014
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Table 2 Employers Liability and Public Lia!
from insurers report.
lity claims since October 2012 — extract
Policy Class Claim Total Paid I Recoveries Open Gross Net
Count Reserves Incurred Incurred
Employers’ Liability £37,946 «£46,146 £46,146
General Liability £106,577 £140,539 «£140,539
Employers’ Liability 2 £360 £20,034 £20,394 £20,394
General Liability 10 £10,352 £32,900 £43,252 £43,252
I I
36) £52,873 £197,458) £250,331] £250,331
24 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 3 below refers)
Table 3 Days lost resulting from injury accidents (Cumulative)
600
500
400
9 —— 2013/14
z 300
a VA = 2014/15
200
100
0
P1 P2 P3 P4 P5 P6 P7 PB PO P10 P11 P12
Period
25 The total number of road traffic collisions (RTCs) for the first 6 months is up 16
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 showing an increase of 10 compared to last year. (Table 4 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.
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Table 4 Road Traffic Collisions (cumulative)
250
200
—+— 2013/14 All
—® 2014/15 All
~~ 2013/14 ‘at fault’
> 2014/15 ‘at fault’
150
100
Number of RTCs
50
P1 P2 P3 P4 P5 P6 P7 P8& PY P10 P11 P12
Period
26 Robberies on Post Office Cash and Valuables in Transit (CViT) crews are down
three on last year from 20 to 17 for the past 6 months. Physical injuries during
robberies, of which there have been 5, 1 more than last year for the same
period, remain relatively minor in severity. The level of use of firearms is down 2
on last year with 3 of the 17 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)
27 Robberies and attempted robberies on the Post Office network, for the past 6
months, are up 1 on last year to 44 of which 59% were successful. Injuries
sustained during robberies are down from 9 to 5. Robberies take place
predominantly at sub post offices leaving Crown branches largely unaffected
although Wandsworth Crown Branch suffered a robbery on 1* October 2014.
Supporting activities have been introduced to continue to mitigate the robbery
risk and are identified at 3.2. (Appendix 1 — Significant Incidents refers).
ies
3.1 Road Risk
Current activities to mitigate road risk are:
« Road risk forum in place to scope and develop road risk reduction initiatives
and activities supported by the risk management division of our insurers
« Analysis and deployment of interventions for reversing incidents to mitigate the
increased incidence rates, including yard assessments and technical accident
reduction interventions on new vehicles e.g. Reversing aids to reduce accidents
e Analysis and evaluation of data including risk profiling to identify drivers who
need additional support and to determine further generic accident reduction
interventions
« Safe driver of the year award to encourage and reward responsible driving
« Weekly case conferences to ensure consistent approach to accident
investigation, follow up activity and sharing of good practice
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e Programme of driving and road risk communications to raise awareness of
current and emerging risks
32 Robbery/Burglary Risk
Current activities to mitigate robbery and burglary risk are:
« Active liaison activities with the police to understand ‘at risk’ areas and to
deploy surveillance teams
« Increased use of ‘advertising’ on vehicles of new deterrent technologies e.g.
DNA taggant — a solution that contains a unique identifier that is released
automatically in the event of a robbery, spraying those involved and enabling
identification of the individuals involved in the robberies
«Trialling new point of transfer arrangements to reduce exposure at Post Office
counters - the majority of robberies take place at the point of transfer which in
Post Office’s is the counter where there is ready public access. The new
arrangements allow for the cross pavement protection box to be emptied / filled
in a secure location.
e Significant reduction in opportunities for duress type robberies linked to the
introduction of single person vehicles — single person vehicles eliminate the
opportunities for Supply Chain employee duress type incidents which
historically have been the most violent and likely to involve injury.
3.3 Health and Wellbeing
Healthcare interventions:
« Second programme of visits to Crown branches, Supply Chain units and Admin
offices to offer health checks using equipment that provides a wide range of
indicators on physical wellbeing. The anonymised data is used to develop
future health and wellbeing campaigns and target interventions.
