Present:
Apologies:
In attendance:
GROUP EXECUTIVE
AGENDA
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for the meeting to be held on 12" March 2015
in Boardroom, Room 501, Old Street
Paula Vennells (Chair), Alisdair Cameron, Martin George, Kevin Gilliland, Neil
Hayward, Jane MacLeod, David Ryan, Henk Van Hulle (deputising for Nick Kennett)
and Alwen Lyons
Nick Kennett
Gavin Lambert, Geoff Smyth, Jonathan Hill, Henk Van Hulle, Nick Beal
and Tom Moran
Start time: 09.30hrs End: 16.30hrs
Time Item Sponsor/ Presenter
09.30 - 10.30 Approval and recommendation to the Board of: Alisdair Cameron
¢ 2015/16 budget (aligned with high level
3 year plan)
* 2015/16 Scorecard
10.30 - 10.40 BREAK
10.40 - 11.40 Telephony Strategy - Options and Martin George / Geoff Smyth
Recommendations
11.40 - 12.10 HAWK Jonathan Hill
12.10 - 12.40 Banking Service Henk Van Hulle
12.40 - 13.10 LUNCH
13.10 - 13.40 SME Strategy Martin George
13.40 - 14.10 Digital Sales Martin George
14.10 - 14.20 BREAK
14.20 - 14.50 NFSP Negotiating Approach & Mandate Neil Hayward / Nick Beal
14.50 - 15.20 Transforming Employee Relations Neil Hayward / Tom Moran
15.20 - 15.50 Talent Retention —- Managing Flight Risk Neil Hayward
15.50 - 16.05 Verbal update on Sparrow Chris Aujard / Jane MacLeod
16.05 - 16.15 GE Action Log All
16.15 - 16.25 Noting paper(s):
e Cyber Security & Information Assurance
Report
e Health & Safety Report
e Significant Litigation Report
e Pensions Update
16.25 - 16.30 AOB All
16.30 CLOSE
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POST OFFICE LTD GROUP EXECUTIVE COMMITTEE
Update on strategic options for the telecommunications business
1. Purpose
The purpose of this paper is to:
1.1. agree with the Group Executive what role we expect the telecommunications
business (‘telco’) to play within our 3 year operating plan, including specifically what
financial projections to include in our base case scenario; and
1.2. update the Group Executive on progress in reviewing the alternative strategic
options for telco, including divesting or franchising the business, and to outline the
proposed next steps.
The accompanying slide deck sets out more of the detailed analysis of the telco market, our
place within it and the strategic and financial options going forward.
2. Background
2.1. In 2012 the Post Office began the process of migrating from BT Wholesale to Fujitsu
for the provision of the technology platform and managed services which underpin
the delivery of our HomePhone and Broadband (HPBB) products. While the
technical migration was executed successfully and within a tight time scale, the
managed services transition proved to be more challenging with the call centre
function failing to maintain adequate service levels due to poor planning and
preparation. This failure caused the loss of 25,000 customers over the period
September 2013 to July 2014, alongside brand damage and network dissatisfaction.
2.2. Call centre performance has stabilized with the addition of an additional 70 FTE's
above the original launch assumption of 225 FTE’s. However while we have seen
marked improvement in customer service, billing and collections, technical support
staffing levels continue to be inconsistent leading to frequent failure to answer 80 %
of calls within 20 seconds. In commercial terms trading performance has improved
over the past 4 months with a forecast net addition of 5,000 customers this financial
year. The business will deliver a direct product contribution of c£15.6m in 2015/16,
and as set out in more detail in the slide deck this value is expected to improve over
the next three years through the potential for both steady price increases and net
growth in customer numbers.
2.3. However, the strategy for telco has not been reviewed in detail since the preparation
of the 2013 Strategic Plan — it was not an explicit part of the work done for last year’s
June Board away day, other than to reach the high level conclusion that it was a
secondary pillar rather than one of our core strategic priorities of mails and financial
services. The Executive Committee therefore agreed in November 2014 that a
review should be undertaken of the strategic options available to us for the telco
business, and in particular whether it should be retained as part of our group portfolio
or divested to release capital and reduce management distractions.
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3. Activities/Current Situation
3.1. Since then we have reviewed these options in greater detail, including pursuing a
preliminary dialogue with BT and Fujitsu to estimate the potential market valuation of
our business under a full disposal and to assess whether there is market appetite for
a franchising or merger arrangement which would retain a role for the Post Office
brand within the telco market, but with a third party taking on responsibilities for
running the business.
3.2. During the dialogue in December, BT expressed enthusiasm for either an acquisition
or franchising arrangement, which might be consolidated alongside their Plus Net
subsidiary (which targets a similar value-focussed segment of the market). However,
these discussions were temporarily paused at the start of January while Ofcom
reviews the competition implications of BT’s acquisition of EE.
3.3. Fujitsu has not at this stage expressed enthusiasm for either an acquisition or
franchising arrangement, on the grounds that owning a telco franchise is not part of
their core business model - although they remain keen to continue working with us
under the current arrangement.
3.4. Alongside the assessment of these full or partial divestment options (covered in
more detail in the next section and accompanying slides) we have continued to
develop our plans for the telco business under the base case assumption that it is
retained, with the objective of maximising its direct product contribution (DPC). A
price increase of £2 per month on the Home Phone service was executed
successfully in January 2015, delivering an annualised EBITDAS improvement of £7
million. Plans are in place with the network and other distribution channels to deliver
a net increase of 20,000 customers in 2015/16 (taking the total base to 475,000
customers by end 15/16). This together with the proposed £1.00 monthly price
increases (effective Jan 1 2016) would deliver an £7.5m year on year increase in
DPC in 2015/16. These growth plans are supported by a proposed £0.7m investment
to introduce fibre based broadband in Q2 and £0.1 m to develop our internet security
product (‘Post Office Safeguard’). The scope for further price and volume growth in
subsequent years is outlined in the next section and the accompanying slide pack.
3.5. Post Office launch of mobile was delayed from November 2014 to May 2015,
primarily to improve our financial outlook this year by reducing marketing spend
within Q4. In addition the delay allowed u more time for rigorous testing through a
friendly user trail with colleagues and relations. As the slide deck sets out in more
detail, we are proposing to stagger the roll-out of mobile with clear check points in
place to review trading performance before committing to further investment.
3.6. Post Office Homephone product pricing does provide an opportunity to increase
EBITDAS by “cash-cowing”. We anticipate that in the next price increase round
(November 2015) the market will increase Line Rental by £1.00 a month, as a result
based on Post Office positioning versus BT it possible to consider increasing our
Line Rental price on Homephone by £2.00. This would generate an additional £3.5
million EBITDAS. However it is important to note that 82 % Home Phone base is
over 65 and likely on fixed income. Further since September 2013 we have
increased our Line Rental charges by 31 %. If we were to implement a further £2.00
rise effective January 1 2015, this increase would represent a 51 % increase in Line
Rental in a 39 month period. This degree of increase compared to a basically
unchanged wholesale price may be considered excessive by both our customers
driving increased churn and potentially brand damage. Therefore it is recommended
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that we increase prices in line with the market in 2015/12. Further it is recommended
Broad Band pricing remains unchanged, due to the competitive environment.
3.7. There is little reliance on Post Office IT systems and processes. Horizon is the only
core system used, and its use is limited to entering basic customer order details in
branch; a channel which represents 39 % of all orders.
4. Options Considered (see slide deck for further detail)
4.1. Option 1: Retain and grow the telco business and maximize DPC
. The UK telco market is very mature with some major competitors with far larger
marketing budgets and more compelling bundled ‘quad play’ propositions —
therefore our right to play in this market remains confined to a limited, value-
focussed segment, particularly amongst the over 65s.
Telco is also planning 10% gross income growth year over year in 15/16. In
addition telco also delivers a positive DPC of £8.1m (2014/15 FYF) to the
overheads of the business, and provides a useful degree of diversification during
a period when we are facing significant structural challenges in the mails market.
¢ Furthermore, while we are only projecting an 11 % customer growth over 3
years, we expect the DPC to continue improving at a higher % rate, due to
continued annual price increases, reflective of a rational market with BT as a
price leader. We also have the option of reducing the price differential versus BT
on HomePhone in order to maximise the DPC, but with some potential trade off
against longer-term value. Under our ‘balanced’ growth scenario set out in the
accompanying slides, we project gross income to increase from £121m in
2014/15 to £133m in 2017/18, delivering £26m DPC by year 3. This assumes
that we maintain our current price differential and increase prices only in line
with market.
e Telco also places limited demands on the wider Post Office group, both in
funding terms (Capex over next 3 years estimated at £5 to £10 m) and operating
model requirements. In particular, in the context of the constraints and risks
associated with our IT transformation plans, telco has the significant advantage
of being serviced by an independent technology platform at Fujitsu with limited
interface requirements with Horizon and its replacement system.
e« The product is also predominantly traded online and through call centres
(accounting for 70 % of projected sales in 2017/18), limiting the demands on the
network during the deployment of Front Office.
4.2. Option 2: Sell the Base of Customers to a Competitor and Exit the Business
e Estimated value £90 million, based upon a market tested price of £250.00 per
Broadband customer and an estimated £175.00 per Homephone customer.
a. BT the most likely purchaser of the combined base, as other competitors less
likely to be interested in Homephone customers. There is a possibility that we
could split the customer base and sell to different parties; in this instance the
likely purchaser of the Dual Play base would be Talk Talk at a small premium,
while BT remain the target purchaser of the Homephone Base.
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b. Write off of Technology investment in OSS/BSS Fujitsu solution projected at end
15/16 as £5 million
c. In the event that the Mobile Business is not considered viable due to the sale of
the Telephony Business, write off of £6 million investment is likely.
« Discussions with BT have progressed well. Discussions were paused in January by
BT, due to their EE acquisition announcement and an Ofcom review of broadband
market impact. BT has continued to express interest in pursuing discussions in
May/June.
« — Divesting of the business would arguably reduce management distractions from core
priorities in mails and FS. However, financially the question is whether the
opportunity cost of not disposing of the business to release c£90m capital is greater
than the £20-30m of annual DPC which we believe is achievable by retaining the
business (we have not identified any material central costs which would be saved if
we no longer had a telco business, and therefore this loss of DPC would be largely
unmitigated).
* At this stage we have not identified alternative investment opportunities which clearly
deliver a greater risk-adjusted annual return and which would only be affordable if we
were to divest of telco. However, this will be kept under review as part of the next
stage of work to refine and prioritize (by pay back) the options for spending against
our limited discretionary budget (see the separate 2015/16 budget pack for an
overview of these options).
« There is also potential for brand damage if customers feel unhappy about being
transferred to another provider, and also an undermining of network confidence in
the growth aspirations of the Post Office (notwithstanding the fact that 60 % of HPBB
sales are via non-network channels).
e — Finally, it should be noted that shareholder approval would be required for a disposal
of telco (both because this is an explicit deviation from the Strategic Plan and there
are specific obligations under the Articles for approval of disposals). Alongside the
commercial considerations, BIS would wish to take account of the potential
stakeholder, network, regulatory and competition implications of such a move.
4.3. Option 3: Franchise the business or merge with another player
« Depending upon the model selected, the Post Office would either earn a modest
franchise fee, based on customer volumes, or would become a minority shareholder
in a merged entity. In particular this could be a value enhancing move for both
parties if one believes the Post Office brand is better leveraged using the capabilities
and infrastructure of a larger player such as BT.
e This option has the potential benefit of reducing management distractions by
handing over operational control to a better qualified third party, and in financial
terms could release both some upfront capital and maintain a recurrent annual
dividend/royalty payment.
* However, at this stage this remains only an estimate and to accurately gauge the
current market price we would need to formally approach qualified purchasers.
e« While management and operational distractions might be reduced by a franchising
arrangement, we would need to build and maintain an effective framework and
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competence for managing our exposure to brand risks through the third party
arrangements. As part of any proposed deal we would also need to assess
arrangements over data ownership e.g. for use in cross-selling into our other product
lines.
5. Proposal
5.1. Given the considerations outlined above and the fact that we have not received a
concrete expression of interest in either an acquisition of franchising arrangement, at
this stage our recommended default strategy is to retain telco within the corporate
portfolio and seek to maximise the net cash contribution to the overall business over
the next three years through the right combination of pricing, sales and investment
levers.
In practice this is likely to mean keeping the investment in marketing and product
development to relatively low levels compared with industry benchmarks, and
maintaining the price differential vs. BT in HomePhone over the period. The optimum
pricing and marketing strategy will be reviewed ahead of the next expected price
increase round in Jan 1 2016, based on the available evidence at that point. It is
noted however that the regulator Ofcom may intervene in the Line Rental component
of telco pricing to introduce a price cap.
5.
ie)
. In parallel to the development of this ‘retain’ strategy, we would propose resuming
the exploratory discussions with BT once the EE regulatory embargo has lifted in
early summer, to seek to obtain more reliable estimates of the financial impacts of
the disposal and franchising options outlined above. These updated figures will then
be considered alongside our latest assessment of alternative investment
opportunities (including any arising from further consideration of the ‘Plan B’ options
in mails or other areas) to understand the effective opportunity cost of retaining telco.
A further update on this assessment will be provided to the Group Executive at this
point.
5.3. It is also recommended that we increase the number of possible purchasers to
create a more competitive bidding environment; these parties would include but not
be limited to Sky, Virgin, Talk Talk, Vodaphone.
6. Commercial Impact/Costs
6.1. See financial impacts detailed above and in the accompanying slides.
7. Key Risks/Mitigation to Recommendation of “Retain and Grow”
7.1. The Fujitsu relationship and performance delivery is critical to the success of the
telco business. The Post Office team consists of a total of 9 FTE's in 15/16
encompassing Commercial and Managed Services, while approximately 490 FTE’s
are engaged by Fujitsu and their supply chain in supporting and delivering the Post
Office telco service. Fujitsu performed admirably in developing the telco technology
platform against a very challenging timeframe but struggled to prepare and operate
the call centre at time of launch. As a result of these challenges Post Office has been
endeavouring to reclaim damages from Fujitsu for business loss during the launch
period. In addition the call centre sub-contractor Capita has continued to have
difficulties, partly caused by their own staff scheduling errors, but also by their initial
contract pricing. Specifically for both Fujitsu and Capita the Post Office contract has
been loss-making to date. There has been a substantial improvement in the
management of the Fujitsu relationship since September, and Fujitsu now indicate
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they are at break-even while Capita continue to claim they are loss-making. One of
the primary drivers of the financial challenges facing our partners Fujitsu and Capita
is the contract structure only remunerates the call centre fees on a cost per customer
resulting in a flat rate fee. While this controls Post Office costs and places the risk
with the partners it does not provide sufficient flexibility to ensure great customer
service in periods of volatile call volume. The answer to these issues is a limited re-
negotiation of the contract and a 3 year extension. If we are unable to successfully
achieve a mutually beneficial contract extension this will manifest as a risk to the on-
going operation of the business.
7.2. The migration of the call centre also poses a risk to the integrity of the business. The
last migration saw the loss of 25,000 customers and a huge spike in complaints to
the regulator. The last migration was poorly planned, and underfunded due to the
contract structure. It is essential that any migration is meticulously planned and fully
funded. The funding is required to ensure the new agents are fully trained, the
operation is over-staffed during the transition phase, and retention payments are
made to current agents. The funding will be encompassed within the contract
extension and if successfully negotiated should have minimal impact in 15/16.
7.3. In the event that a decision is made to either divest or merge the telco business,
there is a risk that our homephone customer base in particular will be confused
leading to an increase in complaints and potential brand damage. This risk should
be mitigated by the fact that the purchaser will have had a lot of experience in this
area and will have successfully migrated telco customers.
7.4. In the event that Post Office elects to pursue a “cash cow” strategy, and increase line
rental ahead of the market i.e. £2.00 v an expected BT increase of £1.00, the total
increase in Line Rental prices over 39 months will be in excess of 50 %. In the event
that this was widely and publicly recognised there is some risk of brand damage and
increase in complaints.
8. Conclusion
8.1. As set out above and in more detail in the slide pack, telco currently delivers a DPC
of £7.4m pa, but underlying £2.7m DPC (less £4.7m one offs) which we expect to
increase to £26m by 2017/18. It therefore provides a useful source of diversification
and meaningful contribution to the central overheads associated with out strategic
priorities of mails and financial services, and this is the benchmark against which
alternative corporate portfolio options should be assessed. We will continue to
assess these alternative investment opportunities alongside further work to validate
and quantify the economics of either a disposal or franchising/merger arrangement.
9. Recommendations
The Group Executive is asked to:
9.1. note the update on strategic options for telco set out above; and
9.2. discuss and agree the proposed base case financial projections to include in our 3
year operating plan on the provisional assumption that the telco business is retained.
Martin George
March 2015
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Post Office
Strategic Options for Telecommunications
February 2015
Post Office®
Contents
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&
Background and objectives
Assessment of the business as it currently stands
Market and customer view
Assessment of our strategic options
Our vision for Telecoms at Post Office
Financial projections and underlying assumptions
Next steps
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
©
Contents
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@
Background and objectives
Assessment of the business as it currently stands
Market and customer view
Assessment of our strategic options
Our vision for Telecoms at Post Office
Financial projections and underlying assumptions
Next steps
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
©)
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Background: ©
In November 2014 we set out three options for the future of our telecoms business in
the Exco ‘Telecoms Deepdive’. The three options were:
1. Retain and grow business
2. Sell the base of customers to a competitor and exit the business
3. Sell the business as Post Office Franchise
« Following the ExCo session a 3 person team was appointed to review and scope
divestment opportunities (Geoff Smyth, Martin Edwards and Robin Gregory).
= Two companies were identified and placed under NDA as potential acquirers: Fujitsu
(with loose agreement with Talk Talk) and BT. We discussed market validation of
base value and qualification of franchise/merger opportunity, throughout November
and December. It is recognized that this is a limited sample.
= Asaresult, BT expressed enthusiasm and identified their Plus Net subsidiary as a
likely acquirer or merger partner. Fujitsu elected not to pursue opportunity, as owning
a Telco franchise was not their business model.
a
Post Office®
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Objectives of this session ©
1. To establish clarity with the GE on the vision and direction of the telco business
(including mobile) and its role within our overall strategy.
2. Specifically to agree which financial scenarios should be included in our base case
3 year plan for the overall business (bearing in mind that this could be a significant
factor in our path to profitability).
3. Reach agreement on approach to alternative strategic options for the telco
business, and provide clear direction
On the basis of reaching agreement, identify what telco needs from the wider business to
support these financial projections, including any Fujitsu contract amendments,
investment, IT, network or other operating model requirements.
Implications : Telco will receive investment consistent with the business goals of the
organisation
OL
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Executive summary
Today: We have a focus on the senior, fixed income, value-seeking market. Our business is growing
(20k net acquisitions in 2015/16, ARPU and net income growing and a new platform in place). We have
a base of 455k customers, 315k Homephone only, 145k broadband. The mobile launch now planned for
May 2015 remains a key component of our strategy.
The Market: The bundled communications market is forecast to grow *, although most of this growth is in
Pay-TV and superfast broadband, areas we do not currently play in. Fixed voice (Homephone) is
forecast to decline. The Post Office market has limited growth opportunity, but 5-8 % YOY Gross Income
Growth is achievable.
* Strategic Options: We have 3 strategic options: 1) Retain & grow the business, 2) Sell, 3)
I Franchise/Merge.
I « Key questions for Exco: i) Do we believe that Post Office HomeServices is a credible and profitable
I business unit going forward, or is it likely to decline? ii) Even if it is a profitable business that is likely to
produce returns over the coming decade, would we rather take the cash now?
I » Recommendation at this stage: We believe that we have a profitable business that can grow.
Moreover, there is no immediately obvious alternative business that we could re-invest the cash into that
would generate better returns. As such, we recommend pursuing option 1) Retain and grow, according to
the base case scenario. However, this view could change depending on the commercial terms for
franchising. We do not recommend a “cash-cow” strategy, due to churn and brand implications .
Post Office®
Contents
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@
Background and objectives
Assessment of the business as it currently stands
Market and customer view
Assessment of our strategic options
Our vision for Telecoms at Post Office
Financial projections and underlying assumptions
Next steps
Post Office®
©)
IN THE STRICTEST COMMERCIAL CONFIDENCE
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Gross and Net income have increased over the past three years &
Post Office Telecoms performance 2011/12 — 2014/15:
Revenue #Gross Income Net Income
140 420 129 124 122
120
Post Office 100
Telecoms 0 51
(£k) “1 45 46
40 29 33 30 37
0
2011/12 2012/13 2013/14 2014/15
Customer
Numbers (k)
Monthly ARPU t 2029 ) ey t ez.35
@)
Post Office® 455,000 customers : 145,000 Broad Band; 315,000 Homephone
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Non-physical channels (call centre and online) account for 60% 2
of telecoms sales
Post Office Telecoms sales split by channel, 2014:
45 * We know that online is a
40 - 39 significantly cheaper
35 I channel for acquiring
customers, and more is
30 - being done to quantify
% of I 24 this.
sales 25 21
* Homephone 2 year net
20 16 margin value £275
15 - * Dual Play 2 year net
10 margin value £156 due
to increased cost of
5 sales i.e. Customer
0 - home equipment,
Crown Agency CallCentre Online engineering services.
©)
Post Office®
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Of the in-branch sales, the majority are in Crowns and larger 2
agency branches
Distribution of HomePhone and Broadband sales across our network*
70%
60% -
% of
HomePhone
and
Broadband 40% ~
sales by
branch 30%
50%
20% -
10%
0% { 4 a . _ , a
1k 2k 3k 4k 5k 6k 7k 8k 9k 10k 11k 12k
Our largest branches (e.g. Our smallest branches
Crowns and large Mains), ———> (e.g. Community &
by customer session Outreach) by customer
session
Of the 40% of
HomePhone and
broadband sales that
are in branch, 64%
come from our top
1,000 branches.
80% from the top 2k
largest branches.
Post Office® “Post Office income 2012/13
©)
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HomePhone customers are older and in the lower socio-
economic groups
% of UK population with Home Phones who use POL as their Home Phone provider
Social Grade Age 15-24 Age 25-34 Age 35-44 Age45-54 Age55-64 Age 65+
PU ey LU
B i
C2
° We have an aging customer base: 82% of Homephone Base over 65; 46% of Broadband base over 65.
* Many of our customer are in lower socio-economic groups. They are attracted to our low prices and ability to
pay in cash.
+ We are conducting further research to qualify whether BT’s homephone base can be attracted to Post Office
products.
(co)
Note: Home phone numbers as indicative of HS, as telephony is c.90% of HS revenue at present _ WS
Source: GB TG! 2014 Q2 (January 2013 — December 2013). (c) Kantar Media UK
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Telecoms makes a direct contribution to the business and this EE
will improve over the coming three year plan
140
(em) Total FTE’s delivering Telco service to current/future Telco products
420 — 9 Post Office FTE’s 490 Fujitsu/Supply Chain FTE’s
15/16 projected £132m Gross revenue we have to pay Fujitsu for
100 - the managed service and the costs of calls/broadband — Total £96
million
80 £6m project investment in Mobile.
Current amoritization of technology stack investment
60 I £25m total /E5m p/a; last year 2017/2018.
40 -
20
14/15 : . ae
results Revenue Income Direct costs Direct contribution
estimate
CY
ww)
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Post Office has a number of assets that we can leverage
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@
Strengths
New Platform: Our new Fujitsu technology
platform provides flexibility, and lower cost of
change
Brand: Post Office brand does provide
advantages in customer recognition and trust
Network : Our target demographic does visit our
branches on a frequent basis
Bundling: In comparison to other players, our
customer base remains relatively ‘unbundled’.
This provides us with a Triple Play opportunity
Mobile: Our mobile proposition is going to
market
Value-seeking customer segment: There is an
opportunity to establish ourselves with the value -
seeking customer segment
Opportunities
Limited marketing: Limited marketing and PR
investment in the Brand and Telco products
Aging Customer base: 82 % of Homephone
Base over 65, 46 % of Broadband base over 65.
Cost of Acquisition/Churn - The 15/16 budget
shows 100 k new sales to achieve a 20k net
additions target, due to churn
Fixed Voice in decline: The fixed voice market
is forecast to decline, the growth is in Pay-TV
and superfast broadband.
Competition and Consolidation: Market is in
considerable flux
Single Partner Dependency: Fujitsu
relationship will require careful management in
the light of Front Office replacement
Threats
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IN THE STRICTEST COMMERCIAL CONFIDENCE
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®
Within the HomePhone market, POL is well placed to maintain
value leadership
16.99 line rental £16.99 line rental . .
+£13.a month ( +£4.75 a month £16.70 line rental £16.40 line rental £15.00 line rental
+ £3.50 a month + free for 12 + free for 6
no offer at for 6 months for 12 months months then £8 a
present on this then £3.50 a then months then month for 12
package ) month £7.50 a month h
Total cost over 18 Total cost over 18 months then
Total cost over 18 Total cost over 18 months = £ 353 months = £340 Total cost over 18
months = £539. months = £515. -£12 on POL - £25 on POL months = £366
+£173 on POL +£149 on POL
(€) 30 5
25 I 24.99 23.99
TN CANT na 20.75
20 -
15
10 -
5 I
(£) 0 L =e a r et oo a
Line rental +
avirecst BT € TalkTalk E>
package media
(£/month)
Line rental + Anytime call package (£/month)
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®
Within the dual play market our value leadership is not as clear as
in HomePhone, as Value segment is Shared with Talk Talk
how £16.99 line rental + £13 a month (no offer at presenton this package) _
BT@ Total cost over 18 months = £539.82 + £173.82 onPOL
a £16.99 line rental + £1.75 a month for 6 months then, £3.50, A MOND cos men
a Total cost over 18 months = £515.82 + £149.82 on POL
\edia
TalkTalk £16.70 line rental + £3.50 a month for 12 months then
aikta Total cost over 18 months = £ 353.10 - £12.90 on POL
sky
£15.00 line rental + free for 6 months then £8 a month
Total cost over 18 months = £ 366
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
Contents
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@
Background and objectives
Assessment of the business as it currently stands
Market and customer view
Assessment of our strategic options
Our vision for Telecoms at Post Office
Financial projections and underlying assumptions
Next steps
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
@)
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There are a number of key market trends that are impacting our EE
business
* Fixed-line Voice (HomePhone) market value continues to decline
1 Decline in fixed line due to falling call volumes. The fixed-line voice market is forecast to
(Homephone): decline from £8.4 billion revenue pa 2014 to £7.3 billion per annum
in 2019.
G th in Triple/Quad Fixed-line telephony and broadband providers e.g. BT and TalkTalk
(oe u iP cane have been diversifying into TV, attracted by the lower churn and
o Play: higher average revenue that triple-play consumers provide.
be ie ssid nen 5 Whilst Sky has moved from Pay-TV (its heritage market) into the
fixed-line internet, mobile) : _ -
broadband market to increase the stickiness of its base.
* Over a quarter of all fixed broadband connections are now
superfast. By the end of Q1 2014 there were 6.1m UK superfast
3 Growth of Superfast broadband connections; an increase of 2.2m (58%) compared to
broadband the previous year, indicating increasing consumer demand for
higher speeds. Virgin have also announced a $3 billion investment
in 1 gigabyte fibre over next 3 years.
Source: Ofcom / Mintel Technology Tracker Base: All aduli =; Ne
Post Office® : gy Tracker Base: All adults aged 16+ (2014 n=3740)
QG1. Do you receive more than one of these services as part of an overall deal or package fromthe same supplier?
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Growth in the overall market will be driven by Pay-TV and EE
superfast broadband, whilst Fixed Voice will decline.
Forecast value of operator revenue (£ billion) 20014-19*:
=2014 =2019
21.4
20 I 48 decline
Forecast * Overall the
15.716 icati ket
value of = 45 I communications marke
operator will see steady growth
revenue e Pay TV and Internet will
(£bn.) 10 8.4 drive the majority of
7.3 7.7 are
6.4 6.2 growth in this market.
5 4 Players that are not
strong in these two
markets will struggle to
0 r r 1 deliver growth.
Fixed Internet Pay TV Mobile Total
¢ Fixed-line will continue to
Voice
Source: Mintel, “Bundled Communications Services” January 2015
Post Office® rae : ,
Mobile is the retail value of mobile network connection sales
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In line with this, the average spend on fixed voice has declined Ea
to just £22.32 per month
Average household spend on communications services: (£ per month (2013 prices))
5 3% 54% 54% 5.4% 5.5% 5.5% 6%
ma Post
LOO LL CC I EAE ALLL LALLA,
126.73 4221912148 »~=— 12040 =~ 149.90
es ees 4% wamTelevision
29.68
_ 30.59 3% waa Fixed internet
2% lag Mobile services
tee 2.32% . :
48.23 mms Fixed voice
1%
=—% of total spend
0 : — ; 0%
2008 2009 2010 2011 2012 2013
Notes: Adjusted for CPI; includes VAT.
18
Post Office® Source: Ofcom “Communications Market Report” 2014 ; Nr
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The growth of bundling services is the key underlying trend
Take-up of bundled services: (Proportion of households)
70%
63%
m@ Other
60%
50% @ Mobile and broadband
50%
™ Fixed voice, broadband,
mobile and TV
w Fixed voice, dial-up and
Tv
@ Fixed voice and TV
@ Fixed voice and dial-up
@ Fixed voice, broadband
and TV
mw Fixed voice and
broadband
46%
40% 39% c
40% °
5% 5%
29% 29%
30% = pe
20% 5%
22%
10% 19% a 20%
12%
0%
Q1 2005 Q12006 Q12007 Q1 2008 Q1 2009 Q12010 Q12011 Q12012 Q1 2013 at 2014}
L
* 63% of consumers bought at least two services together in a bundle in Q1 2014
* A dual-play package of landline & broadband was the most popular, taken by 28% of households.
° A triple-play package of landline, broadband and TV, taken by 23% of households, is the fastest
growing bundle.
