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Briefing Note for new Non-Executive Directors — May 2021
1, Overarching strategy
Nick Read joined as CEO in September 2019 and led work on Purpose, Strategy & Growth? in
discussion with the Board. That work identified strengths, weaknesses, challenges and imperatives
for change. These outputs have been further developed leading to a strategy that focuses on the
core services and building a modern franchise partnership.
Post Office strengths:
- Trusted institution (58% of consumers give it a rating of 8+ out of 10). Strong ratings on
reputation, service and convenience in parcels
- Branch network convenience for mails and parcels (65% of participants in our customer
survey agreed or strongly agreed that they had a PO branch close to their home/office vs.
50% for our best competitor)
- Access to basic banking services (8 million customers annually)
- Businesses outside our core (financial services, insurance, telecom) that make a large
contribution and which, delivered through digital channels, are a proof of concept of our
ability to deliver platform plays, leveraging our brand and access to customers.
External challenges:
- Competition in parcels
- Decline in use of cash (UK cash payments fell by 16% from 2017 to 2018)
- _ Difficulty of attracting and retaining younger customers and SMEs (relevance of Post Office
and trust in it is lower for younger customers. There is a gap for SMEs in the ease of service
offered and quick access to staff.)
- Aside of travel money and travel insurance Post Office has not established financial services
as a medium-term growth engine for consumers or SMEs. Credibility needs to be established
on expertise, ease of use and an awareness of the products and services being offered by
Post Office. There is also a “negative halo” associated with poor branch experience which
makes consumers sceptical about Post Office’s digital services
- Digital and gig economy competitors with a low-cost base, agility and focus on volume over
profitability.
Imperative to modernise Post Office as an organisation:
- high-cost operating model, with limited deployment of process digitisation or analytics. This
means that there are currently ~3,850 FTEs in POL against a potential target state of ~1,600.
- Post Office isn’t a compelling proposition for retailers with processes and systems seen as
onerous while trust needs to be improved with Postmasters
- Diversification has led to a complicated set of products. Mails & Parcels, Cash & Banking and
Financial Services account for 76% of FY2019/20E direct contribution (including PayZone),
but managerial focus, best PO team capabilities and change budget do not reflect this, with
topics such as BillPay (including PayZone) and Identity (respectively 1% and 3% of
FY2019/20E direct contribution) taking disproportionate oversight and investments
- Bottom quarter organisational health index compared to relevant peers with particular gaps
in clarity of strategic direction, role clarity, personal accountability, external/competitor
orientation and innovation.
- dependence on third parties for technological needs with low maturity in vendor
management capability (Horizon costs = ~£90m vs. initial benchmarks of ~£50-60m)
1 Supported by McKinsey.
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- Unsustainable physical branch network to self-fund. The loss-making part of the network has
an estimated support cost of ct predominantly driven by the need to support out
geographic and access criteria, alongside some legacy fixed agent pay contracts
- reduction in change funding (fro RRELE
FiRRELEVANTI FY2018/19 t fst evan xcluding GLO reserve
funding in FY2020/21). There is an envelope of ifor change in FY2020/21 after
delivering projects required to “keep the lights on”.
Clarifying our purpose:
- Thriving postmasters a) increasing our efficiency to offer valuable, competitively priced
services b) focusing and innovating to maintain our lead in core markets in the face of
competitive disruption c) re-thinking our support and franchise model for our postmasters
to better serve their needs.
- Ease and access (a) Services and products that are easy to use and make our customers lives
easier. b) access to services they wouldn’t otherwise have access to without Post Office’s
physical and digital presence (esp., mails & parcels and banking)
- Service oriented central support.
Post Office Limit
siness and product lines can complexity? but out of a
total revenue of jn ‘net cash contribution of jimRELEvaN Tat P11) was delivered by
Mails & Parcels an net cash contribution of Tat P11) by Cash & Banking Services.
Clearly there are no simple choices as other products and services help drive footfall into branches
and deliver revenue and profit, while the allocation of costs associated with particular products is
not always straight forward. Additionally, we need to maintain a branch network of at least 11,500
to meet the access criteria attached to our funding agreement with Government; these services in
turn help to distinguish POL as a retailer which provides vital services to customers who might
otherwise be excluded, an important aspect of our brand. The discussions at last year’s strategy
sessions? set out the focus for the next few years on developing the retail network and the core
services of Mails & Parcels and Banking. Other services will support the core but the limited
investment funding available will be directed to the core as well as critical IT projects. Non-core
services will shift more to partnership or branding arrangements which have limited investment
requirements. The focus of activity broadly maps to three areas: 1) Re-setting and fixing the past
(Cultural change; fit for purpose network; right sized cost base; 21* century tech; Historical Matters
Business Unit work) 2) Building foundations for POL (entrenching Mails & developing PUDO; Cash &
Banking; Commercial Relevance) 3) Self-sustaining commercial (platform products).
Strategic planning priorities will be discussed again at the Board on 3 June 2021 as we prepare for
the next funding submissions in the Autumn. Dedicated strategy sessions will take place at the end
of July 2021.
2s Fixing the past
Group Litigation Order (GLO)
In 1999/2000 POL introduced a computerised electronic point of sale system, Horizon, which
Postmasters were required to use in their branches. The Horizon System required sub-postmasters
(SPMs) to account for stock, sales and takings and, as part of the balancing process, identify
2 Regulatory demands stretch on management time, challenges in prioritising competing demands for
investment and resource etc, working out what is really adding value.
2 The Board has dedicated strategy days each July.
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shortfalls or discrepancies. Under the terms of their contracts, SPMs were required to make good
any shortfalls out of their own funds.
In April 2016, a High Court claim was issued against Post Office. The litigation* was between Post
Office and a group of 555 mostly former Postmasters®; it involved complex technical, operational
and contractual matters. In March 2017 the Court issued a Group Litigation Order, a procedural tool
to enable the Court to manage litigation affecting multiple parties. The Judge ordered that the case
would be heard in a series of trials. Until 2013 POL had sought to prosecute cases for theft, fraud
and false accounting®. Some settlements were paid under a mediation scheme in 2013 and under
the Network Transformation Scheme leavers were offered 26 months’ worth of earnings.
Mr Justice Fraser, the managing judge across the trials in the GLO, handed down his judgment on the
Commons Issues trial in March 2019 and on the Horizon Issues trial in December 2019’. Both
judgments were very critical of POL historically and while the current Horizon system was seen to be
reasonably robust the legacy systems were not. The Judge was also critical of the approach POL had
taken to the GLO. The POL Board lost confidence in the approach being taken to the litigation. HSF
was instructed together with new Counsel and following a constructive mediation process, which
involved Nick Read as the new CEO and Ben Foat as the General Counsel appointed a few months
previously, a settlement was reached with the claimants in December 2019 thereby ending the
litigation.
Settlement
The settlement agreement reached was at a cost to Post Office Limited of £57.75m, inclusive of the
£5.5m Common Issues Judgment costs. The distribution of that sum was for the claimants and their
backers to determine. Part of the settlement agreement was that POL would set up a compensation
scheme for historical shortfalls.
Compensation Schemes
The Historical Shortfalls Scheme (HSS) was developed and launched in May 2020. A Stamps
Reconciliation Scheme was subsequently set up in July 2020 as part of the HSS. The HSS window for
applications has closed and those claims are being worked through by an independent panel with
Board and Shareholder oversight. The process is for a settlement offer to be made to a claimant
who may choose to accept or reject that proposal. Following the approval of the Funding
Agreement with BEIS for 2021/22 on 18" March 2021, the Board approved the first settlement
offers being made under the HSS subject to being sighted on those claims.
POL also set up a Historical Matters Business Unit (HMBU) in September 2020. The aim of this was
for all historical matters to be dealt with by a dedicated team to include overseeing the management
of the compensation schemes®; the ongoing litigation (criminal and civil), supported by internal and
external lawyers; obtaining assurance on conformance with the judgments; and, since the
announcement of the Public Inquiry (Independent Review into the Post Office Limited Horizon IT
System. https://www.gov.uk/government/publications/post-office-horizon-it-inquiry-2020), co-
ordinating POL’s response to this. It also meant that the HMBU could be tasked with “shining a light”
* Alan Bates & Others v. Post Office Limited
5 61 of whom had been prosecuted through the criminal courts
® There were also two cases involving Horizon evidence in 2015.
7 The trial ended in July 2019.
® An independent panel has been set up which recommends the settlement offers but the overall financial
envelope for the HSS claims must be approved by the Board prior to discussion with the Shareholder.
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on any operational issues that still needed to be addressed. A further aim of the HMBU was to allow
management to focus on the running and development of today’s business. Inevitably, the HMBU.
needs support from the business to provide information and understand processes. The Public
Inquiry, with a focus on the future and assurance that what happened could never happen again,
means that the Chairman, the Shareholder representative and some of current Group Executive will
present evidence to the Inquiry on the improvement work that has been undertaken and the
roadmap for future improvements.
The programme of work is extensive and linked to organisational culture and the development of
partnerships with Postmasters and multiple franchisees as much as it is with processes and
procedures. Third party assurance of the work we are doing has been secured, with a report on
conformance and gaps with the Common Issues judgment provided by Norton Rose Fulbright; a
report on the work required to achieve conformance with the Horizon Issues judgment from KPMG;
and an overarching report on improvement work required from Deloitte. An Improvement
Development Group is overseeing and tracking all of these workstreams at executive level and this
will be superseded by a governance forum in May 2021, established to ensure a separation between
those charged with delivering the work and those assuring it. Board oversight of certain matters will
continue and a monthly update will be received by the Board. Details can be found here: [papers to
The Board also retains oversight of the work of the HMBU and certain decisions are reserved to the
Board.
Court of Appeal and Crown Court cases
On 26" March 2020 the Criminal Cases Review Commission (CCRC) referred 39 cases prosecuted by
POL to the Court of Appeal Criminal Division (CACD) while still reviewing a further 22 cases. These
were cases originally tried in the criminal courts. Six cases were also referred to the Crown Court.
These were cases which were originally tried in a Magistrates Court. A further two Crown Court
cases were subsequently referred and the Board decided not to oppose these cases on public
interest grounds at its meeting on 29" April 2021.
The CCRC set out its reasons for the case referrals in a Statement of Reasons (SoR) in June 2020. The
SoR drew heavily on the judgments from Fraser J. As the private prosecutor in these cases POL had a
duty to respond. POL also had a duty to review what information it held that might be relevant, not
only to those whose cases had been referred, but also to all those prosecuted. That review (the
Post-Conviction Disclosure Exercise) is near conclusion and bundles of information (both generic and
case specific) have been issued. By January 2021 more than 3.8 million documents had been
reviewed.
The Board reviewed the cases referred to the CACD and to the Crown Court individually over two
days in September 2020. A trinity of issues riddled most of the cases: unreliability of the historical
Horizon system (a finding in law following the Horizon Issues judgment); disclosure failures (e.g. in
many cases not providing information such as Horizon transaction data) and poor investigation
practices (e.g. starting from the premise that the Horizon data was correct with the burden resting
on the Postmaster to prove otherwise). The Court considered arguments for limb 1 abuse of process
(not able to receive a fair trial) and limb 2 abuse of process (not fair to try). The Board determined
to concede limb 1 abuse in 39 of the CACD 42 cases and oppose in three cases which were not
reliant on Horizon data. In other words, the Board did not think that the overwhelming majority of
the convictions were safe and supported the quashing of these convictions. In four cases the Board
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also thought that limb 2 abuse of process was evidenced because of the improper use of plea
bargaining. The benchmark for such a finding is high as limb 2 abuse of process is considered to be
an affront to the criminal justice system. On 23" April 2021 the CACD handed down its judgment
which found both limb 1 and limb 2 abuse of process in all 39 cases. In essence, it found that issues
with the Horizon system, which had had “teething” issues from its introduction in 1999, the
disclosure failures and the poor investigation practices were so bad that they amounted to an
affront to the public conscience (i.e. the reasons for finding limb 1 abuse and limb 2 abuse of process
were the same because of the severity of the failings) The CACD dismissed the 3 cases that POL had
opposed. Public apologies were made when the settlement was reached in December 2019 and
following the CACD judgment. Letters of apologies are being sent to the 39 Sub-Postmasters whose
cases were overturned. POL has publicly supported the need for compensation while acknowledging
that the damage done cannot be undone.
In the Crown Court cases the Board did not oppose any of the six cases initially referred and these
cases have since been quashed. The Board will not oppose the two further cases submitted on public
interest grounds. 16 cases are still being reviewed by the CCRC or the CCRC has decided not to refer
the case.
The approach between the CACD and the Crown Court differ. The CACD is focussed on the safety of
the conviction and is not re-examining the evidence but where a case is referred to the Crown Court
and the original prosecutor opposes the conviction being overturned the case would need to be re-
prosecuted. The prosecutor has to follow the Crown Court guidance for prosecutors which includes
an evidential test and a public interest test. In the former, POL has to consider factors such as how
long ago the cases were prosecuted and how much evidence is available; in the latter, POL has to
consider factors such as whether it would be in the public interest to re-prosecute, which could, for
example, include that an individual had already served a sentence. In cases dependent on Horizon
data the Board would not seek to oppose given the judgment’s findings on the potential unreliability
of the system.
Cases will continue to be referred. In most instances referrals for Crown Court cases will be made by
the CCRC but cases previously tried in the criminal court will normally be referred direct to the
CACD. A further 672 cases were prosecuted so there is a large pool of future potential appellants
(FPAs) and the Board will not oppose any cases which are Horizon dependent on either limb 1 or
limb 2 grounds.
Civil claims
Following the overturning of cases in the CACD and the Crown Court POL will face civil claims. This
could include claims of malicious prosecution and breach of good faith duties®. The Board will
continue to receive legal advice and has received initial advice from Counsel in respect of malicious
prosecutions. The Board has made plain that where an injustice has been suffered an individual
should have access to recompense. We are aware that Hudgell, the solicitors representing a large
number of claimants, will not support a compensation scheme route but mediation may be an
option.
The size of the claims collectively (including those for the HSS) means that POL will not be able to
meet the full costs and Government will need to meet the costs of many of these claims. This has
naturally impacted on the funding position and consideration of the going concern status of POL, as
° This could include claims for shortfalls, loss of remuneration, personal injury and stigma.
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well as the funding discussions with Government, Shareholder oversight of POL and the assurance it
needs around decisions being taken, particularly where these set a precedent. Currently many of
the costs associated with the claims cannot be quantified and these issues are being worked
through. The initial settlements through the HSS (aside of de minimis claims) will be one marker of
the potential costs for that Scheme.
Public Inquiry
An Independent Review into the Post Office Limited Horizon IT System, led by Sir Wyn Williams, a
retired judge, was announced on 29" September 2020
(https://www.gov.uk/government/publications/post-office-horizon-it-inquiry-2020). The Inquiry is
expected to report in August or September 2021. Oral evidence is due to start in May 2021.
Evidence will be provided by the Chairman, Chief Executive and a number of members of the Group
Executive, as well as UKGI and BEIS. The Inquiry Secretariat has also advised that it will run a
number of “show and tell” sessions where POL employees demonstrate and explain processes now
in place to help evidence the changes have been implemented to ensure conformance with the
findings of the judgments.
POL has responded so far to 59 questions from the Inquiry Team and provided materials requested
by the Team.
The response to the Inquiry will continue to be a major focus for the organisation over the next few
months but this is not just about the past, it is also about making improvements for the future.
Whilst conformance with the findings of the judgments is essential and a legal requirement more is
being done. A wholesale shift in the ways of working is taking place through a transformation
programme that aims to makes POL postmaster centric, which in turn promotes a customer centric
approach.
Starling
Project Starling concerns a case brought by 121 agent postmasters claiming that they are Post
Office’s workers and are due worker rights, such as holiday pay and pension contributions. The case
is funded by the CWU. A trial date is set for 7" June 2021 but we are holding discussions with a view
to a mediated settlement.
3. Core products and services:
Mails & Parcels
Mails Distribution Agreement (MDA)
MDA2 was signed on 16" December 2020 with POL entering a new Mails Distribution
agreement with Royal Mail Group. The agreement went live on the 29 March 2021. Under the
agreement POL remains the primary retail sales and acceptance channel for Royal Mail. POL
customers will continue to benefit from Royal Mail Group’s status as the UK’s designated universal
service provider making deliveries to 31 million addresses.
The exclusivity under the previous deal has gone so POL can partner with other providers and POL is
able to sell Mails products on-line.
The new commercial construct:
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The forecast for the first five years of MDA2 is broadly flat at /IRRELEVANT'P.a.
There is a mitigation plan in place to address the risks attached to MDA2. ‘link to November Board
Moving to the new arrangements affects Postmaster remuneration, with the overwhelming majority
benefiting. A consultation with Postmasters on the implementation proposals has been launched
with responses requested by 23" May 2022. The remuneration based on the new structure is
expected to come into effect in December 2021 or January 2022 assuming a 6-month contractual
notice period starting at the latest from July 2021. The exact start date of the contractual notice
period is still under discussion..
In the meantime, there will be an implementation benefit payment during the contractual notice
period of June or July 2021 trading to around November or possibly December 2021 trading where
Postmasters would have benefited from moving to the new arrangements earlier. In addition, from
April 2021 trading until implementation of the new agreement, all branches will receive an interim
additional monthly remuneration payment to reflect thi
IRRELEVANT
IRRELEVANT
from the Christmas 2021/22 trading period.
i ee IRRELEVANT ___
The initial focus is on Pick Up because of the challenges posed by Drop Off due to capacity and space
constraints ani
Banking
Banking Framework
As noted, Cash and Banking services accounted for:
contribution of
ki of POL’s revenue in 2020 (net cash
Jat P11). POL’s partnership with over 30 banks, building societies and credit
unions, to offer everyday banking services means that 99% of customers can access their High Street
bank account over the counter at their local Post Office for cash withdrawals, deposits and balance
enquiries.
The Board discussed the pricing principles proposed for moving from BF2 to BF3 at its meeting on
30" March 2021 and will be asked to take a decision on the pricing framework on 3 June 2021. The
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BF3 commercial and contract proposals must be released by June 30", 2021. Each bank must decide
by December 31%, 2021 whether to remain in the Banking Framework or to terminate. POL’s
objective is for all of the banks currently part of the framework to move into BF3.
Research has been conducted to identify the “pain points” for the banks; these include the need for
IRRELEVANT
Collective engagement with the banks has been takin,
proposal is for a deal with a revenue range of
Postmaster remuneration of; ths NT! A move from a steps system to a curve for iansacion
volume numbers is proposed to encourage volume by removing the “cliff edge” between bands.
lace since September 2020. The rea
tis likely to take up the option to stay on BF2 rates when moving into BF3 but we are
considering how we might develop more strategic partnerships with the bigger banks, for example
by entering into two-term deals in which jas expressed an interest.
We expect compression in the market as banks and ATMs close, increasing Post Office footfall until
c.2025 but decreasing thereafter (annual falls of H e forecast from 2022). But by then we expect
Post Office to be at the core of the national cash network delivering an improved Postmaster model
and with better customer journeys. This may include self-service and counter cash automation,
subject to the business case being met and funding being available.
- withdrawals, though immature.
Access to cash
Access to cash legislation is being considered by HMT, FCA and others which could mandate the
banking industry to provide appropriate coverage for cash services. This would make it likely for the
banks to need BF3 for deposits, but only make it ‘desirable’ for withdrawals as there are existing
viable alternatives (ATM, cashb:
{IRRELEVANT}
ATMs
The Bank of Ireland decided to move out of the provision of an ATM service in the UK. POL is seeking
to acquire 1,400 of these ATMs before the end of the current contract to be able to remain in the
market as a free to use provider. These ATMs will be replaced with new devices (under a leasing
model) over a two-year period.
4. Other services that support the core:
Insurance
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Post Office Insurance (POI) offers travel, life and general insurance (house, motor, pet and gadget).
It is a subsidiary of POL and has an independent Board and management team. POI is an FCA
regulated insurance intermediary carrying out regulated intermediation activities under the Financial
Services and Markets Act.
The draft budget considered by the Board on 30" March 2021 assumes a revenue o' tjand
minimal trading profits in 2021/22. The business has been severely impacted by Covid-19 and
lockdowns. Sales are normally strong in travel insurance.
The business has been seeking to increase its share of the value chain by bringing key products in-
ection insurance have the main areas of focus for growth. 1
_but until the investment of recent years come to fruition that path is
seen as sub-optimal. Over the next 18 months — 2 years the focus will be to protect and grow the
business to drive a return on those investments, making cost and efficiency savings where possible
without damaging long-term value.
The insurance industry faces regulatory pressures with the FCA’s reforms on pricing for home and
motor insurance. POI has set up a Pricing Sub-Committee to help respond to the FCA requirements.
Identity Services (including digital identity, in-branch verification, document certification)
The draft budget considered by the Board on 30 March 2021 assumes a revenue of I
2021/22 but the Verify contract will close and the deal with Yoti will be loss-making initially.
The Government Digital Service (GDS) has extended the Verify service until April 2022 and POL will
continue to be a provider with the service supplied by Digidentity (though they may be replaced by
Yoti, our new partner, in due course). POL will make a small margin for the provision of the service.
POL agreed a collaboration license deal with Yoti in January 2021 for their full UK business providing
us with a Post Office branded digital identity app, in-branch verification solutions and co-branded
B2B services - Induding online identity verification, digital signing and age estimation. The deal will
transactions andinr digital transactions. This is our first example ofa true platform
proposition.
Bills Payments
Post Office completed the acquisition of Payzone Bill Payments Limited (PZBPL) after clearance from
the Competition and Markets Authority in October 2018. PZBPL has been set up as a subsidiary. The
acquisition brought an additional 14,500 locations into the network. PZBPL signed an exclusive
contract with British Gas which came into force in December 2019. This new deal is for a minimum
'ZPBL’s focus has been on delivering the British Gas contract, winning further client
contracts and building strategic partnerships. Revenues were FIRRELEVAN’ it the end of the 2020/21
FY with the business affected by Covid-19 and lockdowns.
Together with POL’s own bills payment business, the draft budget for 2021/22 (considered by the
Board on 30" March 2021) assumes a revenue of; ind a trading profit of jm
Foreign Exchange
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FRESH/ FRES is Post Office’s joint venture with the Bank of Ireland for the distribution of FX. Post
Office receives a dividend annually.
* FRES was established in 2002 as a joint venture between the Bank of Ireland and the Post Office
Ltd.
* Originally established to provide on-demand and pre-order foreign currency and travellers
cheques to the POL branch network.
+ _FRES has since expanded its operations through Post Office to provide Travel Money Online and
Travel Money Card.
+ Anumber of ‘white labelled’ services have been developed in the UK (e.g. John Lewis, Santander)
* Post Office has grown to be the largest provider of retail foreign currency services in the UK with
circa 11,500 branches.
+ FRES operates a wholesale FX notes business, creating one of the five largest currency dealing
rooms in the world by volume {i In 2017, FRES completed the acquisition of American
Express Wholesale Currency Services which created a travel focussed Corporate Client portfolio
(e.g. TUI)
+ Regulated as a Money Services Business (MSB) by HMRC.
FRES is approved by the Financial Conduct Authority (FCA) as an Authorised Electronic Money
Institution (AEMI) and issued its own Multi-Currency Card in March 2017.
The business has been severely impacted by Covid-19 and its impact on the travel market. The
assumptions for recovery in 2021/22 are conservative given the trading uncertainties but could give
a better return if the travel market revival is strong.
Financial Services
Post Office offers mortgages, savings, credit cards, personal loans, travel money and postal orders.
Most of our financial services are offered in partnership with the Bank of Ireland, with whom we
have had a long-term partnership and serve more than 2 million customers in the UK.
Anew deal was agreed with Bank of Ireland in September 2019. This was set against the backdrop of
a deteriorating market with! }
The term of the agreement was extended from September 2023 I
IRRELEVANT (now the earliest
termination date of the partnership). The agreement was structured such that Post Office is able to
‘were also agreed.
An exclusive arrangement remains on residential mortgages, personal loans and personal savings
products. Bol will maintain exclusivity on’ and point of [I Post Office is able
to explore other partnerships for transactional banking, retail investments and SME. An
improvement in thei "was negotiated with an additional! _
p.a.to 2022 (representing/« net p.a.), and
IRRELEVANT
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IRRELEVANT
Post Office made use of its new freedom to enter new partnerships by launching two new credit
cards with Capital One in November 2019.
Telco
The Board decided to sell the Telco business, partly because of the need to generate income given
the impact on trading of Covid-19 and the litigation costs, and partly recognising that to the develop
the business and scale-up would require significant investment” thereby reflecting the strategic
decision to focus investment on the core products. The sale went through on 31 March 2021 with a
sale price of £70.6m
5. Areas of focus:
Public Inquiry
The Public Inquiry process has been described above and as well as ensuring conformance with the
judgments, POL wants to change its culture to reflect that its employees are here to support the
work done by Postmasters and to work with Postmasters to built a modern franchise partnership.
This has a number of strands:
Culture
POL wants to develop a Postmaster centric culture. This is at an early stage and will continue to
evolve but the steps towards this include:
Postmaster consultation — this was run at the end of 2020 and the findings were analysed by
Quadrangle, the firm supporting the process. Six areas were raised by Postmasters as top
priorities for improvement: 1) Remuneration, 2) IT systems and processes, 3) Communication,
4)Training, 5) Access to senior management and 6) Innovation and working groups. Co-creation
sessions on the priorities have been held with Postmasters.
link}. There will be regular surveys and it will be important to check whether the improvements
being made to processes etc are making a positive impact and see where there’s work still to be
done. A number of forums and co-creation groups have also been set up. Area managers will
continue to engage, feedback and seek to resolve issues. Postmaster roadshows and conferences
will continue. The Senior Leadership population will continue with the “Adopt an Area” initiative
so they can listen, discuss and seek to understand the key issues for Postmasters to factor this
into decisions made. All employees with undertake the “Week in the life of a Postmaster”
sessions to build an understanding of what it’s like to run a branch. Postmaster directors joining
the Board is of course a vital part of making sure that a Postmaster lens is applied when taking
major strategic decisions.
* Organisational ways of working are being developed, informed by colleague listening groups and
Pulse surveys.
* Postmaster communications and support - the process of reviewing all the standard letters and
documents received by Postmasters and hearing feedback from Postmasters on their experiences
of seeking to access support has been sobering and underlined the need for change. Support
materials for Postmasters have been overhauled and the Onboarding process has been
1 Partly linked to termination fees in the contract with Fujitsu, the provider.
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streamlined (but with an ongoing drive to reduce the average onboarding time further and keep
simplifying the process). The development of Branch Hub (including the “We're Listening”
function and an ordering facility) is seen as an important resource. A specialist customer service
team has been added to the Branch Support Centre and customer satisfaction scores will be
included in the metrics. Work on developing new contracts will take place over the next few
years.
Developing as a modern franchise
The Board discussed the network strategy in depth in its strategy sessions in July 2020 and has had
regular updates and discussions since then. The principles underpinning the changes include:
* continue to meet the six access criteria to safeguard access across the UK, maintaining a
commitment to rural & urban deprived communities. We plan to expand the network to circa
12,000 branches as the new formats come into place and the new definition of a Post Office
agreed with our Shareholder gives us the scope to open new express formats which can offer a
smaller range of services
« rebalance the network to areas of higher customer demand, partly funded by a shift away from
c.2000 loss-making branches which account for 1% of total customer visits (75% of income is
concentrated in 4000 branches)
¢ runona fully franchised basis, with the remaining DMBs replaced to meet customer demand
© greater flexibility in how the product offering, technology solutions & operating model for each
branch is tailored to the needs of the postmaster and the local market
¢ a compelling overall franchise proposition.
The focus will be on delivering mails, banking and other essential services to customers and small
business across the UK.
Levers to deliver the strategy:
A new network blueprint — geospatial modelling has been used to help plan the network with an
initial focus on expanding coverage in over 1,800 identified ‘whitespace’ locations, which will allow
us to move away from the c2000 loss-making branches that only account for 1% of customer visits
Amore flexible formats range — addressing the retailer wish for simplicity, ability to integrate better
with their business and remove the need for dedicated staff and counters
Modern franchise arrangements - underpinned by a tiered operational model with different levels
of account management, planning, training and marketing support to allow both sides to reduce
costs and increase sale.
Stronger strategic partnerships — with major retailers but also including the upgrading of suitable
Payzone partners.
The priorities for 2021/22 are:
a. Meeting our network obligations and managing churn as efficiently as possible in the context
of continued coronavirus uncertainty, offsetting forecast churn of over 350 branches and
minimising the number of ‘regretted’ solutions (like outreach) ahead of the new formats coming
on stream from Q3.
b. Delivering the first phase of expansion into new locations using our new SPM-enabled
propositions, thereby supporting our PUDO growth ambitions and providing the headroom we
need to manage churn more effectively and tackle legacy formats with 400 ‘Express’ outlets by
March 2022.
c. Reshaping the existing network to address ‘wrong format’ branches, including, closing &
replacing a further 84 DMBs, replacing over 200 existing legacy contract branches, converting
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around 30 Mains to Locals (instigated by the postmaster) and starting the process of optimising
the outreach network.
Thought is also being given to how we better categorise our products and offerings:
‘Core’ products are mass-market and sold face-to-face by our Postmasters. These deliver our
Government mandate for universal services, and are primarily made up of Mails, Banking
Services, Bill Payments and Travel. Key features include clear customer propositions, intuitive
end-to-end Postmaster journeys, and replicated systems and processes across multiple branch
products to minimise training and points of failure.
2. ‘Range’ products improve the attractiveness of the Post Office franchise to existing and
prospective Postmasters or franchisees. These drive Postmaster economics either directly
(through commission) or indirectly (through footfall). Examples of ‘Range’ products are:
Lottery, Gift cards, MoneyGram, and Postal Orders. Key features of these products include
minimal financial investment and focus on Postmaster benefits such as footfall, income and
simplicity.
3. ‘Platform’ products are primarily digital or online propositions, managed by suppliers or
partners, which drive Post Office contribution and require minimal management bandwidth
and/or investment. There is flexibility for Post Office to build, maintain or sell ‘Platform’ assets
depending on requirements. Examples of ‘Platform’ products are: Insurance, Retail Banking
and Digital Identity. Key features include low/no effort for Postmasters, driving income to re-
invest in ‘Core’ products/Postmasters, and leveraging of Post Office brand equity.
DMB franchising
A moratorium was placed on DMB franchising during the pandemic but will resume again in the
2021/22 financial year. There are 115 DMBs and the timeline for completion of franchising depends
on being able to meet customer needs, whether through a new franchise arrangement or provision
of services through existing branches and having the funding to make closures. The plan assumes
there will still be 58 DMBs operating at the end of the 2021/22 FY based on current plans.
Network
POL's strategy includes increasing the Post Office network to more than 12,000 branches. The
Funding Agreement for 2021/22 included a new definition of a Post Office branch “
Branch means any outlet of POL that makes it possible for customers to access the Services of Public
Economic Interest set out in row 1 of Schedule 6 (SPE/ Services). An outlet of POL shall include any
post office counter or any means of transacting one, some or all of the Services of Public Economic
Interest at a third party premises and any other facility (including an “outreach” facility) designated
for the transaction of business with members of the public by or on behalf of POL”. POL will not
seek to remove services provided by existing branches but where branches are set up in new
locations under the express format not all the services currently provided as core, such as cash, need
to be provided. 400 express formats are targeted for March 2022. The express format will allow the
network to expand and make running a Post Office more attractive for some retailers who may wish
to provide a smaller range of services.
Funding
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POL has a Funding Agreement with BEIS, its Shareholder“, which sets out the access criteria POL
must meet, such as having a network of at least 11,500 branches and providing access to core
services, to secure the network subsidy”? and any additional Government funding to support
investment.
BEIS approves the annual budget and plan and the four-year plan. A quarterly accountability
meeting is held with BEIS and there are regular conversations with UKGI and BEIS as budget and
strategic plans are developed. The Funding Agreement discussions align with the Government
Spending Review which normally spans a three-year period but for 2021/22 the Funding Agreement
reached was for one year only. This reflects the funding uncertainties across the public sector and
by extension to government owned businesses as we emerge from the pandemic. The Funding
settlement for 2021/22 was £227m. That is a reflection of Government support for POL with
Postmasters demonstrating the value of the services offered to so many people during the
lockdowns as demand for Mails & Parcels grew and as Post Office was relied on more for banking
services with bank branches closing. 90% plus of the network remained open through the period and
by the end of the financial year 99% of the network was operating with 97% of the working hours of
the pre-Covid period.
Budget planning
Normally the executive start budget planning discussions in the Autumn with a draft budget and plan
coming to the Board each January and a final version for approval each March. That pattern was
upset by Covid-19, lockdowns and the trading uncertainties that ensued, particularly with the
collapse of the travel market (down 85% for POL at P11). The position with the funding of the
litigation has also driven considerable uncertainties and the Annual Report and Accounts for
2019/20 were only signed on 25‘ March 2021 at which point a provision of £153m had been
included for the HSS payments.
Solvency
The combination of the impact of Covid-19 on trading performance, particularly in our FX and
insurance businesses, and the costs associated with the litigation with a provision needing to be
made retrospectively in the 2019/20 accounts as some of those costs crystallised, led to discussions
about POL’s going concern status and the danger of triggering a wrongful trading event. Close and
careful attention has been paid to these matters and advice received. The funding agreement for
2021/22 referred to above and a letter of comfort from BEIS meant that POL could still be regarded
as a going concern. The position on going concern would be different for a company not owned by
Government but the backing of Government carries a level of security that would not apply to a
private backer. The quantum for the HSS claims and for the predicted civil claims cannot yet be
determined with any degree of certainty. Government will not write a cheque for an unspecified
sum so while it is supportive of POL it will not provide a letter of guarantee; however BEIS has
provided a commitment letter in which it has agreed to fund HSS payments for up to £285m minus
44 Although BEIS is our Shareholder, UKGI is responsible for managing the relationship day-to-day and has a
team that focusses on Post Office issues. Tom Cooper, the Non-Executive Director appointed by the
Shareholder is a director at UKGI.
22 The payment is to cover the costs associated with meeting the access criteria and a Network Report is
produced and laid in Parliament each year showing how the access criteria has been met. At certain points in
the 2020/21 financial year a waiver was granted by Government on branch network numbers and on the
security headroom buffer that would normally apply because of the impact of lockdowns on the trading
position.
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the proceeds of POL’s sale of its homephone and broadband business. Despite this we are operating
from a position in which POL’s liabilities exceed its assets on the balance sheet and are likely to do
so for some time. . BEIS have also provided a letter of support which may be provided to any third
parties with whom POL has a contractual relationship if they raise concerns with POL’s financial
position providing that consent is obtained from Carl Cresswell at BEIS before doing so.
Facility Headroom and Security Headroom
We supply the cash for branches as well as our own working capital. Our borrowing capacity has
three primary limit hard limit on what we can borrow from BEIS (a facility headroom of £950m
but in practice’ because the Board wishes to maintain ail uffer), a security headroom
limit which ensures that branch cash and client debtors exceed borrowing from BEIS and a limit on
BoE borrowing based on cash withdrawals.
This security headroom is important to Government as it means that our borrowing is accounted for
on their balance sheet as working capital not debt. We continue to seek to improve cash efficiencies
but this has an adverse effect on our security headroom because less cash is held in branches. The
security headroom position has been difficult over the past year when banking transactions have
fallen etc. and we have obtained a waiver from BEIS twice. Security headroom will continue to be
monitored closely.
Investment spend
The net result of litigation costs, the reduction in trading profits last year, trading uncertainties in the
current year and a lower funding settlement than we bid for means that investment spend will be
limited. The Board will consider strategic priorities at its meeting on 3" June 2021 but there is
limited room for manoeuvre both because of the restricted funds available and some essential
spend on “big ticket” items. This means that some investments POL would like to make have been
paused and hard choices on priorities and sequencing have been made and will continue to need to
be made.
Organisational design and right sizing
Anew structure at Group Executive (GE) level and for their direct reports was introduced in April
2020. This was designed to support the strategy to build a modern franchise, be postmaster and
customer focussed and also to avoid silo working. A new role of Chief Commercial Officer was
created and Owen Woodley moved into this post. This brings together all of the business areas of
Mails & Parcels, Banking, Financial Services and Identity Services. Ed Dutton, the MD of Post Office
Insurance, is also part of Owen’s lead team. Previously the Retail and FS areas were managed
separately but the new structure brings everything together and includes Chrysanthy Pispinis as the
Commercial Strategy and Planning Director. At the same time Dan Zinner became Chief Operating
Officer and within his area a Retail and Franchise Directorate has been established led by Amanda
Jones within which Tracy Marshall has been appointed as the Postmaster Effectiveness Director to
support the Postmaster centric focus [Structure Chart link]
Over the past year there have been two waves of organisational design changes with a reduction of
134 FTE witha annualised benefit associated with Tranche 1 and 83 FTEs likely to be removed
in Tranche 2 with an annualised benefit oftirscvrf?, Ultimately the headcount for Post Office is likely
to settle at around 1,600 — 1,800 FTE but this will be after the DMB franchising programme has
concluded and after the technological and process changes needed to reduce headcount
+ But with redundancy and programmes costs exceed the savings in the first year.
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requirements in support functions have been implemented and when funding allows for these
redundancies. There will also be some areas where we need to build capability, particularly in IT
with the SPM programme and developments in the digital space, and in contract management.
The focus for the 2021/22 FY is the Public Inquiry and the responses that will be required when it
issues its recommendations, as well as the changes needed to better support Postmasters and built
a modern franchise partnership. This means that any further reductions in head count will be
managed on a departmental level in the short-term.
Belfast Exit and Strategic Platform Modernisation (SPM)
POL has a long-term contract in place with Fujitsu for the Horizon platform which, amongst other
things, processes POL’s branch transaction data out of two dedicated data centres in Belfast. POL
will migrate the hosting of the Horizon platform from these Belfast data centres to a modern cloud
hosting environment run by Amazon Web Services (AWS) and has set up an SPM programme to
improve the quality, functionality and cost of our branch IT platform, ultimately delivering a next
generation core IT platform to enable the digital transformation of our branch and on-line 23
operations.
Acontract extension has been negotiated with Fujitsu for Horizon support beyond March 2023 ona
1+1-year extension. The approach to migration is not a “big bang”; elements will move off the
Horizon onto the SPM platform in advance of the Horizon system being replaced fully. BAU work
and Belfast Exit is being managed by Jeff Smyth, ClO, and his team. An SPM team has been set up
and is led by Zdravko Mladenov. Both teams meet regularly and are integrated with the business
and its projects and plans to ensure alignment and effective prioritisation.
IT Towers
In addition to the Fujitsu Horizon contract, POL has in place contracts for: (i) End User Computing
(EUC) with Computacenter which provides branch counter kit and support and computers and
printers in our support centres; (ii) Network services with Verizon which provide connectivity to
branches and contact centres for all our network traffic and network security; and (iii) Back Office
services with Accenture supporting, developing and hosting certain back end systems other than
Horizon. These arrangements were procured a number of years ago following the split of POL from
Royal Mail Group, where POL had to quickly stand up its own enterprise-wide IT infrastructure and it
did so in part by implementing a Towers model for these key IT service requirements just listed.
These Tower services and providers were managed by a Services Integrator and Service Desk (SISD)
provider, Atos. The SISD service expired last year, with POL taking in-house much of the services and
functionality that Atos had been delivering. The EUC contract term has recently expired, although
EUC services are continuing to be provided by Computacenter for a number of months as part of a
contractual managed exit arrangement enabling POL to re-procure EUC services from the market.
Aside from the Horizon and Tower contracts, there are a number of other strategically important IT
contracts (e.g. Microsoft Enterprise agreement for all POL’s Microsoft software, NCR for supply,
support and maintenance of self-service kiosks (SSKs) etc).
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Supporting Papers
1.
OO SS Ol oe oe
b
[=
11.
Strategy Papers from the Board meetings on 28" & 29" July 2020
Subsequent update papers from the Board meeting on 30'" March 2021:
1.1. Network Strategy
1.2. Strategic Platform Modernisation (SPM)
1.3. Fujitsu
Papers from the Board meeting on 25' March 2021
Starling Paper from the Board meeting on 26" January 2021
MDA2 Paper from the Board meeting on 24"" November 2020
PUDO Paper from the Board meeting on 30" March 2021
Banking Framework Paper from the Board meeting on 30" March 2021
Digital Identity Paper from Board the meeting on 26" January 2021
Telco Sale Paper from the Board meeting on 30" March 2021.
rom Pe r ltati ireul: i il I
. Organisation Structure Chart (GE & GE-1
Funding _
a) Funding letter to Government, supporting paper and appendix
b) jing Agreement between and B e Boa eeti gth
2021
c) Letter of comfort from BEIS from the Board meeting on 26" January 2021
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Agenda
Post Office Board Agenda (Strategy Session 1)
28 July 2020 15.15 — 17.30 hrs Finsbury Dials, 20 Finsbury
Street, London EC2Y 9AQ
1.19 Wakefield
‘© Tim Parker (Chairman) © Carla Stent ‘© Veronica Branton ‘© Dan Zinner (Group Chief Strategy &
(Company Secretary) Transformation Officer)
© Nick Read (CEO) Alisdair Cameron (CFO) I ¢ Owen Woodley ¢ Amanda Jones (Interim Network
(Chief Commercial Officer) Director) (Item 3.)
Ken McCall (SID) © Zarin Patel © Richard Taylor © Martin Edwards (MD Digital Identity)
(Group Corporate Affairs and (Item 3.)
Communications Director)
e Lisa Harrington
1. Welcome and Conflicts of Interest Noting Chairman 15.15 hrs
2.I Introduction to the Strategy Sessions Noting NickRead/Dan I 15.20 hrs
Zinner
3.I Network Strategy Discussion ‘Amanda Jones/ I 15.35 hrs
Martin Edwards/
Paul Martin
(kPa)
4. Any Other Business Noting and Input Chairman 17.25 hrs
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Network Strategy
Pre-read for the Post Office Board
NOTE:THIS IS A CONDENSED VERSION OF THE FULL DECK
July 2020
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Work in Progress
Executive Summary (1)
Context: the current situation
The Post Office is the network: it is the foundation of our commercial and social purpose. And the network is our postmasters.Without a proposition
which works for them we cannot sustain the nationwide scale needed to increase convenience for customers, drive growth in priority markets such as
PUDO and support communities with access to cash and other essential services.
The reality is that our current branch propositions (based on current BEIS definitions) are not attractir
deliver our strategy.As a result we are falling behind our competitors in urban areas while spendin;
increasing numbers of outreach required to plug the gap to I I.5k branches.
The feedback from retailers is clear: they want control over the products they offer their customers and greater flexibility around how ey integrate a
post office into their main business, including simpler options which can be run without the need for dedicated staff and counters. Covid-19 has made
these changes all the more urgent.
Vision for the future network
We envisage a future network which balances commercial sustainability with the needs of our customers, clients and wider stakeholders through the
following key characteristics:
¥ Continuing to meet the six access criteria to peiguard access across all regions of the UK and maintaining an unrivalled commitment to rural & urban
deprived communities, with the I I.5k target largely an irrelevance because we have expanded beyond that number
¥ Arebalancing of the network to areas of higher customer demand, partly funded by a shift away fro loss-making branches which are not
required to meet the access criteria and account for just 1% of total customer visits (averaging around 45 customer sessions per week)
y Run ona fully franchised basis, with the remaining DMBs replaced with more sustainable and convenient solutions to meet customer demand in each
local area
s v Greater flexibility in how the product offering, technology solutions & operating model for each branch is tailored to the needs of the postmaster and
the local market
¥ Acompelling overall franchise proposition which generates a siete of prospective postmasters & retail partners wanting to take on a branch and
expand their business with us, thereby ensuring we have great locations and hosts to meet customer demand.
Through these changes we can ensure the Post Office network remains a vital and sustainable part of the national infrastructure for the years ahead,
delivering mails, ban ing. and other essential services to customers and small business across the UK — and thereby support the Government's Spending
Review priority to level up economic opportunity across all nations and regions of the country.
\d_retaining the great postmasters we need to
each year just managing network churn, with
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Work in Progress
Executive Summary (2)
Strategy to deliver this vision
We have identified four main levers to deliver this vision and manage the transition from the legacy challenges facing the network:
1. Anew network blueprint, using geospatial modelling to dynamically guide how we plan the network to meet customer demand and drive
profitable business for postmasters - with an initial focus on expanding coverage in over I,800 identified ‘whitespace’ locations.
2. Amore flexible formats range which gives postmasters greater choice over the services they offer and a wider range of options around how the
post office can be integrated with their own retail operation, including through new light-touch options which do not require dedicated staffing or
complex training. Ultimately this flexibility will give us a much better chance of finding great host retailers & rural community hubs for the locations
identified by the blueprint, rather than resorting to more outreach in areas of lower customer demand.
3. Modern franchise arrangements which match external best practice to support our postmasters to grow their business. This will be underpinned
by a tiered operational model with different levels of account management, planning, training and marketing support will allow both sides to reduce
costs and increase sales
4. Stronger strategic parersiips with a portfolio of great retailers that are conveniently located where our customers live, work and shop. These
might be traditional players such as Co-op or new hosts such as Boots — and will also include the upgrading of suitable Payzone partners as part of a
more coherent approach to managing our total network.
In order to deploy the new formats at scale, we will need to reframe the definition of what ‘counts’ as a post office with BEIS, moving from the
rigid requirement to include all SGEI services to a more flexible approach with access to parcels services as the core anchor in all branches. Ultimately this
flexibility will strengthen our proposition to customers and communities, ensuring we can attract and retain great postmasters running thriving local
businesses.
The strategy is also dependent of course on securing the necessary funding to deliver the proposed changes, alongside the necessary political support to
help self-fund the changes by shifting away sub-optimal branches not required to meet the access criteria.
Subject to the Board's feedback on this overall strategic direction, we will work on more detailed implementations plans over the summer, in particularly
focussing on the key interdependencies with technology (Strategic Platform Migration), bringing this back to the Board for further discussion in the
autumn.
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Introduction: what questions are we answering now and what further detail with follow in the autumn?
SONS TBE DOR Sed STORES
I. What do we need from the network to deliver our overall I. Based on more detailed geospatial modelling, what network
commercial priorities & purpose? blueprint should we be aiming for?
2. Whatis our future network to deliver these priorities? 2. Whatis the role of automation & other technology enablers to
improve the economics of our new branch propositions for
a. What is our segmented format strategy to attract the
4 id postmasters & Post Office?
right retailers in the right locations and improve
profitability for both sides? 3. What is the impact on network economics of further work on
2
b. Based on these new formats, what is the shape & size of (REG OLOG TOTNES SEL
our future network? (Initial view with more detailed 4. Whats our plan for implementing the new network strategy,
geospatial analysis to follow in September) including how this integrates with Strategic Platform Migration?
c. What is our framework for creating winning franchise
propositions which enable both Post Office and
postmasters to thrive?
3. What enablers do we need in place to move to this future
network, including changes to the policy framework set by the
Government?
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Ljo9
z
oY
Fl Convenient locations are the top priority across all customer segments & products
PO Is EASY TO DO BUSINESS WITH CONVENIENCE AND COMPETITIVENESS ARE KEY BARRIERS TO USING POST OFFICE
(AGREEMENT %, BY CUSTOMER SEGMENT) (BARRIER KEY % OF RESPONDENTS, BY PRODUCT CATEGORY)
Mails & Parcels Travel Services
Aspiring &
Digital eae
28% 42%
Pressured &
Price Conscious Te! ™% ae
% moe
F Moving Forward
Comfortably 5M
o Everyday Finances
pada 25% of respondents who use a touch point
i c. Cacinaseie' 31% @ = Not in a convenient location
Ҥ Discerni 61% e = There was a queue
. Sites: 9 ® Couldn't find other items needed/ Found better deal elsewhere
Happy with my usual shop
15% ‘
® I use online alternatives
Content & 0%) 10% = Didn't know they offer this service
Conventional am Quicker & easier to use specialist online providers
Other
Source: Customer Pen Portraits, Kantar research 5
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DRIVERS OF CONSUMPTION
5]
N4
A VALUE centred approach and connections to online are anticipated to
have increasing importance due to economic uncertainties
CONVENIENCE requirements have changed with fewer trips to stores,
however consumers are still willing to pay for this both on- and off-line
Z~ 1 Keg K69)
Shopping EXPERIENCE expectations have shifted and online retailers are
seeking to maintain current increased volumes
There is a general acceptance of CHOICE reduction, inspiring simplification of
product ranges to address specific functional needs
PRIVACY AND SAFETY becomes a key concern for the majority of in-
store shoppers and drives customers further toward options that are local
and close to home (vs. work)
Retailers who can demonstrate a PURPOSE that is organic, consistent and
aligned with customers’ values will emerge stronger
SQOSOWW
Sources: Research by retail think tanks, subject matter expert
9bL
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= There are 6 drivers of consumption which will shape consumer purchase decisions
@Y during and in a post-Covid environment
Cig
WHAT DOES THIS MEAN FOR OUR NETWORK?
Offer the right products, in the right formats, at the
right prices based on customer needs
shopper missions to deliver more convenience to our
Fl Focus on strategic locations and partnerships that align in
customers, especially in dense urban areas
Make customers’ in-store experience easier, safer and
more efficient through the use of technologies e.g. self-
service kiosks, cashless technology, and improvements to
branch layout
Regularly review branches across location types to
maintain a relevant and profitable network that evolve with
changing customer needs and habits
Continue to deliver social value through strengthening
our network access and working with partners that
compliment our brand
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orl jog
&
O2/LO/8Z-02Z02 AInr Bz -
‘CLOSURES ARE INCREASING,
ESPECIALLY AMONGST LOCALS & MAINS!
Post Office closures split by type
mLegacy Outreach =Mains mLocals
QP D@ @D &P
=> &> <> 4D
500
400 i]
300 136 14
"
0
2016/17 2017/18 += 2018/19 2019/20!
= In 2019/20 our projected run rate of churn
was 560, but that was pre-Covid-19
= £25-30m pa cost of managing churn &
maintaining the network
= WE ARE STRUGGLING TO FIND GOOD RETAILERS
TO REPLACE THEM
What happens 18 months after a Local closes?
20% are
replaced
with a Local
25% are
replaced
with an
Outreach
It’s becoming increasingly difficult to replace
branches that churn with good Locals
To date we have asked over 4,000 prime
retailers if they would like to host a Locals,
and our ‘hit-rate’ is just 8% - we are running
out of candidates
Note: I.Given the impact of COVID-1 9, 2019/20 numbers are provisional and subject to revision
Source: POL Analysis
= The rate of branch closures has been increasing in recent years, driving high
@7 replacement costs and a growing number of outreaches
803
2009
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THIS IS DRIVING AN INCREASED USE OF
SUB-OPTIMAL OUTREACHES
Total number of Outreach Branches, ‘09-'20
1266
10911136
933 979 10171065
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
It costs £5k - £15k to set-up an Outreach
They typically receive ~£6k p/a in fixed rem and
only generate ~£1k in income
Overall they produce a loss to POL of ~£15m
pla each year
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Post OFFICE FORMATS
ARE NOT TAILORED TO
RETAILER’S NEEDS
REMUNERATION MUST
KEEP PACE WITH STAFF
COST INCREASES
Poor RETURN ON TIME
INVESTED IN DELIVERING
MULTIPLES
“I dislike the bluntness of the Main / Local format. Our stores have several
sub-configurations which match the local market .The PO services should
fit with these ..." Mid-counties Co-op
“NLW means that our PO Labour costs have been increasing by £100k
pla. PO reward should at least keep in line with NLW increases (~6%
pla)” Lincolnshire Co-op
“I look after about 40 partners. PO takes up a disproportionate about of
my time. I have spent a lot of time taking out cost e.g. shortening opening
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The feedback from both independent postmasters & Multiples highlights key
concerns around the complexity & profitability of current formats
7
INDEPENDENTS
“I'm not in control of the business at all, even the services that I offer”
“Need to offer more and I should be in control of what services I can
offer”
“Abysmal! I've seen a dramatic decrease in my earnings. I was taking
£79k, it’s now down to £45k but I am busier than ever”
“Labels get printed at home and I only get pennies for them delivering to
the store — it’s not worth the work I do”
SERVICES hours. ou should be doing this” Mid-counties Co-op
“PO has a history of overpromising and under-delivering. For example, we “Lost a lot of business to competition as our prices are too high”
pia aces a have an SSK on trial. It’s okay but I wouldn’t buy it We expect that PO “Travel money rates are different online to in branch with the
provides more support to the branches" Mid-counties Co-op supermarkets also offering the service”
LACK OF TRANSPARENCY “In our strategic planning sessions with the Board, I can give them an oo htng IENOW HOW eicHi thet PO te making fren Gach of the services
AND NO VIEW OF FUTURE outlook for all our categories but have nothing to say about the future of ae en eT
PLANS the Post Office” Martin McColl's pany oP
them money
Note: This lst is based on feedback from the Agents Remuneration Review, combined with multiple interviews with front-line ‘account manager’ colleagues of their experience working with retailers ‘
Source: POL Data
POL-BSFF-WITI
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-015-0009992_0025
POL00448765
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IN € qed
Locals & Mains have narrow ‘sweetspots’ of profitability, making it difficult to
attract and retain the right postmasters
LESS THAN 50% (3,600 OUT OF 7,538) OF THE EXISTING ‘MAINS’ AND ‘LOCALS’ Wa HAYS IDENEE Eee ince ey
ARE PROFITABLE FOR BOTH POL AND PMS.
Profitability to POL and PMs by format and customer sessions per week laps Formerly ‘Local’ Formerly ‘Main’
3500 LEGEND: 3000+ p =
[I Unprofitable for POL and/or PMs C1) costorven Little choice of retailers that can host
Marginally profitable for POLPMs
Profitable for POL & PMs 7
Xx) # post offices
branches this large (e.g. Trafalgar Sq)
3
1800 - 3000
Sweetspot
Customer sessions p/w
8 8
1200-1800 Not profitable for
= Payzone (PZ) customer PMs as they would Notas profitable
S @ * PZ charges alow usage fe of sessions pw need dedicated staff
1000 ">>> a
© fae transactions per week
Sweetspot
500 1_
(oso Sweatspot <450 customer PMs would struggle to cover POL fully
sessions pw allocated costs
a)
Main Payzone
Source: POL Analysis .
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POL-BSFF-WITN-015-0009992_0026
We need to reflect changing
patterns of customer demand
The network has not kept pace with the huge shifts
in customer demand over the last decade.
Weekly customer sessions declined from 15 to 10
million between 2007 and 2019, with government.
services revenue declining by 90% since 2003 —
meaning we now have more Mains branches (on a
30% pay premium) than we need.
E-commerce has doubled since 2007, generating
growing demand for parcels services. But despite our
network size, we lack coverage in convenient
locations for customers - in urban areas Collect+
has 0.4 branches per capita whereas we have 0.12.
Summing up: the key challenges we need to address with our network strategy
We need to create compelling
propositions for postmasters
Our current propositions are unattractive to many
retailers, due to the complexity & cost of running a
post office, and the modest returns relative to
competing retailer propositions.
Just 8% of the 4,000 retailers we have approached
have shown a willingness to take on a new post
office.
Ultimately this is preventing us from locating
branches where customers need them, and is forcing
us to rely on a growing number of stop-gap solutions
like outreach to offset churn.
POL00448765
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We need to improve network
profitability to offset headwinds
Our subsidy has declined by 88% since 2013/14 and
clearly our next funding round will be set against a
challenging fiscal environment.
Many of our traditional markets are facing long-term
structural decline.
We must therefore improve overall network
profitability & commercial resilience, in particular
reducing the ‘social’ network losses and the costs of
managing network churn (estimated at i
on current projections).
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We have identified six key levers to address these challenges, creating more
compelling propositions for postmasters and a stronger network for customers
= Amore flexible format framework which gives postmasters greater choice over the services they offer and a
wider range of options around how a post office can be integrated with their own retail operation, including
through new light-touch options which do not require dedicated staffing or complex training.
Create a more flexible
format range
Invest in automation & = Technology is a key enabler for the new formats range, reducing operating costs for postmasters and improving
other tech enablers customer experience through a flexible range of solutions including automation & integration with the retail till.
arrangements which enables us to reduce costs, increase sales & manage network churn more effectively (linking to RIPE).
= The new flexible formats range will provide a more seamless route for upgrading good Payzone outlets into light
touch post offices, thereby increasing convenience for customers. This will be underpinned by a more coherent
approach to managing our combined network & retail partnerships across Post Office and Payzone.
Leverage the Payzone
network
Develop stronger
partnerships with great
Multiples
= We want to develop stronger partnerships with a portfolio of great retailers that are conveniently located where
our customers live, work and shop. These might be traditional players such as Co-op or new hosts such as Boots.
= We will use new formats to find great retailers to host branches in the over I,800 whitespace locations where we
are currently failing to meet customer demand. This expansion will also provide the headroom to shift away from
around 2,000 sub-optimal branches that poorly used by customers and surplus to meeting the access criteria.
Shift the network to
meet customer demand
a Develop new franchise * Growth orientated commercial terms based on franchising best practice, with a tiered operational support model
Source: POL Analysis fa
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a
&
e
=
s
=
8
A more flexible format range with greater customisation for postmasters will enable
us to meet the evolving needs of customers in different locations
Store-based format (a) Automated format
» +———_ Retailer Cash 19=§=—————> PO Cash
fe} © Pe [J Automated formats; can act as productivity
® @ Essential 4 enablers for all store based formats (except PZ)
g Basic* Basic oa ¥ PuDO
© (0%! Banking) Y puDo i phar se
5 Express ¥ PUDO > oe Y Lottery Automated Automated
8 Pz a ¥ puDo i ene ‘—— v Mails Banking
9 Seo. bBmeed ¥ Bureau calc ¥ AB Mois
ES Bil Poyment ¥ Gf cords tS ie Herd Parcefor Y Ghee SSK Stamps (I" ¥ Business Banking
= (PZ only) vB Paneee 2 meereal vi ¥ Postal Or 4 come 2) ¥ Personal Banking
iq ¥ Stamp books spose Y AllMais Y Bill Payment Stamps isp v All Maits
x Bureau collect {intemet ony) C FostahOhtens 7 Business Bonkngs %, Tusiness Ranking ¥ PUDO
€ (internet only) eid y ¥ Personal Banking °, Pevsonel Banking Y Parcel force
é ~ Mails ~ inland * eae ¥ cats Travel Money (onder
= stamps =p & TMO)
s ew Bass 7 Trond Money (r- 4. Monapean
Ki ¥ Postal Orders ee vy femand & TMO) + Travel Insurance
8 vor I Producvtersce included ¥ Passports
s in he format on lee Banking® a pai Insurance — Cor Tax poy
3 7 wa I Newproducdservice % Parcel force pore: Y Identity Services
8 stroduced nth format FS products
¥ Home phone & broadband
¥ Insurance Products
Simple transaction Complex transaction Simple transaction
(avg. tx time <3 mins) “ (avg. tx time>3mins) : (avg. tx time<3mins) 7
Targeted Pressured & Moving
customer ‘All segments Poccniee Sesaarea Price Aspiring & Forward
segment we Comfortal sini Conscious Comfortably
Notes: * Personal banking includes withdrawals, cheque deposits, cash deposits and POCA. Business banking includes change giving, and higher value deposits (over £3k). To be further reviewed to assess if it can be merged into one
set. Basic (excl. banking) could include withdrawals below £50, however it is limited by our ability to determine the retailer's ability to manage cash (such as availability of cash, cost of cash management); Basic upward formats are!
currently modelled as having horizon system I Source: POL analysis
G
Ey
S
&
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Set up costs
Troininglstoff
Space
Opening hours
Technological
support
A more flexible format range with greater customisation for postmasters will enabl
us to meet the evolving needs of customers in different locations
Store-based format
+——__ Retailer cash ©—————> PO Cash
© Pe!
@ Essential!
Basic! Basic! ag
© (e10 Banking) £30,000?
Express!
ee i ~ £16,000
o-—_—_—_——_+
£10,500
£6,000 I =———*
o——___+
£800
———
£420 I 11.25 hours inital
7.5 hours on-going
7.5 hours initial_
Sy inet I T-2 hours on-going (varies according to range)
05 how inal I*—1 hour ongoing Dedicated area
T hour ongoing
Storage spoce + Front office
Storage space only
PO specfied operating hour requirement
Operating hours In line w
PO provided technology and devices & card payment device +
‘Scales and labels printer’ OR ‘Cash sofe and till with alarm system”
Standard retail devices and peripherals, or tablet & card payment device
POL00448765
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AS MOMION € GEL
a
&
Ta) Automated solutions & formats
Primarily productivity enablers for the other
formats but could also be standalone solution
Automated Automated
Mails Banking
£2,500 £450
2.5 hours inital
25 hours on-going
Storage spoce + Shop Floor space
Scales and labels printer / Cash safe and ti with
alarm system, automated self service options
Notes: I. Basic upward formats are currenty modelled as having horizon system. 2. Cost for a Plus i higher than Essential as it will require more than one counter so requires multiple horizon terminals, a larger sofe. 3 Express set up
costs have been based on Parcelshop set up costs. 4, Set-up costs for automated solution do not include the capex costs of the devices, which are instead assumed to be leased.
Source: POL analysis
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A more flexible format range with greater customisation for postmasters will enable
us to meet the evolving needs of customers in different locations
Store-based format
Retailer Cash
PO Cash
2
Plus [a]
fa} Essential
Basic Basic <a
° (excl. Banking) 2
Express = F —— I
_——# I I
Customer sessions pw
10-500
j Up to 1000 450-1500 1000-3000
Average annual income per branch! (£k, based on 2019 income assumptions) \s00
24
HE POL Income [lll PM cross sell income
Hl PM Income sak -
216
said 199
137 a
90
tat
08 05 02 oe ge Ba Ed
=.
Estimated average =
‘customer sessions pw 7 201 528 9. 912 2,050
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POL-BSFF-WITN-015-0009992_0031
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We are using detailed geospatial modelling to develop our target network
‘Blueprint’
WE STARTED BUILDING THE BLUEPRINT BY CREATING 5,139 ‘POST OFFICE MARKETS’
PO Markets and Shopper RegionsI
Lorge City 4)
LorgeTown0
Small Town 1
‘Small Town 2
= The Blueprint (BP) is a geo-mapping tool that helps us to understand how to
optimise our network locations and formats. It is customer-centric, trying to find the
best locations and formats that deliver the services customers want near to where
they work and live.
* This creates a framework and hierarchy for us to collate data on demand, supply,
competition, performance to create an optimised location plan or blueprint.
Source: POL Analysis
&
ONTO THIS FRAMEWORK WE THEN LAYERED ON DATA ON DEMAND, SUPPLY,
COMPETITION AND PERFORMANCE:
* Customer demand: What drives how much customers spend across 5
key product areas: Premium Mail, Standard Mail, Personal Banking,
Business Banking & Bill Payments.
. Catchment areas: We then created ‘catchments’ around all post offices
to show how far customers will travel to a branch, this depends on how
urban they area is where they live.
* Growth or cannibalisation? Calculate the level of incremental sales
achieved when new branches are opened to help inform whether an
increase in coverage will increase sales, or simply cannibalise the existing
estate.
® Competition: What is their effect on post office demand and where we
need to locate branches
From this we created a Network Blueprint...
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This Blueprint assesses the strength of each location, the preferred format in each
location and what overlay is required to meet our shareholder requirements
Number of Branches according to network Criteria
¥ 3,774 Formerly Locals
¥ 1,129 Formerly Mains
4903
Right Format & Right
Location
=
Retain & Invest in
Focus on retaining these
branches. New
§ propositions improve
{ability to replace churn
through a greater choice
of commercially viable
alternatives.
tion
Source: POL Analysis
1537
2258
Right Location but
Wrong Format
a
Transition to New
formats
Transition the Mains &
Legacy branches to
Locals or other Light-
touch models.
Supplement ‘Mains to
Locals’ programme with
other strategies
When we move into
new locations we
should use Locals or
light-touch outlets
predominantly in
urban areas
895 minimum but
we would likely
‘want a cushion
Whitespace (no branch,
but need one)
=
Penetrate new
locations
Focus on driving urban
penetration. To date we
have delivered ~600
NNL (Locals) but are
running out of
candidates. We should
utilise new formats to.
penetrate strategic
partners
Access Criteria Top-up
nd
Policy changes
We need to retain at
least 895 additional loss
making branches to meet
the network access
criteria.
Annual cost of £8-9m to
Operate these branches
(mostly outreach).
Blueprint Network
se
The blueprint network would
be better for customers,
retailers, cost less in NSP to
government and generate
greater profits for POL...
gy Not profitable unless
lighter model
Not profitable even
on a lighter model
Wrong Format, Wrong
Location
=
Network Pruning
Exit these branches,
especially those that
provide the lowest social
value, or transition to new
commercially viable
formats. Cost savings here
fund development
elsewhere.
POL-BSFF-WITI
-015-0009992_0033
POL00448765
POL00448765
The blueprint underpins our proposition development and significantly changes
the shape of our network and profitability for postmasters
POL and postmaster profitability across branches grouped POL and postmaster profitability across branches grouped by # of customer
by # of customer sessions, Mains and DMB vs. Plus sessions, Locals* and Community vs. Essentials, Basic and Express
3,585 ety tthe branches not 10,167 10,167
<1000 profitable for POL and postmaster
‘Some branches profitable for POL
1000-1500 and Postmaster
< 150
@ Most branches profitable for POL
and Postmaster
150-500
1,287
1500-3000 - 340 500-1000
1000-1500
810
3000+, si 1500+
Current ~ Mains and DMB Blueprint - Plus Current — Locals, Option I: Blueprint - Option 2: Blueprint
and Community Essentials and Basic Essentials, Basic and By PO
8 Introduction of new formats will drive :
= Availability of more commercially viable options to postmasters including the branches which currently serve lower levels of customer demand
* Reduction in losses in deep rural areas with low population densities (versus a full service outreach)
= Use of automation to best service the customer demand in branches with 1,000-1,500 customer sessions per week
Note: I In the current network locals classification includes locals, legacy and community but excludes social. Blueprint count excludes social 2. For unprofitable branches: 86 - Plus less than 1,000 CS will have a manning standard
significantly above the workload and associated agent rem. Reduced hours could help, but requires capital investment and will take up floor space reducing profitability for POL and PM, 460 — fully manned POs at Local rates above 1,500
‘customer sessions are at best likely to break even for PO and PM and will be operationally too busy to manage in conjunction with their retail front of the store for most retailers. 797 — on average 150 CS doesn't cover POL variable
costs. We will be able to make a PUDO offer work at this level, but have not fully defined the break even point for POL as yet so may still have some areas where we need to deploy a PUDO offer but may not have sufficient demand to
move above break even. As previously discussed this will stil be significantly more profitable for POL than deploying a full outreach, \7
Source: POL Analysis
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a
=
rs
S
g
The Network Blueprint proposes a network that is better for customers,
postmasters and Post Office &
Post OFFICE NETWORK TODAY (MARCH 2020) VERSUS FUTURE BLUEPRINT NETWORK KEY BENEFITS OF THE BLUEPRINT NETWORK:
3
i 11,638 ~12,500 More convenient for customers:
2 Access criteria - —_
3 Outreach branches * In the blueprint 44% of customers are within 500m of a
@ Potential additional post office versus 40% today
Fi access points = Reduces the number of busy PO (3,000+ customer
g Traditional Express sessions) where it is difficult to find hosts
9 (Le id Cor
& ASL aE Sot Basic + Focused on where customers live & work:
re Basic (excl. Banking)
im = Nearly 2k new outlets in areas of high customer demand,
= ensuring we have a clear advantage over competition —
& with the option of up to a further Ik additional access
8 points (including locker boxes) in high density urban
8 locations, retail parks & transport hubs
gs Essential More sustainable for Post Office:
= Improved resilience by reducing the number of retail hosts
with ‘limited or no retail’ from 64% today to 38%
= Option to move away from ~2k sub-optimal branches
which are underutilised (the majority with <20
customers/week), unprofitable & surplus to meeting access
criteria, saving c.£20m pa
Current Network - Blueprint Network
March 2020
Notes: (*) Includes some branches not open 52 Weeks in 2019/20 not included in branch by branch analysis; (*) Preferred option counted (other format options will work in the majority of format locations) ig
Source: POL analysis
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8 x
“I &
z z
3 2
é
2
=
8
Significant margin gains could theoretically be realised through full implementation of
the Blueprint, but in practice will be constrained by funding & politics
Breakdown of Post Office network revenue & allocated costs, £m, FY19/20 NOTE: Detailed branch level analysis is required to determine how much
of the theoretical margin improvement is achievable in the next 3-5 years
3 640.2
ia Theoretical profit improvements from full
2 implementation of the Blueprint
a
2 386.3
g
5
g
& Cost improvements
& 362 (10% of current costs)
re ” 48.7 170.0
8 736 934 =e =i ae
8 Network revenue Postmaster Supply chain costs IT costs Network Profit Migration of mains Move legacy —_Exit loss making New margin Profit after
8 remuneration support costs to lighter models contacts to branches from Whitespace __implentation
R varible By only branches of Blueprints
s
8
Migration of mains to lighter models (2.2k I Move legacy contracts to variable pay only (I.2k New margin from Whitespace branches (I.8k
Exit Loss making branches (~2k branches)
branches) branches) branches)
Assumptions to All simple product income retained at lower :
rica tul prot remuneratbn rate 8 50% complos retined inI ASSUMES we retain these branches (to meet I Assumes we can extal loss-making branches I Margin improvement based on gravity modeling
; sw access criteria) but shift to new formats not required by access criteria & Blueprint ‘of demand in new locations
improvement remaining Plus network
Likelihood of Migration at scale unlikely unless we create I Challenging - community branches are difficult I _YVOuld be noisy & costly (£28m) toexit I ain obstacle is the pace at which we can sign
; proactively all the Community & outreach ;
achieving quickly strong incentives for postmasters to replace although new formats could help pea up new retailers
Notes: Based on 2019/20 actuals; Includes fixed fee income from RM and BF2; Does not include DMB income or costs
Source: POL Analysis 2020
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The extent to which we can transition to the Blueprint over the next 4 years will be
constrained by funding availability & political appetite —- we are assessing the lead
scenarios as part of the wider funding plan &
Locations - Maintain Rural Locations - Maintain Rural Network Locations - Optimise Rural Network
Network (Don't replace churn) (Low active churn) (Actively churn)
Current ruber IS eT
CV-19 returns in 2020-21
Close DMBs
Churn of branches
we want to keep
Reduce outreaches
Reduce small,
fixed pay branches
IRRELEVANT I
New rural models IRRELEVANT
bu DMB franchising/
if replacement
fe)
Full service openings
(to replace churn)
Whitespace development
End March 2024 total Ea
EBITDAS improvement (£m)
Investment (£m)
EBITDAS improvement (ém)
Investment (£m)
EBITDAS improvement (ém)
Investment (£m)
Notes: Assumes no significant Covid 2nd wave impact, churn of branches post 2021 assumes return
costs associated with recruitment & onboarding of new retailers. Compensation costs assumed to be!
Source: POL Analysis 2020
for year trends; Investment &
er branch for outreach and
[TDAS estimates do not include DMB closures; Set-up costs only cover branch capex ~ not other
per fixed pay branch.
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What do our proposals mean for the ‘Services of General Economic Interest’
(SGEls) and our commitments on network size & accessibility? &
IRRELEVANT
Sources: POL Analysis
POL-BSFF-WITN-015-0009992_0038
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A fit-for-purpose commercial model, supported by an effective operational model will
allow us to build stronger relationships with our postmasters
THE COMMERCIAL MODEL WILL INCLUDE THE FOLLOWING THREE INCOME TYPES ‘THE OPERATIONAL MODEL WILL VARY BY RELATIONSHIP WITH POSTMASTER
Adoption of appropriate commercial and operational model could lead to a 3-5% improvement
POL profit by:
la 5
K) __Increase in sales value and volume @) Reduce churn and improve retention @) Better network access across community
Sources: Analyses based on data from best in class case studies on commercial and operational models a
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We have identified a portfolio of leading retail partners to deliver our target network
based on locations, brand fit, operational capability & financial stability
PORTFOLIO APPROACH TO PARTNER STRATEGY”
Retail partners who address
specific customer needs which
Urban I Rural
2
TESCO @B. “. HSBC §8 EEE! @shell
ti 88 @Q== a cigned with PO range,
ROSE
~”" LloydsPharmacy
HOLLAND & BARRETT TESCO Ee)
Nisa Nisa
KEY PARTNERS ACROSS LOCATION TYPE AND PARTNER TYPE”
Retail partners whose coverage
could help us fil gaps to meet
access requirements
@Shell 88 Independent Pubs
Independent
Newsagents
Community Pharmacies us
\, HOLLAND @ BARRETT rf Nisa ()
" - Premier
Independent Newsagents
Independent Pubs
Community
Pharmacies waivenst
GREENE KING
f 2 GREENE KING ie 2
INNS
Retail partners who score highly
across our criteria and meet the
We need to consider a combination of partners across Urban and Rural locations across
multiples, independents, mutual & symbol groups and others (specialists and charities) rey of a raga
23
Notes: (*) Icons reference to the top choices by location type. The remaining choices can be found in the long list
Sources: Analysis based on research across convenience retail, mutual and symbol groups, independent retailers, specialist retailers and charities
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Key dependencies to deliver our network strategy
I.Agreement with BEIS” - Agreeing a more flexible definition of what counts as a post office is a key enabler of the new formats range (in
on definition of a post particular for the lighter touch models), which we believe is essential to secure great retailers in the right
office locations for customers
2. Technology enablement = IT will be a key success factor in improving POL and PM profitability and operational efficiencies, particularly in
(Strategic Platform supporting postmasters with a wider range of trading solutions which can integrate more effectively into their
fs = 8! sia main retail operation. In some locations this will include automation of mails & banking transactions in particular
Migration) to reduce labour costs & improve the customer journey (further detail due in September)
= Roll-out of PUDO only propositions not including sale of RMG products in-branch will require their approval
SLRS ETT under MDA provisions (although previous experience with Parcelshop suggests they will be supportive).
MDA2 = PUDO strategy more generally predicated on the opening up of restrictions with RMG
= Potential change costs of jinReLevant (not including SPM) required to transition to target network over the next 3.5
4. Sufficient funding years — although this needs to be compared against the high costs of managing the churn under the default
strategy.
Landing a sustainable economic model for banking services beyond the end of BF2 (end 2022) is essential to
5. Banking Framework 3 ensure we can continue to provide widespread access to cash across our network
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ABa12.g YOMIEN € GEL
4 key phases in the roadmap to successfully implement our network strategy
Formulate strategy
(July ‘20)
Design format, franchise and
strategic partnership options
0
We are here
Q Key deliverables
Pre
(Aug-Sep ‘20)
Validate and Build detailed plan
Detailed format
Detailed profiles considering :
financial analysis _!ocation-specific
byformat and economics & aligned
location type t© RIPE personas
(bottom-up) - Detaled
commercial
) framework
(remuneration,
rewards &
investment)
Hhecel Rakes! One considering new
Close) and target RMG deal
format(s) for each
blueprint location Q ¢
Value stories BY Detailed pilot
Pints ag, PR Including
Symbols&Mutuls), pesini ay
tier and format gevirements
network numbers and access requirements in line
ilot
(Oct-Dec ‘20)
Test, Track and Improve
Detailed implementation
plan including funding,
resource & operational
requirements including
On-going engagement
with pilot branches to newt
review the success of
new formats eg. fe)
customer experience,
profitability, service level
Summary of findings
and considerations
for country-wide
implementation
Roll-out of pilot plan
across shortlisted
branches and format
types (including enablers
eg, automation)
v
0
On-going monitoring and MI
postmasters on monthly basis
ith updates to the de!
Implement
rd)
Adjust, Roll-out and Monitor
(Jan
On-going engagement with strategic
partners and independent postmasters to
roll-out new formats and franchise options
‘Communication and transition support
for impacted branches, based on
postmaster-level winner-loser analysis
Optimisation of digital strategy to improve
product awareness and customer experience
= in light of the changes made to the network
performance reports for
in of a Post Offic:
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Network Strategy
Pre-read for the Post Office Board
July 2020
POL-BSFF-WITN-015-0009992_0043
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Executive Summary (1)
Context: the current situation
The Post Office is the network: it is the foundation of our commercial and social purpose. And the network is our postmasters.Without a proposition
which works for them we cannot sustain the nationwide scale needed to increase convenience for customers, drive growth in priority markets such as
PUDO and support communities with access to cash and other essential services.
The reality is that our current branch propositions (based on current BEIS definitions) are not attracti
deliver our strategy.As a result we are falling behind our competitors in urban areas while spending
increasing numbers of outreach required to plug the gap to I I.5k branches.
The feedback from retailers is clear: they want control over the products they offer their customers and greater flexibility around how ey integrate a
post office into their main business, including simpler options which can be run without the need for dedicated staff and counters. Covid-19 has made
these changes all the more urgent.
Vision for the future network
We envisage a future network which balances commercial sustainability with the needs of our customers, clients and wider stakeholders through the
following key characteristics:
¥ Continuing to meet the six access criteria to esieguard access across all regions of the UK and maintaining an unrivalled commitment to rural & urban
deprived communities, with the I I.5k target largely an irrelevance because we have expanded beyond that number
¥ Arebalancing of the network to areas of higher customer demand, pare funded by a shift away from j-=n/oss-making branches which are not
required to meet the access criteria and account for just 1% of total customer visits (averaging around 45 "customer sessions per week)
y Run ona fully franchised basis, with the remaining DMBs replaced with more sustainable and convenient solutions to meet customer demand in each
local area
s v Greater flexibility in how the product offering, technology solutions & operating model for each branch is tailored to the needs of the postmaster and
the local market
¥ Acompelling overall franchise proposition which generates a sete of prospective postmasters & retail partners wanting to take on a branch and
expand their business with us, thereby ensuring we have great locations and hosts to meet customer demand.
Through these changes we can ensure the Post Office network remains a vital and sustainable part of the national infrastructure for the years ahead,
delivering mails, ban ing. and other essential services to customers and small business across the UK — and thereby support the Government's Spending
Review priority to level up economic opportunity across all nations and regions of the country.
taining the great postmasters we need to
ach year just managing network churn, with
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Executive Summary (2)
Strategy to deliver this vision
We have identified four main levers to deliver this vision and manage the transition from the legacy challenges facing the network:
1. Anew network blueprint, using geospatial modelling to dynamically guide how we plan the network to meet customer demand and drive
profitable business for postmasters - with an initial focus on expanding coverage in over I,800 identified ‘whitespace’ locations.
2. Amore flexible formats range: which gives postmasters greater choice over the services they offer and a wider range of options around how the
post office can be integrated with their own retail operation, including through new light-touch options which do not require dedicated staffing or
complex training. Ultimately this flexibility will give us a much better chance of finding great host retailers & rural community hubs for the locations
identified by the blueprint, rather than resorting to more outreach in areas of lower customer demand.
3. Modern franchise arrangements which match external best practice to support our postmasters to grow their business. This will be underpinned
by a tiered operational model with different levels of account management, planning, training and marketing support will allow both sides to reduce
costs and increase sales
4. Stronger strategic parersiips with a portfolio of great retailers that are conveniently located where our customers live, work and shop. These
might be traditional players such as Co-op or new hosts such as Boots — and will also include the upgrading of suitable Payzone partners as part of a
more coherent approach to managing our total network.
In order to deploy the new formats at scale, we will need to reframe the definition of what ‘counts’ as a post office with BEIS, moving from the
rigid requirement to include all SGEI services to a more flexible approach with access to parcels services as the core anchor in all branches. Ultimately this
flexibility will strengthen our proposition to customers and communities, ensuring we can attract and retain great postmasters running thriving local
businesses.
The strategy is also dependent of course on securing the necessary funding to deliver the proposed changes, alongside the necessary political support to
help self-fund the changes by shifting away sub-optimal branches not required to meet the access criteria.
Subject to the Board’s feedback on this overall strategic direction, we will work on more detailed tenplementadons plans over the summer, in particularly
focussing on the key interdependencies with technology (Strategic Platform Migration), bringing this back to the Board for further discussion in the
autumn.
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Introduction: what questions are we answering now and what further detail with follow in the autumn?
KEY QUESTIONS ADDRESSED IN THIS PAPER QUESTIONS TO BE ADDRESSED IN OCTOBER
I. What do we need from the network to deliver our overall I. Based on more detailed geospatial modelling, what network
commercial priorities & purpose? blueprint should we be aiming for?
2. What is our future network to deliver these priorities? 2. Whats the role of automation & other technology enablers to
improve the economics of our new branch propositions for
a. What is our segmented format strategy to attract the
4 sy postmasters & Post Office?
right retailers in the right locations and improve
profitability for both sides? 3. What is the impact on network economics of further work on
2
b. Based on these new formats, what is the shape & size of Pros Office centtcal.sosts(
our future network? (Initial view with more detailed 4. Whats our plan for implementing the new network strategy,
geospatial analysis to follow in September) including how this integrates with Strategic Platform Migration?
c. What is our framework for creating winning franchise
S propositions which enable both Post Office and
postmasters to thrive?
3. What enablers do we need in place to move to this future
network, including changes to the policy framework set by the
Government?
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Overview of this document and the approach to shaping our network strategy
We have reviewed our customer, postmaster &
stakeholder requirements in the context of developments
in the wider market environment
These insights have then been used to drive the design of
our future network strategy
4 Evaluation of key gaps in current
network and levers for change
: I Assessment of customer, client & al 5 New format strategy to create more ” fe)
° shareholder requirements = flexible branch propositions
R P i Overall network shape to meet customer
£ 2. Assessment of postmaster requirements 6 @sharehelden requiremencs
8 3 Impact of developments in the wider x 7 Win-win franchise propositions
market environment Cissy to drive profitable growth SN:
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Table of Contents
=I I. Review of network requirements & gap analysis
2. Proposal for future network strategy
@ 3. Implementation plan and key considerations
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Pages 8-29
Pages 31-64
Pages 66-67
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2.
3.
Proposal for future network strategy
Implementation plan and key considerations
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ASSESSMENT OF CUSTOMER, CLIENT & SHAREHOLDER REQUIREMENTS
POST OFFICE CONTINUESTO PLAY AN INDISPENSABLE ROLE
IN THE BRITISH SOCIETY
10% of customers visit PO as the main or only destination\”
© (Solus mission, excluding Main PO)
believe that PO provides an essential service to vulnerable or
80% lonely populations”
(91% among 65+ years)
3% 227 2he closure of ther local PO would be a problem®
© (78% among 65+ years)
92% think PO is essential to have in their ideal town®
‘© (For 53% it must be on the high street)
38% of those who say their local area is getting worse link it to the
‘© closure of services like PO and banks®
We can strengthen our social purpose and reduce barriers for our customers by
optimising our locations and the way we deliver our services
(CONVENIENCE AND COMPETITIVENESS ARE KEY BARRIERS TO USING POST OFFICE
Barriers to using PO, % of respondents for each product category”)
Mails & Parcels Travel Services
‘oy 2) fe
a Na
Base n=50! Base n=355 Base n=292
Everyday Finances
Bai
1 Key
® Not ina convenient location
= There was a queue
® Couldn't find other items needed/ Found better deal elsewhere
Happy with my usual shop
= I use online alternatives
= Didn't know they offer this service
Quicker & easier to use specialist online providers
Other
Sources: (1) ‘Category Segmentation & Shoppers Path to purchase insights’ Kantar research — July 2019, based on 1,438 online interviews among users of Post Office (n=732) and competitors (n=706); (2) Voter Research GE
Presentation’ PSG Update - May 2020
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= Requirements on product range and the way we deliver our service vary across
@,@7 customer and political segments
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a
&
o
z
z
8
g
PO is easy to do I 10. ocervations Political
business with* y segments
The Uninterested:
7 ; = Likely to consider PO irrelevant
Aspiring & * High preference for automation for convenience and speed Predominantly iad tscompaniive
Digital 30% 53% * High demand for omni-channel customer experience Uninterested — * Low loyalty, would only use PO
® High popularity of Travel products are popular (48% overlap) when it is the best value for money
Peau * High adoption of online shopping eg. collections and returns Predominantly
Price 20% 57% * High demand for consultation on products Passive a
* Highly dependent on mobile communications to fit their supporters Be pial
Conscious . (55% overtap) Price competitiveness is the key
routine and need for emotional reassurance barrier to using PO (26% find PO
expensive)
Moving * Considerable appetite for savings and insurance products Predominantly = Lely sospeinctees PGi sok vin
V poara 12% 54% driven by generally risk averse attitude Passive and think PO provides an essential
Canierant * Automation considered desirable for a quick and easy supporters service for vulnerable & lonely people
= Comfortably oe (83% overlap) * Opportunity to translate passive
support to more active support,
i through tailored approaches to sub-
c. * High demand across products and services driven by Predominantly ugh -siemale
Cuinaanee o ducts Paulie segments ie. urban left, traditional
: 17% 61% both own and family’s e.g. children’s needs Pics working dass, offlvent moderates
Discerning * High appreciation for trust, locality and convenience (40% ah
The Loyal Left Behind:
* Relatively higher loyalty toward Financial products Wetnewl "74% believe PO provides an essential
Content & 53% * Opportunities to strengthen and extend loyalty to other Behind 7} service for them and others
Conventional product areas through offering support and advice (47% overlap) * Largely ‘offline’ lifestyle, valuing easily
accessible services
Note: (*) % of respondents agreeing to the statement ‘Post Office is easy to do business with’, value is average across location types: large town! city centre, suburban area! small town centre, rurall village area 7
Sources: Customer Segment Research - Pen Portraits ~ February 2020, ‘Voter Research GE Presentation’ PSG Update — May 2020
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= Attitude toward the Post Office is generally positive across customer groups, with
@,@7 rural customers visiting a branch more frequently than shoppers in urban areas
CONSUMER FREQUENCY OF VISIT AND ATTITUDE BY LOCATION TYPE (ALL SEGMENTS)
Frequency of the branch visit Attitude towards Post Office
5]
N4
* Research by the Association of Convenience Stores
identifies post offices & conveniences stores as
having the most positive impact on their local
Large town! Suburban area/ Rural!
city centre small town village area PO ‘plays an iportane role
in the wider community areas across both urban & rural areas.
