POL00251661
POL00251661
®
Post Office Board Agenda
23" November 2017 + Tim Parker ( Chairman) + Jane MacLeod None
+ Richard Callard + Marla Balicao
StartiTime Finish Time + Tim Franklin + Rob Houghton (item 4)
14.00hrs 17.50hrs + Virginia Holmes + Heather Jackson (item 4)
+ Ken McCall + Kevin Gilliland (item 5, 6,& 7)
+ Carla Stent + Tom Wechsler (item 5)
Papers are due 16'" November 2017 + Paula Vennells + Mark Siviter (item 6)
+ Alisdair Cameron + Sue Barton (item 6)
* Tom Moran (item 7)
+ Nick Kennett (item 8)
+ Martin Kearsley (item 8)
+ Martin Kirke (item 10)
+ Martyn Lewis (item 10)
+ Rob Houghton (item 10)
Agenda Item Action Needed Purpose Lead Timings TBC
1. Minutes of previous Board and Decision Minutes formally agreed. Jane MacLeod 14.00 — 14.05
Committee meetings including
Status Report
2. CEO Report CEO report noted CEO to update the Board on the report. CEO 14.05 — 14.25
Including IR update
Financial Report For noting CFO to update the Board on the report CFO 14.25 - 14.45
4. IT Assurance For noting Rob Houghton/ Heather 14.45 — 15.15
Jackson
5. Project Panther Discuss and To discuss and approve the purchase of Kevin Gilliland/Tom 15.15 — 15.35
approve Payzone’s convenience bill payment business. Wechsler
BREAK 15.35 — 15.45
6. RM Negotiations update For information and To update GE on the progress of RM Kevin Gilliland / 15.45 — 16.15
input negotiations. Mark Siviter/Sue Barton
7. Network Development Business Discuss and Kevin Gilliland/Tom Moran 16.15 — 16.30
Case Approve
POL-BSFF-0089724
POL00251661
POL00251661
®
Post Office Board Agenda
Agenda Item Action Needed Purpose Lead Timing
8. Cash Service Strategy Noting To update on ATMs, Banking Services CFOO / Nick Kennett / 16.30 - 17.00
Framework and Supply Chain strategy Martin Kearsley
9. Group Litigation Update (verbal) Noting To update the Board on progress made to date. Jane MacLeod 17.00 - 17.10
10. I SAPHR & Payroll Replacement Discuss and For Board to approve further funding. Martin Kirke/ 17.10 - 17.25
Business Case approve Martyn Lewis/
Rob Houghton
11. I Board Committee Chair updates For noting To update Board 17.25 - 17.40
(verbal)
+ NomCo
+ RemCo (including LTIP)
+ ARC
12. I Items for noting 17.40 - 17.45
12.1 Sealings For noting Board aware of the affixing of the seal
12.2 Health & Safety For noting To update Board
12.3 Meeting dates and forward
agendas
13. I AOB 17.45 — 17.50
CLOSE 17.50
POL-BSFF-0089724_0001
POL00251661
POL00251661
Post Office Limited
Board Meeting
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS OF THE COMPANY HELD ON TUESDAY
31ST OCTOBER 2017 AT 20 FINSBURY SREET, LONDON EC2Y 9AQ AT 09:35AM
Present: Tim Parker Chairman (TP)
Richard Callard Non-Executive Director (RC)
Tim Franklin Non-Executive Director (TF)
Ken McCall Senior Independent Director (KM)
Carla Stent Non-Executive Director (CS)
Virginia Holmes Non-Executive Director (VH)
Paula Vennells Group Chief Executive (CEO)
Alisdair Cameron Chief Financial and Operations Officer (CFOO)
In Attendance: Jane MacLeod General Counsel & Company Secretary (Secretary) (JM)
Marla Balicao Minute Secretary (MB)
Martin Edwards Group Strategy Director (ME)
Rob Houghton Group Chief Information Officer (RH)
Owen Woodley Managing Director, Post Office Money (OW)
Henk Van Hulle Business Innovation Director (HVH)
Jeff Smyth ClO, Financial Services, Telecoms & Digital (JS)
Jeff Lewis IT Procurement (JL)
Martin Hopcroft Head of Health & Safety (MH)
Apologies: None
(item 4&6)
(item 8 &9)
(item 5&8)
(item 8)
(item 8)
(item 9.1)
(item 10)
ACTION
INTRODUCTION AND CONFLICTS OF INTEREST
A quorum being present, the Chairman opened the meeting.
and the Company's Articles of Association.
The Directors declared that they had no conflicts of interest in the matters to be considered at
the meeting in accordance with the requirements of section 177 of the Companies Act 2006
1. MINUTES OF THE PREVIOUS BOARD MEETING INCLUDING STATUS REPORT
Minutes of the meeting of the Board held on 26th September 2017 were approved and
authorised for signature by the Chairman.
The actions status report was noted as accurate.
2. CEO’s REPORT
additional points:
The Board noted the CEO report. In response to questions, the CEO made the following
e The strategic plan had been finalised and work was now underway on developing the
2018/19 operating plan. The CEO noted that Martin Edwards was over stretched and
consideration was being given to providing further resource to support on the operational
side. The Board discussed the additional skills set that would be required.
« Phase 1 of the Branch simplification went live on 19"° September with little resistance and
the benefits of efficiencies are being shared with Postmasters. Phase 2 is planned to go
live in March 2018.
« The CEO and Public Affairs team had hosted the annual drop in session for MP’s at the
House of Commons on 18th October. The response from MPs was very positive with a
significant change in tone as compared with previous events.
Strictly Confidential
POL-BSFF-0089724_ 0002
1
POL00251661
POL00251661
e The CEO also reported that she had met with the Secretary of State for Scotland and had
discussed future plans for Scotland and ‘Trapped Postmasters’. There are approximately
500 postmasters - predominantly in small communities - who wish to retire however no
successor can be found to take on the post office, and they therefore do not qualify for
payments under the Network Transformation programme. Further, they are unable to sell
their retail business. It was noted that in these circumstances tax payer money cannot be
used to fund retirement payments. The CEO advised that options were being considered
as to how to address these postmasters as part of the network strategy, and the Chairman
encouraged the CEO to consider commercial solutions could be as well as how social
needs could be met in these circumstances, as well as continuing to meet the access
criteria. He also queried whether there is an option to provide termination payments other
than from tax payer funded sources.
e The CFOO reported that the Credence transition was improving however there were still
material concerns. As daily sales data from Credence was critical across the peak
Christmas trading season, transition activity would, if necessary, be halted until January in
order to ensure continuity of data.
« The CEO noted that in her report she had flagged a recent colleague question regarding
the commercial experience of the Board, and advised that this was a genuine question as
many colleagues have little engagement with Board members other than the Chairman.
« There is ongoing engagement with Royal Mail to understand the likely impact of industrial
action and the options to mitigate this impact. The Board queried whether collections by
third parties had been considered. The CEO advised that space constraints in branches
was a major issue which was being considered however we were struggling to get the right
level of focus from RMG. The CEO stated that in her view the CWU would not be able to
support an extended strike, however repeated short strikes would be possible.
FINANCIAL PERFORMANCE REPORT
The CFOO presented the P6 financial performance report covering September 2017.
The Board noted the financial performance report and in discussion the CFOO made the
following points:
e Performance was in line with prior months and marginally ahead of budget.
e Weare back on track to deliver full year EBITDAS of £28m, albeit with a different shape.
« Balance sheet headroom in P6 was £36m, £71m lower than budget with higher drawings
on loans offset by lower NRF usage.
e Branch numbers were reduced by 16 this month and is now at 11,558 which is 75 behind
target. YTD there have been 102 unplanned closures of which 55% are due to suspension
over losses identified at audit. Still progressing 60/70 rolling audits as part of the branch
technology roll-out, and to date there have been no material losses identified through this
process.
e Of the £9m targeted for the ‘growth fund’ investable business cases had been received
representing about half the fund.
e The performance of Moneygram was discussed and the CFOO commented that
immigration patterns were changing as a result of Brexit impacting the pattern of
remittances. Work is underway to review the strategy for the Moneygram relationship.
e The question was posed as to the expectations for the balance of the year. The CFOO
noted that the budget gets harder in the second half of the year, however work undertaken
recently supported the achievement of the £28m EBITDAS target. The Chairman noted that
the Board needed better visibility of the delivery of major projects and the impact on
expected performance in the current year and next year. The CFOO confirmed that
programme spend had been delayed although was the quantum had not changed.
POL-BSFF-0089724_ 0003
POL00251661
POL00251661
Post Office Limited
Board M
jleeting
The Chairman asked for the Board to be provided with a better view on the status of I AC
current projects.
The Board queried how the costs of the Postmaster litigation were being accounted for and
whether these should be treated as exceptional. The CFOO noted he would consider
whether these could be shown so as not to adversely impact operational costs and Ac
will consult with the auditors on this.
The Chairman queried why performance was behind on mortgages, savings and Insurance.
The CFOO noted that mortgages had improved during the month however we were
dependent on BOI pricing models. The CEO added that she had requested that POMs
develop an end to end plan now that they have a marketing director in place and right
capabilities, as well as access to additional investment from the growth fund. She reiterated
her view that the POMS Chief Executive had the right capabilities, however he needed
more support. The Chairman noted that the insurance division should have big strategic
goals in order to capitalise on the brand value and that he wanted to see more being done
to ensure the benefits could be realised.
The Chairman noted that the Board needed better visibility of the major business lines
across Post Office as these were currently subsumed within the BU reporting. The CEO I py
noted that she was reviewing the current organisational structure and would provide
a further update in November.
STRATEGY UPDATE
The Chairman welcomed ME to the meeting to present the 3 year Strategic Plan for 2018-21.
ME explained that the purpose of the Strategic Plan is to set out the overall financial and
strategic outcomes we expect to deliver over the three years in return for £210m investment
funding from the Government. The focus of the current update was to highlight changes since
the draft discussed with the Board and UKGI in May. The followi joints were highlighted:
As the Board was aware we had opened negotiations wi
Post Office’s long-term value in
savings. The options presented by: id not achieve our objectives and this puts at risk
of annual profit over tl ext three years relative to our assumptions in May.
chart on page 5 which showed recommended EBITDAs targets of
‘with a view to protect the
with better deals for}!
he impact of the possible adverse changes in the telecoms market still needed to
be understood. The Chairman noted we needed to work harder on our cost structures to
enable reaching a breakeven point, and asked at what level would Post Office to be self-
The Board discussed the need to focus on revenue drivers as well as the cost base, noting
that a number of core products and markets are in decline so there needs to be a focus on
new products that will address these gaps. The Chairman requested that management
focus on both revenue drivers as well as costs ensuring that we have the necessary
capabilities to deliver these. The main changes to the cost base would be driven by IT,
simplification of the network, further franchising of the DMBs, and digital initiatives. He
noted that these were the right areas of focus but queried whether more could be done in
other areas. The CFOO noted that any further material reductions in the cost base must
be driven by digitisation. The CEO flagged that two acquisitions opportunities were currently
being considered, however reliance only on organic growth would not deliver sufficient
change in the period.
Strictly Confidential
3
POL-BSFF-0089724_ 0004
POL00251661
POL00251661
e The Chairman noted that he would like more visibility of the separate businesses within in
Financial Services such as Banking Services, Insurance, Payments and Travel Money and
there should be increased focus on products that could deliver growth opportunities such
as insurance. He also added it would be beneficial to have regular updates from the heads
of these business lines, not just from the respective Chief Executives.
e Minor changes were suggested to certain of the slides within the pack.
e The Chairman noted it was a good plan and thanked ME for the good work done on this.
It was Resolved that the plan be Approved and submitted to the Shareholder.
The Board then went on to discuss the approach for setting STIP targets as well as the
performance targets for the 2016-19 and 2017-20 LTIP schemes (both of which were midway
through the performance period) and the schemes that underpinned the period for the 3 years
strategic plan.
« The Board discussed a range of possible LTIP performance measures (which could include
EBITDAS, free cash flow and/or IT transformation measures) noting that there was not yet
agreement on these. It was noted that a further debate was required and that the Remco
had not yet had a full discussion on the possible measures.
¢ The Board requested that these be discussed at the next Remco and brought back
to the Board for discussion and approval. AC
CHIEF EXECUTIVE RETAIL PERFORMANCE REPORT
The Chairman welcomed Owen Woodley to provide the update on the Financial Services &
Telecoms Performance Report.
The Chairman requested OW to focus on the areas of concern.
OW reported:
e At P6 FS8&T is slightly behind budget (
risks are the transparency requirements relating to POMS insurance premiums, and the
Ofcom review and the consequential impacts on fixed line prices.
sulted in changes to immigration patterns and this is adversely impacting
performance; a ‘root and branch’ review is underway to understand the longer
ions and options. In response to a question as to whether Post Office was
losing market share, OW advised that work was underway to understand how the market
performance, migration has now been completed and overall the transaction had been
successful.
in the online channel on overall performance and the resulting profit share to POL.
POL-BSFF-0089724_ 0005
POL00251661
POL00251661
Post Office Limited
Board Meeting
e The Chairman reiterated his previous concern that the performance reporting needed to be
improved to provide greater clarity around activities. He noted that the reporting across
different products was not on a like for like basis and this makes it difficult for the Board to
get a view on product related costs, profit or contribution. The Chairman asked for each
key business line to be reported separately with specific commentary, and more I AC
information about competitor activity and market developments.
—for example on deferred checking. The Board also queried what impact the new business
would have on margins and whether Post Office is making a sufficient return on the service
taking into account the costs such as supply chain etc and the risk profile?
* The Board requested the ARC to consider the systems and controls around the I cg;
banking framework, and requested an update from the ARC in relation to the money JM
laundering audit and the remediation work that had been undertaken.
IDENTITY STRATEGY
The Chairman welcomed backed Martin Edwards with Jason Sheehy and Jon Evans to report
on the progress on development of the digital identity services strategy. ME took the Board
through the paper and reported on the following changes since the June away day:
e Digital identity is an example of a two sided market — an economic platform with two distinct
sets of users (providers and consumers) who provide benefit to each other. Such markets
are difficult to create and will require a proactive role to stimulate adoption on both sides.
At the Board’s request, we have engaged and worked with two leading external consultants,
met with over 30 different organisations including prospective clients and partners, as well
as reviewing the competitive landscape.
e We are developing the operating and delivery plans. Key to delivery will be to ensure that
we have access to the necessary capabilities, and aligning with a partner that can deliver
these is seen as key to implementation. There are a number of options as to how such a
‘partnership’ could work and we are considering what would be most viable.
IRRELEVANT
Strictly Confidential
5
POL-BSFF-0089724_ 0006
POL00251661
POL00251661
e ~The Chairman summarised the Board view which I was ‘supportive of the proposal, however
noted the need to move forward quickly to determine the necessary capabilities and how
best to develop these with potential partners. ME was asked to come back to the Board ME
in March 2018, with an update on progress, including a tangible proposition.
BORROWING LIMITS OVER CHRISTMAS
The CFOO tabled his paper and asked the Board to approve a derogation to reduce the
headroom buffer from £200m to £100m for the period from 27 November 2017 (beginning of
Period 9) to 29 January 2018 (end of Period 10).
The CFOO noted that the request was driven by the need to provide more cash to branches
over the Christmas period and that it would take until end January for cash levels in the network
to reduce to normal; a similar request had been made for the same period in previous years.
It was Resolved that the request to reduce the headroom level by £100m for the period from
27 November 2017 to 29 January 2018 be Approved.
CUSTOMER HUB AND FIRST DELIVERY
The Chairman welcomed Owen Woodley, Henk Van Hulle, Jeff Smyth and Rob Houghton to
present the Customer Hub and First Delivery paper.
It was Resolved that the Board authorised and approved the release off IRR
the first delivery of the customer hub (the Travel proposition).
T!to build
IT UPDATE
Everest Update
Rob Houghton presented his paper with Jeff Lewis which proposed the realignment of the Post
Office relationship with Fujitsu through the signature of a Memorandum of Understanding
(MoU). He highlighted the following points:
« The current contract with Fujitsu commits us to £195m costs over the next 6 years. The
proposed MOU allows Post Office to move away from fixed pricing and onto a variable
arrangement for hosting and maintenance. Post Office remains committed to the total
spend with Fujitsu, however savings from the move to variable pricing will be available for
investment principally to fund the transition to cloud architecture and the development of
HNGT. Where Fujitsu are unable to deliver an appropriate technical solution (such as for
cloud architecture) Post Office would be able to source solutions from other third parties.
POL-BSFF-0089724_ 0007
POL00251661
POL00251661
Post Office Limited
Board Meeting
e RH noted that parts of the MOU are expressed to be binding, however these obligations
are mainly applicable to Fujitsu. Further the tone of engagement within Fujitsu has been
very positive and we are seeing increasing willingness to work proactively with us.
e RH noted that once the MOU was signed, we would then work to deliver the necessary
contractual changes
e The Chairman thanked both RH and JL for the work to date and noted that this revised
arrangements puts Post Office in a much better position and will have a major impact on
the restructure of the cost base.
It was Resolved that the Board approve the signature of the MoU and authorised the
negotiations of the detailed contract changes to support the agreed principles, including the
creation of Digital Delivery Services.
Security Operations Centre (SOC)
Rob Houghton tabled the business case for the implementation of Security Operations Centre
(SOC) to be sourced through Verizon and which will enable the Post office to develop and
deploy cybersecurity capability across the IT estate, including all of the outsourced IT and
network supply chain. The Chairman asked if the Board had a choice and if it was necessary.
RH stated that the Post Office needed a SOC and that it would proactively protect Post Office
against any cybersecurity threat.
KM asked why was it managed in Germany. RH replied that Verizon's first line defence team
was based in Germany and that his team had visited the Verizon operations in Germany as
part of the assessment. It was noted that the impact of Brexit on European based services
would need to be considered.
It was Resolved that the business case for the implementation of SOC be approved.
HEALTH & SAFETY DEEP DIVE
The Chairman welcomed Martin Hopcroft to the meeting who presented the annual ‘deep dive’
on Health & Safety and drew the Board's attention to the following:
« A Deep Dive review will be undertaken every 6 months to look at safety risks including those}
arising from property, network, driving/roads and material incidents. A further update is
scheduled with the GE next week which will be cover recent acid attacks and guidance for
the network. A systematic review will also be undertaken to ensure we focus on continuous
improvement, and there is ongoing engagement with the Central Risk team to report throughI
the placemat. An external audit has also been commissioned on our safety management
systems.
« The Chairman queried what we define as ‘attacks’ as referred to in the paper. MH clarified
these as assault (involving a physical action) and while the number of incidents had
increased, the level of severity had come down. The Chairman expressed his concerns on
the number of attacks on branch staff and asked how this could be reduced, and queried
whether we were spending enough money to keep staff safe. The CFOO responded that
this was not a budgetary issue and noted that some of the incidents are driven by criminal
activity targeting particular areas or types of operations; an example is the recent spate of
attached around Birmingham. The police are aware but have not as yet progressed to
arrests.
« MH reported that gas attacks on ATM's have reduced over the last year. The Chairman
asked that we focus on deterrents to help protect staff.
e The Board noted the impact on supply chain - particularly if we are moving more cash should
we expect to see an increase in attacks. The Board discussed different options to protect
staff — particularly in supply chain and branches, including protective equipment, notices,
Strictly Confidential
7
POL-BSFF-0089724_ 0008
POL00251661
POL00251661
training and communications. It was noted that more was being done this year with DMB
and similar guidance was also being provided to agents as well.
« The CFOO noted that Mental Health cases were at a lower level than last year however
cases were lasting longer. More work has been done in this space with good feedback from
managers who have undertaken the mental health awareness workshops. We now have 60
mental health first aiders and other initiatives are being considered. MH noted that we have
good engagement with a range of other organisations in relation to both safety and health
initiatives, and are able to share information and experiences to develop good practices. We
have regular engagement with a range of other organisations to understand developing
trends, and emerging best practice. This assists us to develop appropriate benchmarks
across a range of metrics.
The Chairman thanked MH for his report and noted that an update would be provided at each
meeting.
11. I ITEMS FOR NOTING
11.1 I Sealings
It was Resolved that the affixing of the Common Seal of the Company to documents numbered
1576 to 1591 inclusive in the seal register was confirmed.
11.2 I Future Meeting Dates
The Board noted the future meeting dates.
12. AOB
12.1 I There being no further business the Chairman declared the meeting closed at
13:04pm.
POL-BSFF-0089724_ 0009
Strictly Confidential
Post Office Limited Board
Status Report as at:
POL00251661
POL00251661
16/11/2017
REFERENCE
ACTION
Action Owner (GE
Member)
Due Date
STATUS
Open/Closed
31 January 2017
POLB 17/11 (d)
Board Effectiveness Review
Reconsider the proposal for an independent advisor to the
Board after the IT strategy presentation at the July Board
meeting.
Ken McCall/ Rob
Houghton
October 2017
Board
Underway and there will be an independent review
presented at the October Board.
(Closed
28 March 2017
POLB 17/25 (j)
FS Growth - POMS
As part of the long term financial services strategy, a
potential future move into underwriting activities would
be brought to the Board for further discussion at the
appropriate time.
Nick Kennett
Board Date TBC
This is a long term strategic option and as such, a
Board date has not been assigned. Nick will revert in
due course as/when POMS are ready to proceed.
Open
25 May 2017
POLB 17/36 (d)
CEO Report - Identity Services
The CEO explained the enhanced Verify product which
would be launched in June and was likely to include a
digital driving licence product. The new product would be
helpful for vehicle rental companies and Ken McCall
loffered advice in accessing this market. Post Office as the
Verify market leader had been chosen to launch this new
service in advance of other suppliers and this would help
Icement the position in the market.
Martin Edwards / Ken
McCall
October 2017
Board
[Action originally assigned to Kevin Gilliland for
ISeptember Board but this falls within Martin Edward's
remit and has been reassigned accordingly, and is on
the agenda for October.
(Closed
25 May 2017
POLB 17/36 (h)
ICEO Report - Industrial Relations
The CEO reported that the Company was still in dispute
with the CWU and UNITE unions although the UNITE
dispute was closer to resolution. The Board discussed the
reduction in number of CWU reps paid for by the Business
which had reduced from nineteen to six. The Board
challenged the practice of paying for any union reps and
jasked the CEO to check why the union were not paying
for their reps.
Martin Kirke
October 2017
Board
ITo be addressed in Industrial Relations Project Jay
report at October Board.
Closed
POL-BSFF-0089724_0010
POL00251661
POL00251661
REFERENCE
ACTION
Action Owner (GE
Member)
Due Date
STATUS
Open/Closed
25 May 2017
POLB 17/40 (e)
(f)
Mails Strategy Update
ihe Board asked KG and MS to continue to develop the
next best alternative work in parallel with an emphasis on
the technical integration, and to return to the Board with
ja view on how quickly they could be implemented if the
negotiation do not deliver what is needed. The Board
asked the CEO to ensure she had the strongest
negotiation team possible.
Kevin Gilliland / Mark
iviter
November 2017
Board
IRRELEVANT
To Close
26 Sept 2017
POLB 17/72 (j)
Funding Documents
The Board requested management to develop plans to
address the possible scenario of an election and Labour
victory.
Martin Edwards
November 2017
Board
To be included in the Strategy update for November
To Close
26 Sept 2017
POLB 17/74 (c)
(Chief Executive Retail
KG was asked to consider (a) the economics of products -
both for Post Office and agents given the declining
volumes and margins, and have a view as to which
products were genuinely necessary to support footfall and
(b) the implications of the increasing use of Post Office
supplied cash.
November 2017
Board
To be addressed in the CE Retail report for November.
To Close
26 Sept 2017
17/78 (d)
Meetinas
Noting that the meeting scheduled on 1 Feb 2018 would
create a schedule conflict for Virginia Holmes the
Chairman requested that the Secretary see if an alternate
date could be identified.
Company Secretary
October 2017
Board
Meeting now moved to Monday 29 January
‘Closed
31 Oct 2017
3
Financial Performance Report
IThe Chairman asked for the Board to be provided with a
better view on the status of current projects .
Al Cameron
January 2018
Board
We are building a summary capital and investment
report for January that will operate as the future BEIS
reporting required in the next funding round
Open
POL-BSFF-0089724_0011
POL00251661
31 Oct 2017
5
lines across Post Office as these were currently subsumed
within the BU reporting. The CEO noted that she was
reviewing the current organisational structure and would
provide a further update in November.
Chief Executive Retail Performance Report
The Board would like strategic options presented to the
Board and that this should include an overview of this
market. OW confirmed that he would be taking a paper to
GE before the end of December and an update to Board
would follow thereafter.
Kevin Gilliland/ Owen
Woodley
January 2018
Board
POL00251661
REFERENCE ACTION Action Owner (GE Due Date STATUS Open/Closed
Member)
31 Oct 2017 Financial Performance Report
3 IThe Board queried how the costs of the Postmaster Al Cameron January 2018 IWe are in discussions on the treatment. It is not clear IOpen
litigation were being accounted for and whether these Board that there is a case for an accounting change and it
should be treated as exceptional. The CFOO noted he may be that Sparrow costs would have to be excluded
would consider whether these could be shown so as not from EBITDAS for bonus purposes.
to adversely impact operational costs and will consult
with the auditors on this.
31 Oct 2017 __I Financial Performance Report
3 The Board needed better visibility of the major business Paula Vennells I T8C 2018 Board ICurrently work in progress. Open
open
31 Oct 2017
5
(Chief Executive Retail Performance Report
Reporting across different products was not on a like for
like basis and this makes it difficult for the Board to get a
view on product related costs, profit or contribution. The
Chairman asked for each key business line to be reported
separately with specific commentary, and more
information about competitor activity and market
developments.
Al Cameron
TBC 2018 Board
We will improve the reporting in the next round of CEO
reports and have added a slide to the group financial
performance pack to help slightly. However this will
remain sub-optimal until we are through the legacy
back office systems changes.
open
POL-BSFF-0089724_0012
POL00251661
POL00251661
31 Oct 2017 Identity Strategy
6 ME was asked to come back to the Board in March 2018,I Martin Edwards March 2018 Open
with an update on progress, including a tangible Board
Proposition.
POL-BSFF-0089724_0013
POL00251661
POL00251661
POST OFFICE PAGE 1 OF 7
POST OFFICE BOARD DISCUSSION
PAPER
Impact of a Labour Government
Author: Patrick Bourke Sponsor: Mark Davies Meeting date: 23 November 2017
Executive Summary
Context
1. The purpose of this paper is to answer the Board's question about tl
. i(and since)
the General Election, and a return to a starker contrast in policy between the two main parties.
2. Post Office is politically neutral and will naturally wish to execute the requirements of its
Under a Labour administration; .
- At one end of the spectrum I — __ ELEVANT _
HIRRELEVANT;, we will be entering into radically new territory. But it is far from clear that the
ntation of these more dramatic changes has been properly considered by the!
r that they would represent real priorities for a new administration. This paper seeks
specific risks and opportunities without expressing preferences.
Bs While the political backdrop is certainly turbulent, it currently appears to be the case that
Conservatives on all wings of the party remain focused on doing what they can to avoid
precipitating a General Election in the next year. Moreover, the Fixed Term Parliaments Act
does further limit the chances of an election being called in the near future. While recent
polling data shows Labour leading the Conservatives consistently since June, that lead is also
pretty consistently stuck at the +2 and +3 mark, suggesting that, if held now, a General
Election might not produce an emphatic win for Labour.
4. However, if a Labour Government is elected in the next 6 months, the most likely trigger
for change to the Post Office’s plans will be the need for BEIS to approve our Annual Operating
Plan for 2018-19 in around March 2018.
5 This paper does not address the legal implications of any moves by a future Labour
Government to push us to vary, reverse or amend our existing contractual commi
sufficient support and_a_willinaness to fund the compensation due to third parties,
[ANT
Questions this paper addresses
What are the likely implications for our governance?
What are the likely implications for our business model?
Will new or different commercial opportunities open up?
Are there any other implications?
What should we do about it?
WP wNr
Strictly Confidential
POL-BSFF-0089724_ 0014
POL00251661
POL00251661
POST OFFICE PAGE 2 OF 7
Conclusions
1. We are likely to see pressure to limit executive pay, give much broader recognition to
Unions, including nominated Board members. Conversely, we may see greater availability
of public funding.
2. RMG could, in due course, be renationalised, with POL re-absorbed into the fold; changes
to the employment status of our agents is a distinct possibility.
3. A Labour Government will likely press for the creation of a PostBank. We might expect
support for the Post Office’s role as the front office for Government.
4. A Labour Government under a Corbyn Leadership will likely create short term economic
turbulence (by John McDonnell’s own reckoning), against a backdrop of an already
potentially challenging economic climate resulting from Brexit. Modernisation activity which
results in fewer or less well remunerated jobs will be challenged. —
5. Post Office will be IRRELEVANT.
We suggest _
We will continue to actively monitor evolving Labour thinking
and ensure this is fed into existing risk management networks.
Input Sought
The Board is invited to note this paper.
The Report
What are the likely implications for our governance?
6. In a speech to the CWU in April 2016, Corbyn said “The best thing would be for Royal
Mail and the Post Office to be brought back together in public ownership, not the system of
ownership we have at present”, ° °
IRRELEVANT
ra More immediate impact will be felt through early legislation to repeal the Trade Union Act
and a roll out of sectoral collective bargaining. Labour will wish to give a much broader role to
the Unions, potentially leading to Union nominated Board members and a greater number of
full time Union representatives,
8. We would also expect to see felatively’ swift action on}
Strictly Confidential
POL-BSFF-0089724_ 0015
POL00251661
POL00251661
POST OFFICE PAGE 3 OF 7
What are the likely implications for our existing business model?
