POB(98)10"
P098/123 to 138
In Strictest Confidence
POST OFFICE BOARD
Minutes of the meeting held on 8 December 1998
Present
Dr Neville Bain
John Roberts
Richard Close
Jerry Cope
Mike Kinski
Dr John Lloyd
Miles Templeman
Rosemary Thorne
Richard Adams
Scott Childes
at 148 Old Street
Chairman
Chief Executive
Managing Director Finance
Managing Director Strategy & Personnel
Non-Executive Member
Non-Executive Member
Non-Executive Member
Non-Executive Member
Secretary
Notes
Richard Dykes, Managing Director Royal Mail
Stuart Sweetman, Managing Director Post Office Counters Limited
Kevin Williams, Managing Director Parcelforce Worldwide
Others attending:
MINUTES OF
PREVIOUS MEETING
MILES TEMPLEMAN
David Morphey, POCL Commercial Director, for item
PO98/129
Dick Wheelhouse, POCL Lottery Director, for item
PO98/130
Dom McKenna, International Transaction Team
Leader, for item PO98/131
Barrie Stephens, Royal Mail Delivery Review Director,
for item PO98/132
PO98/123
The Board approved the minutes and separate record
of proceedings from its meeting of 10 November 1998.
PO98/124
The Board welcomed Miles Templeman who had been
appointed a Non-Executive Board Member for a three
year period from 6 October 1998.
GRO
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MATTERS ARISING
POB(98)78
Liberalisation of
Postal Markets &
PO Regulatory
Strategy
(PO98/113)
CHAIRMAN’S
BUSINESS
10)
(ii)
(iii)
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PO98/125
The Board noted the matters arising from the i
November 1998. " ae
A meeting had still to be held with the General Secreta
ry of
the CWU. A further report would be provided after this
meeting had been held.
PO98/126
The Chairman highlighted the sensitivity of discussions on
the Lottery and the need to maintain strict confidentiality.
The announcement on the outcome of The Post Office
Review and the positive benefits it outlined were in no small
measure the result of the efforts of John Roberts, Jerry Cope
and the Review team.
The detail behind the statement would be contained within a
White Paper due to be published in January. The media
reaction had been lukewarm with some disappointment that
privatisation had not been announced. However, a share
sale would have resulted in at least two years of further
uncertainty as legislation was progressed.
The announcement that an annual cash dividend of 40% of
post tax profits would be introduced was welcomed, as was
the reduction in next year’s EFL from £335m to £207m,
although both had already been built into the existing
Corporate Plan. It was understood that a threshold of £75m
would be placed on investment projects below which
Government approval would not be necessary. Government
would approve normal investment cases above £75m
provided they could be shown to be commercially robust.
This was a significant improvement.
The new financial regime was expected to be introduced
from April 1999.
noted further that
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(vi)
vii)
viii)
(ix)
(x)
(xi)
(xii)
(xiii)
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The emphasis on a rolling five year strategic plan, which
would be agreed with Government, was significant. It would
detail the five year capital programme and development
capital spend. Significant one-off investments not within the
plan would be referred to Government for approval, with an
assurance that a response would be provided within 28
days.
The importance of the White Paper was recognised as was
the need for the Secretary of State to remain firm on his
stated position.
The announcement to proceed within the public sector would
be welcomed by the CWU and it would now be important to
work with them to develop relationships and agreements,
building on the impetus of the statement.
No further detail had been provided with regard to regulation,
although it was known that an interim arrangement with the
DTI acting as regulator was a possibility.
The embargo on Crown Office conversions had been lifted
and The Post Office Minister, lan McCartney, had supported
The Post Office position that the network should not be
based on a specific number of offices but rather the volume
of business transacted through the directly owned network.
He had accepted a volume figure of 15%.
The Board's consideration of project Sapphire (PO98/131)
was of fundamental importance to the future of the
organisation and the realitively weak financial case had to be
balanced against its strategic importance.
Horizon had reached a critical stage with ICL having until 9
December to reply to the letter from Stephen Byers, Chief
Secretary to The Treasury, which sought agreement on an
acceptable Heads of Agreement with POCL and the Benefits
Agency.
The Chairman recognised the difficult commercial conditions
within which the businesses were trading. Nevertheless a
clear commitment to achieve the Group budget remained
essential, with the failure of one business being detrimental
to the image and perception of the others.
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CHIEF
EXECUTIVE'S
REORT POB(98)79
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PO98/127
Financial Performance. With the exception of Counters,
October had been a poor month financially. A successful
Christmas was therefore of increasing importance.
