In Strictest Confidence
POB(98)9"
P098/106 to 122
POST OFFICE BOARD
Minutes of the meeting held on 10 November 1998
at 148 Old Street
Present
Dr Neville Bain Chairman
Richard Close Managing Director Finance
Jerry Cope Managing Director Strategy & Personnel
Dr John Lloyd Non-Executive Member
John Roberts Chief Executive
Rosemary Thorne Non-Executive Member
Richard Adams Secretary
Scott Childes Notes
Richard Dykes, Managing Director Royal Mail
Stuart Sweetman, Managing Director Post Office Counters Limited
Kevin Williams, Managing Director Parcelforce Worldwide
Others attending: Robert Bishopp, Group Commercial Director for item
PO98/113
Apologies: Mike Kinski and Miles Templeman were unable to
attend.
MINUTES OF PO98/106
PREVIOUS MEETING
The Board approved the minutes of its meeting of
8 September 1998.
ROSEMARY THORNE PO98/107
DR JOHN LLOYD
The Board welcomed Rosemary Thorne and John
Lloyd who had been appointed Non-Executive Board
Members for a three year period from 6 October 1998.
MATTERS ARISING PO98/108
POB(98)54
The Board noted the matters arising from the
meeting of 8 September 1998.
CHAIRMAN’S PO98/109
BUSINESS
(i) The Chairman was pleased to report that Rosemary
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CHIEF
EXECUTIVE’S
REPORT
POB(98)68
(i)
(iii)
(iv)
(v)
10)
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Thorne had agreed to Chair the Audit Committee, with
Miles Templeman and Mike Kinski as Non-Executive
Members. Mike Kinski had agreed to Chair the
Remuneration Committee with all other Non-
Executives as Members.
The conclusions from the Post Office Review were
with Ministers and it was hoped that an announcement
would be communicated before the next Board
meeting. Regardless of the outcome The Post Office
would continue to press for the early implementation of
commercial freedoms.
Treasury and DTI had advised their acceptance, for
planning purposes at this stage, of The Post
Office’s proposed EFL of £207m for 1999-00, as
opposed to the original baseline figure of £335m.
The Chairman drew attention to items later on the
agenda which were of major importance to The Post
Office. These included the need to protect and grow
international business (project ‘Sapphire’ being key to
this, PO98/110), the Horizon programme, and
improved trading performance and cash flow
generation from Parcelforce.
The Chairman was concerned that across the
organisation a number of issues continued to be
process driven, which on occasions hampered
effectiveness. Improvements were expected as a
result of the Shaping for Competitive Success
Programme and business organisational changes.
Executive Members would seek other opportunities for
improvements.
PO98/110
Financial Performance. With the exception of
Parcelforce, the Businesses were on budget, although
Royal Mail was facing pressures on productivity and
mails operations costs.
ins}
In Strictest Confidence
aor
(ii)
(iii
In Strictest Confidence
Pay Negotiations. The CWU pay award for POCL
employees was implemented on 1 October with a pay
bill effect of 3%; this was in line with the Board’s agreed
remit. The Executive Committee of the CWU had
recommended acceptance of a 2.7% increase for
Parcelforce employees a fraction over 3% headline
increase on basic pay. DTI had agreed Royal Mail's
temit for CWU employees (PO98/92) and Royal Mail
would seek to conclude negotiations by the end of
November.
Horizon. (a) Exhaustive discussions had been held with
ICL to consider the development of new structural
processes and organisational arrangements which
would enable ICL to demonstrate additional commercial
value in support of their revised business case. As a
result of these discussions a non-binding Heads of
Agreement had been prepared. This was the first step
towards a closer partnership arrangement with ICL and
would provide them with knowledge of potential
development opportunities through Government
initiatives and smart cards.
