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Agenda
Post Office Board Agenda
Tuesday 30 April 2019* 14.30 — 16.30 hrs 1.19 Wakefield and by
phone
Parker (Chairman) [I ¢ Tim Franklin *_ Veronica Branton (Head of Secretariat)
* Alisdair Cameron ‘© Shirine Khoury-Haq_ I Jonathan Lewis (Head of Strategy and
{Interim CEO) Corporate Development)
Ken McCall © Carla Stent
‘* Tom Cooper
‘Apology: Paula Vennells
1. ] Welcome and Conflicts of Interest Noting Chairman 1430-1435
2. I CEO Report Noting and Input Interim CEO 1435-1450
3. I 2019/20 Annual Strategic Plan and Budget Approval Interim CEO/ 14.50 - 15.30
Jonathan Lewis
4. I Succession Planning Noting and Input Interim CEO/ Group I 15.30-16.20
Director HR
5. I Any Other Business Noting and Input Chairman
6. I Date of next meeting Noting Chairman 16.20 16.30
28 May 2019: 11.30 - 16.30 hrs
This meeting is in addition to the scheduled meetings and ordinary business, such as minutes and matters
arising, have been carried over to the scheduled Board meeting on 28"" May 2019.
STRICTLY CONFIDENTIAL
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POST OFFICE LIMITED
THE BOARD OF DIRECTORS DISCUSSION PAPER
CEO Report
Author: Al Cameron Meeting date: 30 April 2019
The GLO (subject to legal privilege)
Our request for leave to appeal on the recusal and the claimants’ counter-argument
have been submitted to the Court of Appeal.
To ensure we have sufficient, full-time advice, experienced in litigation and capable of
testing the views of advisors, we have asked Herbert Smith to lead the GLO, reporting
to the Board sub-committee. There are no plans to amend the rest of the team other
than standing down Norton Rose.
The sub-committee met on Wednesday and debated the grounds for appeal on the
common issues trial and wheth er we should accelerate that appeal, requesting that
the two appeals be heard together. On balance and against the QC’s advice, we
decided to proceed with two separate appeals, although ultimately it will be a matter
for the Court of Appeal to determine how it wishes to hear them.
Consequently, POL will first apply for permission to appeal in respect of the common
issues trial on 16 May 2019 before Justice Fraser. On 23 May 2019 it will be
determined how the costs of the common issues trial should be apportioned. The
Horizon issues trial will recommence on 10 June through to the first week of July.
Various workstreams are underway to agree changes to the way we work in line with
the objectives of serving agents better and reducing legal risk in our contractual
relationships. This is already changing the structure in Chesterfield with a Tier 2
contact centre team created to focus on disputes. A full update will be presented to
the Board in May.
The GLO has received limited media attention. For the most part it has escaped the
public’s attention: only around 10pc are aware of having seen or heard something
about Post Office in the media recently. However, within this group, negative
sentiment about the business increased significantly.
Commercial Performance
In our management accounts, we reported a trading profit for 2018-19 of £61.5m,
broadly in line with expectations.
Gross revenue grew 2% year-on-year to £968m, £3m ahead of budget. This included
Mails trading up 6% including some stamp buy-forward ahead of the price rise.
Banking income grew 15% offset by declin es in Payment Services, POCA and Postal
Orders. Identity grew its trading profit 33% to £34m, a peak before the changes in
UKVI and Identity pricing flow through. Insurance grew its revenue by 15% but
trading profit by just 1%.
Change spend of £272m exceeded the Q4 forecast by £7.6m, although half of this
related to non-cash onerous lease provisions. Benefits of £37.5m were delivered, in
line with forecast but £2.7m below budget.
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On cash, we ended the year with £747m in use, £135m better than the previous year-
end. £90m of the lower usage was in branch.
Delivery
Network.
Network location numbers grew to 11,638 at year-end, subject to audit. This is an
increase of 91 in 2018-19, a significant achievement. We opened 328 New Network
Locations in areas that didn’t have any Post Office provision, increasing convenience
for customers. We also exited 67 DMBs, leaving 188 remaining.
