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EXECUTION VERSION
‘Funding Agreement
26 November 2013
‘TIE SECRETARY OF STATE FOR BUSINESS, INNOVATION & SKILLS
POST OFFICE LIMITED
FUNDING AGREEMENT
CONTENTS
CLAUSE PAGE
INTERPRETATION.
CONDITIONS
DELAYED PAYMENT
STATE AID CLEARANCES
GOVERNMENT FUNDING FOR SERVICES OF GENERAL
ECONOMIC INTEREST...
POL STRATEGIC PLAN.
FINAL CONTRIBUTION...
EMPLOYEE INCENTIVE ARRANGEMENTS...
SUB-POSTMASTER COMPENSATION CONDITIONS..
10. ACCESS CRITERL
11, JOINT VENTURES.
12, PUBLIC CONSULTATION, COMMUNICATION AND EQUALITY.
13, CONSENTS,
14, CONFIDENTIALITY.
See Ne
SCHEDULE I DELIVERABLES.
SCHEDULE
PART A FUNDAMENTAL CHANGE.....
Part B POTENTIAL FUNDAMENTAL CHANG!
SCHEDULE 3 CALCULATION OF ACTUAL SGEI COST.
APPENDIX A POL ENTRUSTMENT LETTER.
APPENDIX B STRATEGIC PLAN.
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EXECUTION VERSION
uning Agreement
‘THIS AGREEMENT is made on 26 November 2013
‘BETWEEN:
(1) THE SECRETARY OF STATE FOR BUSINESS, INNOVATION & SKILLS of
1 Victoria Street, London SW1H OET (the Secretary of State); and
@) POST OFFICE LIMITED, a company incorporated in England and Wales
(rogistered number 2154540) and whose registered address is 148 Old Street, London
ECIV 9HQ (POL).
Wrereas:
(A) The Parties entered into the 2010 Funding Agreement in respect of funding for certain
post office services until the end of the Financial Year 2014/15,
(B) The Scoretary of State has requested that POL continues to provide a national
network of post offices across the United Kingdom and wishes to entrust to POL the
provision of services of general economic interest over that network.
(©) The Secretary of State has agreed to enter into this Agreement in order {0 provide
funding to POL to enable it to continue to provide services of general economic interest
across that national network.
NOW THIS AGREEMENT WITNESSES as follows:
INTERPRETATION
1.1 In this Agreement, including the recitals, Schedules and Appendices, unless the
context requires otherwis
2010 Funding Agreement means the funding agreement entered into by, inter alia, the
Parties dated 25 October 2010.
2010 Funding Period means the funding period under the 2010 Funding Agreement, being
the period commencing the start of Financial Year 2012/13 and ending the end of Financial
‘Year 2014/15,
2010 SGEI Cost means POL’s net cost of: (i) maintaining a network of post offices; and (ti)
ensuring the provision of services of general economic interest over that network, calculated
in accordance with schedule 3 (Calculation of SGEI Payment) of the 2010 Funding
Agreement,
2010 SGEI Payment means the total aggregate amount of all payments made by the Secretary
of State under clause 5.7 of the 2010 Funding Agreement.
Actual SGEI Cost means POLs net cost of: (i) maintaining a network of post offices in
accordance with clause 10 (Access Criteria); and (ji) ensuring the provision of services of
general economic interest over that network, caloulated in accordance with Schedule 3
(Cateulation of Actual SGEI Cost).
Branch means any retail outlet of POL, including any post office counter or means of
transacting any post office services (including those services described in clause 10.1(a)
(Access Criteria)) at a third party premises and any other facility (including an “outreach”
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‘Funding Agreement
facility) designated for the transaction of business with members of the public by or on behalf
of POL.
Business Day means a day (not being a Saturday or a Sunday) on which banks are open for
‘general non-aufomated banking business in the City of London.
ic Consultation and Communication
Code of Practice means the Code of Practice on Pt
shed in December 2012 as amended,
with respect to change in the Post Office network pu
varied, supplemented or substituted from time to time.
Community Branch means Branches that are the “only shop in the community”, where “the
community” is defined as a direct ‘crow flies’ distance of 0.5 miles from the current post
office, When considering if Branches are the “only shop in the community”, only altemative
retailers most likely to be suitable for post offices are included, such as convenience and CTN
(Confectioner, Tobacconist and Newsagent) stores.
Cumulative Funding Period means the 2010 Funding Period together with the Funding
Period, being the period commencing the start of Financial Year 2012/13 and ending the end
of Financial Year 2017/18.
Cumutative SGET Cost has the meaning given to it in clause 5.9 (Government Funding for
Services of General Economic Interest).
Cumulative SGET Payment bas the meaning given to it in clause 5.5 (Government Funding
‘for Services of General Economic interest,
Cumulative SGEL Staternent has the meaning given to it in clause 5.9 ((Govermment Funding
‘for Services of General Economic Interest).
Deprived Urban Areas means:
(@) the most deprived fifteen per cent. (15%) of super output areas in England;
(b) the most deprived fifteen per cent. (15%) of data zones in Scotland; and
(©) the most deprived thirty per cent. (30%) of super output areas in Weles and Northern
Treland,
based upon each country’s then current index of multiple deprivation,
Entrustment Letter means the letter in the form set out at Appendix A (POL Entrustment
Letter) from the Secretary of State to POL and countersigned by POL.
Financial Year means an accounting period of POL commencing on or around 1 April in any
calendar year and ending on or around 31 March in the following calendar year.
Fundamental Change means the occurrence of any of the evonts listed in Part A of
Schedule 2 (Fundamental Change).
Funding Period means the period commencing the start of Financial Year 2015/16 and
ending the end of Finar ‘Year 2017/18.
Government means Her Majesty’s Government,
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Funding Agreement
Milestone means:
(@) _ in respect of the SGEI Payment payable on 1 April 2015 (or the first Business Day
thereafter), the requirements referred to as Milestone 1;
(b) _in respect of the SGEI Payment payable on 1 April 2016 (or the first Business Day
thereafter), the requirements referred to as Milestone 2; and
(©) _in respect of the SGEI Payment payable on 1 April 2017 (or the first Business Day
thereafter), the requirements referred to as Milestone 3,
in each case in Appendix A (Funding milestones and test dates) of the Strategic Plan.
Milestone Test Date means, in respect of each SGEI Payment, the date specified in Appendix
A Funding mitestones and test dates) of the Strategic Plan for the achievement of the
Milestone applicable to that SGEI Payment.
Order means the Post Office Network Subsidy Scheme Order 2007 (SI 207/962) made
pursuant to section 103 of the PSA2000 and amended by the Post Office Network Subsidy
Scheme (Amendment) Order 2011 (SI 2011/98) as may be further amended or replaced by
any subsequent payment order increasing the maximum amount payable under it in any
twelve (12) month period,
Parties means the parties to this Agreement.
PO Group means POL and its subsidiaries from time to time,
POL Working Capital Facility means the working capital facility provided to POL pursuant
to the terms of the credit facilities agreement between the Secretary of State and POL dated
17 October 2003, as amended and restated on 16 May 2007, amended on 18 April 2008,
amended and restated on 24 March 2010, amended on 22 March 2012 and as further amended
and restated on or around the date of this Agreement,
Potential Fundamental Change has the meaning given to it in PartB of Schedule2
(Potential Fundamental Change).
PSA2000 means the Postal Services Act 2000.
‘PSA2011 means the Postal Services Act 2011.
Relevant Payment bas the meaning given to it in clause 3 (Delayed payment).
Remedy Period bas the meaning given to it in clause 3 (Delayed payment),
Required Payment Date has the meaning given o it in clause 3 (Delayed payment).
Rural Areas means those areas which are not Urban Areas.
‘SGEI Payment means a payment by the Secretary of State in a Financial Year of an amount
calculated to compensate POL for the net cost of: (i) maintaining a network of post offices in
accordance with clause 10 (Access Criteria); and (ii) ensuring the provision of services of
general economic interest over that network, in each case during that Financial Year,
EXECUTION VERSION
Funding Agreement
SGEL Statement has the meaning given to it in clause 5.9 (Government Funding for Services
of General Economie Interest).
SGEL Supporting Statement has the meaning given to it in clause 5.9 (Government Funding
‘for Services of General Economic Interest,
State Ald Clearance means, in respect of any payment to be made to POL under this
‘Agreement, confirmation by the European Commission that such payment is compatible with
the requirements on State Aid of the Treaty on the Functioning of the European Union.
‘Strategic Plan means POL’s strategic plan in relation to the provision of services of general
‘economic interest as set out in Appendix B (Strategic Plan).
Urban Areas means communities with ten thousand (10,000) or more inhabitants in a
continuous built up area,
VAT Amount has the meaning given to it in clause 5.12 (Government Funding for Services of
General Economie Interest).
1.2 Inthis Agreement, except where the context otherwise requires:
(@) reference to a person (which shall include any individual, firm, company,
corporation or other body corporate, government, state or agency or any association,
‘rust, find or partnership (whether or not having separate legal personality) shall
inclide, as appropriate, its successors, permitted assignees or transferees;
(>) reference to an enactment or statutory provision shall include a reference to any
subordinate legislation made under that enactment or statutory provision and is a
reference to that enactment, statutory provision or subordinate legislation as from
fime to time amended, consolidated, modified, or re-enacted;
(©) Words in the singular shall include the plural and vice versa;
(@) references to one gender include other genders;
(©) a reference to any agreement or other instrument (other than an enactment or statutory
provision) shall be deemed to be a reference to that agreement or instrument as from
time to time amended, varied, supplemented, substituted, novated, assigned or
restated;
(O —areference to a clause, Schedule or Appendix shall be a reference to a clause of, or
Schedule or Appendix 0, this Agreement;
(g) _areference to “includes” or “including” shall be construed without limitation to any
events, circumstances, conditions, acts or matters specified after those words;
() references to dates which do not fall on a Business Day shall be construed as
references to the immediately subsequent Business Day;
(the headings are for convenience only and shall not affect its interpretation; and
G@) references to this Agreement include this Agreement as amended or supplemented.
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EXECUTION VERSION
‘Funding Agreement
1.3. The Schedules and Appendices form part of this Agreement and shall have the same
force and effect as if expressly set out in this Agreement, and any reference to this Agreement
shall include the Schedules and Appendices,
2. CONDITIONS
2.1. The obligation of the Secretary of State under this Agreement to make any SGET
Payment is conditional on:
(a) all necessary State Aid Clearances having been obtained for the making of that
payment; and
(>) the relevant Milestone having been achieved.
2.2 Each obligation of POL under clauses 5 (Government Funding for Services of
General Economic Interest), 6 (POL Strategic Plan), 8 (Employee Incentive Arrangements),
10 (Access Criteria) and 12 (Public Consultation, Communication and Equality) of this
Agreement, and the obligations of POL under the Entrustment Letter, in each case in each of
Financial Years 2015/16 and 2016/17 and 2017/18 (respectively), is conditional on the
conditions referred to in clause 2.1 having been met in respect of the SGEL Payment for,
subject to clause 2.3, that Financial Year, save that to the extent the condition in clause 2.1(b)
is not met and (at the absolute discretion of the Secretary of State) only part of the SGEI
Payment for that Financial Year is paid, then POL shall perform such of its obligations under
this Agreoment and the Entrustment Letter as shall be correspondingly adjusted by POL and
the Secretary of State to be appropriate having regard to the funding constraints to which POL
will be subject and to POL’s obligations under clause 6 (POL Strategic Plan).
2.3. Inthe event that POL fails to achieve any Milestone by the Milestone Test Date, POL
shall provide to the Secretary of State a remedial plan and the Secretary of State sball have no
obligation to make the SGEI Payment until POL has achieved the Milestone. Should POL not
achieve the Milestone within three (3) months following the Milestone Test Date, any
payment (or part thereof) by the Secretary of State of the SGEI Payment shall be at the
absolute discretion of the Secretary of State.
Deliverables
24 Onthe date of this Agreement, POL shall deliver (or ensure that there is delivered) all
those documents listed in Schedule I (Deliverables) in a form and substance satisfactory to
the Secretary of State (acting reasonably).
Fundamental Change
2.5 Without prejudice to the accrued rights and remedies of the Parties, the obligations of
the Secretary of State to make or facilitate any payments in accordance with this Agreement,
the obligations of POL under clauses 5 (Government Funding for Services of General
Economic Interest), 8 (Employee Incentive Arrangements), 10 (Access Criteria) and 12
(Public Consultation, Communication and Equality) of this Agreement and the obligations of
POL under the Entrustment Letter, shall immediately terminate upon the occurrence of a
Fundamental Change,
2.6 If on the date on which any payment is due to be made by the Secretary of State to
POL under this Agreement a Potential Fundamental Change exists, the Secretary of State
shall be entitled to withhold such payment until such time as:
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(@) a Fundamental Change occurs, whereupon clause 2.5 shall apply and the Secretary of
State shall have no obligation to make that payment; or
(b) the Potential Fundamental Change ceases to exist, whereupon the payment shall
become immediately due and payable, together with interest from the due date until
the date of actual payment ata rate equivalent to the rate of interest then applicable to
drawings by POL under the POL Working Capital Facility (as amended from time to
time).
2:7 Until the date on which the last SGEI Payment is due to be made by the Secretary of
State to POL under this Agreement, POL shall promptly disclose to the Secretary of State any
matter or thing of which its board of directors becomes aware after entering into this
‘Agreement which constitutes, or which in the reasonable opinion of its board of directors is
reasonably likely to give rise to, a Fundamental Change or a Potential Fundamental Change.
3, DELAYED PAYMENT.
If any SGEI Payment to be made by the Secretary of State to POL under this Agreement (a
Relevant Payment) is not made on or by the date on which it is required by clause 5.5
(Government Funding for Services of General Economic Inerest) to be made (the Required
Payment Date), then during the period between the Required Payment Date and the end of the
tenth (10) Business Day thereafter (such period being the Remedy Period), the Parties shall
continue to comply with their respective obligations under this Agreement and the Secretary
of State shall make the Relevant Payment within the Remedy Period
4, STATE Aj CLEARANCES
4.1 The Secretary of State agrees to:
(0) prepare as soon as reasonably practicable, in consultation with POL, an application
for State Aid Clearance for all arrangements under this Agreement requiring such
State Aid Clearance, including any payments to POL under clause 5 (Government
Funding for Services of General Economic Interest), in respect of each of the
Financial Years 2015/16 and 2016/17 and 2017/18;
(b) pursue such State Aid Clearance application in good faith and expeditiously;
(©) keep POL informed as to the progress of such State Aid Clearance application;
(@ permit representatives appointed by POL to attend meetings with the European
‘Commission in respect of such application, to the extent permitted by the European
‘Commission and deemed appropriate by the Secretary of State;
(©) discuss with POL any written notifications to the European Commission in respect of
stich State Aid Clearance application before they are submitted; and
(® discuss with POL any written notifications from the European Commission in respect
of such State Aid Clearance application promptly upon their receipt.
4.2 Asat the date of this Agreement the Secretary of State is targeting the obtaining of
the State Aid Clearance referred to in clause 4.1 by the start of the Funding Period and the
Parties shall use their reasonable endeavours to obtain the State Aid Clearance by such date, i
being acknowledged that a mere failure to achieve that target is not of itself a breach of this,
clause 4.2,
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EXECUTION VERSION
‘Fong Agreement
5. GOVERNMENT FUNDING FOR SERVICES OF GENERAL ECONOMIC INTEREST
5.1. POL undertakes to the Seoretary of State that it will for the duration of the Funding
od: (i) maintain a network of post offices in accordance with clause 10 (Access Criteria);
and (fi) provide across that network the services of general economic interest entrusted {
by the Entrustment Letter,
5.2. Subject to clause 2.1 (Conditions), the Secretary of State agrees to make to POL in
each of the Financial Years 2015/16, 2016/17 and 2017/18 an SGEI Payment in the amount
specified in clause 5.6, to enable POL to maintain the network and to provide services of
general economic interest over the network,
53 The SGEI Payment for each of the Financial Years 2015/16, 2016/17 and 2017/18
shall be made in a manner or manners 1o be determined by the Secretary of State in
absolute discretion (but having consulted with POL as to the impact thereof (if any) on their
profit and loss accounts and the tox treatment of such payments).
5.4 The Secretary of State agrees:
(@) to submit for approval of both Houses of Parliament as soon as reasonably practicable
any order amending or replacing the Order to increase the maximum amount payable
under the Order in any period of twelve (12) months in order to make any payment
under this Agreement which it is determined by the Secretary of State in accordance
with clause 5.3 will be made pursuant to section 103 of the PSA2000;,
ble
(©) to submit for approval of the House of Commons as soon as reasonably prac
any payment under this Agreement which itis determined by the Secretary of Sta
accordance with clause 5.3 will be made pursuant to section 8 of the Industrial
Development Act 1982;
(©) tokeep POL informed as to the progress of such approval(s); and
(@) to notify POL in writing as soon as reasonably practicable after such approval(s) have
been obtained,
5.5 ‘The amount of each SGEI Payment payable shall be subject always to the aggregate
amount of the 2010 SGEI Payment plus all SGEI Payments made under this Agreement (the
Cunutative SGEI Payment) not exceeding one billion seven hundred and ninety five million
pounds (£1,795,000,000). Each SGEE Payment shall be made by way of payment on 1 April
(or the first Business Day thereafter) ofthe relevant Financial Year of the amount specified in
clause 5.6.
5.6 The amount payable in:
(@) the Financial Year 2015/16 shall be two hundred and eighty million pounds
(€280,000,00
() the Financial Year 2016/17 shall be two hundred and twenty million pounds
(£20,000,000); and
(©) the Financial Year 2017/18 shall be one hundred and forty million pounds
(140,000,000).
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Tn ascertaining for any purpose of this clause 5 the amount or maximum amount of any SGEI
Payment no account shall be taken of: (i) any VAT Amount which may be payable under
clause 5.12; or (i) the benefit of any interest receivable on any amount held by POL prior to
its expenditure,
5.7 The Secretary of State acknowledges that, without prejudicing clause 5.2 or his
discretion to determine the method of payment of the SGEI Payment referred to in clause 5.3
above, itis his current expectation that:
(@) one hundred and thirty million pounds (£130,000,000) of the SGEI Payment for
Financial Year 2015/16;
(&) eighty million pounds (£80,000,000) of the SGEI Payment for Financial Year
2016/17; and
© seventy million pounds (£70,000,000) of the SGEI Payment for Financial Year
2017/18,
will be made by way of a payment under a network subsidy scheme introduced under the
‘Order provided that: (i) the necessary slatuory instrument to permit such payment has been
approved by an affirmative resolution of each House of Parliament; and (ji) any necessary
consent to the making of such statutory instrument has been given by the Lords
‘Commissioners of Her Majesty's Treasury.
5.8 It is acknowledged by the Parties that any part of the SGEI Payments received by
POL under a network subsidy scheme pursuant fo section 103 of the PSA2000 (currently
‘expected to be the amounts specified in clause 5.7 above) would be treated as revenue in
POL’s accounts, which has an impact on POL’s operating profit. Should any SGEI Payment
(or part thereof) be made in any Financial Year in any manner which would result in it not
being treated as revenue in POL’s accounts then any target operating profit applicable for any
purpose fo POL, or the PO Group as a whole, in such Financial Year shall be reduced by the
‘amount of any SGEI Payment (or part thereof) received in any such manner in that Financial
Year,
5.9 Within three months following the signature of POL’s accounts in respect of each of
‘the Financial Years 2015/16, 2016/17 and 2017/18, POL shall provide to the Secretary of
Slate a statement (the SGEY Statement) setting out in writing the Actual SGEI Cost for that
Financial Year and a cumulative statement (the Cunuilative SGEI Statement) setting out the
‘cumulative amount of all 2010 SGEI Cost for the 2010 Funding Period plus all Actual SGEL
Cost for the Funding Period up to and including the relevant Financial Year (the Cumulative
‘SGET Cost) together with supporting calculations and a clear explanation of how the amounts
of each have been calculated. Each SGEI Statement shall be accompanied by a statement (the
SGEI Supporting Statement) from an independent firm of financial advisers confirming:
(@) that the SGEI Statement has been properly prepared in accordance with the
sments of Schedule 3 (Calculation of Actual SGEL Cost) and any additional
ns imposed by any relevant State Aid Clearance; and
(®) that while carrying out its financial analysis for the purposes of providing the
‘statement referred to in paragraph (a) above, they did not discover any inconsistency
of POL’s use of the SGEI Payment as against the terms of this Agreement or of any
applicable State Aid Clearance.
EXECUTION VERSION
Funding Agreement
For the avoidance of doubt, the independent firm of finanoial advisers will not be responsible
for determining whether the net profit that would have been incurred by POL in Schedule 3
(Calculation of Actual SGEI Cost) is reasonable. POL agrees to use reasonable endeavours to
engage such independent firm of financial advisers on the basis that, if requested by the
Secretary of State and on such terms as the financial advisers may agree:
(@) —_anaccountancy firm nominated by the Secretary of State shall be entitled to discuss
directly with the financial advisers the manner in which the SGEL Supporting
Statement has been prepared; and
(b) the financial advisers shall provide to the Secretary of State all notes and other work
products produced by them in the preparation of the SGEI Supporting Statement.