10. On the Retail side, we would face significant pressure to halt our ranchising policy,
Office branches,
as is evident from the manifesto: “Labour will end the closure of Crown
which play a major role in serving their communities”.
ould cease, and our room for manoeuvre in the HR space will be
severely constrained. We will not be in a position to count on the support of Government in IR
matters.
he creation of PostBank (see below) would clearly
14. More broadly still, given the attention already being given to this area following the
recent spate of litigation (Uber/Deliveroo), the Taylor review, and recent CWU noises in this
direction
. . REL ur own Sparrow
igation’s focus on the legal nature of that relationship is also clearly relevant here. The
financial, network and workforce management implications of;
I IRRELEVANT I
Will new or different opportunities open up?
15. Labour’s attachment to a PostBank was underscored in a recent meeting held by the Post
Office public affairs team with the Shadow Postal Services Minister, Gill Furniss MP at which
she was joined (unexpectedly) by Rory Macqui
Chancellor. At this meeting, PostBank was the
is, however, far from clear that Labour has begun to understand the true financial implications
involved (dwarfing the figure cited in the recent CWU-sponsored Cass Business School Report),
and how these might be bridged. That said, it is far from difficult to recognise the potential
attractions of a PostBank.
16. In the shorter term, one might reasonably expect strong support for the Post Office
acting as the front office for Government to stimulate footfall and generate revenue in a range __
of areas, in fect ict establishing the Post Office I as the!” Hi
Strictly Confidential
POL-BSFF-0089724_ 0016
POL00251661
POL00251661
POST OFFICE PAGE 4 OF 7
17. While some tentative consideration of the role the Post Office could play in the energy
market has been undertaken, I Labour r thinking may act as something of a catalyst i in this
Are there any other implications?
18. Whilst the majority of our current change plan shou!
as replacing and modernising core IT);
challenge corporate decisions to modernise where there may b IRRELEVANT
support (such
19. Workforce and reputation management is likely to becom IRRELEVANT
ion a wide range of
a : : IRRELEVANT ee : ;
21. We should be cognisant of wider changes in the economic outlook, including changes to
corporation tax; Labour has mooted an increase to 26% by 2022. Additionally there may be
although small independent retailers may be protected to a certain extent. Early economic
turbulence will exacerbate the potentially challenging economic environment of Brexit, and
could lead to significant pressures on economic growth.
What should we do about it?
oT IRRELEVANT. @ recommend that we continue to build our engagement programme
(see appendix below), focusing on key shadow frontbench and backbench MPs, and figures
from within the leadership’s inner circle.
23. As noted above, there is much about the Post Office which appeals to this audience.
Much of our current and proposed activity can find a home in Labour's core themes of:
- Fair Work - Post Office as a responsible employer; a values-led business; positive progress
on gender and executive pay; strong LGBTQ policies
- Protecting public services - Post Office enabling access to Government services
particularly for vulnerable groups; innovation in identity services; role in promoting financial
inclusion
Strictly Confidential
POL-BSFF-0089724_ 0017
POL00251661
POL00251661
POST OFFICE PAGE 5 OF 7
- Rebalancing the economy - Post Office supporting SMEs; stimulating economic life in the
High Street
24. While the Party leadership has successfully tightened its grip on the key vehicles for
policy making ° 1 N
“Thécordingly, a Sensible engagement pian will also see
us continue to build our relationships with, _ RELE }
on the _jand has become a Senior figure
rrently working effectively across political boundaries
Strictly Confidentiat
POL-BSFF-0089724_ 0018
POST OFFICE
Appendix
Tier one targets
Rebecca Long-
Bailey MP, Shadow
BEIS Sec
Andrew Gwynne,
Shadow
Communities
Secretary
Andrew Fisher,
Policy Chief
Seb Corbyn, John
McDonnell’s Chief of
Staff
Laura Murray,
Stakeholder
Relations
Strictly Confidential
POL00251661
POL00251661
PAGE 6 OF 7
A long standing Corbyn ally, Long-Bailey is a prominent
member of the Shadow Cabinet and tipped as a future
leader. She has strong connections to Unite. Similarly to
McDonnell we should watch out for her contributions.
Is also the party’s campaign coordinator. Mentioned Post
Office in a speech in July 2017 in which he repeated the
pledges to “protect post offices”, “end the closure of Crown
Post Office branches” and “establish a Post Bank”. He
recently attended our parliamentary drop in session.
A friend of Corbyn’s for over 10 years, Fisher has proved a
divisive figure for his uncompromising left views. He was
suspended over his tweets urging the public to vote for
rival parties, but he has since been welcomed back into the
fold.
Corbyn’s son, Seb is a neutral go-between for the Corbyn
and McDonnell camps. He is known for being very mild
mannered and well-liked.
Daughter of Unite’s Chief of Staff Andrew Murray.
Previously Shadow DCLG adviser. Responsible for engaging
business, unions and NGOs.
POL-BSFF-0089724_ 0019
POST OFFICE
Tier two targets
Debbie Abrahams
MP, Shadow DWP
Sec
Rachel Reeves
MP, Chair, BEIS
Select Committee
Frank Field MP,
Chair, Work and
Pensions Select
Committee
Liam Byrne MP,
Shadow Digital
Minister
Gill Furniss MP,
Shadow Steel,
Postal Affairs and
Consumer
Protection
Jack Dromey MP,
Shadow Labour
Minister
Dr Alan
Whitehead MP,
Shadow Energy and
Climate Change
Minister
Strictly Confidential
POL00251661
POL00251661
PAGE 7 OF 7
Abrahams is considered a fairly sensible member of the
Shadow Cabinet and is therefore a good “bridge” into the
wider Labour leadership.
Rachel Reeves is adept at building cross party coalitions
and is well respected as extremely bright and
knowledgeable on economic policy.
As Chair, Field will have an important role to play in key
policy areas for Post Office. He is divisive; he has been
around too long not to speak his mind. Nonetheless he has
cross-party appeal and is a well-respected Parliamentarian
who knows how to use the media to further his agenda.
Former Chief Secretary under Gordon Brown. Brought into
the fold despite moderate views. Genuine interest and
knowledge in the tech sector.
Low profile figure. Has a broad brief and has focused much
of her attention on Royal Mail and the future of the steel
industry which is important to her Sheffield constituency.
We recently met her in Westminster to provide an update
of our work.
Husband of Harriet Harman, he is an important figure in
the party. His role is to shadow the Government on
employment issues while developing Labour's policy on the
future of work including engaging with unions and fleshing
out the concept of a Ministry of Labour.
Longstanding interest and knowledge of the energy sector,
Whitehead has served in this role since September 2015
and has a greater interest in the generation rather than
retail aspect of energy.
POL-BSFF-0089724_ 0020
POST OFFICE
POST OFFICE BOARD
CEO’s Report
Author: Paula Vennells Meeting date: 23" November 2017
Executive Summary
Context
Our target for 2017/18 is to achieve EBITDAS of
~ Accelerate the transformation of the Post Office.
— Secure commercial sustainability for the long term.
— Establish a business that can ultimately fund investments and the social
purpose from profits rather than subsidy.
In summary, our strategy is to secure our position as the UK’s number one
parcels and letters retailer, grow in and protect our network
and social purpose - all supported by a much leaner central organisation.
Questions this paper addresses
1. What is on my mind? (successes, challenges, opportunities and risks)
2. What are the implications for our outlook and plans?
Input Sought
The Board is invited to note the report and highlight any issues where a future
discussion would be welcome.
Strictly Confidential
Our 3 year goals are to:
POL00251661
POL00251661
PAGE 1 OF 5
POL-BSFF-0089724_0021
POL00251661
POL00251661
POST OFFICE PAGE 2 OF 5
The Report
Looking Back
WHAT HAS GONE WELL?
« Fin
cial Performance
— EBITDAS benefitted from higher retail revenue than forecast offset by cost
timings which are anticipated to reverse prior to the year end.
— Weare still on track to deliver!
shape and timing of delivery.
— Balance sheet headroom in P7 wa:
a reduction in Network Cash oft
« Retail
— Continued strong performance in the month following recent trends acros:
— Year to date, income and costs remain on forecast, with Mortgages and
Credit cards ~ jbetter than forecast.
— Telecoms wasi®
performed marginally better.
usiness Bank is live on banking framework - enabling us to serve up
"of all UK SME bank customers.
— All BCV fraud risk has been removed - the automated process has fully
replaced paper.
— Volumes and revenues continue ahead of budget and forecast for FY17/18.
— Interim update on strategy at this Board meeting.
w Retail Arrangement Agreement (RAA) has been signed wit!
I This should improve ranging and sales of stationery in all DMBs and
rofit over 5 years. Current annual profit is
Strictly Confidential
POL-BSFF-0089724_0022
POL00251661
POL00251661
POST OFFICE PAGE 3 OF 5S
e Christmas planning
— Our Christmas marketing campaign started w/c 6" November, including
activity in branch, press and on the radio. Online and social media activity
targeting marketplace sellers started w/c 23 Oct (delayed by 1 week due
to risk of Royal Mail’s industrial action). Our key mails audiences this year
are retaining marketplace seller volume and home shopping returns for
Black Friday peak and post Christmas.
— Our mails reforecast has predicted we will generate !! tin variable
income over the main Christmas campaign period (P8 & P9). P9 alone
should generate! IRRELEVANT ___jhigher than an average
month.
~ All activities connected to our “No queues at Christmas” strategy remain on
track.
WHAT HAS NOT GONE WELL?
e Union activity
+ A update will be provided at the Board meeting.
« POca
— Further to the note sent to the Board, we have continued to experience a
larger than expected volume of calls to the contact centre in relation to a
letter sent to all Post Office Card Account customers about changes to terms
and conditions.
— The issue has been closely monitored throughout the week and we have
taken steps manage the flow of calls into the contact centre and to provide
reassurance to customers with concerns via automated messages, on our
website and in branches. There has been no commentary in the media or on
social networks.
— Separately, the POca procurement continues its final stages of negotiation
with DXC and JPM. Focus remains on closing the last points of disagreement
between the parties, in particular agreeing provisions relating to data
protection and upcoming GDPR legislation.
e IT
~» We have experienced two DDOS attacks in as many weeks, both were a likely
probe of our defences. Root cause is complete and heightened monitoring/
protection is in place.
~— There has been an increase in escalation of service issues in October. The IT
team have instigated emergency measures and brought the supply chain
together. The systemic issues are around BT OpenReach performance and our
current hybrid supplier model as we transition services from FJ to Verizon and
CC. We have a Joint Service Recovery Plan being discussed at GE.
Strictly Co:
POL-BSFF-0089724_ 0023
POL00251661
POL00251661
POST OFFICE PAGE 4 OF 5
— We postponed rollout of Portable Horizon Units (PHUs) to outreach sites whilst
we investigated systemic issues with security and connectivity. This caused
concern and disruption as they were due to be received. This is now resolved
and rollout continues.
— Progress against ISDN continues for end November but there is a high risk of
outage on a small number of sites which we continue to work through.
— Progress continues on the rollout plan with 3,140 HNGA counters now
complete and 4,080 branches with replacement routers. Changes of this
magnitude and complexity would generally attract high failure rates. We are
within our expectations (upto 15%), but this is difficult to explain to
postmasters when it goes wrong. In all cases fixes are successful but
frustrating for those involved. I have reviewed recovery activity with Rob and
his team - we will brief more fully in the Board meeting.
— Belfast DR test still under review as updated at the RRC/ ARC. We cannot risk
a full DR test until we have migrated Credence, POLSAP and HRSAP. Deliveries
of this are being closely monitored so we can schedule it at the appropriate
time. Likely to be Autumn 2018.
IRRELEVANT I
Looking Ahead
FUTURE FOCUS
« Market Developments
— Two developments of note in the convenience retail market last week. Firstly,
members of the symbol group Nisa voted to accept the Co-op’s takeover. This
will be a ‘vertical takeover’ of the supply chain rather than a rebranding of the
c2,400 Nisa stores. As such there is no direct or immediate impact on the
c250 Nisa stores with Post Offices, but we are close to Nisa members and Co-
op on this and foresee it increasing Co-op’s influence. Secondly, the
Competition & Markets Authority (CMA) gave its conditional approval to
Tesco’s acquisition of wholesaler Booker, which owns the Budgens, Premier
and Londis brands. The market had expected the CMA to be more cautious,
and many had predicted it would require Tesco to sell off its One Stop
convenience stores (we have 180 Post Offices in One Stops), so this removes
one area of uncertainty. It does however underline the trend towards
Strictly Confidential
POL-BSFF-0089724_ 0024
POL00251661
POL00251661
POST OFFICE PAGE 5 OF 5S
consolidation in convenience retail which some independents fear will squeeze
their margins. This deal is likely to go through next year.
¢ Bank of Ireland
— Ihad a positive introductory meeting with Francesca McDonagh, new Group
Chief Executive at Bank of Ireland. She was keen to reiterate that our
relationship is important to BOI and is committed to reaching a mutually
beneficial commercial agreement. We are reviewing how we proceed with our
negotiations.
e Strategy to 2018/19 plan
— Following Board approval of the 3 Year Strategic Plan last month, the business
is now focussing on developing the more detailed budget and plan for
2018/19. The GE is reviewing initial submissions during November and
December, and will be presenting a first draft view of the budget to the Board
in January.
« Government and external affairs
—» I met with Tom Cooper, who was appointed as Director in UKGI last month.
Previously, Tom was Global Co-Chairman of M&A at Deutsche Bank where he
has spent the last 8 years. He started his career at KMPG and was at UBS
Investment Bank for 21 years where his various roles included Head of
European M&A.
— Aland I attended the annual CBI conference earlier this month. It was a
useful event with good speakers. Dominant themes of the day included
technology, discussion around the increasing need for companies to become
much more digitally advanced and how artificial intelligence will change the
workplace of the future. Brexit uncertainty was referenced throughout the
day.
RISKS OR CONCERNS?
« Postmaster Litigation
— This will be covered in the Board meeting.
e Union activity
— Weare seeing a shift in union activity and their tactics which is concerning.
The recent Employment Tribunal case around weekly to monthly pay was a
huge confidence boost and no doubt will encourage more frequent and bolder
activity. We are reviewing internally how we manage this going forward.
Strictly Co:
POL-BSFF-0089724_ 0025
POL00251661
POL00251661
@
October 2017
Financial Performance
Al Cameron
23 November 2017
(1)
mer
Post Office®
Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0026
POL00251661
POL00251661
®
P7 Performance is in line with forecast.
YTD EBITDAS is +£3.8m ahead of budget.
Context
YTD P6 EBITDAS performance was £4.4m. £2.7m favourable to budget.
At end of FY 16/17, cash in Network was £666m and balance sheet headroom was £189m
P7 budget EBITDAS is £2.1m, P7 forecast EBITDAS is £3.1m
Questions
How is our scorecard performance in P7?
What is the financial performance of the business in P7?
Are we appropriately funded?
Conclusions
From this month we will compare results to the forecast outturn for the year as well as the approved annual budget.
P7 EBITDAS £3.2m (£0.1m favourable to forecast, £1.1m favourable to budget) and YTD £7.6m (£3.8m favourable to budget).
EBITDAS benefited from higher retail revenue than forecast offset by cost timings.
Weare still on track to deliver £28m EBITDAS for the year, albeit a different shape and timing of delivery.
Balance sheet headroom in P7 was £162m, £126m better than P6 following a reduction in Network Cash of £116m (Branches £28m,
CViT £24m, Cash Centres £65m). An increase in the NRF usage of £40m following reductions in P6 to coincide with the Bank of England
year end funded the capital investment in the month £15m and working capital movements of £15m.
Input Sought
The Board is asked to note the financial performance.
{5 \,
Post Office” Post Office Limited — Commercial in Confidence Taal
POL-BSFF-0089724_0027
Strong Digital performance in the month
Branch numbers continue to track below targets
POL00251661
POL00251661
®
Key Performance Indicators
P7
Target Var.
Full Year
Growth
Total Gross Income (excl NSP) £m
EBITDAS £m
Headroom £m (vs Board minimum limit)
Digital Net Income £m (digital team)
Net profit £m?
Customer
‘Customer Effort 84% 76% 78% 76%
Net Promoter score Financial Services 25 25 25 25)
Acceptable Wait Time % 95% 95% 93% 95%
Branch Compliance - Financial Services - basket of 11 measures 60 <=50 30 <=50
People
Representation (Senior Managers) - Gender 38% 37% 38% 37%
Attendance 95.9% 96.7% 96.4% 96.7%
IT Lost Time (Number of Sev1/Sev2 IT incidents) 5 13 45 91
Safety LTIFR 0.137 0.180 0.260 _0.180
Modernisation
Number of branches (one month in arrears) Same as YTD 11,559 11,670
NT and ND Branches Transformed in Year 51 43 308 260
IT Transformation (% of IT controls implemented) 66% 59% 66% 59%
1. Net Profit metric target based 5+7 forecast
All high risk
gaps closed
Post Office®
Post Office Limited — Commercial in Confidence
©
POL-BSFF-0089724_0028
POL00251661
POL00251661
®
Strong Digital Performance in the month but Branch
numbers continue to track below targets
+ Digital Net Income
* Strong Digital Income performance in the month,
«I
‘favourable to target. YTD revenue is!
th the overperformance was driven by Online Savings which delivered Revenue o' head of budget and
ahead of the monthly average P1-P6 following the offering of a competitive interest rate supported by a marketing
campaign with significant exposure.
+ Attendance
ladverse to target.
+ YTD higher absence has been apparent in Directly Managed branches where attendance is 95.8% versus a target of 96.3%
and Supply Chain attendance is 95.6% versus a target of 96.4%. Both improved in the month, DMBs by 0.1% to 95.4%, Supply
Chain by 1.2% to 95.3%.
* Short term absences improved by 33% in the month and both Support Centres and Supply Chain staff are being offered flu
vaccinations over the next month to minimise the impact of flu on short term absence.
+ Network
* Number of branches increased by 1 in the month and is now 11,559, 111 behind target. YTD 67 branches remain closed
following postmaster suspension with the remaining gap due to higher churn.
+ Actions to open new premises continue to be considered and developed.
(4)
A
Post Office® Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0029
POL00251661
POL00251661
®
P7 EBITDAS is favourable to Forecast £0.1m and Budget £1.1m
£m
Gross Income
Direct Costs
Net Income
Staff Costs
Agents Pay
Non-Staff Costs
Expenditure
FRES - Share Of Profits
EBITDAS
Revenue
Retail
FS&T
POMS
Other
Total Revenue
IRRELEVANT
«3 IRRELEVANT
Fest Bud PY
. Agents pay - - £1 ‘4m. ‘adverse. Increase in costs in line with
the better than forecast Retail revenue performance
* Staff costs — £0.8m favourable. Delays in project spend and
recruitment within Retail (£0.6m) drive in month benefits.
+ Non-staff costs — £(1.4m) adverse to forecast due to timing of
spend. All items are expected to reverse by end of the year.
Performance against Budget
I IRRELEVANT
. Staff costs — £(1.1)m adverse. Overspends in Retail £(0. '8)m
continue due to delays in branch conversions.
+ Non-staff costs — (£1.2)m adverse to due to timing of spend.
Post Office®
()
Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0030
POL00251661
POL00251661
®
YTD EBITDAS is £3.8m favourable to budget
£m
Gross Income
Direct Costs
Net Income
Staff Costs
Agents Pay
Non-Staff Costs
Expenditure
FRES - Share Of Profits
EBITDAS
Revenue
Retail
FS&T
POMS
Other
Total Revenue
Performance against Budget)
YTD i
!
Var Var Var
Fest Bud PY
IRRELEVANT
IRRE LEVANT.
. Staff costs -
to delays in branch conversions, s, partially offset by reductions in
agent pay.
+ Agents pay —irrevevantiadverse and continuing to track in line with
YTD trends due to favourable revenue variances in Retail partially
offset by fewer agents from delays in conversion; IRRELEVANT!
. Non-staff costs ifavourable to budget:
I underspend i in marketing with full year savings anticipated at
asian savings from property (leases and rebates); offset by
' 1 Of unbudgeted LTIP costs
! agent losses
. FRES’ performance now tracking in line with budget and forecast.
Post Office®
(6)
Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0031
POL00251661
POL00251661
Retail revenues +£1.9m favourable to forecast and +£16.5m
ahead of budget year to date
P7 YTD Full Year
£m Act Var Var Var Var Var Var Var
Fest Bud PY Bud PY Bud PY
Total Mail Trading
Total Mail Non-Trading
Retail (Inc Gift cards & Other)
Lottery
Retail and Lottery
Payment Services I
ATM i
Payment Services i
Card Account i
Passport Services
Digital ID Serv UKVI & Asylum
ID - Assurance (Verify)
Other Govemment Services
Government Services i
Total Retail ‘
Retail
Slower decline in revenue than anticipated following recent trends across all revenue pillars.
Revenue overperformance against budget will slow over the balance of year due to delays in launch of Digital Check and Send.
Strong performance in the month v forecast in Lottery but attracts significant agent’s pay.
ox
Post Office” Post Office Limited — Commercial in Confidence Tasat
POL-BSFF-0089724_0032
POL00251661
POL00251661
FS&T and POMS revenue in line with forecast
P7 YTD Full Year
£m Var Var Var Var Var Var Var
Fest Bud PY Bud PY Bud
Mortgages eataessiais _ ee peeatstesnoteeese
Credit Cards and lending
Savings
Travel Money
MoneyGram
Post Office Money
Banking Services
Telecoms i :
Postal Orders i i
Other Income i i
FS&T ; :
POMS
Total FS&T
Supply Chain
Other Income
Supply Chain & Other I
Total Retail i
Total Revenue
FS&T
Trading in line with forecast for the month. Shortfalls in
month and Banking Services! IRRELEVANT!
POMS =
In line with forecast for the month but Iiereteva
which had shown some uplift on ytd trends last
hortfall against budget.
(®
LY
Post Office® Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0033
POL00251661
POL00251661
®
Trading overperformance offsets project delays
Revenue Direct + AgentsI EBITDAS YTD EBITDA Bridge v Budget
Costs Pay
FST Trading
Post Office Money
Banking Services
Telecoms - Excl. New Call
New Call i
Other FST I
Total FS&T
Revenue Direct AgentsI EBITDAS
Retail Trading
Mails
Retail and Lottery
remmenseveet IRRELEVANT
Government Services & 2 2 = : 5 & g = = § i 5
3 £ & 642% 3 2 Oo €
oa FF ec mam = £ &B E
3S § = @¢ & es
2 2 § ° & = FB
Ee Fs 3 5
st
E 5
a a
©)
Post Office® Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0034
POL00251661
POL00251661
®
P7 and YTD Overheads by GE Member
Overheads Month YTD Full Year
Actual Var to Fest Var I Actual Var PSF Var
Bud Bud Bud
£m Staff Other Total Staff Other Total Total Total Total
Costs Costs
KG Retail 84 40 12.0 06 (07) (0.1) (1.0) 68.4 02I 1214 (6.1)
NK FS&T 44 44 54 (01) (0.2) (0.3) (0.1) 32.1 (0.0) 52.7 38
NK = POMS 0.3 1.4 1.8 0.1 (0.0) 0.0 0.2 12.6 1.5 20.7 25
AC Finance & Ops 4.2 73 145 0.0 (09) (0.8) (0.9) 71.3) 03} 12214 (0.0)
PV CEO 00 00 00 (0.0) 0.0 0.0 (0.0) 0.2 (0.0) 0.4 (0.0)
RH ClO 0.4 8.2 8.6 0.0 (0.0) (0.0) (0.9) 61.0) (1.0) 98.7 0.0
ME — Strategy (0.0) 0.0 (0.0) 0.1 0.0 0.41 0.1 0.5I (0.1) 0.7 (0.2)
JM LRG 0.4 0.3 0.7 0.1 0.2 0.3 0.1 5.9] 0.2 11.1 (0.4)
MK HR 15 08 24 0.0 0.1 0.41 (0.3) 14.3 (0.4) 24.6 (0.4)
MD — Communications 0.1 05 0.7 (0.0) 0.0 0.0 (0.3) 34 (0.3) 48 (0.0)
Central (0.1) 0.0 (0.1) (0.0) 0.2 0.2 1.0 5.4 (4.0) 9.9 (1.0)
Total 16.1 26.6 42.7 0.8 (1.4) (0.6) (2.3) I__274.9 (3.7) 466.6 (1.8)
Variances are based on YTD performance v Budget
. Retail: £(4.0m) staff cost variance due to delay in branch conversions offset by non staff costs savings in marketing,
monetisation project delays and payment card upside.
. POMS: Cost savings to offset trading underperformance. Additional opportunities to drive revenue performance to be funded via
Growth fund for 2017/18
. Finance & Ops: Incremental costs from Supply Chain £(1.0)m and losses from agents. Offset by savings in Property costs.
. CIO: £(1.0m) adverse to budget due to phasing of spend in P7. P7 in line with revised forecast and expected to deliver budget
in full year outturn.
. HR: Incremental costs for Apprenticeships to be offset with savings elsewhere.
(10)
C*)
Post Office® Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0035
POL00251661
POL00251661
®
Capital and Investment spend continues to track below
forecast and budget
P7 YTD
£m Act Var Var Var YTD Var Var Var
Fcst Bud PY Act Fcst Bud PY
EBITDAS 3.2 0.1 1.1 4.2 7.6 0.1 3.8 21.9
Network Subsidy 6.7 - - (1.0) 41.7 - (0.0) (6.0)
EBITDA 9.9 0.1 1.1 3.3 49.3 0.1 3.8 15.9
Depreciation (4.0) 0.3 - (3.9) (25.9) 0.3 0.3 (25.7)
Interest (0.5) 0.1 0.1 (0.9) (2.6) 0.1 1.5 (3.5)
Discontinued Operations - - - - - - - -
Impairment - - - 7.8 - - - 56.0
Change Spend (5.9) 4.3 Sue 6.8 (52.7) 4.3 8.2 32.5
Investment Funding 5.8 - - (5.8) 40.8 - - (40.8)
Profit/(Loss) On Asset Sale 0.1 0.1 0.1 0.0 3.4 0.1 3.4 1.7
Profit/(Loss) Before Tax 5.4 4.8 4.5 7.3 12.2 4.8 17.1 36.0
. Change Spend (previously exceptional) expenditure is £5.9m in the month and continues to spend below
forecast and budget expectations. The change process is being amended with a stronger portfolio
management function to address this.
. In period spend on capital assets was £14.8m, £65.9m YTD (cost would previously have been expensed prior
to the change in accounting treatment).
(ny
b Sale”
Post Office®
Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0036
POL00251661
POL00251661
®
Project Spend is currently tracking £59m below budget
P7 YTD Total Transformation Spend
450
Act} Var Var Act} Var Var ae
PSF Bud PSF Bud iad
IT & Digital 9.9) 04 14 36.7/ 0.4 28.4 200
Network Development Programme 4.3) 0.3 5.1 27.2 0.3 7.0 a
DMB Network Development 1.8 0.7 (0.5) 20.1 0.7 (9.7) ad
FS &T 0.9) 13 24 9.4) 1.3 15.2 ia
Retail 0.44 0.7 1.4 3.8] 07 8&1 sail
Back Office Transformation 1.9) 1.7 0.6 8.3 1.7 3.6 aa
LEAN Centre (0.4), 0.9 0.4 2.8, 0.9 0.9 pLom2SPLOSGSSCORTSPBSsCSwIPz
Supply Chain 0.0) 1.4 O01 2.4) 14 (1.3) cee sets! mmm ps
People and Engagement Transformation 1.0] (0.3) (0.4) 3.1] (0.3) 0.5 [
Property 0.4) 0.1 (0.1) 2.1/0.1 (0.0) Transformation Spend
POMS 0.3) (0.1) 0.1 1.7] (0.1) 05 ‘ 7 lantel
(0.1) (0.1) * Transformation spend continues to track significantly below
Other Transformation 0.2 0.1 0.1 0.8 0.1 1.0 .
Corporate Services Transformation 0.0/ 01 0.4 0.2; O01 08 budget and forecast in the month.
eis y oo 88 ‘I °8 38 + IT & Digital continues to see delays in the rollout of software
Digital & marketing . - 02 . - 42 and network to branches. YTD spend is £28m behind
Network Operations -I oo - (0.0)} O1 15 budget with an expected increase in activity over the
Central Adjustments 0.1] (0.1) (0.1) 0.0} (0.0) (0.0) remainder of the year as the projects catch up.
Total 20.8 8.2 11.5 [118.7] 8.2 58.7 . -—
Capital 14.91 3.9. 6.0 65.9 3.9 59.8 ° FS&T includes £6.1m ytd for the acquisition of New Call v
Investment 5.9] 43 5.5 52.7I 4.3 (1.1) budget of £10.3m (final tranche and retention payments
Total 20.8] 8.2 11.5 [118.7I 8.2 58.7 outstanding). Delays with BOI negotiations lead to shortfalls
in spend on Customer Hub ytd. Project is now underway and
expected to catch up by end of year.
+ Retail underspend v budget due to delays on Anti Money
Laundering as scoping of project to comply with HMRC
requirements is ongoing and delayed roll out of POS
enhancements.
(®)
Post Office® Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0037
POL00251661
POL00251661
®
P7 balance sheet shows a net asset position of £200m
£m Oct Mar Var
2017 2017
Fixed Assets 450.9 391.0 59.9
Debtors 314.9 339.0 (24.1)
Cash 660.6 680.0 (19.4)
Creditors (583.0) (582.0) (1.0)
Pension surplus 1.5 1.0 0.5
Provisions (65.4) (88.0) 22.6
Other 8.4 8.0 0.4
Loan (588.0) (561.0) (27.0)
Net Assets/ (Liabilities) 199.9 188.0 11.9
Capital and Reserves 199.9 188.0 11.9
. Debtors reduction since year end is due to collection of 2016/17 Bank of Ireland profit share balance.
. Reduction in provisions balance due to OSOP and agents’ compensation payments.
. Cash and loan balance movements explained on next slide.
(13)
Ler
Post Office®
Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0038
POL00251661
POL00251661
®
Network cash lower than forecast due to cash efficiency
initiatives
(1) Where was our cash?