= (% 16x 2% 7
2 13% 13% 1% PO ts a brand that I would bd According to the same research, consumers -
9 26% 2% 25% Betisececad think that the most valuable services offered in
% 4% 32% their convenience store are: 1) Cash / ATMs; 2)
ry PO is easy to do post office services; 3) Click & Collect
= Wl Weekly Ml Fortnightly Monthly Ill More than a month business with
© * Rural shoppers typically visit PO more often
= than their town & suburban counterparts
8 can rely upon PO me
8 — An average rural shopper visits the store
Top three activities (Mails only) in terms of usage S48; Canes per Week anid 7390 ay in (cast
© 2 [MailsParcel 30% Heel a duty to
BS I ccnscaon af cabwe parcel Gee aimed Gohmy — support the PO — Rural consumers tend to use PO for
PBA tecared of prea pred om po returning their online parcels, whereas large
———— PO make me wait town consumers often use PO to collect
Mails/Parcel o% too long their missed online parcel delivery
Collection of online parcel due to missed delivery 23%
Slide 109 shows the mix of product sales by
location type, highlighting that rural & urban
deprived branches over-index in cash & banking,
Dealing with the PO is
Returned of parcel purchased online 23% hard work
Suburban
area /small
Mails/Parcel 85%
= £ 8] Returned of parcel purchased online 29% Hl Large town/ city centre Rural/ village area urban areas over-index slightly in mails and city
© = “I Collection of onlin parcel using a cick and collect option I 18% WD Suburban area/ small town centres strongly over-index in travel & identity
Sources: “The Rural Shop Report 2020” & “The Local Shop Report 2019", Association of Convenience Stores; Customer Segment Research - Pen Portraits ~ February 2020 is
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= Customers visit convenience stores the most frequently and also have the most
positive attitude toward this branch type
‘CONSUMER FREQUENCY OF VISIT AND USAGE BY BRANCH TYPE
: ee eee Convenience store! Shop with PO services
prerteniposeialls pblialen othe corner shop with at the till (no dedicated = A‘Convenience store with dedicated PO
dedicated PO counter PO counter) counter’ is the most preferred format by all
Frequency 7 ” om cere with the highest usage seen among
t 21% suburban consumers
of the - 16% 12% 15% 14%
branch visit 26% 2% 26% 19% ® This is also the format which customers generally
(All seg.) see ~ Po ‘a find the easiest to do business with
WB Weekly I Fortnighty Monthiy Il More than a month — This is particularly true among the Aspiring
& Digital and Content & Conventional
PO is easy to do business with (agreement %, by customer segment) segments, whereas Pressured & Price
Conscious and Confident & Discerning
Al 52% 49% 54% customers tend to have better experience
with large retail stores with a dedicated PO
Aspiring & Digital 51% 45% 54% counter
Premed & Price Prost ae = Meanwhile,'WHSmiths store with dedicated PO
Conscious her aat counter’ as a format has the lowest visit
Moving Forward ne a ae frequency, while not being highlighted as the
easiest to do business with by any customer
segment
Confident & Discerning} 63961 51%
ae
Content & Conventional 43%, 50%
Customer Segment Research - Pen Portraits ~ February 2020
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ASSESSMENT OF CUSTOMER, CLIENT & SHAREHOLDER REQUIREMENTS
= 75% of our income is concentrated in our 4,000 largest branches
Post OFFICE NETWORK INCOME BY BRANCH-SIZE DECILE OBSERVATIONS ON DISTRIBUTION OF SALES ACROSS OUR NETWORK
1 are the largest branches (such as Mains and DMBs) 10" are the smallest branches such
as (Community)
70
4
o “aa Nals * Our 4k largest branches generate 75% of our network income.
: 35% of network income is generated in our largest Ik branches
F E 50 =O-Banking * Our smallest 3k branches generate just 4% of network income
2
8s a = Our 4k largest branches generate the following % of network income
: 8 40 BePayments: by product (excludes income from online & direct channels):
$3 4 + Mails: 77% of income from our 4k largest branches
Be 30 -O-PO Money, Telco & Identity
£2 * Banking: 70% of income from our 4k largest branches
E«
s S3 2% + Payments: 80% of income from our 4k largest branches
(excluding Payzone)
Ig * PO Money, Telco and Identity: 95% of income from our
4k largest branches
& Fe SF FF F FC KF KF LH
Na €
ee
Source: POL Analysis; excludes outreach which account for c.1% of total sales 2
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ABajens OMEN € GEL
= The BEIS access criteria are generally more extensive than our client network
©
requirements
BEIS network requirements Contractual commitments by product & other client requirements of the network
National access criteria Mails Banking Services I I Bill Payments Travel Financial Services I I Identity Services
Access % of population/ postcode
ae ox 3% BK 9 soxssx I OS 98% Passport I DVLA
Office I (te sx)
owt so FF is s I
ne 9 95% 29% ose. 95%
Urban
I i i i ee hetieares No contractual i
MB wrt 95% 95 95% 98% ZA agreements 95%
5-6 miles postcode district, postcode area, to FRES' 90%
me 6 miles 62 miles I I_I I
deprived 99%
10 miles
PUDO Reach I I coverage Bank of Ireland:
across the UK 4 i, ~6.5k branches
«Rural locations I I°SPecially valued I Large network is I I soy providingI [ACCESS to
Products/ I Maintain a total network of at least with high last I [In rural areas and I jimportantgiven I I 5 demand FX I IProduct
” towns where the I Ithe competition " information &
Other 11,500 branches mile costs : i following recent aah
banks have i.e. Paypoint’s 28k ‘ marketing in at
+ Urban: close : ; review of HMRC
i withdrawn their network . least 1,250
competitor licence fees
coverage gaps I OW” branches branches
Note: (*) Consultation required to permanently close on-demand outlets a
Source: POL Analysis
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ASSESSMENT OF CUSTOMER, CLIENT & SHAREHOLDER REQUIREMENTS
Our network needs to meet our wider shareholder priorities
BEIS statement on Post Office purpose (March 2020):
Post Office Ltd is a Government-owned, commercially-focused business with a strong social purpose. Through its extensive and accessible network of branches the Post
Office delivers essential services that are hugely valuable - to both individuals and SME businesses — in urban and rural areas across the UK.These include mail,
parcels, cash, basic banking, utility bill payment facilities and Government and public services.
The Post Office must continue to grow a thriving commercial business together with delivery of its social purpose. The building blocks of the Post Office’s social
purpose are:
» Delivering a convenient and trusted local service offer that meets customers’ needs, working closely with Postmasters who play an important role in their local
communities.
» Ensuring its services continue to be easily accessible to all consumers, but particularly vulnerable groups who rely on them the most.
+» Supporting the Government's access to cash and financial inclusion agenda by ensuring that basic cash and banking services are available throughout ring its
services continue to be easily accessible to all consumers, but particularly vulnerable groups who the network to meet the needs of individual customers and
SMEs.
Delivering these services enables the Post Office to also contribute to the Government's broader social and economic priorities, locally and nationally. The Post Office
has a key role to play in high streets across the UK, helping keep town centres vibrant and playing a role in levelling up communities throughout the country.
Consumer use has and will continue to change over time. The Post Office will need to continually adapt its services so that these meet the needs of its diverse
customer base. The Government assesses the Post Office's delivery of its Social Purpose through its ongoing role as the company’s sole shareholder.
Source: POL Analysis i
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ASSESSMENT OF POSTMASTER REQUIREMENTS
ABa12.g YOMIEN € GEL
We have ~1 1,500 branches with the majority of branches hosted by
Independents & Symbols
POST OFFICES SPLIT BY TYPE (MARCH 2020) POST OFFICES SPLIT BY GEOGRAPHY (MARCH 2020) POST OFFICES SPLIT BY NETWORK SEGMENT
u
2
@ Network Segment # post offices
8 z Urban D.
a Traditional Mains in a Multiple 1,081
2,274
Fi Locals in a Multiple us
< Large Main with good retail 1,015
2 Outreach Large Main with average / poor retail 977
iy 1,700 Urban, 35% Main that should be a Local 331
8
€ (4,050 branches) Sustainable Local 2,150
8 Local with average retail, other options nearby 463
8 Buvabie Local with retail, no other opti
FS wt ocal with average retail, no other options
8 W (6,256 b arty 403
By ‘Community with Retail 938
Busy Community without retail 831
19% (2,200) Post Offices are hosted in Multiples, These %s have remained fairly stable over the past ‘Community without retail and low demand 505
the other 81% are hosted in Independents and 10 years, although we have seen a slight decline in Gueeach Spore Coal 400
Symbols the % of rural branches
Outreach unsustainable 1,300
JO Lb
9
‘Sources: POL Analysis, Branch numbers as at 31 March 2020
Does not include DMB branches
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= The rate of branch closures has been increasing in recent years, driving high
@,@7 replacement costs and a growing number of outreaches ga
‘CLOSURES ARE INCREASING,
ESPECIALLY AMONGST LOCALS & MAINS!
THIS IS DRIVING AN INCREASED USE OF
= WE ARE STRUGGLING TO FIND GOOD RETAILERS
SUB-OPTIMAL OUTREACHES
TO REPLACE THEM
Post Office closures split by type What happens I 8 months after a Local closes? Total number of Outreach Branches, ‘09-'20
633 1700
wie Our; \si7
gacy utreach Mains ™Locals 20% are 1439
replaced 1266
S C333) C414) <> p> with a Local 933 979 10171065 10911136
: => a> > > 20a
: 600 25% are
8 500 replaced
& 400 with an
300 136 144 Outreach
8 200 SSeeeseseete 8
8 oi g8s8828 28288888 8
3 0
= 2016/17 2017/18 2018/19 2019/20!
= In 2019/20 our projected run rate of churn = It’s becoming increasingly difficult to replace = Itcosts! set-up an Outreach
wut that was pre-Covid-19 branches that churn with good Locals © They typically
a cost of managing churn &
maintaining the network
To date we have asked over 4,000 prime
retailers if they would like to host a Locals,
and our ‘hit-rate’ is just 8% - we are running
out of candidates
Note: I.Given the impact of COVID-1 9, 2019/20 numbers are provisional and subject to revision
Source: POL Analysis
only generate
Overall they produce a loss to POL of ~w
pla each year
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= Feedback from our Multiple partners highlights some consistent areas of
© concern with the Post Office proposition ga
Post OFFICE FORMATS cence 5 ‘
ARE NOTTAILORED TO 1 dislike the bluntness of the Main / Local format. Our stores have several sub-configurations
patie Raia services should fit with these where we get more say over the services", _ IRRELEVANT.
REMUNERATION MUST
KEEP PACE WITH STAFF
COST INCREASES
Ye. gre worried about the continued impact of NLW increases.We have seen a 42% increase in staff costs over the last 10 years”
1eans that our PO Labour costs have been increasing by £100k pla. PO reward should at least keep in line with NLW increases (~6% pla)”
PosT OFFICE ISTIME
“I look after about 40 partners. PO takes up a disproportionate about of my time. I have spent a lot of time taking out cost e.g. shortening opening hours. You
pani hias should be doing this”
OPERATE
8 Post OFFICE DOESN’T “PO has a history of overpromising and under-delivering. For example, we have an SSK on trial. It’s okay but I wouldn’t buy it. SSK has been in development for
DELIVER years and no clear plan in site. We expect that PO provides more support to the branches (e.g. better call centre SLA)
Post OFFICE HAS NO “You need to demonstrate where you are going and if you are going to be relevant in five years”
TUTORE PLANS In our strategic planning sessions with the Board, I can give them an outlook for all our categories but have nothing to say about the future of the Post Office”
Note: This list is based on feedback from the Agents Remuneration Review, combined with multiple interviews with front-line ‘account manager’ colleagues of their experience working with retailers
Source: POL Data
L409 eb
oP
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7
= Independents have many of the same issues as Multiples, and are particularly
© concerned with the competitiveness of our products
INCREASES IN STAFF
COSTS AND OVERHEADS “Abysmal! I've seen a dramatic decrease in my earnings. I was taking £79k, it's now down to £45k but I am busier than ever.”
BUT NOT “We have to work harder now compared with I0 years ago. Salary is the same but we have to employ more staff just to make the same amount!”
REMUNERATION
LACK OF “We want to know how much the PO is making from each of the services we provide”
‘TRANSPARENCY “The company is making a profit and all the top bosses are making big bonuses, and we are the ones who are making them money”
(COMPETIVENESS OF “Lost a lot of business to competition as our prices are too high”
PRODUCTS “Travel money rates are different online to in branch with the supermarkets also offering the service, Collect+ and PayPoint are cropping up in the area as well”
CONTROL OF THE “I’m not in control of the business at all, even the services that I offer within my branch!”
PRODUCTS THEY OFFER “Need to offer more services and I should be in control of what services I can offer — it’s my business.”
“Labels get printed at home and I only get pennies for them delivering to the store — it's not worth the work I do”
DisTRUST ONLINE “Most annoying is the difference between online and branch rates. Losing sales to online. Have to encourage click and collect so at least we get something”
“I’m not really aware of the products sold online and it takes customers away from my store”
Note: This list is based on feedback from the Agents Remuneration Review, combined with multiple interviews with front-line ‘account manager’ colleagues of their experience working with retailers ig
Source: POL Data
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CASE STupy I:
WHSmith
CAsE STupy 2:
The co-operative
Source: POL Data
such as PUDO
RETAILER DEMAND
WHSmiths have 576 High Street locations, we have post
offices in 207 of these. WHS have identified a customer need
for PUDO services and International Money Transfer in their
~370 non-post office locations and they are going to tender
for:
— PUDO / Parcels: They want one high-end provider such
as DHL and a second economy provider such as Hermes
— Money Transfer: Considering WU, MoneyGram and Rio
Co-op conducted customer research to understand ‘What
‘Services’ do customers want?’
PUDO came out as most popular. Co-op are currently
working with:Amazon Lockers, John Lewis and MyHermes
= Multiples have already highlighted an interest in hosting lighter format offerings
©
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Post OFFICE SUPPLY?
WHS stated that they would prefer to take these services from
us, if we could provide a ‘simple’ proposition
As we are already a trusted partner; and having one provider
saves on staff training, reduces the number of devices and
different operations in the business and management time
Co-op are looking for a 4” PUDO provider and they would like
this to be Post Office, if we can provide a simple, PUDO
proposition
They are interested in trialling Parcelshops
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Percentage of branches / locations in multiple / Co-ops retailers:
29%
29% of convenience stores
are run by ‘Multiples’ ~ 22%
Multiples and 7% Co-ops
We currently under-index
for the proportion of post
offices in Multiples - closing
this gap to 29% would
45%
mean an additional ~!,200
branches in Multiples
19%
& P PayPoint
We have 2.2k branches ~45% of PayPoint's
with Multiple retailer locations are in Multiples
hosts, which is 19% of (included PPoS)
our overall network
Sources: Research and POL Analysis
= Both independent postmasters & Multiples will play an important role in our future
© network, although we expect to index more towards the latter for new branches
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=
Be
Advantages of targeting the Multiples for new branches:
I. Multiples tend to be in the best locations — nearest to where our
customer live, work and shop
2. Multiples hada far lower closure rate than independents (2% for
Mults vs ~4% for network as a whole), although Mults closures is
increasing
3. It is more resource-efficient to do larger deals with Multiples
4. Weunder-index versus the market on Mults: 29% of convenience
stores are run by ‘Multiples’ — 22% Multiples and 7% Co-ops
However, this needs to be balanced with the risks of having too
great a dependency on Multiples:
I. Too many eggs in one basket: If a Multiple had too many post
offices and went bankrupt it could materially disrupt service. ‘Financial
Stability’ is a key metric in our Retailer Scorecard
2. Due to high-staff turnover and busier stores they tend to under-index
on post office income versus good independents
3. Some Multiple partners may have too much power in the relationship
4. Over dependence on one multiple could cause implementation
challenges
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z
IMPACT OF DEVELOPMENTS IN THE WIDER MARKET ENVIRONMENT
Covid-19 has driven the UK into an economic downturn, with full recovery 5
unlikely to take place before end-2021/ early 2022 Cag
ON-GOING ECONOMIC DISRUPTIONS AND SOCIAL DISTANCING RESTRICTIONS HAVE CURTAILED BOTH CONSUMER SPENDING AND BUSINESSES’ ABILITY TO OPERATE
Index of Real GDP: Q4 2019 = 100
100 forecast
99
100 98 cr) #8 Change in GDP(") 14 ce
% (YoY, %) 2 zZ
95 94 94 ZI
AA I
90 (72)
5 Change in consumer _:! 13
85 spending) (YoY, %)
80
(95)
75 + ‘ :
Q4 2019 QI 2020 Q2 2020 Q3 2020 Q4 2020 QI 2021 Q2 2021 Q3 2021 Q4 2021 2019 2020 2021
* The UK economy is likely to remain under pressure for the remainder of 2020, with the most severe hit felt by hospitality, travel, among other ‘non-essential’ sectors
= Consumer spending could fall by 9.5% this year and recover modestly next year by 1.3%, as demand is suppressed by both lower willingness and lower ability to spend
* Apartial recovery is expected with the easing of lockdown restrictions, although a full resumption of activity will likely not be probable until we have a vaccine for Covid-I9
Note: (1) Average % change on previous calendar 4
Sources: ONS, proprietary forecasts
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=
IMPACT OF DEVELOPMENTS IN THE WIDER MARKET ENVIRONMENT
= UK in-store retail is facing margin compression owing to rising costs,
© lower pricing power, and shift to online retail Cag
THE RETAIL SECTOR IS FACING UNPRECEDENTED CHALLENGES ‘THERE ARE FOUR KEY TRENDS THAT ARE INFLUENCING
AMID THE CURRENT HEALTH AND ECONOMIC CRISIS THE SECTOR
(1); =
ERR! SR OR The retail business Purpose moves to
10 model is evolving the forefront
i Evolving customer demands Retailers are under
FI are pushing retailers to increasing pressure to
g reconsider business models articulate their
eS and partnerships purpose and role in
& society
& 9
2 t) ==
§
: 22-20 forecast: 62
. OSes seeease
pe ee eee See eee
ogooo0oo0oo0o000090 Rethinking the cost of Customer choice
doing business becomes more
, . rful
= Demand is shifting from areas such as fashion to “new-essentials” for working from home and entertainment, Retailers are required to take Powe
alongside more conscious planning for groceries and socialising radical steps to navigate Retail is transitioning
* More than ever, retailers are required to identify new ways to extract value from existing assets, rather than technology disruptions and from a push B2C to a
address rising costs pull C2B model
relying on reducing costs and increasing prices to drive profit
Notes: (1) The Retail Health Index is based on quantitative assessments by members of the KPMG! Ipsos Retail Think Tank, of the impact on retail heath of demand, margins and costs for the quarter just completed and a forecast of ,
the quarter ahead I Sources: KPMG! Ipsos Retail Think Tank — a UK based think tank which was created in 2006 to provide views on Retail sector in the UK: ONS; BRC; Euromonitor
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IMPACT OF DEVELOPMENTS IN THE WIDER MARKET ENVIRONMENT
ABa12.g YOMIEN € GEL
Existing retail trends have been further highlighted and accelerated by the 5
current health and economic crisis Cag
‘THE DOWNWARD PRESSURE IS PARTICULARLY ACUTE ON
PHYSICAL RETAIL
‘COVID-19 WILL INEVITABLY HAVE A LARGE NEGATIVE IMPACT ON RETAIL SALES
u «
fo Retail sales with/ without COVID -All segments, £m Lockdown UK retail revenue by channel, 2 Mar ~ 7 jun ‘20
Py riods
8 12,000 = 800,000 xe ™ Pre-Covid baseline
a be! ae ™ Post-Covid actual
11,000 —Pre-Covid ame @ 3
& 600,000 ge
s 10,000 500,000
< —Pre-covidD —§& 400,000
“ 9,000 forecast
a é 300,000
@ s
€ 8,000 200,000
<= —Post-Covid
iy actual sales 100,000
8 7,000 .
g 6,000 —Fost-covid Elie ai
g forecasts ‘ ‘
8 Historical online penetration rates in retail (incl. grocery)
5,000
QI Q2 Q3 Q4 Qi Q2 Qs Q4 QI Q2 QI _Q4 QI Q2 Q3 Q4 QI ‘Year 2015] 2016] 2017] 2018I 2019
2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022
Online penetration rate 13%] 14%] 16% 17%] «18%.
2020 2021 I Higher priority for safety concerns and convenience are
Sales impact I-£18.2bn )-4.6% Sales impact -£11.2bn 2.7% further driving shoppers toward online channels, reducing the
of Covid-19! of Covid-19! size of the physical retail channel
Note: (1) Impact is based on pre-COVID forecast
Sources: ONS, BRC, Euromonitor, proprietary forecasts
JO 6b
9
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IMPACT OF DEVELOPMENTS IN THE WIDER MARKET ENVIRONMENT
= Covid-19 implications, however, have been felt at different levels and in different
©
ways, across our network of retail partners Cag
MULTIPLES ~19% of PO network MUTUALS & SYMBOLS ~81% of PO network (together with Independents)
— managing through scale Pre-Covid avg retail sales: £1.8m pa per store — reviving the tertiary high street Pre-Covid avg retail sales: £1.0m pa per store
ificant increase in sales, particularly for groceries and other essentials ing footfall as consumers turn to more local and smaller convenience stores
+ Higher consumer focus on value for money benefiting Discounters in the future I + Growth in sales primarily driven by the food segment
+ Vertical integration playing a critical role in helping Multiples mitigate and + Agile adaption to mitigate Covid-related disruptions e.g. Co-op implementing
& overcome supply chain disruption contactless checkout process
5 + Opportunity to accelerate digital and omnichannel strategies e.g.Asda’s roll: I + Rapid roll-out of new business models such as online ordering and home
8 out of Scan&Go app delivery e.g. Londis and Spar
5 ~ Higher sales have however not translated into higher profits due to rising costs I - Significant increase in operational costs to comply with safety guidelines to
= ~ Online models, including home deliveries, being run at low profitability/ loss protect staff and customers, and recruiting locally The Co-op expects Covid-19 to
— levels ‘cost’ over £200m
8 ~ On-going challenges with declining footfall and further migration to online sales ~ Increased competition from bigger players as Government looks to relax Sunday
8 Trading Laws, allowing large retailers to operate longer hours on Sunday
8
S INDEPENDENTS ~81% of PO network (together with Symbols)
3 — emerging Pre-Covid avg retail sales: £0.3m pa per store
+ Surge in sales for Independent food retailers driven by strong demand and additional traffic diverted from large supermarkets (due to location and overcrowding) —
Small grocers saw a 69% increase in sales in the three months leading up to June ‘20
Growing consumer preference toward shopping from smaller stores and contributing to local communities — 30% of UK consumers have purchased more locally since
the start of Covid-19, of which 80% plan to continue doing so in the future
~ Significant impact on non-essential retail as a result of lock down related store closures
- Existing operational challenges aggravated by Covid-19, including space crunch, high fixed costs, as well as safety concerns for staff and shoppers
Sources: IGD; BIRA; Kantar; YouGov; POL analysis; press releases
rs
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IMPACT OF DEVELOPMENTS IN THE WIDER MARKET ENVIRONMENT
5]
N4
SQOSOWW
There are 6 drivers of consumption which will shape consumer purchase decisions
during and in a post-Covid environment
DRIVERS OF CONSUMPTION
A VALUE centred approach and connections to online are anticipated to
have increasing importance due to economic uncertainties
CONVENIENCE requirements have changed with fewer trips to stores,
however consumers are still willing to pay for this both on- and off-line
Shopping EXPERIENCE expectations have shifted and online retailers are
seeking to maintain current increased volumes
There is a general acceptance of CHOICE reduction, inspiring simplification of
product ranges to address specific functional needs
PRIVACY AND SAFETY becomes a key concern for the majority of in-
store shoppers and drives customers further toward options that are local
and close to home (vs. work)
Retailers who can demonstrate a PURPOSE that is organic, consistent and
aligned with customers’ values will emerge stronger
Sources: Research by retail think tanks, subject matter expert
LJO Ls
oP
Cig
WHAT DOES THIS MEAN FOR OUR NETWORK?
Offer the right products, in the right formats, at the
right prices based on customer needs
shopper missions to deliver more convenience to our
Fl Focus on strategic locations and partnerships that align in
customers, especially in dense urban areas
Make customers’ in-store experience easier, safer and
more efficient through the use of technologies e.g. self-
service kiosks, cashless technology, and improvements to
branch layout
Regularly review branches across location types to
maintain a relevant and profitable network that evolve with
changing customer needs and habits
Continue to deliver social value through strengthening
our network access and working with partners that
compliment our brand
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EVALUATION OF KEY GAPS IN CURRENT NETWORK AND LEVERS FOR CHANGE
= Locals & Mains have narrow ‘sweetspots’ of profitability, making it difficult to
@,@7 attract and retain the right postmasters
LESS THAN 50% (3,600 OUT OF 7,538) OF THE EXISTING ‘MAINS’ AND ‘LOCALS’ Wa HAYS IDENEE Eee ince ey
ARE PROFITABLE FOR BOTH POL AND PMS.
Profitability to POL and PMs by format and customer sessions per week laps Formerly ‘Local’ Formerly ‘Main’
3500 LEGEND: 3000+ p =
[I Unprofitable for POL and/or PMs C1) costorven Little choice of retailers that can host
Marginally profitable for POLPMs
Profitable for POL & PMs 7
Xx) # post offices
branches this large (e.g. Trafalgar Sq)
3
1800 - 3000
Sweetspot
Customer sessions p/w
8 8
1200-1800 Not profitable for
= Payzone (PZ) customer PMs as they would Notas profitable
< (so) * PZ charges a low usage fee of sessions pw need dedicated staff
[eemelper week to stores wo fal
a ———————
© fae transactions per week
500 +. 0- 800
(oso Sweatspot <450 customer PMs would struggle to cover POL fully
sessions pw allocated costs
oe’)
Main Payzone
Source: POL Analysis a
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EVALUATION OF KEY GAPS IN CURRENT NETWORK AND LEVERS FOR CHANGE
@ We have a significant gap in our current format portfolio
% OF PRODUCTS OFFERED BY FORMAT TYPE:
Full product set drives complexity:
4 Mains 9
Fi = Mains & Locals formats offer the full product set and they need:
& Scales, label printers, Horizon kit,a counter, extensive training,
eS compliance, etc.
= Locals ed * Format is unsuitable for many retailers due to space and time
by commitments leading to low take-up rate
2 Comme TLE 2 Demand for a simple format:
8 Outreach = Customers and Retailers require a simple model where they
8 can do core services e.g. Bill Pay, PUDO, Online Mails, Lottery,
8 Simple Money Transfer, simple FX & simple Cash
- Payzone 5 Retailers are filling this void through piecemeal solutions:
= Retailers offer PayPoint for payments, Hermes for PUDO,
Western Unions for Money Transfer, etc.
Parcelshop fl 3
(Moth-balled)
Source: POL Analysis ae
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5]
A
I eg ABajens
z-0z02 Ainr ez -
8
We need to reflect changing patterns of
customer demand
The network has not kept pace with the huge
shifts in customer demand over the last decade.
Weekly customer sessions declined from 15 to 10
million between 2007 and 2019, with government
services revenue declining by 90% since 2003 —
meaning we now have more Mains branches (on a
30% pay premium) than we need.
E-commerce has doubled since 2007, generating
growing demand for parcels services. But despite
our network size, we lack coverage in convenient
locations for customers - in urban areas Collect+
has 0.4 branches per capita whereas we have 0.12.
EVALUATION OF KEY GAPS IN CURRENT NETWORK AND LEVERS FOR CHANGE
Summing up: the key challenges we need to address with our network strategy
We need to create compelling propositions for
postmasters
Our current propositions are unattractive to
many retailers, due to the complexity & cost of
running a post office, and the modest returns
relative to competing retailer propositions.
Just 8% of the 4,000 retailers we have approached
have shown a willingness to take on a new post
office.
Ultimately this is preventing us from locating
branches where customers need them, and is
forcing us to rely on a growing number of stop-
gap solutions like outreach to offset churn.
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We need to improve network profitability to
offset headwinds
+ Our subsidy has declined by 88% since 2013/14
and clearly our next funding round will be set
against a challenging fiscal environment.
+ Many of our traditional markets are facing
long-term structural decline.
+ We must therefore improve overall network
profitability & commercial resilience, in
particular reducing the ‘social’ network losses
and the costs of aging network churn
(estimated at {msecevanrI pa on current
projections).
w
a
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EVALUATION OF KEY GAPS IN CURRENT NETWORK AND LEVERS FOR CHANGE
Create a more flexible
format range
Invest in automation &
other tech enablers
Develop new franchise
arrangements
Leverage the Payzone
network
Develop stronger
partnerships with great
Multiples
Shift the network to
meet customer demand
Source: POL Analysis
We have identified six key levers to address these challenges, creating more
compelling propositions for postmasters and a stronger network for customers
Amore flexible format framework which gives postmasters greater choice over the services they offer and a
wider range of options around how a post office can be integrated with their own retail operation, including
through new light-touch options which do not require dedicated staffing or complex training.
Technology is a key enabler for the new formats range, reducing operating costs for postmasters and improving
customer experience through a flexible range of solutions including automation & integration with the retail till.
Growth orientated commercial terms based on franchising best practice, with a tiered operational support model
which enables us to reduce costs, increase sales & manage network churn more effectively (linking to RIPE).
The new flexible formats range will provide a more seamless route for upgrading good Payzone outlets into light
touch post offices, thereby increasing convenience for customers. This will be underpinned by a more coherent
approach to managing our combined network & retail partnerships across Post Office and Payzone.
We want to develop stronger partnerships with a portfolio of great retailers that are conveniently located where
our customers live, work and shop. These might be traditional players such as Co-op or new hosts such as Boots.
We will use new formats to find great retailers to host branches in the over I,800 whitespace locations where we
are currently failing to meet customer demand. This expansion will also provide the headroom to shift away from
around 2,000 sub-optimal branches that poorly used by customers and surplus to meeting the access criteria.
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3.
Review of network requirements & gap analysis
Implementation plan and key considerations
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
ABa}2Ng WOMEN € GEL
We reviewed successful formats from the retail sector and post offices from other
countries to identify design principles for the future network design
Examples from ‘SUCCESSFUL FORMATS TARGET SPECIFIC CUSTOMER NEEDS
Retail E.G. PUDO, CLICK AND COLLECT, ETC.
©) Automation is key to:
Arges KG
= Optimise operational efficiency
= Enhance in-branch customer experience
= — Maximise profitability for both host retailers and PO
L$DL = i) Reducing the role of cash in transactions allows: Learnings
pueog 10d
served as
= Reduction in operating costs for both host retailers and PO design
= Reduction in the transaction complexity for retailers principles
Other Post Office for the new
Examples Simpler formats in convenient locations support maximisation of community access format
8
®
g
8
w
8
id
FS
8
s
an oe I . structure
Digital platforms are significantly effective in building stronger customer relationships by
giving the customers control of their experience and journey, which:
DIE POST’
bois ? * Drives a postive brand image
Ones Oe * Creates further opportunities for cross-sell
Options to open new revenue streams, such as travel related services offered through
eee presence at travel locations e.g. airports, train stations etc.
La poste
Note: Please refer to the appendix for detailed case studies
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POL-BSFF-WITN-015-0009992_0073
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
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A more flexible format range with greater customisation for postmasters will enable
us to meet the evolving needs of customers in different locations
Store-based format
+———_ Retailer Cash 19=§=—————> PO Cash
fa} Plus fa}
@ Essential Le
Basic* Basic A ¥ PuDO
© (0%! Banking) ¥ PUuDO i phar se
Express 4 ” PUDO . 2 Sond Lottery
PZ = v \~ Gift cards ¥ Stomp books ¥ All Mails (including
—H Fi v <, eaapbass Ma Pacers)
7 me : Dee, YAM fncng Pace
. can ostal Orders
oon 7 Bil Poyment ¥ Stamp books yf 3 ¥ Bil Payment
¥ Stamp books ees Y All Mails ¥ Bill Payment Stamps ¥ songs
Y Bureau collect (intemet ony) pir Y Busines Banking, Business Banking
(internet g of, Cartel Chere Y pines Bonin” ¥- Personal Bonking
oo) Mais inland BA Poyment Ratan BNR Thal Maney fowl
only (below 2 ¥ Stamps Contax payment & TMO)
kgs) ¥ Business 9 Travel Honey for Moneygram
¥ Postal Orders ee Pe rlekda) Travel Insurance
wo] Mosher mee A Asia ot Passports
Y Parcel force ~ Passports
New productservice
introduced mths format
KAKA 55
Simple transaction
(avg. tx time <3 mins)
erases ontent & Sertet!
customer Pixies Forward
segment Comfortal
Complex transaction
—<$£@§=,
(avg. tx time>3mins)
i
Confident &
Discerning
(a) Automated format
Automated formats; can act as productivity
enablers for all store based formats (except PZ)
Automated Automated
Mails Banking
¥ SSK Stamps (I**/ ¥ Business Banking
2") ¥ Personal Banking
v All Mails
v PUDO
Parcel force
Simple transaction
(avg. tx time<3mins)
Pressured &
Price bar cohort
Conscious c
oe se
Notes: * Personal banking includes withdrawals, cheque deposits, cash deposits and POCA. Business banking indudes change giving, and higher value deposits (over £3k). To be further reviewed to assess if it can be merged into one
set. Basic (excl. banking) could include withdrawals below £50, however it is limited by our ability to determine the retailer's ability to manage cash (such as availability of cash, cost of cash management): Basic upward formats are
currently modelled as having horizon system I Source: POL analysis
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
ABa12.g YOMIEN € GEL
A more flexible format range with greater customisation for postmasters will enable
us to meet the evolving needs of customers in different locations
Store-based format Q rvromatea solutions & formats
+——__ Retailer cash ©—————> PO Cash
Plus! Primarily productivity enablers for the other
© Eventi! formats but could also be standalone solution
Basic! © Basic! oa
© (ox: Banking) gaa.c00
Express? B- I Automated Automated
PZ I = ae, I Mails Banking
+
£10,500
£6,000 I}
— £2,500 £450
£800
——_—_—__—+
£420 I 11.25 hours inital FR ieeilid
Set up costs. =§ 2.5 hours on-going
75 hours initial 25 hours ongoing
I Sy inet I 2 hours on-going (varies according to range)
Tron 0.5 hour inl _, I*—I hour on-going *
diated T hour ongoing s @—Dedicated orea_ Storage space + Shop Floor space
Storage spice + Frove office
Space Storage space only
PO specfied operating hour requirement ai7
Sei howe Operating hours in ine with the store
PO provided technology and devices & card payment device + —_ ‘and labels printer I beer ‘safe and till with
“Scales and labels printer’ OR ‘Cash sofe and til with alarm system” ‘lar system, outemated self service options
Technological Standard retail devices and peripherals, or tablet & card payment device * = - ——
support
Notes: I. Basic upward formats ore current modelled as having horizon system. 2. Cost for o isis higher than Essential os it wil require more than ane counter so requires multiple horizon terminal, a larger sofe. 3 Express set up,
costs have been based on Parcelshop set up costs. 4. Set-up costs for automated solution do not include the capex costs of the devices, which are instead assumed to be leased.
Source: POL analysis
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
A more flexible format range with greater customisation for postmasters will enable
us to meet the evolving needs of customers in different locations
Store-based format
—_——" Retailer Cash PO Cash
eo ™ [a]
a) Essential _—=_
Basic fa} Basic <a
la) (excl. I
Express oe
Customer sessions pw
10-500 I Uj 50 I Up to 1000 450-1500 1000-3000
Average annual income per branch! (£k, based on 20/9 income assumptions) 1500
4
POL Income PM cross sell income
Hl PM Income 385 bi
239
Estimated average
‘customer sessions pw
77 201 528 895 912 2,050
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
Progressive product range driving incremental revenues across the format range
Annual POL income per branch, £ Annual PM income per branch, £
Modelled based on customer sessions by format Modelled based on customer sessions by format
Hl Stamp Books
Mi puvo
oem 199 1 Bill Payments
IM Gift Cards
Hl Mails Other
9,569
6 Lottery
eae Ti Labels
Ml Parcelforce
2,695 Postal Orders
Ed Wl Withdrawals
Stamps
8
3,020 ae 1,953 4g, Tl Deposits
605 130 § d 1 ' \ 367 I ress! Hl Card account
poe Epic test I abreee) beste Travel Money - Variable
Express Basic (excl. Basic Essential Express Basic (excl. Il international Priority & Standard
- banking) banking)
g¢2
83
33 Wg 302 556 563 I 9 302 556 563
foie
The analysis is a case study based on a specific store (FAD 251410 a local format store) to illustrate the incremental nature of revenue drivers for the same store across the new formats and
considers a varying level of customer sessions. While modelling the product sales across formats, we have used the actual transaction data and hence have not overlaid any assumptions related to
growth in product sales as we transition from one format to another
Note: Products shown are those offered by the particular store (FAD 251410) and do not include all PO products. The analysis is conducted 35
Source: Economic model analysis for new formats, 2020
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
As branches progress along the format ladder, costs will increase for both POL and
postmasters
Annual costs incurred by POL per branch!, £ modelled based on customer
sessions by format and £20k retailer revenue per year
Annual costs incurred by PM per branch, £ modelled based on customer sessions by
format and £20k retailer revenue per year
10,447
[2117 Variable cost 3,535 9.964
i Supply chain variable cost allocation até 886 1,040
[i customer Sessions Variable Cost 7
[Hi Branch Variable Cost 698
670
713 ed 2,083
1 .(
No.of Express Basic (excl. banking) Basic Essential 654
‘customer 119 302 556 563
sessions Express Basic (excl. banking) Essential
s
g g £800 £6,000 £10,500 £16,000
Bt [BB Labour Cost Reduction? Hl Training Cost BATT Cost
£ & £4,354 £4,633 £5,355 £5,380 [Bi Back Office Product Specific Cost [J Back office non-prod specific cost
it
Cost increases driven by increase in:
= Set up costs increase (from basic onward) due to installation of PO technology and
devices & card payment devices, scales, labels printer, safe and till with alarm system
= Branch variable costs and customer sessions cost associated with higher remuneration
rates for complex transactions such as special delivery
= Cost increase is primarily driven by ATT cost related to transactions and back office costs
= Labour cost reduction is assumed for retailers for their existing staff, as they will be required
to manage some of PO transactions
Notes: I. POL costs are modelled based on a store with 600 CS with full demand. The location remains constant but the demand scales down based on the range being offered by each format. Plus has not been shown as we
would not run a Plus at 600 CS; 2. Fixed costs include IT fixed cost, branch fixed cost, supply chain fixed cost allocation and customer session fixed cost allocation; 3. Labour cost reduction is based on the actual modelling of
workload by product and volume in each format
Sources: Economic model analysis for new formats, 2020
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OVERALL NETWORK SHAPE TO MEET CUSTOMER & SHAREHOLDER REQUIREMENTS
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We are using detailed geospatial modelling to develop our target network
‘Blueprint’
‘WE STARTED BUILDING THE BLUEPRINT BY CREATING 5,139 ‘POST OFFICE MARKETS’
PO Markets and Shopper RegionsI
Lorge City 4)
LorgeTown0
Small Town 1
‘Small Town 2
The Blueprint (BP) is a geo-mapping tool that helps us to understand how to
optimise our network locations and formats. It is customer-centric, trying to find the
best locations and formats that deliver the services customers want near to where
they work and live.
This creates a framework and hierarchy for us to collate data on demand, supply,
competition, performance to create an optimised location plan or blueprint.
Source: POL Analysis
&
ONTO THIS ‘FRAMEWORK’ WE THEN LAYERED ON DATA ON DEMAND, SUPPLY,
COMPETITION AND PERFORMANCE:
* Customer demand: What drives how much customers spend across 5
key product areas: Premium Mail, Standard Mail, Personal Banking,
Business Banking & Bill Payments.
. Catchment areas: We then created ‘catchments’ around all post offices
to show how far customers will travel to a branch, this depends on how
urban they area is where they live.
* Growth or cannibalisation? Calculate the level of incremental sales
achieved when new branches are opened to help inform whether an
increase in coverage will increase sales, or simply cannibalise the existing
estate.
® Competition: What is their effect on post office demand and where we
need to locate branches
From this we created a Network Blueprint...
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This Blueprint assesses the strength of each location, the preferred format in each
location and what overlay is required to meet our shareholder requirements
Number of Branches according to network Criteria
tion
U
¢
¥ 3,774 Formerly Locals
¥ 1,129 Formerly Mains
4903
Right Format & Right
Location
=
Retain & Invest in
Focus on retaining these
branches. New
propositions improve
ability to replace churn
through a greater choice
of commercially viable
alternatives.
Source: POL Analysis
1537
2258
Right Location but
Wrong Format
a
Transition to New
formats
Transition the Mains &
Legacy branches to
Locals or other Light-
touch models.
Supplement ‘Mains to
Locals’ programme with
other strategies
When we move into
new locations we
should use Locals or
light-touch outlets
predominantly in
urban areas
895 minimum but
we would likely
‘want a cushion
Whitespace (no branch,
but need one)
=
Penetrate new
locations
Focus on driving urban
penetration. To date we
have delivered ~600
NNL (Locals) but are
running out of
candidates. We should
utilise new formats to.
penetrate strategic
partners
Access Criteria Top-up
nd
Policy changes
We need to retain at
least 895 additional loss
making branches to meet
the network access
criteria.
Annual cost of £8-9m to
Operate these branches
(mostly outreach).
Blueprint Network
se
The blueprint network would
be better for customers,
retailers, cost less in NSP to
government and generate
greater profits for POL...
gy Not profitable unless
lighter model
Not profitable even
on a lighter model
Wrong Format, Wrong
Location
=
Network Pruning
Exit these branches,
especially those that
provide the lowest social
value, or transition to new
commercially viable
formats. Cost savings here
fund development
elsewhere.
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The blueprint underpins our proposition development and significantly changes
the shape of our network and profitability for postmasters
POL and postmaster profitability across branches grouped POL and postmaster profitability across branches grouped by # of customer
by # of customer sessions, Mains and DMB vs. Plus sessions, Locals* and Community vs. Essentials, Basic and Express
3,585 ety tthe branches not 10,167 10,167
<1000 profitable for POL and postmaster
‘Some branches profitable for POL
1000-1500 and Postmaster
< 150
@ Most branches profitable for POL
and Postmaster
150-500
1,287
1500-3000 - 340 500-1000
1000-1500
810
3000+, si 1500+
Current ~ Mains and DMB Blueprint - Plus Current — Locals, Option I: Blueprint - Option 2: Blueprint
and Community Essentials and Basic Essentials, Basic and By PO
8 Introduction of new formats will drive :
= Availability of more commercially viable options to postmasters including the branches which currently serve lower levels of customer demand
= Reduction in losses in deep rural areas with low population densities (versus a full service outreach)
= Use of automation to best service the customer demand in branches with 1,000-1,500 customer sessions per week
Note: I In the current network locals classification includes locals, legacy and community but excludes social. Blueprint count excludes social 2. For unprofitable branches: 86 - Plus less than 1,000 CS will have a manning standard
significantly above the workload and associated agent rem. Reduced hours could help, but requires capital investment and will take up floor space reducing profitability for POL and PM, 460 — fully manned POs at Local rates above 1,500
‘customer sessions are at best likely to break even for PO and PM and will be operationally too busy to manage in conjunction with their retail front of the store for most retailers. 797 — on average 150 CS doesn't cover POL variable
costs. We will be able to make a PUDO offer work at this level, but have not fully defined the break even point for POL as yet so may still have some areas where we need to deploy a PUDO offer but may not have sufficient demand to
move above break even. As previously discussed this will stil be significantly more profitable for POL than deploying a full outreach, 9
Source: POL Analysis
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~--Profit.orLoss.2019/20....
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Where we exit a DMB, we will always ensure that there is adequate capacity in the
local area to meet the customer demand
HAMPSTEAD DMB Is DUETO CLOSE THISYEAR, AND THERE IS ADEQUATE CAPACITY NEARBY TO MEET CUSTOMER DEMAND:
Hampstead DMB is due to close this
year. It is open 45 hours a week and does
2340 customer sessions per week
West
Hampstead is a
Main, 1.4 miles
Swiss Cottage is
a Main, 1.3 miles
from Hampstead from Hampstead
DMB, doing 3,264 DMB, doing 2723
c/s, with 3 c/s, with 4
Mill Lane is a counter positions counter positions
Local, 1.4 miles & 2 SSKs
from Hampstead a ; Queens
DMB, doing 916 poner orn Crescent isa
c/s, with I em Haeeten A Main, 1.3 miles
counter positions ; from Hampstead
open 51 hours eel deen! DMB, doing 1,889
per week ‘ c/s, with 2
counter positions
open 102 hours
per week
counter positions
open 66 hours
per week
There is adequate network
capacity around 50% of the
remaining I 16 DMBs. So if we
simply closed these 58 DMBs
the existing post offices in the
local area would be able to
absorb the customers from the
DMBs.
For the 58 DMBs where there
is not adequate capacity in the
network, then we will either
franchise the DMB or we will
open-up new NNLs in the
area.
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The Network Blueprint proposes a network that is better for customers,
postmasters and Post Office
Post OFFICE NETWORK TODAY (MARCH 2020) VERSUS FUTURE BLUEPRINT NETWORK
11,638
Current Network -
March 2020
Outreach
Traditional
(Legacy and Community)
~12,500
Access criteria
branches
Potential additional
access points
Express
Basic +
Basic (excl. Banking)
Essential
Blueprint Network
&
KEY BENEFITS OF THE BLUEPRINT NETWORK:
More convenient for customers:
= In the blueprint 44% of customers are within 500m of a
post office versus 40% today
= Reduces the number of busy PO (3,000+ customer
sessions) where it is difficult to find hosts
Focused on where customers live & work:
= Nearly 2k new outlets in areas of high customer demand,
ensuring we have a clear advantage over competition —
with the option of up to a further 1k additional access
points (including locker boxes) in high density urban
locations, retail parks & transport hubs
More sustainable for Post Office:
= Improved resilience by reducing the number of retail hosts
with ‘limited or no retail’ from 64% today to 38%
* Option to move away from! sub-optimal branches
which are underutilised (the majority with <20
customers/week),.unrrofitable & surplus to meeting access
criteria, saving c.
Notes: (*) Includes some branches not open 52 Weeks in 2019/20 not included in branch by branch analysis; (*) Preferred option counted (other format options will work in the majority of format locations) Pt
Source: POL analysis
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OVERALL NETWORK SHAPE TO MEET CUSTOMER & SHAREHOLDER REQUIREMENTS
Overview of the drivers of Post Office & postmaster profitability (based on the
current network) &
Breakdown of Post Office network revenue & allocated costs, £m, FY19/20 Breakdown of estimated postmaster income & costs, £m, FY19/20
AJ
AJ
ITI
~
<
>
Zz
—I
See slides 105 to 108 for the assumptions underpinning these numbers (particularly the postmaster cost & cross-sell estimates)
Notes: Based on 20/9/20 actuals; Includes fixed fee income from RM and BF2; Does not include DMB income or costs
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Significant margin gains could theoretically be realised through full implementation of
the Blueprint, but in practice will be constrained by funding & politics
Breakdown of Post Office network revenue & allocated costs, £m, FY19/20 NOTE: Detailed branch level analysis is required to determine how much
eter iii aliens _ a 1_of the theoretical margin Improvement is achievable In the next 3-5 years.
IRRELEVANT
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The extent to which we can transition to the Blueprint over the next 4 years will be
constrained by funding availability & political appetite —- we are assessing the lead
scenarios as part of the wider funding plan &
Locations - Maintain Rural Locations - Maintain Rural Network Locations - Optimise Rural Network
Network (Don't replace churn) (Low active churn) (Actively churn)
Current ruber I ae a
CV-19 returns in 2020-21 H
Close DMBs I :
Churn of branches
we want to keep
Reduce outreaches
Reduce small,
fixed pay branches
New rural models
be DMB franchising/
if replacement
(o)
IRRELEVANT I IRRELEVANT
Full service openings
(to replace churn)
Whitespace development
End March 2024 total I
i —
EBITDAS improvement (£m) EBITDAS improvement (ém) EBITDAS improvement (
Investment (£m) Investment (£m) Investment (ém) I
Notes: Assumes no significant Covid 2nd wave impact, churn of branches post 2021 assumes return to prior year trends; Investment & EBITDAS estimates do not include DMB closures; Set-up costs only cover branch capex ~ not other
costs associated with recruitment & onboarding of new retailers. Compensation costs assumed to be £6k per branch for outreach and £20k per fixed pay branch.
Source: POL Analysis 2020 o
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= What do our proposals mean for the ‘Services of General Economic Interest’
© (SGEls) and our commitments on network size & accessibility? &
= Mails will remain the core anchor product in all branches carrying the Post Office brand.
The majority of the network will still offer customers the option to purchase their RMG
products in-branch. We will also continue to meet the 6 access criteria for mails, far
exceeding the Ofcom proximity requirements (see next slide).
Network commitments
5]
= We will continue to meet all six access criteria:
1. 99% of the UK population to be within three miles of their
nearest Post Office outlet.
2. 90% of the UK population to be within one mile of their
nearest Post Office outlet.
= Where appropriate for the postmaster & local market (and with RMG agreement) some
outlets may be PUDO only, but still enabling drop-off for the full RMG range online.
= Under Banking Framework 2, we remain committed to meeting the six access criteria for
iy
S 3. 99% of the total population in deprived urban areas across Cash, banking until the end of 2022, and we expect this to continue in successor arrangements.
g the UK to be within one mile of their nearest Post Office YD anki = Furthermore, we expect to maintain banking & POCA in all existing branches and our first.
ie anking b x : z
= ou Ce] near preference is always to include them in new branches. We would only exclude them if
4. 95% of the total urban population across the UK to be
within one mile of their nearest Post Office outlet.
5. 95% of the total rural population across the UK to be within
three miles of their nearest Post Office outlet.
6. 95% of the population of every postcode district to be within
six miles of their nearest Post Office outlet.
necessary to secure a good retailer in the target location and adequate alternative cash
options exist for the local market (including innovative PO models for distributing cash).
= No significant change expected — bill payments expected to feature in all PO formats &
Payzone outlets, given it is a good footfall driver and easy for retailers to transact.
LOMAS © Better locations will improve our proposition to both customers and clients.
* We will continue to maintain a network of over
11,500 outlets
= We propose using the existing Funding
Agreement definition that a branch is “any post
office counter or means of transacting some or
all SGEI Services” — rather than the more rigid
definition that a branch must provide all SGEls
= No significant change expected — network size already constrained by client requirements
so not available in all branches.
= More flexible format range will provide the option to include specialist partners such as
photoshops, providing increased coverage for passports & other ID transactions.
= Growth of identity assurance should drive additional revenue for Plus branches.
Sources: POL Analysis “
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ABajens OMEN € GEL
What is our minimum mails offering to meet the SGEI & Ofcom requirements?
= The definition of the mails SGEI in the current Entrustment Letter is “the provision of access to postal services which the universal service provider (RMG) is required to
provide by Ofcom” — which specifically are Ist & 2nd class stamps & labels; Signed For; Special Delivery by Ipm;and International Air & Surface mail (with no weight
specifications).
= All formats except Express will continue to provide customers with the option of purchasing these RMG products in-branch — and in practice the branches we are
proposing to retain in our target network over the next 3 years account for 99% of existing mails business.
* Subject to RMG agreement, the Express format will provide customers with the option to drop-off any RMG product they have purchased online, which includes the full
range designated by Ofcom —and therefore these branches will still be providing customers with access to the SGEI services.
Express I Basic Excl. Banking Basic Essential and Plus
All home shopping returns and collections (Royal
Mail and Parcelforce - ID AND 2D Barcodes) id v ¥ id
All Royal Mail and Parcelforce services that can be vw wa we VW.
printed at home and accepted in branch.
Stamp Books v v v v
All Royal Mail and Parcelforce services x v v v
All Stamps x x v v
Philaelic (same as where currently ranged) x x x v
Source: POL Analysis
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
The number of additional formats that are profitable for both POL and PMs increases
our ability to replace ‘Wrong Format, Right Location’ branches ee
IRRELEVANT
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
A combination of formats would allow us to deliver a profitable network for both Post
Office & postmasters in our target whitespace locations ee
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
Once we reach maturity the number of commercially viable options for each location
increases significantly in the target whitespace locations ee
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NEW FORMAT STRATEGY TO CREATE MORE FLEXIBLE BRANCH PROPOSITIONS
PO and postmaster profitability analysis of moving the ‘right location, wrong format’
branches into one of the new formats ee
Source: Economic Modelling of the new formats, July 2020
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KBAIENS OMIEN € GEL
Adding automated mails solutions can improve the format economics in some
locations by reducing postmaster staff & training costs
Cost Advantages Challenges Ros aater L benefit Likely number
benefit
Labour savings Still needs manning * Allows as Better customer Up to 400 branches
Prcbaexagence ia I Mesaxscae baere’3 hours reduction from experience, solution for could justify a bank of
iebois cast machines arejicdhed tills large branches future- three or more
i proofed machines. f machine
2 H costs were halved, up
Fs to 1,200 branches
g I_ nee
< Single * Labour savings = Lower migration when I = Needs to work * Can make busier Essential I = Up to 600 additional
s Units ag * Protect against rising not manned around a combi-till stores more appealing to branches (i. not in
= a hour cues Rotana decptions to and allow seamless postmasters (no above) at current cost
a lo Ga ee standard queue when intervention rei for 2nd See ites
e ' solution (clerk on nearby interventions are ‘
& horizon unit oversees needed pombecyicog
SS 1 interventions/handovers) ECE)
8 IRRELEVANT I
8 Bolt-on * Allows mails acceptance I * NeedIT solutions that I * Allows mail * Increases service options I = Potentially all PO
solutions, to be added to both work outside of acceptance to be for customers and model if a label printer
to retail manned and self-service Horizon located at diferent acceptance of mails by could be added
CounterI 1 points points in their store retailers economically
Completing * Improve online adoption I = IT integration and + Reduced need for I = Future proofs models as. I = Depends on cost and
Online and customer journey solutions that cost in interaction, lower customer naturally other alternatives
journeys jee and choices online for postmasters and staffing costs migrate online installed, crucial for
in branch ke i POL unmanned drop-offs
Notes: Inputs from Mails teom 82
Sources: POL analysis; SSK July Board 2020 V2.pptx; Wraparound self service hardware solutions.xlsx, Wrap around pptx
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ABa\eNS HOMEN € FEL
Banking automation: Deposit taking machines and TCRs could work for large
branches as they are and could be adapted for smaller branches in the future &
Cost Advantages Challenges Foe eeate POL benefit Likely number
benefit
2
2 Deposit Freeing up of counter time Separate queue Improves security, frees Better customer experience, I Up to 600 branches could
2 taking Quicker for customers (as I Needs scale to justify up time on the counter, _increased deposit demand justify a standalone deposit
8 machines ‘opposed to SSK) reduces reconciliation device based on existing
a time volumes
2
a Internal Known solution, customer _I Limited visibility Trade-off between retail Improve access to cash, Up to 300 in branches
& ATM's adoption high Hours limited to retail space lost and time saving potentially grow withdrawals I currently without internal
B hours and extra withdrawals (less profitable than OTC) AT™
= I
i Teller Cash 100% adoption (counter Needs integration with Staff savings (counter and Better customer experience, I Up to 2,000 branches, all
8 Recyclers controlled) horizon to realise full reconciliation), fewer growing deposit volumes plus formats and certain
= (TCR's) No space customer side benefits, more expensive to mistakes, customer Postmasters happier servicing I essentials could have
= Can be shared across two retrofit than roll-out as part growth banking technology
8 IRRELEVANT I) positions of a new model Lower losses
2 Better note management
Ss Integrated Larger saving in reconciliation I Massive IT challenge to Reduced reconciliation Allows for banking to be Potentially all multiple
Ss TCRs! for retail tll, and no POL till I integrate the two tills and _time and improved offered more widely at lower I models, taking ‘BY PO’ up
Retail Till to manage reconcile at the backend security. Till only needed _cost, simplifying models and __I to Basics, could also be
(No PO till) for coins. Possibility to increasing take-up by retailers I used in rural locations
Hl get PO to manage their (Pubs/Pharmacies) to
I ‘ash, saving money maintain access to cash
Customer As above and can eliminate I As well as IT integration Removes nearly all As above, with even greater I As above (likely to be
facing cash any handling of challenges above would reconciliation and risk, ‘stickiness’ for retailers, and I multiples only)
acceptance { ashireconciliation by the require counter rebuild removing the need fora _greater chance of whole
: sales assistant, includes coin till and simplifying estate deals
handing ‘operations dramatically
Notes: Inputs from Banking team 33
Sources: POL analysis
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Simple and performance-driven commercial terms are the key to ensure
win-win for POL and PMs
DESIGN PRINCIPLES FORA WIN-WIN FRANCHISE MODEL
(INFORMED BY RIPE APPROACH)
Putting
Postmaster
First
Performance
driven - win-win
scenario
Simplified terms
- explaining the
Working
together to
build the future
Enable best practice
- becoming truly
modern
©
®
@
@
Sources: Analyses based on data from best in class case studies on commercial and operational models
Ensuring our future design has the
Postmaster at the heart of everything we
do, understanding their wants and needs
Consider an incentivised (variable) rate
based system for products where PM can
influence upsell and establishing a lower
cost base, which in tum helps Postmaster
Clear and consistent remuneration policies
across product range and transaction
types. Ensuring our PMs and stakeholders
feel involved
Alignment with new RMG deal, alignment
with PSG work, smoother process and
quality services. Focus on digital self-
service capability for branch operators
Invest in the necessary technology to succeed
and thrive. Design our support model around
‘a modern, compliant PM in mind and tackle
non-adherence wherever we can
COMMERCIAL MODEL CONSIDERATIONS WOULD VARY BASED ON FOLLOWING FACTORS
Product Type
Postmaster
Type
Transaction
Type
Location Type
Format Type
Partner Type
Static rate or incentivised rate dependent on new RMG deal
High profit/low cost to serve vs. low profit/high cost to serve
Fixed annual/monthly reward system for more entrepreneurial
postmasters taking initiative to grow awareness of Post Office
and its services
Incentivised rate for complex transactions which increases with
an increase in number of transactions
Static rate for all simple (<2.5 min transaction) and transactional
transactions (<I min transaction)
Location based incentives where required and aligned to our
future strategy
Specific investments for certain formats such as Essentials and
Plus depending on size of store and number of customer
sessions
Investment for growth type options for Gold partners to jointly
grow the business contingent to greater access
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Sources: Analyses based on data from best in class case studies on commercial and operational models
WIN-WIN FRANCHISE PROPOSITIONS TO DRIVE PROFITABLE GROWTH
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A fit-for-purpose commercial model, supported by an effective operational model will
allow us to build stronger relationships with our postmasters
‘THE COMMERCIAL MODEL WILL INCLUDE THE FOLLOWING THREE INCOME TYPES
Investment in network: In certain locations or partner types
* Investments aligned to future strategy
Performance Based Rewards: Drive higher sales volume and
promote entrepreneurial behaviour
* Entrepreneurial behaviour will include activities focussed on driving
awareness of PO products
* Payment conditional to performance and enables best practice
Remuneration for Product Sales: Static and incentivised rate
= One rate card per product
Rate card applicable across all postmasters
* Static rate — rate card for simple and transactional products,
variable rates applicable to complex products
* Focused on driving consistency, defensibility and simplicity
Post Master Income
<y» Transactional
LY) partners
[v) ow
nyt review
Qrerermonce of performance and
equipment o ste mentor complance
monitored
omens Y ir woarucie
“support available on
No imegraion of cave by cose boss
technology stack
beoveen ®O ond Mas support for
retaler marketing materials
monthly performance
ond review meetings
with account managers
No account manger
[~) Visis by feld teams
‘THE OPERATIONAL MODEL WILL VARY BY RELATIONSHIP WITH POSTMASTER
QD Key pareners
Q isin
Manager
Quarterly reviews
Mi reports
Integrated
‘monthly performance
review wth Shared
‘count monager
Support with business QB join business plans
review, and compliance “PO responsible for
heck staff on-boarding &
=
support with basic
Integration features (or) Support on IT
infrastructure
Basie support for ‘Automatic feeds with
morketing motericls reporting features
‘ond some investments
In promotional activity
1M Joint investments in
‘brand campoigns
Cross marketing
Operasene! Morketing & Brond
soppert clung ITM) Monee
i techology
Adoption of appropriate commercial and operational model could lead to a 3-5% improvement in POL profit by:
@ Reduce churn and improve retention
@) Better network access across community
55
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A winning Franchise Support Model for Post Office and our Postmasters should mean
Postmasters feel positive towards us
“Post Office is difficult
to do business with for
“Post Office needs to cash, stock, FX..”
involve its Postmasters
in its decisions and
direction.”
I have a voice at
Post Office
I get MI & insight to
help my business
perform well
[Pp
I know how I can Id like more
“Td like to see how I'm make money from training through
doing and where I can Post Office digital tools.”
do better.” :
“I like the support my Area Manager brings..”
‘Source: RIPE Program inputs
There are lots of initiatives already underway which
can be brought together to create a better
experience for Postmasters whilst delivering
efficiencies for Post Office:
Area Manager Support
a] Branch hub backlog
@ Training improvements
® Postmaster consultation & Engagement
This project alongside the Network Strategy
proposals will help us design a support model
tailored to branch needs [digital, remote, face to
face], prioritise improvements, remove pain points,
re-work and duplication to provide a win:win
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WIN-WIN FRANCHISE PROPOSITIONS TO DRIVE PROFITABLE GROWTH
Creating a Winning Franchise Model will require us to rethink our support
Network Strategy
PE Ii
ights
Siloed teams are duplicating work, eg. cash
win-win scenario
Putting management is picked up in 3 areas, but
Postmaster Postmasters think Supply Chain processes are
First too rigid
28% of ongoing support costs!
Perrorinance re-work or troubleshooting activity, such as
chasing conformance
driven —
There is no direct MI feed of performance to
branches
Simplified terms
- explaining the
why
Only 50% of the 343 processes we carry out
today are deemed value add by our teams, and
only 38% by our Postmasters
Working together
80% of potential new Postmasters drop out of
the recruitment process before application.
to build the We lose 400 Postmasters a year at a cost of
tare ;with little or no insight into why they
leave
There is an appetite from Postmasters for more
Enable best digital tools — this is backed up by the recent
practice - Branch Hub survey which found 83% of
becoming truly Postmasters would use it for everything and
eb le 87% thought the stock ordering function saved
them time
‘Source: RIPE Program inputs
Prioritised next steps
je
Postmaster Engagement
We need to engage further with Postmasters to understand their needs,
specifically testing what support mechanisms they would like us to focus on
to to address the current gaps between a winning franchise model and
today's reality
Validation of the data
A deeper dive of the data to validate the early findings on duplication and
waste and frustration to enable potential solutions to be developed
Best in class Franchise - working with Neo 5, Network Strategy
Learn from the various Franchise case studies to discover how we can
streamline our attraction and recruitment processes. Zero base these and
then layer on additional measures because of the unique nature of our
business
(levels of cash, regulatory requirements)
Discovery phase - working with Neo 4, OE
‘Commence design of a target operating model for our support model,
covering structure, systems, processes and Postmaster experience and
leading to a business case for significant change
Digital Tools / Data
Aligned with all of the above, create a data strategy for Branches designed to
help them see, learn, act and improve their business’ performance to move us
towards best in class franchise businesses.
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New remuneration framework to drive the right behaviour through rewards and
strategic investments
‘Components of postmaster income to drive a more value for value relationship
Remuneration for Product sales Performance based rewards Investment in Network
— al
Specific income oe I
would vary by
format type =
Fee for simple Fee for complex Volume based reward Performance bonus Fair value adjustment Investment for growth I Post Master Income
transactions transactions for complex tx.
* For simple (I to 25 * Support for
min transactions) and * For complex * Payment inlieuof I * Reward for . rt for providing access
Description transactional transactions (>2.5 meeting volume entrepreneurial locations with high such as high rental
transactions (<1 min min transactions) threshold behaviour cost to serve locations or
transactions) strategic locations
Payment =, . . . . .
Frequency 7 Monthly Monthly Quarterly Half yearly/ annually * Monthly/ Quarterly * Yearly
* Variable rate based
p onno. of trans. for. * Basedonayeary I i
Condonay * Guetenper roduc dare * Meet,” re Se fe
drive upsell (eg, std. = Mystery shopping
to premium mail)
Relevant. ai rmats + Essential + Essential * Basic & Essential = Basic Essential gormmats
Format type = Plus = Plus = Plus = Plus
Relevant I F : - = Rural * Urban city centres
Location types” Allocations All locations All locations All locations Pinar peanele I muni
Sources: Analyses based on data from best in class case studies on commercial and operational models
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WIN-WIN FRANCHISE PROPOSITIONS TO DRIVE PROFITABLE GROWTH
Same product specific rate cards across all locations and all formats to drive
consistency in remuneration
Rate card for Simple Transactions Rate Card for Complex Transactions Rate Card for Automated Format
Commercial 2 mar ., .,
Model Static Rate Model Incentivised Rate Model Direct revenue/profit sharing model
= Static rate model with a static fee per * Incentivised rate model depending on product- I = Return per transaction for PM to increase with
transaction specifically for products where PM can influence I _ an increase in transactions to a fixed upper
2 upsell e.g. standard mail to premium mail threshold
9 * Rate would vary by product type and a rate
Bed eae card would be applicable for each product * Rate may increase with an increase in number * Static rate of return per transaction once it
: Description of transactions crosses the upper threshold
% i .
8 * Higher static rate for new products where we
= want to increase market penetration = Discretionary payment for any promotional = Remuneration rate may vary by location type
N activity or partner type
8
8
“ 0-100 fix 0-150 Tx
Example Log300 HE 150-300 £EIT
Rate Card New Products 73 Lee 300-500 bhilx 300+ ££EITX
junches
500+ LELEIX
Sources: Analyses based on data from best in class case studies on commercial and operational models
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WIN-WIN FRANCHISE PROPOSITIONS TO DRIVE PROFITABLE GROWTH
For a successful implementation of the commercial and operational model, we need
to consider some key dependencies
rm
Existing = Transition to the new commercial model will lead to creating winners and losers in the existing group of postmasters
contract and = Careful consideration is required, with potentially prioritising implementation to right location wrong format stores and
relationships whitespaces
Technology = Technology required for implementation of dynamic and timely performance measurement of PM performance
Enablement = Better in branch technology driving customer convenience
Internal = Successful implementation would require changes to the internal account management approach and processes
Resource = Further joint working approach (PO and PM) will have to be encouraged for successful tracking of commercial objectives and
Requirement performance measurement
Enforcing = Measurement of quality standards related to delivery of services and customer experience will have to be monitored regularly
Store = Appropriate methods such as mystery shopping, customer surveys, etc. will be required on a more frequent basis and on a larger
Standards sample size
Managing
= Ensuring there are no major changes in overall envelope for POL and hence balancing the investments in the network with
overall ‘ .
network pruning actions
envelope
Sources: POL Analyses
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WIN-WIN FRANCHISE PROPOSITIONS TO DRIVE PROFITABLE GROWTH
Formulating a strategic plan to partner with retailers across categories
would be key to the network’s success
RETAIL PARTNERS ARE SHORTLISTED USING THE FOLLOWING METHODOLOGY
Step I:
Created a long list of
potential partners from 4
categories: Multiples &
Banks, Mutual & Symbol
groups, Independents and I
specialist retailers
Step 2:
Evaluated retail partners
through 4 key lenses
Step 3:
Shortlisted top partners
to drive a portfolio type
approach to partnership
in urban and rural
locations
IRRELEVANT
Factor
Location
@ location
© Brand fe
© operational copabiity
1
O Financia! stabitey
—es<s
“ILLUSTRATIVE I
'
t
RETAILERS ARE EVALUATED AGAINST BELOW CRITERIA
Criteria
No. of unique stores within 0.1 mile of a Whitespace
location — by location types: Urban, Urban Deprived, Rural;
based on PO's blueprint analysis (v24)
No. of unique stores within 0.1 mile of a Whitespace
location and within 0.5 mile of a non-Whitespace blueprint
location — by location types: Urban, Urban Deprived, Rural,
based on PO's blueprint analysis (¥24)
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Weighting
50%
> Brand Fit
IRRELEVANT
Financial
Stability
Measure of positive brand equity for us, based on inputs
from internal subject matter experts, recent public mentions
and customer reviews
Measure of positive brand equity for them
20%
No. of store staff per 1000 sq, ft (including all shifts)
‘Avg size of store (sq. ft)
Available staff capacity, based on complexity of transactions
and footfall per store staff
Level of automation within the store, based on store
features like Cash only, EPoS, Digital shelf edge labels, self-
service checkouts, potable scanners ete.
Level of in-store staff skill, based on review of min. skill
requirements to work in the store
20%
POL Scoring of financial stability
Financial health status post-Covid impact
10%
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Key retail partners based on blueprint overlap, brand fit and operational
capability to host a post office
‘Top 20 RETAIL PARTNERS FOR URBAN LOCATIONS Top 20 RETAIL PARTNERS FOR RURAL LOCATIONS
Retailers Composite! I ccation Operational grand ft Retailers Composite I cation Operational pang fic
score Capability score Capability
Others
Sources: Analyses based on data from company websites including annual reports, investor reports, IGD, ACS, Euromonitor, Geolytix, POL data, press releases, and primary research (subject matter expert interviews)
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WIN-WIN FRANCHISE PROPOSITIONS TO DRIVE PROFITABLE GROWTH
We have identified a portfolio of leading retail partners to deliver our target
network based on locations, brand fit, operational capability & financial stability 4
KEY PARTNERS ACROSS LOCATION TYPE AND PARTNER TYPE” PORTFOLIO APPROACH TO PARTNER STRATEGY”
Retail partners who address
specific customer needs which
are aligned with PO range
5 - Retail partners whose coverage
yrements
i
I ) IRRELEVANT
AJ
A
m
re
<
>
=
—I
i
I IRRELEVANT
We need to consider a combination of partners across Urban and Rural locations across
multiples, independents, mutual & symbol groups and others (specialists and charities)
' Retail partners who score highly
° ‘across our criteria and meet the
majority of our requirements
Notes: (#) Icons reference to the top choices by location type. The remaining choices can be found in the long list
Sources: Analyses based on data from company websites including annual reports, investor reports, IGD, ACS, Euromonitor, Geolytix, POL data, press releases, and primary research (subject matter expert interviews)
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WIN-WIN FRANCHISE PROPOSITIONS TO DRIVE PROFITABLE GROWTH
© Key considerations for our retail partner strategy
&
©
ce)
&
8
©
Balance between social
value and commerciality
Potential friction
between competing
partners
Retailers’ existing
proposition and
partnerships
Consideration for local
specificities
Managing the
commercial risk to
network
Managing locations
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Manage a portfolio of partners who can help deliver our network target from both a profitability and access
point of view
Consider potential partners’ network coverage and propositions and design clear terms and commitments for
each tier (Bronze to Diamond) to ensure our partners play complimentary roles within our portfolio
Understand retailers’ existing propositions and partnerships e.g. Click & Collect, and related system
integration requirements to evaluate retailers’ ability and willingness to take on PO formats
Assess the geo-locational characteristics and commercial circumstances driving consumer behaviours across
retail partners’ network in order to offer the relevant formats and manage potential cannibalisation
Considering the critical mass of stores with different partners such that the network is not over indexed on
any one partner's network
Efficient management of locations in a neighborhood to reduce or eliminate any potential sales cannibalisation
amongst PO locations
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I. Review of network requirements & gap analysis
2. Proposal for future network strategy
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IMPLEMENTATION CONSIDERATIONS é
Key dependencies to deliver our network strategy
I.Agreement with BEIS” - Agreeing a more flexible definition of what counts as a post office is a key enabler of the new formats range (in
on definition of a post particular for the lighter touch models), which we believe is essential to secure great retailers in the right
office locations for customers
2. Technology enablement = IT will be a key success factor in improving POL and PM profitability and operational efficiencies, particularly in
(Strategic Platform supporting postmasters with a wider range of trading solutions which can integrate more effectively into their
fs = 8! sia main retail operation. In some locations this will include automation of mails & banking transactions in particular
Migration) to reduce labour costs & improve the customer journey (further detail due in September)
= Roll-out of PUDO only propositions not including sale of RMG products in-branch will require their approval
SLRS ETT under MDA provisions (although previous experience with Parcelshop suggests they will be supportive).
MDA2 = PUDO strategy more generally predicated on the opening up of restrictions with RMG
. iT! (not including SPM) required to transition to target network over the next 3.5
4. Sufficient funding years — although this needs to be compared against the high costs of managing the churn under the default
strategy.
Landing a sustainable economic model for banking services beyond the end of BF2 (end 2022) is essential to
5. Banking Framework 3 ensure we can continue to provide widespread access to cash across our network
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IMPLEMENTATION CONSIDERATIONS
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a
&
4 key phases in the roadmap to successfully implement our network strategy
Formulate strategy
(July ‘20)
Design format, franchise and
strategic partnership options
0
We are here
Q Key deliverables
Pre
(Aug-Sep ‘20)
Validate and Build detailed plan
Detailed format
Detailed profiles considering
financial analysis _!ocation-specific
by format and economics & aligned
location type _t© RIPE personas
(bottom-up) ~ Detailed
commercial
framework
(remuneration,
rewards &
investment)
Beare nog, considering
1g new
Con al RMG deal
lose) and target \/
format(s) for each
blueprint location
0.6
Value stories by
Detailed pilot
Saks Ps plan including
Symbols& Mutuals), funding and
tier and format fetashaates
rt
(Oct-Dec ‘20)
Test, Track and Improve
Detailed implementation
plan including funding,
resource & operational
requirements including
On-going engagement
with pilot branches to newt
review the success of
new formats eg. fe)
customer experience,
profitability, service level
Summary of findings
and considerations
for country-wide
implementation
Roll-out of pilot plan
across shortlisted
branches and format
types (including enablers
eg, automation)
v
0
On-going monitoring and MI
performance reports for
postmasters on monthly basis
network numbers and access requirements in line with updates to the defi
Implement
Adjust, Roll-out and Monitor
On-going engagement with strategic
partners and independent postmasters to
roll-out new formats and franchise options
‘Communication and transition support
for impacted branches, based on
postmaster-level winner-loser analysis
Optimisation of digital strategy to improve
product awareness and customer experience
= in light of the changes made to the network
jon of a Post Offic
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Appendices
1.1 - Case Studies - on format options
1.2 - Case Studies - on franchise options:
1.3 - Partnership options
1.4 - Customer segment analysis
1.5 - Postmaster case studies
1.6 - Format Economics and other assumptions
1.7 = References and List of Abbreviations
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Case Studies - on format options
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Case Studies - on franchise options
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Learnings from case studies
petrol station
®
forecourt operator
@)
quick service F&B
self-serve coffee
soft drink company
v
Annual business plan shared with franchisee to manage
expectation and support with business planning
Annual review of commercial terms to improve profit stability
for franchisees
Payment support for branches in strategic locations
Variable remuneration: Higher level of control on operations
and offering variable remuneration to franchisee based on volume
and complexity of operations by branches
Defined fixed % commission from franchisee: While all
revenues goes to franchisee, only a certain set of fixed charges are
taken from franchisee
Branding and systems support: Fixed % of charges for marketing
and systems which the Franchisor handles for all franchisee
Fully commission-based model: With progressive rates
provides clear incentive to push volume
Wider range of partners: Potential to partner with hospitals,
universities and transport interchanges etc.
Incentive based remunerations: Sales volume based incentives
to franchisee to motivate upsell
Terms aligned to strategy so that it maximizes profitability for
both the company and franchisee
Full control over supplier selection and range of products
Staff training and technology platforms provided by brand
and paid by franchisee: ensuring consistency of customer
experience and brand perception across branches
Varied level of operational support depending on volume sold
Franchisee’s full operational responsibility: Franchisee
carries out all operations ~ ensures efficient use of resources
Regular monitoring: Appointed site managers can carry out
regular check-ups to monitor performance and quality standards
Free up franchisee from real estate responsi Manage
the real estate and charge franchisee a rental fee, but Franchisor
manages the layout and usage of real estate
Dedicated training support: Mandatory training for staff to
censure high service quality
Minimal space requirement: Kiosks require minimal space
(c15 sq ft per machine/kiosk)
Direct reporting: Direct reporting of all transactions processed
through Kiosks to franchisor
Potential high rural coverage
Promotional investment within stores to help drive footfall
Joint business plan created on an annual basis and reviewed
ona quarterly basis
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Full service
Full service
Express
Automated
Express
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Case study — petrol station by oil major
Overview
Salaries are paid by franchisee
+ 527 sites in the UK - 79 are fianchisee who own ~5-6 sites each, providing both fuel and non-fuel Staffing
‘i Staffing policies are also prepared by franchisee
Growth rate in franchisee — On average, there are 6-10 new franchisees per
+ Exit rate — On average, there are 4-5 franchisee exits per year, usually driven by Inoblty to fli SLA 2 UO eee eS een ym ar)
= Existing franchisee often shadow as trainers to new franchisee
Commercial arrangement = EPOS and Daily Settlement Advice System provided by the franchisor
Franchisees are provided with an iPad for communication and general
business needs
+ Fuel: The franchisee revenue is primarily driven from a commissions
‘amounting to ~0.5-Ip per litre of fuel sold
= The franchisor reimburses a specified % of the franchisee’s operating
Revenue Model b posal ielaseardiae iid Saal costs and rates
+ Additional adjustment: An amount the franchisor contributes to the site quality * The franchisor employs teritory and district managers to oversee the
to make it desirable to have in a cluster from a profitably standpoint standards licensee's performance. Full reporting on the data for daily sales
Financial overview Franchisee (2019, £le) EE There ore sites all across the UK inducing rural locations
‘Avg. gross income / cluster 950- 1000" The franchisor greatly contributes to local communities, particularly young
hed arelicina cave yy CREED EM adult, from providing grants to local charities to reduce crime, to facilitating
programmes in STEM for future career opportunities
Notes The franchisor provides a setement figure to ensue the franchise's propesons ae proftabe nd ctocthe; Froncior ithe ‘Of Majorond franchise ste ‘Reale, who run the she? (o) Chster level represents a group of
sites in a certain location run by same retailer (on an average 7 sites per cluster) 3
Sources: Company website, annual report, press releases and primary research (subject matter expert interview)
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Case study — quick-service restaurant
The company employs ~!20,00 people in the UK; with ~70+ staff per store. Usually,
franchisor doesn’t play any direct role in staffing for its franchisee stores
Franchisor provides mandatory 26 weeks training to all its new franchisees which
includes dassroom learning as well as practical restaurant experience
Technolo: ‘ pepe Sie 98 to its franchise partners, and in-return
ey changes 0 fixed monthly service fee of 5% of net sales
* Global, franchisor’s average store size is 4,000 sq, feet A franchise partner hes no
Overview
+ QSR operates ~1,300 restaurants in the UK market, of which 1,100 are franchised units. The QSR manages
over 160 Franchise partners, and employs over 120,00 people
+ Ithas almost tripled the amount of franchised restaurants in last 15 years. In 2019, the QSR observed SOth
straight quarterly growth in revenues
Staffing
Commercial arrangement
Franchise partner (franchisee) keeps the revenue from store's sales, but pays following ;
fee to the franchisor (QSR), thereby earning ~70% to 78% of net sales: say in the use of realestate and franchisor would decide the space use plan
Revenue + Rent fee: 12.25% to 21% for use of full-functioning space, equipped and ready to pe ae oe ee ep ee ee
Model un as QSR's store eee the restaurant space
+ Monthly service fee: Fixed 5% of the net sales for use of franchisors system
+ Contribution to the marketing fund: Fixed 4.3% of net soles * Franchisor usually follow 0 20- year agreement wit each Franchise partner
‘One time The franchise partner is required to investment at least £100k to buy franchisee rights SIE EASEIRE Prondee ean ond SONY stardom Bua os tine pane
investment and equipment
eee eT eee
* Franchisor runs a ‘Farm Forward’ plan where it partnered ~1 5k farmers in the UK
Financial overview Franchisor (2019) Franchisee (2019)
Avg. revenue / store £380K ~ £1,080K £15 million ~ £4.3 milion’? Commu + Franchisor partnered with ‘The Prince's Countryside Fund’ in the UK to support
ivy, Groiincsew! £150K ~ £450K £50K ~ £55OK (Cash flow)'9 served farming and rural communities in the times of Covid-19 pandemic
store
Note: (a) Avg. revenue / store colaulated by taking ov. franchisor remuneration per store 25% of soles) and multiplying it by avg. revenuel store for franchise partner (b) Avg profil store is collated by taking QSR's EBIT margin FY20 (41.4%) from S&P Capital IQ and muting it
by Arg. revenve / store; (c) From May 2018 to June 2019, 80% of al QSR's UK franchised restaurants had sales between £1,500k and £4, 300k; (4) Represents typical annual cash fow after fst year of franchisee operations, and includes maney left in the business before a personal draw, 4
‘and payment of any loans or taxes that may be outstanding I Sources: Company website, annual report, press releases and primary research (subject matter expert interdew), What-franchise.com; 29 june 2020
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Case study — forecourt operator
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Overview: A leading forecourt operator chain in the UK, operating ail of is sites through franchisee (each .
typically running 2 to 5 sites). Franchisee is responsible for day-to-day operations and is paid a remuneration
# sites: 490
Growth in franchised sites: ~15% year-on-year
Commercial arrangement
Franchisee gets a largely fixed remuneration annually which is dependent on:
‘a. Volume of transactions on the site
Revenue model _b. Complexity of the operations (nature of other services available at the site
‘and skills required to operate and manage those services)
< Ability to meet all service quality checks set by the franchisor
Franchisee is reimbursed for the operating costs at the site which include:
‘a. General operating costs and site maintenance costs (cleaning / upkeep etc)
b. IT hardware, software etc.
< Staff salaries
Costs model
While franchisee would be responsible for managing the staff at the site,
stoff costs is borne by the franchisor
Training usually provided at the time of onboarding or at times of upskiling
w.rt a new technology. Also Health & Safety trainings provided to all
franchisee
All technology including the EPOS system provided by the franchisor
Franchisee has no say in the use of real estate and forecourt operator (or in
some cases the Grocery Fascia) would decide the space use plan
Franchisee undertakes the operations and maintenance of the site and gets
reimbursed by the Franchisor
Franchisor appoints site managers who are responsible for ~5 to 10 sites
and undertake regular check-ups of the sites. Franchisee may get their
remunerations reduced if they fail to meet the check-up requirements
E> IEEE
Financial overview Franchisor (2017, £k) Franchisee (2017, £k) Rural I Rural footprint I
Avg. revenue / store £360 ~ 380K® NA
= Customer -
Avg. Income / store £140 - 160K* £30k - £70k) segments served
Notes: Franchisor is ‘Forecourt operator’ and franchisee is ‘Retailer, who runs the site’ (a) Average revenue per store is based on Gross Profit from the site including margin on sale of fuel and non-fuel items, while profitability is reflective
of Contribution per branch; (b) and busier sites franchisee with better branded fascia such as Sainsbury's etc. id hi dea teiniatccoll Ladies pBeleetal ath but for other branches the franchisee remuneration
pject matter expert interview); Forecourt Trader
would be somewhere between £30 to £40k I Sources: Company website, annual report, press releases and primary resear
Sites spread through the UK including rural areas (~1.5% in rural areas)
While through the fuel retailing, the franchisor serves all kinds of customers
cand communities, its grocery retail caters to customers with missions such as
‘Top-up shop’, ‘Food for now’, and ‘Food for tonight’
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Case study — soft drink company
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Overview: A leading botting company in the UK, that work together with its customers (ike their partners),
to designs and execute joint plan to create value for both the parties. Additionally, offers performance based
incentive structure
Convenience Retail
Revenue Business plans are drafted on a yearly basis and performance reviewed on a quarterly basis to
model dive a value fr value conversation:
Volume based investment — greater % discount for ordering more volume based on RPC
‘measured on a monthly basis
+ Efficient ordering — higher % of discount for ordering full vs. half truck measured on an order
basis
* Soles collaboration ~ Reimbursement for sharing data and insights on buying patterns paid
on receipt of data
. Peal reac Payment for instore promotions, product placement, reviewed on a
Technology
Operating costs
maintenance
Staffing requirements are undertaken by the partners, sometimes the
distributor deploy temporary staff to support promotion and product
faunch
Distributor provides product related training to the ground staff
EPOS are held by the partners, sometimes bottling companies pays the
convenience retailer for the purchase and use of data
Distributor has no say in the use of real estate, however it can influence
the placement of its products with additional incentives in the current
remuneration structure
Portner undertakes the operations and maintenance of the site
LS \
Financial overview Customer / Partner I foo!