5.10 If following the end of the Cumulative Funding Period the Cumulative SGEL
Statement (for the entire Cumulative Funding Period) shows that the Cumulative SGEI Cost
is less than the Cumulative SGEI Payment, POL shall, within ten (10) Business Days of a
request by the Secretary of State, reimburse to the Secretary of Stale, without deduction, an
‘amount equal to the difference,
5.11 POL shall use each SGEI Payment only to meet the direct and indirect costs
associated with: (i) maintaining a network of post offices in accordance with clause 10
(ecess Criteria); and ({i) ensuring the provision of services of general economic interest over
that network (as entrusted to it pursuant to the Entrustment Letter), as described in Schedule 3
(Calculation of Actual SGET Cost) (or to make any reimbursement required {o be made by
POL pursuant to clause 5.10) and only for purposes permitted by any State Aid Clearance
applicable to it.
5.12 Its the mutual opinion of the Parties that the SGEI Payments reveived by POL will
not (and POL agrees not to take any steps with the intention of procuring that they will)
constitute, for VAT purposes, the consideration for any taxable supply and that, accordingly,
the receipt by POL of such SGEI Payments should not give rise to any liability of POL (or
any other member of the PO Group) to account for VAT in respect of any such receipt.
Notwithstanding the foregoing opinion, if it should, at any time (whether or not a time falling
within the duration of this Agreement), be determined by Her Majesty’s Revenue and
Customs that such SGEI Payments (or any of them) must be treated as the consideration for
taxable supplies made by POL (or, as the case may be, by any other member of the PO
Group) and that in consequence POL (or such other member of the PO Group) is liable to
account for VAT in respect of the receipt of any of such SGEI Payments (the VAT Amount),
POL shall notify the Secretary of State of that determination within five (5) Business Days of
being so advised by Her Majesty’s Revenue and Customs and the Secretary of State shall, as
‘soon as reasonably practicable following notification of such determination, make a payment
to POL, in addition to all amounts otherwise payable by the Secretary of State to POL under
‘this Agreement, of a sum equal to the VAT Amount, against production of a valid VAT
invoice,
5.13 IfHer Majesty's Revenue and Customs issues a determination as referred to in clause
5.12, the Parties shall (acting reasonably) consult as to what action to take regarding such
determination. If the Secretary of State disagrees with the determination he may, within ten
(10) Business Days of being notified by POL of such determination, give written notice to
POL that he requires POL (or any other member of the PO Group) to obiain a review by Her
‘Majesty's Revenue and Customs of that determination; and POL (or such other member of the
PO Group, as the case may be) shall prompily request (the form of that request being subject
to reasonable review by the Secretary of State) Her Majesty's Revenue and Customs to
undertake such review. In the event that the review results in POL obtaining a refund of any
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VAT Amount, or not being required fo pay a VAT Amount, in each case in respect of which
the Secretary of State shall have made a corresponding payment under clause 5.12, POL shall
promptly refuund to the Secretary of State the amount of such corresponding payment,
3.14 The Secretary of State acknowledges the expectation of the Parties that ongoing SGEI
Payments may be required to be made to POL following the end of the Funding Period to the
extent that POL may be requested to continue to provide services of general economic interest
following the Funding Period.
5.15 The Secretary of State acknowledged in the 2010 Funding Agreement that the
‘expectation of the Parties was that ongoing SGEL payments would be required to be made to
POL following the end of the 2010 Funding Period to the extent that POL was requested to
continue to provide services of general economic interest following the 2010 Funding Period.
‘The Secretary of State acknowledges that this Agreement and the Strategic Plan continue the
arrangements under the 2010 Funding Agreement and, as such, hereby waives its right to
receive any amount that POL may be required to reimburse to the Secretary of State together
with POL’s obligation to pay such amount, in each case under clause 5.11 of the 2010
Funding Agreement, on the basis that the Secretary of State is entitled to receive a
reimbursement for any short-fall between the Cumulative SGEI Cost and the Cumulative
SGEI Payment made over the Cumulative Funding Period pursuant to clause 5.10.
6 POLSTRATEGICPLAN
6.1 POL shall from 1 April 2015 use its best endeavours to procure the delivery of the
‘Strategic Plan within the financial parameters of the SGEI Payments provided pursuant to this
‘Agreement and (unless otherwise agreed by the Secretary of State or required by the terms of
any State Aid Clearance) POL shall not apply any SGEI Payment for a purpose inconsistent
with the Strategic Plan or make any material deviation from the Strategic Plan.
62 In monitoring POL’s progress in delivering the Strategic Plan, the Secretary of State
may request information both on a routine and an ad hoc basis. The Secretary of State will
censure that information requests are not overly onerous and POL will use its reasonable
endeavours to satisfy all information requests,
7. FINAL CONTRIBUTION
POL acknowledges that, subject to clause 5.15, the SGEI Payments to be provided by the
Secretary of State pursuant to this Agreement represent the Secretary of State’s final funding
contribution in respect of POL’s obligations over the Funding Period to: (i) maintain a
network of post offices in accordance with clause 10 (Access Criteria); and (ji) ensure the
provision of services of general economic interest over that network in accordance with the
Strategic Plan as entrusted to it by the Entrustment Letter.
8 EMPLOYEE INCENTIVE ARRANGEMENTS
BI POL shall continue to maintain an incentive scheme, approved by the Secretary of
State, for its senior executive team in a manner which is designed to ensure, and is consistent
with ensuring, the delivery of the Strategic Plan,
82 POL confirms that:
(@ the terms of any bonus arrangements specific to POL (or those parts of any group-
‘wide arrangements which are related 10 the performance of POL) are designed to
incentivise and reward the performance of POL;
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() the terms of such bonus arrangements are robust, subject to annual review and
designed not to provide rewards where POL's business has not performed
satisfactorily against the relevant target; and
(©) accordingly, no such bonus arrangements will pay out in respect of any Financial
Year during the Funding Period in which POL seeks and obtains new funding from
the Seoretary of State, over and above that anticipated in this Agreement, as a result
of a failure by POL to perform in accordance with the requirements of the Strategic
Plan (other than as a result of a change in Government policy or other reasons beyond
POL's control). Any future bonus arrangements following any such Financial Year
will be discussed with the Secretary of State at the time.
9, SUB-POSTMASTER COMPENSATION CONDITIONS.
9.1 As part of its obligations to deliver the Strategic Plan, POL shall ensure that it
complies with the provisions of clause 10 (Access Criteria) and confirms that the Strategic
Plan has been developed on the basis that no community loses access to services of the type
‘contemplated in clause 10 (Access Criteria) other than due to circumstances beyond POL's
control.
9.2 POL shall ensure that during the Funding Period all new or amended agency contracts
centered info between POL and any sub-postmaster shall be on such terms as to ensure that
such sub-postmaster has no right to receive: (i) fixed pay; or (if) any compensation payment
for termination of such agency contract (other than in respect of a breach by POL of the terms
of such agency contract or applicable law), provided that that any new agency contracts
centered into with sub-postmasters of Community Branches pursuant fo a sale, transfer,
termination or otherwise may be on materially the same terms as the existing agency contract
for such Community Branches.
93 POL shall ensure that (save as required by law or contractual requirements) during
the Funding Period, no compensation payments may be paid to any sub-postmaster upon
replacement of such sub-postmaster’s existing agency contract, unless such replacement
‘agency contract complies with the provisions of clause 9.2,
10. ACCESS CRITERIA
10.1 Without prejudice to its obligations pursuant to clause 5.1 (Government Funding for
Services of General Economic Interest), POL shall throughout the Funding Period provide a
network of at least eleven thousand, five hundred (11,500) Branches which:
(a) _ provide access to all of the following services:
(D postal services;
Gi basic cash and banking facilities and payout services including those that
POL is required to provide on behalf of Government (in respect of pensions,
benefits or tax credits),
bill payment facilities; and
(iv) information about other services which may be available from POL outlets
from time to time,
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provided that only eleven thousand (11,000) of such Branches (such Branches 10 be
determined by POL in its absolute discretion) shall be required to provide the service
contemplated in clause 10.1(a)(ii) (Access Criteria) above; and
(b) enables the following criteria to be met:
Nationally:
(A) ninety per cent, (90%) of the UK population are within one (1) mile
of the nearest Branch;
(B) ninety nine per cent. (99%) of the UK population are within three (3)
miles of the nearest Branch;
Gi) In Urban Areas:
(A) ninety five per cent. (95%) of the total population within Urban
Areas across the UK are within one (1) mile of the nearest Branch;
(B) ninety nine per cent. (99%) of the total population within Deprived
Urban Areas across the UK are within one (1) mile of the nearest
Branch;
In Rural Areas: ninety five per cent, (95%) of the total population within
Rural Areas across the UK are within three (3) miles of the nearest Branch;
(iv) In each posteode district: ninety five per cent. (95%) of the population in
each individual postcode district are within six (6) miles of the nearest
Branch.
10.2 In applying the above criteria POL shall in addition take account of geographical
constraints such as rivers, mountains and valleys, motorways and sea crossings to islands 60
as not to impose undue hardship when considering the appropriate Branch network.
10.3 Reference to “Branch” in this clause 10 shall mean a Branch providing the services
desoribed in clause 10.1(a)..
11, Jor Ventures
Unless otherwise agreed with the Secretary of State, POL agrees that it shall only enter into
Joint ventures with third parties for purposes consistent with the delivery of the Strategie Plan
‘and provided that the joint venture is structured on the basis that it would not (according to
Government advice) be classified as part of the publi sector under the relevant rules of Her
Majesty's Treasury.
12, PUBLIC CONSULTATION, COMMUNICATION AND EQUALITY
12,1 POL shall at all times comply with the Code of Practice.
12,2 POL acknowledges the commitment recorded in the resolutions made during its board
meeting of 21 January 2008 that any individuals taking any decision or exercising any other
function on POL's behalf should do so having due regard to the need to observe factors which
comprise the statutory equality duties and that appropriate steps be taken to inform all people
making decisions or exercising functions on POL’s behalf of these equality duties. POL shall
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censure that this commitment is maintained in the performance of its obligations under this
Agreement.
13, CONSENTS
‘The Secretary of State hereby consents, for the purposes of the articles of association of POL
and of any other document or arrangement under which its consent or approval is required, to
the execution and performance by POL of this Agreement and the documents and
arrangements to be entered into pursuant to, or otherwise contemplated by, this Agreement
(other than any agreement contemplated in clause 11). The Secretary of State agrees that such
consents will take effect notwithstanding any failure to comply with any procedural
requirements of such articles or other documents in connection with the obtaining of such
consents,
14. CONFIDENTIALITY
14.1 Each Party undertakes to the other Party that, subject to clause 14.2, it shall treat as
stricly confidential all confidential information, For the purposes of this clause 14,
confidential information shall mean:
(@) the provisions of this Agreement, the Entrustment Letter and the Strategic Plan; and
(b) the negotiations relating to this Agreement, the Entrustment Letter and the Strategic
Plan,
14.2 Clause 14,1 shall not prevent the disclosure by a Party of any confidential
information:
(@) to those of its officers (including auditors), employees and agents as it considers have
need for such information in the performance of their respective functions and who
shall in each case be made aware by such Party of its obligations under this
Agreement and shall be required by such Party to observe the same restrictions on the
use of the confidential information as are contained in this clause 14;
(©) to Postal Services Holding Company PLC and its officers (including auditors),
‘employees and agents, in each case who are bound to such Party by a duty of
confidence which applies to the confidential infomation disclosed;
(©) to its professional advisers who are bound to such Party by a duty of confidence
which applies to the confidential information disclosed;
@ to the extent required by applicable law or by the regulations of any regulatory or
supervisory authority to which such Party is subject or pursuant to any order of court
or other competent authority or tribunal
(©) which shall have entered the public domain or ceased to be confidential other than as
a result of a breach by such Party of its obligations under this clause 14;
() which was already known to such Party prior to its disclosure to such Party other than
as a result ofa breach by such Party of an obligation of confidentiality;
(g) as such Party, acting reasonably, considers necessary in connection with any
investigations, inquiries, or actual or threatened proceedings in connection with POL
or any of its directors;
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(ht) in the case of POL, to the extent that its board of directors acting reasonably,
considers disclosure necessary from time to time in its statutory accounts;
@ ‘to the extent that the Secretary of State, acting reasonably, considers disclosure
necessary from time to time in the published accounts of the Department of Business,
Innovation & Skills or Her Majesty's Treasury,
@ to the extent required by any Parliamentary obligation;
(K) to the extent required for the purposes of any examination pursuant to section 6(1) of
the National Audit Act 1983 of the economy, efficiency and effectiveness with which
the Secretary of State has used his resources;
@® tothe European Commission for the purposes of obtaining State Aid Clearance; or
(m) with the prior written consent of the other Party.
143 Ifa Party becomes required, in cireumstances contemplated by clause 14.2(4), (g) or
(h) to disclose any confidential information, such Party shall, to the extent permitted by law,
give to the other Party such notice of such disclosure as is practicable in the circumstances
‘and shall, to the extent permitted by law and practicable in the circumstances, consult with the
other Party as to the extent of such disclosure.
15, Notices
15.1. A notice to be served pursuant to or in connection with this Agreement shall be in
writing and, unless otherwise slated, served in person or sent by pre-paid fist class post, fax
or any electronic method of communication as agreed by the Parties to the relovant Party at its
address or fax number set out below, or such other address in England or Wales or fax
number notified by it to the other Party and marked for the attention of the person or
department therein specified,
15.2 The address and addressee of each Party at the date of this Agreement are:
Name of Party I Addressee ‘Address Fox Number
Secretary of I Legal Director for I 1 Victoria Street, 0207 215 3221
State Postal Services London SWIH OET
POL Company Secretary I 148 Old Street, 0207 212 2145,
London EC1V 9HQ
15.3 A notice shall be deemed to be received on the date and time specified below (save
that where such notice would otherwise be deemed to be received after 17:00 London time on
a particular day, it shall be deemed to have been received at 9:00 London time on the next
Business Day):
(a) inthe case of a notice served in person, upon delivery at the address of the addressee;
() inthe case of a posted letter, on the second Business Day after posting;
(©) inthe case ofa fax, when received in legible form; and
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ondlag Agreement
(@) in the case of any other electronic method of communication agreed by the Parties,
‘when actually received in readable form,
154 Bach Party undertakes to notify the other Party by notice served in accordance with
this clause if the address specified for that Party herein is no longer an appropriate address for
the service of notice or if it is desired to substitute any individual addressee of that Party
named in clause 15.2.
15.5 In proving service of any notice under or in connection with this Agreement it will be
sufficient to prove:
(@) __ inthe case of a letter, that such letter was properly stamped or franked, addressed and
placed in the post or in the case of personal delivery, was left at the correct address;
and
() in the case of a fax transmission, that fax was duly transmitted to the fax number, as
appropriate, of the addressee referred to in clause 15.2,
16, ENTIREAGREEMENT
16.1 This Agreement and any documents referred to in it or annexed to it constitute the
whole and only agreement between the Parties relating to its subject matter and, for the
avoidance of doubt, supersedes any other prior arrangement, understanding or agreement
between the Parties relating to the subject matter of this Agreement.
16.2 Each Party acknowledges that in entering into this Agreement, it is not relying on any
pre-contractual statement which is not set out in this Agreement,
163 _ Except in the case of fraud, neither Party shall have any right of action against the
other Party arising out of or in connection with any pre-contractual statement except to the
extent that it is expressly provided for in this Agreement.
16.4 For the purposes of this clause 16, pre-contractual statement means any draft,
agreement, undertaking, representation, warranty, promise, assurance, forecast, estimate or
arrangement of any nature whatsoever, whether or not in writing, relating to the subject matter
of this Agreement made or given by any person at any time prior fo the date of this
‘Agreement.
17, GENERAL
Sceretary of State
17.1 Nothing in this Agreement fetters the powers conferred on the Secretary of State by
the PSA2000 and the PSA2011.
Costs
17.2 Save as expressly provided for elsewhere in this Agreement, each of the Parties shall
at its own expense do all such things as shall be necessary to give full effect to the obligations
imposed on it under this Agreement,
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Third parties
17.3 For the purposes of the Contracts (Rights of Third Parties) Act 1999, no person other
than a Party shall have any rights in respect of this Agreement.
Counterparts
17.4 This Agreement may be executed in any number of counterparts and by the Parties on
separate counterparts, cach of which when so executed and delivered shall be an original, but
all the counterparts shall fopether constitute one and the same instrument,
Partial invalidity
17.5 If any term or provision in this Agreement is held to be illegal or unenforceable in
whole or in part under any enactment or nile of law, such term or provision or part shall to
that extent be deemed not to form part of this Agreement but the enforceability of the
remainder of this Agreement shall not be affected.
Rights, variations and waivers
17.6 The rights and remedies of the Parties shall not be affected by any failure to exercise
or delay in exercising any right or remedy or by the giving of any indulgence by the other
Party or by anything whatsoever except a specific waiver or release in writing and any such.
‘waiver or release shall not prejudice or affect any other rights or remedies of the Parties. No
single or partial exercise of any tight or remedy prevents any further or other exercise thereof
or the exercise of any other right or remedy.
17.7 No variation of this Agreement shall be of any effect unléss it is agreed in writing by
oon behalf of each Party,
178 Any waiver of any right, power or remedy under this Agreement must be in writing
‘nd may be given subject fo any conditions thought fit by the grantor. The person secking the
‘waiver shall disclose to the grantor all material facts then in that person's knowledge retevant
to the subject matter of the waiver. Unless otherwise expressly stated, any waiver shall be
effective only in the instance and only for the purpose for which itis given.
Remedies
17.9 Without prejudice to any other rights or remedies that either Party may have, each
Parly acknowledges and agrees that damages alone would not be an adequate remedy for any
breach by a Party of the provisions of this Agreement, and that the remedies of injunction and
specific performance as well as any other equitable relief for any threatened or actual breach
Of the provisions of this Agreement by a Party may be more appropriate remedies and that no
proof of special damages shall be necessary for the enforcement of this Agreement.
Governing law and jurisdiction
17.10 This Agreement and any non-contractual obligations arising out of or in relation to
this Agreement shall be governed by and construed in accordance with English law.
17.11 Bach Party hereby submits to the exclusive jurisdiction of the courts of England,
EXECUTED by the Parties on the date first written above.
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EXECUTION VERStO’
anung Agreene
SIGNED by
for and on behalf of
F STATE FOR BUSINESS, INNOVATION & SKILLS
Signature:
Nami
Title:
ll Gibso!
Executive Director, Shareholder Executive
SIGNED by
for and on behalf of
POST OFFICE LIMITED
Signature:
Name:
Title:
Signature:
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EXECUTION VERSION
Funding Agreement
SCHEDULE 1
DELIVERABLES
‘A certified copy ofa resolution of the board of POL:
@
©
©
approving the terms of, and the transactions contemplated by, this Agreement and the
amended and restated POL Working Capital Facility and resolving that it execute and
perform this Agreement and the amended and restated POL Working Capital Facility;
authorising a specific person or persons to execute this Agreement on its behalf, and
authorising a specified person or persons, on its behalf, 1o sign and/or dispatch all
documents and notices 10 be signed and/or dispatched by it under or in connection
with this Agreement and the amended and restated POL Working Capital Facility.
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SCHEDULE 2
Part A
Fundamental Change
A Fundamental Change will have occurred if:
L an order has been made or resolution has been passed for the winding-up of, or a
provisional liquidator to be appointed in respect of, POL;
2. an administrator has been appointed in respect of POL;
3, a receiver (which expression shall include an administrative receiver) has been
appointed in respect of POL;
4, POL has stopped paying its debts as they fall due;
5. a moratorium is declared in respect of the indebtedness of POL or POL enters into a
‘moratorium or a composition, assignment or similar arrangement with its creditors
generally;
6. a Scheme of arrangement is approved, or proposed by POL, under Part 26 of the
Companies Act 2006 with a view to rescheduling or restructuring POL’s
indebtedness;
7. voluntary arrangement has been proposed by POL under section 1 of the Insolvenoy
‘Act 1986 in respect of POL; or
8 an event analogous to the foregoing has occurred in relation to POL in any
Jurisdiction outside England,
Part B
Potential Fundamental Change
A Potential Fundamental Change exists at any time if.at that time a Fundamental Change shall
not have occurred but:
1. a petition has been presented or a meeting has been convened for the purpose of
winding-up POL or appointing a provisional liquidator in respect of POL and such
petition has not been discharged or such meeting has not been held; or
2. POLis currently taking steps with a view to appointing an administrator or agrecing a
‘moratorium, composition, assignment or similar arrangement with its creditors
generally.
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‘Funding Agreement
SCHEDULE 3
CALCULATION OF ACTUAL SGELCOST
The amount of the Actual SGET Cost shall be equal to the difference between the actual net
costs incurred by POL and the reasonable net profits thet would have been incurred in
connection with the provision of a network that POL would maintain on a purely commercial
basis (as specified by the relevant European Commission decision(s)), during the relevant
Financial Year(s).