ém Branches cviT =. Sash
P7 - Actuals 618.5 115.6 162.3
P12 - Actuals 647.0 138.0 158.0
Variance vs P12 - Actuals (28.5) (22.4) 4.3
P7 - PSF
Variance vs P7 - PSF
P6 - Actuals 646.7 138.7 226.7
Variance vs P6 (28.2) (23.1) (64.4)
(2) How was it funded?
ém RCF Clients
P7 - Actuals 588.0 60.6 648.6
P12 - Actuals 561.0 127.0 688.0
Variance vs P12 - Actuals 27.0 (66.4) (39.4)
P7 - PSF 640.2 52.8 693.0
Variance vs P7 - PSF (52.2) 7.8 (44.4)
P6 - Actuals 714.0 92.0 806.0
Variance vs P6 - Actuals (126.0) (31.4) (157.4)
(3) What was our facility headroom on the RCF?
—m cap Board Net Limit
P7 - Actuals 950.0 (200.0) 750.0
P12 - Actuals 950.0 (200.0) 750.0
P7 - PSF 950.0 (200.0) 750.0
P6 - Actuals 950.0 (200.0) 750.0
(4) What was our security headroom on the RCF?
en Network Other Net Total
Cash Assets Security
P7 - Actuals 648.6 208.1 856.7
P12 - Actuals 688.0 210.0 898.0
P7 - PSF 693.0 238.6 931.6
P6 - Actuals 806.0 189.0 995.0
(5) What was our actual headroom?
Total
896.4
943.0
(46.6)
973.5
(77.1)
1,012.0
(115.6)
NRF
247.8
255.0
(7.2)
280.5
(32.7)
206.0
41.8
RCE
(588.0)
(561.0)
(640.2)
(714.0)
RCF
(588.0)
(561.0)
(640.2)
(714.0)
Total
896.4
943.0
(46.6)
973.5
(77.1)
1,012.0
(115.6)
Facility
Headroom
162.0
189.0
109.8
36.0
Security
Headroom
268.7
337.0
291.4
281.0
Given we do not apply £200m buffer to Security headroom our actual headroom is £36m.
(lower of £36m facility and £281m security headroom)
Performance against Prior Month (£116m lower than P6)
Network cash is £116m lower than P6 due to reductions in Branches
£28m, CViT £23m, Cash Centres £64m.
FX holdings at branches (£83m), has fallen back to 2016/17 year
end values after the increased demand of summer (P6 balance -
£104m).
Cash centre balances have reduced £65m, due to inward rems
reducing by £16m from £73m to £57m following continued focus in
this area and the reduction of sub optimal holdings held in P6
(£32m).
An increase in the NRF usage of £40m following reductions in P6 to
coincide with the Bank of England year end funded the capital
investment in the month of £15m and working capital movements of
£15m.
Performance against Forecast (£77m lower than forecast)
The lower cash is split £44m in cash centres and £24m in branches.
The lower cash centre balance reflects the lower inward rems which
had conservatively been assumed to remain at P6 levels (see
above).
Headroom under the loan was £162m, £52m higher than forecast.
This was due to lower than forecast network cash (£77m) and
capital & investment spending (£14m), offset by lower than forecast
usage of the NRF (£33m).
Performance against Year End (£47m lower than year end)
Since year end Headroom has fallen £27m. The reduction is driven
by capital & investment spend partly offset by Government funding
(net £92m), partly offset by lower network cash (£47m) and cash
from operations. raat
14
Post Office®
poe
Post Office Limited — Commercial in Confidence
POL-BSFF-0089724_0039
POL00251661
POL00251661
POST OFFICE GROUP EXECUTIVE DECISION PAPER
IT Assurance Response
Author: Catherine Hamilton Sponsor: Rob Houghton Meeting date: November 2017
Executive Summary
Context
The Post Office CEO, supported by the Group Executive and the Board, requested that
Heather Jackson and Kirk Winstanley of Actinista perform an independent review of
the IT strategy in September 2017. The objective was to assess whether the IT
strategy would deliver the proposed benefits, the approach was sound, the strategy
was executable and the targets were reasonable. The review outcome, complete with
Terms of Reference, is attached. The review material forms background reading and
Heather Jackson/ Kirk Winstanley will present their findings to bring this to life for the
Board. This paper is the management response to the independent review and is
therefore not in the standard format.
Conclusion
We are very supportive of the independent review carried out. It has proven a useful
provocation of thinking and approach. The following response is provided; some of the
actions were already in train and others are happening as a result of the review. We
have responded against the recommendations made in the report.
Actinista Recommendations
1. Bringing Post Office Strategy to Life (page 19)
e We will build our IT story into the North Star communication and bring into our
existing IT communications strategy to the wider team (November/ December
17)
e We will continue Tech Breakfasts to engage the wider organization with our IT
strategy (Jan - March 18). We will shortly be starting “Welcome to IT” sessions
for Post Office joiners (Jan 18). This month, we launch the strategy with the IT
team, ensuring each person knows their role in bringing it to life.
e We are developing our communications roadmap to inform, engage and
recognize strategy delivery planned to be implemented 4Q17/18
e A Digital Transformation framework is being delivered to the GE in November
17. This will provide the foundation definition and framework in which we can
discuss digitisation and the impact of digital.
e We will clearly communicate the benefits our strategy delivers for Post Office at
each critical milestone.
2. Improve Quality of Portfolio Management and Change Management (page 20)
e A paper is submitted to the GE (Nov 17) to strengthen the strategic Portfolio
Office, with a number of improvements recommended to implement the Change
Portfolio and invest in appropriate capability and talent.
Better for the customer. Simpler to run. A great place to work
POL-BSFF-0089724_ 0040
POL00251661
POL00251661
e The IT transformation plan is deliberately aggressive and challenging to stretch
delivery of significant operational risk reduction and cost reduction targets. We
do anticipate that there will be challenges within the execution approach and
we are already facing these challenges. The instigation of the Strategic Portfolio
Office will allow choices to be made on both phasing and prioritisation of
activities. Our priorities will be centred on the following and our phasing will
shift to accommodate:
— Regulatory Change and Maintenance essentials: GDPT, Risk and Resilience
— Reducing Operational Risk: exit of POLSAP, HRSAP, Credence Transition,
Horizon Data Centre Refresh, Networks exit, SOC and HNGX replacement
— Business Driven Revenue Opportunities: such as; Retail Transformation
(HNGT Lite/ HNGT), Identity Services, Customer Hub
— Operational Transformations and Business Improvement: Agent Portal, Back
Office transformation, Robotics, AI
The GE and Board should expect movement on plans given the ambitious scale
of change.
3. Consider other potential business enhancing opportunities (page 22)
e Digitisation and analytics opportunities are already being progressed through
other initiatives
e AML services and Digital enhancements should be considered through the
business strategy team and Customer Hub development respectively
4. Strengthen delivery of the IT strategy to reduce delivery risk (page 23)
e We have instigated a review of the Vendor Management team through a specific
Contract and Vendor management consultancy. Given the size and scale of Post
Office outsource and the significant shift to new contracts we need to ensure
that our controls and capability are suitable for the new operating model.
Within this we will review PO executive alignment to the vendors. Owner:
Catherine Hamilton; Date: Jan 18.
e Permanent capability is being embedded into the change organisation and
recent hires include a Change and Release Management lead to build rigour into
the testing regime and change processes. Owner: Rob Houghton; Date: Next
level hires by Mar 18
e Our shift of the operating model will clarify roles and responsibilities in the
supply chain and focus on service and change improvements Owner: Mick
Mitchell; Date: Jan 18
Better for the customer. Simpler to run. A great place to work
POL-BSFF-0089724_0041
POL00251661
POL00251661
IT Strategy Review
Actinista
October 2017
Purpose of today’s review update
* To update GEC on the assignment and its findings and to air recommendations for
subsequent GEC debate.
* To agree owners / next steps in terms of taking agreed recommendations forward.
19/10/17 Confidential — not to be distributed
POL-BSFF-0089724_0042
POL00251661
POL00251661
Actinis
Terms of Reference
Context
The IT Strategy was presented in July 2016 with
updates presented in January 2017 and now due
for another update submitted 19" September.
The Board has requested an independent
external review of the strategy. This is to ensure
they are fulfilling the duties of the board whilst
recognising that technology is a core enabler to
the companys future strategy.
Objectives of Initiative
« Provide the board with an expert advisor
review of the IT strategy — leveraging industry
sector best practice (Retail/ Financial
Services) with leading edge technology
« Provide the CIO and leadership team with
recommendations of future direction
Questions defining the review
1. Will the IT strategy deliver the benefits
outlined in the paper — both cost and risk
reduction?
2. Is the approach sound - from a talent,
technical and commercial approach?
3. Can we execute the strategy — do we have
sufficient talent, capability and supplier
alignment?
4. Is the outline timetable realistic and
achievable — what are the major risks the
Board needs to track?
IT Strategy Review
5. Are the targets within the strategy
reasonable?
Scope of Work
The scope of this work will include but is not
limited to the items listed below:
* Reviews of the IT strategies submitted to
date, other independent reviews related to it
(KPMG/ TORI Inasight/ Retail IT strategy)
and current WIP IT strategy
Interviews with current IT Leadership team to
assess both deeper review of each element
and review alignment
Review and clarification of the business
strategy after review of the IT strategy and
meetings with ClOs
* Deeper dive on the 5 year cost strategy
Deliverables:
* Deep pack for CIO and leadership team
* Executive summary and presentation for the
Group Executive
* Executive summary, prepared in board
format, for September! October board —
potentially with presentation but preferably
that CIO presents the outcome of the review
Schedule for Review
10" September — IT strategy V3. submitted for
Group Exec Review
14” September - Group Exec
£ SKK
RSA
19 September - IT strategy V3. submitted for
Board Review
26" September — PO Board
Ideally the chosen advisor can work within this
schedule to have a supplementary one or two
pager to go into the 19" September papers for the
board. However, the Group Exec will have had to.
review the contents prior to submission.
Reporting
Weekly reviews with Rob Houghton — CIO (and
acting CTO until Sept)
Consult with:
IT:
Michael Passmore: IT Finance Lead
Andy Garner: Retail ClO
Jeff Smyth: Financial Services/ Digital ClO
Mick Mitchell: Security and Operations Lead
Catherine Hamilton: 5 year cost lead and
governance
Sharon Gilkes: Business Performance Director
Jason Black: IT Programme lead
Business:
Paula Vennells; CEO
AI Cameron: CFO
Martin Edwards: Strategy Director
Kevin Gilliland (Retail CEO)
Nick Kennett (Fin CEO)
Version: 1
Date: 21 August 2017
Sponsor:
Paula Vennells CEO
Business Lead: Rob Houghton
Copies for Information:
Jane MacLeod, General Council
19/10/17
Confidential — not to be distributed
POL-BSFF-0089724_0043
POL00251661
POL00251661
Actinista
Summary
* Overall the IT direction is right and many of the right things are being done, and good
progress is being made.
* However, we believe that there is opportunity to gain more value, and also to avoid
disappointment as a result of differing expectations.
* 33% of the Post Office profit uplift for next 4 years is planned from IT Opex reduction.
Structure of the following slides:
I. Your comments on the IT strategy.
2. Findings on the Post Office change agenda.
3. Findings on the IT strategy.
4. Recommendations.
19/10/17 Confidential — not to be distributed 2
POL-BSFF-0089724_0044
Our big challenges are the regulators,
conduct risks and disintermediation
The first line service desk
out of Manila just does not
work for us
We know far too little
about our customers
The essence of why it costs so much
and is so difficult to change comes.
down to the Fujitsu relationship. ...
A key challenge is the complexity
of running a Post Office, due to the
complexity of the business and due
to the systems and processes
We are doing a lot better relative to
our past, but relative to our
competition it is not fast enough
I feel very nervous about the IT strategy.
I understand what it is trying to achieve in
terms of robustness. Its very technical. We
are focusing on the machine rather than the
marketplace, The big concern is that it takes
too long to do anything.
19/10/17
we have been their best cash cow
The main thing I need is to
do things better and cheaper
If everything goes to plan I
have a 70% confidence we
can land the big things
We are making decisions about
POL00251661
POL00251661
ies
Actinista
Our risks are that we are trying to do
too much - we are doing more than
ever before, much investment is for IT’s
sake and we have multiple project
teams all with interrelated releases so
things will trip over one another
Rolling out the EUC platform currently
is saving us a little - it gives users Office
365 and a new laptop but as a
business we not yet using Sharepoint
or Skype etc.
Delivery is extremely
difficult with the supplier
tower model
where we put resources without
understanding the implications
There are still too many
surprises coming out of
the woodwork
Confidential — not to be distributed
Each programme is deliverable
in isolation but the risk is in the
total amount of change and the
timescales
POL-BSFF-0089724_0045
POL00251661
POL00251661
1.2 Your comments on the IT strategy.
Actinista
* The business is wary due to events / performance of the past.
* There are lots of positives about Rob and the improvements in his structure and team.
* You feel it is very technically focused. The business do not yet seem to ‘get’ what it will enable for
them and so perhaps might not take advantage of the tech enablement in the way that adds most
value.
* Some people may be standing back and letting Rob get on with this whilst they run their areas! This
is probably, in partly, due to the point above.
* The biggest thing the business is looking for from IT is to improve the speed of change - they do not
understand why the timescales for all changes seem to take so long and cost so much!
* Broadly the business is OK with the run service from IT. However, are they looking properly at all the
opportunities to make this better and more efficient, or are they simply complacent so long as it does
not break? Do they know what good looks like here? Are they aware of the operational risks which
could impact them?
19/10/17 Confidential — not to be distributed 4
POL-BSFF-0089724_0046
POL00251661
POL00251661
®
2.1 Findings on the Post Office change agenda. a)
Actinista
Your strategic goals and aligning change to these:
* It is not clear that the changes planned will be enough to drive the change in appeal to the differing customer
groups that you seek to attract in the future.
* It is not clear which products/services you are driving because they give you the largest growth / profit / customer
loyalty etc, and how any targets for these relate to your business plan financially.
* Some of your drivers can seem contradictory - e.g. in Retail, pay by average transaction time length and sell post
office services to drive footfall, and yet digitisation would reduce transaction time length and potentially allow
customers to transact on-line and so not drive footfall into retail branches.
* You need to attract a younger demographic into the Post Office to sustain the future. What are the services you can
offer to drive that younger demographic footfall which cannot simply replaced by online competition?
Volume of change:
* You are doing more than ever before in terms of change, therefore constantly evaluate:
o Can your end users in the business absorb this amount of change?
o Can your change functions, including IT, deliver this amount of change?
o Will the change deliver the improvement in performance that you seek?
The following two diagrams are examples of how you can show the volume of change and impact to the business.
19/10/17 Confidential — not to be distributed 5
POL-BSFF-0089724_0047
POL00251661
POL00251661
®
2.2 Scale of the change agenda
CAPEX spend per annum (£m) on change
400
mProgramme I
350 Example — what does the Programme 2
uplift of change look like m Programme 3
300 using your actual data? ssProgramme 4
mProgramme 5
250 mProgramme 6
mProgramme 7
Programme 8
200 m Programme 9
Programme 10
150 mProgramme I I
100
: il la
=
2013/14 2014/15 2015/16 = 2016/17, 2017/18 =. 2018/19 = 2019/20 =. 2020/21
Can be populated with validated information from change portfolio
19/10/17 Confidential — not to be distributed 6
POL-BSFF-0089724_0048
POL00251661
POL00251661
2.3 Impact of the change agenda
Change Initiatives - how big, when they land,
Example -do you have and the impact to the business
this picture or similar? ReIenTES
H
@ Branch
Size = business impact
@ IT Support
Programme 4 euR
Programme 2 ~~
a Programme 5 © Digital
Complexity
Zé
Programme 1
— Programme 6
L
2015 2016 2017 2018 2019 2020 2021
Can be populated with validated information from change portfolio
19/10/17 Confidential — not to be distributed 7
POL-BSFF-0089724_0049
POL00251661
POL00251661
2.4 The IT delivery plan in terms of business outcomes
Actinista
2017/18 2018/19 2019/20 2020/21
ID Check ¥ * Online training * Process mail
. in “A” at retail till
Retail
* Train tickets
in branch
* Customer Hub * Customer Hub * Customer Hub
FS & outcome 'X' outcome ‘Y' outcome ‘Z’
Telecome Example - outcomes
are not currently clear
to us - some work may We Perimeter
; secured
IT Ibe required by the Post oe Self serve
Office in order to I* line support
populate this.
Finance I Can also overlay costs
and benefits. Who benefits
* Self-serve * Customer
HR benefits * Colleague
* Payroll by email * Post Master
19/10/17 Confidential — not to be distributed 8
POL-BSFF-0089724_0050
POL00251661
POL00251661
3.0 Findings on the IT Strategy a)
ctil
I. Will the IT Strategy deliver the benefits - cost and risk reduction?
2.
3.
4.
5.
6.
The following slides consider each of these in turn.
Is the IT Strategy the right strategy?
Is the technical approach sound?
Is the commercial approach sound?
Is the approach to IT talent sound?
Is the timeline realistic and achievable?
19/10/17 Confidential — not to be distributed 9
POL-BSFF-0089724_0051
POL00251661
POL00251661
3.1 Will the IT strategy deliver the benefits? a)
Run Costs: in summary, OK position given your history and commercial situation.
You will find it tricky to meet a benchmark if you use other UK retailers or retail financial services as the benchmark.
What are sensible benchmarks to use — or is it truly a unique situation?
* Your IT run costs will not compare to other retail or financial services providers because:
© your systems support a much broader set of services;
© you do not charge for the consumption of IT services in the same way and therefore drive the same
efficiency of behaviours - e.g. being charged for peripheral replacement, engineer visits etc;
© your user base has shorter length of service, higher turnover and less deep knowledge of the transactions
they perform and of the more complex kit they use, and therefore will require more contact with the first
line service desk / other means of support.
You have I 1,000 outlets in buildings and environments that are not 'IT friendly’
Government procurement processes will not be as fleet of foot and demanding of suppliers as those in retail
FS institutions.
* The commercial arrangements you have in place currently limit the cost reduction opportunity to some extent -
length of the contracts; multiple suppliers; lack of outcome-based service levels and penalty clauses; onerous exit
costs etc.
* On the positive side, you have built in facility in your contracts to ensure you can benchmark your unit costs for
network and help desk costs.
* The forecast for your run cost reduction is realistic but challenging and the team will need support and
understanding to achieve it.
19/10/17 Confidential — not to be distributed 10
POL-BSFF-0089724_0052
POL00251661
POL00251661
3.1 Will the IT strategy deliver the benefits? (cont)
Actinista
* Regarding overall total change costs, reducing or increasing these very much depends on the appetite for change
initiatives.
* Currently your change projects probably cost you more in IT than they should for a variety of factors, including:
© not being as specific as to the benefits, priorities and scope as you could be for each project (e.g. Customer
Hub);
not managing the tech providers for each project as closely and relentlessly as you might do;
having to navigate the range of suppliers on many projects;
managing some complex cross dependencies across projects;
oo°0o 0
engineer visits necessary to branches to implement
* You currently underspend a large % of the budget for change. Is this due to lack of focus on existing projects?
Could the underspend be better utilised to drive more change/benefit?
* The IT strategy will reduce the operational risk exposures significantly - resilience, recoverability, security, ‘route to
live’ etc. It will put you in a place where you should be ie. in line with other retailers and physical retail financial
services organisations. Ongoing investment will be required to keep you in line, particularly as you increase your
financial services offerings and therefore exposure.
19/10/17 Confidential — not to be distributed I
POL-BSFF-0089724_0053
POL00251661
POL00251661
3.2 Is the IT strategy the right strategy?
Actinista
The IT strategy has the right main ingredients - it is the timescales that are the challenge.
We also list some topics we have seen in other IT strategy documents.
Broadly yes.
Sensible approach to the infrastructure and Horizon so you are building the right foundations but this will take a lot
of time and effort.
The issue is more one of can you do it all in the timescales?
* Below are example areas of things we have seen in other IT strategies:
co honing the service levels delivered to the business so that SLAs and OLAs really work for the business
users’ needs;
doing more ‘opportunity wins’ whilst fixing the plumbing :
deeper activity on data analytics and learning from the information you already have;
clearer view of the architecture roadmap and the steps towards delivering this — which systems will be
decommissioned, which are strategic, where are new ones planned etc;
quick wins automating time consuming, error prone processes (worst ten offending processes’);
optimising the end user computing capability to increase colleague efficiency;
putting greater pressure on the suppliers to deliver what they say they will and then to deliver meaningful
value add on top of that;
a more systemised approach for innovation;
an approach to learn more about and adopt digital technology.
19/10/17 Confidential — not to be distributed 12
POL-BSFF-0089724_0054
POL00251661
POL00251661
3.3 Is the technical approach sound? a)
Yes, given the basis you were starting from but you will have to ‘hold the baton’ on this
Technically the Post Office is not doing anything that is ‘bleeding edge’. All the technical infrastructure
components of what you are using are sound, and moving to the cloud makes sense for your operation.
In strengthening the architecture and the service manager teams you are making a step toward ensuring you have
enough technically competent people to assess what the suppliers are doing and ensure it is moving you forward
technically appropriately.
You are aware of the risks of not having run a full DR on the back end since 2015 and will need to schedule time
to run both DR and BCP tests. In the meantime the Exec and the Board need to be cognisant of the resultant
exposure in this area.
In some cases, because your roll-outs take so long and because you are using kit to link to some old applications,
the kit is nearing end of life by the time you complete roll out.
You will need to ensure all Data Protection and security issues are fully covered off for your cloud platform,
particularly if you move further into Financial Services provision.
On innovation, the sifting and prioritisation technically will have to come from the Post Office, otherwise the
suppliers will only ever push and offer what they know and what they can make a profit from.
On continual improvement and ensuring you do not fall behind technically , it will also be the Post Office IT
team that has to push for this to address questions such has
* What is the plan to exit the Horizon platform in the future?
* How well can you stress test the changes as they go out?
* How optimised is your release strategy to safeguard the run environment and maximise change throughput?
* Will your be security monitoring be benchmarkable with other high street financial service organisations?
19/10/17 Confidential — not to be distributed 13
POL-BSFF-0089724_0055
POL00251661
POL00251661
3.4 Is the commercial approach sound?
* You are working with a complex ‘mesh’ of suppliers.
* You supplier contracts and therefore their behaviours are not aligned to Post Office direction, particularly when they see it as a
capped or diminishing account in terms of profit to them.
+ Adhering to contract work levels, end points and to your standard of OJEU process means that you are less fleet of foot than others
in how you use and flex your supplier base.
* You have done what you can to adjust existing contracts to drive more from your suppliers - more change capability, e.g moving run
costs to change costs with Fujitsu. However, if the level of change spend is guaranteed you need to make sure that you drive the supply
chain to get value for money.
* Your cost efficiencies and your speed of change improvements are driven through several suppliers and it is down to the Post Office
resources to navigate and pull these all together
* You could perhaps leverage more out of your suppliers by applying more pressure on them from across your exec and non-exec
team.
* Akey area of opportunity is first line help where most other organisations would be much more automated and have more rigorous
SLAs with suppliers.
* Do you have enough internal capability to validate the technical capability of the resources from your partners?
* You will need to continually push your suppliers re innovation and new technological approaches, and will need to ensure they are
putting technically competent teams on your work - will they always put the ‘a’ team on if the account is not growing for them on
profit?
* The Post Office brand though is strong and you should leverage positive PR for you and your suppliers to your advantage!
The following diagram is a simple picture of the supplier commercial position — if used it needs to be updated and maintained.
19/10/17 Confidential — not to be distributed l4
POL-BSFF-0089724_0056
POL00251661
POL00251661
®
3.4 The IT supplier contract timeline
os 5yr Spend
Provision Poreeact 2017/18 2018/19 2019/20 2020/21
Fuji nenren peo Op. £142m Renegotiation Plan for reselection Contract end
ujitsu (infrastructure and Cap. £ / breakpoint
aepiletiten), * Revised contract in place
End user computing
EDy ig
(ee (desktop, print and eee) ao Plan for reselection
branch counter)
Contract end *
/ breakpoint
tos Service Desk I* line Op. £30.5m Plan for Contract end
support Cap. 2 reselection —_/ breakpoint
. Network Op. £40.1m SOC contract starts
Verizon infrastructure support Cap. £ *
A part-complete example
stl platform and - needs updating and
igital platform ani 9 in
Agasnianie support of key back Na ag Mal ntaining
office applications
19/10/17 Confidential — not to be distributed 15
POL-BSFF-0089724_0057
POL00251661
POL00251661
3.5 Is the approach to IT talent sound?
* Moving to the “fatter” in-house IT leadership team makes lots of sense to own and drive a step change in IT performance.
* You have a new IT leadership team with some apparently decent recruits to the roles. It is a very new team, with many new to the
Post Office, so will need lots of time and input from Rob to build it into an effective team. Some are on a development journey and will
take time (and may not make it).
* The next layer down of the IT team needs strengthening. This is recognised and being worked on.
* You have only two architects, one who has been with the Post Office several years and one brand new Head of Architecture. For the
scale of change, this is a very light capability, and you don not have clear enough IT architecture roadmaps and good architectural
interlock with the business yet.
* Your security approach will improve with a new Head of Security and new SOC arrangements with a supplier. This needs to be up
and working as quickly as possible - is absolutely everything being done to enable this?
* You need to strengthen your vendor management skills with people who are competent to really face into the suppliers, otherwise the
weight of this will fall on Rob’s shoulders ... and at times he is too nice with them perhaps!
* Jason Black appears to be good example of a strong IT change programme deliverer but, given the scale of change and the complex
supplier landscape, you will need more to supplement those you grow internally.
* The ClOs facing into the business areas will need continuous scrutiny to ensure they successfully deliver step change.
* The relationship of service managers for Post Office facing into suppliers will need constant review to ensure value and service
improvement is being drive from this.
* Rob's digital role is not yet clear, and should be given the focus on this across the business strategy. This may mean being clearer on
responsibilities across Paula's direct reports.
19/10/17 Confidential — not to be distributed 16
POL-BSFF-0089724_0058
POL00251661
POL00251661
3.6 Is the timeline realistic and achievable?
Actinista
You are doing more than ever before, with some ‘drag factors’ and against
very optimistic timescales, so building some contingencies might be helpful.
* You are doing more than ever before, seeking to deliver on a scale you have never delivered on
before - it is new territory!
* And you will be doing this with lots of ‘drag’ factors:
o ahistory of continuous changes in IT direction and a number of false starts;
© atrack record of late delivery;
© acomplex supplier ‘mesh’, and suppliers not always pointing in the same direction as you
strategically or commercially;
o anewlT leadership team at the top and a next layer down that will need to be increased in
size and capability;
© aneed to get more throughput at a better price from your suppliers than you have managed
historically.
o In our opinion, the timescales are perhaps overstretching as it is not clear where there is
contingency. It is a ‘happy path’ plan and so long as all recognise this, that is fine. Do the
contingencies exist elsewhere in the business?
19/10/17 Confidential — not to be distributed 17
POL-BSFF-0089724_0059
POL00251661
POL00251661
4.0 Recommendations
Actinista
We have four areas of recommendations for the GEC to consider how they best take forward:
I. Bring the Post Office Strategy to life, linking it to the financial plans and making it tangible to all Post
Office colleagues.
2. Improve the quality of portfolio management and change management to flag likely risks and issues
rather than just ‘keep score’,
3. Consider some other potential business enhancement opportunities.
4. Strengthen delivery of the IT Strategy to reduce delivery risk.
The following slides consider each of these in turn.
19/10/17 Confidential — not to be distributed 18
POL-BSFF-0089724_0060
POL00251661
POL00251661
4.1 Bringing the Post Office Strategy to Life
Actinista
The overall business strategy would benefit from a clear and simple ‘North Star’ that everyone can
understand and follow and that is supported by consistent frequent communication.
Use customer journeys to bring to life desired outcomes and keep everyone focused on the end
consumer.
Focus on those things that will give the greatest chance of achievement to the strategy numbers.
If you go ahead with Panther, really look at the opportunity for synergies and work out how you will
integrate Panther into your offering.
Make digitisation ‘real’ to the organisation and use it to add value and benefit, for example exposure
to cutting edge use of digital technology, schemes to promote innovative digital ideas etc.
Customer Hub and Identity will be ongoing journeys that could benefit many parts of your service
proposition. There will need to be continual investment to keep exploiting the opportunities that
come through learning and data. It is important to have a clear roadmap with benefits that is owned
by everyone (not just Nick and Martin).
Develop some business contingency to ensure you achieve the financial business plan, in case of IT
slippage on cost reduction or key business outcomes.
19/10/17 Confidential — not to be distributed 19
POL-BSFF-0089724_0061
POL00251661
POL00251661
4.2 Improving the quality of Portfolio Management
and Change Management Actinista
Map more clearly the ‘blobs’ of change to the key strategic themes (the five) and ensure you have
clear line of sight of the impact each change will drive on the achievement of the strategy £ numbers.
Assign a small amount of change spend to each business area so that they can use it for their own
specific enhancements and to drive value for their area. .
De-risk the volume of change by:
o reducing the number of change initiatives and really focusing on those that make a difference;
© phasing the areas of change impact to prevent overload in any one business area.
Make your macro change management and portfolio management work better.
Be clearer on roles and responsibilities, metrics and improve measurement of delivery of business
outcomes — ‘you get what you measure’. There may be value in establishing a very simple clear
dashboard.
Ensure you have experienced, professional portfolio management team and similarly experienced
people managing your major programmes and projects. These people need to have done similar
scale roles before and need to ‘know what good looks like’
19/10/17 Confidential — not to be distributed 20
POL-BSFF-0089724_0062
POL00251661
POL00251661
4.2 Portfolio management and change management (cont) —
an example of ‘what good looks like’ Actinis
A good change portfolio function will:
* Look forward at key risks across the change portfolio and help mitigate them before they become issues.
* Provide clear and simple reporting to exec to ensure good decisions are made and the right support is provided.