A team from Post Office attended the recent NFSP conference. The audience and NFSP
leadership recognised that change was underway, including higher sales incentives for
telecoms and insurance, greater ability to sell travel insurance in Locals, higher pay
on banking deposits and we waived the clause preventing the NFSP from criticising us
in public. Our new field leadership structure is also now in place.
The areas we discussed aligned with the results of the survey they had undertaken
with 1,000 Postmasters, prioritising concerns around pay and competition. While our
change of tone was appreciated, it also underlined the extent to which Postmasters
have felt neglected — a typical question was “Do you view us as an asset at all?” — and
how much there is to do in delivering our strategy of “Making it easier for Postmasters
to earn more money for less effort.” We confirmed that we will be undertaking a
review of Postmaster remuneration for the Board in October.
The publication of the survey did generate some press attention and the strap line
that 20% of Postmasters are thinking of handing the keys in will continue to gain
attention. This reinforces our strategy and we should not complain about the NFSP.
trying to put us and Government under pressure to do more. We do, however, think
that they are a little naive and the story predictably played into the hands of the CWU.
We challenged the NFSP from the platform to recruit more active members, ensuring
that they remain representative of Postmasters.
Banking Framework 2.
We continue to have 25 Banks signed up for BF2, with three more expected to join at
the end of May: RBS; Barclays; and the Co-op. RBS has just requested additional and
legally binding commitments in areas like ch ange spend. Our response is that with 25
banks on board we are beyond the negotiation period and they need to re-join or stay
out. Barclays has said that it no longer views PCI as an issue for BF2.
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Bank of Ireland.
The Board sub-committee has agreed to the commercial construct for Credit cards
with CapOne. Details will be provided at the May Board. We expect to sign both the
CapOne agreement and the associated back book agreement with Bol in early May.
New CapOne-backed PO branded credit cards will be launched by the end of October.
Following agreement of Heads of Terms on the new relationship with Bol, work is
underway to agree a new FSJVA. We are driving for completion by the end of May but
it may slip into June, given the number of outstanding legal complexities.
Iam meeting Francesca McDonagh straight after this Board meeting.
Back Office Transformation.
Progress has been made resolving reconciliation through to our financial system with
failure rates much reduced. Cash depots continue to count physical cash weekly,
confirming a match to Transtrack. The inventory team has reduced excess cash in the
network close to expected levels. The Phase 2 forecasting solution for sterling cash
went live over Easter weekend and is now being tested in parallel run. We continue to
work closely with PwC on the year-end audit.
Security.
Following the known exploit of a number of our email accounts, we shared our Office
365 data from October 2018 to February 2019 with the National Cyber Security
Centre (NCSC). The NCSC noted high activity during December 31, 2018 and
February 23, 2019 but were unable to identify any credible malicious activity. It is
satisfied with the controls and monitoring systems implemented in December.
For PCI, as set out in a separate paper, progress is being made on the deployment of
point-to-point encryption on all pin-pad devices across our branch estate. This will
meet our PCI compliance for retail transactions ie using your card for mails or bill
payment transactions.
The challenge to the overall timeline relates to the estimated work to the back-end
systems for processing banking services transactions. An alternative solution design is
being urgently investigated that would remove our back-end systems from the scope
of PCI, processing transactions directly via the Ingenico/ Vocalink networks. This will
take some weeks to work through but has obvious advantages.
POCA
POCA customers are expected to decline from c.1.2m today to c.0.5m in March 2021
when the current contract ends. DWP then plans to terminate the provision for 350k
customers, forcing them onto bank accounts and is about to tender provision for the
remaining 150k who are unlikely to be offered a bank account.
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We have requested a meeting with Amber Rudd and are writing to her and to DWP
officials. We are recommending that the tender process properly reflects the
vulnerability of these customers many of whom are elderly, resistant to normal
communications and anxious. We also believe that space should be left for a single
solution that could encompass all 0.5m customers.