‘The calculation of those net costs shall include:
1. All variable costs including those incurred in providing the Network SGEI and the
Product SGEIs; plus
2. lll fixed costs including those incurred in providing the Network SGEI and the
Product SGEIs; less
3. All revenues received by POL from providing the Product SGEIs as well as non-
SGEI services.
For the purposes of the calculation above:
‘+ The costs shall include, without limitation, contributions to pension funds, interest
costs, central costs, capital expenditure, ‘costs of any employee incentivisation
‘arrangements and the costs of transforming the network, in each case whether such
‘costs are recurring or exceptional.
‘+ Network SGET means, as set out in the Entrustment Letter, the obligation on POL to
‘maintain during the Funding Period a network of post offices beyond its optimal
‘commercial size,
© Product SGEE means, as set out in the Entrustment Letter, the obligation on POL to
make available during the Funding Period certain services of general economic
interest across a network of post offices as defined by the Network SGEI.
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nding Agreement
APPENDIX A
POL ENTRUSTMENT LETTER
Paula Vennells
Post Office Limited 148 Old Street
London
ECIV 9HQ
November 2013
Dear Paula,
ENTRUSTMENT OF POST OFFICE LIMITED WITH THE DELIVERY OF
CERTAIN PUBLIC SERVICES
Commencement
‘This letter has effect from the later of: (i) the date on which the European Commission
confirms that the requirements of this letter are compatible with the requirements on
State Aid of the Treaty on the Functioning of the European Union; and (ii) 1 April
2015 (the "Effective Date").
Existing Entrustment Letter
Notwithstanding the signing of this letter, in respect of the period prior to the
Effective Date, the provisions of the letter from the Goverment to Post Office
Limited entitled "Entrustment of Post Office Limited with the delivery of certain
public services" and dated 21 March 2012 (the "Existing Entrustment Letter") shall
continue in full force and effect and the provisions of this letter shall be without
prejudice to any rights, remedies, obligations or liabilities of any party accrued under
the Existing Entrustment Letter.
‘The Existing Entrustment Letter shall be terminated on the Effective Date.
Entrustment
‘This letter contains an overarching ministerial instruction entrusting Post Office
Limited with the provision and delivery of certain services of general economic
interest. This instruction is legally binding on Post Office Limited and Post Office
Limited has signed this letter in agreement and acknowledgement of this.
We confirm that Post Office Limited is under a public service obligation (as set out
here and also contractually in the Post Office Limited Funding Agreement dated
26 November 2013 (the "2013 Funding Agreement") to maintain, from the
Effective Date until the end of its financial year ending on or around 31 March 2018,
a network of post offices beyond its optimal commercial size (the "Network SGEI"),
That network must number a minimum of 11,500 post offices and also meet the
following minimum access requirements:
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‘+ Nationally, 99% of the UK population to be within 3 miles and 90% of the
population to be within 1 mile of their nearest post office outlet.
‘+ 99% of the total population in deprived urban areas across the UK to be within 1
mile of their nearest post office outlet,
‘+ 95% of the total urban population across the UK to be within 1 mile of their
nearest post office outlet
© 95% of the total rural population across the UK to be within 3 miles of their
nearest post office outlet.
In addition the following criterion will apply at the level of each and every individual
postcode district, establishing a minimum level of coverage at a very local level.
‘+ 95% of the population of the postcode district to be within 6 miles of their nearest
post office outlet.
Post Office Limited is required to provide this network of post office branches to
make available the services of general economic interest detailed in Annex A
("Produet SGEI") on the basis set out in the 2013 Funding Agreement, This
‘Network SGEI obligation therefore extends the provision of the Product SGEI over a
network which may be beyond that required under individual Product SGEI contracts
entered info on a commercial basis between Post Office Limited and relevant
Government departments or bodies (whether public or private). The delivery of the
Product SGEI by Post Office Limited across its network will be governed in
accordance with contracts or other agreements under which the terms of the provision
of the individual product SGEI are specified.
The entrustment of the delivery of the Network SGEI set out in this letter to Post
Office Limited does not replace or change in any way any contracts or other
agreements under which the terms of the provision of the individual Product SGEI are
specified, Post Office Limited is expected to use reasonable endeavours to enter into
contracts with Government departments or bodies (whether public or private)
contracting with Post Office Limited in respect of the provision of one or more
Product SGEls. A list of the current individual contracts and agreements held by Post
Office Limited to deliver the Product SGEI is provided in Annex B.
Method of Calculating Compensation
As soon as reasonably practicable following publication of its audited accounts for the
Financial Year ending on or around 31 March 2018, Post Office Limited will be
required to provide, in accordance with the 2013 Funding Agreement, a statement (the
"Cumulative SGEL Statement"). The Cumulative SGEI Statement must be
accompanied by a supporting statement from an independent financial adviser, to
confirm that the aggregate amount of the SGEI compensation payments made by the
Government to Post Office Limited under the funding agreement dated 25 October
2010 (the "2010 Funding Agreement") and the 2013 Funding Agreement (the
“Cumulative SGEI Payment") did not exceed the difference between the actual net
costs incurred by Post Office Limited and the reasonable net profits that would have
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been incurred in connection with the provision of a network that Post Office Limited
would maintain on a purely commercial basis (as specified by the relevant European
Commission decision(s)), during the financial years covered by the 2010 Funding
Agreement and the 2013 Funding Agreement (the "Cumulative SGEI Cost"). The
calculation of those net costs shall include:
1. All variable costs including those incurred in providing the Network SGEI and
the Product SGEIs; plus
2, All fixed costs including those incurred in providing the Network SGEI and
the Product SGEls; less
3, lll revenues received by Post Office Limited from providing the Product
‘SGEIs as well as non-SGEI services.
For the purposes of the calculation above, the costs shall include, without Limitation,
contributions to pension funds, interest costs, central costs, capital expenditure, costs
of any employee incentivisation arrangements and the costs of transforming the
network, in each case whether such costs are recurring or exceptional,
Recovery of Overpayment
Notwithstanding clause 5.2 of the 2013 Funding Agreement, in the event that the
Cumulative SGEI Payment exceeds the Cumulative SGEI Cost, Post Office Limited
will be required to repay to the Government, within 10 Business Days of a request
from the Government, an amount equal to such excess.
‘The 2010 Funding Agreement does not foresee an outcome in which the objectives
associated with the entrusted obligations under the 2010 Funding Agreement will
need to be re-phased. In the unlikely event that this occurs and a repayment from Post
Office Limited arises under the 2010 Funding Agreement, the Government waives its
right to receive any such repayment on the strict understanding that (a) the cumulative
described in the paragraph above will be carried out and (b) any
objectives that are not achieved during the 2010 Funding Agreement will remain as
objectives under the 2013 Funding Agreement. This is in recognition of the scale and
complexity of the activities being carried out by Post Office Limited and the parties’
desire to promote the efficient use of all funds committed by the Government to Post
Office Limited under the 2010 Funding Agreement and the 2013 Funding Agreement.
It is possible that Post Office Limited may during the period of this entrustment cease
to provide an individual Product SGET, the provision of which over the post office
network beyond its optimal commercial size is compensated by the Government, In
those circumstances, the Government shall, provided that the provision of the
‘Network SGEI will be maintained, withhold such proportion of that compensation (if
any) which corresponds to the net direct costs of providing that Product SGEL.
Yours sincerely,
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EXECUTION VERSION
uning Agreement
JO SWINSON
Post Office Limited acknowledges that the instructions set out in this letter are legally
binding,
Signed by
for and on behalf of Post Office Limited
Dated November 2013
Annex A
EXECUTION VERSION
Funding Agreement
SCHEDULE OF SERVICES OF GENERAL ECONOMIC INTEREST
PROVIDED BY POST OFFICE LTD AT POST OFFICE BRANCHES
EXECUTION VERSION
‘Funding Agreement
Category of Service Provided Service Provided on
Service Behalf of
‘Access 10 postal I Provision of access fo postal I Royal Mail Group Limited
services services which the universal
service provider (Royal Mail
Group Limited) is required to
provide under regulatory
conditions and directions issued
by Ofcom in accordance with
section 36 of the Postal Services
Act 2011 and the Designated
Universal Service Provider
Conditions issued by Ofcom on
27 March 2012
Universal access to I Provision of basie community I Financial Institutions
basic cash and banking facilites (e.g. including ce
banking facilities _I cashing of cheques, cash ‘Her Majesty's Treasury,
and Government deposit, Post Office card National Savings &
savings instruments, I account and cash withdrawals I Investments
especially for rural I and deposits) and cash
custome and those I transmission facilities (e.g. ‘The Department for Work
and Pensions
on social benefits,
‘including postal orders), in
particular fo socially excluded
customers and businesses local
‘The Social Security
Agency - Northern Ireland,
Category of Service Provided ‘Service Provided on
Service Behalf of
Processing social I Cash payment of state benefils I The Department for Work
benefit and tax credit I including state pension, child I and Pensions
‘ments to the I benefits and tax credits . ,
public. ‘The Social Security
Issuing of vouchers to eligible I Agency - Northem Ireland
asylum seekers ‘Her Majesty’s Revenue &
Customs
Financial Institutions
‘The Home Office
Processing of ‘Providing passport application I ter Majesty’s Passport
national identity I forms for customers to Office
and licensing complete and return
scheme applications
Checking and authentication of
passport applications and
supporting documentation
Capturing biometric data for
‘Biometric Residence Permits
UK Visas and Immigration
Providing vehicle licence
application forms for customers
to complete and return Driver and Vehicle
Licensing Agency
Receiving payment for vehicle
licences and photocard licences
Services for the sale of Rod
Fishing Licences
‘The Environment Agency
Universal payment I Provision of facilities for Financial Insitutions
facilities for public I payment of electricity, gas, . eet
utility services. telecommunications and water Individual Utility Service
rovider
bills. Payment options include
pre-payment and other
budgeting schemes (e.g.
including savings stamps)
Provision of facilities for
payment of tax bills and social
housing rents
Billing Service Providers
‘Her Majesty’s Revenue and
Customs
Local Authorities
Housing Associations
Page25
{0 post office branches Her Majesty’s Revenue &
‘Access to certain Government I Customs
savings instruments
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‘Funding Agreement
Annex B
POST OFFICE CONTRACTS TO DELIVER SGEI
AS AT THE DATE OF THIS LETTER
Category 1: Processing Social Benefit and Tax Credit Payments to the Public
‘Description of Services
Contracting Entity Opposite Post
Office Limited
POCA Card Account
“The Department for Work and Pensions
Asylum Seekers Benefits Payments
‘Sodexho Pass,
‘Meals on Wheels Vouchers
Fife Council
‘Meals on Wheels Vouchers London Borough of Waltham Forest
‘Meals on Wheels Vouchers ‘London Borough of Tower Hamlets
‘Meals on Wheels Vouchers Salford City Council
‘Meals on Wheels Vouchers London Borough of Islington
‘Meals on Wheels Vouchers Eastleigh Borough Council
‘Homecare Vouchers Salford City Council
‘Payout (Emergency Payments) Contracts I Bedford Council
‘Payout (Emergency Payments) Contracts_I Blackpool Council
‘Payout (Emergency Payments) Contracts
‘Cornwall Council
‘Payout (Emergency Payments) Contracts
Derbyshire Council
‘Payout (Emergency Payments) Contracts
Glasgow Council,
‘Payout (Emergency Payments) Contracts
Greenwich Council
‘Payout (Emergency Payments) Contracts
Lewisham Council
Payout (Emergency Payments) Contracts
Merton Council
Payout (Emergency Payments) Contracts
Reading Council
Payout (Emergency Payments) Contracts
‘Rotherham Council
Payout (Emergency Payments) Contracts
‘Staffordshire Council
‘Payout (Emergency Payments) Contracts
Torbay Council
Payout (Emergency Payments) Contracts
‘Tower Hamlets Council
Payout (Emergency Payments) Contracts
‘Westminster City of)
Payout (Emergency Payments) Contracts
‘West Lothian Council
‘Payout Contracts
‘Autism Initiatives:
Payout Contracts,
‘Durham and Darlington NHS
Payout Contracts
First Initiatives
Payout Contracts,
Blackbur and Darwin Council
‘Payout Contracts,
Buckinghamshire Council
Payout Contracts
‘Cumbria Council
Payout Contracts:
Hampshire Council
Payout Contracts
‘Hull Council
‘Payout Contracts,
Lambeth Council,
Payout Contracts
Lancaster Council
Payout Contracts,
Leeds Council
‘Payout Contracts
Lewisham Council
Payout Contracts
‘Manchester City Council,
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[EXECUTION VERSION
Funding Agrecrent
Payout Contracts ‘Newham Council
Payout Contracts ‘Redbridge Council
Payout Contracts ‘StHelen’s Council
Payout Contracts Staffordshire Couneil
Payout Contracts City Of Westminster Council
Payout Contracts ‘Wirral Council
Pope 28
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uning Agreement
Category 2: Processing of National Identity and Licensing Scheme Applications
Deseription of Serviees
Contracting Entity Opposite Post
Office Limited
Passport Applications ‘Check & Send”
Her Majesty's Passport Office
‘Driving Licence Applications
Driver and Vehicle Licensing Agency
‘Services for the sale of Rod Fishing
Licences
“The Environment Agency
‘Capture of photograph in support of
applications
Seaurity Industry Authority (The Home
Office)
Biometric data capture for Biometric
Residence Permit applications
‘UK Visas and Immigration
Tdentity Assurance Services (for access 10
online public services)
Government Digital Services (The
Cabinet Office)
Document checking in support of a
Vetting and Barring Scheme application
(formerly CRB)
Care Quality Commission
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ing Agreement
Category 3: Universal Payment Facilities for Public Utility Services
Description of Services
Contracting Entity Opposite Post
Office Limited
Bill Payments Santander (A&L Commercial Bank ple
as was)
Bill Payments ‘The Co-Operative Bank ple
Bill Payments ‘Allpay.net Ltd
Bill Payments Airtricity Holdings Limited (Republic of
Ireland company)
Bill Payments Freedom Council - London Councils
‘Transport and Environment Committee
Bill Payments EON Energy Limited
Bill Payments EDF Energy
Bill Payments RWE Npower ple
Bill Payments. Scottish Power Energy Retail Limited
Bill Payments Scottish & S Southern (SSE)
Bill Payments British Gas Trading Limited
Bill Payments Phoenix Gas
Bill Payments BT ple, novated to BT Payment
Services Limited
Bill Payments South West Water Limited
Bill Payments ‘Northem Ireland Electricity ple, novated
to NIE Bnergy Ltd
Bill Payments ‘United Utilities
Bill Payments Yorkshire Water
Bill Payment Bristol and Wessex Billing Services Lid
Bill Payment Siemens Energy Services (a
‘Management Division of Siemens PLC)
Travel Tickets ‘West Yorkshire Passenger Transport
Executive
Travel Tickets Merseyside Passenger Transport
Executive
Travel Tickets ‘Cardiff Council
Travel Tickets Brighton and Hove Bus & Coach
Company
Travel Tickets Coventry Council
“Travel Tickets ‘Neath Port Talbot Council
“Travel Tickets ‘Scotland Improvement Service
Travel Tickets Strathclyde Council
Travel Tickets ‘Transport for London.
Council Tax and Other Related Council _I The Lord Mayor & Cifizens of the City
Services of Westminster
Council Tax and Other Related Council
Services
London Borough of Hammersmith and
Futham
Poge30
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Category 4: Access to Postal Services
[EXECUTION VERSION
Funding Agreement
Description of Services
Contracting Entity opposite Post
Office Limited
Master Distribution Agreement - Mail
support services from Post Office
Limited to Royal Mail Group Limited to
assist Royal Mail Group Limited in meeting
its designated Universal Service Provider
conditions
Royal Mail Group Limited
Paget
EXECUTION VERSION
Funding Agreement
Category 5: Universal Access to Basic Cash and Banking Facilities and
Government Sayings Instruments, Especially for Rural Customers and Those on
Social Benefits
Description of Services
Contracting Kentity opposite Post
Office Limited
‘ATM Services Bank of Ireland
Provision of Basic Banking Facil Bank of Ireland
Provision of Basic Banking Facil Barclays Bank
Provision of Basic Banking Facilitic Charities Aid Foundation (CAF) bank
Provision of Basic Banking Faciliti Cahoot
Provision of Basic Banking Facil Clydesdale Bank
Provision of Basic Banking Facil Co-operative Bank
Provision of Basic Banking Facilities Danske Bank
Provision of Basic Banking Facil First Direct
Provision of Basic Banking Facilities First Trust Bank
Provision of Basic Banking Facilities HBOS
Provision of Basic Banking Facilities HSBC Bank
Provision of Basic Banking Facil Lloyds Bank
Provision of Basic Banking Facil
National Australia Group
Provision of Basic Banking Faciliti
National Savings & Investments
Provision of Basic Banking Facilitic
Nationwide Building Society
Provision of Basic Banking Faviliti ‘Northem Bank
Provision of Basic Banking Faciliti RBS Group
Provision of Basic Banking Faciliti Santander
Provision of Basic Banking Facil Smile.
Provision of Basic Banking Facil TSB.
Provision of Basic Banking Facilities Virgin Money
POCA Card Account,
“The Department for Work and Pensions
Premium Bonds applications
‘National Savings & Investments
Pope 32
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APPENDIX B
STRATEGIC PLAN
EXECUTION VERSION
‘Funding Agreement
ages
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Foreword
We are submitting this Strategic Plan to Government having completed
the 2012/13 financial year; our first year operating independently
of Royal Mail and the first year of our 2012/15 Strategic Plan. We
have delivered a strong performance, improving the service we offer
to our customers, starting to rebuild the Post Office brand and
moving forward on our goal of commercial sustainability.
We are not, however, complacent about our future. This year has
been one of the most challenging on the high street. Many well-
known brands are disappearing and others continue to struggle. The
Post Office has been at the heart of the nation for almost four
centuries but if we are to thrive for future generations we have to
continue to adapt and change our business. ‘The Post Office is proud
of its heritage and while this is at the core of what we are as an
organisation, we cannot let it prevent us from responding to the
changing market environment. When one looks at the organisations
that have failed in recent years, it is clear that they did not
address the fundamentals of their business by updating their retail
model, their products and services and responding to technological
changes fast enough, We will not allow this to happen to the Post
Office. The commitment in our 2012/15 Strategic Plan to deliver a
sustainable and relevant Post Office remains our absolute priority.
‘This year (FY 2013/14) will be one of the toughest in our
transformation. fo get the Crown network (373 directly managed
branches out of 11,818 total branches) to break-even, we must find a
way through on our current industrial relations dispute; and to get
the Post Office as a whole to a sustainable financial position
within the next plan period, we must ensure that agents are moving
forward with their part in our transformation journey, rather than
continuing with out-dated and unsustainable models. We will also
need to make significant changes to our cost base to enable us to be
commercially sustainable. We understand that these changes may be
difficult for our people but if we are to deliver a commercially
sustainable business that could be mutualised for the benefit of all
our stakeholders, they are essential. In the past, we have often
compromised when faced with these difficult decisions. We cannot
afford to make those same mistakes again. The transformation of our
physical network, a core differentiator for our business, is
absolutely fundamental to our future - it must be modernised,
offering self-serve solutions and extended opening hours. Without
these changes, we will not be able to compete effectively.
Organisations such as PayPoint and Collect+ will steal market share
and undermine the economics of our own and our agents’ businesses.
But our transformation is about more than just our networks. It is
about the services we offer, the way we structure our business, the
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competitiveness of our cost base and our engagement with our people
and our stakeholders. Through the implementation of our strategy,
we will improve every one of these elements. We will grow our
income through customer focused product development. We will make
an increasing proportion of our cost base variable to provide us
with the commercial resilience to withstand downturns in the market.
We will reduce our central support costs through the adoption of new
business models. We will embrace the opportunity of multi-channel
by enhancing our online offer and improving the management of our
customer data. We will build better levels of engagement with our
people and all our stakeholders so we can create the opportunity for
a mutually owned Post Office.
‘The change programme we are proposing in this Strategic Plan is
comprehensive. We are confident that through its implementation we
will deliver a Post Office that is modern and vibrant ~ a
commercially sustainable business that is committed to its public
purpose; a public purpose defined and agreed by its stakeholders.
Our achievements over the past two years demonstrate that our
business now has the leadership to deliver this.
We have set out in the following pages our vision of the Post Office
in 2020. It is a vision we believe is compelling for our people,
our customers, and our partners - one which we will all be proud to
have realised. To deliver this, we will need the support of
Government - not just in terms of meeting our funding request but
also in terms of empowering us to face the difficult challenges
ahead. In return, we commit to protect the future of the Post
Office, reducing its reliance on taxpayer subsidy and safeguarding
its public purpose for this and future generations.
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Our Vision of the Post Office in 2020
For almost four centuries, the Post Office has been at the heart of
the nation. This strategy aims to ensure that when we reach our
400th birthday we are not just surviving but flourishing in
communities across the UK. To meet this goal in a challenging market
environment we need to continue to drive forward and complete the
most wide ranging modernisation programme in our history. We are
transforming our products and services, our network and our
supporting organisation. In this section, we present our vision of
the Post Office in 2020, At the simplest level it is a vision of a
multi-channel Post Office, serving customers in communities across
the UK and growing to offer a wider range of essential products and
services aimed at touching tho lives of every citizen: a thriving
commercial business differentiated by, and committed to, the
delivery of its public purpose.