(,»
19
Source: Ofcom Technology Tracker Base: All adults aged 16+ (2014 n=3740) WN
Post Office® ‘i .
QG1. Do you receive more than one of these services as part of an overall deal or package fromthe same supplier?
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Free installation and set-up is the main influence on choice of
bundled communications provider
Influences on bundle choice: (November 2014)
28%
Fre installation/ The ability to cancel a Areputation for Included free extras Ashorter set uj
no set-up costs contract month on excellent customer (eg a year of Netflix installation tim
month, instead of service included in the price)
each year
Post Office® Source: Lightspeed GMI. Base, 2000 adults.
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®
The market is dominated by the big 4 who together have 88%
share of the bundled communications market
Fixed-line internet connection market share, 2008-13
100%
90%
80%
70%
60%
2008 2009 2010 2011 2012
SBT Sky ®Virgin Media @TalkTalk Group ® Others
50% ©
40% ~
30% +
20% »
10% ~
* The big four control
88% of the bundled
communications
markets*:
Sky: 27%
Virgin: 23%
BT: 21%
Talk Talk: 17%
oOo0 0
Source: Lightspeed GMI/Mintel
“Who provides the bundle of services g TV __
and internet, landline phone and internet) you
currently receive for your home?”
1,761 internet users aged 16+ who have
some form of bundle (with or without a
landline)
Post Office® Source: Source: Ofcom “Communications Market Report” 2014
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®
The take-up of superfast broadband is increasing with
superfast now accounts for 26% of all connections
Take-up of superfast broadband services: (connections, million)
10
26.7 30
8 24.6. ja Superfast
22.3 connections
6 (left axis)
4 :
, O smSuperfast as a
2 % of all
; 19 connections
0 +6 5 : 0 (right axis)
586658 CGSFESESESESESESBSBSBS
= = 2 2 =
oO Oo o oOo oO
N N N N N
* Superfast growth has mostly been attributable to BT over 2013. BT’s 2013/14 annual report
states that it has taken 69% of net superfast or cable consumer market additions over the
fiscal year. Virgin have also announced 1 gigabyte fibre to the premise plans
Source: Ofcom / operator data e—
Post Office® Note: Includes estimates where Ofcom does not receive data from operators; the total connections figure used to calculate the
os 0 percentages above does not include an adjustment for corporate connections which isused elsewhere in this report.
Each player is moving into the triple / quad play market, but
tailoring their approach according to their heritage and
strengths
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@
~’
BTe
Superfast growth has mostly been attributable
to BT over 2013
BT’s rate of TV subscribers has increased
dramatically in the last two years
BT is acquiring EE. BT may elect to divest Open
Reach and separately list Open Reach on FTSE
@ a
‘media
.
Virgin’s market positioning is in the provision of
super-fast internet
Virgin Media is focused over the next year in
boosting the number of customers who take
high value post-pay mobile subscriptions
sky
Sky remains the most popular provider of TV
services in the UK in 2014 with ~10m
subscribers
Sky’s broadband base has grown considerably
since 2006. The main motivation in offering an
internet connection is to decrease churn
amongst its TV customer base
TalkTalk
Talk Talk remains confident that it will convert
up to 80% of its 4m customer base to its TV-
inclusive triple-play proposition
It announced in 2014 that it would be promoting
its quad-play bundles, where it has seen 64,000
customers added over the course of one 2014
quarter
6.)
Post Office®
RB)
IN THE STRICTEST COMMERCIAL CONFIDENCE
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Other market developments &>
* 3 acquiring O2
* Vodaphone entering consumer broadband market
* Sky/Talk Talk have each established new strategic MVNO relationship with O2
* Sky and Talk Talk both in play for the merged 3/02 (Hutchinson)
* Virgin (Liberty Global) yet to declare are they in acquisition/divestment mode
* Reseller market in both Dual Play/Mobile sectors in flux
* Vodaphone squeezing their MVNo’s and not releasing 4G to them
* Margins in Fibre very tight for any primary reseller of Open Reach fibre which in turn places
additional pressure on secondary resellers such as Post Office
* Virgin announcing 1 GB to the premise
* Industry consolidation of Telecommunications reseller sector highly likely
* — Industry profitability (EBITDA) will continue to be very healthy 20 % +
©)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
Contents
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@
Background and objectives
Assessment of the business as it currently stands
Market and customer view
Assessment of our strategic options
Our vision for Telecoms at Post Office
Financial projections and underlying assumptions
Next steps
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
@)
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®
We have a range of strategic options for our telecoms business
going forward
PROs
CONs
Retain and grow Business
Sell the base of customers to
a competitor and exit
Sell business as Post Office
Franchise
ace
Maintain income stream
for POL and agents
Contributes to fixed costs
Still have options 2 and 3
open to us in the future
Will require ongoing
investment
The growth in the market
is not in our sector thus
our growth will be
sourced from value
segment consolidation
nu
* Cash injection
* Free-up network and
management space
* Clearer management
focus on the 2020
Strategic pillars
* Lose an ongoing income
* No current identified
alternate use of proceeds
* Capex write-off circa £10
million.
* Potential regulatory
issues
Maintain a regular (and
profitable) profit stream,
with direct management
responsibilities.
Set a precedent for future
business models
Sweats our brand
Unclear at this juncture
but could include
migration risk, brand
damage, network
dissatisfaction
Post Office®
6)
There are a number of key financial assumptions that sit behind
each option
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@
Retain and grow Business
Sell the base of customers to
a competitor and exit
Financial
assumptions .
ace
The £8m Direct Product
Contribution in 2014/15,
increasing to £26m in
2017/18.
Revenue of £122m in
2014/15 grows to
£165m in 2017/18.
Sell business as Post Office
Franchise
Le
Assumes £250 per
customer for Dual, this
is a market tested
assumption.
£175 per customer for
Homephone, although
there is a ~15%
variance on this either
way.
The most likely scenario
is a merger with
PlusNet, where we
would receive a one-off
payment and then an
ongoing ‘fee’ / dividend.
We have not yet started
to discuss figures with
BT/PlusNet.
Post Office®
@
We should ‘retain & grow’ the business, but we are not ruling-
out disposal or mergers in the future, depending on the terms
and the future performance of the business
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Reasons to believe in Retain & Grow:
Potential to grow
income and Direct
Product Contribution
Limited investment
and cost to business
Lack of alternative
investments that
deliver equivalent
Costs would not
reduce materially if
divested
Over 3 years we are projecting an 11% customer growth. We also expect
the DPC to continue improving over the next 3 years through the potential
for continued annual price increases. We will grow our base next year by
20k.
* Limited funding required (capex over next 3 years estimated at £5m -
£10m).
* 60% sold online/ Call centres limiting the demands on the network.
We have not identified alternative investments which deliver a greater risk-
adjusted return and which would only be affordable if we were to divest of
telco.
Telco makes a positive DPC of £8m p/a and we believe this will grow. We
have not identified any material central costs which would be saved if we
no longer had a telco business, and therefore this loss of DPC would be
largely unmitigated.
6.)
Post Office®
eB)
IN THE STRICTEST COMMERCIAL CONFIDENCE
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Recommendation &®
1. Pursue Option One (Retain and Grow). Continue to build business and execute
2015/16 plan (the ‘base case’): £132m Gross Revenue; £56m Net Revenue; £13m
estimated EBITDAS.
2. Within the Retain and Grow option, conduct more analysis to understand which is
the value maximising scenario.
Summary:
1. Continue trading and deliver against a 15/16 agreed plan, and do not “cash-cow”
the business while maintaining discussions to divest the business if we conclude
that the business remains as described as tactical, and non-strategic.
2. Launch Mobile as planned and review trading performance at 90/180 days
©)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
Contents
POL00151514
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@
Background and objectives
Assessment of the business as it currently stands
Market and customer view
Assessment of our strategic options
Our vision for Telecoms at Post Office
Financial projections and underlying assumptions
Next steps
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
©)
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We have a clear market positioning...
* Singular focus on Senior, Fixed Income, Value-seeking market
* Total New Customer Acquisitions in 15/16 109,000. Net Acquisitions in 2015/16 plan
pty 20,000, concluding Base Size ay end 15/16 480,000.
: « Within mobile there is an opportunity in value segment as MNO’s and Retailers
consolidate and move up the value chain.
* Value Provider of choice in the Phone/Broadband/Mobile market.
What is our * We will always provide better value than our competitors.
proposition? * Our mobile product is well-suited to our network (SIM only, simplicity). The handsets
are not sold in branch; only available via contact centre/online.
« Modest ongoing investment in product portfolio (£5m - £10m) over the next 3 years.
This will be evaluated on its marginal impact on Direct Product Contribution.
* There will be a review in 2017 when we are due to refresh the technology. At that
point we will need to decide what level of further investment is required.
* Contract extension with Fujitsu & reliance on Fujitsu as very long-term partner
* Open to acquiring other value providers during market consolidation.
What do we need?
@)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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Telecoms customers tend to be older and poorer that the °
national average, although most of our customer tend to be
older
Pillar customers .
Those who use the Post Office for the various pillars! « Atthe moment there is no
cross-selling from Telco to
other pillars, or vice versa.
* However, going forward we
will look for opportunities. For
example, we could assess the
potential value through a direct
marketing campaign.
¢ The opportunities for cross-
selling within a digital
environment with a single view
of the customer, is being
evaluated as part of the digital
strategy.
* Of all the product areas,
Telecoms has the oldest and
the lowest socio-economic
profile customer base.
Mails Home Services
Source: GB TG 2014 Q2 (January 2013 —- December 2013). (c) Kantar tiods UK n=c.; 25, 000; FS ‘internal database, ~ pulled by Mimecast on 22/04/2014
Contents
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@
Background and objectives
Assessment of the business as it currently stands
Market and customer view
Assessment of our strategic options
Our vision for Telecoms at Post Office
Financial projections and underlying assumptions
Next steps
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
@)
Income will grow next year due to 20k customer additions, price
increases and launch of new fibre product
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@
Income (£m) jane I 2014/15 % change
2013/14 Full year Budget 2015/16 budget
forecast vs. 2014/15 FYF
HomePhone income £80.5m £75.8m £77.5m +2%
Dual income £38.3m £39.5m £48.4m +22%
Mobile income - - £3.8m -
Other income (e.g. eTop-ups) £5.5m £4.6m £7.5m +64%
TOTAL income £124.2m £121.5m £133.3m +8%
HomePhone cost of sales (£78.3m) (£74.6m) (£76.3m) +2%
Mobile cost of sales - - (£1.5m) -
Total Net Income £45.9m £46.9m £55.4m +18%
One-offs £4.7m
TOTAL NET INCOME £51.6m £55.4m +7%
&)
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
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®
The scenario we are recommending, the ‘Base Case’, will see
us grow the customer base and increase prices
Key assumptions in Base Case scenario:
1. Base case scenario assumes line rental price increases by £1 every year to 2020
2. BB wholesale charges remain flat in line with new agreement with Fujitsu
3. Subscribers increase by 8% year-on-year from 15/16
=
Base case scenario:
——Income
—ppc £211.6m
£187.0m
£165.2m
@ Dual m HP
£145.7m
£118.8m £129.0m
f £115.61
J 545.6k 594.9k ome
465k —464.2k 467.7 —_903.2k
£40.4m
£33.01
£7.4m £8.1m
FY13/14 FY14/15 FY15/16 FY16/17 FY17/18 FY18/19 Fv19/20_ “FYL3/14 FYLA/AS. FvA5/16. "EYL /IT FYIT/18 Fv1g/19_ 59a)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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Within ‘Retain and grow’ there were other options that we EE
considered...
« Within the ‘Retain and grow’ the business there are a number of scenarios*.
¢ We believe that the ‘Base case’ scenario is the optimum mixture of price rises, customer
growth and investment to ensure that we maximise the Direct Product Contribution from telco.
¢ The table below shows some of the alternative scenarios that we considered.
TE
Direct Product Contribution (£m) 2017/18 2019/20
Direct Product Direct Product
Contribution Contribution
Base Case £26.2m £40.4m
No price increase from 2016/17 £13.4m £10.3m
No price increase, no growth in customer numbers, but
8% HP upgrade to Dual Bean elk
oo =
Price increase and 8% HP upgrade to Dual, but no £21.9m £26.8m
customer growth
HP only price increase (£2 in 2015/16), £1 thereafter, no £26.2m £31.7m
customer growth
ee_)
Post Office? *More detail is available on each scenario in the Appendix
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There are a number of risks to our telco business ee)
The Fujitsu relationship and performance delivery is critical to the success of
Fujitsu platform the telco business. Fujitsu performed admirably in developing the platform but
struggled to prepare and operate the call centre at time of launch.
The migration of the call centre also poses a risk to the integrity of the
Gall ce business. The last migration saw the loss of 25k customers, and a huge spike
migration . .
in complaints.
Brand risk from There is risk of brand damage and complaints if “cash cow” strategy is
divestment or pursued. There is also risk to our brand of an ‘untidy’ handover if we divest or
cash cow strategy merge our base.
Technolo Technology disruption has the potential to disrupt the entire market, and
Aerupion. specifically mobile via wi-fi has the ability to change our plans for Mobile.
Supercharged fibre has Capex implications.
@
Post Office®
Contents
POL00151514
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@
Background and objectives
Assessment of the business as it currently stands
Market and customer view
Assessment of our strategic options
Our vision for Telecoms at Post Office
Financial projections and underlying assumptions
Next steps
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
©)
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Next steps &>
1. Continue conversations with BT/PlusNet, once the EE embargo is lifted.
Understand the best deal they are likely to offer for merging / franchising our
base with PlusNet. Engage with other likely partners including but not limited to
Sky, Virgin, Talk Talk, and Vodaphone.
2. Further evaluation of the best scenario within the ‘Retain and Grow’ option.
3. Successfully launch Mobile, and demonstrate trading success in initial six
months, thus enabling continued investment in Post Pay Monthly product
launch in H2 2015/16
©)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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Appendix
©)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
Financial Strategies within HP&BB —
Increase
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No Price
No Price Increase from 16/17
£40.4m
a= Base Case
£15.6m
£12.2m
£10.3m
£€7.4m £8.1m
FY13/14
FY15/16 = FY16/17_—s FY17/A8
Fy14/15 FY19/20
FY18/19
+ Assumption is that price remains flat from
January 15. 15/16 impact is minimal given price
rise in Q4.
+ Growth in customers remains as base case
+ Reduction in DPC due to growth in dual
customer base at a lower product margin, &
increased managed service cost that is semi
variable based on number of customers.
Post Office®
IN THE STRICTEST COMMERCIAL CONFIDENCE
©)
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®
Financial Strategies within HP&BB — No Price
Increase, No growth in base
No price, No growth in customers, 8% HP upgrade to dual * Scenario modelled shows what would happen if
€40.4m investment in Telco was removed.
== Base Case . + Retention strategy would become key in keeping
base at 480k, adds & churn assumed neutral
+ DPC is reduced by the upgrades from HP only to
dual proposition.
£15.6m
£13.3m £105;
om
£7.4m £8.1m . : £7.5m
£41m_*
Fyi3/14—FY14/15.—FY15/16 = FY16/17_ ss FYA7/M8—FY18/19_—-FY19/20
©
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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Financial Strategies within HP&BB — Price Increase,
No growth in base
Price Increase, No growth in customers, 8% HP upgrades to dual
* In this scenario we take a traditional cash cow
£40.4m
Base Case approach.
* Increase price in both HP & BB, by £1 per annum.
+ Focus on retention is key to keep base at 480k,
£26.8m adds/churn assumed neutral
£19.0m
£15.6m
£7.4m £8.1m _
FY13/14 -FY14/15-FY15/46 «-FY16/47.—s«FY17/18—-FY18/19_—-FY19/20
©)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
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Financial Strategies within HP&BB — Price Increase
to market in HP&BB, No growth in base
HP only price to market (£2 inc) in 15/16, £1 therafter, no growth in customers * Maximise DPC through pricing to market on
HP. Dual ARPU increase of £1
Base Case £40 fm * HP price increase of £2 in 16/17 , £1 there
after. This would b ring line rental up to £16.99
in line with BT.
+ Assumes base position remains flat at 480k.
* Scenario up to 17/18 would de-risk growth of
8% in base case.
£74m___ £8.1m
Fy13/14-FY14/15.—FY15/16 = FY16/17_—-FY17/18 = FY18/19—-FY19/20
©)
Post Office® IN THE STRICTEST COMMERCIAL CONFIDENCE
OfCom internet and technology factsheets - 2014
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#CMR2014
ae
3s
f of adults use social
’ networking sites
Average
broadband
speed
I of households
have a tablet
f up from 24%
in 2013
fe Others
3% 10%
TalkTalk
of people
' use mobile
to access the
internet
fast facts
of adults have
broadband
_ superfast
) broadband
connections
Post Office® Source: Ofcom Technology Tracker Base: All adults aged 16+ (2014 n=3740)
©)
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®
Household take-up of communications services
Household take-up of communications services: (% of households / adults)
==—=IViobile telephony
omeFixed telephony
==aelnternet connection
exe Total broadband
aweFixed broadband
e==Mobile data user
(personal)
a g «==Intemet on mobile
0 s (personal)
2007 2008 2009 2010 2011 2012 2013 2014 ~~Mobile broadband
dongle or datacard
Post Office® I Source: Ofcom research, data as at Q1 of each year
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Sky remains the most popular provider of TV with an °
estimated 10 million households taking its pay-TV services in EE
2014
Volume of UK TV Households, by provider, 2013 and 2014: (volume of households)
12 -
10.4 10.5
10 +
Es.
nn
=z
2
@ 65
vo
2
3.7 3.7
x 45
P=)
2 I 1.8 1.8 ™
Gg ay me at
0 1
‘Freeview Virgin Freesat “TalkTalk BT Other
only Media*
2013 m2014 (est)
©
Virgin Media include free and pay TV
1 .®
Post Office? SOURCE: OPERATING COMPANIES/MINTEL
1.2.
1.3.
1.4.
2.2.
3.1.
3.2.
3.3.
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Strictly Confidential
POST OFFICE LIMITED GROUP EXECUTIVE
Project Hawk
Exercising th ion Bank of Ireland’s share of P ffice Insuran:
Purpose
This paper updates GS on the negotiations with Bank of Ireland UK plc (Bol) on Project
Hawk - the exercising by Post Office of its option to buy Bol’s share of the joint insurance
business (the Business) as set out in the Eagle agreement (“FSJVA’).
This submission follows the paper presented to the Board on 16” July 2014, where
approval was given for “management to negotiate a buy-out of Bol’s share of Post Office
Insurance business at a cost not exceeding £40m” (Board Minute POLB 14/91).
The Independent Insurance Expert (IIE) has opined, concluding that the valuation of the
Business is £43.9 million; this determination is final and binding on both parties (although
there will be a final true-up on completion). This value, while 9.8% outside the Board
mandate, is within Post Office's value horizon.
This paper seeks Board approval to allow management to proceed with the acquisition
Bol’s share of the Business at the given valuation. Management further seeks scope to
negotiate potential alternative structures with Bol.
Background - Transforming Insurance to deliver value to Post Office
The insurance transformation programme is targeted to increase Post Office’s gross
income from insurance activities from £18 million in 2013/14 to £138 million in 2020 and
net income of £86 million. As set out in the Financial Services strategy presented to the
Board at various times, the program comprises three phases, viz:
¢ Phase 1 — Titan (new travel insurance model);
¢ Phase 2 - Exercise buyout option as set out in Eagle;
. Phase 3 — Migration of other insurance businesses as contracts expire (e.g.,
Junction).
Phase 1 has been completed with the establishment of POMS. Project Hawk is Phase 2.
Negotiations and the IIE determination
The FSJVA set out a defined process for Post Office to exercise its option as follows:
¢ Post Office initiates the process with a “market value” offer. This was completed
when Post Office submitted an offer of £20 million in September 2014;
. If Bol and Post Office cannot conclude an agreement, Post Office can escalate
to an IIE, who would be appointed by both Parties;
¢ The IIE will determine the price based on representations from Bol and Post
Office. This determination is binding on the parties if Post Office chooses to
exercise the option.
Following the submission of Post Office’s offer, Bol responded in October with a counter
valuation of £100 million.
As it was quickly evident that the Parties would likely be unable to negotiate an
agreement, in November Post Office advised Bol that it would refer the matter to an IIE.
The FSJVA provided for the role of the IIE and set out a clear valuation approach
including timings. In January Grant Thornton was appointed as IIE, working within an
agreed four week timeframe.
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3.4.
3.5.
3.6.
4.2.
4.3.
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The IIE process comprised:
¢ Initial submission by both Parties setting out their valuation rationale:
. Oral presentation by both Parties;
. Interview with the Managing Director of the Business;
. Second submission by both Parties;
¢ Questions from the IIE.
At each stage papers were shared with the other party; all Parties attended the interview.
Post Office was supported by KPMG and Linklaters (the same team that drove Eagle),
while Bol retained Morgan Stanley, utilised its corporate finance in-house business and
appointed a leading insurance valuation expert to its team.
The IIE delivered his outcome to the parties to schedule on 27" February 2015:
. He determined Bol’s share of the Business to be £43.9 million.
¢ This valuation is final and binding on the Parties.
Financial Analysis
Whilst the Board granted a mandate upto £40 million, the discussion at the time
discussed a realistic value of £45-55 million. Subsequent analysis by Post Office Finance
has suggested that an even higher valuation would have worked for Post Office. Diagram
1 below sets out an analysis of the theoretical maximum acquisition price Post Office
could pay and see a commercially sustainable return.
This analysis shows the value derived from the various step changes an acquisition of the
Business would enable. Each scenario highlighted below builds on the previous scenario.
. Scenario 1 is based on Post Office simply acquiring the Business and not
developing it. This was the basis of our opening offer to the Bank.
. Scenario 2 shows the incremental value of Post Office undertaking the work
carried out by Budget Insurance Services Limited (“Junction”) from 2017/18.
POMS would take on this role.
. Scenario 3 expands the value from the business by replicating, for some
insurance products (e.g., Life), the share of underwriting benefit similar to that
being done in the travel insurance business in POMS.
. Scenario 4 builds additional value from new products, which we would only seek
to develop following Hawk (those products would not be commercially or
operationally viable if Bol were still to particulate.
. Finally, Scenario 5 assumes that we can achieve the growth and return that the
joint insurance team has forecast.
In all cases the acquisition of the Business would reduce Bol’s contribution to the
marketing fund by £3.0 million per annum. These funds would be provided by POMS (and
have been assumed in the budget submissions for 2015/16.
The initiative creates a business with a total value NPV of £324.1 million (based on a 10%
discount rate), less the acquisition investment (ie net £280.2 million). On a conservative,
risk adjusted basis, the value add NPV of the acquisition id £205.8 million.
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Diagram 1
HAWK - THEORETICAL MAXIMUM ACQUISITION PRICE SUMMARY
ort Vermin I ae _Iahntment Iv nea I mE
[benefits I Be ee as 100% me 729 ‘oenetits. Upside comes from taking BOI share
faraen ronarnsevensetem I aus I ass I ou I co I os I as
aleng Sn area oct {termination costs c€27m
Feomnse BPO Sein: ets pada Won 4 snetits of sharing in underviiting profits.
[share of underwriting profits bead bie ae bad ad ee teretisot a lm efenirtnig Oh
Scenario 4: POL acquires, gets upside from, I Ises new product sales values perthe PO!
new products it would nothave otherwise I 236 as sa 0% 262 roo Ses new Prods perneros
had en
sscnonalssesotexstneproaucse I ana I 232 I oa I ack I 6s I gang [itsseiesvaluesperthe otter
Iwould not have otherwise had I onan ¥
[NPV of whole business (existing + value I men
ws I =
Source: Post Office Finance
Risks
5.1. The buy-out of the Business is a key pillar of the Post Office’s Financial Services 2020
Strategy. Its increases the likelihood of the successful delivery of the strategy, and opens
additional opportunities, such as investments (see below).
5.2. There remains a risk that the conclusion of the acquisition could be frustrated by Bol
seeking to slow the process. However, the buy-out is a contractually binding obligation as
set out in the FSJVA. Moreover, the Bank has indicated that it is keen to get this process
concluded and focus on the growth of the remaining businesses.
5.3. There is a risk that the business transfer will be delayed whilst Post Office develops the
infrastructure to manage it. This risk has been largely offset by the establishment of
POMS and the FCA’s “minded to authorise” letter, which was received on 19" February’.
5.4. POMS will need to advise the FCA that its business will grow beyond travel insurance;
this is not an exceptional process. POMS will also need to implement capabilities,
process and controls in order to run the newly-acquired business. The analysis and
process to develop this is underway, building on the existing POMS infrastructure and
capabilities. It is expected and anticipated in the FSJVA, subject to TUPE, that the
existing and experienced joint insurance team will move across into POMS.
Next Steps
6.1. Working with Post Office Legal and Finance, Linklaters and KPMG, we will engage with
Bol to conclude the contractual discussions and arrange for the transfer of the business to
Post Office. To start the process and following support from the FS Committee, Post
Office has written to the CEO of Bol advising him that we will be seeking Post Office
Board support to proceed to acquire the Business, based on the IIE’s valuation.
6.2. Anticipating that the business will be run through POMS, POMS is preparing itself to be
ready for the business, including ensuring it has all the relevant regulatory, compliance,
technical and commercial capabilities in place.
Board approval for POMS to proceed to stand -up as a principal under the FCA regime is tabled separately at
this meeting
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6.3. With Finance leading, supported by our legal team, we are assessing the most cost
effective and practical financing structure for the acquisition and how to ensure its delivery
into POMS.
Summary
7.1. The IIE determination has a valuation of the Business of £43.9 million, which is slightly
above the Board mandate but within the Post Office value-horizon.
7.2. The acquisition is a core component of the delivery of the FS strategy.
7.3. The acquisition would reduce Bol contribution to marketing by £3.0 million per annum.
7.4. Management strongly believes that the acquisition of the Business at this valuation
represents a good investment for Post Office, with a strong NPV.
7.5. Management is assessing the appropriate structure and process to acquire the Business
and integrate it into POMS.
Recommendation 1.
8.1. Management seeks Board approval to proceed to acquire the Business for £43.9 million.
9. Alternative models with Bol
9.1. Subject to approval 8.1 above, management will seek to conclude Hawk.
9.2. There are, however, alternative models that could further opportunities. These are
supported by:
. Bol being keen to retain the exclusivity of its relationship with POL. This is both
an optical/market and operational concern;
. Bol being concerned at the dilutionary impact on branch and marketing
activities/focus if those activities were split between remaining Bol business and
insurances;
° In 2014/15 the Parties failed to negotiate a commission structure and operating
model that enabled the launch of investment products. While this is a potentially
significant market opportunity for Post Office, the commission proposals from
Bol did not provide an economic return.
9.3. Preliminary discussions were held in late 2014 to ascertain the interest and value of an
alternative model for Hawk, on the basis of:
e Hawk to proceed;
. Bol to gain a small share of POMS (say 10%); this would therefore include a
share of value from the travel insurance business (which is outside Bol today);
¢ Bol would not be able to influence strategy, but certain aspects would require
consent (eg acquisition or dilution);
. Utilise POMS as the vehicle to develop the investments strategy, with POMS
engaging directly with the market.
9.4. This opportunity has considerable merits, including
¢ — Significant opportunity from investments;
. Maintaining Bol focus in the Post Office FS business; and
. Reduced acquisition investment and retention of the annual marketing
contribution.
9.5. However it also raises a number of issues:
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¢ Bol would own part of a Post Office subsidiary and Bol would gain a share of
the long term upside from insurance growth;
. Negotiations on this solution could delay Hawk.
10. Recommendation 2.
10.1. Management proposes to:
¢ Proceed with Hawk as recommended above (8.1), establishing a clear timeline
for completion; and
. Initiate parallel conversations with Bol to determine whether there is a financial
and strategic alignment to proceed further with the alternative solution.
10.2. The Board is asked to note the alternative solution and authorise management to assess
its veracity, while continuing to complete Hawk (as per 8.1 above).
Nicholas Kennett
Director, Financial Services
March 2015
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2.2.
2.3.
2.4.
25.
26.
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POST OFFICE LIMITED GROUP EXECUTIVE
Establishing a Banking Services “Scheme”
Purpose
This paper provides an update to the Group Executive on the strategy for Banking
Services and of the negotiations underway to create a national Scheme. Group Executive
is asked to note the paper and support the negotiating strategy.
Background
Post Office provides services to the retail, and in some cases, business customers of UK
retail banks to enable them to undertake various transactions in Post Office branches. It is
a “B-to-B-to-C” service with Post Office acting as an agent to the banks. The transactions
are anonymous and most (although not all) are automated (ie require no active
involvement of the counter staff member).
Banking Services is a key generator of footfall into branches and generates income to
Post Office of c£55 million per annum (c£26.2 million after agents’ commissions); it
fepresents c18.5% of Financial Service’s gross income. In recent years, Santander
revenue has declined, although this has been offset by the addition of new Clients
(particularly HSBC and RBS) and additional services with existing Clients. This has had a
net effect of revenue remaining largely flat.
The service, which generated £24.8 million DPC as at P9, was initially established to
support banks with limited branch networks (especially Alliance & Leicester following its
acquisition of Girobank), and to support the launch of the Basic Bank Account. Over the
past three years the service has been extended, with 95% of debit card holders (including
100% of Basic Bank Account holders) able, as a minimum to withdraw cash.
The arrangements have been established through bi-lateral agreements with each bank
resulting in different services being available for their customers’, with varying standards,
offerings and commission structures. A consequence of the multifarious arrangements is
that it is not possible to market the service to customers.
Santander customers from Alliance & Leicester and Bradford & Bingley (who operate
Santander accounts) can use the service; those who migrated from Abbey or took out a
Santander account directly, cannot, although both have a Santander account?.
While there had been concern, expressed especially by RBS and Santander, that Post
Office would use the service to sell its own-branded products against theirs, it is now
being seen by banks as an alternative delivery platform as they rationalise their branch
networks. Thus the service is now seen to support and augment banks’ distribution and
customer strategies.