* Have a clear view how all changes align to the strategic business objectives.
* Take a view of all types of resource requirements over time
* Drive a complete ‘join up’ between IT and the business so all resources are pointing the same way focused on the same things!
Here are some examples of the types of deliverables they produce / manage to give you clarity and certainty:
Business Prioritised change
strategy portfolio
Mandatory CostéI Bené
I, Alaskidlkasdilidsa
2, Bkkshtishdtkjdhs
3, Clsfnkdshikjdshkjsdht
4, Dkjasndtkdsthkjsdhfad
5. ElskdSdflcdjksidf
Key change
initiatives
I. Alaskidlkasdidsa
2. BKkshtkshdtkjdhs
3, Claffnkdshtkjdshkjsdhf
4, Dkjasndadsthkjsdhtd
Alaskjdlkasdilidsa
B
456
2. Bkkshkshdtkjdhs
B
456
3. Clsjhkadshikidshkjsdht
B
456
Programme & Portfolio resource
Change plan project delivery schedule
Strategic
1. Alaskjdlkasdiljdsa
1234
5678
2. BKkshfkshafkjdhs
1234
5678
3, Clsfihkdshfkjdshkisdh I
1234
5678
4, Dkjasndfkdsthkjsdhfd
1234
5678
5. Elskalfedlkfkdfiksjdf
1234
5678
BAU
1. Alaskidlkasdiljdsa
2. BKkshfkshafkjdhs
3. Clsfihk
Innovation Pilots
I. Akihfskdfhkjdsfhks
12
2. Bkajhtkjdsfkidhtkjs
12
Business impact
assessment
19/10/17
Confidential — not to be distributed 21
POL-BSFF-0089724_0063
POL00251661
POL00251661
®
4.3 Consider some other potential business enhancement a)
Opportunities Actinista
* Digitise training and Post Office operating processes to be more easily absorbed and accessible for people working
in your branches. You spend huge amounts of time and money on training (face-to-face and shadowing), there is a
high turnover of staff in branches, there are long wait time for help query support and changing processes can
currently be cumbersome. There are other more accessible, more effective digital ways of delivering this today
which other retailers are already adopting.
* Drive more value from analytics and intelligence from the your existing data — elsewhere we see that a small team
of 2 to 4 good data analysts with some analytical tools gives insight that they do not currently have, and therefore
helps them make better business decisions.
* Look at the opportunity to hone the website to appeal more to the customer segments you are targeting in order
to drive more business now and in the future.
* Provide AML services for other organisations, e.g. lawyers, accountants, estate agents, trade accounts and charge a
transaction fee for doing so. Is there a possibility to provide signature witnessing for other organisations?
19/10/17 Confidential — not to be distributed 22
POL-BSFF-0089724_0064
POL00251661
POL00251661
®
4.4 Strengthen delivery of the IT Strategy to reduce delivery risk a)
Actinista
* Leverage senior Post Office Execs involvement with vendors in a structured way to apply real pressure on your
vendors so that they are seriously striving to add value to your business.
* Strengthen your vendor management capability in terms of experienced, senior people; perhaps people that have
worked in the relevant parts of the supplier organisations so that they know how to navigate and get best value.
* Hold your suppliers to account in terms of bringing more innovative ideas / solutions to the table.
* Find a way to benchmark the performance of your suppliers on change delivery.
* Be more clear on what the future planned technology changes will enable in terms of business improvement and
innovation.
* Introduce regular release cycles for deployments to key applications, e.g. Horizon and Website.
* Validate that the Fujitsu cloud solution will provide the flexibility you need to move to an alternative supplier in
the future, should you wish to do so.
* Look at what is giving most pain to Post Masters in terms of IT service desk and look for any potential quick wins.
* Ensure that you have a simple, integrated plan with IT resource allocation to show the future resource risks, skills
and pinch points.
19/10/17 Confidential — not to be distributed 23
POL-BSFF-0089724_0065
POL00251661
POL00251661
Summary
Actinista
Overall the IT direction is right and many of the right things are being done.
There is a reducing risk of serious Post Office operational failure as a result of IT.
Regarding change, there is a significant risk that too much is being done / planned to be done — ‘it is a
happy path plan’.
We believe there is an opportunity to get more from your technology suppliers in terms of business
alignment, partnership working and innovation.
There should be more clarity around the specific business outcomes that will be enabled through the
delivery of the technology change projects.
There is a strong opportunity to give better alignment between what specific change is being planned
and your overall business strategic objectives. This will help with priorisation and reduce risk to the
achievement of the business plan.
19/10/17 Confidential — not to be distributed 24
POL-BSFF-0089724_0066
POL00251661
POL00251661
POST OFFICE PAGE 1 OF 6
BOARD
Project Panther
Authors: Tom Wechsler & Andrew Goddard I Sponsor: Kevin Gilliland I Meeting date: 23 November 2017
Executive summary
Context
As set out in the June Board Strategy discussions, bill payments are a core part of
Post Office’s retail proposition, driving footfall and value for retailers. The bill
payments business has been declining relative to the competition. This paper provides
an update on one of the key proposals within gy to address that decline:
Project Panther - the potential acquisition of} ‘bill payments business.
Questions addressed in this report
What are we aiming to achieve?
What benefits do we expect from acquirin bill payments business?
What is included in the potential deal?
What would constitute a good deal range?
as ON eS
What is the plan for completing the transaction?
Conclusions
6. We have been pursuing the option to acqui
bill payments business
our place in the value chain mers, clients and retailers, and increase our
ability to compete against I
7. Having completed comprehensive I IRRELEVANT __
diligence and applied conservative forecasts and ass:
land operational due
ions, we believe that
8. Our analysis suggests that a price between
for money to acquire the carved out bill payments business.
9. Furthermore, the acquisition of bill payment business supports Post
Office’s wider retail strategy and creates optionality to expand the distribution of
some of our products, notably mails.
Input sought
The Board is asked to note the progress made since June strategy discussions and
endorse the move to formal negotiations with Our intention is to return to
the Board with proposed heads of terms in January.
Strictly Confidential
POL-BSFF-0089724_0067
POL00251661
POL00251661
POST OFFICE PAGE 2 OF 6
The report
What are we aiming to achieve?
1. Bill payments are a core part of the retail proposition, representing the third
highest driver of footfall in the network with:
generating positiv for the Post Office.
2. Bill payments provide the following benefits to our retail network:
and
a. Drive footfall - Payments customers visit more frequently than averag
visits per month vs. for all Post Office customers;
b. Drive basket size - "Customers buy more when they visit, with an average
c. Have social purpose — bill payments are explicitly part of the social purpose
of the Post Office, providing a facility for the financially excluded to pay bills.
3. However, Post Office has been managing the decline of this business while
share, limiting their top- line decline in transactions to 4%.
4. PayPoint’s success arises fi
locations, conveniently located in urban areas
and open 39 hours per week longer opening hours than the Post Office;
b. Good technology - easy to use in-store technology, integrating features
such as ePos software, card acceptance and bill payment into their own
hardware solution or retailers ePos system;
c. Strong bill payment content - enable
portfolio than the Post Office or {ir including exclusive contracts with
clients such as the BBC (TV Licensing) and via pre-pay energy payments
5. We want to arrest Post Office’s decline and grow our share. Our aim is to
outperform the current 5-year plan to maintain and strengthen the value of bill
payments in the retail proposition.
I iRRELEVANT, tO Secure a broader content
6. Since June, we have initiated Project Panther to assess the opportunity to
acquire or partner with
he is the 3° largest bill payments Provider with of the market. It
I from Duke Street.
Under new payment leadership, their revised strategy I is focussed on targeting
SMEs with a leading card terminal offering. The management of bill payments is
not their focus and a disposal to Post Office represents a logical approach.
Strictly Confidential
POL-BSFF-0089724_ 0068
POL00251661
POL00251661
POST OFFICE PAGE 3 OF 6
8. The acquisition of! carved out bill payment business offers the potential
to add an immediate 50m transactions, taking our market share from approx.
nd take ownership of an extended network of 14,000 convenience
stores open 100 hours/week. This would place Post Office in a much stronger
position to compete withiirretevantion some of their key areas of strength;
notably, network size and additional client content.
9. We have a window of opportunity to regain market share. There are significant
number of the largest payment contracts coming up for renewal in the next 18
month: This includes all of the large utility companies, including British Gas with
ove! {imnetevanTI pre-pay transactions pera annum. The combined strength of the Post
10.
I “I against the
yy restructuring our relationship with resellers
and winning new direct clients. However, this would significantly hinder our
ability to compete effectively wit who will continue to profit from bill
payments and in turn, invest in‘ our largest mails competitor.
What benefits could we expect from acquiring Payzone’s bill
payment business?
11. Comprehensive due diligence work has been completed with PA Consulting. Fig1.
38.0
*Calculated over 10 years, including terminal value
Fig. 1 - Total potential value from the transaction (including terminal value)
Strictly Confidential
POL-BSFF-0089724_ 0069
POL00251661
POL00251661
POST OFFICE PAGE 4 OF 6
locations and opening hours; whilst it would not be a larger network than
i the combined rural and urban strength would be compelling for bill
payment clients to consider exclusive deals with us, given the right price.
17. Strengthening the Post Office’s client portfolio through new and exclusive
contracts is estimated to generate mostly driven by an increased
opportunity to win new clients on an exclusive basis, and by adding critical smart
ticketing content to the Post Office content offering.
EASY TO USE TECHNOLOGY
18.
bill payment technology is more developed than the Post Office. By
in-store bill payment solution as a replacement for our
jevice, Post Office could increase its speed to market with a
new device, whilst saving on procurement and software development costs.
adopting /IRRELEVANT!
19. In addition, it would provide faster access to smart ticketing and smart metering,
which are expected to represent an area of substantial transactional growth.
20. The availability of new devices would reduce time to market by at least six
months helping displace competitors from Post Office branches sooner.
OTHER BENEFITS
21.
card payment solution could also provide additional value to the Post
Office by sharing revenues generated through the acquired installed base of
convenience stores currently paying for this service.
Post Office figures adjusted to exclude comm
Strictly Confidential
ind outreach branches
POL-BSFF-0089724_0070
POL00251661
POL00251661
POST OFFICE PAGE 5 OF 6
22. Furthermore, the acquisition of} bill payment business supports Post
Office’s wider retail strategy and creates optionality to expand the distribution of
some of our products, notably mails. These have not been included in our
financial evaluation but we have included lower costs for acquiring agents and
support e.g. equipment and cash.
What is included in the potential deal?
23. Our aim is to purchase arved out bill payment business. We have
identified the following areas as in scope:
nvenience stores
. Existing and pipeline of bill payment clients
Technology estate to operate the bill payment business
. Use of and rights to the!
47 staff currently employed by I arved out bill payment business
>oeoaod
Revenue share arrangement for'
g. Other assets required to operate? he bill payment business
24. We believe that there are benefits in retaining the Iirretevantibrand, as this will
avoid the substantial cost of rebranding the acquired hetwork, as well as
avoiding potential customer confusion by rebranding under the Post Office brand.
card acceptance business
25. Furthermore, although today the [imrevevanr! brand does not carry much value this
can be enhanced from the increased volume of transactions from Post Office’s bill
payments content, e.g. British Gas.
26. Our objective is to minimise any valuation attached to the
find an amicable solution for both parties.
brand and
What would constitute a good deal range?
27. Inthe June sli paymen
28. “We also propose that a proportion (to be defined) of ine transaction should be
dependent on performance, with payments over three years from the acquisition
associated to some or all of the future revenues growth.
Strictly Confidential
POL-BSFF-0089724_0071
POL00251661
POL00251661
POST OFFICE PAGE 6 OF 6
What is the plan for completing the transaction?
29. We have a detailed plan of all major activities to execute the deal, meet CMA
approval requirements, counter market reactions, and engage with all Post
Office’s major internal and external stakeholders.
30. We are working to agree a deal wi principle; conditional Heads of
Terms; and mobilise key transition expertise to execute the transaction.
31. We are preparing for a phase one assessment by the CMA, with the help of
Oxera and Pinsent Masons. Their preliminary view is that this transaction will in
fact encourage competition against PayPoint’s leading market position.
32. Nonetheless, prior to CMA approval and, realistically, up to June 2018, it is likely
the negotiations for critical existing and new client contracts.
What are the risks associated with the transaction?
33. Failing to conclude this deal could mean a continued decline of Post Office’s bill
payments business and impact the value of our proposition to existing and new
branches. Continued decline in this market will strengthen: nancially to
reinvest in/irrevevanr} impacting our mails business.
34. Pursuing this deal also presents risks: externally, in the form of a reaction from
the competition, CMA or the broader market, and internally, from our limited
experience and capacity to execute the acquisition and manage the transition
effectively. We are working up plans to bring in expert resource and support.
RI
Next steps
We will continue to have discussions in order to ascertain withi1
achievable. We will return to the Board with proposed heads of terms in January.
Strictly Confidential
POL-BSFF-0089724_0072
POL00251661
POL00251661
POST OFFICE Strictly Confidential
Mails Strategy Update
Author: Mark Siviter Sponsor: Kevin Gilliland Meeting Date: Nov 2017
Executive Summary
Context
In May 2017 we set out our Mails strategy and received a mandate to negotiate the
contractual Mid Term Review (MTR) with RM. The purpose of this paper is to update
the Board on how the Mails market has developed since May, the implications for Post
Office and how we are responding. In addition it provides an update on our
negotiations with Royal Mail and our recommendations on securing a long term
extension to the current MDA.
Questions addressed in this report
1. How has our strategy and the market developed since May?
2. How are we progressing with our no regret actions?
3. What progress has been made with Royal Mail?
4. How will we move forward?
Conclusion
1. Our strategy, agreed in May, remains focused on meeting the needs of the
customer groups most important to Post Office.
2. The changes in the market point to a direction of continued competition for
marketplace volumes.
3. We are actively taking action to improve our attractiveness as the UK’s leading
mails retailer, improving the in branch customer experience, network coverage and
capabilities, and customer journeys.
4. In addition we are building our relationships with other key operators in the
market such as eBay, Amazon and others. The degree to which we can pursue
these is limited by the conditions in the MDA.
5. We have prepared well for a Mid Term Review with RM which has been superseded
by Royal Mail’s recognition of the value of entering into negotiations on a long term
extension of the MDA. We believe it is a no regret move to engage in negotiations
with RM should they receive approval to do so.
6. Our strategy and negotiation preparation have been reviewed by Accenture who
have confirmed their appropriateness for a MTR, and with some further work a
long term negotiation.
7. We will return to GE and Board in January with a formal recommendation to
negotiate with RM with a detailed mandate.
Input Sought Input Received
Board is asked to note: progress we have made since I Input into this paper has been
May and developments in the market and Royal Mail, I received from Mails and Retail
the assurance by Accenture of the strategy and teams.
negotiation preparation, and the next steps to
prepare for LTR
Strictly Confidential
POL-BSFF-0089724_0073
POL00251661
POL00251661
POST OFFICE PAGE 2 OF 7
The Report
Summary of Mails Strategy
1. In May our strategy was agreed by GE and Board. This separated our market into
three key segments reflecting the different customer types. Each segment
possesses differing needs, competitive dynamics and value to Post Office, requiring
a separate approach.
2. In summary these were:
a) *¢ USO’ volum
this is a critical!
lly low volume, ¢
but of high value to retailers:
Both RM and Post Office benefit from consumer brand confusion and the VAT
advantage from USO services.
While in long term decline IRRELEVANT I, our objective is to sustain a close,
long-term relationship with RM to maximise profitability. We will maximise sales
and profitability through improved customer services and increased, selective
automation (e.g. SSKs) in our branches.
‘Multi-channel marketplace’, is mostly large letter and parcels from
marketplace sellers and eBayers and Accounting for
b
easing threat from price
competition, new entrants (eBay shipping platform) and RM’s channel strategy.
Our strategy is to invest in improving the integrated online and in branch
journey for customers who wish to use it, expand self-service and quick drop
options. Drop and Go remains a core element of our customer Proposition.
they will continue to win orf - IRRELEVANT
To this end we wish to continue close co-operation whilst
Maintaining the Sptionality of existing in part or full, the agreement should a
market tipping point be reached.
c) ‘E-retail’ market accounts fo! and comprises Click
and Collect and Home Shopping Returns. This is smallest but most rapidly
growing segment: } characterised by customers actively choosing
this options from a range of alternatives. (e.g. home delivery, or return in
store). RM & Post Office combined have: IRRELEVANT.
I, which is largely preferred by
young, urban online shoppers with less affinity to the Post Office brand.
Our intent is to compete directly with Collect+ and Hermes to become the
ubiquitous third party network. We will improve
functionality of our Local Collect service but the
i f MDA restrictions on Post
items in our network.
3. We also set out a mandate for a Mid-Term Review (MTR), the mid-term contractual
opportunity for both parties to agree any changes needed for the second half the
Strictly Confidential
POL-BSFF-0089724_0074
POL00251661
POL00251661
POST OFFICE PAGE 3 OF 7
MDA (slide 2). We sought to prioritise agreement of new terms for the
increasingly competitive multi-channel and e-retail segments of the market. Our
specific objectives were:
IRRELEVANT
4. In doing so we sought to protect the value in the current contract, defend our
brand position and refuse any extension of restrictions beyond those currently set
out in the MDA. In the event that no agreement was reached we were happy to
revert to the formal contractual renegotiation window of Jan 2019.
5. Based on our analysis, and the output of the joint strategy work, we remain more
confident of the value we offer RM. We would not renew the agreement at any cost
and are clear that we should not offer up significant financial value in order to
secure an extended agreement.
What has changed in the market since May?
6. Since May the high level market trends have continued with development of
further competition in the multi-channel marketplace segment for Post Office.
a) UK letter volumes continue to decline at approximately -4% to e-substitution
although RM is seeing further erosion of bulk letters to downstream access
(DSA) competition. Parcel volumes continue to grow at ~5% largely driven by
e-retail growth.
b) Competition, especially in parcels remains intense. The potential for contraction
of market capacity through consolidation receded after the Berkeley brothers,
owners of Yodel, withdrew Shop Direct Group (SDG) from sale.
c) Competitors continue to chase higher margin customers in the SME area in
particular. Despite launching a couple of new services targeting returns and
social trading site customers, we have seen no evidence of Collect+ achieving
their strategy to become carrier agnostic or doubling their network to 12,000.
d) Doddle, the recent challenger brand closed all but 6 of their 23 standalone
stores to focus on growing locations through partners, further demonstrating
the economic challenge of dedicated parcel shops in city centres. They appear
on track to hit their target of 500 retailer hosted stores by the end of 2017.
e) Royal Mail entered the price war for medium parcels (essentially >2kg) with
two online promotions to test customer price and brand elasticity. This saw
significant uplift from a small base in their Click and Drop service despite a
counter offer by myHermes.
f) The eBay/Shutl shipping capability is being slowly integrated into eBay’s seller
journey and we now expect an incremental soft launch in Q4. e/Bay and
Hermes ran a joint £2 small parcel promotion in September to drive awareness.
g) Royal Mail will launch a new Tracked Online service in January sold initially via
their own online platform ‘Click and Drop’, followed by eBay and Amazon. This
Strictly Confidential
POL-BSFF-0089724_0075
POL00251661
POL00251661
POST OFFICE PAGE 4 OF 7
will offer marketplace sellers a fully tracked RM service for the first time
creating a risk of migration from branch sales of Signed For.
Royal Mail half year results (16'" Nov) show a flat performance in the UK, with
growth in parcel volumes in line with the market at 6%, helping to offset the
decline in letters. The continued threat of industrial action (IA) presents a
further challenge to their results irrespective of the outcome as a settlement
will require result in increased operating costs.
i) All carriers are now focused on peak and whether growing economic uncertainty
and weakening consumer spending will affect e-retail volumes after non-food
online sales growth fell from annual monthly average of 8% to 4% in October.
What does this mean for Post Office and RM?
7. For RM and Post Office the biggest challenge is increased competition for
marketplace customers. eBay's shipping platform will offer marketplace customers
more choice with greater reassurance while reducing the value for carriers as price
transparency improves.
8. In network terms the difficulty Doddle and Collect+ have in expanding their
branches, suggests the UK may be reaching parcel shop saturation as retailer
economics tighten. While not complacent, it reinforces the relative strength of the
Post Office and the value we offer RM.
9. Post Office’s and RM’s,
h
__ IRRELEVANT
IRRELEVANT
IRRELEVANT.
H IRRELEVANT
IRRELEVANT.
and excellent customer experience in branch.
12. The twin challenges of marketplace competition and possibly growing tensions
with RM reinforce the need to rapidly secure our objectives and protect Post
Office’s core assets; our customer relationships, brand and network.
What action have we taken to prepare Post Office?
13.In response our approach has been to:
a) Improve our understanding of customer buying behaviour for our target
customer groups in the marketplace and e-retail segments. This is informing
our strategy and proposition design by highlighting, for example, the strong
correlation between Returns and Click and Collect users and the demographic
distribution across age groups.
Incorporate the key outcomes of this into the network development strategy,
particularly focusing on the number
i) Extending the branch network,/
"Where Post Office is Under represented coripared to
b
Strictly Confidential
POL-BSFF-0089724_ 0076
POL00251661
POL00251661
POST OFFICE PAGE 5 OF 7
competitors. We will open 150 new branches this year in such locations to
increase customer choice and convenience.
ii) Work to improve in branch experience for key customer groups, specifically
multi-channel marketplace users who are high value and at risk to direct or
indirect competition. We have done this through initiatives such as Journey
Simplification and ‘No queues’ which extend beyond the Christmas peak,
_ including reducing SSK host interventions, and improved availab
i ~ IRRELEVANT _
Hl IRRELEVANT
r —
IRRELEVANT
D&G volumes and online customer journey improvements such as online
registration, transaction visibility and online manifests will be deployed by
January 2018.
c) We have increased the prioritisation of improving our click and collect
capabilities. In the short term we will deliver improvements to the current Local
Collect Ty system to improve management information and service visibility,
IRRELEVANT
qd) Identified I and ‘evaluated market opportunities beyond Royal Mai
13; These 2 are no o regret ‘actions that will sustain Post Office’s sS . attractiveness asa
network to either RM or other parties.
What progress have we made with key market players?
14. We have made good progress building our relationship wit!
a wider and deeper range of relationships and explored a joint programme of
actions to demonstrate intent and capability.
15. In the short term these actions are centred on tactical developments which
deliver immediate mutual value such as sharing customer insights, co-promotion of
drop and go and other marketing, plus the possible sales of eBay packaging via
Post Office’s physical and online channels. The longer term objective is to seek
their input to the design and shaping of the branch network to ensure we deliver
the best possible offer to their sellers.
16. For their buyers, eBay are looking to extend their current click and collect
network from 950 Sainsbury/Argos stores to more than 3000 outlets using third
party providers. Under the MDA Royal Mail will lead our response, but we now have
direct dialogue and visibility of the service standard expected from which we can
build our Local Collect proposition.
1% We have had several conversations wi
LLEVA
Strictly Confidential
POL-BSFF-0089724_0077
POL00251661
POL00251661
POST OFFICE PAGE 6 OF 7
18. Furthermore, we are engaging with other market specialists such as Parcelly, to
inform our propositions and technical service design. These operators tend to be IT
and concept rich but lack the brand, infrastructure and volume to create profitable
businesses, all of which are core strengths of Post Office.
What progress has been made with Royal Mail?
19. Since May the negotiating environment has changed. Key personnel have
changed and RM has come under growing pressure as investors become
increasingly nervous over its ability to compete effectively in the parcels market,
resulting in their exit from the FTSE 100.
20. Over the summer we engaged and worked with Royal Mail resulting in them now
recognising that an MTR is not the right means to address the core challenges we
both face in the market as it would not provide certainty beyond 2020 or address
the core issues such as online sales or customer data ownership.
21. As we intended, RM have expressed their desire to move directly to discussions
regarding early renewal of the entire agreement and will seek agreement to
negotiate with Post Office at November's Chief Executive Committee (CEC) prior to
seeking final approval from their Board in early 2018.
How do we move forward?
22.Post Office must decide whether to engage in early negotiations, or revert to the
formal contractual renegotiation window that starts in January 2019. IRRELEVANT I
IRRELEVANT ____
“the form of either an improved offer or other options if required.
c) We have a window of opportunity where RMG are interested and engaged
le must capitalise on this in case key
stakeholders change such as their CEO or other urgent priorities distract them.
d) Early renewal will bring forward the opportunity for Post Office to exercise new
freedoms if secured or understand the key areas of conflict should it fail.
e) It will provide early certainty of the future financial value for Post Office, and
help offer longer term certainty to agents and the shareholder.
23.While we believe it is right to engage early this does not mean we are prepared to
reach a deal at any cost, for example should Royal Mail seek excessive cost
savings beyond the natural extension of the efficiency savings already provided by
the MDA, Post Office can either seek to continue to negotiate or if no progress is
expected, revert to the contractual re-negotiation window.
24.On this basis we are preparing a formal recommendation to enter into early
negotiations and a detailed mandate to bring to January GE and Board. If
approved, we believe we should aim to complete renegotiation in time for
implementation in April 2019. This aligns with both party’s financial years and
Strictly Confidential
POL-BSFF-0089724_0078
POL00251661
POL00251661
POST OFFICE PAGE 7 OF 7
secures any relaxation of restrictions a year earlier than contractually possible.
This would need an agreement to be reached by the summer 2018.
25.To provide reassurance to the business and the Board we commissioned a review
of our strategy and MTR preparation by Accenture who concluded:
a) Post Office’s underlying market understanding and conclusions are robust and
consistent with their own views of the market.
b) The approach and objectives set out at the May Board are appropriate.
c) The Mails team have identified and understood the key risks in terms of the
market, the strategy and the negotiation with Royal Mail.
d) The business should therefore have a high degree of confidence that the team
have prepared as well as is possible to deliver against their strategy for the
Mid-Term Review.
e) The only area to be completed was the development of negotiating tactics and
the creation of a sales pitch for Royal Mail, which now complete.
26.In addition, we asker ‘to consider its appropriateness and our readiness
should the discussion move to a long term renegotiation, the conclusion of which
was:
a) The analysis which has been completed by the Mails Team provides all the
information needed to support the negotiation of a new long-term contract, and
the strategy that has been established remains sound.
b) Given that the time horizon for a new contract could be
with that comes additional uncertainty, some additional’a
recommended for consideration
ii)
IRRELEVANT
These considerations will be addressed in the final mandate we will present to GE and
Board in January.
ly Confidential
POL-BSFF-0089724_0079
POL00251661
POL00251661
In Strictest Commercial Confidence
Mails Strategy Update - Reference material
November 2017
Version 1.0
Strictly confidential and not for onward distribution
>
Post Office® nl
POL-BSFF-0089724_0080
POL00251661
POL00251661
Annex 1. Our strategy is based on the needs of our different customers and E>
the market dynamics
IRRELEVANT
a Lo
i 7 i All data relates to Post Office sold and measured acceptance volumes only and therefore
Strictly Confidential excludes “Annual count” bulk acceptance of RIM's account customer volumes.
POL-BSFF-0089724_0081
POL00251661
POL00251661
@
Strictly Confidential
POL-BSFF-0089724_0082
POL00251661
POL00251661
POST OFFICE PAGE 1 OF 6
POST OFFICE BOARD DECISION PAPER
Network Development Delivery
Author: Neil Ennis Sponsor: Kevin Gilliland Meeting date: 23" November 2017
Executive Summary
Context
Our Network Development strategy, agreed by Board as part of our Retail Strategy in
June 2017, gives us a clear direction to 2021. We plan to grow our network by
opening Post Offices in new locations (c800 by 2021, 150 this year), particularly city
centres where competition is fiercest but also rural locations, to balance expected
churn. Our customers and our clients - particularly Royal Mail and payments clients -
demand convenience and these new locations, combined with rolling out automation
in our agency network, will deliver this.
We have funded 2016-2018 activity (notably 265 contracts signed and 150 new
branches built by year end, providing a pipeline of 115 branches to build early in
2018/19) from the existing Network Transformation programme (£10.9m) and now
need to agree funding for 2018/19.
Questions addressed in this report
1. What do we propose to do and why?
2. What options did we consider?
3. What do we need to do next to progress?
Conclusion
1. We propose to maintain our network of at least 11,500 and change it to better
match customer demand by delivering c300 ‘whitespace’ Locals with a particular
focus on London, transitioning some small Mains to Locals and managing churn in
the Community and ‘stranded’ (unconverted) parts of our network.
2. With a clear strategy for our network development, our key consideration was
whether to request funding for more than one year. We have decided not to, given
the new models and initiatives in our Retail Strategy (next generation automation,
EPOS integrated proposition through the retailer’s till, ongoing Simplification) are
being developed and tested during 2018/19 and will give us better and cheaper
ways to maintain and develop our network in time for 2019/20 and beyond.
3. Securing funding will allow us to continue establishing a pipeline of new branches
for delivery in 2018/19 and retain the team we need to deliver it.
Strictly Confidential
POL-BSFF-0089724_0083
POL00251661
POL00251661
POST OFFICE PAGE 2 OF 6
Input Sought Input Received
1. Approval from the POL Board of 2. The Network Development Strategy
£18.71m to deliver the Network was approved by the GE and the
Development Programme from April Post Office Board in September 16.
2018 - March 2019. It was further validated as a key
part of the Retail Strategy approved
by the Board in June 2017. The Post
Office Executive Change Group (GE)
has approved this case in October
2017.
The Report
What is the need or opportunity and why now?
We have a customer and competitive imperative to ‘be where are customers are’,
opening new outlets in both the urban and rural areas. This does not mean replacing
branches with like-for-like provision in the same location where customer usage is
very low. To do this requires active management of our network, both opening up new
branches where our customers need them and competition is fiercest (London being
the most obvious example) and managing ‘churn’ so we can replace branches that are
not the best customer or commercial option such as some small Mains branches,
‘stranded’ branches we have been not been able to convert through NT due to a lack
of an alternative in the area, and Community branches). Maintaining our social
purpose in rural and urban deprived areas remains essential and again requires us to
open new branches to offset churn in this part of the Post Office estate.