We will achieve commercial sustainability
While we have made great progress in improving the financial
performance of the Post Office in recent years, there is still much
to do. The execution of this strategy will complete this
transition. By 2020, we will have achieved true commercial
sustainability. Our Government funding will be limited to support
for the non-commercial public purpose elements of our business, and
will have reduced to £50m by 2020. This funding will be subject to
a long term contractual relationship.
We will broaden and increase our market presence
By 2020, we will have transformed the Post Office from a channel
business into a retailer of transparent, value for money, and
ethical services for both consumers and small businesses; serving
them in their communities, both physically and digitally.
The provision of postal, government and financial services will
always be at our core. These are the services for which the Post
Office is known and they are the reason that millions of our
customers visit us in branch and online every day. Our vision for
2020 continues to be built around this core. We will continue to be
the front office of government having expanded our role into more
specialised areas such as identity management. We will be the
number one mails retail provider, offering a range of competitive
postal products that cover the traditional and online marketplace.
Our most significant growth will be in financial services, where we
will double our customer base to five million and be a true
challenger in the sector, with a broad range of services and
products from current accounts through to mortgages. But we will do
more. We will look beyond these core markets for opportunities
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where we can provide consumers and small businesses with new
services. By 2020 we will have built on this platform of success
and will be providing broader home and small business services such
as energy.
We will protect and grow our physical network whilst expanding
our digital services
We will continue to be differentiated by our physical presence on
the high street and in rural and deprived urban communities. We
will have completed the transformation of our branch network and
have introduced a greater number of store formats ~ formats that are
customer-focused and cost-efficient. By 2020, changes to our
network will be embedded as part of business as usual activity.
Like every other retailer we will update and refresh our network to
ensure it remains relevant and competitive. Opening hours,
locations, service models and branch numbers will be driven by our
customers and their needs, with access to post office services in
even more locations and a new fund to support Community post
offices.
By 2020, our unrivalled access will extend beyond our physical
network into the digital world; we will be a truly multi-channel
retailer. Multi-channel is now the norm - both for access to
information and to transact. We will embrace this change and
rapidly build our capability in this area. By 2020, we will have
made significant progress on this journey with around 30% of our
income initiating from direct channels.
We will have an organisation and operating model that is
streamlined and cost effective
By 2020, the Post Office will be a very different organisation from
today. The developments in our income, network and market
environment require us to change and we will respond. Looking
forward, we see an organisational structure that is simpler and
slimmer than today. At the top of our business there will be a
small corporate centre that manages relationships with our key
stakeholders and the external marketplace. It will also set the
framework and parameters for the overall business. At the heart of
this organisation will be a customer function listening to our
customers and reviewing the market to anticipate and respond to
market changes. We will sustain the growth in our income by
Proactively managing our product portfolio. We will continually
make our business more cost efficient - significantly reducing costs
as a proportion of the income we generate. We will also ensure our
costs are more variable, to give us greater flexibility and
resilience to market changes. By 2020, commercial sustainability
will be a given and the focus will be increasingly based on creating
value for the Post Office business and its shareholders.
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We will be an organisation that lives and breathes the
principles of mutualisation
While it is not clear today what form of mutual ownership will be
right for our business, we know that by 2020 our culture will be
truly aligned to that of a mutual organisation. We remain
resolutely committed to protecting our public purpose ~ a public
purpose developed with our stakeholders. Our public purpose will be
at the core of our organisation. It will be the uniting force for
all Post Office stakeholders representing not just how we want to
engage with our customers but also with each other. We will be an
organisation that is connected with our customers, our employees and
all our stakeholders - this will ensure we hear and understand their
issues and ideas for change and improvement. These connections will
add real value to the Post Office in terms of greater stakeholder
alignment, loyalty and ultimately improved business performance.
Along with the achievement of commercial sustainability they will
provide the conditions to make mutualisation a possibility.
Post Office Strategic Plan 2013/20
Contents
1. Introduction ...
2. Delivering our vision - the commercial perspective ........
3. Delivering our vision ~ the channel perspective ......-..++
4. Delivering our vision - the organisational perspective ...
5. Delivering our vision ~ our mutualisation journey
6. Delivering our vision - our funding requirement ......
7. Delivering our vision - assumptions, risks and opportunities ..65
8. Delivering our vision ~ supporting your commitments .......
Appendix A - Funding milestones and test dates
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\
Appendix B ~ Operational milestones...
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Executive Summary
Post Office Vision for 2020:
We will achieve commercial sustainability.
We will broaden and increase our market presence.
We will protect and grow our physical network whilst expanding
our digital services.
We will have an organisation and operating model that is
streamlined and cost effective.
We will be an organisation that lives and breathes the
principles of mutualisation.
The commercial perspective:
3
Bees 8
Total Net Income Em
Malls Reta MES Government mHomoSenices mSuppy Chain mother MFAES eContlagoney
As the figure above shows, our Strategic Plan includes
ambitions income growth targets. Specifically, we will grow
our income from £921m in 2013/14 to £1,360m in 2019/20,
investing in our products, network, brand, sales and multi-
channel capability.
Since 2010, the marketplace has changed significantly.
Bconomic pressures continue to drive down margins and push
face to face transactions online. Competitive intensity is
increasing with players such as Collect+ and MyHermes
extending their presence in the mails market, financial
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services seeing new entrants challenging the traditional banks
(Mes, Virgin, major grocers, as well as new challenger brands
such as Metro) and PayPoint continuing to grow in bill pay and
challenge in government services.
As a result of these changes we are seeing significant
pressure in our traditional markets. Additionally in
Government Services, whilst we have had many contract
successes, the revenue and margin associated with these
contracts is much lower than was envisaged in 2010.
To secure our future, mails and government services remain
vital and will be protected and grown. However, the most
significant revenue increase will be achieved by building on
the Post Office’s established position as a retailer of
financial services and telephony products. Our differentiator
is our commitment to serve consumers and small businesses in
communities across the UK, providing them with access to
transparent, value for money, ethical services that are built
around their needs.
Customer value propositions will ensure we develop a product
portfolio that is targeted and effective at attracting new
customers and increasing the number of products they buy. The
key focus initially will be to develop and grow our small
business offering.
The channel perspective:
‘The post office network remains at the heart of communities
nationwide. However, as we recognised in our 2012/15
Strategic Plan if this network was to be sustained and retain
its relevance, a significant modernisation was needed.
Crown branches, the flagships of our network, were out-
dated and loss making. We had to change their layout and
format - creating more open plan and welcoming
environments for our customers. We had to embrace new
self-serve technologies to deliver efficiencies and
better customer service. We had to provide consultation
areas where our financial services specialists could
speak privately with customers ~ away from the hustle and
bustle of the day to day transactions of our business.
We had to create a design that was modular - capable of
evolving along with the needs and expectations of our
clients and our customers. We had to address our pay
model to make ourselves more competitive and ensure we
did not introduce any consolidated increases until
financial break-even was achieved.
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II. Agency branches, the core of our network, were sub~
optimal commercially. We had to move our agency costs on
to a more variable basis - to incentivise agents to grow
their business and to make the Post Office more resilient
to market downturns. We had to change the compensation
terms for exiting a post office - to ensure that future
investment in the network is spent not on those leaving
our business but instead with the agents who are building
our future. We had to extend our opening hours - to
align them with the needs of our customers who want to
visit us early in the morning and late in the evening.
We had to increase the number of store formats which we
had in the market - to make the models profitable and
attractive for agents, our customers and the Post Office.
We had to consider introducing additional access points —
to extend our network coverage and enable us to compete
on specific services such as mails and bill payment.
IIT. Community post offices, where we are introducing a new
investment programme. Sustaining post offices in rural
and urban deprived areas is increasingly important to
both ensuring we support our customers in difficult
economic conditions and successfully address the
increasing competitive pressure in the mails market. We
are therefore in this Strategic Plan including a
commitment to invest £20m in this element of the network.
‘This Community Post Office Fund will be used to invest
not only in improving the conditions and services of
these branches; it will support communities in creating
the post office that is right for them. Today we have
over 150 mutual post offices being sustained by their
local communities. They have defined their purpose,
sought out partners and funding, and ensured they provide
a value to their community. We want to support this
activity and to provide the stimulus and investment to
make it a greater part of what the Post Office does.
Over the past twelve months, we have made significant progress
with network modernisation. The losses in the Crown network
have been reduced by around 20% and we continue to make good
progress towards our break even target in March 2015. In the
agency network, over 2,000 new contracts have been signed with
agents and our converted branches are exceeding targets in
extended opening hours, customer satisfaction and queue times.
However, the past twelve months has also shown that the
current approach on network transformation will not allow us
to meet our commitment to convert 6,000 agency branches to new
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models by 2015/16. The reality is that in these difficult
economic times, sub-postmasters are reluctant to enter a
transformation process. While there are clear benefits around
investment in their store, lower operating costs and the
opportunity for them to release retail space for other uses,
there is also a risk associated with the removal of the
current fixed pay model. We understand their reluctance, but
we cannot afford to delay the programme. Competitors such as
PayPoint, MyHermes and Colloct+ are growing their networks
every day. This is a significant threat to our agents, to the
Post Office and to our ability to serve Royal Mail.
‘This 2013/20 strategy therefore introduces a new approach to
network transformation. This has been developed in
partnership with the NESP and moves the programme on to a
semi-compulsory basis with additional investment to support
sub-postmasters in making this transition to our future
network. Our expectation is that this new approach will
deliver an outcome similar to that of the more structured and
tightly scheduled approaches to network transformation we have
previously discussed with Government. Given the importance of
this transformation to our market competitiveness, our ability
to serve our clients and customers and our journey to
commercial sustainability, we will take action should there be
a shortfall against this projection or the benefits accruing
from the broader programme. In that context, we will complete
a formal review of the programme in September 2015. At that
stage, we will decide on any adjustments that need to be
introduced - this could include amongst other changes
amendments to investments made in branches, changes to
compensation levels, alterations to the Core Tier Payment.
Both the NESP and Government understand the need for this
action should the shortfall arise.
This change in approach to the agency network which is
absolutely essential to our strategy remains true to the
fundamentals of our network transformation journey:
I. Maintain geographic accessibility, network capabilities
and social valuo for the benefit of customers,
II. Undertake a network modernisation programme to ensure
customers can access services through channels that meet
their needs and expectations,
III. Offer a ~40% increase in opening hours giving greater
convenience,
lu
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IV. Ensure queues are reduced so that 90% of customers are
served within 5 minutes,
V. Bring the Crown Office network to break even by March
2015,
VI. Create branch models that are profitable for Post Office
and for Agents,
VII. Ensure all new agency contracts have fully variable
commission and remove the right to compensation on exit,
VIII. Manage the transition from the current network structure
to one that is fit for purpose and cost effective in a
smooth, customer oriented way which compensates agents
appropriately, minimises adverse public opinion and which
takes account of local community views,
IX. As part of this transition, Post Office will not remove
any provision from a community where a service currently
exists, other than for reasons beyond Post Office's
control.
* Tt also ensures we deliver on our long term commitments to
Government. Without it, we will not be able to secure the
commercial sustainability of our business and create the
opportunity for mutualisation which is important to many of
our stakeholders. We remain committed to implementing the
Crown and Network Transformation Programmes. We understand the
challenges these programmes present for staff and agents, but
we cannot allow the pace of change to slow if we are to keep
up with market developments and rapidly changing customer
expectations.
The organisational perspective:
* If we are to deliver this strategy, we must address two
fundamental issues in our business:
I. Our organisational model is structured on a traditional,
product structure. To make the transition from a channel
business to a retailer we must have an organisation that
is built around the customer ~ ensuring that all of our
processes are focused on delivering an excellent customer
experience.
II. While the Network Transformation Programme will increase
the proportion of our cost base which is variable, it
will not be enough to secure a commercially sustainable
future. We must also reduce central costs and ensure
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that as we grow our income we are not adding fixed cost
back in,
To achieve this we are conducting a ‘root and branch’ review
of our organisation, starting with customer facing channels
and working back through the organisation to make the business
slimmer and ensure that everything we do is focused on
delivering value for the customer.
This will create a Post Office with a cost base that is lower
and more variablised and therefore able to adapt to changing
market conditions. The Post Office will be built from the
customer perspective and focused on growing true value for our
shareholder.
Our Mutualisation journey:
In 2010, the Government made two key commitments on the long
term ownership arrangements for the Post Office: firstly that
it is not for sale and secondly that it would create the
opportunity for a mutually owned Post Office.
‘This Strategic Plan contains three commitments that combined
will build the opportunity for mutualisation to be realised:
I, We will make the Post Office financially sustainable -
this is the primary driver for our strategy and is an
absolute pre-requisite before a transfer of ownership can
be considered.
II. We will create an onvironment that encourages mutual ways
of working ~ introducing stronger and more effective
models for engaging our staff, sub-postmasters, customers
and other stakeholders.
III. We will define our Public Purpose - completing the
process that is underway with the Stakeholder Forum and
making a recommendation to BIS that we can then jointly
communicate.
Supporting these three commitments is a roadmap that will
evolve the Post Office into an organisation that has all the
characteristics of a mutual organisation. An organisation
that is commercially sustainable. An organisation that is
connected to its people, its customers and its wider
stakeholder audience. An organisation that invites others to
engage and participate in its development and future.
Finally, when the transformation is complete, we will have
delivered the pre-conditions for a mutualisation transaction
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and associated changes in our ownership and formal governance.
The final decision on whether to transfer ownership at that
point would of course be for Government and Parliament.
Funding requirement:
At the heart of this Strategic Plan is a commitment to make
Post Office commercially sustainable and less reliant upon
Government subsidy.
We are protecting our network and increasing the range of
services that we offer to consumers and small businesses,
we
are offering customer friendly opening hours, and improving
our on-line offer to serve those that prefer digital access.
Combined this will deliver a 47% increase in income through to
2019/20.
We are investing in automation, franchising and other cost
measures to create a Crown Network that will not only achieve
breakeven but over the plan period will become profitable;
turning a £51m loss in 2010/11 to a position of breakeven by
March 2015. This creates the momentum for a bright future.
We are improving the economic viability of our agency network
and individual sub-postmasters: introducing variable pay to
align sub-postmasters and Post Office commercial objectives
and creating a retail support team who can support sub-
postmasters to ensure they can maximise the value of the new
pay model. Over the plan period, the proportion of our agency
costs that are variable will increase from 73% to 908.
We are protecting post offices that are the ‘last shop in the
village’ taking them out of the scope of network
transformation and creating a Community Post Office investment
fund of £20m. This recognises the social value that these
post offices play, giving them access to funds that can help
them improve the service they offer to their communities.
We are also addressing our central costs developing a new
target operating model for Post Office looking to other
organisations and the wider marketplace to understand if there
are more efficient ways to operate our business. Through this
activity we will reduce our existing central business costs by
23% over the plan period.
Our journey to commercial sustainability is already underway.
Our overall income in 2012/13 was £35m higher than forecast in
the 2010 Strategic Plan, and our EBITDA is £10m better.
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Annual losses in the Crown network reduced from £51m in
2010/11 to £37m in 2012/13.
+ To continue this journey, we ask Government for £640m of
funding for the period 2015/16 to 2017/18. This will allow us
to deliver the strategy as set out in this document protecting
the post office network and creating a Post Office that is
profitable, cash-flow positive and has a materially lower
subsidy requirement ~ from over £400m per annum now to a
forecast of £50m per annum in 2019/20. All the conditions
needed for mutualisation.
Assumptions, risks and opportunities:
* As with any plan that stretches out for seven years, there is
uncertainty. We will therefore continue to monitor and adapt
to ensure we deliver on the goal of commercial sustainability.
* At the heart of our plan are two core assumptions which are
fundamental to the overall strategy. If these do not
materialise as planned, a significant adjustment to the plan
would be required.
* First is the switch from a voluntary to a semi-compulsory
approach to the roll-out of the Network Transformation
Programme. Failure to secure agreement to this shift in the
programme approach will impact upon every aspect of our plan -—
our ability to grow income, to reduce cost, to compete, to
protect the network and to deliver commercial sustainability.
* Second is the continuation of the Post Office Card Account
contract beyond 2015, albeit at a reduced volume and income
level. ‘This has strategic importance not just for the direct
contribution it makes to our PgL, but also for the way that
income is distributed around the network, the additional
footfall and retail income it generates for agents, and for
the way we run our supply chain business.
* Beyond these core assumptions, the plan contains a balance of
risk and opportunity across income and costs. We will
proactively monitor these and adjust the tactical
implementation of our strategy as appropriate.
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1. Introduction
2010 represented a major milestone in the Post Office's history.
Our 2012/15 Strategic Plan to deliver a sustainable and relevant
Post Office was approved along with a four year funding promise of
£1.34bn. When this was combined with the commitment of Government
to secure the post office network in a digital age, it was clear the
platform had been created to allow our aspiration of commercial
sustainability to become a reality. The task was now ours to
deliver.
We aro one year into the delivery of this strategy. We have
completed our first year as an independent business, our first year
as an Executive team with an independent Board; and our first year
as an organisation that is not only looking at commercial
sustainability, but beyond it to the potential of becoming a mutual
Post Office. Tt has been a tough year but in spite of all the
challenges, we have more than delivered. Our financial performance
in FY12/13 at income and profit levels exceeded targets and as the
table below shows, in every one of our transformation programme
elements, we made great progress:
Notwork transformation I 1,450 of our agents signed up to our new
network transformation contracts, allowing
us to convert them to new network models
that deliver better customer experience
and allow us to better align our costs to
our_income.
‘The losses in our Crown nctwork were:
reduced by around 208 from the 2011/12
financial position and we continue to make
good progress towards our break even
target in March 2015.
Grown transformation
Financial services We agreed a new contract with our
financial services partner, Bank of
Ireland
We signed partner banking agreements with
RBS and HSBC meaning 95% of card holders
in the UK can now access their cash at a
post office.
We introduced Mortgage Specialists into
branches
We grew our presence in the financial
sexvices market with ISA, mortgage and
most_recently current account products.
Waiis We trialled Priority Services on our Post
& Go kiosks as the basis for roll-out
across the Crown network in 2013/14 and
launched our Drop & Go solution for SMEs.
Government We won the DVLA contract.
We celebrated procossing 1.5m applicants
through our AET technology.
We trialled our assisted digital solution.
‘Folophony We reinvigorated our telephony business
and increased our customer bas to boyond
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300, 000.
‘Technology We became the number one accepter of
contactless paymont_in Europe.
watualisation We established the Stakeholder Forum to
develop a proposed public purpose.
Governance We set up a fully functioning Board and
developed the supporting governance
arrangements following our separation from
Royal Mail Group.
Balanced with a commitnent that we will not
cannibalise our sub-postmasters’ businesses.
our strategy therefore includes a commitment
to increase our physical reach through the
development of access points rather than full
service post offices.
However, as we progressed through this year, it became clear that to
deliver against our goal of breakeven before subsidy in 2015/16 and
build beyond that point to achieve commercial sustainability, we
Would need to make some fundamental changes to our Strategic Plan.
The table below provides an overview of the structure of this
document and highlights the key changes that have been made since
the last Strategic Plan submission.
Beotio I Hele
Rey changes since 2012/15 Strategic Plan
a
Numbor
Bectio I Securing
n2 our income
growth
Total income remains in-line with our 2012/15
Strategy submission however the profile has
been rebalanced to reflect changing market
conditions in front office of government.
This shortfall has been addressod with a more
aggressive financial services strategy.
Sectio I Delivering
a3 jour
channel
programmes
While the core principles of the network
transformation programme romain unchanged,
there have been some fundamental changes to
our approach:
© Community post offices: we have
included a commitment to protect our
community post offices oxcluding them
from the network transformation
programme and providing a community
fund of £20m to help them continue to
improve the service they offer to their
customers.
© Network transformation: in partnership
with the NESP we have revised our
approach to include additional
investment and a mandate to exit those
post offices that are not viable under
our new network models.
Finally, the strategy recognises that while
network expansion will be necessary to
maximise the mails market opportunity and
resist competitive expansion, it must be
a7
Sectio IGreating + the 2012/15 strategy remained largely silent
na I the fon the core Post Office organisation. This
organisatiI strategy recognises the need to create an
on of the organisation that is capable of competing in
future today’s market.
Sectio [Adopting I+ Wutualisation was not included in the 2012/15
ns Ithe strategy. This strategy therefore recognises
principles I that commercial sustainability and
of establishing the right culture are vital
mutualisat I steps towards mutualisation.
ion
Sectio I Setting I ‘The 2012/15 Stratogic Plan included funding
n6 — I out our projections through to 2016/17 and we have
funding worked hard to develop a plan that remains in
equiremen I line with these projections. However as a
G result of our work with tho NFSP on Network
‘Transformation, our funding requirement has
increased by £200m.
Sectio [Risks and [+ tn this section we highlight the key risks to
n7 — Jopportunit I our plan.
ies
‘The most significant to note are the failure
to secure agreement to move the network
programme to a semi-compulsory approach and
the failure to secure any extension of the
Post Office Card Account.