Challenge and Opportunity for Post Office
While banks have embraced the service, there has been increasing tendency to see Post
Office as providing an immediately available solution, without the need for engagement;
for example, advising customers that a branch is closing and that they can utilise a Post
Office branch for transactions, without having discussed this with Post Office. Thus Post
Office is assumed to have the capacity and capability to deliver the service, irrespective of
cost, logistics or customer/ branch implications).
Details of the differing services are set out in Appendix 1
Post Office counter staff cannot determine which account-form the customer holds. A transaction attempt for
the “wrong” account will result in an unexplained decline, causing negative customer outcomes.
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While transactions will increase as bank branches close, Post Office risks cementing a
high fixed cost structure (especially cash delivery), while the banks are able to have
flexibility to remove high fixed (branches) and variable (cash services) costs and replace
them with a low variable cost (Post Office’s transaction fee). Post Office, however, would
retain the full service cost and an inability to exit the market (if it were to so chose) as we
would be the final provider of cash services to the community.
Finally branch services have become a political issue, particularly as it has become inter-
twined with a backlash from the closure of bank branches. Since December there have
been two “roundtables” hosted by Vince Cable (VC) (the latter also by Andrea Leadsom,
Economic Secretary to the Treasury (AL)); VC has been very supportive of Post Office
providing the service, and privately so has AL.
Creating a Scheme
Post Office is seeking to redefine and simplify the contractual and operational structure of
banking services into a national “Scheme”, comprising:
. Restructuring the services into a single set for consumer and business banking
activities;
° Standard contractual and operational structure, simplifying the multifarious bi-lateral
structure today, whilst at the same time enabling the banks to represent to their
regulators (FCA and PRA) that they are meeting the operational and prudential risk
requirements through using the Post Office;
. Consumer services would be available at all Post Office branches (but not any new
access points), while the need for larger business banking deposits (in excess of
£1,000) would only be available at those branches with the capacity and security®;
. Standard commission structure combining consumer and commercial transactions,
based on threshold bands, with diminishing rates occurring as volumes increase
(details to be agreed);
. A communications protocol that ensures that Post Office is engaged (centrally) well
ahead of a prospective branch closure. This would ensure that the likely additional
volume is understood and a joint assessment made as to whether any additional
services would be needed (for example, business services). This would enable Post
Office to consider whether it could invest to provide additional local capacity (eg
create a business banking counter*) or change the designation of the branch’, this
would be on a “no-commitment” basis and would require the support of the sub-
postmaster (if applicable);
« Agreed communications strategy, including the ability of Post Office to market the
service;
. The payment of an annual “option” fee by all banks to Post Office. This fee, which
Post Office proposes would be based on the number of personal and business bank
accounts and would contribute to the fixed cost of cash distribution and provide
funds to invest in upgrading the service — eg local changes to support business
banking, process changes such as cheque deposits and truncation at source. It
would be payable irrespective of the usage of the service; and
There is no commitment to actual branch numbers. Service details have been discussed and agreed by
Network and Legal (to ensure that any competition risks are appropriately managed).
Any branch offering business banking services must have a secure area and appropriate safe.
For example, in February Barclays looked to close its branch in St Agnes, Cornwall; as Barclays cash
deposits are paper based (which cannot be transacted in a Local) and as all the neighbouring Post Offices are
Locals we upgraded one branch to Local Plus (which can accept paper-based cash deposits).
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. A migration strategy to move all existing contracts on to the new structure within a
defined time period.
Post Office benefits:
The Scheme will:
¢ Simplify the provision of banking services at branch and operational level;
. Provide a unique proposition to Post Office branches;
. Provide funding to support local service changes to support the service (eg building
of a secure area for business banking services);
. Provide a significant contribution to the fixed costs of cash distribution.
. Ensure that Post Office is aware of bank branch changes well ahead of their
implementation, enabling more effective capacity planning;
¢ Enable Post Office and branches to advertise and market the service; and
Overall the Scheme as proposed would put the business on a sustainable commercial
footing enabling Post Office to support customers and assist banks as they change their
branch configuration.
Banks’ benefits
The structure would give the banks the operational flexibility they need and potentially
local operational and “political” support to ensure that their customers are supported, and
seen to be supported, in the transition.
By working closely with Post Office through the Scheme, banks can better plan and
communicate branch closures, ensuring that basic services for customers are available.
The creation of funding through the Option Fee would enable Post Office to build local
capability; there would be no commitment on Post Office to extend services, but a
reasonable endeavours to assess options; Any additional investment or service change
would require the support of the Postmaster (as appropriate).
Summary
Under the Scheme, Post Office would get increased financial security, removing the risk
of grandfathered fixed costs, simplified service requirements, and long term revenue.
One area of negotiations that may arise surrounds a desire from the banks for a
commitment by Post Office to branch numbers and capability. Post Office’s position to
date has been that we are unable to offer any commitments beyond those set in public
policy.
Negotiations & Timings
Negotiations to date, which have focussed on services and operational standards, have
been managed through the British Bank Association (BBA). The BBA coordinates
responses to its members through its Retail Committee. A copy of the latest discussions
through the BBA is in the attached appendix.
The Parties anticipate that these operational matters will be largely concluded by late
March.
Once this has occurred Post Office will write directly to the CEO of each bank setting out
the commercial terms that Post Office proposes for the service, covering the transaction
commission rates and the annual option fee. The proposals will be identical. The initial
targets will be HSBC and Barclays as these banks have been particularly keen on the
Scheme.
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5.4. If a bank does not support the proposal, Post Office has the option to give notice on the
arrangements. In particular Lloyds Bank is out of contract and operating under one-year
rolling notice. Post Office would look to give notice and withdraw the service. This action
has been discussed with staff from the Department of Business Innovation & Skills.
5.5. The Parties are seeking to conclude high level negotiations by 31° March 2015.
Recommendations
Group Executive is asked to note the strategy to establish a banking Services Scheme
and support the negotiations positioning.
Nicholas Kennett
Director, Financial Services
March 2015
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POST OFFICE LTD GROUP EXECUTIVE
SME Proposition Update
1. Purpose
The purpose of this paper is to:
1.1. Update the Group Executive (GE) on progress made in the development of
Post Office Limited (POL) proposition for the SME market, since the last update
in January 2015.
2. Background
2.1. At the January 2015 Executive Committee (ExCo), a noting paper was
submitted updating on progress on the SME proposition development work.
2.2. The January 2015 paper outlined the market context and the approach
undertaken to shape a compelling SME proposition, following over 110
interviews. The most credible proposition areas were in mails and financial
services in the form of added value services for SME’s (e.g. customised
packaging and payment services).
2.3. The January 2015 noting paper summarised that following an extensive piece
of research, further work was being undertaken to determine the key priorities
and focus areas for the SME proposition including an updated view of the
potential financial benefits.
2.4. Work has been continuing at pace since the January update to review and
refine the proposition in order to protect declining SME revenues.
2.5. The March position re-states the value of a POL SME proposition, following a
final round of research. This work re-enforces the need for a phased approach
to delivering an SME proposition, notably by working in 15/16 to address the
fundamental basics in mails which SME’s require, ahead of launching the non-
mails element of the proposition in 16//17. In short, POL lacks credibility in any
product area outside mails until the core mails product offering is improved.
3. Current situation
3.1. The SME. market is becoming increasingly competitive with POL losing an
market share in SME only mails in the last 10 months. If this
3.2.)
IRRELEVANT
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3.3. It is proposed to build and launch an SME proposition to halt the decline in
customer numbers and in time help POL regain and grow mails market share.
In addition, we intend to seize this opportunity to look for new revenue
opportunities from the SME audience.
4. Proposition Overview
4.1. The proposition put into the final research was developed from an extensive piece
of research and development, where over one hundred ideas were identified
based on in-depth interviews with SME's and internal ideation. This latest phase
narrowed the focus to Mails and Financial Services.
4.2. The proposition was presented as a series of services from POL, with some
forming a loyalty programme or monthly subscription service.
5. Proposition research summary
5.1. Research was undertaken amongst SME’s in January/February 2015 (750 x 20
minute online interviews amongst small businesses) with the following key
objectives:
. To understand proposition appeal
. To prioritise features and benefits
. To assess monthly pricing or discounts
5.2. The findings from the research undertaken in January/February 2015 were:
. SMEs are primarily interested in a simple and focused set of mails based
services from POL but find the current experience frustrating (queues,
pricing, little or no online experience, no collections service, limited
tracking, etc).
¢ Financial Services and additional non-mails services are of interest but only
once SME's have confidence in the core mails offering POL provides. POL
need to earn the right to offer a more sophisticated and broader set of SME
services outside mails.
. 6 in 10 would be “very” or “fairly” interested in the idea of a points based
loyalty scheme around mails and this was favoured ahead of a subscription
service at this stage.
. Additional subscription services with a monthly fee would be considered by
SME's once POL improves its core mails offering. SME’s are willing to pay
for these services but only if sufficient value is returned to them for this
charge. Additional services include business analytics, business hub and
financial services payment facilities. At this stage only 3 out of 10 SME’s
would be interested in these services: however this would increase if POL
improved its credibility with this audience by fixing the basics.
. Of the additional service features researched, domestic tracking and
collection services in mails performed the strongest in terms of stated
impact on consideration:
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. Domestic tracking ranked top for appeal - 70% much more likely or
slightly more likely to consider the proposition and 36% would be
willing to pay for this.
. Parcel collection service ranked second for appeal - 57% much
more likely or slightly more likely to consider the proposition and 50%
would be willing to pay for the service.
5.3. Other key insights from this research again confirmed the high incidence of
market place sellers, with 53% of the research base selling through online
market place(s); with 13% being Ebay Powersellers.
5.4. Conclusions from the research — POL must:
° Provide a simple and focused mails proposition (businesses are time
poor so saving time and effort are key consideration points when
looking at mails providers).
. Use technology to save businesses time and effort (i.e. more online).
. Treat businesses as priority customers, particularly in branch.
° Work with Royal Mail (RMG) on improving pricing for SME's;
particularly higher volume mails users.
. Focus on fixing and improving the core mails proposition offered to
this audience to retain and winback SME’s. The priority areas
identified include online mails, drop and go, in branch experience,
collections and tracking.
° Work to deliver an initially mails based loyalty style programme, which
has strong traction with this segment. Additional subscription services
can be offered over time once the core POL mails proposition is
improved.
° Shape the go forward SME proposition alongside ongoing discussions
with Ebay, given the clear overlap between SME’s and online market
place and Ebay sellers.
6. Recommendations
6.1. Our immediate priority must be to focus efforts and investment in 15/16 on
strengthening the core mails proposition ahead of any development of wider
non-mails subscription services in 16/17. This would be realised by drawing
down budget from the £5.3m currently set aside for the SME proposition in
15/16.
6.2. POL must develop a basic but consistent and efficient multi-channel SME
service for mails in 15/16, bundling the following areas:
¢ An improved and enhanced Drop and Go (D&G) account. This will build on
the Phase 2 D&G fix work currently being undertaken by Kevin Seller and
the mails team.
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e Volume/value based pricing/loyalty following continuing _ positive
engagement with Royal Mail (RMG) on the SME proposition.
e A consistent in-branch experience that supports businesses as priority
clients who are time poor.
e An online mails service to provide purchasing, administration support and
reporting to customers.
¢ Alink to market place accounts (e.g. Ebay) for SME's to upload their order
and shipping information. Therefore POL opportunities to develop
propositions in conjunction with key brands (notably Ebay) needs to be
pursued
¢ A chargeable collection service linked to the Drop and Go customer
account registration (this requires further testing).
¢ Tracking (or indeed special delivery/signed for). This also requires further
testing.
7. Implementation Plan
7.1. The following chart highlights the major strands of work to be undertaken and
broad timelines for delivery:
2015/16 2016/17
Mar-16
Drop & Go (Fix currentaccount top
PY ole Acco [up and account history)
In Branch [Drop & Go 2a (Improve existing in branch experience - Express drop off-linked to
On Line lonline mails and NW Extension Programme)
[Drop & Go 2b (Integrated to online mails programme -account administration and
[reporting functionality)
[Drop & Go price discounts/loyalty programme. Objective to incentivise volume
CRM/Loyalty Prog land reduce usage of competition
[eBay Joint proposition [eBay joint service roll-out (TBC)
development
[Collections- Trial (Test & Learn) [collections Roll-out
eBay
Value Added
Services [Trial reposition of signed for and special Frracking services
delivery v tracking services
T
as ae ee ae I
7.2. Fix and improve the Drop & Go (D&G) proposition:
. Build on the Phase 2 D&G fix work currently being undertaken by Kevin
Seller and the mails team.
e Identify the optimal D&G in-branch experience through a programme of test
and learn and roll out.
. Develop a commercial loyalty scheme to incentivise D&G customers to
send more items via the Post Office (volume based discounts/loyalty points
working with Royal Mail). POL need to continue work with Royal Mail
(RMG) to offer mails discounts for volume SME senders. Positive
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discussions are underway with RMG who are currently working through if
and how they can discount.
Improve data capture through D&G account registration to enhance
prospecting opportunity from POL.
Map the end to end operational and retail processes involved in processing
a D&G item and identify opportunities to become more efficient.
Develop a multi-channel journey and sales process — linking online mails
with D&G requirements. For example ensure online mails supports account
top-up, online purchase, integration with market place seller systems,
account reporting and historical transactions.
In all the above, continue to work closely with the IT Team, mindful of the
Towers replacement work and constraints around Horizon in 15/16.
Test and develop additional added value services:
Collections — building on Agency Network's pilot in Birmingham, more formal
pilots need to be undertaken to fully determine SME appetite and relevant price
points for this service. A relevant product owner in the mails team will lead the
work to understand current service tests including operational requirements,
customer needs, likely commercial model and benefits to both POL and Royal
Mail (RMG) of undertaking collections.
Tracking — review of current and potential tracking services with Royal Mail tied
to the development and launch of the online mails solution.
Ebay — a direct link with Ebay and pending workshops with their customer
insights and market development teams will be used as an opportunity to
explore marketplace seller capabilities. This would help inform the development
of D&G and value added services.
8. Financial Case
8.1.
8.2.
8.3.
The decline in the Post Office mails market share in the SME base is continuing
therefore “do nothing” is not an option. We know we have lost 5% market share
in this market in the last 10 months. If this trend continues the Post Office will
have lost around 250K SME customers by 2019 equating to £16m of
annualised income.
The table below produced by POL finance highlights the size of the prize
(income) by 2019 for every 1% improvement in retention.
SME Volumes
‘Annual Decline 2013 2014 2015 2016 2017 2018 2019 [Change in income to 2019
1% 925,000] 915,750] 906,593 897,527 888,551 879,666 870,860] =£3,599,702
2% 925,000] 906,500] 888,370 870,603 853,191] 836,127 819,404] “£7,022, 21,
3% 925,000] 897,250] 870,333 844,223 818,896 794,329) 70,499] -£10,274,310]
4% 925,000] 888,000] 852,480] 818,381 785,646 754,220 724,051 7£13,363,111
3% 925,000] 878,750] 834,813 793,072 753,418 715,747I 679,960] £16,295, 160]
Initial focus and investment needs to be in fixing the basics and test and learn
programmes. This will mean putting in place resource to run the projects with
clear ownership and accountability. £5m capex and £300k opex has been
SME Proposition Update Martin George Page 5 of 6
March 2015
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budgeted for this activity in 15/16 to be drawn down on a “case by case” basis
via the Transformation Management Group (TMG) to support the delivery of the
SME proposition.
9. Next Steps and resources needed
9.1. The SME vacancy in the mails team will be filled, with this role accountable for
working across the various programmes touching SME's - network
access/extension, online mails, and collection trials. This role will continue to
ensure all SME activity being undertaken by POL remains aligned.
9.2. Business cases will be built for each of the elements identified in section 8 with
specific requests made for draw down on a “case by case” basis. At this stage
the proposal is to ring-fence £5m capex budget for 15/16 in anticipation of the
national roll-out of concepts discussed in this paper. Full business cases will be
developed and submitted on a “case by case” basis through the Transformation
Management Group (TMG).
9.3. At this stage, to support the set-up and management of the field tests for
collections, detailed customer experience journey mapping and testing of a
loyalty scheme £200k will be requested to be made available (from the £300k
opex budget put aside for SME in 15/16). Approval for this budget will now be
sought via the Transformation Management Group (TMG).
SME Proposition Update Martin George Page 6 of 6
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Group Executive (GE)
March 2015
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Executive Summary Ea
POL are losing market share in the SME mails market to My Hermes and Collect Plus with
an estimated 5% share loss in the past 10 months alone. If this trend continues by 2019
POL will have lost around 250k SME customers (£16m annualised revenue).
To arrest this decline, work has been undertaken to shape a new POL SME proposition:
* Over 100 interviews with SME's
* Ideas generated were grouped and clustered based on SME segment needs with
mails and financial services viewed as the most credible areas for the proposition in
the form of a loyalty or subscription service
Final round of research was undertaken in February 2015 with the core aim of determining
the proposition appeal and to prioritise features and benefits
The research conclusions help shape the core focus areas for POL for 15/16:
° Fix the basics in the mails proposition. Without this anything offering from POL
beyond mails lacks credibility (and currently would only appeal to around 3 out of 10
SME's)
* Primary focus areas for fixing the basics in mails are improving the current “Drop &
Go” offering, work to improve pricing with Royal Mail (RMG), test collections, work
with RMG to improve tracking and take proposition discussions with Ebay to the next
level
It is recommended that the £5.3m set aside for SME in 15/16 (of which £5m is capex) is
approved on a “case by case” basis through the Transformation Management Group
(TMG)
(>
Post Office® ear,
CONFIDENTIAL
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Background: Post Office is losing SME parcel business to
competitors at current rate this will equal £16m in lost income
annually by 2019
Overall Post Office parcels only customer numbers
+ The figures are estimated based on
existing knowledge of SMEs
+ This trend is indicative of the decline
seen in Post Office
~~
Currentyas is
98 level: 925k
898k
889k 880k
£2.88m revenue lost in
2019, from the 45k
customers who currently
spend an average £64 pa
5% decline
As seen in the last 10
months to competitor only
users
2013 2014 2015 2016 2017 2018 2019
5% decline of SME
Baseline of current ed 1% decline of SME
customer base
SME parcel users customer base
* Currently, 19% of all UK micro SMEs
(925,000) interact with the Post Office
* Overall market share is declining by ~1%
but amongst online sellers it has declined
5% in 10 months
* On average SMEs are sending 25 parcels
a week
* — In the last 10 months we have lost 5%
market share from Post Office only SMEs
(19%) to competitor only (24%)
* SMEs that are very satisfied (TB) with
competitors (MyHermes 42%) is higher
than Post Office (20%)
Doing nothing to address this
decline is not an option. We need to
re-engage SMEs on a level where
we have the “right to play” (Mails)
and develop credible business
services over time. There is no
silver bullet
Post Office® I Source: Project: Online sellers — Wave 3, Optimisa Research, (Sept 2013 & Aug 2014)
CONFIDENTIAL Internal Post Office SME research 2014
©)
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Competition for SME parcels lies in both changes current
competitors are making and new tech start-up mails businesses
FLEXIBLE SENDING — DROP OFF POINTS FULFILMENT
Traditional competitors Traditional competitors
FIND A PARCELSHOP FULFILMENT
*vamazon
ed
have expanded into
full logistics and
fulfilment services
that are available to
businesses of all
size, on a pay as you
go basis
Reinvented their traditional
catalogue order business,
now focussing on
collections and also offering
drop-offs at ParcelShops or ©
Parcel Lockers, with a large ~
range of options in all
central locations, and a
core focus on SMEs
collect# Our services Patveiellvery:
have reinvented the en yar coh wom your toed Conc sexe oe arse are progressing
traditional Post Office a Cc within this market
within your local shop, = 7 by acting as a
using the space to @ @ fo] : Mails aggregator
serve customers drop " @=-= emer and offering foe “ar
off, pick up and returns Ge=~- . specialised ==
needs. With a key services for large Peres
focus on returns TS ecomm platforms ais
©
Post Office®
CONFIDENTIAL
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Our work revealed that there are 4.7 million micro SME’s °
(representing 95% of all SME’s) in the UK, which we segmented
into three groups based on attitude to growth and life stage
ATTITUDE TO GROWTH
Individuals that have made the
decision to set up in business, are in
the process of setting up or have
recently set up
AVERAGE TURNOVER
£100,000 for year one
AGE OF BUSINESS
Two years or less
PezeorsecueT
Approximately 500,000 start-ups each
year
I ATTITUDE TO GROWTH
Owner managed business with little
aspiration to grow above levels that
maintain their relative position in the
market
I AVERAGE TURNOVER
£300,000
I AGE OF BUSINESS
Two years or more
Poet
Roughly 2.5 million
ATTITUDE TO GROWTH
Owner managed businesses with the
ambition to grow above the levels that
maintain their relative position in the
market
AVERAGE TURNOVER
£900,000
AGE OF BUSINESS
Two years or more
[scorn _—_
Roughly 500,000
Post Office®
CONFIDENTIAL
©)
Source: Segmentation and associated data based on Business Link Segmentation Model, 2006, updated 2010, Lastdropofink 2012
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We co-created an SME proposition with internal teams and over
110 SME customers
POST OFFICE
EXTERNAL
EXPERTS TEAM
ME TEA\
G RO SME TEAM DEPTH INTERVIEWS CO-CREATION
MAILS
a : i ay)
Tr Clarke- Rebe Gl
Walter ————Corounder Lixx FINANCIAL SERVICES pens
MD EMEA Firserv Fix “ ~
MARKETING tl
Interviews across segments to Co-creation sessions to
i identify needs, frustrations, generate new ideas and build
i DIGITAL attitudes and behaviours on initial features
DIGITAL EXPERIENCE PHYSICAL EXPERIENCE
TESTING TESTING
-_—
i INSURANCE = Pos
i =o~ '
I NETWORK =
sa Nichoiag sweet” a — * ; : °
Rory O'Connor Chairman of Mail INTERNAL POST Testing and iterating the core Physical experience testing for
Founder of Scurri Carrier's OFFICE TEAM digital features of the specific SME ambassador
Association proposition features
(6)
LY)
Robin Mackenzie ~~~" Kevin Gillett
Former marketing Former MD LT
Director at BT Business Banking
spovenne ASIA SS ona ns ee ROSS. ~
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The customer needs analysis work demonstrated that SME °
customers expect a core service they can trust but want services
that help them ‘win’
LEVEL OF DIFFERENTIATION
‘HELP ME WIN’
Help all SMEs reach
Start-ups want guidance on how to get
up and running in an affordable way
WHAT their goals and I * Lifestyle want to maintain their brand
SMEs ambitions for their reputation in the minds of customers
WANT DUS ESS ena Growth wants help driving operational
ups to Growth _ .
efficiency and exploring ways to expand
START UP IFESTYLE GROWTH * Start-ups need services that meet their
basic needs, at an affordable price
WHAT at MNase vee 'T ; ‘GIVE We AcK I * Lifestyle require simple services that
THEY cosTs SIMPLE FOR ME’ TIM reassure them and fit into their schedule
NEED Li an .
+ Growth require simple, efficient
\ Za t H processes that allow them to focus on
\ a I their core business
we oy i ; * All segments want core services the’
THEY I ] ‘Do the basic stuff well, every time’ 9 f ‘ y
EXPECT SE can trust to deliver every time
we
(7)
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100+ ideas were identified, grouped into 15 potential opportunity °
areas and mapped against capabilities, time to deliver and market
size
Very strong fit
Accessibility Improving
Brand stretch branches > Government © Mails
Capability fit services
Risk -
Right to play Logistics Financial services
Market size
: Utilities
Co-working “oe (Broadband/mobile)
dvice a Networking £10 bn +
Training and
Workshops od Online community
Set-up covatt £1-9 bn
services oyally
Community @ Ge a @ £100m- 1 bn
crowd funding Uulities @ POL Promotions cane
uncertain
@ Incubator
No fit
3 yrs + 2-3 yrs 1-2 yrs 6 mth—1 yr Quick win
Time to deliver
(e»
Post Office® k= For more information: Appendix YY
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Initial research indicated a subscription service providing access to a
comprehensive set of features that allow SMEs to run and develop their
business was appealing
The mails subscription provides all core features SMEs require, including:
(1) Unique features that differentiate Post Office from our competitors
(2) Additional bolt on features to meet all SME needs
Mails subscription SME Ambassador features
‘SME MAILS ACCOUNT SME AMBASSADOR
A single SME account paid by monthly subscription ‘Additional features, accessible as part of the subscription,
Small business Team sme
that help SME's develop their business
Customised > Flexible shipment
: packaging methods hub advisor
Pre-Shipment Tracking -Co-working Funding
preparation options space ( finder
ADDITIONAL FEATURES Business.
Features that can be accessed at an additional charge ‘ analytics _
i neG Ambassador features provide additional services that:
Collection options \ (1) SME's can use to make the most of their account
4 :
(2) Help SME's reach their business ambitions
‘Simple banking can be added allowing
everything to be managed in one place
(9 \
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The SME proposition was put into a final stage of research with a °
number of key objectives
Key Objectives Approach
Understand proposition appeal {I 750 x 20 minute online
interviews amongst small
businesses:
* <10 employees
Prioritise additional * Key decision makers
added-value features
Assess monthly pricing/
discounts
* Must send parcels
©)
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CONFIDENTIAL
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Key findings: The proposition needs to initially be simple and focussed on °
mails. Until the core mails offering is fixed there was low consideration for Ea
non-mail features
* Key findings overall on the proposition were:
¢ In mails, domestic tracking and collection services perform strongest in terms
of stated impact on consideration
° Mails related features (domestic tracking, collection services and customised
packaging) also rank highest when looking at impact on consideration and
willingness to pay in combination
¢ Less additional impact “reach” is gained when bundling non-mails features
with mails at this stage (driven by SME’s desire for POL’s core mails service to
improve)
In short: Fix the basics on mails first
@)
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Key findings: Mails related features perform most strongly for °
SME’s when looking at impact on consideration and willingness to
pay in combination
Value Index
Parcel collection service
Domestic tracking Ca 130
Customised packaging Ce 121
Payment acceptance services 97
145
SME advisor 82
Business Analytics 80 PASS
Funding Finder 74 LEESON
Business Hub 71 PacaacouusI
< L Willingness to pay H »
@)
Post Office®
CONFIDENTIAL S4Q4, S4Q5, Base: Total sample : 750
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Research findings: Domestic tracking is the most appealing feature, °
customised packaging is the weakest. Collections was the most likely
feature that customers would be willing to pay extra for
Likelihood to consider proposition — by additional feature
44%
36% aoe Oren. i 37%
31% oe “-®
ee @-- ween
@ ~~ ge
28% 25% ~#--8-10
Unbranded base Branded base line Customised parcel Range of sending Domestic tracking} Collection service
line proposition proposition packaging options
1
Of those likely to consider: i
58% would be willing to pay 20p per parcel tp
i
H
H
!
53% would be willing to pay 50p per parcel
44% would be willing to pay £1 per parcel
Post Office®
CONFIDENTIAL S3Q1, S4Q1, S4Q2, S4Q3, S4Q3B Base: Total sample : 750
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Key findings: For SME’s to commit to any form of subscription service
they need to see immediate value to justify the cost and commitment
Period comfortable to committing to , Proportion of parcels likely to send
for subscription service —- amongst i through service - amongst those likely
those likely to consider i to consider
Se
24 100% CZ 52
1 month % i of parcels ne %
<>
48 75% SS 29
2-3 months of parcels we %
18 ! 50% <4
5 OWN
Over 6 months 6% i nove & 3%
i i of parcels vw 8
(14)
Nea
Post Office®
CONFIDENTIAL S3Q2, S3Q5 Base: Those likely to consider (213)
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Key findings: Around 6 out of 10 SME’s would be very or fairly °
interested if a points-based loyalty scheme was launched by Post
Office
Interest in a points based loyalty scheme for mails
Post Office is exploring the idea of a
loyalty programme that could operate
much the same way as any other points-
based loyalty scheme.
mVery interested
w Fairly interested
After registering, every time you sent a
parcel using your Post Office account you
would collect points. These would then = Neither
add up to provide discounts on future
parcel postage spend. Different points
would be applied, depending on the =Fairly
service used and the cost of the parcels uninterested
you have sent.
mVery
The scheme would be focused on offering uninterested
you volume based loyalty benefits to use
towards your future parcel needs rather
than offering you non-related things like
high street vouchers.
m=DK
®
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CONFIDENTIAL
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Key findings: 3 out of 10 SME’s would consider a broader subscription °
based service from POL at this stage. This would likely increase if
POL improve its core mails offering
Likelihood to consider overall subscription proposition
Likely to consider — top
5 reasons:
Unlikely to consider - top
5 reasons:
Don’t send enough }
matol0 I WH Unpredictable i
I ee parcel send i
Kite Cost effective
pekee §=Good idea
Efficient/
PEA convenient
m5 to7
Happy with current
mito4
Like it - want
more info. arrangement
Don’t want to
9% Easy commit
Post Office®
CONFIDENTIAL S3Q1 Base: Total sample (750), S3Q2 Base: Likely to consider (213), Unlikely to consider (207)
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Overall research conclusions Ea
* Provide a simple and focussed mails proposition - this research confirms that
propositions aimed at SMEs need to stay simple and focussed, in this case on
mails — it’s an area of strength and where the Post Office have most credibility and
permission to play.
* Develop a mails based loyalty scheme - the idea of a loyalty style proposition
seems to have traction and could negate some of the objections to a subscription
service. Potential impact on retention/win back and parcel behaviour needs to be
explored in more detail to make a more balanced assessment
« Additional non mails services are of interest but only once the core SME mails
proposition from POL is improved. This should therefore not be the primary focus for
15/16
@)
Post Office®
CONFIDENTIAL
Recommendations & Next steps
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* Focus effort and investment in 15/16 on strengthening the core SME mails proposition ahead of any
development of wider non-mails subscription services in 16/17
+ We must develop a basic but consistent and efficient multi-channel SME service for mails in 15/16 bundling the
following areas:
Drop & Go — an improved account facility linked to online mails
An online mails service to provide purchasing, administration, support and reporting to customers
Volume/value based pricing/loyalty programme following continuing positive engagement with Royal Mail
(RMG) on the SME proposition.
