Royal Mail Holdings
Minutes of the Investment Committee
Dated 18" July 2006
ore Members Invited Members:
Adam Crozier Paul Tolhurst
lan Griffiths David Smith
Martin Gafsen lan O'Driscoll
Frank Schinella Peter Corbett
Alan Cook
Derek Foster
David Burden
Ninian Wilson
Doug Evans
Michaela Jordan (Secretary, Letters)
Adrian Terry (Secretary, Group)
1. Meeting Opened — 8.30am
6 2. Minutes from the Previous Investment Committee
Tabling of Minutes of the Investment Committee, IC, 20" June decision — Approved.
The IC requested that David Burden, Ninian Wilson and Doug Evans were added to the Investment
Committee's membership.
3. Outstanding Issues
Tabling of Outstanding Issues from previous Investment Committee meetings, the following points
were raised:
The IC requested that a list of the key outstanding actions be collated and presented to
the Business Unit Managing Directors.
Completed By Michaela Jordan 28" July 2007 __I [0607-01
The Investment Director informed the Committee that a large proportion of the cases being
presented had been submitted late into the Investment Team. The Committee noted the issues this
causes and emphasised the need for all cases to have sufficient review. The Committee suggested
charging a “fine”, payable to the Mails Benevolent Fund, of £10 for all late papers. The Group
@ Finance Director informed the Committee that going forward a three month rolling agenda would be
being presented.
4. Year to Date report
Discussion: The IC noted the report.
I Issues: None a
Decision: Noted :
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5. Investment Cases
The following investment cases were discussed:
Project Title
Breakthrough PFW £9.0m. Replacement
Transport Legislation RML £5.0m Compliance
Packets Strategy RML. £0.6m Revenue
Horizon Update POL £127m Replacement
Genesis RMG. £4.5m Cost Focus
Project Emily RMG £12.5m Other
GLS Austria — Replacement Depot GLS €2.7m Replacement
The decisions made by the Investment Committee were as follows:
5.1 GIA200603/06 — Breakthrough @
David Smith Acting Managing Director Parcel Force Worldwide
Discussion: The Investment Director reminded the Committee of the actions from the
previous meeting:
* Review of the Quarter 1 trading performance of Parcel Force; and
¢ Gain greater certainty around the costs and benefits of the systems.
David Smith informed the Committee that subsequent to the additional scoping
works authorised at the March Investment Committee Parcel Force are
confident that:
* 20 legacy systems can be switched off as a result of new system;
* revenue benefits can be achieved;
¢ the project can be delivered to the agreed timescales; and
* head count savings can be achieved as a result of the system capability.
Whilst discussing the operational benefits of the new system, David Smith
noted that there still remains a risk to delivering the savings as until the system @
is in operation, it is impossible to gain a greater level of certainty around the
assumptions.
The Committee noted that Quarter 1 year to date results were on budget,
Regional Revenues were up £2.1m and new accounts were running at c.£8.6m
against a full year target of £12.6m. David Smith informed the Committee of
his confidence in the project and the assumptions in the business case.
The Committee noted that the benefits of the scheme related to improving
operational efficiency and lowering head count, and queried the state of
negotiations with the CWU. David Smith informed the Committee that although
the CWU hadn't given formal approval to the proposals, they had voiced their
support for what the system was trying to achieve, and reminded the
Committee that the proposal included a 1.5% additional pay award as a cost of
transition.
It was noted that IT element of the system delivered three streams of benefits:
¢ avoided annual refresh costs of £3m Sea @
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a
* removal of the Halcon and Poise systems saving c.9 FTE’s pa
simpler IT system that required a smaller team to manage
Whilst discussing the benefits, it was confirmed that all the systems being
made redundant were PFW systems, rather than Group wide ones.
The Committee noted that at the initial presentation there were concerns
regarding the sales pipeline of PFW which, given the current performance of
new accounts, seem to have been mitigated.
David Smith informed the Committee that c.75% the project team are PFW
employees and therefore did not add into the PFW cost base.
The Committee requested that David Smith spoke to Ninian Wilson and Doug
Evans regarding the terms of the contract.
Issues:
Decision:
Agreed
_I Legal regarding the terms of the contract.
Gain the input of Group Procurement and Group I David Smith 0607-02
Compliance
5.2 GIA200607/01 — Road Transport Directive (RTD): Duty Structures, Management &
Monitoring
Paul Tolhurst
Network Director
Steve Cameron
Territory Director North
Discussion:
Paul Tolhurst outlined to the Committee the key strands of the RTD initiative
and the constraints placed on Royal Mail through the introduction of legislation
to limit driver hours, for those driving vehicles over 3.5 tonnes, to a maximum
of 48 hours per week. Paul Tolhurst explained that planning assumptions for
the implementation timescales for the portfolio of transport legislation cases
were not accurate, as Digital Tachographs had fallen back, whereas RTD
would take effect earlier than anticipated.
Paul Tolhurst explained that a team of people were required to create
compliant duty structures and because of the data requirements of the Vehicle
& Operator Services Agency (VOSA), a system was needed to allow tracking
of the hours worked by drivers. The project team had considered a number of
solutions and had decided to use the TRMS system, which would align to the
TRMS system currently being trialled at Leicester Mail Centre.
The IC noted that recurring cost in the Areas, was as yet unquantified, and
asked when a complete view of all the strands of the project would be
available. Paul Tolhurst advised that the team would have to assess duty
structures in detail and, therefore, it would be the end of October 2006, before
the complete situation would be known. Negotiations with the CWU would
then start. A second business case would be presented, which would
conclude on the number of additional drivers required and explain what had
been done to minimise the requirement
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Minutes of the Investment Committee
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The IC queried the level of project team costs of £2.1m. Steve Cameron noted
that the team would include 71 planners, one per mail centre, for 36 weeks.