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Delivering our vision - the commercial
perspective
Key messages:
+ Since 2010, the marketplace has changed significantly. Economic
pressures continue to drive down margins and push face to face
transactions online. Competitive intensity is increasing with
players such as Collect+ and Mylermes extending their presence
in the mails market, financial services is seeing new entrants
challenging the traditional banks (MS, Virgin, major grocers,
as well as new challenger brands such as Metro) and PayPoint
continues to grow in bill pay and challenge in government
services.
* Asa result of these changes we are seeing significant pressure
in traditional markets. Additionally in Government Services,
whilst we have had many contract successes, the revenue and
margin associated with these contracts is much reduced compared
to what was envisioned in 2010.
* To secure our future, mails and government services remain vital
and will be protected and grown. However, the most significant
revenue increase will be achieved by building on Post Office's
established position as a retailer of financial services and
telephony products. Our differentiator is our commitment to
serve consumers and small businesses in communities across the
UK, providing them with access to transparent, value for money,
ethical services that are built around their needs.
* Customer value propositions will ensure we develop a product
portfolio that is targeted and effective at attracting new
customers and increasing the number of products they buy. The
key focus initially will be to develop and grow our small
business offering.
* To support this we will continue to invest in our brand, sales
capability and multi-channel capability and understanding of our
customers.
* Through these activities we will grow our aggregate income from
£921m in 2013/14 to £1,360m in 2019/20.
Post Office is moving from a ‘Channel’ to a ‘Retailer’
business:
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Looking back through history, the Post Office's primary purpose was
to be a channel for third parties. Our national network of offices
allowed citizens and customers access to essential services from
within their local community. We were the primary access point,
the first choice when looking to offer certain kinds of service to
the marketplace.
However as we look forward, our ability to be successful as a
channel for third parties is challenged by two key developments:
* Reducing market for physical face to face services (volume
Pressure): citizens and customer want to be able to access
services through a range of channels. Call centres, online
and mobile are now an increasingly important part of everyday
life. The fact that the alternatives are typically lower cost
than a physical channel means that organisations are
proactively seeking to increase their use. This is reducing
the overall size of the physical channel market.
* Increased commoditisation of the market (margin pressure):
historically the face to face market has been a high value
market which needed trusted agents to conduct the services
provided. However as technology has progressed and the
economic environment has become more challenging,
organisations are reconsidering their requirements and are
often willing to ‘trade down’ on the value of the service to
realise cost savings. This is commoditising significant
elements of the market and reducing the level of profitability
that can be achicved.
While success in bidding for Government contracts over the past two
years demonstrates we can compete in this commoditised, low cost
marketplace, the reality is that we need to adjust our strategy for
this marketplace in three ways:
+ Firstly, we need to accelerate the cost reduction elements of
our strategy to help mitigate the impact of reduced margin on
the contracts which we have recently secured. ‘The scale of
this task is best illustrated through the recent DVLA
contract. Proviously DVLA paid £1.25 per transaction. Under
the new agreement this has been reduced to 72p, impacting both
agents income and the Post Office margin. To offset this
reduced margin, we will need to reduce our associated costs
well beyond the level originally envisaged in the current
transformation plan.
* Secondly, we need to focus our third party channel activities
on to the non~commodity areas of the market. An example of
this is our market leading Applicant Enrolment Identification
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(AEI) service which has now processed the biometric * The network: we have over 11,500 branches. This enables us to
information of more than one and a half million applicants. sell and service our customers from a truly national footprint
This service is currently being used by the DVLA and the UK and gives our customers the assurance that only face-to-face !
Border Agency. We also need to develop our offering in the interaction is able to provide.
Identity Services space, where there are opportunities for
Post Office with both Government and Corporate clients and the
consumer.
Combining these components allowed us to get clarity on how we would
realise our vision.
* Finally, we need to accept the challenges and likely future In addition, we also need to understand the competitive dynamics in
trajectory of the channel marketplace and look to build our our markets. The “Porter's Five Forces” diagram below gives a high-
presence as a retailer in our own right. We have a very evel overview of key dynamics impacting our markets.
strong track record in this marketplace having successfully
established offerings in telephony, travel, financial services
and retail.
‘THREAT OF NEW ENTRANTS:
POWER OF CONSUMERS.
‘thttittititt
+ Halla: Campettos are ocasig on
Irmcs Prope sere a UK aratin
{1000 chops and UPS wih 600
+ Bol New enranis such as MAS Bark and Teeeo Bank
POWER OF SUPPLIERS
tx DWP Bakar
In conclusion therefore, our strategic imperative is to protect our
channel income while we grow our retail business. This will allow : Bing
us to continue to provide access to Government and Royal Mail facia eae
ovement re ayo
services whilst also growing new income streams to support the
future economic stability of our business. :
Ze woes ore
+ Paypal: Payson bent css ues
Mae lo Gort caress
+ ot Thighmaster lorie oe
‘te ofeuneat accounts & 7 of savings markets
THREAT OF SUBSTITUTION
PraniumcurntAccount ST DET
+Travel: Travel insurances tequenty bund into
packaged accounts, al tavel money"
+ Bil}Paymants:Dilissuersarerereasingly posing
uslomer towards Ving Dict Debt
Building a Retailer business:
The retailer markets that we are targeting are highly competitive, este
and often have entrenched big players that control significant
shares of the market. For example, in financial services, 87% of
Britons’ main current accounts are held with the top five providers.
ta re so
facsioo wis
As we look to establish ourselves as a retailer in our own right, it
is clear that we need to understand our customers better. We need Customer Value Propositions: We will bundle together products and
to understand what it is that they value about the Post Office and services that meet the specific needs of nine key customer segments,
how that differentiates us from other service providers. Having providing customers with the products and services they need, from a
considered our market position, we identified three key components provider they trust that has an unparalleled physical network. These 1
of differentiation: nine Customer Value Propositions (CVPs) will allow us to stand apart
from our competitors in the crowded retailer marketplaces.
* The Post Office brand: Post Office is one of the best known
brand names within the UK. It has a heritage and history
which is unrivalled. We are recognised as a trusted service
provider; an organisation that is national and local; an
organisation that provides the essential services.
We will not go to market with the CVPs all at once, as this would
reduce their impact. Instead we will prioritise our focus on a
small number of CVPs in 2013/14. This will start with the small
business CVP and when we have confirmed our approach in this area
will extend into the other CVPs where we already have traction and
* The range of products and services that we offer: while see growth opportunity:
single products are offered by many other service providers,
there is no other service provider who can compete with us on
the range of services offered on a national basis. No other
provider offers government, mails, bill payment, savings,
mortgages, and telephony services.
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sige : [=]
vaca I LL sere on seen Md
PORTANT
arr
WEAK” Post Office steady has strong presence STRONG
We have produced a definition for each value proposition, sizing the
market opportunity, defining the customer needs, aligning our
existing products and identifying gaps. The outputs from this
exercise have then been provided to our market pillar teams to drive
their product development strategies for the coming years. A
summary of each market pillar strategy is provided below.
Government Services strategy:
Front office of government will continue to be an important part of
our business, providing both footfall and unique customer
interactions which will help add depth to our customer value
propositions.
Key areas of focu
* support Government policy on Digital by Default by developing
and expanding three core propositions: identity assurance;
assisted digital services; and physical step out (in support
of an online journey).
* explore the opportunity to support Government in its agenda of
reducing the costs of providing front office of government
services either through service provision or co-location.
Changing role of Government Services: Government service products
(both new and existing) are important ‘hooks’ for our other products
and services. They are the core transactions of our businoss today
the transactions around which we can build service offers that are
relevant and compelling for customers. For example, a customer who
is using our passport Check and Send service will quite possibly
need additional travel services including travel money and travel
insurance.
‘Traditional Government business, for example car tax and Post Office
Card Account, will continue to be a footfall driver during the Plan
period to 2020. However as Government moves more transactions
online, demand for these services will reduce. The strategy is
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therefore to grow our new ABI services and the three new
propositions supporting a digital future so that we create a new
customer base that will support new customer value propositions. In
particular identity assurance and physical step out from digital
journeys will provide valuable hooks for the small business,
student, ‘starting out’ and ‘rocent arrivals’ customer value
propositions.
Summary: we project that this market pillar will grow by around
£90m from 2013 to 2020 over the Plan period and will continue to
represent around 15% of our income. This is a significant change
from our 2012/15 Strategic Plan which had assumed this pillar would
account for 26% of income by 2017.
Mails strategy
‘The mails pillar is an absolutely vital part of our future strategy.
It provides 67% of footfall in branch and accounts for 38% of visits
to postoffice.co.uk. It applies to every one of our customer value
propositions. It draws a broad demographic of consumers and small
businesses. It is resilient to the growth in online technology,
with the growth in eCommerce more than offsetting the likely decline
in mails.
Key areas of focus:
* Customer knowledge: The key challenge with the mails pillar is
that the vast majority of transactions are non-attributed.
They tell us very little about the customer and therefore
provide very little basis upon which to structure our customer
value proposition offers. ‘The first customer segment where we
will address this gap will be small business accounts.
* Drive small business proposition: We estimate that 40-45% of
small businesses in the UK use their post office on a weekly
basis for their mailing needs. Our branches know these
customers and already have established relationships. We are
currently developing a bespoke small business proposition
which manifests itself through the newly developed and
launched Drop and Go service. This will start the basis of a
relationship with these customers and provides the opportunity
for the Post Office to develop a more complete small business
account service. This will be underpinned by a loyalty scheme
which, while starting with mails, will broaden out to cover
financial services, telephony and retail services.
* Enhance our collections services: Beyond the SME customer
value proposition, the key mails opportunity is related to
ecommerce. Tho UK online market is one of the largest and
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most developed in the world. ‘The market is moving at pace and
the new developments offer great opportunity for the Post
Office. Through our relationship with Royal Mail we can offer
Click and Collect services to retailers and consumers.
Through our combined mails and financial services pillars we
can offer secure payment solutions. Through our combined
mails and government services pillars, we can offer identity
assurance to increase the opportunity for authenticated
transactions. An improved collections offer is central to us
exploiting all of these opportunities.
Changing role of Mails: Overall, Post Office will face more
competition in the mails marketplace and will need to work much
harder to retain customers, particularly small businesses. We will
defend and grow our position by:
Providing consumers and small businesses with more
convenience, competitive prices, simpler product range,
flexible payment options, and online interaction.
Giving clients, specifically Royal Mail and its retail
customers access to consumers and small businesses; services
and solutions that extend reach and keep costs low;
professionalism through staff specialist expertise and
effective IT infrastructure; extensive footprint; and
operational accuracy.
By doing this the Post Office will gain more ownership of customer
relationships in the mails area and strengthen customer and client
loyalty to the brand while providing the insight needed to benefit
our customer value propositions. This strategy will also allow the
Post Office to minimise any risk associated with the privatisation
of Royal Mail and any associated implications for the Mails
Distribution Agreement by providing the basis upon which the Post
Office could also take more control of its mails business by
leveraging its strength to source good quality, high margin products
from other mails or retail providers.
Summary: We project that this market pillar will grow by around 34%
from 2013 to 2020 and continue to account for around 40% of total
revenues.
Financial Services Strategy:
Financial Services is a critically important focus area for the Post
Office, and it is this pillar where the greatest shift towards
becoming a retailer will be realised as we develop and grow our own~
branded products and services. The higher margins achieved in this
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area will also be essential to the Post Office achieving commercial
sustainability.
Key areas of focus:
Customer knowledge: as in the mails pillar, the vast majority
of customer transactions with the Post Office today are
anonymous. If we are to realise our customer value
proposition potential, we must get to a position where we can
link these directly to customers as it is this information
that will allow us to better develop our product offer.
Whilst the mails pillar can provide the basis of this for
small businesses, it is the financial services pillar that
will allow us to do this for individual consumers. Our
savings, insurance, lending, and payments services are all
attributed to individual customers and while these are
provided on an individual transaction basis today, the launch
of our current account in 2013 will give us the core data
around which to build our relationship with consumers,
FS plans to move up the value chain in order to get closer to
its customers and maximise the opportunities around the
products it offers
Our financial services strategy will be realised through four market
components:
Savings: the Post Office already offers a broad range of
retail savings products; including tax free, fixed and
variable rate and online savings. Over the plan period, we
will extend our offer in this area to include pensions,
annuities, and investments, eventually including advisory
services.
Insurance: insurance is a service that applies to every life
stage and therefore every customer value proposition. These
products create a longevity and natural contact cycle for
customers. They allow us to have an annual conversation with
the customer building our knowledge and understanding of them
and their needs.
Lending and transactions: this is an area of growth and
opportunity. The Post Office has some basic offerings in the
credit card and mortgage areas. These are areas of great
potential. The need for consumers and SMEs to be able to
access lending that is transparent, fair, and value for money
is increasing. The larger banks are constraining their
lending and as a result there is now a prevalence of short
term lenders who are charging above market rates. The Post
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Office will focus on satisfying this unfulfilled market
demand.
* Payments and banking services: bill payment and utility top
up services are integral to our customer value propositions.
Our network of branches and ATMs provide customers with a one
stop shop to maintain the administration of their home and
business services. Over the strategy period, we will look to
broaden our offer with a specific emphasis on SME services and
pre-paid cards introducing the capability to support mobile
and peer to peer payments.
Summary: We project that this market pillar will grow by
approximately 75% (£215m) in the period 2013 to 2020. Today
financial services accounts. for around 30% of our total income. By
2020, this will have increased to around 368.
Telephony strategy:
The Telecoms portfolio is evidence of how the Post Office can be
successful as both a channel and a retailer. In the Mobile Top-up
market, we launched in 2003 and currently have in excess of 5% of
the retail top-up market. In the residential telecoms market, we
launched HomePhone in 2005 and currently have a customer base of
close to 500,000 customers.
Key areas of focus:
* Mobile: the Post Office is planning to deliver a branded
mobile service in 2013-14, the launch of this service will be
phased with pre-pay being delivered first, followed the next
year by post-pay services. Our pre-pay services will primarily
be targeted at those customers currently topping-up theix
mobile phones in our branches (c 15m transactions per annum).
Post-pay services will be targeted at key customer segments
within our Homephone and financial services base.
* Energy: Within the residential ‘Home Services’ market, the
other area where we believe we can potentially add real value
is the Energy market. Recent press coverage of the Energy
Industry has focussed on the lack of clarity and transparency
in the market and the Post Office, given its low cost of
customer acquisition and position as a trusted provider of
services, would be well positioned to take market share.
Customer Research suggests that consumers would be very open
to considering an Energy proposition and our agents are likely
to find it relatively simple to sell, given the obvious
association with our bill payment business.
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© Additional telecoms services: Inéluding Superfast Broadband
(Fibre) - where the move to our new service provider will
allow us to offer higher speed broadband services, and so
improve new segments and retain our existing customers.
* New home services: Bundling of TV - the bundling of TV with
communication packages is becoming more prevalent, Post Office
will add a TV option to retain and grow our customer base.
* SMEs: our current Telecoms proposition is focussed purely on
residential services and similarly our launch plan into the
mobile market is focussed initially on residential customers.
Our new service platform gives us the building blocks to be
able to provide simple business propositions to the smaller
end of the SME market (less than 5 telephone lines) and- the
addition of Superfast Broadband and post-pay mobile would
allow the Post Office to deliver some compelling SME
propositions.
Summary: We see significant opportunity in this market. Relative to
our other market pillars, it is currently small, accounting for
around only 5% of our total income. However, as we look to broaden
our appeal and to target new market areas, its relative importance
inereases, The telecoms and a wider ‘Home Services’ portfolio will
become a central pillar to our customer value propositions allowing
us to offer customers a one stop shop for their household utility
needs. We anticipate this market growing by about £100m during the
Plan period with it ultimately representing at least 10% of our
total income.
Developing our sales capability
Over the past few years, the Post Office has developed a specialist
sales capability within its larger branch offices. This is
comprised of two key segments:
* Financial Services Specialists (FSS): ‘There are around 300 of
these located primarily in the Crown network. Each FSS
operates in one branch and is supervised by a branch manager.
‘They do not share sales leads across the network.
* Product Specialists: There are around 40 savings and 40
insurance product specialists operating within the Crown
network who are again managed through the branch manager
structure, In addition to this, there are around 16 Product
Champions in the WH Smith branches. These are WH Smith's
employees and counter staff with accreditation in some of our
products. The supervisory structure is provided by the Post
Office WH Smith's area team.
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While this structure has delivered income growth in recent years, if
we are to realise our income potential and address the shortfall in
government services income, we need to deliver a step change in
their performance. Our strategy will therefore see significant
changes in the operating model of this sales force ~ and
specifically the FSS:
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+ Establishing a dedicated FS team & structure: Creation of a
supervisory and performance management structure outside of
the branch management structure with dedicated, qualified and
motivated managers to effectively performance manage the FSS
team.
+ Developing the FSS role: Ensuring it is seen as a career
opportunity; providing levels of training, recognition, reward
and remuneration that are aligned with market expectations and
ensuring our people are appropriately qualified for their
roles.
* Improving lead generation: Building a greater pipeline of
leads by applying analytics to our customer data so improving
our ability to offer relevant product and service prompts both
at the counter and through direct channels.
* Creating the right environment/ location model: Ensuring our
FSSs are in the right location and environment to provide the
best customer service and results, exploring the opportunity
to expand the FSSs into the larger agency branches.
By taking these steps, we believe we can deliver the essontial the
productivity gains of this sales force and not only grow our
financial services sales, but also provide the platform for selling
other specialist sales products such as telephony and home services.
Conclusion:
The successful implementation of the above customer and commercial
strategy will allow the Post Office to become a more balanced
business with income being generated across a range of different
markets. We believe this will allow us to reduce dependency on any
one single market or client and will therefore make us more
resilient to short term market changes, and enable the Post Office
to reach commercial sustainability.
Additional information
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Additional detail on each of the elements of the commercial
perspective of our strategy is included under separate attachment,
specifically:
1. Market and competitor work book
2, Introduction to customer value propositions including small
business workbook
Income overview workbook
Financial services workbook
Mails and retail workbook
Government services workbook
7, Telecoms and home services workbook
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Delivering our vision - the channel
perspective
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Key messages:
* The post office network remains at the heart of communities
nationwide. However, as we recognised in our 2012/15
Strategic Plan if this network was to be sustained and
retain its relevance, significant modernisation was needed.
Crown branches, the flagships of our network, were out-
dated and loss making. We had to change their layout
and format ~ creating more open plan and welcoming
environment for our customers. We had to embrace new
self-serve technologies to deliver efficiencies and
better customer service. We had to provide
consultation areas where financial services specialists
could speak privately with customers - away from the
hustle and bustle of the day to day transactions of our
business. Wo had to create a design that was modular ~
capable of evolving along with the needs and
expectations of our clients and our customers. We had
to address our pay model to make ourselves more
competitive and ensure we did not introduce any
consolidated pay increases until financial break-even
was achieved. We had to pursue franchising to realise
reductions in our operating costs.
Agency branches, the core of our network, were sub-
optimal commercially. We had to move agency costs on
to a more variable basis - to incentivise agents to
grow their business, to make post office a more
attractive proposition for a new generation of sub-
postmasters and to make the Post Office more resilient
to market downturns. We had to change the compensation
terms for exiting a post office - to ensure that in the
future investment in the network is not spent on those
leaving our business but instead with the agents who
are building our future. We had to extend our opening
hours - to align thom with the needs of our clients and
customers who want to visit us early in the morning and
late in the evening. We had to increase the number of
store formats which we had in the market - to make the
models profitable and attractive for our agents, our
customers and Post Office. We had to consider
introducing additional access points - to extend our
network coverage and cnable us to compete on specific
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creating the post office that is right for them. Today
we have over 150 mutual post offices that are being
sustained by their local communities. They have
defined their purpose, sought out partners and funding,
and ensured they provide a value to their community.
We want to support this activity and to provide the
stimulus and investment to make it a greater part of
what the Post Office does.
* Over the past twelve months, we have made significant
progress with network modernisation. ‘The losses in the
Crown network have been reduced by around 20% and we
continue to make good progress towards our break even target
in March 2015. Over 1,450 new contracts have been signed
with agents and our converted branches are exceeding targets
in extended opening hours, customer satisfaction and queue
times.
* However, the past twelve months has also shown that the
current approach on network transformation will not allow us
to meet our commitment to convert 6,000 agency branches on
to new models by 2014/15. The reality is that in these
difficult economic times, sub-postmasters are reluctant to
enter a transformation process. While there are clear
benefits around investment in their store, lower operating
costs and the opportunity for them to release retail space
for other uses, there is also a risk associated with the
removal of the current fixed pay model. We understand their
reluctance, but we cannot afford to delay the programme.
Competitors such as PayPoint, MyHermes and Collect+ are
growing their networks every day. This is a significant
threat to agents, to Post Office and to our ability to serve
Royal Mail.
* This 2013/20 strategy therefore introduces a revised
approach to network transformation to include additional
investment and a mandate to exit those post offices that are
not viable under our new network models. This has been
developed in partnership with the NFSP and is currently
going through their governance process for approvals. this
change in approach is absolutely fundamental to our
strategy. Without it, we will not secure the conmercial
Introduction
This year has been one of the most challenging on the high street.