Beverage Company rint
Avg. revenue / store £85 — 100k £130 — 150k
Avg. Gross Income / £25 ~ 35k £20 ~ 30k Communities served [im
store
Sources: Company website, annual report, press releases and primary research (subject matter expert interview)
Depends on the location of the customers! partners
Services communities across ail regions and customer segments through
presence of partners across region in the UK
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Partners - complimentary value proposition
= Retailers with lower footfall/ m? could benefit
from a PO partnership and the cross-sell halo
effect
i I = This would be particularly relevant for
retailers experiencing a recent decline in
footfall, and/ or retailers with shopper
i I R R f I f VA N I ' missions that align to those of PO customers
= Depending on the location and alignment of
H i range and brand equity, a PO partnership
po could help improve retailers’ competitiveness,
boost customer loyalty and strengthen their
presence in strategic locations
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POL-BSFF-WITN-015-0009992_0132
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Partners - complimentary brand value
(2) Packer algnvscnd nil RO beard valu 0) ovserations
' = Brand alignment with POL is strongest with
i companies that are closely linked with
ns ¢
communities such as}.
I — Alignment with these companies will
i generate positive net combined brand
equity, thus benefiting both POL and the
partner
= Brand equity of banks and financial services
H i companies would benefit significantly from
1 ' partnering with PO
— This will enhance the importance and
I I hence their motivation to partner with
i PO
= Discounters and budget stores such as
7 score the lowest from a
brand alignment view point showing their
significantly different brand value and purpose
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POL-BSFF-WITN-015-0009992_0133
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POL00448765
OrLJOSLL
ABalENS HOMION € FEL
Customer Segment Analysis
3
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POL-BSFF-WITN-015-0009992_0134
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Aspiring & Digital customers have low awareness and consideration for
insurance, financial and telecom product across Mains formats
MaINs on Locats
5]
a dedicated counter
Large Retailer
Higher awareness of all products from A&D customers
formats with telecoms awareness across all formats extremely low. using a Local format.
o
g oe
oO 38% 41% i I
g on er °° eel 087
@Consideration of Service Total Awareness of POL Service @ Consideration of Service Total Awareness of POL Service BConsideration of Service S Total Awareness of POL Service
Locals are used more often for collecting missed deliveries and
Substantial use of the Mains format (especially retailers) for sending letters/parcels. Returns are most often conducted in a
online purchases.
Send letters/parcels 80% Send letters/parcels 91% Send letters/parcels 74%
Returns 31% (Click and collect 14% {Collect missed delivery 26%
* Monthly visits to suburban areas are favoured and
+ Weekly visits acros: formats are less frequent than * Monthly visits are most common in retailer environment.
increasing in dominance.
other formats. These visits are highest in suburban areas * These visits are increasingly in large town and city centres,
and town centres, and declining in rural areas. and declining in rural locations.
+ 50% believe POL plays an important role in community * 57% believe POL plays an important role in community + 65% believe POL plays an important role in community
* 52% of customers want to see POL as a brand to succeed = 63% of customers want to see POL as a brand to succeed
45% of customers want to see POL as a brand to succeed.
Perception
Notes: Base numbers for charts -!RRELEVANT!(insurance- 222, Financial- 274, Telecom- 44); Retailer (Insurance- 245, Financial- 324, Telecom- 39); Locals (Insurance- 284, Financial. 385, Telecom- 86); ¥®°"**"s and large retailers. 4»
classified as Mains; stores without iers and convenience stores classified as Locals I Source: Customer Segment Research - Pen Portraits ~ February 2020
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POL-BSFF-WITN-015-0009992_0135
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~ I keg A639)
POL00448765
POL00448765
z
Ba
Pressured & Price Conscious customers use Mails to send letters and parcels
frequently and have a good awareness of insurance, financial and telecom products
k¢
Visit
POL
Perception
MaINs
Large Retailer a dedicated counter
Product awareness is good across Mains formats for P&P customers. Financial and insurance products are more prevalent
for customers using formats while telecoms awareness is high at large retailers.
Conversion Ratio
63% see
oe j
m
Insurance Financial Telecom Insurance Financial Telecom
@Consideration of Service ZToral Awareness of POL Service B Consideration of Service =Total Awareness of POL Service
Extremely high activity of sending letters/parcels for P&P customers, especially in the Retailer format. Returning
purchases from online is most prevalent in a Retailer format while collecting missed deliveries is common in
LocaLs
on
Good awareness of products in a Local format, especially
insurance products.
~ 26% 84%
it 1 i ’
@ Consideration of Service 2 Total Awareness of POL Service
Sending letters and parcels in addition to returning online
purchases are two key Mail activities in the Locals format.
Send letters/parcels 90% end letters/parcels 96% {Send letters/parcels 93%
{Collected missed delivery 33% Returns 46% [Returns 37%
* Visits are generally on a monthly basis to suburban areas, with * Visits tend to be monthly, in suburban areas followed by = Visits tend to be weekly or monthly, in villages and suburban
a growing number of customers visiting city centre city centres. areas, with city centres declining.
outlets (46%) and a declining number visiting rural areas.
* 65% believe POL plays an important role in community * 71% believe POL plays an important role in community = 64% believe POL plays an important role in community
= 59% of customers want to see POL as a brand to succeed * 65% of customers want to see POL as a brand to succeed
Note: Base numbers for charts ~{ nreuevant {insurance- 107, Financial- 150, Telecom- 22); Retailer (Insurance- 81, Financiat 95, Telecom- 14); Locals (Insurance- 295, Financial- 358, Telecom- 70)
classified as Mains; stores without it
ters and convenience stores classified as Locals I Source: Customer Segment Research - Pen Portraits ~ February 2020
= 67% of customers want to see POL as a brand to succeed
and large retailers.
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POL-BSFF-WITN-015-0009992_0136
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POL00448765
z
High awareness and consideration of telecom, insurance and financial products
among Moving Forward Comfortably customers shopping at a locals rather than
mains
Mains
5]
[IRRELEVANT i Large Retailer a dedicated counter
Product awareness is moderate across Mains formats for MFC customers. Weak telecoms awareness exists across
both Mains formats with insurance and financial products more prevalent at I !RRELEVANT ompared to large retailers.
~ I keg A639)
Telecom
Financial Telecom Insurance Financial
Total Awareness of POL Service
Insurance
Consideration of Service @Consideration of Service ZTotal Awareness of POL Service
Using POL to send letters and parcels is less frequent in this segment. Click and collect is a key activity for consumers in
formats, while collecting missed deliveries in prevalent in Retailer Mains formats.
LocaLs
on
Strong awareness of most products from MFC customers
using a Local format compared with Mains format.
20%
r 1 1 57%
Telecom
Insurance rancial
BConsideration of Service @Total Awareness of POL Service
Locals are most important to connect customers to online,
particularly recurns, with sending letters lowest of all segments
=
$ Send letters/parcels 78% Send letters/parcels 75% Send letters/parcels 66%
@ [Click and Collect 43% [Collect missed delivery 33% [Collect missed delivery 45%
WN * Visits tend to be monthly and increasingly in city centres, * Visits are predominantly monthly (32%) * Locals visited most often; with 23% visiting on a weekly basis.
i with consistent use of suburban and small town shops for 47% * Customers favour city centres and suburban stores. = Visits are increasingly to small villages and suburban areas
be in convenience stores.
of customers.
* 61% believe POL plays an important role in community
* 71% believe POL plays an important role in community
= 61% of customers want to see POL as a brand to succeed
71% of customers want to see POL as a brand to succeed
POL
Perception
Note: Base numbers for charts -f
‘as Mains; stores without PO couniei
Convenience stores classified as Locals I Source: Customer Segment Research - Pen Portraits ~ February 2020
.svantt (Insurance- 71, Financial- 91, Telecom- 20); Retailer (Insurance- 39, Financial- 40, Telecom II); Locals (Insurance- 209, Financial- 237, Telecom. 43); I e.evaNt
= 66% believe POL plays an important role in community
= 67% of customers want to see POL as a brand to succeed
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z
Confident & Discerning customers show strong awareness of products and
services across both mains and local formats
MaINs on Locats
5]
IRRELEVANT I Large Retailer a dedicated counter
Product awareness is strong for C&D customers using Mains. Financial awareness Pe eatel is substantial in the High awareness of all products from customers using a Local
7} formats. format. Low consideration for Telecom products
. EE \ SS. - i
o Insurance Financial Telecom Insurance Financial Telecom Insurance Financial Telecom
Sending letters and parcels is most prevalent ii although still a key activity in Retailer format. Returns in Sending letters, parcels and returns are the most popular mail
23 tores and click and collect in Retailer's are key Mains activities. activities for C&D consumers in Local formats.
=
eae Send letters/parcels 92% Send letters/parcels 84% {Send letters/parcels 87%
< “1 "
ra Returns / collect missed delivery 43% (Click and collect 40% [Returns 33%
WN «This segments are increasingly visiting large town and city * Customers tend to visit monthly (38%). * Customers dominantly and increasingly use Locals in
3 centre locations (47%), similar to suburban areas (48%). * Visits are most common in suburban areas (76%) with rural suburban areas.
Sa «Visits are predominantly monthly or 3-4 times per year. visits reducing in prevalence. = These visits tend to be weekly or monthly,
§
MEW - 72% believe POL plays an important role in community * 77% believe POL plays an important role in community + 76% believe POL plays an important role in community
EE = 71% of customers want to see POL as a brand to succeed = 74% of customers want to see POL as a brand to succeed = 69% of customers want to see POL as a brand to succeed
é
7 =
cuzve (Insurance: 75, Financial- 73, Telecom- 18); Retller(Insurance- 55, Financial. 81, Telecoms I 1): Locals (Insurance- 322, Financia. 359, Telecom- 80); mre.evarrI and larg retailers classified,
Convenience stores classified as Locals I Source: Customer Segment Research - Pen Portraits ~ February 2020
Note: Base numbers for charts —
‘as Mains; stores without PO count
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POL-BSFF-WITN-015-0009992_0138
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z
Content & Conventional customers use suburban stores on a monthly basis. They
have greatest awareness and consideration of products and services in Local stores
MaINs
5]
{ IRRELEVANT Large Retailer a dedicated counter
Consideration to purchase PO products is average across Mains formats. One difference is the consideration for telecoms,
which is substantially higher in a Retailer format than all other formats.
Conversion Ratio
é 5% 6% «x
. Insurance Financial Telecom Insurance: Financial Telecom
@Consideration of Service =Total Awareness of POL Service BConsideration of Service Total Awareness of POL Service
s. This is most prevalent in Retailer
This segment sends letters and parcels much more frequently than all other Mails serv
formats while collecting online goods or missed deliveries is more prevalent in
LocaLs
on
Higher awareness of Insurance and Financial products from
customers using a Local format
Telecom
Financial
Total Awareness of POL Service
Insurance
‘Consideration of Service
These consumers find Locals convenient for collecting their
missed deliveries in addition to sending letters/parcels.
2%
st Send letters/parcels 88% Send letters/parcels 95% Send letters/parcels 82%
ES [Click and collect / collect missed delivery] 21% Returns 24% [Collect as missed delivery 24%
* 58% of customers visit suburban areas and 28% city centres
* Visits are predominantly monthly (26%), however 18% visit
weekly and 20% 3-4 times per year.
This segment increasingly visit city centres (40%), with
suburban areas being most popular (51%).
These visits are predominantly monthly or 3-4 timeslyear.
Visit
* 61% believe POL plays an important role in community
57% of customers want to see POL as a brand to succeed
64% believe POL plays an important role in community
* 63% of customers want to see POL as a brand to succeed .
POL
Perception
Note: Base numbers for charts
classified as Mains; stores without PO counters and convenience stores classified as Locals I Source: Customer Segment Research - Pen Portraits ~ February 2020
+ These customers tend to visit monthly, however weekly
visits are becoming more frequent.
+ Suburban areas are predominant, seconded by villages.
= 66% believe POL plays an important role in community
= 60% of customers want to see POL as a brand to succeed
and large retailers 5
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ABalENS HOMION € FEL
Postmaster case studies
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Our existing models are profitable for POL and attractive to many
convenience retailers in the:
£5k re
Name
Location
Estimated Customer Sessions
PM Remuneration
Cross Sell Income
ATT Cost i
Back Office i
Staff Hours Costs (Manning) Hi
Labour Cost Absorption H
Training Cost
PM Op. Margin incl. Cross Sell
PM Op. Margin excl. Cross Sell I
Observations
* Profitable Postmaster examples can be noted above for formerly Locals and formerly Mains in retailers with weekly sales of, IRRELEVANT
tailer example (Local, CS: 600 to 700)
: IRRELEVANT I
£20k retailer
Name
Location
Estimated Customer Sessions
PM Remuneration
Cross Sell Income
ATT Cost
Back Office
Staff Hours Costs (Manning)
Labour Cost Absorption
Training Cost
PM Op. Margin incl. Cross Sell I
4
PM Op. Margin excl. Cross Sell
example (Local, CS: 600 to
700)
IRRELEVANT
“IRRELEVANT I range of weekly retail sales
Name H
Location H
Estimated Customer Sessions {
PM Remuneration
Cross Sell Income
ATT Cost
Back Office
Staff Hours Costs (Manning)
IRRELEVANT
Labour Cost Absorption
Training Cost
PM Op. Margin incl. Cross Sell I
PM Op. Margin excl. Cross Sell I
* Even excluding cross sell income, Postmaster operations alone can generate positive operating margins
* Cross sell income will be far more significant to these retailers with lower levels of base retail footfall
. Profitability improvement initiatives should be progressed for ae who are generating losses or struggling to breakeven — the above examples
k for th
POL-BSFF-WITN-015-0009992_0141
POL00448765
POL00448765
Desktop modelling on actual branches indicate our new propositions will provide significantly more
profitable format options for higher sales density retailers such as the /icevantiwhere the cross sell is not
recognised and there is little opportunity to exploit unproductive retail staff time
I IRRELEVANT }
typical with Income declining, costs
ir 39 post offices are now losing them money
e As-is I Future State Future state Future state
fate oO OnI i
(legacy) I (Essential) I (Basic (excl. banking)) (Basic) 3500 Income -0-Costs -o-Profit .. 45 200
hae 3000 °
—- ___I
Estimated Customer Se: i : =
‘Estimated Customer Sessions 2500 2000 “20°
PM Remuneration 2000 ~400
Cross Sell Income H I ne gia
= ATT Cost H i
w Back Office i I #288 —
& Training Cost t } 500 -1000
FE PM Operating Margin} 1 0 =1100 1200
PM excl. Cross Sell DS PO Wy dD HG ON DO EC
[pet exol.: Cross Sel __! S $ SO Oh? Oh oF Sew oP OE
POL Operating Margin e Ss PEP PAP PP" oP Pe ea
: : 4s
Observations:
+ In the above example, the branch is currently breakeven for the Postmaster excl. cross sell income
+ — In the future state, Essentials, Basic excl. banking, and Basic are all profitable for both the Postmaster and POL
Note: *Cross sell calculation is based on customer sessions and estimated retail revenue. The cross sell is calculated at a gross margin of 25%, with basket size of £5.00, £6.50 and £8.00 for a £5k, £20k and £50k retailer respective,
The underpinning assumption is that 50% of revenue is driven by POL, and of that, 20%/30% will goon to buy products (for mains/locals respectively)
POL-BSFF-WITI
I-015-0009992_0142
POL00448765
POL00448765
The new propositions also provide the opportunity to partner with new and different
businesses in locations where we have not previously been represented
The below examples illustrate that Postmasters of various types can generate positive operating margins in multiple formats, even when excluding cross sell income.
Chemist — Essentials Travel location — Essentials*
Perens lank ILA aR De LA ASL.
IRRELEVANT
POL-BSFF-WITN-015-0009992_0143
POL00448765
POL00448765
Further opportunities exist in partnering with other different types of
retailers who are already equipped with the necessary staff and equipment
Potential opportunities J} Potential retail partners Income and cost assumptions* Comments
IRRELEVANT
Identity offer
Automated banking I
offer i
IRRELEVANT
POL-BSFF-WITN-015-0009992_0144
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POL00448765
ABaIENIS HOMION € GEL
Format Economics and other assumptions
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Appendix — PM assumptions in the Economic Model (in the current state)
IRRELEVANT
PM assumptions summary
PM remuneration
Cross sell income
Labour costs
IRRELEVANT.
Estimaced retail sales + Estimated retail sales of PMs based on based on retail type, fascia and surrounding population
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POL-BSFF-WITN-015-0009992_0146
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POL00448765
POL assumptions in the Economic Model (in the current state)
POL assumptions summary
Branch fixed costs
Branch variable costs
Customer sessions fixed and H
variable costs {
‘Supply chain costs
IT fixed and variable costs
IT variable costs
Customer sessions i }
Note: Branch, Customer Sessions, IT and Supply Chain fixed and variable allocations based on Hydra model 1
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POL-BSFF-WITN-015-0009992_0147
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3
oz/Lo/gz-0z0z Ainr gz - I Aeq AB=y
Appendix
Product level 3 range cubes modelled in each format
Product
‘Zone Express [Basic Essential Plus
Bill Payment (current product set) _Bill Payments [Banking Other Banking Other Banking Other
Home Shopping Returns IHome Shopping Returns _[Bill Payments Bill Payments, Bill Payments
(Gift Cards Labels ICard account Card account Car Insurance
‘Stamp Books Lottery [Deposits Deposits Card account
[Mails Other IHome Shopping Returns Gift Cards Credit Cards
iParcelforce Labels Home Shopping Returns Deposits
Postal Orders Lottery International Priority & Standard I Gift Cards
IGift Cards [Mails Other Labels Home Insurance
[Stamp Books IParcelforce Lottery Home Office
[Postal Orders Mails Other Home Shopping Returns
Withdrawals Moneygram Identity Services
IGitt Cards Parcelforce International Priority & Standard
[Stamps Postal Orders Labels
[Stamp Books Stamps Life - Over 50s
Travel Money - Variable Life - SLI
Withdrawals Lottery
Stamp Books Mails Other
Moneygram
‘Other Insurance
PO Money (Morgages, Savings Loans)
Parcelforce
Postal Orders
‘Stamps
Telco
‘Travel Money - Variable
‘Withdrawals
‘Stamp Books
Note: Stamp income and cost lines (at product level 3) has been split 50% between Stamps and 50% between Stamp Books
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ABa12.g YOMION € GEL
106
POL-BSFF-WITN-015-0009992_0148
I eg ABajens
N
8
e
POL00448765
POL00448765
Over recent years POL have developed a growing body of research to evidence and quantify
the cross sell opportunity with the core retail business which has been further enhanced by
KPMG
KPMG
benchmarking
(Retailer) - 2020
Kantar research
2019
Him! research 2018
Retailer Co-Op
Research 2017
Post Office Agent
Survey and NT
Analysis 2016/17
Rymans and
Henderson’s
2016/17
= Anaverage increase of 5% in sales with a maximum increase of 12% when
comparing stores with POL branches vs those without POL branches (in the
same size (sq ft) and affluence category for a large retail organisation)
= 72% is the main reason for visiting a branch with a Post Office
30% of the trips include an additional purchase
= 39% of Post Office customers primarily visited the store to fulfil a Post Office
mission (this was down from 52% in 2016 but was driven by a change in the
sample methodology)
= 52% of these customers made a retail purchase at an average basket of £8.01
= 37 % of Post Office customers primarily visited the store to fulfil a Post Office
mission
= 37% of these customers also bought retail products on their visit
= Average retail sales uplift from a Post Office is +12% (Local Model)
= Average retail sales uplift from introducing Post Offices to stores is +3% to
+15% which equates to a circ I in 4 conversion rate of Post Office customers
based on retail sales
The Cross sell calculation is based on customer sessions,
estimated retail revenue, average basket size and gross
margin
It is assumed that 50% of Post Office customers have
visited the store primarily to fulfil a Post Office mission
Of the 50% of additional customers 30% will buy additional
products (20% in Mains / Plus). This changes depending on
the estimated number of customer sessions.
The average basket size is dependant on the approximate
size of the retailer:
- A£S5ka week retail sales PM will have an average
basket size of £5.00
- A £20k a week retail sales PM will have an average
basket size of £6.50
- A £50k a week retail sales PM will have an average
basket size of £8.00
The Cross sell benefit is calculated using a average retail
gross margin of 25%
Using the above assumptions, the increase in cross sell
revenue for an average essential (with 912 customer
sessions and revenue range of £5k to £50k) is 2% to 13%
which is in line with the KPMG benchmark, Post office
agent survey analysis and Rymans and Henderson's
benchmark
107
POL-BSFF-WITI
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POL00448765
POL00448765
Current format economics breakdown by branch type
POL and postmaster income by format type, FY19/20
Main (£m) Local (£m) Legacy (£m)
POL Postmaster POL Postmaster POL Postmaster
Revenue (less COGS)
Cross-sell I i
Postmaster Remuneration 1
POL Costs ; i
Supply chain i
fa '
Network
Postmaster Costs
Counter time Hl
Other time
Other costs H
Total (Variable Only)
Source: POL Analysis 108
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POL-BSFF-WITN-015-0009992_0150
Summary of products by location type
POL00448765
POL00448765
Centre Urban Urban Deprived Rural
Branches
Customers visits
Share of
Total income
Product
Banking withdrawals and POCA
Banking deposit and Change
ATMs
Bill payment and lottery
Moneygram, Gift cards and Postal orders
remium mails
IRRELEVANT
International
Home shopping returns
Other mails
Travel (Bureau & Insurance)
Insurance
PO Money
Identity
Telco
[il Seow sversee across a Above average across all
location types location types
Source: POL Analysis
Average or close to average
across all location types
POL-BSFF-WITI
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=
POL cost allocations in the Economic Model (in the current state)
Network Model Cost Allocation Explanation
Variable costs Cost per driver Driver (ém) Source
Technology 844 Number of Horizon units Hi 2020 IT costs breakdown
x ‘Supply Chain Per table Previous years actuals Based on product breakdown of heavy cash products
ad Branch 1039 All branches 2016 KPMG model allocating variable costs per branch that don't scale (eg payslips)
2 Customer sessions. 1.62 Weekly customer sessions 2016 KPMG model allocating variable costs per customer session that do scale(eg till slips)
Seta eed es IRRELEVANT
o Technology 1493 Number of Horizon units 2020 IT costs breakdown
S ‘Supply Chain 50% Variable Balance of non-variable costs ‘Add up to toal Supply chain costs (ie those that are not variable are fixed)
2 Branch 2679 All branches 2016 KPMG model allocating fixed costs per branch (eg branch support)
= Customer Sessions 1.53 Weekly customer sessions 2016 KPMG model allocating fixed costs per customer session (eg helpline)
= '% of product income that drives Supply Chain cost
iy For Income Factor Income] For Scaled Income
8 Deposits —_ : ° i
& Card Account I
mm, IRRELEVANT I
8 ATM
‘Change I
Bureau j
Note: Branch, Customer Sessions, IT and Supply Chain fixed and variable allocations based on Hydra model
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POL-BSFF-WITN-015-0009992_0152
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POL00448765
Profitability for Right Location Wrong Format branches (Main and large Legacy
branches)
Right Locati
rong Form:
Average per store (£)
PM Remuneration
Cross Sell Income
ATT and Back office costs
Labour Cost Reduction
PISO ae ee ee
PM Operating Profit inc Cross Sell
PM Remuneration Cost
Branch Variable Cost
Customer Sessions Variable Cost
IT Variable cost
Supply chain variable cost allocation
‘Customer Sessions Fixed Cost
IT Fixed cost
Branch Fixed Cost
Svpaly chainExed cost allocation. .. 1}
U pot operating Prose, _
Total Setup Costs
(Annual Setup Costs (over 5 years, oo.
POL Operating Profit (inc set up costs)
Full service
Mains and Large Legacy
1. 89% of Mains and Large Legacy branches have 3
or more format options that are profitable
(above breakeven) for both POL and PMs
2. Current POL operating profit margin is c£14k for
Smaller Mains and Large Legacy branches. POL is
making money here but not as much as it could
‘on a lower renumeration Local
3. Therefore Full Service Essential followed by
Full Service Basic remains the preferred option
for both POL and PMs
4. Itis unlikely that a current Main or large Legacy
store will move to a Retailer Integrated option
given size of demand
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POL-BSFF-WITN-015-0009992_0153
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Profitability for Right Location Wrong Format (Community and small Legacy branches)
Right Location Wrong Format - Other (As-is) - P&L ;
bee u oer 1 Community and Legacy
1. 57% of Locals and Small Legacy branches have 3 or
more format options that are profitable (above
breakeven) for both POL and PMs
2. On average our Legacy branches lose ci
branch. The community branches lose !
3. Full Service Essential, Basic and Basic (excl. banking)
1 would be more profitable for POL
IRRELEVANT
‘
Note: costs (including for Express) include the core POL fixed IT
Source: Economic modelling of new formats, 2020
See slide 106 for cost allocations.
POL-BSFF-WITI
-015-0009992_0154
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Profitability for Whitespaces at maturity
1. 83% of whitespaces have 3 or more format
options that are profitable (above breakeven) for
both POL and PMs. This reduces to 77% if you
exclude cross sell income for PMs
2. Whilst the additional formats provide additional
‘options to access more whitespace locations
there is a preferred hierarchy to ensure volume
and income is maintained
I 3. The best format for both POL and PM would be
Full Service Basic and Full Service Essential as this
provides the highest profit margin and has the
highest percentage for breakeven branches for
both POL and PMs
4. Set up costs are not included in the profitability
of POL but should be considered for each
location
Note: costs (including for Express) include the core POL fixed IT} IRRELEVANT
Source: Economic modelling of new formats, 2020.0 nmin
See slide 106 for cost allocations.
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Profitability modelled for IRRELEVANT; 600 customer session retailer for new formats
and the profitability in Futur:
IRRELEVANT I
Observations
I. In the current state (as-is) the format that makes the PM and POL the most profit as an Essential (Basic works for both the PM and POL too). When you factor in the set up costs an
Basic becomes more profitable for POL.
2. In the future state Basic is most profitable format for POL with Essential and Basic (excl. banking) both profitable formats for both POL and the PM.
Source: Economic modeling of new formats, 2020
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Profitability modelled for ai IRRELEVAN 00 customer session retailer for new formats
and the profitability in Future states
c. 600 Customer Sessions with £20k Retailer Revenu
__IRRELEVAN
ig costs increase and the amount of labour they can absorb decreases.
Basic is still the format that remains most profitable for POL in the As-is and the Future State scenarios.
1
2. “Whilst the cross sale i
3
Source: Economic modelling of new formats, 2020
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Profitability modelled for a £50k a week, 600 customer session retailer for new formats
and the profitability in Future states
IRRELEVANT I
2. Whilst the cross sale income increases the costs the training costs increase and they cannot absorb any labour costs.
3. Basic is still the format that remains most profitable for POL in the As-is and the Future State scenarios.
Source: Economic modelling of new formats, 2020
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References and List of abbreviations
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References
Customer Research
Market and Company Research
POL internal data and document:
including:
‘Category Segmentation &
Shoppers Path to purchase
insights’ Kantar research —
July 2019
. ‘Voter Research GE
Presentation’ PSG Update —
May 2020
I. Customer Segment
Research - Pen Portraits —
February 2020
. Customer Segment
Research — Module Packs —
February 2020
. ‘PO Network Vision CIE”
Chime data — February 2017
. ‘Shape of the Network and
Topline Customer habits’ -
2020
Euromonitor: data on UK retail sector, company and industry data
. ONS: macroeconomic data, data on UK retail sector
IGD: data and research on retail sector and individual retailers
British Retail Consortium (BRC): data and research on retail sector
. YouGov: survey data on consumer trends and behaviours
British Independent Retailers Association (BIRA): data and trends on
independent retail sector
Association of Convenience Stores (ACS) reports, including ‘Rural Shop
Report 2019’ and ‘The Local Shop Report 2019"
KPMG/Ipsos Retail Think Tank: Retail Health Index and research on UK
retail sector
. Company websites, annual reports and investor reports for retailers e.g.
7-ELEVEN BHF LaPoste Sainsbury's
AnPost Boots Lid! Shelt
Aldi BP Lie Waitrose Sing Post
ASDA ‘Canada Post Uoyds Bank Spar
Australia Post Cancer Research UK Lloyds Pharmacy Sun Art Group
Bam The Co-op Group MFG/ MRH Superdrug
BaQ Costcurter Mitchells and Butlers Swiss Post
Barclays DHL Morrisons Tesco
Barnardos HSBC Nationwide Well Pharmacy
10. Various press releases including:
Ecommerce News Qsr The Global and Mail Wired Gov
Forecourt Trader Retail Insider What-Franchise.com
Paris Aeroport Silicon Retail Gazerte
10,
12.
13
14,
. ‘Voter Research GE Presentation’ PSG Update — May 2020
.. ‘Project NEO: Network workstream SteerCo update’ -
. ‘Network Big Bet’ - January 2020
I. ‘Project Neo Formats & Propositions Update’ - June 2020
. ‘Partnerships in UK convenience retailing’ IGD.
. Project RiPE Blue Sky Workshop document — July 2020
. ‘The role of Post Office Concessions at Co-op’ report —
I. ‘Retail Strategy Customer Insight’ — April 2018
uh
. MDA2 Remuneration overview ~ June 2020
. Agent economics overview documents — June 2020
15.
May 2020
‘Strategic Partners Strategy’ ~ January 2020
presentation — May 2017
June 2017
‘The value of the PO shopper’ HIM report — January 2019
TPG POL Category Strategy Workshop document - May
2019
Feedback on Parcelshop — July 2019
Various POL models including: Blueprint model, Mults
Scorecard, geospatial analysis,
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I eg ABajens
N
8
e
List of abbreviations
BEIS
DMB
EPoS
FX
HMRC
MDA
NLW
NNL
PO
POL
PUDO
PZ
RIPE
RMG
SGEI
SME
SPM
SSK
STEM
Department for Business, Energy & Industrial Strategy
Directly managed branch
Electronic Point of Sale
Foreign Exchange
Her Majestys Revenue and Customs
Mail Delivery Agent
National Living Wage
New Network Location
Post Office
Post Office Limited
Pick up Drop Off
Payzone
Reimagining Postmaster Experience
Royal Mail Group
Services of general economic interest
Small Medium Enterprise
Strategic Platform Migration
Self service kiosk e.g. Travel Money Card
Science Technology Engineering and Mathematics
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Agenda
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Post Office Board Agenda (Strategy Session 2)
29 July 2020
10.00 - 16.30 hrs Finsbury Dials, 20 Finsbury
Street, London EC2Y 9AQ.
1,19 Wakefield
‘ Tim Parker (Chairman) Carla Stent ‘* Veronica Branton Jeff Smyth
(Company Secretary) (Chief information Officer) (Item 2.)
© Nick Read (CEO) * Alisdair Cameron (CFO) I * Owen Woodley © Gareth Clark
(Chief Commercial Officer) (Item 2.)
* Ken McCall (SID) © Zarin Patel ‘* Dan Zinner © Zdravko Mladenov
(Chief Strategy and (McKinsey) (Item 2.)
Transformation Officer)
* Tom Cooper © Lisa Harrington * Richard Taylor ‘* Martin Kearsley (Director of Banking
(Group Corporate Affairs and
Communications Director)
Services) (Item 4.)
Julie Thomas (Operations
Director) (Item 3.)
Elinor Hull
(Chief Operating Officer, Digital Identity)
(Item 5.)
Performance and current issues
Gregg Braden (Programme
Manager, Branch Hub) (Item
'* Mark Siviter (Managing Director, Mails &
Retail) (Item 6.)
1. I Welcome and Conflicts of Interest Noting Chairman 10.00 - 10.05 hrs
2. I SPM/FJ contract exit Approval Jeff Smyth/ 10,05 ~ 11.10 hrs
Gareth Clarke/
Zdravko
Miadenov
(McKinsey)
3. I Branch Hub (demonstration and funding Approval Gregg Braden / 11.10 - 11.35 hrs
approval) Julie Thomas
Break 11.35 - 11.50 hrs
4. I Cash and Banking Discussion Owen Woodley/ I 11.50 - 13.05 hrs
- Cash and Banking Services (Banking Martin Kearsley
Framework 3)
- ATM ‘Exit or Remain’ strategy
Lunch and individual Cash Automation Demos 13.05 - 14.00 hrs
5. I Digital Identity Discussion Owen Woodley/ I 14.00 - 15.00 hrs
Elinor Hull
6. Mails including PUDO Strategy Discussion Owen Woodley/ 15.00 - 16.00 hrs
Mark Siviter
7. Wrap up session Discussion Nick Read/ Tim 16.00 - 16.25 hrs
Parker
8. I Any Other Business Noting and Input Chairman 16.25 - 16.30 hrs
STRICTLY CONFIDENTIAL
POL Board Strategy Day 2 - 29 July 2020-29/07/20
1 of 90
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POL Board Update — SPM & Fujitsu Exit
July 2020
CONFIDENTIAL
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In late June, the Board approved actions, relating to the commencement of the
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Strategic Platform Modernisation (SPM) programme and FJ Exit
At the June Board, the following was approved: Focus of today’s update
Commence the Strategic Platform Modernisation (SPM) programme:
— Begin work on the scope and approach of SPM in such a way as to both
reduce dependency on Fujitsu and offer flexibility for new branch formats
— Mobilise and commit to a first ‘tranche’ of SPM deliverables
— Accelerate standing up internal capabilities (business and IT) required for
delivery of SPM
Horizon Discovery: continue Horizon discovery work to understand in more
granular detail the technical underpinnings of the system and our commercial
obligations in order to enable transition later
FJ Commercial and Negotiation Strategy: Begin work on developing a strategy to
resolve outstanding challenges and obtain a 2-year support extension with Fujitsu for
Horizon to de-risk delivery of SPM in the necessary timescales
OJEU Procurement: As insurance against failing to secure extension with Fujitsu,
begin work on timetable and resources for an OJEU procurement of a system
integrator (SI) partner
* SPM Mobilisation: Summary of the
Programme, with delivery plans and
key prerequisites for success.
« Horizon Discovery: Key discovery
highlights from the engagement with
FJ and POL’s internal reviews
« FJ Commercial and Negotiation
Strategy: Summary of our current
position, approach going forward and
resourcing plans
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POL Board update on SPM
July 2020
CONFIDENTIAL
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SPM will deliver a new, modern core IT system for POL, but adequate ‘insurance’ is
required to mitigate risks and delivery timescale challenges
s Deliver as quickly as possible, whilst ensuring quality and ongoing service, to minimise the volume of transactions that remains
SPM Core ‘on Horizon come March 2023. _
Principles
P L Find an appropriate balance between the need for pace and the opportunity to transform the postmaster experience with
moder, efficient IT. I
x
2 s Deliver a system that is modular, flexible and ‘fit for the future’. New products and devices should be quickly and efficiently
3 supported by the new IT system, with this concept built in from the start.
5 s SPM will be delivered using a model where individual products and services are ‘striped’ off in an incremental manner. POL
will focus on core products such as Mails/PUDO, Banking, Travel and Bill Pay first, moving later to services which are
SPM Delivery aspirational, or may have reduced prominence in the POL business model. Services such as accounting will be implemented and
evolved alongside keeping pace with product delivery.
LJ Given the complexity of current POL Products, the scale of its branch network and the historic complexity surrounding the Horizon
system (e.g. Branch Accounting), there is obvious delivery risk associated with any desire to complete everything by
March 2023. It is recommended that a more appropriate planning objective is one where POL moves a substantial and material
sub-set of its products and thus revenue to a new system by 2023, but anticipating some services may at that time remain with
Horizon, and establishes an ‘insurance’ plan for managing FJ contract end.
. Any extension to Horizon beyond the current contract is likely to be expensive and difficult. To mitigate this, and FJ taking
a hostile stance to any extension of services, a two-pronged approach has been designed. POL will engage FJ on appetite and
conditions for a post-2023 extension, but in parallel, POL will create an option to recompete for a SI partner to replace FJ.
8
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Insurance Plan
and FJ Exit ; , 4 eabeatieal ; ; ,
s Astriping approach to delivery provides SPM risk mitigation by allowing POL to take in-house, for a short period, a much-reduced
Horizon service if this offers the best balance between cost and risk. Large-scale long term insourcing is discounted.
LJ FJ and Horizon will remain a large part of the POL ecosystem for the next 30 months, and there remains a number of significant
issues and cost challenges to resolve. A dedicated Exit Team is now being established to negotiate the required changes with
FJ, to establish the insurance options, and ultimately conclude exit as required.
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Our approach is to coexist with Horizon, allowing incremental delivery of product
journeys, and postmaster operational capabilities.
We will select and deploy a new device alongside Horizon counters capable of completing all Horizon product journeys. MVP will include a processes for coexistence with
Horizon and a meaningful product set; Mails. Over time as products and operational features are added, primacy for Branch Accounting will switch to the new solution, and
when all products are migrated, Horizon legacy counters will be removed.
Tranche X
3 Tranche 1 Trenche 2
2
a
= New ePoS provides first meaningful " Major product groups become available as " Final selected products are migrated
Use cases use case - Mails developed: banking, bill-pay, travel * New system takes branch accounting
delivered * Branch cash primacy remains with * New online accounting portal available to primacy.
Horizon, minor integration enables agents * Horizon counters are decommissioned
coexistence. = New operational processes added * On-going optimisation continues
Branch services — Horizon _ I New platform Branch services — Horizon _ I New platform New platform
ES = I servon =
ES baton
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Existing New parallel Existing New parailel Existing New parallel
Horizon services Horizon services Horizon services
Branches 11,500 1 11,500 11,500 11,500 11,500
Products 108 1 98 10 0 108 2?
Functionalities 100% 5% 75% 25% 5% 95% 2)
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Initial Multi-Year Plan
The plan below outlines our multi-year journey. This will be built out in more detail over the coming 3 months, including risks, dependencies and
costs.
Network
Commercial
Products
Technical
Device
FJ Risk
mitigation
2020
Q3 '20 I Q4'20 Q1'21 I Q2'21
— Mobilise —» «—— Build, Test, Le:
Clarify SPM
f Strategy
Market Product Selection
econnaissan. & Contracting
Technical
Rctuacnire Initial Platform Build
Device Partner Pilot Device
Roadmap Selection Creation
We device formats and
UX postmaster
walkthroughs.
FJ Negotiation
‘J Extension vs
jTeam & Partner Identification
& On-Boarding
2021
I Q3'21
i
rm —
ENetworkwide II Pilot Live
Postmaster concept Comms Branches
& beta testing
Branch Operations ReadinessI
* PRSPM ive plot
i
2022
Q4'21 Q1'22 I Q2'22 I Q3 '22
[—_—_—— Deploy & Iterate
Training, Change Mgmt, Intensive Support
i
ee ee Pourey Trees I
i
omplete Accounting &
Operations Build Iterative Improvem
Contract
caed & Mobilise
* Partner Selected
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¥x@ JORNUOD P4/WdS Z FEL
2023
Q4 '22 Q1'23
Fujitsu Horizon
Contract ends
@
tea Products live
‘SPM in all branches
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Concurrently we must agree together as a business, our priorities for a strategic
platform, and the priority sequence in which we should approach them
Delivering a complete Horizon replacement is a significant undertaking. At the same time our organisation has projects running to deliver new
products (e.g. Amazon PuDo), improve ATM operation, procure new SSKs, create new formats (including retailer cash based) and fill the
largest Post Office network numbers gap we've ever faced. We can’t do it all. We are working through with the network strategy team the extent
to which we support and align to the new initiatives vs. a plan that targets replacing Horizon as soon as possible
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Product Strategy El, Project Alignment
= Are new products required? * Which projects have primacy?
= Are any current products not required? = = How do they fit together?
= What is our preferred product priority GR ‘0. * For how long can we reasonably
delivery sequence (WIP) ? SEE] freeze new Horizon requirements?
zoz Ainr 6z- z Aeg Bare:
Network Propositions G Device Strategy
= Are we remaining entirely Post Office = Whatis our 5 year device roadmap?
cash? Or do we need to enable ;
‘ Ar = How does it align to our propositions ‘.
retailer cash propositions also? & g & product sets? a 4
= Which products form a viable MVP. P
for new network formats? fae Future counters, SSKs, deposit taking
ATMs, retailer till accompaniment (& any
« Is there a real requirement for any other physical kit required in branches)
retailer API integration? Who?
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What are our prerequisites for SPM success?
Clarity of
Objectives
Ability to
Execute
Economical
Delivery Path
Checkpoints &
Course
Correction
Managing &
Mitigating
Fujitsu risks
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Considerations
Key Outcome Required
Is our overall programme task
clear, aligned and agreed?
Do we have a coherent route to
mobilising delivery resources;
internally and partnered?
Will the programme delivery be
economically executed and
yield the agreed benefits?
How will we monitor delivery
progress and accommodate
changes in needs or priorities?
How do we ensure that Fujitsu
do not incumber or frustrate
SPM deliverables or pace?
= Arealistic agreement of the scale of transition v
transformation that will be undertaken
Dedication of the right internal IT and business
resources, hiring key missing capabilities and
appointing delivery partners
Acredible plan with stretching initial deliverables
that validates the delivery methodology and proves
ROI at an early stage
Appropriate governance that gives the Board the
transparency and insight that delivery is on target
and that we can respond to inevitable change
" Selective interventions on Horizon that are laser
focused on achieving migration of key products
and postmaster activity migration concomitantly
maintaining Horizon integrity
Board will be regularly
apprised of our progress
across these themes :
Open invitation to “drop-in”
to daily stand-ups and agile
delivery reviews
Bi-monthly checkpoints on
agile product deliverables,
product needs, outcomes,
risks/issues challenges
Direct experience of the
actual deliverables — on-line
product walk-throughs,
virtual demos
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Expected SPM organisational responsibilities and resource requirements a
We have begun to recruit for key positions and are preparing to engage the market to fill identified resource gaps. ~
Technical Programme Delivery
Release
: Applic:
king
De
Post Office Business Support/Expertise
re Banking
hardware
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Over the coming 3 months we will mobilise and deliver
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Over the next 3 months we will mobilise the capabilities to deliver SPM whilst conducting an assessment of tools and types of partners available to
support us on our journey. This will give us a far clearer understanding of our plan.
Market
reconnaissance
Engage technical retail
consulting support to conduct a
3 month market
reconnaissance evaluating key
SPM building blocks
Technical
Architecture
Commercial/
Partnering
Approach
Plan route to market for
required tools and services.
Begin the commercial
processes to engage key
delivery partners.
Identify
Business
Product Owners
& Postmasters
* Define core architectural
governance and vision.
= Create Reference architecture
= Branch data integrity requirements
(CX)
= Branch Accounting, Branch
Operations, Products (Mails etc)
= Select independent partners to
participate in early engagement
Define Op
Model & Hiring
Plan
Announce nascent “Branch &
Digital Engineering” team.
Agree organisation structure
and complete role descriptions
Continue capabilities build-out
Product &
Network
Delivery
Alignment
= Review and finalise product
prioritisation and delivery
sequence
= Agree delivery alignment to
network strategy
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July 2020
CONFIDENTIAL
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Summary on a page
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forward
@® FJ Engagement "
highlights
© Recapping "
= Address outstanding contractual obligations estimate
- Secure savings from Belfast Exit estimated at §
- Negotiate a post-Belfast Exit Horizon scope and two year-long extension options (post-2023) with sufficient
@ Plan going &
Aggressive stances: FJ is taking aggressive, hardening lines on a number of discussion elements, pertaining to
financial savings due to Belfast Exit and the overall contract Exit. This foreshadows an impending difficult set of
negotiations with an experienced supplier.
No extension: FJ retains a resolute and hardening view that it won't entertain any extensions, regardless of
circumstances. Part of the rationale may be long-term optics, preparing for a scenario where POL is unprepared to exit
by 2023 and FJ demands large compensation to run Horizon.
Weare facing an experienced supplier, with track record of ‘winning’ in similar situations with public sector clients,
now likely deploying it's “A Team”
We have narrowed down our objectives to three critical el,
IRRELEVANT}
incentives for Fujitsu to ‘put their best foot forward’ on enabling Exit
Today, we have limited-to-no dedicated capability and resource to prosecute these negotiations
We are engaging external support for a short set of sprints to define our commercial strategy to achieve our three
objectives. Longer-term, our strategy is very likely to include leveraging external political stakeholders and GLO.
We are standing ~3 dedicated resources to work with the external support and then take over by September
We will continue our technical due diligence to allow us to Exit FJ in 2023, either via transfer to a different provider
(requires procurement) or by insourcing a small part of Horizon not covered by SPM at that point
NOTE: We have not revealed our post-2023 extension desire from Fujitsu at this stage. Once we have sufficient
clarity on SPM timescales, we will breach the topic, but for now do not see any upside from opening the subject at this
early stage
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Over the last month, the POL team held 4 discussion meetings with FJ, clarifying a
fairly aggressive vendor position with regard to the Horizon system
Highlights from the engagement with FJ over the last month Additional commentary
@ FJ have now conducted their own contract due diligence and are establishing a very aggressive negotiation position:
“Limited” savings from Belfast Exit: FJ have asserted an expectation to be paid for the full value of the
contract until Oct 2021, regardless of services exited early due to the move to cloud infrastructure. Beyond this
date, there is willingness to discuss, mandated by the contract, but FJ’s positioning is that the savings will be of
limited magnitude and extremely dependent on POL confirming how it plans to set up its Cloud operations
Double-/ triple- / quadruple-hatted FTEs: FJ have asserted that the majority of their personnel are associated
with multiple Horizon services and, therefore, POL cannot terminate one service without significant effect on
others
TUPE obligations: As a result of Belfast Exit, as well as other future service terminations, FJ has asserted an
expectation that POL will take on the full slate of FJ employees associated with the contract, which was verbally
estimated at a very high “300-400 FTEs”
Exit cost obligations: FJ have asserted expectations that their exit costs will be paid for by POL, regardless of
when contract exit happens
(2) No extension: FJ have clarified a seemingly resolute position that they will not accept any extensions to the Horizon
contract, post-2023. They also have no appetite for any transformation before transfer, reinforcing the desire to
simply exit quickly and hand over to a different party
* FJ's “A Team”: It is clear that FJ
have had the opportunity to
regroup and assess their contract
implications. There is no reason
to believe they are not deploying
their ‘A Team’ now
« Staking out an early
neg ion position: The FJ
position is aggressive, but fairly
typical in similar situations
Long-term optics: The ‘no
extension’ narrative is politically
expedient with a view of 2023.
Should POL be unprepared to
exit, FJ can point to established a
clear red line already 2.5 years
earlier and, therefore, ask for
greater compensation
1X JORAUOO P4/WdS Z FEL
oS Service and tooling transfer: FJ has asserted a position that some of the tooling and operational aspects of their
current service cannot be easily moved to POL or another service provider. Therefore, the implication is that further
investment may be required to decouple those elements from FJ
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In addition, POL’s continued internal review has provided important additional context
Key findings
GLO Review
* POL’s Legal Team has reviewed the ongoing legal considerations, from a GLO perspective, on exiting
early. The below synthesis of key implications is subject to further review and documentation by POL’s
Legal team. Hence it represents the provisional position only:
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With regards to the Horizon contract, POL has to resolve three commercial ORDER-OF-
issues, with combined value-at-stake of £17M - £51M in the next 12-18 months ESTIMATES
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MAGNITUDE
Next 12-18 months
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=)
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= Address historical contractual obligations for
Fujitsu support that may not have been met (e.g.,
historical “Core Team”) or future contractual obligations for
obligations support that POL does not intend to consume
(e.g., “DDS”)
= Capture savings that POL may be able to claim
. due to the partial or full termination of a subset of
‘Run rate’ savings Horizon services associated with Belfast Exit
from Belfast Exit (e.g., “Data Centre Operations”) and the move to
cloud-based infrastructure
= Negotiate a post-Belfast Exit contract with Fujitsu,
which covers the remaining Horizon services until
2023 with options to extend for two years
Horizon extension = The contract would lock in the savings in the item
options above and also serve as fallback option in the
event that SPM progress and/or progress
transferring services to a different partner post-
2023 fails to deliver on time
30
9
aa
Low Case * High Case 2
21
8
Low Case High Case
IRRELEVANT
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Existing commercial dynamics and context with FJ create further complexity for POL é
Details
= FJ have had enough time to organise and establish a long-term negotiation plan, setting up the
‘table’ for a very hard bargain and attempting to make the most of existing contractual ambiguities
= Examples include messaging around “we want to exit in 2021”, aggressive stance on “you can’t
touch the current contract”, a “there is nothing to negotiate” narrative
FJ is already declaring very hard
negotiation stances
= In the period until 2023, POL is still reliant on FJ to provide active live support to a complex
Horizon service and to roll out service modifications over the next 2.5 years. Thus, maintaining a
positive vendor relationship will be a factor for POL
FJ’s assistance is ‘must’ for both
service continuity and Exit planning
* Further complexity comes from the requirement to leverage all of FJ's knowledge to either in-
house Horizon components or hand them over to another vendor. POL previously was
unsuccessful with the attempted IBM transfer, which also struggled to establish the necessary
traction with FJ
= FJ currently acts as integrator of 20+ subcontractors to provide support to the Telecoms business
POL carries further FJ
dependencies * There is limited interdependence between the contracts and no known major interfaces between
the Horizon and Telecoms systems, but only one vendor account team member across both
Other considerations: FJ’s organisation is experienced in similar situations
* With large portfolio of similar contracts, FJ are experienced in similar situations and likely confident in their ability to extract maximum value
* It is worth noting that FJ’s team (same head of Legal as in POL's case) endured a multi-year dispute with NHS, ultimately winning £700M
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POL’s resourcing for the FJ engagement requires reinforcement if POL is to replace
interim external support with a mix of in-house and contractor capability
Current capability and op model
Planned resourcing for the duration of
negotiation(s)
Negotiation
lead
No explicit negotiation lead; engagement led
by IT Portfolio Director and ClO ad-hoc roles
Overall, POL handles FJ contract changes,
in a fragmented way, aligned with individual
projects and requirements
Commercial
analysis
Commercial analysis done by multiple vendor
managers in addition to regular, BAU roles,
with legal support provided by POL Legal
Team on an ad-hoc, as requested basis
Financial
analysis
Basic ad-hoc financial modelling and scenario
analysis done by BAU vendor management
staff, with support from the Finance function
on an ad-hoc basis
Strategy and
oversight
Done by informal committee through the IT
senior leadership team as an add-on to ‘day
jobs’, under the overall leadership of ClO
1) Interim resourcing
External
support for
contract
analysis,
commercial
strategy,
financial
modelling,
preparation of
negotiation
materials and
‘digestion’ of FJ
proposals and
positions
= Dedicated negotiation lead with relevant
experience to execute the commercial strategy
* Negotiation lead to ‘own’ and coordinate all
components of the FJ negotiations
= No change needed if other roles are in place
and presuming dedicated POL Legal team
engagement through the negotiations
Financial analyst to ‘own’ the numbers, with ability
to rapidly model scenarios and provide in-depth
management of the economics and financial
drivers behind the negotiation business case(s)
= Programme management team with experience in
exiting large outsourced contracts.
* Team will include expertise in the procurement of
large-scale IT projects
In parallel with the above, we will be strengthening our IT controls approach with FJ
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Our approach and next steps going forward: We aim to have our next progress report to i
the Board in the September / October session
Define commercial strategy to achieve our 3 goals Continue technical due diligence to prepare for Exit
* We are engaging McKinsey to deliver a short set of sprints (6-10 weeks) to define and/or engaging a third-party SI
the commercial strategy for our 3 objectives (see page 8). McKinsey will also We are directing our focus on:
assess and refine the levers we have and the overall financial value at stake
= Defining the set of services we will need from FJ (and,
= Further, we will propose an engagement plan for external stakeholders to apply therefore, another supplier) after we complete Belfast Exit
pressure (e.g., leverage BEIS and Select Committees; engage directly with Japan * Continuing to set up a possible rapid procurement , potentially
HQ), and an approach to maximally leverage GLO as the strongest lever POL OJEU-compliant, for this subset of services
currently has. ,
o ; ¢
pueog 10d
July October
2020 2020
Stand up our own capability, transfer knowledge Enact strategy and continue engagement with FJ
" Weare recruiting for the negotiation support roles outlined * First steps of commercial strategy will commence
(see page 10). We will accelerate the process to ensure the * We will continue the discussions with FJ to reinforce the technical
personnel has sufficient time with McKinsey on the ground to discovery process (e.g., how are Horizon sub-components
help shape the strategic approach and take on the delivered and with what FTEs)
knowledge and experience
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Next engagement with the Board on this topic:
= We will report back with progress update in the September or October Board meeting
= We propose to also have an interim touch point in late August with select NEDs as needed
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POST Branch Hub Programme
OFFICE gf Mis: saree eel
Demonstration & funding request
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Executive Summary
* The Branch Hub team, using Accenture as a development partner, has delivered a digital portal for postmasters: at pace and at a third of the cost of
Fujitsu (£0.3m per month cheaper) by using the Service Now off the shelf platform.
* Branch Hub was successfully launched to the entire network in April due to Covid-I9 needs: online branch opening hours changes, registration for
Remuneration top-ups and PPE ordering. This was all reprioritised ahead of the planned stock, coin and cash ordering features.
208 10d
The result has been over 10,200 registered users, mainly Postmasters. However, over 20,000 counter colleagues remain unregistered and this is now
our target group to build adoption once the Stock Cash and Coin Ordering features are fully rolled out.
* Stock Ordering has been launched to 2000 branches. Planned Cash Orders and Coin Ordering will quickly follow, giving postmasters and counter
colleagues a superior service and transparency of their orders versus the telephone support provided today. We believe this will further increase use of
Branch Hub as our one stop shop.
* A further detailed plan of features and benefits is constantly logged, prioritised and sequenced for development based on needs and benefits.
* Branch Hub has also proven to be an effective channel to collect and distribute information to postmasters, like serving video or other training content.
83% of postmasters* surveyed said they would prefer to use Branch Hub for all their operational needs rather than placing a call.
8
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* Postmasters indicate their top 5 priority features are: I) Access via a Mobile App, 2) Sales MI (Branch sales data), 3) Postmaster Community information
(forums, events, knowledge validated by SMEs), 4) Digital forms (e.g., Staff Vetting Form), 5) Compliance Messaging (visibility of issues for Postmasters)
* In the shift towards full adoption of digital-centric contact, we must be aware of the challenges some branches face around access to a device or
internet provision. This is still being considered before we can achieve 100% migration from other routes (Horizon online help, Branch Focus, Contact
Centres).
* After a short live demonstration, we seek approval from Board for £6.9m. £1.2m of this represents the development costs since the previous Board
approval to June 2020, with the remaining £5.7m to complete the Branch Hub programme for the rest of this financial year. This will fund £2.9m in
development costs and £2.8m in redundancy costs to remove 33 FTEs from our operations team as a direct result of the Branch Hub self-service
channel.
*401 Branch Hub survey responses to 29 May
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Future Vision
+ One Stop Shop for our Postmasters. Enable one
platform for the Post Office and its Postmaster
community to communicate and collaborate, replacing the
current multiple platform approaches.
* Branch Hub is how we digitise - Easier to connect
areas of the business, remove manual processes, break
free from legacy and multiple systems — react quickly and
adapt.
+ Understand Postmaster needs and behaviours — by
continually reviewing the data, we can see what's working
and what isn't so we can respond in an agile way.
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Highlights from the Branch Hub Dashboard
This is our target
no. Branches
Branches
Whats not included?
ink to the parent branches. There are also 88 branches not fully transitioned on to Smart 10s.
ROLaW ETS Mains Locals Local Plus PSO Crowns
contact information
for 10,000+ 2278 sb 7 4
postmastere- We.will 99890 33640 2290 0 120 21010 18
ask these users to
promote registration
to their staff.
Branch Joternat
10297 245
Registered Users ‘Internal users are Area Managers, Ay
Registered Users
target is ~25k as
many users are
part-time staff or I SPSO and a Main, that would count in both.
Mains Locals Local Plus SPS0s Crowns
OURreR straton: 48.03K — Q.00K 21.78K 000K 11.64K 0 05 0 04s 0 1
556
not in scope for Our challenge is to grow this number exponentially. More
current roadmaj accessed knowledge and self-service will reduce contacts
Hub Forms used
1199 6960 6250 5072 I 5861
By using Branch Hub to request PPE Gloves, we have halved the expected consumption rate I
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Data as of 20 July 2020. Live data will be
shown on the day
Managers. Supervisors and Clerks
Last upascea:
The following branch types do nat have Smart IDs directly inked to them: SAT, ACPT, BFPO, HNMO, HOME, NTB, PRIV, PSOS, PSPO. T)
Other (e.g. CFPC
‘Our registration
challenge is split
across the
network.
404
Other (e.g CFPO)
f-.
784
enings
Br
Total of each branch type added together is slightly higher than the actual overall number of users. This is because some users work in more than one branch - Le. if they work in an
5506
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We need to drive more registrations
‘overall, building on the Postmaster
registrations gained via Agent
Remuneration requests.
We will target branch supervisor and
colleague roles by launching cash and
stock ordering features.
Customers can now see more
accurate Branch opening times
on the POL website following
tegration from Branch Hub to
Branch Finder
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Branch Hub Roadmap (at June 2020)
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For feature descriptions and expected usage see appendix
The backlog shows when features are ready to deploy. Embedding the features will
‘require additional iterations following user and business feedback
Priority and schedule is determined by technical dependency, Postmaster request (&
frequency of use) & POL benefit
Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Core Platform vere ones ie g Sardeahow
Gem ted Location Paton
“an = vane see ago
nae ce a
Platform Experience a0 ae & ae
neces ses 73 rs
= Motel
Messaging & Ordering e aon) Ser Ed oe bay pay sock rang io
wines onda oe
oS, BS a ma poneed Soames a.
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Digital Operations Ragas de
down cals (8 contevously Heirkiinel TY
2. © peste Conoay
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ons) Arpisse reo
= sek
Digital Workforce a Qoc jolt ae “ae S&. Geant es
froreny mero ae Managerect Scorecard ged Branchreviews
Increment 4 [underway] Increment 2 [approval required} Increment 3 [approval required]
investment: £0:9: Investment €1.5m Investment: 1.1m
Benefit: 16 FTE (€0.5mn) Benefit 17° (€0.6m) Benefit: £0.2m contirmed,£0.7m to go, expected o be split beween
Objective: Suld platform, T, Core Features e.g, Stock, Covd features & re~ I Objective: Deliver tech enablers o allow bull of further ‘sticky features through to increment I contract savings and FTE
platform features, Set up and prove delivery model. Measure and react to I 3, gather requirements for & activate out ofthe box features, itera. Enhance knowledge. I Objeetive: iterate features delivered in increment 2, build more ‘sticky’
jaster demand anditerate features, All Postmasters registered, Drive registration of counter colleagues, and have them login muliple times 70% registered _I features to deflect and reduce calls, enhance knowledge Deliver more
Users, Reduce overall call volumes by 25% tech enablers. Drive multiple weekly usage to 90% registered users.
Reduce call volumes by a further 25%
Legend: MMEnabler, MMIPOL Benefit, MIPIV Benefit
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“b.
Roadmap Feature Descriptions
i ea
‘ranch Hub Enable users to register to use Branch Hub oneot Al Branch
Registration Users
rou
toate Feature Deseription fapected I a thor
Usage
Menthy All Branch
Users
Platform changes required to ensure the systems set upto scale and to give the best
Knowledge Base Knowledge articles prove accurate iformation and a‘single source ofthe truth’ Dad All Branch Users
Improvements ‘experience to Branch Hub users Articles (8 {for pastmasters to reference and self-serve They canbe liked te fram anywhere.
continuously In Branch Hub,
eee Sales ML Enable Postmaster te see sales data for their Branch(es). Daty Postmasters
Engineer Visits case _Dgitise engineer vsts using case management, embed with partners, ardreduce Weekly allBranch Users,
‘management ‘he number of rick ral’, POL, 3° Parties
Weekly AllBrarch
Users
Foreign Exchange
‘Google Integration _Intograto te Google infermation and provide PMs a view of what Google Monthly Postmastors
‘and the average queve wai time,
Cain Orcaring Enable users to order coins Weekly Al Brarch
Users
Al Branch,
rea, : : : Le di ‘
sapmpsine Enable Postmasters to update their branch Opening hours for rears velating to Monthly Postmaster
Covi,
‘mernency Enable POL to send messages to users. Similar to Grapevine but via mobile rottiction (cen be Monthly li Branch
Messaging MS or eral Users POL
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Benefits to be linked to
Branch Hub features
Reduced Postmaster churn
Increased Postmaster satisfaction
Reduce Area Manager workforce
Improved self service & controlled messaging
Omni channel support, flexible 24x7 for Postmasters
Accurate Postmaster & user contact details
PPE stock cost avoidance
Reduced cash holding in the network
Better product awareness - increased revenue
Universally-skilled and reduced digital workforce
Better system data can enable further savings
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Further Benefit Opportunities
Here are some examples where reduction in budgets is possible by creating new Branch Hub features:
; Field Team Branch Vehicle Maintenance Physical & Agent Statione'
Travel feneevan Postage - Ray ea losses - - oan
* By introducing f s ry * Vehicles could make fewer 3 Better knowled
tising inform: ‘ orts s re less c encourage self service to
atac e “maintenance would be ess for 45k users, teams re
“required _ auld make fewer mistakes
ng to those
Hub users could reduce
stationery consumption could mean mor
3
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issues can be reso
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their staff
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Financial Summary
Prior
Spend
Cost Forecast (£m) Apr20 May20 Jun 20 Jul20 Aug20 Sep20 Oct20 Nov20 Dec20 Jan21 Feb21 Mar21 FY20 FY21 FY22
== IRRELEVANT
* Spend for QI FY20
I6FTE saving.
* Next phase (July — Nov) is ito deliver ‘sticky’ features such as a mobile app and Postmaster Communities. A further I7FTE benefit is
targeted along with a 25% reduction in calls.
‘Y20 phase (Dec — March) is isavings tbc but expected
in VR costs is required between July and March to deliver the 16 FTEs realised from QI and 17 FTE from the July-Nov phase.
+ We request the full amount of
progress made.
Spend in FY 18 was?
Spend in FY 19 was) I
Impairment value of Fj deiive
Payback presmpairmenten
post impairment is.
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Tab 4.1 Cash and Banking services (BF3)
POST OFFICE LIMITED
BOARD REPORT
Title: Cash and Banking Services Meeting Date: I 29 July 2020
30 of 90
(Banking Framework 3)
Martin Kearsley, Director of Owen Woodley, Group Chief
Author: Commercial Officer
Sponsor:
Banking Services
Input Sought: Decision/Discussion
Board is requested to consider and approve management recommendation to release final
Banking Framework 3 (BF3) pricing no later than 30.06.21 rather than no later than 31.12.20
Board is further asked to note, discuss and give direction regarding:
« Residual and deeply held bank concerns after BF2 commercial challenges
« BF3 key commercial levers and options to address the above, to ensure full
continuation
« Implications of emerging industry Access to Cash programmes and associated
automation
Finally, Board is requested to note the update on Cash Automation proofs of concept and
linkage to industry pilot schemes.
Previous Governance Oversight
* BF2 dates and commitments approved at 2018 Boards, since signed into contract with
banks
Executive Summary
Covid-19 has caused a significant reduction in cash use nationwide and impacted POL’s ATM
and Banking Framework businesses accordingly, with an almost 50% decline in transaction
volumes in the early stages of lockdown. Whilst both have recovered to c.80-85% of pre-
Covid levels, this market-wide decline has now brought real political focus on the ‘Access to
Cash’ agenda, which will lead to legislation ensuring sustainable national cash and banking
access.
Cash and Banking has been identified as a core service in PSG; post-Covid it is still core, and
with the increased focus on sustainable cash nationwide, it remains a vital PO service. The
recommended ATM strategy is addressed in a separate Board paper.
Our service proposition therefore needs to evolve, including automation and efficiency
improvements, which in turn will help us respond positively to direct and hard-hitting
feedback from the banks about the commercials POL has imposed in BF2.
This paper covers strategic issues facing three areas of POL cash and banking: Banking
Framework 2 recovery, Banking Framework 3 pricing, Automation and one new area of
relevant market-wide activity that we are involved in - the Community Access to Cash Pilot
(‘CACP’) - that will drive innovation and competition.
Confidential
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Tab 4.1 Cash and Banking services (BF3)
Market Context
UK Cash usage continues to change rapidly. Cash transactions have declined over 50% since
2007 to 26% of all transactions and was already projected to decline to 17% by 2027
(Ceeney) which is approaching the level seen in Sweden, the most cashless society to date.
Covid has accelerated the rate of decline, reducing cash usage by a further 20-25% over the
past few months.
41
There is wide agreement that the final full market recovery of cash will be less than before
Covid - settling at c80/85% (validated by independent stakeholders, including HMT, FCA,
Ceeney and LINK) - but within which POL will likely over-index due to the socio-geographic
groups we serve, and their greater dependency on cash use. We could also benefit from
declining cash usage prompting banks to accelerate further branch and counter closures.
Protecting Access to Cash in disadvantaged, rural and other underserved communities is now
driving government and regulator demands for the industry to step up efforts to provide
sustainable cash services.
The Report
Banking Framework 2 Recovery
1. Pre-lockdown, record Banking Framework volumes and values were continuing to grow
in line with our original BF2 business case. In the immediate aftermath, overall
transaction volumes fell circa 50%. Our current data-based MI shows our recovery
exceeding the original market projections, reaching 80% recovery even before the major
lockdown restrictions have been lifted. See chart 1 below.
Chart 1, Recovery in Banking Framework Transaction Volumes
Average
2. As lockdown has eased, we have seen differential rates of recovery between service
lines (chart 2) and between banks (chart 4).
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Tab 4.1 Cash and Banking services (BF3)
vs. Deposits
41
51%
3. By the start of July deposits had recovered to 86% of pre CV19 levels whilst withdrawals
had recovered to 77%. Within deposits the recovery has been driven by personal rather
than business. (see chart 3).
'y - Personalvvs. Business
4. Personal deposits have now exceeded pre-Covid levels (101%) whilst business deposits
remain subdued (49%).
Postscript - Business deposit recovery rose to circa 60% on Monday 6" July following further
lockdown easing.
5. Evidence suggests that an element of the personal deposit recovery has been driven by
new-to-POL customers displaced from their bank branches. This is most clearly observed
when comparing the recoveries of Santander with LBG. A smaller percentage of Lloyds
customers use POL than Santander customers (we undertake all Santander Business
deposit transactions), and due to bank branch closures and restricted hours, there have
been more displaced LBG customers who have discovered our services (chart 4).
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Tab 4.1 Cash and Bi
ing services (BF3)
Chart 4. Deposit Recovery Comparison LBG vs. Santander
verage of period 26/1 to 22/3 = 100!
41
6. With recent Citizens Advice research finding over 86% of customers citing PO service ‘as
good as or better than’ bank service, we expect a material percentage of these new
customers will continue to use their local Post Office.
7. The lockdown period also saw an increase in the average transaction values (up to 20%)
suggesting customers were making fewer visits to avoid social contact but with greater
value. As we exit restrictions and customer confidence returns, we should expect
average values to return to the slightly lower pre CV19 levels with a consequential
additional increase in transaction volumes.
8. To assess the long-term impact of these changes, we have developed three scenarios
and compared them against the Pre-Covid BF2 baseline for both transaction volumes
(Chart 5) and value of cash handled (Chart 6).
SCENARIO RATIONALE
1. Volumes and ATV return to 80% of the baseline I A conservative scenario aligned to market expectations
by Jan 2021 with any current recovery beyond of cash usage decline
80% being lost (NB - already overtaken)
2. Volumes and ATV return to at least 80% of the I Over recovery already observed due to new to POL
baseline by Jan 2021 with retention of 50% of customers who have been unable to access their Bank
any recovery beyond 80% branches. We retain 50% in medium term.
3. As Scenario 2 plus impact of displaced Declining cash/branch usage has triggered banks to
transactions from c.700 further bank branch assess their network afresh. Likely closure of branches
closures starting Jan 23 below minimum viable thresholds with POL capturing
75% of displaced transactions
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Chart 5. Total Banking Framework Transaction Volumes
41
IRRELEVANT
9. Taking scenario 2 as the most expected outcome, the total transaction volumes forecast
for the period 20/21 to 25/26 range from79% to 88% of the pre-Covid forecast. The
range for cash handled across the same period is between 79% and 92%.
10. Based on BF2 pricing (and on an unlikely, but possible scenario that ALL banks carry on
with BF2 commercial terms throughout BF3) these scenarios deliver:
DPC - Revenue minus variable
agents’ remuneration
Pre-Covid Baseline
Scenario 1 I
Scenario 2 - Expected : i
20/21
/22 22/23 23/:
24/25
Scenario 3
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1 Cash and Banking services (BF3)
11. This provides a predicted DPC range of between 86% and 93% for the pre-Covid
forecast for the period 20/21 to 24/25. There is a higher volume scenario (linked to
banks proactively migrating counter cash transactions to POL as they make even more
radical changes to their branch networks) which would require attractive volume
discounts in BF3, discussed in the next section.
Banking Framework 3 (BF3) Options
Current engagement with Top 5 banks
12. CEO meetings:
A series of meetings between CEOs have been arranged and are underway. Full candid
disclosure is helping to inform options and directions for subsequent 1-1 and group meetings.
13. Direct bank meetings:
We have commenced a series of one to one and working group discussions to take on board
Banks’ feedback on BF2 and thoughts on how BF3 could be restructured. UK Finance is
taking an observer role once again (as they did in BF1 and BF2) to ensure no conflict of
interest or anti-competitive activity or language is evident.
Bank perspectives on BF2 issues, BF3 options, industry alternatives and POL services
14. In the first few meetings, a number of key considerations have been discussed:
14.1. The scale of the Banking Framework is negatively perceived and
‘0 increase volumes. We should
14.2.
14.3.
ir Banks. to_oroactively.
IRRELEVANT
customers to use the Post Office - there i:
significant volume.
14.4. They expect a lower fee for a self-service deposit transaction than for one done at
the counter - a challenge for when we run our Automation pilots. Create a
satisfactory service for time-poor business deposits.
14.5. The banks view the emergence of a POL monopoly as against their interests, as
hat lack of trust cannot be in our interests
14.6, jiRRELEvaNT: view that their customers use of POL branches ‘for convenience’ is
counter to their inte hich was to support vulnerable and distanced
customers). Can w transactions to reduce the impact of convenience
transactions near wh ank branches remain vs ‘no option’ transactions
(rural/remote with no nearby bank)?
14.7. Despite 6 (and Citizens Advice recent independent research) proving customers
value POL transactions more favourably and reliably than bank branch ones, some
banks repeat a mantra of ‘unreliable and inconsistent’ service as a significant
issue. Errors and miss-key rework must be addressed
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15. The top 5 banks cater foi of all transactions and accounts held in the UK. An
explanation of their current position re: POL Banking Framework may clarify their
individual and collective approach to BF3.
Bank BF2 position Executive view of POL Operational view of Top key issues? Branch Potential Cash services
celationsh POL relationshi strategies direction
41
IRRELEVA
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I IRRELEVANT
16. We understand the variations in the banks’ perspectives of POL and our BF2 actions.
While we work to regain the trust damaged in that process, and find a commercial model 4.1
that will encourage growth and full commitment for the long term, we need strong and
persistent positive Government and regulatory support and for that support to be made
well known to the banks. Engaging UKGI, HMT, FCA and PSR colleagues in that very
vocal support is key, and we wish to explore how that support can be generated with the
help of BEIS colleagues.
17. We believe that any changes to BF3 need to meet a number of general principles
service that is satisfactory for consume!
IRRELEVANT I
17.8. Protect rural service and not over-compete in city centres.
17.9. Drive a more consistent customer experience.
18. Considering the above challenges and the outlined principles, in early 1-1 discussion
meetings a number of initial directional options have emerging for the key BF3 products
and fees, and are set out in the table below:
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Withdrawals
Deposits
19. Initial feedback from the big 5 Banks has been limited and they have been asked to
consult internally and return with their input by end of July, after which ongoing
discussions will ensue.
20.
IRRELEVANT oe
his would restrict Independent ATM Deployers (IAD)
ability to force higher interchange rates on the industry and thus potentially improve
footfall at the POL ATM estate. From an ATM perspective we are in a win-win position as
higher ATM interchange would improve profitability of our estate and make any
difference with BF pricing less significant.
i
Current Banking Framework 3 decision timing
21. Banking Framework 2 (BF2) runs until midnight on 31.12.22. All participants have a
right to terminate their automatic ‘rollover’ into BF3 but must declare that by midnight
on 31.12.21 (thus giving 12 months’ notice). To allow participants to take any new
pricing and associated contract changes through their internal Governance we will need
to agree and release BF3 pricing ‘some months’ in advance.
22. Agreement on BF3 pricing will come from resolving a complex interplay of issues
resulting from the vitriolic feedback received from our BF2 commercial position, the
resulting bank perspectives of POL as a partner, and repairing the trust issues that we
now face - both commercially and organisationally.
23. The fee revisions put in place under BF2 addressed a number of structural issues for
POL, such as our under recovery of the cost of cash deposited and the value delivered
by our fixed infrastructure as Banks stripped cost out of their branch networks.
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1 Cash and Banking services (BF3)
24. The changes, which were both significant and largely unexpected by the banks, took our
ability to increase pricing to its limit. This was exacerbated by the unintentionally short
time span to allow for Bank Governance to approve the changes and resulted in a
damaging period in our relationships with some banks.
25. Consequently, it was agreed that for BF3 a longer time frame would be built in. It was 41
also agreed that as a ‘safety net’ against POL aggressively increasing BF fees in BF3, .
banks could choose to stay on BF2 pricing throughout BF3.
The original timeframe agreed was as per the table below.
BF3 pricing released by Banks who wish to the deadline of ON 31/12/22. Remaining
POL to enable banks to stay with BF2 pricing 31.12.21, by which time I silent beyond 31.12.21 means
“work the numbers’ and__I have to positively they must serve notice _I they have not given us the
choose to stay with BF2_I notifyus by 30.6.21, _ that they wish to leave _I required 12 months’ notice to
pricing or move to BF3. or remain silent the Banking leave, and are therefore ‘in ‘
until... Framework... BF3.
Nb: even if a bank chooses to declare it wishes to stay on BF2 pricing throughout BF3 by June 2021,
that bank can still serve notice on or before 31% December 2021 to exit the entire Framework.
Pre H invert ricin isions on ne _existin intre l
26. The impact of Covid on both POL and the banks’ resources and priorities has resulted in
a request from Lloyds, subsequently supported by all banks at BF steerco, to delay the
point at which the BF3 pricing is released.
27. A delay in issuing BF3 pricing benefits both banks and POL in a number of ways:
27.1. Longer period to assess and respond to the recovery in transactions post
lockdown - and to better understand the Covid impact on the banks’ strategies.
27.2. Understand any emerging solutions from the CACP process discussed later in this
paper.
27.3. Assess the output from a UK Finance exercise to quantify the scale of counter
cash transactions remaining with Bank branches
27.4. Develop discussions with certain banks, e.g. } ver their appetite to
proactively migrate whole customer segments or geographies to use the Post
Office.
27.5. Combining the decision points means that Banks can avoid a double governance
cycle, reducing risk for POL and provides a single focus decision moment for the
banks.
28. A delay in issuing BF3 pricing benefits POL uniquely in a number of ways:
28.1. Further develop our understanding of Bank's expectations from BF3 - bearing in
mind that these will be influenced by options we put forward in close engagement
from now onwards.
nges to Bank branch network strategies
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30.
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28.4. Run our cash automation pilots embedded in the CACP sites and other sites to
inform the cost of a self-service transaction and therefore the fees we should set
A delay benefits the banks in a number of ways:
29.1. If the cash market settles at a significantly lower level than pre-CV19, they are
less dependent on us, and can react more strongly against our pricing model.
29.2. There is longer time for the j otentially deliver alternative
Hl NG out of line with the market).
29.3. POL will not know which banks might want to remain on BF2 until later in the
process.
29.4. The banks contractual decision date (31.12.21 - to declare either notification to
exit the Framework, or remain silent and stay in), could now include a ‘stay in”,
but at BF2 pricing decision.
29.5. When we DO confirm pricing (suggested by end June 2021), if POL choose to
inflate BF3 pricing, banks will have had a further 6 months to remain silent and
give us less time to react if they then serve one years’ notice.
Board is therefore asked to discuss the options and approve a move to a single decision
date - 31.12.21 - enabling a further 6 months (to 30.6.21) for the release to the banks
of BF approved pricing. When we revert, we will include detailed financial analysis on the
economics for POL of the whole range of potential outcomes in BF3 (e.g. Barclays
withdrawal, Barclays & LBG withdrawal etc).
Cash Automation
31.
32;
The success of the Banking Framework has delivered a step change in cash deposits.
The shift from heavily cash deficit to cash surplus branches, combined with higher
average transaction values, has increased pressure on the counter and back office
infrastructure and processes which are currently almost entirely manual, time
consuming and open to error. The impact is concentrated because c50% of Banking
Framework cash is handled in c20% of the network.
With increasing transaction volumes, and without changes to our infrastructure, Post
Offices struggle with:
. Increasing counter queues and associated negative customer and bank reaction
Growing cash reconciliation issues
Loss of Postmaster advocacy
Greater security risks
Undermining of the Banking Framework members’ confidence in the service we
provide.
coee
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1 Cash and Banking services (BF3)
33.
34,
35.
36.
37.
We therefore need to identify and implement cash management solutions which:
. Improve our ability to count, secure and reconcile cash at the counter and within
branch
. Improve the visibility of cash in the network to optimise cash holding and
distribution
. Make overall cash management and control easier for Post Masters and POL
colleagues
. Improve customer service experience and enable new ways for customers to
deposit cash
. Lowers the cost to serve to allow attractive and sustainable framework fees (BF3)
that encourage Banks to commit an increasing share of their counter cash
transactions to the PO channel.
Deposit self-service and counter cash automation has been globally deployed by Banks
to address similar issues. This mature technology falls into two categories and we are
seeking to evaluate both.
34.1. Counter cash automation - for Postmaster use behind the counter. Teller Cash
Recyclers (TCRs) count, authenticate, capture and recycle cash and can be fully
integrated into teller or POS platforms to provide audit trials and centralised cash
visibility.
34.2. Self-Service - for public use in-Branch. Devices come in multiple forms. The ATM
is the most common but deposit only or multi-function devices have greater
relevance to the cash transaction profiles we need to address.
To commence this process two pilots/proofs of concept were started in 2019/20.
35.1. Self-Service Deposit Proof of Concept
We have a self-service deposit device installed in the Model Office. PRB funding is
currently being sought for final IT and Bank sign off and the deployment of 4 units
into the network. Coordination with the Community Access to Cash Pilot (CACP),
described later in this paper, is in planning. The POC is focussed on the evaluation
of customer uptake and the benefits delivered to Postmasters and POL.
35.2. Counter cash automation pilot using a Teller Cash Recycler (TCR)
In early 2020 we supported 2 TCR pilots with Coop Retail. A similar opportunity
has arisen with Henderson’s (our major NI partner running c50 Post Offices in the
province) who are keen to deploy TCRs at their Post Office Counters.
A request for funding to support the Henderson’s pilot (commencing Q2 20/21) and then
run a further 10 directly managed pilots is going before PRG with a potential
commencement date in Q3 20/21.
TCRs and self-service devices were included in the ATM OJEU process and we can
therefore rapidly put compliant purchase arrangements in place. Whilst TCRs can be run
without integration into Horizon, we have commenced an exercise with our IT partners
to assess the resource and timeframe required to integrate TCRs into the Horizon
counter system to extract maximum operational benefit from the device. Self-service
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Cash and Banking services (BF3)
devices will be able to piggyback on the software platform and management services
being acquired for the new ATM network.
* *
Pilot Funding ou
Approval Completion
—_ > >
Bom
> ere
38. The mix of cash automation deployed will depend on the volume of cash transactions at
individual branches, e.g. in deposit heavy/withdrawal light branches we would deploy
self-service deposit devices. In heavily used branches, we would deploy all appropriate
automation. And where space limits self-service, we would focus on counter automation.
And below a threshold, existing manual systems will be retained.
Internal ATMs inci.”
reoyclinapnglor TORS + Fillsuite of banking seUt-gervice anc'counter automation (TCRs)
39. The above proposals open up two possible automation models:
« POL-decided - we invest in equipment, we define which branches get equipped, we
decide the commercial model (lease, shared contribution, capex, opex etc, and then
transaction price to banks accordingly)
« Bank-funded - banks invest in the equipment, we have less control in which sites
are selected, transaction price is ‘pence not pounds’ but sufficient for us to
sustainably reimburse the PM. POL merely host.
40. We already have deposit automation installed in the model office. We propose to move
that solution to the CACP sites and work with CACP to ensure our solutions to cash
deposits are fully embedded in the resulting trials.
Community Access to Cash Pilot (‘CACP’)
41. The intensifying debate about supporting communities and those still dependent on cash
has resulted in a new initiative. CACP is sponsored by UK Finance with a board
consisting of Natalie Ceeney, banks, FSB, LINK and Fairer Finance, has commenced and
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Tab 4.1 Cash and Banking services (BF3)
is examining a range of new and existing solutions. Eight locations have been selected
and CACP is now seeking community engagement to understand their cash needs. POL
is seen as central to the provision of sustainable solutions by the Chair and we are
engaging to ensure our branches are utilised.
42. Likely challenges to be addressed include:
Cash Access. New solutions to enable consumers and businesses to access cash from
accounts, such as cashback without purchase (from convenience shops) using PayPoint, and
rekindling supermarket cashback.
Cash acceptance (ensuring anyone who needs to pay with cash, can do so). Legislation is
being drafted by HMT to ensure cash is accepted by all small businesses. This is due to
become statute in the next Parliamentary session, and will commit banks to properly promote
all deposit channels, including Post Offices.
Cash Deposits (creating new ways for cash to be paid into accounts)
« Shared banking utility sites - utilising individual banks’ closed buildings to reopen and
equip with shared services. Ceeney has so far had little success in generating a new
approach and has not moved forward.
« Automation in third party sites such as Post Offices, Petrol Stations, public buildings.
This would see bank-funded devices (serving all banks) installed in c.2-400 locations,
able to accept cash deposits.
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Appendix
Cash and Banking Insights from other Post Offices worldwide
Name/Country
Insight
Source
Deutsche Post
Deutsche Postbank AG will modernize its retail
bank branch network with NCR intelligent deposit
ATMs and NCR SelfServ 85 consulting kiosks. The
NCR software and hardware solutions deployed by
Postbank will enable customers to make
appointments and calculate loans on the NCR
kiosks, as well as deposit notes and coins through
the convenient new ATMs. The new solutions will
be available 24/7 across many Postbank locations,
with long term plans to roll out the NCR technology
across all 1,100 branches.
https://www.ncr.com/news/newsro
om/news-
releases/financial/deutsch-
postbank-modernizes-branches-
with-next-generation-ncr-
technology
Russia Post bank
Diebold Nixdorf Inc. will supply 3,200 self-service
cash recycling systems to the Russian Post Bank,
which is expanding its retail banking network
within post office branches throughout Russia.
https://www.atmmarketplace.com,
news/diebold-nixdorf-to-roll-out-
3200-recyclers-for-russias-post-
bank/
Pakistan Post
Under the strategic alliance, PPOD shall provide
branch-less banking services to its customers using
HBL Konnect, the bank’s branch less banking
https://profit.pakistantoday.com.pk
(2020/06/08/hbl-and-pakistan-post-
join-hands-to-further-financial-
platform. inclusion/
At selected locations across the Pakistan Post
network, HBL will also place Automated Teller
Machines (ATMs) and Cash Deposit Machines
(CDMs) to further support customers and enhance
the digital financial service capabilities available at
Pakistan Post locations.
Japan Post Nationwide ATM network, largest deposit taking I https://www.jp-
institution bank.japanpost.jp/en_index.html
Malay Post Ability to send money, deposit and withdraw cash https://www.pos.com.my/
for Maybank and RHB
Australia Post
Banking services available but not automated:
"With access to over 70 banks and financial
institutions, including key partners CommBank,
Westpac and NAB, you'll find it easy to manage
your money locally’.
You can deposit cash and cheques, withdraw
money and make balance enquiries for free2 at
participating Post Offices, including 1,800 in rural
and remote locations.
https://auspost.com.au/money-
insurance/banking-and-
payments/bank-at-post
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Tab 4.2 ATM ‘Exit or Remain’ Strategy
POST OFFICE LIMITED
BOARD REPORT
Title: ATM ‘Exit or Remain’ strategy Meeting Date: I 29 July 2020
. I Martin Kearsley, Director of . Owen Woodley, Group Chief
auttion: Banking Services Spaiisors Commercial Officer
Input Sought: Decision/Discussion
POL Board is requested to consider both ‘Remain’ and ‘Exit’ ATM strategy options and approve
which to pursue. Should POL Board approve the ‘Remain’ option, an additional request is
made to delegate authority to the GE to proceed to contract signature for the preferred
suppliers, on completion of the procurement-driven OJEU selection process undertaken during
2019.
