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Post Office Board Agenda
22" January 2016 + Tim Parker ( Chairman) + Alwen Lyons None
+ Richard Callard + Mark Ellis (2)
SEE wilt Fue wit + Tim Franklin + Justin Zatouroff (KPMG)
12.00hrs 16.30hrs + Virginia Holmes + Martin Edwards (2, 3 & 6)
* Ken McCall + Martin George (3)
Room 1.19 Wakefield * Paula Vennells
* Alisdair Cameron
1. CEO Report CEO report noted CEO to update the Board on the report. CEO 12.00 - 12.15
- Transformation Report
2. IRIS Noting To update Board on the status and seek input. CFO / Mark Ellis 12.15 — 13.15
& Martin Edwards
WORKING LUNCH KPMG -— A global perspective on postal operators Justin Zatouroff 13.15 — 14.00
BREAK 14.00 - 14.10
3. Mails Strategy Update Noting To update the Board on the status and seek input Martin George / 14.10 — 14.50
Martin Edwards
4. Minutes of previous Board and Decision Minutes formally agreed. Alwen Lyons 14.50 - 14.55
Committees / Status Report
5. Financial Report — Period 9 CFO report noted CFO to update the Board on the period 9 performance. CFO 14.55 — 15.25
6. Initial discussions on the 2016/17 Board input taken Board input taken on the shape of the 2016/17 budget and = CFO/ Martin 15.25 - 15.40
budget and outlook for the 3YP 3YP and strategic themes Edwards & Dave
Carter
7. Trinity Discussion and input — Update and input from the Board Al 15.40 — 16.00
8. Any Other Business 16.00 — 16.25
8.1 Delegated Authorities Decision Decision taken on proposed delegated authorities Alwen
8.2 Noting Paper : Back Office Noting To update the Board on the Back Office project Al
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Post Office Board Agenda
9. Items for noting : 16.25 — 16.30
9.1 Sealings Noting Board aware of the affixing of the seal
9.2 Prosecutions Policy Noting Board aware of the new prosecutions policy
CLOSE 16.30
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CEO’s Report
Author: Paula Vennells Date: January 2016
Executive Summary
Context
Our scorecard metrics for 2015/16 are: Our 3 year goals are:
1. Net Income - £875m 1. To establish the foundations of a
2. EBITDAS - (£35m) successful independent business.
3. Digital Net Income - £21.5m 2. To accelerate the transformation of
4. Customer Effort - 64% Post Office and reach breakeven.
5. NPS FS only - 25 3. To secure commercial sustainability
6. Engagement - 63% for the long term.
7. NT branches transformed - 1850
8. Crown P&L - (£4.9m)
In summary, our strategy to achieve our goals is to stabilise our income in mails and
grow in financial services by focusing on the customer, moving up the value chain
where suitable; modernise our physical and digital channels; streamline our support
services; build a simpler, more cost effective operating model; alongside improving
our colleague and network engagement.
Questions this paper addresses
1. What is on my mind? (successes, challenges, opportunities and risks)
2. What are the implications for our outlook and plans?
Conclusion
3. Financial performance through the P9 peak period is encouraging with EBITDAS
and income favourable to forecast. Provided momentum is maintained through
Q4 we are well placed to deliver our targets.
4. Our transformation continues. As set out in the transformation report, some
slippage (notably in End User Computing) is putting their benefits delivery profile
at risk, with the potential to create additional pressure on next year’s budget.
5. In addition, some of our change activities are generating industrial relations
challenges that require careful management.
Input Sought
The Board is invited to note the report and highlight any issues where a future
discussion would be welcome.
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The Report
Looking Back
WHAT HAS GONE WELL?
« Financial Performance — P9
— EBITDAS for month 9 was £(0.5)m - £0.5m favourable to Q2 forecast.
— Net income in the month of £81.6m was £0.7m favourable to Q2 forecast.
— This was driven by a strong mails performance through the peak trading
period; and continued improvements in financial services, notably in life and
home insurance, credit card and banking and payments.
« Customer Service
— Our focus on maintaining customer through the peak helped ensure that
targets were achieved on Effort (65% vs 62% target) and NPS (+61 vs +55
target)
— Wait time and Customer Satisfaction fell just below target (69% vs 71%
target; and 85% vs 86% target respectively)
— Strongest performance came from Crown, with all four targets achieved.
— YTD performance remains ahead of target on all measures
WHAT HAS NOT GONE WELL?
« Financial Performance - P9
— Despite improvements in financial services as a whole, performance in
mortgages and savings continues to be significantly below target. We will be
monitoring the impact of re-pricing through P10.
e Industrial Relations
— As expected, there was industrial action by the CWU on Christmas Eve:
o 48% of staff who could have gone on strike chose to do so (lower than in
previous action)
© 83% of Crown Offices stayed open
o All staff in Leeds supply chain went on strike.
o 9 out of 11 staff in our St Helens call centre went on strike.
— Contingency plans meant at there was no impact on customers from the
action in Leeds and St Helens. This is a credit to the leadership of those
teams.
+ There was a further strike in Leeds Supply Chain on 4" January and
separately, a vote in favour of action in our Dearne call centre.
e Flooding
— Unfortunately, 144 Post Offices were affected by the recent flooding.
However, the majority of which have been dealt with locally and are now re-
opened.
— 5 remain closed but are expected to reopen within the next week.
— We will be conducting a review of our response to ensure we respond as
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effectively as we can to future flooding threats or incidents.
Looking Ahead
OPPORTUNITIES?
« SGEI Consultation
— Subject to internal Government clearance, BIS are proposing to publish their
consultation paper on our SGEI later this month or early next month.
— We have been working closely with the Shareholder Executive in formulating
the paper and the draft is completely aligned with the policy position we
discussed in October.
+ In particular, it reaffirms Government’s commitment to maintaining the
current network size and access criteria (with the possible exception of some
flexibility around the postcode criterion). It also discusses the need to move
to more cost effective operating models and locations in the rural /
unconverted network.
— BIS propose to publish the final report from London Economics / You Gov on
the social value of the network alongside the consultation document. It
confirms a headline valuation range of £4.3bn - £9.7bn pa, which is broadly in
line with the range identified in the 2009 Nera study (although that had a
lower bound of £2bn).
e Communications and Engagement
— We are getting our top 300 managers together in a new leadership and
communications forum.
— The aim is to drive leadership behaviour, empower and inspire colleagues and
generate passion about the detail of delivering our transformation.
— Our success will depend on these leaders engaging their teams regularly in
both the opportunities and hard realities of change.
— The first event takes place on January 26th
RISKS OR CONCERNS?
e Budget
— Weare in the process of working up budgets for the next financial year, with
a clear focus on driving down costs to close the gap between current plans
and where we need to be to achieve our targets, and potentially break even in
2016/17. Al will provide a further update in the meeting.
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e Interim Report
— The Board approved the interim report for the six months ended 30
September 2015, subject to finalising the provisions for the compensation of
Subpostmasters (SPMs) under Network Transformation.
— The arrangements with SPMs are complex and change over time. As a result,
recalculating the provisions at specific dates has been extremely complex,
hampered by multiple, manual data sources. The work has been completed
and the provision has been increased by £67m in the comparative balance
sheet at September 2014 and £87m at March 2015. EY has audited the
changes.
— A detailed paper, setting out the causes, rectification and lessons learnt has
been circulated to the ARC. The work has enabled us to confirm that there
has been no impact on payments to SPMs, cash or bonuses: it is a timing
difference in recognition of a future liability. The team is confident that there
is no impact on the total forecast cost of the programme and is completing
final checks in the next few days.
— As discussed, the error is disclosed in the Business Review section of the
Interim report as follows:
An error was identified in the calculation of the provision for future payments
of postmasters’ compensation within the Network Transformation programme
on the balance sheet and exceptional items charged in the 2014-15 half year
and full year. The March 2015 exceptional charge has been restated by £87
million of which £67 million was restated into the September 2014 exceptional
charge. This was a timing error related to recognition of the liability. It has
not impacted payments to postmasters or the overall cost of the programme.
— In addition, the change will be noted in the 2014-15 accounts of our holding
company.
— A detailed set of reactive questions-and-answers are being prepared. The final
Interim report will be circulated early next week with a view to signing on
22nd and publishing in the following week.
« Industrial Relations
— Our most significant change activities (as outlined at September’s Board
meeting) are all now underway and on schedule. For example:
© consultation on closing the defined benefit pension scheme to future
accrual starts on 2" February;
© colleagues in Crown branches that may be affected by our franchising
plans are being briefed about the potential changes on 19 January; and
o we are developing our mandates and negotiating position for the
impending pay negotiations for all managers and Crown CWU grades
respectively.
— We will also be discussing the latest position on Supply Chain later in this
Board meeting.
— As indicated above, each of these presents challenges for our industrial
relations. The challenge is made greater by the CWU ignoring important
aspects of our agreed Collective Engagement & Industrial Relations
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Framework, notably the Dispute Resolution Procedure designed to avoid a
default to industrial action.
— Ihave written to the General Secretary making it clear that the CWU’s actions
are making the agreement unworkable. A meeting is being scheduled with
the aim of securing a commitment to respect the agreement so it works as
intended.
« NFSP Relations
— Tensions arose at the beginning of December as a result of the presentation
of the NFSP Annual Plan (required to enable the annual grant payments) and
subsequent reluctance to agree to the suggested additional requirements.
— This resulted in NFSP threatening to withdraw from the Grant Agreement
unless POL meets their demands of concessions on the agreement
(membership levels, VAT) and various business initiatives (ATM fee reduction,
cost recovery for conformance training). They also requested a £20m (£10m
this year, £10m next) “stabilisation” payment to postmasters.
— We have sought to resolve this in a cooperative manner in order to maintain
our preferred position of a collaborative relationship with NFSP.
— We have been clear that we will not be making a payment of £20m but
indicated our willingness to discuss the NFSP’s other concerns. The offer of
further discussions has been received positively with the next meeting
scheduled for 14" January.
In Conclusion
Following good performance through P9,
I remain confident that we will deliver
our targets this year. I also am confident
that we will deliver our transformation
programme. However, slippage in some
programmes is putting the delivery
profile of benefits at risk, with the
potential to create additional pressure on
next year’s budget.
Strictly Confidential
The process for setting the budget for
2016/17 will be challenging and require
some difficult choices. This is underway
and there is an opportunity to discuss at
this month’s Board.
Similarly, we need to manage a
challenging industrial relations
environment, being clear on the rationale
for change.
Board Intelligence Hub template
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Transformation Update
Author: Michael Brown Sponsor: David Hussey Date: 13/01/2016
Executive Summary
Context
The Post Office is undertaking a complex transformation programme, designed to
modernise our network and IT infrastructure, streamline our cost base and create the
platform for customer-led growth. The core objective is to create a commercially
sustainable business equipped to cope with lower levels of government funding after
March 2018.
Questions this paper addresses
1. Overall, are we on track to deliver our key Transformation programmes?
2. What are the implications of any variance, for our outlook and plans?
Conclusion
1. Reasonable progress has been made delivering some major milestones across the
Transformation programmes. These include: completing 5,000 modernised
branches under Network Transformation; delivering, or on track to deliver, £53.9m.
of in-year cost savings against a target of £45.7m; the new Banking Framework
with banking partners operationally live; and publishing the detailed integrated
plan.
2. However, slippage in the IBM plan for the Branch Technology Transformation
Programme has used some of the programme’s contingency, though the overall
end date is not currently impacted. End User Computing (Admin) and Post Office
Card Account plans have also experienced milestone slippage, with risks across
other programmes.
3. Delays to Branch Technology Transformation and Post Office Card Account
programmes are putting their benefits delivery profile at risk. The impact of
revised benefit profile is being reviewed as part of the three year planning process,
with an updated position to be presented to the Board in March.
Trinity investigations are progressing and a separate update on the latest position
will be provided at the January Board.
Input Sought
The Board are asked to note the progress made, key challenges faced and actions
taken to address them.
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The Report
Looking Back
WHAT HAS GONE WELL (SINCE LAST PROGRESS REPORT IN OCTOBER)?
¢ Network Transformation
o In November the milestone to modernise 5,000 branches (with 5,114
modernised by the end of 2015) was achieved.
o This provides 152,000 additional opening hours per week across the 5000
modernised branches - the equivalent of 3,300 extra Post Office branches
helping us become better for customers by being there when they need
us.
o It will also help us greatly reduce our reliance on public funds as we
remove fixed remuneration to agents.
e Cost Reduction
o Group has delivered, or are on track to deliver, £53.9m of in-year cost
savings against a target of £45.7m.
o Achieving the target enables us to make a significant contribution to the
e Digital Programme
o Re-branded, enhanced and improved customer journeys on the Post Office
Website have improved conversion rate across the site by 24% and the
amount of time customers spend on the site by 45%.
¢ Back Office
o IT Back Office Tower Project approach has been agreed which will allow
contract signature during January (see separate noting paper).
WHAT HAS NOT GONE WELL (SINCE LAST PROGRESS REPORT IN OCTOBER)?
e Branch Technology Transformation Programme
o In parallel to the Trinity discussions, IBM have slipped their original dates
for development and have supplied an updated plan. The decision to put
Common Digital Platform migration to IBM on hold has also impacted the
plan.
o In order to mitigate further slippage we are holding detailed requirements
and design workshops with suppliers, to ensure we adopt the best
approach.
o The programme team are finalising the integration of IT partners’ (IBM
and Fujitsu) activity into the baselined plan; this will be completed by the
end of January 2016.
o The overall go-live delivery date is not currently impacted.
Strictly Confidential
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IRRELEVANT :
Looking Ahead
UPCOMING ACTIVITY
e Delivering Year End Targets
o Crown Break even run rate - including advertising the first batch of closures
and franchises (including Project Paddington). Announcing franchising is
almost certain to result in industrial action in Crown branches.
o Network Transformation branch modernisation target - the programme will
implement the removal of fixed pay for postmasters who have not signed a
modernisation contract or conditional resignation pack, replacing it with 18
months of Transitional payments. The current estimate is that this may
impact between 150 to 250 postmasters.
o Delivering remaining cost reduction initiatives
e Branch Technology Transformation Programme
o We will complete work on Trinity to enable a decision to be taken in
February.
¢ Post Office Card Account
o The new supplier contract is due to be signed by 30 March. Board approval
will be sought in March.
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CONCERNS & RISKS
e Overall Risk, Issue and Assurance
o Risks across the whole portfolio remain significant.
o Anew Head of Transformation Risk and Assurance has been appointed to
strengthen our approach.
o A Transformation Risk Assurance framework is being developed to gain deeper
understanding of the risks (threats and opportunities) inherent at the Project and
Programme levels.
o In addition, the framework will provide assurance throughout the life of the
programmes.
e Top Transformation Risks
k or Issue Implication Mitigation
Financial risk - Benefits/Revenue Intended Benefits not realised I Financial deep dives on each portfolio
Realisation & Cost of Change. at all or within the timeline have commenced to effectively assess/
expected. prioritise initiatives and enhance
Benefits may have been overstated I Opportunity to gain increased I opportunities in the cost budgets.
and outcomes may not be realised I market share is lost.
or sustainable. The cost of change I Costs exceed budget Transformation Finance Control Group
may be greater than planned. allocated. (TFCG) continues to rigorously challenge
There may be impact on the the robustness of the cost and benefits
financial viability of some or profiles of programmes to improve
all of the transformation robustness of estimating the appropriate
programmes which could lead I benefits realisation (e.g. achievement of
to de-scope/postponement or I hurdle rates).
removal of initiatives.
Further, all new budget drawdowns are
reviewed and challenged through TFCG
to ensure they are aligned and that
benefits cases are clear and achievable.
Delivery risk (IT Suppliers Transformation programmes The Technology Transformation Director
Transition) - The risk that replacing I are delayed, increasing costs I is working on a robust cross tower
legacy IT systems/suppliers and and delaying benefits. system integration programme with
simultaneously deploying a new Quality of service suffers and I detailed plans and performance
integrated IT operating model potential risk of control management of delivery (by 31st
creates unmanageable complexity. I failures. January).
Associated Data/Information
security breach or An Integrated E2E Plan is in place and is
compromised regulatory under review to ensure dates align with
obligations (e.g. PCI) Post Office and Third Party
Extension of Incumbent timescales. Interim recommendations
contracts - additional cost and I of changes due by 31st January and
time. agreement of these dates by mid-
February.
Resource Capacity - Managing Performance suffers and strain I Continued development of resource
the availability of both Change and I on resources. Quality of plans to identify scheduling and
Subject Matter Expert resources. output suffers. resource issues. Extend detailed
Issues include number of resource planning from three to six
resources, bandwidth, scheduling I Impact on day to day running I months.
and appropriate use of resources. _I of business and impact on
people due to the demands
made on them.
Delay to
Implementation/Delivery of
Transformation Programmes
Industrial Relations (IR) - The I Disruption to customers; Industrial Relations being managed
threat of industrial action/dispute in I delays to Transformation though IR steering group (IRSG) with
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response to Transformation
Programme Initiatives.
programmes and therefore
impact on benefits delivery;
impact on brand.
Increased absence or exiting
the business which compounds
the capability & capacity risks
alignment between transformation plans
and IR heat map.
Appropriate Contingency plans are in
place to address “live” ballots by IRSG
and Operational teams. These
contingencies have been developed by
the Operational teams with input from
the Industrial Relations team on a case
by case basis taking into consideration
of the likely scenario, location, duration,
and available resources to cover.
In Conclusion
The biggest risk to delivery is replacing
the Horizon branch software with the IBM
solution (Front Office). Supplier dates are
slipping, putting the whole plan under
increased pressure.