Many well-known brands are disappearing and others continue to
struggle. When we have looked at organisations that have failed in
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recent months, it is clear that they did not address the
fundamentals of their business by updating their retail model, their
products and services and responding to technological changes fast
enough. The commercial elements of our strategy are designed to
reinvent our customer proposition. However if we are to deliver it
successfully, we need to re-align our operational capability.
This strategy is therefore focused on creating a modern and
integrated multi-channel operating model.
@
Flegstip tains Local Contact
Branch Branch Branch SeFServie@ Contra
Ontine Mobo
While this model is not significantly different from that of our
2012/15 strategy? the business imperative is much greater. If we
are to be a retailer of Post Office branded products, attract
customers from a broader customer demographic, and grow our presence
in the financial services marketplace, we need a very different
operating model. We need a specialist sales capability that is
experienced and qualified to sell regulated products. We need
consultation rooms where customers can discuss their financial
services needs in an appropriate environment. We need longer
opening hours so customers can access our services at the time that
suits them. We need self service solutions for consumers and small
businesses that allow them to complete simple transactions without
the need to visit a counter. We need to recognise that while our
face to face capability will always be our differentiator, many
customers want to interact through other channels. We need a single
view of our customer, so that customers feel that they have a
relationship with us and we can guide them to the products and
services that they need.
our 2012/15 strategy built the foundations for this new operating
model and over the past twelve months, we have made significant
progress in its creation. However if we are to secure the delivery
of our strategy, we must increase the pace of our transformation
activity. The competitive threats in our market are continually
increasing. The unaffiliated retailers who have been at the core of
our agency network are disappearing from our high streets.
Meanwhile, organisations such as PayPoint, Collect+ and MyHermes are
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forming relationships with the Multiple Retailers and the Symbol
Groups. If we do not move quickly, we may find that cannot secure
the retail partners we need. ‘This is a significant threat to Post
Office, our agents, and our ability to serve Royal Mail.
This 2013/20 Strategy addresses these issues head on.
our transformation commitments
The 2012/ 2015 Strategic Plan recognised that the scale of the
network transformation that was being proposed could raise concerns
around the extent to which it would reduce customer service or
affect the coverage provided by the post office network. In that
context, we set out the core principles that would underpin the
transformation. As we refresh our strategy, we can confirm a
continued commitment to every one of these network transformation
principles:
* Maintain geographic accessibility, network capabilities and
social value for the benefit of customers,
* Undertake a network modernisation programme to ensure
customers can access services through channels that meet their
needs and expectations,
* Offer a ~40% incroase in opening hours giving greater
convenience,
* Ensure queues arc reduced so that 90% of customers are served
within 5 minutes,
* Bring the Crown Office network to break even by March 2015,
* Create branch models that are profitable for Post Office and
for Agents,
* Ensure all new agency contracts have fully variable commission
and remove the right to compensation on exit,
* Manage the transition from the current network structure to
one that is fit for purpose and cost effective in a smooth,
customer oriented way which compensates agents appropriately,
minimises adverse public opinion and which takes account of
local community views,
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* As part of this transition, Post Office will not remove any
provision from a community where a service currently exists,
other than for reasons beyond Post Office's control.
Transforming our Crown network
‘Through this strategy we are converting the Crown office network
into the flagship for our brand, our services and the experience we
can offer to customers. Specifically, we are:
+ improving branch layout, using a modular design that allows
the branch the flexibility to create a tailored model that
functions for them and their customers.
* creating distinct, discreet and formal areas for financial
services interactions, where confidential discussions about
mortgages, current accounts and savings can take place
* increasing the use of self-service to allow customers the
option of by-passing the queue and complete transactions
themselves
* improving our systems and sales incentives to provide the
front line staff with the tools and recognition for serving
customer needs
* relocating, merging or franchising branches where the property
costs and/or branch size is no longer appropriate.
As the components of this programme indicate, this is not just about
customer service and competitiveness; it is about making this
eloment of our network commercially sustainable. In 2011/12, our
Crown network made an annual loss of £46m. Through the
implementation of the above measures we have already reduced this to
£37m in 2012/13. This is a significant achievement and provides a
great foundation upon which to build.
As we look forward the next steps are:
* re-sizing our network: we currently have 373 Crown branches.
By the end of 2015, we will have reduced this to 300;
franchising 70 branches, merging a further 6 with branches
close by, and replacing two pairs of neighbouring branches
with one new improved branch. Since announcing our intention
to franchise these branches, we have received a significant
amount of market interest. We will now progress this through
a formal market engagement activity to ensure we select the
best partner.
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© rolling-out our blueprint operating model: over the coming
two years, every single one of our remaining Crown branches
will undergo a transformation. Working with the team in the
branch, we will develop the dosign that is right for their
branch, for them and their customers. This will be
constructed from our blueprint which has been informed by the
learning of the pilots which we have completed.
* strategic network growth: as the Crown models develop, and
our financial services and retail product offering
strengthens, there may well be areas where it is felt that
adding a Crown office into the network could be warranted. We
therefore envisage a future where the number of Crown branches
could potentially increase.
We believe that by completing this transformation, we will have
realigned our cost base to make it market competitive and created an
environment where the Crown network can play an increasingly
important role in the delivery of our sales growth.
The successful completion of this transformation programme will not
only see the Crown network achieve break-even in March 2015, it will
create the platform for profitability. If income is generated in
line with the expectations set out in this strategy, the Crown
network could deliver profits of around £65m by 2020.
Transforming our agency network
While our Crown Network is our flagship, we must remember that it
only accounts for around only 3% of our total network. For the vast
majority of our customers, it is the agency network and the sub-
postmasters that are their main connection with the Post Office.
The transformation of this network is therefore absolutely core to
the delivery of our strategy and the commercial sustainability of
our business.
In our 2012/15 strategy, we laid out the elements of our agency
transformation programme:
* introducing new contract terms that would provide for fully
variable pay: incentivising and rewarding sub-postmasters for
growing their business whilst improving the Post Office's
resilience to market downturns;
© removing the right to future compensation: removing the
onerous compensation costs that have been associated with past
network transformation programmes and ensuring that agents
were rewarded not for exiting the business but for continuing
to be a part of our future;
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+ improving customer service: introducing longer opening hours,
better queuing time and improving overall customer
satisfaction;
* reducing the agent operating costs: integrating the post
office into their retail model to deliver staff efficiencies
whilst also freeing up space that could be used for other
retail activity.
When our 2012/15 Strategy was submitted, much of the thinking around
network transformation was yet to be tested. This testing has now
been completed and we are convinced these models are the right ones
for the future of our business.
At the end of our first year of the programme and over 1,450
contracts had been signed (against a target of 1200) and more than
500 agency branches had converted to the new models. In our
converted branches, we were delivering excellent customer service -
an 878 increase in opening hours; average queue times of around two
minutes in Mains and less than one minute in Locals; and customer
satisfaction levels of 95%. In addition, the new models were
delivering benefits to our agents with a survey showing an increase
in income levels of between 9% and 198 in their associated retail
businesses after conversion.
However, in spite of this success, the past twelve months had also
shown that the current approach on network transformation would not
allow us to convert our network with the pace that we need. In
these difficult economic times, some sub-postmasters are showing a
reluctance to enter the transformation process. While there are
clear benefits around investment in their store, lower operating
costs and the opportunity for them to release retail space for other
uses, there is also a risk associated with the removal of the
current fixed pay model. We understand their reluctance but we
cannot afford to delay the programme. We have to make our network
more competitive and deliver the benefits for our customers.
Our competitors are growing their networks every day:
* PayPoint has grown its network by ~4% per annum and now has
over 24,000 sites. In addition, it has begun integrating its
products onto retailers’ tills and has recently signed deals
with Co-op Group to integrate their services onto the Co-op
EPOS system, enabling them to offer PayPoint services across
all of their 4,500 stores and at each of their retailer tills.
* indicative results from trial branches ~ will be further substantiated as the number of converted branches
increases
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PayPoint has also grown its Collect+ network to over 5,000
branches.
* MyHermes has begun the rollout of its own network, with over
1,500 collection points already established
* UPS has 600 locations with plans for a further 900 by the end
of the year.
‘These and other competitors are likely to continue to establish
long-term partnerships with retailers on the high street, as well as
expanding the range of services they offer. This is a significant
threat to agents, to the Post Office and to our ability to serve
Royal Mail.
‘This 2013/20 strategy therefore changes the basis of the agency
transformation programme, specifically reducing the voluntary nature
of the programme and introducing additional investment. Sub-
postmasters will in 2013/14 complete a retail survey which will
allow us to take a more strategic approach to this programme.
Through this exercise we will build our understanding of the
viability of our sub-postmasters’ businesses and their ability to
successfully operate one of our new network models. Where sub-
postmasters cannot be viable, we will have the ability to manage
their exit from the business. We will work with them to either find
@ new agent to take over their business or to find an alternative
location for the post office within the vicinity. No post office
will close and no agent compensation will be paid until the new post
office is operational. For those that are viable, our field change
advisors will support thom through every stage in their
transformation - helping them understand the process, build their
business case, connect with suppliers and partners and finally make
the transformation.
ur expectation is that this new approach will deliver an outcome
similar to that of the more structured and tightly scheduled
approaches to network transformation we have previously discussed
with Government. Given the importance of this transformation to our
market competitiveness, our ability to serve our clients and
customers and our journey to commercial sustainability, we will take
action should there be a shortfall against this projection or the
benefits accruing from the broader programme. In that context, we
will complete a formal review of the programme in September 2015.
At that stage, we will decide on any adjustments that need to be
introduced - this could include amongst other changes amendments to
investments made in branches, changes to compensation levels,
alterations to the Core Tier Payment and possibly even an extension
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of the compulsory nature of the programme. Both the NFSP and
Government understand the need for this action should the shortfall
arise.
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Investing in our sub-postmasters’ retail capability
Our Local operating model relies on there being a host retail
business that is sustainable. To ensure that sub-postmasters receive
the support and advice to allow their businesses to be successful
during and after conversion, we are creating a fund that will expand
the role we play in assisting them with the retail side of their
business. Specifically, Post Office will provide support in three
key areas:
* Advice and guidance: Post Office already provides tools and
services to help sub-postmasters grow their retail income, and
we will expand this team and their remit to enable them to
support a greater number of branches. These services range
from shop layout to website support.
* Funding: existing sub-postmasters will be able to apply for
funding to assist in growing their retail income after
converting to a Local model. We anticipate this support being
available to up to 2,500 branches who wish to convert on site.
* Providing a conduit to external support and partnerships:
working with potential partners and franchises, we will be
able to present sub-postmasters with a range of external
options to get investment and growth opportunities. Given the
size and scale of tho Post Office, we would hope this would
provide them with moze competitive and convenient deals than
they may be able to negotiate themselves.
Investing in our community network
‘The final part of our network transformation plans relates to
Community post offices, where we are establishing a new investment
programme to sustain and reinvent this increasingly vital part of
our public service. The importance of a post office in rural and
urban deprived areas is increasingly important in difficult economic
conditions. They not only provide access to vital services, they
provide a hub for the community and an important differentiator in
an increasingly competitive mails market. We are therefore
including a commitment to invest £20m in this element of the
network. ‘This Community Post Office Fund will be used to invest not
only in improving the conditions and services of these branches but
in supporting communities to create the post office that is right
for them. Today we have over 150 mutual post offices that are being
sustained by their local communities. They have defined their
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purpose, sought out partners and funding, and ensured they provide a
value to their community. We want to support this activity and to
provide the stimulus and investment to make it a greater part of
what the Post Office does.
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Investing in increasing access to our services
Within this strategic plan period, we are looking to not only
transform our existing network but to grow it. While the Post
Office network has for many years been the largest retail network
within the UK, we are seeing competitors using relationships with
third parties to create significant networks. As we highlighted
above, PayPoint has over 24,000 sites and has grown its Collect+
network to over 5,000, If we are to protect our market position, we
must also adopt this approach. We must look for new ways to
increase the access points to our network. This will need to go
beyond our standard post office models and consider the possibility
of self-service technologies and perhaps even single service
solutions, e.g. collection and return access points. This latter
point is essential if we are to protect our position as the number
one retail mails provider and continue to support Royal Mail in its
market aspirations.
Investing and creating a multi-channel presence
The final element of our operational strategy relates to multi-~
channel. In today’s retail world, customers expect to be able to
interact with organisations across a range of channels. Whilst we
have made progress in providing multichannel access to our financial
services and telecoms products, we lag the market in every other
product area. If we are to deliver our strategy, we have to address
this issue and become a truly multi-channel retailer. Over the
strategy period, we will therefore invest in creating an
interconnected modern channel model for our business. This is
summarised in the figure below.
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Post once Branches
it dato ches tet the customar expetenee & Bost ales,
‘subrpxinaio ni einceod i acemiman ber enannen ts her cama
2 Part websites
‘where wo choose,
[Coteoques in bane contact cont, neo oes and ie customer thomas
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Fundamentally, this model will allow customers to start any product
or service journey in one channel and complete it in any other,
whenever and wherever they want. It will allow us to attract a
broader customer base by appealing to those segments who do not want
to use a physical branch. It will allow us to share data across our
service providers to enable us to provide a joined up view every
time they interact with the Post Office. It will allow us to up-
sell and cross-sell our product offer, increasing the likelihood of
customer retention whilst also reducing our cost to serve and sell.
Conclusion
This operational strategy protects the physical network which is and
will continue to be our greatest strength, whilst also maximising
the synergies between this and the digital world. No other retail
organisation in the UK can compete with our breadth, reach and
physical presence, and we must build on this advantage if we are to
deliver our retail vision. Through the effective and relevant use of
these channels we will be able to ensure that all our current and
prospective customers, regardless of their means, capabilities,
location or preference will be able to access the Post Office
products and services they require, in a manner convenient and
relevant to them.
Additional information
Additional detail on each of the elements of the channel perspective
of our strategy, are included under separate attachment,
specifically:
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Transforming the post office agency network workbook
Crown network workbook
Digital and multi-channel workbook
Network transformation stakeholder engagement and communications
workbook
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Delivering our vision — the organisational
perspective
Key messages:
* If we are to deliver our strategy, we must address two
fundamental issues in our busines
© Our organisation model is structured on a traditional
product structure. To make the transition from a channel
business to a retailer we will have an organisation that is
built around the customer - ensuring that all of our
processes are focused on delivering an excellent customer
experience.
© While the Network Transformation Programme will increase the
proportion of our cost base which is variable, it will not
be enough to secure a commercially sustainable future. We
need also to reduce our central costs and ensure that as we
grow our income we are not adding fixed cost back in.
* To achicve this we will conduct a ‘root and branch’ review of our
organisation, starting with customer facing channels and working
back through tho business to make it slimmer and ensure that
everything we do is focused on delivering value for the customer.
+ ‘This will create a Post Office with a cost base that is lower and
more variablised and therefore able to adapt to changing market
conditions. The Post Office will be built from the customer
perspective and focused on growing true value for our
shareholder.
Current situation and the inherent challenges:
In 2012/13 Post Office total costs were £1.05bn on total income of
just £934m. Around two thirds of the total cost relates to the
‘front office’, i.e. agents pay, Crown staff, property and sales
support. The remainder is split across the support functions of the
business:
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* We will focus on ensuring value for money in everything we do
© We will have clear and unambiguous accountabilities
* We will embrace mutualised ways of working
As we take this forward, we will challenge every aspect of our
business. We will consider its purpose value, effectiveness and
efficiency. The 2012/15 strategy was focused on making our network
customer focused. In this strategy, we extend this principle to our
entire business making sure that everything we do is justifiable in
the value which it adds to the customer, to the Post Office and to
our shareholder.
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. Delivering our vision - our mutualisation
journey
Key messages:
* In 2010, the Government made two key commitments on the long
texm ownership arrangements for the Post Office: firstly
that it is not for sale and secondly that it would create
the opportunity for a mutually owned Post Office.
* This Strategic Plan contains three commitments that combined
will build the opportunity for mutualisation to be realised:
I, We will make the Post Office financially sustainable -
this is the primary driver for our strategy and is an
absolute pre-requisite before a transfer of ownership
can be considered.
IT. We will create an environment that encourages mutual
ways of working - introducing stronger and more
effective models for engaging our staff, sub-
postmasters, customers and other stakeholders.
III, We will define our Public Purpose - completing the
Process that is underway with the Stakeholder Forum and
making a recommendation to BIS that we can then jointly
communicate.
+ Supporting these three commitments is a roadmap that will
evolve the Post Office into an organisation that has all the
characteristics of a mutual organisation. An organisation
that is commercially sustainable. An organisation that is
connected to its people, its customers and its wider
stakeholder audience. An organisation that invites others
to engage and participate in its development and future.
Introduction
Over the past eighteen months, we have taken some important steps on
our mutualisation journey. We have established a Stakeholder Forum
to support us in the definition of our Public Purpose. We have
engaged with other mutual organisations to improve our understanding
of the many different organisation constructs and operating models.
We have conducted a cultural study that assessed the gap between the
current Post Office culture and that of mutual organisations.
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Through this work, we have built a clear understanding of the
requirements for mutualisation and it is in this context, that our
2013/20 Strategic Plan makes three commitments:
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+ We will make the Post Office commercially sustainable ~ with a
business model that is robust for the commercial environment
in which we operate, supported by a far smaller and more
stable long-term funding agreement from Government that
sustains those elements of our network that are for social
benefit.
* We will create the conditions to enable mutual ways of working
across our business - introducing stronger models for engaging
our customers, consumer groups, partner organisations, our
people and their representative bodies to improve business
performance and to facilitate the cultural changes that are
crucial to becoming a mutual.
* We will work with our partners to define our Public Purpose -
completing the next stage of the process with the Stakeholder
Forum to allow us to recommend a Public Purpose statement to
Government which we can then jointly communicate and use to
guide the future development of the Post Office.
Creating the commercial conditions for mutualisation
As the Government's 2012 consultation identified, if the Post Office
vas to operate as an independent mutual entity, it must
fundamentally redefine its financial relationship with Government
This does not mean the subsidy must reduce to zero, but it must
reach a far smaller and stable level to enable a more arm‘s length
relationship with Government. Since the consultation response was
published we have been working with external advisors to refine this
definition of financial independence, identifying the core
characteristics that would enable us to operate as a standalone
mutual business:
* A strategy and market position that allows us to compete
effectively in our chosen markets ~ both now and in the future
* The flexibility to respond quickly through corporate actions
to unforeseen changes in these markets
* An appropriate cost base and business model with the
flexibility to withstand revenue volatility
* A robust track record of profitability and cash generation
(taking into account of a far smaller on-going funding stream
from Government)
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* Sufficient free cash-flow to allow on-going investment in the
business to maintain commercial competitiveness in a
continually evolving marketplace.
We believe the successful implementation of our Strategic Plan will
create these commercial conditions and in doing so the opportunity
for mutualisation. In March 2015 our Crown Network will return to
breakeven. In F¥15/16 Post Office will achieve breakeven at EBITDAS
(earnings before interest, tax, depreciation, amortisation and
subsidy). In F¥16/17 Post Office will be cash-flow positive. In
FY18/19, we believe Post Office will have established a track record
of commercial sustainability that would be credible in the external
market and by FY19/20 we will have reduced our overall Government
subsidy requirement from a peak of £415m this year to around £50m
per annum.
Our primary driver in this Strategy is to create a commercially
sustainable Post Office that is successful, vibrant and growing
‘The decision on whether to transfer ownership at that point and
create a mutual organisation would of course be for Government and
Parliament to make.
Creating an environment that encourages mutual ways of working
While the above commercial milestones are important steps towards
being a mutual organisation, it is in our view the cultural shift
that is more important.
Over the past year we have hold discussions with a wide range of
mutual organisations to hear their story and learn from their
experiences. At the core of these organisations is a commitment to
engage with their stakeholders through customer forums, employee
councils, regional stakeholder bodies or a variety of other
mechanisms, to hear and understand their issues and ideas. Inspired
by these examples, we have already started to make progress on our
own engagement agenda.
* Our Stakeholder Forum brought us together with the people from
the BBC, Consumer Futures, Citizens Advice, Age UK, the
British Youth Council and the representatives of our people
(Unite, CWU and the National Federation of Sub-postmasters) .
Together we are shaping the Public Purpose of the Post Office.
* Our Super-Briefers are connecting our head office staff with ;
our branches. ‘This group of around 100 senior managers in the
business was mobilised to communicate directly with our staff
in Crown offices to explain the pay and franchising proposals
50 we could hear their concerns. While this was initially
introduced to address a specific business issue - it is a
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concept that has received positive feedback from our people + Introduction of a sub-postmaster survey: while we have
and is therefore one we will continue and expand. mechanisms in place to measure the engagement and satisfaction
of our employees, we did not have a formal mechanism in place
* Our Wow magazine for our Crown Staff saw us introduce a for our sub-postmaster community. In 92 FY13/14, we developed
magazine that was for our people and written by our people. a sub-postmaster engagement survey. This embraced the
This magazine allows people to share their stories whether principles of our existing survey whilst also recognising that
they are about their experiences of Crown Transformation, our relationship with our sub-postmasters is very different.
their transformed branches or their successes at a branch and The survey was launched in September 2013 and we will shortly
individual level. have the first round of results. ‘These will help us shape our
‘ ‘ i future plans for engaging with the network and also support
These have been important first steps for us in changing the the refinement of the engagement survey process. Surveys will
culture of the Post Office and our mutualisation timeline now take place on a regular basis with action plans to respond
includes many more: being developed.