Previous Governance Oversight
ATM Strategy approved at April board, subsequently re-assessed in Project NEO.
Executive Summary
As the end of the BoI ATM relationship has approached, supported by an OJEU process, we
have reviewed all possible solutions to either remain in the ATM market or exit completely if
the market position demands it. The preliminary strategy recommendation from that work
was to remain in the market operating with a new commercially viable operating model under
an OJEU-compliant partnership. This recommended approach was presented to the POL April
Board and endorsed. Since Board approval, the project team has:
e Progressed the OJEU process and appointed preferred supplier status for Lot 1
(transaction processing) and Lot 2 (managed services). The process is nearing
completion for Lot 3 (ATM hardware).
« Reviewed all options previously considered in the light of the impact of Covid 19 on
cash usage
Covid-19 initially caused a significant reduction in cash use nationwide and impacted POL’s
ATM businesses accordingly with an almost 50% decline in transaction volumes in the early
stages of lockdown. Significant recovery commenced as lockdown was eased and by early
July, we have seen volumes back to c.80-85% of pre-Covid levels.
This report provides an update to the April Board paper that reflects the impact of Covid on
both the Remain and Exit strategy options, and seeks approval of the management
recommendation to Remain.
Remain
Exit
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all possible options for either remaining in the ATM market or exiting completely. The
recommendation presented to Board was to remain in the market with a new operating
model and under our full control. This strategy was approved by the Board in April. At
that point, the model projected £49m cumulative cash flow over the period to 27/28.
The project team has continued to progress the OJEU process and appointed preferred
supplier status for Lot 1 (transaction processing) and Lot 2 (managed services). The
process is nearing completion for Lot 3 (ATM hardware).
The impact of CV19 on cash usage has required us to re-visit all the strategic options
again and consider whether the market dynamics and financial models underpinning the
April recommendation are still valid.
Immediately post lockdown UK ATM transactions fell by c55%. POL ATM transactions fell
by c45% (both figures compared to the volumes in weeks just before lockdown). As of
the start of July, transactions have recovered to c71% and 84% respectively. This
recovery is ahead of initial industry expectations and is in line with the recovery levels
also seen in the Banking Framework. Our over-indexing (when related to the whole UK
ATM estate) is a result of the demographic profile of our customer base and our less
urbanised / more localised mix of ATM locations.
A series of revised transaction volume projections were developed to compare against
the volumes used in the April Board paper:
4.1. Baseline - 80% Recovery by January 21 (note: already achieved w/e 5" July 20).
This recovery to be followed by slower decline after 21/22 and eventual alignment
to pre Covid assumptions by 27/28.
4.2. Further Growth - 80% Recovery plus market gain of c.4% market share of
transactions displaced as free to use ATMs are converted to surcharging or
removed.
4.3. Worst Case - 80% Recovery followed by the pre-Covid forecast decline (3% in
21/22 increasing to 6% by 23/24), thereafter accelerating to a 10% decline from
24/25.
4.4, Break Even - Volumes initially return to 80% of pre Covid, but continue to decline
at an accelerated rate of 15% in 21/22 and 10% thereafter.
4.5. Exit - All ATMs removed by Mar 22. See chart below for transaction volumes
forecasts to 27/28.
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2 ATM ‘Exit or Rer
To enable POL to achieve migration prior to the end of the Bol contract in March 2022, POL
must sign contracts with new suppliers in August 2020.
The Report
1. Over the last 15 months, and approaching the end of the Bol relationship, we reviewed
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IRRELEVANT
5. The strategy options revisited were
5.1. Market Exit as Bol withdraw
5.2, Remaining in ATMs by either of:
a. Renewing the contract with Bank of Ireland
b. Partnering with another Bank
c. Outsourcing to an Independent ATM Deployer (IAD)
d. Partnering with industry leaders to manage our own estate.
6. Options 2a and 2b remain discounted due to lack of interest from BOI/Other banks,
whilst in 2c, an IAD would take control over location and charging, leaving our access to
cash credentials severely compromised.
7. Set out below are details of the re-assessment of the Exit strategy (option 1) and
Remain (option 2d) with a new operating model strategy.
Exit
9.
¢ The majority of the positive cash flow occurs between 22/23 and 27/28, post removal
of ATMs, from the migration of an estimated 10% of ATM volumes to the counter
under the Banking Framework (percentage seen so far in ATM removals to date).
« POL would need to see a c70% migration to the counter to yield the same financial
benefits as the Remain strategy.
¢ However, demand for cash is falling and exiting would de-risk the business should our
forecasts be significantly optimistic and demand for cash falls beyond the breakeven
volumes identified.
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2 ATM ‘Exit or
. {inne.evarrichange spend is required largely due to;
rémoval of all ATMs. Included i f sunk OJEU costs together with {
id Supply Chain teams.
redundancy costs for FTE in the ATM
. Compared to the retain strategy {inretevant} change spend), exiting the ATM market will
free up of change spend for alternative investment.
[Financial Metrics MN 202121722 22/23 23724 2428 2526 2627 2728 I 20721 - 27/28
Revenue ’
‘Agents’ Remuneration i
Operational Costs
‘Supply Chain Costs
EBITDAS
Spend
Cash Flow: In Year
‘Cumulative Cash Fiow
10. There are also Postmaster and political implications to consider.
© For the c.2100 Postmasters who run our ATMS, they will lose all ATM remuneration:
representing 10% of their total remuneration.
© At 133 branches, ATM remuneration > 30% of total branch remuneration
© Total 19/20 ATM remuneratior
© —Postmasters will face lost footfall to their store
© There will be disruption to branches as ATMs are removed
However:
* Removing ATMs will reduce security risk at Branches from gas, rip out and other forms of attack
* Removing ATMs will reduce cash losses in branches as a result of poor ATM balancing processes
« The Postmaster will no longer need to cash fill and maintain the ATM
wip.a. ON average)
* Exiting the market would create significant negative “access to cash” issues with government, regulators
and pressure groups.
Exit will indirectly impact our commitment to the CACP pilots by diluting our access to cash credentials
and potentially weaken our position as the most viable partner.
* POca customers (who can only use PO ATMs) will be disadvantaged at a key moment in the
conversion/migration process
Remain
11. The 3 transaction volume scenarios used to assess remaining in the ATI
a range of cumulative cash flow between 20/21 and 27/28 of between ;
12.
13. The baseline scenario will pay back the H T} investment required within 28 months.
In line with PRB evaluation criteria to the end of 24/25 our base case will generate a
contract period, will generate a
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2 ATM ‘Exit or Re
[Financial Summary I 20/24 21/22 22/23 23/24 24/25 25/26 2627 27/28 20/21 - 27/28
Revenue
Agents’ Remuneration
Operational Costs
‘Supply Chain Costs
EBITDAS
Change Spend
Payment terms
Cash Flow: In Year
Cumulative Cash Flow
Further Growth H
Worst Case
Break Even
14. Sensitivity Analysis of Base Case Key Assumptions
The sensitivities below are not included in the base case.
Key Variable Sensitivity Performed Cumulative Cash I Revised
Flow Impact £33.7m
20/21-27/28 I Base Case_
Change in LINK 5% Change in April 22 & 23.
Revenue Rates Agents’ rem. revised in proportion.
‘Agents’ do not agree to I Assume 100 fewer ATMs.
retain a POL ATM
Increased ATM Attacks Attacks increase from 3 to 6 per month. Last 12
months average is 3 per month. H i
Increased Branch Churn BAU branch closures run rate increase from 1 to IRRELEVANT ]
2 per week resulting in ATM removals.
Cash Management Cost reduction if no transformation of legacy :
Back Office cash management processes, and IT option 1 H
Transformation (page 6) is selected.
Delay in Migration 2 month delay in migration
15; investment between 20/21-23/24 is made up of:
ti Of fixed costs, including ‘or legacy cash management process
improvement.
nevevanrl relates to ATM costs dependent on the number of devices (baseline 1,400).
_iS required for the removal of commercially unviable Bol ATMs.
16. There are also POL, Postmaster and political implications to consider:
* POLretains control over ATM deployment.
* Continued payment of ATM remuneration to Postmasters, which makes up a significant proportion of
their income. Whilst remuneration is reduced to reflect new operating model, it will still be material to
PMs.
The new software platform can be developed to support other transactions (such as deposit) at marginal
cost, which can then be supported on industry-standard deposit equipment
The managed services solution provides economies of scale for other automation e.g. deposit, including,
device monitoring and fault reporting, helpdesk and maintenance.
© Asa significant acquiring member of LINK, POL will have more influence on ATM cash access policy and
the setting of interchange fees.
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The UK Government, Bank of England and key regulatory influencers (Ceeney) view Post Office as central
to the provision of free access to cash services.
POL is actively working with the Community Access to Cash Pilot (CACP) led by Natalie Ceeney which is
seeking to provide solutions to ensure the provision of cash for communities and businesses. ATMs are an
important vehicle in the provision of access to cash.
¢ Our ATM network’s locational mix and the demographics of the customers they serve not only represent a
commercial opportunity but mean that we are often the last free to use ATM in town.
* Our free to use approach is central to POL's strategy of being the primary source of everyday banking cash
services in the UK.
* POCA customers are only able to withdraw cash at POL ATMs or POL counters (for a limited time- Nov 21)
Impact on IT Infrastructure
oA
18.
19.
The IT solution for ATMs under the new operating model would be delivered by third
party suppliers (VocaLink for transaction processing and Cennox for ATM software and
maintenance), and is fully costed within the business case.
During design phase of the various future branch ATM cash management processes, we
identified a number of severe legacy inefficiencies relating to the management of all
cash in branches and POL back office. These fall into 2 categories.
1. Cash forecasting and branch ATM cash management
2. Wider back office cash balancing and reconciliation that includes branch ATM cash,
but also covers how retail and counter cash is managed in the Branch by the
Postmasters, and reconciled in POL systems.
Delivering the Remain ATM strategy will include solutions to both categories - firstly by
automating the Postmaster cash declaration process directly into Supply Chain, and
secondly by progressing a sub-project (which has already commenced, but only to the
stage of categorising and planning how to remediate the issues identified in item 2)
which will — on approval — deliver a full programme of works to fix the legacy cash
management processes both within the branch and back office. The forecasted total
£1.5m expenditure in this business case will deliver:
« Horizon integration (for messaging, processing and related activities)
« ATM cash reconciliation (for systems such as Arrow, CWC etc)
« Back office (non ATM) related process improvements (connectivity for SAP/CFS and
MI systems)
Supply Chain ATM Costs
20. The ATM Strategy has assumed that Supply Chain will continue to provide cash for the
ATMs, and that Postmasters will continue to cash fill the ATMs in their branches.
21. An assessment of the ATM cash provision & delivery costs for the c1,400 ATMs that we
plan to migrate from Bank of Ireland (over and above the Supply Chain costs for other
Branch cash) is £0.8m p.a.
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Tab 4.2 ATM ‘Exit or Remain’ Strategy
Summary Request
22. POL Board is asked to discuss both Exit and Remain options and approve the
recommendation to Remain.
23. If Remain: the business will move forward with replacing the Bol ATM network with
ATMs that are leased and operated by POL under a new commercial and financial
framework. To enable us to achieve migration by the end of the Bol contract we must
sign contracts with new suppliers in August 2020 to enable us to commence
development of the solution.
24. If Exit: the business will move forward with BOI to remove all ATMs between now and
March 2022.
7
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Tab 5 Digital Identity
POST OFFICE LIMITED
BOARD REPORT
ie Digital Identity Partnership Meeting th
Title: Strategy Date: 29 July 2020
Ruthior: Elinor Hull - COO, Identity Sponsor: Owen Woodley = Group Chief
Services Commercial Officer
Input Sought: Decision
The Board is asked to:
« Agree the partnership recommendation for Post Office’s digital identity future and
provide authorisation to commence detailed partnership negotiations with the chosen
organisation.
Previous Governance Oversight
* On 8" May 2020 the Board approved an extension of our contract with Digidentity to
support the continuity of our Verify service to March 21.
* On 17% June 2020 the GE approved negotiating a six month extension with Digidentity
for the remainder of the Verify contract through to September 2021 (on viable terms to
Post Office) but not proceed further with Digidentity strategically for Post Office’s
identity future.
* On 17" June 2020 the GE approved taking three organisations into round two of
partnership negotiations with a focus on long term value to Post Office.
Executive Summary
« Post Office has an opportunity to cement its position as the leading UK brand in the
emerging digital identity market, thereby growing long term revenue and modernising
our brand and purpose. PSG analysis concluded that digital identity should be a
platform play with our preferred business model being to work with a partner who has
technology, distribution capabilities and cash to deliver our market ambitions, rather
than investing significant sums required to develop our own platform.
« Covid has changed the landscape for digital identity - with the need for increasing
digitisation and less physical transactions comes the greater need for trustworthy
digital identity. There is imminent market demand for the service Post Office has
scoped, but we do not currently have a partner to optimise the opportunity with.
t Office has established strong market interest and
with access to our brand, branch network and
ital identity has been modelled to bring Post Office
net profit over a ith potential greater value throug! i
lepending on partnership terms. The Board is asked to
rr the risk/reward profiles of the two strongest negotiated partnership deals with
and Yoti, evaluating the long-term value the partnerships bring to Post Office
against the risk presented by the proposed partnership structures and operating
models.
« The decision put to the Board is to endorse the preferred partner for Post Office’s
strategic digital identity future and the commencement of detailed partnership
negotiations.
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Tab 5 Digital Identity
Questions asked & addressed
1
2
3
. How can Post Office be successful in the UK identity market?
. What are Post Office’s digital identity partnership goals?
. Which is our recommended partner and why?
Report
How can Post Office be successful in the UK identity market?
1. Today, Post Office’s suite of identity services, used annually by over 6 million customers
in branches and online, are used for everything from obtaining a child’s first passport,
certifying a document for opening a bank account and verifying identity to submit a tax
return. The frequency of identity transactions is rising, driven by the need for higher
assurance transactions to counter increasingly sophisticated identity fraud and theft which
currently costs the UK economy over year. An update on Government identity and
our commercial position with Digidentity for Gov.UK Verify can be found in Appendix 1.
2. Identity assurance is a large and growing market - our own modelling (supported by
independent consultants) suggests an addressable market of over pa while external
studies by the Open Identity Exchange and McKinsey size this at a, growing at
over 5% pa due to regulatory pressures and digitisation. The attractiveness of the market
is evidenced by the significant investment going into the sector (c$6bn pa globally
according to Crunchbase). The key sectors for the market include government services,
financial services, employment vetting, travel and retail. Further detail is available in
Identity Services Business Overview.ppt in the reading room.
3. Post Office has an opportunity to generate revenue through transactional identity
verification (IDV) for organisations who require a face-to-face check (often for regulatory
reasons or an organisation not wanting to process documents) whilst transitioning to the
re-usable digital identity operating model that can be used and re-used by an individual
to access multiple services across multiple channels in a way that is convenient and
privacy-centric, offering economies of scale to organisations.
4. Identity services demonstrate Post Office’s mission to be there for all through providing
an inclusive proposition utilising our branch network. The elderly, the young, the
financially excluded, recent immigrants, disabled people and those living in rural
populations face the greatest risk of identity exclusion, all people who we serve in the Post.
Office today. A typical online identity assurance process requires you to have photo ID
evidence, a fixed address, a credit file and access to a device. Today in the UK 11m adults
do not have a passport or a driving licence, 90,000 households are in temporary
accommodation, 5.8m adults have thin/non-existent credit files, 1.5m adults are
unbanked and 6m cannot turn on a device. Aside from ability, 40% of consumers
surveyed stated that ‘in person’ was their preferred channel for identity verification, only
25% selecting on-line. This is evidenced by c25% of customers dropping out of the Verify
registration process when asked to upload ID documents (despite previously stating they
have the documents), suggesting issues with trust, motivation and/or ease. Feedback
from UK banks has indicated that branch ID processes for them cost !! highlighting
the opportunity for Post Office in this space.
5. Covid and remote-working practices have forced more services and interactions online,
highlighting the need for and forcing the acceleration of trustworthy digital identity. With
the economy of scale and market demand all aligning, an opportunity for the digitisation
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of identity exists, which Post Office is well positioned to address with clear USPs in this
market:
a. Long-standing role in providing identity services under our trusted brand (as
evidenced by our >55% Verify market share);
b. Position as the natural interface into government and growing association for
banking transactions (key sectors for driving adoption of digital identity);
c. Expansive branch network, which enables us to offer more comprehensive and
inclusive coverage than purely digital players.
Existential threats do however also exist from the UK government, via a possible approach
of a government led identity scheme, and big tech players such as Apple and Google should
they choose to provide reusable identity alongside their existing consumer product suite.
However, if this occurs then Post Office can continue to operate a successful identity
business by focusing on transactional identity verification through the branch network,
supporting and enabling whichever service becomes dominant.
Given Post Office’s affordability and delivery constraints and the significant uncertainty
associated with the outlook for the market, PSG analysis concluded that digital identity
should be a platform play with our preferred business model being to work with a partner
who has the technology, distribution capabilities and cash to deliver our market ambitions,
rather than investing significant sums required to develop our own platform. With a funded
partnership, digital identity can be a core part of Post Office’s strategic future landscape.
What are Post Office’s digital identity partnership goals?
8.
Post Office’s aim is to find the most suitable partner for Post Office's digital identity future
with a vision of providing a suite of identity services:
a. Identity verification: one-off identity verification transactions, conducted
digitally or face-to-face in our branch network.
b. Re-usable trustworthy digital identity: for a user to self-manage and clients to
consume when needed under consumer consent.
c. Ancillary services: future potential to create additional ID led use-case IP.
The outcomes that we are looking to deliver to the business from the identity partnership
are 1) maximum profit creation with minimum complexity and investment, 2) long term
value beyond revenue % share and 3) reinforcement of our purpose - supporting customers
who need us through our branch network. To evaluate long term value potential, we will be
considering the following:
a. Vision: shared vision for digital identity in the UK & what is needed to succeed.
b. Partnership value: profit and wider asset value creation.
c. Investment: strong partner investment / ability to raise external investment.
d
I. Control: Post Office maintaining control of success whilst operationally
remaining as light-touch as possible / realistic.
e. Quality: of technology and flexibility for the products and services to evolve to
ensure relevance and a competitive position in the emerging marketplace.
f. Risk: of partnership operating model / deal structure / market proposition.
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10. Following detailed analysis of potential UK focused identity providers, a short list of those
who met the core entry partnership criteria, including willingness to invest, was created
(partner viability analysis can be seen in reading room). Five organisations {inretevanr}
ind Yoti) were invited to participate under NDA in jal
two week engagement. There was strong market enthusiasm about a partnership with Post
Office, with all five companies submitting a proposal, validation of our belief that Post
Office’s strengths are valued and in the UK are currently unique.
11. Following proposal review with the GE and the pre-Board NEDs session, there was
agreement that the focus must first be to negotiate partnership value and secure clarity
and alignment of assumptions and then to move to negotiate the best commercial structure
to achieve that value. We have continued negotiations with Mastercard, Onfido and Yoti as
the three proposals offering greatest long-term value to Post Office.
Which is our recommended partner and why?
UK identity market entry in the form of a commercial scheme
which could be strengthened through leveraging Post Office’s brand strength to introduce
their new consumer ‘ID’ trust mark. With a slim revenue share license model offered it was
a low risk partnership, but one that did not meet Post Office’s ambitions of long-term value
or control. We concluded negotiations with options to work together in the future using the
Mastercard scheme for distribution.
offering
organisations the assurance they need to on-board customers remotely and securely via
Government issued photo ID documents. Their business model to date has been to be world
class at executing with their single product and expand globally. They have also recognised
the risks of disruption to their business model through Digital Identity and have spent the
last year proving the case through the They have a team of 400 spanning
across 8 countries, serving over 1500 companies globally with 234 in the UK, including 4
of the 5 mainstream UK banks and the majority of the Fintech landscape. They have raised
over £160m in funding including an £81m in April 2020, with full investment from
TPG (backers of Uber, Spotify and Airbnb). ing market leading identity verification
technology along with a strong B2B network and a focus on accessibility.
14. An SPV with f) would develop and own IP of the digital identity product as well as
apeillaty products. The SPV would seek to deliver value in the short term by extending
i current business model, offering online and in-branch IDV to serve as
steppingstones for the wider adoption of reusable digital identity (that Onfido plan to be
operating by September 21). Post Office and
15. Yoti, founded in 2014, has an existing consumer-centric, reusable digital identity platform
downloaded by over 7million consumers globally (1.75m in the UK). They also have a ‘doc
scan’ product similar to although not as mature as well as other ancillary
products. Over the past five years, Yoti has invested in creating optimal user experience
to facilitate trusted interactions, for both consumers and businesses. The business has a
team of over 250 and has received £81m of funding to-date from its founders. Yoti brings
proven technology with a market ready proposition and a growing user base.
16. An SPV with Yoti would re-brand their existing product suite to form a co-branded service
which both Yoti and the SPV would sell to designated market verticals. All
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to the SPV and the
ively gani: ed market verticals
(including goy:
Yoti propose
17. Company profiles and SPV business plans can be found in the reading room. A summary
comparison of the two propositions against the core defined areas for success is below
followed by financial analysis (further analysis can be found in Appendix 2).
.......ONfido. Partnership... = .-¥oti Partnership. on
Vision - H
shared vision
for digital
identity in
the UK &
what is
needed to
succeed
Partnership
Value -
profit and
wider asset
value
creation
Partner ij
Investment I
Quality - of
technology
and
flexibility for
products to
evolve
f_______
Risk i Hl
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/ IRRELEVANT
02
)) focused in the FS,
ie stream). From year 3 onwards
of revenue).
Government adds to become a significant drivel
Trading profit margins after Year 2 are
Year 5) as Yoti is proposing to take on
i of the
IRRELEVANT
i IRRELEVANT 3 is significantly different than Yoti’s, with first volumes and revenue
materialising in H2 of Year 2 due te Year 1 being focused on product development.
submitted a very cautious model ! cumulative profit) which Post Office have adjusted
jo present an upside generated scenario A showing "=="; cumulative profit (POL 50% share
+ funding ‘to bring the SPV to profitability). The adjustments made are
based on POL DI UK universe modelling and a belief that a 30% market share is achievable
r 5. Overall users i thi i ion estimated to be 20m by the end of the 5 years,
jand the profit split is proposed at
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22. In summary, we have negotiated jointly agreed SPV principles with both parties for mutual
benefit and which don’t cross our red lines for partnership. Our analysis has shown that
both partnerships are viable and will drive success, net profit to POL over five
years. However, the risk-reward profiles are different. With Yoti we would start on a more
certain solid foundati and hence higher confidence of the short
term, but we receive: as all IP and product operations remain in
their core company a y ctors between the SPV and core company
restricting full business reach. ri greater jas they have global
ambitions and a desire to be a known B2C brand so their value in Post Office's brand over
in the longer term once the market has grown as we will be al ts
in an organisation of product and IP holding selling to all UK industries
under the Post Office brand.
Recommendations, Next Steps & Timelines
« We recommend proceeding to partnership formation wit! generating a long-term
growth opportunity for Post Office’s strategic portfolio. During the deal negotiation we
will work with the partner to actively mitigate the short-term risks of product
development including a POC prior to deal signature.
* A partnership approach is unlikely to be transformative financially to Post Office but
equally we are taking minimal risk with minimal investment (year 1 POL resource costs)
coupled with reinforcement of our Purpose and a brand leadership Pc
emerging market. We seek to earn a net incremental increase in profit o'
five year period than if we did not form a partnership and only sold o
verification service.
« Appendix 3 details the SPV formation plan, with contract signatures aimed for December
and SPV company operations commencing in January 2021. Updates and decisions
required will be brought to the steerco / GE / Board as appropriate for the governance.
Documents uploaded to the Diligent Reading Room
ntity Partnership Viability Assessment
and Yoti Company Profiles
Yoti SPV Proposition
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Tab 5 Digital Identity
Appendix 1 - Current Position with Verify and Digidentity / Solera
Verify, our first digital identity service, has been strong business for Post Office, generating ove net income 2015-2020
and over 3 million Post Office identity users. However, it has not been a conclusive success for Government. HM Treasury has
given approval to continue Verify operations through to 23rd September 2021, no extensions beyond September 2021 are
permissible under the framework. Cabinet Office have learnt that a digital identity needs to be consumer centric, used for both
public and private sectors and that their role should be one of policy and standards definition rather than leading technology.
The Cabinet Office, through Lord Agnew, has commissioned a review of Digital Identity for UK Government. This review is
attempting to understand the market while at the same time challenging the current approach being taken by GDS and DCMS
on the emerging Identity Attribute Exchange (IAX) Framework. The result of this review is currently unknown (ministerial
reviews expected in 2-3 months) however we expect the Government to align behind identity standards that enables each
Government department to individually procure Identity Services against those standards. We also believe that the central
purchasing function of the Cabinet Office will not continue.
In April 2020, Post Office board approved the extension of our contract with Digidentity to support the continuity of our Verify
service over the next 12 months to March 2021, flowing down the complete costs paid by Cabinet Office which were re-
negotiated for this period due to high COVID-19 demand. This was concluded via a heads of terms agreement which linked into
the Cabinet Office emergency change notice. Digidentity required Post Office to enter into discussions regarding a
commercialisation agreement to re-use Verify identity accounts. GDS have confirmed that it is going to be highly unlikely that
they permit re-use of the Verify identities that were created using the Document Checking Service and the DVLA database. This
reduces the size of the trusted identity pool and renders the accounts created under DVLA DCS checks effectively unusable as
an asset beyond Verify. Negotiations between GDS and DVLA are continuing but there is low confidence in success unless it
is linked to outcomes from Lord Agnew’s review. This has a significant knock on affect to the proposed Commercialisation
Agreement between Post Office and Digidentity. However, Post Office has a duty to at least discuss the Commercialisation
Agreement initially with Digidentity as a result of the Heads of Terms which it is doing whilst seeking greater clarity from
Cabinet Office. Digidentity have not yet given any indication of a use-case for the commercialisation agreement.
HM Treasury has since given approval to continue Verify operations through to 23rd September 2021, although Cabinet Office
may decide to end the service sooner which they are contractually able to do by giving us notice in January 2021. No extensions
beyond September 2021 are permissible under the framework. Post Office and Digidentity have started negotiations with GDS
on the pricing for the remaining six months of the Verify contract between March 2021 and September 2021. GDS are not
engaging proactively and have stated that they are subject to a November budget review, so it should be assumed that the
pricing will revert to the MSA pricing of{—iper LoA2
Given the future changes to the Government market it is simplest to extend Digidentity’s contract for this additional six month
duration (noting that this will be subject to risk exception). This should not be done at any cost however, and it is expected
that without Cabinet Office commitment to greater funds that we are unlikely to reach an extension agreement with Digidentity
without guaranteeing their costs and hence committing to losses. The mitigation to this is to include the Verify service within
our new partnership arrangement if achievable. Alternatively, Post Office reneges / negotiates on Cabinet Office contractual
commitment and we exit Verify in March 2021 suffering potential Government ramifications (unlimited liability if deemed wilful
breech, but with an obligation on GDS to mitigate losses which it can arguably do through Digidentity as an alternative provider
of the same service). Post Office and Digidentity are in discussions re this period of extension but lack of certainty from
Government is disabling any conclusions.
We remain in dispute with Digidentity for the period 1* December 19 - 23° March 20 related to the cost per transaction
(Digientity asking fort: heir stated cost of manufacture, POL believi ntractually agreed pricing under the MSA
hence following its obligations under the
jbased on paving a maximum of i=../transaction).
reducing potential liability t. }, the Solera lead negotiator has
now left the business and there has been no fc ip. In June 20, Digidentity pres a draft of the commercialisation
agreement and also another agreement to settle the fee dispute and attempting to remove other clauses of the original MSA.
Legal and procurement advice is to not proactively engage in these topics as there are no strong justifications for them and
await a next move from Digidentity given that our legal position remains that the MSA was valid and hence there was agreed
pricing and service terms. Post Office’s aim is to protect its budget, not believing that Digidentity will stop our service whilst it
is generating good revenue from it
[Confidentiality Classification]
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@
Appendix 2 - Detailed Comparison of Propositions
IRRELEVANT
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SPV with
Proposed Equity
Ownership
Dividend Policy
Proposed
Investment
Resource costs for
year 1 for the SPV.
Long term value
creation for POL
and IP
Brand
Perception of POL
Engagement - by
identity industry
Partner Products
Products for the
sv
IRRELEVANT
Product
Development
Approach
82C Service Desk
128 Sei
Sales Team
Existing Users
(82C) in the UK
Speed to mark
Go to market
strategy
Market verticals
that the SPV can/
cannot engage
with.
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828 IDV Clients
Di Glients
Government
Engagement
‘Speed to Market!
if the other part
Company
Reputation
ifthe primary}
business plan fait
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Tab 5 Digital Identity
Appendix 3 - SPV Formation Plan
[seteecback to 2 partners tor final sharperes, is for Board decision
[Decision by GE & Bours to narow tot (29/07)
{contracting process
lappoictment professional zervies infor special
forbowcing of professors seraces
Ienet. lannirgancpresarator of prcfessonal services
serves with POL Pater to create SPV
[Prat apremerts(Pirserts)
bSharetolcers Agement SPV)
bervees Agreement Partrer> SP)
Trademark ence (POL sara)
brunsirgapremert{SPV)
bet contact temolting SPV)
Daesourceseconcmert agreemertOrfice &POU>SPV]
ofS wth profservees parr z
[ancl Mosel
[Dstobction ae terior af SPV couimertation (eure)
JPistabtion are nertion of SPV conumertator (r0ure 2 TT
Jostnbstion are terion of PY {roure 3
[create agreemert with preferres partner i
fneratec negotiation wth pre ure
[reratecregottion with partner (ure 2)
[neat regouatir wth pare’ (ure 3
[p01 SPV Project Activites
ine ss Engageme t Summary Dec prepared ard cstibctes to business
eee
PO stakehoicer RAG confirmation I
i I i ter
[sisiness stateholcer checkpairt [eenng committee)
[Project Man agemert ivitiation
[business Rik assessment arc schecvled reviews
alin POL legal rik ete [require for Bare)
{Governance TO BE CONFIRONED
/BEIS Aeprovolto proceed
[POL Board Contract
12
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RDSIENS OCNd BuIPNOU! SEW 9 GeL
PUDO (Pick Up Drop Off) Strategy
Update
July 2020
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Following the completion of the Mails Strategy Review by McKinsey in April 2020, we have been
progressing the recommended direction of development.
We have made progress in many areas, there are some, such as Network and IT, where we are
continuing to work closely with wider business projects (e.g. NEO) to define the optimum solution.
Questions being answered in this update:
i.
2
mi.
4
Revisit the objectives of the PUDO strategy and why it remains the right choice for POL
Outline the commercial mechanisms e.g. pricing and relationships needed to succeed
Specify the operational implications for Post Office and its agents?
Update the Board on the trial with Amazon and how this fits to our objectives for a deeper
relationship
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Recap on output from McKinsey
* There is al! isk to future mails income resulting from the potential disruptions identified
during the mails strategy review
*« Acomprehensive assessment of market plays and strategic options was undertaken resulting in
the recommendation to pursue a ‘winning in PUDO strategy’
* This means Post Office becoming the UK’s preferred location for Pick Up and Drop Off (PUDO) of
e-commerce driven collections, returns and undeliverables plus parcels bought online irrespective
of carrier
* It is aligned to market and consumer trends, is deployable across arrange of different formats
and offers the opportunity to secure material new income and footfall
¢ It has minimal dependency on Royal Mail and the new agreement and is aligned with the
“Thriving Postmasters and “Ease & Access” elements of the Purpose, Strategy and Growth review
Du! SIIEW 9 GEL
ABa}eNS OANd Buipn
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Why PUDO is great for Post Office
ABayeNS OGNd 5
; Protects Builds relevance
Offers material new 5 Supports network
marketplace seller with younger
income and footfall stability
volume demographic
Complex transactions I
and high costs to serve I
I Younger users mostly '
I deter new agents. Mults I
use post for e- {
Social users send less '
parcels reducing need I commerce returns.
' Driven by convenience,
' rather than brand
loyalty
SMEs increasingly
purchasing postage
: ! attracted to simplicity of I
' online
t
Challenge i
for complex sales in
direct carrier agnostic
branch i
PUDO proposition e.g.
Co-op
Carrier agnostic, t
extended network and I
simple journeys i
Simple customer
journeys. Multi-carrier
offers greater income
Acceptance volume
maintains income (@
New volume and '
: lower unit rate), footfall
income to offset
Benefit of PUDO dase improves transactional ‘i
reduction in volume dace our convenience. Makes I I and footfall than retailer
from traditional users avaee p: i i OL ane-comm relevant I I direct relationships. POL
Posuieters sie eet brand I may offer simplified IT
Laencamemcenacnacraseant! Lmeaannnmetemenpammnme spel a 1
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PUDO is similar in size to our traditional ‘send’ market
The PUDO market has four key components; Click
and Collect (C&C), Home Shopping Returns (HSR),
un-deliverables, and acceptance of items sold online
All are driven by the growth of e-commerce
The market is currently a similar size to the ‘send’
market in which Post Office holds a large legacy
share (~80%) unlike PUDO (~26%).
PUDO volumes are expected to match then exceed
‘send’ volumes by 2022/23 as consumers send fewer
parcels and marketplace sellers increasingly buy
online (switching volume from ‘send’ to PUDO)
Growth in Click and Collect is expected to accelerate
as pressures to address the social and
environmental costs of home delivery grow. Covid
19 has brought these forward (accelerating e-comm
from 8% to 24% in 2020)
UK PUDO & Send Market Volume (m items)
8s]
lili
I se] I 308 I
392 = Ls]
S7ia7t 86 369 aE a ER
[79] Paes] 154 oP
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26
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FY20-21 Fy21-22 FY22-23 FY23-24 FY24-25 FY25-26
(=m Returns mmmUndeliverables mammmAcceptance mami Click & Collect =--Market Volumes (Send)
Source: Mails strategy Review market model, pre-Covid 19
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Competition for an agnostic network is low but growing
AB812.S OGNd Bulpnjou
® The traditional approach of parcel carriers running dedicated parcel shop networks is declining as they seek to maximise
customer accessibility
= Following the exit of Doddle as an network provider, Collect+ is the only material carrier agnostic network operator
= However, competition is growing from non-traditional operators in particular retailers such as Co-op who are rapidly
developing direct relationships with parcel carriers and retailers
® This is accelerating as retailers seek new sources of income and footfall, and technology providers offer low investment
models (especially lockers) to gain market leadership
Direct Network Competitors Retail Networks Technology Challengers
Players
i
1 1
i
I ne I L
r
I 7.5klocations, with the majority in convenience I
Network Size ! stores in urban areas. Network has not grown in 2 I
L I
Propositi
InPostplan to expand from 850 to 6k lockers by 2022
af
in Parcelly operates from ¢.3k locations
im
I I Quadientambition for 10k UK lockers next year
years and nowat a stable figure
I Carrier agnostic with 5+ partners including Yodel,
‘Amazon, eBay; ePos integrated simple scan-in
transactions; <60 second customer journey
No capex model for carriers using small footprint
r
I Direct relationships with carriers with each requiring
1 self assembly lockers
bespoke device & processes
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é
5
. . . . o
®
We believe we can win in this market g
In PUDO we are competing with other retail outlets for share of volume rather than established parcel carriers. Use is driven
by customer choice, with convenience and trust two important selection criteria, which Post Office scores well against.
u
2
g We are starting from a Customers trust and We have the most Allowing clients to
convenient network reach more customers
& 44
35% 29% 46% 30%
solid market position
prefer our brand
ay
®
g
9
5
2
R
rs
P
SS
8
z
FS
ES
g
8
Of customers prefer to drop a Of customers prefer Post Office Of consumers choose Post Office More of the UK population
return at a Post Office, and we are for PUDO journeys over alternatives as the location is Hermes could reach by using
the most preferred delivery point (vs 11% for myHermes and 8% closer to their home or work Post Office
after ‘to home’ Collect+) (Detailed comparison in Annex)
Source: IMRG, C&C and Returns Reports 2020 Source: Quadrangle Research, 2018 Source: Chime Research, 2018 Source: Parcel Strategy market analysis, 2020
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Our ambition is to become market leader
Our ambition is to increase our share of market from
1. Protecting our current baseload volume with Royal Mail
2. Offer market leading proposition to other carriers
We believe our proposition will allow us to secure r
é
U
=
i=]
(e)
4
&
g
Value can be driven through...
Product & * Providing our customers access to PUDO.
ERE services through multiple carriers (RMG Royal Mait
Pemnesiee and others such as Amazon, Hermes...)
Network * Having the best PUDO network in the UK, aeetn
locations and with the best locations and formats for our H
formats customers’ “missions” fume
* Streamlining transactions with partners I R R ; I ; VA N [ I
esti other than RMG (each with its own tech) for
beet * Build and leverage customer data i
are Having the best PUDO customer oro ;
d experience in the UK, allowing customers i
Bouruey® to come in & out our stores within 60 sec
Other
Customers understanding theycando . .
PUDO operations with multiples carriers at 150 200 250
car lrenohes (eerie So Conk: 6 Banking) Click & Collect mUndeliverables mReturns m Acceptance» Non-POL
Source: Mails strategy Review market model, pre-Covid 19
POL-BSFF-WITN-015-0009992_0233
06 30 ZZ
pueog 10d
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IN COMMERCIAL CONFIDENCE
This is supported by a growing sales pipeline
* We have identified a pipeline of opportunities from the major carriers which build over the period
* The combination of which will deliver >£60m incremental income by 2025/26
POL 3rd Party PUDO Volume (m items)
300
Market share
250
=m 20%
150
100
a 110 119 125 21%
o
Fy21-22 Fy22-23 FY23-24 FY24-25 FY25-26
mRoyal Mail mAmazon mHermes @DPD mYodel m Other
Source: Mails strategy Review market model, pre-Covid 19
POL 3rd Party PUDO Income projection (£m)
Higher unit prices increase
yield from 3° party volume
45
E : :
FY20-21 FY21-22 FY22-23 FY23-24 FY24-25 FY25-26
mRoyalMailPUDO ™ incremental PUDO
Source: Mails strategy Review market model, pre-Covid 19 9
AB9}21§ OGNd Buipnjou! sieW 9 qeL
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We seek to maximise value through our pricing strategy
= The market generally operates on a standard flat rate with an
element of brand or volume related benefit.
= Rather than adopting a ‘me too’ approach we want to focus e
on the value and cost drivers for the operators 14
= To maximise value we are exploring a different approach to i EE
pricing our services reflecting the strength of our brand and qi higher volume or
network advantages 8 - es
he 0.75
= Example: Cw I
= Higher pricing for rural locations to reflect the avoided 0s 05
costs and improved customer experience for a carrier of a } =
dropping a undeliverable at the local post office rather 0.2 7
than returning to distant depot a
= In urban areas, where POL is under represented we may POL/RMMDA Current
1&2 market rates
need to compete on price rather than convenience
= We are not interested in short term business. The investments
and customer expectations mean we need to secure long term
contracts
Actual costs to
deliver in rural
can be >£10
15
No convenience
advantage as
networks overlap
0.75
I 0.65 0.65
05 }
0.45
Urban rates may
need discounting
to secure volume
POL urban POL dense POL rural
urban
Indicative rates to illustrate
differentiated pricing approach
POL-BSFF-WITN-015-0009992_0235
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IN COMMERCIAL CONFIDENCE
é
8
We are refining our operational model Z
* We have considered the operational and commercial attractiveness of the different services and clients
* We will lead with Pick Up services due to operational simplicity and greater financial opportunity (due to lower market share)
2
2
(1) Start by offering Pick Up services due operational
simplicity and incremental value
o
3 Customised Access Standardised Access
5 RM forms base trading volume/income and secured
2 through MDA 2 PD, Hermes, DHL, UPS etc)
2 Amazon only other carrier with scale to make UT ra a Urban Bernere/onel Suburban:
N Sas page Sal ro Product Proposition ——raximise volume from Compete for high Leverage POLUSP & Generic ‘me too’
y few customers volumes support social purpose proposition
€ Other carriers offered access on standard terms @ Pick up 6. etd Collen v 7 Hy Sh
Pf with proposition based on network value ‘Low POL market
8 share, oj rationaD i
8 Click and collect open to all carriers due to ae Undeliverables x v v v v
simplicity
operational simplicity for postmasters
Un-deliverables operationally similar to Click and
Collect. RM declined opportunity in preference for its @ 7
rop Off Home Shoppin,
own Customer Service Points and Delivery Offices ek age, I Seats ay v v x v x
Drop off limited to few clients due to operational share, one
challenges in branch and lower incremental value, inline acceptance
except rural areas where POL offers unique value
Online acceptance restricted further to protect in
branch sales value by preventing acceleration of
customer migration online
POL-BSFF-WITN-015-0009992_0236
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8
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g
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Ss
8
IN COMMERCIAL CONFIDENCE
PUDO services are consistent with the new network design
® To be successful we must continue to offer customers the most convenient network and quickest customer journeys
= Post Offices remain at the core of the network and we are working closely with the NEO team to refine the
requirement for different access points potentially including automated solutions such as lockers.
Post OFFICE NETWORK TODAY (MARCH 2020)VERSUS FUTURE BLUEPRINT NETWORK
~12,500
11,638 895 Potential additional
1,000 Aspirational Access
Outreach he
14 By PO
Traditional Basic +
(Legacy and Community) Basic (excl. Banking)
Locals
Essential
Mains
DMB Plus
126,
‘Current Network - Blueprint Network
March 2020
POL00448765
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4621215 OGNd Buipnjo
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06 39 92
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IN COMMERCIAL CONFIDENCE
POL00448765
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IT is central to securing clients and network flexibility
We are working closely to develop the optimum approach for the PUDO technology solution which needs to operate
across a broad range of different propositions and channels. Our working hypothesis is option 3 below, using either a POL
supplied or BYO device.
PUDO
technology
solution
» Format
Customer
r— Main
;— Local
+ Outreach
I} Payzone
;— Unmanned locker
r— Click & Collect
;— Returns
Undeliverables
journey
———* Features
~~ Online Acceptance
___ On-demand delivery /
collection
— SSKs
I__ Customer identification
(QR codes)
;— Real-time advice
High-level strategies
Use carrier
technology
Change POL IT
stack to support
multiple carriers
Develop own
greenfield
solution (incl.
leveraging third
party)
Description é ‘on approach
Deploy individual carriers’ tech in
branches
* Each carrier (e.g., Amazon, Hermes)
provides its own app (and possibly devices)
directly to branches
« Functionalities and journeys differ
depending on the carrier selected
Modify Horizon to support multiple carriers
* Collaborate with Fujitsu to add multi-carrier
functionality to Horizon and other existing IT
components
« Requires deep knowledge of Horizon,
likely led by Fujitsu
Develop POL smart integration layer
* Deliver end-to-end PUDO solution
independently from current IT landscape
Decide which components to build and
which ones to purchase
Possibly use strategic partner in short term
lails Strategy Review, 2020
Early hypothesis
ABaIENS OGNd Suipnjou! sje 9 qeL
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IN COMMERCIAL CONFIDENCE
Operational implications are important for Postmasters
Proposed approach
Opening hours Will branches need to 93% of items are currently collected between 9am and A flexible PUDO network where POL is able to turn locations
5.30pm despite 52% of branches being open before _off and on rapidly and adjust quickly to increases and
be open longer?
9am and 44% after 5.30pm decreases in demand
fit et
Interoperability I How do we stop items Avery low level (,0.5%) of mis-sorts is possible as Non RM items are scanned, then scanned to bag, agent
being accidentally services grow. All carriers have an obligation to unable to complete next transaction until this is complete.
mlercuted? minimise the risk of loss, damage or delay to all POL to develop an interoperability framework with 3"
parcels. parties and Royal Mail
Remuneration What will we pay Need to balance postmaster expectations with Initial principle is that agents will receive the same level of
postmasters? consistency across clients (esp RM). remuneration as they currently do for equivalent RM
products. However this will be reviewed prior to full roll out
POL-BSFF-WITN-015-0009992_0239
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Amazon represents an opportunity and challenge
Overview
hi UD
strateg)
How do we
t value?
IN COMMERCIAL CONFIDENCE
Second largest UK parcel carrier after Royal Mail
Driving market standards of customer convenience and service
quality
Increasing use of Amazon Logistics to meet and improve
services especially for higher value PRIME members
Developing own access point network to support Amazon
Logistics same day and sub-same day services
Using 4k Collect+ stores and >1k other retailers (e.g. NEXT),
plus own locker network
But retailer quality and relevance remain a challenge. Post
Office helps address this
Engage: Amazon's own plans may put 70% of POL Local
Collect and >20% of Home Shopping Returns income at risk
Use initial engagements to set high demands & expectations,
we do not need to make early concessions.
Leverage citizenship role — Amazon value the community and
social credibility working with Post Office offers
175
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ABaIENS OGNd Suipnjou! sje 9 qeL
Amazon Logistics Growth (m items) CAGR
Gor) a
375
310
: i i
FYIS-16 FYIG-17 (est) FY17-18 —-FY18-19 _FY19-20 (Fest) FY20-21 (Fest)
Amazon PUDO Volumes (Forecast m items)
CAGR
154
G9)
46
123
102
387
68
: i i
FY19-20 © FY20-21. FY21-22—FV22-23FY23-24 © FY24-25 —FV25-26
(Fest)
(Fest)
POL-BSFF-WITN-015-0009992_0240
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IN COMMERCIAL CONFIDENCE
Amazon Trial
6
<
fe)
o
Overview
= We are trialling Amazon Logistics click & collect in c.120 branches split across two postcode areas (Preston & Edinburgh).
= The trial start is dependent on signing MDA 2, due late August and will run through peak period to Jan 2021.
= We will use Amazon’s hardware and software and require no integration with POL IT systems (including Horizon).
= Amazon will provide us with daily and weekly data feeds on volume and performance.
= POL taking a strong position in commercial negotiations to test Amazon’s real appetite and set positive precedents for a full deal.
= The trial will test the viability of opening the network to Amazon’s Click and collect volumes.
= The limited scale and duration mean the financial benefits are modest however there are significant non-financial benefits:
1. Build a relationship and test demand from the UK’s leading online retailer
2. Prove the viability of our PUDO strategy
3. Inform what operating changes are needed for the new network design (NEO)
13/7 20/7 27/7 3/8 =~ 10/8 «17/8 24/8 31/8 7/9 14/9 21/9 28/9 5/10/20 - 15/01/21
Go/no g6 decision ¢ ¢ ¢ @
>? Tigdlive T2golive 13 golive T4 golive
‘cuss (20) (20) (30) (30) E
2 contract ,
: a ‘3 # L Po} Trial needs to.run through peak ,@
tneernel Postmaster = Device : Agent setup Branch bedding in period
ot engagement = supply I & training Earliest date
Prep
for trial to Finish
&set
up
POL-BSFF-WITN-015-0009992_0241
Next steps
IN COMMERCIAL CONFIDENCE
POL00448765
POL00448765
“i
The focus over the next quarter is on launching the Amazon trial and using this to finalise the technical design and full business case
C&C Trial preparation
Cease and return kit
C&C Trial Oct ~ Jan 2021
PUDO
strategy
Network design
Organisational design
Pricing/commercial model
Business case for full roll out
End State IT solution
Qi
2021/22
C&C Trial roll out
Full contract agreement
Ship with Amazon Trial preparation
Client #2 engagement
Client #3 engagement
Delive
ing London Initiative
Dependencies: post peak,
IT & commercial mode!
POL-BSFF-WITN-015-0009992_0242
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IN COMMERCIAL CONFIDENCE
We are updating the original financials
= Target operating DPC of based on standard market pricing and agent remuneration equivalence with RM services
= Hardware and network change costs need to be updated and align with wider IT and Network proposals
ai Q3 as Qs a6
[Assumptions Nb of stores Ey 300 1000 2500 5000}
Partners Amazon Deal signed Deal operational
Hermes Deal signed Deal operational
‘TOTAL STAFF COSTS
TOTAL HARDWARE COSTS
Store enhancements
Customer service and technical support
= IRRELEVANT
‘Assumed network of 5k branches within 18 months with ambitious client sign up r jon of a new dedicated team (6 FTE's rising to 16 by Qs.
Excludes value of Royal Mail services
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DUI SIIEW 9 GEL
IN COMMERCIAL CONFIDENCE
Appendix
KBa,eng OANd BuIpn
PUDO market breakdown
POL/Hermes network comparison
Competitor Summary
Effect of Covid-19 on market volumes
Financial effect of Covid 19
Market pricing
Agent remuneration
eS Fee ££ aes
Amazon trial - agent and customer journey
POL-BSFF-WITN-015-0009992_0244
5]
-z Keg A609)
What is PUDO?
IN COMMERCIAL CONFIDENCE
POL00448765
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é
5
°
2
g
PUDO comprises more than just Click and Collect and Returns, offering access to substantial new volume streams
Why Enter?
Market Forecast
Pick Up
Click & Collect 1
POL current market share 10%
Operationally simple and
consistent with existing offer
Minimal impact on agent and
improves agent proposition
Economically and
environmentally attractive to
consumers, carriers and
retailers
38
35
16
or
FY19-20 FY24-25
POL Volume via RM
Rest of Market
POL Volume Other
Drop-off
Undeliverables 2 Returns 3 Online Acceptance 4
= Operationally similar to accepting = Over 55% of market is currently = Increasing rate of migration to
click & collect non-RM. online purchase
Simple scan-in acceptance
interaction
= Large market in which POL
currently does not operate
Increases convenience and
maintains relevance to younger
demographic
* Carriers can consolidate and avoid
costly redeliveries
129
at 103
22
Retains Marketplace volume
which has migrated online
and/or away from RM
Simple scan-in acceptance
interaction
2a1
145
a 44 nH mm
= SEO
Fv19-20 Fy24-25 Fv19-20 Fy24-25
POL Volume © Rest of Market POL Volume via RM POL Volume Other
Rest of Market
FY19-20 FY24-25
Total Marketplace Sold Online
POL Marketplace Acceptance
POL-BSFF-WITN-015-0009992_0245
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IN COMMERCIAL CONFIDENCE
By partnering with Post Office, Hermes can reach ~30% more of the population
POL-BSFF-WITN-015-0009992_0246
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ry
IN COMMERCIAL CONFIDENCE
Market Competitor Summary
Segment Direct Network Competitors Retail Networks Technology Challengers
5]
N4
parcelly? =(inpost. quadient
Parcelly operates from ¢.3k locations
InPost plan to expand from 850 to 6k lockers by 2022
7.5k locations, with the majority in convenience
stores in urban areas. Network has not grown in 2
years and now at a stable figure
r
I
{ ¢.2.5k coop ¢.1.3k WHSmith .500 Morrisons
r
Carrier agnostic with 5+ partners including Yodel,
‘Amazon, eBay; ePos integrated simple scan-in
transactions; <60 second customer journey
No capex model for carriers using small footprint
1
1
1
_!
1
1
1
I
anes
1
I
self assembly lockers I
“4
1
Direct relationships with carriers with each requiring I
bespoke device & processes \
1
z-0z0z Ainr 6z - z Aeg ABay
I Integration not required for Parcelly operating model I
I Locker providers have ability to integrate with multiple!
L carriers and retailers I
Nature of direct relationships means additional
device per carrier, would want multiple carriers on
ideall rt of their epos
1
Epos integrated through Paypoint One device- I
ire to have multiple carriers on single device I
I
Strengths why
partner
POL Right to Play
POL-BSFF-WITN-015-0009992_0247
Effect of Covid-19 on original market projections
Following an initial negative effect this financial year we expect the effect of Covid 19 to be net positive
IN COMMERCIAL CONFIDENCE
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for PUDO volumes as the growth in e-commerce has accelerated market volumes by ~2 years
Social lockdown reduces volumes by -15%
especially Click & Collect, undeliverables and
Home shopping retur
Relaxation of restrictions sees undeliverables,
click and collect and HSR return to pre-Covid
levels, with volumes amplified by one off
+24% growth in e-commerce parcels in 2020
Compound effect of e-commerce parcels
growth sees PUDO forecasts achieved 2
years early
Volumes +22% as Click and Collect
volumes accelerate driven by
environmental and economic pressures to
reduce % of to door deliveries
421
396 y
I
.
FY21-22
PUDO Market forecast (m items)
453
i I Ie
92 I a
I I
' a
I I
I ce i I
i I I
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IN COMMERCIAL CONFIDENCE
Financial effect of Covid 19
The cumulative financial benefit of Covid related increased volumes could b ver 5 years from 2021/22
= Of which additional HSR volume through RM delivers I
* And increased 3" party volumegm
McKinsey income projection Revised income projection
POL-BSFF-WITN-015-0009992_0249
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IN COMMERCIAL CONFIDENCE
Market Pricing
We propose to maximise the value of our network and brand by testing a zonal based approach to pricing
2019 Volume (est. m)
© Unit price
* Collect+ now the only primary agnostic operator * POL rates to RM reflect greater volumes (esp. HSR)
* Rates are offered on a standard national basis, reflecting * POUs under-representation in dense urban and over
* Competitor network concentration the in same urban & representation in remote/rural areas creates opportunity to
<uburbat.areas consider a more sophisticated pricing approach
* Market rates vary based on actual or predicted volumes * Proposal is to test zonal based pricing leveraging POL’s
geographic coverage (e.g. Hermes could reach
population through POL — McKinsey analysis)
Source: Carrier rates based on 3" party industry sources
POL-BSFF-WITN-015-0009992_0250
IN COMMERCIAL CONFIDENCE
Agents remuneration
Our current proposal is to remunerate agents at the same rates as the equivalent RM product
Aim is to support core Post Office network first by targeting
incremental volume at lowest cost
Non RM product customer journeys are quicker and simpler
than existing mails products, i.e. no need to weight items
Remuneration options;
1. same as RM (footfall offsetting unit rate differential),
2. _ less (as its quicker) or
3. more (risks influencing customer behaviour)
Considerations:
* Alignment between different formats including PZBP
* Retailer direct rates (e.g. Amazon to co-op) maybe higher
* Should host retailer rates be equal irrespective of local costs and
alternatives
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6
a
é
b=
8
2
g
IRRELEVANT
mAgent = DPC
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Amazon Agent & Customer Pickup Journey
Agent -receiving
items
Customer
pick-up
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IN COMMERCIAL CONFIDENCE
Agent selects delivery Agent scans every ‘App stores receipt of parcels and agent places them in Customer notified and
from app menu package received secure area sent QR code for pickup
via Amazon email
‘Agent selects customer Agent scans customer Agent sees parcel Agent retrieves parcel(s) and scans them Agent confirms hand Process complete
pickup from app menu QR code information upon scan via the app cover of items
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POST OFFICE LIMITED
BOARD REPORT
ts Network Strategy: update & Meeting th
Title: DMBs programme data: 30" March 2021
. I Martin Edwards, Network 7 Dan Zinner, Group Chief
Author; Strategy & Delivery Director Sponsor: Operating Officer
Input Sought: Decision & noting
The Board is asked to approve the exit and replacement of 57 DMB branches in 2021/22
at a cost of £18.9m, generating £4.4m annual recurring benefits.
The Board is asked to note the progress in developing our new light-touch formats and
our plans for further piloting and roll-out during 2021/22.
Previous Governance Oversight
Board discussions on Network Strategy in July, October & January
Questions addressed
1. What is our 2021/22 DMB exit plan?
2. What progress have we made since January in developing the new propositions and what
are the next steps for piloting?
Report
1. Directly Managed Branches (DMBs)
de
At the January Board we discussed our plans for exiting the remaining 115 DMBs,
reasing accessibility with c.216 new postmaster-run branches and generating over
LEVANT] annual benefits for a total investment of ecu} The Board was strongly supportive
of these proposals.
While our aspiration in January was to exit 84 DMBs in 2021/22 and complete the
programme within 18 months, the reduction in our overall investment budget has required
us to rephase these plans. We are now proposing to complete the programme over a 24-
month period, targeting 57 exits in 2021/22 and the remaining 58 in 2022/23. If funding
and delivery constraints permit us to accelerate this timetable we will do so.
Of the first 57 exits, we expect 9 to be straight closures in areas where we already have
ample coverage to meet customer demand. The other 48 will mostly be delivered through
onsite franchises with temporary postmasters, meaning we release the staff savings but
retain the property costs. To release the full savings we will need to find a permanent
solution for these branches at a later date, most likely once we have SPM-enabled
solutions such as automation to offer nearby retailers.
We are provisionally planning to commence the first tranche of branch consultations on
20" April, preceded by briefings with the CWU and Unite on 13" April, although this may
shift to May to reflect wider stakeholder and political considerations. We discussed these
plans with the Minister on 15 March. No specific objections were raised, although he did
request a list of the branches impacted so he can work with the relevant MPs.
Confidential
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5. The Bo
cost of
ng 57 DMBs in 2021/22 ata
y generating annual recurring benefits.
2. Update and next steps on the wider network strategy programme
6. Since January, our focus has been on developing the detailed plans for our two new
simpler formats, ‘Express’ (which combines bill payments and PUDO) and ‘Basics’ (which
adds in-branch RMG products). Like Payzone, both these formats use a small footprint
device and operate off the retailer's cash & payments capability, matching the simple,
easy-to-integrate propositions offered by our competitors such as Collect+ and
MyHermes. Our hypothesis is that these models will expand the pool of retailers interested
in running a Post Office, thereby generating multiple benefits over time:
i Reducing the :: we spend each year in managing network churn, with the
set-up costs for these new formats estimated at less than!
for our traditional formats;
more
pa for
profitable one for POL (===! pa profit contribution for Basics and
Express, compared with a typical loss of pa or worse for outreach);
iii. Providing more options to replace ‘wrong format’ branches (i.e. DMBs, Hard to
Place, surplus Mains and outreach not required to meet access criteria);
iv. Supporting incremental revenue growth through a more convenient network for
customers (we estimate a 3-5% sales uplift from delivery of our blueprint); and
v. Linking to point i), supporting the shift to a lower cost operating model for POL.
7. The slide deck we distributed to the Board on 15" March provides further background
detail on our plans for Express and Basics, including: i) the commercial model (which
broadly matches Locals product rates but with the introduction of IT subscription costs
aligned to competitor benchmarks); ii) the service support model (including how we
propose to leverage Payzone capabilities to create a streamlined operating model); and
iii) our analysis of profitability for both postmasters and Post Office, confirming that the
models should be viable and attractive for both sides.
8. The key next step is to test this theory through live piloting with new postmasters. We are
already testing a version of Basics using a temporary Horizon counter in 6 locations, with
a further 6 to follow over the next month. In Q1 of the new financial year we will build on
this with 32 Express pilot locations using a technology solution that is more closely aligned
to our target solution enabled by SPM. This will enable us to gather retailer and customer
feedback to inform the subsequent roll-out to 400 locations in H2 and validate the
assumptions underpinning our profitability analysis. Section 2 of the slide deck sets out
further details of our plans for the pilots.
9. Over the next 4 months we will also be evaluating how we can optimise our full-service
formats, including through greater use of automation. We will also be reviewing the overall
commercial framework for existing postmasters, assessing how we can create modern
franchise arrangements and address legacy contractual risks, using the hook of new SPM-
enabled technology propositions as the catalyst for change.
10. Appendix 1 provides updates and responses to the various network strategy questions
raised by Board members over the last 6 months. We would be happy to follow up in
Confidential
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further detail on any of these points in 1:1 briefings and we will revert to the Board with
an update on the overall programme in June and July.
Confidential
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Appendix 1: questions from previous Board meetings
Question / topic
Update / answer
Hard to Place (HTP):
explore options for
accelerating resolution of
the remaining branches,
to inform next funding
submission to BEIS.
January Board
« Engagement underway with remaining 365 HTP postmasters —
based on the responses to date we expect around 84 will opt to stay
on their existing contracts (effectively converting to Community
status) and 281 will opt to extend their conditional resignation offer
(allowing them to leave with compensation if we find a
replacement). We have potential solutions in train for 88 of these
branches, leaving just under 200 wanting to leave but with no
replacement currently in the pipeline.
« We have developed a decision tree framework which identifies a
range of different levers for resolving these remaining branches
according to their circumstances, which we can share with Board
members on request. We will need to manage these options within
the scope of available funding beyond 2021/22.
What are we doing to
assess and improve the
physical capacity of the
network to deal with
increasing parcel
volumes, especially as we
expand to 3" party
carriers?
Ken McCall, January
Board
Pick-up
We have built a desk-based view of capacity by branch which
conservatively suggests that we have space for 75m parcels a year
across our existing network. We expect pick-up to grow to 50m
items by 25/26, so in theory we have adequate capacity at an
aggregate level. However, there are three caveats: 1) Nov/Dec is
always going to be a capacity challenge and may require alternative
solutions; 2) the postmasters may want the extra space back when
we migrate to SPM; and 3) there may be localised shortages, which
we are currently attempting to model. There is also likely to be a
disparity between the desk-based model and the reality on the
ground, which we will stress test through the piloting with Amazon
and other carriers.
Drop-off:
« In theory the increased drop offs should easily be absorbed - we do
over 300m parcels for RML (sale and accept), and the increased
volumes from 3rd party are only projected at 80m by 25/26.
However, further work is required to assess the segregation
requirements across multiple carriers and the implications for in-
branch space requirements. In principle if capacity is a challenge we
can negotiate with carriers for more frequent collections. Again, the
main challenge will be in the peak trading period.
Network expansion:
e Capacity in our network will be further improved through our
network expansion plans. The blueprint identifies around 2,000
locations where there is customer demand for additional branches,
with the first 400 Express targeted by March 2022. The Q1 pilots
will test the willingness of new retailers to dedicate space for
parcels.
What are our plans for
automation and
digitisation of branch
transactions? What
happened to the
procurement activity
commenced in 2019?
July Board. Also raised by
Tom Cooper in January
« As slides 8 & 9 of the Reading Room deck set out, our roadmap for
SPM includes both mails and banking self-serve solutions, subject to
funding and prioritisation of other demands. Mails and banking
account for 80% of all counter time across our estate, and therefore
automating these two product areas would make the greatest
difference to improving postmaster profitability.
* For mails our modelling suggests that the largest 500-1,500
branches could justify our next generation self-serve solutions,
depending on the costs of the technology and the extent to which
we can remove the need for staff supervision. However, we are also
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evaluating the merits of creating a digital to branch mails journey,
either as an alternative or addition to in-branch self-serve.
For banking we estimate the busiest 1,000-1,500 branches are
likely to warrant investment in deposit automation solutions,
potentially more as bank branch closures accelerate.
As slide 28 of the deck sets out, as a first step we will be trialling
deposit automation in 4 sites and parcels drop boxes in 3 locations
during Q1 to provide further insight on customer adoption and the
impacts on postmaster and POL profitability, to inform the business
case for subsequent roll out.
We will return to these options at future Board meetings, alongside
an analysis of the commercial framework with postmasters for
automation solutions (i.e. who pays for the cost of the devices and
what this means for remuneration rates).
NB work was commenced in 2019 by the previous network
management team to prepare procurement documents ready for an
upgrade of the current SSK estate. This was paused at the start of
this financial year due to Covid-19 related funding constraints and
the opportunity to consolidate this activity under SPM. The contract
with NCR for the existing SSKs was extended for a further 2+1
years to provide service cover while we develop the new solutions.
How are we going to
measure the success of
the network
strategy? How will we
know it is working and
how are we measuring
the return on the
investment that is being
made?
Tom Cooper, January
Ther
e are multiple ways to measure the success of our network strategy,
but we would highlight the following as the top three areas:
Maintenance and delivery of our network accessibility obligations
to BEIS, including our specific commitments to grow the network
to over 12k locations and increase aggregate opening hours by
20% by 2025 (while also managing and mitigating the legacy
contract risks and issues);
A reduction in the annual cost_of managing network churn, which
in recent years has averaged i- by 2023/24 we would expect
to have reduced this by at least 25%
Delivery of our 3 party PUDO growth targets, as identified by the
mails team. We will also track our wider share of the addressable
parcels market, although clearly this will be shaped by a range of
factors beyond the strength of the network so it is a less reliable
indicator of success.
How will the assumptions
that underpinned the
geospatial modelling be
tested against
experience; how will the
optimal network be
demonstrated to the
Board going forward; and
how will we be able to
see the development of
the network against the
optimal network?
Tom Cooper, January
We provided a background analytical document covering the
outputs of our latest geospatial modelling in the Reading Room for
the January Board. Slide 7 of that deck provides a segmented view
of the gap to be closed against our ‘optimal’ blueprint network. If
desired we can track progress against these segments on an annual
(or even quarterly) basis for the Board, which should demonstrate
steady progress in closing the gap.
The assumptions which underpin the geospatial model have
already been tested against experience in a large test area
(covering 160 branches around Milton Keynes and Nottingham) to
improve the predictive accuracy of the model. We will continue to
iterate and improve these assumptions as we make changes to the
network in line with our target blueprint, checking whether the
actual customer demand (and hence profitability) for each branch
is matching against the modelled expectations. To underpin this
iterative approach, we have now established the capability to
manage the blueprint model on a dynamic basis in-house.
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How are postmasters
inputting to this work and
what is the feedback
loop?
Carla Stent, October
Board
The pilots described in Section 2 of the supporting slide deck
(together with the parallel PUDO pilots) are the key means of
testing the new propositions with postmasters in a live setting to
inform their development prior to full roll out.
In parallel we are continuing to engage with both multiple partners
and independent postmasters on both the overall concepts and
specific design aspects of the new propositions.
What are the
opportunities for running
outreach more
efficiently?
July Board
There are currently c. outreach outlets in the network,
running at a net loss of pa. While they are a good solution
to meet our access commitments in deeply rural communities, we
have become over reliant on them to offset churn in less rural
locations and meet our 11.5k target.
Over the next 3 years we propose to actively reshape the outreach
network, using three levers to improve profitability and enhance
the service we provide to rural communities:
o Efficiency improvements: there is a package of incremental
steps we are taking to reduce the cost of running
outreaches, such as reducing the mobile stop times on
existing clusters and removing unwarranted premium
payments.
o Replacing outreaches with new propositions: our new
propositions should enable us to gain greater traction with
tural retailers, pubs and pharmacists for whom the standard
Locals model is unattractive. This will increase the hours of
service and help sustain the viability of other rural
businesses, creating genuine community hubs generating
greater commercial and social value.
© Targeted closures: once network headroom allows we
propose closing the worst performing outreaches, starting
with the least used branches such as Home Service and
coinciding with the opening of new models.
By taking a balanced approach to these levers - avoiding a
significant reduction in rural branch numbers or politically
contentious regional impacts - we could reduce the net loss of
pa by March 2024 with an investment of
he coming months we will be developing this strategy in
further detail, including exploring the options to leverage
alternative banking and automation solutions to further improve
the efficiency of our service to rural communities.
How we will ensure
customers understand
our more flexible
formats?
July Board
We will be using a combination of in-branch tools (such as clear
signage and marketing) and online tools (e.g. clear and accurate
Branch Finder information) in order to manage customer
expectations around the formats.
We will be testing customer satisfaction and understanding in a live
environment through the Q1 pilots of Express and Basics (see
section 2 of the supporting deck). The initial results of the first 6
Basics pilots are promising, with a +93% NPS score.
How do we propose to
distribute profits as part
of the new franchise
models?
July Board
We will be reviewing remuneration and overall commercial
structures as part of the next phase of work, and will bring back
our emerging recommendations for discussion to the July Board.
Slide 32 in the supporting deck outlines the context and key
questions that we are seeking to answer as part of this work.
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POST OFFICE LIMITED
BOARD REPORT
Progress update on the
Strategic Platform
Business Transformation Unit
ae Modernisation (SPM) amen pees) SO“ Maten 2028
programme
Author: Zdravko Mladenov, Head of Sponsor: Nick Read, Group CEO
Input Sought: Approval
The Board is asked to note the progress update on the Strategic Platform Modernisation
(SPM) programme and approve a drawdown of £4.68M to deliver a range of concrete
outcomes and deliverables until June 2021.
Previous Governance Oversight
GE and Board updates on SPM:
Jun ‘20
The Board supported the high-level intent for the Strategic Platform
Modernisation (SPM) programme and mobilisation of activities to reduce
long-term dependencies on Fujitsu and exploit business opportunities
through new technologies
Jul ‘20
The Board requested more detailed plan for SPM (incl. cost and risk). In
the concluding discussion, the Chairman stated that SPM should be
developed alongside the Horizon system.
Nov ‘20
The Board endorsed the creation of the Business Transformation Unit
(BTU), part of which becomes the SPM programme. See Appendix A for
details. The Board endorsed two main SPM objectives: (1) short- and long-
term tech-enablement for the POL business (e.g., new formats and
Postmaster propositions; optimisation of customer journeys); (2)
retirement of the Horizon platform and exit from the main FJ contract.
Jan ‘21
The Board noted the early progress of SPM as part of BTU and endorsed
the proposed aspiration to deliver 400 new branches outside of Horizon
with the Express format by end of FY21/22.
Questions addressed?
1. What progress has been achieved on SPM since the January Board?
2. What is the status of the funding governance process with UKGI and BEIS?
3. What are the deliverables and funding for the next 3 months?
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Executive summary
The SPM programme is ramping up successfully and has already build momentum
programmatically (e.g., agreed governance cadence with BEIS; first multi-year cost model)
and from a technology perspective (e.g., accelerating the overall ‘build’ to allow for 400 new,
‘Horizon-free’ Express branches to open by March 2022). The programme leadership team is
also taking shape with key technical, operational and finance roles now filled with a combination
of internal placements and exceptional external talent.
The programme is requesting funding drawdown of it for April - June 2021 to deliver a
range of outcomes. Some of those are: (a) continuing the tech development to launch the
400 new ‘Horizon-free’ Express propositions; (b) completing the multi-year business case for
UKGI/ BEIS; (c) completing the future Device and Peripherals Strategy; (d) scoping the legal
changes required to commercial agreements affected by Horizon; (e) identifying the options
to deliver better Branch MI to Postmasters in the next 12 months.
Report
What progress has been achieved on SPM since the January Board?
1. As we ramp up, we have been conservative with our early outlays {!RRELEVANT month,
total off over the life of the programmes so far). Nevertheless, we have built
significant momentum programmatically and technologically, where we have prioritised
(a) solutions to the most immediate business challenges (e.g., enabling a reduction in
spend on the Outreach format), and (b) standing up the tech ‘infrastructure’ to enable
exit from Horizon by 2025.
2. Some specific outcomes of the last months include:
a. Programmatically, we have agreed with UKGI/BEIS the governance process for
approval of the multi-year business case for SPM and the subsequent oversight
arrangements at various levels of seniority, all the way up to Perm Sec. Further
details follow in the next section. A first version of the financial model underpinning
that business case also has been completed and is now under intense refinement
with a target POL Board approval date for the business case of early June and
UKGI/BEIS sign-off in the summer.
b. Technologically, we made major early strides. Firstly, we constructed a multi-
year delivery roadmap targeting exit from Horizon in 2024-25. That ambitious and
detailed technology strategy includes significant discrete work packages, many of
which will be made available to the market as we seek best-of-breed external
expertise while retaining the ‘central brain’ in-house. Secondly, we also have the
first-order view of our future device and peripherals strategy and are now fleshing
out the more granular details and specifications. Thirdly - and perhaps most
critically — after the January Board session, we launched the accelerated ‘build’ of
the technology and underlying new infrastructure to deliver 400 new branches with
the “Express” proposition by March 2022. These 400 locations will be completely
independent from Horizon, thus marking a major step towards the retirement of
the old platform. The first pilots are on track for September this year.
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The team for the long haul is also taking shape. In late 2020, we prioritised standing up
the core tech leadership, given the urgency of our ‘ticking clock with the FJ contract.
That team is now in place, led by David Steed (previously the Chief Technology Officer
for PayPoint) and Ben Cooke (previously the POL IT Operations Director). We then
shifted focus to the business operations and finance side through a similar combination
of internal POL resources and external talent. A veteran DMB manager is joining the
team shortly to help provide a critical Postmaster lens. Other key leaders joining the
team are Nick Beal (previously POL’s Network Performance Optimisation Director) for
Branch Operations, and Woody Ruane (previously the Finance Operations Director at
John Lewis) as our Finance Strategic Partner.
With regard to enabling PUDO, the 400 new Express locations (and any subsequent,
expansions of that “Express” footprint) will be technologically suitable for Amazon PUDO
services, subject to agreement from Amazon that the locations fit their criteria. With
regard to non-Amazon PUDO carriers, separate work is in-flight to enable integration of
PUDO offerings from other carriers onto Horizon, to enable immediate business traction,
while SPM is developed and rolled out.
What is the status of the funding governance process with UKGI and BEIS?
5:
We have agreed governance cadence and mechanisms with UKGI / BEIS for the
multi-year funding business case. Review and sign-off will be done at BEIS Permanent
Secretary level in June - August 2021, following expected POL Board approval in June
and formal submission by POL CEO to the Perm Sec. Due to the specific nature of SPM,
the business case will not be required to adhere to the standard BEIS templates.
Prior to POL Board approval, the relevant group of UKGI and BEIS colleagues will engage
every three weeks with the Business Transformation Unit Director to review progress,
highlight challenges early and enable an accelerated BEIS review post submission.
Once the case has been approved by the Perm Sec, UKGI and BEIS will retain oversight
in two ways: on a monthly basis through the already existing Investment Spend
Reporting, and on a quarterly basis through a new SPM Sub-Committee, consisting of a
BEIS Deputy Director, a UKGI Deputy Director, a BEIS Finance Representative and POL's
Business Transformation Unit Director.
programme.
Per UKGI/BEIS direction, we will proceed to engage two types of external assurance:
a. Programmatic assurance will focus on the robustness of the technology planning
and financial estimates, as well as overall quality assurance of the business case.
Some initial ‘heavy lifting’ will be done by the external partner as part of the review
of the multi-year business case, with subsequent annual follow-up.
b. Technical assurance will focus on assuring the robustness of transaction
processing and relevant back-office operations (e.g., Postmaster remuneration
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calculation). This assurance will commence closer to the end of the calendar year
as we intend to go live with the first non-Horizon branches, but will then remain
ongoing.
Relevant funding for the first 3 months is included in this request.
The Board’s guidance is sought whether we should combine all external assurance with
one provider or seek to diversify. The advantages of combining are around efficiency of
procurement activity and possibly lower combined cost, while the downsides are around
‘putting all eggs in one basket’ and restricting our ability to pick the best individual
partners for the different assurance types. The choice also has implications for our
procurement approach due to the cancelled previous procurement for “Strategic Delivery
Partner”.
7. A first version of the bottom-up cost model to underpin the multi-year business case
has been completed. However, the resulting estimated cost envelope significantly
exceeds previous estimates and, for this reason, is not shared with the Board yet. The
model will be subject to extensive pressure-testing and prioritisation in order to offer to
GE in May and to the Board in June a range of scope options with associated different
‘price tags’.
Specifically, we will aim to break out the “must haves” to retire Horizon vs. the “nice to
haves” (e.g., investing in Mails Automation, investing in a Retailer Accompaniment
Device alongside, the degree to which we will improve Postmasters and Post Office
journeys relating to Branch operations and back-off office systems and processes).
What are the deliverables and funding for the next 3 months?
8. In the next 3 months, we will focus on the following outcomes and deliverables:
a. Completion of the BEIS business case, including the costs for an external
programmatic assurance partner as directed by UKGI. A key component will be
bounding the final scope of the SPM programme;
b. Continuation of the tech development towards the September launch for the first of
the 400 new ‘Horizon-free’ Express propositions (“Mails on Payzone”), with
the associated internal (e.g., Finance systems) and external (e.g., with Royal Mail
Group) integrations;
c. Completion of the Device and Peripherals Strategy and launch of formal market
engagement with suppliers if feasible;
d. Acceleration of the Full SPM counter work strand (parallel to “Mails on Payzone”)
with a target of standing-up by Christmas 2021 a SPM counter prototype in a live
‘dummy’ branch in Chesterfield;
e. Review and possible amendments as feasible of the 300+ commercial contracts
that must be legally amended for Horizon replacement;
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f. Review of the options and costs to provide better Branch Management
Information (“Branch MI”) in the next 12 months (i.e., prior to rolling out SPM),
starting with some immediate improvements in advance of the Inquiry’;
g. In close internal coordination with the broader POL organisation, begin
Postmaster engagement covering the major themes of SPM (e.g., input on the
design of the programme; input on the device options).
Also included in this funding request are the launches of several smaller, but key ‘non-
technology’ activities, which will ramp up slowly in the next months. Those activities
focus on modernising and simplifying in-branch processes, alongside replacing Horizon
from a technology standpoint. Examples of such in-branch processes include cash
management process, training processes or administering the user Smart IDs.
9. To deliver these outcomes and deliverables, we are requesting Board approval for a
drawdown of £4.68m funding for the period April to June 2021.
Main Area: Funding Requested:
Technology Design and Build costs
Programmatic costs / Business case / External H
assurance / BTU operations H
POL Commercial and Network Support IRRELEVANT I
Third-party costs (RMG, Payzone, FJ) ! !
Legal and miscellaneous other costs
10. In the next Board session (3 June 2021), we will cover the following topics:
a. Review the rationale and agree our direction of travel to move away from Horizon
as opposed to extend and modify it;
b. Review and approve the multi-year SPM business case, cost envelope and plan;
c. Review our proposed future Device and Peripherals Strategy, which moves away
from a one-size-fits-all Horizon-like terminal.
4 Given the urgency to deliver improved Branch MI to Postmasters and against the backdrop of the Inquiry, we have to
accelerate this effort and cannot wait for the SPM roll out. To this end, the delivery of new Branch MI is planned to be via
Branch Hub, which also enables a longer-term link between Branch Hub and SPM. The Branch Hub software development costs
are part of a separate business case. What is covered in this business case is the support to the business support to the
development team (e.g., what content and MI to ‘post’ on Branch Hub?) and the SPM linkage.
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Appendix A: Overview of BTU accountabilities
Introducing the Business Transformation Unit (BTU) and link to SPM
Mobilising the Business Transformation Unit (BTU): Link to the scope and objectives of SPM
= What is BTU: Dedicated unit to own POL's ™ SPMis a key programme under BTU. SPMhas a dual mission
business transformation and technology 4 m Stinc
aoe f Tech-enablement for the business— which at the onsetincludes
mogernleavon cots oven ie eraeag wpa delivering multicarrier PUDO capabilities and enabling the
eet tea ves ea By we Nicene provision of new formats, in line with the Network Strategy and wit
Dashes Pareonnaion oe cuvss Ine immediate focus on establishing a wable future “basic” propositioI
Retirement of the Horizon platformand exit from the main FJ
= Overarching BTU goal: Supporting POL's mission contract as rapidly as p ble, but recognising maynot be fully
statement, “We are here, in person, for the people achievable by 2023
who rely on us”, byimproving our services and
operational processes for Postmasters, Customer} Additional proje with further businedsd and technologybased
and the Network, in lockstep with modernising our objective: ybe to the SPMs e. In the near term, those ard
core technology. likely to include the optimisation and digitisation of customer
journeys for key products, such as Mails and Cash/Banking, and
= Scope of BTU: At the onset, BTU will be the optimisation of core back office functions (e.g., the
accountable for (a) the SPM programme, which will modernisation of Branch Accounting).
focus on the technology platform modernisation; (bI : ee. . : :
for the FJ Exit programme, which will focus on For the purposes of bounding SPM programmatically to a man:
winding down our Horlzonand Fujitsu relationship; nd engaging with BEIS/UKGI on funding requirements and
and (c) other future projects or programmes that 4 busin e for that scope, thi additional programmes will come
are relevant to BTU's objective with separate business cas t sit alongside SPM
6
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Split of technology and IT accountabilities between CIO and BTU oe) omy
‘Own POL’s IT strategy and strategic tech architecturenith focus on improved Postmaster systems experience; link closely with overall POL strategy and product and network
priorities for revenue growth and improved costo-serve
Technology-led business enablement fead on enabling business transformation through new technology by:
* Defining the scope of the overall business transformation and driv ing the execution of transformation activities, with erispbathe technology side
* Coordinating leadership and resources across POL business units, and overseeing crostunctional transformation delivery teams
* Defining business change strategies to enact overall IT strategy
For programmes facing into network, customer, and Postmaster tech:
* Ownership of individual programme strategy, programme priorities and
requirements, commercial and sourcing strategy, business case
* Responsible for vendor selection and management to procure extemal IT
suppliers to mobilise and embed new IT capabilities in the CIO organisation
using a scalable Dev/Ops agile model
* Overall programme delivery management and oversight, including financial
oversight and benefits management; governance; stakeholder engagement
For programmes linked to colleagu@nd corporate facing technology:
* No change from current accountabilities and governance mechanisms; see
‘separate page for details on the implications for the CAPEX portfolio
For all programmes:
Technical delivery (“build”) of technology components (where internal) and
day-to-day delivery management of suppliers (where external)
Day-to-day IT “Run” for the Groupfocusing on the delivery of the appropriate organisation,
skills and process to ensure resilient Live Services and to guarantee the rapid resolution of issues
via Incident Management and Problem Management processes
Minor, OPEXdriven maintenanceand changes to existing services, including routine change,
patching, routine upgrades
CAPEX driven maintenance and upgrade projectte.g., Win10 rollout or server obsolescence
management)
Day-to-day vendor managementof suppliers in the “Run” space
Group IT Security(’CISO"), with which all “Build” work needs to align
‘Design Authority’and IT Assurance - set the “rules of road” for design of IT services; own the
process for ensuring the adherence of individual solutions to published PObide IT architecture
(beyond STTU remit)
Test and Transition for new servicesCo-owns (with COO) the testing and rollout of the new IT
services and platforms, ensuring those meet IT standards in preparation for handover to live
service, including the onward support
Broad technology Subject Matter ExpertiseProv ide advice and specialist skills to Change
projects and live service
Cloud Centre of ExcellenceProv ide cloudnative technical infrastructure capabilities, as part of both the Build and Operate Dev Ops cycle 2
3:
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POST OFFICE LIMITED
BOARD REPORT
Title: Fujitsu Horizon Negotiation Meeting Date: I 30 March 2021
Author:
Isabel Christophers, IT Cloud
Services
Jeff Smyth, Group Chief
Information Officer
Sponsor:
Input Sought: Decision
The Board is requested to:
i.
Approve the award of the extension to the term of the Fujitsu Horizon Agreement for the
supply of Application Services from 1 April 2023 (“Extension CCN”). The duration of the
extension will be for a further 1+1-year period (one year is contracted from execution of
the extension and extends the agreement from 1 April 2023 to 31 March 2024, the optional
extra year can be committed to, no later than 31 March 2023, and extends the agreement
from 1% April 2024 to 31 March 2025 (together the “Proposed Extension”)). The forecast
spend is estimated at £21.3m p/a (£42.5m estimated total), some spend is variable and
demand based - there is no minimum commitment; and
Delegate authority to the Chief Information Officer to approve extension as Contract
Owner, in accordance with the commercial terms set out in this paper and including the
permitted 1+1-year extensions in due course. The extension(s) shall be executed by an
authorised signatory.
Executive Summary
Background and Business need
i.
Post Office and Fujitsu Services are exiting the Horizon Agreement through replacement
of the underlying services. Work has already begun with:
a) Delivery of a PCI DSS P2Pe Payment & Banking Service due to go-live in 2021 with
opportunity to novate the Fujitsu underlying sub-contract with Ingenico direct to POL
or a replacement service provider at any time.
b) Migration of the Horizon System from Fujitsu’s Belfast Data Centres to Post Office
operated AWS cloud hosting platform (“BEXIT”), once complete, the contracted
service scope (and costs) with Fujitsu will be reduced, in gross terms, by ~35%.
c) Implementation of the Post Office Strategic Platform Modernisation (“SPM”)
programme, to progressively replace remaining services under the Horizon Agreement
with new services - this work will continue beyond 31 March 2023.
The requirement to extend the Fujitsu Application Services for 1+1 years provides the
time needed for SPM to deliver and enable a full move away from Horizon.
Although the scope of services with Fujitsu will reduce significantly by 31 March 2023, an
extension has potential Public Contracts Regulations 2015 (“PCR”) compliance risks that
have been duly assessed by Legal (please see separate advice on PCR provided by Legal).
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What have we done?
5. Executed a non-binding Letter of Intent (“LOI”) on 31 December 2020 that laid out the
agreed negotiated principles including:
e Obtained early use of Horizon IP for use by SPM - Post Office will have access to
relevant IP at any time and (subject to payment of the licence fee of £10m, which is
already provided for in the current agreement) will have full access to IP from 1 April
2023;
e Charges during extension will be consistent to those charged today;
e Termination rights & charges continue as-is and are subject to the same aggregate
caps;
e All Minimum Spend Commitments cease 31 March 2023;
« Aggregate employee information will be provided to Post Office to assist with
calculating the cost of exit;
« Cap on the indemnity given by Post Office in respect of Fujitsu employees who must
be made redundant because they do not transfer to Post Office/a new supplier under
TUPE increases from £3m to £4.5m in extension years; and
e Expiry of the existing Parent Company Guarantee (“PCG”) at 31 March 2023.