In addition, it seems appropriate to highlight that although POCA is marginal for our
finances, it is important to some Post Offices. Removing the product from Post Office
may be interpreted as anti-Postmaster by the NFSP and may lead individual
Postmasters to hand the keys in, making Government policy harder to deliver. The
overall impact on remuneration over the next few years is substantial with 200 Post
Offices badly hit and around 20 becoming loss-making, especially in Northern Ireland.
Compliance and regulation:
Select Committee
We have been invited to attend a BEIS Select Committee on the future of Post Office
on 21 May. We will submit evidence by 6 May. This is in draft and will be shared with
Government in advance.
We have also worked with BEIS colleagues to support our minister through a further
House of Commons debate, this time on the sustainability of the branch network.
Team
As the Board is aware, Jane MacLeod is leaving at the end of May, focusing on GLO
handover before then. Ben Foat is promoted to General Counsel, leading Legal,
Compliance and Company Secretary, with the latter being undertaken by Veronica
Branton. Audit & Risk will move to the CFO, with disaster recovery moving to
Operations. We will follow the process with NomCo and RemCo for Ben to become a
member of GE.
Afua Kyei is still expecting to join us as CFO and should resign her current position on
1 May. She requested one contractual change, backdating LTIP if she is appointed to
the permanent position. UKGI consider this unlikely and we are seeking other ways to
provide equivalent compensation in this ci rcumstance. We are understandably anxious
that this might make her vulnerable to a counter offer from Barclays.
Rob Houghton has, with our support, been appointed a Non-Executive of the new NHS
Supply Chain vehicle.
Jonathan Lewis has been appointed Head of Strategy and Corporate Development on
a fixed term contract.
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Decisions for today
Budget. We have amended the budget for the Board’s feedback and for changes
arising from the GLO judgement. We are seeking Board approval, subject to agreeing
the recent changes, as the details are finalised, with UKGI.
Succession. As requested, we are submitting a paper setting out risks and actions
around GE succession. No specific decisions are required.
Strategy
At the May Board, we will bring back the outcomes from the McKinseys work, to fill
capability gaps, deliver cost reductions and simplify the organisation. In addition, we
will revert on the Mails negotiations and on our plans for Insurance.
We have started a formal tender process for the future of the Telco supply chain and a
smaller, private RFP to test a sale of the business.
In July, we will revert with our financial strategy, taking us beyond 2021. We will also
bring back a recommendation on the future of Telco; how we manage the incumbency
trap for Travel Money; the opportunity to support a cash utility; the future of Identity;
and a forward strategy roadmap.
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POST OFFICE LIMITED BOARD OF DIRECTORS APPROVAL PAPER
2019/20 Budget
Author: Jonathan Lewis Sponsor: Al Cameron Meeting Date: 30 April, 2019
Executive Summary
Context
In January, the Board reviewed a draft budget for 2019/20. Normally, we would have
presented a final budget for review and sign off in March. However, we agreed to
postpone the review until this special April meeting given the potential implications of
the Judgement in the Common Issues Trial.
The January draft proposed an underlying trading profit of £77m with further upside
expected from lease accounting changes. With £92m of Government support, a change
plan of £170m and with working capital, interest and GLO costs largely netting off, the
budget would have been broadly cash neutral. The Three Year Plan had £66m for trading
profit and was also cash neutral over the three years.
This paper sets out our proposed budget for 2019-20, with implications for STIP targets.
Questions addressed in this report
1. What is our current commercial plan and assumptions within the budget?
2. What is the impact of the GLO decision and Project Blueprint on our Change Plan?
3. What are the other implications of the GLO findings?
4. What does this mean for the 19/20 budget?
Conclusions
Following the additional work and conversation with UKGI, we are proposing three
changes to the budgeted trading profit: £3m of additional stretch; £9m upside for the
lease accounting change; and £12m of additional costs to support the accelerated agent
agenda. The budgeted trading profit target for 2019/20 would therefore remain at
£77m.