Continuing our network development activity is not only essential to delivering the
requirements above, it is also needed to avoid losing vital momentum. Having
stabilised our network through Network Transformation after years of decline, not
delivering new branches would result in us shrinking our network in areas where we
want to be active. This would send the wrong message to our customers and our
competitors. It would also result in significant ‘noise’ from customers and stakeholders
locally and nationally as we would be unable to maintain our positive narrative of a
stable network.
More practically, ceasing funding for 2018/19 after one year of Network Development
activity would leave us unable to fulfil our planned commitments to build new
branches with operators who will have signed contracts but not yet opened their
branch (115 by year-end with planned opening dates in early 2018/19, which we will
need to avoid a sudden drop in network numbers). We would also have to make
redundant the field and programme support team (129 people), losing experienced
resource knowing we would almost certainly need to recruit a similar team in the near
future to deliver this type of activity.
Strictly Confidential
POL-BSFF-0089724_ 0084
POL00251661
POL00251661
POST OFFICE PAGE 3 OF 6
What do we propose to do and why?
The focus of our work will be identifying and opening c300 new network locations (aka
‘whitespace’ branches). These will all be Locals, this currently being our best model
for providing customers with a convenient service which is sustainable for the agent
and for Post Office. In addition we propose to continue to change the shape of our
network, using natural churn as the opportunity.
In doing all this we are aware that our current cost of build is higher than it should be.
A Local costs c£17.5k and has a payback of c10 years. We are therefore focusing, in
parallel to this work and not included in the funding request, on developing new
models and simplifying our proposition to retailers. This is crucial to note as we
recognise how important this is to minimise our ongoing costs by reducing the cost of
build.
We have started a procurement exercise for the next generation of self-service
machines and are trialling a lease-based model with Multiple partners shortly. We will
also be trialling an EPOS integrated solution (sometimes referred to as ‘HNGT’
internally, and meaning enabling a retailer to sell Post Office products through their
own till) with Multiples in late Q4 2017/18 and implementing operational simplification
and the next phase of Mails simplification in 2018.
With this development as background, our key proposed activity is as follows:
1. Small Mains to Locals:
We will transition ~114 small Mains to Locals (through churn) with an EBITDAS
benefit of ~£6.5k per branch.
2. Managing ‘stranded’ branches left after NT:
We will continue to reduce the number of ‘stranded’ Network Transformation
branches. We expect ~46 Traditional branches left after NT to close, replacing with a
new Locals giving an EBITDAS benefit of ~£11.5k per branch.
3. Managing change in the community network:
We will replace through churn, ~123 Community branches with new Locals, giving an
EBITDAS benefit of ~£8.5k per branch.
4. Maintaining the Network:
We have identified more than 2,000 potential sites for new Locals. We aim to deliver
~300 new Locals, in mainly urban areas. The headroom off-sets the expected churn in
traditional and community branches (shown above), so overall there will be a small
net increase.
5. Central London:
In addition to the DMB Programme we will be delivering around 50 new Locals in
central London (included in the 300 re point 4 above). This is to meet the customer
demand in London and improve our ability to compete.
Note: We also plan to open a further c125 new branches in areas close to DMBs to
improve customer service and allow subsequent closures of the DMBs.
Strictly Confidential
POL-BSFF-0089724_ 0085
The business case
Funding requirements and benefits:
POL00251661
POL00251661
Client
j ,
Project expenditure (em/k) Opex Capex I Exceptional I cunt, Total
Sunk Costs 16/17 (401) (401)
2017/18 Future request 2
Future Request (beyond 17/18)* (5,732) I __(12,976) (18,708)
Total Expected costs (3,018) I _(21,640) (29,658)
Cost included in Plan* (25,162)
Variance to Plan (4,496)
income Income Cost Cost
Benefits (€m/k)
Benefits (ém/k) Growth Protection I Savings I Avoidance ie
inYear
‘Steady State (Vr 19/20)
Recurring 3,979 3,979
Hurdles I NPV
Payback
(yrs) 10.2
EBITDAS
Figure 1: Network Model Change Estimates
Network model change estimates
Population Population dee [Subsegment Replacement [Explanation Boir/s__2oiw/is__2o19/ao__—_-2oR0/AA
‘small mains ‘Schur Offske (Churn increases afer 50% fees assurance pt 3a 63 7 7 21
(ctehuen _Onste {CT policy change announced April 17 with 12 zi Al sy Fr) 20
aaco\C2mpliance _joftste [Terminations replaced 30 20 20 10 40
9° nauts deal (Onsite [Ahancful of partners see the value : 20 20 Fy 0
lind desl __Onste {A very small numberof inde with good ret 10 10 10 30
‘Tradtional gao[Pesign_—__Outreach/Headroom_ILow churn rate increases asthe branches req] 38 46 54 5 194
(convert [Onsite Local [None convert onsite post NT
Resign _(Outreach/Headroom [Relatively igh churn rate reduces over time 16 2 a 2 7
[Pommurty with rte 5 lconvert Onsite Local [None convert on-site post-NT 5
(Community without retail 41500Ifesign___Outreach/Headroom igh churn rate reduces over time 300" 100 100) w 37
Headroom crested to [Brownfield Locals around Crowns London strategy 5 as 0 200
keep network stable Rural Community-run/ lst shop Locals 35 35 35 145
whitespace Ey 100" 5 200 555
IWhitespace addtional ask due to churn forecast 30 30 32 30
Local aftste churn 70 70 Ea 210
Total new locals needed to stay fat 3541
fC
Strictly Confidential
ange initiatives.
jed in the Business Case.
ing costs that have not been requested.
ing costs for future years that have n
een requested.
Board Intelligence Hub template
POL-BSFF-0089724_ 0086
POL00251661
POL00251661
POST OFFICE PAGE 5S OF 6
Risks & mitigations
Details of the key risks that may have an adverse impact on benefits realisation
(taken from programme/project Risk Log).
Risk Risk Title / Current Target
ID Description I (Impact) I (Impact)
L (Likelihood) I L (Likelihood)
rT L ICurrent) I L I Target
1-5I 1-5 I Score I1-5I1-5) Score
(Ixt) (Ixt)
Mitigation Action
Prog I Asaresult of anadverse [5 [3 [15 Bo 6 We will take a coordinated and
010 media story/campaign
(e.g. from CWU, NFSP, a
Royal Mail strike,
Sparrow) there is a risk
that we could see a
reduction in the level of
PNO interest. This could
result in an inability to
reach NNL targets and
maintain the access
criteria.
planned approach to
communicating all the proposed
proposition changes, focusing on
the benefits to communities,
customers and retailers of the
changes as a whole.
We have dedicated Sales teams
working closely with PNOs and
Strategic partners to ensure they
understand the value of having a
Post Office.
Enhanced the Pitch packs.
We will be using testimonials
from recently established NNLs.
005 I not happen at the rate
and volume as defined in
the modelled benefits
plan and no ability to
influence the demand. It
is a reactive strategy.
E.g. economic conditions
do not play out in line
with the Strategy
ws- As a result of New 2 8 New network location
005 I network locations opportunities follow the current
opening there is a risk selection criteria to ensure no
that existing branches in more than 10% impact on nearby
the vicinity could lose branches.
business which may A stakeholder plan is in place.
result in complaints and Legal approval of approach.
resignations, particularly NDA team will continue to work
from new operators just through modelling the criteria for
appointed under NT identifying whitespace branches.
Prog I The level of churn may B [9 Work with NDA team to
continually monitor trends and
re-adjust the forecast/plan
Flexible resource pool in Property
in place to manage spikes and
dips.
Monthly review of benefit plan to
enable adjustment.
What options did we consider?
A number of alternative scenarios were considered for each of the categories of
agency branches, considered in line with the network strategy approach set out to
the Board in October 2016 and re-validated in the Retail Strategy in June 2017.
[See Appendices].
What do we need to do next to progress?
Implement the proposed option:
Network Development Programme is currently implementing the solution, funded
through Network Transformation:
Strictly Confidential
POL-BSFF-0089724_0087
POL00251661
POL00251661
POST OFFICE PAGE 6 OF 6
« The Network Strategy was signed off in October 2016 and the Network
Development Business case for funds 2016/17 and 17/18 was approved in
November 2016. The project team was established and Network development
underway from December 2016.
« The Processes used to deliver the Local Model are based on those used in the
Network Transformation Programme. It mirrors the current OBC process and will
call off the latest post office branch equipment.
e Network Development programme has been selling new network locations since
mobilisation in December 2016.
« The Programme is in its implementation phase and therefore the next
appropriate Gate would be Gate 5. The Programme will have the previous gates
Mandatory documentation in Project Server, including the Programme plan (level
0 and level 1 reporting milestones) for reference.
Operate the proposed option
New Network Location branches, once opened, will be passed to our Network
Operations field team for ongoing operational support and compliance. The net impact
on Network numbers for 2018/19 is expected to be a slight increase overall and
therefore there is no material change to Network Operations.
Future Approvals will be required for years 2019/20 and 2020/21. Our aim is for these
to be based on lower build costs as a result of the steps we will take in automation
and EPOS integration.
What would the impact be of delaying or rejecting the decision to progress?
e¢ We would allow our competitors, particularly in mails and bill payments, to gain a
competitive edge as we would not be increasing our presence in the (particularly
urban) areas where we need to be.
e We would incur unbudgeted costs if we do not get approval by November 2017, as
we would have to either stop all activity or continue with engagement and
commitment to agents, given the need to maintain a pipeline of activity.
e Failure to maintain the current network numbers obligation (11,500).
e Failure to optimise the benefits of Simplification.
e Failure to meet customer demand and maximise overall network potential.
Appendix
1. Retail Strategy Jun 2017
2.2. Network Funding Paper Sep 2016
Strictly Confidential
POL-BSFF-0089724_ 0088
POL00251661
POL00251661
POST OFFICE PAGE 1 OF 16
POST OFFICE BOARD DISCUSSION PAPER
Retail Business Unit Strategy
Author: Tom Moran Sponsor: Kevin Gilliland Meeting date: 28'" June 2017
Executive Summary
Context
We created the Retail Business Unit in December 2016 to join up our work on mails,
payments and government services with our network strategy and proposition to
retailers. Our strategic ambition is to maximise profitable income and footfall, reduce
operating costs and become a ‘must have’ for host retailers by strengthening our
position in the value chain in an increasingly challenging convenience retail market. This
paper brings our thinking together as the basis for action in the next 3 years.
Questions addressed in this report
1. What are our key challenges as a retail network post-Network Transformation?
2. What options do we have to improve profitability of our models while sustaining a
compelling retail proposition?
3. What options do we have to change the shape of our network, in order to meet
customer and client needs and improve profitability?
Conclusions
1. Network Transformation and DMB transformation have variabilised and reduced
our cost base, saving c£86m p.a. While this has also reversed years of net branch
closures, as a result we are now far more reliant on the agents who own our
customer relationship. To avoid network decline and to retain and recruit the right
retail partners, we need to strengthen client relationships (particularly in
payments), simplify our proposition and improve our technology and customer
experience.
2. Pay changes since 2016 will have reduced variable pay by £20m (c6.5%) at year
end - a tough sell which to date we have been able to justify. Our potential next
steps are therefore to reduce pay further and/or align incentives such that agents
and Post Office share more of the cost base and are both driven to make
efficiencies. We have identified c£7-9m of financial benefit to Post Office from
changes to our service model.
3. Our Network Development strategy gives us a clear direction to 2021. We plan to
grow our network by opening Post Offices in new locations (c800 by 2021, 150 this
year), particularly city centres where competition is fiercest but also rural
locations, to balance expected churn. Our customers and our clients - particularly
Royal Mail and payments clients - demand convenience and these new locations,
combined with rolling out automation in our agency network, will deliver this.
Input sought
4. The Board is asked to note the retail benchmarking and discuss the options set out
in the paper to evolve our network strategy.
Strictly Confidential
POL-BSFF-0089724_ 0089
POST OFFICE
The Report
POL00251661
POL00251661
PAGE 2 OF 16
What are our key challenges as a retail network in a post-Network
Transformation world?
1. Network Transformation (NT) has been the biggest and most successful
transformation in the recent history of the Post Office. It has made Post Office a
true retail category, competing for client contracts and space in retail stores. The
switch from fixed to variable pay for over 7,000 of our branches means we have a
commercial relationship with a wide range of independent and multiple retailers,
all of whom are aiming to realise the value Post Office brings to their businesses.
For our Retail business, this means driving higher, more profitable footfall than
the competition by offering the right products and services.
We cannot be complacent. There is continued churn in the network and unless we
increase — and sell in - the commercial benefit of Post Office in the retail value
chain we will find it hard to retain our network at its present size and risk being
seen as an unattractive proposition to retailers. This challenge applies upstream to
clients as well as downstream to the retailers who are our agents and the face of
our customer experience. Figure 1 below summarises the challenges we face.
Figure 1: Post Office Retail Value Chain - Challenges to address
Stage of the
value ch
Clients
Direct clients e.g.
Royal Mail, DWP,
energy companies.
Upstream clients
eg. eBay
Strengths
+ Trusted large network
+ Relationship with Royal Mail
materially improved over the
past 9 months
+ Strong relationships with the
banking industry
Retailers * Strong ‘destination’ brand
+ Attractively full and unique
Independents 85% products range
Multiples 15% + Compelling footfall offer for
retailers
+ Technology supports over-the-
counter mails
Customers * Astable network
+ Successful modernisation with
longer hours and accessible
branches
+ At the heart of the
community, high levels of
traditional trust
In-branch customers
Support other
channels, e.g.
providing leads
Areas of focus
+ We need to apply the same strategic focus for
payments clients, changing the relationship
with utilities themselves and resellers
(particularly in terms of transparency and
value share
+ We offer no customer self-service in most
branches, provide poor MI for retailers and
cannot support integration into retailer
operations (esp. Point of Sale)
+ Direct remuneration leaves little room for
error on covering the costs of operation,
requiring a strong focus on staffing
management disciplines from the retailer
+ Our payments offering is less compelling than
the competition in product range and densi
* We do not have enough branches nor open
hours for mails users or bill payers in city
centres and other urban areas
+ We still have a counter-based model, witho'
self-service, in nearly all agency branches!
Section of the
paper
* Covered in
Payments Strategy
Paper (PSP)
* Mails covered in
Mails Strategy to
Board in May 2017
+ Network shape
+ PSP
ity. Network shape
ing
ut
! Self service kiosks are currently operating in DMBs, some WHSmiths and one trial agency
branch
Strictly Confidential
POL-BSFF-0089724_ 0090
POL00251661
POL00251661
POST OFFICE PAGE 3 OF 16
Benchmarking Post Office’s retail proposition
3. We have benchmarked our current proposition, with support from IGD? and Fizz?,
and sought feedback from existing agents with strong retail.* One conclusion is
particularly clear - we need to prove we can drive profitable footfall through each
of our clear, differentiated models. The research also shows retailers will not
typically ‘pay’ for footfall, so making Post Office at least break-even on a stand-
alone basis is important, as is aligning incentives to reward good behaviour and
penalise non-conformance.
4. IGD’s benchmarking included sectoral expectations and best practice on
technology and management information, where we know Post Office’s offer is
inferior to our competitors. Retailers have high expectations of in-store IT.
Installing technology in-store allows suppliers to gain valuable management
information (MI) on sales and stock, so often the supplier will provide it for free.
5. It is the overall retail proposition - direct income and indirect footfall ‘halo effect’
- which the retailer considers when choosing whether to bring the Post Office
category into their store. Please see Appendix 1 for more details.
e The key benchmark for the main is against other high-specification,
demanding-to-operate franchises that complement a convenience retail offer,
including food-to-go franchises such as Subway. A main Post Office generates
much higher footfall (2,000 per week compared to 1,000 for a Subway, with a
higher propensity to spend in store) but around half the direct profit.
«The local is the closest offer to the competition against whom we typically
assess ourselves: Collect+ or myHermes/Payzone. However the local is much
more than this:
20% ‘category add-on’ accessible to all retailers (lottery and stamps);
— 20% like-for-like with the PayPoint/Collect+ offer (payments + mails
pickup/ drop off); and
60% unique offer without parallel in IGD’s categories that is critical to the
proposition (mails, banking and government services)
The direct comparison to Camelot and Collect+ is poor: retailers can make
50% higher profit at lower investment, training and space requirement from
ignoring the 60%. However, the 60% does offer something special: a
destination brand and an extra 250 customers a week.
? The Institute of Grocery and Distribution, the leading grocery and convenience experts.
A consultancy run by the founder of him! research, which led our research into Post Office
footfall in 2016
* Please see Appendix 2 for a summary of the research.
Strictly Confidential
POL-BSFF-0089724_0091
POL00251661
POL00251661
POST OFFICE PAGE 4 OF 16
e We have also taken the opportunity to benchmark the economics of a
standalone self-service-led proposition. Retailers can generate 25% higher
profits with no up-front costs from a coffee kiosk (simpler to operate but little
destination brand value). While a retailer would be highly unlikely to give up
an existing local for a coffee kiosk, even the very best retailers in high footfall
areas who have not taken on locals (e.g. Tesco Express) do operate coffee
kiosks. At the right price point, therefore, we believe the self-service
proposition provides an opportunity to open up new retail locations (see later
section on shape of the network).
6. In conclusion, we have a sound retail proposition but not one that is significantly
more profitable than those of our competitors. Relatively minor changes in footfall
could shift the balance. For example, if Collect+ doubled its traffic from c250 a
week to 500 it would be more profitable than a Post Office and far simpler to
operate.
7. We are drawing upon this benchmarking evidence to help set the right level of
‘value share’ with retailers. This results in a series of options relating to what we
can and should pay, and provide, to our agents to remain competitive. We have
always balanced priorities in setting pay rates, changing contracts etc. for agents.
We have now codified - for Post Office decision-making purposes, not for wider
sharing - a set of principles to follow when reshaping the retail proposition (see
Figure 2 below). The next section quantifies progress to date and future
opportunities.
Strictly Confidentiat
POL-BSFF-0089724_ 0092
POST OFFICE
PAGE 5 OF 16
Figure 2: Proposed Principles for Retail Model Proposition - Value Sharing with Agents
What we will do
Make decisions on the basis that Post Office operators in the non-
Community network are good retailers, with flexible staffing
models and effective management.
Combine attractive footfall to benefit the wider retail with an
attractive ‘paid proposition’. The fees on offer to retailers will be
consistent with running the Post Office component at break-even
or better, unless market evidence changes.
Maintain a small number of models, each with a transparent and
clear offer to retailers.
Where there is a market fee rate (due to meaningful competition)
we will review fees regularly, taking account of the whole package
on offer to retailers. This may mean some products will be paid
below market rate.
Continually evaluate supply and demand for Post Offices to
benchmark the attractiveness of our overall offer for each model
and adjust rates accordingly, seeking to retain the highest value
share consistent with a stable network of sustainable Post Offices.
Seek to align incentives between retailers and Post Office in the
structure of fees and charges to improve the commercial
outcomes for both retailers and Post Office.
Where contracts change, look to share any gain or pain with
agents (taking account of market rates), subject to our principle of
seeing the highest value share possible for Post Office.
Implement material proposition changes in a measured way,
providing reasonable evidence for the change and time for
retailers to adapt - thus keeping the network reasonably ‘net
stable’.
Strictly Confidential
What we will not do
Protect poor retailers from commercial reality in the long term.
(e.g. by declining to reduce rates due to concerns that poor
retailers lack the flexibility to accommodate change).
Presume that there is sustainable retailer demand for footfall-only
offers that cause direct losses, unless market evidence changes.
Negotiate individualised models and pay rates retailer by retailer
(although we will be flexible and act commercially where
appropriate e.g. format, up-front investment and ongoing sales
and marketing support).
Impose arbitrary reductions in fees for competitive products
simply to improve Post Office profitability or leave the paid
proposition unchanged for long periods out of inertia.
Stick to the status quo paid proposition - with no charges and all
fees paid exclusively for products sold - for reasons of
conservatism or to avoid stakeholder challenge.
Pay agents such that products are loss-making (unless there is
clear market evidence that such fees are necessary to retain a
viable proposition to retailers).
Impose changes too quickly or without appropriate rationale - or
desist from imposing changes as a result of concerns over
‘protecting’ the least capable retail hosts for the long term.
POL00251661
POL00251661
POL-BSFF-0089724_0093
POL00251661
POL00251661
POST OFFICE PAGE 6 OF 16
What options do we have to improve the profitability of our models while sustaining a
compelling retail proposition?
8. Reducing agents’ pay is a key lever to improving Post Office profitability - agents’
pay is £365m p.a. and we need to minimise it, consistent with being able to retain
a strong retail proposition and stable network. Our options are therefore based on
whether, and how much further, we could reduce pay and how we could change
our service model to save more.
9. Recent history is important here. We are in the midst of major changes to the paid
proposition for retailers. As a result of NT, we have increased variable pay from
66% to 85% of total pay, with further reductions in fixed pay planned to continue
through churn in the network (see network shape section below).
10. Around 75% of agent fees do not increase in line with inflation; around 25% are
paid according the value of each transaction (e.g. POca, stamps, bureau). Through
the period of the plan we expect agents to experience a small overall drop in pay
from this effect alone, while cost pressures from national living wage changes and
other forms of inflation are intense. Furthermore, we are mid-way through a
series of reductions in variable pay that amount to nearly £20m in annualised
terms:
e Rebalancing pay further onto sold products to improve sales incentives. The
total mains pay bill for selling 2nd class parcels is now only just over £5m
(1.4% of the total pay bill), while selling special delivery is over £12m
(3.2%);
e Creating a network-wide incentive for Mails Segregation of c£5m to mitigate
our ongoing risk from Royal Mail and to improve behaviours and reduce costs;
and
e Simplifying our most common Mails journeys and processes and translating
the savings from shorter transactions in to efficiencies (c£12m). This is shared
between agents and Post Office, recognising the challenges agents will have in
realising the savings.
11. Overall, these changes pose a very significant challenge to implement while
sustaining a network of 11,700 branches. Although we have a carefully planned
transition approach (including field support for agents and helping them move to a
specialist model in-store to reduce the training burden), simplification will be
particularly challenging this year. We may also make reductions in rates of pay for
POca (unknown, but could be up to £1m p.a. depending on how current
negotiations proceed) to ensure that Post Office is not operating the contract at a
loss.
Strictly Confidential
POL-BSFF-0089724_ 0094
POST OFFICE
POL00251661
POL00251661
PAGE 7 OF 16
12. The overall effect by the end of the four year plan leaves a local at breakeven for
the retailer in direct profit terms, while the direct profitability of a main is cut by
around 40%. Although footfall is also expected to decline slowly, both models will
continue to offer strong footfall benefits that make them profitable overall: the
local total value drops from £52k to £49k, while the main drops from £85k to
£73k. The benchmark organisations will suffer similarly from wage and cost
inflation, although they start from a position of offering higher direct profit today.
13. We have examined our options for further changes to the paid proposition:
Figure 3: Options for further changes to agents pay and wider proposition
Option
Continue as-is
Implement planned
changes.
Aggressive cuts
5% cut to fees to take
effect in FY19/20
Strategic rebalancing
Align incentives, change
behaviours and realise
savings
Changes
« Implement all the planned changes
* No inflationary increases during the
plan period (for most products.
+ Make no further rebalancing of fees
and charges, leaving incentives
unchanged.
* Follow our principles when required —
likely to include fee rate increases by
2021 for locals in particular (to keep
the model at standalone breakeven).
« Implement all the planned changes.
+ Implement c£15m cut to variable fees.
+ Implement all the planned changes.
+ Pursue a staged series of changes to
rebalance the paid proposition by
introducing charges for certain
services, offset by agents’ benefits in
automation, space and higher fees for
certain products.
Likely effects
+ Local direct profitability reduced to breakeven
by 20/21.
* Mains direct profitability reduced by 40%
+ Retailer demand for local under pressure, but
messaging for existing agents can be managed
as there is clear rationale for the change and we
are sharing the simplification benefits.
+ Local model is immediately loss-making from
moment these changes are introduced.
+ Mains direct profitability reduced by 55% from
current situation.
* Multiples likely to hand back significant number
of existing locals as there is no way for them to
cover their costs.
* Significant effect on wider retail s: hand-backs
depict Post Offices as a loss-making category
that good convenience retailers do not want.
+ WHSmith possibly unwilling to take on
additional mains branches as part of DMB
franchising.
+ Network strategy to have a growing network
‘where our customers are’ is unsustainable.
+ Local direct profitability reduced to breakeven
by 20/21.
* Mains direct profitability reduced by 40%, but
accompanied by a change in narrative to
encourage agents to take greater control of
costs to their advantage: e.g. adopt automation,
replace unused counters with retail space.
« The cost base for technology and cash
variabilised to a certain extent — both agents
and Post Office benefit, while both feel pain for
cost increases.
14. Figure 4 sets out in more detail the changes we could implement under the third
option in Figure 3 above.
Strictly Confidential
POL-BSFF-0089724_ 0095
POST OFFICE
Stages of incentive
alignment
1, Further embed
payments and
penalties for
behaviour
N
. Introduce the
concept of paying
for technology
w
. Move to a shared
incentive to equip
the branch
efficiently
4. Incentivise moving
payments, cash
and banking to the
retailer’s POS
. Incentivise
reduced network
cash holdings
a
6. Create a shared
cost base for cash
7. Leverage retailers’
existing card
acquirer in new
sites
8. Better
enforcement of
restrictions on
offering of
competitor
products in store
POL00251661
POL00251661
PAGE 8 OF 16
Figure 4: Service Changes Proposals
Description
Saving not material — included here as important first step which
would introduce the principle. Charging for false alarm call-outs and
equipment breakages. Small charges to encourage fewer engineer
call-outs.
Use the incentive of in-branch automation to establish principle of
paying for tech: retailers lease self-service technology, while Post
Office removes a Horizon terminal. Our analysis shows up to 2,000
Mains would benefit; we assume here 1,000 will sign up by 2021.
Potential opportunity through current rollout of new branch
technology: new base units will be provided to work with existing
monitors; agents could opt to pay for a new monitor.
Post Office provides without charge the efficient number of terminals
that a well-managed retailer needs to operate the Post Office.
Retailers could opt for additional terminals but they would be
charged. Analysis shows 2-4,000 terminals could be removed or
charged.
If it proves feasible to provide cash & banking services from the retail
counter through new technology, further terminals could be released.
We would expect to pass the benefit to the retailer to establish the
principle that they are now paying for those terminals outright.
Interim step to reduce cash in the network (before moving to stage
7). For branches in deficit, encourage retailers to deposit their own
cash ‘little and often’ into Post Office holdings, reducing the size of
the weekly float required and therefore overnight cash holdings.
Retailers benefit from reduced cash deposit charges at their bank.
Requires high quality, retailer-facing information on cash
requirements.
Post Office charges individual branches for the cost of providing them
with cash so retailers start to ‘own’ the cost of sorting, transport and
overnight holdings. Positive incentives are also improved: banking
services rates increase significantly so retailers get more of the
benefit of acting as a bank. Retailers can drive down their costs by
reusing their retailer cash; each year the savings Post Office can make
from reduced demand are shared with the retailers.
New retailers adopting the partially automated local (see Fig 5 below)
sell over-the-counter non-mails products through the retail till,
covering their own acquirer fees.
Increase our enforcement of restrictions for agents, particularly in the
3,000 branches with PayPoint terminals. This is heavily dependent on
winning the BBC (in order to close the largest immediate product gap)
and the rollout of the PayStation replacement to provide an easy-to-
use solution with a full range of future growth products such as smart
metering and transport ticketing. This is explored further in the
Payments Strategy paper.
Indicative
opportunity
£0.1m
£2m
£0.7-1.4m
Reduced
overnight
cash
holdings by
<£20m
£3-5m
£0.2m
£0.1-0.2m
13. Overall, we believe these additional measures provide a potential further c£7-9m
benefit to Post Office.
Strictly Confidential
POL-BSFF-0089724_ 0096
POL00251661
POL00251661
POST OFFICE PAGE 9 OF 16
14. The effect on retailers of any of the options is significant. However, we believe
the strategic rebalancing option - if implemented in a measured way over time -—
offers the opportunity to go further than the current plan while sustaining our
commitment to a growing nationwide network of branches in the right retailers.
Network metrics
15. With 98% of our network run by agents, our ability to maintain and grow our
network is dependent on sufficient demand from retailers to take on Post Offices.
Monitoring this demand gives us an indication of whether our proposition is valued
by retailers - too much demand would suggest potential to reduce pay, while not
enough would tell us we need to increase pay or improve the proposition in other
ways.
16. In the last financial year, although churn amongst mains and locals was low
(around 3%), we had over 100 branches where the old retailer has resigned and a
new retailer has not yet been found. In around 30% of cases this is simply due to
economic change i.e. there is no longer a suitable nearby retailer. In the
remaining cases we have been unable so far to persuade a nearby retailer to take
on the Post Office. This illustrates the marginal attractiveness of the proposition
to many retailers and how careful we need to be in further changes to the
proposition.
What options do we have to change the shape of the network, given the need to meet
customer and client needs and improve profitability?
Network shape: blueprint and the model menu
17. We have a clear strategy for network development which the Board approved in
October 2016. Since then we have started implementation while also reviewing
our plans, particularly given our work with Royal Mail and the new approach we
are taking in payments (see Payments Strategy). This section summarises the
progress we have made and the options we have to best meet our strategic
objectives, particularly focusing on the network models available to us.
18. The network in overall size and depth is relatively stable after decades of
reduction. However, this masks a huge amount of change. Most is to the
advantage of customers, Post Office and taxpayers while remaining viable for
retailers, but there are key areas of strain.
Strictly Confidential
POL-BSFF-0089724_0097
POL00251661
POL00251661
POST OFFICE PAGE 10 OF 16
19. The chart below is taken from our Network Development (ND) strategy of 2016
and summaries how we saw the shape of the network evolving.