Delivery of a consistent in-branch experience that supports businesses as priority clients who are time
poor
A chargeable collections service linked to the Drop & Go customer account registration (this requires
further testing)
Tracking (or indeed special delivery/signed for). This also requires further testing
Link to market place accounts (e.g. Ebay) to upload order and shipping information.
* The SME vacancy in the mails team will be filled with this role accountable for working across the various
programmes touching SME’s
+ Business cases will be built for each of the elements in the proposition outlined above with specific requests
for a draw down of the £5.3m (£5m capex, £0.3m opex) on a “case by case” basis via the Transformation
Management Group (TMG):
Each request to be backed up by its own clear and robust business case
Post Office®
CONFIDENTIAL
(48 \
@)
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Implementation Plan
2015/16 2016/17
Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16
Drop & Go 1 (Fix current account top
DROP & GO up and account history)
In Branch Drop & Go 2a (Improve existing in branch experience - Express drop off - linked to
online mails and NW Extension Programme)
I I I I
Drop & Go 2b (Integrated to online mails programme - account administration and =
reporting functionality)
Drop & Go price discounts/loyalty programme. Objective to incentivise volume =>
and reduce usage of competition
eBay - Joint proposition eBay joint service roll-out (TBC) =>
development
Collections - Trial (Test & Learn) Collections Roll-out =>
Value Added
Services Trial reposition of signed for and special Tracking services eee
delivery v tracking services
©
Post Office®
CONFIDENTIAL
Financial Case
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The table below produced by POL finance highlights the size of the prize (income)
by 2019 for every 1% improvement in retention.
SME Volumes
Annual Decline 2013 2014 2015 2016 2017 2018 2019 Change in Income to 2019
1% 925,000 915,750) 906,593) 897,527I 888,551) 879,666) 870,869) -£3,599,702
2% 925,000 906,500} 888,370) 870,603 853,191) 836,127 819,404) -£7,022,121
3% 925,000 897,250) 870,333) 844,223 818,896) 794,329 770,499} -£10,274,310
4% 925,000 888,000) 852,480 818,381 785,646 754,220 724,051) -£13,363,111)
5% 925,000 878,750) 834,813) 793,072 753,418} 715,747 679,960) -£16,295,160)
(20)
Post Office® Nar
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POST OFFICE LTD GROUP EXECUTIVE
Digital Update
1. Purpose
The purpose of this paper is to:
1.1. Update the Group Executive on the proposed activity and funding required to
accelerate growth in digital sales.
1.2. Seek additional funding for 2015/16 in line with this ambition.
2. Background
2.1. At the January Executive Committee we outlined the actions that were in plan to
increase income generated via digital channels from c3% in 2014/15 to 5% in
2015/15 and described our ambition to achieve 25% (£250m) in 2019/20.
2.2. The plan showed a balanced growth plan for online income in all pillars, with the
significant growth towards the latter years of the plan. Exco challenged what it
would take to bring forward the significant increase in the contribution of digital,
and specifically in the Financial Services pillar.
2.3. Since that time we have evaluated the opportunities by product, developed a
detailed plan in Financial Services, and sense checked whether there are also
additional significant opportunities outside of the FS pillar.
2.4.We have also worked to ensure that the plan is deliverable, reviewing the
operating model required to deliver the desired outcome, as well as the
relationship between the digital acceleration plan and delivery of the Front Office
tower and other business transformation initiatives.
2.5. We have also sought to explain what is already assumed within the baseline cost
and revenue profile, in order to describe the incremental costs and revenue
associated with this proposal. This work will be finalised over the next two weeks.
3. The opportunity and need for digital acceleration
3.1. Opportunity - In detailing this plan, we looked at the capabilities of a world-class
multi-channel retailer, and how these relate to our goal of transforming the Post
Office. In doing this we aim to exploit the key benefits of digital, including lower
cost to acquire and service, ability to scale economically, data driven product
development, data driven communications to drive cross-sell and up-sell, and
speed and ease of entry to markets. As well as increasing sales revenue, our
digital programme will also create a data asset for future exploitation and
monetisation, supporting our ambition to move our interactions with customers
from being transactional to relationship based.
3.2. Comparing our current channel performance with external industry benchmarks
shows significant opportunity to increase income through digital channels via an
immediate programme of ‘fix the basics’, while setting a platform for future growth
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within and outside of FS. As an example, our conversion rate on Instant Saver
from application start to submission is 23%, compared to an industry benchmark of
62%. An investment case to improve the sales funnel has been built based on
achieving realistic conversion levels.
3.3. Customer — customers’ expectations of online banking capability have risen
significantly in recent years. An easy to use, end-to-end application process,
available on any device and an online servicing portal giving access to all
customer holdings is a minimum set of expectations. Failure to provide a fit for
purpose online service to customers and prospects will impact our credibility as a
challenger in banking and hence our ability to grow our revenues and retain
existing customers
4. Proposal
4.1. Focussing on FS products, and working closely with the Post Office Money team,
the first stage of digital acceleration seeks to deliver the basic capabilities required
to maximise sales revenue. As well as providing an uplift in product sales, this also
sets the foundations for other products and propositions by establishing ownership
of the experience and customer data. As we lack many of the basics required to
meet our customers’ expectations, investment is required before we can realise
the full benefits and any short term gains are limited.
4.2. We will improve the customer journey to fix our sales ‘funnel’. In 2015/16 we will
focus on greater understanding and optimisation of our website, ensuring more
customers apply online. Alongside this, we will redevelop the application process
across savings, insurance, loans, mortgages and credit cards to deliver increased
conversion of visitors to sales. We will build and host product application journeys
on our Common Digital Platform (CDP). We will not just link to our third party
product providers as we have done in the past. This approach gives us greater
ownership of customer data - a key lever for competitive advantage and future
growth. This is a significant change in the way we operate and the approach and
prioritisation needs to be agreed with third parties including Bank of Ireland. We
have already begun work to define this new customer journey for our loans
product. Our delivery plan has been built to align with delivery of the Front Office
tower; this ensures maximum return with lowest risk of ‘throw-away’ build. We will
also provide ‘live chat’ help across the journey to drive more customers to
completion.
4.3. We will seek to develop these customer journeys to be available in all channels,
not just online. This will ensure that the benefits of quicker, paperless processing
are available in branches and contact centres, as well as direct to customers.
4.4. We will increase and focus our marketing spend — once we have a more effective
sales funnel, we can flex our marketing spend more cost-effectively, delivering
more prospects to the website and driving more sales.
4.5. We will deliver ‘My Account’ capability — this will give customers a single entry
point to their Post Office accounts. In the first instance we will enable this for FS
and Telco, but in a way that scales easily to all other products. MyAccount will
deliver intelligent marketing messages to customers to drive cross-sell.
Personalised messaging within MyAccount and a simple application process will
deliver significant revenue through increased cross product holdings at low cost of
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sale. Our plan has been built alongside the Customer Management Programme,
ensuring that the two sets of deliverables work to a single common vision.
4.6. These core capabilities give us the digital and data assets on which to build digital
propositions in the medium term. A description of potential propositions is outlined
in slide 13 of the accompanying presentation.
4.7. These capabilities also give us the foundation to fulfil our digital ambitions in other
pillars. In Telco, we will apply a similar improvement to the application journey,
with an improved journey to be introduced in Q2 2015. In mails, we will develop an
online proposition in line with the strategy work currently under way. In
Government Services, our next stage will include delivery of an in-branch digital
application for passports and develop a proposition that will enable us to bring
value to both ourselves and Government and build on the potential competitive
advantages our IDA service brings.
5. Financial case
5.1. The business case for investment in the digital capability is based on increasing
the number of online sales, using current income factors. Taking today’s
performance as the baseline, for a total incremental investment of £36m
(comprising £18.3m IT spend and £15.6m implementation costs, and £2.3m
marketing investment) over the next five years, the programme expects to deliver
£106.5m income over the 5 years. These figures are outline costs and a full
business case including capitalisation and exceptionalisation will be produced as
part of the next stage. Work is underway to ensure alignment with current FS
revenue growth and cost plans and an update will be brought to the Group
Executive with this paper.
5.2. A number of other benefits will be realised, but these have not yet been factored
into the current financial case. As an example, incremental channel switch from
branch to online would not realise a lower cost of sale until the Financial Specialist
population in the Crown network reaches full utilisation. We do recognise that a
switch from sales in the agency network to online will reduce the cost of sale due
to reduced agent commission.
5.3. The full business case, including phasing and 2015/16 draw down will be brought
to the Transformation Committee for approval.
6. Delivering the capability
6.1. In order to deliver the acceleration plan, a step change in organisational digital
capability is required. As the Post Office is digitally immature, three actions are
recommended to increase capability and move towards digital maturity.
6.2. We propose to immediately create a single Digital Programme Office (DPO) to
oversee all digital initiatives to bring programme discipline, consistency, standards
and principles to existing digital projects. Focussed on ensuring better co-
ordination and optimisation of delivery, this requires two additional FTE
(incremental to current plan). This resource will be aligned to the Business
Transformation governance.
6.3. Alongside this, we must build out the current Digital team to create a Digital Centre
of Excellence (CoE) to set and execute the digital strategy across the organisation,
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develop a consistent digital customer experience, embed digital principles,
processes and standards, and develop and prioritise the digital capability
roadmap. Whereas the DPO will initially act as a delivery ‘wrapper’ around all
projects, the CoE will define and deliver the new digital capabilities. They will
ensure that full benefits of digital capabilities are realised, and bring innovation and
pace into digital proposition development. Estimates are that an additional 2 FTE
will be needed, but these will be fully evaluated in line with agreed development.
We are working with Bank of Ireland to understand what resource, skills and
experience can be leveraged within the CoE. All resource models are built on an
assumption of minimum permanent staff, scaled up with agency/contract staff.
Once established, the CoE will absorb the DPO.
6.4. Thirdly, we propose to create a Digital Leadership Programme to build digital
understanding and behaviours at all levels. This programme would embed a
‘digital first’ approach, communicate the digital vision, and build a culture which is
agile, customer obsessed, innovative and responsive. Resource would be
provided from the Digital CoE, but would need additional funding for training, etc.
6.5. To gain the maximum benefit, mobilisation of all three workstreams needs to take
place immediately, although full accountability for digital delivery should only move
to the CoE once the operating model has been defined and the resource is in
place. Trying to move to this immediately will slow development down as
responsibilities and working practices need to be appropriately defined. Work is
under way to define the detailed processes and ways of working needed to
operate this model effectively.
7. Key dependency — data and analytics
7.1. The Data & Analytics programme has a key role to play in the success of the
digital programme. It needs to provide the analytics and decisioning capability to
drive the appropriate targeting and communications. It will also need to provide the
insights that close the loop on test and learn developments of the digital platform.
8. Key risks
8.1. Organisational change requirement: There is significant risk that return on
investment will not be achieved if activities are delivered within existing processes.
Realisation of benefit assumes the adoption of the recommendations for
operational change put forward in this paper.
8.2. Marketing effectiveness: There is a risk that online marketing, given the variability
of impact and cost due to competitor activity and changes in market conditions,
does not drive consistent and high growth in site visits. This will be mitigated by
the marketing team conducting regular assessment of forecasts and investment
requirements to deliver the most effective return.
8.3. Partner ability to handle increased volumes: Benefits are based on increasing
volumes of product sales that may not be legally or operationally feasible.
Forecasts have been tested with product leads. As part of the next stage,
confirmation from partners is required on the feasibility of processing and
supporting sales. In particular, BOI product volumes need to be fully assessed
against bank regulatory rules (i.e. lending ratios).
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March 2015 I Page 4 of 6
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8.4. Sales attribution: The model is focused on online vs. branch impact and does not
reflect multi-channel sales attribution. An effective sales attribution strategy is a
pre-requisite of successful multi-channel retail. The Post Office must ensure that
increased online sales are also a win for agents. A proposal will be developed by
the CoE once in place.
8.5. Front office linkage: There is a risk that investment is more ‘throw-away’ than
anticipated due to lack of compatibility with Front Office supplier solutions.
Mitigated through close working with IT and the preferred supplier pre-contract
award to ensure compatibility/alignment and agree migration as part of scope.
8.6. Technical feasibility: The aspiration assumes that data and connections are
available to and from all third parties. This feasibility study needs to be worked
through in detail.
9. Network impact and cost of sale
9.1. The business case includes an initial working assumption that 20% of the ‘new’
digital volume is as a result of cannibalisation of existing channels, assuming that
the main growth comes from better conversion and customers already looking for
products online. Modelling this 20% against current sales in agency branches
shows a negligible impact per branch. A product by product evaluation will be
conducted as part of the full business case development.
9.2. The cost of sale benefit is also not currently factored into the overall business case
at this stage, although it is clear that direct business online will have a lower cost
of sale as a result of not having to pay agents. The full impact of this will be
modelled into the final business case.
10. Next steps
10.1. The case has been aligned to the business transformation plans. A request for
funding will be taken to the Transformation Management Group in March.
10.2. Work is already underway to improve the website with a target of Q2 for the next
set of design changes. We have started the redesign of the personal loans
application form; this will set the standard for all our online applications.
10.3. We will require £100k to finalise the business case and mobilise on our initiative to
fix the sales funnels. This will complete the detailed business case and clarify the
dependencies on operating model change.
10.4. We must gain agreement with third party providers to Post Office hosting the
application processes and still satisfying information security and data. We have
started this discussion with Bank of Ireland.
11. Recommendations
11.1. Group Executive is asked to sanction the approach proposed, agree to the next
stage of organisational design and agree that the plan should go forward to
Transformation Committee for next stage funding.
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March 2015 I Page 5 of 6
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Martin George
March 2015
Digital Update I Martin George
March 2015 I Page 6 of 6
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Digital Acceleration
Challenge
12 March 2015
GE presentation
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At the January ExCo you asked what it would take to...
¢ Turbocharge the growth of digital revenues with a focus on Financial Services
¢ Do this in a way that creates a platform for building Post Office into a competitive
multi-channel retailer
* Successfully deliver this at an accelerated pace
* This deck describes:
* Progress and Plan
* Our approach in summary
* Opportunity and need — The WHY
* Proposal — The WHAT
+ Proposal — The HOW
* Business case
* Risks
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Plan for investment approval
Date Plan Request
Seek approval of approach and drawdown of
£100K (subject to GE approval)
Endorse the approach taken so far and confirm
approach for business case development
Full investment in recommended options
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The summary of our approach
Accelerate Financial Services revenues
+ Short term focus on broken FS funnel: attack headroom to
benchmark - attraction and conversion
+ Build capability that enables us to own the customer relationship
and realise cross-sell benefits within FS and from other pillars MAILS
Progressively build capability to support digital and multichannel
maturity
+ Delivery and operating model — pragmatic but scalable
+ Commercial platform from which to open up new revenue streams
DIGITAL
POST
OFFICE
Provide foundation for digital ambition of other pillars and future cross-
pillar proposition development
+ Mails — Align digital to strategy in progress GOVERNMENT TELECOMS
+ Government — Develop holistic proposition including IDA
+ Telecoms — Align to strategy. Deliver sales/cross-sales. Channel
shift in service.
Why Post Office MUST do it now
Threat and opportunity
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The competitive threat
. Post Office faces focused digital competition in all pillars
+ Competitors are developing digital capabilities at pace
. The financial services market in particular has big
ambition and deep pockets
+ Competing with our partners to own the customer
. Government services going online
. Royal Mail seeking to own the online mails customer
The competitive opportunity
. Digital leadership in Post Office markets is not yet
established — still very siloed with legacy systems and
service issues
. Post Office assets of branch, range, brand, trust and
customer are differentiating
The time is now
* — The digitally literate customer will not wait— customers
are migrating behaviour online and Post Office needs to
own and retain it’s customer base
Own your customer — before someone else does
1.4m
visit myHermes every
week (a 40%
increase since late
[soul ei}
ZO EB «=
-. 2 Fe City Linke
sT@ 0
O=2 — vopn io
44%
Talk Talk Group
sales through
online channels —
up from 33% on
the previous year
Cacksrourd)
Opportunity
Proposal
Business
case
July)
O vodafone” “=myHermes
GO BH Lloyds Digital by Default
verizon
29 HIRBS br
(¢) TESCO Bank me
——
of digital consumers ee Home Office decline in road tax
regularly use online applications in
financial services tools branch
in 14-15
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Why Post Office CAN do it now .
What’s different within the Post Office
* Aclear vision for the role of digital across the organisation
+ Moving from transactions to enduring and profitable relationships
* Differentiating on service; actively gathering and using data; and using nay,
network as a bridge to multichannel relationships
* Other initiatives within Post Office in alignment
+ Business Transformation setting agenda for change
* Complements and builds on Front Office capabilities Data that
* Digital is a requirement if PO growth plans are to be achieved a eet
* Arobust plan for driving digital revenue and ROI
* Getting Financial Services to benchmark performance to add revenue
while building wider PO capability and differentiating service propositions —
that will benefit FS and other pillars Source: PO Omni-Channel Vision,
Transform, June 2014
¢ Aclear understanding of the organisational change required
« Wrapping immediate projects into programme discipline while building a
digital capability with the skills and authority to deliver
* Getting the ‘how’ right will drive the success (or otherwise) of the ‘what’
This plan
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The activity proposed here will fix some key basics
and build the foundation for the future
Mails, Government and Telecoms
digital execution — sales and service
foundations to own
wider customer
relationship
* Phase 2:
Build cross-pillar and
new commercial
propositions for Post
Office
The digi i ( ‘
gital acceleration i PHASE 1 : PHASE 2
plan has two phases: 4 1
Phase 1 H Fix the FS funnel — application t Beat the penehmark -FS dial
* Fhase 7: i process t products and service capability
Fix the sales funnel; i Cross pillar cross sell to FS i Cross pillar propositions
drive cross sales and ' H é i
. i Foundations ~ own the H New commercial propositions
put in place i customer relationship t prep “
i H
i H
i i
. r
i
i Channel Shift cost savings
Focus for today’s Digital Revenues across pillars
presentation New digital revenue streams
DIGITAL MATURI
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The WHAT: Phase 1a: Fix the FS conversion funnel
THE PROBLEM SOLUTION BENEFIT
Across many products we are lagging behind Bring PO up to benchmark quality at each Success in increasing credit card
market benchmark for online conversion stage of customer journey/funnel application conversion from 9% to 22%
demonstrates effectiveness of this approach
eg.
Instant
—_ SHAE ne neund Increase visits to the FS pages
Saver SEO and PPC activity
Improving CX, product discovery and
——> _ effectiveness of PO website: Website Increase application starts in FS
design, research tools and live chat
98% rT
drop out M Build optimised application Increase sales completions; PLUS
f ft a 5 processes on CDP- Control consistent capture data via CDP to enable
: design, pre-fill and pre-eligibility. greater ownership of the customer
23% ° Activation, not application. relationship (see next slide)
drop out
a Platform agnostic processes to ensure applications are optimised for branch and mobile
Full product summaries available in See supporting document Pr
oe . ct Charters that describe scope of
supporting information deliverables, products
Product summary — potential benefit from
conversion improvements
Current performance Future performance
App
starts
Mortgages*
Credit Card
Online Saver
Instant Saver
Reward Saver
Premier Cash
ISA
Fixed rate ISA
Motor
Insurance
Term Life
*Mortgage application uplift attributed to planned FS activity, not Digital investme:
Visits
1.3m
04m
1.6m
0.5m
0.4m
1m
0.7m
04m
0.02m
App
starts
2%
39%
12%
2%
3%
12%
16%
12%
26%
App
completion
5%
22%
51%
23%
24%
20%
27%
2%
6%
Visits
uplift
(SEO &
PPC)
10%
10%
10%
10%
10%
10%
10%
3%
39%
12%
5%
5%
12%
16%
App
completion
33%
60%
52%
62%
62%
52%
52%
18%
18%
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Potential additional revenue
2015/16 2016/17 2017/18 2018/19 2019/20
£2,424,632 £7,610,274 £9,768,442 £12,519,742 £16,024,535
£163,640 £1,369,976 £1,874,466 £2,533,861 £3,392,397
£502,216 £806,553 £1,217,227 £1,766,270 £2,494,781
£168,119 £401,179 £513,940 £657,551 £840,330
£142,246 £373,922 £483,226 £623,028 £801,640
£367,221 £1,265,731 £1,668,978 £2,189,260 £2,859,116
£83,859 £473,230 £639,543 £856,064 £1,137,021
£178,361 £461,195 £530,375 £609,931 £701,421
£28,877 £83,021 £95,474 £109,795 += £126,265 a
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Example user experience improvement — loans
Actual screens to be demonstrated at GE
Current form is functional, unattractive and Proposed design is more contemporary,
not optimised for today’s devices easier to use and adaptive to device
mu @ Money
ES Personal loan apptication
Personal Loan Application
=: 0-8 £ re
‘Lboan Details 2. Personal Details 3. Contact Details 4. Financial Details, $. Submit
° : Need help?
eyo hove ay County Cure damn ease WOK? Given One Personal Details Ses
‘What you will need Tale: Presse splat. ca
Ferns 0800 196 2000
vidi
rn fe at rn yrs Gender: C) ve O) Fenate
A ey a Soa
Dao ath
Maral satu
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The WHAT: Phase 1b: Own the customer relationship in
order to cross-sell
THE PROBLEM THE AMBITION SOLUTION BENEFIT
Losing sales opportunities at the
end of the funnel.
Owning very little customer data makes it
harder to Know who they are, what they
want and realise cross-sell opportunities
Capture and own data about customers
across all product pillars to offer
seamless servicing and the ability to
deliver targeted cross-sell in FS
Marketing.
v
MAILS
DIGITAL
GOVERNMENT TELECOMS
Build core capability to enable capture
and leverage of data that drives
customer relationships
Create a Single Customer View
(SCV)
Deliver PO My Account for all
products which provides customers
with a single view of their products
Next Best Action engine
integrated with SCV to deliver
targeted, relevant comms
Deliver eReceipts in branch
Ability to cross-sell in a relevant and
targeted way and a platform for new
propositions
Capture customer journey data
and use it to know your customer
across product and channel
Generate more data, improve
service to customers, and use it
as a platform for cross-sell.
Targeted, relevant messaging
sent to My Account and email
post sale to drive cross-sell
Capture customer email in branch
for cross-sell
The capabilities proposed in Phase 1 (a & b) will deliver the
kind of digital experience that customers expect
STAGES ie : Research a me :
a a ervicil
tomer visits website application Servicing Ongoing comms
Same content seen by all.
No personalisation even if
fmnd@)\iie Visitor has been before or is
an existing customer. Hard
to find product information.
Low level of decision support.
Inconsistent and poorly
designed application forms.
Same data required for new
and existing. No data retained
in Post Office.
Disjointed across products and
channels. Relationship held by
partners, not PO. Missed
opportunity to drive usage and
cross-sell.
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Irregular, impersonal
messaging based on blanket
segmentation with little
variation.
Not joined up across
channel.
+ Personalised
banners/content delivered
by intelligence/
knowledge.
* Product comparison tools
+ Data flows from and
through Post office data
repository to 3rd parties.
* Activation not application.
+ Comprehensive account
data and personalised
messaging/ cross-sell.
* Consistent cross-channel
journey
* Personalised, real time
trigger based messages
in all channels
«>
HSBC
a
HSBC customers are presented ;
with clear personalised up/cross-
sell messages based on user
an profiles
Lloyds single account portal
provides excellent targeted cross-
sell. Four clicks to open a new
gj account.
Barclays in branch self service I
; .
I delivers channel agnostic
service
is
Santander customers sent relevant ES
3" party offers based on
preferences via SMS directing
them to the app
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The WHAT: This plan will provide the foundation for Phase 2 that
enables new internal and cross pillar propositions and revenue growth
PHASE 2
PHASE 1
IN PILLAR GROWTH
Mails, Telco and
Government Services
can leverage and
support this capability
to enhance digital DieTAE
ae POST
propositions OFFICE
eo
NEW X-PILLAR AND COMMERCIAL
PROPOSITIONS*
‘Owning the customer’ will enable new revenue
generating propositions to be developed with greater
ROI and reduced time to market. Examples:
Local Post Office
Loyalty scheme Insight
Monetisation
{ Cross pillar My Account (and Single Sign On) I
Single customer view I
{ Optimised sales funnel and revenue base I
Successful delivery of phase one provides not just its own return on investment, but
also the option to invest in building truly differentiating Post Office propositions
se RTA
AS
*Full list of potential propositions and descriptions in Appendix
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The HOW: The Post Office needs to move to the next level of .
digital maturity
* Getting the ‘how’ right will drive the success (or otherwise) of the ‘what’
* Change will be required in order to ensure that proposed investment is managed effectively
* Post Office should wrap current and new digital projects into programme discipline while
building a digital capability with the skills and authority to deliver and ability to steer the
organisation’s culture and readiness to exploit the capability
There is a well-trodden path to digital maturity
Digital Centre of Excellence Digital capability
Dispersed ye Hub and spoke model
digital capability C
PO is here Not ready to move here yet
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We propose three concurrent streams of activity to ‘
deliver rapid development of digital capability
ae + Supports the product pillars to deliver digital channel objectives
Digital Centre of Excellence (CoE) pp product P ever aig opieci 7 Set up costs £250k
* Drive the execution of the PO digital strategy and deliver digital capabilities at pace Ongoing +£200k (2 FTE)
\ ts wid duct keti d + Lead digital customer experience across PO products Stage 2 proposition costs
FARR EE WIGEL PIORUEE Manenng alte + Needs more development groundwork before can start work one off in 15/16 £200k
business digital proposition community Included in business case
oe e + Accelerates delivery of existing projects without organisational restructure
Digital Programme Office (DP.
g 9 (DPO) + Brings programme discipline, consistency, standards and principles to digital projects Set up costs £100k
+ Builds experience, methodology and shared digital learning to accelerate new projects Ongoing costs £300k
. s - : Included in business case
Impacts immediate community associated, Establishes digital decision making at cross -pillar, company level
with project development
Set up : May 15 is
ital Leadership Prog! me + Programme of activities to build digital understanding and behaviours at all levels
+ Embedding ‘digital first’ approach One off costs c£400k
. woe . 15/16
* Communication of digital vision and principles £600k 16/17
Impacts the whole organisation from
senior leadership team outwards + Build culture which is agile, customer obsessed, innovative and responsive Included in business case
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Business Case: Phase 1 investment options are driven by °
whether to start before or after Front Office has taken on
CDP
SEO and paid marketing ' Vv -From 2015 t v - From 2017 v - From 2015
ft L
Website design, research tools and Live Chat { v - From 2015 t v - From 2017 v - From 2015
t
Optimised forms on CDP (pre-fill) ul v - From 2015 t v - From 2017 v - From 2015
Single Customer View I v - From 2015 HE v - From 2017
My Account and SSO i v - From 2015 i Vv - From 2017
Next Best Action ! v = From 2015 ' v - From 2017
eReceipts 1 v - In CMP plan [ v - From 2017
I
Phase 2 proposition development
. 1 Capex: £18.3m t Capex: £16.4m Capex: £4.3m
Cost over S years ((7 and Business) { Opex: 17.6m t Opex: 16.9m. Opex: 5.4m
t
Benefit (income) 5 years ; £106.8m ' £89m £36.2m
ROI5 years ' £71m — payback mid 2016/17 ! £56m — payback mid-2017/18 £26.6m — payback early 2016/17
t Li
H RECOMMENDED OPTION 1
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In recommended Option 1, investment required to deliver Front
Office components at an accelerated pace
+ The majority of capabilities in our plan are outside of FO scope and therefore require additional investment
+ FO dependencies within the plan have been developed withIT
+ The elements of FO that the plan is reliant on, and therefore would be built in advance, are highlighted in orange below
+ Itis assumed that migration costs of new capabilities will be minimised by agreeing schedules with the new FO supplier
2016/17 I 2017/18
Qi a2 3 a4 al Q2 Qa Qt Qh a2 Qs O4
t 155m : 1T-€3m
: 48 75m
es ‘Bs Edm Bus -£45m Bus - 3m
FO components that will be delivered
in advance ~ at additional cost
Data presentation and viewer
Build Single ae :
Build front end Asis ptovider/ All other capabilities outside FO scope
— i @ Some ‘via CDP ‘ ‘sardenpe ess dd more providers
eesne a eee All other capabilities outside FO scope
and Single Sign Fully SSO with
BOI DA?) :
bon Best Action —, pt tics Pq loregsare with SCM and My Account All outside FO scope (TBC)
ie a @ Dobe fules and comms
Agree product with i ct i
Prodectapp 2 Ps, pela rs Epo Bs BPM Tool (agree with partner to reduce risk of
Build insurance on COP Seca ‘on CDF Pa 2 component throw-away)
Receipts I, ba ‘ ¢ ponent All outside FO scope
ve i inadvance
optimisation & tools . : ry ‘nantal) All outside FO scope
t id tearm bs : digital investment i
Live Chat @ vo2tw: coe i a All outside FO scope
wero
— Full screen version on next slide
2015/16 2016/17 2017/18 >
Qi Q2 Q3 a4 Ql Q2 Q3 «64 al
ee .
I TT 468 75m fF £5.5m
== Bis -£4m Bus - £4 5m
Build Single
Baha ie View Build front Asis ptovider/
portal for business consurter via CDP Add more providers
> { Surface SCV via
My Account portal 1 My Account
and Single Sign On H
Next Best Action & cee _
wit partner
CDP
Build Insurance on CDP
eReceipts PLR Build on Horizon
t
optimisation & tools ,
& Tool and tam live
Live Chat
‘ '
* COP migrate
to FO
I 4
: +> Integrate with sc and My Account
eiaa & Define (ules and comms
'
Agree product with Build Loans, CC and
Product apps on & FO partner and buy @ Savings on > [ut remaining products on COP I
1
Rebyjild mortgages on CDP
'
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Q2 Q3 Qa
IT - £3m
Bus - £3m
& Fully $50 with
BOIIDA?)