The improved performance from 2018/19's draft trading profit of £61.5m is made up
as follows:
e The lease change nets off with costs moving from right to left hand column as we
end Network Transformation. The net impact of accounting changes is nil.
e The major contractual changes net off to a £2m reduction in profit as the benefit of
one quarter’s Banking Framework is more than offset by the termination of the UKVI
contract, the reduction in Verify pricing and the impact of the new Bank of Ireland
deal.
e After taking account of the loss of the 53 week’s trading, the underlying
improvement in performance is c. £17m as the benefits of change outweigh the
ongoing reductions in traditional products such as POCA and Postal Orders, as well
as £12m of costs to improve agent relationships.
e This includes ungrounded challenges of £12m.
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In response to the GLO findings, we have recommending a re-prioritised 2019/20
Change Plan. Making changes for the agent agenda, especially on Horizon, is currently
estimated to consume £12m of cost in year and we have allocated more funding for
potential redundancies on the back of Project Blueprint and £8m for the cost of the
litigation itself. With other smaller changes, we envisage some £30m of additional
spend.
We are also recommending changes to the timing of other spend. In particular, we
cannot make consistent agent oriented changes to Horizon in 2019-20 AND materially
migrate Belfast data centres to the cloud. Postponing cloud migration would save £11m
and we are re-looking at the proposed changes to Swindon (£4m) and believe we can
shave £3m off Identity costs in year without losing strategic momentum. In total we
could largely mitigate the increased spend if we slowed DMB migrations across year-
end, saving £5m and losing benefits of £0.7m. However, our preference would be to
spend an additional £5-10m and we will still believe we will be cash neutral for the year.
2019/20 will be a transitional year as we work through the implications of the GLO,
manage Postmaster pressures and the politics around them, with the business
benefiting from the full year impact of BF2 in 2020-21. The 2-3 year trading profit
trajectory is therefore very positive and we will discuss future financial strategy in July.
It could be argued that it is more important this year to manage the strategic issues
than to drive to a particular number but we obviously recognise that with bonuses linked
to trading profit everyone must be satisfied that the plan is stretching.
We had proposed STIP as follows: 11,500 branch locations remains the gateway; 90%
on trading profit and 10% change benefit delivery; with on target trading profit of £77m.
On the gap from minimum to stretch, we have been operating 20% either side. So for
2018-19, with On Target at £50m, minimum was £40m and stretch £60m.
We had discussed narrowing the range, or holding it at £10m either side of On Target
but the shareholder’s preference is to retain the 20%. So at £77m, the range would be
£61.6m and stretch £92.4m. If the feeling was that this made minimum too close to
2018-19 and stretch too hard, we could split the difference at £12m and a range from
£65m to £89m.
A detailed deck with the individual business plans is in the Reading Room, supporting
the initial £77m. We are working through the detailed plans for the recommended
changes.
Input Sought
The Board is asked to review and approve the proposed budget, subject to confirmation
with UKGI, as we share the detailed plans for the recommended changes and agreement
at Remco on the final STIP targets.
Strict
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The Report
What is our current commercial plan and assumptions within the budget?
Network strategy
1.
Our critical deliverables are meeting the access criteria and having more than 11,500
branches. We remain uncomfortably close on branch numbers (currently having c. 11,638 made
up of physical locations and outreach locations). The GLO findings increases the risk of greater
disruption in our network.
Our plans, based on current trends, assumes that 500 branches will close, and that we will be
able to reopen around 350 of these within the same community. In our latest version of the plan
we are proposing to fund a further 220 new network locations which will help to maintain and
increase the number of branches overall.
Our DMB strategy for 19/20 was to reduce DMB numbers by 77 (from 188 to 111). 35 of those
reductions are already committed under the agreement with WHSmith. If we go with the £5m
saving in the change plan, we would deliver a slightly reduced number of 69 this year.
Gross Income and commercial background
4.
Our gross income is ona slight upward trajectory of c. 2% a year for the first time. Income from
Banking Services is strongly up given the renegotiation of the Banking Framework (one quarter
benefit taken) as well as volume increases. Together with growth in Insurance and Travel
Money, however, this only just offsets expected market declines in POCA and ATM, the loss of
the UKVI work and the imposed rate reduction on Verify services.