Pay Settlements. The Executive Committee of the CWU had
agreed Royal Mail's pay award which was now to go to an
individual membership ballot. The deal was within budget
and the negotiating remit, adding 3% to the paybill.
Royal Mail Pricing. The DT! had received Royal Mail's pricing
proposals but a response was not expected until later in the
month.
Horizon. (a) The letter from Stephen Byers (PO98/126) had
been meet with surprise by ICL who to date had not
responded on how they intended to finance the programme.
It was important that, in the event of Horizon being ceased,
Counters could work with the Benefits Agency on an
alternative automated solution. Counters could not afford to
lose the BA income, at least in the short term.
(b) Day to day management of the programme was now
compounding other difficulties. ICL had just confirmed that
software due to be released shortly would require further
laboratory testing. This would delay the programme by
between 1 - 2 months and move rollout from July to
September. This would further damage ICL's credibility.
(c) Authority to negotiate had been transferred from ICL to
the parent company Fujitsu. Funding requirements had
increased with the latest estimate being £800m, an increase
of £200m since November.
(d) News of the additional delays and increase in funding
made it appear increasingly unlikely that the programme
would proceed. It now had to be regarded as doubtful that
Fujitsu would be prepared to proceed when the financial
risks were so great.
(e) Government was taking legal advice on terminating the
programme, something Counters had already undertaken.
(f) Ceasing Horizon would not necessarily impact on
Counters’ vision, but it would have network implications.
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FINANCIAL
SUMMARY
(ii)
(iii)
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(g) In a post Horizon environment the Benefits Agency would
press for the introduction of Automated Credit Transfer
(ACT) with benefits payments being paid directly into a bank
account. This was unlikely to be an attractive proposition for
banks.
PO98/128
Profit for October was:
e Royal Mail £40m
e Parcelforce £(1.9)m
« POCL £6m
e SSL£1.9m
Royal Mail's poor performance was the result of increased
staff costs which, on current performance, would result in a
variance of £25m from the full year forecast. Remedial action
was being taken to eliminate the overspend, and the
expected introduction of a productivity deal with the CWU
would be of assistance. It was hoped that the current
advertising campaign would also increase revenue.
Royal Mail’s risks currently outweighed opportunities.
Debts over 90 days old remained stubbornly difficult to
reduce within Parcelforce with £18.12m outstanding at the
end of November. With no experience in this area the
business had found it difficult to reduce the level of debt
although a great deal of work was being focused on doing
so, including the use of sales staff.
Negotiations with Hewlett Packard on a settlement figure
were continuing although it was likely that a payment of
£4.2m (plus VAT) would be agreed with £2m paid in this
financial year and the remainder in 1999-00.
Trading conditions were extremely difficult with PF48 seeing
monthly growth of £0.5m moving to a reduction of £0.5m in
October. Competitors were also facing financial pressures.
Manpower reductions of 2,500 would occur as a result of
lower volumes and every effort would be made to exit 1998-
99 at a level appropriate for 1999-00.
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POST OFFICE
VISION AND
STRATEGIC
DIRECTION FOR
POCL POB(98)80
(viii)
(b9)
(ii)
(iii)
(iv)
(v)
(vi)
In Strictest Confidence
Parcelforce’s cumulative performance was nearly £10m
below budget at -£20.1m. Income across the board was
disappointing although the business was anticipating the
award of a number of contracts. Notwithstanding these it was
now unrealistic to expect the original budgeted loss of £12m
to be achieved.
It was agreed that Richard Close would report to DTI forecast
outturns of £478m for Royal Mail, £(20)m for Parcelforce and
£35m for Counters.
PO98/129
POCL’s Vision and strategic direction had first been exposed
to the Board at its July Awayday. It had been developed to
ensure the viability of the business beyond the current
business plan.
Work had focused on the development of three areas:
wholesale cash and banking, as a gateway between
individuals and Government, and maintenance of its
traditional mails and distribution business.
Three key enablers bound these activities together: the
strength of the network, the use of smartcard technology and
the strength of POCL’s trusted brand image.
The Vision provided a one-stop location for customers to
carry out banking, interact with Government and conduct
postal business. They would use a post office because it was
close, it provided a number of services in one location and it
was trusted and regarded as being independent from
Government.
Implementing the Vision would be a considerable challenge,
not least because funds would need to be found, as would
partners, whilst continuing to achieve targets.
noted further that
The business was targeting a return on turnover of 2.5%.