®
®
¢
in-scope FO component
{no extra cost}
FO component
developed in advance
(extra cost}
New (incremental)
digital investment
Risks
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Organisational change requirement: Realisation of benefit assumes
the adoption of the recommendations for operational change put
forward in this paper.
Marketing effectiveness: There is a risk that online marketing, given
the variability of impact and cost due to competitor activityand
changes in market conditions, does not drive growth.
Partner ability to handle increased volumes: Benefits are based on
increasing volumes of product sales that may not belegally or
operationally feasible
Technology feasibility: Benefits assume that customer and account
data can be passed between Post Office and 3 party platforms.
Sales attribution: The model is focused on online vs. branch impact
and does not reflect multichannel sales attribution
Option 1 results in more throw-away investment than anticipated due to
lack of compatibility with FO supplier solutions
Costs may increase due to changes to the way service management
charges will be cross charged to projects
Proposed mitigation
See recommendations in ‘How’ section of this presentation. There is a
significant risk that return on investment will not be achieved if
activities are delivered within existing processes.
Marketing team to conduct regular assessment of forecastsand
investment requirements to deliver the most effective return.
Initial forecasts tested with product leads. As part of the next stage,
confirmation from partners is required on the feasibility of processing
and supporting sales. In particular, BOI product volumes.
Detailed work being carried out with 3° parties as part of the next
stage of work
Awell thought-out sales attribution strategy is a pre-requisite of
successful multi-channel retail. The Post Office must ensure that
increased online sales are also a win for agents.
Work closely with IT and the preferred supplier pre-contract award to
ensure compatibility/alignment and agree migration as part of scope
It is anticipated this will have a minor impact on overall costs.
Any changes will be identified and captured in the plan.
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POST OFFICE GROUP EXECUTIVE
NFSP Negotiating Approach & Mandate
March 2015
1. Purpose
The purpose of this paper is to:
1.1. Update the Post Office Group Executive (GE) on the current position of the NFSP.
Grant Agreement (GA)/NT cliff/Network Development (ND) discussions;
1.2. Identify options for approach to negotiation of the GA/NT cliff/ND scenarios
1.3. Gain the GE’s agreement for the mandate for negotiation with the NFSP on the
GAINT cliff/ND scenarios.
2. Background
2.1. We have reached a point where a formal mandate for the negotiations with NFSP is
now required in order to ensure these negotiations have clear parameters that take
account of the various business wide dependencies and risks.
2.2. We have made good progress in the last 12 months in achieving delivery of NT and
moving NFSP towards a position of supporting further business change including our
plans for Network Extension, in an environment where we have yet to sign the Grant
Agreement whilst maintaining our position of wanting to work collaboratively but only
in circumstances that are right for the business.
2.3. NFSP have been public in their support for generic business strategies, typified by the
messages contained in the recent publication of their Annual review:
. Post office network is changing, and ‘the majority of subpostmasters have a
much greater retail offer than ever before’;
. NT has allowed subpostmasters to leave the network with compensation and
‘be replaced in their communities with branches that are much more retail
focussed than before’
. ‘Subpostmasters have to become as retail focused as they possibly can to the
changing face of UK high streets’... trying their best to ‘maximise not only post
Office sales, but retail sales’
. ‘Important that NFSP continues to work with POL and the Royal Mail to
identify the changes affecting our marketplace, ranging from an explosion of
mails collection and drop off points, to extra competition in the international
money transfer outlets’...
. ‘as a network we are at a definite disadvantage to the competition in our lack
of opening hours and it is something that needs to be addressed’
NFSP Negotiating Approach
Neil Hayward Page 1 of 16 March 2015
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2.4. NFSP have provided good support for us/collaboration in terms of POCA, ATM
business rates and BIS Horizon Select Committee.
2.5. We had some tension related to the Ivy trials last September — but delivery of trials
and negotiation needed to get tacit support was very useful for Post Office in building
a negotiating asset for further extension and exposing NFSP’s demand position.
2.6. NFSP have been challenged/hampered with internal politics to move quickly in
achieving an agreement with us on the back of the MOU - they have lost their Trade
Union status, the MOU was leaked pre 2014 conference forcing them to make
commitments to look at other options (CWU/NFRN) and took a long time to review
and respond to the draft GA.
2.7. NFSP have provided some support for Transitional Locals — but these compulsory
elements of NT (which will have to increase in the next 6 months) are pushing the
boundaries of NFSP’s ability and desire to be supportive of Post Office in difficult
cases. Whilst they support the principles of compulsion, they have struggled
supporting detail in the implementation that they find it difficult to take responsibility
for. Therefore any agreement must ensure this support is forthcoming.
2.8. Current position is finely balanced — we do not believe a merge with CWU is their
preferred outcome and we have reduced their demand position significantly. An
agreement with suitable termination rights, agreement to public support for NT cliff
(that may enable acceleration/better conversion:leaver ratio), agreement to 2k access
points in 2 years and avoid the need for further annual remuneration discussions
would be a good outcome for Post Office.
2.9. This approach has improved our position substantially - it would be a significant
reduction in NFSP demands and represent genuine movement from them on
extension — at the time of the agreement in November 2013 to support NT2,
additional access points was a red line for them and the last issue to be resolved (by
it being removed from any public statement) just before their special
conference/ministerial announcement.
3. Activities/Current Situation
3.1. Since NFSP returned their reviewed version of the GA in October we have had
several meetings to discuss both the GA and ND. The initial meetings were
constructive in nature and tone but stalled as we were unable to agree on aspects
related to termination. NFSP introduced an obligation on Post Office to make a
payment to the NFSP in the event of termination of the GA. Furthermore, as currently
te-drafted by NFSP, the GA gives Post Office limited rights of termination. We
indicated to NFSP that we would not accept a clause that relates to making a
payment to them in the event of the agreement being terminated for material breach.
We also indicated that if NFSP were to agree to a more generic termination (break)
clause, we would consider an associated termination payment. NFSP indicated this
was not acceptable. In any circumstance, we will not recommend a termination
payment without any associated conditions/concessions.
3.2. Other areas of disagreement are listed at Annex 2. NFSP have refused to discuss
these other areas any further until the termination aspects are resolved.
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3.3.
3.4.
3.5.
3.6.
3.7.
3.8.
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Additionally, since October, they had asserted (i) that they would not engage in any
detailed discussions related to NT cliff and Network Development until the GA is
signed and (ii) that the GA should clearly state that they are not required to support
Network Development beyond that defined in the current NT plan — i.e. excludes
Network Extension.
However, this position recently changed and further discussions on these areas have
now taken place. These discussions have clarified respective positions and indicated
that, subject to the parameters (including funding) outlined in annex 1, agreement
could be reached on NFSP support for NT cliff, Network Extension over the next 2
years and annual remuneration review for the next 2 years. However, NFSP continue
to assert a position that they will not agree to a break clause in the GA and our
assessment is that this will be a deal breaker for them. They have indicated they
would be prepared to remove the requirement for a termination payment. They assert
any termination aspects must not undermine their ability to position themselves as
independent from the Post Office.
NFSP's desire is to gain agreement to the GA and then hold a Special Conference to
confirm their preferred future organisation design -— whether this is with
PO/CWU/NFRN - via a Special Conference. Timing for this has drifted — originally it
was November 2014, recently positioned as March 2015 but increasingly likely to be
at the May annual conference or beyond.
PO timescales are linked to NT cliff activity and NE. On the former, we are expecting
to engage with agents mid-May, with formal notification of contractual change by end
June for a January 2016 implementation (for any branches that have not opted to
leave or convert by that point). NE activity is likely to create additional public
awareness in May if we implement a technology trial.
These circumstances indicate PO's best approach is to
. maintain our position as defined in the negotiation mandate (see annex 1) and
confirm our approaches for delivery of the cliff and Network Extension, which
will include a scenario of no NFSP support.
. undertake close engagement with BIS to ensure we have their input and that
they are supportive.
. craft a further version of the GA termination clause in an attempt to clarify
what constitutes a material breach in order to try to provide further comfort that
the agreement will not be terminated on a whim. This is intended to strike the
balance NFSP need to ensure they maintain their independence.
. assuming agreement to satisfactory termination rights and agreement on NT
cliff/NE/annual remuneration, remove our requirement for a break clause in
response to NFSP removing their requirement for a termination payment.
Opinion remains that NFSP’s preferred outcome to their organisational future is an
agreement with Post Office — but we believe that this is a finely balanced issue for the
NFSP, and recent tensions relating to Network Extension and termination aspects of
the Grant Agreement have definitely increased the possibility of them merging with
CWU.
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3.9. NFSP acknowledge that this would not be a good outcome for subpostmasters — their
influence in CWU would be minimal, membership numbers would decline and most of
the senior leadership would find it very difficult to remain in post, primarily from an
ideological basis. However, George Thomson would secure a position and sufficient
influence/longevity to satisfy his own needs — and would probably cope with the
ideological challenge given his own history of adaptation.
3.10. Post Office’s response to this would be to resist any recognition attempt by the CWU
and look to consult with postmasters (including multiples) to set up/work with another
organisation such as Association of Convenience Stores.
3.11. Coupled with this, NFSP would withdraw their support for the compulsory aspects of
NT and/or raising a formal challenge (possibly as an attempted Judicial Review) to
these aspects and further network extension. Additionally, they would instigate
stakeholder agitation — particularly lobbying BIS/Minister/MPs which could be very
unsettling for them with an imminent election.
3.12. The absence of NFSP support for compulsion within NT would be a complication to
achieving full transformation as it could discourage postmasters to volunteer for
change in advance of the cliff and therefore force a higher number of compulsory
actions. Whilst the NT programme is confident it can deliver in these circumstances,
a public fall out with NFSP would have an impact, both financially (as a result of
potential delivery delays) and in the stakeholder environment. Our assessment is that
on the balance of probability we would come through this with a Network Strategy
broadly fit for purpose BUT it would not be without risk and would cause significant
external stakeholder disruption. Therefore our preferred outcome is also an
agreement with NFSP, but one that does not place undue restrictions on Post Office
and also has the ability for us to exit in the event of further unacceptable pressures
from NFSP.
3.13. Similarly, further Network Extension would be disrupted without NFSP support. In
reality, we have made significant progress with them in the last 12 months on gaining
support for Extension — from a position of not being prepared to countenance any
additional access points to acceptance of 2k over the next 2 years.
3.14. Any agreement would be entirely consistent with our position on the MOU last year
which visioned an NFSP re-constituted as a quasi Trade Organisation that focuses on
developing postmasters’ business whilst remaining independent and able to
challenge Post Office
3.15. The options that follow reflect this environment, recognising that there is no single
simple solution and that none are without risk.
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Option 2 is recommended.
5. Next steps
5.1. Activity underway as follows:
. Continue discussions with NFSP in order to narrow NFSP demand position
within the framework of the negotiating mandate
° Ensure detailed audit trail of engagement
. Ensure stakeholder/communications environment is prepared for NFSP
reaction
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6. Key Risks and Mitigation
6.1. NFSP withdraw support for NT (particularly compulsion) — this and other stakeholder
activity undermines NT delivery and Network Expansion. Mitigation: we will have a
proactive engagement approach for stakeholders and handling negative PR noise.
6.2. A commitment to a 15 year agreement whereby NFSP are able to continually
challenge Post Office and threaten to block change/attempt to exert more money
places constraints on PO’s ability to transform. George will argue that NFSP must
maintain their independence and that their route to modernisation has to be sold to
their members — evolution not radical change overnight - and that we should be able
to trust him on this aspect, particularly with the financial benefits (in terms of
achieving NT conversions) he believes their support brings. Mitigation: The
agreement must provide safeguards against this.
6.3. BIS withdraw support whilst under political/election pressure. Mitigation: We will
work with BIS to ensure continued ministerial support for our strategy.
6.4. Commercial plan undermined by lack of customer confidence in Post Office.
Mitigation: There remains an on-going need to put the customer voice at the heart
of Post Office thinking.
7. Long term considerations — horizon scan
7.1. Acceleration of NT/expansion/compulsion/implementation of cliff. Withdrawal of
support for NT is likely to have a mixed impact. In the short term, some converters
would reverse their decision and compulsory exiters would use this as a means to try
to avoid exit with NFSP support for this on the ground (though note that PO have
government policy backing for this). Design of processes to accelerate compulsion
could be easier if we do not take account of NFSP requirements. Significant roll out
of access points could encourage some existing postmasters to leave. Any success
of this approach obviously assumes NFSP’s disruption would not prevent PO from
undertaking these activities but this is less than certain — operating the cliff in
agreement with NFSP is clearly the best option.
7.2. Potential for NFSP alternative leadership. Currently no indication that George
Thomson’s position is at risk but an aggressive stance that pushes for a merger with
CWU could be at odds with the more commercial part of his executive who, in the
past, have privately (to PO and in secret) demonstrated some concerns with his
attitude to change (this related to his lack of support for Mutualisation). This might
emerge if tensions grow — though equally likely is that this faction remains silent and
exits after a CWU merge.
7.3. Alternative to NFSP as postmasters’ representative organisation. Depending
upon the outcome of these discussions and the impact of a merger with CWU, we
should explore developing relations with other organisations to function as a voice for
postmasters. This would clearly be framed as a commercial/trade play and not be
badged as representation/recognition. This could include support grants based on
the numbers of voluntary members (rather than the NFSP model which includes
automatic membership). Examples include National Federation of Newsagents
(NFRN) and Association of Convenience Stores (ACS).
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8. Communications Impact
8.1.
There is significant communications/stakeholder impact and the Communications
team are closely aligned to this activity and the fortnightly NFSP Relations SG is a
regular review mechanism. NFSP activity is a specific strand within the
communications plan whilst noting that all comms activity must be integrated and take
account of all business change activity. See Annex 3 for propose external lines.
9. Conclusion
9.1.
9.2.
9.3.
9.4.
As previously described via the P & E strategy papers, we are reaching critical points
in our relationship with the NFSP and decisions relating to network/wider business
transformations.
We should not underestimate the potential for NFSP to create significant
environmental noise in the short/medium term, particularly in the political arena, or the
resource required to manage this noise.
A supportive NFSP does aid the business — POCA, relationship with RM, ATM
business rates and, most recently, BIS Horizon Select Committee are all examples of
where a collaborative relationship helps the business. Significant progress has been
achieved in the last 12 months in gaining NFSP recognition for the need for Network
Extension, pragmatic consideration of implementation approaches and movement
from them in ensuring we were able to launch the pilots.
There is no single simple solution to these challenges and all come with risks. The
recommended approach outlined in this paper is considered to balance all the
competing tensions but outcomes cannot be guaranteed. PO must be prepared to
accept these risks in order to ensure best chance of long term delivery of the strategic
plan financials.
10. Recommendations
The GE is asked to:
10.1. note the update and actions set out above;
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Annex 1
Negotiating Mandate (see attached file for expanded version)
B)
NESP Negotiating
Mandate Mar15 v 4-3
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Annex 2 ~ Legally Privileged
Grant Agreement main issues following NFSP review
Issue NFSP proposed I Post Office view Action
amendment
1. I Post Office I The concept of the I This relates to the ILegal have advised
structured the
agreement as
a grant with
the annual
grant —_ being
subject to the
approval of an
annual plan.
annual plan has been
removed. Instead,
funds to be paid in
advance and held by
NFSP.
This amendment has
been proposed by
NFSP so they
maintain greater
control of their funding
and day to day
operations.
£1m per annum grant
payment. NFSP
approach would risk
funds being used for
purposes not intended
by Post Office. It
would also limit Post
Office's ability to have
funds repaid if not
spent.
The effect of the
proposed amendment
is that the agreement
is less likely to be
viewed as a grant.
There would therefore
be an __ increased
procurement risk).
that as the payments
have not —been
publicly procured or
competitively
tendered, there is a
risk that Post Office
has not complied with
public — procurement
law obligations. One
way of mitigating this
risk is to structure the
agreement as a grant
— this needs to be
considered if Post
Office concedes this
point.
2.I Agreement is I Specific references to I Significant issue - I Post Office would be
for NT2 only. I NT2 have been added I agreement —cannot I obliged contractually
and implication that I constrain future I to seek agreement
anything beyond this I business change I with NFSP for all
is subject to further I and/or legally bind I further strategies for
agreement. Likely to I Post Office to having I the Post Office
be positioned as a red I to have NFSP I network.
line for NFSP. agreement for
change.
3. I Termination Post Office obliged to I There was no I This is a commercial
payment. make a _ payment I termination payment I decision. There may a
equal to 3 years’ grant
payment in the event
of termination/ceasing
of the GA for any
reason.
in the GA as drafted
by Post Office. The
GA would expire at
the end of a 15 year
term unless
terminated earlier for
breach of contract.
benefit to Post Office
in agreeing a shorter
term or having greater
freedom to terminate
the agreement in
exchange for a
termination payment
(lower than suggested
by NFSP).
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Issue NFSP proposed I Post Office view Action
amendment
NFSP’s NFSP’s obligation not I The effect of theISee comment on 2
obligation not I to engage in activities I amendments to this I above
to engage inI which are actively I obligation and the
activities which I detrimental to Post I removal of the ability
are actively I Office has beenIto terminate mean
detrimental to I caveated by alIthat NFSP could
Post Office. statement that NFSP I engage in any
must have freedom to I activities “that
undertake _ activities I represent Post Office
that protect and I Operators”, even if
represent Post Office I detrimental to Post
Operators. Office and POL would
still be under an
This allows NFSP to
criticise Post Office
without this being a
breach of contract
giving rise to a right
for POL to terminate.
Note also that the
NFSP’s amendments
remove the ability for
Post Office to
terminate for a breach
obligation to provide
the funding for the full
15 year term.
Always —_ understood
that Post Office needs
to agree NFSP will
continue to have
independent voice but
not that it may engage
in activities which are
of contract of any I actively detrimental to
kind. Post Office.
Watering down I Rewriting of the I Red line for Post I NFSP to clarify.
of ability of I provisions relating to I Office — document is
Post Office to I POL’s rights to I badly written by NFSP I Legal have advised
terminate the I suspend or withhold I in this area and this I that Post Office's right
Agreement or I payments for breach I could be deliberate. to terminate the GA
suspend or I significantly reduces and clawback grant
withhold protection offered to monies need to be
payment of the I Post Office. clearly included in the
grant where document.
NFSP_ is’ inI The ability to
breach terminate if specified
breaches are
rectified has
been removed.
not
also
Removal of ability to
terminate immediately
on a material breach
of confidentiality has
been removed.
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Issue
NFSP proposed
amendment
Post Office view
Action
The NFSP has
introduced a dispute
resolution process
which does not
provide sufficient
protection to Post
Office.
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Annex 3
External positions in the absence of NFSP support for NT/Cliff/Extension
Introduction
This note covers the general external position that POL would take with stakeholders (and by
extension the media) on key network issues in 2015 (continuing NT, the Cliff and extension).
It analyses the position from the perspective that the NFSP are not supporting POL’s
activities on the specific issue. Each specific issue is supported by comments that explore
timing and associated issues that are relevant to the external stance that POL is taking.
Network Transformation — external positioning
NT is now a mature activity which is based on a solid external media position;
- This is an unprecedented investment programme for the network
- Itis not a closure programme, rather it is about improving hours and improving
environments
- We work with the individual agent on the change and consult in the community if the
location of the Post Office is changing
- The new models work — customer satisfaction, retail growth
- The Community branch and associated fund supports the ‘last shop in the
community’ situations
- Over half the network now on the new models.
lf NFSP withdrew support, its attack lines would be along the lines that ‘general
circumstances have changed and the models are not now appropriate’ and on the perceived
‘compulsory’ parts of the programme - transitional locals and non-core mains. The defence
lines for POL are the evidence that the models do work, the sensitive application of
transitional locals/non-core Mains (underpinned by the emphasis that we work with the agent
to create a more sustainable future for the Post Office and that the community will not lose its
Post Office) and heightened emphasis on the Community Branches and Community Fund.
The NFSP opposition would be positioned as being about the vested interest of a minority of
the network — a supplier interest that wants to retain open ended Government subsidy
irrespective of market or customer needs.
Comments and timing implications
The biggest risk to the above POL position is an anti-NT campaign that gains momentum
through the linking of individual cases and which is amplified by the volatile media and
political environment in the run up to the election. This risk is best countered by POL
emphasis on the benefits / successes of NT plus heightened emphasis on Community
branch security — and, critically, ensuring the sensitive individual case handling of transitional
locals and non-core Mains to avoid ‘cause celebres’ emerging that then may get joined up
into a coherent campaign.
In timing terms, NFSP activity in advance of the election would gain more traction than
afterwards. In a post-election environment, even if there remains political uncertainty, there
will inevitably be an cross party emphasis on public expenditure reduction (whilst seeking to
maintain service availability). NT falls squarely into that philosophy and by June 2015, a
clear majority of the network will already have been changed or committed to. In such an
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environment, NFSP opposition can be more readily placed into self-serving supplier interest
from a minority in opposition to the wider public and customer interest.
Cliff — external positioning
The concept of the ‘cliff’ is very much internal shorthand for the decision point within the
Programme at which we need to consider a change in approach to ensure the Programme
achieves its objectives by 2017/18 when assured funding ceases. It is prudent preparation
against the key end stop that we don’t have funding after March 2018 to operate a
Programme of change, to invest in branches who are considering change nor to compensate
subpostmasters leaving. This leads to three key external arguments for the Cliff
- Duty of care to our agents. We know that current funding ends in March 2018 — there
is no assurance of on-going funding (other than some potentially limited funding for
Community branches). We therefore have a duty of care to our agents, and the
communities they serve to take the actions that avoid the situation whereby they carry
on receiving fixed pay — only for it suddenly to end through lack of funding
jeopardising their business and service to the community. We need to give them the
chance to take advantage of the transitional funding arrangements, or the potential to
leave the business, - and allow time for the programme to implement changes
(including any necessary consultations) so that a secure, sustainable Post Office can
be in place for the relevant community by March 2018. The Cliff is driven on these
principles
- Moral Fairness. The branches to which the Cliff applies are those branches that we
know have sustainable retail but which are choosing to continue to take an on-going
state subsidy rather than change to a more efficient way of operating that would be
better for their customers, more sustainable for their community and which isn’t
unnecessarily bleeding public money. Given that most of the network has now
moved onto more sustainable, efficient models that don’t drain public funds, it is
morally unfair that these branches should believe they can just continue with open
ended state subsidy. The Cliff is a fair way of addressing this issue — it is about clarity
to agents on the economic realities and it gives agents time to commit to and make
the changes — and it gives time for a funded programme to implement them. We
avoid a situation whereby a branch might get itself into a situation where it can’t take
advantage of programme funds for leaving or for change.
- Fairness to the public purse in times of austerity. When there is a clear need for
continued reduction in public expenditure, it is not right that viable retailers (often
multiples) carry on drawing a public subsidy when the evidence is now clear that this
isn't necessary for an efficient Post Office operating model. The Cliff addresses this
position in a way that is fair to the agent — but also fair to the public purse.
These arguments enable opposition to the Cliff to be positioned in terms of individual supplier
self-interest. The approach gives time and generous funding for the agent to change - all it
requires from the agent is a commitment to future change. Opposition to this is effectively
claiming an open ended right to unlimited future public subsidy — clearly unfair in places that
have successful retail. Support for such opposition would clearly be against the wider public
interest.
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Comments and timing implications
These arguments gather more strength as time moves on and the more NT is completed
through the programme (painting refuseniks into more of a minority and emphasising that the
new models and change to them works). They are also stronger in a post-election
environment where the pressure on future public spending will be a clearer cross party
reality. In the run up to the election there is more risk with these arguments from political
posturing — and from the potential to seek out individual negative NT cases and combine into
an overall campaign (see NT arguments above). There is also the risk that extraneous
‘opportunistic political factors’ can be drawn into the debate prior to an election — e.g. ‘lack of
Government work has changed the environment, these branches were right to hold off
making a decision and now further commitments are needed from prospective Governments
before they are forced to commit’.
Extension — external positioning
The positioning of extension is a combination of emphasising the customer advantages,
ensuring the ‘one integrated network’ concept whilst negating the ‘fear of change’ supplier
narrative. Key arguments are therefore
- Extension is beneficial for customers in terms of better access and services. It is a
natural development in a competitive marketplace from which the customer benefits.
- It is complementary to the existing network. This is not a network set up in opposition
to the current network or to take work away from it. On the contrary, it complements
the existing network, extending its reach and ensuring that the overall network
remains competitive in existing markets as well poised to best take advantage of new
growing ones. It is not in POL’s or the networks interest to take work away from
existing branches — it is in POL and the networks interest to be positioned to best
defend the overall work we have and be poised to grow in developing and fast
moving markets. The benefits of this approach accrue to the network as a whole. This
is about protecting and expanding our business within the overall POL narrative of
revenue growth.
- Extension is therefore being driven by these philosophies — so that siting of new
locations is about protecting and expanding revenues for the whole network.
- The alternative to extension is leaving the field to the competition in a very fast
moving market. If we were not extending we'd effectively be acquiescing to a network
decline narrative. Extension is, at one level, a defence ring for our network — if we put
our heads in the sand — then other parties will grab growth market sectors, will eat
into our future and current work and we'll passively let it happen. Our ambitions for
our whole network are greater than that.
- We are about one network — the vast vast majority of our growing work is through the
existing network — extension complements this and allows that growth to continue.
Comments and timing implications
The core arguments against extension play on fears that extension would, either deliberately
or inadvertently, cannibalise work in the existing network and therefore undermine its viability
and therefore extension could be positioned as a strategy of network decline and
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downgrading. To avoid this opposition narrative gaining traction, it is essential that the ‘one
network’ approach is strongly promoted. It is also critical to display ‘proof points’ that our
agenda is ‘protect and grow’ — the key element to this is some commitment to support
activities (e.g. fund) should there be any individual cases where the network developments
create issues for individual branches. The aim is that such support mechanisms won't
actually be necessary — but they are in place to reassure. The biggest risk in terms of
opposition to extension is the one of ‘fear’ stopping extension happening until it is too late.
Opposition to extension needs to be positioned as ‘head in the sand’ and against the
customer interest — and, because ultimately its acquiescing in a network decline narrative,
against the public interest. We are aware and conscious of existing agent concerns — so we
have contingency support mechanisms in place — but critically this is a ‘one network play’.
In terms of timing, the biggest risks to extension are that the ‘supplier fear’ narrative gains
prominence and builds on itself (with ancillary suggestions that this is a plan to undermine
the existing network). The risk of this is greatest in a volatile pre-election environment.
Counteracting the fear narrative (and promoting the customer benefit narrative) also means
clarity as to what extension is and a model that is effective and workable. Therefore timing
needs to be consistent with clarity on a model and thereby showing how that model
complements the existing network and fits the ‘one network’ narrative. If the debate is held
too early without that clarity , there is more scope for the fear and conspiracy agendas to
gain traction. Finally, it is critical that extension is not positioned as ‘handing the network to
the multiples’ — as this will create a small business — big business dynamic that will feed the
fear and conspiracy agendas. Therefore — in positioning any extension arrangements with
multiples, we need to complement with parallel arrangements with perhaps symbol groups
and other routes for independents to show our commitment to a continued ‘mixed network’.
Critically we need to continuously push the ‘one network’ concept and that network is a
mixture of the right operators for the right sites in the right locations (and that small
businesses remain the core of our network).
Final comment
The above arguments are all sustainable in the absence of NFSP support — but timing and
positioning needs to be consistent. We also need to ensure that the three issues —
NT/Cliff/Extension are likely to be combined in terms of narratives. All the positions above
are consistent with the ‘meta narrative’ of a commercial Post Office committed to its social
purpose confidently developing in a changing world and serving the public interest. The
opposition narratives should all be positioned around vested, narrow, self-serving, self-
interest that are in conflict with the wider public interest and which can only be served by a
public approach of ‘open ended future public subsidy’ irrespective of market conditions or
customer needs.
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POST OFFICE LTD GROUP EXECUTIVE
Transforming Employee Relations — Noting Paper
1. Purpose
1.1. The purpose of this paper is to:
. Update the Group Executive on our progress in transforming Employee
Relations within Post Office and highlight the improvements made recently;
. Invite the Group Executive to note and support the approach and next steps
being taken; and
e Ask that the Group Executive note and endorse the updated Code of Business
Standards.
2. Background
2.1. Improving employee engagement is a fundamental part of the People & Engagement
strategy. One aspect of this — the Industrial Relations strategy — is already well under
way. Another, transforming our approach to Employee Relations (ER), has seen
significant progress in recent months and is now sufficiently developed to be
presented to the business for review and endorsement.
2.2. To give us the best chance of delivering successfully, we have integrated the IR, ER
and engagement teams. This is crucial as many of the largest obstacles to improving
employee engagement are collective agreements we have with our unions, some of
which are not fit for purpose.
2.3. Defining Employee Relations: Employee Relations has two main dimensions:
° First, the policies that govern our day-to-day business such as Recruitment,
Conduct, Leave, Bullying & Harassment and Performance Management; and
¢ — Second, the support, advice and guidance which employees and managers are
given to manage (and be managed) effectively and fairly. This includes the
support we give to colleagues and managers through a grievance process,
including appeals and potential employment tribunal (ET) cases.
2.4. Our vision for Employee Relations: We need highly engaged employees who are
proud to work for the Post Office and support a high performance customer service
and sales culture. This should be based on simple, best practice policies, well-
understood by colleagues and consistently applied by managers.
2.5. The past — challenges and issues: Pre-separation, ER in the Post Office was
characterised by a reactive approach to ER and an inconsistent application of our
policies. This was evident in the large number of policies we held (120 in 2012) and
the large variations in tone, language and format between them. Furthermore, there
was no central access point, with a consequently low level of awareness and
understanding across the business. This contributed to confusion on when and how
to apply these policies, causing frequent problems for managers and employees.