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For 20/21, we are expecting strong revenue growth driven by taking the full year benefit of the
Banking Framework renegotiation, as well as growth in Insurance, to counter the continued
decline in POCA, Verify, UKVI, ATM and other areas. We therefore have reason to believe that
we are on the right path.
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What is the impact of the GLO decision and Project Blueprint on our Change
Plan?
6. In light of the GLO decision, we have revisited the Change Plan to assess whether elements
should be reprioritised, either to accelerate an improvement in agent relationships or to reduce
delivery risk.
Reprioritisation of Change Plan
7. Our revised plan assumes a greater investment in 19/20 on:
a. Back Office operations changes; specifically in how we manage losses and how we
onboard agents.
b. Branch Hub acceleration to digitise the agent process and also to reduce costs in
operations.
c. Systems Changes to perform more defensive programming, reduce common failure
scenarios and to accelerate operational changes required.
d. Additional spend on outreach to ensure we maintain our branch numbers through this
period where we may experience additional churn
e. Continued investment to support the Telecoms business to expand in fibre while we
consider (i) a new contracting model; and (ii) whether we should market the business for
sale. The budget assumed fibre investment only until the end of July.
f. Project Blueprint implementation costs
g. Litigation costs
8. Atthe same time, however:
e We could slightly reduce our DMB plan commitment from 77 to 69 branches due to our
assessment of feasibility to deliver in 19/20. We did investigate reducing our
commitment to a much lower number for reduced publicity and political impact but
believe our strategy and plan is correct. We remain committed to the strategy of
removing all DMBs to the maximum extent possible.
© We have significantly reduced our plan commitments on IT spend:
i. We have postponed the migration of Horizon into the cloud architecture. We
believe this is a high operational risk programme that we don’t have the
appetite to take in a period of prioritised focus on agents. Furthermore, the
resource to undertake this programme is critical to delivering other IT
programmes that will improve agent relationships. The migration to cloud
remains an important programme for us to improve resilience and reduce cost,
and will be addressed as part of the prioritisation work for 20/21.
ii. We will extend the ComputaCenter contract by a further year — and use the year
to fully prepare for a tender process and any opportunity sourcing plans
iii. We have reduced our spend and ambition on implementing the integration hub
We have reduced our investment in the identity programme and reprioritised this work
into 20/21. While there is a potential risk that we miss an opportunity in the market on
Digital Identity, we will monitor on an ongoing basis and adjust our plans accordingly.
© We will limit our ParcelShop opportunity in 19/20 to a pilot only and perform no further
rollout (while the cost saving is small, expanding ParcelShop further would compete with
PostMasters).
9. This reprioritisation will push a number of change activities out of 19/20 and into 20/21 — further
work is being undertaken to assess how best to manage this increase in change workload in
20/21 and whether additional funding may be required.
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How we will organise and lead the changes
10. We have further considered how we organise the delivery of the change portfolio and made the
decision to organise the portfolio into 8 strategic programmes as outlined below. The entire
portfolio will be overseen by the Strategic Portfolio Officer and governed by the GE. Operational
Sponsors and dedicated programme managers will be committed onto the programme activities:
Digital
Operations Agent Network Product & cash IT Platform Organisational Without
Transformation _ Relationship Development Partnership Management Enablement Effectiveness Portfolio
‘Sponsor ‘Sponsor ‘Sponsor ‘Sponsor ‘Sponsor ‘Sponsor Sponsor
Portfolio Portfolio. Portfolio Portfolio Portfolio Portfolio Portfolio
Director Director Director Director Director Director Director
Sanch Hub i ome PMs forecasting Taran sxe, Tee
Failure mand II Egremont work II I Mains totocals III Youth strategy option Data platform Support irsurance
1 Rik and
oneatng Retail strategy ‘Manage Churn Propestion ‘Automation Pin Sl Relocation Fit& Proper
osintegraton I I peat ‘atomation Travel Hub Consoation AP Gateway ‘Organisation Sore
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11. We are expecting that this structure will also enable us to reduce the number of programme
managers we have in the business.