+ Engagement with NFSP on Strategic Plan and revised Network * Introduction of super-briefers: in Ql FY13/14, we introduced
Zeansformation approach: In Q2 FY¥13/14, with the encouragement super briefers into our Crown Network. ‘These individuals who
of Ministers, we started to engage with the NFSP on our are chosen from our senior management community spend time in
2013/20 Strategic Plan, We agreed principles for information branch engaging with our front line staff. They cascade our
sharing, provided the NESP with a copy of the draft Strategic messages into the business and listen to the thoughts,
Plan document, had teams from across the directorates share concerns and issues of our people. We intend to engage with
the detail of their elements of the plan and provided the NFSP the NFSP to assess the feasibility of introducing a similar
with the opportunity to truly engage and challenge the work concept into the agency network aligning Post Office managers
that had been completed. We then worked together to with each of the NFSP regional branches to create a rolling
redesigned the network transformation programme approach and Programme of regional forums and roundtable discussions.
the associated funding/ compensation elements. The NFSP are Should this prove a viable way forward, we would start
now taking this revised approach through their governance implementation in Q4 F¥ 13/14.
processes. We expect this to conclude at the ond of November
2013 and for us then to work together on driving through the © Creation of a joint NFSP & Post Office communications forum:
delivery of network transformation approach. as the NFSP and Post Office progress the approvals and
subsequent implementation of the revised network
* Engagement with the NFSP on the future of their organisation: transformation approach, we have been working closely on
over 7,000 of our sub-postmasters are members of the NFSP and communications. fhile we each have responsibility and
it is the only organisation that Post Office recognises as ownership of our respective organisations agenda and
representing the sub-postmaster community. As we consider messaging, it is absolutely essential that we are aligned. In
our future and that of our sub-postmasters, it is clear that that context, we are sharing timetables, plans and as far as
the NFSP has an important role to play. We need them to is practicable content. This is building a relationship and
support sub-postmasters as they determine their future through way of working that we believe would be valuable to continue
Network Transformation. We need them to be capable to support beyond network transformation. We will therefore seek to
‘the sub-postmaster of the future who, to ensure their success, establish a joint NFSP & Post Office communications forum in
will need a thriving retail business sitting alongside their QL Fv14/15.
post office. We need them to be relevant to our multiple
partners who will play an increasingly important role in our + Creation of a Post Office Advisory Council: In June 2013, the
business. Jointly we recognise that this will require the Post Office Board agreed to establish a Post Office Advisory
NESP to change its organisation, its capability and the Council. This will provide a formal mechanism for customers,
services that it offers to its members. In Q4 2013/14, we employees, sub-postmasters and wider stakeholder groups to
will therefore focus our engagement in this area; building a engage with the Post Office on areas such as new products, new
view of the NESP of the future and developing a joint roadmap branches, advertising, customer/ service issues. This will
to secure its delivery. allow them to connect into the highest level of our business
51 52
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and us to really understand their views. The Council will
have around 20 members and be chaired by one of our Non-
Executive Directors. The aim is to announce and recruit
Council members during Q4 FY13/14 and hold the first meeting
of the Council in Qi F¥ 14/15. Once the Council is
established, it will meet three times each year.
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* Creation of Business User Groups: Alongside the Post Office
Advisory Council, Post Office will establish business user
groups. These will allow people from across our organisation
to come together and address specific business ideas,
opportunities or problems. In 93 F¥13/14, we established our
first user group. This is focused on the findings of the
recent Second Sight review and is tasked with developing an
action plan for the business. Additional business user groups
will be established in Q4 F¥13/14 and then throughout Fy14/15.
* Cross stakeholder culture working group: In 94 FY12/13, Post
Office commissioned an independent review of the Post Office
culture comparing it to that of a mutual organisation and
identifying key gaps. A workshop with the CHU, Unite and NFSP
had beon planned to provide a similar opportunity to discuss
and understand their perspective on priorities. Due to the
current industrial relations environment, this was postponed.
We intend to resurrect this and would anticipate this taking
place in Qi PY14/15 with the output of the session being a
long term roadmap for our joint engagement moving forward.
Post Office is absolutely committed to this engagement programme.
Where possible we will accelerate the activities that are set out
above but in doing so we will be cognisant of our partners. The
objective here unlike our other programmes is not to finishing first
but to finish together. Patterns of behaviour and ways of working
have been developed over many years and to truly change these will
take time,
Creating our public purpose
Over the past year, the Stakeholder Forum has been working together
on the Public Purpose of the Post Office. It produced two draft
Public Purpose statements and over the summer, these have been
tested through independent qualitative market research. Through
this process we have received over 1000 responses from customers,
small businesses, employees, sub-postmasters and the general public.
‘They have provided us with their views of the Post Office - the
reasons they believe the Post Office needs to exist, what it is
about the Post Office that makes it different, and as the Post
Office evolved what it must protect. They also provided specific
feedback on the two statements that the Stakeholder Forum produced.
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The analysis of this information will be presented to the
Stakeholder Forum in Decenber 2013. The outcomes of their
discussion will then be structured into a submission for the Post
Office Board to consider in January 2014. By the end of 94 FY13/14,
the Post Office will make a reconmendation to BIS on the Public
Purpose statement with the intention that this is announced in Qt
FYL4/15.
Mutualisation timeline and milestone summary
In summary, this Strategic Plan will create a Post Office that has
all the characteristics of a mutual organisation:
* An organisation that is commercially sustainable
* An organisation that is connected to its people, its customers
and its wider stakeholder audience
* An organisation that invites others to engage and participate
in its development and future
* An organisation that is clear about its Public Purpose.
The table below provides a summary of the key milestones on our
journey.
Milestone [Activity Wilestone
type
Public Launch of Stakeholder Forum @3 FYI2/i3
Purpose
Engagement I Independent review of Post Office Of FYI2/i3
culture
Engagement I Super-briefers into Crown Network Oi FYI3714 on=
going
Engagement I Board agree to establish Post Office I Ol FY13/14
Advisory Council
Engagement I Post Office and NFSP engagement on I Q2 FY13/14 on-
Strategic Plan going
Engagement I Development of sub-postmaster 2 FYis/id
engagement survey
Engagenent I Launch of WOW magazine oe Fras/ii
Engagement I Sub-postmaster engagement survey 03 FYI3/14 on-
launched going
Engagement I First Post Office Business User Forum IQ3 FY13/14 on-
created going
Engagement I Post Office and NFSP engagement on IQd FY13/14 on-
future of NFSP going
Engagement I Announce and recruit Post Office od FY13/14
Advisory Council
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Engagement I Super-briefers into agency network OF FYI3/14
(if viable)
Public Stakeholder Forum submits findings to IQ@ Fy13/14
Purpose Board
Public Post Office Board recommends Public I Q4 FY13/14
Purpose Purpose to BIS
Public Post Office and BIS announce Public I QI FY14/15
Purpose Purpose
Engagement I Creation of NFSP & Post Office Ql FYI4/15
communications forum
Engagement I First meeting of Post Office Advisory IQi FY14/15 on-
Council going
Engagement I Cross stakeholder culture working Or FYI4/15 on
group going
Commercial I Crown network achieves breakeven Qa FYIS
Commercial I Post Office achieves breakeven at FY 15/16
EBITDAS
Commercial I Post Office achieves positive cash-~ I F¥ 16/17
flow
Commercial I Post Office achieves commercial FY 10/15
sustainability
Commercial I Post Office reduces NSP to £50n FY 19720
Tn 2010, Government set out its commitments to create the
opportunity for a mutually owned Post Office with an ambition to
make progress by the end of its term in Government. As the table
above shows, by 2015, significant steps will have been taken:
* Public Purpose: the Post Office will have a Public Purpose
statement that has been developed in partnership with its
stakeholders and with the input of over 1,000 people including
consumers, small businesses, sub-postmasters and employees.
* Post Office Advisory Council: a Council of around 20 people
from within and outside the Post Office will have been formed
and operational. This body will have the opportunity to be
involved in key business areas and have direct access into the
Post Office Board, through its Chairman who is one of our Non-
Executive Directors.
* NFSP: a new long texm commitment to the NFSP will be in
place. This will be a joint agreement to work together to
evolve the NFSP so that it has the skills, expertise and
resource that are needed to support our sub-postmaster
community regardless of whether they are independent business
people or large multiple organisations.
* Engagement with our people: our people whether they are
employees or sub-postmasters will be playing a greater role in
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our business and we will have a better understanding of their
issues. Business user forums, engagement surveys, magazines,
and super-briefers will have been in place for over a year and
will be delivering tangible results.
Commercial sustainability: the final deliverable will of
course be the steps we have taken towards commercial
sustainability. Our Crown Network will be at breakeven and we
will be on track to achieve breakeven at EBITDAS level the
following year.
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6. Delivering our vision - our funding
xequirement
Key messages:
* At the heart of this Strategic Plan is a commitment to make
Post Office commercially sustainable and less reliant upon
Government subsidy.
* We are protecting our network and increasing the range of
services that we offer to consumers and small businesses, we
are offering customer friendly opening hours, and improving
our on-line offer to serve those that prefer digital access.
Combined this will deliver a 47% increase in income through
to 2019/20.
+ We are investing in automation, franchising and other cost
measures to create a Crown Network that will not only
achieve breakeven but over the plan period will become
profitable; turning a £51m loss in 2010/11 to a position of
breakeven by March 2015. This creates the momentum for a
bright future.
+ We are improving the economic viability of our agency
network and individual sub-postmasters: introducing
variable pay to align sub-postmasters and Post Office
commercial objectives and creating a retail support team who
can support sub-postmasters to ensure they can maximise the
value of the new pay model. Over the plan period, the
proportion of our agency costs that are variable will
increase from 738 to 908.
We are protecting post offices that are the ‘last shop in
the village’ and taking them out of the scope of network
transformation and creating a Community Post Office
investment fund of 220m. This recognises the social value
that these post offices play and gives them access to funds
that can help them improve tlie service they offer to their
communities.
We are also addressing our central costs developing a new
target operating model for Post Office looking to other
organisations and the wider marketplace to understand if
there are more efficient ways to operate our business.
Through this activity we will reduced our existing central
business costs by 23% over the plan period.
Our journey to commercial sustainability is already
underway. Our overall income in 2012/13 was £35m higher
than forecast in the 2010 Strateaic Plan, and our EBITDA is
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Introduction
As the previous section set out, this Strategic Plan has been built
around the key imperative to deliver a commercially sustainable
financial position for the Post Office before the end of the plan
period. We have already made strong progress against this objective
over the last year, finishing 2012/13 ahead of our targets to reduce
the deficits in both the Crown Network and overall business, despite
the worse than expected economic environment, the additional
resource implications of separation which were not incorporated in
our plan and the shortfalls in income from government services
compared to our original expectations.
By mitigating these risks and developing an ambitious but credible
plan for growing our revenue and cutting our costs we believe we
will be able to complete the task of delivering commercial
sustainability before 2020. The key financial milestones contained
in this Strategic Plan are as follows:
© March 2015: breakeven in the Crown Network
© 2015/1 breakeven at EBITDAS (earnings before interest, tax,
depreciation, amortisation and subsidy)
+ 2016/17: first year of positive cash-flow
* 2018/19: point at which track record of commercially
sustainability is achieved, i.e.
a sustained level of positive cash-
flow, self-financing of investment and
profitability
Financial projections
‘The tables at the end of this chapter set out the components of our
profit and loss and cash flow projections from 2013/14 through to
2019/20. The key trends and developments are highlighted below:
+ Overall income in this period will grow from £921m to £1,360m
- an increase of 47%, equivalent to an annual average real
growth rate of over 4%, outpacing the rate of growth in the
broader economy during this period. Within this all of the
main pillars are delivering sustained growth, with the
strongest driver being the 77% increase in financial services
income, from £277m in 2013/14 to £492m in 2019/20;
+ Our cost to income ratio (excluding subsidy) will decrease
from over 110% in 2013/14 to just over 91% in 2019/20. This
is in line with expectations for other organisations of our
type and a key indicator of our decisive shift to financial
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sustainability. This turnaround in ratios is delivered through
@ combination of our ambitious revenue growth and a clear
focus on reducing operating costs. 90% of our agency costs
will be variable by the end of the plan period. Staff costs
(excluding agents) will be reduced by ~16% over this period,
and existing central business costs (i.e. not including new
income costs) will be reduced by 23%.
* Operating cash flow becomes positive on a sustained basis from
2016/17, alongside a significant reduction in the network
subsidy period in every year. Improvements in our working
capital management will reduce our overall requirement by
£200m and improve the overall volatility. Working Capital
changes, whilst substantial in-year, net off over the plan
period.
Key areas of investment
To deliver the strategy set out in the document and the associated
financial performance, we will need to complete our transformation
programme. The key investment areas are presented below.
1, Network spend:
As in the previous plan, the majority of the investment will
be concentrated on the Network Transformation Programme (NTP).
As we highlighted in Section 3, to deliver our Strategic Plan,
we must accelerate our network transformation programme.
While great progress has been made to date, without a change
in approach, we will not be able to complete the scale of
change that is needed to secure our and our sub-postmasters
future. This funding request therefore includes additional
investment funds for our sub-postmasters who are both exiting
and converting. ‘The scale and profile of this requirement is
provided in the table below.
2013/14 I 2014/15 I 2015/36
Peer ra
42 32 42, 39 6 161
35 WB Tez Tor 2 350
eB 37 2 2 iG 126
Tae 5E Era 80 70 BT
eincludes Taveataant In community Branches and inareased access Rodels
2. Non-network spend:
In parallel to the modernisation of our physical network, it
is essential we invest in the capabilities needed to drive the
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income growth forecasts set out in this plan. Specifically,
we mus
Invest in developing face-to-face sales capabilities for
financial services, implementing a supervisory structure
and developing a customer management system to drive
mortgage and other financial services business.
II. Develop and roll-out new, customer-focussed financial
services products, such as the Post Office current
account.
III, Invest in assisted digital access and identity assurance
technology to provide both ‘entry level’ and ‘premium’
services to our customers.
IV. Implement IT systems to support the growth in new
products and services, and replacement of the existing
point-of-sale system ("Horizon") to make it fit for the
future.
The profile for the funding until the end of the plan period
is as follows:
26/19" I
Terao prey 30
Flesse pote the Zigites oa PoE TO7ID aad TRTEO cee Tadlcativa and uae Te
scope of this funding request
3. Working capital facility
The Post Office currently has a Working Capital Facility of up
to £1.15bn to finance its working capital requirements (mainly
network cash). The demands on this facility are particularly
volatile as they are often driven by customer behaviour and
outside of Post Office’s control (for example, the weather
impacts on the pattern of benefit withdrawals).
As a sign of our strengthening financial position, as part of
this Strategic Plan we are able to lower our requested Working
Capital Facility limit to £950m, a reduction of £200m. In
addition the Post Office will undertake a review of options to
reduce the volatility of this facility.
Measuring progress
Building on the governance arrangements that have been established
over the past year, we will work with the Shareholder Executive to
develop and agree an appropriate monitoring regime and new scorecard
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and supporting metrics to enable progress against the Strategic Plan
to be monitored, assessed and discussed on a regular basis. This
should incorporate both the specific performance conditions
associated with the funding agreement, and the broader range of
metrics which BIS officials and Ministers will wish to monitor in
their capacity as shareholder.
Additional information
Additional detail on each of the elements of the funding perspective
of our strategy, are included under separate attachment,
specifically:
1, Finance workbook [Re~issue}
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Post Office Ltd.
Profit & Loss Statement 2013 to 2020
(em)
Ts/id [ais [ise I Ae7aT_[a7/i8 I A87id I 19/20
Total Mails ¢ Retain] 407 I 430 I 425 I 448 I 482 I sis I 546
Fokal Financial services I 277_I 295_I 308 I 379 I ae7_Iaea_I 492
‘Total Government I 1isI 117 I~1se I 17@ I 173_I 190 I 206
Services
Total Hone Services I 51 0 oe I ais I_I as [80
Total Pillar Income: 350 [902 I a008 I aa19_[-taig [asia 3390
Supply Chain I 29 32 3a 33 37 37 37
‘other I G 3 3 3 3 @
Total Income aaa I 910] “a0a7 I taco “azet [isso tase
excluding Fes Progte share)
RES Profit ShareI 33, 3a 33 Ed Eg i a
Total Not Teoma SaxI—97@ I t000 I —an95I“isoiI~ra0o I “ra85
(Aneluding mes Protse share)
Tneone contingency Ts) _I 107 Teor I Ta00) I azo
Variable Agents PayI (344) I (379) I (41) I (455) I_(aea) I (52a) I (551)
Fixed Agents PayI (izé) I (ai) I (99) I (ea) I (65) I (61) I (60)
gente Pay (@i0)_Ica90y_I-ts20) I 1536)_I Sa) I (se2)_I ety
Central staff coats] ON I a) I an I @9)_I Ga I Gn I G5)
Supply chain staff costs} (55) I (95) I (55) _I (55) _I (98) _I (55) I (55)
‘Other staff costs I (149) I (138) I (429) I (a20) I tan) I (a27)_I ti27
otal State Coste (259)_I (236) I _(a25)_I (@a2y_I (220) I aia) I (ie)
TF running costs I (61) _I_(7a)_I (67) I (6e)_I (ea) I (es) I (60
Central costs (inciuding I (97) } (98) I (ea) I (ay I (es) I (2) I (80)
inter-business)
Supply Chain costsI i) I [an I a I an I an I am
‘Other costs I (7a) _I_(er)_I _a)_I 0 I on I_I 137)
Fetal existing business I (290) I (278) I (eed) I (232) I (229) I (226) I (a2ay
costs
Wow fncone Related Won- I oO a
IT costs
Wow ncone Related iF] 0 a a a) or
costs
Total new income I Oo ay I Weay I BLY I aver I (easy I (ae0y
business costs
Foeal Non-stafF costs (ao0y I (S05) I TSAB)_I_(3z)_I aoe) I casoy_ICaaD
‘otal Costs qoisy I (0297 I qa06a) I Taran) I GATS) I Gzsiy I as)
Costs related to income 3 2 36 78 Gy 72
contingency
Total costs after ancome (1019) (1020) (2040) (2105) (21:
tangs
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Post Office Ltd. Post Office Ltd.
Cash Flow Statement 2013 to 2020 Summary Balance Sheat 2013 to 2020
(em) (em)
TR THE TE pe i 5 ia EE] Aa at March (Genes ae aaa] aaa 0]
» Io
EBITOAS Te ten) I 30 Fixed Assets] 79] On) Ol] ot) a?) 2] 8
x 260 0° I 80"
807K Tio Working Capital I Thosy [asa asT_I asm I sr I aT I asa
Capex (Eangible and (08) Provisions and Grants I (i7)_I_o a a 7 ° o
Ponaion Debtor/ (Creditor) I_ 96 [96 I 36 I 96 I 96 _I 96 I 96
(oy Cheat Balances I (276) I (200) I (25s) I (assy I Taso) I (220) I (i907
°
Wotwork Cash] 785} 730 I S00 I 725] 725] 780] 725
scrves, Provisions & 730
sae captiooal steus (sn) Wot Trading Fonds I (100) I (365) I (o27) I (sia) I (eat) I (350) I (225)
ee ane = Net Assets 420 4100~~«S8SL dS HD
Financed by:
Underlyang Cash anflow/ 43 (246), (141) 94 104
(outflow)
a SA EE
Total Cash anflow/ (outflow) 104 (269) (263) 114
[Oe coPstan Rocerves I ize [ice 730] ox I ica [aaa [ase
Cele nl a ne
Please not
- For planning purposes impairment is assumed to continue
throughout the plan period, although in practice this is
unlikely to be the case. This is an accounting issue and has
no impact on funding. However, this will impact financial
targets and these will need to be altered at the point of
change of accounting treatment.
- This plan and the associated financial projections assume that
Post Office receives £1.795m of State Aid funding over the
period FY2012/13 to FY 2017/18. Should the level of actual
funding be less than this amount, the plan commitments and
outcomes will be revised.
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Delivering our vision - assumptions, risks
and opportunities
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Ke}
y messages:
As with any plan that stretches out for seven years, there is
uncertainty. We will therefore continue to monitor and adapt
to ensure we deliver on the goal of commercial sustainability.
At the core of our plan are two core assumptions which are
fundamental to the overall strategy. If these do not
materialise as planned, a significant adjustment to the plan
would be required.
© Fizst is the switch from a voluntary to a semi~
compulsory approach to the roll-out of the Network
Transformation Programme. Failure to secure agreement
to this shift in the programme approach, will impact
upon every aspect of our plan ~- our ability to grow
income, to reduce cost, to compete, to protect the
network and to deliver commercial sustainability.
© Second is the continuation of the POCA contract beyond
2015 albeit at a reduced volume and income level. This
has strategic importance not just for the direct
contribution it makes to our P&L, but also for the way
that income is distributed around the network, the
additional footfall and retail income it generates for
agents, and for the way we run our supply chain
business.