Even allowing an asset turn of six times, this would only
achieve a 15% return on investment. POCL needed to
compete for funds with other internal initiatives and if
partners could be found to provide 75% of the funding a
return of 18% would be achieved Further work on
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(vii)
(viii)
(%)
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(xi)
(xii)
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the mix of funds was therefore required.
The Vision, with the possible exception of cash, aligned well
with the Group vision; the key issue for Counters would be
attaining business to sustain the new operation.
Counter’s believed it could develop a role as a front end
provider of services for banks who were continuing to reduce
the scale of their own networks. Pilot operations with Lloyds
TSB were already underway and the business had strong
links with Girobank, the banking arm of Alliance & Leicester
and the Co-operative Bank. Whilst an important element of
the Vision was to retain income from the Benefits Agency, it
was reliant on also developing a new client base.
The provision of excellent customer service would be a
fundamental requirement if banking business was to be
secured. The rural network was also important, often
providing services for communities that had no banks or
supermarket outlets.
Whilst telephone banking and electronic payment of bills was
increasing, Counter’s research had concluded that for the
majority of its customers (C2, D and E's) a post office was
the favoured means of drawing cash, benefits etc. Research
also showed that as people aged their shopping habits
altered and they were more likely to want an outlet providing
the services Counters was proposing.
Government Gateway held the greatest element of risk for
the business and pilot exercises were being utilised to
demonstrate its viability.
The Vision could not be introduced overnight. It needed to be
developed over the coming five years during which time the
credibility of the proposed initiatives would be proved or
disproved.
The Secretary of State’s announcement on the outcome of
The Post Office Review had highlighted Counters’ social role
and in looking at this with a view to grow its market the
business would want to consider working with external
organisations to improve standards of literacy across the
country.
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(xiv)
(xy)
(xvi)
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Action
Stuart Sweetman (a)
(b)
Secretary (c)
THE NATIONAL
LOTTERY
PROJECT
POB(98)81
PROJECT
SAPPHIRE
POB(98)88
In Strictest Confidence
The Counters network was of considerable importance to the
mails businesses and it would be important to try and defend
this position should a regulator seek to open the network to
competitors.
Developing appropriate partnerships which would still provide
the strategic flexibility for Counters to operate as it wanted
would require careful consideration.
Thanked Stuart Sweetman for his clear and informative
paper
Supported the broad strategic direction proposed, noting that
further work on the financial viability and deliverability within
the context of Group wide initiatives was necessary.
Consider how work on literacy being progressed by Royal
Mail could be linked to Counters’ social obligation within the
community.
Bring to the Board an update paper on the Government
Gateway exercise.
Consider the possibility of a demonstration of new
technology (such as Gateway) after a Board meeting, or,
perhaps of visiting one of these pilot venues.
PO98/130
(Secretary's note: The minute of this discussion has been
circulated to Members on a personal basis)
PO98/131
(Secretary's note: The minute of this discussion has been
circulated to Members on a personal basis).
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ROYAL MAIL P098/132
DELIVERY
EW - THE
WAY FORWARD
POB(98)82
(i) The work done to date did not encompass Royal Mail's top
4000 customers or rural deliveries and developed the issues
discussed by the Board at its July Awayday.
(ii) Considerable research had been conducted to determine the
delivery preferences of a wide range of residential and
i business customers (SMEs and SOHOs). The research
e concluded that residential customers. wanted improved
/ punctuality and reliability within the existing specification.
Business customers endorsed this view.
(ii) += Anumber of delivery options had been considered and
following discussions at the Executive Committee the
proposal for an early delivery plus a ‘sweeper second
delivery, had been endorsed. Additionally, the Second Class
specification would be altered to an on day two service for all
second class products. This would eliminate customer
confusion around what the service specification was.
(iv) I New arrangements for Second Class traffic would be
introduced and to reduce disruption and lower the risk of
customers down trading from First to Second Class the
changes would be introduced on a phased basis. Customers
switching from First to Second Class was likely to have a
negative impact of £40m, although in the worst case this
could be up to £95m.
(v) In the context of the preferred option, two time spans were
considered feasible - delivery between 0630 and 0930 or
delivery between 0700 and 1000. An 0630 start would allow
more customers to receive their mail early, would fit with
existing specification and customer need, and provide a time
window to handle unexpected operational difficulties The
main uncertainty with this option was the desirability of an
0630 start time and its achievability. An 0700 -1000 time
frame gave employees the benefit of a later start time and
was easier in operational terms. It would however, result in
later delivery for some customers and moving beyond 0930
would be politically sensitive.
noted further that
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vii)
(viii)
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The quality target for Second Class traffic would be set at
95% of items delivered on Day C. This was somewhat higher
than that currently achieved (88%). The balance of
judgement taken by the business was that Day C was
achievable and preferable. Work to confirm feasibility of a
95% target would be undertaken and the brand name
Second Class should be reviewed.