(b) ICL still faced a reduction of £250m in its business
case and for the programme to continue it was
therefore essential that a workable solution to the
financial issues could be successfully negotiated. If the
programme were aborted, ICL would almost certainly
take legal action against The Post Office and DSS,
although legal advice was that in turn ICL could be
sued for defaulting on the terms of the contract.
(c) Indications were that Government would not step in
to help ICL should the programme cease.
(d) The Secretary of State would shortly be considering
three options for the Horizon programme. These were:
continuation, termination and continuation following a
negotiated settlement.
(e) POCL’s business case remained positive and
management control of the programme had improved
considerably to the extent that milestones were now
being achieved.
(f) Automation was essential to the future success of
Counters. However, this imperative would not cause the
business to compromise system quality and reliability.
74
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Stuart Sweetman
(iv)
)
(vi)
(vii)
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(g) The Board Thanked those people employed on the
Horizon Programme for the considerable effort they had
put in to try and make the project a success.
Circulate to Board Members a copy of the Heads of
Agreement drawn up with ICL.
Crown Office Conversions. (a) lan McCartney, the
Post Office Minister at the DTI, had accepted that it was
sensible for POCL to operate an ongoing conversions
policy, but that the network should be mixed.
(b) Discussions with the CWU and CMA were
continuing in an attempt to set boundaries around the
level of franchises. These discussions were against the
background of a CWU conference resolution that there
should be more Crown offices not less. Finding a
workable solution was therefore proving elusive. lan
McCartney wanted a report on the outcome of
discussions by the end of November.
Quality of Service. Counters’ waiting times were close
to target and Parcelforce quality remained high across
all streams. Royal Mail's Second class quality was high
but the First class stream remained disappointingly low
despite the considerable efforts of the Business. Work
to improve the performance of Streamline services had
resulted in improvements. It was acknowledged that
more radical action was required, in the international
streams.
BBC Contract. (a) The BBC had recently announced
that the Television Licensing contract had been
awarded to ‘Envision’, a consortium of SSL, Bull and
WPP. The seven year contract would run from 1 April
1999.
(b) The Board acknowledged the enormous effort put
into the negotiations by the SSL contract team and
thanked them for all their efforts.
(Secretary's Note: the remainder of this minute has
been circulated to Members on a personal basis)
75
In Strictest Confidence
FINANCIAL
OVERVIEW
RICHARD CLOSE
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(ii)
(iii)
(iv)
(v)
(vi)
(vii)
viii)
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PO98/111
Profit for September was:
@ Royal Mail £51m
@ POCL £9m
@ Parcelforce £(4)m
@ SSL £0m
Royal Mail’s September result, £35m above budget,
was the result of one-off payments received from the
sales of Quadrant and King Edward Building.
Group provisional half year results, which had still to be
reviewed by the Audit Committee, showed a Group
profit of £283m compared with a profit of £329m in
1997-98. The result would include £78m of interest.
The reduced profit was mainly attributable to increased
operational costs in Royal Mail and a £25m General
Election benefit in 1997-98.
The half year result would be announced close to
Christmas and public relations considerations would be
carefully assessed.
Royal Mail had reduced its full year profit forecast from
£496m to £478m driven by mails operations costs
which in turn were driven by higher mails volumes.
Risk outweighed opportunities in Royal Mail and the
Executive Committee had asked the Business to seek
opportunities to balance the two.
To protect profit Royal Mail had initiated a number of
improvement actions including improvements to
underlying productivity, strengthened manpower
controls, optimised management utilisation of
automation equipment, an austerity programme to
restrict non-staff expenditure, the re-measurement of
workload to reflect increased levels of A4 size flat traffic
and action to implement the Interim Delivery Agreement
with the CWU.
Parcelforce had assessed its full year outturn and
produced three scenarios: -£12m, -£17m and -£22m.
The Plan target was -£12m, without the pensions
benefit adjustment, but based on current risks and
opportunities a -£17m was the most likely result.