EUC admin plans are tight and the
environment inherited from RMG is
complex. Whilst there is milestone
movement, the end date is currently
protected.
Strictly Confidential
The risks within the current Front Office
plan could result in increased costs and
delayed benefits; and an erosion of
timeline contingency.
The potential options to reduce
complexity, risk and cost are progressing
under Project Trinity (separate update to
the Board)
If we miss 31% March deadline, we incur
further penalties from RMG.
The programme is being closely
controlled and reviewed regularly jointly
by the CFO and Transformation Director.
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Appendix - The Dashboard
Portfolio Summary Milestone Cos Benefits Risk
delivery
ALL PROGRAMMES AGGREGATED EE Aer Amber
Delivery:- Whilst there has been milestone slippage within the baselined plan across
some programmes, the red status is primarily driven by delays to:
Branch Technology Transformation Programme - IBM plan and the Common Digital
Platform migration dates are slipping.
PO Card Account - Uncertainty around the Hewlett Packard timeline for selecting their new
Banking Partner and the consequential impact on the procurement time lines.
End User Computing Admin - Extensions to pilots and testing, whilst protecting the end
date.
Next steps:
Branch Technology Transformation - undertaking deep dives with external suppliers (IBM,
ATOS and Fujitsu) to interrogate/challenge plans and minimise impact of slippage.
PO Card Account - working with bidders and their respective Banks, draft revisions to the
supplier agreement before issuing the final tender documents on 8" February 2016.
End User Computing - CFO and Transformation Director monitoring closely to ensure
delivery to plan. Daily reporting dashboard will be implemented from commencement of
roll out.
Plan reviews in the Transformation Delivery Group are being undertaken with programmes
to address root cause of milestone movement.
Cost:- 2015-16 full year investment costs is forecast to underspend by £34M, (excluding
provisions for postmasters’ compensation) c.£20m of which will flow into next financial
year. Costs across the three year plan are under review as part of the three year planning
process, current submissions are c. £70m above the assumptions in three year plan.
Next steps:- Close management of 2015-16 year end position and completion of three
year planning. Complete prioritisation exercise to bring 2016-17 investment spend back in
line and create contingency.
Benefits:- In year benefits are Green with the longer-term forecast Amber. Cost
Reduction Group is reporting £53.9m of delivered or on track initiatives for 2015-16
against a target of £45.7M. Benefits from Network Transformation are on track. The
majority of other Transformation benefits are due in subsequent years, and some are
under threat of being delayed or reduced as a result of risks impacting delivery and
updated assumptions across programmes.
Next steps:- Undertake benefit reviews with each programme during Q4. The impact of
revised benefit profile will be reviewed as part of new three year plan process, with an
updated position to be presented to the Board in March.
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Risks: Risks across the whole portfolio remain significant. Over the last six months the
total qualitative risk exposure has slightly reduced. However the profile of high impact
and probability risks has slightly increased, due to both the financial (cost and benefits)
and industrial relations risk trending upwards. A new Head of Transformation Risk and
Assurance has joined the team to strengthen Business Transformation Risk and
Assurance.
Next steps: A Transformation Risk Assurance framework is being developed with the
key objective to gain deeper understanding of the risks (threats and opportunities)
inherent at the Project and Programme levels. Risk management remains under close
control in formal monthly risk management meetings.
Key Programmes
Milestone
1. Branch Technology Transformation (BTTP) — delivery Costs Benefits Risk
Goal: Deliver new counter hardware, IT (REG Amber Amber REG
networks and replace Horizon counter application.
Improved modernised customer journeys. Enables
agility and speed to market. 25% reduction in IT
operating costs.
Branch Technology Transformation (Replace Horizon counter application)
Implications:
Four major delivery milestones have slipped as a result of the decision to put Common
Digital Platform migration to IBM on hold. One major design and build delivery milestone
has also slipped as IBM have changed their plan. As a result the end of design milestone is
at risk. However, the overall go-live delivery date is not currently impacted.
The risk profile is increasing because milestone delivery performance and supplier plans are
putting whole programme under pressure.
Next steps: The BTTP leadership team continues to manage these “hotspot” areas
through daily management meetings.
In order to mitigate further slippage, we are holding detailed requirements and design
workshops with suppliers, to ensure we adopt the best approach.
The programme team are finalising the integration of IT partners’ (IBM and Fujitsu) activity
into the baselined plan; this will be completed by the end of January 2016.
Branch End User Computing (New counter hardware)
Implications: The dates for the rollout are 1st August 2016 to 30 June 2017.
Next steps: Preparations for User Acceptance Testing.
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IT Networks
Implications: The IT Networks and Branch End User Computing plans have now been
integrated and support the agreed rollout schedule above.
Next steps: Commence delivery in line with plan.
Milestone
2. Network Transformation delivery Costs Benefits Risk
Goal: Modernise 8000 branches. Move agents to _ Amber I Green I/Green)) Amber
variable remuneration contracts, increase in
opening hours, reduce queue waiting times and
increase customer satisfaction
Implications:
The programme has a target to modernise 1850 branches by April 2016. To date (11%
January) we have opened 1061 branches, leaving 789 branches to open by the financial
year end. The overall risk to achieving the openings target has reduced to around 50
branch openings. Branches that are not modernised in this financial year will flow through
to next year with no material impact on the programme.
Next steps:
The programme team continue to mitigate risks through process efficiencies, more flexible
approaches and continued engagement with branches to progress them through the
pipeline as quickly as possible.
Milestone
3. Crown Network Development delivery Costs Benefits Risk
Goal: Crown P&L run rate (including Financial I Amber Amber Amber Amber
Services costs) breakeven point by end of
2015/16 and achieve a £10M profit by 2018
Implications:
Due to the critical timing for the Crown Strategy plans to be in place to secure breakeven
this financial year, the Network Change and Paddington activity continue to work to the
critical path. The first batch of activity (closures, franchises), including Paddington, are
being advertised in January 2016.
Next steps:
We are continuing to work on the Paddington deal with an update to GE in January followed
by contract signing mid-March 2016. These activities are designed to secure break-even on
run-rate this financial year in line with the Crown Strategy and plan.
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Milestone . -
4. Reduce our Costs delivery Costs Benefits Risk
Goal: Deliver £45.7m Cost Saving Initiatives in (Green GreenI Amber Amber
2015-16 and deliver further cost reductions in
2016-17 and 2017-18.
Implications:
£53.9m worth of initiatives have been, or are on track to be delivered by the financial year
end against a target of £45.7m.
Next steps: Continue to work with business functions to ensure delivery plans to realise
benefits are in place and being progressed.
Set 2016-17 and 2017-18 costs saving targets as part of three year planning process.
Milestone
5. Support Services Transformation delivery Costs Benefits Risk
Goal: Consolidated support services for the Post I Amber Amber Amber Amber
Office across key sites, moving from seven sites
to two. Lean, efficient business processes.
Transition existing Back Office IT services to a
new, more stable, resilient and flexible
environment.
Support Services
Implications:
Elements of the programme have been delayed due to lead times for improving IT network
capacity in the Chesterfield site and availability of suppliers to undertake required
assessment. These have been caused by Post Office not knowing what the existing IT
bandwidth was at the Chesterfield site. Following consultation the St Helens site (one of the
customer service centres) invoked industrial action on 24th December and Dearne (branch
support centre) have voted for industrial action but CWU has not yet served notice for
industrial action. The programme formally announced closure of Leeds (branch support
centre) on 8th December - affecting c.50 people.
Despite the deteriorating IR landscape the programme does not anticipate any significant
deviation from the plan or material impact on benefits realisation.
Next steps:
End January deadline for validation of IT and property refit timescales and costs to ensure
Chesterfield readiness for quarter 2. Focus on critical path activities particularly IT
readiness.
Strictly Confidential
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IT Back Office Tower
Implications:
Back Office Transition pre-contract due diligence recommended removing SAP-HR from the
original scope. This recommendation was agreed by Transformation Executive Steering
Group on 4th January 2016. Subsequently GE has agreed the business case for
SuccessFactors (the new enterprise HR platform) which will replace SAP-HR.
Next Steps:
Sign new contract with Accenture based on new scope.
Mil " F
6. Technology Transformation — Separation & slestone Costs Benefits Risk
EUC Admin Roll-out delivery
Goal: Separate Post Office IT from RMG IT. I Amber = Amber N/A Amber
Replace desktops & laptops across the Admin user
estate.
Separation
IRRELEVANT
Next steps:
IT Networks, Supply Chain and HR applications are due to be completed during February
2016. Close monitoring of status and progress.
EUC Admin
Implications:
EUC Admin pilots commenced in December. There has been some milestone movement
which is being managed within overall programme timescales, though the EUC admin roll
out plan remains challenging.
Next steps:
A significant ramp-up of the deployment of the remaining Admin estate remains on track to
be completed by 31st March 2016. Communications & stakeholder activities are
continuing. Close monitoring of status and progress.
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i Milestone
IRRELEVANT Menvory, Costs Benefits Risk
Implications:
Next steps:
Thaornaranme.is.snckina.swith
: IRRELEVANT I i
IRRELEVANT I
I Milestone
Costs Benefits Risk
I delivery
The Following programmes are also in development though there is no material
update to provide to the Board at this point.
Strictly Confidential
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Project Iris
Author: Mark Ellis Sponsor: Al Cameron Date: January 2016
Executive Summary
Context
1. In September the Board requested internal and external options for a radical
reduction in the cost of Supply Chain (SC). Other options, such as expanding the
operation to capture market share, were considered but not taken forward.
Questions this paper addresses
2. What are our findings and recommendations if we retain ownership of SC?
3. Which options should POL progress with external partners?
4. What are the risks?
Summary Conclusions and Recommendations
5. The following conclusions and recommendations have been reached:
e We can reduce costs by optimising routes and sites, improving EBITDAS by c.
£9.5m. 235 FTE would be redundant and 10 facilities closed at a cost of £11-13m.
e We increasingly believe that the operation would be optimised if we withdraw from
the external market. This would increase redundancies to c.800 FTE, delivering a
further EBITDA improvement of c. £4m, increasing the one off cost by £19m. The
method and speed of withdrawal will now be modelled.
e Weare exploring a variety of demand reduction scenarios, which have the
potential to make a further, limited reduction in the number of deliveries required.
e We will revert in March with a consolidated, optimised view across these
opportunities. We will build a detailed implementation plan that could be put into
consultation with our people by the end of April. To plan and implement such a
fundamental restructuring will require an investment of £2-3m.
e We believe that any plan on this sort of scale will trigger industrial action. We are
developing mitigation plans for the March Board.
e Discussions for a full joint venture with Vaultex have been stopped: the outcome
was too complex for the value that could be obtained.
e There is, nonetheless, market interest in an outsource or sale of both cash
processing and CVIT. We will work with the interested parties, in private, to bring
the best options and conclusions to the Board in March, enabling a joined up set of
plans to be available for consultation. The paper sets out a number of potential
complexities with the outsource options including the impact on the Note
Circulation Scheme, VAT, public procurement and CMA referrals.
Input Sought
6. The Board is asked to comment on the findings and support the
recommendations.
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CURRENT STATUS OF SUPPLY CHAIN (SC)
7. SC operates 24 CVIT depots, 3 coin centres and 4 cash processing centres, in 25
locations. 1,384 FTE are employed to deliver cash, foreign exchange and value
stock to 10.3k branches.
8. Over the last 12 months we have reduced direct costs, from £74m to £67m in
2015-16. Savings are being delivered through route and duty revisions enabling
redundancies. This is meeting a level of resistance from the CWU, with sporadic
industrial action at one depot. A further £5m of gross savings, equivalent to 3%
operational efficiencies, are in the budget for 2016-17 and this is broadly
considered deliverable without triggering widespread action.
9. Costs are offset by external income of c. £29m down from £32m as poor service,
due in part to Union restrictions, has led to a loss of activity and contracts. Other
operational measures, including safety and engagement, continue to improve.
FINANCIAL BASELINE
10. We currently incur an EBITDA loss of c. £53m, as set out below. Over the next
five years the SC baseline is therefore a net run cost of c. £265m and we would
incur some c.£10m of expected capital investment in IT, machinery etc. We are
currently working to understand cost drivers across central functions, including IT.
This will increase the true cost of running SC. The NPV of different options, set
out in paragraph 18 below, is calculated against this baseline cost.
Baseline £m
Direct costs (54)
Indirect costs (13)
SC costs (67)
External revenue 29
EBITDA - run-rate (38)
Property (5)
Central allocated costs (3)
EBITDA including property and centralised I (46)
costs
Vehicles (maintenance capex) (6)
EBITDA including maintenance capex (53)
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WORK CARRIED OUT TO DATE
11. At the September Board it was agreed that we would:
e Develop internal plans and recommendations based on an investment in new
modelling capability.
e Enter a 3-month, dialogue with Vaultex and its shareholders to assess a business
combination; and
e Explore an outright sale/outsource of SC, through a corporate finance company.
12. Following implementation of a new network optimisation planning tool (CAST), we
understand the costs of serving individual branches and customers for the first
time. We have developed a financial model to estimate the economic outcomes of
potential future SC options, both internal and external.
13. We have progressed discussions with Vaultex and its shareholders. Assay, the
corporate finance advisors who successfully handled the sale of the Co-op’s CViT
business in 2014, have conducted early market testing with parties potentially
interested in an acquisition/outsource/JV option for CP/CViT.
What are our internal findings and recommendations?
SITE AND ROUTE OPTIMISATION
14. Assuming we retain ownership of SC, based on current demand, we have used the
modelling capability to run an optimal view of sites and routes. This suggests that
we can deliver demand with 10 fewer units, reducing the number of depots by 9
to 15 and shutting one coin centre. Some 235 staff would be made redundant.
15. Operating costs would fall by £8.1m per annum and capital costs (fewer vehicles)
by £1.4m. The one-off costs of redundancy and property exit would be c. £11m
and there would be implementation costs of c.£2-3m, enabling better route
planning and network management. Even assuming no benefits in Year 1 and
using a discount rate of 9%, the incremental 5 year NPV would be c. £19m.
16. Recommendation 1: We will develop a business case for approval in March, with
an operational plan ready for consultation with our people by end April. This date
may vary as we work through the timing in relation to other Union consultations.
We will add short-term resource now to enable us to understand and implement
the detailed changes which will require significant operational restructuring.
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EXTERNAL REVENUE
17. We now understand the profitability of our larger customers. On our current way
of working a number are loss-making. We have undertaken a first modelling of the
impact of reducing or removing external customers, compared to the optimised
scenario above.
18. At first sight the 5 year NPV is adverse without the external customers, more
strongly so if we try to cherry pick. However, over 10 years, the NPV is favourable
without external customers and it should be noted that we are currently struggling
to hold onto external revenue and would need to invest in capability to maintain
our current scale. Our business will be simpler and easier to transform without
external contracts.
Optimisation Optimisation
of sites and Optimisation - Retain
routes - Keep - POL Only profitable
all externals externals
Annual EBITDA (incl capex) (£43.1m) (£38.9m) (£43.6m)
Redundancy and site
closure costs £11.0m £29.9m £13.6m
5yr NPV (vs. Baseline) £19.0m £15.6m £15.1m
10yr NPV (vs. Baseline) £40.7m £47.7m £35.7m
Payback (years) 2 3 2
Redundancies 235 796 314
19. Recommendation 2: We will plan to withdraw from the market progressively,
creating a simpler business with lower net running costs. We will develop a
business case for approval in March, incorporating the outcomes in the operational
plan for consultation by end April. This will be subject to the affordability of
higher up-front costs. Our desire to phase withdrawal will be subject to customer
behaviour as our strategy becomes clear.
COIN
20. We have analysed the cost of providing coin into the network. Removal of all coin
collections and deliveries and the closure of coin processing facilities would result
in a stand-alone estimated cost saving of £14m per annum against the current
baseline.
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21. This is a sign it prize but is not consistent with our existing contracts, for
banking, fe pr with general change giving, or with the SGEIs that support
our funding. It may be possible to change the nature of certain products like
I to enable small overdrafts and avoid coin payments but this is, in itself, a
significant, long-term change.
22. Recommendation 3: We will work to minimise the cost of coin over the medium
term by:
e lobbying Royal Mint and Treasury for the removal of copper - worth c. £1m per
annum;
e working with Royal Mint, Treasury and the industry to introduce a ‘coin utility’ in
the UK; and
« undertaking an alternative medium term case to operate future contracts
without coin. This would also enable a more commercial return on coin activity
if it is retained. This would be led by the Commercial and Financial Services
teams and report back to the Board in March 2017.
INTERNAL DEMAND MANAGEMENT
23. The current operation supports branches as follows:
POL No Weekly Monthly
Branches) Deliver Deliver
Crown 317 98% 0%
Agency 9,804 80% 2%
WH Smith 108 98% 0%
Other 98 72% 1%
Total 10,327 81% 2%
©) There are a further 276 branches using Royal Mail Special Delivery, 53 branches self-funding their
own cash and c.900 outreach branches using a hub and spoke model.
24. The Network Team believes that there is an opportunity to reduce the number and
frequency of deliveries across the network by expanding the current alternatives.
25. Special Delivery extension:
* SC is continuing to switch delivery for certain branches to Royal Mail Special
Delivery (RMSD)
e This applies to low-value drops to smaller branches, within Royal Mail (RM)
limits, e.g. 10kg for coin and is dependent on RM’s appetite
26. Recommendation 4: Continue to expand RMSD as ‘business as usual’. This is
expected to be small, with no material impact on the future of SC.
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27. Retailer self-funding:
e We currently have 53 branches which self-fund their cash requirements as part
of their wider retail business. In theory we could extend this model where there
is a good match between the cash dynamics of the retail and POL sides of the
business. The majority of such branches would be Locals and in aggregate they
might account for around a third of the network.