6. The drafting of all items referred to in the LOI is substantially complete and we remain on
track to finalise drafting of the Extension CCN for execution on or close to 31 March 2021.
Timing of execution is important when considering the Horizon Inquiry related timetable
over the next 6-weeks combined with the continued risk of Fujitsu withdrawing from
committing to extending the contract beyond 2023.
7. The risk of non-agreement of an extension still exists; in 2020, Fujitsu approached Post
Office seeking an early termination of the overall Horizon Agreement. Post Office adopted
a different stance to extend Horizon application support assistance from Fujitsu and sought
a contract extension in order to de-risk the transition away from Fujitsu. These opposing
positions clearly illustrate the differing postures and contractual objectives of both
organisations.
8. Regarding contract terms, expiry of the PCG is not considered to be a significant
commercial risk given the relatively strong financial position of Fujitsu Services Limited
(for note: the company was incorporated in 1907 and is the main trading vehicle for Fujitsu
UKI business; has net assets of ~£262m; and ~£1.35bn income p/a) which should enable
it alone to stand behind its obligations and meet liabilities arising under the Horizon
Agreement for the extension. The PCR implications of expiry have been duly considered
in the legal advice.
9. In advance of executing the extension, we have completed analysis of PCR compliance
using KPMG (technical, market and commercial perspective) and internal & external public
procurement lawyers (Norton Rose Fulbright) to provide legal assessment.
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10. Our conclusion and recommendations are to continue to target execution of the Horizon
Application Support Extension on or close to 31 March 2021 and concurrently finalise the
mode of market execution guided by NRF legal advice.
11. Note: a contract change note setting out anticipated operational and service scope
changes required to Horizon system/services as a result of BEXIT (“BEXIT CCN1”) is also
being negotiated with Fujitsu. Fujitsu require that the BEXIT CCN1 is co-signed with the
Horizon Application Support Extension CCN. This has resulted in a challenging workload
to conclude both CCNs by 31 March 2021 and may delay signing of the Horizon Application
Extension CCN1 into early April. BEXIT CCN1 is one of two contract change notes we
anticipate executing in 2021 to fully address Belfast Data Centre Exit changes of
responsibilities, with the second CCN following in Q4.
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@®) Public Inquiry Update
25 March
POL Board
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Agenda
+ Improvement Delivery Group
+ IDG purpose and future Governance forum
+ Current status of IDG tracking of 332 actions
+ Success example
+ Details of “Oxblood Red” and “Red” actions
+ Updated plan to confirm substantive legal GLO conformance for ClJ, after PM Journeys report
+ HIJ Update
* Tbe
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+ CIJ Update
+ Outline of the Postmaster Journeys Final Draft Report - Exec Summary
+ Detail on 6 specific “Urgent Priority” Improvements contained in the Final Draft Report
+ Report Roadmap suggestions
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+ Draft PSIP (for CIJ) Plan (Postmaster Service Improvement Programme)
+ Outline Plan on a Page for 4 main areas of PSIP with current status of resources
+ Risks/Issues, Dependencies and Assumptions
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Improvement Delivery Group
Subtitle
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Improvement Delivery Group (IDG) purpose
Weekly sub-GE forum focused on collating, prioritising and guiding operational improvements to further put
postmasters at the heart of our business
Creates focus to align critical improvement activities which feed into the Public Inquiry
The IDG does not deliver improvements, it tracks activity (managed by Head of Transformation Portfolio and
Change Risk Assurance Manager) and ensures appropriate assurance/audit activities
Has visibility across all GLO improvement activities: progress, escalations and risks are reviewed weekly
Uses information and data from extant forums and sources, aggregated into a common format, to adopt a
lean approach with minimal overhead.
Updates the Inquiry Team on improvements delivered/in-progress. Receives inputs from the Inquiry Team to
guide prioritisation
IDG is currently in place until the end May ‘21, after which a new overarching governance forum will be
established to help oversee and drive required PM related decisions and actions through to completion
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Future overarching governance and oversight forum:
Evolution on current IDG and VoPM forums
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+ New ‘PM Governance Forum’ to be focussed on the “Present” and “Future”. HMBU focuses on HSS, CCRC, etc.
+ Anew forum will include:
+ Postmaster risks, controls and mitigations, through use of trends, PM feedback and operational reviews
+ Identification and commissioning of improvement activities
+ Prioritisation and delivery oversight of inflight improvements
+ Ongoing implementation effectiveness oversight, ensuring intended outcomes through quality MI and benefit management
+ Holding the business (including GE members) to account for identification, resolution and sustainment of improvements
+ Chairperson must be suitably senior and independent to allow any part of business to be held to account
+ Intended to be established and operating by end May ‘21, taking over from IDG
Lzeoise-
‘We recommend that this [report] action plan is delivered as a focussed programme or set of programmes of work going forwards
with a single overall accountable owner and work package and work stream leads.
Progress should initially be reported to and monitored by the Improvement Delivery Council /Group (IDG) as an interim measure
and then moved to the new (recommended) PM Governance forum, once this is operational.’
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Over 60% of the 332 PM Improvement Actions tracked by IDG have been closed
+ All Postmaster Improvement actions are tracked by status (active or closed) and by impact to Postmaster oe
+ The IDG have prioritised higher impact actions g
Improvement Status Improvements by PM Impact
13 so I 46 23
Closed checkec 62 46
(29)
33 52 50 36_ I 171 52
o 6 20 3 29 9
46 108 I 116 I 62 I 332
14 32 I 35 19
Grand Total I
%
+ 72% of “Oxblood Red” identified actions have
been closed - all of which are awaiting Internal c
Audit checks 8
+ 54%, 60% and 63% of “Red”, “Orange” and >
“Yellow” (respectively) identified actions have
been closed.
Almost 70% actions already confirmed by
116
‘Activity complete but awaiting ‘Non-compliance with the outcomes of the CI) ruling and / or where there is @
Internal audit assurance review detrimental impact on PMs, where detrimental means any form of PM harm Internal Audit are “Orange” PM Impact a
‘Activity and subsequent internal There is potential detriment to Postmasters, or a reputational risk to POL + Only 4% of all improvement actions are :
audit assurance complete
This change would significantly improve the Postmaster experience
remaining active “Oxblood Red” opportunities
for immediate improvement (see slide 11)
‘Activity is either inflight or
planned
Beneficial to make this change to improve the Postmaster experience
Note: Data presented in these slides /s as of 18 March, before the Postmaster Journeys Final Draft was released to Board (19 March). Thus there may be slight differences in numbers being resolved now
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55% of identified active PM Improvement Actions have already started
+ All active actions are tracked and prioritised by impact and weekly assessed to confirm if the action is on track
to deliver against agreed dates
+ Due to prioritisation or linkages with other dependencies, not all activities have started
Postmaster Impact Current delivery status Total) 9%
13 10
50 I 38
46 35
6
14
23°) 17
59 132
50 + Of the 132 Active tracked improvements, 53%
come from the Postmaster Journey’s (Deloitte)
53 report and 32% come from the KMPG HI) Review.
46 The remaining 15% are from various other
identified improvement opporutnities across the
business (e.g., Service & Support straetgic plan,
Shine-a-light, etc)
23 13
‘Non-compliance with the outcomes of the CI ruling and / or where there is @ Offitrack against agreed dates + Of the 32 Active tracked improvements, only 4%
—— impact on PMs, where detrimental means any form of PM harm Hciegetiat agresd date are off-track against original agreed dates
ere is potential detriment to Postmasters, or @ reputational risk to POL rack genet aoraad Gate + Given prioritisation, 45% of actions have not yet
TIRE ARS QE RSIIEY WOT The Peer SNCS Activities have not yet started started*, however as currently tracked, half of the
Beneficial to make this change to improve the Postmaster experience “Reds” will start in the next month
Note: Data presented in these slides is as of 18 March, before the Postmaster Journeys Final Draft was released to Board (19 March). Thus there may be slight differences in numbers being resolved now
*Of the 22 "Red” impact actions not started, 12 of them are for HIJ which will take longer to start given dependencies and 7 are linked to Culture which are improvements due to start in the next month
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Given an earlier start, almost 70% of ClJ improvements have closed
+ Every improvement identified is mapped against a CIJ or HIJ finding
+ Substantive GLO conformance will be reviewed against the full set of all actions for each judgement theme
Onboarding of Operators
Training of Operators
Beyond
Transaction Queries and Disputes
Shortfalls
Policies & procedures for Suspending Operators
Operator Termination Policies and procedures
Branch Audits
Transparency of communications between
Postmasters and PO!
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Dispute Robustness Architecture & Access & Audit Additional Produc
Resolution Data Activity & detriment
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Note: Data presented in these slides is as of 18 March, before the Postmaster Journeys Final Draft was released to Board (19 March). Thus there may be slight differences in numbers being resolved now
*6 themes across the 15 HIJ findings
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Main accountabilities for improvement sit within the IT and Postmaster teams
* Simon Oldnall, Horizon & GLO IT Director (reporting into Declan and Jeff) is accountable 1/3" of all tracked
active improvements. The single highest individual accountability.
+ However, Amanda Jones and her leadership team (Tim, Tracy, Andy) together are responsible for just under half
all tracked active improvements
+ Data presented om
Simon Oldnall 20 EE: © 42 here represent - 60
86% of all Active
Improvements 50 45
Tim Perkins (0S DY 27 and the top 6
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Note: Data presented in these slides is as of 18 March, before the Postmaster Journeys Final Draft was released to Board (19 March). Thus there may be slight differences in numbers being resolved now
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Improvement Success: Branch Audits
16 improvements have been delivered
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+ Before GLO: reasons for branch audits unknown, unannounced by single auditor, and the triggers were unclear. There was a
perception of bias and a high number of complaints as PMs thought POL was trying to “catch them.”
1. Supportive calls and different types of contacts introduced
2. Cultural shift to collaborative partnership approach
3. Reason for audit provided
4. 2 Auditors per review to provide quality assurance oversight
5. 3rd person undertakes independent QA review of audit paperwork
introduced
6. Full audits completed with drill downs to help identify branch issues
such as training gaps.
7. Tone of audit more conciliatory and explanatory
8. Quarterly observations by Audit managers to ensure consistent
applications of procedures
9. Options to investigate and dispute result discussed with the
postmaster as part of the closure meeting.
10.In December 2019, Post Office introduced a proactive intervention
activity known as a SPEAR visit (SPEAR stands for Support, Prevent,
Educate, Advise and Resolve).
1,
. Auditors signed up to apprenticeship to provide a
. Audit escalation threshold level raised
. Feedback loop to record and answer outstanding
. Audit tool enhancements implemented to improve
. Knowledge center for auditors set up to share
Network monitoring & Audit policy approved by
ARC 26th January 2021
formal qualification
Postmaster questions implemented via Microsoft
Dynamics
language and tone.
changes in working practices to ensure
consistency of approach
+ Current Status: IA work complete. PM Journeys report indicated “There has been a lot of focus on improvements in this area,
with the goal of creating a more supportive experience for the PM and changing the perception of the audit function (historically
perceived negatively in the eyes of PMs). 'Audit' terminology has been amended e.g. renamed auditors as ‘audit and support
advisors.”
+ GLO Conformance of Branch Audits to be assessed as part of upcoming work.
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Weekly tracking of individual items ensures pace and early issue
identification
+ Aligned to the numerical reporting on previous pages, a weekly updated tracker allows the IDG to follow
progress of each identified improvement action
+ The focus below, on Oxblood Red Impact actions, indicates breaking down of issues between
identification/scoping, fixing the issue and remediation - as all of these will have different time horizons
+ The following pages track additional detail for Oxblood Red Impact actions - given the nature of the impact
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Note: Data presented in these slides is as of 18 March, before the Postmaster Journeys Final Draft was released to Board (19 March). Thus there may be slight differences in numbers being resolved now
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Shortfall Resolution Scheme Exceptions
Improvement Summary
+ The historical shortfall resolution scheme does not cover the period between each branch's migration to HNGA in 2017 and 2018 and the common issues judgement in 2019. Should PM detriment have occurred
in this period (e.g. arising from contract termination of unpaid suspension), this detriment will not have been investigated or compensated.
References Ownership Status
Deloitte Ref - BCL
IDG Tracker Ref - M347
CL/HD Judgement Area - C1) 6 Responsible: Jacki Adams
Proj Plan
Detriment analysis activity
ATM Detriment
stopped in Live \
(29/01/21) 1
Analysis of how we
Maintained Error limit ‘account for and deal
Detriment stopped in with balance
tive (25/01/21) uncertainty complote
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update, Progress Projection and Detriment
+ Whilst there are some elements of the HNGA period that are covered under other workstreams (e.g
Maintained Error Limits), this overarching improvement is intended to cover everything pending
items being broken out.
+ Our approach is to analyse the internal POL process for how we account for, and deal with each of
the specific potential detrimental BAU activities, that occurred in a period or circumstances that fell
outside of the scope of the historic shortfall scheme. Broadly speaking this is the date of each
branch’s migration to HNGA, est. to have concluded Oct 2019 (although these dates will be fully
ratified as part of the project). Once we have this, we can net off the balances against, any aged
debt balances not actually paid.
+ For the upcoming Inquiry, whilst we do not anticipate that all of the projects will have completed
and fully remediated the shortfall, we do aim to be able to quantity the value of remediation and
the requisite ongoing remediation timetable in time for the May inquiry. i.e. will know how much we
need to pay and to whom.
+ There is a risk that requisite data may not be available, the impact should that risk occur is that it
will be harder to align specific detriment per postmaster, and therefor the remediation approach
may have to make assumptions that could result in individual postmaster receiving less/more
financial remediation than if we had accurate data.
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Postmaster Debt Uncertainty
Improvement Summary
+ No investigation has been conducted to identify and resolve any PM debt accrued between the implementation of HGNA and the establishment of new ways of working in the PM support team. This leads to a
risk that PMs who accrued debt in this period do not have certainty over their historic debt balances and do not understand if, how, or when they will be resolved,
fe} References Ownership Status Current update, Progress Projection and Detriment
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= Intended approach for this improvement is as follows:
@ Deloitte Ref - BC2 GE-Amanda Jones + Conduct research to identify and quantify the financial volume such debt and the number of PMs
= IDG Tracker Ref - M348 Accountable: Tim Perkins involved.
. CL/HD Judgement Area ~ CD 4 Responsible: Jacki Adams + Reach a decision on how such debt balances will be managed by POL
> + Determine how the decision will be communicated to relevant PMs and managed appropriately
& thereafter.
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BR Position with aged debt in excess of 60 days (provide for 100% of the entire net debt balance,
Ss regardless of ageing, excluding the element of the debt which is part of a repayment plan).
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project and . ‘There is a risk that requisite data may not be available, the impact should that risk occur is that it
approach will be harder to align specific detriment per postmaster, and therefor the remediation approach
may have to make assumptions that could result in individual postmasters receiving less/more
financial remediation than if we had accurate data
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Oxblood Red Impact
Improvement A
Maintained error limits
Improvement Summary
+ Where there is a difference in a POL settlement account for a process affecting branches (for example ATM or Lottery) for a specific amount which varies by product, rather than issue a transaction correction
which would move the difference to a PMs’ branch account, the amount is instead ‘written off’ to a POL P&L account. These differences could result in a write-off being either a cost or a benefit to the PM. BRT
no longer use maintained error limits. However, there is a min/max cap set in Horizon that needs to be updated to allow low value credit TCs to flow to PMs. This is in progress with the Horizon IT team. KPMG
are reviewing the detriment that this procedure could have caused in the past.
References Ownership Status Current update, Progress Projection and Detriment
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Proj Plan
Detriment
stopped in Live
(2s/ox/2a)
Agree scope of project
and approach
GE-Amanda Jones
Accountable: Tim Perkins
Responsible: Jacki Adams
KPMG Conclude Phase
1 initial activity (Arbour
report) and identify
detriment
Detailed
Analysis Start
Analysis of how we
‘account for and deal
with balance
‘uncertainty complote
IT Horizon changes to mitigate
application impact of removing
‘maintained error limits in BAU.
+ Remedial actions have already been identified and these actions should be completed in order to
resolve the issue, specifically:
+ Identify and resolve issue in Horizon that is still impacting the resolution of the issue
+ Identify the detrimental impact to PMs from the issue
+ Resolve detrimental impact (decision on whether Net or Gross amount will be used).
+ Confirm approach for disclosure of the issue to PMs’ and initiate the process of refunding.
+ The detrimental activity was stopped 25/01/2021 , The fix in horizon is still outstanding expected
(through prioritisation) be resolved at the end of April 21 (date to be confirmed) We will work to
Understand the detriment incurred by writing off surplus balances from the date of each branch's
migration to HNGA, then understand if these balances were settled, and remediate accordingly.
+ £0.25M provisioned to cover detriment costs. Detriment scope Is currently under analysis.
Risks and Issues
+ There is a risk that requisite data may not be available, the impact should that risk occur is that it
will be harder to align specific detriment per postmaster, and therefor the remediation approach
may have to make assumptions that could result in individual postmasters receiving less/more
financial remediation than if we had accurate data
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Improvement A
Investigations/Settle Centrally
Impr ment Summary
+ Currently the PMs can only ‘Settle Centrally’ for amounts of > £150 and any amount less than this currently needs to be ‘made good’ by either cash or cheque by the PM. Also, there is no dispute functionality
within Horizon in order to allow PMs to easily dispute any amounts that have been ‘settled centrally’.
POL are working on the fix to reduce the Settle Centrally amount to £0. We are then reviewing the terminology ‘settle centrally’ which we will be replacing (within IT systems and operational documents) as a
subsequent change.
KPMG have identified 29 work packages recommended for POL to implement, including the disputing of balance queries on Horizon and further end to end improvements in the dispute and investigations
process to significantly improve Postmaster experience and address a range of CL) and HU's.
References Ownership Status Current update, Progress Projection and Detriment
£150 value removal:
+ The fix of issues found during testing is underway and pending a newly planned test phase,
launch is expected to complete mid-end April.
+ Manual workarounds options have been developed to mitigate the impact of the delay, and
discounted. No changes to operational process will be made before launch but an update will be
Issued to postmasters to explain the issue due to be fixed.
Investigations/Disputes:
+ Workshops are underway with business leads and postmasters to agree the IT, process and
business change required to develop and deliver an enhanced disputes process. Each element of
this workstream contains IT change, business change and the need for cultural change.
+ There is a plan to deliver 20 of the 29 KPMG recommendations by May to create the first version
of a new Target Operating Mode! (TOM 1.0) as part of this tactical options for disputes are being
developed for launch by May (outside of Horizon). Remaining recommendations if feasible will
form part of future operating models.
Detriment:
+ £2,9M provisioned to cover detriment costs. Detriment scope is currently under analysis.
Deloitte Ref - B12
IDG Tracker Ref - M112
CL/HD Judgement Area - CL) 4
Responsible: Jacki Adams
Proj Plan
Risks and Issues
+ There is an issue of postmaster detriment before the £150 value is removed. The impact of this is
that there will be new work scoped to identify individual cases of detriment and remedy them.
The detriment review is currently in the remediation backlog awaiting prioritisation.
+ The risk is that further test issues delay the £150 IT change beyond end April. The impact of this,
is ongoing non-compliance to CL) findings.
+ There Is a risk of complexity because the solutions for parts of this work are interlinked. The
£150 element Is due to deliver in April, but further work will deliver over several months after
that once the scale of the design change is clear.
+ There is a risk that requisite data may not be available, the impact should that risk occur is that it
will be harder to align specific detriment per postmaster, and therefor the remediation approach
may have to make assumptions that could result in individual postmasters receiving less/more
financial remediation than if we had accurate data.
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+ This improvement this covers a number of HI) areas including the provision of a ‘dispute button’ on Horizon and the underpinning processes required to support the resolution of disputes, Including their
investigation, determination of issues, provision of relevant transaction data to Post Masters (including audit and key stroke data)
+ The improvement must allow for PMs to successfully register that they do not agree with a proposed amendment to branch accounting records and support a workflow that delivers a robust and auditable set
of steps that validate (or refute) the need for the amendment
° + Workshop with Postmasters to validate long term candidate solution. Postmasters decided they
= needed more time to review and agree on preferred option
2 KPMG Ref: 1 GE-Jeff Smyth + In parallel tactical options validated agreed on options that should be investigated further (use of
> IDG Tracker Ref: M114 Accountable: Simon Oldnall ‘settle centrally’ button along with ‘suspense’ account)
LJ CL/HD Judgement Area: HI) 14 Responsible: Dean Bessell + Received report writing guidance from DPO ~ to be incorporated into guidance notes for
S investigation teams as part of Target Operating Model
= * Existing contractual arrangements reviewed, imitations and proposed changes identified to
= negotiate with Fujitsu.
a Proj Plan Information Architecture interaction model drafted
PA Options for securing supply of counter log file discussed, both short- and long-term options
identified
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Improvem:
ATMs
Improvement Summary
‘There is a lack of documented clear procedures and processes to manage ATM transaction disputes. Disputes are raised by customers using Post Office ATMs via the LINK dispute process which is managed by the
Bank of Ireland (Bol), who are the LINK member. Furthermore, Bol is exiting the Post Office ATM Agreement by 31 March 2022 and new procedures and processes need to be established going forward to ensure
effective end to end management that is controlled and transparent and fair to Postmasters.
References Ownership Status Current update, Progress Projection and Detriment
Transaction corrections are only being made to Postmasters for cash retracts where the Postmaster has
acknowledged that there is a surplus at the ATM when it is balanced and recorded on the surplus
button on Horizon. There is no longer a detriment in live. In all other cases charges are not passed to
the Postmaster and this ceased on 29 January 2021.
Deloitte Ref - Final Deloitte, 813
IDG Tracker Ref - M88
CL/HD Judgement Area - CI 4
GE-Owen Woodley
Accountable Martin Kearsley
Responsible: Wendy Luczywo
The ATM strategy will result in the implementation of revised procedures and processes that will start
to be implemented in September 2021 as each ATM is migrated to the POL ATM network where POL
r will be the LINK member. Migration will be completed by end March 2022.
Proj Plan
Initial analysis underway to determine the scale of the impact on Postmasters.
2] 9 ]16]23]30I 7 I14]21] 28] 4 ]11] 18] 25 I] Issues have been identified with the way that ATM disputes are managed with Bol, especially with
‘Task Description- Fespect to suspected fraud at the ATM and the way that reversed transactions are handled by the
Bank. It is very likely that this has caused detriment to Postmasters. The agreement with Bol is
leview processes with Bol for fraud and reversal management, unclear in places and has resulted in POL standing losses that may not be appropriate. Additionally POL
is obligated by Bol to undertake regular balancing at ATMs and this is not always completed by
Postmasters resulting in POL taking responsibility for any disputes that could not be resolved under
LINK scheme rules that dictate that ATMs must be balanced.
Review Bol Agreement and OLA with Bol & identify improvements I
ycument & flow chart all procedures & processes under Bol Agreement _I
:mbed process in POL to ensure ATMs are balanced weekly and follow up
Lear volirasser aot esse wince tae sone? Debt provision is too early in the process to quantify. We are awaiting the output of the KPMG review
I before knowing if we should provide and how much to provide.
Jmplement changes to fraud & reversal management & Bol contract
[assuming Bol agree to changes)
Risks and Issues
came are Ps Wl rcedres& processes wth Vain new I I
rovider) for dispute management
ycument future (Post Bol) procedures and processes with POL
Feconciliation team for dispute management
There is a risk that requisite data is not be available to identify Postmasters who may have been
Jmplement control framework for ATM dispute tracking inline with 3 lines I ‘subject to:detriment:in the past
f defence model Develop regular reporting for senior management team I
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Appeals and disputes for contract terminations
Improvement Summary
+ The appeals and dispute process regarding contract terminations has not been clearly communicated to PMs to ensure they understand the options available to them and that the procedures and timescales are
clear. There is a contractual appeals policy in piace for legacy contracts, which is clearly documented. However, for Locals and Mains contracts, the right of appeal was taken out. A new appeals policy is
currently being finalised which will allow PMs on all types of contracts to appeal a termination.
+ A cconsistent appeals process is being developed including an independent appeal panel which allows appropriate PM representatives to ensure a fair and transparent process is in place. Once finalised this will
be communicated to all, including both internal stakeholder and Postmasters and full training provided.
References Ownership Status Current update, Progress Projection and Detriment
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CD/HD Judgement Area 8 (1,2,9)
GE : Amanda Jones
Accountable: Andy Kingham.
Responsible: David Southall
Proj Plan
Postmaster Termination Appeals policy (known as the Postmaster Termination Decision Review policy)
drafted and submitted to ARC on the 19 March 2021. Policy drafted to ensure that all postmaster
contract types have the right to dispute a decision to terminate the agreement.
Work in progress to define how an independent appeals panel would look and would work with inputs
from Deloitte as to try and benchmark against other Franchise models. Meeting(s) to be held with
procurement team and architect of NED panel process on the 22 March 2021 to understand options.
Framework to be drafted by 26 March 2021 to outline options and seek GE input (Amanda) on
preferred approach. Input being sourced from legal services.
Task Description
Although the drafted policy allows postmasters on all contract types to dispute a decision there is
ontracts within scope for the appeals/ dispute process defined.
currently no independent panel in place
"ostmaster Termination Appeals Policy approved by RCC.
ostmaster Termination Appeal Policy approved by ARC
[Decision Review Panel Framework developed and options outlined
Decision Review Panel standard operating procedures developed
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a) Setting up of and independent Decision Review Panel. Currently no process in place to establish an
fine and build training plan
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te policy to all key stakeholders
independent panel and in doing so POL is unable to meet its commitment to postmasters. Look to
mitigate by developing a framework of options for GE review.
b) Delivery Date. As panel framework has not been agreed there is a risk that the project won't be
ymmunicate policy & process to PMs
delivered by aspirational date
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The IDG also reviews the status of “Red” PM impact rated actions
issue impact Start Date Target (RAG) ‘ Marzi apr2d May21
ating Deliverable . e
- (End Dar=* wale] a] saTs3] 3) 35]
[Streamline Uigent Horizon Comms [26/02/2021 [31/05/2021 [Katina Holmes [Tracy Marsha
[Diticuities in providing remuneration Mi (31/08/2021 [Alex Todd ‘Nick Beal
[lack of PIA-centric metiics and transparency in tering system 31/08/2021 [Ove to lockdown this Is not ‘Regional (Andy Kingham
[cash discrepancy investigation procedure misalignment 3170872023 CIV systems in cash centresare [Doug Brown [Russell Hancock
[Accounting disputes process (31/05/2021 [Currently on track for end of May [Accounting ‘Tim Perkins
Sore invozron fsesr2021 ime richer [tim Petos I
[Absence of SLAs for Issue resolution processes i 31/05/2021 (Mel Fischer [Tim Perkins
i
101702/2021 (3: [New Values/Behaviours created to [Jo Barnickle
Postmaster Empathy in ment - conned serfor management 19/02/7001 I170372021 MMM Anton Area tative Torche fo Race
[ao tesens teamed oe
[Lack of overarching Gata strategy Bist May (31/08/2021
esceton of bn ives 31/05/2001 : Andy Keon
‘Quality issue with cash pouches 15/03/2021 I q i, [Andy Stevens [Russell Hancock I
[comprehensive and transparent investigation of postmaster twansactional concerns to Coca Ne Davey [Simon Otcratt_I
limproved processes to resolve € 1s (current KELs), Stage 2 [24/06/2021 I c [Martin Gokibold [Simon Oténall
[stone KELS- Tech
plete 12/02/2024 [Martin Goldbold [Simon Otarall
[Historic KELS- Create regression testing suite 30/04/2021 Oo [Martin Golabold [Simon Otdnall
[Histone KELS/SDUC (30/06/2021 f [Martin Golabolé [Simon Okinall
[Stress testing HNGA Create NFT framework 5/08 axsh Somany 0
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[stress testing HNGA-Determine current OR approach & create DC policy 15/03/2021 ‘Awaitirg SME [Hash Soman/ [Simon Otarall I
[Software Development Life Cycle / Quality Assurance (SDLC/QA) Process improvements lox7oa72024 [02/04/2021 ritil crait of Test Policy [Dan Addy/ Harsh_ [Simon Odnall
[Proactive Identification of Horizon HNGA software issues deliver recommendation of most fafo3/i2 [30/08/2021 [Analysed Fujitsu reference data [Dan Addy [Simon Olerall
ams. psfozrz0n [31/05/2021
/ Remote Access to Horlaon Branch Database. Discovery, [24/02/2024 [21/05/2021
Imottiples contractual status [05/03/2021 [31/08/2022 [Emma Conroy I
vice Mindset Training [01/02/2021 [31/05/2021 t ce Tim Perkins
[zPolices and Procedures -Onboarding 30/04/2021 Tracy Marshall
Note: Data presented in these slides is as of 18 March, before the Postmaster Journeys Final Draft was released to Board (19 March). Thus there may be slight differences in numbers being resolved now
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Approach to substantive GLO conformance
Background
By comparing the original judgements (CIJ and HIJ) with the improvements delivered (and planned), are we now (or will we be)
substantively conformant? ‘Substantive’ is used to acknowledge that until all POL process are mapped out end-to-end, there
remains a risk that further issues will be identified.
Since the judgements, a large number of reviews and subsequent improvements have been delivered, including the most recent
Deloitte and KPMG work.
CIJ introduced the requirement for POL to act in good faith in the performance of its obligations and exercise of its rights under its
postmaster contracts and take reasonable care in performing its functions (particularly those which could affect the accounts and
therefore liability for alleged shortfalls. Each area of operation (e.g. Onboarding) needs to be reviewed against these
requirements.
HIJ provided specific issues to address. However, a similar process needs to be taken — review the judgement alongside the
improvements, does that deliver a substantively conformant position?
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Recommendation to secure confidence of GLO conformance:
Form a blended team of operational, technical and legal skills to combined review and assessment of conformance.
POL internal teams are heavily focussed on delivering improvements. To quickly generate additional capacity, plan to utilise skills
and POL knowledge present with external parties.
NRF, KPMG and Deloitte will be engaged to complete a rapid assessment of GLO Conformance. Approach will see multiple parallel
teams taking judgement themes and delivering a reasoned position on conformance.
By exploiting the knowledge and experience already present in external parties, POL will avoid distracting internal resources from
essential improvement delivery work. Internal resources will still be involved (POL must own this work), but the additional time
burden can be substantially reduced by capitalising on knowledge elsewhere.
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Postmaster Communications and Network Capacity
+ Given multiple improvements being delivered simultaneously, management of change and communications is a priority.
+ While there are existing processes to manage network capacity and operational communications, we need to and are doing more,
including recruiting additional BAU resources to better manage for Postmasters.
+ Network Capacity Planning
Our existing Branch Engagement Team operate a “Network Gateway” process, managing all Network change delivered to
ensure changes are fit for purpose, impact assessed, tested, appropriately scheduled and coordinated to minimise branch
impact and avoids peaks.
Given the breadth of changes requiring implementation, we are reviewing our prioritisation criteria (due for completion mid-
April), considering the magnitude of impact on postmaster financials, customer experience and day to day branch
Operations.
In addition, a new approach to Horizon UAT is being developed with the Horizon IT team, involving Postmasters at early
design and release stages.
+ Operational Communications
Accountability for operational communications is in the process of being transferred from the central POL communications
team to the Postmaster effectiveness area, reinforcing the importance of postmaster communications and the need for
coordination and prioritisation, with the postmaster in mind.
A number of areas have been highlight for improvement (number of communications, channel, relevance, timing etc) and
these will reviewed in the coming weeks.
Immediate tactical fixes already being deployed (e.g. establishing a communications gateway team, reminding POL
colleagues of the appropriate comms channels, adjusting content of weekly Branch Focus ).
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Subtitle
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Horizon Issues Judgment Remediation: Overall Summary
+ In October POL commissioned a piece of work that would provide status against key areas of HIJ findings (the KPMG
‘audit’)
* This work has delivered an interim report which has identified key areas where we need to rapidly implement process and
technology changes that will progress us towards conforming with the judgement
+ We have now received a series of reports from Fujitsu that provide some context and their views on HIJ findings and KPMG
are continuing to probe these areas with supplementary questions/requests for further technical detail
+ In parallel we have initiated a programme activity to fully remediate the HIJ issues and deliver a robust set of capabilities
to manage Horizon across the remainder of its lifetime
* This programme has been initially focussed on a 12 week ‘fast fix’ approach to provide accelerated delivery and to set the
foundations for the longer remediation
* KPMG are bolstering their team over the next 2 weeks to ensure that we are well structured to successfully deliver the fast
fix as a Phase 1 and then move rapidly onto the next phase(s) of remediation
+ We have now identified 13 areas of agreed focus where we are working collaboratively with Fujitsu to further investigate &
remediate areas which will have benefit to Postmasters
+ Additionally as part of this initial 12 week period KPMG will complete their assessment of status against the judgment and
confirm their recommendations for the overall programme
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KPMG Audit Work
This activity is the completion of the Horizon Audit work commenced in October 2020,
A draft interim report was submitted to Post Office in December 2020, with revised version submitted February 19 post feedback from
stakeholders.
The Report assessed six areas identified in the Horizon IT Judgement: Privileged Access Management (PAM), Software Development Lifecycle
(SDLC), Known Error Logs (Historic and Current), Remote Access, and Horizon Next Generation Robustness.
In order to complete this work KPMG will require detailed insights into the areas directly managed by Fujitsu
This access is being managed via the same set of interactions focussed on rapid remediation in order to not distract resources from the
delivery of the remediation activities
Availability of Fujitsu resource is being closely monitored and this critical dependency will be elevated at CEO/CEO governance meeting in
early April
Key milestones for completion of are shown below
Receipt of Fujitsu responses to our initial evidence request
for SDLC, Testing, PAM/RAM
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19 March
Receipt of responses to evidence request for Testing, Current
and Historic KELS
26 March
Response to Robustness Report
2 April
Updating Interim Report with additional evidence received.
9 April
First draft of a Final Report for circulation
16 April
Final Report issue
30 April
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Fujitsu Commitments to Fast Fix Plan
+ The following initiatives have support from Fujitsu and enable us to progress with completion of the audit as well as remediating
key areas of HIJ findings; The delivery/completion date represents when we expect to have completed these activities to a level
whereby they represent substantive progress towards demonstrable conformance with the Judgement findings
Testing of the historic 29 KELS to confirm closure
Define a process for current dispute investigation (and resolution) identifying Horizon Functionality as required
Define a process for historical dispute investigation (Fujitsu activities)
Identify Requirements for Enhancement/deployment of full counter key/session logging
Validate/test key HNGA transaction area
Testing Improvements (across the test lifecycle)
Identify Requirements to Enhance the APADC and Reference Data processes
Review and enhance reconciliation processes & consider system changes to avoid need to reconcile
Define and operate a more efficient Incident and Problem process - ensuring PM awareness of what is going on and status of issues
and fixes, and follow up to themes
Refresh/Enhance APPSUP process (managing privileged access to Horizon)
Decommission the Fujitsu operated Transaction Correction Tool
Identify additional operational metrics that Fujitsu can provide to POL that build PM confidence in Horizon robustness
Review all the governance meetings held to ensure that they are impactful and focussed robust management of Horizon
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Delivery/
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Date
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9/4
30/4
23/4
23/4
16/4
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30/4
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Mapping Of Fast Fix Activity Against HI] Findings
The priority initiatives have been mapped to the HIJ findings. This does not indicate how completely the HIJ will be addressed, as some will
only be partly addressed with the finding.
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The wider remediation programme will provide a more complete response. That mapping is ongoing and RAG against HIJ findings will be
assessed against completeness of initiatives and how overall conformance (in conjunction with legal) is assessed
The robustness area (currently assessed as no remediation action to date) is being investigated via the KPMG audit work and we expect to
identify remediation activities in the next 2 weeks
No remediation
action to date
Reports & Remote
Errorsfrom Reconcitati EONS Remote Commsto investigati_ change Permission PAM&FI RAMaffect Nodispute Tx
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HIJ Remediation Overall Programme plan
+ The overall programme plan sets out in the short term, audit completion, ongoing remediation of HIJ issues as well as
next steps to plan for wider TOM and the assistance to historic detriment work.
+ Work is progressing (w/c 22/3) to complete the detailed programme plan beyond the short term, fast fix activity
February / March / Apr May /June / July 24 August 21 and onward
Rapid Remediation
Medium to Longer-term f
Operating mode! transformation
support ~ Planning and Nceeinae & Gey DackiCh Operating model transformation implementation
implementation
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Assistance to quantify the
historic detriment to PMs
Contract & programme
management
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Final Draft Report
Deloitte Risk Advisors, 19 March 2021
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The PM Journeys Report identified 44 improvements completed and recommended a further
59 to put PMs completely at the heart of all we do
Number of findings identified by work stream
Rating Description On-Boarding I BAU: Continuous I BAU: Issue oO
Governance
& Early Days Activities Resolution I Boarding
Urgent priority, must fix issues - non-compliance with
the outcomes of the CIJ ruling and / or where there
is a detrimental impact on PMs, where detrimental
means any form of PM harm -including where that there 0 0 2 3 1 6
is a significant contractual issue and, a negative 2
financial impact and/or an impact on PMs from a
relationship or wellbeing perspective.
There is a risk of potential detriment to Postmasters, ‘ é é , A a
or a significant reputational risk to POL.
This change would significantly improve the 4 é 43 , r ”
Postmaster experience.
It would be beneficial to make this change to improve 0 é # 5 0 i
the Postmaster experience.
7 12 23 1a 6 59
Improvements noted as part of this work that have been , 13 24 9 " “4
made in the last 12-18 months.
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9Themes across all improvement opportunities were identified
1. Create a single overarching governance forum to help oversee and drive required PM related decisions and actions through to
completion. The Voice of the Postmaster Forum is a step forwards, though need to build on IDG for a wider risk-based governance
forum focussed on PMs.
. Develop detail below the purpose and communicate expectations as part of the culture workstream to truly achieve a shift
in colleague attitude.
. Proactively use data to drive insight to support action and decision-making by creating a detailed plan (e.g., proactive sharing of
branch performance with PMs).
@ 4. There is still more required to develop a PM communications framework: consistency of messaging and approach to create the
appropriate balance between focus and use of a range of channels to communicate with PMs.
i) 5. Multiple IT systems are required to paint a holistic view of a PM at any one time which results in siloed working and disjointed PM
support. Review systems architecture for efficiency of use and support.
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® 6. Enhance the processes that PMs must go through to handle cash and products ensuring an understanding of end-to-end
accountability of the customer and PM journey for cash and products.
© 7. There is still huge complexity in the number of different PM contracts and related PM obligations. Document and communicate
clearly to PMs the appeals and dispute process, including SLAs and monitoring processes.
8. Provide further organisational clarity on roles and responsibilities across teams supporting PMs.
® 9. Work to provide further support to PMs to help them grow and manage their businesses (e.g., data provision, training, etc)
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The PM Journeys report identified 6 “Urgent Priority” actions, now being tracked by IDG
* Progress status in the PM Journeys report was as of early March. More progress has been made on a number of
these items (e.g,. RCC has approved Appeals process but final comms to PMs won't be until early May)
+ Other items (e.g., PM debt uncertainty) have just started given the new finding from the PM Journeys report
Urgent Priority Improvements
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Reference
Number Finding Name Finding Progress
OF1 Appeals and disputes for The appeals and disputes process regarding contract terminations or suspension has not been clearly
contract terminations or communicated to PMs to ensure they understand the options available to them and that the procedures and
suspensions timescales are clear.
BI1 Maintained Error Limits Where there is a difference in a POL settlement account for a process affecting branches (for example ATM or
Lottery) for a specific amount (which varies by product), rather than issuing a transaction correction which would
move the difference to a PM’s branch account, the amount is instead ‘written off’ to a POL P&L account leading to
potential PM financial detriment.
BI2 _ Settle Centrally Currently the PMs can only ‘Settle Centrally’ for amounts of > £150 and any amount less than this currently
needs to be ‘made good’ by either cash or cheque by the PM each month. Also, there is no dispute functionality
within Horizon in order to allow PMs to easily dispute any amounts that have been 'settled centrally’.
BI3 ATM transaction disputes _There are a lack of effective procedures in place to manage ATM transaction disputes, raised by customers
through Bank of Ireland (Bol), who are the Link member currently managing the POL ATM network. This leads to
potential PM detriment.
BC1 — Shortfall Resolution The historical shortfall resolution scheme does not cover the period between each branch’s migration to HGNA in
Scheme Exceptions 2017 and 2018 and the common issues judgement in 2019. Should PM detriment have occurred in this period O
(e.g. arising from contract termination or unpaid suspension), this detriment will not have been investigated or
compensated.
BC2 Postmaster Debt No investigation has been conducted to identify and resolve any PM debt accrued between the implementation of
Uncertainty HGNA and the establishment of new ways of working between HMU and BAU. This leads to a risk that PMs who C
accrued debt in this period do not have certainty over their historic debt balances and do not understand if, how,
or when they will be resolved.
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+ Current immaturity of the overarching programme structure and medium term project scoping.
+ Mitigation - working to establish core programme controls, delivery cadence, clear roles and responsibi
other programmes (e.g., Branch Hub, MDA2, Network Strategy) to facilitate successful delivery.
+ Organisational design is under consultation and could impact the delivery plan.
+ Mitigation —- On-going review and re-alignment of consultation feedback to assess any impact on the organisation design.
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. Key Dependencies:
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(OF1).
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+ Detriment analysis and assessment will have been completed by the end of May. The remediation will follow.
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Important Notice
This document (“Report”) has been prepared by Deloitte LLP (“Deloitte” or “we”) for Post Office Limited (“POL”) in accordance with our engagement letter dated 4 January
2021. The report is produced solely for the use of Post Office Limited for the purpose set out in the Engagement letter. Its contents should not be quoted or referred to in
whole or in part without our prior written consent except as required by law. Deloitte LLP will accept no duty or responsibility to any third party, as the report has not been
prepared, and is not intended for any other purpose.
The Report has been prepared on the basis of the limitations set out in the engagement letter and on page 13 and 92. The scope of our services and any deliverables will be
limited solely to the Services set out in this engagement letter. We will make no representations in respect of and will not consider any other aspect of your operations.
Deloitte LLP 2021 ~ Postmaster Journeys ~ March 2021 Private and Confidential DRAFT —for discussion purposes only
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Contents
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Contents Page
Executive Summary
1.1 Executive Summary 6
1.2. Background, Scope and Approach 12
1.3. Summary of Urgent Priority Findings 14
1.4 Summary of High Priority Findings 15
Key Themes
2.1 Summary of Thematic Findings 18 9
2.2. Governance 19 é
2
2.3. POL Culture and Staff support 20 9
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2.4 Data and Management Information 21 3
2.5 POLand PM Communications 22 3
2.6 Systems and Technology 23 3
2.7 Cash and Products 24 4
2.8 PM obligations and disputes 25 =
2.9. Roles and responsibilities and Organisational Design 26 FI
2.10 Proactive support to PMs 27 ma
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Roadmap 5
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1.1 Executive Summary
Introduction
In January 2021, Deloitte was commissioned to undertake a piece of work for Post Office Limited (POL) looking at the extent to which the organisation has moved towards its stated
aim of ‘putting Postmasters (PMs) at the heart of the business’. Postmasters operate their businesses through a variety of different business structures. Therefore, a reference to a
Postmaster or PM in this report could, depending on the circumstances, mean an individual, a limited company or a partnership. In the case of a limited company or partnership,
the recommendations in this report will typically apply to the partner/director or employee with main responsibility for running the branch, and, in the case of individuals who do
not work in their branch regularly, many of the recommendations in this report apply as much to a branch manager or officer in charge of operating the branch on their behalf as to
the individual who has entered into a contract with Post Office.
This work builds on findings and improvements made by POL as a result of both the Common Issues Judgement (ClJ) and Horizon Issues Judgement (HU), as well as looking at wider
improvements that have been (or should be) made to mitigate the risk of PM detriment, looking at cross cutting organisational themes such as culture, systems and management
information in the governance section (see pages 38-47) as well as specific potential improvements across each element of the PM journey from on-boarding to off-boarding (see
pages 48-90).
The work was completed between January and March 2021 with this report summarising both improvements made over the last 12-18 months as well as making recommendations
around areas for further focus and investment going forward - setting out the position and progress on findings at the beginning of March 2021. Each finding is classified as urgent,
high, medium or low priority based on the potential PM detriment (see table on page 8 for definition). These findings were based on evidence obtained from across the business
and through a series of interviews and conversations with key stakeholders. This work did not include detailed systems assessment, testing or verification of the timing of
improvements made, planned and in progress, nor did it include direct contact with PMs (see section 1.2 for full details of scope, approach and limitations and Appendix D those
spoken to as part of this process). All findings and recommendations have been discussed and verified with business owners.
For each finding the report makes associated recommendation(s) setting out proposed activity to address the finding, as well as specifying named responsible and accountable
individuals. The recommendations are structured into an overall roadmap of activity (see section 3). This roadmap has been developed to prioritise urgent and high-risk areas of
activity around preventing PM detriment. This work did not take into account cost or resourcing implications and POL will need to consider these further in finalising
implementation plans.
Context to the work
Post Offices are a key part of the UK high street and supporting PMs to succeed and thrive is key to the long-term success of the organisation. However, over many years, layers of
culture and working practices across POL have built up that have considered PMs in part as a means to securing network coverage, with the organisation focussed on moving
towards a more commercial footing rather than consistently prioritising support to, and interactions with, PMs. Related to this there has also been a lack of significant or ongoing
investment in information technology or wider processes to support PMs, meaning that the working practices in branches are outdated and not consistent with elements of good
practice that would be expected across comparable sectors.
Over the past two years there has been positive change in the way that POL looks to support PMs. A good example of this is the introduction of area managers (AMs) around two
years ago - a move almost universally recognised by PMs as a huge step forward in terms of the support they receive. On the receipt of the Cl, Post Office undertook a significant
programme of work led by the Operations Director to implement improvements to both comply with the judgement but also to make things easier for branches. Further
improvements have also come about since the launch of the new Purpose statement, and ongoing organisation changes, including senior management organisation re-design
rolled out from September to November 2020. These positive changes have helped to simplify and improve POL interactions with PMs and to start to change culture and ways of
working. The Hid and CU have also acted as catalysts for change making a number of specific recommendations that the business has been taking forward. The linkage and
relationship between this piece of work on ‘PM Journeys’ and these wider activities is shown in Figure 1 the following slide.
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1.1 Executive Summary
Scope
This PM Journey work looks wider than the specific recommendations from the CU to call out a range of potential further improvements that have been, and could, be made
across the PM journey to support the strategy of ‘Putting PMs at the heart of the business’. This is aligned with ongoing improvements, including work taking place as part
of the wider organisational redesign activity and through the culture change programme.
Following the HU and ClJ a number of operational and wider improvements have taken place across the organisation, Work completed by Norton Rose Fullbright (NRF) has
looked at the operational progress in meeting specific requirements from the CU and remaining gaps, with Internal Audit tracking progress against closing any NFR found
when reviewing the operational improvements made. Similarly KPMG has undertaken work to look at progress in addressing HU requirements, and there have been ongoing
improvements on some of the specific technical Horizon issues raised in the HU. This report does not repeat specific findings from these activities but does note the work
being progressed and the tracking of progress that is now taking place through the Improvement Delivery Group (IDG).
Figure 1: How PM Journey fits with wider work across the network
NRF Report- looking at KPMG Report into the
Reporting and progress made to progress made to PM Journeys work — Tracking of
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In addition to these areas, business owners have been undertaking reviews as part of business as usual and have changed and improved ways of working. The creation of the
Historical Matters Unit (HMU) has also added focus and momentum to activity to address historic issues (not covered by the scope of this Project).
This work has been taking place over the last 12 months against a backdrop of a global pandemic, with the organisation adapting to new ways of working and supporting the
safely and wellbeing of PMs and POL employees whilst maintaining, and in many cases enhancing, PMs’ ability to improve the support and offerings provided to customers.
Deloitte LLP 2021 ~ Postmaster Journeys ~ March 2022 Private and Confidential DRAFT for discussion purposes only
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1.1 Executive Summary (continued) Z
Overall Findings
We have called out 44 areas where we have noted improvements that have been made over the last 12-18 months. These improvements span right across the business and
include improved onboarding processes (e.g., improvements to initial assessment and training processes) guidance and support for PMs (e.g., through the PM support guide, and
improved branch support tools) and communication (e.g., improved call centre scripts and wider PM communications). There is evidence of increased focus and momentum across
the organisation to deliver improvements and ‘Put PMs at the Heart of the Business’ with many of the findings and recommendations set out in this report being addressed through
activity that has started and been prioritised over the last three to six months. Examples of positive changes implemented over the two-month period that this work has been
underway include setting up the new ‘Voice of the PM’ Forum, changes and further improvements to direct communications with PMs and the progress being made as part of the
culture change programme to instigate activity such as pairing of senior leaders with PO branches to facilitate understanding and knowledge sharing
There remain significant opportunities for further improvements in POL interactions with PMs. Some of the findings raised as part of the HlJ and CU, (e.g., transaction disputes and
the defining and communicating of an appeals process for PMs who have a dispute with) have not yet been fully addressed (though we note action is in progress), and several
wider areas identified as having potential to go further to make a real difference to PMs are not yet in place. The cultural shift needed to support a focus on the PM is key to this
and has not yet been fully communicated or embedded across the organisation. a
Specifically, we raise 6 urgent priority, 14 high priority and 26 medium priority findings, with Figure 2 below showing how these are spread across different elements of the
PM Journey. The urgent and high priority findings are summarised in Figure 3 alongside an indication of progress made to date in addressing these.
Figure 2: Table of finding
and improvements identified, by ating and work stream
Number of findings identified by work stream
Rating Rating Description On-Boarding & I BAU: Contin: BAU: Issue iticeriln ial
; Early Days Activities Resolution Z
Urgent priority, must fix issues — non-compliance with the 3
outcomes of the Cll ruling and / or where there is a
detrimental impact on PMs, where detrimental means any 0 0 2 3 1 6
form of PM harm —including where that there is a significant
contractual issue and, a negative financial impact and/or an
impact on PMs from a relationship or wellbeing perspective.
There is a risk of potential detriment to Postmasters, or a
i 5 0 5 3 1 “4
significant reputational risk to POL :
This chi i the Pi
s change would significantly improve the Postmaster 7 a “i ‘ ‘ »
experience
It would be ‘ial te ike this ch toir pve the
would be beneficial to make this change to improve the a ‘ ‘ 3 ° 13
Postmaster experience.
7 2 23 fel 6 59
Improvements noted as part of this work that have been - a . . in E
made in the last 12-18 months a
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1.1 Executive Summary (continued) 3
5
Overall, the majority of findings (particularly those rated as urgent or high priority) raised in this report can be grouped into nine thematic areas, which are 2
summarised below and set out in detail in Section 5 of this report: c
3
a
@ Governance There are currently limited mechanisms in place to review POL performance in providing services to PMs, nor a single overarching 8
POL Culture and Staff
Support
Data and Management
Information
POL & PM Communications
Systems and Technology
Cash and Products
PM Obligations and Dispute
Resolution
Roles and Responsibilities
and Organisational Design
Proactive Support to PMs
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@
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@
Deloitte LLP 2021 ~ Postmaster Journeys ~ March 2021
governance forum to help oversee and drive required PM related decisions and actions through to completion. The Voice of the Postmaster
Forum recently created is a step forwards, but we recommend a wider risk-based governance forum focussed on PMs, building on the
current IDG.
The culture developed across POL over many years has not focussed on PMs. The new purpose statement and plans currently underway as
part of the culture work stream will drive improvements. However, there is a long way to go to truly achieve this shift in attitude. Developing
detail below the purpose and continuing to communicate expectations across the business will be key in making further improvements here.
Although POL has access to a significant amount of data, this is not used proactively to drive insight to support action and decision-making.
Whilst there is an overarching data strategy, there is no detailed plan below this nor funding/resources set aside to deliver against this.
Examples of areas for improvements include PM remuneration data and proactive sharing of branch performance with PMs.
There have been improvements in both operational communications (e.g. tone in letters to PMs) and more strategic communications, but
there is still more to be done to develop a communications framework and ensure consistency of messaging and approach to create the
appropriate balance between focus and use of a range of channels to communicate with PMs.
There has been a historical lack of investment in IT to support PMs and there are many known issues in Horizon which are being progressed.
Multiple systems are in use by different teams, and a combination of these systems are required to paint a holistic view of a PM at any one
time. This results in a siloed approach to working and the provision of disjointed support to Postmasters.
Cash handling is an issue frequently raised by PMs as a problem area. Cash forecasting to meet branch cash requirements is not close to good
practice and there is confusion and inconsistency around the support provided to PMs. Products such as Lottery and ATM are also flagged as
problem areas, with issues around transactions correction processes and manual cash processes representing key parts of this.
PM responsibilities are not always clear and, despite some simplifications, there is still huge complexity in the number of different contracts
and related obligations. The appeals and dispute process regarding contract terminations or suspension or for general issues, such as
transaction corrections, has not been clearly documented and communicated to PMs. SLAs have not been set for issue resolution processes
and there is also no effective monitoring in place for the efficiency or quality of POL's response to issues raised.
Roles and responsibilities across teams supporting PMs are not always clear. The organisational design work in progress is making changes to
improve this and it will be critical to ensure that there is sufficient clarity and that changes are communicated effectively and consistently to
support their implementation and drive improvements.
There is opportunity to provide further support to PMs to help them grow and manage their businesses. Some data is currently shared, but
this is limited and not provided consistently meaning some PMs receive more proactive support than others. Training is not always aligned to
the needs of different PMs e.g. business improvement training to help in driving revenues is not provided to all branches.
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1.1 Executive Summary (continued)
Progress made to date
As well as the 44 areas where improvements have already been implemented, in approximately two-thirds of the recommended areas for further improvement we
noted that work was either already underway or has started during the duration of this project. Specifically:
* Out of the 6 urgent priority findings, 4 have activity in progress
* Out of the 14 high priority findings, 12 have activity in progress
* Out of the 26 medium priority findings, 17 have activity in progress
* Out of the 13 low priority findings, 8 have activity in progress
In addition, Internal Audit has been assessing the implementation status of the Norton Rose Fulbright (NRF) recommendations to address the ClJ findings. As of 10
March 2021, Internal Audit reported that 29/34 recommendations were complete, 4/34 were in progress (with a significant overlap with those called out in this report
e.g. around onboarding policies and procedures and operator engagement) and the remaining 1 had been postponed. Of those in progress all are reported as being on
track for completion at the end of March 2021. (Note: We have not independently checked or verified these findings as part of this Project).
Furthermore, we note that progress is being made on implementation of the HU actions through the work being undertaken through the IT teams and supported by
KPMG. However, aside from the high-level recommendations we make here about overall IT and systems strategy, and a small number of references to specific
technology fixes needed (e.g. finding BC3 around use of memo view for urgent communications), we do not list out or repeat progress and recommendations reported
in this area, as this was beyond the scope of this piece of work.
Suggested Roadmap
As well as identifying a number of thematic and specific findings this report also sets out a high-level roadmap for delivering the recommendations. This roadmap (see
section 3) sets out groups of activities against different topic areas and is broken down into three recommended time periods for completion:
* ASAP - To be implemented as soon as possible, with completion by May 2021.
* Short Term - To be implemented in the near future, after the ASAP improvements, by August 2021.
* Medium Term - To be implemented over the course of FY21/22, with completion reached before March 2022.
Where recommendations are by their nature more complex and require a longer-term action, we have used an arrow box to indicate that they will remain a work in
progress beyond March 2022.
On the whole, urgent and high priority findings are flagged to be addressed immediately, though we note that there are some findings, that while work can start, will
not be completed until later in the time period because of the complexity or reliance on third parties. Similarly, medium and low priority findings are typically included
later in the time period; however some are grouped with more urgent issues where it makes sense to address them at the same time or where they represent a quick
win and can be addressed more immediately.
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1.1 Executive Summary (continued)
Closing down recommendations
Assuming that recommended actions from this report are completed in line with the targets set in the roadmap, the charts below illustrate how the status of findings will
evolve (please note we have broken down our 59 findings out in to 66 actions, as some findings contain both shorter and longer term actions).
Figure 3: Charts illustrating the progression of findings resolution
Total Incomplete Recommendation Total Incomplete Findings Total Incomplete Findings
Urgent
Start of March 2021 By end of May 2021 By end of August 2021 i
High
I Medium
—“£ Low
By the end of March 2022, only longer term actions should remain incomplete, such as: embedding cultural values and behaviours, implementing technology and data
strategies, plus any actions which cannot commence until after the period of time included within the Roadmap e.g. transition of ATM management to POL and review of
the Lottery agreement with Camelot.
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This roadmap does not take into account cost or resourcing implications and POL will need to consider these further in finalising the more detailed implementation plans
to deliver against this. Meeting the timescales suggested will require investment and focus of the organisation both in the short term (e.g. through the shifting of
resources to urgent and high priority areas), and over a sustained period to genuinely drive change, particularly given that some elements of this — most notably shifting
culture and addressing the technology debt — will take time.
Throughout the report its findings, we have been clear to set out accountable and responsible owners as this is key to delivery. We recommend that this action plan is
delivered as a focussed programme or set of programmes of work going forwards with a single overall accountable owner and work package and work stream
leads. Progress should initially be reported to and monitored by the Improvement Delivery Group (IDG) as an interim measure and then moved to the new
(recommended) PM Governance forum, once this is operational.
Implementing these changes provides a real opportunity for POL to build for the better, genuinely moving towards its aim of ‘Putting Postmasters at the heart of the
business’ and supporting long term success for both POL and the PM community.
Post Office Horizon IT Inquiry to establish a clear account ofthe
implementation and fangs of Horizon over its ifetime
Deloitte LLP 2021 ~ Postmaster Journeys ~ March 2022 Private and Confidential DRAFT for discussion purposes only
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1.2 Background, Scope and Approach
BACKGROUND AND OBJECTIVES
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SCOPE
Post Office Limited (‘POL’) has a core strategic aim to put Postmasters (‘PMs’) at the
heart of its business. As part of the implementation of this strategy, POL needs to
understand the extent to which the interests of PMs’ have been embedded across POL,
and where additional activity can be taken forward to better take into account PMs’
needs.
In January 2021 Deloitte (referred to as ‘we’ throughout this report) was commissioned
by POL senior leadership to undertake a piece of work looking at the ‘Post Master
Journey’ (the ‘Project’) and areas of interaction between POL and PMs, to consider the
progress made by the organisation towards it aim to ‘Put Postmasters at the Heart of the
Business’.
This Project involved the consideration of core activities and overall end-to-end
processes across POL in relation to PMs - looking at the extent to which there have been
improvements made over the last 12-18 months, where there are activities in progress
or planned, and where there are existing gaps in PM support that POL should consider
addressing and any further work that may be needed to support achievement of this
strategic aim.
Note: Post Office's Postmasters operate their businesses through a variety of
different business structures. Therefore, a reference to a Postmaster or PM in this
report could, depending on the circumstances, mean an individual, a limited
company or a partnership. In the case of a limited company or partnership, the
recommendations in this report will typically apply to the partner/director or
employee with main responsibility for running the branch, and, in the case of
individuals who do not work in their branch regularly, many of the
recommendations in this report apply as much to a branch manager or Officer in
Charge operating the branch on their behalf as to the individual who has entered
into a contract with Post Office.
Deloitte LLP 2021 ~ Postmaster Journeys ~ March 2021
Private and Confidential
This purpose of this Project was to:
* Understand POL's core processes and activities in respect of PMs to identify:
1. What improvements have been made over the past 12-18 months in terms of POL
interactions with PMs
2. What improvements are planned or in progress to improve POL interactions with
PMs
3, Any existing gaps and further improvement opportunities (referred to as ‘findings’
throughout this report) POL should address in support of its strategic aim.
* Consider wider thematic areas that could strengthen POL interactions with PMs including
(but not limited to) governance and organisational structure, accountability and
responsibilities, communications and relationship management and training.
* Develop a risk-based prioritised roadmap showing potential sequencing of
improvements to support interactions with PMs. Whilst this did not include an
assessment of the costs of implementing these changes, it does focus on the areas that
are likely to have the largest potential impact in reducing the risk of PM detriment.
We considered the above by conducting a wide range stakeholder interviews across POL to
understand current processes and activities across the organisation from a Governance
standpoint, and across the four stages of the PM journey below:
We have also performed a high-level review of documentation to aid process
understanding, or to validate stakeholder feedback, where we felt this was required.
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1.2 Background, Scope and Approach (continued)
APPROACH
LIMITATIONS
This Project was conducted as follows:
* We mobilised a leadership team and five core teams each consisting of two to three
individuals with access to relevant additional subject matter experts. Four of these teams
led the analysis of activities within in each of the four stages of the PM journey based on
the initial list of activities within each stage as provided by POL. The final team focused
on the wider thematic areas that could strengthen POL interactions with PMs including
(but not limited to) governance and organisational structure, accountability and
responsibilities, communications and relationship management and training.
* Work was broken down into three two-week ‘sprints’ across the project with key findings
reported to POL project leadership at the end of each sprint phase (refer to Appendix C
for a list of meetings held with POL leadership, including summary of content presented).
* Each team conducted interviews with stakeholders across POL to understand what
improvements have been made to date and what improvements are planned or in
progress. We also considered what further improvement opportunities exist for POL.
+ Information was obtained by:
- Interviewing the head of each business unit and relevant team members across POL
- high-level review of documentation to aid process understanding, or to validate
stakeholder feedback, where required.
* Where we identified any gaps or further improvement opportunities, we validated our
findings and suggested recommendations with POL responsible and accountable action
owners.
* We presented emerging findings and recommendations periodically at weekly
Postmaster Experience Roadmap Steering Committee meetings and bi-monthly
Postmaster Experience Roadmap Forum meetings (refer to Appendix C for a full
schedule of meetings held, including POL attendees and information presented at each).
Our fieldwork was completed based on review of key business documentation and
workshops and interviews with stakeholders across the business between 11 January and 2
March 2021 (see Appendix D for a full list of stakeholders consulted). The findings in this
report reflect the latest position as of 3 March 2021.
Private and Confidential
The scope of this Project did not include:
* Direct contact with PMs (however, we did consider the extent to which POL engages with
PMs to support the overall strategic aim of putting PMs at the heart of the business and
looked at feedback e.g. from the PM Survey on issues that matter most to them, spoke
to Area Managers around issues faced by PMs and considered information and wider
evidence including on PM complaints)
* Operational effectiveness testing.
+ Review of the underlying IT system controls and environment.
* Assessment of improvements in activities and processes made prior to March 2019.
* Assessment of the design or effectiveness of improvements made, or improvements
planned or in progress.
* Testing or verification of the timing of improvements made, or of improvements planned
or in progress. Information on timings has been obtained through discussion with
Management only.
* Cost assessment of any additional activities that could be used to further strengthen POL
interactions with PMs. (Given the limited funding available POL may therefore need
to prioritise activity contained with the recommendations or in some cases may choose
to implement a different approach).
* Detailed consideration of the historical issues covered by the 2019 Horizon Issues and
Common Issues Judgements ~ though as highlighted on the previous slide this work was
completed with awareness of activity happening in these areas and any findings and
recommendations mentioned here are made in with this wider context.
* Validation of work under taken by Internal Audit or other third parties.
* Legal analysis or engagement in connection with the process and report.
Furthermore, this Project is one of a number of related activities taking place across POL
following the Commons Issues and Horizon Issues Judgements (the Judgements’). This
includes work around culture and IT system (See figure 1). This Project has been conducted
separately and does not:
* Summarise the work performed across the different areas of POL
+ Formally assess any follow on or follow up activity in relation to these Judgements.
DRAFT—for discussion purposes only 7
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1.3 Summary of Urgent Priority Findings
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The following table summarises the urgent priority findings with a brief description of each of these and an indication of progress in addressing each of these. Further detail on the finding,
recommendations and details of the accountable and responsible owners for each of these is included is included in Sections 5 to 9.
Urgent Priority Improvements
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Reference
Number Finding Name Finding Progress
OF1 Appeals and disputes for contract The appeals and disputes process regarding contract terminations or suspension has not been clearly communicated to PMs
terminations or suspensions to ensure they understand the options available to them and that the procedures and timescales are clear.
BIL Maintained Error Limits Where there is a difference in a POL settlement account for a process affecting branches (for example ATM or Lottery) for a
specific amount (which varies by product), rather than issuing a transaction correction which would move the difference toa
PM’s branch account, the amount is instead ‘written off’ to a POL P&L account leading to potential PM financial detriment.
BI2 Settle Centrally Currently the PMs can only ‘Settle Centrally’ for amounts of > £150 and any amount less than this currently needs to be
‘made good’ by either cash or cheque by the PM each month. Also, there is no dispute functionality within Horizon in order G)
to allow PMs to easily dispute any amounts that have been ‘settled centrally’.
BI3 ‘ATM transaction disputes There are a lack of effective procedures in place to manage ATM transaction disputes, raised by customers through Bank of
Ireland (Bol), who are the Link member currently managing the POL ATM network. This leads to potential PM detriment.
BC1 Shortfall Resolution Scheme The historical shortfall resolution scheme does not cover the period between each branch’s migration to HGNA in 2017 and
Exceptions 2018 and the common issues judgement in 2019. Should PM detriment have occurred in this period (e.g. arising from
contract termination or unpaid suspension), this detriment will not have been investigated or compensated.
BC2 Postmaster Debt Uncertainty No investigation has been conducted to identify and resolve any PM debt accrued between the implementation of HGNA and
the establishment of new ways of working between HMU and BAU. This leads to a risk that PMs who accrued debt in this O
period do not have certainty over their historic debt balances and do not understand if, how, or when they will be resolved.
Progress Summary: The Harvey Balls give an estimate of progress made towards addressing the findings at start March 2021 based on conversations with key
stakeholders across the business, These progress updates have not been fully tested or verified and are included here to given a high-level indication of progress only:
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recommendations and details of the accountable and responsible owners for each of these is included is included in Sections 5 to 9. =
High Priority Improvements
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G1 Complex Systems landscape There are a number of different systems in use for processing and recording interaction with PMs, as set out in the diagram g
making single view of PM shown in Appendix G. Multiple systems are in use by different teams, and a combination of these systems are required to g
challenging paint a holistic view of a PM at any one time. 9
G2 Values and Behaviours not yet The desired cultural shift to putting the PM at the heart of all activities has not been consistently embedded yet across POL. =
embedded across organisation Additionally, ‘Post Office Values’ have yet to be developed and communicated. 5
g
G3 No overarching PM focussed To date, there has been no overarching mechanism in place for review of POL performance in providing services to PMs or a £
governance forum governance forum to help oversee and drive required PM related decisions and actions through to completion x
g
G4 No detailed plan to implement the There is no detailed plan for activity behind the high-level data strategy or agreed funding and resourcing to take forward 8
high-level Data Strategy activity around MI, data utilisation and optimisation.
2
GS Insufficient clarity on roles and —_-POL’s organisation is complex and there is a lack of clarity between teams on roles and responsibilities, which undermines a &
responsibilities cohesive approach across the Postmaster journey. This is being addressed by some of the organisational re-design activity, ©) =
but will need to be embedded. g
3
BC3 Use of memo view may mean that The processes in place to push urgent operational communications (e.g. around notification of scam calls) to branches is 2
PMs are not sighted on all urgent based around memo view. At present, messages are not retained on the system, meaning that if PMs miss them initially they G) §
communications may be unaware of security or other business critical risks. 5
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unable to readily assess how their remuneration compares with other similar branches or their own trading performance in 3
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1.3 Summary of High Priority (continued)
The following table summarises the high priority findings with a brief description of each of these and an indication of progress in addressing each of these. Further detail on the finding,
recommendations and details of the accountable and responsible owners for each of these is included is included in Sections 5 to 9.
High Priority Improvements
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Reference
Runber Finding Name Finding Progress
Bi4 Accounting disputes process Accounting disputes processes have not been clearly documented and effectively communicated to relevant POL staff, nor
has guidance been produced and shared with PMs to clearly explain the options available to them and what the procedures
and timescales for reply and resolution are.
BC7 Cash discrepancy investigation There is no Service Level Agreement (SLA) for investigating cash discrepancies (e.g. a PM having less cash in their tills than
procedure misalignment their system declares), which can result in such discrepancies, on occasion, not being fully investigated before the CCTV data
is removed, which happens after 90 days.
BIS Complaints handling processes Complaints processes have not been clearly documented or effectively communicated to relevant POL staff. Additionally,
guidance has not been produced or shared with PMs explaining the options available to them and what the procedures for
complaint reply and resolution are.
BI6 Absence of SLAs for issue SLAs have not been set for issue resolution processes across POL and there is also no effective monitoring in place for either
resolution processes efficiency or quality of POLs response to issues raised.
oF2 Perception of bias in Investigation There is no clear objective party involved (from a PM perspective) during POL’s suspension, investigation or termination
process processes, or in situations where there has been appeal lodged regarding these items. O
BCS Lack of PM-centric metrics and Historically, branches have been assigned a tier to determine the level of support provided to the PM by their AM, from Tier
transparency in tiering system 1 (high 'priority') to Tier 3 (lower priority’). This tiering approach is based on branch customer numbers rather than being
based on PM need and has not been transparently communicated to PMs.
BC6 Design methodology and process Many existing products have been designed based on cost-based metrics and in isolation, rather than in a manner that
prioritises the PM experience. This has led to several PM-operated day-to-day processes being complicated and difficult to
administer.
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In the course of this work, a number of themes have become apparent in respect of the observations raised. Nine themes span the entire Postmaster journey, where there
are a number of significant (particularly urgent and high priority) findings, which we have summarised in this section.
The nine themes are:
Figure 4: Themes illustration
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2. POL Culture and Staff 4. POL & PM 5. Systems and
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6. Cash and Products
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9. Proactive Support to
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consideration. The findings in these nine themes are summarised in this section then described in more detail in the Detailed Findings Sections 4 to 9
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2.2 Themes: Governance
How are PM centric
risks identified,
mitigated and
monitored?
f observations and recommendations
Governance is key to supporting business strategies and objectives, to support alignment and focus on the right areas of activity and to ensure risks are mitigated
in areas that are critical to delivering desired outcomes. POL's desired shift to a PM centric business needs clear governance and end-to-end oversight.
Current position
There is no single overarching end-to-end governance over risks and activities that could be detrimental in their impact on a PM. Our findings have highlighted a
number of areas where key aspects have been lacking across POL in respect of focussing attention, resource and activity on PM centric issues.
To date, there has been no overarching mechanism in place to review POL’s performance in providing services to PMs or a governance forum to help oversee
and drive required PM related decisions and actions through to completion. This lack of an end to end PM centric forum and visibility of PM related issues has
manifested throughout POL and resulted in a disparate and non-cohesive way of working with PMs and with less focus on the issues that matter most to PMs.
In addition, there has been insufficient information made available across POL and to PMs to support driving a more PM centric approach e.g, branch trading
MI (Ref G3).
* Risks impacting PMs have not previously been well articulated, and further effort is required to make the impact on the PM clearer in risk descriptions. There is
also currently no mechanism supporting the shifting of attention onto emerging risks that may require more attention or are operating outside of risk appetite
as the risk management framework in place does not allow these to be identified or discussed in an appropriate governance forum (Ref G3).
* Management information is key to supporting governance and decision making and multiple observations around the quality and use of it have been
highlighted in section 2.4, Improvements are required to ensure the right information is being collated in order to drive appropriate decision making by POL,
so that activities and focus can be on those areas where attention is required. The current Ml and reporting in place does not provide sufficiently clear
insights into how POL is performing against its PM centric objectives, or a clear enough view on branch performance or conformance insights through the KPls
in place. Mlhas not been optimised to support decision making, and there has been no centralised forum where end-to-end PM related MI has been received
and reviewed by management to support these objectives. We note some good recent progress in this area with the introduction of the Voice of the
Postmaster forum in February 2021, which will review PM insights and some PM metrics.
* As noted further in the Culture section (3.3), POL has not historically had a culture which encouraged transparent feedback or continuous improvement
activity. This is a key part of an effective governance framework, to learn and improve processes on a continual basis. (Ref G7).
Recommendations
Specific recommendations for these areas are set out in Section 5. The Voice of the Postmaster Forum and Improvement Delivery Groups recently created are a
step forward in addressing some of the issues, and the Postmaster Director role (once filled) should also add more focus to the governance aspects. We
recommend a wider risk-based governance forum (section 5, G2) is developed where focus is on risks and issues that impact PMs and POLs ambitions with respect
to working with PMs. Information and data, including intelligence from AMs, should inform areas of focus and where attention is required. Actions should be
driven through to completion by this forum, with clear accountability and responsibilities in place. A forum of this nature would be considered good practice for a
significant area of business risk.
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2.3 Themes: POL Culture and Staff Support
Theme
2. POL Culture and
Staff Support
Does the culture
support the strategy
and are mechanisms
in place for
colleagues to
support PMs?
Summary of observations and recommendations
Context
Historically, POL has not consistently focused on the organisational culture and how this can support and drive desired strategic objectives. Focus has been on a
commercial perspective rather than on ways of working with PMs to focus on their needs and requirements to deliver outcomes. A clear shift is required across
the organisation which requires a significant amount of effort. Steps are underway to progress this through the work being undertaken as part of the Culture
programme but this will need ongoing focus to ensure a genuine shift in focus towards PMs happens across POL.
Current position
A number of observations have been made in the course of this Project about the culture of the organisation in regards to ways of working with PMs,
communication, and shared values and behaviours. Putting the PM at the heart of the business is not yet embedded throughout POL's culture, processes, and
resourcing structures. Examples include:
* Values and Behaviours are not yet articulated across POL (at the time of reporting). Whilst we understand there are plan in place to do this, as yet these have
not been clearly articulated or agreed (Ref G2). Cultural initiatives and activities (described at G2) under the Driving Postmaster Centricity workstream have
already started prior to these values being articulated.
* Core policies and processes in operation across the PM lifecycle have not always considered PMs needs or had the view of a PM embedded within them. The
POL strategy has previously focused on cost reduction and commercial return. We also noted a lack of cultural and soft skill training provided to key PM facing
teams, such as the security team and support teams, which has not adequately equipped teams to support PMs effectively (Ref BC12).
* In addition job descriptions, recruitment and induction processes don’t currently reflect the PM centric approach or focus on how PM services needs to be
built into performance objectives (Ref BC9).
* Consistent feedback mechanisms and continuous improvement have not been in place across the organisation. Many issues have been raised to various
external and internal groups over a period of years but no action has been taken or followed through as a result. This has impacted colleague motivation
across POL and PMs who do not feel as though their concerns or suggestions have been listened to and taken into consideration. In addition, it is not clear to
some colleagues how to make suggestions for improvements and what the appropriate mechanism is to do this. This absence of a continuous improvement
culture also impacts the ability of the organisation to assess and respond to valid feedback that may be gained from those in operational roles (Ref G7).
Recommendations
Plans are in place to start addressing the required shift in culture throughout the organisation, and these activities (Ref G2) will bring POL up to date with what
many organisations have been doing for some time, e.g. twinning of senior leadership to day to day operational teams, spending time in different parts of the
organisation, articulating clear values etc. These will provide a baseline from which POL should continue to develop and embed the required cultural changes.
Overall, the organisation needs to define its core values, behaviours and purpose in a way that can be understood by all, embedded and consistently adopted
across POL’s ways of working and colleague communications. The new purpose statement and plans underway as part of the culture workstream will drive
improvements, but there is a long way to go to truly embed this shift in attitude. Developing detail below the purpose and continuing to communicate
expectations across the business will be key. Focus needs to be on where the PMs fit into the organisation, what their critical role is and how POL teams
can ‘work together’ to achieve strategic ambitions.
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2.4 Themes: Data and Management Information
Theme Summary of observations and recommendations
3. Data and Context
Management
Several observations and findings have been made in the course of this work about ways of working with PM and how to use management information (MI) in
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information respect of driving decisions and the right outcomes and behaviours.
Current position
There are a number of areas where MI has been lacking across POL in respect (1) Overall ownership and strategy; (2) How data is collated and accessed; (3) How
the data and MI is used, and by whom; (4) How insights are drawn and presented; and (5) How and where MI is being reported. Currently, a significant amount
of organisational redesign is underway. Whilst the design principles and need for PM prioritisation have been considered, detail behind the overarching MI, data
g utilisation and optimisation strategy has not been developed. The key findings in respect of Data and MI include:
3 raphe tor * POL has a high-level data strategy but there are no detailed plans to support putting this in place or resources or funding allocated to progress this activity. As
= al ard a result, this limits the ability for POL to make use of best practice in relation to data optimisation and utilisation, such as leveraging data to innovate products
g ay ae mecieclP and services and using telemetry to enhance and improve the PM and customer experience. (Ref G4)
é strategic objectives, I* Numerous systems exist in POL, and there is no single view of a branch and all the interactions that POL has with them. This limits the ability to have a clear
x and the decisions in I view of insights that can be used to enhance the PM experience. For example, it was found that the field teams can view what the central teams’ action, whilst
= relation to better the central teams cannot view what the field teams are actioning. (Section 2.6, Ref G4, OF3, POL IA Review: Postmaster Reporting)
outcomes for PMs? I+ At present Ml and reporting does not provide complete end to end PM insight or enable forward looking decisions to be made, nor does it show how POL's
8 strategy is performing to ensure that POL is achieving the desired outcomes (Ref G2, BI6). Where metrics exist, there are no early warning indicators or €
8 baseline metrics that exist in either the Branch Insight Tool (BIT) or in the MI available to POL management and the AMs, which limits POL’s ability to take e
& proactive measures to prevent issues or capitalise on consumer trends. (Ref OF3, G1, BI6, POLIA Review: Postmaster Reporting) E
8 * PMs are not provided with sufficient information to understand their remuneration. Whilst remuneration advice slips are provided, PMs are not able to assess z
8 how their trading compares to other similar branches or compare their trading results (and remuneration) with prior years. Additionally, whilst remuneration 2
and sales reports are available on Horizon, these are not user friendly, and PMs are often not aware of these reports or how to use them. (Ref BC4) =
* POL could do more to actively support PMs to improve branch performance. Heavier emphasis is placed on the tier 1 branch network, with tier two and three s
branches having access to some remote support but less frequent AM contact and input. Further details of this are set out in Findings BC4, BCS, BIG, BI7, and as
OF3. PMs additionally have limited visibility of their performance data (including TCs) and do not have access to standard, automated information that will s
improve revenue or sales. POL also does not use the data it has available to prioritise the provision of support to improve branch performance. 3
Recommendations a
A plan setting out further detail to deliver the data strategy should be developed (Ref G4). This should include the approach, priorities and requirements for
funding and resources to take this forward. It is key that PMs are provided with the tools enabling them to monitor and grow their own business using MI. Whilst =.
it is recognised that data analytics is an area where a lot of investment could be made, short term focus should be on optimising existing data to support &
governance forums in ensuring that the right outcomes are being met. The data strategy should be in line with an overall technology strategy (Section 2.6). 3
Potential longer-term considerations would be costly and take significant investment, such as an overarching data lake, which is supported by a reporting $
warehouse and MI Insights/Reporting Team or implementing a Self-Service MI Function through existing tools such as Branch Hub. =
=
8
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2.5 Themes: POL and PM Communications
Theme
4. POL& PM
Communications
How are PMs
communicated with,
and how are internal
communications
considered?
Summary of observations and recommend:
Context
Effective communication between POL and PMs is key to strengthening effective working relationships. Communication methods have been raised multiple
times during this project with respect to the need to improve specific day-to-day operational communications with PMs and their effectiveness, clarity and
consistency. The recent PM survey further highlighted that 62% of PMs want to see ‘better communications in general’, with 57% noting the importance of
‘simpler communications’. Communication to date has often focused on what POL want to share or think is important, rather than what PMs need or what is
important to them.
Current position
‘Some important improvements in day-to-day operational communications that have already taken place, with tactics and content rationalisation ensuring
PMs have clearer and more accessible messages. Examples of this are at findings BI23 and BC29 and include areas such as updates to letters and call centre
scripts to reflect more PM centric wording. At the strategic level, there have been attempts to communicate ‘the why’, listen to PM feedback, expand the
conversation on different channels, and better target messages (G6)..
There is now a clear effort in ensuring communications to PMs are more useful and tailored to PMs
Despite these improvements, this Project identified several key areas where further work is needed, including:
* Development of an overarching communications framework, including a documented, scoped and planned project to improve the communications
between PMs and POL, setting out clearer distinctions and accountabilities between operational and strategic communications.
+ The proliferation of new ways of communicating to PMs (e.g. new channels such as use of WhatsApp) ~ perhaps in response to the difficulties of
targeting this audience, the current approach risks confusion, incoherent messages, and insufficient POL control on the information going to PMs.
Careful consideration should be applied here.
* The need for a formal processes to ensure that the contents of this strategy (e.g. key messages or vital PM-centric information) is disseminated to the
people and functions (AMs and Contact Centre, for example) that have the most touchpoints with PMs.
As well as these overarching themes, there are several specific findings that touch on PM communications e.g., BC20, BC3 and ONS 80.
Recommendations
Overall, we recommend implementing and coordinating a strategic communications framework for PM engagement to cement the planned activities and
formalise the work already being done — this should be resourced appropriately to allow effective delivery. Recommendations are set out in the detailed
findings section for the specific day-to-day communications issues noted.
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2.6 Themes: Systems and Technology
Theme Summary of observations and recommendations
5. Systems and
Technology
=
Does the IT
infrastructure support
a single view of PMs
and support them in
running their
businesses?
Context
Across POL there is currently no centralised enterprise technology strategy and no vision overall for the target desired technology landscape. There has been
historic under-investment in technology (particularly to support PMs) which has resulted in a disparate and disjointed system landscape. The most recent PM
survey shows that a desire to ‘simplify/improve horizon’ is the 2" highest priority area for PMs, with 71% of them flagging this as an issue.
Current Position
There are numerous different systems in use for processing and recording interactions with PMs, as set out in the diagram shown in Appendix G. Multiple
systems are in use by different teams, and a combination of these systems are required to paint a holistic view of a PM at any one time. This results in a siloed
approach to working and the provision of disjointed support to Postmasters, with customer support teams not having visibility of previous issues / or queries
raised. The systems in use often do not ‘speak’ to each other, so there is potential duplication, and effort spent on aligning information or entering
data. Systems are very limited in terms of a two-way flow of data (Ref G1).
Some systems are old and do not contain the level of functionality required for day-to-day tasks, which leads to slower processing, limited use of systems and
teams using workarounds to enable them to access and utilise data e.g., Galaxy. There has been a lack of investment in Supply Chain technology, which
has contributed to several issues for PMs and has not enabled them to be able to effectively manage cash and stock, for instance.
Recommendations
There are specific recommendations for individual findings in the detailed findings sections 4-9. However, there are thematic recommendations for POL to
consider which are longer term to optimise the systems and technology landscape.
Specifically, there is a need to develop an overarching and enterprise-wide forward technology strategy, setting out a vision for each component of technology
estate required to support operating processes and an overall timetable for key changes required to more away from legacy infrastructure.
As part of this strategy there should be a clear view, developed in conjunction with the rest of the business, on critical elements including:
* Clarity on standard operating procedures and processes which should be supported by technology.
+ Isassingle customer view the goal? What is the optimal way to achieve this?
* How can POL systems provide a branch with all the details needed to provide the support in one place: such as cash and stock management requirements,
transaction data, onboarding processes, and transaction corrections?
* What information would be self service for PMs? How does this link to PM requirements/capability/ training?
* The extent to which POL continues to rely on 3rd parties vs development internal capability for systems changes and upgrades.
(Note: wider specific Horizon related IT improvements as a result of the HJ are being taken forward as part of the work being undertaken by KPMG. Findings
and recommendations here are consistent with that activity but do not seek to replicate the detail of that work).
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2.7 Cash and Products
Theme
6. Cash and
Products
What processes
are in place to
support PMs in
safely managing
cash and providing
daily product
offerings?
Sum
ry of observations and
ommendations
Context
This theme summarises the high priority findings noted around cash and product management, each of which could lead to PM detriment and collectively comprise a
thematic area where significant improvement is required. Overall, 65% of PMs report day-to-day systems, processes and products (including cash management) as
priority areas for improvement, as per the PM Consultation Survey 2020/2021. Currently, processes around cash management require heavy manual involvement,
which is inefficient and leads to cash handling risks. Furthermore, transaction disputes remain an area of concern, with further clarity required around POL's strategy
in this area (particularly in relation to investing in systems and products that reduce the risk of disputes occurring) and additional assurance needed to ensure any
historic detriments are managed effectively.
Current position
There are a number of areas where we have raised observations, including:
* Cash forecasting remains heavily manual, with an excel spreadsheet used by teams. Additionally, cash counting devices are not consistently used across the
network, which leaves PMs vulnerable to cash counting errors. Whilst it may not be financially expedient to provide all PMs with cash counting devices, further
consideration is required around the provision of such devices across the network given their importance in mitigating errors. (Ref BC22)
* Transaction disputes continue to be an area of concern, with no consistent procedures in place. This risk is particularly high around ATM transaction
corrections, with aged machines and reliance on Bank of Ireland's data leaving PMs vulnerable to financial detriment. (Ref BI1)
* Key products operated by PMs daily are cumbersome and require heavy manual input, most notably ATM and Lottery products. (Ref BC)
Recommendations
Detailed recommendations are set out in Section 4-9 of the report. Overall, POL should consider enhancing its processes for cash forecasting, as well as use of good
practice equipment and procedures in order to ensure processes in this area are robust and meet the requirements and challenges of PMs. Aligned with this, POL’s
‘historical matters’ should continue to be the subject of scrutiny, with an assurance review required to ensure PMs are compensated for any historical detriment in a
fair and transparent manner. Additionally, key products used by PMs must be intuitive, simple to use, integrated within Horizon (in so far as is possible) and support
robust financial controls to support and protect PMs.