76
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PARCELFORCE
WORLDWIDE
PERFORMANCE
(viii)
(x)
(x)
(xi)
(xii)
10)
(ii)
(iii)
In Strictest Confidence
Counters’ full year profit forecast had increased from
£30m to £35m, the result of lower development spend.
Risks and opportunities were balanced at £11m.
POCL’s financial challenge was to manage its full year
outturn.
The EFL was currently forecast to outturn £18m below
the target of £310m.
Capital Expenditure spend was currently £219m against
a budget of £253m with a full year forecast of £510m
against a budget of £525m. Less than £100m of this
money was uncommitted leaving little scope for
expenditure to be allocated to other initiatives.
It was agreed that Richard Close would report to DT!
forecast outturns of £478m for Royal Mail, £(12)m for
Parcelforce and £35m of POCL.
PO98/112
The Parcels market was exceptionally competitive with
4,000 operators trading within extremely small margins;
5% return on sales being considered good. External
competitors were suffering financial difficulties with
United Carriers reporting a half year loss of £5.9m. In
general the market was moving to next day products
operating through information rich networks and
offering an increasingly tailored service.
In terms of quality Parcelforce compared well with its
competitors although they were improving quickly.
Customers viewed quality as a complete service
package including access to information through track
and trace.
Parcelforce profits had not grown in its history and
performance was currently £5m below budget. This
shortfall was the result of a reduction in international
income, which accounted for 40-50% of contribution, a
productivity shortfall, an accounting variance and,
significantly, unbudgeted costs on SAP.
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(iv)
(v)
(vi)
(vii)
(viii)
(%)
(x)
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Current UK income trends were encouraging but with
trends in the Parcels market extremely difficult to
predict, it was unclear whether this performance would
continue.
Action to improve revenue would include targeted
advertising and increased telesales resource, improved
revenue protection and increased sales channel
effectiveness.
Action to reduce weighted unit costs had to date been
successful with a reduction of 3% currently being
achieved. Productivity improvements were harder to
secure with a variable workload making the alignment
of staff and costs difficult.
Cost control would focus on improved utilisation of
transport, better operational process controls, improved
recruitment and retention of staff, central overhead cost
capping and the avoidance of error enforced
duplication. Considerable overhead reductions had
already been achieved and this left little scope for
further ‘real’ improvements.
Sales functionality difficulties on the introduction of the
SAP system had caused significant problems and cost
£2.5m in unforeseen expenditure. The level of debt had
peaked at £98m and although significant reductions in
the level of outstanding debt had been achieved, debts
over 90 days old were significantly higher than normally
experienced. No abnormal bad debts had yet
materialised. Discussions with Hewlett Packard, the
systems provider, had resulted in a settlement offer of
£4.2m plus VAT, although this had yet to be ratified.
noted further that
The Board had previously considered a number of
ways to improve Parcelforce’s performance and the
current proposal to eliminate overlaps with Royal Mail
was being considered by Government within the
context of The Post Office Review.
Historically October and November were Parcelforce's
best months financially and would have a significant
impact on achievement of the ‘most likely’ full year
forecast.
7B
In Strictest Confidence
(xi)
LIBERALISATION
OF POSTAL
MARKETS &
POST OFFICE
REGULATORY
STRATEGY
(POB(98)70
(ii)
(iii)
In Strictest Confidence
Overdue payments appeared to be concentrated on
medium sized businesses many of whom were
unhappy about the additional work they were having to
undertake to account for missing invoices.
Thanked Kevin Williams for his informative
presentation.
PO98/113
The European Commission was due to make
recommendations by the end of 1998 on the
liberalisation of postal markets. Agreement on a draft
Directive was being sought by January 2000 for
implementation by January 2003.
The Government Review of The Post Office was likely
to introduce an independent regulator who would have
power to introduce licensed competition. The Review
was also likely to recommend some market
liberalisation in advance of the EU proposals but these
would probably not be as far reaching.