« Such an arrangement may be attractive to the retailers as it would reduce their
own banking costs. A number of multiples have expressed their interest in such
a model. From a POL perspective if would also lower our working capital funding
requirements and volatility.
« However, there are a number of practical issues which would need to be
addressed to expand the use of this model, including:
>» The necessary in-branch and back office IT changes (e.g. the model would be
more easily deployed where we have provided an IT solution that fully
integrates with the retailer's till);
How we would cost effectively deliver travel money and non-cash stock;
>» How we would maintain the service standards required to support our
commercial propositions;
» The risks around debt exposure; and
» Whether we would need to pay agents, off-setting SC savings
7
28. Recommendation 5: The Network Team will undertake more detailed research to
develop a proposed implementation plan. Our current expectation is this would
take time to implement and we are unlikely to achieve a quick reduction in SC
demand. It will therefore be excluded from the April planning.
29. Hub and spoke:
e We currently have over 900 ‘outreach’ branches where the cash is effectively
delivered through a hub and spoke model, consisting of: 670 ‘hosted outlets’
where POL services are provided in a fixed location for a few hours a week by
230 ‘travelling’ postmasters. The SC services are delivered to the postmasters’
main branch and they then use their own vehicle to shuttle the cash and stock
between the satellite branches. 267 sites are covered by a mobile Post Office
van (with each van covering an average of 7 locations). The van carries the
cash required for each of these locations.
« We expect the use of these branches to expand as they provide a more cost
effective replacement to standalone Community branches when they churn: we
are procuring a further 14 mobile vans.
e This infrastructure effectively provides an alternative cash distribution network
to our main SC business in rural areas, and there may be the potential to
increase utilisation by arranging for postmasters to service a greater number of
branches in their locality.
e The GE is revisiting its appetite for the risks associated with carrying cash in
unprotected vehicles.
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30. Recommendation 6: Identify branches where this would provide more cost
effective cash delivery and collection. The Network Team will assess the insurance
and legal issues associated with an expansion of the service, with the aim of
reaching conclusions in March. The opportunity will be included in the March
business plan and the consultation plan with colleagues in April.
IRRELEVANT
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_IRRELEVANT I
37. There is likely to be an impact on our membership of the IRRELEVANT
Network Cash, £m Financed by:
POL NCS Total
Cash Centre (out of bond) 20 144 164
Cash in transit Sb 23 58
Branch cash $13 158 671
Sub total 568 325 893
Cash Centre (in bond) it} 282 282
Total 568 607 1175
39. Any material outsourcing would require permission:
,...eopardise_either arranaement.
I IRRELEVANT
CMA
41. 18 months ago, RBS abandoned a planned outsourcing of cash processing to
G4S/Vaultex based on conversations with the CMA (then the OFT). The OFT made
the following informal points: they had jurisdiction; coin and cash were separate
markets; and such a deal would have a 50% chance of referral. Any options with
incumbents should be considered under this lens, which could extend the process
materially and in public.
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PUBLIC PROCUREMENT
42. Any contract to provide services back to POL should be publicly procured. Even if
we undertake substantial market testing in private, we would be undertaking the
formal assessment in public, which is likely to precipitate industrial action. The
CWU believes it managed to stop similar options being pursued, notably in 2005-
6. We are working through mitigation plans for a variety of scenarios, including
with third parties.
Recommendation 8: Review options to make direct awards
Recommendation 9: Develop contingency/mitigation plans against industrial action
for the March Board.
43. All outsource scenarios trigger higher VAT costs of c. £2-3m per annum and risk a
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10
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IRRELEVANT
What are the key risks?
IRRELEVANT
11
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I IRRELEVANT [tee
Authors: Martin Edwards / Mark Siviter Sponsor: Martin George Meeting date: 22"¢ January 2016
Executive Summary
*- Context
11 While in-year trading has been relativel
. IRRELEVANT
strong, the longer-term risk
23 How does this shape our short-term priorities in mails?
24 what is our initial assessment of the case for acquiring a price comparison website?
3- Conclusion
‘IRRELEVANT
r" intact
41 The Board is asked to provide their initial thoughts on the strategic choices outlined
in this paper, to shape our analysis for the further debate in March.
Strictly Confidential Board Intelligence Hub template
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The Report
t RELEVANT: Fit into the emerging view of our wider corporate strategy?
How doe
a
During the first half of 2016 we are reviewing our overall corporate strategy,
identifying what further changes are required to our business model to reduce costs,
improve profitability and maintain our customer relevance in changing markets.
While there are a number of potential scenarios that may emerge from this work, it
1.2
Strictly Confidential Board Intelligence Hub template
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3. What is our long-term plan and how does this drive our short-term priorities?
34 It is clear that the ‘base case’ trajectory identified in June of steadily declining
volumes and fees is unsustainable in the long run. Given the time pressures outlined
above, we have a limited window of opportunity to redirect the business towards a
more sustainable end-point. In essence this requires a change in our long-term
partnership arrangements - either towards closer alignment with RM or greater
independence. The table below sets out three theoretical scenarios which, in
principle, w
Scenario: Pros: [ Cons:
A. Long-term.
extension of
(10 years+), but
with an ‘underpin’
which provides an
acceptable floor on
our fees and
volumes, thereby
providing us with
long-term planning
certainty.
B. Greater
economic
reintegration with
a!~~icovering all or
some of our mails i
business or through I ;
I.an,outright sale to H
et} (reversing i
separation).
C. Assert our
_position.as.an.....
i IRRELEVANT I
provider of our
volumes, but we
would also build
relationships with
other carriers and
upstream retailers
(whi ould be sold
is facilitating
a reduction in fees)
Strictly Confidential Board Intelligence Hub template
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32 We are currently undertaking more detailed financial and market analysis to help us
This analysis will then enable us to compare the relative risks and benefits of the
different scenarios. However, it should be noted that it will not provide an empirical
answer to which provides the best option — ultimately we will have to make some
strategic judgements about what provides the best approach for our customers and
for the Post Office. ,
The renegotiation of thé IRRELEVANT I ‘provides the main, pre-scheduled opportunity
to move towards one of these alternative scenarios, although as indicated above
there may be events which trigger a renegotiation before then, either by mutual
consent or as a result of a significant regulatory or market development. The
questions we need to address in the short-term are therefore: a) do we have a
strong preference between these scenarios at this stage; and b) based on this, what
steps should we take now to enable us to realise our preferred outcome?
For example, if we reached the conclusion now that we wanted to build the
optionality to move towards greater independence (scenario C) - either because we
believed it was the most desirable end-point, or because we judged it necessary to
strengthen our leverage ovel"™"**"ito secure a favourable extension to }!RRELEVANT- our
priority for the next three years would be to develop the capabilities that would
provide us with that optionality. In particular this would mean building an online
channel, strengthening our customer ownership and developing the technical and
operational capabilities required to support a multi-carrier service from 2020 or
earlier, nee
The most significant step we could take in the near_tero..withaut breaking them":
would be to acquire a price comparison site such ag IRRELEVANT which would provide
a rapid route to a more meaningful digital presence i while also
establishing a relationship with a broader range of partners. Annex A outlines our
initial evaluation of this opportunity, and we will revert with a firmer view in March in
the context of our broader strategy and 3 Year Plan.
3.3
3.4
3.5
3.6
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--Initialauestion:.
I IRRELEVANT
Answer: moving to
greater independence
(scenario C) - or at
least
preserving/building
the optionality
iMIRRELEVANT
Next step:
commence dialogue
wit! during 2016
on new agreement,
based on clear
negotiating mandate
Next step: focus on
building the required
capabilities to support
optionality, e.g. digital
customer ownership.
Incurrs costs.
Outcome: negotiation
results in new
agreement that meets
‘our requirements.
Proceed to
implementation.
Outcome: fail to
secure satisfactory
agreement within the
defined time
parameters
Revert to building optionality & leverage
Strictly Confidential Board Intelligence Hub template
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4.
Next steps
41 We would welcome the Board's initial views on the choices and questions outlined in
this paper, which will inform the more detailed analysis we will conduct ahead of a
longer discussion oni the March Board. During this period we will
also be conducting further work on} IRRELEVANT :as outlined at the
end of Annex A. ~ 7
4.2
We would also be very happy to meet with individual Board members on a bilateral
basis during February, to go through any more detailed questions. For those Board I
members who have recently joined this could include a wider induction on the! !
“", and also a review of the outputs of last! IRRELEVANT
Strictly Confidential Board Intelligence Hub template
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IRRELEVANT
Strictly Confidential Board Intelligence Hub template
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IRRELEVANT
Strictly Confidential Board Intelligence Hub template
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Post Office Limited — Strictly Confidential
POLB 15(7'")
POLB 15/110 - 15/119
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held at 11.15 am on 25 November 2015
at 20 Finsbury Street, London EC2Y 9AQ
Present:
Tim Parker Chairman
Richard Callard Non-Executive Director
Alisdair Cameron Chief Financial Officer
Tim Franklin Non-Executive Director
Virginia Holmes Non-Executive Director
Paula Vennells Chief Executive
In Attendance:
Alwen Lyons Company Secretary
Nick Kennett Group Director, Financial Services (Minute 15/114 and 15/115)
Martin Kearlsley Banking Framework Manager, (Minute 15/114)
David Hussey Business Transformation Director, (Minute 15/116)
POLB 15/110 INTRODUCTION
(a) A quorum being present, the Chairman opened the meeting.
POLB 15/111 MINUTES OF THE PREVIOUS BOARD AND COMMITTEE MEETINGS
AND STATUS REPORT
(a) Minutes
The minutes of the meeting of the Board held on 22 September
2015 were approved as accurate records and the Chairman was
authorised to sign them.
Status Report
(b) The Status Report, showing matters outstanding from previous
Board meetings, was noted.
POLB 15/112 CEO’S REPORT
(a) The CEO introduced her report and focused on the following key
areas:
(b) A total of £1.3m had been raised for Children in need and the CEO
thanked the Chairman and Tim Franklin for attending the charity
ball.
(c) The network had delivered its 5000" branch transformation and
Baroness Neville-Rolfe would be opening the 5001® in the first
week in December.
(d)
The pulse engagement survey results had shown a decline of 2%
since the full survey in March 2015, although 1% higher than the
POL Board minutes, 25 November 2015 1 DRAFT v1
ACTION:
Richard Callard
ACTION:
Gc
POLB 15/113
(e)
(f)
(9)
(h)
(i)
()
(k)
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pulse in 2014. The CEO explained the focus on the key areas for
improvement which included the speed of decision making.
The Board discussed the CWU ballot for industrial action on
Christmas Eve and the CEO explained the actions the Business
would take in the event of a strike, including loss of pay for those
staff who took action. The Board recognised the progress made in
industrial relations over the last three years, but were disappointed
with the prospect of a strike.
Richard Callard was asked to circulate the changes proposed
in the Trade Union Bill and the timescale for implementation.
The Distributed Denial of Service DDoS attacks on the Post Office
website had reduced with only one since the last Board meeting.
The assurance work to review the systems of the Business’ top
suppliers was underway.
The Board asked when the additional supplier review would be
completed.
The Business had received a questionnaire from the FCA as part of
contingency planning for a prolonged countrywide power failure.
The CEO reported there would be little the Business could do in
such circumstances, and the Board supported the proposed
response.
The CFO reported that the preferred candidate for the ClO role had
accepted the position and was negotiating a release date with his
existing employer. It was hoped that he would join the Post Office
in the New Year. The Current interim ClO had also been retained
until October 2016.
The CFO explained that project IRIS would be presented to the
Board in January, including options for full subcontracting
The Board asked if the Business had agreed an additional payment
for Royal Mail (RM) barcoding. The CEO explained that barcoding
had been introduced early as a favour to RM, and that the fee was
part of a wider negotiation, although she had received a letter from
RM CEO acknowledging the favour.
Having taken all of the discussion issues into account, the Board
noted the CEO’s report.
FINANCIAL REPORT
(a)
(b)
The CFO was encouraged by period 7 and year to date
performance, he was now more confident that the Business would
hit the full year EBITDAS target, however trading over the
Christmas period would be key.
The Board discussed the postmasters’ compensation error and the
effect on the balance sheet provision and exceptional items
charged in the interim and final accounts for 2014/15. The error
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would affect both Post Office Limited and Postal Services Holding
Company Limited.
(c) The CFO explained why the error had occurred and assured the
Board that, based on the incomplete work considered to date, this
was an accounting timing issue and did not affect the payments to
postmasters or the cash position. The CFO stressed that this error
was completely unacceptable and reinforced the view he had noted
in May that the financial reporting controls had not been strong
enough. He reassured the Board that since joining the business he
was introducing new structures and individual accountabilities into
the Finance team and that a detailed project was underway to
systematically improve controls. This would take some time to
complete and more surprises could not be ruled out.
(d) The Board discussed the Interim Report and Condensed
Consolidated Financial Statements as recommended by the Post
Office Audit and Risk Committee at their meeting of 10" November
2015. The Board asked the CFO to ensure the report was clear
about the accounting timing error for the postmaster provision, and
that this error did not affect any payments made to postmasters.
(e) The Board:
e Noted the issue relating to the postmaster’ compensation
provision, the action taken and agreed the proposed level
of disclosure;
e Approved the approach to Going Concern and agreed the
Going Concern status for Post Office Limited at the half
year;
¢ Approved the Interim Report and Condensed Financial
Statements subject to finalisation of the provision for
Postmaster’ compensation;
e Delegated authority for reviewing final amendments to a
Sub-Committee, of any three of Tim Parker, Paula
Vennells, Alisdair Cameron and Tim Franklin; and
e Approved the Letter of Representation to the auditor and
authorised Paula Vennells or Alisdair Cameron to issue it
on behalf of the Post Office Limited Board.
POLB 15/114 BANKING FRAMEWORK
(a) The Chairman welcomed Nick Kennett, Group Director, Financial
Services, and Martin Kearsley, Banking Framework Director, to the
meeting.
(b) Nick Kennett presented the Banking Framework proposition and
gave the Board an update.on.the.necotiations..curcentlu.takina..
IRRELEVANT
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(c) _Nick Kennett explained that the most significant changes from the -
ACTION: (d)
Nick Kennett/ CFO
(e) Nick Kennett explained the k.. — a
obligations to which the “panks~ had ‘to comply if
undertaking a material outsourcing.
ACTION: -The..Board..asked.for.ai...------ IRRELEVANT.
Nick Kennett I IRRELEVANT '
(f) the. Board aareed that. Nick. Kennett shouldssoriiiitie:
IRRELEVANT)
IRRELEVANT
CATE,
(9)
(h) Martin Kearsley left the meeting.
POLB 15/115 FINANCIAL SERVICES (FS) STRATEGY
(a) Nick Kennett gave the Board an update on the performance of the
FS __ busi id f__th tions available in
(b) The Board discussed the FS product.set.and.the differant. channals.,
throuah_which. thev.were. sold \ IRRELEVANT.
°/ IRRELEVANT
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Post Office Limited — Strictly Confidential
IRRELEVANT
(d)
(e)
nett explained that initial discussions had taken place with
ta.understand the options for the new relationship. The
the opportunities available to
The Board asked him to revert in due course.
ACTION: (f) The. Roard.asked for eee
IRRELEVANT
(9) Nick Kennett left the meeting.
POLB 15/116 BUSINESS TRANSFORMATION
(a) The Chairman welcomed David Hussey, Group Transformation
Director, to the meeting.
(b) David Hussey updated the Board on the integrated Business
Transformation plan and the changes since the last update in May.
(c) He explained that a detailed integrated revised plan had been
developed which identified that the IT plans were undeliverable.
While there is greater realism embedded in the revised plan, it is
still subject to significant risk and increased costs; not least
because the plan anticipates final delivery only one month before
the expiry of the Fujitsu contract in March 2018. These costs,
together with delayed benefit realisation, pose material risks to the
delivery of the 3 year plan.
(d) The CFO explained that as a result of these risks, he had
requested that work be done to explore options to reduce both risk
to the plan and cost. This included revisiting with Fujitsu why they
had elected not to participate in the procurement for the Front
Office and other towers. Fujitsu, through these conversations, has
POL Board minutes, 25 November 2015 5 DRAFT v1
ACTION:
CFO
ACTION:
CFO
POLB 15/117
POLB 15/118
ACTION:
Company Secretary
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Post Office Limited — Strictly Confidential
indicated that there may be alternative options, and the Interim ClO
had been requested to understand these options. The CFO
stressed that he was a long way from making any
recommendations to the Board but it was clearly important to
ensure that all options to reduce costs and risk were fully explored.
(e) The Board were disappointed that the risks in the Front Office plan
had not been fully understood at an earlier stage given the
extensive challenge from Board members both inside and outside
formal board meetings.
(f) The CFO was asked to go back and review the external
assurances that had been given on the existing plan.
(g) The Chairman asked the CFO to ensure that all potential
options were properly assessed — including for any legal risk,
and agreed to call an additional Board meeting by conference
call in December to consider any options that management
considered viable in all the circumstances.
(h) David Hussey left the meeting.
ITEMS FOR NOTING
(a) The Board noted the Report on Sealings and resolved that the
affixing of the Common Seal of the Company to the documents set
out against items numbered 1346 to 1361 inclusive in the seal
register was hereby confirmed.
ANY OTHER BUSINESS
(a) As recommended by the Nominations Committee, the Board
approved the appointment of:
e¢ Ken McCall as the new Senior Independent Director; and
¢ Carla Stent as a Non-Executive Director and Chair of the
Audit, Risk & Compliance Committee two new Non-
Executive Directors
The Company Secretary was asked to seek consent from ShEx
for their appointments, and after consent is given to issue the
appropriate appointment letters were issued and filings made
at Companies House.