« The programme of visits is supported by an online ‘Wellbeing Zone’ health
check tool as a ‘self- help’ option
« Ongoing campaign of communications to promote a range of different wellbeing
issues
e Wellbeing events to promote general health, exercise and dietary initiatives
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.
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3.6 Network Transformation (NT) - Safety
Discussions continue with legal services in respect of responsibilities in relation
to appropriate health and safety support for the agency network. Considerable
time and effort has been put into defining, obtaining legal sign-off for and
incrementally implementing procedures to support and improve the Health and
Safety processes in relation to network transformation and associated works.
4. Residual Risks
41 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
November 2014
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Appendix 4
I Significant Incidents (Period 6)
Crowns and Network
Location
Loss
[-Cireumstances. [Physical Iniuries_I Any further details
Gala Park SPSO, 8
Balmoral Place,
Galashiels, TD1 1JE
£2,870
Royton MSPO, 60
Rochdale Road,
Royton, OL2 6QQ
£12,891
Dumers Lane
SPSO, 263 Dumers
Lane, Manchester,
M26 2GN
£4,792
IRRELEVANT
Supply Chain
Location
Loss
Any further details
Cheetham Hill
SPSO, 6 King
Edward Building,
Bury Old Road,
Manchester, M7 4QJ
£26,000
Ravenhead SPSO,
117-120 Ravenhill
Road, Belfast, BT6
8DR
£21,000
Health and Safety
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November 2014
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POST OFFICE LIMITED BOARD
Sealings 22 October 2014 — 18 November 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 1231 to 1240 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 1231 to 1240 inclusive in
the seal register is hereby confirmed.”
Alwen Lyons
Company Secretary
18 November 2014
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Date 5 . Company Number
18/11/2014 Register of Sealings 2184540
Seal Number Date of Date of Persons Attesting Destination of
/ File Ref. Sealing Authority _I Description of Document To Document Document
1231 29/10/2014 29/10/2014 — TR1 relating to Title number LN102706 between Post Alwen Lyons Jean Reynolds
Office Limited and Ajay Thakarshi Kukadia
1232 29/10/2014 29/10/2014 = TR1 relating to Title number NGL898655 between Post Alwen Lyons Jean Reynolds
Office Limited and Ajay Thakarshi Kukadia
1233 29/10/2014 29/10/2014 — TR1 relating to Title number NGL899365 between Post Alwen Lyons Jean Reynolds
Office Limited and Ajay Thakarshi Kukadia
1234 29/10/2014 29/10/2014 — TR1 relating to Title number NGL901217 between Post Alwen Lyons Jean Reynolds
Office Limited and Ajay Thakarshi Kukadia i
1235 30/10/2014 30/10/2014 Deed of surrender of lease at Ground Floor, Leamington Piero D'Agostino Jean Reynolds
Spa FPO, 1 Priory Terrace, Leamington Spa, CV31 1AA
between Post Office Limited and Royal Mail Estates
Limited I
1236 05/11/2014 05/11/2014 I Counterpart/Retrospective Licence for Alterations relating Alwen Lyons Jean Reynolds
to Part Ground Floor Premises, Bristol & West House, 39-
41 Boutport Street, Barnstaple, Devon, EX31 1SA between
__the Cooperative Bank plc and Post Office Limited il it I
1237 07/11/2014 07/11/2014 Letter licence to occupy 9-10 Kings Street, Carmarthen, Piero D'Agostino Jean Reynolds
Dyfed 11 November 2014 between 10.30am - 11.30am
between Sian Elizabeth O'Leary, John Heddwyn Davies
and Post Office Limited I
1238 10/11/2014 10/11/2014 I Deed of variation of the collaboration agreement between Piero D'Agostino Sabrina Jethwa
Post Office Limited, WH Smith High Street Limited and WH
_Smith Travel Holdings Limited L
1239 14/11/2014 14/11/2014 Lease of Ground Floor Room TX-G-02, Town Hall Piero D'Agostino Jean Reynolds
Extension, St Peter's Square in the City of Manchester
between the Council of the City of Manchester and Post
Office
1240 17/11/2014 17/11/2014 I Agreement for sale of a property at 13-14 High Street, Alwen Lyons Jean Reynolds
Southampton, SO14 2DF between Post Office Limited and
Harkalm Estates Limited
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POST OFFICE LTD BOARD
UPDATE ON STATE AID PROCESS
1. Purpose
The purpose of this paper is to request the Board to note the latest events in relation to the on-
going State aid application process for Post Office’s 2015-18 Government funding package.