Figure 5: Network shape changes present-2021 and beyond
jains = Directly Managed
ee
2000
2800
3300
5400 7,000 -
10,000
1400 +400 1400
2018 2024 Future
20. This remains our ideal path of evolution: rebalancing the network with net growth
in total network size. Since Network Development was approved we have started
changing our network shape and also made progress in honing the clear set of
branch model types we need. With our reconfirmed confidence in the importance
of ‘USO’ mails (the regulated universal service obligation product set) and our
partnership with Royal Mail in the offer, it is crucial we have the right network
capacity to sell and handle significant parcel volume in a variety of retailer-friendly
ways.
Options for network models
21. The two tables below set out our current and potential future network models, all
of which we have assessed, both internally and jointly as part of our strategic
discussions with Royal Mail. In principle we have the option to continue or stop
any existing model and to develop or de-prioritise any new potential model.
Figure 6: Network Model evolution
Main Implement ongoing changes to the paid proposition, as above.
Introduce automation to improve sustainability and introduce retailers to paying
for technology.
Continue to simplify operations, releasing time and footprint for the retailer.
¢ Expand around them with different models in inner urban areas.
e Exploit churn amongst smaller Mains to switch to Locals.
Local Primary objective is to reduce the up-front installation costs while retaining the
compelling product mix. We believe it will be possible to combine a self-service
option with a much smaller counter footprint, using simpler technology, to deliver
Mails, payments, cash & banking.
Strictly Confidential
POL-BSFF-0089724_ 0098
POST OFFICE
POL00251661
POL00251661
PAGE 11 OF 16
Model How it needs to evolve
NEW: alternative option to Local in certain inner city and urban mails-intensive
locations to open up new retailer types. Small footprint and ease of operation
should be particularly attractive in space-constrained inner cities. Where
payments, cash & banking are already very well served, these are effectively full
Post Offices for the demand in that specific location.
Fully °
automated
mails-only
Local
Community e«
Outreach, .
including
mobile .
Community branches with retail are typically sustainable
No-retail branches will continue to reduce in number through natural churn.
Opening local branches in sustainable rural shops currently without a Post Office
Provide a core part of our social purpose, where there are genuinely no
alternatives
New models in rural retailers across the country will allow outreach to become
less of a default option than currently.
N.B. For some time to come, there will be traditional branches with fixed pay where no suitable retailer nearby is
willing to operate a Local. These represent locations where we have not been able to find an alternative retailer over
the course of Network Transformation. They have no place in our blueprint and will gradually disappear.
22. As described in the mails strategy submitted to the board in May 2017, we have
concluded it is vital not to create confusion in the minds of customers or retailers
over what the Post Office brand represents. Our brand is synonymous with posting
letters and parcels: mails, including our USO services, must be offered in every
outlet. Given this, and our limited financial and management resources, we have
therefore deprioritised some feasible alternatives.
Figure 7: Deprioritised alternative models
Potent
Mails-only
counter service
Post Office
Cash-free
counter service
Post Office
Payments &
“Pick up & Drop
Off
Retailer cash
local only (no
Post Office
Supply Chain
deliveries or
pick-ups)
Strictly Confidential
Inner city mails-intensive areas
Inner city mails-intensive areas —
lots of businesses/ marketplace
sellers but where demand for cash
and banking already well served
Collect+ clone for certain inner city
mails-intensive locations to
improve PUDO accessibility.
Primary attraction over Local or
automated option is low cost to
implement; will revisit if Local
expansion stalls.
In theory, any local, but would
require a particular balance of cash
and banking which did not require
large amounts of cash to be
delivered or removed.
Feasible option, but deprioritised
because we believe the automated
option will be more attractive to retailers
(due to the lower staffing and training
requirements).
Once you remove all cash transactions,
this is effectively a mails-only Post Office,
as above.
Limited customer appeal/ high levels of
confusion (as demonstrated by
unsuccessful trial branches in 2014): the
Post Office brand is synonymous with
posting things. Removes Post Office
value-add from mails, damaging our
overall positioning with Royal Mail.
Complete balancing between Post Office
and retail only works for small Post
Offices.
POL-BSFF-0089724_ 0099
POL00251661
POL00251661
POST OFFICE PAGE 12 OF 16
ttegy are to continue to meet the national
access criteria and to maintain the overall size of our retail network. We have a
customer and competitive imperative to ‘be where are customers are’, opening
new outlets in both the urban and rural areas. This does not mean replacing
branches with like-for-like provision in the same location where customer usage is
very low.
24. This financial year, we have made a solid start to our plans to grow network
headroom in new retail locations: the first 15 contracts for new ‘whitespace’ locals
have signed in the first two months, with more than 90 having chosen to enter the
application process following our sales visits. A further c300 are in the pipeline to
be visited and we are on track to meet our target of 150 new Post Offices by year
end. The majority of these will be in urban areas around the country, but we are
also focusing on rural locations. In addition, we are working with the Plunkett
Foundation to engage with community-run shops in rural areas and have c30
where we plan to introduce a Post Office.
25. The introduction of self-service technology remains one of our top priorities. It has
three key advantages:
e Customers - and mails customers in particular - are used to using self-service
in many directly managed branches (where 69% of mails transactions are
now through self-service) and in the wider retail environment;
e Retailers can secure significant benefits both in reducing staff costs
(increasingly critical in light of the National Living Wage) and moving to an
out-of-hours solution for mails that has lower training requirements; and
e Post Office can leverage the significant benefits to the retailer to move to a
different charging model for self-service technology, leasing the equipment to
a retailer and removing a Horizon terminal.
26. We have trialled our existing self-service technology in an agency main in London:
this has proved the operational concept of a single kiosk (as opposed to the
hosted banks of SSKs in DMBs); and early customer migration and feedback has
been very positive: the branch received 5 customer ‘wows’ in the first week. The
challenge is to make self-service technology cost-effective. We are engaged ina
market-testing exercise at the moment to benchmark against our incumbent
provider NCR. From the NCR pricing we know that we can create a viable leasing
model that generates sufficient value for larger branches that they benefit and
Post Office profits from the lease; cutting costs further will make this attractive for
more branches and support the push for lower-cost easier-to-operate partially
automated Locals and fully automated mails branches.
Strictly Confidentiat
POL-BSFF-0089724_ 0100
POL00251661
POL00251661
27. Our current Network Development strategy forecasts higher churn in parts of the
network where we want to see change. That is indeed the case: excluding the
effects of NT, in FY16/17 churn of traditional and community branches ran at
around 6%, nearly twice the rate we see in our larger mains and locals. When
added to small mains, this churn of c300 of the branches we want to replace was
slightly ahead of the plan. We continue to expect higher churn amongst this
group, particularly those with limited retail, as a result of the aggregate effects of
National Living Wage and business rates increases, the ongoing expiry of NT fees
assurance three years after conversion, continued decline in some traditional
transactions (e.g. POca) and the actual and psychological impact of changes to the
remuneration model.
28. There are significant benefits to opening Locals instead of mains and outreaches
when branches churn: they bring £3-6k p.a. DPC for Post Office. However locals
currently require an expensive suite of equipment, leading to costs of c£17k each
to open. We believe the partially automated local option described in the section
above is particularly suited to new operators: it has a smaller footprint, lower
staffing costs and lower training requirements for staff. We are working with
potential suppliers to develop low-cost automated mails options (such as the card-
only small footprint kiosk); our ambition is to be able to deploy into new sites for
less than £17k.
29. There are currently 278 directly managed branches. We are mid-way through a
programme of a further 51 branches being franchised, leaving us with 227
branches by FY18/19. Moving a further 177 branches into the agency network by
end FY20/21 would cost £102m and generate around £25m annual benefits.
Clearly our ability to deliver further franchising on this scale will be dependent on
the availability of funding.
30. We continue to consolidate our analytical understanding of the relevant retail
markets (particularly convenience) to ensure that the changes we make are
optimal i.e. the right models in the right locations, taking into account customer
demand, competition and changing retail patterns. But our ambition needs a lot of
new sites and experience continues to show it is a challenging process to persuade
retailers to go through the disruption and learning process of taking on a Post
Office, even when the proposition is attractive. The Payments Strategy paper sets
out a potential opportunity to work with Payzone to provide additional sites for
upgrading to Post Offices.
Strictly Confidential
POL-BSFF-0089724_0101
POST OFFICE
Appendix 1
Retail offer benchmarking comparisons
POL00251661
POL00251661
PAGE 14 OF 16
IGD (the Institute of Grocery and Distribution) has helped Post Office quantify the
overall economics of the following benchmark comparisons.
ESUBW/AYe—
@ Main
3,500 outlets in the UK. c.2,500 in retailers
Preparation of area
Equipment & fitout
Dedicated space:
Staffing:
Footfall value:
Commercial
‘outcomes:
Direct prof:
Total value
Brand:
Retailer cost
'~£30k (50:50 share)
200 sq ft
Dedicated 3-4 FTEs, with high levels of training,
standards and regulations to be met etc.
2,000 customers each week
High propensity to spend in retail= ~£65k p.a,
£75k p.a., offset by ~£55k staff and other costs
£20k
£85k,
Destination brand: high likelihood to be in store
because of mails offer
Local Post Office
4,000 outlets in the UK.
2,200 outlets in the UK. c.
750 outlets now in retailers, especial
convenience stores ~ a growing focus for expansion
I
Retailer cost
~£70K
200+sq ft
Dedicated 4-5 FTEs, with high levels of training, standards and
regulations to be met ete.
41,000 customers each week
Medium-high propensity to spend in retail = ~£30kp.a,
£225kp.a. @ 50% gross profit. 20% net profit
£45k p.a.
£75kp.a.
Destination brand: high likelihood to be in store because of
Subway offer
Paypoint with Collect+ Lottery and stamps
6,000 locations
35,000 locations
Preparation of area
Equipment & fit-out
Dedicated space:
‘Shared staffing:
Footfall
Commercial
outcomes:
Estimated proft:
Total value
Brand:
Retailer cost
Varies 0-100% retailer contribution to £17k
40 sqft
20-30 hours of counter time needed each
‘week, need to make sure all stafftrained
~700 customers per week
High propensity to spend in retail= £50k p.a.
£19k p.a., offset by ~£17k staff and other
costs.
£2k p.a. + cash flow benefit in stamps
£52k p.a.
Destination brand: high likelihood to be in
store because of mails offer
Strictly Confidential
Part 1 (20%)
Retailer cost
£10/month
4sqft
3-4 counterhours, minimal
training required
250 customers per week
Med-high propensity = £20k p.a.
£2k p.a., offsetby 2k cash/tech
costs
Destination brand for both
Payments and mails
Part 2 (20%)
Retailer cost
None
12sqft
3-4 counter hours, minimal training
required
200 customers per week
‘Med-high propensity = £15k p.a.
£5k p.a. offset by £2k bank and staff
costs
£38k p.
Destination brand for lottery
‘Stamps secondary brand
POL-BSFF-0089724_0102
POST OFFICE
Preparation of
Post Office mails only SFK
=A
: q
I
Retailer cost
Equipment & fitout Free (costto POL up to £10k)
Dedicatedspace: 12sqft
Mails accepted at the retail til
Same: Consumables restocked
150 customers each week
Foottets Medium propensity to spend in retail = £5k p.a
Commercial
‘outcomes: ad
Estimated profit! £2kp.a.
Total value: eTkp.a.
—, Destination brand: high likelihood tobe in store
because of mails offer
Strictly Confidential
POL00251661
POL00251661
PAGE 15 OF 16
Costa Express coffee machine
Retailer cost
Free (cost to Costa unknown)
12sqft
Coffee bought at the retail till
Consumables restocked
150 customers each week
Medium propensity to spend in retail = £5k p.a.
£3.5kp.a., offsetby £1k of milk
£2.5kpp.
£7.5kp.a.
Secondary brand: partly impulse purchase, partly regular
destination
POL-BSFF-0089724_ 0103
POL00251661
POL00251661
POST OFFICE PAGE 16 OF 16
Appendix 2
Summary of the key findings from the IGD research
IGD (the Institute of Grocery and Distribution) undertook a research and
benchmarking exercise on our behalf in May 2017, focusing on examples from five
types of partnership organisation:
« Symbol groups - soft/transactional partnership (e.g. Premier);
« Symbol groups - hard/brand partnership (e.g. Spar);
e Retail franchise - turn key partnership (e.g. One Stop);
e Mission solutions - bolt-on brands, store with a store (e.g. Subway); and
« Category solutions - category add-ons (e.g. Cuisine de France).
There are six key findings we have taken from the research results:
1. Retailers appreciate clarity on the offer from the potential partner and the
consistency to which that offer is applied across the network. It is not common
practice to negotiate and customise the offer for each new store.
2. Incentive-based remuneration is a crucial part of how many category/ symbol
offers work for retailers. Incentives can reward good behaviour and be strong:
poor conformance with standards, for example, could remove incentives to the
extent of materially affecting profitability. For some partnerships, continued poor
conformance may cause the partner to end the agreement.
3. Every retailer chooses from a range of categories to fill their store. Partners
should maximise value per unit space taken, so we should not try to ‘second guess’
their cost of space as each retailer may value this differently. Low cost, low risk,
low maintenance options (such as Costa Express) are naturally popular, and
retailers will accept a subordinate role in the management of that space, and
tolerate a minority share in profitability as the flip side of this (as long as the cash
value is attractive).
4. Every additional service category promises additional retail value from footfall.
Footfall is crucial to the offer. But a category being profitable itself also matters:
retailers will not ‘pay’ for the footfall effects.
e Retailers are willing to invest significantly where they see a clear opportunity
for enhanced profitability
e Retailers are also willing to take on additional operational complexity to
implement solutions that offer clear opportunity for significant incremental
sales and profitability
5. Retailers want technology in their stores that is easy to use and provides valuable
information and insight. The value of the data to the category provider sometimes
means technology is provided to the retailer for free.
Strictly Confidential
POL-BSFF-0089724_ 0104
POL00251661
POL00251661
POST OFFICE PAGE 1 OF 13
STRATEGY PAPER
Network Strategy & Funding 2017-21
Author: Kevin Seller Sponsor: Kevin Gilliland Meeting date: 29"" September 2016
Executive Summary
Context
The Post Office network of 11,650 branches is constantly evolving, reflecting demographic,
economic and population change. It must be actively managed or face the prospect of decline.
Our strategy is to be where customers are: hosted by the right retailers in the best urban and
rural locations. At the June Board, the long-term opportunities were discussed to advance this
strategy and more profitably realign the network around the needs of customers, retailers and
clients. This paper turns those high-level principles into specific approaches to be taken from
April 2017 and identifies the associated funding requirements.
Questions addressed in this report
1. How do we see the network evolving to 2021 to best serve our customers, support our
commercial strategies and social purpose as well as to service demand more profitably?
2. What are the key transition paths we will follow to deliver this roadmap?
3. What enabling actions do we need to take to give us the best chance to deliver it?
4. What are the investment requirements and what will be the effect on P&L?
Conclusion
Our strategy is to have a network in the best urban and rural locations — of around 12,000
branches - bringing together vibrant retail with Post Office and banking services.
1. We see the network evolving in three ways: improving the proposition for agents to
operate a Post Office; changing the shape of network to reflect our customer-focussed
strategy and reduce the number of stand-alone Post Offices; and enabling these changes
by increasing retailer demand for a Post Office.
2. We will introduce simplification and automation to make having a Post Office easier and
more profitable for a retailer; we will share in these benefits through reductions in agents’
remuneration. We will commercially manage the expected increase in the churn of
branches without retail, enabled by new network headroom. We propose to continue to
convert the Directly Managed network to more profitable agency models, supporting our
drive to a more variable cost base.
3. We will improve retailer demand to allow us to open new Post Offices in urban and rural
retailers and be more agile to competitive threats in the market. Growing and promoting
our ‘waiting list’ of more than 1000 existing prospective agents, particularly through
relationships with symbol groups such as Booker, and communicating the retail value of
the proposition through improved evidence will enable us to attract and retain the best
retailers.
4. Investment of £286m generates up to £65m of annual EBITDAS and mitigates the
prospect of declining branch numbers and/or increasing subsidy requirements arising
from the market challenges facing the business and our agents.
5. These activities will give rise to significant stakeholder challenge. A communications and
stakeholder strategy is being developed, underpinned by a clear narrative that describes
the benefits of the changes.
Input Sought
The Board is asked to approve the proposed network interventions so they can be included in
the overall 5 Year plan to 2021.
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_0105
POL00251661
POL00251661
POST OFFICE PAGE 2 OF 18
The Report
What do we propose to do and why?
The proposal
1. Post Office must continue to evolve to be an excellent complementary category for
retailers. The traditional model of standalone Post Offices continues to decline - and
generally we do not see a place for such Post Offices in the long run. Good retailers
maximise the profit of their business by using the Post Office footfall twice - for Post
Office and their retail, with stronger benefits for customers and communities. Our mind-
set as Post Office needs to be aligned to this approach.
The network strategy consists of three inextricably linked components:
¢ Improving profitability through simplifying the agent proposition
e Improving profitability through changing the shape of network
e Enabling these changes by increasing retailer demand
2. We will simplify Post Office transactions, branch and support processes, including the
initial application process. Changing the retailer proposition through simplification will
improve profitability directly - sharing in the retailers’ benefit (maintaining footfall while
cutting staff costs) by reducing overall agent remuneration - and indirectly by driving a
change in mind-set amongst agents that will lead to higher levels of churn, particularly
from branches with poor or no retail. We need to actively drive model change to improve
profitability and improve long term sustainability for Post Office, for host retailers and
therefore our customers. We will use research evidence to communicate the value of a
Post Office more effectively. We need to increase retailer demand for Post Offices so that
we can create headroom in the network; without new Post Offices the other changes
would simply lead to overall network decline.
3. Improving profitability through simplifying the agent proposition
Simplifying the agent proposition is based on three initiatives; transaction simplification,
operating simplification and automation. These need to be launched in a planned,
coordinated manner with a clear articulation of the true value of a simpler-to-run Post
Office for our agents and the NFSP. The narrative must also stir agents into action so
that they realise the benefits that simplification and automation bring during a proposed
period of associated fees assurance (a transitional payment to support agents).
3.1. Transaction Simplification: Work is underway to simplify the top 100 product
journeys, of which the top 5 show a saving of 710k hours which equates to £11m
of agents’ remuneration. The remaining journeys are being ‘hot-housed’ and will
be completed in October 2016. Initial work shows that it will allow us to remove a
further 1.4m hours, equating to circa £21m of agents’ remuneration. Agents will
not be able to realise all of these savings, so we have modelled a realisable
benefit of ~£16m for an investment of ~£5.3m plus an exceptionalised fees
assurance of ~£16m.
A further revenue opportunity for customer referral transactions exists worth circa
£1.3m per annum for an investment of £150k.
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_ 0106
POL00251661
POL00251661
POST OFFICE PAGE 3 OF 18
3.2. Operating Simplification: 18 branch processes, with a primary focus on cash and
stock, have been reviewed and show that we can simplify these by removing
between 3 and 16 hours of office admin per month per branch. This is work that
must be completed in order to operate a Post Office and simplifying it will make it
easier and more profitable for new and existing retailers, further supporting the
case for savings from Transaction Simplification. We are validating the analysis
and expect it to be finalised in October 2016.
Time spent on key branch admin activities
Activity Est asistime IEst to betime [Saving
Seconds: ‘Seconds Seconds
Logon oo 30 30
‘Stock Unit End of day transaction cut offs 100 2 7
‘Stock Unit End of week transaction cut offs 70 ° 7
Stock deca 300 100 200
Cash dedarati 45 35 10
Stock Unit Balance & Rolover 300 o 300
Logott 40 4 36
Order cash (phone cal) 300 45 255
Cancel cash order (phone cal) 180 10 170
Order currency 360 0 300
Order stock 900 180 no
Receive cash remittance 20 2s 5
Send cash remittance 60 4s 15
Receive stock remittance 150 75 75
Office balancing os 600 m5
ATM Balancing (Horizon only) 90 o 90
Rem Discrepancy Reporting 0 «0 360 F
Send stock remittance 180 90 °0
3 Total 4500 1452 3048
oah:t3m:008 000 :24m:128 0h: 50m:408
Potential impact on Network
The graph below shows the total estimated monthly time saving per
branch based on its size:
25:00 24:03
16:20
Time
15:
HH:MM al
10: 07:43
06:36
5:00] I P -
‘Small branch Med branch Large branch
(1 Stock unit) (4 Stock units) (8 Stock units) :
In addition, initial work has identified ~£4m EBITDAS benefit from the potential to
work with agents to optimise the cash supply chain for a ~£9m investment. This
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_0107
POL00251661
POL00251661
POST OFFICE PAGE 4 OF 18
includes initiatives such as using retailer cash, ‘hub and spoke’ and alternative
cash delivery methods. Initial pilots are planned in two cash centres.
3.3. Automation: The potential to offer self-service automation to agents - based on
existing and proven self-service kiosks (SSKs) — providing ~£4.5m EBITDAS
benefit by 2020/21 for ~£14.2m investment, if 2,000 branches take up this
opportunity. We believe this is a compelling offer and would expect Agents each
to benefit by an average of ~£9k p.a. These costs are based upon a lease model
for SSKs; an outright purchase option is also undergoing financial appraisal.
Large mains 2000 4 counters or more; sufficient staffing to enable duty
rebalancing and use of automation
‘Small mains with retail 1000 Rebalancing of duties between dedicated counters and combi.
Automation may work for some branches.
‘Small mains without retail 500 This group will find it most difficult to adjust. N.B. NT has
already tested they can survive a 20% reduction. That said, as
per the paper we expect to see an increase in churn through
selling or service issue, as result of this plus external factors
like minimum wage
Locals 3700 Already implemented shared staffing between retail & Post
Office at the combi counter
Unconverted 750 ‘Already communicated that these branches do not have a long-
term place in the network, Although limited ability to handle,
they keep their fixed pay for now, so the effect is only around
E1k or 3% of pay
Large community 500 Limited impact <£ik or 3% of pay
Small community & outreach 3000 Very limited impact due to high proportion of fixed pay
3.4. We know that there are features of our models that detract from the benefits of
Post Office footfall for some retailers. We have begun working on improving key
elements of the proposition to agents, but this will continue over an extended
period.
¢ Simplification: has two further benefits to agents over and above reduced
staffing needs - faster transactions and easier non-customer facing processes
(both areas of concern for retailers).
e Automation: moving transactions away from the counter reduces staffing
requirements and makes serving customers out-of-hours easier.
e Better, more accessible, training: developed with remote access in mind,
always-on and including modules for product specialists.
« Space: we are working with partners to optimise the space that they have.
Simplification, automation, model change and potentially moving the sale of
some products onto retail tills (through ePOS integration, with an optimised
cash supply chain) all contribute to reduced space and improved customer
flow for certain retailers.
4. Improving profitaI
‘y through changing the shape of the network
We will manage the shape of our network to focus on where customers are, to meet our
social obligations and minimise cost to the taxpayer. Doing nothing will result in an
inevitable decline in branch numbers, customer service and accessibility.
Directly managed to agency branches
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_ 0108
POL00251661
POL00251661
POST OFFICE PAGE 5S OF 18
4.1. The Directly Managed (DM) network strategy is consistent with the core network
strategy. We can provide a more sustainable, cost effective and convenient
service to customers by converting branches to agency models, co-locating with
vibrant retailers and moving away from standalone Post Offices, as such we do
not see a long-term future for DM branches.
4.2. In order to deliver this strategy, we will need to take a firm stance in the face of
substantial external stakeholder opposition. Timing and sequencing will be
critical, as will the need for a compelling storyboard to support the changes.
4.3. Direct franchising to agency branches will continue to play the primary role in
replacing the DM network. However, we cannot solely rely on this approach as
many branches are very large and retailers are not willing to give up large
volumes of profitable retail space, particularly in city centre sites where there are
limited convenience stores and property prices are high. In these situations, we
will open agency branches in close proximity to the DM branch to cannibalise its
customer traffic and subsequently franchise the DM branch. We will also offer a
package to our agents that includes appropriate remuneration for lost retail space
when franchising large branches and self-service kiosks (in line with the agency
automation offer) to help them to manage their business cost structure.
4.4. The DM strategy has been developed to maximise EBITDAS benefit to the
business while still supporting our Commercial and FS strategies.
4.5. 227 DM branches will remain after delivery of all the approved business cases for
franchising under the Crown Network Development Programme and the latest WH
Smith deal. The table below sets out our recommendation to secure funding to
franchise all 227 branches. Two alternatives are also included as an example of
future decisions we might take to maximise the ROI for Post Office.
Branches One-off One-off EBITDAS I Payback
Scenario retained cost (£m) I benefit (£m) (£m) (years)
Franchise all branches 0
Retain branches with 28
eer er IRRELEVANT
Retain branches with 46
a payback >10 years
*In progress pensions consultation may reduce EBITDAS benefit by £1.6m. Cost and benefit assumptions are
aligned to the emerging FS distribution strategy, details of which will be presented to the October Board.
**Draft legislation related to Employers’ NI for settlement agreements may come into law in April 2018
leading to a one-off cost increase of ~£2.2m.
e Hub temp:
POL-BSFF-0089724_ 0109
POL00251661
POL00251661
POST OFFICE PAGE 6 OF 18
One off costs £k
Settlement agreements
Strip out and dliapidations
Leashold holdover
Marketing & Agents Fees
RM site separation
Project team & legal
Central cost reduction delivery cost
Total Staff & Property Costs
New branch setup (POL share)
SSK re-location & installation
ATM re-location & removal
FS CRM build costs
Training & Migration Support costs
New Model set up costs
AEI relocation
cro
Marketing
IRRELEVANT!
Recurring EBITDAS Benefits
Recurring benefits
Staff costs saved
Property costs saved
Branch variable income lost
Branch variable income migrated
Agents pay on migrated variable incom
Allocated income lost
Allocated income migrated
Agents pay on migrated allocated incor
Franchising Top-Up
Supply Chain costs increases
Misc, Consumables & Other Non-Staff
FS CRM sales model run costs
IRRELEVANT
Central cost reduction
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_0110
POL00251661
POL00251661
POST OFFICE PAGE 7 OF 18
FY16 Budget Post Migra' Netincome Migration
Pillar (£k) (£k) effect rate
FINANCIAL SERVICES _}
PFS
Travel
eer — IRRELEVANT
SERVICES
MAILS & RETAIL I
TELECOMS {
Total I
Crown Direct Costs — Losses etc
Channel Admin (Crown Support Team)
Financial Services Support Costs
Property and Facilities
IT Infrastructure
Central Support Team - PE
Central Support Team — Finance
Central Support Team — Retail
IRRELEVANT}
One-off benefits:
Number of Disposal) Adj. Disposal] Disp Value in
branches Value (£k) Value (£k)I model (£k)
Freehold
oo IRRELEVANT
Leasehold
Mains to locals
4.6. We propose to transition smaller Mains to Local branches onsite, delivering an
EBITDAS benefit of ~£6.5k per branch, by:
¢ Changing the terms for smaller Mains, so that they can only sell their business
to an operator willing to operate a Local.
¢ Negotiating with multiples partners and strong independent retailers to
transition to Locals.
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_0111
POL00251661
POL00251661
POST OFFICE PAGE 8 OF 18
4.7. For the past five years branches that would otherwise have been sold by agents or
closed have been replaced as part of NT; it is only now we are getting a measure
of the behaviour of these new models in BAU. Over the past twelve months there
has been a consistent level of change in ownership of around 3% of converted
smaller Mains (through sales) and around 2.5% service issues (through agent
retirements and resignations, etc.)
4.8. We expect these rates to increase primarily in smaller Mains due to:
e National Living Wage policy: around 5% wage inflation for each of the next
four years (which particularly impacts Mains who cannot spread the impact of
the increase as they have little or no retail)
e Lost NT fees assurance: for smaller Mains this is ~£3k (7% of remuneration)
¢ Continued decline in traditional transactions
¢ Both the psychological and direct impact of variable remuneration reduction
through simplification (which particularly impacts Mains with little or no retail,
who are our most disengaged agents according to independent research)
e Larger Mains (~2-2,500) are better engaged, and better able to respond by
taking action to realise the opportunities from simplification and automation.
4.9. We anticipate small Main churn rates to increase: service issue rates peaking at
5% (from 2.5% today). These Mains would also be replaced by Locals, delivering
an EBITDAS benefit of £6.5k per branch.
Managing traditional branches left after NT
4.10. There are approximately 750 remaining unconverted branches that will not
become either Mains or Locals under NT as they could not be replaced in a nearby
retailer. Churn is expected to increase following a period of suppressed rates in
recent years as branches signed up for enhanced compensation for closure under
NT, which will now not be forthcoming. As a result, we expect that this may
increase from 2% today, peaking at 7-8% in the next five years, as many
postmasters simply resign or retire and sell their premises.
4.11. We believe that there will be two ways in which these branches can be replaced.
Firstly, by re-approaching the nearby retailer who has so far refused: when faced
with local pressure that there will be no Post Office, we expect some to change
their mind. In this situation we believe there is a risk that compensation may be
necessary in some circumstances. Secondly, by relying on suitable headroom to
sustain overall network numbers and the access criteria. In either scenario the
traditional branch will be replaced by a Local, giving a benefit of c.£10k.
4.12. We will need to resist the pressure to reopen a de facto community branch on site
when the branch closes. Our approach should be clear: we continue to expand
actively in good retail hubs but do not open subsidised branches where there are
suitable retailers.
Managing change in the community network
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_0112
POL00251661
POL00251661
POST OFFICE PAGE 9 OF 18
4.13. We propose to realise savings to Post Office through reductions in Core Tier
Payment (CTP) fixed remuneration for approximately 500 Community branches
supported by both a viable retail business and receiving in excess of £10k CTP
p.a. We propose to reduce these rates by 10% for each of the three years from
April 2018, with fees assurance protections offered to agents. The EBITDAS
benefit of fully achieving this reduction in fixed remuneration will be an average of
approximately £3k per branch, giving a total saving of ~£1.4m per annum with
transitional payments of ~£2.1m. This change is particularly likely to encounter
significant political and stakeholder pressure, given that the impact will be largely
felt by rural retailers with strong links into local and national politicians and
readily mobilised interest groups.