(b) The Board challenged the appropriateness of being asked to note
the POMS minutes without any relevant background information
and asked the Company Secretary to discuss the inclusion of the
these minutes with the General Council and POMS Chairman.
(c) The Board agreed the membership of the Board Committees:
Nominations Committee
Tim Parker (Chair)
Ken McCall
Virginia Holmes
Remuneration Committee
Ken McCall (Chair)
POL Board minutes, 25 November 2015 6 DRAFT v1
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Post Office Limited — Strictly Confidential
Tim Parker
Virginia Holmes
Audit Risk & Compliance Committee
Carla Stent (Chair)
Tim Franklin
Ken McCall
Richard Callard
Richard Callard stressed that his role on the ARC was as a Post
Office Director and not as a representative of ShEx.
POLB 15/119 DATE OF THE NEXT MEETING
(a) It was noted that the next meeting of the Board would be on 21
January 2016.
Shaggy spy
POL Board minutes, 25 November 2015 7 DRAFT v1
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Post Office Limited Board
Status Report as at: 15.01.2016
Board IREFERENCE (ACTION [Action Owner ]Due Date STATUS (Open/Closed
(GE Member)
POL B ‘September 2014 ITo present the results of the six month trial where Post IKevin Gilliland IMarch 2016 ITo be included as part of FS strategy in]Open
14/105(F) Office FS colleagues used Mains branches as their base. Board Meeting IJanuary.
POL B 22nd September ITo submit detailed recommendations relating to project IMark Ellis/CFO IJanuary 2016 Closed
2015 15/94 Tris in January 2016 Board Meeting
(9)(4)
POL B October 2015 ‘The CFO to ensure that the business received assurance ICFO January 2016 (Open
POLB 15/102 (d) Istatements from all major suppliers, for which it acted as Board Meeting
a portal, that they had DDoS plans in place.
POL B October 2015 IA full assessment on the Mails Acquisition and a further IMartin George IJanuary 2016 Closed
POLB 15/103 (d) Iupdate on RMG negotiation to be presented to the Board Board
in January.
POLB October 2015 _ITo provide a further update on New Starter Attrition for_INeil Hayward IMarch 2016 Open
POLB 15/105 (b) Ithe March Board. Board Meeting
POL B October 2015 To circulate the current Accenture market report on the {Martin End of October Closed
POLB 15/107 (b) IEuropean Postal Administrations Edwards 2015
OLB October 2015 _ITo provide analysis of ATM economies including the cost IMartin January 2016 IReport provided after the status report IClosed
POLB 15/107 (d) Jof servicing and holding cash. Edwards Board
POL B October 2015 ‘The Executive to work with Richard Callard's team at Martin End of IThe SGEI consultation has been Closed
POLB 15/107 (e) IShEx to optimise the questions in the public consultation IEdwards November 2015 Idebated and is being finalised by BIS
Jas set out in the paper, but also to test public opinions onI/Richard
[SGEI products, including the importance of posting and ICallard
collecting of parcels; the alternative branch operating
models to support the delivery of these services; the
importance of the Post Office for small and medium sized
enterprises.
POLB [October 2015 IThe Chairman asked General Counsel to provide further IGeneral November 2015 IPaper to January Board Closed
POLB 15/108 (b) Iinformation on the number of contracts being signedt — ICounsel/Chair IBoard
the levels proposed and any benchmark data available Iman
from other organisations, especially ShEx Businesses.
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POL B November 2015 IRichard Callard was asked to circulate the changes Richard January Board. IReport provided behind status report IClosed
POLB 15/112 (e) Iproposed in the Trade Union Bill and the timescale for _ICallard
implementation.
OLB INovember 2015 I ~ Nick Kennett [March 2016 ‘Open
POLB 15/115 (f) V Board Meeting Hl
contract in 2023 H i
OLB INovember 2015 IThe Board were disappointed that the risks in the Front ICFO End of With apologies, the focus has been on [Open
POLB 15/116(e) IOffice plan had not been understood at an earlier stage December Project Trinity and this will be picked
and asked the CFO to go back and understand what up before the March meeting.
external assurance has been given on the existing plan.
POL B November 2015 Company Consent received 25th November. Closed
PSP ITT P75] Ldiecenid rat spanaminapat dbebagina pir ded uctoubsnyhgpegticge ee Appointment letters issued.
ShEx for their appointments, and after consent is given to
issue the appropriate appointment letters were issued and
filings made at Companies House.
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Trade Union Reform
The Post Office Board requested a briefing on the Trade Union Bill. Note this summary is confidential
and for the Board only and will be updated if changes made to the Bill during its passage make this
necessary. The Bill team hopes to have the legislation reach royal assent in the spring.
The main elements of the Trade Union Bill are:
e — Introducing a 50 per cent voting threshold for union ballots turnouts, whilst retaining the
requirement for there to be a simple majority of votes in favour.
e — Introducing an additional threshold for certain important public services (the health, education,
fire, Border Force, nuclear decommissioning and transport services) so that 40 per cent of those
entitled to vote must vote in favour of industrial action. This is on top of the 50 per cent
minimum voting turnout threshold.
e Tightening the rules on ballot mandates to make sure industrial action is only taken on a recent
mandate.
e = Tackling intimidation of non-striking workers during a strike.
e Reforming the role of the Certification Officer (responsible for statutory functions relating to
trade unions and employers’ associations).
e Introducing a transparent opt-in process for unions’ subscriptions that allows members to make
an active decision to contribute to the political funds. This will reflect the existing practice in NI.
e Tightening the rules around taxpayer funded facility time for union representatives.
e Banning ‘check-off’ in the wider public sector (i.e. will require employees to set up
their own subscription rather than simply ticking a box as they join an organisation.)
e HMG will also take forward secondary legislation to remove the current ban on employers using
temporary workers to replace staff taking part in industrial action.
Post Office-specific considerations
e Post Office is not one of the ‘certain important public services’ such as transport to which
additional requirements will be placed regarding strike ballots.
e All of the strike ballots held by the CWU in recent years would still have been valid under the
new restrictions for all unions (as all had a turnout of over 50%) — incidentally, all would have
been valid had the additional public sector requirements been applied as well.
e Post Office is not included in the changes under the bill that will stop check off for civil service
departments and Non-Departmental Public Bodies (NDPBs).
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Should secondary legislation to end the ban on using agency workers to cover strikes be passed it
would allow Post Office to explore this option across the business, including Supply Chain.
Further information can be found in the Annex.
ANNEX: Comparison between Bill measures and current status
Measure in the Bill Current position
50% threshold for ballot turn-out; no change - No minimum turn out required. Simply
to simple majority needed majority of those voting must vote in
favour
An additional threshold (40%) for support to - No minimum threshold
take industrial action in important public
services (fire, health, education, transport,
border security and nuclear decommissioning);
More detailed information required on ballot I - Dispute can be as vague as “pay” or
paper, including more details of the dispute, “terms and conditions”.
and the nature and timing of industrial action - Only need to specify “strike” or “action
proposed short of a strike”. Nothing required on
timing of industrial action
4 month time limit on ballot mandates to - No time limit, though employers can
ensure industrial action is only taken ona seek injunctions if they feel dispute is
contemporary mandate over.
- Recent strikes called on the basis of a
mandate over 2 years old
Making section F of the Code on Picketing a - Code on Picketing is a statutory code and
statutory obligation by requiring unions to can be considered by a court.
appoint a picket supervisor
Reforming the role of the Certification Officer, I - I Most investigatory powers can only be
by: used in response to a complaint from a
Extending investigatory powers to enable
proactive investigation without the need
to receive a complaint from a trade union
member;
member;
Can only issue Declarations and/or
Enforcement Orders across a range of
infringements (though can prosecute in
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- Giving the Certification Officer the power
to impose fines for non-compliance;
- Power to raise a levy on unions and
employer associations to cover the costs
of the Certification Officer
relation to financial infringements which
can result in a fine being imposed by the
Court);
Running costs funded by the taxpayer
Transparency in political funds
- requiring union members to make an
active decision to “opt in” and 5-yearly
refresh to contribute to political funds;
- require unions to report on expenditure
exceeding £2k a year from political funds
Default position is the member
contributes unless notifies to the
contrary
Reporting requirement for wider public sector
and reserve power to set a cap to tighten the
rules around taxpayer-funded paid facility time
for union representatives.
Currently, there is a Cabinet Office
agreement that Whitehall departments
monitor the spending on facility time.
Removing the use of check-off in the wider
public sector (trailed for an amendment)
Currently, some employers offer a facility
that enables a worker to request that his
or her trade union subscriptions are
deducted directly from his or her salary
and paid to the trade union by the
employer.
MEASURES NOT IN THE BILL:
- Repeal of the ban on hiring agency workers to cover for striking workers (to be done by
secondary legislation). Government yet to publish its response to the consultation on
this.
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POST OFFICE LIMITED PAGE 1 OF 4
Economics of the ATM Business
Author: Phil Bowdery Sponsor: [insert] _ Date: 09, 5
Executive Summary
Context
There are over 7.
ATMs in the UK that are operated und
IRRELEVANT
The ATM relationship wit! tarted in 2005 with the number of ATMs increasing
steadily until September . Our current ATM estate consists of 1,900 external and
200_internal_ ATMs.snreadacrass.the Post Office network. Each ATM is installed on an
IRRELEVANT
the LINK scheme
As well as providing an income stream the I ATMs are the only ATMs where
Poca customers can make cash withdrawals, with Poca transactions now representing
c.10% of ATM withdrawals.
Under the ATM Agreement ATMs can continue to operate until the end of their
individually term or until 31%* March 2022 at the latest. From November 2017 ATMs
will begin to fall out of the scope of the current agreement and options from this date
are under consideration.
Questions this paper addresses
This paper summarises the economics o'
applied in the product P&Ls.
TMs based on the cost allocations
Economics of} IRRELEVANT I
The table below shows the forecast income and costs for 2015/16 based on the actual
volume of ATM cash withdrawals to date and the product P&L cost allocations for the
first half of this financial year.
The_ estimated income received b'
It is forecast there will be cl160m ATM cash withdrawals in 2015/16. ATM income
received by POL is set out in the ATM Agreement and is based on a mix of fixed-ae4—~
variable payments, which equate to an average income per cash withdrawal IRRELEVANT I
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Forecast Commercial Flow for
15/16
Estimated Total commission r¢ IRRELEVANT 1
ATM Commission received by POL £34,500,000
ATM remuneration paid to Agents — Note 1 below -£18,534,608
Other Product Costs -£407,286
Direct Product Contribution £15,558,106
Fixed remuneration allocated to ATMs — Note 2 below I -£5,115,579
Technology Costs -£273,854
Supply Chain Cost — See Note 3 -£5,924,620
-£353,002
Marketing Costs - Brand & Generic
-£228,956
Other Indirect Product Costs allocated to ATMs
Total Indirect Costs of Products -£11,896,011
Indirect Product Contribution £3,662,095
Other Central and Overhead Costs -£9,410,865
EBIT - POL TARGETED PROFIT — See Note 4 -£5,748,770
Adjustments as detailed below:
1. Correction of 6% overstated VAT on ATMs and I £2,312,076
reduction in remuneration on extended ATM
contracts.
2. Fixed remuneration not apportioned to ATMs. £5,115,579
EBIT after Adjustments £1,678,885
The ATM product currently shows a direct product contribution of £15.5m. While a
negative EBIT is being reported this is being assessed as ATMs receive a
disproportionate allocations of fixed remuneration (indirect cost) and overhead costs
as covered in note 2 below.
Note1: The direct product contribution going forward will be significantly
improved as the actual ATM remuneration cost is overstated in the P&L model
by 6% due to VAT being applied to ATMs. However as ATMs are VAT exempt
the actual cost is £1.1m lower. It should also be noted that remuneration
changes being introduced as part of extending the contract term of expired ATM
will deliver a reduction in Agent’s commission of £1.2m per annum from 17/18.
Direct product contribution would therefore increase to £17.8m.
Note 2: Fixed remuneration allocated to ATMs is apportioned on the basis of
revenue generated. As fixed remuneration is removed through NTP contractual
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POST OFFICE PAGE 3 OF 4
changes this cost will no longer be allocated to ATMs (i.e. any increase in
variable remuneration would be reported against appropriate product lines).
Additionally ATMs sit largely outside of the normal branch environment and
whilst they do take up time being managed they are not really part of the wider
infrastructure. Therefore as the allocation of 50% of overhead costs is based on
income this adversely impacts this product. At the extreme, an argument could
be made that no further overheads should be allocated beyond those relating to
time spent on managing the ATMs. This issue is still being considered as part of
P&L reporting.
Note 3: Supply Chain costs reductions will flow through to the product over
time reducing this significant element of product costs. No benefit being
forecast at this time.
Note 4: Please refer to Appendix 1 for the reasons for the change in EBIT for
ATMs between 2014/15 and 2015/16.
Assumed Profitability to
After deducting the commission paid to POL and the LINK switching fees the bank
retains c.£24m (c39%) of the annual LINK interchange generated by the ATM estate.
As owners and operates of the ATMs the bank has to cover lifetime costs of running
the ATM estate including the purchase and installation.of.the. ATMs._.renlacement_of,
damaged machines, daily operating costs, IRRELEVANT _ I
software/equipment upgrades (e.g. polymer notes) and removal of each ATM at ‘the:
end of its agreed term. Based on the ongoing depreciation of c1,400 external ATMs
that have not yet reached the end of their planned 8 year term and operating costs of
c£2k per ATM per annum, the product contribution achieved by the bank is estimated
to be c£14m. This is similar to the DPC earned by Post Office of c£15m pa.
Basis of ATM Remuneration and Benefit to Agents
The ATM remuneration structures, which have been in use since 2005/06, are based
on combinations of fixed and variable elements that are designed to incentivise the
Agent to maximise ATM transactions. The remuneration structure is aligned with the
commissions received by POL and accounts for about 50% of this. As 8 year contracts
with Agents are reaching their end revised remuneration is now being offered that will
reduce this cost by £1.2m.
The ATM estate generates an overall income to Agents of nearly £17m per annum,
equating to an average annual income of £8.8k for an external ATM and £2.5k for an
internal. While the Agent has responsibility to load and balance the ATM the only
additional cost incurred would be for the power supply and, in Scotland only, any
business rates applied to the ATM. The ATM also acts as a footfall generator and with
over £8bn per annum being dispensed from ATMs in Agency branches there is a
ignificant opportunity for increased retail sales. Where we are unable to install a
CATM the Agent would be issued with an ATM waiver so that an ATM from
alternative supplier could be installed. Over 5,000 waivers have been issued over the
life of the ATM Agreement with H
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Conclusion
ATMs are a key product for customers, postmasters and Post Office Limited. They
provide a significant product contribution and are a key component of Post Office
projecting a Financial Services image.
With the expiry period of ATMs shortly falling within the timeframe of the I IRRELEVAN
the business is assessing options for the future. t a
Appendix 1
The main reasons for the improvement in EBIT for ATMs from the c£9m loss showing
on the 2014/15 P&L compared to the c£5.8m loss forecast for 2015/16 are:
1. Agents Variable pay - the 2014/15 product P&L had some complex formulas for
the calculation of Agents Variable costs, which contained some fundamental
errors in allocation to all products - most notably Mailwork as this is not a
volume driven cost but rather fixed. This resulted in the costs being overstated
in 2014-15 across all products, with the impact on ATM's being in the region of
c£1m.
2. Agents fixed Costs - in total agents fixed costs have reduced in 2015/16 by
c£17m in total for POL. As this allocation is calculated using the agents variable
pay ratio per product the net result is that Agents fixed costs in down c£2m
from 2014/15.
3. Variable net Income for ATM's is also up £1.5m from 2014/15.
Strictly Confidential Board Intelligence Hub template
@
Period 9 Financial Results
Al Cameron
22nd January 2016
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Period 9 Financial Performance
Context
P9 incorporates our peak trading weeks, particularly in Mails. P8 had seen lower Mails volumes; weaker renewals income in Motor and
Home insurance; and Lottery below plan. Telecoms income was also below forecast as the November price increase had not been fully
captured within the billings cycle.
Questions
. What was the financial performance of the business in P9 compared to budget and forecast?
. Did income recover from the impacts seen in period 8?
. What are the implications of variances to forecast on our full year outlook?
. How is our scorecard performance?
Conclusions
. P9 EBITDAS of £(0.5)m was £0.5m better than forecast in the period. YTD we are £0.9m ahead of forecast and £3m above
budget.
- Net income was £0.7m favourable to forecast, Expenditure £(1.1)m adverse and Project expenditure £0.9m favourable.
- Underlying performance (excluding timing and one-offs) was £(0.6)m adverse on Income and £1.2m favourable on
expenditure.
. Net Income improved on P8:
- Mails performed well over the peak period with higher volumes across most products, trading above forecast and last year.
Sustained customer activity after the last posting dates provides further evidence of a later Christmas peak.
- Lottery performance remains significantly below forecast, in line with the wider market following Camelot game changes.
- Telecoms income now reflects the full November price increase.
- Within Financial Services, stronger than anticipated performance in Business Banking partially offset disappointing
performance in MoneyGram and Gift Cards over Christmas.
. Underlying favourable performance across a number of Non-Staff cost lines was offset by a catch-up versus forecast within IT
and Marketing. Project Opex continues to fall below forecasted levels.
. Q4 challenges are emerging to the income forecast. Within Expenditure, opportunities net out, delivering our full year target of
£(34)m EBITDAS. The Group Executive will review progress weekly.
Input Sought
The Board receive and feedback on the current trading performance and our expectations for the Full Year.