Central to the challenge of addressing these known product issues (particularly ATMs and Lottery) has been a lack of organisational clarity around who is responsible
for addressing product issues, which has been coupled with an under-investment in long-term solutions. ATMs provide a good example, with some PMs not having
access to cash counting devices and counting cash in their ATMs manually. The risk of manual cash counting error this results in is amplified by POL providing PMs with
insufficient support in managing Bank of Ireland discrepancy claims, which leads to an increased risk of PM detriment.
Organisational design review activities intend to make this clearer, by placing end-to-end responsibility for all product customer journeys with the product teams, who
will be equipped with the authority and accountability to resolve product issues. The key challenge for management will be supporting product owners (and holding
them to account) in working with the business to ensure optimisation from a PM perspective, rather than solely in support of POL cost drivers. Additional challenges
are presented by contractual relationships with 3" parties vis-8-vis products, which will require robust commercial and contract management.
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2.8 PM Obligations and Dispute Resolution
Theme
7.PM Obligations and
Dispute Resolution
Are the processes and
practices in POL
ensuring fair and
transparent treatment
for PMs?
f ob
Summary ervations and recommendation
Context
This theme summarises several of the urgent and high priority findings identified around PM obligations and dispute resolution, noting that clarity in PM
obligations — together with the dispute resolution process — has been a historic area of weakness for POL (as referenced in Cll).
Current
The key findings in relation to this theme are summarised as follows:
+ There is a large degree of complexity in the number of PM contracts in place. Following the Ci this has been reduced, but there are still a large number
(30+) of variants that can be used. PMs and AMs have inconsistent understanding and knowledge of such contracts due to their complexity and varied
contractual obligations, which at times results in the non-enforcement of contractual terms. There has also been a reduced desire to enforce such terms
following the GLO. This has resulted in a significant downturn in suspensions and terminations, with four suspensions and zero terminations in FY20/21
compared with 70 in FY19/20. An example was given by an AM whereby a PM was unaware that operating a MyHermes alongside a Post Office is a breach
of contractual obligation (Ref BI7).
* The appeals and dispute process regarding contract terminations or suspension is still being developed. Work remains to be done to establish an
independent party's involvement in the investigations (and decision-making processes) for both POL and PMs regarding terminations. It was noted that
there is a contractual appeals policy in place for legacy contracts, which is documented; however, for Locals and Mains contracts, the right of appeal
was taken out. Work is underway to address this gap. (Ref OF1 & OF2)
* The process for handling complaints and dealing with queries or issues raised by PMs has not been clearly defined, nor have appropriate guidelines been
developed and made available to PMs, to help ensure that they are aware of the assistance available to them, Additionally, clear SLAs for issue resolution
activities have not been set, to enable monitoring and help to identify and address any emerging areas for improvement. (Ref BI4, BIS & BI7)
* Three instances have also been identified where issues have been noted with the accounting reconciliation processes, which are highlighted below:
© Maintained error limits - Where there is a difference in a POL settlement account for a branch affecting process (for example ATM or Lottery)
of specific amounts rather than issue a transaction correction which would move the difference to a Postmaster’s branch account, the amount
is instead ‘written off’ to a POL P&L account. These differences could result in a write off being a cost or a benefit to the PM. (Ref BI1)
© Settle centrally - Currently PMs can only ‘Settle Centrally’ for amounts of > £150 and any amount less than this currently needs to be ‘made
good’ each month by either cash or cheque by the PM (Ref BI2)
‘© ATMs - Procedures in place to manage ATM transaction disputes, raised by customers through Bank of Ireland (Bol), who are the Link member
currently managing the POL ATM network, are not effective. (Ref BI3)
Recommendations
Recommendations with regards to specific findings are made in the detailed finding section of the report. In summary, there is a need to create a clear
framework for contracts, including a schedule of obligations to the contracts. Additionally, policies and procedures need to be drafted, communicated and
trained on in relation to appeals, dispute escalation, and accounting reconciliation processes. Furthermore, in relation to the accounting reconciliation,
processes, systems and controls need to be reconsidered in line with the revised practices (Ref BI1, Bl2, BI3, OF1, OF2).
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2.9 Roles and Responsibilities and Organisational Design 3
Theme Summary of observations and recommendations i
g
8. Roles and Context =
Responsibilities and _I in order to put the PM at the heart of the business, the organisational structure and the POL teams' roles and responsibilities needs to be reflective of this PM
Organisational Design I centric goal. This work has highlighted the complexity of the current POL organisation and an overall lack of clarity between teams on roles and responsibilities, a
which undermines POL's ability to apply a cohesive approach across the PM journey. The organisation redesign work in progress seeks to remediate this, but $
there will need to be high clarity in order for the changes to be successfully embedded across the organisation and drive tangible improvements. (Ref G5). é
3
Current Position 3
Throughout the course of our work, we noted several findings that highlight a lack of clarity over roles and responsibilities, which could have a detrimental é
impact on PMs. Overall, sentiment has indicated a need to simplify the organisational structure to support POLs future strategic ambitions and goals. g
9 + AMs spoken to over the course of the Project had different views on their core roles and responsibilities. For example, one AM considered themselves to be 9
2 julBols the conduit between the PM and POL from a perspective of facilitating conversations between the parties, while another stated that helping PMs grow and =
a manage their business effectively was their core responsibility. (Ref BI8) 3
F organisational fs
$ structures and teams’ I* To reduce organisational complexity, all PM support teams have recently been brought together under the Retail & Franchise Network Director. However, 3
a roles and interviews with support team members indicated that the roles and responsibilities of the teams are still unclear. Agreement of the field and support 5
& responsibilities centre teams roles and responsibilities is required between functional heads. Fs
8 3
= iconahelye to: * Due to numerous organisation shifts over the recent years, there have been many name changes to the support function roles resulting in 8
supporting the right
confusion amongst both PMs and POL over who is the correct team to contact. For example, the Cash Management team was recently renamed as the
8 outcomes for PMs? Inventory Management team, but due to a poor communication programme PMs were not adequately aware of this change and have thus not been willing g
8 to engage with outbound calls from this team. Similarly and the Network Provision Lead 'NPL' has changed names up to five times in the last five years. &
& Whilst their role has had minimal change, but this has led to confusion from other teams. (Ref BC10) 5
8 * Asset out in the governance theme, there has been no overarching mechanism or forum in place with the specified role and responsibility for reviewing Fy
x POL performance in providing services to PMs (See section 2.2). =
Recommendations H
Organisational redesign is in progress, and good improvement has been made to date, with the aim of simplifying the organisational structure to support the .,
desire to put at the heart of the business. To date, reorganisation to the GE-1 level has been rolled out, with the second tranche of changes announced on the Ey
3° March 2021. As an example of the changes made, product owners (ATM, Lottery etc.) will now be responsible for the end-to-end processes for their 5
product, including any historic issues and/or future activities. This clarity in accountability is crucial as it has been a critical issue previously. However, the 8
changes will be challenging to the individuals directly involved, so there is a clear need for the change to be clearly communicated, understood and for g
consultation to be undertaken on capacity and knowledge issues, particularly in respect to historical matters, to ensure that the issues can be addressed §
effectively. ©
&
The organisational redesign process will help to ensure roles and responsibilities are clear as there will be a focus on PMs specifically for those teams who are g
directly PM serving below GE-1. However, further work is needed in ensuring the roles and responsibilities of the support teams and field teams are clearly g
documented and communicated to the PMs as well as the wider business; following this, POL should reassess and consider whether the support levels are c
sufficient to support the desired op model and outcomes (G5). Detailed recommendations can be found within section 5-9. zg
s
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2.10 Proactive Support to Postmasters Z
Theme Sumi of observations and recommendations s
9. Proactive Supportto I Context i
PMs Part of the move towards putting PMs at the heart of the business should be around POL providing more proactive support to PMs to improve their branch
performance - for example, supporting them in increasing sales of certain products, or improving elements of their customer service. With access to
information on transactions and sales across a branch network of 11,500 branches, there is a huge potential to use this information to identify suggestions
aS and improvements to support individual branches. This has the potential to have a significant positive impact on both PMs and POL.
FA ——s
At present, however, as set out in the detailed findings sections, there are several observations that demonstrate support levels are not consistent, or
delivered in a way to maximise impact:
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6 How does POL provide * Despite the improvements in the last 18 months to the on boarding training process, PM training is still primarily focussed on products and common
= proactive support to transactions with limited direct PM training around areas such as how to grow or improve business performance only provided to a limited number of
2 Postmaster in relation to. branches. (Ref ONS)
a Branch Growth,
RS Postmaster Training and I* The Branch Insight Tool (BIT) pulls together all the back-office information on a branch and compiles it for ease of use by AMs. PMs do not have access to
= Upskilling, and on-going this tool and as such must request any information directly from the AM. Due to limited AM capacity, MI is usually only shared when they visit PMs, and
a customer support? therefore since Tier 3 branches are visited much less frequently (every 6 months) when compared to the tier 1 and tier 2 branches, there is less
opportunity for them to receive relevant insight data. (Ref BC4, BCS, BI8)
* To date, there is no self-service function for PMs to access their branch MI, and as a result all Mi must be requested directly through the AMs. This limits
the ability of a PM to easily make informed decisions to grow their business and thus limits POL’s ability to meet strategic objectives. (See Section 2.4)
* While AM job descriptions include a focus on supporting PMs to grow their business, the approach taken by AMs differs significantly. Of the AMs spoken
to, not all were aware of this wider role but were focussed only on query and issue resolution. (Ref BI8)
It is also understood that in relation to training there are a number of improvements underway, and consideration of delivery methods is in progress to
make training as flexible and innovative as possible (ON27).
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Recommendations
Recommendations with regards to specific findings are made in the detailed finding section of the report. In summary, POL should provide more consistent
proactive support to their PMs to support them in building their businesses, This would include better access, utilisation and sharing of insights and MI (See
Section 2.4). Additionally, further training for PMs is needed which should be targeted to what would be the most valuable to them based on their input and
feedback. Both points in relation to MI and training were incorporated into the hothousing programme which significantly grew branches and it is therefore
recommended that the hothousing programme is restarted.
Such proactive support in areas as diverse as customer services, managing teams, sales and marketing is typically seen in wider retail/franchise businesses
and therefore could be positively leveraged in POL too.
5
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3.1 Prioritised Roadmap
Introduction to the Roadmap
The following pages set out our suggested roadmap for the implementation of the recommended actions identified. The
roadmap sets out groups of activities against different topic areas, which focus on questions about the Postmaster Journey
from the PM and POL perspective as set out in the table on the right.
The required actions to address the recommendations made in this report have been organised into three ‘lanes’ to
indicate the time period in which we believe the action should be completed. We have 59 findings, with recommendations
relating to each divided into the following categories: :
* ASAP-To be implemented as soon as possible, with completion by May 2021. Ahead of the submission of evidence for
the inquiry*.
* Short Term -To be implemented in the near future, after the ASAP improvements, by August 2021. Before the expected
release date of the Inquiry’ report.
* Medium Term - To be implemented over the course of FY21/22, with completion reached before March 2022.
Where recommendations are by their nature more complex and require a longer-term action, we have used an arrow box
to indicate that they will remain a work in progress beyond March 2022.
There are several findings that need to be addressed over a longer time scale. These include some of the low priority
findings that are not expected to commence until the end of the roadmap activity as well as longer term improvements,
such as the move away from the Horizon system and the implementation of a full IT and data strategy, which will continue
beyond this period. Relevant ‘owners’ have been identified for each action, and group of actions, on the following basis:
* Accountable Owner — the individual (at GE level for Governance findings and GE-1 level for all others) with responsibility
for ensuring that the action is completed.
* Responsible Owner —the individual who has functional responsibility for developing the solution and completing the
action.
For each action, or set of actions, we have included a single accountable owner to ensure that there is clarity, even when
activities may straddle more than one Business area. Having this single accountable owner is key to ensuring that the set of
recommendations is addressed fully and to avoid issues ‘falling between the cracks.’
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PM focussed questions
Do I understand my role, responsibilities and how to run my Post
Office (PO)?
Do I have the appropriate technology I need to run my PO
effectively?
Do I regularly have the information I need torun my PO effectively
© I andis the appropriate tone used in communicating this?
D. I Dot fee! POL supports me to adequately run my PO?
g,_I flhave anissue, am clear whoto contact and am I confidentit w
be resolved?
F. I When! stop being a PM, how do I end my relationship with POL?
cussed questions
How do we ensure that all of our people put PMs at the heart of our
decision making and that they are supported to do this?
How do we ensure that we are delivering satisfactorily for PMs?
At POL, is technology used effectively to support our interactions
with PMs?
At POL, are we set up to support PMs in the most effective way?
This roadmap has been developed to prioritise urgent and high-risk areas of activity around PM detriment. This work did not take into account cost or resourcing implications and POL will
need to consider these further in finalising implementation plans. Meeting the timescales suggested will require investment and focus of the organisation both in the short term e.g.
through the shifting of resources to urgent and high priority areas, and over a sustained period to genuinely drive change, particularly given that some elements of this, particularly shifting
culture and addressing the technology debt, will take time.
Our Recommended actions - The Roadmap includes recommended actions that have been identified by us as sensible ways to address the issue identified in the relevant finding. We
recognise that when assessing the actions, Post Office Limited (POL) may identify an alternative approach to address the issue, to a similar or better level, and is within the spirit of the
action identified by us — which is fine and to be expected in some instances.
Guide to the roadmap - the roadmap combines recommendations from multiple findings to address specific themes. Each box groups a cluster of actions that logically sit together and the
position of the box indicates the period when the recommended action is expected to be completed, The circles provide an estimate of progress to date and the overall accountable owner
for the activity within the box is show in the top right.
Post Office Horizon IF Inquiry t
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boarding and early days improvements Tracy Marshall] training Tracy Marshal
Clearly define overall on-boarding journey and timelines. 1 Broaden the current training programme for new PMs to cover the Practical aspects of running a branch.
I: Ensure that ali PM feedback relating to on-boardingandtraining I J) i T
racy Marshal
is captured centrally to enable effective anaiys's, investigation and I
review 1
1 ding process improvements 1
: Increase f2f meetings during on-boarding and offer I
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away from legacy infrastructure.
{Horizon Improvements __ 5709 Oldnallfor IT system update
Upgrade MemovView functionality in Horizon ~ (HU).
Nick Beal
Mis to be provided with sufficiently clear information to enable
them to confirm that remuneration is correct. Controls over
remuneration to be assessed by IA.
vy Branch Hub to provide information to PMs
Pr
ss to security equipment Tim Perks
Implement a process that enables PMs in lower
risk level branches to request and receive
additional security equipment.
Develop and implement PM Communications Framework °°"! 79/0"
strategic communications plan for PM engagement should be
developed.
ity & Comms around support roles RER Tim Perkins
: Provide clear structure of support teams responsibilities,
suring consistent training and communications on their roles.
): Review the communication approach for PMs and assess
t forums are best suited to meeting PMss support needs.
sntory Team Ways of Working Russell Hancock
}: Continue deploying actions identified in the improvement
, in order to ensure PMs receive appropriate support around
cash provision.
ing development for PMs
ont: Introduce mandatory refresher training for PMs
Tracy Marshal
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Inquiry evidence Inquiry report FY 21/22 End
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quency of PM Support ‘ Andy Kingham
Continue to adjust the tiering system so that tis based on PM suffoort-focused metrics. Consider transparently communicating
the system to PMs.
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Ensure there is a process to analyse and investigate
1M Feedback survey results, and review existing
processes to drive continual improvements to on-
boarding and training,
Update the performance metrics of the on-boarding
am to include KPI's around quality, experience or
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G. How do we ensure that all of our people put PMs at the heart of our
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‘onfirming Values and Behaviours should be a priority activity fre
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which other activities and messages should be tailored. These values and bhaviours should be embedded in training and policies, and
Lisa Cherry
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wvelopment of a holistic plan to deliver the data strategy
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f Reporting Warehouse and MI Insights/Reporting Team.
Juliet Lang
PM centricity across support network
: Develop and implement targeted soft skills training for frontline teams.
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monitoring practices, around PM centric metrics.
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Utilisation and Indicators
direction.
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art of this.
Review owner, intent and purpose of the branch contact file.
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Deloitte.
Statement of Responsibility
We take responsibility for this report which is prepared on the basis of the limitations set out below. The matters raised in this report are only those which came to our attention during the course of our work and
are not necessarily a comprehensive statement of all the weaknesses that may exist or all improvements that might be made. Any recommendations made for improvements should be assessed by you for their full
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party is entitled to rely on our document for any purpose whatsoever and thus we accept no liability to any other party who is shown or gains access to this document.
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In this document references to Deloitte are references to Deloitte LLP*.
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POST OFFICE LIMITED
BOARD REPORT
Title: MDA2 Contract Approval Meeting Date: I 24" November 2020
Owen Woodley, Group Chief
Commercial Officer
Author: Mark Siviter, MD Mails & Retail Sponsor:
Input Sought: Decision
The Board is requested to;
i. Approve Post Office Limited entering the MDA2 contract with Royal Mail Group (‘RMG’),
based on the recommendations and main terms set out in the paper and the Risk Note
[Risk Note published within the Reading Room] to the Board on 24th November 2020.
ii. I Delegate authority to the Group Chief Executive Officer and Group Chief Commercial
Officer to finalise the agreement in accordance with the summary of MDA2 terms
within the Risk Note provided to the Board and to agree any further non-material
changes required to finalise the deal. The Risk Note includes a summary of MDA2
terms and the MDA2 legal risks. In the event of material changes being proposed we
would revert to the Board with recommendations prior to signin
iii. Following Investment Committee approval, authorise a further}
current approved exceptional spend of jrvaxr) to complete and sign the new MDA2
contract (total project spend: { lg e Appendix 3 for breakdown]
This will be used to complete:
a. Linklaters and Internal legal resource for contract drafting
b. Stamp Stock Options stand up project
c. Commercial model and Agent Rem project stand up
d. Other MDA2 implementation requirements
Previous Governance Oversight
e In April, the Board approved a mandate to progress MDA2 through legal drafting based
on the commercial deal described in the 8 April board paper, subject to circulating the
final summary of the terms to the board.
e In July, the Board was asked to note the progress made on the legal drafting, and it
was confirmed that once the drafting was agreed a contract summary and risk note
would be shared with the Board for approval.
Executive Summary
Consistent with the April mandate the negotiation team has now almost completed the legal
drafting of MDA2 following a delay in the summer driven by an RMG restructure and the loss
of their lead negotiator through that process. The only material change since the last update
to the board in July is a revised commencement date of 29 March 2021.
Both parties are keen to close out the final drafting topics before the end of November with a
view to signing the new agreement in early December.
Questions Addressed
* What does the new deal mean for Postmasters?
« Why has the commencement date changed?
« What is the latest view of the financial impact of MDA2?
Strictly Confidential
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Question 1. What does the new deal mean for Postmasters?
is of Postmaster remuneration (based on 19/20
better off and ‘losers’ would in aggregate be
1. Under MDA2, if we applied the existing
data), winners would in aggregate bi
worse off.
Our recently implemented remuneration modelling enables us to understand the impact
for each and every branch at individual product level based on actual ongoing data and
we are now able to monitor this on a monthly basis.
IRRELEVANT
w
-
6. Our intention is to mitigate these impacts through adjustments to our remuneration
structure (possibly with transitional support payments), direct 121 engagement with
postmasters via the Area Manager organisation to explain the changes (every branch will
be provided with its own individual before and after remuneration statement) and focussed
support in driving activity to maximise opportunities from the new value based commission
incentives.
7. Weare negotiating to implement these new remuneration arrangements by April 2022 at
the latest but we will seek to do this earlier if we can. That time period will allow us to
consult transparently and fully with Postmasters. In the meantime, we will continue to
remunerate Postmasters in the current format.
8. The new commercial construct is designed to incentivise better behaviours, performance
and conformance, and this will afford branches the opportunity to improve their income,
and specificall
a.
sa
9. For the first time in Post Office history, we have the scope to work directly with other
partners and handle non-RMG parcels in the network - an opportunity for generating new
Strictly Confidential
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income streams for Postmasters with first trials set to go-live before Christmas with
Amazon.
10. We also forecast a reduction in Postmasters’ workload over time through MDA2 which
supports the emerging network strategy in providing for an increase in simpler
transacti ens and.adaccaaca.in.ceconiay..and.timanconciumina..nraducts..cnaecificalls:
IRRELEVANT
11. To support the changes in the MDA2 the table in Appendix 2 provides the Communications
Timeline for Postmaster messaging (please note this is draft and subject to revisions).
Question 2. Why has the commencement date changed?
12. The previous intention was for the new commercial framework to be implemented at the
end of March 2021 but with the new contract formally implemented at the end of March
2022. However, we are now proposing to implement both elements at the of March 2021.
13. This was important in closing down any risk of further delays to concluding the
negotiations. And we also secure the ability to sell online a year earlier and lock in the
freedoms of the new contract earlier as well.
Question 3. What is the latest view of the financial impact of MDA2?
14. The only changes to the medium case average growth/decline assumptions over 5 years
since our update in July are;
a. parcels moved from -0.5% to -1% across products to flat to -2%
b. Home Shopping Returns from 8.4% to 8.2%
fimrevevanti Million p.a.
15. These changes have no material impact on the forecast of broadly flat
for the first five years of MDA2.
16. The projected risks to the commercial deal, the likelihood of those risks materialising, and
the proposed mitigations are in Appendix 1: MDA2 Risk Mitigation Plan
Next Steps & Timelines
17. We are aiming to agree the contract with RMG before the end of November and move to
the contract approval process including electronic signature in early December.
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Appendix 1
MDA2 Risk Mitigation Plan
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Impact Mitigation Planned date of
over 5 Probab plan start mitigation
Risk ility Mitigation Plan date complete
1. Extended industrial Low to I Requirement in MDA2 on
action at RMG medium I RMG for contingency plans 29/03/21 29/03/21
POL to engage in USO
2. Medium Parcels I review and influence Ongoing with
taken out of USO i Medium I outcome 30/09/20 annual review
POL to engage in USO
3.Small Parcels taken review and influence Ongoing with
out of USO Low outcome 30/09/20 annual review
Hi Board/GE have previously
de-prioritised the sale of
4. Additional 1% RMG products online. This
migration to RMG risk will be monitored and
online (1-2% assumed i reviewed on an ongoing Ongoing with
in medium case) Medium _I basis. 07/12/20 quarterly review
No mitigation, MDA2
5. No increases to RMG Low to I shared risk and reward
prices {medium I commercial structure 29/03/21 29/03/21
6. CPI -0.5% below i No mitigation, MDA2
medium case forecast Low to I shared risk and reward
of 1.5% medium I commercial structure 29/03/21 29/03/21
H No identifiable mitigation
in MDA2, therefore PUDO
7. HSR and Local strategy forecast to
Collect growing at 1% Low to I increase Local Collect and Dependency on
less than medium case I ippe_evanti_Medium I HSR, to make up shortfall. 07/12/20 PUDO Plan
8. RMG compete head-
to-head in retail and
take 100% revenue 1. POL should benchmark
from POL top its prices and ensure they
performing c220 remain competitive for
branches which account RMG
for 10% of POL Mails 2. Restrict Agents from Ongoing with
revenue Low dealing directly with RMG 29/03/21 quarterly review
Contract management plan
9. Long term in place to avoid missing
agreement with limited the termination window if
rights terminate. Low POL wanted to terminate. 29/03/21 28/03/32
10 Changing the
Network shape and size
could lead to non-
compliance with the Committed to meet the Ongoing with
DUSP condition. Low DUSP condition. 29/03/21 annual review
11 RMG not supporting Negotiation team are
POL Network Strategy engaged with Royal Mail to
specifically for lighter obtain support for lighter
formats. - Low formats. 29/03/21 29/03/21
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Impact igation Planned date of
over 5 Probab plan start mitigation
Risk years ility Mitigation Plan date complete
r Agents Remuneration
review planned in the
round next financial year
12 Commercials flow { and no change to
down has an impact on { Postmaster pay prior to
agents remuneration. High review being completed. 07/12/20 28/03/22
13 A failure to give 3
months notice of new Contract management plan
carriers and to flow in place to ensure flow
through MDA2 down of MDA2 terms are
obligations into aligned with its rights in
contracts with third third party PUDO Ongoing with
party PUDO contracts. Low contracts. 07/12/20 quarterly review
14 There is a risk that
the proposal of stamp
stock inventory
management may miss
the deadline of March Project in place to create March 2021
2021 Low proposal. 01/11/20
Immediate plan to review
and assess the current
IRRELEVANT ongoing mitigations, with
15 Service Levels are the view to strengthen to
missed and POL are i meet a target of reducing
exposed to financial } Low to I the risk and meeting the Ongoing with
service credits medium I Service Levels. 07/12/20 annual review
16 There is a risk that
there is ongoing miss- i Design and implement a
selling of products in I Low to I plan to reduce miss-sold Ongoing with
the Network. medium I products in the Network. 07/12/20 annual review
17 POL will have less
flexibility to refuse i
changes under the i Risk accepted no
MDA2 terms. Medium I mitigation plan 29/03/21 29/03/21
18 There is a risk that
the delayed i
communication
between signing the
contract with Royal Mail I}
to the subsequent H
communications to i
Agent's on the impact Communications plan to
on their remuneration mitigate this risk is being
could cause a reaction. — { Medium I worked on. 01/09/20 30/11/20
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Appendix 2
Postmaster communications activities...
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positive in ever
changing Mails
world.
Key messages —
Agent Remuneration
review and analysis
is underway using
detailed modelling,
this will involve a
period of
Postmaster
engagement and, as
with all
remuneration
changes of this
nature, a 6-month
notice period before
the changes are
implemented.
Day A-7 I NFSP Pre-notify Background of new Mark Siviter Under review
contract
Day A- 1 I Unions Pre-notify Background of new Lee Kelly Lee Kelly to advise on
contract timings - early on Day
A
Day A- 1 I BEIS/UKGI Pre-notify Background of new Patrick Bourke
contract
Day A- 1 I Multiple Pre-notify Background of new Relationship
Partners contract Manager
DayA Contract Project go / no To give approval for I Mails Team
Signed go for external PR and external
6am notification to I comms comms
all required
audience
DayA External Press release Explaining new Karim POL Press release
audiences agreement - Aziz/Cardew _ Bimultaneous to Royal
7am (tbc) strategic importance lail Regulatory News
to POL, benefits to Service announcement
postmasters and
customers
DayA Postmasters Message from Explaining new Nick Read jote: Potential to be
Nick Read agreement - hugely specific about
7.15am Amanda Jones
timeframe of Agent
Remuneration review
e.g. begin Jan 21 to
konclude by May 21.
(Also need to consider
giving a ‘guarantee’
hat remuneration will
ot change until review}
is complete.
(Comms team to work
ith Amanda Jones
and Mark Siviter on a
package of multi-
channel
fommunications
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Current
implementation plan
has notice given in
May 2021 with new
rates implemented
in November
2021. Postmaster
engagement will run
throughout and we
will explain on the
day of
announcement and
in the weeks to
follow that we want
their involvement.
Option 1 - Print
letter /e-mail from
Nick Read plus
potential video
message
Option 2 - E-mail
from Nick Read and
Memo view on day
of announcement to
ensure all branches
are informed, plus
potential video
message
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support for
Postmasters.
DayA DMBs Note from Nick Explaining new Comms
Read agreement - hugely
7.15am Supply Chain positive in ever
changing Mails
Colleagues om
Day A Area Conference call Area Manager call Nick
Managers with updates from Beal/Mark
eave Mark Siviter and Siviter
Nick Beal
(remuneration
process/next steps)
Day A Area E-mail Area Manager brief Comms
Managers featuring:
9am
* Overview/PO
Position
* — Clarification
of messages
and FAQs
Day A News Wires, Conference Call Nick Read and Richard Taylor
e.g. PA, Owen Woodley to / Karim Aziz /
09.15am I Reuters, set tone of reporting I TB Cardew
Bloomberg
7
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why this is a good
deal for POL
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DayA
late
morning
1-2-1 calls
with
journalists
e.g. Michael
Pooler at FT
Call
Nick Read and
Owen Woodley to
explain further why
this is strategically
important for POL
Richard Taylor
/ Karim Aziz /
TB Cardew
lote - free time
needed in diary; calls
to be arranged on the
Kay if sufficient
interest
DayA
Postmasters
National
Postmaster Call
‘An opportunity to
Position the new
contract and deal
with questions
about remuneration
immediately (Agent
Remuneration
review and analysis
which will be a 6-
month process).
GE/Mark
Siviter /Andy
Kingham/
Nick Beal
December
2020 -
March
2021
Postmaster
engagement
continues
Multi-channel
Continuing to set the
scene and explain
length of process
Possibility of first
advisory group for
this topic
Asking Postmasters
to help shape output
Amanda Jones
Regional and
Area
Managers
Postmaster
engagement plan will
be worked through
with Agent
Remuneration and
letwork team on best
approach.
[Decision on approach
has a hard dependency}
jon the proposed Qi
Remuneration Review.
Feb 2021
IMPLEMENTATION ACTIVITY
Horizon ID changes
completed
Chris Howard
Feb 2021
IMPLEMENTATION ACTIVITY
Detailed branch
analysis for every
branch and
Postmaster/Partner
Chris Howard
May 2021
IMPLEMENTATION ACTIVITY
Validate final
remuneration rates
for all contract types
(after collating 3
months of data)
Chris Howard
May 2021
November
2021
IMPLEMENTATION ACTIVITY
6-month notice
period for
postmasters begins
Chris Howard
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May 2021
NFSP
Call
Engagement on new
rates
Nick Beal
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May 2021
Multiple
partners
Call
Engagement on new
rates
Relationship
Manager
May 2021
Postmasters
Letter
Letter explaining
rem changes are on
the way
Updated rates via
printed letter
Agents Pay
Team
May 2021
Area
Managers
Conference call
Area Manager
call/briefing ahead
of remuneration
comms to
Postmasters from
Amanda and issue of
rate cards
Andy Kingham
/Nick Beal
/Mark Siviter
May 2021
onwards
Postmasters
Visits to branches
Area Manager visits
to adversely
impacted branches
for support
conversations. Mails
team to provide
supporting
Postmaster centric
materials/toolkit for
this.
Each Area Manager
provided with impact
analysis pack.
Area
Managers
May 2021
onwards
Multiple
Partners
HQ calls
Engagement
sessions.
Each Account
Manager provided
with impact analysis
pack.
Mark Siviter
/Amanda
Jones
November
2021
IMPLEMENTATION ACTIVITY
New Postmasters
contracts active
N/A
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@
Appendix 3
Investment Committee further funding approval
1.SUMMARY OF CHANGE
SNow Id I PRJ0012266
Project Name I Mails Strategy MDA2 Negotiation
GE Project Sponsor I Owen Woodley
Project Manager I Katie Ennis
Date initiated I 24" November Decision required by I 30" November
Proposed change
Provide a short description of the proposed 2s
change 3,
IRRELEVANT I
The Contract with Royal Mail comes to an end in} IRRELEVAN
The key external dependency of this work is upon RM (the contract
Reason for change I Principal), their negotiating team and their approach. Due to recent
Explain why the change is necessary, ane I ANNOUNCements within Royal Mail, there have been changes within the
benefits associated with" I team which has impacted timelines as well as outcomes.
Protracted negotiation has impacted spend which is projected to exceed
the approved budget
2.FINANCIAL SUMMARY
Actuals 5431
Actua Actua Actua + Approved
Spen i
Is Is Is Foreca in Funding
st
in (£m) Variance
Conibined 17/1 18/1 1972
20/21 ‘Total
=== IRRELEVANT
10
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3. GOVERNANCE HISTORY
Governance History
@ new item or edit this list
Y — MiDMeeting Date + MIOMType
24/11/2020 Board
09/11/2020 ic
08/04/2020 Board
06/04/2020 «
13/03/2020 IC (Offline)
30/10/2018 CAG
23/08/2018 ic
17/04/2018 AG
02/05/2017 acy
14/11/2016 Offline
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Request Type
Change
Request
Change
Request
Change
Request
Change
Request
Change
Request
Change
Request
Change
Request
Change
Request
fay
Drawdown
aR
Drawdown
Decision
Scheduled
Approved
for Board
Approved
at Board
Approved
for Board
Approved
atic
Approved
at CAG
Approved
atic
Approved
for ic
‘Approved
at ECG
Approved
RequestSummary
Milestone slippage andsm=mfadditional exceptional funding
Milestone slippage and f-="fadcitional exceptional funding
»xceptional spend for consulting support and Legal costs.
xxceptional spend for consulting support and Legal costs.
“} Exceptional Spend for the McKinsey work in 19/20 and then a
to complete the contract construction in Q1 20/21. Total request including SPO levy is
NDA - No Information provided
Tom Wasilewski and Mark Siviter joined the meeting and Mark summarised the request.
There was a debate on the need for funding for Next Best Alternative (NBA). Mark & Tom to review
the need and timing for NBA funding (circa femur} and update the business case accordingly and
resubmit case for pre implementation funding to Michael A Brown.
Funding request in support of the next steps as set out in the Mails Strategy which was reviewed and
11
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POST OFFICE LIMITED
BOARD REPORT
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Title: Mails PUDO Strategy Meeting Date: I 30% March 2021
Mark Siviter, Product Portfolio Owen Woodley, Group Chief
Director Commercial Officer
Author: Sponsor:
Input Sought: Noting
The Board is asked to please note:
i. The launch of the Amazon Click and Collect trial
ii. I The roadmap and releases for the PUDO project
Previous Governance Oversight
¢ Post Office GE and Board (January 2021)
e Post Office GE (March 2021)
« PUDO SteerCo (Ongoing)
Executive Summary
e Executing the PUDO strategy remains a central element of the wider Mails strategy and
a key revenue growth opportunity.
e Delivery of the strategy has accelerated since January 2021, with the Amazon Click and
Collect trial launching to customers and receiving its first parcels on 1% March 2021.
Postmaster feedback will be sought on a regular basis to identify improvements to the
trial and future roll-out.
e Two of the four-week sprints focused on addressing key design and deployment issues
have been completed, resulting in a revised product roadmap that sets out staged
deliverables over the next 12 months.
e The next releases include extending network coverage for Amazon and onboarding
‘Carrier 2’ at scale across the network, in time for Christmas peak 2021. Client evaluation
has resulted in DPD being identified as the next preferred carrier. Commercial and
technical conversations have started, whilst constructive dialogue continues with other
target clients.
e Significant progress has been made on the pricing and discount structures to support
these negotiations. Our pricing approach now reflects existing market convention more
closely, with item rates per service, and there is continued evidence to support the
potential for a Post Office premium. Price points seek to balance volume growth and
associated footfall benefits with protecting the financial value for Postmasters and Post
Office.
e We propose to align Postmaster remuneration with the equivalent Royal Mail Group
(‘RMG’) service using supplementary payments to incentivise behaviours, such as
scanning conformance and sharing of product margin.
e A detailed review of the end-to-end economics, and therefore the true margin, will be
completed in April 2021, following finalisation of the preferred technical approach.
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Questions addressed
How does PUDO fit with our wider evolving Mails strategy?
How is the Amazon trial progressing?
What is our intended deployment roadmap?
What is the proposed approach to commercials?
What are the next steps?
UBWNHe
Report
Question 1 — How does PUDO fit with our wider evolving Mails strategy?
1. Our mails strategy is focused on our right to play in key market segments, and takes a
dual approach centred around:
a. Maintaining our market-leading positions in Social and Marketplace segments;
initiatives here include embedding MDA2 and driving ongoing improvements to our
customer and postmaster journeys, e.g. on Drop and Go
b. Growing in attractive e-commerce services where we are currently under-
represented, leveraging MDA2 contractual freedoms
2. The various mails-related initiatives currently in train to help us deliver against this
strategy are visualised in the table below, working alongside the evolving Network strategy
and SPM programme.
3. The PUDO initiative is a key element of our Mails strategy, aimed at growing our market
share in attractive e-commerce services (1.b. above)
The jigsaw of all things mails: our activities aim to cover all aspects of our — -
addressable market and bring our strategy to life... pores .
‘L.MDAZ 2. Competitor / Market 3. Customer behaviour 4, Regulation i '
implementation ‘analysis incl. online, CV19 ' i
i (narrow) acceleration t H
A~Social ' i
(maintain) Mails annual i :
I plan H ,
ae I - = + assumptions, 1 spMand I
eg. customs 1 Network!
forms Mails H '
8 -Marketplace Post Covid19 oe Ie i:
(maintain) Risks and Opps suateny q :
: re-evaluation i H
Mapping i :
of material H 1
obligations i :
C~PUDO (phase 1- AMZ) ' H
(grow) ' H
Note:
1 Purpose and Postmaster experience embedded through all workstreams
2 Brexitimpact excluded given relative materiality
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Question 2 - How is the Amazon Trial progressing?
4. The objective of the PUDO strategy is to build a material new income stream by accessing
the growing e-commerce market to offset the inherent risk to core revenue from consumer
buying behaviour moving from in-branch to online sales.
5. The trial of click and collect services for Amazon went live for customers on Monday 1*
March as planned, marking the first time Post Office has accepted parcels from a carrier
other than RMG. To date over 2,500 parcels have been received with scanning compliance
of 97% vs target of 98.5% as branches adapt to the new operational process.
6. There are currently 145 branches live, with a further five pending a final decision. The
primary reason among independents for declining to participate was a concern over space.
In order to reach the target of 200 trial sites, and in addition to re-contacting these
branches once evidence on dwell time is available, , we are working with Amazon to identify
a further 50 branches by extending the trial areas.
7. PR and public awareness of the trial has been low key, consistent with Amazon’s
preference. An article by The Grocer has been picked up and shared via various trade
media, despite being initially overshadowed by Amazon’s launch of the till-less ‘Go’ shop.
8. A fortnightly survey will be distributed to Postmasters, via their Area Managers, to capture
feedback. In addition, we are working with our Network colleagues to establish Postmaster
user groups to co-create future process design.
Question 3 - What is our intended deployment roadmap?
9. Over the last six weeks, we have refined our high-level roadmap (Appendix 2) to reflect
learnings from ongoing market engagement, with the principle changes being:
a. Greater granularity of deliverables with better cross-functional alignment;
b. Earlier inclusion of returns, to test operational feasibility;
c. Shorter intervals between delivery of releases (every 3 or 4 months).
10.While an important milestone, the c.200 trial branches do not yet offer Amazon the scale
needed, therefore expanding network coverage remains a priority, with the focus on having
a route to a minimum viable network number of >1k branches by the end of 2021.
11.Of the 700 branches with Identity tablets originally intended to contribute to this target,
analysis shows only c.360 meet Amazon’s revised opening hour requirements, raising the
question of whether a stop-gap device may be needed pending deployment of the wider
business device solution. We are working closely with the IT, SPM and Network teams
regarding the options and expect to have a clear recommendation within the next month.
12.We have evaluated and prioritised the major market players in terms of scale of
opportunity and organisational compatibility. Our priority prospects in descending order
are DPD, Hermes, DHL and UPS. Yodel remains of interest but is complicated due to its
ongoing relationship with Collect+.
13.Engagement continues, each at varying degrees of maturity. DPD is the most advanced
with workshops taking place to finalise detailed technical specifications. Similar workshops
are planned for Hermes and DHL in March.
5}
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14.We continue to prioritise Pick Up (PUDO) services - i.e. Click and Collect and un-
deliverables - due to their lower strategic tension and operational simplicity for
Postmasters. Customer Drop Off (PUDQ) continues to present capacity and segregation
challenges which we are working through closely with Network and a dedicated Postmaster
forum we have formed specifically to help design operational process.
15.The requirement to accept mail items sold online may become a challenge to securing
comprehensive deals - especially with Hermes where it represents a core volume - due to
the threat it poses to RMG and Post Office sales income from migrating customers online.
This is a broader challenge for the evolving mails strategy.
16.Our ambition is to have scaled access (>1k branches) to the Network for a second carrier
in time for Christmas peak this year using an APADC-enabled integration to Horizon.
17. Integration and network deployment need to be completed prior to carrier operational
freeze in September 2021. Subsequent roadmap releases in January and April 2022 focus
on extending network coverage, adding Carrier 3 and completing the current proposition
set.
18.As the immediate roadmap is now clear, we are starting to consider how to extend and
integrate the core PUDO proposition into the development of the wider mails strategy.
Added-value services such as age or ID verification and customer shipment consolidation
need to be consistent with the digitisation of other mails customer journeys.
19.In addition, we continue to carefully consider the potential use of lockers, which remains
a major area of industry focus. The significant investment now being made by various
parties such as Amazon and Inpost is increasing awareness, if not use, but is likely to
result in network fragmentation in the short term, further challenging their economics.
Question 4 - What is the proposed approach to the commercials?
20.Our approach to pricing these new services seeks to maximise volumes (and associated
footfall benefits for Postmasters) whilst reflecting and protecting the unique value Post
Office brings through our brand and network.
21.We have developed a pricing framework (Appendix 3). Well-established market price
structures and growing competitive intensity effectively rule out seeking a network access
fee or undifferentiated flat rates (as seen in the Banking Framework or the MDA1 models).
22.Our approach follows the convention of individual item transaction fees differentiated by
product and/or carrier, with pricing levers to incentivise scale, duration and deter cherry
picking of the network. The latter is addressed through blended pricing - item rates assume
a standard geographic distribution across the network with rates reset if the actual profile
deviates significantly.
23.High entry price points are intended to deter access by multiple, small scale operators,
with discount levers to deliver competitiveness for target clients. Analysis of carrier
economics suggest a best-case range of 70p-90p an item. Our current view is that securing
the largest clients will be closer to 60-80p an item.
24.Current proposals align Postmaster remuneration with equivalent RMG services in order to
provide simplicity and prevent differential treatment of customers/parcels. Additional
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increments, such as for achieving scanning targets, are being considered to incentivise
sound operational practice.
25.Complete end-to-end economics for PUDO are being developed pending confirmation of
the direct operating costs expected from the technical approach set out previously and
finalisation of the appropriate ongoing Postmaster remuneration strategy.
Question 5 - What are the next steps?
26.The plan to deliver the next release by 1% June (Appendix 4) includes:
a. Get the Amazon trial fully embedded with clear measures against KPIs and learnings
captured;
b. Start extending Amazon to c.1k branches;
c. Secure agreement with and integrate Carrier 2 into Horizon;
d. Complete the resourcing of the PUDO team and the full handover from McKinsey.
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Appendix 1 Questions from the last Board
Ken McCall - How do we maximise operational compliance to key processes such as
parcel scanning and dangerous goods?
One of the objectives of the Amazon trial is to identify the natural level of network compliance
to new operational processes, as well as any inherent or structural inhibitors to their
achievement.
Item level scanning and data richness of third party PUDO services provides greater visibility
allowing more timely and targeted interventions.
Remuneration supplements can be used to incentivise conformance while the risk of being
deprioritised by retailers or carrier websites provide a dis-incentive to fail.
Carla Stent - How do we manage Amazon’s expectations regarding network
expansion
While keen to extend network access, Amazon are also bound by practical considerations
specifically; development of local customer demand and the speed at which the supporting
Amazon Logistics distribution becomes economic to serve each area.
Their current ambition is to add approximately 3k Post Offices branches over the next 12-24
months, working with us to build a shared expansion plan.
Carla Stent - In a multi-carrier world, how do we ensure customers are clear which
carrier services they access at which branch?
This remains a key question, and is subject to ongoing consideration reflecting our
engagement with key market operators.
For the majority of individual customer journeys the issue is limited as consumers are
increasingly led and limited by the choices presented to them digitally by the retailer.
In summary; for pick up services the locations available to consumers are determined and
presented by the retailer, based on their carrier agreements and their wider commercial
objectives. This happens at the checkout or direct communications following a failed delivery.
For drop off services, the growth in digital returns means the location options are increasingly
presented digitally to the customer at the point the return QR code is issued.
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Appendix 2. High Level Product Roadmap
Release# 1 2 3 4 5 Ideal end-state
® ® e e e ®
Deadline 4st March 2021 Ast June 2021 ‘1st September 2021 Ast Jan 2022 Ast April 2022 TBC
Out MVP Live Strategic technology Network extension Proposition expansion Full PUDO proposition Full PUDO proposition at
come
solution scale
Objective * Deliver basic proposition * Demonstrate functionality (5) Expand PUDO offeringto * Demonstrate multi-carrier * Launch market-leading * Deliver consistent
to customer whilst of POL technology with larger network scope, in capabilities at scale to proposition delivering customer offer across all
informing future design new ‘standard’ carrier to time for peak prove resilience of PUDO business objectives PUDO locations
choices for customer / prove solution potential operational network (‘e., financial targets)
Postmaster needs * Scale Amazon trial to across an optimal network
suitable branches
Description . a .
* Amazon: C&C (Trial) * Amazon: C&C * Amazon: C&C [+ Online * Amazon: C&C [+ Online * Full PUDO proposition for * Full PUDO proposition for
Carrier and 0 Carrier 2: C&C + Accept] Accept] multiple carriers multiple carriers
product mix Undeliverables [+ Retums] * Cartier 2: C&C + * Carer 2: C&C +
Undeliverables (+ Returns] Undeliverables [+ Returns)
* Carrier 3: C&C
Technology * Leveraging Amazon app * Amazon app on existing * Amazon app on “stopgap” * Amazon appon “stopgap” * Amazon oncombinationof * Amazon app & all other
and devices, manual back- POL Identity tablets (with devices & existing POL devices & existing POL devices (possibly including carriers available on same
end processing; RM critical back-end Identity tablets Identity tablets express device); Horizon device via SPM
through Horizon Processes automated) — » Horizon for Carrier 2&RM * Horizon forCarrier2,3& for Carrier 2,3&RM * Full suite of SPM device
* Horizon for Carrier 2 & RM RM options (e.g., counter, RAD,
‘SSKs) to be selected based
‘on branch type
Network * Across 200 branchesin3 * 500 branches for 2) 1.5k branches for * 4.5k branches for * 3-4k branches for all * ~Qk branches with carriers
regions Amazon’; 200 branches 3) Amazon}, 1-2k branches Amazon; 3-4k branches carriers ‘overlapping
for Carrier 2 for Carrier 2? for Carrier 2; 200
branches for Carrier 3
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Appendix 3. High Level Pricing Structure
1 I Overview of PUDO pricing strategy
Key objectives of price setting Overall pricing structure Rate card Fee adjustments (MVP)
« Win substantial PUDO volumes Consists of 2 key pricing mechanisms. Product Price range Contractually-agreed adjustments to
from key strategic carriers, rather ‘ rate card as follows,
than assortment of smaller contracts. I a alan abe Li =
— Distinct pricing per product £0.70 - £0.80
* Mitigate strategic risks, by ring (based on weighted average Discounts for,
partnerships of ideal duration & ioe nero £0.70-£0.90 ~ ‘Significant PUDO volumes delivered
PRvEons Carrier's network) — Commitment to longer partnership
* Avoid ‘cherry picking’ to ensure i Foe ectostmrents Pree frotums I a iataatead
optimal uptake of PUDO network Surcharges for
a. MVP — forward adjusted TBC — Deviation from expected fall-to-earth
* Maximise value generation for eps eetinges [984 Profile
- A final column)
Postmasters, whilst safeguarding a
against excessive operational burden b. Future state — dynamic pricing
options which vary depending Keys for implementation
‘on operations (e.g., capacity,
additional product features, etc.) * Tailor negotiation approach depending on nature of carrier
discussions
* Ensure tracking mechanisms in place for volumes / incomes to
inform continuous refinement of pricing model
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Appendix 4 High Level Project Plan
. @ Ontrack
High-level summary of project plan — release 2: NOT EXHAUSTIVE @ nr
@ Requires immediate escalation
Mar Apr May GD PUDO team sprints:
Summary tasks Activity o1. 08 15 22, 29% OS 12. #19 26 03. 10 17. 24.
Select carrier 2 A Cartier 2 agreed 7 1 i i t T Hi H q
Agree commercial structure —s' Hi I A Sign-off commercial structure w Board i 1
Commercials ‘Commercial framework, agreed: q ‘ : t ‘ : 4
Engage legal, procurement etc. a: 7 " — H { H ‘ i : 1
Negotiate with carrier 2 ‘ ‘ i A f > - - -
Assess feasibility of tech integration (A Horizon integration approach confirmed ; H : Contract signed
Design tech solution for Horizon integration —_—__ H H with carrier 2
canrteca Technology Finalise tech resources and budget for Horizon integration
Tech build for Horizon integration & build for client
Begin testing of tech build
Design carrier 2 ops and journey
Design branch ops solutions and implementation plan
Network ‘Select 200 branches
Approach and confirm Postmasters
‘Onboard 200 branches (e.g., training)
Confirm scope of release 2 (inc. branches)
Engage legal, procurement etc.
Finalise tech resources and budget for ID tablets
Tech build for ID tablets (inc. testing)
Finalise tech resources for strategic Amazon solution?
Scaling Tech build for strategic Amazon solution
Identify suitable branches (e.g., ID tablets")
Approach and confirm Postmasters
ready
for Go-Live
Amazon
Onboard selected branches (eg, training, Postmaster T&Cs)
Branches ready
{for Go-Live
‘Tobe repeated forrelease 3 RELEASE 1A RELEASE 2A
1770 branches with ID tablets, sub-section expected with suitable location
2 Remuneration automation and Location Data Services — not a dependency for release 2
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POST OFFICE LIMITED
BOARD REPORT
Title: Banking Framework 3 (BF3) Meeting 30° March 2021
hatte Martin Kearsley, Cash and vein Owen Woodley, Group Chief
4 Banking Portfolio Director p : Commercial Officer
Input Sought: Decision
The Board is invited to authorise the Banking Team and Executives to engage Framework
member banks in April and informally present BF3’s proposals regarding:
i. Pricing structure of BF3
ii. Pricing and expected volumes for each bank during BF3 and beyond
iii, I Propositional improvements and initiatives to support BF3
And to delegate approval to negotiate to the CEO/CCO within agreed ranges
Previous Governance Oversight
1. July 2020 Board meeting presentation on approach to BF3
2 January Board meeting update / noting paper on BF3 background, plan and progress
3. Executive and Non-Executive Director Board one-to-ones held throughout February
4. GE socialisation 17 March 2021
Executive Summary
BF3 commercial and contract proposals must be released by June 30", 2021. Each bank must
decide by December 31% 2021, whether to remain in the Banking Framework or to terminate.
Cash and Banking is a key pillar of the business. We aim to maintain full engagement - no
leavers - as we move from BF2 to BF3, and continue that into BF4, optimising our income,,
COrFECE BFS positioning Will place the Post OTtice CEntral to UK Cash
provision and reduce the likelihood of any banks exiting, thus promoting a smooth transition
to BF4. To deliver this, we propose a deal with a revenue._range of £
contribution of :
We expect compression in the market as banks and ATMs close, increasing Post Office footfall
until c.2025, decreasing thereafter. By then the Post Office should be the core national cash
network delivering an improved Postmaster model and better customer journeys. This may
include self-service and counter cash automation, subject to a separate business case.
Since September we have engaged banks collectively in contract evolution with UK Finance and
the next step post-Board is to discuss BF3 pricing bilaterally. Accenture have now completed
their review and supported the development of the proposed BF3 pricing model and deal
strategy.
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Questions addressed
. What is happening in the cash market?
. What are Framework members and Postmasters’ pain points?
. What options do banks have?
. How have we approached BF3?
. What is the proposed deal structure?
. How are we approaching the banks and how will they respond?
. How are we creating an external environment that supports our aim?
Report
Question 1. What is happening in the cash market?
1. UK Cash usage continues to decline, with annual falls of c.5% forecast from 2022. Following
a steep 2020 COVID-19 driven decline, a modest recovery in 2021 is expected.
2. Post Office’s cash market share will benefit from continuing bank and ATM closures.
3. Competitive solutions have been analysed, and the related pricing models clearly illustrate
the challenge Post Office faces, particularly in Withdrawals, shown in Appendix 1.
4, The expected shape of our Banking Framework cash transaction volumes, modelled across
BF3 are shown in Appendix 2. A further paper detailing changes and impacts has been
placed in the reading room.
NOWUPWNE
Question 2. What are Framework members and Postmaster's pain points?
5. Accenture interviewed the top 5 banks and several Postmasters to understand their views
on the good and bad points of the Banking. Eramewark.and_the Past Office relatianshil
6.
the reading room document and Appendix 3.
7. The overall BF3 proposal seeks to address many of those pain points.
Question 3. What options do banks have?
8. Banks can choose to remain in the framework at either BF2 or BF3 prices or leave at the
end of BF2.
9. Access to cash legislation being considered by HMT, FCA and others is expected to mandate
the banking industry to provide appropriate coverage for cash services. This will likely make
participation in the framework essential for deposits, but only ‘desirable’ for withdrawals
during BF3, as there are existing viable alternatives (ATM, cashback etc).
10. However, emerging competitive channels for deposits and withdrawals, which although
immature, pose a future risk to our income stream and the stability of the framework.
11. Our view is whilst banks may fully participate in BF3 they are likely to explore alternatives
to spread their risk before BF4. If our pricing is not competitive, or we.severely. break. thei
trust again, then they will further encourage new entrants such as the}
through deposit-taking ATMs. .
Question 4. How have we approached BF3?
12. We will maximise Post Office’s commercial benefit from the framework while maintaining
full bank participation.
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13. Improving the operation of our banking services through Postmaster training, evolving the
contractual terms, and adding the possibility of counter automation (subject to a separate
business case) is designed to benefit Postmasters, customers and the banks by addressing
the pain points raised.
14. We have engaged with the banking industry and UK Finance to evolve the existing
framework contract terms, upon which our deal structure has then been based. We engaged
with the Top 5 banks to align our future directions, and build more strategic relationships,
including further branch evolution dependent on a long-term partnership with Post Office.
15. Accenture completed a full market assessment, including anonymised interviews with key
banks and Postmasters. From this, we stated our design principles and developed a
comprehensive set of commercial options to achieve the objectives stated above. These
principles can be seen in Appendix 4.
16. We refined our proposal and modelling through engagement with Steerco, GE, 1-1 Board
member briefings and by testing the principles and outline directions with the largest 5
banks.
Question 5. What is the BF3 proposed deal structure?
IRRELEVANT
18. The ‘three ‘major components all alter to reflect market feedback:
dey work Fee — to be capped ai
"i (which would peak at ci! significantly above the Post Office ‘Network
Access Fee’ requirement). This fee has been modified to a marginal approach using a
curve rather than stepped tiers, incentivising the migration of higher volumes of
-transactions to Post Office branches... sane
25 i H
- IRRELEVANT I
19. The above major components are all geared to encourage further engagement and volumes
and are illustrated in Appendix 5. Our proposed pricing structure aims to incentivise
volumes and enable flexibility for clients, whilst targeting existing exploitation of the
deposits model.
20. Following iscussion welcoming a possible BF3 and BF4),
we are exploring options to further encourage long térin strategic partnerships.
24,
22.
IRRELEVANT _
resulting from one or more sig and
defined at what point the Banking Framework ceases to fully recover fixed costs (ignoring
transactional contribution). Please see Appendix 6.
‘ The impact of a large bank leaving the framework is significant, and we propose to mitigate
This is illustrated in Appendix 7.
Question 6. How are we approaching the banks and how will they respond?
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25. Post Office has briefed the top 5 banks at the operational and strategic level about the
possible outcomes of our BF3 work. Stating an intent to be ‘net neutral or better’ than BF2,
and to embrace longer term commitment, branch investments and closer strategic ties has
generated significant interest.
26. This will be followed up in April with further.meetings..up.to and including CEO to CEO. Our
proposal to the banks will be a fir (the baseline) with the potential
to move through the proposed ranges (staying within the overall envelope of the deal)
depending on overall industry reaction.
27. Following a series of meetings gathering and adapting to that reaction, we propose to return
to the Board in June to present the final position for final approval. We would then formally
release the proposal, together with contract terms, to all banks by 30°" June.
28. We would then brief ministers, stakeholders and industry figures to ensure Post Office
remains central to the Access to Cash debate ensuring banks go through their governance
processes (to the end of December) constantly reminded of our prime position in cash.
29. With c.85% of all revenues being generated by the Top 5 banks, the possible response of
each of SS specific situations and likely reactions. 4 out
of 5 am will benefit from this.. pEpoeal (see Appendix
30. The combination of the ae pricing changes delivers, anet neutral or better position
for almost all banks during BF3 (See Figure A below).
Figure A. Total BF3 Revenues* ~ Proposed BF3 Pricing vs Staying on BF2
ws
Deposit Fee Delta ve staying on BF?
his
(ed ill Benefit from free pricing model and are strategically aligned with Post Office
CEO-CEO level. No emergin: ,
D. is in the same position as j!RRELEVANT! and will continue into BF3
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E: while lower volume than the other, remains a supportive and strategically
aligned partner and will continue in BF3.
32. Other banks benefit from reduced overall charges based on Post Office assumptions of
future volumes. These assumptions have been tested wit! ‘and others and confirmed
to be within their expectations. Some (potentially expect / demand better
pricing, although the Accenture feedback from Phase 1 has shown that it is not the quantum
that most destabilised the banks and damaged the trust placed in us during BF1, but the
lack of transparency around what the fee covers and the lack of time allowed for their
internal processes.
33. Our defence would therefore be to potentially provide a clearer breakdown of the areas that
the Framework Fee supports, highlighting the value the fee covers, and attempting to
address that ‘pain point’.
Question 7. How are we creating an external environment that supports our aim?
34. We intend to mitigate the risk of non (or selective) acceptance by any..ane_bank.via_a,
combination of careful commercial engagement, supported by a IRRELEVANT
position us at the centre of the current discussions on the ‘Access to Cash’ agenda.
35. We continue to rebuild trust with members after BF2 ‘pain points’ - regular bilateral
meetings with the major banks at both operational, strategic and executive levels are the
key means to achieving this and will be further developed between now and December to
ensure full participation.
Financial Impact
AJ
AJ
Tl
re"
<
>
Zz
—I
Modelling based on all banks moving to BF3 pricing, including ! !RRELEVANT',
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Risk Assessment, Mitigations & Legal Implications
36. A full risk report will be prepared based on final BF3 contract and commercial terms.
37. Immediate issues that might arise, based on an even more ‘dominant’ BF3, will be
continued calls for regulation or further oversight. Current engagement with FCA and PSR
shows little appetite for formal regulation, but this is being closely monitored.
Postmaster Implications
38. We are assuming no Remuneration rates change during BF3. However, Postmasters will
benefit from increased volumes, projected to deliver jirrevevawr} of remuneration over the 3
years, jee! more than BF2.
39.,If. Banks exit Cor reduce participation. in) the Banking Framework, Postmaster.remuneration.,
i IRRELEVANT
40. Future implementation of automation, subject to business case, will deliver quantifiable
operational benefits to Postmasters — faster processing in branch, better customer journeys
and greater in-branch security for the higher cash volumes. We are also enhancing training
plans and simplifying our cheque service to benefit Postmasters.
Other stakeholder impacts
41. Less than full participation will produce negative responses from government, media and
influential pressure groups on the access to cash and financial inclusion agenda.
42. A greater commitment from the Banks to the Framework would deflect bank investment in
competitor channels.
Next Steps & Timelines
47. April: Progress with participant bank bilaterals
48. Collate feedback on pricing levels, structure, gauge appetite for staying on BF2, volume
forecasts
49. May: Based on outcome from bilaterals, re-model and finalise BF3 Commercials
50. In June, present final BF3 proposal to Board for final approval to formally release to member
banks
51. End of June, formally release BF3 pricing to Framework member banks
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Appendix 1 — Post Office BF2 Pricing v Competition
COMPETITIVE PRICING CURVES
IRRELEVANT
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Extreme Volume Scenarios
+ Aoverse Market (2. over voumes ore 15% lower thon Baseline in
Uuninely event there are no more Bonk branch cosures ond monet
cosh ssoge devine double Wot we expec A merNbe's 9 UP LO
BFS /00 ents
+ Wonk tats Le. overall volumes are SON lower than Baseline in
Lnitely event thot ~ despite being presented with BS
hoving the BF2 pricing 0s fal fa
Concern
prccrnonns
oe 1 Partnership &
WP commer I) Sore © Cotshoraton
‘
ThePostOtice IThe Post Ofce branch The banks abitty to
cemoinsakeypartot I experiences aici see Port Office 2
bank serving 1 seabasc level, but sratepc parne is
suotegies~partevaely I thereremainserice I IRRELEVANT I] pcevertecty the lock
foritscoverege/abity — I —_ferentators that proper stratesc
toserve rural preven them trom ceataboration seen as
communes snd Rly replacing branches erate mtu vive,
prowsetecerotace I listing te opoecte
Sericetocustemers I toseepen eaters
‘who needit t
In Phase I we conducted interviews with both Postmasters and Clients.
They shared many of the same concerns (albeit from different perspectives).
While banks do care about service, network coverage and a number of other areas, their primary issues with the BF agreement currently are a)
Price and b) Partnership.
They're seeking greater flexibility and transparency / fairness from pricing (.¢. less about the amount the pay, more where it goes and what it
subsidises)
From partnership, they'd like to collaborate and engage more ~ specific banks also want to feel less like Post Office is abusing its monopoly
position in the counter cash service space.
Appendix 4 - Design Principles to ensure Strategic delivery
Banking Framework 3 has 7 design principles that will inform the direction of the
agreement and that can be used to evaluate proposed options
8F3 DESIGN PRINCIPLES
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Appendix 5 - Key Area Pricing Components
IRRELEVAN
Appendix 6 - Profit Contribution Sensitivity
Volume Tipping Point — Income coverage of banking related costs
IRRELEVANT
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} Conetusion
* Granted, when.comnared to
the best I !RRELEV, BF2
scenario, the BF3 pricing
1s look I:
during
namely to the tune
between 2023 - 2025.
+ However, the BF3 proposal’
benefit_and purpose becomes
additional"
ompared.to-nunn,
to the optimistic I IRRELEVANT!
approach. af
{2 pricing to ensure BF4 full engagement
10
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POST OFFICE LIMITED
BOARD REPORT
Title:
Digital Identity Partnership Meeting Date: I 26" January 2021
Author: Elinor Hull - COO, Identity Services I Sponsor:
Owen Woodley - Group Chief
Commercial Officer
Input Sought: Noting
This paper provides the Board with information about the signed collaboration license
agreement with Yoti Ltd (‘Yoti’) for identity services.
Previous Governance Oversight
On 29" July 2020, the Board agreed to endorse the preferred partner for Post Office’s
strategic digital identity future and the commencement of partnership negotiations.
On 25" November 2020, the GE agreed to endorse moving forward to final deal
negotiations for a collaboration license deal with Yoti.
On 12 January 2020, the GE endorsed contract signature on a collaboration license
agreement with Yoti.
Executive Summary
Post Office has an opportunity to cement its position as the leading UK brand in the
emerging digital identity market, thereby giving the potential to grow long term
revenue and modernise our brand and purpose.
The scale and nature of the market in the long term is unclear at this point, but we
continue to believe that there is the potential for exponential long-term growth in the
long run. However, we do not have the capability or technical skills in-house to operate
a solution, nor the capacity to invest in them. Given this, and our focus on Core areas
of the business, the PSG work concluded that digital identity should be a platform play
with our preferred business model being to work with a partner with the technology,
distribution capabilities and cash to deliver our market ambitions, rather than investing
significant sums required to develop our own platform
The deal will bring a fixed annual
return an incremental
5 years through:!!
iby way. of a license fee and is projected to
tmaster remuneration over
digital transactions.
et profit and
n-branch transactions an
This will be our first example of a true platform proposition; it minimises our expenses
and management attention whilst leveraging our brand to give us an interest in a
market that has the potential to grow significantly over the longer term.
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Questions addressed
Why have we done this deal?
Why is this a good proposition for Postmasters?
What are the key components of the deal?
What is the projected financial return?
What does this mean for Verify and our relationship with Digidentity?
Report
Question 1: Why have we done this deal?
1. As discussed in previous Board meetings, identity assurance is a large and growing market
- McKinsey size this at £2-4bn pa, growing at over 5% pa as regulation and digitisation
grows. There is now significant investment going into the sector - c$6bn pa globally
according to Crunchbase) with key sectors including government services, financial
services, employment vetting, travel and retail.
aswne
2. Post Office’s current branch identity services (in-branch verification and document
certification service) are not sustainable in the long run and over the next five years will
move into serious decline due to three core disruption risks:
a. Government policy/legislation changes - over the next three years many identity
checks needed to be performed face-to-face will be enabled digitally.
b. Technological disruption - automated document processing and fraud detection.
c. Reusable identity - reducing the frequency of need for face-to-face identity as
customers can prove once and reuse many times.
If we choose to do nothing, income and Postmaster remuneration will significantly decline
over the next four years, eventually to zero, and we would remove our presence in Digital
identity post GOV.UK Verity in September 2021.
3;
IRRELEVANT
~~ IRRELEVANT
4. Yoti made a: roposel sdidcessing previous concerns, which was concluded as the
most benefic ‘ost Office under a collaboration license agreement. Yoti, founded in
2014, is a UK leader in digital identity technology. They have an existing consumer-centric,
reusable digital identity platform downloaded by over 9m consumers globally - 2m in the
UK.
5. A partnership with Yoti will deliver benefits against the Post Office purpose:
ostmasters remuneration.
trading profit over 5 years.
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d. Brand: 10-16m customers could be interacting with our brand through the app,
and 3.5m through our branches over 5 years, helping customers access the
services they need at the time they need them.
Question 2: What does this deal mean for our Postmasters?
6.
Combining Post Office’s network access with Yoti’s digital identity technology will create a
unique multi-channel proposition to the UK’s identity needs, providing reusable identity
alongside transactional online and in-branch services.
In-branch verification will provide support for specific processes or customers who require
identity verification face-to-face. Yoti will create an in-branch service that utilises their
online verification technology to verify documents that customers bring into a branch.
The benefits to Postmasters of the new in-branch verification services are:
a. New transaction opportunity - forecast: Postmaster remuneration over five
years from transactions.
b. Simpler and quicker transactions - transition from Horizon to a tablet-based
service will enable a simpler experience with the time-consuming document
inspection and attribute matching now completed digitally. Expectation is that a
transaction will be <3minutes.
c. Reduction in training needs - the transaction will be focused on accurately
digitising customers’ documents, not on speculation as to the validity of the
document. There will be no need for identity specialists in branch.
d. Ability to influence sales - it is proposed that there will be additional
remuneration to Postmasters for successfully up-selling a digital identity, e.g.
the creation of a digital identity account following a passport application.
Question 3: What are the key components of the deal?
9. Post Office has negotiated a collaboration license agreement for Yoti to provide technology
solutions and E2E business operations (product, sales, marketing and support functions)
with Post Office providing access to our branch network and our brand for a range of B2C
and B2B identity services. A contract synopsis of key terms can be found in Appendix 1.
10. Post Office will receive an annual brand an 2 from Yoti he
Operating profit will be spli and Yoti, including I IRRELEVANT ;
ti.
12. The duration of the agreement is for! tiyears and can be terminated ot
notice. If termination is not served by either party at ‘m«
continue until such time termination is served.
13. Post Office has several termination protections at exit as follows
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IRRELEVANT I
14. It is expected that the Post Office digital identity app will launch in Q1 21/22 and the in-
branch verification service in Q2 21/22.
15. The partnership will be governed_by.a monthly Oversight Board which Elinor Hull and Ed
Dutton will sit on for Post Office nd Post Office will have equal voting rights and the
board will be responsible for the setting of strategy, financial budgets and forecasts and
go-to-market plans and for the monitoring of monthly performance.
Question 4: What is the projected financial return?
16. Forecast modelling is for a cumulative profit for the collaboration
Appendix 2.
17. The main driver of operational costs is Yoti’s {_
profit margins after Year 2 are consistently high +
18.
st Office’s identity service business i:
Postmaster remuneration. This is a
RF operating profit contribution and i
Postmaster remuneration and
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19. Post Office have negotiated an annual license fee which improves cashflow and
provides annual income certainty.
Overall Cash Flow (£m) H IRRELEVANT
20. Technical accounting has assessed the deal to be a ‘joint operation’ and therefore Post
Office must account for
accounting treatment is hig
later. The worst case scenario, if there i:
remained the same, is that Post Office would have to account for:
1 IRRELEVANT
Overall P/L(IFRS11) i
Overall P/L (pre IFRS11 accounting) i
Question 5: What does this mean for Verify and our relationship with Digidentity?
21. Cabinet Office received funding in the November 2020 Spending Review to extend Verify
for its final six-month term through to September 2021. Subsequently, Government
Digital Services (GDS) has confirmed that they will not have a new solution ready to
replace Verify and hence will need to continue the service for a further 12-18months. They
are currently deciding whether to extend the current contract with Post Office and
Digidentity or to run a restricted procurement for this extended period.
22. Post Office plans to negotiate an extension with Digidentity for the initial six-month
extension March-September 2021 whilst we build our new solution with Yoti and then
move to Yoti as our Verify platform from September. GDS has already indicated their
support for this change and have met Yoti under NDA to assess platform integration needs.
It is expected that terms with Digidentity for this six-month period will remain similar to
current.
igation to provi _ IRRELEVANT TA
IRRELEVANT {to Yoti’s platform.
of our new service
and provide a link to create a new account. Subject to Digidentity’s co-operation, best
case is that we will migrate customers’ data from Digidentity to Yoti’s platform and then
Yoti provide new account access details to the customer.
24. Given the need to finalise negotiations with Digidentity, we will schedule contract signing
announcement communications sensitively so as not to disrupt the desired outcomes. GDS
is due to finalise the pricing for March-September ‘21 and the commercial route to extend
Verify duration by end of January ‘21.
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Appendix 1 - Contract Synopsis
PURPOSE STRATEGY AND GROWTH: Post Office Identity Services
Postmasters:
Contribution:
Simplification
Brand:
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IRRELEVANT
Pirostmasters’ pay with potential up-selling remuneration I Post Office is there for those who need identity
services face-to-face MMi from iifdeal, :ABB trom in-branch verification (IBV) & document certification
service (DCS
coEMBacing profit over 5 yea 1s BB rom $B ical, BBB trom iv a bcs
Binanages all Post Office identity services business & takes the hit of losses until profit generated whilst
POL receiveciaaemMtiicense fee per annum
14m Customers interact through the Post Office App & 5.5m through Post Office branches, helping them acces:
the services they need, when they need them
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Appendix 2 - Post Office Identity Services P&L
Identity Services P/L
Q4 Year1 Year2 Year3 Year4 Year5 cummulative
Partnership Gross Revenue
Postmaster pay
Partnership Cost of Sales
Partnership Gross Profit
Partnership Operating Costs
Partnership Net Profit
JV accounting @35%
pcs
Verify '
iBv '
IRRELEVANT
Total Revenue
Postmaster Pay (BAU) i
Staff Costs i
Trading Profit i
POL Investment
Overall P/t i
Q4 Year1 Year2 Year3 Year4 YearS cyummulative
Cash Flow: 20/21 21/22 22/23 23/24 20/25 25/26
IRRELEVANT
Digital identity BU Revenue (BAU)
POL Investment
POL Cash Flow from Partnership
Partnership funded POL staff costs
License Fee
Overall Cash Flow
Assumptions:
¢ App launch in Q1 21/22, Integrated hranch.services Q2 21/22
* Post Office Investment costs: Legal }!RRELEVANT!& Product implementation ('®
- in Post Office
Confidential
POL-BSFF-WITN-015-0009992_0402
POST OFFICE LIMITED
BOARD REPORT
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Title: Telecoms Sale Completion Date: 30" March 2021
' Owen Woodley,
" Meredith Sharples, 7 7 x .
Author: Director-of Telecoms Sponsor: eran chileh Commercial
Input Sought: Noting only
The Board is asked to note that the Telecoms transaction has now successfully completed,
and the business has transferred to Shell Energy Retail Ltd (‘SERL’).
Previous Governance Oversight
Post Office Board on 26 May 2020
Post Office Board on 8 November 2020
Post Office Exceptional Board on 1% and 2° December 2020
Post Office Board on 26* January 2021
.
.
.
.
Executive Summary
« The sale of the Telecoms business has been reviewed at a number of previous Board
meetings and as agreed at the Board meeting on the 26" January, Post Office signed an
agreement with SERL on the 1* February.
¢ To avoid the CMA potentially imposing a group injunction on Shell Group, SERL requested
that the transaction structure was amended to enable signing on 1* February 2021
completion on 15‘ March 2021.
and
* The Telecoms business has been run by the current management team since signature
while working closely with SERL and being cognisant of competition issues.
« The sale was successfully completed on the 15" March and funds have been received.
e SERL and Post Office will agree a post-completion financial true-up within the next
business days.
110
e The actual amount of network cease charges incurred by SERL will be notified to Post
Office by 30 April 2022, with any repayment of the contingent amount to be paid to
Post Office by 31** May 2022.
e Post Office will continue to support SERL pursuant to the Transitional Service Agreement
(‘TSA’); these activities are focused within the next 6 months, but will continue until
earlier of 12 months or the completion of customer migration by SERL from Fujitsu.
Questions Answered in this Paper
1. What is the status of the Telecoms transaction?
2. What are the post-completion obligations?
Highly Confidential
the
POL-BSFF-WITN-015-0009992_0403
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Report
Question 1: What is the status of the Telecoms transaction?
1. The transaction was signed on the 1% February 2021 and was then completed on the 15"
March 2021 at 23.59, funds have been received.
2. The Telecoms team (9 FTE) has now TUPE transferred to SERL and relevant employee
data records have also been transferred.
3. All Post Office Telecoms customers have been contacted and informed of the change in
ownership; the customer response has been within expectations. Further customer
communications from SERL are planned post-completion and SERL will continue to use
the Post Office brand while on the Fujitsu platform.
4. All associated contracts have been novated to SERL, with the exception of Indesser which
has been assigned and the novation will now be negotiated directly by SERL.
5. Details of Postmasters’ remuneration totalling have been shared with the relevant
Postmasters and will be paid in March 2021.
Question 2: What are the post-completion obligations?
6. The transaction has been structured to offer a clean break, however there are a number
of short-term and long-term obligations for Post Office. The obligations are laid out in
detail in Appendix 1, but cover:
a. Regulatory/compliance obligations e.g. data requests, Ofcom etc.;
b. Financial completion statement;
c. Tasks considered under the Transitional Services Agreement e.g. web support,
Branch payments etc.
7. The management of Post Office’s obligations will be delivered by a Separation Manager
but will also be reliant on BAU resource within Post Office such as Finance and Marketing
teams.
8. SERL and Post Office will perform a post-completion financial true-up based on a
Completion Statement:
a. SERL has up to 65 business days to prepare a draft of the completion statement;
b. Post Office then has up to 45 business days to review and challenge;
c. A dispute mechanism is in place if agreement cannot be reached.
9. SERL potentially faces certain charges as customers transfer from the TalkTalk
network. These charges were not known to SERL at the time of their offer and a
deduction to the purchase price of was agreed to reflect that. However, it
was also agreed that if the actual cease charges incurred by SERL are less than
}then SERL must refund the difference to Post Office. The actual amount
incurred by SERL must be notified by SERL to Post Office by 30% April 2022, with
supporting evidence. Any resulting repayment to Post Office must be made by 31* May
2022.
CFD-#32411287-v1 2
Highly Confidential
POL-BSFF-WITN-015-0009992_0404
Appendix 1: Post Completion Obligations
No. Obligation/Right
1. I Cease Charges: SERL is obliged to pay to Post Office any
amount by which the actual amount of Cease Charges
payable to Fujitsu under the HPBB Agreement fell short
of the amount by which the purchase price was reduced
by the expected Cease Charges Cost.
Resource required
Resource required by Post Office should be quite limited but
it may be necessary to ensure that SERL are complying with
their obligations under this provision, analyse any
documentary evidence provided by SERL and legal support
may be required.
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Time F
me
On or before 30" April 2022 with
payment to be made on or before 31*
May 2022.
2. I Business Receivables: From Completion, Post Office is
obliged to pay to SERL any money in respect of Business
Receivables that it may receive post-completion.
Specific agreement has been reached in respect of branch
payments which may be made into a Post Office account.
Post Office’s obligation to pay such money to SERL arises on
becoming aware of amounts received by POL in error.
As soon as practicable and in any event
within 15 Business Days of becoming
aware of such money.
3. I Contracts: There are certain obligations to address the
failure of any contract to properly transfer to SERL.
The only issue we are aware of is the Indesser Agreement
which will be assigned to SERL at Completion. Legal resource
may be required if there is a post-Completion negotiation
between Indesser and SERL to novate the Indesser
Agreement as Post Office would be a signatory to the
novation.
February 2027.
4. I Non-compete: Post Office is obliged to comply with
certain non-compete restrictions
These should not require additional resource unless Post
Office requires legal advice as to what Post Ofice may/may
not do.
18 months following completion.
5. I Further assurance: There are various obligations to
ensure that the Business and the Assets are transferred
to SERL in circumstances in which they have failed to
properly transfer at Completion or they are mistakenly
with POL rather than SERL (or vice versa).
If this arises it may require legal and operational support but
this is unlikely.
The requirement is ‘promptly’ after
Completion — within 5-15 Business
Days.
6. I Wrong pockets: If assets have mistakenly remained
with Post Office, Post Office is obliged to transfer those
assets to SERL.
Post Office has an obligation to ensure that any assets that
should have transferred as part of the Business are
transferred to SERL. If this arises it may require legal and
operational support.
For a period of 12 months post-
Completion.
CFD-#32411287-v1
Highly Confidential
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No Obligation/Right Resource required Time Frame
7. I Regulatory obligations: Post Office has certain Post Office is likely to need ongoing regulatory/data PSD2 Audit — obligation should be
regulatory obligations which it either retains because protection support and potentially legal support to ensure. completed by the end of this financial
they are non-transferrable or because the transfer of that their obligations continue to be met. year.
regulatory obligations are carved out of the transfer of
the business. Broadly, the retained obligations relate to: Ofcom requests and data protection
@ =PSD2 Audit obligations are indefinite.
Ofcom requests/disclosures
Data protection obligations
8. I Completion Statement: Post Office to review and Post Office will require both external and internal Post Office will have 45 Business Days
respond to draft Completion Statement which will be accountancy support and possibly legal support in respect of I to review the draft Completion
provided to Post Office by SERL within 65 Business Days I this process. Statement — there may follow a period
of completion. of resolving any disagreements
between the parties.
9. I Customer objections: Post Office is obliged to inform Post Office may require some resource to pass any such February 2027 but given that all
SERL if Post Office is notified by any customer that they I objections onto SERL. customers have been notified, resource
object to the novation of their contract to SERL. should only be required for a short
period.
10. I Post Office has ongoing data protection obligations Post Office will require ongoing data protection support. 6 years and 7 months from the date in
and must comply with its obligations as a data which the relevant customer
controller/processor under the DPA and DSA. terminated their agreement with Post
Office so the number of previous
customers this relates to will
deteriorate over time.
(Payout agreement
11. I Payouts: Post Office’s payouts team has a number of Post Office payouts team. Ongoing until terminated.
obligations under this agreement, however this
agreement was negotiated by the Post Office payouts
team based on its standard form payouts agreement
and its usual terms with third parties.
CFD-#32411287-v1
Highly Confidential
POL-BSFF-WITN-015-0009992_0406
No. ation/Right
12. I Separation Manager: Separation Manager to manage
day-to-day TSA relationship, meet/speak weekly with
SERL’s separation manager, agree written Separation
Plan with SERL, and respond to change requests.
Resource required
Separation Manager (funded by SERL).
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Time Frame
Ongoing throughout term of 12 months
(or earlier customer migration)
Separation Plan to be agreed within 20
Business Days of completion.
13. I IT Services: Transfer external hard drive and password Post Office/CMC. Completion date only.
on completion containing documents required for the
business.
14. I Email Services: Transfer hard drive and password on Post Office/CMC. Completion date only.
completion containing transferring employee emails.
15. I Web Pages: Discuss in good faith and use reasonable
endeavours to agree best approach to transition web
pages to SERL. Invoice SERL monthly in arrears for
charges.
Post Office digital team.
3 months from completion (can be
terminated by SERL on 1 months’
notice).
16. I Branch payments:
- Facilitate branch payments via Payzone.
- Make branch payment data available to FJT.
- Weekly (on Mondays) remittance of branch
payment amounts in Post Office central bank
account
- Invoice SERL monthly in arrears for charges
- Payzone team
- Horizon team
- Post Office Finance team
12 months from completion (can be
terminated by SERL on 1 months’
notice).
17. I Pay monthly cards: Supply payment cards to end
customers. Invoice SERL monthly in arrears for charges
Separation manager working with CPI under the payment
cards contract.
12 months from completion (can be
terminated by SERL on 1 months’
notice).
18. I Alternative Format Documents: Provision of braille,
large print and audio for low-volume communications.
Invoice SERL monthly in arrears for charges
Separation manager working with Bayfield Media under the
Bayfield contract.
[Until 1 July 2021] (can be terminated
by SERL on 1 months’ notice).
19. I Router Order Fulfilment: Provision of Post Office’s
Royal Mail account for order fulfilment of routers and
ancillary equipment. Invoice SERL monthly in arrears for
charges
N/A (Net Lynk continues to use the Supplier’s Royal Mail
account).
12 months from completion (can be
terminated by SERL on 1 months’
notice).
CFD-#32411287-v1
Highly Confidential
POL-BSFF-WITN-015-0009992_0407
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Postmaster consultation survey:
key themes
Final Data
Monday 22"4 February 2021
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Project progress
—
Oct 20 = Jan 21: Feb - Mar 21:
QUANTITIATIVE STAKEHOLDER &
Sept - Oct 20: SURVEY with 1,767 234 Feb 21: POSTMASTER Mar 21:X3 CO-
QUALITATIVE completes SEGMENTATION SSS CURATION aN
CONSULTATIONS DEBRIEF
with 63 Postmasters Mar 21: FINAL
DEBRIEF
nb profiling the segment is the easy
part. Embedding and activating
segments within POL is a critical next
step
POL-BSFF-WITN-015-0009992_0409
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/ Post Summary
OFFICE
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I. Sentiment
1. Just under half of Postmasters have a poor relationship 5. Nearly all Postmaster re deeply concerned about the future.
with Post Office (feeling like a subordinate, feeling It is not just the situation with COVID-19 that gives cause for
undervalued, a sense that Post Office does not concern. Many are extremely worried about increased
understand their day-to-day realities) competition from Royal Mail and the inevitable (further)
2. Added to this, about a third feel Jukewarm — taken Mlgitisation of prodlicts ‘and seniices
together we might say two thirds have a sub-optimal 6. It adds up toa pretty bleak picture. Almost one third say
relation with Post Office, which shines a light on the scale they will cease to be a Postmasters in the next 5 years. It
of the challenge does not mean a third will actually leave the brand, but it is
a useful barometer for the scale of negative sentiment that
3. Their relationship with Post Office aside, the majority say
they are confident in their ability to run a post office
(although some say they don’t get the support they need)
exists today.
4. While running a successful business is obviously
important, serving the local community is the key reason
for being, and remaining, a Postmaster. It’s quite
important to understand the role community plays — for
Postmasters it provides a sense of purpose.
POL-BSFF-WITN-015-0009992_0411
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2. Engagement
1. Three-quarters of Postmasters are satisfied with 4. Around three-in-five express an interest in being
their Area Manager — as we saw through the more involved in Post Office decision- making
consultation interviews, they are often perceived (around one-in-ten indicate no interest)...
by Postmasters as being “on my side”
2. Area Managers score highly for being supportive,
helpful, understanding and logical — but the
helpdesk and other central communications
perform less well.
3. Most Postmasters prefer online communications
(web portal and email) for day-to-day interactions,
but half want ‘human’ contact (phone or f2f) when
they have an urgent issue
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3. Priorities for improvement
1. Remuneration is Postmasters’ number 1 priority area
for improvement — only 14% feel they receive
appropriate remuneration for the products and
services they offer
2. IT systems and process, and communication are key —
between 60% and 70% would like to see improvements
in these area
1. Remuneration
3. The two most popular ways in which Postmasters
would like to be involved in different types of decision-
making (e.g. for marketing, operations, products &
services, customer service and significant issues) both
involve Area Managers — via one-to-one meetings and 4.Training 5. Representation _ 6. Innovation &
working groups working groups
3. Communication
f
POL-BSFF-WITN-015-0009992_0413
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(POST. Postmaster sentiment
OFFICE
About 2 in 5 Postmasters feel they are treated like a
subordinate business partner by Post Office
How would you describe the relationship you have with Post Office?
39%
33%
Post Office treat
the Postmaster
like a subordinate
business partner
Question: 81 How would you describe the relationship you have with Post Office?
Base (1767)
Post Office treat
the postmaster
like a valued/equal
business partner
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“Post Office only think about their own
profit/loss. They don't support us as a
business partner. Post Office pay lots of
money to Business managers, Support
manager — it doesn't make any sense
from a business prospect, because they
do not work or support us when we
need it.’