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2.6. As a result, we saw too many Employment Tribunal (ET) cases brought and
subsequently lost or settled by Post Office. 2011 saw 17 cases which cost us a total
of £133k, plus legal costs and management time.
3. Activities/Current Situation
3.1. We have taken practical steps to address the legacy issues summarised above.
These have resulted in significant improvements in our ER policies and the key
metrics against which we judge success. These include:
. A 73% reduction — from 120 to 32 — in the number of policies we have. This was
achieved through a comprehensive review which has simplified our approach
without undermining our values or employee offer (see Appendix 1);
e All policies now fully updated in line with best practice and recent changes in
legislation. Each policy now has a named SLT member with personal
responsibility for ensuring it is up to date. This was not the case previously and
had led to some policies becoming anachronistic. The ER team has instituted a
rolling review cycle of all policies to ensure this does not re-occur in the future;
e — The introduction of AdviserPlus (branded My HR for Post Office Ltd) to create
and promote accessible ‘how to’ guides for ER policies. AdviserPlus delivers a
good service for the Post Office and achieved a marginal increase in customer
satisfaction last year. This is particularly pleasing as we reduced the spend on
this contract from £370k to £170k in 2013 to contribute to ongoing business
efficiencies; and
. A 71% reduction in ET claims (from 17 to 5) from 2011 to 2014 and the near
elimination (-98%) of ET settlement costs, from £133k in 2011 to £1k in 2014. At
the time of writing, the Post Office has no pending ET claims for the first time in
its history as an independent business (and possibly well before then).
3.2. Despite this progress, we still struggle to engage our employees as well as we
should and have not achieved our targets in every year, despite them being modest
(see Table 1 below). Improving this is absolutely vital to the success of our business,
as reflected in its status as a bonus-worthy metric. Research shows what we all
intuitively recognise — that improving engagement benefits the business bottom and
top lines. For example, engaged employees take fewer sick days than disengaged
employees — improving the Post Office’s absence rate by one percentage point from
its current level of 3.7% would save us £1.35m per year.
Table ost Office Employee Engagement Scores 2011-2015
100%
90%
80%
70%
60%
50% = Target
40% = Outturn
30%
20%
10%
0% ~
2010-11 2011-12 2012-13 2013-14 2014-15
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4. Options Considered
4.1. Given the problems inherent in our pre-separation approach to ER set out above, we
do not believe that the status quo is a valid option. Our P&E Strategy clearly sets
out our intention to improve employee engagement through improvements in both
ER and IR. Our options therefore relate to how we will prioritise and organise our
available resources to deliver this aspect of the P&E Strategy. The options are
therefore yet to be decided as they will be decided following our next steps set out
below. For example:
4.2. Which collective agreements should we prioritise for renegotiation or removal? — this
will be the outcome of a review in Q1 2015/16, details of which are below
4.3. Which areas of the business should we prioritise for support from the ER team and
AdviserPlus? — this will be informed by the results of the Engagement Survey and
feedback from operational managers. Our working assumption is that these should
be front-line colleagues but we will review this in Q1 2015/16.
5. Proposal including Timeline
5.1. Proposal: We intend to take forward a twin-track approach, based on the two key
aspects of ER defined at Section 2.3. The key workstreams are set out below.
5.2. Workstream 1: Simplifying policies
° 1A: Replacing collective agreements: Many policies are based on collective
agreements eg. Attendance, Conduct, Performance Management, Grievance,
Stop Bullying and Harassment, MtSF. We will hold a joint IR/ER/Operational
review in Q1 2015/16 of these agreements. Engagement with unions on largest
impact policies will follow from Q2 onwards;
. 1B: Benchmarking: We will increase engagement with the Civil Service and
other external ER networks to identify opportunities for improvement; and
. 1C: Regular policy review: From 2015/16, all policies will be reviewed at least
annually (key policies more often) by the ER Manager in conjunction with the
SLT policy owner. Reviews will focus on opportunities for simplification and
efficiencies in line with legal requirements and Acas best practice.
5.3. Workstream 2: Improving support to colleaques
¢ 2A: Building Capability: We will run a training programme, linked to the launch of
the new Performance Improvement Process. We will also raise awareness of
ER and the support available through AdviserPlus, focusing on front line
managers in Crowns, Supply Chain and FS;
¢ 2B: Targeted support: We will work closely with AdviserPlus to increase effective
deployment and embedding of policies. We will also investigate the potential to
increase the scope of services which AdviserPlus provide, assuming this would
further reduce Post Office spend and improve the standard and consistency of
support. We will also continue the recently-adopted approach of ‘Complex Case
Conferences’ to reduce the number of high risk cases and the time it takes to
resolve them. Since introduction, this has halved the number of ‘live’ cases from
34 in June 2014 to 17 in December 2014.
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e Listening to, and acting on customer and stakeholder feedback: The ever-closer
working between engagement, ER and IR will continue with the joint review of all
collective agreements noted above. We will be using the Engagement Survey to
focus on priority areas within the business, in terms of engagement scores and
also ‘hotspots’ in terms of grievances. We will also be reviewing the business-
wide approach to hearing Appeals to identify what improvements can be made.
We have already secured agreement with the Crown team that appeals from
Crown employees will be heard within the Crown line management structure.
This addresses a long-standing concern of the Crown team, namely that some
appeals were being upheld by senior managers from other parts of the business
— in good faith — due to a lack of operational understanding regarding the Crown
network.
5.4. Code of Business Standards: Linked to this work is the specific issue of the Post
Office Code of Business Standards (CBS). This document is crucial as it sets out our
values and expectations of all employees. It is frequently used when recruiting
employees and demonstrating the Post Office’s values to prospective clients.
However, while it has been kept under review in recent years, it has not been
updated since separation.
5.5. The CBS is now completely updated and signed off by all relevant business leads.
The Group Executive is formally required to note and endorse the document for
governance purposes. The full document is therefore attached for reference. Once
agreed, the document will be formatted and made available on our intranet for
colleagues, managers and use in bids and recruitment. We will not issue hard
copies and there are therefore no costs associated with this work.
5.
fy
. Timeline: The EE&E team is taking forward our work on ER in line with the overall
P&E Strategy. This paper is intended to secure business endorsement of the
approach and, for governance purposes, of the updated Code of Business
Standards. Our next steps, assuming approval, are:
¢ Q4 2015: Start rolling policy review programme with SLT leads (see para 3.1
above);
e Q1 2015: Briefing of lead teams prior to roll-out of new approach;
¢ Q1.2015/16: Start of training and briefing programme across POL;
¢ =Q1_ 2015/16: Joint review of all collective agreements with the IR team and
operational leads (eg. Crowns and Supply Chain); and
¢ Q2-Q4 2015/16: Renegotiation of prioritised collective agreements (eg. MtSF) to
‘free up’ our ER policies and empower front-line managers.
6. Commercial Impact/Costs
6.1. There is no significant short-term cost associated with taking this approach forward
as any training requirements can be met within existing resources. Continuing the
positive trend on reduction of ET cases will deliver modest cost avoidance (as set
out at para 3.1). We will be reviewing the commercial relationship with AdviserPlus
in 2015/16 as set out above which could result in a renegotiation of our contract with
them.
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7. Key Risks/Mitigation
7.1. The key risks are as follows:
° ER policies will not be updated as intended and will fail in to disrepute — our new
approach of regular reviews and personal SLT-level accountability for policies
should prevent this happening;
¢ Managers do not implement policies effectively, through lack of awareness or
‘buy-in’ — this is our biggest risk and raising awareness and support for our new
approach to ER is a key focus for 2015/16; and
¢ — Unions are unwilling to update and/or remove collective agreements — this is
highly likely and our review in Q1 will include a legal assessment of which
agreements are contractual and therefore harder to change unilaterally.
Separately, our current review of union facility time is aimed at reducing the
ability of our unions to block or delay necessary changes.
8. Long term considerations — horizon scan
8.1. Employee engagement is notoriously hard to improve in short order. However, our
Strategy to 2020 is dependent on taking our employees with us and that means
improving engagement. We are likely to see our directly employee workforce
(Crowns, Supply Chain and various support functions) reduce further in future years
but they will continue to play a vital role in our success. They are also the employees
traditionally least supportive of change, hence the focus on direct engagement in this
approach. Our work on defining our Vision, which is ongoing, will complement this.
9. Communications Impact
9.1. We do not anticipate any external communications impact from this work. Internally,
this will be an evolution rather than a revolution and will be delivered with close
support from Comms through our existing channels to front-line colleagues.
10. Conclusion
10.1. We have already made significant progress in transforming Employee
Relations and are well placed to take this to the next level in the next 12-24 months.
The approach set out here gives us the best chance of delivering the improvement in
employee engagement we need to deliver our wider commercial objectives.
11. Recommendations
11.1. The Group Executive is asked to:
¢ Note the positive progress on employee relations and support the next steps to
transform ER as set out above; and
¢ Note and endorse the Code of Business Standards.
Neil Hayward
18 February 2015
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APPENDIX 1: NEW HR AND ER POLICY LANDSCAPE
Confidential
Post Office Ltd Employer Vision and Values
Code of Business Standards (including Equality & Fairness Policy)*
1 Joining
the business
Induction Guidance
2 Talent & Resourcing 3 Reward & Recognition 4 Learning & 5 Performance, Attendance 6 Time Off 7 Working Arrangements:
Development & Behaviour
[Resourcing Poticy I [Reward Poticy* I Learning & Performance { Annual Leave Poticy* II I [Flexible Working Poticy I
an Development Policy*I Management Policies*
profesional Interns Protesonal [Anton eave Pty II I I Remote Working Pot]
and Contractors Policy} Job Need Cars Qualification ~ -
Poly Policy 7 - Maternity Leave Policy Union Release Policy I
Redundancy and Leaving the Business
lundancy ane without Notice Poli
Over Business Travel Paternity Le
i a ave
Talent Manat
1H Retit it Poli
Bests Littetienet oc]
Support ng Information
* Required as part of
Joiner Policy Pack
Related Agreements
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8 Working with Unions
—
9 Raising Issues
Union Framework
‘Agreements
Bullying & Harassment
Policy
Grievance Policy
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10 Health and Safety
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Leaver’s Checklist,
11 Leaving
the business
Resignation Guidance
and Leaver’s Checklist
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Employee Relations & Engagement Team
January 2015
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Overview
¢ Vision for Post Office Employee Relations
¢ The past - challenges and issues
¢ The present - problems, progress and results
¢ The future - proposed next steps
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Vision for Post Office Employee Relations
Our Vision for Post Office Employee Relations
We need:
* Highly engaged employees who are
proud to work for the Post Office and cient so BeOS:
support a high performance customer oe eee
business with’
service and sales culture.
..based on...
¢ Simple, best practice policies, well- Sinan ae
understood by colleagues and manager and easy to
. . employee isa
consistently applied by managers. engagement 7
Legally and
Acas best
practice
compliant
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The past - challenges and issues
Over 120
different
‘ policies -
No central inconsistent
application
across the Too many cases brought - and lost or settled by POL
business 17 Employment Tribunals costing £133k + legal
costs in 2011
Confusion on policies
es for managers and employees
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The present - problems, progress and results
All policies I
updated for —
; : compliance and. ;
a consistent tone MM Use of Adviser+
: aay th and format — to create and
go Ounings wk promote ‘how I
SLT owners (see to’ guides for
_ Next page) policies
2013 - 50% saving
_ in Advisers
eke ‘ contract — *All figures based on comparison
policies - from 2014 - 1% increase between 3014 am boil
120 to 32 in customer
- : satisfaction
mployee engagement remains too low (58% 2014).
Improving it is crucial to the success of the business
Transforming Employee Relations
The present - new HR and ER policy landscape
Post Office Ltd Employer Vision and Values
Code of Business Standards (including Equality & Fairness Policy)*
1 Joining
the business
Induction Guidance
2 Talent & Resourcing I [3 Reward & Recognition 4 Learning & 5 Performance, Attendance 6 Time Off 7 Working Arrangements
Development & Behaviour
[Resourcing Poticy I I Reward Policy* I Learning & Performance I Annuat Leave Poticy II I I Flexible Working Policy I
Development Policy* Management Policies*
Recruiting Recognition Policy . ~ ——
Profercionat Inverit Professional Tatandance Paioy [Adoption Leave Poticy I I I I Remote Working Policy I
jand Contractors Policy Job Need Cars Qualification = "
Policy Policy . = [Maternity Leave Poticy II I [Union Retease Policy I
Redon 7 Leaving the Business
Redeployment Relocation Policy without Metice Palle Parental Leave Policy
Overview =
Business Travel Conduct Code Policy Paternity Leave
Expenses Policy Poticy
[Tatent Management I
[Lit Retirement Policy I
[Benefits I Other Time Off Policy
Support} ng Information
* Required as part of
Joiner Policy Pack
Related Agreements
8 Working with Unions
9 Raising Issues
10 Health and Safety
Union Framework
‘Agreements
Bullying & Harassment
Policy
[ H&S Policy* }
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Leaver's Checklist
11 Leaving
the business
Resignation Guidance
and Leaver's Checklist
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The future - proposed next steps (1)
Simplifying policies
¢ Replacing collective agreements:
* Many policies based on collective agreements egg. Attendance, Conduct, Performance Management,
Grievance, Stop Bullying and Harassment, MtSF.
* Joint IR/ER review in Q1 2015/16 of these agreements. Engagement with unions on largest impact policies
to follow over rest of year.
¢ Benchmarking:
+ Increase engagement with Civil Service and other external ER networks to identify opportunities.
* Regular review:
* From 2015/16, all policies will be reviewed at least annually (key policies more often) by the ER Manager in
conjunction with the SLT policy owner.
* Focus on opportunities for simplification and efficiencies in line with legal requirements and Acas best
practice.
QUICK WINS: Produce Parenting Policy to amalgamate 4 existing policies.
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The future - proposed next steps (2)
Improving support to colleagues
¢ Building Capability
* Training programme - supporting launch of Performance Improvement Process with Conduct Code sessions
for Crown Managers.
* Awareness raising with lead teams/across the Network - Crowns and Supply Chain. Including ‘myth busting’
on the value of good employee relations and of Adviser+.
¢ Targeted support
* Working closely with AdviserPlus to use their expertise to increase effective deployment of policies which are in scope
for My HR.
* Continued use of Complex Case Conferences to reduce number of high risk cases and case cycle time- a
recent push has reduced these from 34 in June 2014 to 17 in December 2014.
¢ Listening to, and acting on customer and stakeholder feedback
* Closer tie between Engagement, Employee Relations and Industrial Relations.
+ Forward programme of reviewing collective agreements underpinning ER Policies.
Transforming Employee Relations
The future - proposed timeline
. Phase 2 of
Rolling Start of training policy
Secure P&E policy and briefing simplification -
support for review programme collective
programme across POL agreements
next steps
ExCo Sign- Briefing of Review of all
off for lead teamé collective
approach rout of new aeith I ria
and Code approach
of Business
Standards
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The future - business benefits
Improved
discretionary
effort and
productivity
Reduced
reliance on
and support
for unions
improved
attendance
Better
engagement can
deliver bottom
line and top line
benefit
Fewer
grievances
Better
retention
More
advocacy of
products and
services
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Appendix 1: Annual Schedule for Reviewing Policies
Attendance, Remote working Leave policies Ill health retirement
Conduct, Grievance, B&H Parental policies Abandonment of service
Performance Management Recruitment policies L&D policies
Travel and Expenses TU policies
Reward, Recognition Flexible working
Health & Safety
MtSF
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(front cover)
Post Office Code of Business Standards
55,000 people
Over 11,500 branches
24/7 service
One nation’s trust
Your pride
We are the Post Office
The largest retail network in the UK
A growing business
Investing in thousands of local communities
Investing in cutting edge new technology
An independent business publicly owned
At the heart of communities
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11.
12.
13.
14.
15.
16.
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Making Things Clear: A Guide For Our People
Contents
Introduction
Observing the Code
Our Brand
Customer Excellence
Our People
Health and Safety
Trust and Security
Use of Company Property and Expenses
Use of Computers, Internet, Mobile Phones and Business IT Systems
Social Media
Political and Pressure Group Activity
Conflicts of Interest
Gifts and Sponsorship
Hospitality and Entertainment
Risk Management
Useful Contact and Links
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1. Introduction
The Post Office is unique: a commercial business set apart by its public purpose. We believe
in the importance of connecting communities and enhancing the powerful role they play in all
our lives. We will stay true to this commitment by meeting customer needs through our
unrivalled local presence across the UK.
This statement is underpinned by a set of principles and pledges.
To deliver our purpose we will run our organisation by following four principles:
Keep customers at the heart of everything we do;
Build relationships based on trust;
Treat everybody with fairness and honesty; and
Make a positive social and economic contribution to all the communities in which we
work.
As an organisation we pledge to:
« Maintain ethical attitudes in our behaviours;
e Invest in the organisation to secure the business for the future; and
e Listen with care to the views of customers, colleagues and others with an interest in the
Post Office, and support their development.
Most importantly, our customers are at the heart of everything we do.
This Code is designed to help you understand the Post Office vision and to make sure you
know what you need to do to support it. The Code of Business Standards captures our key
individual responsibilities and how we behave to make the Post Office a success.
Note insert picture of Paula and Paula's signature
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2. Observing the Code
Post Office has high standards and our customers, clients, colleagues and shareholders have
an expectation that they will be treated professionally. We all have a responsibility to promote
the Business Standards and managers should help and encourage their teams to understand
and observe the Code. The Code forms part of our company rules which you must adhere to
as part of your employment.
The Code is also meant as guidance when difficult situations arise. We all, at some time in
our working lives, confront dilemmas about whether an action is right. If you are faced with a
dilemma:
e Read the relevant parts of Code;
e Ask yourself whether you could justify your action to your manager, your colleagues and
your own conscience, and
¢ Think through the likely results of your action for yourself and others.
If you are still unsure what is the right thing to do, talk to your manager.
If you discover that the company’s standards and reputation are being put at risk by unethical
or even criminal behaviour, you should report the facts to a manager. Ignoring bad behaviour
is wrong - it can be detrimental to our colleagues, and damage the perception of our brand
by our customers, clients and partners. If you feel you can’t talk to your own manager, you
should talk to a senior manager, or contact the HR helpline. Of course, we realise it isn’t
always easy reporting unethical or criminal behaviour. If you have any concerns and want to
speak to someone confidentially please contact the Speak Up line on 0800 048 4531.
Please be aware that any breach of this Code may be dealt with under our Conduct Code, and
that gross misconduct could result in your dismissal.
Note insert picture of colleague in a Post Office
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3. Our Brand
For any organisation competing in today’s fast-paced world, there's nothing more vital than a
powerful brand. And if that brand is clear, relevant, engaging and has a purpose, then more
and more people will interact with it. With people like you completely behind it, the Post
Office brand will be just that.
e We have a brand that must run through everything we do: our products & services;
environments; behaviours; communications; and the way we manage our people;
¢ It builds on our heritage and strengths and helps us stay relevant for our customers in a
fast-changing digital world; and
e We are the brand. We need to live it to deliver consistently for our customers.
By brand, we don't just mean a logo, a certain set of colours and a strapline. We mean the
services we provide; the way we deliver them; the perceptions of those who use us, and of
course the people like you who represent us. We mean the way we do business.
So what does our brand say to people? What does it promise?
We're here to help the important things in life happen for our customers. We make it easy, as
life is complicated enough. Whether it’s sending money for a loved one’s birthday, calling
them to show you care, travelling to far-flung places, or getting your broadband connected,
we remove the stress and complexity of sorting them.
Insert picture of our lozenge
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4. Customer Excellence
Our customers are at the heart of everything we do. We all know what good customer
service is and there are hundreds of examples of us all delivering it every day. Our challenge
now is to make sure we deliver great service for every customer, every time. The more we
understand our customers and their expectations - and put ourselves in their shoes - the
easier it will be to provide consistently great service.
Our Customer Promise is to make the important things in life happen for them. There's
nothing that beats the buzz of achieving the important things in life, whether that’s getting
that dream house, starting a business, or even just relaxing on that well-earned holiday. And
yet, accomplishing the important stuff in life can be fraught with complexity, which can cost
our customers time, effort and added stress.
You may ask does this mean for each one of us? How can we at the Post Office make sure
that we full fill the Customer Promise?
We can help our customers focus on the important things by removing the stress of sorting
them.
e We connect with our customers on an emotional level;
e We listen first and fully understand their needs and expectations;
e We talk respectfully, leaving out the jargon to give them the best advice that meets their
expectation, to achieve their goal;
We always think about the customer and not the process;
We make it simple, straightforward and quick to reach us, in branch, online, on mobile;
We always focus on the Service before anything else;
We give the best possible experience, each time; and
Everyone is responsible for putting the customer first.
Service excellence is an attitude engrained in everyone at the Post Office. Our customers
have to be at the heart of everything we do.
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5. Our People
Our people are our biggest asset. Post Office is nothing without people. They provide the
human touch that forms the central part of our vision. It’s you and your colleagues who
make things happen - for customers, for clients, for each other, and for our business. And it’s
you who can make great things happen.
We should always ensure we are all delivering the best possible customer experience, while at
the same time giving everyone within our business the chance to fulfil their potential and
enjoy a varied, challenging and rewarding career.
We need you to take ownership of the part you play, but also work as a team and support
your colleagues when they need it. Always put yourselves in your customers’ shoes and think
about what else you can do to improve their experience. Speak up when you think there is a
better way of doing something - don't be afraid to challenge convention and inject new ideas.
We have high standards of personal behaviour and respect of everyone at all times. We
create a culture where everyone is able to give their best at all times.
We are open, honest and courteous with each other at all times. We challenge any instances
we encounter of bullying, intimidation, harassment, unlawful discrimination or abuse of any
kind and we report any instance to our line manager or via the confidential Speak Up support
line. We show that such behaviour has no place whatsoever in Post Office.
We do not exploit colleagues for loans, private work or favours of any kind nor abuse others
in speech, writing, social media or electronic communications. Our behaviour supports our
excellent service to customers, it enhances our reputation. Any behaviour which damages our
brand is unacceptable, including lateness, poor attendance, dishonesty, drunkenness, use of
illegal substances,violent or disorderly behaviour; and abusive language. Gambling is not
permitted at work.
Our appearance at work reflects our brand. We are professional, we are part of the
community, we respect our customers and we are easy to do business with.
We value the diversity of our customers and employees and are committed to being inclusive
at all times. When it comes to language, the common language of business should be English
(English or Welsh in Wales). However, as long as it doesn’t jeopardise the job or health and
safety and it doesn't deliberately exclude people then workers should be able to speak their
own language within reason.
Customers are at the heart of our business and therefore have an expectation of the
professionalism of the colleagues at Post Office. We should appear professional in our
appearance, therefore we expect people to wear business attire at work. Personal appearance
includes ensuring that any ribbons, jewellery or ornaments (including items used in body
piercing) and tattoos should not be offensive, a health and safety risk or incompatible with
being professional.
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6. Health, Safety and Environment
Everybody has the right to work in a safe and healthy way. We will fulfil our promises
without compromising the safety of our customers, employees, suppliers and all those
affected by our activities.
We will make healthy and safe working a way of life.
Pursuing this aim reflects the high value we place on our employees and all those touched by
our business activities.
© We comply fully with relevant legislation;
e We ensure that the health and safety responsibilities of our employees, including
managers, are clearly defined, allocated and understood;
e We encourage and help all managers and employees to carry out their responsibilities
through effective health and safety management systems, with safe premises, equipment
and processes;
¢ We improve our employees’ capability to manage and work safely, through coaching and
training;
¢ We support and encourage our people and unions to get involved in the health and safety
performance of our business;
e We support and encourage our people and unions to get involved in pursuing a healthy
and safe way of living and working; and
¢ We monitor and review how well we put our health and safety policies into practice.
We are all responsible for health and safety. Every manager is accountable for the health
and safety of their people.
A full copy of the Health and Safety policy can be found on the Health and Safety intranet
site.
Environment
We recognise that our business activities and policies have impacts on the environment. We
shall take full account of the environmental effects of our policies in our planning, decision
making and day-to-day activities. In particular we aim to reduce our environmental impact
through
«Reduction in the use of water;
e Efficient use of energy and a reduction in our CQ2 emissions;
e Reduction in waste to land fill by recycling where possible; and
The use of sustainable materials.
Everyone has a part to play in reducing our environmental impact
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7. Trust and Security
Millions of transactions are entrusted to us by our customers every day. We handle large
volumes of cash and valuable items and we gain information in the course of our business
that is confidential to our customers and clients every day, therefore honesty and trust are
qualities that our part of our core.
Of course, we must keep the absolute trust of our customers, clients and others we come into
contact with. The strength of our company rests on the integrity of our people.
Maintaining our standards means:
e Honesty in handling all items, cash and valuables entrusted to us;
e Correct accounting in all financial transactions and claims, and observance of established
business control procedures;
e Safeguarding company property and assets, ensuring that they are not stolen, abused,
damaged, or appropriated for personal use;
e Making economic use of resources, avoiding waste and extravagance;
e Ensuring that company funds and property are never used for private purposes;
e Ensuring that company premises and facilities are not abused for unauthorised
commercial transactions;
e Safeguarding confidential information against abuse or unauthorised disclosure, and
complying with laws protecting personal data, in particular the Data Protection Act 1998;
e Protecting Card Holder Data against unauthorised disclosure in accordance with Payment
Card Industry Data Security Standards; and
e Ensuring we are compliant with legislation including, but not limited to, the Financial
Services and Markets Act 2000, Road Transport Act 2013, Equality Act 2010 and Private
Security Industry Act 2001.
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8. Use of Company Property and Expenses
We each have a duty to ensure that reasonable and professional standards are maintained in
our work. This includes being watchful against abuse in matters such as claiming expenses
and proper use of official stationery and telephones.
Remember that:
e To claim money from the company for hours you did not work, a journey you did not
make, or an expense you did not legitimately incur is a criminal offence;
e Using pre-paid envelopes or other official stationery for private purposes is a disciplinary
and criminal offence; and
e Making personal phone calls in work time is sometimes unavoidable, but unnecessary,
frequent or prolonged personal calls are unacceptable.
All the above are unacceptable and may be treated as gross misconduct, which could result in
your dismissal. If theft or fraud is involved, it may well result in prosecution.
Please remember that, as an employee, you also have a duty to declare any criminal
conviction, and you must inform your manager if you are arrested and charged with any
criminal offence.
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9. Use of Computers, Internet, Mobile Phones and Business IT Systems
The work tools we provide to many of our people include computers, mobile phones and
a range of mobile equipment such as laptops and tablets. These devices must not be left
unattended in public areas, screens must always be locked when not in use and in the
office environment, and laptops must be secured using appropriate locking devices when
away from the immediate vicinity. The use of privacy screens should be adopted to
protect our information from being overseen by unauthorised people. When importing or
disseminating documents and/or emails, we must only use our corporate email account
or a Post Office approved data transfer system; ensure it is processed using the
appropriate method of protection and be satisfied the recipient is authorised to receive
our information.
While company policy allows some reasonable personal use of business IT equipment and
systems in an employee's own time, it does not permit:
e Use of unauthorised software;
e Unauthorised modification of computer components or other mobile equipment;
e Access to gambling, pornography or other indecent, illegal or offensive material, to
include storing and transmission of such content;
e Sending indecent, illegal, offensive, threatening or insulting material, chain or ‘spam’
emails;
e An unreasonable amount of work time spent on the internet for personal use or
sending personal emails; and
e Removal of hardware from Post Office premises without permission.
All of the above are unacceptable and may result in investigation and disciplinary action
under the Conduct Code, up to and including dismissal for gross misconduct.
For further advice and guidance please refer to our Policy Set on the intranet or contact
Post Office's Information Security and Assurance Group - isag@postoffice.co.uk
Insert a picture of a computer / mobile phone
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10. Social Media
Post Office recognises that many of our people enjoy using social networking sites in their
own time. Comments we publish on these sites may reach a surprisingly wide audience, and
therefore we must all protect our brand and avoid doing anything that might bring our
reputation into disrepute.
Everyone must be aware that information gained about Post Office as a result of your work
for the business should never be discussed or shared on social media sites.
Employees must carefully consider any reference to Post Office in their messages and ensure
that:
¢ No information relating to clients, partners or suppliers is published in a personal context;
¢ Technical, confidential or sensitive information of any nature is not disclosed;
¢ Copyright and fair usage laws and restrictions are respected;
* Social media is not used to offend or harass people; and
¢ Post Office brands or logos are not used or altered in any way.
Where an employee is asked to make any comment about Post Office in a published form
external to the business, such as newspaper, radio, television or a website, they must direct
the request to Communications.
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11. Political and Pressure Group Activity
The interests of the company, and those of its customers, must not be compromised by your
interest or activity with a political party.
If you are involved in political activities in your own time, you must ensure that they are kept
completely separate from your work. There are a few simple rules to remember and keep to:
¢ Political activity by employees is not permitted at work. This includes any active support of
parties, pressure groups, religious sects or other causes;
¢ Badges, slogans or notices advertising parties or causes must not be displayed while on
duty or in uniform, or on company premises, notice boards or vehicles;
* You must not distribute or deliver unauthorised material while you are on duty or in
uniform, or allow anyone else to use business services free of charge; and
e Take care not to make any statement or comment to the media on behalf of the company
unless you are authorised to do so and have cleared the statement first with the
Communications team. This applies whether or not party political issues are involved.
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12. Conflicts of Interest
A conflict of interest occurs when your position within the business means you can make a
personal gain or benefit over and above your terms and conditions of employment. We
should all make sure that our personal interests do not conflict with the interests of the
business, our clients or our customers.
If you feel that you might have a potential conflict of interest please inform your line manager
and seek their advice if you are unsure.