4.14. Although Community contracts have remained unchanged and, in theory, have
not been impacted by Network Transformation, their closure rate has been
supressed in recent years as branches held out to see if they might be
compensated. Since it has been made clear that this is not an option, we have
seen an increased level of closures over the past year, and particularly in the past
few months.
4.15. The current closure rate is far higher for branches without a strong retail offering,
at a rate of greater than 10%. For those with a viable retail offer it is also
relatively high, at around 3-5% closure rates. External cost pressures will sustain
this elevated rate in the medium term.
4.16. This level of churn represents both a challenge to sustain the network reach and
access criteria in some rural communities, as well as an opportunity to deliver a
more sustainable and profitable network by opening Locals, which will generate
EBITDAS benefit of ~£9k per branch.
4.17. As we will have opened new Post Offices in vibrant retail hubs where customers
shop, we will need to resist the pressure to open an outreach for every community
branch that closes where there is no retail. In some remote geographies an
outreach will be appropriate, but in many the wider area will be well served and
we will be meeting all our access criteria and network numbers. We will stress
that our approach is to continue to expand actively in good rural retail hubs that
customers already use but do not open subsidised branches where there are
suitable retailers.
Generating network headroom
4.18. A key principle underpinning our strategy is to take a more dynamic approach to
meeting local customer demand while continuing to meet the national access
criteria. This means scaling back provision where customer usage is very low, not
necessarily replacing branches with like-for-like provision in the same location,
and opening new outlets in both the urban and rural areas where we can better
meet customer demands.
4.19. We are growing four types of headroom and have identified more than 2,000
potential sites with symbol groups:
e Urban symbol group and multiple convenience stores in under-served parts of
towns and cities. We have opened more than 100 Locals so far in FY16/17 as
a result of service issues (including 30 in greenfield sites).
¢ Inner urban retailers to improve capacity and reduce demand in Directly
Managed offices.
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_ 0113
POL00251661
POL00251661
POST OFFICE PAGE 10 OF 18
¢ Rural symbol group convenience stores. Successful commercially operated
convenience stores should be targeted in parallel with their urban
counterparts.
e Rural independent and community-run shops. There are at least 120
community-run shops without Post Offices (on top of over 200 already open);
a policy that all community-run ‘last shops’ are entitled to a Post Office not
only builds rural headroom but also supports the message that our
community branches should be co-located with retail.
4.20. Although there are one-off costs with installing more full-time Post Offices, there
are significant benefits to doing so where appropriate. Whist outreach services
enable us to serve customers cost effectively in remote locations without any
retailers, where rural retail does exist it is better for the customer and more
profitable for Post Office to establish a rural Local. In most cases therefore, even
allowing for a generous allowance to set up a rural Local, it would cost only £5m
more to open 1,000 Locals - generating an annual EBITDAS benefit of £3-5m —
rather than equivalent outreach services.
5. We are improving the evidence for and communication of our value proposition to
retailers. New research has shown that:
5.1. Post Office customers have a higher propensity to shop in a host retail store (78%
for Post Office vs 66% for PayPoint) and tend to buy items with a higher margin.
5.2. 78% of Post Office customers also buy an average of £6.77 of retail goods as part
of the same visit. Of these, 73% are in the shop because it is a Post Office. So
the additional value driven by an average Main amounts to £350k a year of
turnover, or £70k profit at 20% margin. The additional value from hosting a Local
branch amounts to £140k of turnover a year, or nearly £30k profit.
5.3. Our brand impact is strong: the net promoter score (‘would you recommend to a
friend’) is higher in retail stores with a Post Office than those without (80 vs 50).
5.4. — Post Office has the most positive impact on a local area.
6. Weare formalising the ‘waiting list’ of already more than 1000 interested retailers from
all the interactions we have with retailers. We are building relationships with symbol
groups in particular to make adding a Post Office a straightforward potential option for all
retailers joining their networks. We have seen a marked increase in demand since the
implementation of new branch types under NT.
7. Asset out in Section 3, we are also developing an improved value proposition for new
and existing agents, that will benefit from simplified transactions, self-service
automation, improved training and the opportunity to release additional space for retail.
8. By the end of the next funding period in March 2021, significant progress can be made
towards the long term ‘ideal’ network. We believe such progress is possible without
imperilling the sustainability of the network — which remains the defining source of our
competitive advantage. This is set out in the table in Appendix 1.
ligence Hub temp:
POL-BSFF-0089724_0114
POL00251661
POL00251661
POST OFFICE PAGE 11 OF 18
Outreach =Community #Traditional =Locals & New models =Mains # Directly Managed
0-50
50-100
2000
2800
3700 5400 7,000—
10,000
550
al 8
3 8
1400 1400 1400
2018 2021 Future
This is also broadly aligned with the high-level position set out in the June Board paper
below:
= Outreach # Community = Traditional = Locals & new models © Mains ® Directly managed
O=100-
2018 FUTURE STATE
What are the key transition paths we will follow to deliver this roadmap?
9. We have developed a challenging potential implementation roadmap to realise benefits
quickly but in a coordinated way that is feasible within the network. An illustration of
this is set out in Appendix 2.
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_ 0115
POST OFFICE
POL00251661
POL00251661
PAGE 12 OF 18
Network
Change I
Demand
automation and
SSK mains pilot
Enabling Pee
Technology
What are the investment requirements for these changes and what will be the effect on P&L?
10. The table below shows our view of what could be delivered by 2023 at the latest, but we
are looking to accelerate and maximise benefit realisation within the next funding period:
Undated future state as
by 2023 or earlier
communicated in June
Upfront Upfront
Area costs EBITDAS costs EBITDAS
Agents’ Proposition £66m £28m £40m £20-50m
Directly Managed to = - =" = “=
agency IRRELEVANT
Mains to Locals £18m £4m £40-60m £0
Community to Locals £43m £10m £30-40m £4m
Total £286m £65m £260-290m £42-72m
Next Steps
Between now and the October Board we finalise investment requirements and benefits by
financial year to inform the 5-year plan and the funding ask from government.
Risks
The network changes put forward in this paper have the potential to raise stakeholder
opposition (particularly given the political environment that may be in place in the run up to
the 2020 election). Implementation will therefore need to be carefully managed and
sequenced and the development of the network will need to be supported by a clear overall
external narrative. An outline of the suggested narrative is included in Appendix 4. It will be
important to emphasise the alternative to careful implementation of these changes is a
network that becomes increasingly fragile, struggling to meet customer needs and government
requirements, which itself will provoke significant stakeholder concern and opposition.
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_ 0116
POST OFFICE
POL00251661
POL00251661
PAGE 13 OF 18
RISK
MITIGATION
Irrespective of the actual financial effect on the
viability of the reductions in agent
remuneration, a national campaign (similar to
the recent PayPoint campaign) is launched
against the changes by the NFSP or others.
This may be accompanied by a major retail
partner handing back their Post Offices.
We will take a coordinated and planned approach to
communicating all the proposed proposition changes,
focusing on the benefits to communities, customers
and retailers of the changes as a whole. The
reductions in remuneration will amount only to a
proportion of the workload removed. Agents benefit
from reduced off-counter workload - and we will
launch the opportunity for agents in larger branches
with the highest staff costs to install self-service.
The ongoing decline of the rural network -
driven by factors outside Post Office’s control -
leads to an uncomfortable level of political
pressure, considering this government's
commitments. Even the small changes to fixed
remuneration in viable community branches
comes under pressure.
A key plank of the proposal is to invest in the
national network of rural shops that exist e.g.
community-run shops championed by Plunkett. We
will work with the Corporate Comms team to ensure
that these benefits are clearly understood by local
and national opinion formers, we will then use the
External Affairs team to engage with them to counter
negative responses and continue to build a nationally
focussed story on the changes we are making.
Further franchising of the DM network will lead
to increased political and public pressures,
including adverse media coverage where
transformation of the network is viewed as job
losses and back-door privatisation. Some
customers view a Crown as giving their town
status and will therefore campaign against
change.
We will work with the Corporate Comms team to seek
to ensure that opposition remains localised to the area
impacted and does not spill over into national
opposition or campaigns. We will also use successful
examples of recently franchised branches to bring to
life the benefits and counter negative messaging. We
will continue to develop an over-arching narrative that
places these changes in the context of our vision for
the future Post Office - the provider of essential
services under one roof, making life easier for
customers by bringing Post Office, banking and retail
together.
fidentia!
Strictly
Intelligence Hub tempiate
POL-BSFF-0089724_0117
POST OFFICE
Appendices
POL00251661
POL00251661
PAGE 14 OF 18
1. Indicative network evolution from 2018 through 2021 towards the ideal
future state
Outreach Community Traditional = Locals & New models
50-100
2800
3300
1400
1400
2018 2021
Mains m Directly Managed
0-50
2000
7,000 —
10,000
1400
Future
Strictly Confidential
Board Intelligence Hub template
POL-BSFF-0089724_ 0118
POL00251661
POL00251661
POST OFFICE PAGE 15 OF 18
2. Network development transition paths: proposed roadmap
{93 16/17; @4 16/17) Q1 17/18) G2 17/18) Q3 17/18) Q4 17/18 I 2018/49 ; 2019/20 ; 2020/21
Direct Managed Branches: franchised / closed
Network I
Headroom
through
Retailer [i
Demand }
Initiate comms on simplify,
automation and ai local
SK vs pilot
‘Change
Enabling
Technology
3. Alternative Approaches Considered
Directly Managed branches:
To improve the profitability of the DM network in line with the EBITDAS benefit delivered by
franchising you would need to reduce the staff and property costs by over 25% or increase the
income by a third without increasing costs.
Income growth in the 3 Year Plan has been modelled against the DM network and it will not
begin to deliver the level of growth needed. Declines in both Government and Mails plans are
only marginally offset by growth in FS, Telecoms and Retail.
Previous DM network strategies have included assumptions around pay including pay freezes
and buy-downs. Given the level of cost reduction and the current Union regime we do not
believe that a buy-down is feasible. Over the last 5 years we have tightly managed our
property costs, re-locating to cheaper premises where possible. Further reductions in property
costs would attract significant one-off re-location costs and lead to us moving to more tertiary
locations.
Agency branche:
A number of alternative scenarios were considered for each of the categories of agency
branches considered in line with the network strategy approach set out to the Board in June.
We considered business-as-usual for smaller Mains and the most viable Community branches,
but accounting for aggravating factors such as the impact of the National Living Wage.
However, this would forgo EBITDAS benefit to Post Office and fail to proactively manage the
network in line with our strategy of seeking to ensure branches are hosted in the best retailers
and where customers are.
Strictly Confidential Board Intelligence Hub template
POL-BSFF-0089724_ 0119
POST OFFICE
POL00251661
POL00251661
PAGE 16 OF 18
In addition, we have considered an extremely aggressive approach across the network that
might maximise EBITDAS benefit. This would imperil Post Office’s ability to meet its access
criteria, require compulsory contract terminations and would generate a significant national
campaign of opposition.
Therefore, we have proposed a carefully balanced approach that weighs the risks and rewards
of each initiative and enables us to sustain a compelling narrative for the future of the Post
Office that appeals to consumers, clients and retailers.
Approach
Scenarios —
304 branches. Exploitincreased [525 branches. Also ensure CTs
churn to replace with Locals.
Jare to Locals in this population.
Aggressive
‘940 branches. Convert or give 18
months notice to leave. 100 stay. _
Mains to Locals EBITDAS. EBITDAS ESITDAS
(1100) Investment (20-21) Investment (20-21) Investment (20-21)
(6m) £1.4m (€11m) £2.4m (£23m) £4m
[Also fixed pay -10% p.a. for 3
years.
180 branches. Exploit increased
churn to replace with headroom.
Increased churn to 250.
Wait for max. churn then close
with compensation (18 months).
Traditional to
EBITDAS. EBITDAS ESITDAS
Somewhere Investment (20-21) Investment (20-21) Investment (20-21)
(750)
(£5m) £1.7m (£7m) £3.2m (€36m) £7.7m
43 branches, Exploit increased
churn to replace with headroom.
[Also, fixed pay -10% p.a. for 3
lyears. Increased churn to 80.
Wait for max. churn then convert
‘or close with comp (1 year CTP).
EBITDAS EBITDAS
EBITDAS
Somewhere Investment (20-21) Investment (20-21) Investment (20-21)
(sa0) (0.1m) £0.5m (£2m) £2m (€14m) £1.7m
350 branches. Exploitincreased J Also, fixed pay/hrs -10%. Also, close another 200 smallest
Community churn to replace with headroom. {increased churn to 500. branches w/comp (4 year CTP).
without Retail to EBITDAS EBITDAS ESITDAS
Somewhere Investment (20-21) Investment (20-21) Investment (20-21)
(1500) (é1m) £3.8m (€1.4m) £5.7m (€8m) £6.4m
recommended approaches
Underpinned by £19m investment in headroom branches (Locals and Outreach) and £9.5m to cover project costs based on
Strictly Confidential
Board Intelligence Hub template
POL-BSFF-0089724_ 0120
POL00251661
POL00251661
POST OFFICE PAGE 17 OF 18
4. Draft Network Development core narrative
Objective: To present a compelling argument to early audiences (government, MPs) for
supporting our ongoing network development programme.
Post Office Ltd is unique: a commercial business with a public purpose. For 370 years we have
been at the heart of communities around the UK. Over 90% of people in the UK live within a
mile of a post office; in deprived, urban areas, the figure is over 99%. Our 11,600 branches,
mainly independent businesses, employ over 50,000 people and form a key element of the
UK's social and commercial infrastructure.
This huge network with its unrivalled access provides communities with essential services —
not only bill payment and postal services, but access to cash and financial services; these are
particularly vital in communities where banks have closed their branches, or where there is no
other retail outlet. Meanwhile small businesses look to their local post office for convenient
banking and access to the mail system for online orders.
Over the last decade, we have invested in and changed the way we offer our services; Over
6,300 branches have already made the transition to become main or local post offices, with
nearly a thousand more signed up to the programme. Besides being local, we have made our
opening hours more convenient. We have increased our opening times by 205,000 hours -—
the equivalent of opening nearly 4,500 new post offices. Nearly 4,000 branches now open on
Sundays, making us the largest retail business in the country to do so. And our partnership
with WHSmith is helping us to find a more cost-effective way to offer our services in high
streets and city centres around the UK.
We are committed to maintaining and growing our network; we have stabilised branch
numbers branch numbers are at their most stable for decades, and have in fact opened a
number of new post offices this year. At the same time, we have improved productivity and
managed down cost, reducing our operating losses by over 75% in just four years. Beyond
delivering an important public purpose we have consolidated our position as the UK’s top mails
provider in the face of aggressive competition; and we have built up a fair, competitive and
growing financial services offer including mortgages, personal insurance, savings and credit
cards.
But since we began to modernise our network, a lot has changed. The digital economy has
transformed the way people shop, opening up new channels and diverting trade from
traditional outlets. There is increasing competition in core areas such as parcel services
(CollectPlus, DPD, Hermes) and bill payment (PayPoint). But we still believe there is a vital,
social and commercial role for post offices. Research tells us that for communities to thrive
they need three things - a bank, a post office and a convenience store. Our post office
network offers all three on the same premises.
Customers primarily connect with us nowadays as a core service in a local store. These
partnerships are good for retailers, good for customers and for Post Office too, and the data
shows it. Retail businesses with post offices are seeing sales rise - with revenues for our
modernised local branches up 15%, compared to 7% for mains.
This is we need to continue the evolution of the branch network, building further on the firm
foundations we've created, to extend our reach, protect and potentially increase our network,
and complete our transformation to a commercially sustainable model. Given how our network
has evolved and prospered so far, we believe that the best way to do this is by offering our
ntelligence Hub template
POL-BSFF-0089724_0121
POL00251661
POL00251661
POST OFFICE PAGE 18 OF 18
services in a way that customers find convenient, and is commercially attractive to local
retailers.
Customers tell us they want simple, convenient services, and the ability to buy them while on
a normal shop rather than make a special journey. Retailers tell us that, while they value our
brand and the footfall we bring, our often complex products and processes can make it harder
to do business with us. They want simplicity and flexibility in how they use their space and
their staff. They want systems that integrate with their own. And they want a simple,
commercial proposition that lifts us above our key competitors.
We intend to deliver a number of network initiatives that will build on what we have learned
from Network Transformation and give more customers and retailers what they want. These
will include:
e Evolving our network further, giving more communities access to our successful local
branch model
¢ Offering a new, simpler service model built around essential Post Office products (mails,
government services and payments), that offers retailers the simplicity and customers
the convenience they are looking for
e A further, ‘specialist’ product set to be offered by in-branch ‘specialists’, through our
larger branches or online, to ensure customers still have access to the full range of Post
Office services
e Flexible IT packages, which retailers can integrate with their own systems if they want to
* Aclear, simple package that makes retailers actively want a post office in their store
To achieve this, we need to develop our network still further. We will need to review our
supplier contracts; convert some main branches to locals. We remain committed to serving
communities across the country, no matter how remote, and in doing so we need to explore
the most effective ways to service these communities. We also need to rebalance the way we
pay our agents, to reflect the changes to our systems and the wider opportunities having a
post office brings them. Above all, to deliver further change we will need to make further
investment.
The prize, though, is a future where local stores are even more enthusiastic about taking on a
post office, enhancing our convenience and making our services more accessible for customers
across the country. A future where however markets change, our network is resilient and
prosperous enough to continue to serve communities as their needs and expectations change.
A future where the local post office continues to play an essential role as a service provider, as
a small business hub and as a cornerstone of communities across this country as part of
largest retail network in the UK.
Stric
ntelligence Hub template
POL-BSFF-0089724_0122
POL00251661
POL00251661
POST OFFICE PAGE 1 OF 5S
BOARD PAPER NOTING
The Future of Cash - our opportunity
Author: Martin Kearsley Sponsor: Nick Kennett Meeting date: 23 November 2017
Executive Summary
Context
1. The value of cash in the UK economy continues to grow. Whilst the use of cash is
expected to decline by 43% by 2026, cash will remain vital to the UK economy for
many years to come.
2. Banks continue to restructure and close branches, the eventual aim is to run them
without cash, relying instead on a multi-channel mix of online, mobile, and (through
partnership) access to cash through other means, placing our branch network in a
very favourable position.
Bank has approached us to consider taking all of their over the counter cash
tions. In conversation with other UK major banks, most are considering
similar options.
4. The continued demand for cash, allied to the reduced locations to get it, creates a
unique opportunity for Post Office to become THE counter cash partner for UK
Banking.
Questions addressed in this report
1. What is happening in the wider ‘cash market’ in the UK?
2. What is the opportunity for Post Office?
3. What is the impact on our Operating model and proposition?
4. How are we proposing to proceed and over what timescale?
Conclusions
“IRRELEVANT
6. By 2025 Post Office could once again be truly vital in every community, best known
for two leading business themes: Mails and Banking
7. The implications of this opportunity are significant and need to be worked through
in detail, including integrating the increased branch cash requirements to support
our emerging POCA and ATM strategies.
Input sought
8. Detailed analysis of the cross-company implications is required, the objective being
to present a fully integrated Cash Strategy for Board approval in March 2018.
9. This analysis will require focussed resources from Operations, Treasury, Network,
Supply Chain, Marketing and Finance teams and close cooperation between Banking,
POCA and ATM teams.
Strictly Confidential Banking and Cash Board paper Nov17v1.0
POL-BSFF-0089724_ 0123
POL00251661
POL00251661
POST OFFICE PAGE 2 OF 5
The Report
What is happening in the wider ‘cash market’ in the UK?
10. The value of cash in the economy is increasing by 10% per annum (source: Bank
of England). Although the number of cash transactions is falling, expected annual
growth will increase cash in circulation from £70bn today to c.£80bn by 2025. The
UK is not unique in this growth - US, Canada, Australia, and the Euro Area are all
experiencing year-on-year growth in cash of between 5% to 10%.
11. The Bank of England stated 2.7 million people (5% of UK adults, spread relatively
evenly across age groups) will continue to rely almost entirely on cash. Victoria
Cleland, the chief cashier at the Bank of England stated in June 2017 “it is clear
that cash is very much alive and kicking”.
12. The ATM operating model (through LINK) is becoming increasingly challenging
which could potentially reduce the number of ATMs in the UK by 2025. Banks
continuing to consolidate their branch networks, already leaving over 3000
communities without any bank branches. Industry analysts propose an ‘ideal’ bank
network to be 600-650 branches, which will see a further reduction from c.5000
branches today to c.2500 by 2025. (source: Nationwide, 2017, Guardian, Sept 17,
CACI report 2016).
13. As closure programmes complete, the banks intend their remaining branches to
be ‘cashless’, moving as many of their staff as possible to sell high value financial
products.
14. It is clear that Retail banking is rapidly changing; over the counter cash
transactions are no longer a core activity. For the Post Office, over the counter
transactions are, and will remain, a key part of our business.
What is the opportunity for Post Office?
!transaction per annum, growing
banking services will see this grow
ransactions by 2025.
15. Our existing Banking Framework support: [
at c.8%. Raising awareness of P.
organically, potentially to between
business customers — a 66% expansion of our service from just one bank.
17. All four major High St banks are pursuing similar medium term ‘cashless branch’
strategies.
18. By taking on the other large banks’ transactions and adding to our existing volume
augmented by we could increase our total volume to
transactions per annum. The Banking Framework has now made each transaction
profitable on a standalone basis, so the EBITDAS impact of this enhanced growth
would be significant.
19.
might act as our ‘ambassador’ to the rest of the industry to encourage a
similar migration.
20. There is a clear and deliverable opportunity for Post Office to become the counter
cash provider for UK banking.
Strictly Confidential Banking and Cash Board paper Nov17v1.0
POL-BSFF-0089724_0124
POL00251661
POL00251661
POST OFFICE PAGE 3 OF 5
21. This new model would lead to a much more positive and bank-led marketing
campaign, publicly declaring increased access to bank accounts through our
partnership.
22. Supported by a large branch network and a cash supply infrastructure covering
the whole of the country we are uniquely placed to take advantage of this
opportunity.
23. All our services to support this opportunity are already ‘live’ and scalable, and
although investment would be required to enhance the infrastructure to support
the volume, the transactions themselves remain the same.
24. This expansion would radically change and enhance the role that the Post Office
plays in society. It would provide a second core product category alongside mails
that will support the existence of the Post Office for many years to come and
enable key revenue and footfall growth for Postmasters.
What is the impact on our operating model and proposition?
25. This is a unique, significant and timely opportunity for Post Office to capitalise on
the changes underway in the banking industry. We are evaluating the operational
and other implications and the resulting investment requirements:
What are the potential network impacts?
27. The increase in the number of banking transactions could have a significantly
positive impact on the attractiveness of the retail model, with increased revenue
and footfall for agents, providing we can continue to make it simpler and easier
for our Agents to handle this.
28. The retail strategy recently presented to the board reaffirmed our intention to grow
the network with Local and new retail models, and where possible replace small
Main branches that close with Local branches. This increase in banking
transactions, and in particular business banking, would lend itself more to the Main
model.
29. We will therefore need to consider if the retail model mix set out in the strategy is
still appropriate in all geographic areas, with the attendant impact on network
planning and our approach to pursuing new and replacement branches. We will
also need to consider our retail models (Locals, Mains etc) and whether additional
models may be warranted.
30. We will therefore need to undertake further work to better understand the cost of
processing banking framework transactions to our agents, particularly business
banking. This would feed into a review of agents’ remuneration for banking
transactions, with various potential options to consider.
Strictly Confidential Banking and Cash Board paper Nov17v1.0
POL-BSFF-0089724_ 0125
POL00251661
POL00251661
POST OFFICE PAGE 4 OF 5
31. We will need to consider the complexity of in branch transactions and if there are
opportunities to simplify in branch activities to cater for a significant increase in
transactions.
32. Additional equipment in branch may be required that we will need to invest in to
support this, from a volume and from a security, discrepancy or fraud perspective.
This may include coin and note counters, additional fortress positions and larger
safes to store large deposits.
33. Additional security arrangements may be required, and the costs associated with
this. If this moves ahead, a working group would be established to consider
physical security issues and input from an experienced 3rd party may be sought.
What are the potential IT impacts?
34. There are three key considerations for IT - will additional functionality be required,
will the infrastructure be able to support the significant increase in volume of
transactions, and does the architecture have sufficient resilience designed in?
35. If additional functionality is required (such as new transactions or additional MI
and data analysis capability), we will need to consider where in the development
pipeline it can be accommodated, and how this would affect the timeline for taking
on the transactions fromi'
36. We will also need to consider if additional ‘White label’ solutions and applications
may be required to support a wider range of functionality in branch, particularly
for business banking.
37. Further work is required to consider impacts on system capacity and whether
additional resilience will need to be built into the system to reduce any downtime
that may be encountered.
What are the potential impacts on our back office processing functions?
38. If the transaction types remain the same as under the banking framework and the
complexity is not signi
additional resources may be required over time.
39. If we are to take on additional transactions that result in more complexity resulting
in back office support then further work would be required to model how the teams
would take this on.
What are the potential working capital and funding impacts?
40. The impact of the changes on network cash, client debits and client payables will
all need to be modelled to fully understand the impact on working capital. This
modelling will be complex, will require significant engagement from the Supply
41.) i
42./ I R R E L EVA N I ;
Strictly Confidential Banking and Cash Board paper Nov17v1.0
POL-BSFF-0089724_ 0126
POL00251661
POL00251661
POST OFFICE PAGE 5 OF 5
Next steps
43. A full business case discussing the impacts on Supply Chain, Network, Operations,
Treasury, Finance, and IT - linking together the Cash, ATM and POCA strategies
will be created, to be brough' to the March Board meeting. In parallel, we
will respond positively back t hat we are moving ahead with the complex
analysis, intending to deliver a commercial and operational proposal towards the
end of Q1 2018.
Strictly Confidential Banking and Cash Board paper Nov17v1.0
POL-BSFF-0089724_0127
POL00251661
POL00251661
POST OFFICE PAGE 1 OF 10
POST OFFICE BOARD DECISION PAPER
Replacement of HR SAP and Payroll systems
Author: Martyn Lewis Sponsor: Martin Kirke Meeting date: 23 November 2017
Executive Summary
Context
Post Office currently operates an extremely old and heavily customised SAP system for
payroll and HR processes. The support for this system will be discontinued by SAP in April
2018. The programme commenced 2016/17 prioritising the transition of business critical
Payroll and HR data management from our existing system to a new system called
SuccessFactors. As well as providing a more technically robust and stable IT system there
will be a reduction in ongoing IT costs. Design and build of the Payroll and business critical
HR processes (Wave 1) modules commenced to agreed schedule and continued into Test
Phase. The changes to system and processes will also ensure we embed the requirements
of GDPR regulatory changes.
During the Test Phase the results showed a substantial risk of large numbers of inaccurate
payments being made to employees due to the system design not meeting key
requirements. A decision was made that the legal, regulatory, IR, financial and
reputational risks were too great to risk implementation until the system was fixed. As a
result, the programme has incurred delays and resultant increased cost whilst additional
work has been undertaken to fix the problems. Go Live was postponed from July 2017
and is planned for January 2018. However we propose a contingency of Go Live in March
2018 if the system testing results indicate too greater risk with Go Live in January.
Questions addressed in this report
1. What is the need or opportunity and why now?
2. What do we propose to do and why?
3. What has caused the delays, lessons learnt and what has already been done to address
this?
4. What would the impact be of delaying or rejecting the decision to progress?
5. What results have already been achieved?
Conclusion
Protecting our People database and payroll application is critical. This paper requests an
additiona ito complete the delivery of Wave 1 in January ‘18.
Provision to the responsi
draw down o
on payroll }
y of the Programme Steering Committee is sought to allow
) cover the scenario of a 2 months further testing period
! to March’18 go-live should this be required.
Strictly Confidential
POL-BSFF-0089724_ 0128
POL00251661
POL00251661
POST OFFICE PAGE 2 OF 10
Total draw down funds requested is
benefits currently
deliver savings
It should be noted that the programme
naffected as a result of the changes to the programme and will
RELEVANT I OVer the course of the business case.
This paper includes some brief lessons learnt which will be implemented to prevent any
recurrence with other system changes. We also propose a Post Implementation Review.
This will be presented to the Audit & Risk Committee.
Input Sought Input Received
The Board is asked to authorise the Input to date has been received
above funding reques' from;
note the revised go-live date of e Change Approvals Group
Quarter 4 2017/18. e Business Design Authority,
¢ Employee and agents pay
SMEs,
¢ Business process SMEs,
e HR Services SMEs,
* HRSMEs,
. 1,
e Information Security & Data
Protection.
Strictly Confidential
POL-BSFF-0089724_ 0129
POL00251661
POL00251661
POST OFFICE PAGE 3 OF 10
The Report
What is the need or opportunity and why now?
1. In January 2016, Post Office signed an agreement with SAP which included licences for
SuccessFactors. The current HR IT landscape includes the core payroll system (SAP
HR) supplemented by a number of additional systems to support HR processes e.g.
Recruitment and Performance Management. Support for the current SAP HR system
expires on 6' April 2018. HR SAP is used as the master for employee and agent people
data as well as employee payroll and agent remuneration. Both processes will need
to be transitioned away from SAP HR prior to the end of life date in April.
2. Current committed annual support and license costs for applications in scope of this
programme run at [IRRELEVANT! per annum, upon programme completion and benefits
realisation, the support and license costs will be
3. On completion of this programme, SuccessFactors will be used to host all people data
including;
= employees,
= Payroll Data,
= Compliance and training status,
" Agents,
= Agent's assistants and
= Contractors.
who remain on PAYE contracts?.