Blueprint
12. We have asked McKinsey to review our operating model and propose changes taking into
account:
a. the reduced size of the business following the DMB programme
b. additional skills that we are likely to need to ensure we can respond to and take
advantage of future trends
c. simpler structures to ensure we can act more efficiently and with greater agility
13. Their current estimate is that cost savings of £80-120m are possible over a 5 year timeframe,
with around half of that amount coming from IT non-staff costs. Substantial contractual, process
and systems changes are required to release this. Furthermore, there is some overlap between
the McKinsey analysis and our own change plan which we are reviewing. The McKinsey work
does, however, confirm our view that there is around £50-100m of cost to be taken out of the
business over 3-5 years following conclusion of the DMB programme.
14. This year, we will be performing an exercise on spans and layers and support structures and will
revert to the May Board with the future cost plan. We have allowed £9m in our change plan to
accommodate redundancy and other implementation costs, with any savings earmarked against
meeting our ungrounded cost challenge for 19/20.
Impact on costs and benefits in the Change Plan
15. In total Change Plan costs have increased by £3m in 19/20 to £173m or, if we were to maintain
the DMB programme, to about £180m. However around £30m of activity has been removed —
work is underway to determine how much of this should come back and in which year, and
therefore what the result will be for the total 3 year Change Plan spend.
16. We will continue to reprioritise the 19/20 Change Plan over the year but holding within the
overall agreed cost envelope. In particular, we will need to free up resources for central
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consulting spend to cover work on the Future of Cash, the Future Financial Strategy, Travel
Money strategy, Telecoms RFP process, Insurance acquisition scan etc.
17. Bottom-up calculations suggest that the impact of deferring these programmes, particularly in
DMB, Identity and an extension of the ComputaCenter contract, will reduce Change benefits by
about £4m in 19/20.
What are the other implications of the GLO findings?
18. We are currently performing a strategic review of Agents Renumeration which will report to
Board later in the year. Whilst we formulate a longer term view and assess the financial
impacts, we should assume that some provision should be made to cover tactical or early
adoption of any recommendations — our current estimate is that this could amount to £5m.
19. In direct response to the GLO findings, we are also currently investigating:
a. Whether we should pay suspended PostMasters while we investigate financial
discrepancies (£2m estimated impact). In parallel, we are working to drive down the
time taken for investigations so that we limit the amount we pay any fraudulent
PostMasters (currently we do not pursue PostMasters for losses given the GLO
background).
b. Remediation plans in Network Operations (£2m)
We are keen to ensure that whatever package of measures we develop are seen as reasonable
and fair rather than kneejerk and piecemeal.
20. While we are further developing our precise response plan, we believe that it is worth allowing
£12m in the budget to cover increases in Agents Remuneration and any other operational
impacts.
What does this mean for the 19/20 budget?
21. We are proposing a 19/20 trading profit target of £77m.
22. Versus the 18/19 outturn of £61.5m, the movements are as follows:
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There are two material accounting changes which net off.
i. The impact of the lease accounting standard is to reduce operating costs at the
trading profit level by £9m, subject to audit, with corresponding increases in
interest and depreciation.
ii. As we shut down material programmes, reducing costs and as set out in the
Three Year Plan, some transfer of roles and cost to BAU is required. In major
programmes like NT, or in new work like GDPR, the full time programme team
will cover some activity which, when they leave, has to be carried on as part of
the BAU business. In 2019-20 this totals £9.3m, comprised of:
£4.9m — network development and network transformation staff roles to
Finance and Operations BAU, Marketing and Retail BAU, especially in the
Field teams
¢ £2.7m—IT non-staff costs (Licences, Customer Hub, SUF additional
support)
© £1.7m — Digital and Innovation staff costs and Hub non-staff costs to FS&T
BAU
The net impact of contractual changes (-£1m) with the £18m benefits of the Banking
Framework (Q4 forecast income uplift assuming everyone joining net of 6 months of
higher agent pay for deposits and £2m of Supply Chain costs to cope with volumes)
being eaten up by the costs to the business of the Verify price reduction (£6m), UKVI
discontinuation (£9m) and the Bol deal.