‘I think POL has developed a ‘culture’
that is very dictatorial towards agency
branches over the years, &
Postmasters have not been
represented properly... There should be
a more positive culture of, ‘working
with’ rather than being, ‘done to’...
There are a few glimmers of light that
may come to something. My AM is
highly professional, extremely hard
working & understanding of my
branch needs. [Post Office] has been
energetic & personally responsive. I
cannot tell you how important that is
to me feeling valued as opposed to
feeling trapped in a doomed business
model with my life savings becoming
worthless.’
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Almost half feel Post Office does not understand the day-
to-day realities of running a post office
4 feel that a lot of people above me
in management have been
recruited from other business and
have only ever stepped into the
post office branches as customers
and don’t understand the
challenges we face’ Scoring 2/7
To what extent do you feel Post Office understands the day-to-day realities of running a post office?
46% 35%
i 1 i 1 ‘There is a full understanding of
the process of completing
transactions by the Post Office
20% however crucially missing is the
insight into the daily challenges
and difficulties postmasters face.’
4 Scoring 5/7
Post Office has no Post Office fully ‘I feel that a lot of people above me
understanding of the understands the in management have been
realities of running a realities of running a recruited from other business and
post office post office have only ever stepped into the
post office branches as customers
and don’t understand the
challenges we face’ Scoring 2/7
Question: B4 To what extent do you fee! Post Office understands the day-to-day realities of running a Post Office?
Base (1767)
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And a similar proportion (2 in 5) feel under-valued by ‘Recognition in more real terms the
Post Office work complexity of each product
and its associated payment...
eliminate the "them and us"
scenario which did seem to be
diminishing... The tail wags the dog
and this going forward needs to be
reversed. Communicate honestly to
eliminate damage created by
40% 37% "leakes". Ensure they don’t happen
please let me feel confident in
Sense of value to Post Office
i 1 i i knowledge about my future rather
than customers /post man /citv
drivers updating me first! Make me
feel valued and respected and give
me tools to do the job I love .
POST OFFICE ...not a shop that
happens to be able to perform a few
Post Office services ...1am a Main
fora reason!!’
Feeling under- Feeling valued by
valued by Post Post Office
Office ‘Mainly, we need to be paid more
for what we do to make us feel
valued. We need to feel as though
we are partners, not subservient
and irrelevant.’
Question: 82 How would you describe your sense of value to Past Office? e.g., do you feel valued by Post Office for what you do?
Base (1767)
POL-BSFF-WITN-015-0009992_0417
Most back themselves to run successful businesses —
but a quarter say they do not get what they need
from Post Office
Agreement with commercial realities of running a Post Office
Total % Total %
disagree agree
I am confident running
the Post Office part of
my business
5% %l
I know exactly what I
need to do to make the >,
Post Office part of my
business as successful
as it can be
w
I get what I need from
Post Office torun the 26%
Post Office part of my
business successfully
m1-Strongly disagree m2 «3 m4-Neutral m5 m6 wm7-Strongly agree
Question: 86 Thinking firstly about the commercial realities of running your business.
Base (1767)
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Postmasters who have a Local
Model branch are more likely to
agree that they get what they
need from Post Office to run a
successful business. Along with
those from an Asian background
Postmasters who are confident in
using all types of technology are
more confident in:
Running a Post Office
Knowing what to do fora
successful business
And feeling they get what
they need from Post Office
to do so
POL-BSFF-WITN-015-0009992_0418
Community service provides purpose. Almost half say
they are Postmasters because they want to serve the
community/ they feel obligation to the local community
B12 - Why did you become a Postmaster?
I wanted to serve the local
community
I wanted to run a successful local
business
I wanted to run a successful business
backed by a large organisation
I wanted to be my own boss
I wanted to be a part of Post Office
I had previously worked in similar
businesses and I knew I had the...
Other reason
I worked in a Post Office and decided
to buy my own when the chance...
I took over from my parents / other
family member
Question: B12 Why did you become a Postmaster? B13: Why are you a Postmaster today?
Base (1767)
SSSSSSSSsa ww
a 39°
26%
a 22%
17%
_ MR 15%
Ma 11%
Hi 10%
a 8%
B13 -Why are you a Postmaster today?
I want to serve the local
community
I want to run a successful local
business
I feel the local community needs
me
Lenjoy it
I want to run a successful business
backed by a large organisation
I want to be my own boss
It’s my career — it’s what I know
how to do
I can’t find a buyer, I would sell if I
could
a 39%
38%
35%
25%
a 23%
a 17%
ME 10%
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Female Postmasters tend to be a
little bit more motivated by
serving the community
Postmasters in London are more
likely to want to be part of Post
Office today, while those in the
South West are more likely to say
they would sell if they could
White background Postmasters
are a little more likely to be
driven today by serving the
community, while Asian
background Postmasters tend to
be a little more motivated by
running a successful local
business
POL-BSFF-WITN-015-0009992_0419
The majority take deep pride in what they do - 56% tell
us they feel optimistic about being a Postmaster
Level of optimism
21% 56%
Negative: feeling Positive: feeling
pessimistic optimistic
'N.B. Top and bottom boxes are to the nearest decimal place.
‘Question: B3 How do you fee! about being a Postmaster in general? B6 Please say the extent to which you agree or disagree with the following
statements.
Base (1767)
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Postmasters in London are more
likely to feel valued and optimistic
Local Model branch types are
more likely feel optimistic
Postmasters who have an older
customer base tend to feel
pessimistic about being a
Postmaster along with branches
in the South West
Postmasters who feel confident
using all types of technology feel
optimistic
Those who are from an Asian
background tend to feel more
optimistic
POL-BSFF-WITN-015-0009992_0420
Competing forces are shaping how Postmasters feel, driving
them into separate camps and shaping their relationship with
Post Office
1. Sentiment towards Post Office - often
weak or mixed because their
interactions with Head Office, Area
Managers, satellite offices etc. are
inconsistent
2. Sense of pride/ optimism that comes
from doing their job well in local
communities — this if often very strong
(but actually has little to do with Post
Office Ltd, its more to do with
personal ego/ job satisfaction/
fulfilment)
Cold relationship with
Post Office
Weak sense of pride/
optimism about what
they do
Shades of grey in
between
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Warm relationship
with Post Office
Strong sense of pride/
optimism about what
they do
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It means only half feel Post Office is a good opportunity
to run a small business
Do you think that Post Office is a great opportunity to run a small business?
‘I feel proud to be associated with
such brand but somewhere I feel,
we are not tapping into its full
potential. This job isn't like any
other shop-assistant job where
anyone can stand behind the
counter and serve. It requires
27%
— +}
certain skills-sets above honesty,
oom integrity and reliability. This don't
come cheap!! It is not that I don’t
feel for the brand PO, It is a huge
1 2 3 4 5 6 7 Brand with largest network and
solid creditably among the UK-
Post Office is not a Post Office is a consumers.”
great opportunity to great opportunity to
run a small run a small
business business
'N.B. Top and bottom boxes are to the nearest decimal place.
Question: B8 Please read the following and express your opinion using the scale below.
Base (1767)
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The majority are deeply concerned about how the next
9.3 vears will olay out 9 in 10 concerned about
Y play Royal Mail dealing with
customers direct
Biggest concerns over the next 2-3 years
9 in 10 concerned about
more products going
online
Royal Mail dealing with your customers directly
More products and services going online
Maintaining footfall in your business
9 in 10 concerned about
increasing competition
from Royal Mail
Increased competition in the Mails sector beyond Royal Mail
The long-term impact of Covid-19 on society Hy isn 16% 15% 48%
The relevance of the Post Office brand to people
9 in 10 concerned about
maintaining their footfall
The declining use of cash
The age of your customers getting older INN) 2471S EE 32% ‘
8 in 10 concerned about
1-Notatallconcerned m2 m3 m=4-Neither m5 m6 m7-Extremely concerned the long-term impact of
Covid 19
Question: G1 Thinking ahead over the next 2-3 years, how concerned, if at all are you about the following in terms of their impact on your business?
Base (1767)
POL-BSFF-WITN-015-0009992_0423
c. I in 3 claim they will cease to be Postmasters in the
next 5 years
For how much longer do you intend to be a Postmaster?
For the next 6 months
For the next year
For the next 2 to 5 years
For the next 5 to 10 years
For the next 10 years or longer
Don’t know / Haven't thought about it / Not
applicable
I
I fag 33%
a 20%.
a 17
2s
2
Question: B14 And, for how much longer do you intend to be a Postmaster?
Base (1767)
nb this rises to 42% when
we look at Postmasters
who explicitly say they
feel undervalued
N.B. Scores are rounded to the nearest decimal place.
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‘I need to find a buyer so! can
retire but I feel so connected
and part of something when at
work’
‘It would be difficult to sell
given uncertainty created by
POL & other stakeholders such
as HMG & RM’
‘Get better remunerations for
Postmaster and other benefits
like retirement pension scheme’
‘Would like to retire but find
that the Transformation team
has not helped and the payout
that I get is not set — we get no
backing from them’
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There is no consensus among Postmasters on the future
direction of the business
What is more important when running a Post Office?
36% 38%
h
al: 2 3 4 5 6 7
Post Office needs to Post Office needs to
focus on serving become more
local people through digital to be
the branch network competitive
'N.B. Top and bottom boxes are to the nearest decimal place.
Question: 810 Please read the following and express your opinion using the scale below.
Base (1767)
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There is also confusion about whether post offices can
rely on the taxpayer or rely on the paying customer
How do you view Post Office Limited as an organisation?
12%
4% 3% 41%
1 23 4 5 6 7
A private sector A public sector
business business
answerable to answerable to
shareholders Government
N.B. Top and bottom boxes are to the nearest decimal place.
Question: C2 How do you view Post Office Limited as an organisation? Base (1767)
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‘We run the Post office on a daily
basis. Not closed at all. However, we
are exhausted as we have to work
nonstop to save on staff fees to
break even. No government grant
available as within a council
building and when spoken to Post
Office for help financially, was told
we are ok and cannot help. Mentally
this is breaking us. Council Post
office Itd, no one wants to help. All
Post offices close to us are shut
received government grants staff
furlough all stress free. Not for us,
we have to work to support the
community to pay the bills
otherwise our debts get bigger.
Where is that fair and how can you
say that we are supported from Post
office Itd. All we hear from our area
manager is that we are doing well
and will get through it and others
are just as bad as us!’
POL-BSFF-WITN-015-0009992_0426
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(POST. What is working well?
OFFICE
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* c.3 in 4 Postmasters are satisfied
with the performance of their
Area Managers receive strong scores Area Manager
‘We have a superb area
Satisfaction with interactions with Post Office manager. She gets to know us
personally and is easily
available at any time. It’s a
such beautiful addition to my
retail business which gives me a
78% kick to grow all the time.’
‘Until the appointment of the
area managers, which has been
one of the better things PO
have done recently,
communication was very poor.
Keep up the improvements in
this area.’
Area Manager 13% 45
1 - Strongly dissatisfied m2 a3 4 Neither m5 m6 7 - Strongly satisfied
N.B. Top and bottom boxes are to the nearest decimal place.
Question: D2 This time thinking about your interactions with Post Office and the systems and processes in place to enable these.
Base (1767)
POL-BSFF-WITN-015-0009992_0428
Postmasters feel interactions with their Area Manager
are rewarding but the quality of interactions with other
staff are concerning
Different types of communications and interaction: Codes 6 & 7
Ranked #1 for all 4
questions
58% 58% 57% 57%
38% 36% 35% 35%
Interactions and general I The Helpdesk (NBSC)
day to day comms with
your Area Manager
m Extremely helpful
32% 31% 31% 30% 29%
Interactions with Post
Office operations e.g.
ordering cash, ordering
stock etc
™ Extremely understanding
24% 26% 25%
Important news/
announcements from
Post Office
m Extremely logical
% 09% 22% 22%
General communications
from centre of the
business e.g., comms
from senior management
Extremely supportive
Question: D3a to d. Please think about the different types of communications/ interaction Postmasters have with Post Office, please rate each on the following:
Base (1767)
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‘Each post office has different and
unique dynamics in which they
operate. Post office itd need to
focus on individual postmaster’s
needs by having Area managers
devolving that working
relationship with post masters in
their area. That way a postmaster
will feel heard and felt part of this
great organisation. Area
managers mostly communicate to
either give postmaster bad news
i.e. withdrawal of a service from
their branch or some kind of telling
off. POL need to work on
developing one to one relationship
with postmaster for greater output
of their potential. We feel alone
swimming in the sea and see no
one swimming along side us.’
‘The shift in relationship between
Postmaster and Post Office is
encouraging, helped by the
reintroduction of Area Managers,
with what appears to be a shift
towards how they can help the
Postmaster run and operate the
business.’
POL-BSFF-WITN-015-0009992_0429
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There is significant interest in getting involved and
playing a more active role in Post Office ee
Male
To what extent if any, would you like to play more active role in decision-making at Post Office? Those confident in
11% 60% technology
: , Main branch
Indian background
5% 3% (8% 29% 19% * Not at all interested group:
Female
Older customer base (under
1 2 3 4 5 6 7
55)
Not confident in technology
Specifically thinking about operational improvements at Post Office, to what extent if any, would you like to play more active role in decision-making?
12%
oom East of England
: White background
5% 3% 4% 29% 21% 23% * Neutral group
* Over 55s
* Female
1 2 3 4 5 6 7 * Sub Payments Sub Office
1-Notatallinterested > 7~Very interested
Question: F3a To what extent if any, would you like to play more active role in decision-making at Post Office? Base (1767) N.B. Top and bottom boxes are to the
nearest decimal place.
POL-BSFF-WITN-015-0009992_0430
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(POST Priorities for improvement
OFFICE
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For ease we have grouped the priority items into
themes
1. Remuneration & profit 2. IT systems and processes 3. Communication oe
* Changes to remuneration Simplify Horizon * Better communication in 15t priority
* Creation of forums/ working More efficient day-to-day general between PMRs and
groups to focus on systems e.g. cash and stock PO
At least c.60% say these
areas require improvement
remuneration ordering More transparency around
Simplify Branch Hub questions/complaints/ queries
More/ better management Simpler communications
information made available
4. Training 5. Representation 6. Innovation & working 2 nd riorit
* More/ better training * Improvements to groups p y
available to Postmasters representation * More products to sell Still important, but not as
* Creation of initiatives tohelp * Creation of a Non- Exec PMR * Creation of forums/ working critical as first priority
Postmasters come up tospeed * Greater access to senior groups to focus on innovation
* Upskilling of PO staff at management at Post Office * Creation of forums/ working
Helpdesk, Cash centre etc. * Greater Access to Area groups to focus on
* Better training/ support for Manager Operational matters
Area Managers * Creation of forums/ working
groups to focus on CX matters
POL-BSFF-WITN-015-0009992_0432
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1. Remuneration & profit — half are dissatisfied with
product range, c. 7 in 10 are dissatisfied with
remuneration
Agreement with realities of running a Post Office business
Total %
Total %
disagree
agree ‘The remuneration is a joke. We
can’t afford to keep enough staff on
the counter because of the
remuneration we receive compared
to national minimum wage. Due to
The range of Post Office
products and services we sell
is sufficient for my business
48% 19%
25%
which we lose customers who aren't
willing to wait longer time scales.
Postmasters all over have prioritised
other businesses due to this, as they
need better income to help support
them. This is why the post office is
Postmasters receive i losing most it’s customers to online
appropriate remuneration 69% 18% 17% 14% or other revenues.
for the products and services
they deliver
1-Strongly disagree m2 © 3 m4-Neutral m5 m6 m7-Strongly agree
Question: D1 Thinking firstly about the commercial realities of running your business.
Bae (2762) N.B. Top and bottom boxes are to the nearest decimal place.
POL-BSFF-WITN-015-0009992_0433
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2.1T systems and processes — considerable
dissatisfaction c. half are less than satisfied on every
measure ‘Improving Horizon/ PayStation ,
Currently very outdated, Needs a full
upgrade, no point just a few colour
Satisfaction with interactions with Post Office and the systems and processes in place changes , also again why can't there
Post Office pri : . be a till button so I can serve my
counter is frustrating. PayStation is
CCI 9% 7% 3% not viable as it takes far too long
processing , can't this be Linked to
The Helpdesk cash management 22% er eC 10% I the Computer?”
Paystation x
UC 7% 7% i ; :
prs eae ‘I believe that horizon could be a lot
there are easy quick wins.’
Stock ordering 17%
Branch hub 17% I
The Helpdesk branch support (NBSC) ERZHANGHERR n2296
™1- Strongly dissatisfied m2 m3 “4 Neither @5 m6 m7-Strongly satisfied
Question: D2 This time thinking about your interactions with Post Office and the systems and processes in place to enable these.
Base (1767)
POL-BSFF-WITN-015-0009992_0434
3. Communication. Plenty of opportunity to improve
quality of interactions
Rating communication with...
Total % Total %
Unhelpful helpful
14% p34 8% 22%
The Helpdesk (NBSC) 64%
Interactions with Post Office
operations e.g. ordering cash,
ordering stock etc
zo. BB ox I ax
Important news/ announcements 15% % 28%
from Post Office
General communications from
centre of the business e.g.,
comms from senior management
45%
a
20s EE
1 - Extremely unhelpful @2 © 3 = 4Neither m5 m6 m7 - Extremely helpful
Question: D3a to d. Please think about the different types of communications/ interaction Postmasters
have with Post Office, please rate each on the following:
Base (1767) N.B. Top and bottom boxes are to the nearest decimal place.
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‘I just feel in the last 12 years I've
been a Postmaster, I've never felt
important. You ring helpdesk they've
previously not been helpful and cash
management are very rude.’
‘I took over my Post Office 6 years
ago..., I could not speak to anyone
at Post Office about this as there are
no published numbers. I contacted
the help desk many times and all
they could do was send an email on
my behalf... This should never
happen in this day and age. I now
have an Area Manager, but I feel
she comes up against the same
issues... Again, we are unable to
speak with people. Communication
is key and fast responses in a world
of instant service - my relationship
with Post Office is fine until Ineed
help!’
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(POST. Next steps
OFFICE
X5 group sharing sessions
with PMRs x6 group
sessions with key
stakeholders
* Quadrangle to present key findings to
PMRs and stakeholders and priorities
(c.15 mins)
Then host a group discussion on how
we might begin to address the issues
Delivers...
Rapid sharing of survey findings to
PMRs
Sense checks the key areas for
improvement
Enlists PMRs help
Prioritise working
session
* Quadrangle and PO team sift
PMR suggestions
Come to an understanding of
what is and isn’t possible e.g.
weed out suggestions that are
inoperable/ commercially inviable
Feed in our own ideas for
improvement
Identify 5-6 priority initiatives we
want to take into #3
In train: first sharing sessions happening w/cI 5th Feb
gmentation delivered in tandem
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x3 co-creation workshops
Sessions organised around top 3
priority areas (remuneration, IT/systems
and communications)
Each session driven by top 2 emerging
ideas/ solutions
Attendees to include PMRs, key people
from Post Office and wider
stakeholders
Delivers...
Execution plan to address top priority
areas
Commitments to change (PMRs and
Post Office)
Finally, keeping us honest —a plan for
monitoring progress
Scheduled for w/c 1** March
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End of presentation
POL-BSFF-WITN-015-0009992_0438
Proposal for GE Direct Reports — Stands up on 13 Nov 2020
(Announced on 16 Sep 2020)
Commercial Strategy
and Planning Director
Chrysanthy Pispinis
Ed Dutton
interim)
Product Portfolio
Director ~ Telco
Meredith Sharples
Customer Experience
Director
Henk van Hulle
(interim)
Network Strategy and
Delivery Director
Martin Edwards
Strategic
Partnerships Director
Katie Seoretan (joining)
Optimisation Director
Nick Beal
Head of SPO
Saira Burwood
Strategy &
Transformation
Director
Tim Meinnes (joining)
Franchise Partnering
Director
I Andy Kingham
Service and Support
Optimisation Director I
I Tim Perkins
Postmaster
Effectiveness
I Director I
Tracy Marshall I
Postmaster Director I
] ‘Vacancy
I
I
Head of DMB
‘Steve Blampied
SUBJECT TO ONGOING CONSULTATION
Service Managemen an I
Enterprise IT Director
Gary Walker
Branch and Digital
Engineering Director
Ben Cooke
Chief Information
Security Officer
Tony Jowett
IT Cloud Services
Director
Rob Wilkins
Finance Director I
Kathryn Sherratt
Finance Director
Cathy Mayor
Tax, Treasury &
Working Capital
incor
Brian Kelly
Financial Controller ]
Tom Lee
Head of Financial
Performance and
Analysis
‘Max Jacobi
Mi & Anal
sates
Ruk Shah
Procurement Director
Barbara Brannon
Head of Risk
Mark Baldock
Head of Internal Audit
Johann Appel
Head of Health and
Safety
Martin Hoperoft
‘Supply Chain Director
Russell Hancock
People Director ~
Business Partners
Steve OReilly
Talent, Diversity &
Inclusion Director
Juliet Lang
People Director ~
Employee Relations
Lee Kelly
Reward and Pensions
Director
Maxine Cross
Shared
Pitan Director
Helen Rhodes
Organisational
Design Director
Daisie Jope
Group Legal Director
Sarah Gray
Group Compliance
"brector
Jonathan Hill
Group Company
Secretary
Veronica Branton
LCG Operations
Director
Mark Underwood
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Historical Matters BU !
Director
Declan Salter
I Historical Matters I
and Policy Director. , Operations Director _
Patrick Bourke I Jacki Adams (joining)
Integrated !
Government Affairs
Head of Legal
Roderic Williams I
oT I Horizon and HM IT
‘Simon Marshall 1 simon oldnall
i ees eee
Head of
Parliamentary
Relations
Alice Cookson
Head of Media
Relations 1
Karim Aziz
Responsisity and
sibility an‘
Social Impact
Mark Cazaly
Head of Postmaster
‘Communications
Rina Patel
Head of Colleague
Communications
Charlotte Stewart
@.
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® Tim Parker
Chairman
Post Office Limited
Finsbury Dials
20 Finsbury Street
London
EC2Y 9AQ
Paul Scully MP
Minister for Small Business, Consumers & Labour Markets
Department for Business, Energy & Industrial Strategy
1 Victoria Street
London
SW1H OET
28 August 2020
Dear Paul,
Four Year Plan and Funding Request
Post Office Limited (POL) has submitted its Four Year Plan and Funding
The Directors of POL support the Funding Request to HM Treasury for
underpinning Plan.
The Four Year Plan
The Board has reviewed eight iterations of the Plan or financial forecasts over the past
eight months and the Funding Request that will support its delivery. The trading
position has been difficult and volatile because of Covid-19 but at least 90% of the
Post Office network remained open during the lockdown period. Uncertainties remain,
particularly in the travel market, but POL has cemented its position in providing
access to cash and this service and mails are central to our Four Year Plan, as is the
flexibility in format and propositions required for our commercial sustainability.
As a Board, we have discussed the Plan and Funding Request, questioned, tested,
provided challenge on certain areas and assumptions and have been able to speak to
key individuals separately, as well as at Board meetings. The Funding Request
includes several strategic developments, such as the Network Strategy, and spending
requirements that are critical for the business, such as IT system development.
Directors have participated in briefing sessions and held strategy sessions on all of the
main areas for which funding is sought. Additionally, BEIS commissioned KPMG to
provide a report on the Four Year Plan; while this review is for UKGI it has been
helpful for the Board in providing an additional source of independent scrutiny and
testing.
‘Tom Cooper, Shareholder Representative and Non-Executive Director of POL, has been fully
involved in the Board’s discussions but recused himself from the board’s decision to propose this
Four Year Plan and Funding Request to BEIS because he will continue to represent the
Shareholder with any questions or changes required to the Plan post submission.
Post Office Limited is registered in England and Wales. Registered No. 2154540. _
Registered Otfce Finsbury Dials, 20 Finsbury Street, London, EC2Y 9AQ PostOffice.co.uk
Post Office and the Post Office logo are registered trade marks of Post Office Limited . .
Confidential
POL-BSFF-WITN-015-0009992_0440
The POL Board believes the Four Year Plan provides a good picture of our central
trading assumptions, the measures we can take to reduce our cost base and the
funding needed to develop as a commercially sustainable business. We support the
key drivers which are to focus on Mails and Banking, which provide much of our
revenue, and 80% of Postmasters’; to right-size the business and its cost base to
reflect this focus on our core; to continue to deliver the SGEIs and the social benefits
these bring; to make running a Post Office an attractive proposition, re-casting our
relationship with Postmasters through bringing in their ideas and providing the
support and formats that can work for the entrepreneurial and provide fair
recompense to those offering a service to their community.
Some benefits will not be realised until after the funding period and many projects are
interlinked, for example the Network Strategy is supported by IT developments. Our
submission includes that longer time horizon of benefits. There are also proposals that
need to be developed further and issues which we as a board will monitor:
« the proposals for the Network Strategy and the Fujitsu/ SPM work need to be
developed further and the business cases will need to approved by the Board and
the Shareholder before any funds are released
« the non-staff cost base remains high with many fixed costs during this funding
period. The executive is focussed on right-sizing these costs and the Board will
oversee progress and maintain focus in this area, acting where we can now, for
example, when renegotiating contracts
« there are uncertainties about the shape of the post-Covid retail market and over a
four year period market conditions will change so Post Office will need to adapt as
required. Our governance arrangements to support this are described below.
Governance Arrangements
Our investment spend processes and governance have strengthened during the year
and remain a focus for the Board with a report, including the progress of key projects,
provided for each scheduled meeting. These reports are also shared and discussed
with the Shareholder with approvals sought wherever required. POL adopted new
Articles of Association and agreed a Framework Document with the Shareholder in
April 2020. This has given greater structure to our governance arrangements and we
now have a regular pattern of quarterly accountability meetings with BEIS. That
structure supports how we would approach seeking Shareholder input and obtaining
approval where proposals within the Funding Plan need further development and a
supporting business case prior to the release of funding.
At executive level, POL’s Investment Committee reviews, tests and approves business
cases with project progress reported to it and with further tranches of funding
approved by it. Spend of ‘or above must be approved by the Board and any
matter of strategic importance would also be discussed by the Board. Shareholder
approval is required for sums of i ‘or more and for some other relevant
transactions. ; *
Tom Cooper, the Shareholder representative, is also a Non-Executive Director of POL,
So participates in Board discussions and he and his UKGI Team meet with the POL
Finance and Change Teams regularly. This regular contact together with meetings
with BEIS, including the quarterly accountability meetings, provide both informal and
formal mechanisms for obtaining input and approvals.
Confidential
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Value for Money
We believe the Four Year Plan and the Funding Request that supports it represents
Value for Money to the taxpayer. It is designed to maintain access to vital services for
many individuals who are underserved; this may be because they do not have a bank
account or a bank branch in their neighbourhood, they live in a rural area, they are
not online or have more trust in a face-to-face service. It is also aims to develop the
commercial sustainability of the business so that the cost of serving the underserved
can lessen over time. The top priorities of the Spending Review are to strengthen the
UK's economic recovery from COVID-19 by prioritising jobs and skills and levelling up
economic opportunity across all nations and regions of the country by investing in
infrastructure, innovation and people. The Post Office Plan supports both. We aim to
grow our network to over 12,000 branches and we provide services to individuals,
small businesses and start-ups nationwide which supports jobs and levelling up
because that service is universal.
The plan includes our core assumptions and proposals; inevitably some will change
but we have tested a number of scenarios and where less funding is secured fewer
benefits can be delivered, while the costs are deferred rather than eliminated.
Naturally, we appreciate that Government resources are severely stretched so we
have included all the self-help measures we could identify. That includes
redundancies for some Post Office employees and these redundancies bring costs to
the Plan. However, our plan to expand the Post Office network to over 12,000
branches and the service Post Office’s provide to small businesses support
employment.
In sum:
e the POL Board believes the Four Year Plan provides a good picture of our central
trading assumptions, the measures we can take to reduce our cost base and the
funding needed to develop as a commercially sustainable business while
maintaining delivery of the SG!
e the POL Board supports the § Funding Request to HM Treasury that
facilitates the delivery of the Four Year Plan
« the Board had reviewed, tested and challenged the Plan’s assumptions and the
Funding Request over a number of months and our submission highlights
Proposals which require further development
e there are uncertainties about the shape of the post-Covid retail market and over a
four year period market conditions will change so Post Office will need to adapt its
plans as required. The governance arrangements for obtaining Board and
Shareholder input and approval for changes are robust
Confidential
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« we believe the Plan represents Value for Money as it is designed to allow Post
Office to continue serving the underserved while lessening the cost of this to the
taxpayer over time by increasing branch profitability and making it more
attractive to be a Postmaster.
Tim Parker
Chairman.
Confidential
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POST OFFICE LIMITED
UKGI REPORT
Title: Response to 11% August Letter Date: 28" August 2020
Author(s): Dan Zinner & Max Jacobi Sponsor(s): Nick Read & Al Cameron
Context
This document forms the Post Office Limited (POL) response to a letter from UKGI dated 11
August. The letter highlighted a number of areas where UKGI, BEIS, HMT and Minister Scully
would like us to consider potential changes to the current draft four-year plan reviewed with
the POL Board on 28 July, with a view to reducing the scale and structure of our funding request.
Responses
In responding to the discussion points raised by UKGI it should be noted that the short
timescales involved mean that the responses are necessarily indicative, and would require
further work to confirm in an updated detailed submission, alongside requiring Board review
and ratification. We are, however, keen to support the current funding processes and
Government agenda in whatever way we can, and have addressed each of your points below.
In responding to this point we have factored in the request that we should include supporting
litigation legal spend (but not settlement costs) which we currently estimate will cost around
over the funding period. Adding this to our current submission of ins would therefore
yield an overall funding requirement of ii i ~
Whilst our original submission centred on an Equity injection, we have also discussed allocating
this between subsidy, grant, equity and loan mechanisms, with a potential scenario as follows:
we not have a suitable cash surplus).
This being the case there are two key areas worth further discussion?
e How would such a loan potentially work?
e What are the risks and implications around Net Liabilities if a different capital structure
was used?
Confidential
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How could such a loan work?
For discussion purposes we have put forward as a loan amount and agreement on any
upfront amount will be critical, however, we also recognise that the amount of funds that could
be returned will be dependent on our business performance and any sale of business assets.
nis therefore means the loan could be hi
“writs higher loan 7
may be more appropriate as it would protect both Security Headroom and Net Assets and
ensure affordability for POL.
There are many options for how to structure such a loan vehicle, but one option could be:
AJ
AJ
Tl
rr
<
>
z
—_I
Another further loan option would be a longer term loan, with repayments commencing at the
end of the funding period and being repaid over tiperiod from that point (with interest
charged in line with previous option), with this being a simpler and more predictable
arrangement for all parties.
Risks and Implications around Net Liabilities
As discussed in the paper discussed at the 28" July Board, if a material cash injection over the
period was made this would likely avoid POL dropping in to a Net Liability position. Funding
through subsidy and investment grant with only a relatively small loan would still improve our
Net Asset position over the funding cycle.
Being in a net liability position matters for several reasons, and our initial view of the
implications of moving to net liabilities is below, however, further confirmation work is ongoing
with POL legal to confirm all elements:
Itisa fegal indicator of insolvency of which we have to n
Confidential
POL-BSFF-WITN-015-0009992_0445
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IRRELEVANT
IRRELEVANT
RELEVANT jin this way this
would have significant implications for the usiness.
« A secondary consideration is that any issues triggered with
implications with other partner agreements.
e There are also commercial considerations - a deteriorating Net Asset position could
adversely impact.sunplier and cli legoti ing potentially I needing to agree
I IRRELEVANT and; IRRELEVANT
¢ A practical Ww y te id a Géfaunt; anid the associated inipacts Would” therefore be to
introduce more equity into the capital structure either by means of new equity or via a
debt for equity swap.
RELEVANT! COUld have
Alongside Net Assets we have also flagged the need to reform the current Security Headroom
calculations and agree a sensible minimum level to work to that provides us an appropriate
buffer against natural fluctuations. We have provisionally signalled £200m as a sensible level
to aim for once we have updated the calculation, but welcome further debate on this.
IRRELEVANT
In reviewing the savings already being delivered in the current plan it is assumed that these
savings are able to be funded, which may not be possible should any investments be
deprioritised (or delayed) as this would have a flow through impact on cost savings.
Not all our investments are designed to reduce costs. Some are commercial or technology in
nature and increase our cost base in support of gained revenues or Network improvements.
Due to the scale and nature of our business and the markets we operate in, we also have a
material amount of regulatory, compliance and maintenance spend, which whilst all grouped
as “investment” will not increase revenues or decrease costs:
Investment Area (excluding PGLO) Spend (£m)
Cost Reductions (e.g. people costs) i Hl
Commercial Network & Channel Investment H i
Commercial Product Investment i i
Maintenance and End of Life - Technology investments i
Maintenance and Regulatory - Other i
Total H
Confidential
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Alongside these investments we have submitted the following annual shifts in non-staff costs
between current rates and 23/24:
eduction in Identity costs as we transition away from AEI machines to tablets.
oi _jreduction in Supply Chain through various Cash Transformation initiatives.
. ver the cycle, driven by
it of dual running costs for the SPM Horizon Replacement system,
o I "tof Branch Hub run costs, which brings staff cost savings higher than per
camgOf FUN Costs for PCI solution,
_of contracted inflationary increases,
eduction in HR costs, predominantly around insurance and central benefits,
lof reduced Property costs as we rationalise our estate and renegotiate contracts,
lof increased costs from the supply and distribution of CV-19 related PPE,
10%) increase in marketing spend as we invest in our Brand and core products,
(around 10%) of annual savings over the period. This combines with the} fn
reductions listed above to a 14% gross reduction over the period (excluding the ‘business
driven increases from CIO, Insurance and Marketing).
Some of these investment plans are further along in the planning and execution than others,
but even if funding is allocated, no spend will be conducted without each investment going
through the aareed governance processes, including Board approval for any total investment
spend over !****"and agreement of benefits.
Looking to what further cost savings might be targeted in the next funding period beyond those
already submitted, some options are discussed below:
POCa
The main term of our POCa contract with DWP expires in “I but due to delays in
conversion activity due to Covid19 and lack of clarity on the type of exit DWP wish to pursue,
or their timescales to deliver, the 4YP assumes f extension, at a cost of !
impact of this could potentially be reduced if Government were to actively support the mass
migration approach, forcing mainstream banks to take on remaining POCa customers. While
challenging to deliver, this option offers us the! IRRELEVANT. i
If Government can fully support this approach’ wig 1e
of thi
{ievevan}
Staff Costs Savings
POL Board approved in Jul (0 enable the reduction of c. 110 non-DMB FTE's (net) in
September 2020. This requést iicluded capability builds within technology to enable further
and future FTE reductions. Further FTE reductions are anticipated in late FY20/21 to achieve a
total c. 250 FTE reduction for all of FY2021 and will be presented to POL Board in the Autumn.
at fimretevanr
Confidential
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We expect more FTE’s can be removed during FY 21/22 after business process redesign and
implementation of technology changes have occurred. This is forecast to cost : i i
year saving Of [inssever! These costs include severance, technology
enablement and programme delivery.
We continue to explore ways to moderate the quantum and timing of spend. These include
options around reducing severance pay while providing adequate incentives for colleagues to
exit the organisation voluntarily whilst still maintaining industrial relations. Options could
include:
We could reduce
. This reduces to
* Reduce}
Public Sector Severance Pay cap provided for within Enterprise Act
implementing this provision prior to the September 2020 exits is up
ost reduction if applied for FY 21/22.
Risks associated of changing severance terms including Unions taking action to protect their
members and colleagues less likely to leave on voluntary redundancy given the economy post
Covid 19. This could lead to a compulsory redundancy situation which has not occurred in POL
over the last 5 years and there would be a risk of legal challenge costs in response, diminishing
any savings as we would be in breach of our employment contract and subject to employment
claims.
Other Non-Staff Cost Options
The Board and KPMG have both recognised that given the relationships with revenue and the
contracts in place, further reducing non staff costs will take time and money. We are setting
up a programme to progress this as discussed at the Board. We have also reduced non staff
costs in the outer year by a further !m challenge. To do more would be dangerous as we
don’t not have the plan or the investment spend necessary to deliver it.
It is also worth highlighting on non-staff costs, that the vast majority of our non-staff cost base
(circa 85%) support revenue and service delivery (as opposed to central management
overhead), and so further material reductions in this area will likely require changes to which
products we deliver and how we deliver those.
A few areas we have already explored include:
ie;
© cca Feduction in Telephony marketing, with a corresponding:
. I CIO saving by changing Postmaster contracts to requir
at their sites;
e« Reduction in level of Security provided to agents (including safes), currently costing
m to provide internet
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We would also see a corresponding drop in costs (and revenues) should we divest ourselves of
any business (e.g. Telephony, Insurance).
We have been reviewing the GLO cost submission ffir
includes jr of programme costs (
discussions with POL Board.
IF (at the time of this letter) which
over the next funding cycle) given further
We have been exploring the following areas for possible reductions:
« The assumptions to consider economies of scale and the utilisation of previous work
e Renegotiation of fees with our external legal providers to explore volume discounts,
optimising fixed fee arrangements
e The ability to use a blended approach of differently priced legal providers to optimise
overall cost efficiencies
e Consider the build-up of our internal capability over the longer term.
We are due to return to POL Board and UKGI shortly, however, through further work on the
are currently reducing our legal costs submission over the funding period from
At this point it is probably worth reconfirming that our Network team have always, and will
continue to, consult closely with local communities when looking at options around each DMB
branch to ensure we always meet customer demand with sufficient capacity of Post Office
availability (a mix of locations, counters and services provided).
The term “franchise” refers to the previous default (and more expensive) scenario where we
create a new, large Main (or equivalent) franchise site nearby. The term “closure” refers to a
scenario where we “close” a DMB without opening a new large Main (or equivalent) franchised
site nearby. We would only suggest a “closure” if the current customer demand could be met
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through either 1) the existing nearby Post Office locations; 2) an increase in capacity current
Post Office locations (e.g. adding more counters to a Local to become a Local Plus) or; 3) to
add additional Local locations to meet customer demand. There are scenarios where we use a
combination of option 2) and 3). It should be noted that when we suggest a “closure” we are
often helping to sustain local franchise businesses by increasing their footfall and remuneration,
thus ensuring sustainability of these franchise branches.
For example, in below) we opened two new Locals near to the DMB, one in a
convenience store and one in a pharmacy, a few months before closing the DMB which was
closed in September 2018. Within 3 months the customer sessions at these two Locals
increased by 600% and 300%. Overall, the migration level is 99%, meaning that the two Locals
combined have picked-up nearly all of the business that was previously undertaken in the DMB
while at the same time helping to drive footfall and increase business at these 2 local shops.
Greywell Loca: (Pharmacy)
Customer sessionsincreasedfrom « @
250 before the DMB was closed to
800 a few months afterwards
Park Parade Local (Convenience
store):
Customer sessions increased from
WS 73 before the DMB was closed to
= 450 a few months afterwards
Recent transaction data, post Covid-19, suggest an acceleration of the customer shift away
from the DMB format (i.e., a large Main). As of FY2021, 74% of our DMBs are now
unprofitable. When comparing DMBs to the rest of the estate, Q1 FY1920 (Pre-CV19) v. Q1
FY2021 (Post-CV19), we can see that DMBs have been impacted more severely by Covid than
our franchised post I S and as a result we now estimate that the 86 loss-making DMBs cost
POL and additional ! in lost profit) annually.
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Profitability of the 116 DMBs Pre versus Post Lockdown
DMB branches’ profitability: Pre-Covid Lockdown DMB branches’ profitability: Post-Covid Lockdown
Pre-Covid 42 DMBs are profitable (above the line) and 74 ore unprofitable
Post-Covid only 30 DMBs are profitable and 86 are unprofitable
We are concerned that the DMB format itself has become even more untenable. When we
compare the performance of DMBs to Large Mains (the most similar franchise format
comparator) we see that DMBs have performed less well. Weekly Customer sessions in the 116
DMBs have on average dropped 52% YoY compared to just 35% on average for Large Main
franchise branches and income in the 116 DMBs was down 74% YoY versus 63% on average
for Large Mains. We have yet to investigate this on a profitability level, yet this reinforces our
understanding that the DMB format is less sustainable than an appropriately located large Main
format. However, what is very clear is that both large formats, DMBs and Large Mains, are
under-preforming compared to smaller formats, which reinforces customer behaviour shifts in
the market. We will investigate this further as part of our overall Network Strategy. Please
note in the table below we have used average income and average customer sessions per
month for open branches, which may fluctuate during the period, but have been averaged out
pre- and post-lockdown.
DMBs Large Mains Rest of Mains Local
Activity
Average Income per
branch per month +
(hy) I
Average customer I
sessions per branch}
per month Hl
PreLockdown: Ap ~ uy 2019, Pseiak
Large Mains or thote over 2000 cate sessions and therefre ince ex DMBé that ore now ech.
When investigating further, we can see that High and Medium density areas (where DMBs are
located) have been worse impacted by Covid than Low Density areas, as customers visited post
offices near to their homes (in rural and sub-urban areas) rather than their work (in urban
areas).
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In areas
(ie. High Street)
% change in Income pre 76% (EERE -04% 77% YEE -62% na (EEE -56x
versus post Covid
% change in customer
sessions pre versus post Covid 56% MEE -37% 54% (ZEME -31% wa GE -is%
With regards to potential program cost savings, we have re-evaluated two alternative options
— one lower at lower cost and one delivering full “All Franchise” replacement. Scenario 2 is what
we have currently submitted for funding, with scenarios 1 and 3 being the alternatives. Cross-
cutting these two options, we have also evaluated the impact of reducing redundancy
payments:
Cost of option Cost of option
Full Benefit ifonly pay if only pay
Option Overview Coe I Pee Poa i! Other implications
i Paying Statutory redundancy or Market Rate
Assumes 75 exits in 20/21 and 48 exits in} {redundancy in lieu of current POL terms, risk of
21/22 with 2 year full resource i I} legal challenge by Unions due to agreed Managing
; the Surplus Framework (MTSF).
Alll Franchise
H I} Whilst we would try to focus closures on areas
i where there is sufficient capacity in the nearby
branches, some customers may be impacted.
Assumes 58 closures and 58 franchise/
Mi odor § icmerwnecvomenna [RRELEVANT
Sac and marth Faucinee zz ‘Amending redundancy terms could ignite Industrial
I Action across the business as this would impact
{more than the DMB colleagues.
Assumes 42 closures in January and 6 { I Closing DMBs with no replacement PO provision
BEE coonths resource in 21/22.This pipeline is} fw
(azinpraonyy wlkely 0 be delvered as announcements > Ganares gulicane Pokies holes
‘would be planned for Oct and may not be!
+ Reduce Network Numbers
(74 in FY21122) sible until Jan 202 with delivery in QU
+ Compromise customer provision
It is our understanding that in a redundancy situation, POL cannot pay less than the T&Cs as
the MtSF Collective Agreement is contractual. We could seek to change the existing terms
and collective agreement, but this would be subject to consultation with both colleagues and
Unions. We have been advised that if we did not pay the T&Cs it could result in a group
litigation, as not paying MtSF terms would impact almost all POL employees, not just DMB
colleagues. We have explored TUPE’ing our DMB colleagues to our franchise partners, but
our franchise partners have not taken us up on this offer.
IRRELEVANT
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The POL Network Strategy is intended to deliver the political & social agenda whilst also
transitioning the Post Office to commercial sustainability:
# AREA KEY OBJECTIVES FOR OUR NETWORK STRATEGY
Maintain a network of at least 11,500
Meet our 6 network access criteria, especially rural communities
Sustainability POL to be profitable, sustainable and growing
Social Obligations Meet our social obligations to Postmasters and local communities
We have developed
ickage of initiatives that we believe will deliver on these diverse
objectives requiring {i in funding, which we believe represents a conservative approach to
the transition plan suj ng the Post Office Network Strategy. This plan is addressing a key
step in transitioning Post Office to a more commercially sustainable network by ameliorating
our historical format decisions which served the Post Office, and our Shareholder, for a previous
point in time with different customer behaviours and postmaster needs (i.e., large formats with
many counter positions intending to serve many, long transactions as the “front office of
Government”).
Activity Description Rationale
‘+ Our geo-analysis indicates that there are 800 locations across the UK
Wigs peuldirobalreaien realty ase (mainly in urban areas) where we currently don't have a post office, but
customer demand dictates that we need one.
locations whitespace locations S .
+ Needed to provide headroom for closures.
i Deploy into Deploy a mix of Essentials (1.360). Basics and
+ Investment in these Community Hubs will hep to off-set other activites,
that might reduce service in rural areas, such 38 closures of some rural
businesses (Co-ops. local pharmacies. pubs.etc). branches. This will ensure that we are investing in sustainable rural locations
‘We will seek to create vibrant ‘Community Hubs’
Rural areas with a post office at ts heart in sustainable rural 150
+ These 500 branches provide limited social value (\e. they serve very few
customers and there are alternative post offices nearby) and they are
commercial unvable and unsustainable
+ €36m ofthis wil support $0 Hard to Place branches.
ee 300 are Legacy branches (50 Hard to Place and
nares 250 Community) and 200 are Outreaches.
+ Every year around 380 post offices close and need to be replaced with new
operators.
+ Whilst some churn i avoidable, much churn is due to retirement or fraud
and we need to replace these branches in order to maintain service in
those communes
next 3 years They wil be largely replaced with 700
location BAU churn Essentials
Replace ~700 Right We expect to sce ~1.100+ BAU churn over the
Format Right
estment will yield an annual benefit to POL at maturity offi t; Over the course
funding period the return is negative in absolute terms but is as expected as
investments in fixing the current network to meet changed customer and retailer host needs
longer-term in nature and support the long term goal of post office sustainability. The
of Network investments must also be reviewed relative to the c. already spent in the
Post Office Network Transformation and a significant portion of this investment spend is the
finality of that programme.
While the requirement to deliver network numbers (11,500) creates an element of drag on the
return on investment within the period and slows our ability quickly transition to a commercial
network, we understand the need and have planned as such. This short-term investment return
challenge is contrasted with the underlying and on-going cost of running an underperforming
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network, which we estimate to be i mreeva
and the cost of churn as shown below.
(Directly attributable) Cost of Churn to POL per year (£k) Other costs
p/a and includes the cost of supporting Outreaches
Cost to POL pla (Ek) + Does not include cost -
+ Cash losses: Losses from
branches that are shut due
to suspension / fraud
+ Brand impact of
closures: inconvenience
to customers and
communities. Difficult to
quantify, but clearly has an
impact on sales and our
brand equity in those
Cet veo i ether
couvseeimuanee? IRRELEVANT
Shand
(Ouvreach branches fixed agents rem
“ + Senior leadership time:
Closures take up a large
amount of Management
time firefighting,
responding to MP's et.
Project Management of replacement
Cost of Churn pla
As with all investment plans, we acknowledge the requirement for a fully detailed business case
to be approved before spend can occur, and that a funding envelope is being agreed at this
point. In addi
is.relvina-an:
Options to accelerate our transition to a fully commercially sustainable network are currently
being developed and evaluated. Beyond this funding request there remains at least
locations which we would ideally like to exit or change the format deployed in the location to
create a more profitable Post Office and improve convenience for customers. This represents a
ial opportunity to reduce agent pay by possibly {i ja yet would also require at least
Inasuavae iof additional investment. These options are not included in our funding request or this
nse nor have they been detailed out (this is high level at this stage).
In addition, there will be several locations where will have the potential to exit existing outreach
branches while continuing to meet access criteria. Transition options are currently being
developed and evaluated to accelerate the transition of these branches. The key elements of
these options which are not in the existing funding request include an accelerated conversion
of legacy to new formats and an accelerated conversion of “Mains” to new formats. These
alternatives have the potential to provide better outcomes for customers and for postmasters
if funding can be secured, however, we have put forward what we believe is the right mix of
transition, profitability, customer and postmaster benefit as well as funding request.
The funding submission for our Network Strategy is a package of inextricably linked measures
that, when combined, create a virtuous circle of network improvement. Unwinding one portion
of it may have knock on effects in other areas. If we were not to pro-actively close the non-
profitable branches there may not be the customer demand available to open the new profitable
branches for postmasters and POL, (i.e., if we tried to open a branch without closing a non-
preforming branch, we would dilute profitability of both branches, by spreading the same
amount of customers over an increased number of branches).
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We understand the significant pressures on the public purse and so have set-out 6 high-level
options below to reduce this investment cost, whilst also setting-out the implications of
reduced funding, as reducing the investment will reduce the financial return and will impact
our ability to deliver other commercial, social and political objectives. We have not included
an option to reduce the investment in “community hubs” (i Option 2) for rural areas
given their For
the options below, please refer to the first slide in this section which splits the
investment into 4 investment activities. The options correspond to these 4 areas.
Impact of re investment on:
‘Cumulative ‘Access Postmast Defend
Alcermative i branches benefit over ,ESITDAS Network Criceria er & market &
ee delivered — funding Dene (Pia) Namie, rural political attract
WRARSe impact HEE No impact Ml Poste Impact
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Option 1: Dilution of urban (whitespace) penetration
e Instead of deploying new post office formats in 1,800 whitespace locations we would
instead just do 900 locations (but noting that we would still have to invest in about 200
more outreaches to maintain network numbers above 11,500).
Benefits Impacts with this approach:
EBITDAS over the funding period and
reduction in EBITDAS at maturity.
lf we reduce Whitespace to just 900 then we will have to
cost-in 200 Outreach to ensure that network numbers
remain above 11,500,
If we reduc
reduced to
periods.
{IRRELEVAN'
itespace to 1,350, then the investment is
=} but imulative benefit over funding
1d EBITDAS at maturity is
Option 3a: No Proactive Closures
Challenges with this approach:
+ Network Numbers: Deploying the 1,800 post office formats in whitespace
locations helps to offset the branches that we plan on closing, so that our network
numbers remain above I 1,500. Reducing the amount of whitespace to 900 creates a
high risk to us maintaininga network above I 1,500 branches through the funding
period and substantially inhibits our ability to close sub-optimal branches as we will
have no meaningful buffer in network scale,
+ Defend market share and attract clients: Our competitors have already
penetrated these (mainly urban) whitespace locations and we risk falling significantly
behind, especially in key future growth markets such as PUDO.
Deals with Multiples: We want to develop strategic partnerships with great,
sustainable Multiples, such as the Co-op. Reducing the amount of whitespace
locations will reduce the number of strategic partnerships that we can deliver.
+ Meet customer demand: The whitespace locations are primarily in urban areas.
If we cannot deliver here we risk not being able to meet the needs of the next
generation of convenience-focused, younger, urban-based customers
e« Our plan is to close ~500 branches that provide little social value to customers and
communities and are unprofitable (with no path to profitability) for POL.
e 300 are branches (including 50 Hard to Place branches) and 200 are Outreaches.
e We could not proactively close any of these branches
Benefits Impacts with this approach:
our fundingask. This
ly with ‘nil benefitin the alternative
BITDAS at maturity. By having no
proactive management of the network itis highly likely
that we will need to have an increased number of reactive
‘opening s to meet access criteria, of circa 250 branches.
Without doing this we are unlikely to access all of the
whitespace opportunities.
Confidential
Challenges with this approach:
* Better for Postmasters: This will enable many long-serving PMs, trapped in Hard
to Place branches to leave the network with dignity. It also allows us to exit
locations where there is no longer the population density to sustain a post office.
* Delay: The only branches that we would close are those that provide very little
social or commercial value AND have no chance of ever becoming commercially
(socially) viable. So by not closing these branches now, all we are doing is kicking
the can down the road, whilst continuing to provide sub-optimal services to
customers and communities and dragging on POL's P&L.
Starling Risks: Some of the ~500 branches that we would want to close are at
higher risk of future Starling claims.
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Option 3b: Pro-active closures without NT payments or Option 3c: Even more
aggressive closures without compensation
e In these scenarios we could push ahead with our (recommended) plans to close ~500
under-performing branches, but we would not make any NT payments (this is the part
we don’t recommend)
Benefits impacts : Challenges with this approach:
+ Financial Impact: Whilst Option 3b:
the alternative ask is + Political noise: This could create a significant amount of political noise from the Postmasters themselves, their
financially favourable in this Jjocai communities and local MPs.
scenario, the political,
stakeholder and legal + Legal Challenge: itis unclear at this stage, but there is the potential that this could lead to a legal challenge.
concerns make this + Supporting Postmasters: This extremely aggressive approach would contradictall the work we are undertaking
scenario unviable. to build stronger partnerships with postmasters.
Option 3c would have all of the downsides set-out above for 4 with a higher intensity and scale.
Option 3d: Additional closures with compensation
« This scenario would see us increase forced closures significantly beyond the 500 we
have recommended to 1000
Benefits impacts with this approach: Challenges with this approach:
+ Financial Impact: Again, the financial outcome is favourablein * Network numbers: Closing branches on this scale will reduce our network
the Alternative ask, but the political, stakeholder and legal numbers and possibly our access criteria.
concerns make this scenario unviable. * Increased political noise: Closing 500 branches will be difficult, but closing
* Cost: Closing branches is not cheap. So we have optimised the even more will become very difficult.
level of closures at 500 to maximise the returns
Option 4 No replacement of Churn
e Last year around 350 branches churned. If we followed this approach then we would not
replace any of the branches that churn.
Benefits Impacts with this approach: Challenges with this approach:
+ Churn is unpredictable with no active management of branch replacements
there is a substantial risk we would encounter failures against our access criteria.
Maintaining a network of I 1,500 branches through the funding period would also be
a key risk. Even if access criteria and network numbers are met this could result in
areas of the UK being left under-served.
Financial Impact: Reducing the investmenthas a
significant impact on benefits both during funding period
and at maturity. In the submission the dilution of benefits
in the funding period is due to the loss of income, from
lighter-touch formats compared to locals and mains.
+ Impact on customers and communities: Not replacing branches that churn
would leave some customers and small businesses without access to cash, mails &
government services. There is a particular potential risk to vulnerable customers
and POL meeting it’s equality (PSED) requirements.
Loss of Income: Whilst some of the volume from a
closed branch might migrate to a nearby post office, much
of it would be lost (potentially forever) to the competition
+ Impact on High Streets: Were a major High St retailer to close stores, taking
their post offices with them, if we do not replace these ‘High St’ locations, then this
would be yet another blow to footfall on our High Streets.
New Blood: When we replace churn we look for entrepreneurial hosts that will
help to grow the post office
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Horizon: With POL’s contract with Fujitsu coming to an end within the Spending Review period,
and a long-term solution needed for the network, we agree that you need to progress work on
a future system as a matter of urgency. We also understand that at this stage it is difficult for
POL to set out detailed cost forecasts or timelines for this work. As a result, in your proposal to
BEIS, we would like you to set challenging targets for the business to deliver a solution at a
lower cost or, alternatively, so that the overall funding required is reduced. In addition, while
BEIS will seek budget cover for these costs, it will not approve any funding commitment until
plans are more advanced.
POL is currently running a twin-strand approach to the upcoming Fujitsu contract end. The first
strand seeks to extend the support for Horizon beyond March 2023 pending a new system being
delivered. CAPEX forecast assumes procurement and transition to another Service Integrator
following Fujitsu stating they have no wish to extend beyond their existing term. OPEX forecast
assumes an unfavourable outcome beyond 2023 as a result of a difficult procurement process
with the new supplier seeking a premium for supporting a legacy, ageing and politically difficult
system over a limited duration.
Given the uncertainty, options exist to vary the risk included. If we presume Fujitsu quickly
agree to an extension (by March 2021), on terms similar to the current contract (no cost
increase or changes), the OPEX forecast could be reduced by c.£20m and CAPEX by c.£15m
over a 4 year period. However, Fujitsu must agree to these outcomes and there seems little
appetite for them to do so. As such, Fujitsu could choose to increase the costs and demand
protracted negotiations on terms, and a 30% cost increase is not uncommon elsewhere in
Government for similar scenarios. Using this, an optimistic and pessimistic scenario has been
created.
Scenario 20/21 21/22 22/23 23/24 24/25 TOTAI
Baseline OPEX (£m)[1]
Sasalne ore ey IRRELEVANT
Pessimistic OPEX (Em) i
[1] 21/22 & 22/23 costs are higher in baseline as they are predicated on transition costs for an SI partner, including dual run (I.e. matching CAPEX
assumptions). The optimistic and pessimistic cases only consider F) extension, hence no transition or dual run required.
Of note, to maintain the option of procuring a replacement service if Fujitsu refuse to extend,
POL must, and will, commence preparatory work now. POL will have a better view on the likely
Fujitsu outcome towards the end of 2020 and plan to keep options open until then.
The second strand focusses on delivering a replacement system to replace Horizon - Strategic
Platform Modernisation (SPM). A core principal of SPM is the provision of a lower cost, modern
and flexible IT solution. Over the next 4 months a detailed cost forecast is being developed,
along with a high-level plan. Until this time, the costs are based on professional experience and
external benchmarking (McKinsey) with other development programmes.
An option which could be considered is the timing of SPM. In the event that FJ provide a viable
and acceptable extension, or a new SI partner is found, which allows Horizon to be fully
supported for an extended period, SPM could be delayed. This will result in lost opportunities
around operational efficiencies and technology modernisation but would remove short-term
CAPEX investment. However, until we can be sure about the Fujitsu outcome, or a procurement
for a new SI, we must continue SPM. The alternative that POL must face is a genuine risk that
we cannot secure a viable ongoing support arrangement for Horizon and yet the entirety of the
POL operation remains reliant upon it.
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Notwithstanding the above, if SPM was delayed by a year, there would be potential opex savings
ol /and Capex savings of: n the next funding period (although potentially these would
still occur further out).
IRRELEVANT
Whilst we fully support the need to minimise POL’s funding requirements, we also need to
ensure that the proceeds of any business asset are distributed in a way that is not detrimental
to PO Ltd. The sale of any business asset will reduce our ongoing profit levels, and if we do not
have the ability to reinvest the proceeds to further improve our remaining business then the
sustainability of the overall business will be eroded over time. We must therefore ensure that
we have access to a predictable level of cash during the funding period, however, there is
potential to return any surplus cash that a sale might create above our funding needs.
In the first response section above we have raised the possibility of part of our funding coming
through a loan, which would have the potential to be paid off at the end of the funding cycle.
We would suggest that the loan value not exceed 80% of the net gain cash inflows from the
sale of any business over the funding period. That is to say that such a loan would allow us to
potentially return 80% of the net sale price less lost revenues over the period. For discussion
purposes we have estimated at this stage, but this would need to be agreed through
further cashflow scenario analysis.
We believe such a system allows us to return funds under the right circumstances without
harming the business. By keeping 20% of the net inflows we are also incentivised to maximise
any sale price.
In all cases, any sale of business assets would need to be agreed with UKGI and BEIS to make
sure that any sale prices provided appropriate value to the Government, and did not impede
POL’s ability to deliver its key Government objectives.
On the point of asset financing, there are only a few areas where we are considering material
asset purchases in our plan:
e ATM and SSK purchases are already planned on a lease model to minimise our cash
outlays.
e Branch Technology Replacements - these are currently flagged as around {imcaev
capital purchases, however, we are exploring whether we could contractually lea
ese
through the current Computacenter contract and whether it would financially punitive.
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POST OFFICE LIMITED
UKGI REPORT
Title: Post Office Funding Submission Meeting Date: 28 August 2020
Context
This document provides further detail behind Post Office Ltd’s (POL’s) vision and associated
funding request to UKGI and BEIS as part of the 2020 Government Spending Review. We are
keen to remain in sync with the Government's departmental spending decisions and understand
that there will be further discussion, agreement and formalisation over the coming months. We
have prepared for a three-year period to March 2024. A capital submission is also required for
2024-25 but we are not seeking additional funding.
We submitted an initial discussion draft in February. This requested £150m of network subsidy
and the need for conversations on network rules, security headroom, Postmaster alignment
and the responsibility for future legal outcomes.
CV-19 has reduced in year profitability by c. 90%, further reduced security headroom and
brought branch numbers temporarily below 11,000. The Board approved an updated 4 Year
Plan (4YP) to March 2024 in May which highlighted the impact of CV-19, our inability to continue
to fund the GLO, a period of negative security headroom and net liabilities but also a return to
material trading profit and the potential for future, commercial sustainability. KPMG provided
some assurance over this work for UKGI.
This document has been reviewed and agreed with the Post Office Board in line with the
Chairman’s accompanying letter.
Executive Summary
Post Offices matter more than ever. Our renewed purpose affirms the importance of our UK-
wide network and the people and businesses that rely on us. We have the opportunity to over-
index with customers that matter to the government's agenda, including those in small cities
and towns across the UK.
In this paper, we will deal with the hard numbers and the scale of the services we provide. Less
tangibly but as importantly, we do more than that. The dry bones of locations and transactions
do not fully capture the emotional importance of the services our Postmasters provide. We
appreciate they are not important to the affluent, online, visiting City Centres. But if we are not
in local, provincial, rural and urban deprived communities fear, isolation and deprivation will
increase. If we are not there:
« people fear that their communities are being undermined
e older people worry that without us, withdrawing POCA will stop them accessing their cash
e people without computers and wi-fi are isolated and cannot easily do their business with
Government - no digital identity - or corporates like the energy companies or simply send
a birthday present
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« people in 3,500 communities would have to travel to post a parcel, get cash or pay their
bills. With limited bus networks this means driving, or as many of these people cannot afford
a car, catching lifts, dependent on neighbours.
e for vulnerable older people, we are often their only social interaction. Without us they will
become more isolated with real consequences for their physical and mental health
« we have multiple examples of Postmasters checking on customers and saving their lives,
giving advice on how to avoid scams and providing practical support. Without us, people
will be lonelier and more scared.
The importance of the Post Office was reinforced during the recent CV-19 lockdown. Through
our tireless efforts to support and encourage postmasters to continue serving their
communities, 90% of the physical network remained open. Our support of postmasters was a
direct result of our self-funded remuneration guarantees and the 8.3m items of PPE we
supplied. However, it was not just postmasters, and their own local businesses, which
benefited, our customers did as well:
« During the midst of the CV-19 crisis, our opening hours and our retail location availability
was greater than other retailers such as the banks. In fact, many Postmasters have
given feedback that banks were directly pointing their customers to our branches
« When the banks closed their doors, we reconfigured our operations, within 3 days, to
ensure delivery and continuity cash to vulnerable people through our CashDirect service.
To date we have completed 800 cash deliveries, distributing nearly £200k in pensions
and benefits to isolated customers.
e Asa leader in U.K. cash transportation, we were able to quickly work with other industry
partners to provide backup delivery and cash processing capability. Customers noticed
and we are, for example, now serving more Lloyds customers than we were before
lockdown.
« When the Coronavirus hit hard in local communities, we responded to the sudden closure
of branches by opening a “pop-up” post office to meet local needs. There was widespread
local press coverage, praising Post Office for responding to the situation so quickly in
Yarm, Stockton on Tees, England and Maestag, Bridgend County Borough, Wales.
Now, after the lockdown, PO transactions are recovering faster than other businesses: mails is
operating at higher volumes than before lockdown and ATM usage has remained 10% higher
than the industry average. We achieved this without recourse to additional government funding
while increasing our projected profitability through significant self-help measures that mean we
expect to make a trading profit in 2020/21.
By delivering the national access criteria, Post Offices are the only national, physical retail
network, delivering:
e free, national access to cash
¢ critical support for the digital economy, enabling 40% of parcels sent by consumers and
small businesses, to support economic recovery and the opportunity for ‘levelling up’
e trusted connections to digital services including insurance, identity, telephony and financial
services
access to competitive markets for customers who do not use digital services
the last shop in c. 7,588 rural and urban deprived communities
footfall to support high street and convenience retailers
reduced carbon emissions through more local journeys, contributing to the Government's
ambition to reach net zero carbon emissions by 2050
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This has been made possible by sustained material financial support from Government.
Everyone involved with Post Office recognises how essential that has been and is grateful.
In the first two years of the current funding period we have substantially delivered the promised
returns for that money. We have consistently delivered the access criteria and expect to
continue to do so. We maintained over 11,500 branch locations until CV-19 and are back above
11,200. We have delivered a commercial performance that improved year aft ir and ahead
of expectations until CV-19 hit. Our commercial revenue had improved by.
1 «i, offsetting
further declines in Government revenue of : Our costs have fallen by; and FTEs by
59%.
Not everything has gone according to plan and we are learning lessons:
e Just before the 3 Year Plan (3YP), we implemented SAP Success Factors to support our
people administration. This was poorly developed and implemented. We have substantially
strengthened our controls around change management and a recent Internal Audit
demonstrated improvement.
e We inherited our core IT systems from the Royal Mail Group and under-estimated the cost
of updating them, spending more on projects that deliver stability and resilience but not
always substantive improvements or lower costs. We have a fundamental task to deliver
the right IT system to supersede Horizon and are planning this with great caution and care.
« The GLO has not helped. On advice, we defended the claims robustly but lost in all material
respects. We have accepted the Judge’s findings, requiring us to accelerate material cultural
and operational change which will be of enduring benefit. This has cost us more
than plan with more to come. We have learnt the litigation lessons and have been managing
the upcoming workers’ rights case differently.
e We acknowledged in 2019 that we had tilted the commercial balance of Post Office away
from Postmasters. We have invested in higher remuneration, stronger field teams and
improving back office support. This is a fundamental cultural change which is underway but
incomplete.
Commercial sustainability is taking longer and costing more than we hoped for four reasons:
the need to increase agents’ remuneration; the increasing cost and time to replace systems;
the cost of and focus on the legal management of the GLO; and CV-19 lockdown. These are
resolvable by us except for the GLO.
There remains an opportunity to deliver a commercially sustainable, national Post Office service
of significant value to the Government and the public with added flexibility, making if fit for
purpose for the 2020s. We can deliver:
« More than 12,000 branches, distributed nationally and meeting the national access criteria
offering the right services, in the right places at the right time notably for urban deprived
areas and rural communities
e A different relationship with Postmasters, served and enabled by POL
e Free national access to cash, mails and bill payments not only essential to consumers but
also fundamental to business start-ups and SMEs helping kickstart the economic recovery.
e Support, care and commercial opportunity for vulnerable and marginalised people and
communities, critical to the levelling-up agenda, guaranteeing support for rural and urban
deprived areas
e A Post Office structure that can invest sufficiently in the business from its profits, enabling
some profit sharing with both Government and Postmasters.
e Fewer and shorter car journeys than any alternative service provision
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There is a huge amount to do and this is an ambitious plan. Key successes required will be:
1. Extending our Royal Mail (RMG) agreement and expanding into the parcels market across
the UK, enabling small businesses in every town convenient access to sending and receiving
parcels.
2. Delivering a 3 Banking Framework which sustains access to cash and facilitates easy cash
deposits for local businesses across the UK; and remains highly profitable while reassuring
the banks that they can continue to outsource to us.
3. Re-building our broader travel business post CV-19.
ing the costs and management support for other,
IRRELEVANT :This will involve:
IRRELEVANT.
xcliiding Postmaster remuneration) by a further 11% and our
. Delivering a new relationship with Postmasters where we are simpler and cheaper to deal
with, are far more supportive and engage in a mutually beneficial, commercial partnership,
enabled by technology.
8. Replacing Postmaster contracts with modern versions, consistent with the GLO and ensuring
that Postmasters cannot be confused with workers or employees.
9. Increasing automation in the network without funding kit ourselves.
10.Replacing the Horizon system and its Fujitsu support arrangement by 2023 or as soon as
possible.
11.Growing a Post Office network to above 12,000 branches for the first time in many years as
we open substantially more flexible formats across the country, meeting the needs of
customers, clients and, of course, our postmasters who are the face of the Post Office.
12.Opening up the possibility of a dividend payment to Government, matched by Postmaster
profit share.
To deliver, we need the following support from Government:
e Your full-throated support for our commercial agenda. Our shared agenda would benefit
from Government publicly supporting our role in sustaining the right to use cash including
the importance to businesses of cash deposits and also in the development of trusted digital
identity markets.
* To support this plan, we are requesting during this funding period an upfront equity injection
" i ' throughout
‘0 allow us to continue funding the ongoing
the funding period as well as a loan of
group litigation.
« Aseparate funding workstream for the future costs of compensating Postmasters under the
7 "righ Fe at
n
IRRELEVANT
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The financial support required is significant; we understand there have never been more claims
on the public purse. In addition, some of the proposed measures help customers but do not
require additional funding. We also believe that this plan gives the best long-term financial
outlook for Government while providing critical support to the stated objectives for the
Comprehensive Spending Review, notable securing economic recovery and levelling-up.
We expect there to be significant debate about our proposals. Indeed, we welcome analysis of
every part of this plan to ensure that our funding and our targets are consistent. Only the
Government can decide its priorities. The Government can of course give less support as long
as we match the support with the requirements we have to deliver. The risks of lower funding
are impairing our ability to deliver stable IT, maintain the network, force us outside our financial
arrangements, make more controversial cost savings including accelerating the closure without
replacement of Crown offices, or sell assets at undervalue in today’s markets while certainly
delaying or preventing commercial sustainability.
Our report is divided into the following sections:
. Do Post Offices Matter?
. Are we delivering our current commitments and what have we learnt?
. What does success look like?
. How will we deliver success?
. What support do we need from Government?
. What are the key risks?
. What assurance is being undertaken?
. What happens if we get less funding?
. What would the 4YP look like if we sold Telephony?
10. What is the outlook to beyond 2023-24?
11.What are the next steps?
WON DNAWNE
We are hugely grateful to colleagues in BEIS and UKGI for their support, challenge and
engagement.
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Report
1. Do Post Offices Matter?
In November 2016, analysis by YouGov and London Economics for BEIS valued the contribution
of Post Office to the UK at between £4.3 -9.7bn per annum. This has not been updated but we
believe the value drivers are even more valid today:
e National access, providing a level playing field for individual customers and businesses, not
just in city centres and the affluent south-east, but urban deprived provincial communities
and rural areas.
Footfall to support high street retailers
Support for the last shop in 7,588 rural and urban deprived communities
The last, national source of free access to cash and a UK wide network for deposits.
Trusted connections to digital services for customers
Access to competitive markets for customers who do not use digital services
Reduced car usage, operating within 1 mile of 93% of the population
Commentators sometimes assume that PO is declining, notably as social mail reduces, and
branches are seen as a throwback designed solely to protect the elderly. Trading patterns
during Covid-19 refute this, with sending and receiving of parcels becoming more important,
and innovative ways to receive cash valued by multiple demographics. Overall, our commercial
business is thriving and until the CV-19 lockdown was growing. It has also been returning faster
from lockdown than other businesses. The challenges are real but so is the opportunity of
growing customer demand.
For example, cash and banking services are increasingly important as retail banks continue to
close branches. New research by Citizens Advice in their report Banking on it (July 2020) states
that: “more than half (55%) of postmasters say there are no bank branches in the community
their post office serves, and in rural areas this rises to 3 in 4 (74%). Over 2 in 3 postmasters
(67%) who've seen a local bank shut say it led to a significant increase in the use of banking
services at their post office”.
One key measure is customer sessions, a weekly assessment of the number of times a customer
has bought at least one item in a Post Office. This had grown again in the past year and is at
92% of pre-lockdown levels:
Average Customer Sessions (millions per week)
2019-20 2020-21 YTD
(Pre CV-19) (Post Cv-19)
10.6 10.4 10.3 10.4 9.6
2016-17 2017-18 2018-19
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Another measure is our turnover with third party, commercial organisations, which has been
growing steadily since 2013-24, a testament to the commercial value of being the only truly
UK wide network:
IRRELEVANT I
their value to their communities ,and_qur determination to support them with some c.}
of PPE (to protect both Postmasters and Staff). V
ensured that cash remained available nationally. We did not furlough staff except in our
commercial travel joint venture, FRES and did not apply for any forms of direct CV-19
Government support. Most staff have been helped to work from home and where that has not
been possible, have been supported with PPE. All of our staff have been paid in full whether
they were able to come to work or were too vulnerable to do so.
While PO’s commercial revenue has suffered badly from CV-19, with an effective shutdown of
our travel businesses, the performance of our two core businesses - mail & parcels; cash &
banking - shows how critical we are to the UK economy.
Our parcels business slowed in the first month of the crisis, but is now performing materially
ahead of the prior year as the digital economy strengthens, growing small and medium parcels
in particular:
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In our cash business, while we are operating at 80-85% of pre-CV-19, it is worth noting that:
e Our ATM business dropped some 10% less than the industry and remains around 85% of
normal levels, compared to the industry average of 50%, benefiting from our greater
presence outside city centres where people are most vulnerable to a loss of access to cash.
« While cash usage has dropped, we have gained customers from large banks who have
further deteriorated their customer service during CV-19. As shown in the chart below, we
are processing more transactions for Lloyds Bank than we were before lockdown:
IRRELEVANT
By any measure POs remain critical to the whole economy and not just people that otherwise
might be left behind. No 10 recognised this, thanking Post Offices in a CV-19 briefing.
The pressures on the high street are getting worse - we already represent some 2% of the
remaining estate, and that will likely increase if we can maintain the network.
As the only truly national, physical network our Postmasters provide a further value to their
customers and to the UK as a whole. We appreciate that Post Offices can be of limited
importance to affluent, online savvy customers who routinely visit City Centres. We do not deal
in luxuries, we provide basic services that people depend upon to pay their bills and maintain
their independence. If we are not in local, provincial, rural and urban deprived communities
fear, isolation and deprivation will increase. If we are not there:
« people fear that their communities are being undermined
e older people worry that without us, withdrawing POCA will stop them accessing their cash
« people without computers and wi-fi are isolated and cannot easily do their business with
Government - no digital identity - or corporates like the energy companies or simply send
a birthday present
e people in 3,500 communities would have to travel to post a parcel, get cash or pay their
bills. With limited bus networks this means driving or as many of these people cannot afford
a car, cadging lifts and dependent on neighbours
e for vulnerable older people, we are often their only social interaction. Without us they will
become more isolated with real consequences for their physical and mental health
e we have multiple examples of Postmasters checking on customers and saving their lives,
giving advice on how to avoid scams and providing practical support. Without us, people
will be lonelier and more scared.
Post Offices matter to customers more than ever because we’re here, in person, for the people
who rely on us.
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2. Are we delivering on our commitments and what have we learnt?
We are 27 months into a 3 Year Plan (3YP) that lasts from April 2018 to March 2021. It is
important to remember that comparison against that 3YP includes a significant element of
forecasting for the current financial year. More importantly, in common with most businesses,
the shape of delivery has been severely damaged by CV-19,
When we quote the 3YP we are focusing on the documents approved by the Board in October
2017. In addition, there was an earlier and more detailed document setting out our requests
and proposals in June 2017. This document was_not the same as the 3YP and in particular, we
did not receive a proposed loan facility of up to million.
Our primary objectives for the current 3YP period are:
¢ Maintain a national network of more than 11,500 Post Offices.
Meet national Network Access Criteria.
Reduce Funding over time, in line with the agreed investments.
Protect 3,000 Rural Branches.
Deliver commercial progress t
BITDAS in 2020-21.
We have been successfully delivering these requirements in the first two years of the cycle,
and had been forecasting to continue to do so through to March 2021, prior to CV-19.
11,500 branches
Our network has remained stable in overall size as set below and consistently above 11,500
Number of Branches
13,852
11,905 11,820 11,818 11,780 11,696 11,634 =11,600 12,650 11547 11,660 11,638
2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
In April 2020, as lockdown and vulnerability concerns hit, branch numbers dropped to 10,987,
with 9,675 full branches and 1,312 outreach locations open. However, a number of
Postmasters are elderly and vulnerable who were shielding and needed to remain closed at this
time . At the end of July, this recovered to 11,250. A waiver for CV-19 closures is in place to
30 September with extension options.
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Access criteria
The network has consistently maintained the national access criteria. At March 2020, this was
as follows:
Deprived Urban Postcode Districts less
ssid Urban Population Rural Population :
Population within 1 i than 95% Population
as within 1 mile within 3 miles nie & sillae
Total Population Total Population
orienta within 3 miles within 1 mile
99% 90% 99% 95% 95% 0
We do note however, that the number of part-time outreach branches has grown, reflecting
limited customer demand and retailer appetite in specific locations. This is expected to
accelerate if we are managing the same inflexible definition of a Post Office and SGEI
requirements. With greater flexibility we may be able to reduce the reliance on unprofitable,
one-size-fits-all outreach formats while maintaining protection for vulnerable customers and
increasing opportunities for businesses.
Number of Outreaches
Reducing funding
The goal of reducing funding requirements over time also continues to be met, with total
funding for the current funding 8/19 to 20/21) being maintained at: I 58% of the
previous three-year funding of
1633
2018/19 1019/20
IRRELEVANT
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This can also be demonstrated as follow:
‘IRRELEVANT
Rural branches
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While the 3,000 rural branches was a 2017 Conservative Party manifesto commitment not tied
to a specific group of branches, we have maintained the rural network throughout.
Commercial Progress
We were on track to delivering i= i
2019-20, including accounting policy changes of i
IRRELEVANT
in 2020-21, having delivered a trading profit of fr
This has been accomplished by continuing to offset the consistent decline in Government
revenues with commercial growth, as set out below.
‘IRRELEVANT
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Against the backdrop of these relatively static revenues, profit improvement has come from a
more efficient cost base. The improvement in 2019-20 was especially pleasing as within our
overall cost savings, we deliberately reversed the long-term decline in Postmaster pay:
[overnite
This has
In the plan approved
In January, we were discussing a trading profit for 2020-21 wit
been shattered by CV-19, with revenue expected to fall by some
by the Board in May, this was partly offset by additional cost red , projecting a trading
profit o' ‘or the year. We have agreed to revise this forecast in September as the impact
of CV-19 becomes clearer.
Revenue had been developing more strongly than in the 3YP and trading profit exceeded 3YP
until CV-19. Of the I profit reduction versus the 3YP for 2020-21, half relates to
19/20 20/21
£m
Revenue
Cost Of Sales
Netincome I i
AgentsPay I i
“<< IRRELEVANT
Non Staff Cost I i
FRES I
Other Income
Trading Pro’
* Adjusted for accounting changes and network team impacts
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Even with the impact of CV-19, Postmaster remuneration is forecast to be
ed in the 3YP and we have also invested in more people in the field. ng branches
and in 2019-20 back office work to support GLO recommendations ¢ of operating
costs). Despite this, we have worked hard to decrease our running costs and, as such, our
higher than
oday, and our
ie next phase. This is subject
to the availability of investment funding for redundancies and technology investments.
saa I IRRELEVANT
our own profits. Including brought forward spend from
"I, the equivalent total investment spend envelope was ;!
A full summary is set out in Appendix es
Cash and borrowing
During the 3YP period, we have operated within our financial arrangements, paying for the GLO
from cash efficiencies. However, our security headroom has been under pressure from the
as not substantively included in the forecast, and then. one
bilities from CV-19, which peaked at an impact of c.
ersed h headroom up from marginal levels to
y.
IRRELEVANT
ickdown, the Minister for Postal Affairs has indicated that we ce
Funding availability from Bank of England (BoE) had fallen in line with cash withdrawals being
sent out from our cash centres, before being given extra support during CV-19. We are in
discussions with BoE on whether this remains the right mechanism given our importance to
cash infrastructure nationally and rising deposit levels. BoE is undertaking a review with a
proposal promised in 2020.
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Learnings
We are learning as we go, recognising that we have made mistakes. Key areas are as follows:
e Just before the 3YP period, we implemented SAP Success Factors to support our people
administration. This was a very poorly implemented project that continues to cause us issues
today. We have substantially strengthened our controls around change management
including stronger governance, particularly earlier in the process. A recent Internal Audit
summary demonstrated improvement in change management.
« Weunder-estimated the cost of fixing the business, notably in IT, spending projects
that deliver resilience but not always improved effectiveness or lower cost. as, with
the benefit of hindsight, spent on IT where cheaper technologies became available later. We
have a fundamental IT task to deliver around Horizon and are planning it with great caution
and care.
e Our approach to the GLO has been extremely unhelpful. We defended the claims, believing
we were both right and likely to win. We lost comprehensively. We have embraced the
Judge’s comments, embarking on material cultural and operational change which will be of
enduring benefit. This has cost u: more than plan with more to come. However, we
believe that the true incremental cost of defending is some and the material costs of
settlement, new claimants and criminal case reviews are necessary, unavoidable and
primarily relate to the period under RMG control. We have learnt the litigation lessons and
in the upcoming workers’ rights case have been ensuring that the full Board reviews the
advice regularly, that the advice is more diverse and the evidence better tested.
« We acknowledged in 2019 that we had tilted the commercial balance of Post Office away
from Postmasters. Following a review and consultation, higher pay was brought in and
higher banking earnings on deposits were accelerated. We invested in the field teams and
are continuously improving back office support. Recognising that POL’s job is to serve
Postmasters and help them thrive is a fundamental cultural change which is underway but
incomplete.
Commercial Sustainability
The longer-term goal for POL has, since independence, been commercial sustainability. We
have defined that as POL continually generating enough cash from commercial trading that it
can pay for its own investments without needing further financial support from Government.
This is a fantastic goal: other Post Offices are not separated from their Royal Mail equivalents
and many still require state support. Trading profit, which excludes Government support, was
our most incentivised measure from 2015-20 to demonstrate progress towards that goal.
In the discussion paper preceding fundin
trading profits after 2020-21 that at c. /
sustainability.
7, we indicated that we would be making
year, should be sufficient for commercial
The paper requested ! of loan funding to accelerate change and ni iscussion about
swapping that for three more years of network subsidy totalling Neither was
forthcoming, so it is perhaps logical that further funding is required and our original proposal
in February was
In addition, we have, funded
have been hit by i
deterioration in headroom.
of unbudgeted GLO spend while at the same time, we
f net CV-19 cash impacts including the impact on trading and the
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We are proud of managing both of these within our current headroom, which show how
seriously we had improved trading profit and made cash management more efficient.
We believe that the [*
to be the case:
Loan access not agreed previously and therefore not invested. I!
Unbudgeted Litigation spend
Impact of CV-19 on cashflows
Litigation Costs (excl. Settlements) over funding period
Total Impacts Beyond 3YP Baseline
Current 4YP Request
Variance
We also acknowledge that we did not sufficiently consider two further factors:
Firstly, the cost of replacing IT, not to reduce costs but to make the business resilient and
sustainable, is greater than we thought. The Fujitsu contract for Horizon ends in 2023 and we
had contracted for the right to buy the underlying IP - we knew this was likely to be required
during the next funding period - but the full costs of replacement are likely to be very high,
much higher than we would have assumed.
Secondly, our 3YP projected evolution towards a steady state, where the major changes had
been completed and problems resolved and we would be running in “BAU”. Given the
tumultuous changes arising from } 4, tightening
regulation and now CV-19, we now recognise that there will never be steady BAU for a business
with as many different lines of products and services as Post Office. Change will never s
a result, we see a sustainable level of trading profit being higher rather than
We do believe that this is achievable, but no one pretends it is without risk: the delivery agenda
is acute and the world keeps evolving. Some elements of cost control to achieve sustainability
also require political support, I “and redundancy programmes.
UKGI has asked us whether the PO is “investible”. If by that, we mean either being net cash
positive across the next three years or alternatively that we could market this support as a
commercial proposition to, say, a Private Equity company, the answer is clearly “no”.
We talk in the alternative approaches about what you would have to do if there was no funding
itis simi eto di i ial i
That is doable and it would certainly reduce funding. We still do not believe it would be investible
as a purely commercial vehicle because in the long term - 5 to 10 years - it is not clear of the
scale of residual demand.
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More importantly, we do not believe that we have ever been tasked to creating an investible
business - we have been and we believe still are tasked with creating a network that is available
to all, stable or growing and providing free access to cash and parcels across the UK as an
important cornerstone of the levelling up agenda. We can deliver that, and we have a good
chance based on the commercial progress to date and our plans, of not asking for funding for
2024-27.
3. What does success look like?
We aim to maintain national access to the network for customers while reducing Government
financial support and driving to a delayed commercial sustainability. Our detailed work in this
area has focused us on three priorities, which we believe are shared by BEIS as our shareholder
and primary funder:
¢ providing easy, nationwide, physical and digital access to customers for cash, parcels and
other key services;
supporting Postmasters to thrive through a combination of training, support, simplification
and pay; and
e driving the business to be self-supporting through investment, cost reduction and
commercial progress.
We can deliver:
e A national infrastructure of more than 12,000 branches, distributed nationwide to meet our
current access criteria, which supports the growth of small businesses across the country,
especially in areas that need it most.
e A different relationship with Postmasters, served and enabled by POL, helping to support
and throw their small businesses.
e Free national access for consumers and small businesses and SMEs to cash, Mails and bill
payments.
e Support, care and commercial opportunity for vulnerable and marginalised people and
communities, critical to the levelling up agenda, guaranteeing support for rural and urban
deprived areas.
e A Post Office structure that can invest sufficiently in the business from its profits, enabling
some profit sharing with both Government and Postmasters.
e Fewer and shorter car journeys than any alternative service provision, contributing to the
Government's ambition to reach net zero carbon emissions by 2050.