Please be open and frank about any outside activity or business you are involved in which
may conflict with Post Office or your duties as an employee. The essential principles of
conduct are:
e You must not do anything which conflicts with your duty as an employee or agent of the
company, or use your official position for private advantage;
¢ You must declare any outside employment; directorship or material shareholding and
these must not be contrary to the company’s commercial interests or bring it into
disrepute;
¢ Your actions as an employee or agent must not be improperly influenced by any
relationship (e.g. by blood, marriage, partnership or membership of any social, religious or
political association) or by any personal or financial consideration. For clarity, no one
should exploit their personal or family relationship with any colleague for any gain or
differential treatment whatsoever including gain for personal or any other family
member's benefit;
¢ You must not make any statement to the media that brings the company into disrepute;
¢ If you receive a fee from an outside source for performing a service which forms part of
your official duties or takes place in business time, e.g. giving an interview or lecture you
must report it to your manager. You will normally be expected to pay the money to the
company or to a charity connected with it. If the service arises from your work but is not
directly connected with it and is given in your own time, you must still report it to your
manager; and
¢ You must declare to your line manager and HR Services, any outside employment,
directorship or material shareholding, and these must not be contrary to the company’s
commercial interest or bring it into disrepute.
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13. Gifts and Sponsorship
You must not accept any gift, payment, bribe, favour or inducement that might influence (or
appear to influence) your action as an employee. Equally, you must not offer any bribe or
inducement to anyone else. If any such offer is made to you, you must report it to your
manager.
In general the giving and receiving of gifts is not permitted with the exception of low value
promotional items costing under £10 each, such as pens, calendars, diaries, notepads and
paperweights.
e In a situation where refusal to give or accept a gift would cause embarrassment or
offence, such as when giving or receiving a gift from an overseas postal administration in
an official capacity as a representative of Post Office, the gift must not appear lavish or
extravagant and should not cost more than £200;
¢ Before giving any gift costing more than £10 written approval must be obtained from your
line manager and forwarded to the Risk & Compliance team at
ia GRO ~
¢ If you receive a gift worth more than £10 you must notify your line manager in writing,
and forward the details to the Risk & Compliance team at
and
¢ The Risk & Compliance team will maintain a Register of all Gifts given and received.
If in doubt about whether it is proper to accept a gift, please discuss the matter with your
manager.
Private arrangements for gifts, discounts or concessions must not be solicited or accepted in
connection with any contract for goods or services to which the company is a party.
You must not ask for or accept sporting or charitable sponsorship from an organisation that
has (or is seeking) a contract to supply the company, or is in competition with it. You must
declare any plan to accept sponsorship to your manager and ask if there is any conflict with
company interests.
Note insert picture of a gift (wrapped present?)
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14. Hospitality and Entertainment
Hospitality may only be given and accepted where it has a clear and demonstrable link with a
legitimate business purpose, e.g. an organised event or a meal at which business is to be
discussed. In relation to offers of hospitality, numbers on both sides should be limited to those
whose presence is necessary to progress the business in hand. The giving and receiving of
hospitality and entertainment is subject to the following rules:
¢ You must obtain prior permission from your line manager before accepting or giving
hospitality;
¢ The hospitality must be reasonable (not lavish or extravagant), proportionate to its
purpose and must ordinarily be below £100 per person in value;
* You must send details of all hospitality offered and accepted, including details of the host
business (if not Post Office), the number of people attending and the businesses they
represent (if Post Office is the host), with details of the location of the hospitality and the
cost per person, along with written approval from your line manager, to the Risk &
Compliance team ati” nd
© The Risk & Compliance team will maintain a Register of all Hospitality given and received.
You must beware of accepting any hospitality and entertainment which might compromise
your performance of official business, or which might reasonably appear to have improperly
influenced a business decision. Any attempt at entrapment, blackmail, or any suggestion that
preferential treatment or divulgence of confidential information is expected in return for
hospitality and entertainment, must be reported to your line manager and the Risk &
Compliance team.
Do not provide or accept hospitality or entertainment which, because of its expense or nature,
may cause the company embarrassment or bring it into disrepute.
Modest hospitality to other company employees on business occasions is sometimes
justifiable, but extravagance must be avoided.
Alcoholic drinks are not permitted at business meetings or on company premises except for
authorised social functions out of the working hours of those present.
Use judgement and restraint, and consult your manager if in doubt.
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15. Risk Management
We have made a commitment to risk management as an integral part of running the Post
Office. Our risk management practices are intended to help you make better informed
decisions and to increase the likelihood of meeting our strategic objectives, to achieve
customer excellence and to safeguard business interests.
Effective risk management is demonstrated in how we behave and consider risk in everything
we do, from decision making to operational management. We encourage people to consider
risks, manage them and be transparent about it. This pragmatic approach is set out in the
risk management policy and our appetite to risk taking in the POL risk appetite statements.
Please contact the central risk team for more information.
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16. Useful Contacts and Links
Grapevine
www.grapevine.co.uk
HR Help Desk
https://portal.royalmailgroup.com/sites/PostOffice/HR/Site Pages/HRAdviceGuidance.aspx
Post Office Policies
https://portal.royalmailgroup.com/sites/PostOffice/inside/Pages/Policies -and-guidelines.aspx
---DOCUMENT ENDS---
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POST OFFICE LTD GROUP EXECUTIVE
Talent Retention — Managing Flight Risk
1. Purpose
The purpose of this paper is to:
1.1.
1.2.
1.3.
update the GE on plans to identify and manage flight risks
gain agreement to the proposed measures and processes to identify key individuals
ask GE members to take accountability for taking appropriate action to mitigate flight
risks where possible with these individuals in their teams
2. Background
2.1.
2.2.
2.3.
2.4.
2.5.
As Business Transformation gathers pace, the organisation will need to pro-actively
retain the best talent amongst the senior leadership population to lead and transform
the business.
With the likelihood of a lower bonus payout for 2014/15, and morale and employee
engagement likely affected by job losses and organisational structure changes, now
is the time to consider what action we should take to ensure we retain the right
people.
Replacing employees is a costly business — costing up to £75k to replace a senior
manager when you take into account productivity as well as direct costs.
Current attrition rates give part of the picture (see graph in appendix 1) — but other
key metrics to note are:
« Of the 18 Senior Managers who we placed on a talent programme, 5 have
left or are leaving (28%) and 2 have been promoted to SLT (9%) (see
appendix 2 for details)
¢ The SLT has seen churn of 8% over the past year (year ending Dec 2014)
— with 40% of these being leavers within the first year.
¢ FS first year leaver attrition is currently 55%. This is subject to a specific
review being led by Sean Leahy in the HR team.
Engagement has a direct correlation with retention, our intention to stay is heavily
influenced by how engaged we are and how valued we feel. The MacLeod report
and other engagement research shows what key factors need to be in place to
create the conditions for high engagement:
¢ Astrong strategic narrative: We need to create a positive future picture
that our people want to be part of. The GE is building this narrative.
e Engaging managers: Feeling trusted and having a good relationship with
our manager; feeling stretched and valued. Engagement data will be
shared next week and we will be able to clearly see “hot spots”.
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e Organisational integrity: espoused values are reflected in day to day
behaviour. The GE development day in early March will enable GE to
consider their roles as leaders of change. Are we authentic and
empathetic leaders?
3. Principles of our retention strategy
3.1. Key players generally account for about 35% of the overall population’ — and a
retention strategy should find who is both critical (in business terms) and a genuine
flight risk from this group. This is normally around 5-10% of the overall population.
3.2. Financial incentives will not motivate and/or retain everyone, so this shouldn’t and
can't be a purely financial scheme. Furthermore, we have some limitations on salary
budgets and we do not have extensive budget to fund retention measures.
3.3. Individuals who are in the DB pension scheme are less likely to be a risk — any
additional financial compensation for those who are members of the DB scheme,
therefore, should be carefully considered.
3.4. LTIP for SLP provides a longer term mechanism for retention and anything on top of
this should be a short-medium term measure. A promise of payment too far into the
future will not be attractive, too short term and it will not serve its’ purpose.
4. Proposal
4.1. Financial considerations have an impact, but on their own, they are not enough —
both financial and non-financial measures should be considered:
4.2. Non-Financial incentives
¢ Regular Conversation: Simply, regular conversations to ensure that an
individual understands that they are valued and we want them to be part of
the future Post Office. See Appendix 3 for top tips in having conversations
with individuals that you wish to retain.
e Future advocacy: Give them a role in creating and shaping the future —
this could be part of the team designing future OD for their area, part of
the visioning team, or a special role to report to the Lead team that
provides higher profile for them. What can you do to give talented people
more work to do or have greater visibility in your team?
e Role expansion/project/profile: Create a role that provides a more
challenging remit that satisfies career aspirations and/or provides a stretch
opportunity; ensure that they have the best line manager in the team to
support their aspirations and to keep them motivated. Are you keeping
talent in mind in your wave 2 OD?
e Flexible work patterns: Whilst we are all moving to a more agile way of
working, flexibility for some can be a key retention tool. It demonstrates
trust in action and can make a significant difference and impact for an
individual in balancing their work and home commitments. Do you know
the working arrangements that suit key individuals in your team? The
move to Finsbury Dials is an opportunity to look at this again.
* McKinsey Quarterly, Retaining key employees in times of change (2010)
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¢ Training/Development: Ensure that they have a personal development
plan, and that we are doing all we can to support their personal
development. Whilst we are keeping a close eye on costs, we should still
be investing in our future leaders. Do your key individuals have robust
Personal Development plans in place?
« Coach/Development Support: For SLT, a facilitated session to develop
personal development plan with use of a business coach if required.
Gabriella Driver can support this also. Are your SLT members ensuring
this happens for their key people too?
¢ Succession interview: For most senior talent across SLT, a one to one
structured interview with Neil Hayward to determine career aspirations and
suitability for succession, covering potential horizontal moves to broaden
development.
4.3. Financial incentives
¢ Itis recommended that two primary financial mechanisms are used for the
purpose of retention. A discretionary retention bonus or a salary uplift.
« A retention bonus of up to 10% of salary should be the most common
option. This would be conditional on remaining in post (and not under
notice period) and maintaining a minimum performance rating of 3 at mid
and full year.
e For individuals whose salary is low in range/when benchmarked, a salary
uplift could also be suitable.
¢ Decision making for local (within Function) financial retention measures
should be agreed with the Director and HRBP, with the Head of Reward
signing off as is common practice for salary changes. This provides
governance and oversight across the organisation.
¢ All financial measures will have to be funded within local staff budgets.
« Promotions or changes to job role may also attract a salary uplift, as
normal.
4.4. There are two key factors to consider when identifying who is a real retention risk.
Both require a judgement to be made.
« What is the actual likelihood that they may leave? Considerations here
are length of service, personal circumstances and financial package.
Financial package should be compared with appropriate Market data
« How difficult would they be to replace? The factors here are
performance and impact/difficulty to replace (both due to role and current
market conditions, and their Post Office knowledge/experience)
« Anexample matrix is shown in Appendix 4.
4.5. Note that this exercise is distinct and separate from identifying Talent “potential”.
Those that we put effort into retain may be crucial to today’s business as it stands
rather than those people who we believe have the future potential to take on greater
roles within the organisation.
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5. Identifying flight risks - process
5.1. There is no “one size fits all” approach and each HRBP will be asked to determine
the most appropriate process with each Director within agreed timelines.
5.2. Timelines:
HRBPs will facilitate a discussion to include focus on
Senior managers within the function. This could be, for
example;
¢ discussed with the Lead Teams (maybe at the
1. First discussions - - .
same time as peer comparison sessions)
take place before
April 30. ¢ gathering recommendations from Lead Team
members for the discussion
A list of individuals who are felt to be both business
critical, and a genuine flight risk should be created.
HRBPs will review individuals’ financial package (and
whether or not they are members of DB pension
scheme) and review and agree individual measures
2. Consider and with Director.
agree actions
Costs should be taken into account and the impact on
staff budgets considered.
3. Review by Head of I HRBPs will review any financial proposals with Head of
Reward Reward by end of May 2015.
Letters for any retention bonus or salary awards will be
4. Implementation by I provided by HR. Guidance for holding conversations
end of June will also be provided as there is added complexity given
we will be in consultation for Wave 2 concurrently.
5.3. This process, looking specifically at SLT who are flight risks was undertaken with
HRBPs and with Director's input over December. The list of identified individuals is
provided in Appendix 5 and is provided as a “starter for ten” with a view to being
agreed at GE on 7 May as part of the SLT Performance Comparison session.
6. Key Risks/Mitigation
6.1. The timetable coincides with engagement survey cascades; end of year performance
review/peer comparison timetable and wave 2 consultation. Senior management
attention will be limited. Mitigation: Managing people effectively and retaining talent
is a substantial business risk which can only be mitigated if given time to review.
This activity should be prioritised and HRBPs will provide support.
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7. Communications Impact
7.1. This needs to be light touch and carefully handled, with personal ownership by
members of the Group Executive. Individual conversations will be required, and
HRBPs will support Directors through the process.
8. Conclusion
8.1. A robust process, deployed across all functions simultaneously allows us to look at
retention risk holistically and agree actions within agreed guidance.
9. Recommendations
The GE is asked to:
9.1. note the update set out above
9.2. agree to the proposed measures, processes and timeline outlined;
9.3. take accountability for taking appropriate measures to mitigate flight risk where
possible with these individuals without your teams.
Neil Hayward
March 2015
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Appendix 1 — Employee Turnover by Function — to year end December 2014
Employee Turnover - by Directorate (Sub Directorate where requested)
608
Central
‘People and Engagement
ar HR
18 Communications
‘Financial Services
= Commerci
= Corporate Services
Finance
eT
‘Network and Sales
Crown
1 Supaty
Note: IT appears high as it includes those who have left our employ and TUPE’d to ATOS
Appendix 2 - Participants in the Senior Management Talent Programme
Participant
Status
Joel Davis -Digital Marketing Manager, Commercial
Rachael Walter - Product Manager, Commercial
Chinh Dinh - Product Manager, Commercial
Vicky Hampshire - Pricing Analyst, Commercial
Piero D'Agostino - Lawyer, Legal
Rob Pearce - Senior Product Manager, Financial Services
Jayaan Tank - Senior Development Manager, Financial
Services (Savings)
Antonio Jamasb - Branch IT Service Manager, Strategy (IT)
Mario Michael - Senior Operations Manager, Strategy (IT)
Daniel Farber - Commercial Planning Manager, Strategy
Sophie Bialaszewski - Public Affairs Manager,
Communications
Pam Heap - Regional Sales Manager, Network
Aidan Alston - Talent and Diversity Manager, HR
Martyn Lewis - HR Strategy & Governance Manager, HR
Sarah Long - Financial Accounting & Governance Manager,
Finance
Adam Page - Senior Finance Analyst, Finance
Robin Gregory - Investment & Benefits Manager, Finance
Fay Chandler - Senior Procurement Manager, Finance
In Post
Resigned
In Post
Resigned
Promoted
In Post
In Post
In Post
In Post
In Post
Resigned
Promoted
In Post
In Post
In Post
Resigned
In Post
Resigned
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Appendix 3 - Top Tips for conversations with individuals who are a flight risk
- Notice if someone in your team is less productive than normal; taking odd, or more frequent
sick days; not engaging with the team as normal. Talk to them about it.
- Have regular 1:1 conversations and ensure that you ask how people are feeling; create the
conditions and right atmosphere for meaningful conversations
- Paint a positive picture of the future, but also recognise that it is tough right now. Remember,
the conversation is about them and not you. Remind them about what is special and unique
about working here ©.
- Trust is a key ingredient in a successful working relationship — make time for people; listen
and be supportive but honest. Don’t make promises that we can’t keep.
- Try to address frustrations wherever you can — sometimes alleviating frustration can be the
difference between someone choosing to stay or not.
Appendix 4 — Example matrix (from McKinsey Quarterly, Retaining key employees in
times of change, 2010)
Risk heat map for European industrial company, figures indicate number
of employees in category (total = 497)
BE Lowrisk MB Mediumrisk Ml High risk
Unique skilis/knowledge;
High =a pivotal person in
the organization
Important resource whose
specific skils/knowledge
require careful attention
Difficulty in
replacing this Important resource, but
person Person's competencies are
shared and not at risk
General competencies in
own area
t No specific competencies;
easy to find in the market
) 25 50 75 100
Probability of person leaving organization, %
Based on market demand for employee's skills, latest
salary trends, existing competitive offers, family situation,
and known preferences and concerns.
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Appendix 5 — SLT retention list
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Note this also includes some Band 4 managers who were considered as part of the
exercise.
High Risk
SLP Harry Clarke
SLP Henk Van Hulle
SLP Alison Thompson
SLP Giles Dunning
SLP Gavin Lambert
SLP Martin Edwards
SLP Jeremy Law
SLP Pete Markey
SLP Tom Moran
4 Magnus Schoeman
4 Gabriella Driver
4 Paul White
4 Sarah Long
4 Robin Gregory
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GE & ExCo - Current Actions and Decisions Log
ExCo Meeting 3 July - Actions and Decisions
Significant Litigation
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03/07/05 Action 1 Schedule an ExCo discussion on prosecution policy JM/AL 31° March
ExCo Meeting 16" October - Actions and Decisions
Project Titan
16/10/2014 Action 6 Overlay the Risk Appetite framework and operational risk for POMS. NK/JM CLOSED
Update 09/12/15 - Preparing the risk appetite for POMS in the context of the risk
appetite for Post Office.
Update: 12/01/15 - POL Risk Appetite Approach being submitted to POL ARC on
12" January.2015. POMS will develop its Risk Appetite Statement aligned to POL.
Update 4/3/2015 - Going to March POMS Board. Action Closed.
ExCo meeting 20" November 2014 - Actions and Decisions
Telecoms
20/11/2014 Action 3 Commercial Committee, including LS, to work up the possible options for the Geoff Smyth / 12" March
future of the telecoms strategy. MG/ComCom
20/11/2014 Action 4 Present the options and a recommendation to the ExCo in early February for Geoff Smyth 12" March
discussion and recommendation to the March Board.
ExCo meeting 1
ecember 2014 - Actions and Decisions
Period 8 Performance
16/12/2014 Action 1 Paper to ExCo to cover working capital cash management, and the actions to be
put in place to ensure tighter control on cashflow.
Martin Edwards
GE on 4” June/
Board Away Day
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OD Wave 2
16/12/2014 Action 4 Review the delegated authority levels and any changes needed to align with Waves I AL/ AC 31° March
1&2 and circulate.
POca Call off agreement
[26/12/2014 I Action 1 [Undertake a lessons learned review with the ShEx team [Gavin Lambert [31° March
Risk Framework & Risk Data
[26/12/2014 [Action 1 [Provide a risk scorecard with metrics to measure the risk appetite statements Lm [30* April
Christmas Network Support
16/12/2014 Action 1 Provide a list of people who have not turned up for Network Support, all to follow I KG/ All Completed
up and find out why.
Update KG: all colleagues within Network & Sales contacted to discuss non:
attendance.
ExCo meeting 15"" January 2015 - Actions and Decisions
Financial Performance
15/01/2015 Action 10 Provide a paper on State Aid including worst case scenario for discussion at JM 27" February
Monday GE
Mails
15/01/2015 Action 1 Set up Scenario planning and financial modelling for the future Mail strategy and MG 30" June
relationship with RM. Clear TOR for the work with the top 3/4 themes and then
under each, what questions are we trying to answer to be agreed.
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Digital
15/01/2015 Action 3 Giles to work with Martin Edwards to produce a Business case and options on how I MG/ Giles Dunning/ I GE on 12th March
to prioritise and drive opportunities in digital, with an ambitious challenge to Martin Edwards
increase on-line sales by 4 times
SME
15/01/2015 Action 1 Include SME as part of the March Board, detailed paper required on what needs to I MG GE on 12” March
be done to deliver the SME offer. Pick up SME at a later GE Meeting. and Board on 25"
March
ExCo meeting 20"" January 2015 - Actions and Decisions
Budget. Operating Plan and Proposed Scorecard
20/01/2015 Action 4 Agenda item for May GE to look at the forward plan for future funding. Martin Edwards / AC I GE on 7” May &
Board Awayday
SLT Event
20/01/2015 Action 1 Timetable and agenda for SLT Events for the next year to be discussed at GE NH 16" April
On Agenda for 12" Feb GE Closed
GE on 12" February 2015
Resourcing update - Talent Attraction
12/02/2015 I Action 2 Include frontline retention (especially FS) and any geographical issues (e.g. London) I NH 16" April
in the GE slot on retention.
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Action 3
Consider graduate proposition, and how we build relationships with universities;
the timing of the graduate recruitment. To include in the Board paper.
NH
7" May
SLT Events - Communications
Calendar
12/02/2015 Action 1 Mark Davies to review the Teamtalk proposal to consider: Mark Davies / NH GE on 16" April
© messages for different audiences;
e the different purpose and outcomes required:
e how they align with the channels which already exist in network and supply
chain; how they align with SLT briefings;
© how they could be supported by visibility (GE & SLT?);
e the metrics by which we would measure.
As part of the analysis go out to SLT to ask if Teamtalk is working for them, if they
use it to update their teams, and if not why not. To return to GE for further debate
MD update: review in progress and to return to GE for further debate
12/02/2015 Action 2 MD to discuss proposed changes to operational comms with Angela VDB, to ensure I Mark Davies / 31° March
they align with the Branch Improvements planned. Angela Van Den
MD update: in discussions with Angela Bogerd
12/02/2015 Action 3 SLT Events - produce a paper for GE on the purpose and expected outcomes from I Mark Davies / GE on 16" April
SLT events. And the planned themes and agenda items for the year ahead. Gabriella Driver
MD update: in discussions with Gabriella Driver who is producing a paper focussing
on development days
POMS
12/02/2015 Action 2 Ensure the POMs process and meetings are included in the POL business planning. I AC On-going
Update 03/03/15: Will be included once finalised.
12/02/2015 Action 3 POMs performance to be included in the GE POL reporting pack. AC On-going
Update 03/03/15: Will be included in the P11 pack.
12/02/2015 Action 5 POMS MDA included an commercial agreement on services provided by POL to be I AC On-going
charged at a margin. Report back to GE when the margin is agreed.
Update 03/03/15: In hand - the likely structure will be a mark-up on costs.
12/02/2015 Action 6 Circulate POMS Articles and Board TOR to GE for information AL 27° February
12/02/2015 Action 7 Provide a document explaining the timelines for establishing POMS including Board I NK 20" March
sign off.
Update 4/3/15: POMS established FCA Authorisation ‘minded to approve’
Implementation target date 1 May.
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12/02/2015 Action 8 The impact on POL of investment decisions taken by POMS to be discussed at GE_I AC On-going
12/02/2015 Action 9 Push ahead with preparing the NED nominations for CFO & GC ready for NK/AL 27°” February
presenting after receipt of the MtA letter from the FCA (POMS matter).
Update 4/3/15: Submissions occurring early March
12/02/2015 I Action 10 NK and JM to discuss risk management if MtA letter is delayed (POMS matter). NK/JM CLOSED
Update 4/3/15: Letter received. Action CLOSED.
12/02/2015 Action 11 Provide a table setting out how the Governance processes between POL and POMS I NK/JM CLOSED
will work.
Update 4/3/15: See POMS governance paper table to GE Feb ‘15 and Titan Board
Paper. Action CLOSED.
Branch Support Process (BSP)
12/02/2015 Action 2 Establish what resources, knowledge, capability (name individuals if appropriate) Angela Van Den 31° March
are needed to understand what could be done to accelerate branch improvements. I Bogerd / DR
To enable a strategic view on branch support aligned with the business
transformation. Particular areas of focus:
e Case management tool
What does good look like for the roll out of Front Office/Horizon replacement?
What can we put in place now/what learning can we use to support the
transition from today to Horizon replacement roll-out
e Are there any things we could simplify now to make the front office change
easier
Second Sight Thematic Report
12/02/2015 Action 1 Consider how we should test the contract managers engagement with sub Angela Van Den 30" April
postmasters to see if new approach is working Bogerd
12/02/2015 Action 2 PV & JM to go through the Sparrow criminal cases PV/JM 31° March
12/02/2015 Action 3 Circulate the Board Sparrow Committee paper to the GE AL 16" February
SLT Events
12/02/2015 I Action 1 It was agreed that the ‘IT challenge’ and ‘embedding the risk culture into the Mark Davies / NH GE on 16" April
Business’ would be both be good items for future SLT agendas
Update: Items will be noted when building future agendas.
MD update: updating GE at 16 April meeting
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POST OFFICE LTD GROUP EXECUTIVE
Cyber Security and Information Assurance Update
1. Purpose
The purpose of this paper is to:
41.4. inform Group Executive of the response to the Board questions following the
Cyber Security Briefing by Tony Smith, a representative from the Centre for
the Protection of the National Infrastructure (CPNI);
1.2. provide Group Executive with an update relating to the risks of Cyber Security
and Information Assurance (CS & IA) and the management of those risks.
2. Overview/Executive Summary
On the 28" January 2015 Tony Smith a Deputy Director from the Centre of the Protection of
the National Infrastructure (CPNI) raised a series of questions at a Board briefing regarding
CS & IA, these are specifically responded to in Appendix A, as are the CPNI 20 Questions in
Appendix B.
This paper provides the Board and the Group Executive with a regular update on CS & IA
and provides an overview of risks relating to legal, contractual and regulatory obligations.
However it is recommended that future papers begin their journey at Risk and Compliance
Committee for transition to Audit, Risk and Compliance, with a Board paper being produced
annually.
3. Obligations around Information
. We have legal obligations to protect ‘personal data’ under the Data Protection
Act (DPA) (which are being enhanced under new EU regulations) and the
sanctions for breach (reputational and fines) are material (a more detailed list
is set out in Appendix C);
. We have contractual obligations to various suppliers (including the
government and others e.g DVLA, POca, Bank of Ireland, Aviva etc to meet
various ‘security standards’, and a breach of these contractual standards
would also carry material costs (damages, rectification etc) and reputational
damage, as well as possibly preventing us from contracting with those parties
in future - which would be substantially detrimental to our business model;
. There is other ‘information’ which we hold (e.g relating to the financial
performance /status of the business) which we value and therefore need to
develop our risk appetite which will define the level of protection appropriate to
protect that data in accordance with our risk appetite.
The agreed risk appetite for each risk will determine the level of protection required to
mitigate that risk, as well as defining the applicable risk/reward relationship. Where
management of these risks are delegated from a Group Executive to an SLT member or
other staff member, the scope of that delegation must be well-defined and applied
consistently.
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4. Information Security Activities
4.1. Risks, Incidents and Breaches.
There are currently seven active incidents. Of these, 71% relate to the alleged
incorrect handling of personal data, it is important to note that although these
incidents have increased over the last year, to date, no complaint to the
Information Commissioner has been upheld. This is largely due to the fact
that we have an accessible audit trail of Information Security and Data
Protection training, policies and processes.
4.2. Supplier Meetings
The Information Security Management Forum (ISMF) process was created to
manage the relationship between Post Office and its key suppliers. The
meetings are formally recorded and involve ISAG validating their
understanding and compliance to our CS & IA risk appetite.
4.3. Cyber Security Standards and Memberships
¢ CBEST
CBEST ' is the first initiative of its type. Working alongside the Bank of
England, “CREST” has developed a framework to deliver controlled,
bespoke, intelligence led cyber security tests.
¢ CiSP and CERT-UK
We are now receiving regular information and updates from the Cyber-
Security Information Sharing Partnership (CiSP)°, part of the UK
National Computer Emergency Response Team (CERT-Uk).
e Cyber Essentials
Cyber Essentials is a government-backed, industry supported scheme
to help organisations protect themselves against common cyber-
attacks.
45 Cyber Security Profession
ISAG continue to participate in external speaking events, forums and
associated workshops. We are heavily involved in the PCI Council (Payment
Card Industry) and sit on the PCI-ISAG (Information Security and Assurance
Group) committee that was formed to shape the way forward in terms of cyber
security. The PCI Council is also responsible for the development of the new
CBEST financial requirements.
" Intelligence - Cyber Bank of England Security Testing Standard
? CREST is a not for profit UK organisation that serves the needs of a technical information security market-place
that requires the services of a regulated professional services industry.
S CisP is part of UK National Computer Emergency Response Team (CERT-UK), is a joint industry and
Government initiative to increase overall situational awareness of the threat environment and therefore reduce the
impact on UK interests.
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We are also on the steering group for the e-Skills council for the development
of the cyber security profession.
5 Regulatory Development
5.1 General Data Protection Regulation and Cyber Security Directive
The proposed new European Union (EU) data protection regime seeks to
support Data Protection legislation by providing a consistent framework and to
make it easier for non-EU countries to comply with the harmonised
regulations. Sanctions for a breach of the new Regulations could include a
fine of up to 100million Euro or up to 5% of a corporation's worldwide turnover.
The Network and Information Security Directive has been accepted by
member states and is likely to be adopted this year, this is likely to enforce the
reporting of Cyber breaches to a centralised HMG function.
6 Current Engagement
6.1 Technical and Security Operation Initiatives
ISAG continue to work on clear separation of 1st and 2nd Line Defence
activities. The remit of an IT security operational function is 1st Line of
Defence, supported by Atos Operational Security resources, and is being
worked through with the support of the Director of IT and Operations.
6.2. Sparrow Support
ISAG support is being provided in the provision of evidence for forensic
analysis; collation of information on system security and integrity; and in
discovery of evidence in support of Post Office position on the investigations
to date.
6.3 Project and Change
ISAG have created an Information Security business impact and risk process
that includes Data Protection and Payment Card Industry requirements and
this is being aligned with the new Transformation activities.
Further work has also been completed to simplify the process with the
development of workflows and guidance documents. The documents have
been shared with Risk and Compliance for alignment.
6.4 ISAG will be working with the business to identify Information Security
Champions within each area. The role of the Information Security Champions
is to be the main point of contact for ISAG and to forward the understanding of
tisk for any updates or changes that may need to be communicated to the
business. Training and regular updates will be provided to all Information
Security Champions in 2015. We will work with our Corporate Risk colleagues
to ensure we join up this process where applicable.