The new Bol deal results in a negative £3.5m year on year movement in profit compared
to a “no-deal” decline of £8.5m. The reduction is primarily caused by declining savings
balances. The new deal better aligns incentives between POL and Bol, and gives us
commercial freedom to pursue deals with other partners for non-balance sheet
products. The budget assumes that a new deal is in place for June. We are finalising
whether an additional profit share will be taken in 2018-19. If it does it is excluded for
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bonus purposes in 2018-19 and would, as a non-recurring item, increase the £3.5m year
on year change.
c. The net benefits of trading, change and other movements exceed the trading declines
in POCA and ATMs by £29m showing ongoing commercial progress, allowing £12m of
opex to be allocated to improving agent relationships (net +£17m). It is important to
note that the profit target now includes £12m of ungrounded challenge, increased by a
further stretch of £3m.
i. The Marketing increase of £5m is driven primarily by greater spend on Travel
and Protection, Telco Fibre, new credit card communications, and Identity
ii. The budget embeds the following expected cost increases:
£2.1m for Growth in Call Centres primarily as a result in Insurance
1.
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5.
iii, The £121
Costs
growth
£0.9m for Mail Pouches Price Increase
£0.5m for Telco Price Change & Regulatory
£1.0m HMRC fee
£1.7m Verizon (Bandwidth Increase)
m opex for improving agent relationships is described in paragraph 20
23. Overall, staff costs are predicted to decline sharply primarily as a result of the DMB programme
with a corresponding increase in Agents’ Pay.
Post Office FY19
19/20 Budget
18/19 Current
Bropoesl Paecaak YoY (Em) FY19 YoY %
Revenue 991.2 968.3 22.9 2%
Cost Of Sales (134.9) (128.4) (6.5) 5%
Net Income 856.3 839.9" 16.4 2%
Agent's Pay (386.2) (365.0) (21.2) 6%
Staff Cost (168.0) (191.7) 237 12%
Non Staff Cost** (270.9) (270.4) (0.5) 0%
FRES 296 33.0 (3.4) -10%
Other Income (POCa) 12.4 144 (2.3) 16%
Payzone* 44 13 28 215%
Trading Profit 77.0 615 15.5 25%
*Payzone has been included at trading profit level. There is no Payzone element included in revenue.
“*Includes impact of IFRS16
NB Assumes DMB programme reduced to 69 in 2019/20
24. Over the course of 19/20, we expect over 600 people to leave the business, primarily as a result
of the DMB programme. We would expect this number to increase as we ground the
ungrounded challenge. In addition, we have over 400 people in Change — as the Change
programme matures we would expect this number to reduce.
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18/19 19/20 YoY Comments
DMBs 1,847 1,256 (591) -32% DMB programme
Retail 120 124 4 3% New roles
FS&T 161 183 22 14% Change of marketing structure
PO Insurance 51 47 (5) -9%
Identity 22 26 4 19% Business development roles
F&O 1,379 1,351 (28) -2% Restructure driven effiiciencies
IT 75 69 (6) -8%
HR 141 133 (9) -6% HR Target operating model
LRG 85 93 7 9%
Communications 45 37 (8) -18%
Central 5 E} - 0%
Sub-TOTAL 2,084 2,066 (18) -1%
GRAND TOTAL 3,931 3,322 (610) -16%
UKGI Interaction
25. POL Finance Directors have separately met on the 11" April with the UKGI represented by Tom
Cooper and Alex Cole to walk them through the most recent FY19/20 Budget submission to
provide further context and clarity. Whilst there were some requests for additional information,
Tom has shared his appreciation for the time spent and left with improved levels of
understanding and confidence after having meticulously reviewed each area of the Business.