For each of the above core assumptions, we have developed a
detailed counter factual case. This is attached in our Counter
Factual Workbook.
Beyond these core assumptions, the plan contains a balance of
risk and opportunity across income and costs. We will
proactively monitor these and adjust our strategy as
appropriate. In this section, we highlight the key points to
be noted.
have seen a significant increase
in the level of competitive
intensity in our markets.
PayPoint, myHermes and others are
increasing their network size ~
signing partnerships with many of
the multiples and symbol groups
If this level continues it will
have an impact on our competitive
differentiators.
‘allow us to maintain the
momentum of our transformation
activity so ensuring that we
get extended opening hours in
the branches that give us the
best competitive advantage.
. Increasing the pace and level
of our conversation with
franchise partners: the
information obtained through
our retail survey combined
with the mandate to exit
unviable sub-postmasters,
allows us to move our
discussions with franchise
partners on to a more
strategic level as we will
have clearer view of the
possible opportunities for
partnership with them. A
strategic and proactive
engagement plan is currently
being developed.
Increasing the size of our
network: by 2020 we envisage
a network of 13,500 access
points. This will include our
11,500 post offices and an
additional 2,000 access
points. We are currently
building a view of the
possible format and structure
of these new ‘access’ options.
Delivering our strategy ~ the key risks
Competitive threat:
ove:
1. Introducing the revised
approach for network
x the past twelve months, we transformation: this will
Endusteial relations:
The Post Office industrial
relations environment is
currently very challenging. The
transformation programmes we are
currently undertaking combined
with the uncertainties around the
possibility of mutualisation
present challenges for our
industrial relations environment.
If the current situation
The current Crown Network
dispute is being managed
proactively at the most senior
level within the organisation.
We are continually monitoring
the situation and engaging as
appropriate to find a
constructive way through the
dispute. We have established
a ‘super-briefer’ group to
engage directly with our
people to ensure we have a
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escalates, continues for a
prolonged period of time or gets
linked into a wider industrial
relations dispute around the
privatisation of Royal Mail
Group, it could have a
significant impact on the
deliverability of our plan.
direct connection with our
people and have our own
temperature check on
developments. In the
meantime, our central teams
have been trained so that they
can provide support in branch
to mitigate the impact of
strike action on customers,
our partners and the delivery
of our strategy.
2. We are currently conducting a
strategic review of our
relationship with the NESP.
‘The NESP are keen to work
closely with the Post Office
on the mutualisation agenda
and are looking for Post
Office support to enable them
to transition to a trade
association. Our review is
therefore considering how best
we build this relationship
moving forward, ensuring that
we are clear of the role they
can plan in the future
business and the delivery of
our strategy.
‘overall conversion rate.
- We are creating a single
repository for customer data -
accessible and visible by all.
‘This will ensure that we
maximise the opportunity for
cross selling and upselling
products at every customer
interaction.
. We are investing in our
marketing and advertising to
rebuild our brand perception
and product awareness.
Significant campaigns have
been completed over the past
twelve months and these will
continue throughout the plan
period.
Income growth:
At the core of our strategy is an
imperative to grow our income
over the coming yoars. While
historically, we have managed to
deliver pockets of growth, this
has always been offset by areas
of decline to deliver a flat~
Lined income position. If we do
not address this trend over the
coming twelve months we are
Likely to undermine the
fundamental commercial viability
of our network and our commercial
sustainability.
T. We have created a dedicated
financial services sales team.
We are investing in improving
their capability and providing
them with the infrastructure
thoy need to perform. We have
also changed their reporting
line - taking it out of the
branch structure and aligning
it directly with the financial
services commercial team.
2. We arc improving our customer
journeys to remove the current
weak points in our sales
process. This will reduce the
number of ‘abandoned’ sales
journeys and improve our
Management and third party
capacity
‘The transformation programme set
out in this plan is significant
in both scale and complexity. we
are committed to its delivery but
also recognise that this will
test the capacity and capability
of our organisation and our
partners.
7 The Post Office Strategic
Programme Management Office
and the Transformation Board
will continuo to monitor
progress across our
transformation programme and
resource with decisions being
taken to prioritise
activities, strengthen our
teams and increase capacity as
appropriate.
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Delivering our strategy - the key opportunities
opportunitai
Identity & assisted digital:
Post Office has invested and is
committed to both of the above
markets. We see them as a
critical part of our future in
providing front office of
government services. However,
each of these markets is
relatively immature, with
Government still developing their
view of their needs. We have
made an assessment around the
potential value of these markets
in our plan however we are aware
that these could be more valuable
than we have projected.
Positive action
1. Proactive engagement across
Government departments: we
are continuing to build
relationships across many
Government departments to
ensure they arc aware of our
capabilities, expertise in
these markets. We have
established contracts within
identity and we need to ensure
that where possible these are
maximised.
2. Designing the possibility of
the future: aligned with the
above point is the need to
create a picture of the
possibility of each of these
markets. We are therefore
investing time in creating a
Post Office view of the future
market, its needs and possible
solutions.
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Showcases our joint offer to
clients. Conversations are
already taken place and a
sales pipeline is being
developed.
‘New market opportunities
(including energy and broader
home services) :
At the core of our strategy is an
aim to expand our range of
services building from Telephony
into new market areas. The area
which is specifically
incorporated within the plan is
the development of an energy
proposition. The reality is that
if Post Office is successful in
establishing itself in a home
services market, it could open up
the opportunity for other new
markets for both consumers and
small businesses.
> Developing an energy
proposition: we are currently
exploring the potential to
build a Post Office branded
energy service. Through this
exercise, we will build an
approach to new market
identification, assessment and
development. This will ensure
that we continue to learn and
develop as we seek to grow our
income.
Collections & returns (including
click and collect) :
The click and collect market is a
new and emerging marketplace. In
the plan, we have made
assumptions around the scale and
scope of the potential volume and
income that could be generated in
this area, However, there is a
possibility that the market could
be significantly larger.
T. Building @ scalable and robust
operating model: to access
this market, Post Office needs
the ability to integrate into
retailers’ websites so that
collection from a post office
is presented as an option when
ordering online. In
addition we need a capacity
model that can allow us to
understand and map volume at a
branch by branch level. These
models are under development
and are being built in a way
that will allow them to scale
as is needed.
2, Building a market presence:
working in partnership with
Royal Mail we are developing a
retailer proposition that
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Additional information
Additional detail on the core assumptions in our strategy, are
included under separate attachment, specifically:
1. Counterfactual workbook
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commitments
Delivering our vision — supporting your
As we have stated previously, 2010 represented a major milestone in
the Post Office’s history. Our 2012/15 Strategic Plan to deliver a
sustainable and relevant Post Office was approved along with a four
year funding promise of £1.34bn.
It was also the year that BIS set
out its nine commitments to ‘Secure the Post Office Network in a
Digital Age’. This plan supports and enables every one of these
commitments.
BIS Commitment
We recognise that the Post Office
is more than a commercial entity
and serves a distinct social
purpose
Post Office action to deliver
1. We have used this to set the
North Star for our strategy
and for the day to day
operation of our business.
“Post Office: a commercial
business with a public
purpose.”
2. We have established a
Stakeholder Forum that
comprises representatives from
inside and outside our
organisation. They are
supporting Post Office in the
development of its Public
Purpose Statement. This work
has been taken out the wider
public through an engagement
exercise with over 1000
responses. The Stakeholder
Forum will make a submission
to the Board in December with
the Board making a
recommendation to BIS for
subsequent joint announcement.
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2. While our initial focus is on
financial services and home
phone services - we will
expand from these areas into
markets where we believe there
is an opportunity to provide
our customers with a better
service. We are currently
exploring the feasibility of
offering mobile phone and
energy related services.
Small businesses are a key
target for this plan. We will
‘help to support their growth
by developing bespoke products
across our portfolio and
examine the potential to
create small business hubs
within our network.
We will grow our Front Office
of Government business,
developing our traditional
services and looking for new
ways to support the delivery
of public services,
particularly in relation to
identity verification and
digital by default.
We will develop the digital
post office, ensuring that all
our services are also
available online and invest in
our people to ensure they
acquire digital skills.
We will ensure that post offices
xemain a valuable social and
economic asset for communities
and businesses
T. We believe that the Post
Office can be a provider of
ethical, transparent, value
for money services to
consumers and small
businesses, providing the
essential services which make
people's lives simpler.
There will be no programme of
post office closures under this
Government:
T. The principle of no programme
of post office closures
remains at the core of our
network transformation plan.
Where a sub postmaster cannot
transfer to our new operating
models, we will not close that
post office or pay any
compensation until the new
post office opens.
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2. A key paxt of this commitment
is equipping our sub-
postmasters to grow their
retail businesses. As part of
this strategy, we are
investing in resource that
will support sub-postmasters
in this area - introducing
them to possible partners,
suppliers and retail ideas.
This will be a key part of our
future network operation
moving forward.
3. This strategy, however, goes
beyond this principle of no
closure and seeks to extend
number of access points to
post office services.
(Update)
Government identity
initiatives
We have piloted assisted
digital capabilities within
our Crown pilots
The Post Office is not for sale
I. We remain fully committed to
Government ownership.
We will provide £1.3abn for the
Post Office to modernise the
network and to safeguard its
future, making it a stronger
partner for Royal Mail
T. We are modernising our
operating model to make it
more relevant to our
customers: multiple store
formats, self-service options,
‘extended opening hours, and
more online services.
2. We are making our organisation
more commercially sustainable:
reducing our reliance on the
taxpayer, moving our Crown
network to break-even,
variabilising our agent costs,
removing the current
compensation payment model,
and reducing our central
business costs by around 25%.
We will support the expansion of
accessible and affordable
personal financial services
available through the Post Office
T.
We have, over the past twelve
months significantly increased
our position in the financial
services market.
We have moved beyond our
traditional savings market
position, adding mortgage and
current account products to
our offer.
We are now building
relationships with our
customers that are broad and
sustainable.
‘The successful delivery of
this Strategic Plan will
establish Post Office as a
challenger bank within the UK
financial services market.
We want to see the Post Office
become a genuine Front Office for
Government at both the national
and local level
T. We have had significant
success in winning government
service contracts.
2. We have invested in AET
technology to support.
We will support greater
Anvolvement of local authorities
in planning and delivering local
post office provision
We now have over 150
mutualised post offices within
our network, These are a
clear sign that communities
working at a local level can
define a role for their post
office and secure the
financial support needed to
make this viable. We will
continue to support these
initiatives.
We have over the past twelve
months engaged with local
authority groups to explore
opportunities for Post Office
to be a local front office for
government. We will continue
to progress this initiative
where there is clear
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commercial appetite.
. Finally, this plan includes a
commitment to invest in the
~3000 uneconomic branches
within our network which are
not capable of operating under
one of our existing store
formats. Through this plan
we will create a Community
Post Office fund. We are
allocating £20m to this fund
and will work in partnerships
with sub-postmasters,
communities and local
authorities to ensure this is
invested to protect and grow
the role which Post Office
plays in supporting rural and
urban deprived areas.
We will cxeate the opportunity
for a mutually owned Post Office
Tr.
The primary focus of this plan
As to create a commercially
sustainable Post Office. This
is the fundamental building
block for enabling the
opportunity for mutualisation.
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Appendix A — Funding milestones and test dates
Milestone
Milestone Test
Date
‘31 March 2015
‘Requixenents
Network size and scop.
+ As demonstrated by the then most recent
report submitted to the House of Commons
library (subject to any updates notified
by POL), POL's network continues to number
at least 11,500 Branches in accordance
with clause 10.1(a) of the Funding
Agreenent.
* POL's network continues to meet the access
criteria set out in clause 10.1(b) of the
Funding Agreement.
Any shortfall caused by Unplanned Closures,
which POL can demonstrate it is taking steps
to remedy, will be deemed not to be a failure
to meet this milestone.
Wnauwal plant
+ POL has presented a plan for the Financial
Year 2015/16 setting out the steps it will
take in respect of the Strategic Plan (or
any variation to it, agreed by the Parties
where material) during that Financial Year
(an “Implementation Plan”). ‘This
Implementation Plan will include:
= POL's annual budget;
= POL's Crown Network including details of
the commercial rationale for the same;
= POL's Agency Network strategy including
details of commercial rationale for the
same;
= Other targets included in POL's
commercial plan for the relevant year;
~ POL's mutualisation activity timelines
and
= A reconciliation of the steps POL took
under its Financial Year 2015/16
Implementation Plan back to the Strategic
Plan, including a breakdown of changes to
the networ!
SGT Statemonte:
+ POL has presented the SGEI Statement, the
Cumulative SGEI Statement and the SGEI
Supporting Statement for the Financial
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Year 2013/14.
71
Milestone
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Milestone Tes!
pate
‘31 March 2016
Requirement
Netvork size and scope:
As demonstrated by the then most recent
report submitted to tho House of Commons
library (subject to any updates notified
by POL), POL's network continues to number
at least 11,500 Branches in accordance
with clause 10.1(a) of the Funding
Agreement.
POL's network continues to meet the access
criteria set out in clause 10.1(b) of the
Funding Agreement.
Any shortfall caused by Unplanned Closures,
which POL can demonstrate it is taking steps
to remedy, will be deemed not to be a failure
to meet this milestone.
Annual plan:
POL has presented a plan for the Financial
Year 2016/17 setting out the steps it will
take in, respect of the Strategic Plan (or
any variation to it, agreed by the Parties
where material) during that Financial Year
(an “Implementation Plan"). ‘This.
Implementation Plan will include:
= POL's annual budget;
~ POL's Crown Network including dotails of
the commercial rationale for the same;
= POL's Agency Network strategy including
details of commercial rationale for the
same;
= other targets included in POL's
commercial plan for the relevant year;
= POL's mutualisation activity timelines
and
= A reconciliation of the steps FOL took
under its Financial Year 2016/17
Implementation Plan back to the Strategic
Plan, including a breakdown of changes to
the network;
‘SGET Statenonts:
POL has presented the SGEI Statement, the
Cumulative SGBI Statement and the SGEZ
Supporting Statement for the Financial
Year 2014/15.
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lestone Milestone Test
Date
3 31 March 2017
Requirements
Network size and scope:
* As demonstrated by the then most rocent
report submitted to the House of Commons
library (subject to any updates notified
by POL), POL's network continues to number
at least 11,500 Branches in accordance
with clause 10.1(a) of the Funding
Agreement.
* POL's network continues to meet the access
criteria set out in clause 10.1(b) of the
Funding Agreement.
Any shortfall caused by Unplanned Closures,
which POL can demonstrate it is taking steps
to romedy, will be deemed not to be a failure
to meet this milestone.
‘Aanoal plan:
* POL has presented a plan for the Financial
Year 2017/18 setting out the steps it will
take in respect of the Strategic Plan (or
any variation to it, agreed by the Parties
where material) during that Financial Year
(an “Implementation Plan’), ‘This
Implementation Plan will include:
= POL's annual budget;
= POL's Crown Network including details of
the commercial rationale for the samo;
= POL's Agency Network strategy including
details of commercial rationale for the
same;
~ other targets included in PoL's
commercial plan for the relevant year;
= POL's mutualisation activity timelines
and
~ A reconciliation of the steps POL took
undor its Financial Year 2017/18
Implementation Plan back to the Strategic
Plan, including a breakdown of changes to
the network;
EGET Statements
* POL has presented the SGEI Statement, the
Cumulative SGEI Statement and tho SGBT
Supporting Statement for the Financial
Year 2015/16.
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communications forum
Appendix B - Operational milestones
PP ndix B op Engagement First meeting of Post Office Advisory I Ql FY14/15 on-
Alongside the Funding Milestones set out in Appendix A which are Council going
uged to trigger funding payments from Government to Post Office, are Engagenent I Gross stakeholder calture working ‘QI EYIA715 on=
a'range of operational milestones. These milestones relate to two group going
specific areas: mutualisation and network transformation. In Gonmercial I Crown Network achieves breakeven on FYiS
monitoring Post Office's progress in delivering against the Gonnercial I Post Office achieves breakeven at EUG
Strategic Plan and these milestones, BIS may request information EBITDAS
both on a routine and ad hoc basis. BIS will ensure that Comercial I Bost office achieves postive cans} FY T67AT
information requests are not onerous and Post Office will make use flow
reasonable endeavours to satisfy all information requests. Goamarcial —I Bost OFFIGS SGhiaves Gommenclal iss
Mutualisation sustainability
Conmercial I Post Office reduces NSP to £50m Fy 19720
In relation to mutualisation, the key milestones are as follows:
Post Office is committed to this mutualisation programme and where
Milestone Aetivity Milestone possible wé will accelerate the activities that are set out above.
type However, in relation to engagement activity any change to the plan
Public Taunch of Stakeholder Forum 03 FYI2/13 will be cognisant of our partners. ‘The objective here unlike our
Purpose other programmes is not to finishing first but to finish together.
Engagement. Independent revicw of Post Office Qa FY12/13 Patterns of behaviour and ways of working have been developed over
culture many years and to truly change these will take time.
Engagement I Super-briefers into Crown Network Qi FYI3/14 on
going In 2010, Government set out its commitments to create the
Engagement Board agree to establish Post Office IQI FY13/i4 opportunity for a mutually owned Post Office with an ambition to
Advisory Council make progress by the end of its term in Government. As the table
Engagement I Post Office and NFSP engagement on [02 FYI3/14 on- above shows, by 2015, significant steps will have been taken:
—— a + pobtic Purpose: the Post office will have a Public Purpose
engagement survey statement that has been developed in partnership with its
Engagenent I taunch of WOW magazine ar ris/i stakeholders and with the input of over 1,000 people including
Ensacenent I Sab-postnaster engagement Sunvey o3 FYIS/it on consumers, small businesses, sub-postmasters and employees.
iaunched going * Post Office Advisory Council: a Council of around 20 people
Engagement I First Post Office Business User Forum IQ3 FY13/14 on— fron within and outeide the Post Office will have been formed
created going and operational. This body will have the opportunity to be
Engagement I Post Office and NFSP engagement on Qa FY13/14 on~ involved in key business areas and have direct access into the
future of NESP going Post Office Board, through its Chairman who is one of our Non-
Engagement IAnnounce and recruit Post Office Qa FY13/14 Executive Directors.
Advisory Council
Engagement I Super-briefers into agency network Oa FYIS714 * NESP: a new long term commitment to the NFSP will be in
(if viable) place. This will be a joint agreement to work together to
Public ‘Stakeholder Forum submits findings to IQ@ EY13/14 evolve the NESP so that it has the skills, expertise and
Purpose Board resource that are needed to support our sub-postmaster
Public Post Office Board recommends Public IQ@ FY13/14 community regardless of whether they are independent business
Purpose Purpose to BIS people or large multiple organisations.
Public Post Office and BIS announce Public I Ql Fyi4/i5
Purpose Purpose * Engagement with our people: our people whether they are
Engagement I Creation of NESP & Post Office Gi FYId/i5 employees or sub-postmasters will be playing a greater role in
Er 92
our business and we will have a better understanding of their
issues. Business user forums, engagement surveys, magazines,
and super-briefers will have been in place for over a year and
will be delivering tangible results.
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* Commercial sustainability: the final deliverable will of
course be the steps we have taken towards commercial
sustainability. Our Crown Network will be at breakeven and we
will be on track to achieve breakeven at EBITDAS level the
following year.
Network transformation
‘The change in network transformation approach requires us to revisit
the targets that have been set for this programme. At this stage
the new approach has not been announced and we have not yet received
the results of the sub-postmaster retail survey. In that context,
we provide our latest assessment of the likely outcomes in terms of
both contract signature and branch openings. As you will see these
are presented as a range. Our funding requirement has been profiled
using the mid-point of the range.
Branch signatures
‘Worst cate
upto 2032/13 2013/14 2010/35 Sopa _ 2015/36 2016/37 2017/18 2018/19 2019/20)
toeals 4 2650 3,202
Cumulative Mains 2,000 2,080
Tot 1 4.650 5,282
Best case
upto 2032/13 2013/24 2034/35 Sep-25 2035/36 2017/18 2018/19
Locals
Cumulative Mains
Total 55005978
Branch openings
2017/18
upto2010/13 2013/18
locals 329
Cumulative ins
Total
37004452
Bostease
Sep-15 2015/16
2017/18
Toals
Cumulative Mans
Total
4550 5,400
As highlighted above, these numbers are indicative. They will be
updated by end of January 2014 when sub-postmaster reaction to the
announcement of the new approach is better understood. In February
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2014, Post Office and BIS will then use the sub-postmaster retail
survey to further refine this analysis and agree an appropriate
target regime for the programme.
As highlighted previously, given the importance of this
transformation to our market competitiveness, our ability to serve
our clients and customers and our journey to commercial
sustainability, we will take action should there be a shortfall
against this projection or the benefits accruing from the broader
Programme. In that context, we will complete a formal review of the
Programme in September 2015. At that stage, we will decide on any
adjustments that need to be introduced ~ this could include amongst
other changes amendments to investments made in branches, changes to
compensation levels and alterations to the Core Tier Payment. Both
the NESP and Government understand the need for this action should
the shortfal) arise.
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