25 Background
Under EU State aid rules, Government must obtain State aid clearance from the European
Commission (“Commission”) prior to transferring any funding to Post Office. Therefore, it is
imperative that Government obtains State aid clearance for the 2015-18 funding agreement
prior to 1 April 2015, the date on which Post Office is due to receive its 2015 annual payment.
Since early 2014, Post Office has assisted Government in obtaining State aid clearance for the
2015-18 funding agreement, in particular by preparing submissions to the Commission case
team that is managing the State aid application process.
Post Office’s Restrictions Policy has become an issue of relevance to the State aid application
process. The Restrictions Policy prevents sub-postmasters from offering certain services that
can be provided by Post Office (“Restricted Services”) in a private capacity, unless Post Office
has granted a waiver.
The European Commission's previous State aid clearance decision of Post Office’s funding for
the 2012-15 period contains the below misleading statement about the Restrictions Policy
(‘2012 Statement”):
“The contracts that Post Office has with the sub-postmasters are such that other
network operators can sign contracts with any sub-postmaster to deliver services which
are not offered by Post Office. As a consequence, were Post Office to lose any contract
to an alternative provider, this provider can use Post Office’s network of sub-
postmasters to provide this service.”
Specifically, the second sentence of the 2012 Statement is inaccurate unless ‘any contract’ is
interpreted as a contract for a non-Restricted Service or a contract that is covered by a waiver.
Since 2012, we understand that PayPoint has complained to the Commission that the
Restrictions Policy is not operated as per the 2012 Statement and / or is otherwise unfair.
On foot of its contacts with PayPoint, during a meeting in June 2014, the Commission case
team expressed concerns about the Restrictions Policy to Post Office and Government. In
doing so, it pointed to concessions from exclusivity arrangements in relation to post offices that
have been granted by BPost and La Poste in recent State aid clearance procedures.
In response to these concerns, in August 2014 Government (with Post Office's approval)
offered to relax the Restrictions Policy in a limited way. In short, subject to certain caveats, we
offered to grant competitor access to a post office in any case where a competing provider of
Government-funded services (Government services, utility bill payment services, basic banking
services, and postal services) shows that there is no retail premises except a post office ina
postcode district. Out of 2,812 postcode districts in the UK, we calculated that there are around
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395 districts with less than 5 retail premises. On this basis, it appears that a competitor should
not be able to satisfy the terms of the August 2014 offer except in a low number of rural areas.
In October 2014, Government (with Post Office’s approval) responded to a concern by the
Commission case team that the August 2014 offer included certain ‘subjective’ caveats. This
concern was addressed without changing the fundamental terms and scope of the offer.
3. Current Situation
On 13 November 2014, the Commission case team issued what have been described as its
final questions that, if resolved, will enable it to start preparing a State aid clearance decision
for approval by the Commission and eventual publication. On Tuesday 18 November, Post
Office and Government attended an update call with the Commission case team to discuss
their questions.
Set out in sections 4 to 6 below is a summary of the questions that are noteworthy and our
proposed responses.
4. Request for Change to Limited Offer to Relax the Restrictions Policy
The Commission case team has requested the deletion of a caveat that was included in the
latest October 2014 offer and is shown in strike-through below. The caveat was most clearly
relevant to bill payment contracts. It allowed Post Office to refuse access to a competitor that
has met the geographic criteria where Post Office already offers the same service on behalf of
the same client (eg, where Post Office and Payzone both hold contracts with SSE).