26. We will need to continue to liaise with UKGI as we continue to develop and refine the
reprioritisation of the Change Programme, and the precise operational response to the GLO
findings.
Critical decisions underpinning the budget
27. \n producing this proposed budget, we have made some critical decisions of which the board
should be aware:
a. The budget assumes a slight slowdown in the DMB programme to ensure we have
sufficient operational capacity to land the 69 remaining for the year
b. We are delaying the Solaris migration to cloud — partly to ensure we have sufficient IT
change capacity to address other critical initiatives that are being accelerated as a result
of the GLO findings, but also to reduce the potential for negatively impacting agent
relationships through service outages etc.
c. By delaying some change from 19/20, we have increased the burden on 20/21 - we will
need to undertake a prioritisation exercise to ensure 20/21 is deliverable
d. We have taken investment away from Identity Services — not only will this slow delivery
of the product, but could increase the risk of competitors entering the space potentially
reducing the overall opportunity for us
e. Change Plan activities to improve relationships with agents are currently a placeholder
of £10m — further work is underway to determine precisely how this will be spent and
we will revert to the Board with this detailed plan.
f. There is £12m of ungrounded challenge in the budget that needs to be addressed by the
BUs as a matter of urgency.
g. Savings from Project Blueprint (which could help address a portion of the ungrounded
challenge) are only achievable with further work on process and systems redesign and
will need to be verified.
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Profit vs 3YP
28. Versus the 3YP, this budget is £11m positive. While the Banking Framework and the change in
lease accounting has been beneficial, we are also investing in Agent relationships, accepting
commercial downsides in Verify and Bol, and bringing additional costs into BAU from the change
programme. Achieving the £77m target, therefore, implies a £8m cost challenge versus the 3YP.
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Cashflow
29. The Balance Sheet, Cash and Headroom positions have been prepared with the following key
assumptions:
a. Trading Profit of £77m, with the caveats set out above
b. £50m Network Subsidy payments will be drawn down on a quarterly basis in line with
previous years and £42m investment funding will be drawn in Q1 in line with the
proposed spending pattern.
c. Branch holdings are reduced down to c. £500m, including the adverse impact of banking
framework by end of next year vs. 2018-19 YTD avg. of £520m.
d. Cash centre balances are held at current levels, subject to seasonal fluctuations.
30. The net inflow for the year is c. £28m which will be kept as a contingency for Group Litigation.
FY1920
Trading Profit 77.0
Non-Cash IFRS16 impact (9.0)
Interest Expense (8.5)
Change Spend (incl. PayZone Acq.) (173.0)
o/w non-cash 2.6
Investment Funding (UKGI) 42.0
NSP 50.0
Incremental Working Capital 46.9
Available funding 28.0
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The above assumes that the DMB programme is slowed down to 69 this year — keeping it at 77 and
investing further in improving agent relationships could increase cash spend by £10m, though the
budget would still remain cash generative.
31. The incremental working capital improvement is mainly as a result of how the year end dates fall
within the calendar month (31-Mar-19 v 29-Mar-20) which increases the payables balances for
2019-20; specifically agents pay and salary payables balances.
32. The month-end government loan balance is not expected to exceed the £750m threshold but as
always this will tighten over the Christmas period and will need to be closely monitored.
P1FYIS P2 FYI8 P3 FYI8 P4 FYI PS FYI8 P
P7 FYI8 PBFYI8 POFYIB = P10
some Secuirty Headroom = «eee Bala
heet Headroom
STIP target recommendation
33. Our 2018-19 STIP targets is made up of 80% trading profit and 20% delivering key change
initiatives (POLSAP, HRSAP, HNGX and Customer Hub) along with a gateway criteria of retaining
11,500 branch locations.
34. Based on feedback from the Board, we propose to have the similar pattern for 2019-20 STIP
targets.
a. Gateway: retaining 11,500 branch locations
b. Performance:
i. 90% Trading Profit of £77m with (+/-) up to 20% range in each side.
ii. 10% Delivery of change benefits with (+/-) 20% range in each side.
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