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EBITDAS is £3m favourable to Budget in the Period and YTD
P9 YTD
£m Actual Budget Variance Actual Budget Variance
TOTAL GROSS INCOME 90.6 87.9 733.2 737.8
Cost of Sales (9.0) (9.5) (81.3) (82.0)
TOTAL NET INCOME 81.6 78.4 651.9 655.7
Staff Costs A775 (17.9) (172.5) (170.9)
Postmaster Costs (41.5) (42.3) (317.9) (327.6)
Non-Staff Costs (24.1) (21.9) (211.4) (207.8)
Total Expenditure (pre Project OpEx) (83.3) (82.1) (701.8) (706.3)
FRES - Share Of Operating Profits 1.9 1.9 29.8 31.2
EBITDAS - BAU 0.2 (1.8) (20.2) (19.4)
Project OpEx (0.7) (2.0) (9.9) (13.7)
EBITDAS (0.5) (3.8) (30.1) (33.0)
Depreciation (0.0) (0.1) (0.3) (0.5)
Network Payment 10.0 10.0 97.5 97.5
EBIT pre exceptionals items 9.4 6.2 67.1 64.0
Interest (0.1) (1.0) 2.8 (3.0)
Impairment (14.6) (16.7) (82.3) (148.9)
Exceptionals (incl BT) & Redundancy & Severance Costs (9.6) (30.1) (188.3) (158.7)
Goverment Grant Utilisation 0.0 12.5 150.0 112.5
Profit/(Loss) On Asset Sale 0.0 (0.0) 0.0 (0.0)
Total Profit/(Loss) Before Tax (14.8) (29.1) 14.3 (50.7) (134.1) 83.4
Period 9 v Budget:
Income: driven by stronger Mails trading performance, lower Lottery income and Telecoms price increase. In FS, receipt of
final Hawk settlement income and higher business banking offsets withdrawal of NS&I products.
Expenditure: Non-Staff costs adverse driven by higher IT and Property maintenance costs.
Year to Date v Budget:
Income: Continued strong trading in variable Mails, Government services and Banking. More than offset by lower Travel
Insurance, the withdrawal of NS&I and lower supply chain income.
Expenditure:
+ Staff Costs adverse due to higher pensions costs (adverse market conditions at the year end).
+ Postmasters’ Costs favourable due to fixed costs benefit from higher NTP conversions in 14/15.
+ Non Staff Costs adverse due to higher property maintenance costs, additional IT licence costs, higher finance
costs (robberies, FX and Card fees). One-off Mails Segregation fees offset by Fujitsu service credit.
3 + Project Opex favourable reflecting capitalisation of costs, timing of spend, and project savings
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Underlying cost performance in the period was positive against
forecast. Net Income was adverse.
Q2 Var to oaWhich:
Actuals Timing / I Estimated
Forecast I Forecast Gena Underlying
Net Income 81.6 80.9 0.7 1.3 (0.6)
Staff Costs (17.7) (18.1) 03
Postmasters Costs (41.5) (40.8) (0.6)
Non Staff Costs (24.1) (23.3) (2.0) 1.2
Total Expenditure (83.3) I (82.2) 14 (2.0) 0.9
FRES 19 18 01
Invest to Grow (0.7) (1.6) 07 ;
EBITDAS (0.5) (1.0) 0.5 0.0 (0s y
Underlying Performance :
Timing and One-Offs in Period 9:
Income £1.3m, mainly:
£1.1m Hawk settlement income phasing
£0.7m Telecoms price increase billing
£(0.3)m Self Service Kiosk overbilling
Non Staff Costs £(2.0)m, mainly:
£(1.7)m IT project costs to be transferred
out in P10; IT service costs true-up for
prior periods; and £(1.2) Marketing spend
timing
+ £0.6m Non Staff (FX gains/vehicle lease
credit)
Invest to Grow £0.7m
+ Client refund, forecasted for P12 -
MoneyGram funded alterations to Horizon
+ Mails performed well: ahead of forecast by £0.4m underlying (before SSK overbilling of £(0.3)m) and up 2% yoy, recovering
from the impact of Black Friday and customer spending patterns leading into Christmas.
+ Lottery performance was behind expectations by £(0.5)m, broadly in line with the market following product changes.
Performance in P10 is expected to improve due to the multiple roll-overs.
+ Supply Chain Income £(0.2)m below forecast signalling a risk to the full year, due to client losses and a reduction in demand
from Royal Mail.
+ In Financial Services, MoneyGram and Gift Cards performed below expectations, partially offset by stronger performance in
Business and Personal Banking: expected to mitigate full year risk within Banking & Payments.
+ Staff Costs benefited from lower than forecasted Pension costs due to lower headcount than the Q2 forecast (uplifted from the
budget assumptions); Agents variable pay was impacted by the mix of business through mains; Non Staff Cost performance
was strong across a number of operating cost lines.
+ YTD EBITDAS is £0.9m better than forecast.
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Trading risks and opportunities in Q4 currently net out, but
with income shortfall offset by lower expenditure
isk / Opp £m Acc
Mails: SSK overbilling - accrued cost. £(1.1)m MG Resolve with Royal Mail
Mails Trading upside £0.7m Maintain trading momentum
Lottery: Lower demand for new game £(1.0)m MG Some improvement expected in P10 from roll-overs. Product review.
Retail: Higher Photo-Me commission £0.2m Driven by additional kiosks triggering higher commission rate
Mortgages: Weaker pipeline for Q4 £(0.7)m NK Launch Q4 marketing campaign; improve online customer journey
7 Not expected to recover. Focus on driving other opportunities to offset
Gift Card: lower than expected Xmas sales £(0.6)m NK risk. Product review.
MoneyGram: lower than expected P9 £(0.5)m NK Performance in P9 still under review. Monitor performance in P10
Banking & Payments: Greater banking take-up with £1.3m NK Focus on new business banking opportunities; increase awareness of
HSBC. Additional energy provider payment schemes . Energy payments.
Supply Chain: Royal Mail demand reduction on icles i .
warehousing; client losses £(0.9)m AC Tighter control of cost base to offset risk; improve service levels.
Pensions: Run rate lower than forecast due to an
headcount reductions [£11.3m vs £13.8m] £2.5m AC Monitor run rate periodically
Postmasters’ pay: Mix of contract types / NTP delays £(1.4)m KG Continue to drive NTP conversions at fastest pace.
Postmaster pay: Variable pay impact from lower r
lottery/higher mails income £0.4m KG Monitor performance of Lottery / Mails over Q4
Project Opex: Expected opportunity from timing £im+ DH Assess expected spend by project over Q4
Total Expenditure £2.5m
ui
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Mails performed better over the peak period
Period 9 YTD
a2 oe
P9 Forecast I Var to Q2 YTD Forecast I varto q2I 2 FYF
£m Forecast YTD Forecast
Stamps. 66 64 218 213 27.0
Labels 8.9 9.3 66.9 67.7 88.5
Specials 14.4 14.2 95.7 95.6 125.4
Home Shopping returns 11 11 8.6 8.5 11.7
Other 29 3.0 23.7 24.5 32.5
Variable Mails 33.8 33.7 216.7 217.7 285.0
Fixed Mails 3.9) 39 38.0 38.0 50.7
Total Mails 37.7 37.6 254.8 255.7 (1.0) 335.7
Retail & Lottery 34 4.0 31.7 328 ca 43.5
Mails & Retail 411 41.7 (0.5) 286.4 288.5 (2.1) 379.2
Mails performance provides further
evidence of an increasingly later Christmas
peak:
+ Lower volumes leading into Black Friday
+ Sustained activity after last posting
dates.
Revenue vs LY
Black
Friday
+
Sunday trading
peaks
MWwestTrsMWAS I sMWwes tt SMWHS OTT
32 33 a4 as 36 a7 a8 ag
+ Mails underlying trading performance was £0.4m favourable to forecast. An accrual of £(0.3)m has been made
for SSK overbilling [YTD £(0.7)m; FYF £(1.1)m]
+ Total mails grew +2.1% YOY. Home Shopping Returns +30%.
+ Lottery £(0.5)m adverse to forecast, in line with general market conditions following product changes. Period 10
expected to benefit from multiple roll-overs/record Jackpot.
+ Retail £(0.2)m adverse is due to phasing and expected to recover in Q4
Full Year Outlook:
+ Mails and Retail forecast of £379m carries estimated risk of £(1.2)m: SSK overbilling £(1.1)m, Mails trading
performance £0.7m; Lottery £(1.0)m P8&9 underperformance; Photo-Me £0.2m more kiosks driving improved
commission.
* Q4 focus on re-launch of Drop & Go, extension of Barcoding, and maintaining mails trading momentum. °
6
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The Telecoms price increase is now reflected in billings
Period 9 YTD
a2 a2
P9 VartoQg2I YTD Forecast IVarto Q2I Q2 FYF
Forecast
£m Forecast YTD Forecast
HP&BB 51 43 36.8 36.5 50.9
Other 0.3 0.4 3.0 EMS 41
Total Telecoms 5.4 4.7 39.9 39.7 55.0
DVLA 0.5 08 77 8.0 11.0
POCA 3.9 37 37.3 37.1 48.2
Home Office 14 14 23.5 23.9 32.9
ID Services 0.2 01 14 13 2.0
Other 0.3 01 3.7 3.5 Sol
Government Services 6.3 6.2 0.1 73.6 73.9 (0.3) 97.9
Full Year Outlook:
* Telecoms expected to achieve FY forecast. The higher customer
acquisitions are underpinned by the extension of the existing 12 month
free offer until end of Jan, with an on-line promotion from Feb of 18
months half price Broadband.
* Government Services confident of achieving FY forecast. January focus is
to grow Verify volume for the HRMC self-assessment deadline; identify
new services/partners; and selection of new POCA provider.
Telecoms is favourable to forecast by
£0.7m as the billing cycle has now
captured the price increase from P8.
Over periods 8&9, Telecoms is £(0.1)
below forecast. HP&BB dual customers
are in line, with lower call bundle uptake
from new customers.
Customer base at the end of P9 was
468k - 7k higher than forecast.
. 5k due to continuing BB
promotional offer and market
leading position in Oct/Nov.
. 2k Churn improvement in P9
following call centre migration
Government Services is £0.1m
favourable to forecast.
. There remains a continued shift
to online services, impacting
DVLA in particular
. UKVI ID services continue to
perform well in Secure Collection
and Biometric Residency Permits.
Verify was ahead of forecast.
. POCA was slightly ahead
of forecast, reflecting phasing.
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MoneyGram and Gift Cards below expectations in P9
Period 9
a2 in
P9 Forecast Var to Q2 YTD Forecast I VartoQ2I Q2 FYF
£m Forecast YTD Forecast
Mortgages & Transactions 0.7 0.9 ted 7.2 11.2
Savings 4.6 4.6 41.2 41.1 55.0
Insurance 43 EK] 23.5 23.8 34.1
Travel 1.6 1.5 18.9 18.6 23.2
Banking & Payments 15.0 15.4 131.9 131.6 175.2
Financial Services 26.2 25.6 222.7 222.3 298.8
Period 9
Insurance a2
P9 Var to Q2
ein Forecast Forcast
Travel 0.5 0.4
Motor 0.7 1.0
Home 0.4 0.4
Life 0.3 0.3
Other 2.3 13
Insurance 4.3 3.3
Full Year Outlook:
+ Potential risks on Gift Card, MoneyGram and Mortgages are expected to be
offset by over-performance of the Banking Framework, Energy payments and
Insurance.
Mortgages are benefiting from
strong trading in Aug/Sep. The
current pipeline is weaker
presenting a risk to Q4 of
£(0.7)m
Insurance £1m ahead driven
by final Hawk settlement from
BOI booked in P9 but forecast
over P8&9.
Underlying Insurance
performance was more stable:
Motor behind forecast, but
improved on period 8, offset
by Travel.
Banking and Payments were
£(0.4)m adverse to forecast.
Disappointing performance in
MoneyGram and Gift Cards is
currently being assessed. This
was Partially offset by stronger
than anticipated performance
within Business Banking
(greater uptake through
HSBC) and within Payments
(new deals with Energy
providers).
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Supply Chain income expected to miss forecast by £(0.9)m
Period 9 YTD
a2 Q2
P9 F Var to Q2 YTD Forecast I var to Q2I 2 FYF
orecast
£m Forecast YTD Forecast
Bank note distribution 01 0.0 0.6 05 0.6
CVIT & cash processing 2 a5 13.5 14.2 18.9
High value mails 0.4 0.3 3.3 33 44
Warehousing 0.7 0.6 41 4.6 6.0
Supply Chain Income 2274 2.4 (0.2) Pikes 22.5 (1.0) 29.9
+ CVIT and Cash Processing affected by lower quality of service, impacting take on of
new clients and increasing attrition rate of existing clients.
+ Three major factors are affecting service performance - sick absence, vehicle
availability and lack of overtime volunteers. Service improvement plans are in place to
rectify this.
+ Warehousing adverse against forecast by £(0.5)m YTD due to demand reduction from
RM.
* Overall Supply Chain risk against forecast is £(0.9)m. In Q4, further risk in CVIT is
expected to be offset by higher cash processing volumes.
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Costs are adverse mainly due to timing. Underlying, Non-Staff
costs were better than forecast.
Period 9 YTD
a2 a2 YTD Var to
P9 Vartog2I YTD Forecast a2 Q2 FYF
Forecast
£m Forecast YTD Forecast
Postmaster Costs (41.5) (40.8) (317.9) (317.5) (415.2)
Staff Costs (17.7) (18.4) (172.5) (174.7) (232.4)
Non Staff Costs (24.1) (23.3) (211.4) (209.0) (275.9)
Total Costs (83.3) I (82.2) (701.8) I (701.2) (923.5)
Postmaster costs are £(0.6)m adverse. Driven by a greater mix of Mains relative to locals (driving up variable pay);
fewer NT conversions (impacting fixed pay savings); better Mails performance (higher variable pay). Potential FY risk
against forecast is c£(1.4)m.
Staff Costs are £0.3m favourable. Expected Pension costs were increased to £13.8m in the Q2 forecast to reflect the
adverse market conditions at last year end. Estimated cost is now £11.3m due to lower headcount.
Non Staff Costs are £(0.8)m adverse to forecast. Within this:
. £(2.0)m is timing related or one-off: Predominantly within IT (backdated RPI and additional services costs) and
Marketing (timing of Christmas spend); offset by Vehicles cost (lease credit for overcharges); and gains on FX
hedge.
+ £1.2m underlying favourable cost performance across a number of lines, including:
+ £0.3m POMS marketing savings due to a planned move to reduce spend on aggregators.
+ £0.2m Robberies lower than forecast. The YTD risk versus forecast has reduced.
+ £0.7m other small gains and efficiencies across legal and other operating costs.
10
Project Opex is running significantly lower than budget.
£m Period 9 YTD Full Year
Themes Programmes Actual Budget Outlook
Other Flow Through 0.3 (0.0) 0.3
Sparrow 0.0 (0.3) (3.3)
Reduce Network Costs Other Network (0.0) (0.0) (0.0)
Commercial Customer Management (0.0) (0.0) (0.2)
Digital (0.0) (0.0) (0.6)
Mobile (Wave) 0.3 (0.2) (3.7)
Other Invest to Grow (0.0) (0.5) (2.3)
POCA (Maypole / Iliad) (0.0) (0.1) (1.4)
Reduce Central Costs Other Central Costs (0.2) (0.0) (0.6)
Project IRIS (0.6) (0.0) (0.1)
Grow Financial Services Eagle (4.4) (0.5) (2.9)
Hawk (0.0) (0.0) 01
Invest to Grow FS 0.8 (0.4) (1.3)
Transform the Organisation IPeople & Organisation (0.4) (0.0) (0.5)
Transformation Office (0.0) (0.4)
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Commercial is YTD £4.4m underspent mainly as a result of slippage. Forecast spend for Q4 includes £3.1m Invest to grow (Mails
negotiations £0.7m, POCA implementation £0.5m, Barcoding all Parcels £0.4m, Drop and Go £0.3m as well as spend across a
number of other smaller projects) . Further spend of £2m on Mobile is forecast but subject to business case approval.
+ Spend against forecast will be closely monitored. Currently estimating £1m opportunity for the FY.
11
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Capital Expenditure continues to track below budget due to
delayed expenditure across the key IT towers
£m P9 YTD Full Year
Themes Programmes Actual Budget Outlook Budget
Reduce Network Costs Crown Transformation 1 (0.1) (0.0) (3.5) (0.0)
Crown Transformation 2 (0.3) (1.0) (5.3) (9.3)
Front Office (2.2) (5.7) (37.0) (39.2)
NTP. (2.5) (0.6) (20.1) (37.8)
Commercial Customer Management 0.0 (0.2) (1.4) (2.3)
Digital (0.4) (1.4) (3.5) (11.6)
Mobile (Wave) (0.1) (0.0) (0.6) (0.2)
Other Invest to Grow (0.2) (0.5) (1.9) (5.5)
Winning in Retail (0.2) (0.6) 0.0 (6.7)
Lean IT Back Office (0.7) (0.9) (4.3) (7.0)
EUC (5.7) (2.5) (39.4) (39.6)
Networks (0.3) (0.1) (8.4) (11.7)
TPOM (0.0) (0.0) 0.0 (0.0)
Reduce Central Costs Reduce Central Costs (0.0) (0.2) (2.1) (2.1)
Grow Financial Services Eagle (0.0) (0.0) (1.1) (0.0)
Hawk (0.0) (0.0) (43.9) (45.2)
Invest to Grow FS (0.1) (0.0) (1.9) (0.0)
Replacement CapEx IT Risk & Resilience (1.1) (1.1) (30.0) (18.7)
Other Replacement Capex (0.1) (0.8) (1.3) (10.4)
Property (0.2) (0.6) (0.7) (7.5)
Separation (0.2) (0.0) (4.6) (0.0)
Supply Chain vehicles (0.0) (0.8) (3.6) (7.6)
Other (1.5) (0.0)
+ Asignificant amount of Capital spend is forecasted for Q4:
12
+ £71m across Front Office, Back Office, EUC, Networks and Separation, some of which is committed in P10.