Key international competitors already benefited from
commercial freedoms and this had enabled
organisations such as Deutsche Post AG to acquire
substantial stakes in DHL and Securicor. They were
also acquiring a number of smaller mail operators,
although it was difficult to see what strategic purpose
this had. This piecemeal acquisition of mailing
companies was also being pursued by La Poste. The
Dutch postal administration, TPG, had the greatest
degree of commercial freedom and had a clear strategy
to become the world’s leading logistics and express
company. The Scandinavian countries worked closely
together but their operation remained modest in world
terms, and to develop internationally they would need
to align with another major postal administration. The
key private sector operators were UPS and Fedex who
were both looking to expand their European networks.
a2,
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(iv)
(v)
vii)
(viii)
(ix)
(x)
(xi)
In Strictest Confidence
With competitors expanding rapidly the opportunity for
the British Post Office to develop and remain a world
force was, without commercial freedoms, diminishing.
The parcels market was already fully liberalised. The
European Union proposals were to liberalise both
inward international mail and direct mail by 2003.
Liberalisation by contents, as in the case of direct mail,
would be virtually impossible to police. Inward
international mail could also circumvent legislation by
electronic transmission of content which would then be
printed abroad and physically re-imported for delivery in
this country by private operators.
The Post Office’s public position was that it favoured
liberalisation via the progressive reduction of the weight
and price threshold of the monopoly. It was therefore
proposed that the existing monopoly level of 350g, or
five times the first class basic weight step letter price,
be reduced to 150g, or 2 times the basic weight step
price, with recognition that a further reduction to 100g
could be possible subject to a satisfactory outcome
from The Post Office Review.
Existing Monopoly traffic accounted for £3.5bn income.
A reduction to a 150g weight step would place £300m
of this income outside of the monopoly. Any move to
reduce the weight step to 50-60g would be resisted.
noted that
Operating within the monopoly provided a psychological
‘comfort zone’ which hampered the introduction of new
working methods. A cultural change would
undoubtedly occur if this false protection were
removed. It would, however, reduce income at a time
when cash flows were already under pressure.
Without commercial freedoms, The Post Office could
not support market deregulation.
It was important to be influencing future policy and to
this end taking a proactive stance on liberalisation was
supported.
A reduction of the monopoly would be a key driver to
reduce costs, particularly staff costs which accounted
for 75% of Royal Mail's expenditure.
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Jerry Cope
MaPEC - (1)
Parcelforce
Internal Logistics
(POB(98)71)
(xii)
(xiii)
(xiv)
(xv)
i)
(iii)
(iv)
In Strictest Confidence
Understanding competitors’ strategic ambitions, and
how these impacted on The Post Office’s own
ambitions, was an important consideration.
Support for a reduction in the monopoly would have to
be carefully communicated, with the reasons why this
position was being adopted clearly set out.
Communicating with the union who were currently
seeking strong action to be taken against TNT for
breaching the monopoly, would need proper
consideration.
Agreed the proposed approach to liberalisation as set
out in (vi) above and that alternative regulatory
scenarios should be developed.
Agreed that communication of the proposals should be
carefully considered.
Address how communication of the key issues, to
employees and the unions should be approached
particularly explaining why they had been adopted.
PO98/114
The proposal would provide a co-ordinated approach to
the provision of general supplies across the
organisation. Additionally, it developed Parcelforce’s
commercial strategy by enhancing its logistics service.
Under the proposal a one site distribution centre at
Swindon would be developed which would offer upper
quartile performance when benchmarked against
external competitors. All other Post Office stores and
warehousing operations would close.
Annual savings of £3.8m would be realised with one-off
benefits of £17.5m.
Endorsed MaPEC’s approval for full implementation
costs of £5.5m capital, £12.3m revenue, including a
special DFE provision of £1.0m for EVR and relocation
costs, and in principle authority for systems
upgrades/replacement costs of £0.6m capital and
£1.8m revenue.