6.5 2015/2016 CSIA Training and Awareness
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We are in the process of reviewing last year’s CBT (Computer Based Training)
and intend to ensure, for 2015/2016 that it is compatible with devices such as
tablets.
The Information Security and Data Protection e-learning annual training
module for 2014/2015 was completed by 97% of colleagues which is an
industry leading result. The proposed Information Security Champions
programme will ensure each area completes their training in a much more
effective way than is currently being undertaken by ISAG.
Information Security and Data Protection Workbooks are also in process of
being developed to provide an alternative media for the parts of the business
without Internet access.
ISAG has been involved in the development of Information Security
requirements for Post Office subsidiaries such as Post Office Money Services
(POMS). ISAG will be responsible for the delivery of strategic and tactical
Information Security/Data Protection requirements (including resourcing) for
POMS. ISAG will use the POMS process as a template for any further
subsidiary support requirements.
7 Recommendations
The Group Executive Team is asked to:
71 Note the update set out above and approve the transition of the Paper to the
Board on 31°" March 2015.
7.2 Underpin the work of ISAG by providing visible support/communications on
the importance of protecting our information. Emphasising that
Cyber/Information Security is essential in managing risk to our business, that
designated SLT attend the Information Security Committee and training is
mandatory for all colleagues.
Name of sponsor: Jane McLeod
04/03/2015
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Appendix A
Cyber Security Discussion — Tony Smith , 28" January 2015
Whilst particular questions were asked that the Board felt where particularly pertinent to the
Head of Information Security and Assurance, a response to the discussion paper in its
entirety has been provided. This will join up the work that is undertaken by ISAG across the
business for the Boards information.
Tony Smith recommended the Board ask itself the following questions:
Identify what matters to the Business
e What is critical
Where is it - where is what? Perhaps ‘status’ or something would be more
appropriate.
How many copies
Who has access
Who might be interested in getting or damaging it
How much do I care
Can't protect everything
What is critical?
ISAG consider information in any form (people, data/information, technology, media, and
location) as a business asset, as such it is identified, categorised and is part of an on-going
assurance and risk assessment management and mitigation programme.
The Governance Risk and Compliance tool has been populated with Group Executive's and
Senior Leadership Team’s view of the information that they felt was key to their area of
business.
This information is categorised in terms of importance to the business, using industry ‘good
practice’ requirements of Confidentiality, Integrity and Availability and a dynamic (Cyber
Risks change all the time) Threat/Risk profile completed for all identified critical
environments. For example strategic planning documents and financial management
information are categorised as at least “Confidential”. Protocols to protect classes of
documents have been developed for each security categorisation.
It is generally the case in other corporations/organisations that Risk and Business Continuity
and Disaster Recovery (BC/DR) use a ‘cut’ of the same information to highlight a list of all
critical systems, importance to the company and their location, currently this is not the case,
although ISAG work closely with Risk and Audit, business areas.
ISAG have set up and aligned Post Office’s Information Security Management System on a
foundation of 1SO27001 (International Information Security Management System — often
referred to as ‘the Information Security Standard’. The advantages of doing this means that
by complying (and certifying for part of the business) to this ‘standard’ we also align to the
recommendations of centre for the Protection of the National Infrastructure (CPNI) and
majority of other good/best practice Information Security standards across a variety of
industries (see Appendix C):
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ISAG have developed a ‘House Position’ for Procurement requirements and for Contracts,
which passes on our business requirements to all third parties. We then engage with major
suppliers, and those that are measured as higher than usual risk, due to the nature of our
information in their care; to discuss and assure their risk position and incidents and breaches
that may affect our business. We also ‘sample’ other suppliers and undertake information
Assurance Audits and ‘penetration tests'/vulnerability assessments on their technology
where appropriate.
Our supplier/partners often undertake ‘Audits’ on Post Offices Information Security
Management System (ISMS) (i.e. how we look after our data and theirs). We have not had
any major issues with any third party audits and some have commented on the quality of our
ISMS.
Our industry ‘good/best practice’ aligned policies and training provide an auditable record of
our information security ethos and our Business Impact Assessments (BIA) have been
accepted and are embedded within the ‘Change’ community. These are often an advantage
when dealing with third-parties.
Customer Data
The loss of, or/and the potentially significant unauthorised access to customer data will
attract both reputational damage/financial penalties
ISAG are undertaking various Privacy reviews on contracts projects and suppliers and are
planning for the expected revision of Data Protection Regulations
Behaviours of the business (and in some cases our partners) doesn’t always reflect how
important correct handling of personal data is. 70-80% of our incidents relate to incorrect
handling. All known incidents, whether within Post Office or within our supply chain, are
followed up through to closure and ‘lessons learnt’ incorporated in our business as usual
activities or where we are contractually able, our suppliers.
Cyber Security technology is recommended based on our risk assessment — Threats,
Vulnerability Impact and also likelihood, recognising that Cyber risks are on the increase,
especially in the personal data and financial industries. Nevertheless these solutions are not
a universal control and cultural change towards Information Security remains fundamental.
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The Board posed the additional
questions:
Response:
Do staff understand why important?
A new programme to introduce Cyber/Information
Security Champions in each business area is being
introduced to reinforce the messages.
Do we measure/track?
Completion of training is tracked through Orbit but
mainly the analysis is undertaken manually. Using
specialist Cyber/Information Security professionals
to undertake this work is not efficient, but it is
essential, ISAG are looking for a more automated
process, which is less of an administrative burden.
Have we set the culture?
It would greatly enhance the take up and culture of
our business’s Information Security posture for the
Board and GE to communicate their support for
ISAG and their remit of protecting the organisations
information.
Defence against / spear fishing?
Information Security communications have
previously been regularly published on the Intranet
for colleague awareness.
Our third-party suppliers are actively engaged to
support through technical means.
What is in the public domain about
the business?
Increased visibility via advertisements and media
coverage on products and services.
Adverse publicity regarding Mediation activities.
Potential for authorised use of Social Media by the
Network in order to increase sales which may lead
to adverse comments, damaging reputation.
Communications monitor such publicity.
Cyber:
« Gain entry, may target
human being —‘firstBuild
fences, but then monitor
fences
e People looking for the things
that matter
Training and HR are key to ensuring we employ the
right people. Their induction into the business must
include IS/DP training (it is within Networks) and
when they move or leave, system access is
changed accordingly. Our people are both the
biggest risk and the greatest asset to our business.
Separation from RMG will give our business more
autonomy to better protect our information through
improved services and _ better contractual
requirements.
Supply Chain — Outsourcing
« Same security expected from
suppliers
« Tool — Cyber Essentials
¢ Critical controls — e.g. access
control
ISAG have developed a ‘House Position’ which
incorporates all the ‘good practice requirements’
detailed in the first part of this response.
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e Can apply for accreditation
e Are your suppliers cyber
essentials compliant
Human Sources — Care Information Security and Data Protection
Handbook and eLearning address these points,
¢ Especially travelling however there are plans in place to provide a
e Advice : do not take IT with ‘handbook’ with ‘tops tips’.
you (laptop)
« Eyes open
e (Cyber — barrier to entry is
low)
The Board also raised the following which are being considered and will be the subject of
further updates:
e Which organisations like us are on top of this e.g. HMRC?
¢ Board members top tips
« What does good look like
e How do we measure security culture
¢ Cultural question - embedded — there to support
e Should iPads be wiped of Board papers after the meeting?
¢ Emails — cross polluting — risk based judgement
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Appendix B
CPNI 20 Questions and Response
CPNI 20 Cyber Questions
General Statement:
ISAG have the right to undertake Assurance measures on all third parties and we also
have established regular Information Security Management Forums with all major
suppliers to ensure risks are managed appropriately. Further ISAG have made
recommendations to the Technology Office for Cyber Information Security
requirements to address new/forthcoming regulations including a Security Incident
and Event Management (SIEM) facility, and Data Loss Prevention (DLP). £15m has
been earmarked to address these requirements in the Technology Strategy/Roadmap.
Response for Question 1 -— 8 and 10 - 20
This is covered in our requirements and contracts under the Tower procurements. All
suppliers are required to meet this control and governance processes in place for
monitoring its effectiveness. Adherence to 1SO27001 and relevant
regulations/standards is also required of suppliers; which establishes industry best
practice. The provision of appropriate capabilities to meet the businesses current and
future needs has also been written into contracts.
Response for Question 9
A comprehensive programme is in place within Post Office including professional
development, awareness and training. Similar requirements and enshrined in our
contracts with tower suppliers, monitored through 1SO27001 based governance
structures.
Any incident or breach is followed up with further training where necessary.
Information Security skills are maintained and developed.
1 - Inventory of Authorised and Unauthorised Devices
Actively manage (inventory, track, and correct) all hardware devices on the network so that
only authorised devices are given access, and unauthorised and unmanaged devices are
found and prevented from gaining access.
2 - Inventory of Authorised and Unauthorised Software
Actively manage (inventory, track and correct) all software on the network so that only
authorised software is installed and can execute and that unauthorised and unmanaged
software is found and prevented from installation or execution.
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3 - Secure Configurations for Hardware and Software on Mobile Devices, Laptops,
Workstations and Servers
Establish, implement and actively manage (track, reporting, correct) the security
configuration of laptops, servers and workstations using a rigorous configuration
management and change control process in order to prevent attackers from exploiting
vulnerable services and settings.
4 - Continuous Vulnerability Assessment and Remediation
Continuously acquire, assess and take action on new information in order to identify
vulnerabilities, remediate and minimise the window of opportunity for attackers.
5 - Malware Defences
Control the installation, spread and execution of malicious code at multiple points in the
enterprise, while optimizing the use of automation to enable rapid updating of defence, data
gathering and corrective action.
6 - Application Software Security
Manage the security lifecycle of all in house developed and acquired software in order to
prevent, detect and correct security weaknesses.
7 - Wireless Access Control
The processes and tools used to track/control/prevent/correct the security use of wireless
local area networks (LANS), access points and wireless client systems.
8 - Data Recovery Capability
The processes and tools used to properly back up critical information with a proven
methodology for timely recovery of it.
9 - Security Skills Assessment and Appropriate Training to Fill Gaps
For all functional roles in the organization prioritising those mission critical to the business
and its security), identify the specific knowledge, skills and abilities needed to support
defence of the enterprise; develop and execute an integrated plan to assess, identify gaps
and remediate through policy, organizational planning, training and awareness programs.
10 - Secure Configurations for Network Devices such as Firewalls, Routers and
Switches
Establish, implement and actively manage (track, report on, correct) the security
configuration of network infrastructure devices using a rigorous configuration management
and change control process in order to prevent attackers from exploiting vulnerable services
and settings.
11 - Limitation and Control of Network Ports, Protocols and Services
Manage (track/control/correct) the ongoing operational use of ports, protocols and services
on networked devices in order to minimize windows of vulnerability available to attackers.
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12 - Controlled Use of Administrative Privileges
The processes and tools used to track/control/prevent/correct the use, assignment and
configuration of administrative privileges on computers, networks and applications.
13 - Boundary Defence
Detect/prevent/correct the flow of information transferring networks of different trust levels
with a focus on security damaging data.
14 - Maintenance, Monitoring and Analysis of Audit Logs
Collect, manage and analyse audit logs of events that could help detect, understand or
recover from an attack.
15 - Control Access Based on the Need to Know
The processes and tools used to track/control/prevent/correct secure access to critical assets
(e.g., information, resources, and systems) according to the formal determination of which
persons, computers and applications have a need and right to access these critical assets
based on an approved classification.
16 - Account Monitoring and Control
Actively manage the lifecycle of system and application accounts, their creation, use,
dormancy, deletion in order to minimize opportunities for attackers to leverage them.
17 - Data Protection
The processes and tools used to prevent data exfiltration, mitigate the effects of exfiltrated
data and ensure the privacy and integrity of sensitive information.
18 - Incident Response and Management
Protect the organisation's information, as well as its reputation, by developing and
implementing an incident response infrastructure (e.g., plans, defined roles, training,
communications, management oversight) for quickly discovering an attack and then
effectively containing the damage, eradicating the attacker's presence, and restoring the
integrity of the network and systems.
19 - Secure Network Engineering
Make security an inherent attribute of the enterprise by specifying, designing, and building in
features that allow high confidence systems operations while denying or minimising
opportunities for attackers.
20 - Penetration Tests and Red Team Exercises
Test the overall strength of an organisation’s defences (the technology, the processes, and
the people) by simulating the objectives and actions of an attacker.
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Appendix C
CS & 1A related Legal, Regulatory and Contractual Requirements
The laws, regulations and good/best practice standards that we are obliged to comply with
and/or we use to protect our information are used across all industries in UK as well as by
global corporations and are built on the foundation of measuring risk include, but aren't
limited to:
e Relevant Laws:
°
°
°
Data Protection Act 1998 — DPA - currently being enhanced by new EU
Regulations
Human Rights Act 1998
Computer Misuse Act 1990
° Regulation of Investigatory Powers (RIPA) Act 2000
°
EU Network and Information Security Directive — planned to be adopted by
member states 2015
e Regulations and Standards:
°
Payment Card Industry Data Security Standard (PCI/DSS) — current Level 1
Certification in place;
Sarbanes Oxley — 404;
Basel 4 — Information Security aspects;
Prudential Regulatory Authority (PRA) — Information Security Aspects;
Financial Services Authority — Information Security Aspects;
HMG Security Policy Framework;
co International Standards (ISO's) in Risk, Information Security, Business
Continuity, Disaster Recovery, Service Management;
o HMG Cyber Security Essentials;
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POST OFFICE LTD GROUP EXECUTIVE
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 past 10 months of 2014/15 indicates that the 5% reduction
target in absence accidents will not be achieved. This needs to be considered in the
context of the overall low number of absence accidents and the adverse impact that
an additional one or two absence accidents per month has on the overall
performance. The severity of those accidents, measured by the number of days lost,
indicates that while volume has increased, severity has significantly decreased with
days lost from accidents well ahead of the target reduction of 5%. The reduction of
all injury accident incidents is currently on target for a 5% reduction at year end.
Table 1 All Injury accidents and those resulting in absence (Cumulative)
300
250 ee
o 200 —+— 2013/14 All
€ 2014/15 All
8 150
3 2013/14 Absence
< 100 ge 2014/15 Absence
50 -
pe
of
P1 P2 P3 P4 P5 P6 P7 PB PY P10 P11 P12
Period
2.3 Personal injury compensation claims have fallen significantly in line with the
reduction in accidents that result in sick absence. Comparison with a similar
retail organisation indicates that the Post Office claim rate is significantly lower
in both public and employer's liability and of those claims the ‘denial’ or
‘defence’ rate is significantly higher. The general level of claims is recognised
by the insurers as extremely low both in volume and value. The insurance year
runs from October to September.
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ne aa SE
ao Reserves
Employers’ Liability £25,482 £19,710 £45,192 ‘£45,192
General Liability £43,026 ‘0 £111,635 £154,661, £154,661,
Total : H £68,509 0 £131,344 £199,853 £199,853
2013 Employers’ Liability 7 £9,878 £0 £67,463 £77,341 £77,341
& General Liability 16 £16,646 £0 £84,067 £100,713 £100,713
Total 23 £26,524 £0 £151,530 £178,054 £178,054
(2014 y Employers’ Liability 1 £0 £0 £81,000 £81,000 £81,000
General Liability 2 £0 £0 £0 £0 £0
Total : gene! £0 £0 ‘£81,000 ‘£81,000 «£81,000
Employers’ liability - employees. General liability - customers.
2.4 The number of days lost due to accidents is currently well ahead of target and
forecast to outturn ahead of the 5% reduction target. (Table 2 below refers)
Table 2 Days lost resulting from injury accidents (Cumulative)
600
500
400
—o— 2013/14
wm 2014/15
300
Days
200
100
P1 P2 P3 P4 P5 P6 PT PB PO PIO P11 P12
Period
2.5 The total number of road traffic collisions (RTCs) for the past 10 months is up
39 on last year. While this is of concern it is believed that there continues to
be a more robust approach to the reporting of incidents, irrespective of
severity, and what appears to be an increase in minor damage incidents e.g.
broken mirrors and minor scrapes The number of incidents where the Post
Office driver is ‘at fault’ is also up compared to last year and accounts for
54.5% of the incidents. (Table 3 refers) Road risk reduction opportunities
continue to be the subject of analysis at the Road Risk Forum with a view to
identifying improvement activities in addition to those already in place. (3.1
below) Reversing incidents remain a cause for concern and will be the subject
of additional attention. Injuries as a result of road traffic collisions are
extremely infrequent and 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.
There was however a serious road traffic incident involving a Post Office
vehicle on 6" February as a result of which the 3° party died. Indications are
that the 3 party, who had been reported as driving erratically, was on the
wrong side of the road (overtaking) at the time of the collision. The Post Office
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driver received non-life threatening injuries which required hospital treatment
and is being supported via line management and occupational health
interventions. Post Office insurers have been notified of the incident.
Governance of all three areas of vehicle use — commercial, business car and
private vehicle — is being tightened to mitigate the associated risks.
Table 3 Road Traffic Collisions (cumulative)
250
200
—— 2013/14 All
2014/15 All
2013/14 ‘at fault’
2014/15 ‘at fault’
Number of RTCs
Fe i
P1 P2 P3 P4 PS P6 P7 P8& PY P10 P11 P12
Period
2.6 Robberies involving Post Office Cash and Valuables in Transit (CViT) crews are
down 5 on last year from 33 to 28 for the past 10 months. Physical injuries
during robberies, of which there have been 9, 1 less than last year for the same
period, remain relatively minor in severity. The level of use of firearms remains
consistent with last year with 5 of the 28 robberies (17.8%) enabled by the
presence and/or threat of use of fire arms. There has been one occasion where
the fire arms were discharged (into the ceiling). 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). Following discussions at the Group Executive H&S sub-committee the
robbery risk assessment and the business’ approach to body armour is now the
subject of a formal 3 monthly review.
27 Robberies and attempted robberies on the Post Office network, up to and
including P10, are up 4 on last year to 94 of which 55.3% were successful.
Injuries sustained during robberies are down from 17 to 14. Robberies take
place predominantly at sub post offices leaving Crown branches largely
unaffected. Supporting activities have been introduced to continue to mitigate
the robbery risk and are identified at 3.2. (Appendix 1 — Significant Incidents
refers).
3. Activities
3.1 Road Risk
Current longer term 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
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¢ 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
¢ Programme of driving and road risk communications to raise awareness of
current and emerging risks
¢ Onsite coaching to improve slow manoeuvring skills e.g. reversing
3.2 Robbery/Burglary Risk
Current activities to mitigate robbery and burglary risk are:
e Active liaison activities with the police to understand ‘at risk’ areas and to
deploy surveillance teams
e 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
e 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:
e 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
¢ Wellbeing events to promote general health, exercise and dietary initiatives
e Attendance levels are at 96.5% which compares very favourably with the public
sector and relatively favourably with the private sector
¢ Mental health - A programme of activity has been running for the past 9 months
to raise awareness of mental health conditions and the support available to
those affected and those supporting them. Mental health conditions remain the
single most common cause of longer term absence however related monthly
absence (days lost) is down from a peak of 2274 in P5 to 2185 in P10 and
occurrences are down from 121 in PS to 106 in P10.
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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.
4. Residual Risks
4.1 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 Group Executive is asked to:
5.1 Note the overall safety performance
5.2 Note the risk reduction activities.
5.3 Note the residual risks
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March 2015
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Appendix 1
Significant Incidents (Period 10)
Crowns and Network
Location Loss Circumstances Physical Injuries I Any further details
Blyton outreach, £5,000 Tue 6/1/15 9:30. Male armed with a knife entered Nil One previous incident robbery Jan
Blyton Parish the office and took cash. (Core branch Epworth 2010.
Council Office, 498311).
Blyton,
Gainsborough DN21
3LA
Beech Road SPSO, I £27,000 Mon 19/01/2015 5:39 - Supervisor had the safe Cuts and bruises I No previous incidents
12 Beech Road, St open to take out the till and stamps. Two masked
Albans, AL3 SAS men forced their way in and held supervisor at
knifepoint. He was pushed to the floor and has cuts
& bruises. Cash taken. Phone ripped out, the alarm
was activated.
Supply Chain
Location Loss Circumstances Physical Injuries I Any further details
Mill Lane, 41a Mill £26,000 Wed 28/01/2015 10:15 -Crew member was at the Nil No previous incidents
Lane, London, NW6
1NB
counter when 2 males were waiting in the queue in
the post office once she opened the Ibox the
pouches were snatched 1 cash pouch and 1 stock
pouch 2 males made off on foot. No weapons were
seen..
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POST OFFICE LIMITED MATTERS — DISPUTE RESOLUTION
PRIVILEGED AND CONFIDENTIAL — CLAIMS OVER £500K OR THOSE OF A SENSITIVE NATURE
PART (A) - CIVIL LITIGATION
Horizon claims Rodric Belinda
(aka “Project I Williams Angela
Sparrow") Bogerd
Crowe
van
/
den
Post Office has received various claims from
subpostmasters (SPMs) alleging defects in the
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” UFSA)
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 Post Office'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 Post Office launched a Mediation
Scheme (Scheme) aimed at resolving individual
complaints made about Horizon.
This matter is the subject of separate
updates to senior management and the
Board.
The Scheme received 150 applications,
which have been progressed under the
direction of a Working Group comprising
retired Court of Appeal Judge Sir Anthony
Hooper (as Chair), Post Office, Second Sight,
and JFSA. 80 cases are still being
progressed through the Scheme.
On 03.03.15 the Board approved a course of
action by which Post Office would presume
to mediate all non-criminal cases within the
Scheme, the Working Group would be closed,
and the current engagement with Second
Sight would be terminated. Post Office's
project team is acting in accordance with the
Board's direction.
To date, no claim has been made against
Post Office in the civil courts, and no appeal
has been made against any conviction in the
criminal courts, following Second Sight's
Report. Post Office is however in
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correspondence with the Criminal Cases
Review Commission about its past
prosecution practices.
There has also been significant media and
political activity concerning the Scheme,
which is likely to continue in the immediate
future. Post Office's Communications team
is fully engaged on this activity.
Employment
Nisha
Marwaha
Colin Stretch
Legal Privilege
Legal Privilege I
Eversheds
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Legal Privilege I
Employment POL/NM Colin Stretch i Hi i] Weightmans
_Legal Privilege _ Legal Privilege I
PART (B) - CRIMINAL LITIGATION
PROSECUTION POLICY
Post Office is in the process of finalising a new prosecution policy drafted by former First Senior Treasury Counsel Brian Altman QC.
PROSECUTION CASES
Post Office is not currently pursuing any live prosecutions in England and Wales, although there are 5 cases being dealt with by the national prosecutors
in each of Scotland and Northern Ireland. A number of security investigations are being reviewed as to whether a prosecution could be commenced
(supported by an independent expert report on the Horizon branch accounting system if appropriate - see below).
EXPERT REPORT
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Steps continue to be taken to determine the basis on which Imperial College London may be able to provide expert evidence to support prosecutions
which involve data obtained from the Horizon system.
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POST OFFICE LTD GROUP EXECUTIVE
Post Office Pensions - Update
1. Purpose
The purpose of this paper is to:
1.1. Update the Group Executive on the defined benefit, Royal Mail Pension Plan
(RMPP) and the proposed new defined contribution Group Personal Pension,
Post Office Pensions Plan (POPP).
2. Royal Mail Pension Plan (RMPP) - Background
2.1. Following the transfer of RMPP liabilities to the Royal Mail Statutory Pension
Scheme (RMSPS) and HMG in 2012, Post Office became responsible for the
funding of its own section of the RMPP.
2.2. As part of the agreement of the transfer, it was agreed to retain the link
between the RMSPS and final salary for Post Office employees still in
employment. It was agreed to set future increases at RPI + 1%. It was further
agreed that HMG would fund this link and £178m was left in the Post Office
section of the RMPP.
2.3. At the valuation on 31 March 2012, the Trustee of the RMPP utilised the same
assumptions used by the Government Actuaries Department (GAD) when
they valued the liabilities that were transferred to HMG.
2.4. Based upon these assumptions the employer contribution rates and the
investment strategies were set for both Royal Mail and Post Office by the
Trustee. The employer contribution rate proposed was 30.1% of pensionable
pay (compared with 17.1% which was being paid at the time). It was felt that
this higher rate was not economically viable and would put the future of the
RMPP in jeopardy.
2.5. Royal Mail and Post Office examined ways to limit their contributions to the
RMPP whilst providing a degree of certainty for the future of the RMPP. It
was agreed with the Trustee to limit Pensionable Pay increases to RPI (to a
maximum of 5%) regardless of any pay increase an employee would receive
from 1 April 2014 onwards.
2.6. By capping future Pensionable Pay increases it was agreed that the
contribution rate would remain at 17.1%. However, it needs to be understood
that the economic rate the Company should still be paying is 30.1%. The gap
of 13% was subsidised by the assets in the fund. This was possible due to
the money left by HMG to fund the pensionable salary link at a rate of RPI
+1%. The removal of the 1% created a surplus that would be drawn down
over time. It was projected at the time that, if the assumptions and investment
returns were realised, the RMPP would cross-over into a deficit position by
2021. Prior to this point, Post Office would have to consider the future of its
section of the RMPP.
3. RMPP - Current Situation
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3.1 Following an update from the Trustee at the last Pensions Committee
(December 2014), it was highlighted that Post Office might want to consider
its position and support of the RMPP as it was estimated that the deficit
crossover point could be between March 2018 and late 2019 and not 2021.
3.2 RMPP Financial position as at 30 November 2014 (position at 31 December
2014 will be available end of February 2015):
Gilts basis ABO Gilts basis ABO
31 August 2014 30 November 2014
(estimated) (estimated)
Liabilities £176.6m £209.3m
Assets £302.4m £333.6m
Surplus/(Deficit) £125.8m £124.3m
Funding Level 171% 159%
Effective nominal 3.0% 2.7%
discount rate
Effective real -0.4% -0.6%
discount rate
* The surplus position has remained largely unchanged over the period, with
assets increasing by c£31m and liabilities increasing by c£33m.
+ The positions include the effect of the April 2012 salary increases assumed
in the 2012 actuarial valuation basis (3.5% base increase plus an allowance
for promotional salary increase), as well as the promotional salary increases
from 2013 onwards assumed as part of the 2012 actuarial valuation.
+ The gilt basis ABO measure shown here uses demographic assumptions
from the 2012 actuarial valuation basis, market gilt yields and RPI inflation
rates. The RPI/CPI differential is also from the 2012 valuation basis. LPI rates
are Mercer defined.
+ The figures exclude an expense allowance.
3.3. The major contributor to the increase in the liabilities is the significantly
reduced returns in UK government bond yields. Since March 2012 the 20
year UK government bonds yield has dropped from circa 3.5% to circa 2.3%
in September 2014 (source Bank of England).
The impact of this has been significantly to increase the cost associated with
accruing pension benefits in the RMPP, as they are measured with reference
to UK government bonds.
The POL section has a hedging programme in place, however this currently
only extends to benefits accrued to 31 December 2015, and benefits accrued
after this date remain subject to market movements.
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The Trustee will be taking the current situation with UK government bonds into
consideration when they determine the assumptions to be used in the
valuation due on 31 March 2015.
4. RMPP -— Next steps
4.1. Post Office will begin dialogue with the Trustee and its advisers with regards
to the assumptions that will be used to determine the liabilities of the Post
Office section of the RMPP. The first meeting is scheduled for March 2015.
4.2. Post Office will not know the full extent of the financial implications of the
valuation until September 2015 when the initial results will be available. In the
meantime, all possible scenarios will be examined ranging from not doing
anything to closing the RMPP to future accrual. Possible actions will be
presented to the Group Executive in April 2015.
4.3. Arisk profile for the different scenarios will need to be completed, and other
areas of risk will need to be highlighted ie industrial relations and the financial
risk to the business.
4.4. Royal Mail Group faces a similar situation concerning this issue. A joint
approach might lessen the IR risk.
5. New Group Personal Pension (Project Nemo) — Update
5.1. The name of the new pension arrangement will be Post Office Pension Plan
(POPP).
5.2. A 60 day consultation with all employees affected by the change began on 23
December 2014 and ended on 23 February 2015. We considered the
feedback from employees and the Unions before making a final decision to
proceed with the POPP. Unite was broadly positive and this view was echoed
in correspondence to members. Their main issue concerned the governance
of POPP.
5.3. _ As part of the consideration we met with the Unions to gain their support and
discuss any issues they still may have. We addressed the situation
surrounding the governance of the new pension scheme and provided them
with the feedback from employees. It was agreed in principle to the formation
of a joint Post Office and Unions governance group. The terms of reference
have been discussed but still need to be finalised between Post office and the
Unions. Based upon the formation of the joint Governance Group, both
Unions provided their support for Post Office’s proposal to set up a new
Defined Contribution pension scheme to replace the Royal Mail Defined
Contribution Scheme. It was further agreed to issue a joint statement
between the Unions and Post Office demonstrating Union support for the
proposal.
5.4. The implementation of POPP is proceeding, system changes are in an
advanced stage, with this project being given preference over other HR SAP
changes.
5.5. It has been agreed with Zurich to provide presentations to employees joining
POPP, these presentations will take place in London and Bolton. It has also
been agreed to provide presentations to the Union representatives from CWU
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and Unite. These reps will that have the necessary information to answer
questions from their members.
5.6. I The Trustee of the Royal Mail Defined Contribution Plan (RMDCP) and Royal
Mail has agreed to allow current Post Office members of the RMDCP with less
than 3 months’ pensionable service to take a full transfer of their “pension pot”
to POPP instead of the usual refund of the members own contributions.
5.7. Formal notification will be provided to Royal Mail, informing them that Post
Office will cease to participate in the RMDCP from 1 April 2015, will be issued
by 10 March 2015.
6. Recommendations
The Group Executive/Executive Team is asked to:
6.1. _ Note the update and actions proposed in respect of the RMPP set out above;
and
6.2. Note the outcome of the consultation for Project Nemo and the fact that this
project is currently on track as intended.
Neil Hayward
March 2015
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