+ £17m across Crowns, NTP, Commercial and Vehicles.
Exceptional costs are £(30)m higher than budget driven by
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Postmasters’ Compensation, Restructuring & Onerous Contracts
Postmasters’ compensation (within NTP) YTD reflects the timing of the charge for this year - calculated at point of
(0.0)
£m Period 9 YTD
Themes Programmes Actual Budget Actual Budget
Reduce Network Costs Crown Transformation 1 (0.4) (0.0) (4.8) (0.0)
Crown Transformation 2 (0.5) (0.9) (1.4) (14.9)
Front Office 0.0 (0.6) (0.9) (3.2)
LBD 0.0 (0.0) (6.7) (0.0)
NTP. (6.7) (25.9) (126.8) (114.0)
Other R&V (0.0) (0.0) (0.0) (0.0)
Commercial Digital (0.0) (0.0) (0.0) (0.0)
Other Invest to Grow (0.0) (0.0) (0.9) (0.0)
Winning in Retail (0.9) (0.0) (2.4) (0.0)
Lean IT EUC (0.4) (0.0) (0.5) (0.0)
Back Office (0.0) (0.0) (0.0) (0.0)
TPOM (0.4) (0.1) (2.7) (0.9)
Reduce Central Costs Other Central Costs (0.5) (2.2) (20.0) (14.6)
Project IRIS (0.0) (0.0) (0.0) (0.0)
Grow Financial Services Hawk (0.0) (0.0) (1.2) (0.0)
Replacement CapEx Other Replacement Capex (0.1) (0.0) (0.3) (0.0)
Separation 0.0 (0.0) (6.0) (6.4)
Transform the Organisation People & Organisation (0.0) (0.4) (0.0) (1.4)
‘Transformation Office (0.4) (0.4) (1.8) (3.6)
Other Other (0.0) (0.0) 08 (0.0)
Central Exceptional Adjustments ICentral Exceptional Adjustments
(0.0)
liability, but initially budgeted at point of exit. The restatement of the provision for earlier periods will be posted in P10.
In Reduce Central Costs, higher costs reflect higher Wave 2 redundancy provisions
Central adjustments include Property Onerous Lease provisions accounted for earlier than budgeted.
For the full year, Investment spend is expected to be £34m below budget across Capex and Exceptionals.
13
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Cash flow is £175m favourable due to lower capex spend and fewer debit
card transactions prior to Christmas
Va
em YTD Cashflow Variances
3
Inc Interest,
tax, pensions
Ns
(113)
) [I
62
218
‘YTD Budget Operating profit Network Cash Working Capital Client Balances —_CapEx and
Exceptonals
(mainly NT)
YTD Actual
Cash outflow of £(102)m, £175m favourable to budget at P9
e Network Cash was £218m below budget. The cessation of NS&I products account for £40m of this.
Footfall in the days immediately prior to Christmas were lower for the Post Office and small businesses
than expected, resulting in lower debit card balances and lower business banking deposits (offset in
client balances).
¢ Client balances were £(113)m adverse to budget, due to the cessation of NS&I products and lower
business banking deposits.
¢ Capex and exceptionals are below budget, with delayed capital spend across the IT towers.
For the full year, we currently project Cash outflow to be c£50m better than budget, driven by lower
capex and exceptional spend.
14
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Financial Performance has strengthened, but challenges remain in Income,
Engagement and NT Conversions.
. Current Month YTD YTD Full Year I 2914-15
Key Performance Indicators Act Target Var. Act Target Var. IPrior YearI Target I Outturn
Growth
otal Net Income (ex 81.6 78.4 651.9 655.7 642.9 875.0 870.0
Operating profit £m 9.4 6.2 67.1 64.0 515 95.0 100.0
Earnings before ITDA e (0.5) (3.8) (30.1) (33.0) (68.1) (35.0) I (59.6)
Free cashflow £m (82.6) (196.1) (102.6) (277.2) (253.6) (344.6) I (172.7)
I Dic al I e La2 is 16.4 17.1 N/A 21.5 15.2
Customer
Customer Satisfaction 85.0% 88.0% 88.0% 88.0% 86.8% 88.0% 87.6%
65% 62% 66% 64% N/A 64% 63%
\e r ter score 26 25 27 20 N/A 25 N/A
Net Promoter score 61 55 62 56 N/A 57 N/A
Queue time % <5 minutes - Top 1k branches 69.0% 71.0% 78.0% 77.3% 77.0% 78.0% 76.4%
Branch Compliance - Financial Services - basket of 11 measures 10 <=50 26 <=50 N/A <=50 62
People
t r % (Once a ril) (Bonus 60% 63% 58% 63% 62%
Subpostmaster Engagement Index % (Once a year)** Same as YTD 46% 48% 47% 48% 46%
New Starter Turnover 25.0% 23.0% N/A 23% 26.7%
Representation (Senior Managers) - Gender 34.8% 36.0% N/A 36% 35.6%
Representation (Senior Managers) - Ethnicity 7.9% 6.0% N/A 6% 4.8%
Modernisation
Number of branches (one month in arrears) Same as YTD 11,595 11,500 I >=11,500} 11,634
C1 P s) £m (Bonus 10! 0.2) (2.6) (3.7) (4.9) (11.6)
1,017 1,229 1,850 2,039
* Customer Satisfaction is behind plan in P9. Regular customers scored the Post Office in line with target. Over
Christmas we have a greater participation of non-regular customers who score lower.
+ NT conversions behind target but current conversion pipeline has capacity to achieve the target. The current risk is
c(100) branches, improving from a risk of c(350) branches as at Q3.
15
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POST OFFICE BOARD PAGE 1 OF 5
Initial review of 2016/17 budget and 3 Year Plan
Authors: Martin Edwards / Dave Carter Sponsor: Al Cameron Meeting date: 22" January 2016
Executive Summary
Context
11 The Board is due to approve the 2016/17 budget in March, together with an updated
3 Year Plan (3YP) to 2018/19.
In our existing 3YP (approved by the Board in July 2015) we targeted an
improvement in EBITDAS from £(34)m in 2015/16 to £(10)m in 2016/17, followed
by a surplus of £28m in 2017/18. Delivery of these targets is important to
demonstrate the credibility of our turnaround plans, protect our cash position and
ensure we are able to cope with declining subsidy levels.
1.2
2 Questions addressed in this report
21 How do the initial submissions compare against the targets set in the 3YP?
22 How are we going to close the gap against plan to get to our final proposed budget
and 3YP in March?
3: Conclusion
31 The initial submissions from teams (excluding any savings challenges) result in a
£101m EBITDAS loss in 2016/17 - a gap of £91m against our target, which would
persist into subsequent years if not addressed.
Net income is £27m adverse to plan in 2016/17, driven primarily by a shortfall in
financial services growth and a deterioration in POCA. Overall our assessment is
that the current income forecast is realistic, with some upside opportunity. This sets
a clear challenge for the business to adjust our cost base.
Total opex is £64m adverse to plan in 2016/17, with new cost pressures emerging
across a number of areas such as IT.
To close the gap to plan across the period, the GE agreed before Christmas to target
savings of £110m pa from 2016/17. In a number of areas work is well advanced to
deliver these savings, such as pensions and Iris. A detailed list of projects and
accountabilities has been agreed and weekly governance arrangements established.
3.2
3.3
3.4
+ Input sought
41 The Board is asked to note the cost challenge and review a final proposed budget
and 3YP in March.
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1a
1.2
13
2.
24
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POST OFFICE PAGE 2 OF 5
The Report
Overview of our standard cycle of financial planning documents
The key product which the Board needs to approve before the end of March is our
budget for 2016/17. Aside from being necessary to run the business, we are
required to submit this document to BIS before the start of the new financial year
under the terms of our funding agreement.
Last year we also introduced a 3YP: this is not a specific HMG requirement, but we
decided it would be an appropriate discipline to strengthen our medium-term
financial and strategic planning. We committed to update this document each year
to cover a rolling 3 year period. While last year the 3YP was approved in July
subsequent to the sign-off of the annual budget, we decided to run both as a single
process in future years, running to the same timetable.
It should be noted that our new 3YP extends to 2018/19, one year beyond the end of
our current funding agreement. Between March and June we will be updating our
projections to 2020/21, as the basis for the funding negotiations later this year.
Summary of the targets in our current 3YP (2015/16 to 2017/18)
As the chart below shows, the existing 3YP delivers an £88m cumulative EBITDAS
improvement by 2017/18, relative to a 2014/15 baseline. This would result in a pre-
subsidy profit in 2017/18 for the first time in 15 years. The forecast improvement
was driven by a combination of: a) overall net income growth of around 1.5% CAGR,
with FS and telecoms growth offsetting the declines in mails and government
services; and b) net cost reductions of 1.6% CAGR, delivered through network and
Crown transformation, staff savings and renegotiation of supplier costs. Delivering
this rate of profit improvement is necessary to cope with declining subsidy levels.
Funding from Government, £ million
EBITDAS, € million
2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
cau Investment funding mmm Network Subsidy Payment (NSP) ~~ EBITDAS
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POST OFFICE PAGE 3 OF 5
3. Overview of the initial budget submissions
3 The table below summarises the updated outlook to 2018/19 based on the first
round of submissions from teams. It highlights a significant gap to plan in 2016/17
of £91m, primarily driven on the cost side as explained in more detail below. In
2017/18 the gap against plan reduces, but only because we have maintained the
assumptions included in the previous 3YP on staff and supplier savings (which total
£28m). The underlying gap remains broadly the same as in 2016/17. FS growth
falls further behind trajectory, but this is partly offset by the improvement in mails
relative to plan. The key takeaway is that we need to focus on right-sizing our
cost base in 2016/17 to close the gap that year, which should also largely
return us to plan in subsequent years.
15/16 Q2 I 16/17 Budget
Forecast (latest view) updated view estimate
Financial Services (inc Poms) 302 302 (31) 340 (39) 368
Mails & Retail 379 375 14 372 21 372
Gov Services 99 80 (4) 68 (10) 62
Telecoms 55 60 (2) 66 3 70
Supply Chain & Other 35 33 (6) 33 (6) 33
Total Net Income 870 851 (27) 879 (31) 906
Agents pay (415) (406) © (390) 8 (400)
Staff Costs ) (236) (13) (202) 12 (194)
Non-Staff Costs (276) (328) (45) (328) (45) (315)
Total Expenditure (924) (970) (64) (920) (24) (909)
Depreciation 1 i 0 1 () 1
Project opex a7) (21) ° (24) ° (24)
FRES 36 37 t) 37 () 37
EBITDAS (34) (101) (91) (27) (55) 1
32 Overall net income is £27m lower than plan, with the top line deteriorating by £29m
year-on-year (having remained broadly flat over this and the previous year). Overall
FS income is flat year-on-year in 2016/17, compared against the 10% growth
expected in the current 3YP. The main drivers of this shortfall are the delays in the
launch of new insurance, investment and digital payments products, the removal of
the savings underpin from Bank of Ireland (which we are currently renegotiating)
and trading challenges in a range of other products. Within FS the shortfall is partly
offset by the launch of the new Banking Framework.
33° Qutside of FS the main positive variance against plan is in mails: we expected 3% pa
declines in the 3YP, but based on trading performance in the current year are now
forecasting a more gradual decline of less than 1% pa. As the separate mails
strategy paper sets out, we still believe there are significant structural risks to our
business based on the current arrangements with Royal Mail.
3.4
Our assessment at this stage is that the income forecast for 2016/17 represents a
realistic and prudent basis on which to set our cost targets. There is some upside
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3.5
4
44
4.2
43
5
5.1
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POST OFFICE PAGE 4 OF 5
opportunity to these numbers, particularly if we can secure new government services
income and reach agreement with the {_ pn the issues around savings,
investments and However, until we have a firmer view of these areas we
would prefer to hold these as upside opportunities, therefore setting a more
stretching challenge on costs to get back to plan. The pattern in previous years has
been to start with income forecasts that have proved to be too optimistic, leaving
the business less well prepared to implement mitigating actions on the cost side in-
year.
Based on first submissions the underlying cost base is expected to increase by £46m
year-on-year, creating a £64m gap against the 3YP target for 2016/17. This is
driven by: a) cost pressures across the business, particularly in IT, property and
commercial; and b) the fact that these initial numbers do not include the savings
challenges we included in the 3YP. As outlined below we are re-applying these
challenges as part of our plan to close the gap.
Our plan to close the gap
These initial projections expose the fact that fundamentally our cost base is still at
the wrong level to support our top line position, despite the savings that have been
delivered across the business over the past two years. We therefore need to
accelerate the thinking around the more radical changes to our operating model
which we had identified as necessary to support our long-term competitiveness. This
will be informed by a detailed analysis of our cost base and drivers which is currently
underway.
To close the gap between now and the March Board we have set the business an
EBITDAS improvement target of £110m in 2016/17 (including contingency above our
£91m gap). The majority of this has been allocated as a cost challenge, with only
£6m set as a target for profit improvement from higher income.
The programme plan which accompanies this paper (which is best printed A3)
outlines how the £104m cost challenge has been allocated across different areas of
the business, alongside a short description of the specific projects and governance
arrangements to deliver these targets. The whole process will be overseen by
weekly meetings of the Cost Reduction Group attended by the CEO and CFO, to
ensure the necessary degree of scrutiny and challenge.
Overview of the position on investment spend (capex and exceptionals)
At present based on first submissions we also face an overspend on our below the
line investment budget. While this doesn’t affect our profit targets, getting back to
plan is critical to maintain adequate balance sheet headroom throughout the forecast
period. The biggest single driver of the variance relates to IT costs, and the decision
on Trinity will have a significant bearing on whether we can eliminate this overspend.
Overall we have sufficient discretionary flexibility across our investment budget to
get back to plan, but further work is required to assess the trade-offs against our
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6.
6.1
6.2
6.3
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POST OFFICE PAGE 5 OF 5
profit position both in the short and long term. It should be noted that at this we
have not budgeted for substantial redundancy costs, which may be required to
deliver the opex savings. We will provide a full update on the proposed investment
budget in March, aligned to the P&L projections.
The links to our wider strategic planning
We clearly need to ensure that the plans we develop to deliver the 2016/17 budget
and the new 3YP to 2018/19 are aligned with our longer-term strategic ambitions.
Between March and the June Board strategy awayday we will be developing a full
draft of our new Strategic Plan covering the period up to 2020/21, which will then
form the basis of our funding negotiations with BIS for the last three years of this
plan.
As noted above, to close the gap on our short-term plans we need to accelerate the
more radical options to transform our cost base. While some of these options will
entail strategic trade-offs with our capacity to deliver top line growth, our view at
this stage is that it is right to focus on addressing costs to establish a simpler and
cheaper operating model. Fundamentally our business model is based on being a
retail distributor for products and services manufactured by other companies. To
survive as an intermediary in competitive markets our cost base needs to be as lean
as possible so we are in a position to negotiate on fees. Therefore acting now to
reduce costs should in broad terms be seen as a ‘no regrets’ decision.
There will be time set aside at the March Board to discuss the alignment between our
short and long-term trade-offs at a more granular level, to inform the debate on the
budget and 3YP. We will also present a first draft of our longer-term financial
projections to 2020/21, together with an explanation of what this means in terms of
potential scenarios for our next round of funding discussions. This will be followed
by further work between March and June on our longer-term commercial plans and
partnerships, particularly in mails and FS, ahead of a full debate at the strategy
awayday.
Strictly Confidential Board Intelligence Hub template
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P0L00363141,
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POL00363141
POL00363141
POST OFFICE
Project Trinity Update
Author: Alison Japp Sponsor: AlCameron Date: January 2016
Executive Summary
Context
1. At the last Board, we discussed options that would reduce the complexity, risk
and cost associated with IT Transformation including the option to retain
Horizon, the existing branch software provided by Fujitsu (Project Trinity).
2. We have explored three options:
¢ Proceed with IBM as per the current implementation plan
e Re-negotiate with IBM to see if by reducing their scope, we can reduce costs,
time and execution risk
e Terminate the IBM contract, retain the existing Fujitsu contract and build on
the existing Horizon infrastructure as necessary.
Questions this paper addresses
3. The purpose of this paper is to update the Board on the progress; providing fuller
responses to the questions raised at last Board:
e Is there a compelling case for Project Trinity?
e Is there a way to manage the legal and commercial risk?
¢ What are the next steps?
Conclusions
4. There is a compelling case for Project Trinity. It provides a substantial reduction
in complexity; operational risk and a £69m cost reduction over three years,
reducing to £15m after seven years. The IBM options, as outlined above, have
not yet demonstrated that they would provide a substantive reduction in
complexity, risk or cost.
5. There are routes to manage the legal and commercial risks. Detailed advice has
been obtained from Counsel and additional analysis undertaken by Gartner to
better understand which route will be most effective. The Board will be updated
at the meeting.
6. We plan to revert to the Board with a final recommendation during February.
Input Sought
7. The Board is asked to highlight any additional issues that they wish addressed
prior to a final recommendation being brought to the Board in February.