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MaPEC (2) -
Trusted Third
Party
(POB(98)72)
()
(ii)
(ii)
(iv)
(v)
(vi)
(vii)
In Strictest Confidence
PO98/115
Trusted Third Party (TTP) provided electronic
certification of identity, digital signatures and security
during the transmission of messages and transactions
over the Internet and intranets using encryption
software. It provided The Post Office with key
capabilities for the developing e-commerce market and
an infrastructure for other initiatives such as
Government Gateway. It built upon the considerable
brand strengths that The Post Office enjoyed.
The Executive Committee had reviewed and endorsed
the proposal which positioned The Post Office as a
multi-faceted supplier of choice.
Considerable effort had gone into identifying the most
suitable form of technology and the Executive were
happy that suitable systems technology was now in
place.
noted that
The benefit of external investment in the project had to
be weighed against the potential disbenefits that could
result, as had been seen with Horizon. Before
proceeding the Business would therefore need to be
sure that an external investment partner would add real
value.
The wider organisational benefits that TTP would bring
e.g. smartcards, lottery, Government Gateway etc,
could not be underestimated.
The full service would be launched in January 1999
under the Royal Mail brand and that TTP hadthe
potential to generate income of around £120m over five
years.
Endorsed MaPEC’s approval of additional funding of
£8.2m required for completion of the project to full
commercial launch
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a
Action
Richard Dykes
MaPEC (3) -
West Yorkshire
RDC (POB(98)73)
0)
(ii)
AUDIT
COMMITTEE
REPORT
(POB(98)74x
CUSTOMS &
EXCISE
CHANGES TO
VAT GROUPING
REGULATIONS
(POB(98)75x
In Strictest Confidence
Review the value of proceeding with TTP alone, as
opposed to seeking third party investment. Report
conclusions to the Board.
PO98/116
The existing Streamline Regional Distribution Centre
was space deficient and unable to accommodate
volume growth which had seen 14-15% year on year
increases.
The current site had opened in 1994 and it was
disappointing that further expenditure was necessary
so soon but no other satisfactory alternative existed.
Endorsed MaPEC'’s approval of the relocation of West
Yorkshire RDC operations to a new site at Tuscany
Park, Normanton. This was at a maximum outturn cost
of £10m to fit out, together with an annual rental of
£0.99m, giving a total authority sum of £22.9m. Further
endorsed disposal of the existing estate with capital
receipts of £1.7m.
PO98/117
The Board noted the report.
PO98/118
The Board noted the report
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eee
MaPEC Bi-
ANNUAL
REPORT
(POB(98)76x
Action
Richard Close
PROJECT
APPROVED BY
MaPEC
REQUIRING
ENDORSEMENT
BY THE BOARD -
Norwich
Accommodation
Strategy
(POB(98)77x)
PROJECT
AUTHORITIES
Action
Richard Close
DATE OF NEXT
MEETING
In Strictest Confidence
PO98/119
The Board noted the report but questioned the value
that it currently brought to the Board. A more
informative and beneficial report would be one that
addressed post implementation issues and in particular
success/failure criteria.
Dispense with the Bi-annual report but in its place
introduce a bi-annual Post Implementation Review
paper which detailed the success/failure of investment
cases.
PO98/120
The Board noted the report
Endorsed MaPEC’s approval for further expenditure of
£4.11m at outtum prices to provide a new Cashco and
POCL accommodation and Mail Centre rationalisation,
with a DFE of £0.14m and total project expenditure of
£11.15m.
PO98/121
The Board noted that the current format of MaPEC.
Board papers did not always clearly and concisely set
out the key issues. This was a particular issue for new
Board Members.
Consider how best to present MaPEC reports to the
Board which would ensure that the key issues were
easily and readily identifiable.
PO98/122
8 December 1998, provisionally commencing at 9am.
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