We have been asked to comment on whether 11,500 “matters” and if so why. We do not think
there is any particular magic to 11,500 - our understanding is that it was broadly the size of
the network at the point at which the target was set. In order words, the Government of the
day wanted no more net closures.
Within the 11,500 locations there are around 2,000 with less than 50 transactions per week,
accounting for little over 1% of our total business.
Vulnerability protections are encapsulated in the access criteria, which could be met with fewer
branches, probably around 9,500 (provided they are in the right locations).
We informally discussed with UKGI and BEIS reducing the number and their sense was that the
savings would not justify the political capital spent on a round of net closures. We have
sympathy with this and are proposing retaining the 11,500 in future and being facilitated to
increase the network over time. What costs POL too much is being close to the target so that
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every closing PO has to be replaced immediately whether the replacement is of the right quality
or not and we are constantly anxious about a failure of a multiple partner.
What does matter deeply is that we retain our local, physical presence and the connection with
our customers.
We recognise that the change in definition that we are after will make people anxious about
our commitments and whether we are seeking too much “freedom”. We want to reassure the
Government that this is not our intention. For clarity:
e You have signalled the current political sensitivity around closing our Directly Managed
(Crown) Branches and the impact this will have on our overall 11,500 target. We
understand this current sensitivity and undertake not to close DMBs without creating a new
franchised post office location, without a BEIS discussion. At the same time, we wish to
maintain an open dialog with you about our overall Post Office Network vision and the place
DMBs have in that vision. In any specific DMB case, we will always follow a public
consultation and never diminish the capacity for the local area to meet local demand. In
few cases we may find through the consultation process that surrounding Post Offices are
sufficient to absorb the customer demand. History has indicated that this will not usually be
the case, so we will plan to increase local capacity to meet customer demand from a DMB.
« We will seek to solve “trapped” Postmasters who wish to retire but no replacement
Postmaster came forward under Network Transformation: the rules of that programme
prevented compensation without replacement, making retirement unaffordable. Over the
next 3 years we will make modest contributions to enable retirements and appropriate
replacements where required. New formats may make this easier but in some cases there
may not be direct replacements when the branch is in the wrong place and access criteria
are already protected.
e Under our proposed definition, Mails will be the enabling SGEI. Our bill payments are
provided from around 24,500 outlets including Payzone and should not therefore be of
concern.
e¢ The revised definition allows us to open additional urban branches that we want for our non-
exclusive Mails and Parcels services, enabling us to compete effectively in these locations
where convenience is paramount for customers. These will not be commercially viable if we
have to have cash - especially as many urban areas are well and competitively supplied by
the Banks.
e Wewill maintain our specific commitments to accessibility in rural and urban deprived areas.
We will provide POCA to customers under our contract with DWP. We will need the
Government to continue to work with us to enable a full migration to bank accounts, with
our support, as soon as possible: on low interest rates and reducing accounts we lose money
on POCA and those losses could grow.
e For assurance, we will work with you to agree targets and limits around cash provision and
the rural and urban deprived networks. However, it is important that we can negotiate with
the Banks on BF3 pricing without them believing that we have to provide cash nationally
whether they pay for it or not. The obligation to sustainably fund replacement networks
when they close their own should be retained by the Banks who should then pay partners
such as us to deliver services to their customers.
e The obligation should be retained by the Banks who should then pay us to deliver it.
We believe that these are the priorities for Government. If different priorities emerge in these
discussions, our plans will change. To get there we will require both financial investment and
changes to the rules we operate under, while protecting Government's control.
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We must also reach ongoing and mutually satisfactory arrangements with the commercial
partners whose products we sell or give away: the major banks, Royal Mail Group, the energy
companies and others.
4. How will we deliver success?
Delivering success requires that we improve our delivery for customers, our support for
Postmasters, our attractiveness for clients and our own cost reductions. This will require us to
deliver the following critical changes. One of the complexities of agreeing 3-4 year forward
funding for an organisation like Post Office is that we are constantly having to adjust our plans
for changes in the economy, competition, technology and customer need. We commit change
spend only when we have to and usually in small increments. Our plans cannot all be complete
at any point and will evolve.
1. Replacing our agreement with RMG while expanding into the wider UK parcels market. We
expect to reach agreement with RMG this year. RMG has already volunteered that the next
agreement must be non-exclusive. Market analysis shows opportunity in the Pick-Up-And-
Drop-Off (PUDO) market, serving other carriers. We may want to sell more products online.
2. Delivering a 3 Banking Framework which remains highly profitable while reassuring the
banks that they can continue to outsource to us. We imposed a very large price rise on the
banks as part of BF2, which runs from January 2020 to December 2023. We are already
collecting feedback across the cash market on the future relationship. We will define this
over the next six months and seek to negotiate BF3 in the first half of 2021. We envisage
significant change, reassuring the banks that they can continue to move volume to us. Clear
and public Government support will make a difference.
3. Re-building our broader travel business post CV-19.
4. Reducing the costs and management support for other businesses including Mortgages,
Savings, Identity, Telco and Insurance. This will need further changes agreed in our
relationship with the Bank of Ireland.
5. Reducing our cost base by a further 15% (versus 19/20) and our headcount to 1,600-1,700.
We had 7,787 FTE post-independence and 3,214 today. Of the remaining employees some
600 will be supporting cash logistics, although we are in discussions, which we expect to
complete in 2021, about outsourcing and/or membership of a cash utility.
6. Closing all owned branches to reduce the cost to serve. While we recognise the political
sensitivities, especially when we are below 11,500 locations, we continue to believe it is the
right thing to move to a fully franchised model and away from complex and expensive
working practices and high rental costs. We expect to be out of DMBs by Autumn 2021,
although in discussion we are proposing to continue franchising into new branches unless
there is a very clearly sufficient local supply.
7. Delivering a new relationship with Postmasters where we are simpler and cheaper to deal
with, are far more supportive and engage in a mutually beneficial, commercial partnership,
enabled by technology. Alignment with Postmasters is critical and improving but fragile. We
are therefore proposing that any financial return should be shared between a dividend to
BEIS and a profit share with Postmasters: we have always advised that a dividend on its
own would not be politically workable.
8. Increasing automation in the network without funding kit ourselves.
9. Replacing the Horizon system and its Fujitsu support arrangement by 2023 or as soon as
possible thereafter. This is complex, controversial, risky and will be extremely expensive.
We are working through the technical options now.
10.Replace Postmaster contracts with modern versions, consistent with the GLO judgments and
ensuring that Postmasters cannot be confused with workers or employees.
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11.A network that we could grow above 12,000 branches for the first time in many years as
we open substantially more Mails and Bill Pay branches in City Centres that are well served
for cash and enabling no DMBs, fewer outreaches and fewer legacy branches that are unable
to operate as limited companies (discussed later in the investments section).
We are focusing on cash and headroom and at a high level we would summarise our draft plan
as follows:
Fy21/22 FY22/23 FY23/24
£m £m £m
Security Headroom brought forward
Cash Inflows/(Outflows) from Operations
PY Baseline Cashflows (excl. FRES)
Network Strategy (Growth and Cost Reductions)
Banking & ATM Commercial Growth
Supply Chain and Back Office Improvement
Operational Restructuring Benefits
DMB Franchising Benefits
Mails Commercial Investment Growth
Telco Growth & RFP Benefits
Other Net profit/(loss) movements
Agents! Pay Timing Shift
Subsidy
FRES dividend
Cash (Outflows)/inflows from Investments }
Network Strategy Investments I RRE L EV, A N T i
Strategic Platform Modernisation '
Cash & Banking Services Product Investments I
Supply Chain and Back Office Improvements
Operational Restructuring i
Further franchising DMBs '
Mails Commercial Investment '
Telco Investments (incl RFP) '
Mandatory IT Contract Reprocurements i
iC
Other Invesmtent Spend
Unwinding of Previous Investment Provisions (e.g. Redundant
Litigation
Increase/(decrease) in client payables (non Santander)
Finance costs (Incl. Interest)
Equity injection/ividend/loan repayment
Loan
Security Headroom carried forward
Note that cashflows from operations is driven by, but does not exactly mirror, EBITDAS. This
is predominantly due to the recognition of certain costs and revenues being different to their
cashflows as in line with IFRS accounting standards (e.g. Telephony customer acquisition costs
are paid for at the start of the contract, but spread over the life of the customer revenues).
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We have also noted in the above table the possible outflows of a dividend or loan repayment.
This is illustrative and would obviously need to be agreed as part of these discussions, however,
this demonstrates that there would be m for such a projected payment whilst still
to BEIS and matching Postmaster profit share.
From a more traditional p/I perspective, our draft 4YP has the following profit shape:
Gross Income
Cost of Sales
Agents Pay
Trading Staff Costs
Trading Non-Staff C
Pe ane I IRRELEVANT.
Grand Total _}
With revenue increases being driven by a recovery across all areas from CV-19 in 21/22 (with
a slower recovery in travel), followed by growth in our Mails PUDO offerings as well as further
Banking market share expansion.
Banking & ATMs
Telephony
PO Money
Insurance
Lottery & Retail Other
sateen IRRELEVANT
Identity
Supply Chain
Re-imagining the Postmaster Experience
POCA i
Central
Grand Total
Our Telephony business (if not sold) will likely grow as well through customer acquisition and
further moves to. Fibre. However, this requires investment (in customer acquisition, Fibre
as well as increasing cost of sales. We have made a strategic decision to sell the business but
in the current markets, price, value-for-money and timing is deeply uncertain. We have
therefore retain the business in this plan but describe the potential net impact of a sale below.
PO Money is expected to remain fairly static, with low interest rates likely to stay low for the
duration of the 4YP, and the Travel Money market making slow recovery and Postal Orders
continuing to decline.
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Insurance revenues should grow over the 4YP as our investments in Home Insurance bear fruit
and the travel market starts to open up again, although with a two year recovery on travel.
Although a slowly declining market overall, we will continue to target further market share in
the Bill Payments space, stabilising revenues after a post CV-19 recovery. However, this is a
risk area if we see a systemic shift online.
Trading Staff Costs will continue to decrease as we further franchise our DMB estate with
Overheads staff also decreasing as we push towards our targeted end state of aroun
f there is a viable opportunity to outsource cash logistics, further FTE reductions
will follow. However, this may prove unlikely and net savings would have to be shared with the
banks.
Non-Staff costs will increase through a combination of several factors:
e Increased revenues will drive up the non-staff costs that support them (such as
transaction fees and postage)... any
¢ As we drive towards: IRRELEVANT iwe will be required to automate and digitise
further, with a corresponding increase i non-staff costs.
« Necessary refreshes of our IT systems (such as Horizon replacement, EUC replacement)
will also increase our non-staff costs in this area.
Our proposed investment profile (including litigation costs) is as follows. However, we know
that we will not create detailed business cases or approve spend for some time. Most of our
change spend is managed in relatively small increments close to the time, giving us better
control. It does mean that there is a lot of uncertainty in looking ahead 3-4 years:
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Spend 21/22to _ Benefits Rebaselined
23/24 21/22 to 23/24
IRRELEVANT
[Total Spend incl. GLO I 553 I 148 ]
The two largest pillars of our investment are the overhaul of the Horizon Branch accounting
system and investment in the shape of the Network, however, we are also signposting a number
of important areas we feel should be invested in.
Within IT we have included i ‘of investments for delivery of a new Strategic Platform
Modernisation (SPM) programme to improve the quality, functionality and cost of our branch
IT platform, currently Horizon. The intent is to ultimately deliver a new, modern, next-
generation core IT platform to enable the digital transformation of our branch and on-line
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operations; The sooner we invest in SPM, the sooner we will be able to exit Horizon. The first
part of this work, currently being undertaken, is to identify the commercial and Fujitsu
relationship next steps given the urgency of current and upcoming Horizon and supplier
challenges. The exact plan, financial payback and technical architecture is not known at this
time.
The SPM programme will constitute one of the biggest transformational activities for Post Office
in recent years. The current Horizon trading platform is now over 20 years old and doesn't meet
the need of a modern Post Office. Our postmasters tell us they require greater simplicity, and
flexibility in format. Our business needs to be able to quickly assess, design and deploy new
customer solutions. To enable these fundamental requirements, we must have a system
capable of doing so - the trading platform for our future. The projected costs within the 4-year
plan represent an estimate of how much a programme of this magnitude could cost, but given
the embryonic nature of the programme, the estimates given are clearly high level and should
be considered to have large uncertainty bounds.
Captured within the costs is an allocation for a problematic and protracted process to resolve
live Fujitsu contractual issues, which will contribute to the financial headroom for SPM. We
expect Fujitsu to be exceptionally aggressive in these negotiations. Any influence Government
can bring to bear as a fellow customer may help.
Overall, based on the information available, an estimate has been created for the costs to
deliver SPM, including the required work to sustain Horizon in the interim. This estimate is high
level and requires considerable further work. This will be completed during the early phases of
the SPM programme (signposted for 20/21) to provide more clarity and certainty on potential
costs, but also to allow the right business decisions to be made about direction and priority.
IRRELEVANT
The sustainability of our brand and business is built upon the Post Office network: it is the
foundation of our commercial and social purpose. And the network is our postmasters. Without
a proposition which works for them we cannot sustain the nationwide scale and service levels
needed to increase convenience for customers, drive growth in priority markets such as PUDO,
and support communities with access to cash and other essential services. We are therefore
flagging this as a key investment area for the 4YP, earmarking !resevnrpver the cycle (under
“Transforming Postmaster Relationships per investment table").
The reality is that our current branch propositions are not attracting and retaining the great
retailers we need to deliver our strategy. As a result we are falling behind our competitors in
urban areas while spending each year just managing network churn, with increasing
numbers of outreach required to plug the gap to higher numbers of branches, which are
generally loss making and provide a poorer customer experience.
The feedback from retailers is clear: they want control over the products they offer their
customers and greater flexibility around how they integrate a post office into their main
business, including simpler options which can be run without the need for dedicated staff and
counters. Covid-19 has made these changes all the more urgent.
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Balancing our customer & client needs, shareholder priorities and commercial sustainability, we
envisage a future network with the following key characteristics:
e Still meeting the six access criteria to safeguard access to communities across the UK,
with the 11.5k target largely an irrelevance because we have expanded beyond that
number.
« Ashift away from c2k sub-optimal, underutilised outlets to new branches located in great
retailers & community hubs in areas of higher customer demand.
e Greater flexibility in how the product offering & operating model for each branch is
tailored to the needs of the postmaster and the local market, but with every branch still
providing access to core mails and - if required by the community and underpinned by
the right commercial arrangements with the banks - access to cash & banking services.
« A queue of prospective postmasters & Multiples wanting to take on a branch or expand
their business with us, ensuring we have great locations and hosts to meet customer
demand.
« We will fund the resolution of “trapped” branches that failed to be completed during
Network Transformation due to lack of alternative supply.
The investment we are signposting supports delivery of the above through delivering outcomes
in three areas:
1. A more flexible formats range which gives postmasters greater choice over the services
they offer and a wider range of options around how the post office can be integrated
with their own retail operation, including through new light-touch options which do not
require dedicated staffing or complex training.
2. Modern franchise arrangements which match external best practice to support our
postmasters to grow their business. This will be underpinned by a tiered operational
model with different levels of account management, planning, training and marketing
support will allow both sides to reduce costs and increase sales.
3. Stronger strategic partnerships with a portfolio of great retailers that are conveniently
located where our customers live, work and shop. These might be traditional players
such as Co-op or new hosts such as Boots - and will also include the upgrading of suitable
Payzone partners as part of a more coherent approach to managing our total network.
In order to deploy the new formats at scale, we will need to reframe the definition of a post
office with BEIS, moving from the rigid requirement to include all SGEI services to a more
flexible approach with access to parcels services as the core anchor in all branches. Ultimately
this flexibility will strengthen our proposition to customers and communities in urban and rural
communities, including start-ups and small businesses, ensuring we can attract and retain great
postmasters running thriving local businesses.
While alternative approaches exist, our plans assume the following:
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Current number
CV-19 returns in 2020-21
Close DMBs
DMB franchising/replacement
Reduce outreaches
Reduce small, fixed pay branches
New rural models IRRELEVANT
Churn of branches we want to keep
Full service openings (to replace churn)
Whitespace development
End March 2024 total
EBITDAS change (23/24 exit rate)
Set-up/Compensation Costs
We can reduce costs by reducing branch numbers. However, managing the network close to a
contracted number, as we have been since independence is expensive and leads to sub-optimal
decisions. There is no magic in 11,500 but a smaller number requires politically unpalatable
branch closures in rural locations that are not required to meet access criteria you can tell us.
Our need is to have clear blue water between us and the target.
Alongside these strategic investments, we have also included a net [i to finish the
franchising of our DMB business, which has been a Board and UKGI priority, and something we
have accelerated over the current 3YP. This enables a significant shift in the way we work with
far fewer employees.
We would like to invest further in our Mails products, particularly in PUDO., We believe we can
increase revenues, create a more relevant product for our customers, deliver an easier solution
for our postmasters, and most importantly provide significant access points for small businesses
participating in e-commerce across the country, contributing to the economic recovery required
after Covid-19.
We have earmarked a material amount of Telco investment, which is largely to support a
mandatory RFP process (and to a lesser degree router investment for our customers moving to
fibre). However, this figure could be reduced depending on the timing of any sale that might
be made of this business.
We want to invest in our Banking & ATM offerings, with
profitable and sustainable ATM offering, which is not so beholden to BOI, alongside investment
in Cash Automation (e.g. teller cash recycling machines, Deposit ATMs) to improve our cash
handling efficiency and improve the Postmaster experience around cash.
The large reductions in administrative staff costs that we have already flagged will require
investment spend both in redundancy costs and also the build of enablers (e.g. process
automation), with a current view of ver the 4YP period, although we are currently
targeting to front load this spend to deliver the benefits as soon as possible.
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From a cashflow point of view, we expect borrowing to develop as follows, with Security
Headroom restabilising abovei win 21/22 through the net effect of the capital injections,
operational inflows, and investment spend:
P12 P12 P12 P12
20/21 21/22 22/23 23/24
Balance Sheet Headroom
[Available Government Loan
IGovernment Loan
Headroom i
Target Minimum Headroom i
Balance Sheet Headroom i
Security Headroom
Network Cash
Cash at Bank - POL
Client Debtors
Trade & Other Debtors
Total Security i
Government Loan i I RRE L EVANT
Santander '
Total Obligations
iSecurity Headroom i
Net Funding Position
Available Government Loan
Available NRF i
Available Funding i
IGovernment Loan
Demonetisation - NCS I
Cash at Bank - POL I
Net Fundng Position i
Net Funding Position Headroom
With Security Headroom being driven by the following elements:
Security headroom b/f
Operational
=~ [IRRELEVANT
Working capital
Financing
Security headroom c/f
Further detail of our EBITDAS 4YP is attached as a separate document (Appendix A).
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5. What support do we need from Government?
To deliver, we need the following support from Government. This is significant and we
understand that there have never been more claims on the public purse. However, we also
believe that the return will be worthwhile and indeed critical to other political objectives:
Network defi
jon
We have debated the right balance of rules to ensure that we can flexibly respond to customer
needs while protecting access for the vulnerable. While the 11,500 commitment was arbitrary
and not justified by customer need, we recognise that the political difficulty of changing it may
be greater than the benefit. The real cost of maintaining the number is because we are so close
to 11,500, every churning location must be replaced immediately, regardless of the
circumstances.
specifically are 1st & 2nd class stamps & labels; Signed For; Special Delivery by 1pm; and
International Air & Surface mail (with no weight specifications). In some of the additional
branches we propose to open in ‘whitespace’ locations this Mails SGEI will be fulfilled as part of
our broader PUDO propositions, giving customers a convenient solution to drop-off parcels they
have purchased online. These new formats will also include bill payments and other simple
products, but not necessarily providing cash, which is well supported and expensive for retailers
to run. This change would enable us to grow the network and improve its quality as set out in
the previous section. Rural, urban deprived services and the access criteria that protect
vulnerable and left-behind customers will be rigorously maintained.
Funding
We are askii ‘of additional funding in the combined form of equity and subsidy,
alongside a loan. This is similar to that received in the previous funding period but
materially more than expected as a result of CV-19 and Litigation self-funding. We have
included above a reconciliation explaining the need for more funding. Section 4 sets out the
gap between the need to invest and the cash we can generate.
We have requested the funding as equity and subsidy because it helps to resolve our issues
with net assets and postpone our issue with security headroom (below). We initially suggested
a one-off, up-front equity injection to reduce costs and complexity. This has been amended to
split between: up front and after a year in response to suggestions from BEIS
and UKGI.
We talk below about the strategic decision and the uncertainties around a disposal of our Telco
business. We are happy to work with you on some formula to allow a repayment of equity in
the event that the Telco disposal net of lost income transforms our outcomes, and this is
discussed in more detail in the accompanying response to the 11‘ August UKGI Letter.
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Funding - Litigation
In addition, it is clear that the ongoing cost of the post-GLO work cannot be borne by POL
within its current arrangements. The costs of defending the GLO were rightly funded by us.
Nonetheless, the settlement of the civil claim and secondary claims would still have had to be
paid to bring these long-standing complaints to an end, and the costs relating to criminal
appeals still incurred, recognising that they relate primarily to actions, the vast majority of
which (including decisions to prosecute and the conduct of those prosecutions) took place
before POL became an independent business.
A separate paper has been shared, setting out the proposal to ring-fence and preferably
separate the conduct of the litigation from POL to ensure its independence. In that we
recommend that the independent operation has oversight over our dealings with Postmasters.
The current legal and associated programme costs are c! over the funding period and
there are likely to be further claims which could conceivably cost (recognising that this
range is subject to a number of qualifications and assumptions given that the claims have not
yet been made).
In addition, as flagged in February, we are facing litigation in the employment tribunal that 120
Postmasters are workers. If they are successful this could give rise to claims from postmasters
across the network that they are entitled to various worker rights, such as pensions, sick pa’
and hold2y 2. ia
a
If we lose, it is hard to see how all Postmasters could be workers, for example
those who are large limited companies, who manage multiple outlets, or who provide no
personal service. A segment of our postmasters are higher risk than others.
Nonetheless, we had strong advice that we would win the GLO and we did not. At its extreme,
for the higher risk branches. It is important to note that
these figures are only estimates at this stage. There is no precedent for translating postmasters’
complex fee structures and working arrangement (which include separate retail and non-post
office business rates) into worker rights such as holiday pay and wages.
This cannot be funded by the business, whether it arises from the tribunal case, or indeed
otherwise in the future from legal re-interpretation or new law. In addition, we suspect that
many Postmasters would not want worker status and any enforced change would seriously
jeopardise the current business model. We will continue to defend the case and to explore and
implement strategies to mitigate the risk inherent in the network, including only engaging
postmasters through genuine Limited Companies, improving the way we engage with
postmasters, improving remuneration and, in some cases, the opportunity for postmasters to
take time away from branches.
Borrowing
The definition of Security Headroom is no longer consistent with the way the modern business
works. Every time a fixed asset is purchased, headroom is reduced. Thanks to the cost of the
litigation and the contraction from CV-19, we no longer have the headroom to manage this
ongoing deterioration and without change will miss the headroom target in 2021-22 and 2022-
23:
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We have been working with BEIS to; . IRRELEVANT
‘at current levels.
In addition, to achieve a balance, we believe that the value of our fixed assets in our audited
accounts should be added to the calculation. The argument has been made that the nature of
our fixed assets would be hard to dispose of in the open market. This may be theoretically
correct but even the cash can only revert to Government if Post Offices are completely and
permanently closed. Better for the calculation to reflect the money we spend and become
sustainable.
It is also worth noting that in early lockdown, headroom fell by over
some capacity is appropriate.
in four weeks so
We are not proposing any increase in borrowing limits on the BEIS facility, so we will continue
to improve cash efficiency. However, if our Bank of England facility is reduced, we will need
matching funding from either BEIS or a commercial lender. The BoE is not indicating this and
has been supportive, but the rules will have to change to maintain the current facility.
Other support
BEIS and HMT have been consistently generous financial supporters: the business was
essentially bankrupt on independence and your support saved Post Offices. However,
commercial support across Government has been affected by departmental agendas and an
understandable bias to outsourcing.
It is clear from our conversations with the Banks that our task in landing BF3 will be easier if
all Government agencies and regulators reinforce the importance of PO as a channel for cash.
Across Government, we could also be championed as the most trusted provider of digital
identity, showing Government leading the way and securing benefit from its commercial
development. If that took off or we ended up in a more monopolistic situation, we would share
profits with HMG.
BEIS will remain in control of POL after a funding decision is reached, and we propose the
continuation of the following controls:
e BEIS approves all annual and three-year plans. Without that approval, annual funding will
not be provided.
e BEIS approves directors’ remuneration and incentive targets.
« The business operates a detailed and comprehensive change process to approve individual
business cases that must be triggered before spending is incurred.
« Aplan to fund an investment does not constitute permission to spend money.
« The Board, with BEIS representation, approves all investments with a lifetime cost of more
than £5m. Investments of more than £50m together with specific transactions such as
acquiring and selling businesses must be individually approved by BEIS.
e If an investment looks like it will miss its ROI target by more than 10% it must be reviewed
and re-approved by the original approving body, including the Board.
« Monthly tracking and oversight are undertaken across the change portfolio and frequent
Post Investment Reviews are undertaken.
e The monthly results of the business are reviewed by the Board and separately by UKGI.
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We appreciate your counsel, support, and challenge across BEIS and UKGI and often HMT. We
could achieve quicker and better alignment with a streamlined governance structure with
single, combined, monthly meetings that would enable HMT, BEIS and UKGI to deliver their
objectives more easily.
6. What are the key risks?
In February, we identified key risks including the GLO, the workers’ rights claim, security
headroom and the size of the Bank of England facility. We have proposed ways in which these
risks can be mitigated above. We do not believe we can deliver commercial sustainability
within our current rule set.
Otherwise, our ability to move the Horizon branch trading system onto the cloud, replace it
for branch “tills”, transaction processing and branch accounting by the end of the contract in
March 2023 is a complex and concerning issue. We believe that Fujitsu will be largely
unsupportive and will seek to monetise their position aggressively even if it risks our ability to
trade: as a result they also must exit, although we recognise this could be both expensive
and may need more time. Any Government willingness to put pressure on Fujitsu, given their
other Government contracts, would be greatly appreciated.
None of our plans assume a second national lockdown and we do not yet know how much of
our business will, in the end, return.
We must recruit and retain a constantly improving senior leadership team who can match up
to the challenges ahead. This is being made more difficult by the increasing pressure on
remuneration and redundancy pay. However, for now, the pressures of CV-19 on the jobs
market has reduced the risk.
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7. What assurance is being undertaken?
KPMG has provided UKGI and BEIS with a detailed review over our forecast models and our
4YP approved by the Board in July.
In terms of the key strategic challenges, we have had the following governance and third-party
support:
Strategy Area Board Reviewed 3rd Party Support and Assurance
2020/21 Budget (including 4 year plan assumptions) Mat-20I
IAgents’ Remuneration Oct-19]Egremont
[Agents’ Remuneration Jul-19IEgremont
Bank of Ireland Relationship juhag
[Cash and Banking Market Assessment Jun-20IReinvigoration
[Cash Utility Strategy jul-19I
Digital Identity Strategy Update Oct-19]
Digital Identity Strategy Update Jul-19I
Fujitsu Contract/ SPM Jun-20]
Group Litigation Update Jul-19}
insurance Strategy Jan-20I
insurance Strategy Juri9I
Legal Enterprise Optimisation Jul-19]
ILegal Entity Optimisation (Framework Agreement and Articles of Association) Nov-19]
[Legal Entity Optimisation (Framework Agreement and Articles of Association) Sep-19
Network Policy Framework Jun-20IDeloitte, Berkley, Egremont
Network Strategy Sep-19]Deloitte, Berkley, Egremont
Payzone Bills Payments Strategy Oct-19]
Postmaster Engagement/ Representation Jun-20I
Purpose of Post Office Jun-20}
Purpose, Strategy, Growth Jan-20IMckinsey
Purpose, Strategy, Growth Nov-19IMckinsey
Purpose, Strategy, Growth (PSG) Oct-19IMickinsey
[Royal Mail Negotiations Sep-19
Royal Mail Strategy Nov-19
‘Starling (Workers’ rights litigation) Jul-19I
Starling (Workers’ rights) Jan-20I
ITelcoms Strategy Jul-19}
Telecoms Strategy May-20ICambridge Management, Grant Thornton, OMW.
[Telecoms Strategy Jan-20ICambridge Management, Grant Thornton, DMW
[Telecoms Strategy Oct-19ICambridge Management, Grant Thornton, DMW
The Board have also been presented with litigation updates on a quarterly basis.
The critical question is how certain you can be that we will deliver a delayed commercial
sustainability — or is this just a staging post in an eventual recognition that modern POs always
need subsidising?
We do recognise longer term challenges and we believe that the cost of a PO must be
substantially reduced through automation before longer term shifts online and away from cash
take too much footfall away. However, even post CV-19, we believe this point is some years
away and it can be managed.
Assurance can sensibly be taken from the fact that we are projecting a point of commercial
sustainability with a trading profit of c. jiRRetevant; some 50% higher than in our earlier
assumptions. We also believe that pre-CV-19 delivery of our promises should be reassuring, as
was the growing customer sessions and commercial revenue.
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In the meantime, the most likely source of failure is that the cost of change grows while
earnings are slower to return. In this eventuality, we would sell our Telco business and possibly
our Insurance business in order to make the cash available to complete the cost journey set
out above. It should provide additional assurance that we can complete the job if we receive
the support requested.
8. What happens if we get less funding?
If we got less funding or the shareholder required_a.more.investible outcome, we would:
- Sell both Telco and IRRELEVANT.
A
A
ITI
rr
<
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=<
—_I
We would materially reprioritise our investment portfolio, slowing down organisational structure
changes and commercial development, along with their associated tangible and non-tangible
benefits. In the near term, we would focus on delivering against the DMB strategy, contractual
change, litigations, BAU and Regulatory outcomes, and little else.
We would seek a 10-year extension with Fujitsu and other IT providers in exchange for lower
costs to serve.
Almost inevitably, the lack of investment and support for Postmasters and customers would
reduce the stability of the business and make it harder to make the changes required following
the GLO. This could lead to a network reduction programme that would damage us publicly,
creating a vicious circle with the clients that fund trading such as the banks. We would expect
to end at c. 10k branches.
If we got substantial funding but less than requested, we would have to make at least one
material intervention. That might be the sale of Telco but as shown, the numbers are not
compelling. We would probably have to do a long-term deal with Fujitsu to retain Horizon with
high operating costs. This will be problematic for GLO purposes.
IRRELEVANT
In practice, we believe that Government support after 2024 would be much higher than under
our proposed plan and would likely return to historical levels unless there was a wholesale
abandonment of network requirements.
It is also worth noting that if funding is uncertain and we retain the risk of having net liabilities,
the Board will be placed in a very difficult position legally: this is where our responsi ies
under the Companies Act and the Insolvency Act differ from those of Government. Net liabilities
are an indicator of insolvency as defined by the Insolvency Act. Given such an indicator, we will
find it increasingly difficult to sign long-term arrangements, limiting our progress. Within a
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relatively limited time period we may have to cease some initiatives and make further
reductions to employee numbers. Furthermore, our clients may seek additional security, our
suppliers additional insurance or accelerated payment, and our credit lines may be experience
upwards price pressure. This could also be avoided by Government providing extensive
guarantees, but we recognise that these may be more onerous than the funding decision.
9. What would the 4YP look like if we sold Telephony?
As already discussed, the business has already made the strategic decision to sell the Telephony
business if suitable circumstances can be agreed. Based on this business unit transferring out
of POL at the end of 20/21 for an approximate net sale price of £120m, an updated financial
view of the 4YP financials is shown below. This has a net impact on cashflows of around £41m
over the period (after lost profits are adjusted for) and the business’s preference is to sell
because of the complexity that the business brings. We would be happy to discuss a mechanism
whereby, if a materially better outcome is forthcoming, funding can be returned (and this is
discussed further in our response to UKGI’s letter from 11" August).
P1221/22 P12 22/23 P12 23/24
Security Headroom without Telco SaleI
Security Headroom with Telco Sale R R E L EVAN T.
Movements H
P&L Grouping 20/21 21/22 22/23 23/24
Gross Income
Cost of Sales
Agents Pay
Trading Staff Costs
Trading Non-Staff Costs
FRES
lll ‘IRRELEVANT
Trading Profit Total
Overheads - Staff
Overheads - Non-Staff
Overheads Total
Grand Total
Ei}
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Balance Sheet Headroom
Available Government Loan H
Government Loan i
Headroom
Target Minimum Headroom i
Balance Sheet Headroom i
Security Headroom i
Network Cash
Cash at Bank - POL
Client Debtors
Trade & Other Debtors i i
Total Security i
Government Loan i IRRELEVANT
Santander Hl
Total Obligations
Security Headroom
Net Funding Position
Available Government Loan
Available NRF i i
Available Funding '
Government Loan i
Demonetisation - NCS
Cash at Bank - POL }
Net Fundng Position
Net Funding Position Headroom
10. What is the outlook beyond 2023/24?
Clearly the further out we try to look the more speculative our view becomes, however, there
are likely material trends that can be discussed along with their potential impacts on POL:
e Whilst Banking & ATM revenues grow over the 4YP as we further increase our market share,
this will likely stabilise towards the end of the 4YP, with bank branch closures reaching a
minimum level. At this point the longer-term decline of cash in the UK will likely erode our
revenues in this area. It is also worth noting that a third iteration of the Banking Framework
agreement will be implemented from January 2023 which will change commission rates.
e We would expect to see a slightly and slow decline in Mails beyond the 4YP, with PUDO
revenues stabilising and traditional mails products such as stamps continuing their slow
historical decline.
« We have modelled the continuation of low interest rates over the 4YP, with this particularly
affecting our PO Money revenues. A further economic recovery post 4YP would likely boost
profits in the Savings, Mortgages and Loans area (from interest rate increases), along with
Travel Money (as people start travelling more).
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The above factors would therefore likely see our revenues stabilise or slightly decline from the
predicted 23/24 exit level. To maintain our profitability we would therefore look to reinvest a
portion (but not all) of our profits to expand in to new products, increase market share, and
reduce costs further, including encouraging Postmasters to invest in automation and reduce
staff costs. We may see wholly automated Post Offices.
Extrapolating out the above would credibly show a sustainable business in 24/25. Cashflows
from operations would be expected to exceed outflows from investments and other items by
around
stream.
Banking & ATMs
Mails
Telephony
Insurance i
Lottery & Retail Other {
Identity
Bill Payments
New Format Impact
Re-imagining the Postmaster Experier
POCA
Covid-19 Response
Central
‘Comms
Digital
Leg
HR
Finance
Central Marketing
Network Operations (excl. Property)
Property
Supply Chain
Network & Central Retail i
cio i
Grand Total
Confidential
IRRELEVANT
IT Investments
Mails Commercial Investments
Banking & ATM Commercial Investments
Postmaster & Network Investments
Other Investments
Regulatory, Compliance & Maintenance
Grand Total
Interest and Tax
Investment Spend
allowing a build-up of retained earnings that could form a potential dividend
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11. What are the next steps?
This paper (along with associated documents submitted on 28" August) will now become part
of the BEIS submission to HMT in September. The current Government timetable for the
Spending Review expects the conclusions to be published in November, and we expect other
meetings and discussions along this timeline as the Government works through this timeline.
Once we have agreed 4YP funding, BEIS and POL will agree a new contract. This will allow us
to finalise our financial accounts for 2019/20 (ARA), as it is a required element of our proof of
being a Going Concern.
We continue to abide by the EU State Aid regulations, as we have done throughout the current
3YP period. Whilst we are committed to carrying this on, the future structure of State Aid post
Brexit is still to be agreed at a Government level. We therefore note that this future action at
this stage, although we cannot currently plan a response.
In our discussions with BEIS, they have also noted that depending on the decisions made about
the size and shape of the Network during this process, a public consultation may be required
in the future to ratify and steer any changes.
All the above will require close working with UKGI and BEIS in particular, and we thank them
for the support they have given us thus far in this process.
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1. Appendix — 3YP Investment Detail
Further franchising DBS
Network Expansion
Horizon integration Hub
Mult-year Crown Project
Self Service Kiosk (SSK)
Service Oriented Central Sup. Branch Hub
‘Automation strategy
Network and Postmaster Investment
Other Smalier Projects Simply
Malls Projects
Customer Hub ~ Additional Vertical (Falcon)
Identity Services Investments
Project Galaxy
Telco Investments
Travel Hub
Digital Developments
Eagle
Reclassification from Capex to Opex
Sale & Leaseback
‘Cash & Banking Services
Bi Payments
PO Insurance Investments
Vehicles
Falcon - Peregrine
Youth Strategy
Smaller Projects
Project Everest Incl. Beast ext
Riskand Resilience
Pci Compliance
EUCBranch Deployment
End-of-life Replacements
Receipt Printers
IT Service Transformation Programme
‘COP reprocurement
‘Change Excellence (Project Trafalgar)
Integration, Microservces & API Layer
‘Computacenter Run Services Transition
IT Security Programme
EUcProgramme
Network Evolution and Enhancement
‘Strategic Platform Modernisation
ITGLO Improvements
IT Contract Reprocurements
‘General Data Protection Regulation (GDPR)
Payzone (Panther)
cond-19
Central
‘Transforming Agents Relationships
‘Other Smaller Projects Regulatory
IRRELEVANT
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2. Appendix — 4YP Investment Detail
3YR Plan FY21/22 to FY23/24
Spend Benefits
Fv2i/22 22/23 FY23/24 AllPesiod: —_FY21/22 y22/23
Incremen Incremen
Tal Forecast (Or
Forecest Forecast Forecast Forecast Forecast
Further franchising DMBS
‘Network Expansion
Horizon Integration Hub
‘Multi-year Crown Project
‘Self Service Kiosk (SSK)
‘Mails Projects
‘Customer Hub - Additional Verticals (Falcon)
Identity Services investments
Project Galaxy
‘eleo investments
‘Travel Hub
Digital Developments
Eagle
Reclassification from Capex to Opex
‘Sale & Leaseback
‘Cash & Banking Services
Bill Payments
PO insurance Investments
venicies
Falcon - Peregrine
‘Youth strategy
‘other smaller Moderrise
Project Everest nd. Belfast exit
Riskand Resilience
C1 Compliance
==. IRRELEVANT
(COP reprocurement
‘Change Excellence (Project Trafalgar)
Integration, Miroservices & API Layer
‘Computacentor Run Services Transition
FT Securty Programme
UC Programme
Network Evolution and Enhancement
‘States Platform Mocernisation
FT G10 improvements
FT contract Reprocurements
Other Smaller Projects Build
Supply Chain and Back Office improvement
Property
Data & Analytics Excellence - DAE (Arrow)
Modernise our skills, polices and processes
‘General Data Protection Regulation (GOPR)
Payaone (Panther)
covid-19
central
‘Transforming Agents Relationships
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EXECUTION VERSION
___ March 2021
THE SECRETARY OF STATE FOR BUSINESS, ENERGY AND INDUSTRIAL,
STRATEGY
AND
POST OFFICE LIMITED
FUNDING AGREEMENT
POL-BSFF-WITN-015-0009992_0502
EXECUTION VERSION
THIS AGREEMENT is made on __ March 2021.
BETWEEN:
a) THE SECRETARY OF STATE FOR BUSINESS, ENERGY AND INDUSTRIAL
STRATEGY of 1 Victoria Street, London SW1H OET, (the Secretary of State); and
(2) POST OFFICE LIMITED, a company incorporated in England and Wales (registered
number 2154540), and whose registered address is 20 Finsbury Street, London EC2Y
9AQ (POL).
WHEREAS:
(A) The Parties entered into the 2018 Funding Agreement (as defined below) in respect of
funding for certain post office services during the 2018-21 Funding Period. This Agreement
replaces the 2018 Funding Agreement which is automatically terminated on the Parties entering
into this Agreement.
(B) The Secretary of State has requested that POL continues to provide a national network
of post offices across the United Kingdom and Services of Public Economic Interest (as defined
below) across that network.
(©) The Secretary of State has agreed to enter into this Agreement in order to provide
funding to POL to enable it to continue to provide the Services of Public Economic Interest
across that national network in respect of the 2021/22 financial year. The Secretary of State
makes this funding available to POL under the Post Office Network Subsidy Scheme Order
2007 (SI 2007/962).
NOW THIS AGREEMENT WITNESSES as follows:
1. INTERPRETATION
Ll In this Agreement, including the recitals, Schedules and Appendices, unless the context
requires otherwise:
2018 Funding Agreement means the funding agreement entered between the Parties dated 16
April 2018.
Actual SPEI Cost is defined in Schedule 3 (Calculation of Actual SPEI Cost).
Annual Plan has the meaning given to it in Schedule 4 (Milestones).
Articles of Association means the Articles of Association of Post Office Limited adopted by a
written resolution passed on 19 March 2020.
Branch means any outlet of POL that makes it possible for customers to access the Services of
Public Economic Interest set out in row 1 of Schedule 6 (SPEI Services). An outlet of POL shall
inelude any post office counter or any means of transacting one, some or all of the Services of
Public Economic Interest at a third party premises and any other facility (including an
“outreach” facility) designated for the transaction of business with members of the public by or
on behalf of POL.
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EXECUTION VERSION
Business Day means a day (not being a Saturday or a Sunday) on which banks are open for
general non-automated banking business in the City of London.
Civil Claims means the claims arising out of historic prosecutions as summarised in the
document titled Annual Report Insert — Civil Claims Arising Out of Historic Prosecutions dated
1 February 2021.
Deprived Urban Areas means:
(a) the most deprived fifteen per cent. (15%) of super output areas in England;
(b) the most deprived fifteen per cent. (15%) of data zones in Scotland; and
(c) the most deprived thirty per cent. (30%) of super output areas in Wales and Northern
Ireland,
based upon each country’s then current index of multiple deprivation.
Effective Date means I April 2021.
Financial Counterparties means National Westminster Bank ple, Santander UK ple, Barclays
Bank ple, Lloyds Bank ple or The Bank of England.
Financial Quarter means the period commencing on one Quarter Date and ending on the day
before the next Quarter Date.
Fundamental Change means the occurrence of any of the events listed in Part A of Schedule 2
(Fundamental Change).
Funding Period means the period commencing on or around I April 2021 and ending 31 March
2022.
Government means Her Majesty’s Government.
Group Litigation Protocol means the information sharing protocol in respect of the Postmaster
Complaints (as defined therein) between POL and UK Government Investments (on behalf of
the Secretary of State) dated 20 May 2020 (as the same may be amended from time to time by
written agreement between the parties to it).
Letter of Support is a letter from the Secretary of State dated on or around the date of this
Agreement confirming that the Secretary of State places a high priority on the Post Office’s
ability to continue delivering the vital public services and has committed to provide funding to
POL.
Milestone means, in respect of the Funding Period, the requirements set out in Schedule 4
(Milestones).
Network Access Criteria means the criteria set out in Schedule 5 (Network Access Criteria).
Network Investment means a subscription for shares in the capital of POL for cash by the
Secretary of State pursuant to clause 5.6 (Government Funding for SPEI Funding Purpose).
Parties means the parties to this Agreement.
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EXECUTION VERSION
PO Group means POL and its subsidiaries from time to time.
Potential Fundamental Change has the meaning given to it in Part B of Schedule 2 (Potential
Fundamental Change).
Principles of Community Engagement means the Principles of Community Engagement on
changes to the Post Office Network published in June 2018 and agreed with Citizens Advice,
Citizens Advice Scotland and the General Consumer Council for Northern Ireland as amended,
varied, supplemented or changed from time to time.
PSA2000 means the Postal Services Act 2000.
PSA2011 means the Postal Services Act 2011.
Quarter Date means cach of I April, 1 July, I October and I January.
Relevant Payment has the meaning given to it in clause 4 (Delayed payment).
Remedy Period has the meaning given to it in clause 4 (Delayed payment).
Required Payment Date has the meaning given to it in clause 4 (Delayed payment).
Rural Areas means those areas which are not Urban Areas.
Services of Public Economic Interest means the provision of access to the services listed in
Schedule 6 (SPEI Services) across the network of Branches in accordance with the Network
Access Criteria as set out in Schedule 5.
SPEI Funding Purpose means: (i) maintaining a network of Branches in accordance with the
Network Access Criteria; and (ii) ensuring the provision of SPEI Services over that network, in
each case during the Funding Period.
SPEI Network Subsidy Payment means a payment by the Secretary of State of an amount
calculated to compensate POL for the net cost of maintaining a network of Branches beyond its
optimal size. That network must meet the minimum access requirements as set out in
Schedule 5 (Network Access Criteria).
SPEI Services means some or all of the Services of Public Economic Interest.
SPEI Subsidy Statement has the meaning given to it in clause 5.9 (Government Funding for
SPEI Purpose).
Starling Litigation Protocol means the information sharing protocol in respect of the Starling
Litigation (as defined therein) between POL and UK Government Investments (on behalf of the
Secretary of State) dated 8 July 2019 (as the same may be amended from time to time by written
agreement between the parties to it).
Strategic Plan means POL’s strategic plan agreed between the Parties covering the period from
1 April 2021 to 31 March 2024 which:
(a) for the period from 1 April 2021 to 31 March 2022 will align with the Annual Plan
(which has been approved by POL’s board prior to the start of the Financial Year
subject to Secretary of State approval) but, to the extent that that Annual Plan differs
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(b)
EXECUTION VERSION
from the 2020 spending review bid, POL shall produce a reconciliation of those
differences as part of the submission of that Annual Plan to the Secretary of State; and
for the period from 1 April 2022 to 31 March 2024 will be agreed between the Parties
prior to 1 April 2022.
Urban Areas means communities with ten thousand (10,000) or more inhabitants in a
continuous built up area.
VAT Amount has the meaning given to it in clause 5.13 (Government Funding for SPEI
Purpose).
1.2 In this Agreement, except where the context otherwise requires:
(a) a reference to a person (which shall include any individual, firm, company, corporation
or other body corporate, government, state or agency or any association, trust, fund or
partnership (whether or not having separate legal personality)) shall include, as
appropriate, its successors, permitted assignces or transferees and, in the case of the
Secretary of State, persons appointed to act on his behalf;
(b) a reference to an enactment or statutory provision shall include a reference to any
subordinate legislation made under that enactment or statutory provision and is a
reference to that enactment, statutory provision or subordinate legislation as from time
to time amended, consolidated, modified, or re-enacted;
(c) words in the singular shall include the plural and vice versa;
(d) references to one gender include other genders;
(e) a reference to any agreement or other instrument (other than an enactment or statutory
provision) shall be deemed to be a reference to that agreement or instrument as from
time to time amended, varied, supplemented, substituted, novated, assigned or restated;
(f) a reference to a clause, Schedule or Appendix shall be a reference to a clause of, or
Schedule or Appendix to, this Agreement;
(g) a reference to “includes” or “including” shall be construed without limitation to any
events, circumstances, conditions, acts or matters specified after those words;
(h) references to dates which do not fall on a Business Day shall be construed as references
to the immediately subsequent Business Day;
(i) the headings are for convenience only and shall not affect its interpretation; and
Gi) references to this Agreement include this Agreement as amended or supplemented.
13 The Schedules and Appendices form part of this Agreement and shall have the same
force and effect as if expressly sct out in this Agreement, and any reference to this Agreement
shall include the Schedules and Appendices.
2.
2.1
EFFECTIVE DATE
This Agreement starts on the Effective Date.
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EXECUTION VERSION
3. CONDITIONS
3.1 The obligation of the Secretary of State under this Agreement to make any SPEI
Network Subsidy Payment or provide the Network Investment is conditional on the relevant
Milestone having been achieved.
3.2 The obligations of POL under clauses 5 (Government Funding for SPEI Purpose), 7
(Strategic Plan), 9 (Employee Incentive Arrangements) and 11 (Public Consultation,
Communication and Equality) during the Funding Period are conditional on:
(a) the relevant Milestone having been achieved; and
(b) the relevant SPEI Network Subsidy Payments or Network Investment having
been received.
Deliverables
33 On execution of this Agreement, POL shall deliver (or ensure that there is delivered)
all those documents listed in Schedule 1 (Deliverables) in a form and substance satisfactory to
the Secretary of State (acting reasonably).
Fundamental Change
3.4 Without prejudice to the accrued rights and remedies of the Parties, the obligations of
the Secretary of State to make or facilitate any payments in accordance with this Agreement
and the obligations of POL under clauses 5 (Government Funding for SPEI Purpose), 7
(Strategic Plan), 9 (Employee Incentive Arrangements) and 11 (Public Consultation,
Communication and Equality), may be terminated with immediate effect by written notice of
the Secretary of State upon the occurrence of a Fundamental Change.
35 If on the date on which any payment is due to be made by the Secretary of State to POL
under this Agreement a Potential Fundamental Change exists, the Secretary of State shall be
entitled to withhold such payment until such time as:
(a) a Fundamental Change occurs, whereupon clause 3.4 shall apply and the
Secretary of State shall have no obligation to make that payment; or
(b) the Potential Fundamental Change ceases to exist, whereupon the payment shall
become immediately due and payable.
3.6 Until the date on which the last SPEI Network Subsidy Payment or Network Investment
is due to be made by the Secretary of State to POL under this Agreement, POL shall promptly
disclose to the Secretary of State any matter or thing of which its board of directors becomes
aware after entering into this Agreement which constitutes, or which in the reasonable opinion
of its board of directors is reasonably likcly to give rise to, a Fundamental Change or a Potential
Fundamental Change.
4, DELAYED PAYMENT
If any SPEI Network Subsidy Payment or Network Investment to be made by the Secretary of
State to POL under this Agreement (a Relevant Payment) is not made on, or by the date on
which it is required by clauses 5.5 and 5.6 (Government Funding for SPEI Purpose) to be made
(the Required Payment Date), then during the period between the Required Payment Date and
the end of the tenth (10") Business Day thereafter (such period being the Remedy Period), the
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EXECUTION VERSION
Parties shall continue to comply with their respective obligations under this Agreement and the
Secretary of State shall make the Relevant Payment within the Remedy Period
5. SPEI GOVERNMENT FUNDING FOR THE SPEI PURPOSE
5.1 Subject to clause 5.2, POL undertakes to the Secretary of State that it will for the
duration of the Funding Period: (i) maintain a network of Branches in accordance with the
Network Access Criteria; and (ii) provide across that network the SPEI Services.
5.2. The Parties acknowledge and agree that:
(a) the Secretary of State expects POL to maintain a network of at least eleven
thousand five hundred (11,500) Branches for the duration of the Funding Period.
Should the number of Branches fall below eleven thousand five hundred
(11,500) during the Funding Period, POL shall within twenty (20) Business Days
develop a plan to remedy the shortfall, which shall be subject to the Secretary of
State’s approval (acting reasonably);
(b) save to the extent permitted by clause 5.2(c), the Secretary of State requires POL:
(i) to make available for purchase through its network of Branches the SPEI
Service set out in row I of Schedule 6 (SPEI Services); and (ii) to make available
for transacting the SPEI Services set out in rows 2 and 3 of Schedule 6 (SPEI
Services), in accordance with the Network Access Criteria (Schedule 5 (Network
Access Criteria));
(c) POL may not withdraw a SPEI Service from a Branch save for: (i) as a result of
changes to POL’s contractual requirements to provide that SPEI Service; or (ii)
where it is requested by the existing or prospective postmaster and is deemed
necessary by POL to ensure continuity of other services at the location. POL
shall notify the Secretary of State of each case where a SPEI Service has been
withdrawn from a Branch by including a statement in the report or reports
submitted pursuant to clause 7.2(a);
(d) the delivery of the SPEI Services by POL across its network will be governed in
accordance with contracts or other agreements under which the terms of the
provision of the individual SPEI Services are specified. The delivery of the SPEI
Services does not replace or change in any way any contracts or other agreements
under which the terms of the provision of the individual SPEI Services are
specified; and
53 POL may not, without the Secretary of State’s approval (acting reasonably), use the
SPEI Network Subsidy Payments or the Network Investment for any material project delivery
spend related to strategic platform modernisation which is additional to the spend required to
mobilise a team, prepare a business case or stand-up initial piloting activities for strategic
platform modernisation and where such spend does not exceed, in aggregate, ten million pounds
(£10 million). Subject to clause 2 (Conditions) and clause 6 (Withholding, Suspending or
Repayment of Government Funding), the Secretary of State agrees to make SPEI Network
Subsidy Payments and provide the Network Investment to POL during the Funding Period of
the amounts specified in clauses 5.5 and 5.6, to enable POL to meet its obligations in clause
5.1.
5.4 The SPEI Network Subsidy Payments for the Funding Period shall be made in a manner
or manners to be determined by the Secretary of State in his absolute discretion (but having
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consulted with POL as to the impact thereof (if any) on their profit and loss accounts and the
tax treatment of such payments).
55 The SPEI Network Subsidy Payment payable in the Funding Period shall be up to fifty
million pounds (£50,000,000) made by way of payment to POL in equal quarterly instalments
on each Quarter Date during the Funding Period or as otherwise agreed between the Parties.
5.6 The Network Investment to be provided in the Funding Period shall be one hundred
and twenty-five million pounds (£125.000,000). The investment shall be made in two
instalments at six month intervals during the Funding Period for the amounts set out in the
Annual Plan and in the report delivered in accordance with clause 7.2(a), or as otherwise agreed
between the Parties, by way of a subscription for shares in the capital of POL for cash by the
Secretary of State using the form of subscription letter set out in Schedule 7 (Agreed Form
Subscription Letter).
5.7 Inascertaining for any purpose of this clause 5 the amount or maximum amount of any
SPEI Network Subsidy Payment no account shall be taken of: (i) any VAT Amount which may
be payable under clause 5.13; or (ii) the benefit of any interest receivable on any amount held
by POL prior to its expenditure.
5.8 It is acknowledged by the Parties that any part of the SPEI Network Subsidy Payments
received by POL under a network subsidy scheme pursuant to section 103 of the PSA2000
(currently expected to be the amounts specified in clause 5.5 above) would be treated as revenue
in POL’s accounts, which has an impact on POL’s operating profit. Should any SPEI Network
Subsidy Payment (or part thereof) be made in the Funding Period in any manner which would
result in it not being treated as revenue in POL’s accounts then any target operating profit
applicable for any purpose to POL, or the PO Group as a whole, in the Funding Period shall be
reduced by the amount of any SPEI Network Subsidy Payment (or part thereof) received in any
such manner in the Funding Period.
5.9 Within three months following the signature of POL’s accounts in respect of the
Funding Period, POL shall provide to the Secretary of State a statement (the SPEI Subsidy
Statement) setting out in writing the Actual SPEI Cost for the Funding Period, together with
supporting calculations properly prepared in accordance with the requirements in Schedule 3
(Calculation of Actual SPEI Cost) and a clear explanation of how the amounts have been
calculated. The SPEI Subsidy Statement shall be accompanied by confirmation from POL that
POL used the SPEI Network Subsidy Payment in accordance with the terms of this Agreement.
5.10 If following the end of the Funding Period:
(a) the SPEI Subsidy Statement shows that the amount of the Actual SPEI Cost for
the Funding Period is less than the amount of the SPEI Network Subsidy
Payment set out in clause 5.
5 OF
(b) the amount of the total investment spend as set out in the Annual Plan for the
Funding Period (excluding amounts used to pay external legal fees in connection
with any proceedings in relation to Postmaster Complaints (as defined in the
Group Litigation Protocol), the Starling Litigation (as defined in the Starling
Litigation Protocol) and the Civil Claims as disclosed (in written form) to the
Secretary of State) is lower than the Network Investment (in accordance with
clause 5.6),
POL shall, within ten (10) Business Days ofa request by the Secretary of State, reimburse
to the Secretary of State, without deduction, an amount equal to the difference.
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5.11 POL shall use cach SPEI Network Subsidy Payment and the Network Investment only
to meet the direct and indirect costs associated with: (i) maintaining a network of Branches in
accordance with the Network Access Criteria; and (ii) ensuring the provision of SPEI Services
over that network, calculated in accordance with Schedule 3 (Calculation of Actual SPEI Cost)
(or to make any reimbursement required 1o be made by POL pursuant to clause 5.10).
5.12 POL shall not use the SPEI Network Subsidy Payment or the Network Investment for
the purposes set out in paragraphs (a) to (i) below. In so far as POL have additional resources,
from current or retained profits then POL may undertake these activities (where permitted under
the Articles of Association):
(a) to fund lobbying (via an external firm or in-house staff) in order to undertake
activities intended to influence or attempt to influence Government or political
activity or attempting to influence legislative or regulatory action;
(b) to directly enable one part of Government to challenge another on topics
unrelated to the SPEI Funding Purpose or SPEI Services;
(c) to petition for additional funding;
(d) for entertaining, in particular any entertainment aimed at exerting undue
influence to change Government policy;
(c) payments for activities ofa party political or exclusively religious nature;
() for the giving of gifts;
(g) to pay external legal fees in connection with any proceedings in relation to
Postmaster Complaints (as defined in the Group Litigation Protocol), the Starling
Litigation (as defined in the Starling Litigation Protocol) and the Civil Claims as
disclosed (in written form) to the Secretary of State;
(bh) to pay statutory fines, criminal fines or penalties; or
(i) for payments for unfair dismissal.
5.13 It is the mutual opinion of the Parties that any payment of an instalment of the SPEI
Network Subsidy Payment received by POL will not (and POL agrees not to take any steps
with the intention of procuring that they will) constitute, for VAT purposes, the consideration
for any taxable supply and that, accordingly, the receipt by POL of such instalment of the SPEI
Network Subsidy Payment should not give rise to any liability of POL (or any other member
of the PO Group) to account for VAT in respect of any such reccipt. Notwithstanding the
foregoing opinion, if it should, at any time (whether or not a time falling within the duration of
this Agreement), be determined by Her Majesty’s Revenue and Customs that such instalment
of the SPEI Network Subsidy Payment must be treated as the consideration for taxable supplies
made by POL (or, as the case may be, by any other member of the PO Group) and that in
consequence POL (or such other member of the PO Group) is liable to account for VAT in
respect of the receipt of any of such instalment of the SPEI Network Subsidy Payment (the
VAT Amount), POL shall notify the Secretary of State of that determination within five (5)
Business Days of being so advised by Her Majesty’s Revenue and Customs and the Secretary
of State shall, as soon as reasonably practicable following notification of such determination,
make a payment to POL, in addition to all amounts otherwise payable by the Secretary of State
to POL under this Agreement, of a sum equal to the VAT Amount, against production of a valid
VAT invoice.
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5.14 If Her Majesty’s Revenue and Customs issues a determination as referred to in clause
5.13 the Parties shall (acting reasonably) consult as to what action to take regarding such
determination. If the Secretary of State disagrees with the determination he may, within ten (10)
Business Days of being notified by POL of such determination, give written notice to POL that
he requires POL (or any other member of the PO Group) to obtain a review by Her Majesty’s
Revenue and Customs of that determination; and POL (or such other member of the PO Group,
as the case may be) shall promptly request (the form of that request being subject to reasonable
review by the Secretary of State) Her Majesty’s Revenue and Customs to undertake such
review. In the event that the review results in POL obtaining a refund of any VAT Amount, or
not being required to pay a VAT Amount, in each case in respect of which the Secretary of
State shall have made a corresponding payment under clause 5.13, POL shall promptly refund
to the Secretary of State the amount of such corresponding payment.
6. WITHHOLDING, SUSPENDING OR REPAYMENT OF GOVERNMENT FUNDING
6.1 Without prejudice to the Secretary of State’s other rights and remedies, the Secretary
of State may at his discretion reduce, withhold or suspend payment of any instalment of the
SPEI Network Subsidy Payments or the Network Investment due to POL and / or require POL
to repay all or part of the SPEI Network Subsidy Payment or the Network Investment if:
(a) subject to clause 5.12, POL uses the SPEI Network Subsidy Payment or the
Network Investment for a purpose other than the SPEI Funding Purpose or fails
to comply with any of its obligations under clauses 5 (Government Funding for
SPEI Purpose), 7 (Strategic Plan), 9 (Employee Incentive Arrangements) and 11
(Public Consultation, Communication and Equality) during the Funding Period;
(b) POL receives funding from a third party for part or all of the same purposes as
the SPEI Funding Purpose (in which case, the Secretary of State’s recovery will
be limited to an amount equal to the third party funding for the relevant SPEI
Funding Purpose);
(c) the Secretary of State has incorrectly paid money to POL as a result of an
administrative error or other reason;
(d) POL fails to achieve any Milestone referred to in Schedule 4 (Milestones) by the
date specified in that schedule, until such Milestone is achieved;
(e) POL fails during the Funding Period or has failed prior to the Funding Period to
meet any requirement in relation to consent or approval pursuant to article 8 of
the Articles of Association; or
() any of the following events arise:
(i) POLis, in the reasonable opinion of the Secretary of State, delivering the SPEI
Funding Purpose in a negligent manner, provided that the Secretary of State
has given POL written notice that he believes that the SPEI Funding Purpose
has been provided negligently and POL has failed to remedy the provision of
the SPEI Funding Purpose within twenty (20) Business Days of such notice; or
(ii) POL obtains debt funding from a third party which, in the reasonable opinion
of the Secretary of State, undertakes activities that are likely to bring the
reputation of the SPEI Funding Purpose or the SPEI Services or the Secretary
of State into disrepute, provided that the Secretary of State shall have no right
to reduce, withhold or suspend payment where POL has obtained such debt
10
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funding from a third party which is regulated by any arm of the Government
or which has the right to do business in the United Kingdom by reason of the
European Union passporting system or other equivalent system enabling such
third party to trade freely in the United Kingdom. The Parties acknowledge that
any equity funding is likely to constitute a variation of rights attaching to the
special share in POL held by the Secretary of State and therefore will require
prior written consent in accordance with the Articles of Association;
(iii) POL knowingly provides the Secretary of State with any material information
relating to the provision of the SPEI Funding Purpose that is materially
misleading or inaccurate;
(iv) POL is involved in any illegal activity in the provision of the SPEI Funding
Purpose; or
(v) the Secretary of State is required to exercise its rights under this clause by an
order of a court.
6.2 If any of the events in clause 6.1 occur and the Secretary of State reduces the SPEI
Network Subsidy Payment or the Network Investment for the Funding Period then POL shall
perform such of its obligations under this Agreement as shall be correspondingly adjusted by
POL and the Secretary of State.
6.3 The Secretary of State also has the right to impose reasonable additional terms and
conditions to the SPEI Network Subsidy Payments or the Network Investment if any of the
events set out in clause 6.1 occur, or if the Secretary of State has reasonable grounds to believe
that it is necessary to protect public money.
7 STRATEGIC PLAN
7.1 Unless otherwise agreed by the Secretary of State, POL shall not apply the SPEI
Network Subsidy Payment or Network Investment for a purpose inconsistent with the Strategic
Plan or make any material deviation from the Annual Plan.
7.2 Inorder for the Secretary of State to monitor POL’s progress in delivering the Strategic
Plan:
(a) POL shall provide, in a form and substance satisfactory to the Secretary of State (acting
reasonably), a report or reports, approved by POL’s board of directors, setting out an
overall assessment of POL’s activities during the previous Financial Quarter. Subject
to POL’s board of directors having reviewed and approved the report(s), such report
shall be provided no more than thirty (30) Business Days after cach Quarter Date in the
Funding Period, and shall include:
(i) a summary of POL’s financial and change spend performance over the
Financial Quarter and its expected future financial and change spend
performance as compared to the Annual Plan;
(ii) a report analysing the impact of any changes to the provision of SPEI Services
at any Branch or Branches on groups with protected characteristics and any
measures proposed to mitigate any negative impacts on such groups;
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(iii) information on expected drawings by POL on the cash provided to POL
pursuant to the Network Investment for the remaining duration of the Annual
Plan; and
(iv) a statement setting out each case where a SPEI Service has been withdrawn
from a Branch, as per 5.2(a); and
(b) the Secretary of State may request information on a routine and an ad hoc basis. The
Secretary of State will ensure that information requests are not overly onerous and POL
will use its reasonable endeavours to satisfy all information requests.
8. FINAL CONTRIBUTION
POL acknowledges that the SPEI Network Subsidy Payment and Network Investment to be
provided by the Sccretary of State pursuant to this Agreement represents the Scretary of State’s
final funding contribution in respect of POL’s obligations over the Funding Period to: (i)
maintain a network of Branches in accordance with the Network Access Criteria; and (ii) ensure
the provision of SPEI Services over that network in accordance with the Strategic Plan.
9. EMPLOYEE INCENTIVE ARRANGEMENTS
91 POL may maintain an incentive scheme, approved by the Secretary of State, for its
senior executive team in a manner which is designed to ensure, and is consistent with ensuring,
the delivery of the Annual Plan.
9.2 POL confirms that accordingly, no such bonus arrangements will pay out in respect of
a Funding Period in which POL seeks and obtains funding in addition to the SPEI Network
Subsidy Payment or the Network Investment from the Secretary of State over and above that
anticipated in this Agreement, as a result of a failure by POL to perform in accordance with the
requirements of the Annual Plan (other than as a result of a change in Government policy or
other reasons beyond POL’s control including funding related to historical litigation matters).
10. JOINT VENTURES
10.1 Unless otherwise agreed with the Secretary of State, POL agrees that it shall only enter
into joint ventures with third parties for purposes consistent with the delivery of the Strategic
Plan and provided that the joint venture is structured on the basis that it would not (according
to Government advice) be classified as part of the public sector in accordance with a guidance
note for public sector bodies forming joint ventures with the private sector by Her Majesty’s
Treasury dated March 2010 or any subsequent replacements for this guidance note.
11. PUBLIC CONSULTATION, COMMUNICATION AND EQUALITY
11.1 POL shall at all times comply with the Principles of Community Engagement.
11.2 POL acknowledges the commitment that any individuals taking any decision or
exercising any other function on POL’s behalf should do so having due regard to the relevant
protected characteristics as set out in section 149 of the Equality Act 2010 and that appropriate
steps be taken to inform all people making decisions or exercising functions on POL’s behalf
of these equality duties. This is reflected in POL’s Equality, Diversity and Inclusion Policy and
POL shall ensure that this commitment is maintained in the performance of its obligations under
this Agreement.
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12. CONSENTS
The Secretary of State hereby consents, for the purposes of the Articles of Association and any
other document or arrangement under which its consent or approval is required, to the execution
and performance by POL of this Agreement and the documents and arrangements to be entered
into pursuant to, or otherwise contemplated by, this Agreement (other than any agreement
contemplated in clause 10 (Joint Ventures). The Secretary of State agrees that such consents
will take effect notwithstanding any failure to comply with any procedural requirements of such
articles or other documents in connection with the obtaining of such consents.
13. CONFIDENTIALITY
13.1 Each Party undertakes to the other Party that, subject to clause 13.2, it shall treat as
strictly confidential all confidential information. For the purposes of this clause 13, confidential
information shall mean:
(a) the provisions of this Agreement, and the Strategic Plan; and
(b) the negotiations relating to this Agreement and the Strategic Plan.
13.2. Clause 13.1 shall not prevent the disclosure by a Party of any confidential information:
(a) to those of its officers (including auditors), employces and agents as it considers
have a need for such information in the performance of their respective functions
and who shall in each case be made aware by such Party of its obligations under
this Agreement and shall be required by such Party to observe the same
restrictions on the use of the confidential information as are contained in this
clause 13;
(b) to its professional advisers who are bound to such Party by a duty of confidence
which applies to the confidential information disclosed;
(c) to the extent required by applicable law, legal contractual obligations with
Financial Counterparties or by the regulations of any regulatory or supervisory
authority to which such Party is subject or pursuant to any order of court or other
competent authority or tribunal;
(d) which shall have entered the public domain or ceased to be confidential other
than as a result of a breach by such Party of its obligations under this clause 13;
(e) where the Letter of Support is provided to third parties in which POL has a
contractual relationship having received consent to provide such third party with
the Letter of Support from Carl Creswell in writing (whether by way ofan email
or letter);
(60) which was already known to such Party prior to its disclosure to such Party other
than as a result of a breach by such Party of an obligation of confidentiality;
(g) as such Party, acting reasonably, considers necessary in connection with any
investigations, inquiries, or actual or threatened proceedings in connection with
POL or any of its directors;
(h) in the case of POL, to the extent that its board of directors acting reasonably,
considers disclosure necessary from time to time in its statutory accounts;
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(i) to the extent that the Secretary of State, acting reasonably, considers disclosure
necessary from time to time in the published accounts of the Department of
Business, Energy and Industrial Strategy or Her Majesty’s Treasury;
(i) to the extent required by any Parliamentary obligation;
(kK) to the extent required for the purposes of any examination pursuant to section
6(1) of the National Audit Act 1983 of the economy, efficiency and effectiveness
with which the Secretary of State has used his resources; or
(o) with the prior written consent of the other Party.
13.3. Ifa Party becomes required, in circumstances contemplated by clause 13.2(c), (g), (h)
or (i) to disclose any confidential information, such Party shall, to the extent permitted by law,
give to the other Party such notice of such disclosure as is practicable in the circumstances and
shall, to the extent permitted by law and practicable in the circumstances, consult with the other
Party as to the extent of such disclosure.
14, NOTICES
14.1 A notice to be served pursuant to or in connection with this Agreement shall be in
writing and, unless otherwise stated, served in person or sent by pre-paid first class post, e-mail
or any other electronic method of communication as agreed by the Parties to the relevant Party
at its address or e-mail address set out below, or such other address in England or Wales or e-
mail address notified by it to the other Party and marked for the attention of the person or
department therein specified.
14.2 The address and addressee of each Party at the date of this Agreement are:
Sceretary of State Department for I 1 Victoria Street, I ¢
Business, I Energy I London SW1H OET i
and Industrial
Strategy
POL Company Secretary I 20 Finsbury Street,
London EC2Y 9AQ
14.3. Notice shall be deemed to be received on the date and time specified below (save that
where such notice would otherwise be deemed to be received after 17:00 London time on a
particular day, it shall be deemed to have been received at 9:00 London time on the next
Business Day):
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(a) in the case of a notice served in person, upon delivery at the address of the
addressee;
(b) in the case of a posted letter, on the second (2") Business Day after posting; and
(c) in the case of e-mail or any other electronic method of communication agreed by
the Parties, when actually received in readable form.
14.4 Each Party undertakes to notify the other Party by notice served in accordance with this
clause 14 if the address specified by that Party herein is no longer an appropriate address for
the service of notice or if it is desired to substitute any individual addressee of that Party named
in clause 14.2.
14.5 In proving service of any notice under or in connection with this Agreement it will be
sufficient to prove:
(a) in the case ofa letter, that such letter was properly stamped or franked, addressed
and placed in the post or in the case of personal delivery, was left at the correct
address; and
(b) in the case of an e-mail, that e-mail was duly transmitted to the e-mail address
of the addressee referred to in clause 14.2.
15. ENTIRE AGREEMENT
15.1 This Agreement and any documents referred to in it or annexed to it constitute the
whole and only agreement between the Parties relating to its subject matter and, for the
avoidance of doubt, supersedes any other prior arrangement, understanding or agreement
between the Parties relating to the subject matter of this Agreement.
15.2. Each Party acknowledges that in entering into this Agreement, it is not relying on any
pre-contractual statement, which is not set out in this Agreement.
15.3 Except in the case of fraud, neither Party shall have any right of action against the other
Party arising out of or in connection with any pre-contractual statement except to the extent that
it is expressly provided for in this Agreement.
15.4 For the purposes of this clause 15, pre-contractual statement means any draft,
agreement, undertaking, representation, warranty, promise, assurance, forecast, estimate or
arrangement of any nature whatsoever, whether or not in writing, relating to the subject matter
of this Agreement made or given by any person at any time prior to the date of this Agreement.
16. GENERAL
Secretary of State
16.1 Nothing in this Agreement fetters the powers conferred on the Secretary of State by the
PSA2000 and the PSA2011.
Costs
16.2 Save as expressly provided for elsewhere in this Agreement, each of the Parties shall
at its own expense do all such things as shall be necessary to give full effect to the obligations
imposed on it under this Agreement.
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Third parties
16.3 For the purposes of the Contracts (Rights of Third Parties) Act 1999, no person other
than a Party shall have any rights in respect of this Agreement.
Counterparts
16.4 This Agreement may be executed in any number of counterparts and by the Parties on
separate counterparts, each of which when so executed and delivered shall be an original, but
all the counterparts shall together constitute one and the same instrument.
Partial invalidity
16.5 If any term or provision in this Agreement is held to be illegal or unenforceable in
whole or in part under any enactment or rule of law, such term or provision or part shall to that
extent be deemed not to form part of this Agreement but the enforceability of the remainder of
this Agreement shall not be affected.
Rights, variations and waivers
16.6 The rights and remedies of the Parties shall not be affected by any failure to exercise
or delay in exercising any right or remedy or by the giving of any indulgence by the other Party
or by anything whatsoever except a specific waiver or release in writing and any such waiver
or release shall not prejudice or affect any other rights or remedies of the Parties. No single or
partial exercise of any right or remedy prevents any further or other exercise thereof or the
exercise of any other right or remedy.
16.7 No variation of this Agreement shall be of any effect unless it is agreed in writing by
or on behalf of each Party.
16.8 Any waiver of any right, power or remedy under this Agreement must be in writing
and may be given subject to any conditions thought fit by the grantor. The person seeking the
waiver shall disclose to the grantor all material facts then in that person’s knowledge relevant
to the subject matter of the waiver. Unless otherwise expressly stated, any waiver shall be
effective only in the instance and only for the purpose for which it is given.
Remedies
16.9 Without prejudice to any other rights or remedies that either Party may have, each Party
acknowledges and agrees that damages alone would not be an adequate remedy for any breach
by a Party of the provisions of this Agreement, and that the remedies of injunction and specific
performance as well as any other equitable relief for any threatened or actual breach of the
provisions of this Agreement by a Party may be more appropriate remedies and that no proof
of special damages shall be necessary for the enforcement of this Agreement.
Governing law and jurisdiction
16.10 This Agreement and any non-contractual obligations arising out of or in relation to this
Agreement shall be governed by and construed in accordance with the law of England and
Wales.
16.11 Each Party hereby submits to the exclusive jurisdiction of the courts of England.
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EXECUTED by the Parties on the date first written above.
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SIGNED by
for and on behalf of
THE SECRETARY OF STATE FOR BUSINESS, ENERGY AND INDUSTRIAL
STRATEGY
Signature: .
Name: Carl Creswell
Title: Director, Department for Business, Energy and Industrial Strategy
SIGNED by
for and on behalf of
POST OFFICE LIMITED
Signature:
Name: Nick Read
Title: Chief Executive Officer
Signature:
Name: Alisdair Cameron
Title: Chief Financial Officer
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SCHEDULE 1
DELIVERABLES
A certified copy of a resolution of the board of POL:
(a) approving the terms of, and the transactions contemplated by this Agreement and
resolving that it execute and perform this Agreement;
(b) authorising a specific person or persons to execute this Agreement on its behalf; and
(c) authorising a specified person or persons, on its behalf, to sign and / or dispatch all
documents and notices to be signed and / or dispatched by it under or in connection
with this Agreement.
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SCHEDULE 2
Part A
Fundamental Change
A Fundamental Change will have occurred if:
if
Nv
an order has been made or resolution has been passed for the winding-up of, or a
provisional liquidator to be appointed in respect of, POL;
an administrator has been appointed in respect of POL;
a receiver (which expression shall include an administrative receiver) has been
appointed in respect of POL;
POL is unable to pay its debts as they fall due within the meaning of section 123 of the
Insolvency Act 1986;
a moratorium is declared in respect of the indebtedness of POL or POL enters into a
moratorium or a composition, assignment or similar arrangement with its creditors
generally;
a scheme of arrangement is approved, or proposed by POL, under Part 26 of the
Companies Act 2006 with a view to rescheduling or restructuring POL’s indebtedness;
a voluntary arrangement has been proposed by POL under section 1 of the Insolvency
Act 1986 in respect of POL; or
an event analogous to the foregoing has occurred in relation to POL in any jurisdiction
outside England.
Part B
Potential Fundamental Change
A Potential Fundamental Change exists at any time if at that time a Fundamental Change shall
not have occurred but:
1.
i
a petition has been presented or a meeting has been convened for the purpose of
winding-up POL or appointing a provisional liquidator in respect of POL and such
petition has not been discharged or such meeting has not been held; or
POL is currently taking steps with a view to appointing an administrator or agreeing a
moratorium, composition, assignment or similar arrangement with its creditors
generally.
20
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SCHEDULE 3
CALCULATION OF ACTUAL SPEI COST
The amount of the Actual SPEI Cost shall be the actual costs incurred by POL in
connection with the provision of the loss-making network of Branches in accordance
with the terms of this Agreement.
Only Branches that made a loss during the Funding Period are to be included in the
calculation of the Actual SPEI Cost. Subject to Schedule 3 paragraph 4, the Actual
SPEI Cost is to be calculated by the following equation:
Actual SPEI Cost = (B+C) — A (if positive) where:
A =Total revenue from loss-making Branches;
B = Direct costs attributable to loss-making Branches; and
C = Indirect costs attributable to loss-making Branches.
For the purposes of calculating the Actual SPEI Cost, the costs shall include, without
limitation, all variable and fixed costs associated with the provision of the loss-making
network of Branches including contributions to pension funds, interest costs, central
costs, depreciation and amortisation costs of any employee incentivisation
arrangements and the costs of transforming the network, in each case whether such
costs are recurring or exceptional and will be calculated on an annual basis.
The Secretary of State reserves the right to change the basis of the calculation of Actual
SPEI Cost in the event of a relevant change in the applicable subsidy rules.
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EXECUTION VERSION
SCHEDULE 4
MILESTONES
Network Size
Subject to clause 5.2 (Government Funding for SPEI Purpose), POL’s network meets the
Network Access Criteria as reported by POL in each report delivered in accordance with clause
7.2(a).
Annual Plan:
POL has provided an annual report to the Secretary of State prior to the start of the Funding
Period, setting out the steps that it will take in respect of the Strategic Plan (or any variation to
it, agreed by the Parties where material) during that forthcoming Funding Period (the Annual
Plan).
Each year the Secretary of State (acting reasonably) will agree with POL a timetable for POL
to provide a draft and final version of the Annual Plan. This timetable will, among other things,
include providing the Secretary of State with a POL board-approved draft Annual Plan prior to
the start of the Funding Period.
This Annual Plan should include:
(a) POL’s annual budget;
(b) a reconciliation of any differences between POL’s annual budget and the projected
income statement, statement of cash flows and balance shcet in the Strategic Plan;
(c) information on the network of Branches, including its planned size and confirmation
of POL’s intention to continue to comply with the Network Access Criteria and an
impact assessment of the network change plan with respect to POL’s public
sector equality duty responsibilities, as per clause 11.2;
(d) the proposed drawings by POL on the cash provided to POL pursuant to the Network
Investment;
(e) information on the investment activities that POL plans to undertake;
(f) an update on POL’s forecast financial performance for the current Funding Period; and
(g) information on any other outcomes set out in POL’s Strategic Plan that do not form
part of (a) to (f) above.
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EXECUTION VERSION
SCHEDULE 5
NETWORK ACCESS CRITERIA
1. POL’s network of Branches must enable the following criteria to be met:
a. nationally, ninety per cent. (90%) of the UK population are within one (1) mile of the
nearest Branch;
b. nationally, ninety-nine per cent. (99%) of the UK population are within three (3) miles
of the nearest Branch;
c. in Urban Areas, ninety-five per cent. (95%) of the total population are within one (1)
mile of the nearest Branch;
d. in Deprived Urban Areas, ninety-nine per cent. (99%) of the total population are
within one (1) mile of the nearest Branch; and
e. in Rural Areas, ninety-five per cent. (95%) of the total population are within three (3)
miles of the nearest Branch.
In addition, the following criterion will apply at the level of each and every individual
postcode district, establishing a minimum level of coverage at a very local level:
f. in each postcode district, ninety-five per cent. (95%) of the population to be within 6
miles of their nearest Branch.
2. In applying the above criteria POL shall in addition take account of geographical
constraints such as rivers, mountains and valleys, motorways and sea crossings to islands,
and public transport infrastructure, so as not to impose undue hardship when considering
the appropriate Branch network.
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EXECUTION VERSION
SCHEDULE 6
SPEI SERVICES
Post Office are required to provide the below SPEI Services in accordance with clause 5.2:
I. Access to postal I Provision of access to postal services which the universal service provider
services. (Royal Mail Group Limited) is required to provide under regulatory
conditions and directions issued by Ofcom in accordance with section 36
of the Postal Services Act 2011 and the Designated Universal Service
Provider Conditions issued by Ofcom on 27 March 2012.
2. Universal access to I Provision of basic cash and banking, principally for the benefit of
basic cash —_and I financially or socially excluded customers and businesses local to post
banking facilities. office branches, e.g. cash withdrawals, cash deposits, cash transmission
facilities (e.g. including postal orders) and cashing of cheques.
3. I Universal payment I Provision of facilities for payment of electricity, gas, telecommunications
facilities for public I and water bills. Payment options include pre-payment and other budgeting
utility services. schemes (e.g. including savings stamps).
4. Provision of services I Provision of access to Government services as per separate contractual
on behalf of Central I agreements with Central and Local Government and public sector
and Local I agencies.
Government
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EXECUTION VERSION
SCHEDULE 7
AGREED FORM SUBSCRIPTION LETTER
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Ld
Department for
Business, Energy
& Industrial Strategy
Department for Business, Energy & Industrial
Strategy
1 Victoria Street,
To the Board of Directors Lor
Post Office Ltd. a
Finsbury Dials w
20 Finsbury Street
LONDON
EC2Y 9AQ 14 December 2020
Dear Post Office Board of Directors,
LETTER OF COMFORT — IN CONFIDENCE & WITHOUT PREJUDICE
This letter is in response to your request that BEIS provide the Board of Post Office Limited
(the “Company”) with comfort to assist the Board in maintaining its view that the Company
continues to be able to meet its liabilities as and when they fall due. This forms part of the
going concern assessment for the Company's accounts for the year ended 29 March 2020
and the Board’s approach to continued management of risks around the legacy postmaster
litigation liabilities. The information provided in this letter is confidential and may not be
disclosed to any third parties (other than your legal advisers and auditors) without our prior
written consent.
BEIS notes that the number of applications under the Historic Shortfall Scheme (the “HSS”)
has been materially higher than expected resulting in a corresponding increase in possible
scheme claims and costs. One consequence of this is that, subject to a reliable valuation of
liabilities expected to become available in January 2021, the Company may decide to
recognise a provision in its accounts in the 2020/21 financial year. BEIS understands that this
provision may put the Company into a net liability position, which the Company has an
obligation to disclose to certain third parties if it will be in breach of contracts with these
counterparties.
The Company has informed BEIS that, while some payments under the scheme can be
funded by the Company, it expects that any amount in excess of the original budget will be
unaffordable for the Company without a reallocation of funding from its business as usual
budget. Subject to a reliable valuation of liabilities expected to become available in January
2021, the Company has informed BEIS that it expects total compensation claims under the
HSS to exceed the original budget.
BEIS also notes the risk the Company faces in relation to compensation claims from
postmasters that may have their convictions overturned and the Company expects that any
successful claims may start crystallising in the 2021/22 financial year. The Company has
informed BEIS that these claims may be material and could also be unaffordable for the
Company.
BEIS understands these risks and the constraints they place on the Company. The BEIS
Secretary of State is sole shareholder of the Company. Moreover, in light of the vital public
services that the post office network provides to millions of customers across the UK, BEIS
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places a high priority on the Company's ability to continue delivering the policy objectives laid
out in the Funding Agreement between the Company and BEIS.
To this end, successive Governments have invested over £2 billion since 2010 to safeguard
and modernise the Post Office and ensure its sustainability for the future. Through the current
Funding Agreement, which covers the period April 2018 — March 2021, the Government has
provided £210 million investment funding and £160 million subsidy (a total of £370 million).
You have been informed of the outcome of the 2020 Spending Review in which Government
has provisionally granted Post Office £177m of capital spending (of which £52m is a loan)
and a £50m subsidy for the uncommercial network for the period April 2021 — March 2022.
Over this period, Government has also approved extensions of the Company's £950m
Working Capital Facility and £50m Revolving Credit Facilities, plus appropriate waivers when
needed.
The Company has informed BEIS that it needs certainty now regarding its commitments in
relation to the forthcoming HSS compensation payments, given the proximity of possible
provision. BEIS also understands that any request in the current financial year is likely to form
part of a forthcoming wider request from the Company to cover all exposures outlined in this
letter.
While not constituting a financial guarantee, BEIS is working with UKGI to develop a business
case and apply to HM Treasury for future funding, with the aim of enabling the Company to
meet its obligations regarding the payments under the HSS scheme and compensation
payments due to postmasters that may have their convictions overturned. In each case, this
is subject to business case approval by BEIS and HM Treasury.
In the event that any future funding from the Government is provided, the Company will be
subject to the funds being assessed under the relevant State aid or subsidy rules in place
when the funds are granted and the final approval of BEIS and HM Treasury. The provision
of any funding will also be subject to the Company being able to demonstrate that (to the
extent relevant in the context of legacy liabilities) it will share in the cost, that the payments
are otherwise unaffordable to the Company and that the recommended course of action
offers value for money for the taxpayer.
Yours sincerely,
Tom Taylor
Finance Director
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