Upon receipt of a written request from a provider of a service that competes with a
Product SGEI, which demonstrates that no contact point other than a Post Office
Branch can be used by customers of the relevant service in a particular postcode
district, Post Office shall grant access to its network to that provider. Access will be
granted by Post Office permitting one Post Office Branch identified by it in that postcode
district to fulfil a contract to provide the relevant service for the applicant.
Such access will be granted provided that it would not: (i) materially impede Post Office
Ss ability to provide the SGEls entrusted to it, in particular in accordance with the
Entrustment Letter and the strategy and targets as set out in the Funding Agreement
(e.g. in respect of service quality or where access would lead to capacity constraints for
Post Office); (ii) be prejudicial or detrimental to Post Office’s brand or positioning (e.g.
where access would be in conflict with communities’ or customers’ expectations of Post
Office Branches); or (iii) be inconsistent with the regulatory obligations of Post Office or
its commercial partners.
tract-with_th
4.2 Options Considered
We have considered the options of (i) accepting the request, and (ii) refusing the request.
Each of these decisions would be communicated to Government as it (and not Post Office) is
the addressee of any communications with the Commission case team.
4.3 Proposal
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We are minded to accept the request to delete the above caveat, for the following reasons:
e The amended wording appears a successful outcome for Post Office, taking into
account that (i) the Commission case team indicated in June 2014 that it would seek
radical changes to the Restrictions Policy, and (ii) the above wording is significantly
narrower than the 2012 Statement, which covered all post offices and all lost contracts.
e Itis not clear that Post Office would find itself capable of invoking the above caveat in
many (of the few anticipated) competitor application cases. For example, it appears
reasonable to assume that any client and / or competitor of Post Office would be less
interested in delivering a service through rural post offices in circumstances where Post
Office is doing this (unless the competitor already has a terminal installed in the relevant
rural post office).
While the amended wording appears acceptable and low risk to the commercial interests of
Post Office, its implementation (following its publication in the State aid decision in around April
2015) will involve challenges for Post Office. Chief among these will be:
e ensuring that Post Office remains capable of complying with its exclusivity obligations to
Royal Mail and BOI (by relying on the caveats at (i) to (iii) above);
e handling communications with subpostmasters and retail partners who may see this new
commitment by Post Office as an opportunity to challenge the Restrictions Policy; and
*® managing the administrative burden involved in setting up and managing a proper
application procedure to be used by competitors seeking access to rural branches on
the basis of this new commitment by Post Office.
5. Question on Newspaper Article Regarding the Restrictions Policy
The Commission case team has raised the following question by reference to the attached
news article:
“We have received concerns by competitors that the State subsidized network
transformation of Post Office is performed at the expense of competitors (evidenced for
example in the newspaper Article in the attachment). In order to address these serious
concerns, we would like to receive your authorities confirmation and reassurance that
the network transformation does not involve the exclusion of competitors from part of
their network.”
5.2 Options Being Considered
It appears necessary for the Government to provide assurance to the Commission case team
that Network Transformation does not involve any conduct by POL that is unjustified or
inappropriate. While achieving this objective, as of 19 November 2014, we are considering the
options of either:
« Suggesting the Government explain to the Commission why Post Office does not
foreclose competitors from their networks, but noting that new sub-postmasters do
agree to comply with the Restrictions Policy which means that they cannot provide
Restricted Services on behalf of competitors; or
« Suggesting the Government simply provide the assurances that the Commission case
team has requested without reference to the Restrictions Policy.
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6. Public Consultation on Need for Government Funding of Post Office
The Commission case team is seeking a commitment from Government to go out to public
consultation on the public need for the Government-funded services provided by Post Office
before making a new State aid application for funding post-2018. The most recent consultation
of this type was done by NERA in 2009 and the report is available on Ofcom’s website.
7. Recommendations
The Board is asked to note the update and actions set out above.
Chris Aujard
19 November 2014
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