Strictly private and confidential
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The Report
Context
8. Since the last board we have focused on developing a fuller understanding of
these options ensuring that the proposed solution meets our success criteria:
¢ Clear financial benefits on a like for like basis
e Acceptable legal and procurement risks
¢ A significant reduction in delivery risk
¢ Confidence that the solution works
e Additional functionality can be added simply, at an acceptable cost, in an
acceptable timescale
e Improved management controls & processes, mitigating any Sparrow related
risks
e Impacts on the integrated plan and contracts beyond Front Office are
manageable
e Clear communications strategy for multiple stakeholders, with government
acceptance
e Confidence that the supplier will behave as partners, making change easy and
cost effective as it evolves beyond what we know we need today
e Credible governance structure to manage supplier contractually and day to
day, engaging with business leadership as well as IT
9. We have made significant progress with only a small number of outstanding
actions:
e Conclusion of commercial negotiations with Fujitsu and IBM
e Finalisation of the approach to procurement and contracting
e Confirmation that the solution works (test of the Fujitsu solution started on
18°" January)
A verbal update will be provided on these outstanding areas at the Board.
Is there a compelling case for Project Trinity?
Option A: Proceed with IBM as per the current implementation plan.
10. We are in the process of carrying out a full review with IBM of the costs, delivery
risks and delivery plans that underpin our current plan with IBM. Within the
current scope, approach and implementation plans there are no additional
actions that can be taken at this point that will substantially reduce complexity,
risk or cost.
11. We believe the current plan is under threat due to supplier dates slipping and the
operational and delivery risk remain high.
Strictly private and confidential
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Option B: Re-negotiate with IBM to see if by reducing their scope, we can reduce
costs, time and execution risk
12. POL and IBM reviewed the current scope, technical design and delivery plan with
the aim of identifying options that would reduce complexity, cost and risk.
Fundamentally, no suggestions from IBM have materially changed the plan and
increasingly promote leaving more services with Fujitsu.
Option C: Terminate the IBM contract, retain the existing Fujitsu contract and build
on the existing Horizon infrastructure as necessary. (Project Trinity)
13. This option does provide a substantial reduction in complexity and operational
risk and a £69M cost reduction over three years, reducing to £15M after seven
years. Further options are under discussion to adopt an invest to save option
that provide an additional 5% saving year on year run cost saving assuming a 3
year investment. These figures are now significantly more robust and provide a
reasonable estimate of costs.
14. We continue to challenge Fujitsu on the run costs and to ensure that we are
developing a better, partnership spirit in the relationship. This is patchy.
Is there a way to manage the legal and procurement risks
15. Counsel has confirmed that termination of the contract with IBM does not give
rise to any breach of procurement law. However the way in which POL procures
replacement services is open to challenge if POL makes a direct award to Fujitsu,
fails to run a transparent procurement process and it cannot rely on any
available exemptions under the Public Contract Regulations 2015.
16. As outlined in our last update to Board there are a variety of procurement routes
available. We are currently exploring whether a direct award to Fujitsu could be
possible under the terms of an exemption under Regulation 32 which allows
direct awards where, inter alia, the services can be supplied only by one provider
where: (i) competition is absent for technical reasons or (ii) because of the
protection of exclusive rights including IP rights, provided that no reasonable
alternative or substitute exists and the absence of competition is not the result of
an artificial narrowing down of the parameters of the procurement.
17. If this exemption is available, it would substantially reduce the risk of challenge
and of an award to Fujitsu being declared invalid. It would also mitigate
previously highlighted risks of an action against either POL or the Board for f
misfeasance in public office.
18. While at a practical and commercial level, Fujitsu appears to be uniquely placed
to provide this service, this is not of itself sufficient to prove that there is no
competition for technical reasons..
Strictly private and confidential
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19. Accordingly we have commissioned Gartner to provide an assessment, via a
desk-top analysis, if there are likely to be suppliers that would be capable and
potentially interested in delivering our specification. This will inform our
assessment of whether we fall within the scope of the exemption provided by
regulation 32. An update will be provided verbally at the Board.
20. Depending on the nature of the findings, three further options exist to support an
award:
. Expanding the Gartner conversation to interactions with potential
suppliers. This is likely to be appropriate to give the Board confidence.
. Publishing details of the award or the intention to award.
. Re-procuring the services.
Next Steps
21. The priorities are to confirm the approach to procurement of continuation of our
existing Horizon solution and finalise commercial negotiations with Fujitsu. Once
confirmed we will be able to complete an outline business case, finalise high level
delivery plans, and undertake a final assurance review (the requested “Red Team
Review”), with Deloittes, our Business Transformation Assurance partner.
22. We will look to recommend to the Board a final way forward in February. The
Deloitte assurance will be provided to the Board at the same time as the request
for Board approval.
Strictly private and confidential
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POST OFFICE BOARD DECISION PAPER
Decision Paper - Delegated Authorities II
Author & Sponsor: Jane MacLeod Meeting date: 22"¢ January
Executive Summary
Context
A paper on Delegated Authorities was presented to the Board on 28 October 2015,
this paper is attached for easy of reference.
At the meeting the Board discussed the proposed delegated authorities and debated
whether the authorities had been set at the right level. The Chairman asked the
General Counsel to provide further information on the number of contracts being
signed at the levels proposed and any benchmark data available from other
organisations, especially ShEx Businesses.
After discussion between the General Counsel and the Chairman new delegated
authorities are proposed for Board approval.
* Question addressed in this report
What delegated authority levels should the Board set for the Business?
2: Conclusion
21 The Board currently delegates authority to the Group Executive for contracts below
£20m in value. It is recognised that best practice delegates authority to the CEO and
not to an Executive team. The analysis on contracts signed shows that, in the last
two years c. 20 contracts were signed with a value between £5m and £20m.
22 after consideration a new delegated authority level of £5m is proposed with all
expenditure above that level requiring Board approval. (This would not include
operation BAU expenditure such as the monthly pay/agents remuneration bill or
operational costs such as rents, rates or utility costs).
23 A process will be put in place to ensure the Board are able to respond to urgent
requests which require approval by correspondence.
24 Recommendation. The Board approve the new delegated authorities as set out in
Appendix 1
Strictly Confidential Board Intelligence Hub template
POST OFFICE
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APPENDIX 1
Planned
Spend
Notes
SHEX
>£50m
- Consent required from the Shareholder
Executive (ShEx) where spend is not in
the ordinary course of business (and/or
not included in the Annual Operating
Plan).
- Contracts > £50m (other than in
ordinary course of business - if you are
unsure please take advice from Legal/Co
Sec [e-mail] on these)
- All strategic acquisitions and disposals
- All proposals to enter into financial
instruments, bank borrowings and any
proposed loan facility (above £20m)
- Approval of major asset disposal
Board
<£50m
¢ Carries significant risk.
e Risk of significant impact on brand
value.
e Is likely to attract the interest of the
Shareholder.
CEO
£5m
CFO
£4m
Member of GE
£2m
Includes significant indemnities to be given
by Post Office Ltd.
Senior
Leadership
Team
£250k
Delegation may be increased:
e Up to the authority level of the relevant
GE member;
e onan individual basis; or
e fora specified purpose, or
e to aconsultant for a specified period.
Increased delegations must be in writing,
signed by the relevant GE member and
copies must be provided to the delegate
and to Co Sec who keep a register.
Strictly Confidential
Board Intelligence Hub template
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POST OPPUEE PAGE 1 OF 6
Decision Paper — Delegated Au
Author & Sponsor: Jane MacLeod Date: 28 October 2015
Executive Summary
Context
In accordance with the principles of good governance, the Board delegates authority
to the Chief Executive to implement the Board approved strategy; this delegation
includes specific limits on the financial authority of the CEO. Post Office delegated
authorities were last reviewed in 2012. In light of the changes to Post Office’s
transformation plans and the change of a number of senior executive roles during that
period, it is therefore recommended that the Board review these authorities.
In addition, a number of Post Office executives are authorised to sign contracts on
behalf of Post Office Limited. This includes individuals other than directors or persons
acting under a formal power of attorney. Accordingly the Post Office Board should
confirm that these named individuals are authorised as signatories.
Questions addressed in this report
What changes should be made to the delegated authorities and authorised
signatories?
Conclusion
1. The current delegated authorities which date back to 2012 are set out in Appendix
1. Due to changes in personnel and governance processes it is recommended that
the delegated authorities be amended to those set out in Appendix 2. The key
changes are:
. Top level delegation is to the CEO rather than to a committee (GE/Exco)
. CEO delegates authority up to £15m to the CFO and up to £5m to each GE
member
. There is no delegated authority for ‘unplanned’ spend
. There is no distinction between costs and liabilities
. Additional authority may be delegated to individual SLT members if so
required, up to the limit of the responsible GE member.
2. In order to facilitate the execution of contracts by Post Office Limited, the contract
approval process has been updated. As a result, the list of approved signatories is
also being reviewed to ensure that it is up to date. The proposed list of Authorised
Signatories is set out in Appendix 3.
3. If approved by the Board, it is proposed that the delegations and authorised
signatories will become effective as from 1 November 2015.
Strictly Confidential Board Intelligence Hub template
POST OFFICE
Input Sought
The decision(s) &/or advice we would like
from the board is:
The Board is requested to approve and
authorise:
. The delegated authorities set out
in Appendix 2; and
. The list of signatories set out
Appendix 3 as the list of persons
authorised to sign contracts on
behalf of Post Office Limited.
Strictly Confidential
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Input Received
Explain if other forums have seen,
inputted to or approved this paper prior to
the board:
The delegated authorities have been
reviewed and recommended by the Group
Executive.
Board Intelligence Hub template
POST OFFICE
APPENDIX 1
EXISTING DELEGATED AUTHORITIES
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Planned Spend I Unplanned Value of Risk or brand
Spend Indemnities or I impact
Potential
/Contractual
Liabilities
Value Value Potential cost Description
Shareholder >50m >50m a =
Executive approval approval
required only if required only if
the value of the I the value of the
spend is not in spend is not in
the ordinary the ordinary
course of course of
business business
Board > £20m > £10m > £20m Carries
significant risk
(ERM score 4)
Attracts public
and media
interest
Risk of impact on
brand value
New product
Is likely to
attract the
interest of the
Shareholder
POL IC or ExCo I £5m-£20m £3m-£10m £10m-£20m Carries
significant risk
(ERM score 3)
Attracts local
public and media
interest
Impacts on
customer
experience
Significant
product changes
Chief Executive I £3m-£5m £500,000-£3m £1m-£10m Includes
or CFO significant
indemnities to be
given by Post
Office Ltd
Member of <£3m <£500,000 £500,000-£1m Consultancy and
Executive project work
Committee affecting more
than one part of
the business
Head of - <250k = =
Security1
Authorised <50k <50k <50k Minimal impact
Signatory2 on brand. Low
risk
Strictly Confidential
Board Intelligence Hub template
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APPENDIX 2
PROPOSED DELEGATED AUTHORITIES FROM 1 NOVEMBER 2015
This document sets out the delegated authority levels for the Board, Group Executive and
Senior Leadership Team.
To whom can authority be delegated?
. Board delegates authority to CEO.
. The CEO then delegates authority down through direct reports.
Authority may only be delegated to an individual (by reference to the role) and not to a
committee.
What does the authority cover?
. approval of expenditure within the agreed annual budget or under a Business Case
approved through the Transformation Governance processes.
. approval of contracts on the Contract Approval Form (CAF).
Can authority be delegated further?
. Members of the GE may delegate authority for amounts in excess of £250k to their
direct reports. Such authority must be in writing and specify the limit being delegated.
. GE members may delegate authority to contractors for specified periods and up to
specified amounts.
. SLT members may further delegate authority to specified direct reports up to a
specified amount.
All such further delegations must be in writing, and copies must be provided to the Company
Secretary, who will hold the list of current delegated authorities for reference.
Requirement for
Business Case to be
approved by GE
member (minimum)
Does it fall within
transformation?
No PIP/ business case
required to go through
Transformation
; Governance
Is it within the Annual
Budget?
Escalate to rele
level of authori
require FD sup}
Yes Is it within delegated
authority?
Approve
Strictly Confidential Board Intelligence Hub template
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POST OFFICE LIMITED DELEGATED AUTHORITY LEVELS
Planned Spend* Notes
Consent required from the Shareholder
Executive (ShEx) where spend is not in the
ordinary course of business (and/or not
included in the Annual Operating Plan)
SHEX >£50m
e Carries significant risk.
e Risk of significant impact on brand
Board >£20m value.
e Is likely to attract the interest of the
Shareholder.
Chief Executive <£20m
Includes significant indemnities to be
CFO <£15m given by Post Office Ltd.
Member of GE <£5m
Delegation may be increased:
e Up to the authority level of the
relevant GE member;
e onan individual basis; or
. . e fora specified purpose, or
Senior Leadershif <£250k e« toa consultant for 8 specified period.
Team Increased delegations must be in writing,
signed by the relevant GE member and
copies must be provided to the delegate
and to Co Sec who keep a register.
NOTES:
e Uncapped liabilities or indemnities must be specifically authorised by the CFO and General
Counsel
e There are separate signatory procedures for bank accounts and Treasury functions; queries
regarding these should be directed to the Group Financial Controller. Approvals to make
payments must be made through usual AP processes
FD for area must sign off spend as being within budget
HR approval required for template changes
Contractor and consultant spend must be approved through CFO
Must comply with procurement processes
Property spend (buying, selling, renting - including office space) must be approved by
Head of Property
e Marketing spend must be approved through Head of Marketing
eceee
Contract Value
Strictly Confidential Board Intelligence Hub template
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POST OFFICE
APPENDIX 3
PROPOSED AUTHORISED SIGNATORIES FROM 1 NOVEMBER 2015
Job Title Current Incumbent
CEO Paula Vennells
Chief of Staff Tom Wechsler
CFO Alisdair Cameron
Head of Strategy and Corporate Planning Martin Edwards
Group Financial Controller David Carter
Supply Chain Director Mark Ellis
Network & Sales Director
Kevin Gilliland
General Manager Network Development and Transformation
Kevin Seller
Head of Sales, Financial
Jeremy Law
Commercial Director
Martin George
Chief Marketing Officer
Pete Markey
Head of Government Services
Chris Doutney
Director, Post Office Money Mark Siviter
Financial Services Director Nick Kennett
Head of Risk, Governance and Development Jonathan Hill
Director, Post Office Money
Henk Van Hulle
Group People Director
Neil Hayward
Director, Employee Relations and Engagement
Thomas Moran
Head of Agents’ Development and Remuneration
Nick Beal
Communications and Corporate Affairs Director
Mark Davies
Corporate Services Director
Jane MacLeod
Head of Legal, Infrastructure and DR
Jessica Madren
Head of Legal, Commercial
Piero D’Agostino
Head of Information Security and Assurance Group
Julie George
Transformation Director
David Hussey
Company Secretary
Alwen Lyons
Strictly Confidential
Board Intelligence Hub template
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POST OFFICE LIMITED - BOARD PAGE 1 OF 3
Post Office Limited Sealings
Author: Alwen Lyons Meeting Date: 22 January 2016
Executive Summary
Context
The Directors are invited to consider the seal register and to approve the affixing of
the Common Seal of the Company to the documents set out against items number
1366 to 1378 inclusive in the seal register.
Input Sought
For the Directors to resolve that the affixing of the Common Seal of the Company to
the documents set out against items numbered 1366 to 1378 inclusive in the seal
register is hereby confirmed.
Strictly Confidential
Date
15 January 2016
POST OFFICE LIMITED
Register of Sealings
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Company Number
21554540
Seal Date of Date of Persons Attesting Destination of
Number Sealing Authority I Description of Document To Document Document
/ File Ref.
1366 19/11/2015 18/11/2015 I Reversionary Lease between Nottingham Office Assets Limited Victoria Moss Jean Reynolds
and Nottingham Office Assets (No 2) Limited and Post Office
Limited relating to Ground Floor and Part First Floor, Norfolk
House, 47 Parliament Street, Nottingham.
1367 19/11/2015 18/11/2015 I Deed of Variation between Nottingham Office Assets limited and I Victoria Moss Jean Reynolds
Nottingham Office Assets (No 2) Limited and Post Office Limited
relating to Ground Floor and Part First Floor, Norfolk House, 47
Upper Parliament Street, Nottingham.
1368 19/11/2015 18/11/2015 I Counterpart Lease of premises at 90 Abbey Wood Road, Abbey Victoria Moss Jean Reynolds
Wood London SE2 OYH between Trustees of the Insight Displays
Pension Fund.
1369 25/11/2015 24/11/2015 I TR1 relating to 60 Rochdale Road, Royton, Oldham, OL2 6QL. Alwen Lyons Jean Reynolds
Post Office Limited acting as transferor, Mohammed Asif and
Fareda Asif acting as transferees.
1370 27/11/2015 26/11/2015 I Licence to Assign relating to Lease of Ground Floor, 12 Sun Victoria Moss Jean Reynolds
Street. Waltham Abbey between R Cowing & Son Limited and
Post Office Limited and Yunus Patel and Huzalfa Karbhari.
1371 04/12/2015 03/12/2015 I TR1. Post Office Limited at transferor, Kaushik Shah and Divya Victoria Moss Jean Reynold
Shah as transferee.
1372 10/12/2015 02/12/2015 I Agreement for Surrender and New Lease relating to Toplin Alwen Lyons Jean Reynolds
House, Ferndale Road, London SW9.
1373 14/12/2015 11/12/2015 I Underlease relating to Ground Floor, Unit 3, Lord Street, Victoria Moss Jean Reynolds
Oldham.
Register of Sealings
Alwen Lyons
Page 2
Date
22" September 2015
POST OFFICE LIMITED
Register of Sealings
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Company Number
21554540
Seal
Number
/ File Ref.