An 0630 delivery start time could not be achieved in every
geographical location, The number of attendance calls
before 0700 would be small and not seen as a major issue.
The impact of an 0630 start time had a significant impact on
employees and managing the change through the CWU was
a major challenge with no certainty of achievement. Whist
industrial relations benefits would be gained through
improved long term job security and the provision of a five
day working week, employee benefits were less obvious.
However, the impact of greater competition announced in the
outcome of the Post office Review could be a useful lever to
highlight the importance of securing these cultural changes .
Communication of the key issues of customers’ needs and
ultimately the future of the business, would be crucial in
securing the necessary cultural changes.
Whilst research showed that customers did not seek delivery
before 0700, they did want greater reliability and early
delivery. An 0630 start would provide greater flexibility to
cope with problems that might occur and improve the level of
service for the great majority of customers. This
‘contingency’ was removed in an 0700 to 4000 delivery span
and could result in dissatisfied customers removing
business.
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Action
Richard Dykes
POST OFFICE
UNAUDITED
ACCOUNTS FOR
THE HALF YEAR
TO SEPTEMBER
4998 POB(98)83
xi)
(xii)
(xii)
(i)
(iii)
(iv)
(vy)
(vi)
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Health and safety implications of an earlier start time had not
yet been considered.
Endorsed the planned project direction and the focus on an
early delivery specification and improved Second Class
specification.
Supported the development of the project and the plan to
focus on HR strategy development in conjunction with the
Unions.
As part of the ongoing development work, consider re-
branding the re-specified Second Class product.
PO98/133
The half year accounts had been reviewed by the Audit
Committee at its meeting on 27 November. Ernst & Young,
the Post Office’s Auditors, had also reported their
observations.
In the half year ending 27 September 1998, the Group
operating profit was £205m. The trading profit (after net
interest receivable but before taxation) was £283m.
The 1998-99 half year trading profit was £46m less than that
recorded last year. This was largely the result of increased
staff costs in Royal Mail.
Publication would be low key with the actual date being
determined in liaison with the Group Director
Communications.
Authorised the signing of the letter of representation.
Agreed that the half year results be published in the format
of Appendix 1 to the paper with the date being determined
by the Chairman, Chief Executive and Managing Director
Finance in the light of public relations sensitivities.
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()
information
Processing (TIP)
PoB(9#)85x
SAP Advanced
(ii)
Distributions
ystems Project
: (98)86x
/ (iii)
(iv)
(vy)
(vi)
wii)
Action
Stuart Sweetman
In Strictest Confidence
Prepare, in liaison with the Director Communications, 2
press release which addressed the reduction in profit from
that reported in 1997-98.
P098/134
Automation was one of Counters key transformational
enabling strategies with the automation of the network
through Horizon a cornerstone of the business’ automation
programme.
Within the automation programme, and highly dependent
on the continuation of Horizon, were two systems:
Transaction Information Processing (TIP) and Advance
Distribution Systems (ADS). Both had been considered by
MaPEC.
The TIP system received transactions from Horizon,
summarised them, if necessary validated them and then
passed information to other Counters systems.
SAP supported cash centre operations and utilising Horizon
technology would reduce the value of overnight cash
holdings within Counters outlets.
Should Horizon cease, both TIP and SAP would need to be
suspended and reviewed by MaPEC.
Endorsed MaPEC’s approval of TIP at a total outturn cost
of £18.8m, including sunk costs, approval in principle of
£2.5m for OnLine TIP, and DFEs of £2.9m, inclusive of
potential staff severance costs.
Endorsed MaPEC’s approval for a revised total authority of
£17.5m, of which £10.7m at outturn prices was required to
provide new and integrated logistics operational system and
infrastructure to manage cash and stock products for POCL
outlets.
Avoid any new incremental expenditure on these projects
until the future of the Horizon programme is settled.
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PO98/135
Appointments to the corporate trustee company, POPTL,
required Post Office Board approval
Agreed that Brian Thomson be re-appointed as a Director
of POPTL for a three year period until 31 December 2001.
PO98/136
Review commitments and the need for meetings with Mike
Kinski.
Proceed as above.
PO98/137
Ensure that lines of communication e.g. email, exist
between Executive Members’ offices and those of Non-
Executive Members.
Proceed as above.
PO98/138
Scheduled for 12 January 1999.
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