4. The implementation of SuccessFactors provides the opportunity to simplify the IT
landscape, reduce operating costs and improve user experience by moving away from
the current disparate supplementary systems. It also reduces the risk profile of
running on the existing SAP HR system which is 18 years old, heavily customised,
poorly documented configuration and in extended support.
5. The programme will deploy many modern simple self-service functionality removing
the manual activities by introducing automation and workflow.
6. GDPR regulation represents a significant challenge for data driven modern businesses.
These considerations are essential for HR Information Systems. In implementing
SuccessFactors as our people master data record, we will embed compliance with GDPR
requirements both from a technology point of view and a data management
perspective.
7. Upcoming regulatory changes from the FCA in relation to vetting and Fit & Proper may
also impact people data recording which SuccessFactors which we expect
SuccessFactors to accommodate.
‘ The sales commission cai
change will be delivered tl
lations and agent remuneration payments will be made by CFS. This
igh the Back Office Transformation programme.
Strictly Confidential
POL-BSFF-0089724_ 0130
POL00251661
POL00251661
POST OFFICE PAGE 4 OF 10
What do we propose to do and why?
1. To date, the Design and Build of the Wave 1 modules has been completed. Testing
and payroll validation is continuing through to the end of November. If results continue
to provide the same level of confidence as are currently being achieved, payroll
validation will be accepted and endorsed by the business senior stakeholders, allowing
the HR and Payroll solution to go live in January 2018. If the required level of quality
is not achieved in this testing cycle, a further iteration will be required before a go live
of the HR and Payroll solution.
2. Whilst the programme have been signalling to the Group Executive for a number of
months the overrun and delays to implementation, a final revised business case has
not been submitted until the successful completion of data migration was achieved and
a high degree of confidence in the payroll comparison results.
What has caused the delays, lessons learnt and what has already been done to
address this?
1. The key causes of delay have been an underestimate of the scale and complexity of
changing from the existing system, compounded by the contract signed with {iF
and a lack of technical skills and knowledge.
2. A number of key business change initiatives took place during the initial Test window
which impacted the core data that the programme team needed to test and reconcile.
In addition to the planned changes for Auto Enrolment and the transition of weekly to
monthly pay, the business undertook an organisation wide restructure as well as the
closure of the defined benefit pension scheme to future accrual. All of which
significantly changed the data that the programme was reliant on for testing.
3. Significant changes have been introduced to the programme to improve competence
and skills, improve vendor management, expedite decision making, co-ordinate
financial control and visibility of accountability within the programme.
4. The Programme governance model has now been altered to address identified
deficiencies such as; a new GE Programme sponsor, address lack of vendor
management as the Solution Integrator (SI) contract was not fit for purpose and was
without involvement from IT when signed; SI management changes have been made
to improve ways of working; additional experienced programme resource have been
introduced. The product knowledge and system documentation for legacy HR SAP was
found to be missing and caused incorrect planning and technical assumptions.
Deficiencies identified in the future state licensing model have been addressed.
5. A key constraint on the programme’s ability to deliver to time and budget has been
the contractual relationship agreed with Accenture, as well as the licencing agreement
reached with SAP in January 2016.
6. A Post Implementation Review has been commissioned with the support of the Change
Risk & Assurance team and Internal Audit. The output will be reported to the Audit &
Risk Committee.
Strictly Confidential
POL-BSFF-0089724_0131
POST OFFICE
POL00251661
POL00251661
PAGE 5 OF 10
The revised go-live of January ‘18 will require the approval off irretevant: taking the total
programme spend to
resources until the en:
this also includes the extension of the programme
‘18 to support the BAU activities, programme closure
and Early Life Support (Hyper Care) to ensure the embedding of the business processes
and tools.
Change Made
Outcome
Change in Delivery leadership
New Programme sponsor actively involved in the
progress and delivery of the programme
Increased capability within the
programme team
Specific expertise drafted in to increase capability
and delivery confidence.
Improvement working with IT leadership
Leverage existing IT skills and experience into
delivery roles.
Additional Formal and Informal
programme governance meetings
Improved schedule tracking schedule and
management of resources.
Improved business Engagement through
weekly business readiness presentations
and Programme team co-residing in
impacted business units
Brings aware of the Business Change;
Improves resource planning;
Improves End user engagement and aware of the
Processes and tools being implemented and helps
identifies dependencies.
Regular leadership reviews of Capital
Programme costs to track Actuals and
Forecast
Programme Management Office producing reports to
track actuals comparing to forecast, ensuring the
completeness of the forecasting model
Review of the Benefits realisation plan
Changes in scope and schedule being evaluated to
ensure Benefits realisation is protected.
Improved and simplified Programme
Variation process
Closer control of Change Control and financial
management to track agreed changes from demand
through to resource planning and Financial tracking.
Weekly formal review of Programme
Risks, Issues, Dependency and Action
Logs
Improve the response times Capture, asses and
manage Risks and Issues as they are raised. All
have assigned owners to improve accountability.
Weekly strategic review meeting with
Delivery Partners
Engaging and acting on the advice from principle
third party delivery partners focusing on
suggestions to improve ways of working and
Programme delivery.
What would the impact be of delaying or rejecting the decision to progress?
1. Delaying the programme would;
« Postpone the Go-live date currently scheduled for January ‘18. Delays with the
HR SAP migration will have a knock-on delay on the exit from the
acme! data centre
(where HR SAP is hosted), delaying benefits and incurring further costs.
¢ Continue the reliance on an end of life HR SAP ap
ication to calculate payroll for
Strictly Confidential
POL-BSFF-0089724_ 0132
POL00251661
POL00251661
POST OFFICE PAGE 6 OF 10
2. Rejecting the Decision would;
e Increase the business ongoing operating costs and inflate the risk due to requiring
existing legacy applications, support models and processes be extended.
¢ Increase the ongoing support and maintenance costs to HRSAP as currently in
extended support.
What results have already been achieved?
1. To date, the programme has already achieved a number of key milestones, delivering
improvements
i. Auto Enrolment - Legislative requirement to ensure Post Office meets its legislative
compliance for pensions, ensuring robust processes were in place to meet our
staging date of 1st May ‘17.
ii. Weekly to Monthly pay - Modernisation of our pay landscape for employees, moving
over 800 colleagues from weekly to monthly payroll.
iii, Learning module implementation - Successful implementation of the
SuccessFactors Learning module, reducing IT operating costs, simplifying access to
learning and driving up compliance training completion from low levels of
compliance to close to 100% completion rates.
Strictly Confidential
POL-BSFF-0089724_0133
POL00251661
POL00251661
POST OFFICE PAGE 7 OF 10
Appendix 1- Financial Summary
Inve r
ek = 17/18 2018/19 2019/20 2020/21 2 Total
Capex i
Exceptional :
Opex '
Drawdown Request
~ Approved approved New New New New a
Prior 47/18 47/18 18/19 19/20 20/21
Na I
Capex I i
=a ; I
=. IRRELEVANT
Total Drawdown
Request
Total New Request
npact on EBITDA‘
£k 2016/17 2017/18 2018/19 2019/20 2020/21 Total
Net Income
== — IRRELEVANT
Recurring costs I
wow I IRRELEVANT
Business
Case
Strictly Confidential
POL-BSFF-0089724_ 0134
POL00251661
POL00251661
POST OFFICE PAGE 8 OF 10
Appendix 2- Business Benefits
Programme Benefits
A table that shows the cause and effect between the project/programme solution and
the benefits triggered by its implementation (Ben Cooke IT, Joe Connor Ops)
Solution Impact Benefit (financial Benefit
and non-financial) Owner
Migration away Legacy applications will be Financial benefit: Ben Cooke
from legacy end retired to be replaced by the Reduction of operating costs
of life SAPHR SuccessFactors product Suite.
platform P/A
Automated Removes the need for manual Non-financial benefit: Organisation
variable pay calculations and failure demand Cultural shift with people wide benefit
calculations and in the HR Service Centre, owning their own data,
robust annual improving the accuracy of HRSC shifts from failure
leave payments right first time), with demand queries to value
management line managers owning their add.
processes and people processes
calendar.
Manager Self Mobile applications and web- Non-Financial benefit: Joe Connor
Service tool based self-service tools will allow I Improved quality of HR data
managers to be directly and timely reporting of
responsible to the day to Absence, Recruitment and
management of teams and On Boarding through
productivity. Manager Self Service portal
Employee Self Employees will be able to review I Non-Financial benefit: Joe Connor
Service Tool and update their details, Employees will be able to
avoiding the need to contact the I amend their personal data,
HR Service Centre, enter their enter leave requests and
leave requests view their position within
the company Org structure.
Employees will be able to
continue to access payslips
online,
Security and HR data will be mastered in a Non-Financial benefit: HR I Joe Connor
Audit of Personal I single location to improve data and Payroll will be controlled
Data quality and ensure compliance by application
with PL data protection policies. administrators, business
processes and compliance
in-line with the annual
external audit review
Consolidated IT Consolidated IT estate to support I Non-Financial benefit: No I Ben Cooke
Estate and manage longer require contract to
host in a third party data
centre by making use of the
secure cloud tools available
Reduced number I Fewer support organisations to Non-Financial benefit: Ben Cooke
of support support the business Simpler and more efficient
organisations working with fewer partners
and processes to support
change,
Strictly Confidential
POL-BSFF-0089724_ 0135
POST OFFICE
POL00251661
POL00251661
PAGE 9 OF 10
Self Service
Employees
Expenses for all any internet enabled PC or
mobile device and track the
approval of the claim
Solution Impact Benefit (financial Benefit
and non-financial) Owner
Migration to Improved customer service, Non-Financial benefit: Joe Connor
Digital tools to quality of data and response Workflows will be enabled to
replace Paper times; streamline processing of
based processes Increased Employee engagement I New Starters, update of
through awareness of progress _I personal Contact details,
of all requests and actions, leavers plus approve
additional ad-hoc payments
and workflows
Provision on a Any Post Office Employee will be I Non-Financial Benefit: Joe Connor
able to claim expenses due using I Improved Employee
Engagement though use of
technology to empower the
end user.
Significantly reduce number
of data errors through
transposing of claim records
Benefits Realisation
The approved paper in Feb 2017 stated a Go-live date of July 2017, with benefits as
stipulated below;
FY16/17_——_—«I: FY.17/18
OPEX Savings
Headcount
Salary Sacrifice®
Total Savings
= IRRELEVANT
a an hal
The revised programme schedule will impact the benefits realisation in the following way;
OPEX Savings
Headcount
Salary Sacrifice
Total Savings
_.. LeY.a7/as_______ [FY 18/19
=~ IRRELEVANT
Benefits realisation schedule has not been significantly impacted by the delayed delivery of the
programme. Additional OPEX items have been identified that were not known at programme
blueprint phase which impact the Benefit case;
Strictly Confidential
for some form of non
POL-BSFF-0089724_0136
POL00251661
POL00251661
POST OFFICE PAGE 10 OF 10
Increase in OPEX licensing beyond I FY 18/19 FY 19/20 FY 20/21
original Programme plan;
Additional EC Licences
“mom IRRELEVANT I
Solution(SAP HR) qi
« The additional EC licenses were identified due to better understanding of the
SuccessFactors licensing model which to date has been lacking in detail from SAP.
« The SABA licensing needs to be extended until April 2019 in line with Performance
Management go-live, hence an additional year of Licensing (£128k).
¢ Original Business case did not contain any provision for OPEX costs for Archiving/
Decommissioning with the assumption this would be within the Back Office
Transformation business case. The solution for Archiving/Decommissioning of
HRSAP continues to be managed by the Back Office programme.
Whilst the Programme Delivery costs have been impacted by the additional scope items,
the identified benefits realisation plan stipulated recognition was triggered by the ceasing
of the legacy HR SAP licenses on 6th April 2018. This remains unchanged.
The complexity of HR SAP previously restricted Post Office’s ability to implement a salary
sacrifice scheme. With the enhanced capability of SuccessFactors, this has been included
in the scope of the programme.
Strictly Confidential
POL-BSFF-0089724_0137
POL00251661
POL00251661
POST OFFICE BOARD PAGE 1 OF 2
Post Office Limited Sealings
Author: Jane MacLeod Meeting date: 23 November 2017
Executive Summary
Context
The Directors are invited to consider the seal register and to approve the affixing of
the Common Seal of the Company to the documents set out against items number
1592 to 1603 inclusive in the seal register.
Input Sought
For the Directors to resolve that the affixing of the Common Seal of the Company to the
documents set out against items numbered 1592 to 1603 inclusive in the seal register
is hereby confirmed.
Strictly confidential
POL-BSFF-0089724_0138
POST OFFICE LIMITED
POL00251661
POL00251661
Date Register of Sealings Company Number
17.11.2017 21554540
‘Seal Number Date of Date of Persons Attesting Destination of
/File Ref. Sealing Authority Description of Document To Document Document
1592 / 06/11/2017 02/11/2017 I Agreement for sale relating to 17 - 18 Comhill, Bury St Edmunds, IP33 Victoria Moss, Deputy Company Jean Reynolds
Agreement for 1/AA between Post Office Limited (Vendor) and St Edmundsbury Borough Secretary
_ Sale - Council (Purchaser). Seal x1 I I -
1593 /TR1 06/11/2017 02/11/2017 I Transfer of whole registered title in respect of property 17-18 Cornhill, I Victoria Moss, Deputy Company Jean Reynolds
Bury, St Edmund, IP33 1AA (Title no SK273026). Transferor: Post Office I Secretary
Limited; Transferee: St Edmundsbury Borough Council. Seal x1 I I
1594 / Capital 06/11/2017 02/11/2017 I Capital Allowance Collection of 17 - 18 Cornhill, St Edmunds, Bury, P33 Victoria Moss, Deputy Company Jean Reynolds
Allowances 1A between Post Office Limited (Seller) and St Edmundsbury Borough Secretary
Collection Council (Buyer). Seal x1
1595 / Deed of 09/11/2017 08/11/2017 I Deed of variation between Post Office Limited and Vow Retail Limited in Jane McLeod, Company Secretary I CoSec contract repository
variation relation to the agreement for the supply of goods for wholesale and online
sales and associated services dated 1 August 2011. Amendment to the
notice period. Seal no, 1595 (x2) I I
1596 / Lease 40/14/2017 09/11/2017 I Lease of Units 3 and 4, and part of unit 2, 12-124 Camden High Street Victoria Moss, Deputy Company Jean Reynolds
London NW1 between Post Office Limited (Tenant) and Jemorland Secretary
Limited (Landlord) together with signed Stamp Duty Land Tax Release
consent (HMRC Land Transaction Return). I I
1598 / 10/14/2017 10/11/2017 I Underlease between Post Office Limited and Rizwan Salahuddin and Victoria Moss, Deputy Company Jean Reynolds
Underlease Chaudhry Zulfiqar Ali Cheema and Vasantikumari Damen Patel in respect Secretary
of 290 - 292 Seven Sisters Road Finsbury Park London N4 2AB. (x2)
7599/ Licence to I 10/11/2017 70/11/2017 I Licence to underlet between Post Office Limited and The Ancient Order of I Victoria Moss, Deputy Company Jean Reynolds
underlet Foresters Friendly Society Limited and Rizwan Salahuddin and Chaudry Secretary
Zulfigar Ali Cheema and Vasantikumari Daman Patel in respect of 290
and 292 Seven Sisters Road, Finsbury Park N4 2AB, (x2)
15977 13/11/2017 10/11/2017 I Agreement for Surrender between Elanmore Limited and Post Office Jane MacLeod Jean Reynolds
Agreement for Limited for 28/29 Topsfield Parade London N8 8B
‘Surrender I I
1600 / Deed of 13/11/2017 10/11/2017 I Deed of Surrender relating to 28/29 Topsfield Parade Tottenham Lane Jane MacLeod Jean Reynolds
Surrender London N8 8QB
7601 / Form of 75/14/2017 75/11/2017 I Form of Election under Section 198 of the Capital Allowances Act 2007 I Victoria Moss Jean Reynolds
Election I relating to 1 Woodfield Street, Morriston, Swansea, SA6 8AQ I I
7602/TR1 Form I 15/11/2017 15/11/2017 I Transfer of whole registered title of 1 Woodfield Street, Morriston, Victoria Moss Jean Reynolds
Swansea, SAG 8AQ I I
1603 / 15/11/2017 15/11/2017 I Agreement for Sale relating to 1 Woodfield Street, Morriston, Swansea, I Victoria Moss Jean Reynolds
Agreement for SA6 8AQ
Sale
Register of Sealings
Jane MacLeod
Page 2
POL-BSFF-0089724_0139
POL00251661
POL00251661
POST OFFICE PAGE 1 OF 4
POST OFFICE BOARD
Performance Review — Health and Safety
Authors: Martin Hopcroft Sponsor: Al Cameron Meeting date: 23 November 2017
Executive Summary
Context
1.1 Keeping our employees healthy and safe is fundamental to Post Office success. This
is reflected in the Post Office Board’s legal responsibilities and members of the
board have both collective and individual responsibility for health and safety.
1.2 Our Health & Safety performance has improved significantly in the past 6 years
and we have a rolling 3-year plan to drive compliance, targeting a reduction in
safety metrics including accidents; lost time accidents; days lost; and personal
injury claims. Our H&S reporting and safety management system is measured
against the externally recognised standard, OHSAS 18001. We also recognise the
importance that wellbeing can play in creating engaged and motivated employees.
Questions this paper addresses:
2.1 It has been agreed to provide a monthly performance report to the Board for
noting hand a more in depth Health & Safety deep dive report 6 monthly.
Conclusion:
3.1. Accident Performance, including absence accidents and lost days have returned
to normal (see Report-H&S Metrics). Benchmark data has been received from suppliers
/ insurers and overall Post Office performance is favourable. Post Office has also
participated in a BSIA exercise to benchmark performance across the industry.
3.2. Mitigating action has reduced road risk which remains at a low level. An
overarching Road Risk Policy has been developed for all business drivers (company and
personal cars). Online awareness training has also been issued and the Mobile Phone
whilst Driving Policy reiterated.
3.3. CViT attacks remain lower in 2017/18 with 13 v 17 (2016/17), Post Office
robberies remain high with a number of initiatives being deployed in hot spot areas.
The Board and GE have requested a review to assess risk across the Network, following
an ONS report that shop theft is increasing across the industry. This will look carefully
and analyse Post Office robberies, attacks, losses and customer migration following local
bank closures.
3.4 The overall level of Property risk is predominantly low, however, there are some
high risk exceptions that are being reviewed. We have amended our FM contract to
move to a proactive fabric management regime which is deemed the benchmark.
Current property statutory compliance is good at 98 %.
3.5 Anumber of actions are being progressed following the GE H&S deep dive review,
including a review of road policy, guidance for lone workers, safety of vacated buildings,
competency and statutory compliance. A 3rd Party Audit will be arranged in Q3 to
review the Post Office Safety Management System.
3.6 A number of initiatives are being developed to raise awareness of mental health
support and resources, including MH Awareness Workshops, and introduction of MH
First Aiders to provide proactive support to colleagues across the business.
Input Sought
The Post Office Board are requested to note the current health safety performance and
content of this report.
Strictly Confidential Health & Safety Report Nov 2017
POL-BSFF-0089724_ 0140
The Report - H&S Metrics
POL00251661
POL00251661
Summary of Safety Performance - YTD Period 7 (October 2017)
All Accidents - Monthly - Period 7
(Target to achieve a 5% year on year reduction)
Directly Managed Branch
Accidents P7 YTD
P3 P4
P5 P6 p7
2016/17
P P2
2017/18
4
4
2
‘Year to Date
m15/16 41
m16/17 30
m17/18 26
Supply Chain
Accidents P7 YTD
Accidents have returned to normal levels and are consistent with 2016/17.
There have been 69 accidents YTD compared to 81 in 2016/17.
Causation is consistent with previous years in DMBs and due to falls indoors,
lifting and handling and stepping and striking. Whilst stepping and striking
and non RTA vehicle related accidents have increased in Supply Chain
recently, lifting and handling related incidents have reduced.
There was 1 lost time accidents reported in P7 with 12 lost time accidents
YTD 2017/18 and 331 total lost days. Cumulative Trends can be seen per
000 employees in the graph below. Total lost time / 000 employees has risen
by 50%. Trauma related total lost days, following an attack, are 70% down
(37 days 17/18 v 130 in 16/17).
Days lost due to accident / 000 employees - Cumulative
100.0
80.0
60.0
40.0
20.0
Pa P2 P3 P4 PS P6 P7
2015/16 2016/17 2017/18,
Post Office total lost days: 20 in Period 7
DMB total lost days P7 YTD : 156 (96 in 16/17) - 1 slip/trip, 1 lifting, 1 fall
Supply Chain tot lost days P7 YTD: 169 (165 in 16/17) 2 RTA, 3 falls, 1 lifting
Support total lost days P7 YTD : 6 (6 in 16/17)
Post Office CViT Robberies — P7 (Oct 17)
There were 1 incident reported in Oct v 2 in 2016/17 and over a rolling 12 mth
period there have been 16 incidents v 30 in 16/17. Trend is being monitored
closely. 3 incidents YTD have used violence with 1 injury. 4 used weapons v 6
in 2016/17 YTD. Task Force vehicles have been deployed in usual hot spots
with cross pavement observations. Merseyside identified as current industry
hot spot area. Regular Security team attendance at monthly ‘Operation
Guardian’ meeting to highlight and mitigate against CViT criminality in area.
Year to Date
m6,
017/18 40
Post Office (All branch types)
Robberies - P7 (Oct 17)
There were:
May - 15 incidents v 7 (16/17)
June - 8 incidents v 11 (16/17)
July - 4 incidents v 8 (16/17)
Aug - 8 incidents v 12 (16/17)
Sep - 13 incidents v 9 (16/17)
Oct ~ 14 incidents v 6 (16/17)
88 robberies YTD v 57 in 2016/17
179 compared to 107 rolling 12 mth
Violence - 2 vs 4 last year
Injuries - 1 vs 1 last year
7 injuries YTD v 6 (2016/17)
Weapons - 9 (2 firearm) vs 5 last year (2
firearms)
There has been a 10% increase in bladed
robberies and a 2% reduction in firearm
robberies over rolling 12 month period.
TORCH visits are being made to hot spot
branches to verify for compliance to
security standards, A further review has
been requested by GE to assess the
impact of bank closures on the risk profile
of branches and CVIT operations and
compare with data of attacks and losses.
Strictly Confidential
Health & Safety Report Nov 2017
POL-BSFF-0089724_0141
POL00251661
POL00251661
LTIFR - Lost Time Incident Freq Rate
2.50
2.00
1.50
1.00
0.50
0.00
Pa P2 P3 P4 PS P6 P7
LTIFR DMB LTIFR Supply Chain LTIER Post Office LTIFR Target
Lost Time Injury Frequency Rate (LTIFR) - Period 7 YTD
Supply Chain All Post Office - Employee
YTD P7 - 0.753 YTD P7 - 0.260
2016/17 out turn - 0.590 2016/17 out turn - 0.168
2017/18 target - 0.500 2017/18 target - 0.180
Absence accidents/000 SiP: 7.39 YTD v 6.80 (16/17) II Absence accidents/000 SiP: 2.37 YTD v 1.87 (16/17)
Road Risk
P27 Read Traffic Collisions’ Road Traffic Incidents - Cumulative
* 4 Road Traffic Incidents in P7 120
+ 3 at fault, 1 not at fault
Comparing 17/18 v 16/17
There were 46 RTCs YTD in 2017/18 v 97 100
(16/17), a 53% reduction YTD.
At fault RTC’s were 55 in 2016/17 and
have reduced to 28 in 2017/18, a 49%
YTD improvement. Initiatives include: 80
* An overarching Road Risk Policy,
with improved training and
compliance checks is being
developed by the Fleet
Management team to cover
Commercial Fleet, Business Cars
and Personal Car use. ‘0
* Driver Training has been
developed and launched on
Success Factors for all
employees who drive on
business.
* Road Risk Manager is working
closely with the road safety
charity Brake, our Insurers, QBE ° t] ll
PL P2 P3 Pa PS P6 P7
and Fleet providers, BT Fleet and
Inchcape and Cranfield
University to benchmark and WAI16/17 mAI17/18 m mAtFault 16/17 mAt Fault 17/18
pilot initiatives to mitigate risk.
@
8
eS
N
8
Strictly Confidential Health & Safety Report Nov 2017
POL-BSFF-0089724_ 0142
POL00251661
POL00251661
Summary of Wellbeing Performance - YTD Period 7 (Oct 2017/18)
* The overall Post Office attendance level remains stable at 96.4% YTD P7 (October 2017/18). Short
Term absence is 1.0% YTD and long term absence has increased to 3.0% YTD. Supply Chain short
term and long term sick absence has reduced during P7 October.
+ Mental health related absence remains the most common cause of long term absence and there is an
increase in lost days in Directly Managed Branches. Some additional analysis is being undertaken by
our Occupational Health and HR Service Providers to understand trends and areas of concern to
target intervention.
* Proactive activity across the business, includes ‘positive mental health awareness’ sessions for
colleagues, additional awareness training being piloted for line managers and the introduction of
Mental Health First Aid initiatives.
Business Area Absence Performance v Target - P7 YTD 2017/18
2017/2018 Sick Absence %ge
Period I Period] Period I Period I Period I PeriodI Period I¥.1.D
o1 02 03 04 05 06 07 Totals
0.6%
3.8%)
FIN: SUPPLY CHAIN 4.0%I 3.7%) 3.9%I 4.1% 5.1% 5.8% 4.7%I 4.4%)
FIN: CHANGE MANAGEMENT 0.2%I 1.0%) 3.2%I 6.6%I 6.4%I 2.5% 2.3%I 3.2%
FIN: HRSC 0.8%I 3.6%!) 1.1%] 2.6%] 4.4%] 4.7% 9.1%I 3.9%
FIN: NO CONTACT CENTRES 3.7%] 1.9% 2.5%I 5.4%I 4.1%I 6.6% 9.4%I 4.6%)
FIN: NETWORK OPERATIONS 2.1%} 3.6% 2.0%I 2.1% 1.9% 1.8% 2.5%I 2.3%
FIN: FSC 4.0%I 1.7%} 2.1% 1.9%] 2.0%] 6.6% 4.9%I 3.3%!
(RETAML OFFICE Jas] 3.ree] a see]_arme] aan] ape] area] 3.00
RO: DIRECTLY MANAGED BRANCHES 3.9%] 3.4% 3.8%I 4.6%I 4.9%I 4.7% 4.6%I 4.2%)
NCY SALES & CRM 3.8%} 4.9%] 4.1% 1.4%] 3.0%I 3.8% 6.3%) 4.2%!
RO: NETWORK DEVELOPMENT 1.2%I 1.0%) 1.2% 1.4% 1.5% 1.0% 1.0%I 1.1%]
=
Ee
wl]
els
FST: POST OFFICE MONEY 6.0%I 4.5% 3.8%] 4.1%] 3.3%] 2.2% 2.5%I
I
z
Strictly Confidential Health & Safety Report Nov 2017
POL-BSFF-0089724_ 0143
POST OFFICE BOARD
POL00251661
POL00251661
PAGE 1 OF 1
Post Office Limited Board Meetings
Author: Jane MacLeod = Meeting date: 23 November 2017
Executive Summary
Context
The Directors are requested to note the future meetings dates scheduled in respect of
Post Office Limited Board meetings.
Input Sought
The Board is requested to note the future meeting dates.
The Report
2018
Date Time Notes
Monday 29 January 2018 11.45 - 16.30
Tuesday 27 March 2018 11.45 - 16.30
Thursday 24 May 2018 11.15 - 16.00
Tuesday 26 June 2018 TBA Board Away Day
Wednesday 27 June 2018 TBA Board Away Day
Tuesday 31 July 2018 11.45 - 16.30
Tuesday 25 September 2018 11.45 - 16.30
Tuesday 30 October 2018 11.45 - 16.30
Tuesday 27 November 2018 11.45 - 16.30
Board November 2017
POL-BSFF-0089724_ 0144
Post Office Board Agenda - Draft
POL00251661
POL00251661
®
29t January 2018 + Tim Parker ( Chairman) + Jane MacLeod None
5 = 5 + Richard Callard + Marla Balicao
StartiTime Finish Time + Tim Franklin + Nick Kennett (item 6, 7 & 8)
11.45hrs 16.30hrs + Virginia Holmes + Martin Kirke (item 10)
+ Ken McCall
Papers are due 224 January 2018 + Paula Vennells
+ Alisdair Cameron
Agenda Item Action Needed Purpose ad Timings TBC
1. Minutes of previous Board and Decision Minutes formally agreed. Jane MacLeod
Committee meetings including
Status Report
2. CEO Report CEO report noted CEO to update the Board on the report. CEO
Including IR update
3. Financial Report For noting CFO to update the Board on the report CFO
4. Provisional Approval of Annual Budget
2018/19 (TBC)
5. Review of 2018/19 Scorecard and
Bonus (TBC)
LUNCH 30 mins
6. CE Performance Report — Retail For information and To review the performance of Retail SBU.
Input
Le CE Performance Report - FS&T For Information and To review the performance of FS&T SBU. Nick Kennett
input
8. MoneyGram (Board action from meeting on 31% October 2017) I Nick Kennett
9. DMB Strategy
40. I Project Jay Martin Kirke
POL-BSFF-0089724_0145
POL00251661
POL00251661
®
Post Office Board Agenda - Draft
Agenda Item Action Needed Purpose Lead Timing
11. I Board Committee Chair updates For noting To update Board
(verbal)
12. I Ratifications of decisions made by
correspondence (TBC)
13. I Items for noting
13.1 Sealings For noting Board aware of the affixing of the seal
13.2 Health & Safety For noting To update Board
13.3 Conflicts of Interest For noting and For Board to review their respective Conflicts of
agreement Interest and advise any amendments.
13.4 Meeting dates and forward
agendas
14. I AOB
CLOSE
POL-BSFF-0089724_0146