Date of
Sealing
Date of
Authority
Description of Document
Persons Attesting
To Document
Destination of
Document
1374
16/12/2015
15/12/2015
Licence to assign relating to Lease of The Post Office forming
part of the premises known as 1 Trinity Street, Stalybridge,
SK15 2PW between Post Office Limited, Brenda Brooks, Edward
Kenneth Dry and Roger Nicholas Philips, Graeme Read, Abacus
Properties (NW) Limited.
1st of three originals sealed.
Alwen Lyons
Jean Reynolds
1375
1376
1377
1378
16/12/2015
16/12/2015
23/12/2015
07/01/2016
15/12/2015
15/12/2015
23/12/2015
03/12/2015
Licence to assign relating to Lease of The Post Office forming
part of the premises known as 1 Trinity Street, Stalybridge,
SK15 2PW between Post Office Limited, Brenda Brooks, Edward
Kenneth Dry and Roger Nicholas Philips, Graeme Read, Abacus
Properties (NW) Limited.
2nd of three originals sealed.
Licence to assign relating to Lease of The Post Office forming
part of the premises known as 1 Trinity Street, Stalybridge,
SK15 2PW between Post Office Limited, Brenda Brooks, Edward
Kenneth Dry and Roger Nicholas Philips, Graeme Read, Abacus
Properties (NW) Limited.
3rd of three originals sealed.
Licence to Underlet relating to land and buildings at 130C Lord
Street, Southport between; Post Office Limited, Kingscrown
Properties and Keith Hamilton and Denise rose Hamilton.
Minute of Agreement recording a review of rent between
Kilpatrick Assets Limited and Post Office Limited. Subjects:
Units 1, 2 and 3 Maple Court, Alloa.
Alwen Lyons
Alwen Lyons
Alwen Lyons
Victoria Moss
Jean Reynolds
Jean Reynolds
Jean Reynolds
Jean Reynolds
Register of Sealings
Alwen Lyons
Page 3
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POST OPPUEE PAGE 1 OF 3
New Prosecutions Policy Proposal
Author & Sponsor: Jane MacLeod Date: 22 January 2016
Executive Summary
Context
Prior to separation, RMG prosecuted suspected criminal activity in the Post Office
network in England and Wales. Since separation, Post Office has assumed this
function, adopting essentially the same policy as previously applied by RMG.
Prosecuting suspected criminal activity in the Post Office network assists the
protection of Post Office assets by deterring criminal activity.
As good housekeeping following separation from Royal Mail, and in light of public
criticisms of Post Office which arose in relation to ‘Project Sparrow’, we have reviewed
the Post Office prosecutions policy to ensure that the policy is robust and continues to
meet best practice.
Questions addressed in this paper
i. What are the key points to note about the new policy?
2. What are the implications for the board and the business?
3. What happens to cases that are not approved for prosecution?
Conclusion
1. The new policy replaces the previous policy which was inherited from Royal
Mail. It sets out the requirements which must be met before Post Office can
launch a prosecution including in particular, the Code for Crown Prosecutors
(issued by the Director of Public Prosecutions) which require the prosecution to
be in the public interest, and for there to be evidence sufficient to provide a
realistic prospect of conviction
2. Where a case is not approved for prosecution in accordance with the Policy, it is
likely that civil remedies would be pursued (eg contract enforcement or
recovery of debts) as well as other steps as described in the Appendix.
Input Sought: The Board is requested to note the Policy.
Input Received: The draft policy was reviewed by Post Office Legal, Cartwright
King (Post Office Limited’s legal advisers on criminal matters to) and Brian Altman QC.
It was approved by the Group Executive on 17 December 2015.
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The Report
Why do we need to create this policy?
1. On 26 February 2014, the Post Office Board formally approved “pursuing a
prosecutions policy focussed only on high value cases/cases_ involving
vulnerable members of society, and engaging with the police in relation to other
matters”. Adopting the updated Prosecution Policy Post Office will enable
continue to be able to bring private prosecutions focussing on high value cases
and/or those involving vulnerable members of society.
2. The proposed policy sets out the approach that Post Office will take when
considering whether to commence a prosecution. The final decision as to
whether Post Office Limited should commence prosecution will be taken by the
General Counsel.
What are the key points to note about our new policy?
3. The draft Policy:
e explains Post Office’s approach to suspected criminal activity against Post
Office business in England and Wales;
e¢ expressly states that a prosecution can only be brought where the evidence
in the case passes the same two-stage test used by the CPS;
e lists a number of public interest factors which might support bringing a
prosecution; and
* empowers Post Office’s General Counsel to authorise prosecutions.
What are the implications for the board and the business?
4. No particular steps are required to roll out and embed the policy as this will be
the responsibility of Post Office Legal and its external advisers on criminal law.
However we have been advised that the policy should be available on the Post
Office Limited website, and that this is consistent with the practice of other
organisations which conduct their own prosecutions.
5s Where an investigation is conducted and there is deemed to be sufficient prima
facie evidence to support a charge and meet the public interest test, the
investigation case papers are referred to Post Office’s external lawyers who
review the case against the same criteria and provide formal advice/opinion and
a recommendation on whether to prosecute or not. The General Counsel is the
business decision maker on the final decision of prosecution.
6. Where a prosecution is commenced, the case is kept under constant review to
ensure that it continues to meet the evidential and public purpose tests; if not,
the case is withdrawn.
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How will we monitor compliance with this policy?
7. It will be the responsibility of the General Counsel to ensure compliance with
the Policy. A report will be provided to the Board Audit & Risk Committee
annually detailing the number of cases that have been referred to prosecution
and confirming that in each case the requirements of the Policy have been
complied with.
What will the impact be on our wider business?
8. We do not expect there to be any adverse impact on Post Office business,
however the existence of the Policy may assist in discouraging criminal
activities within Post Office.
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ITO BE REMOVED ONCE FINALISED
POST OFFICE LIMITED
PROSECUTION POLICY FOR ENGLAND AND WALES
Post Office Limited 1
Prosecution Policy
THIS DOCUMENT IS SUBJECT TO LEGAL PROF
THE EXPI
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THORITY OF POST OFFICE LIMITED
(TO BE REMOVED ONCE FINALISED)
TABLE OF CONTENTS
Section
1. Introduction
2. Policy Scope
3. Policy Objectives
4. Enforcement Options
5. General Principles of Criminal Enforcement
6. The Decision to Prosecute
7. Decision Making
8. Recovery: Confiscation, Compensation and Costs
9. The Acceptance of Guilty Pleas
10. Review
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1. INTRODUCTION
1.1 Post Office Limited is a private limited company, wholly owned by
Government.
1.2 It has been entrusted by Government to provide a number of services of
general economic interest to the public through its branches across the UK.
1.3 Criminal offences against Post Office Limited’s business, in particular theft,
fraud and false accounting, adversely impact its customers and commercial
partners, and challenge the viability of the services Post Office Limited
provides.
1.4 Post Office Limited is committed to deterring and reducing criminal
offending against its business by investigating offences, and by taking such
action as it considers appropriate in the circumstances of the case.
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2.3
2.4
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POLICY SCOPE
Post Office Limited has been an independent company since its separation
from Royal Mail Group on 1°' April 2012, retaining an investigative and
prosecution function.
In England and Wales, Post Office Limited performs both investigative
and prosecuting functions using external service providers for some of
these functions.
In Scotland and Northern Ireland, Post Office Limited’s Security Team
carries out investigations and decides whether to refer a matter to the
Crown Office and Procurator Fiscal Service in Scotland, or to the Public
Prosecution Service in Northern Ireland. Post Office Limited does not
make the decision to prosecute, nor does it carry on prosecutions, in
Scotland or Northern Ireland.
The present policy is intended to explain the approach that Post Office
Limited will adopt when it is suspected that crime has been committed
against its business in England and Wales.
This policy applies equally to Post Office Limited employees, postmasters,
operators, contractors and customers, as well as to any other person
alleged to have committed a criminal offence against its business in
England and Wales.
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3. POLICY OBJECTIVES
3.1 The general objectives of this policy are to:
3.1.1 ensure that Post Office Limited takes a fair, consistent and
proportionate approach to criminal enforcement;
3.1.2 provide Post Office Limited decision makers with guidelines
enabling them to reach appropriate criminal enforcement decisions;
3.1.3 inform the public and our commercial partners of the general
principles Post Office Limited will use to guide its criminal
enforcement decisions;
3.1.4 deter and reduce the commission of criminal offending against Post
Office Limited’s business;
3.1.5 preserve and maintain the viability and integrity of the services Post
Office Limited provides to the public which criminal conduct
comprises;
3.1.6 protect Post Office Limited’s physical and financial assets; and
3.1.7. recover monetary losses and assets resulting from criminal conduct
committed against its business.
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Post Office Limited’s “Contract Breach” policy document ! sets out how
Post Office Limited decision makers may act in relation to serious breaches
of contract by postmasters operating postmaster contracts, and by
operators of the New Model Contracts.
Where applicable, Post Office Limited will have regard to the terms of the
“Contract Breach” policy before considering whether or not prosecution
will be the most appropriate response to an allegation of crime.
If a criminal investigation is considered appropriate, it will be conducted
by Post Office Limited’s Security Team in accordance with the “Conduct
of Criminal Investigations Policy” document.”
Post Office Limited often works in partnership with police forces and other
enforcement agencies, particularly in cases where offences are alleged to
have been committed by persons who are not Post Office Limited staff,
agents or contractors, or where violence is alleged to have been threatened
or used against Post Office Limited personnel or property, or where
offences are alleged to have been committed against both Post Office
Limited assets and/or personnel and assets of another agency.
In cases of the type referred to in paragraph 4.4, Post Office Limited may:
4.5.1 invite the police and/or other enforcement agencies to investigate the
allegation(s);
4.5.2 pursue a joint investigation with police and/or other enforcement
agencies;
4.5.3 investigate the allegations without recourse to police or other outside
agencies;
1 Version 5.0 dated 7" April 2014, as revised or re-issued from time to time.
2 Issued 29% August 2013, as revised or re-issued from time to time.
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4.5.4. invite another prosecuting agency to prosecute the matter;
4.5.5 pursue a joint prosecution with another prosecuting agency; or
4.5.6 pursue a prosecution without recourse to another prosecuting agency.
4.6 The choice of enforcement option may depend on factors such as, but not
limited to, those matters set out in paragraphs 5.7 and 6.3 below, as well as
the likelihood of non-compliance with, and the likely effectiveness or
consequences of, any other enforcement options available.
4.7. Where the nature of the offence is so serious or the shortage or loss so
substantial that enforcement action other than criminal action is
inadequate and might lead to delaying criminal investigation and
enforcement, Post Office Limited may move expeditiously to take criminal
enforcement action.
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5:5
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GENERAL PRINCIPLES OF CRIMINAL ENFORCEMENT
When making any decision whether to prosecute a person for a criminal
offence, Post Office Limited will apply the Code for Crown Prosecutors
issued by the Director of Public Prosecutions,3 as well as the further
considerations set out in this policy document.
The decision whether to prosecute in any individual case will be taken with due
diligence and expedition.
Post Office Limited will have regard to the Human Rights Act 1998 and the
European Convention on Human Rights.
Post Office Limited will comply with the: 4
¢ disclosure obligations under the Criminal Procedure and Investigations Act
1996 (and the Code of Practice issued thereunder);
e Protocol for the Control and Management of Unused Material in the
Crown Court;
e Attorney General’s guidelines on Disclosure and on the Disclosure of
Digitally-Stored Material;
. Criminal Procedure Rules and the Criminal Practice Directions;
e — Attorney General's guidelines on the Acceptance of Pleas; and
Each case will be approached according to general principles of fairness,
consistency and proportionality.
Fairness and consistency do not require Post Office Limited to take a
uniform approach in every case; rather it means adopting a similar
approach in similar circumstances to achieve similar ends, taking into
account the particular circumstances of each case.
3 Currently the 7 Edition, issued January 2013, but revised and re-issued from time to time.
4 As may be revised and re-issued from time to time
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5:7 Proportionality means that Post Office Limited action will be
proportionate to the seriousness of the offence, the strength of the
evidence against the alleged offender, the harm done by the offence, the
impact of the offence on the community and on the services Post Office
Limited provides and its business, taking into account the costs to Post
Office Limited of investigation and prosecution as weighed against the
likely outcome.
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6. THE DECISION TO PROSECUTE
6.1 A prosecution can only be brought where the evidence passes the two-stage
test for prosecution set out in the Code for Crown Prosecutors. 5
6.2 Inorder to satisfy the two-stage test referred to above (the “Full Code test”):
6.2.1 there must be evidence sufficient to provide a realistic prospect of
conviction (the “evidential stage”); and
6.2.2 the prosecution must be in the public interest (the “public interest
stage”).
6.3 Where the evidential stage of the Full Code test is satisfied, in addition to the
public interest factors set out in the Code for Crown Prosecutors, additional
public interest factors that might justify a prosecution by Post Office Limited
include where:
. members of the public have suffered loss;
e a victim of the offence was particularly vulnerable (for example by
reason of age, infirmity or physical or mental disability);
. the offence involves a serious or significant breach of trust;
e the actual amount of the shortage or loss to Post Office Limited, in
particular where the conduct has resulted in a significant or
substantial financial shortage or loss;
e the offence has or is likely to have an adverse impact on Post Office
Limited’s business, brand, image or reputation;
. the offence (or the concealment of the offence) is sophisticated,
involves multiple transactions, or was committed over a lengthy
period of time;
e there is a history of similar past offences or misconduct;
¢ an innocent party has been falsely blamed or accused;
e the particular circumstances of the offender (such as his/her age,
physical or mental condition, his/her general character or
5 Currently the 7‘ Edition, issued January 2013, but revised and re-issued from time to time.
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reputation, whether there is an absence of evidence of any previous
offending or default);
. the particular circumstances of the offence (such as the pattern of
offending, and whether it was, for instance, the result of deliberately
calculated acts to benefit the offender);
e — whether any or all of the shortage or loss has been (or realistically
will be) repaid to Post Office Limited;
. any early voluntary disclosure or confession by the offender;
. the deterrent effect of a prosecution on the offender and others;
e any unreasonable or inordinate delay by Post Office Limited in
reaching a decision;
e the cost of prosecution to Post Office Limited relative to the likely
penalty on conviction and likely recovery of loss or shortage
(although no decision will be made on this factor alone).
Following a decision to prosecute, Post Office Limited will keep the case under
continuous review. Should it appear to Post Office Limited at any time that the
case no longer satisfies the evidential stage of the Full Code test, or should
Post Office Limited conclude that a prosecution no longer satisfies the public
interest stage of the Full Code test, then Post Office Limited will discontinue
the case without undue delay.
6.5 No prosecution will be commenced or continued in circumstances where it is,
or it becomes likely, that the courts may regard the prosecution as oppressive,
unfair or an abuse of the process of the court.
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7. DECISION MAKING
7.1. The decision to authorise prosecution, or any other decision under this
policy, will be taken by the General Counsel for Post Office Limited, or any
other member of the Post Office Legal Team to whom the General Counsel
may delegate that authority, acting from time to time on the advice of
external lawyers.
7.2 The decision to prosecute will be taken openly and transparently. The
decision and the underlying reasons for it will be recorded in writing and
retained by Post Office Limited until the expiry of a period of not less than
six years following the conclusion of the case.
7.3 Prosecutions in the Magistrates’ Court and the Crown Court are conducted.
by Post Office Limited’s in-house lawyers, external lawyers or appointed
agents.
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8. RECOVERY: CONFISCATION, COMPENSATION AND COSTS
8.1 Post Office will in each case consider whether or not to exercise its rights to
recover any shortage or loss resulting from the offender’s criminal conduct,
as well as the costs of prosecution, subject to the general principles of
fairness, consistency and proportionality.
8.2 Where Post Office Limited seeks to exercise its rights to recover a shortage
or loss, it will do so by seeking orders for:
e — Restraint against assets owned or controlled by suspects;
e Confiscation under the provisions of the Proceeds of Crime Act
2002;
. Compensation;
. Costs covering the investigation and prosecution; or
e Any combination of such or similar orders.
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9.3
9.4
9.5
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THE ACCEPTANCE OF GUILTY PLEAS
In appropriate cases prosecutors will consider whether any offer of a plea to
any particular charge meets with the scope and objectives of this Policy.
The decision whether to accept any offer of a plea or pleas rests with Post
Office Limited only, acting on the advice of the prosecutor.
In cases where a defendant seeks to admit guilt on a basis other than that
advanced by the prosecutor, Post Office Limited will only consider an offer
of a plea or pleas where the offer is expressed in writing and in the form of a
recognised ‘Basis of Plea’ document signed by the defendant or on his/her
behalf by his/her representative. Post Office Limited is not bound to accept
any such offer of plea or pleas.
In cases where the charges are expressed in the alternative and the
defendant accepts the prosecution case without qualification, Post Office
Limited will consider whether to accept a plea or pleas of guilty to
particular charges by reference to the scope and objectives of this Policy.
In cases where the charges are expressed in the alternative and the
defendant seeks to admit guilt to particular charges on a basis other than
that advanced by the prosecutor, paragraph 9.3 of this Policy will apply.
In any case where a defendant seeks to enter a guilty plea or pleas on a
basis not agreed by Post Office Limited, Post Office Limited will invite the
court to hear evidence to determine the facts upon which the defendant is
to be sentenced.
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10. REVIEW
10.1. This policy supersedes any previous Post Office Limited criminal
enforcement action or prosecution policy document.
10.2 This policy will be reviewed annually.
Policy version: v1: 22 January 2016
Policy owner: General Counsel
Date of policy implementation: 25 January 2016
Date for review of this policy: The first review to occur by 31 March 2017 and thereafter
the policy must be reviewed by 31 March in each year.
Formal approval of policy by: Post Office Group Executive
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