Members of the team would be pulled out of their line role and the costs noted
were required to backfill those jobs and could not be avoided.
Doug Evans advised the team to contact the Road Transport Association to
understand lessons learned from the earlier introduction of RTD to the
Logistics industry. Paul Tolhurst confirmed he was already in contact with
them.
Doug Evans noted that agency drivers would need to be managed for risk and
costed. He advised weekly reporting on the progress of the case to the LET
because it was imperative that the business successfully implemented RTD by
the 1 April 2007 deadline. He advised the team to accelerate the
implementation by one month to March 2007, in order to learn lessons during a
dummy run. The Logistics industry had gone live early to test their systems
and processes and this had served them well.
David Burden noted that the WPP for system costs would only be available at
the end of July and requested that if the variance from the estimate of £2.6m
was greater than the 5% tolerance allowed by the Investment Policy, that the
increase be dealt with by lan Griffiths through the LET.
The IC made it clear that Ninian Wilson should advise on procurement matters
and Doug Evans on legal aspects of the case.
Issues: Must ensure timely implementation.
Decision: Approved.
(Retion: [ Engage Ninian Wilson on procurement matters. I Paul Tolhurst [0607-03 ]
(Aetion: I Engage Doug Evans on legal matters. I Paul Tolhurst [0607-04 ]
[Action I Institute weekly progress reporting for LET. [PaulTolhurst I 0607-05
5.3 GIA200607/10 — Packets Strategy — Scoping Funding & Safeplace Trial
Carl-Gerold Mende
Director RM International
Terry Solesbury
Hd Operational Systems M'ment
Discussion:
The Investment Director noted that the business case had been submitted too
late to go to the July LET and was being presented at the IC as a decision was
required urgently.
Carl-Gerold Mende explained the funding request. The IC asked for
clarification of the trial success criteria. Carl-Gerold Mende noted that:
* measurements would be taken weekly to manage any liability issues
through compensation requests; and,
¢ the ultimate success criterion was the increase in first time delivery,
which would create a consequential reduction of workload in delivery
Offices. Re-deliveries would be counted in order to quantify savings.
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The Group CEO queried the level of invoices from McKinsey consultants and
considered these invoices had been incorrectly tagged/labelled as work
relating to the Packets Strategy.
The IC noted the missing concurrences and requested that they be provided to
Letters Investment.
The IC asked whether there would be any further funding requests. Carl-
Gerold confirmed that the request for £577k would be sufficient to cover the
trial, but future business cases would be expected to cover new products e.g.
Techpack.
The IC raised IB charging matters and requested that they be informed of
topics being discussed, on which decisions had yet to be taken. It was noted
that if DSA was introduced for Packets, it was imperative to ensure the price
charged to internal business units was right, to avoid cannibalising our own
business. Before we could price for a service accurate costing information
would be required.
Issues: IB matters.
Decision: Approved
\ctio! I Provide outstanding concurrences to Letters Carl-Gerold Mende I 0607-06
Investment.
Provide IC with list of IB topics on which Carl-Gerold Mende I 0607-07
decisions are yet to be taken. on
5.4 GIA200607/06 Horizon Next Generation
Peter Corbett Post Office Limited Finance Director
lan O'Driscoll Commercial Director
Discussion: Peter Corbett informed the committee that the IT solution and benefits of the
scheme were the same as that presented previously and that they were
requesting authority to enter into a full contract in advance of the securing of
long term funding from Government.
Whilst highlighting to the Committee the addition of a conditionality clause
into the contract allowing POL to terminate the deal should agreement with
Government not be achievable, Peter Corbett noted that that the non-
cancelable commitments up until 2010 of the new deal were almost equal to
those of the existing contract at £437m (HNGX) vs. £427m (SAWA) but could
decline to £418m if the POL network reduced by 5,000.
In response to a question from the IC regarding committed capital, Peter
Corbett responded that £35m had been committed to date for 2006/07 with
requirement for another £32m in 2007/08 fundable from POL cash flows
Peter Corbett noted that beyond 2007/08 a funding agreement from
Government would be needed
I The IC queried the implications of terminating the contract in March 2007. In
I response, the POL Finance Director noted that the termination costs under
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®
both contracts would be the same at c.£80m under the existing contract and
c.£78m under the new one. It was also confirmed that POL have the right to
revert to the existing contract at any point up until February 2007.
The Committee queried the funding position of POL in 2007/08, the POL
Finance Director confirmed that under a new Government funded
arrangement POL would have sufficient cash to fund the expenditure. In
addition, POL would have sufficient funding under “manage for cash” basis if
the project was deemed a top priority. Peter Corbett also confirmed that POL
was not reliant on the £150m from RML reserve.
The Group Technology Director queried the telecom element of the new
contract, lan O'Driscoll replied that under the revised terms POL would be
able to benefit from any potential savings from economies of scale by
removing the lines from the Fujitsu requirement and bundling the
procurement of these with the rest of the Group requirements.
The IC queried the alignment of the new contract with the developing POL
strategy, in response, the POL Managing Director noted that the purpose of
the new contract was to reduce costs, rather than add functionality.
The IC noted that should the new contract not be terminated in 2010 then it
would generate savings of £44m, versus the existing one, per year.
lan O'Driscoll highlighted to the Committee that under the terms of the new
contract the variable cost element had been increased, enabling greater cost
savings to be achieved should any branch re-organisation occur. Under the
existing contract minimal savings would be available.
The IC queried the nature of the Managed service agreement and the POL
Finance Director noted that it was now unlikely that this route would be
undertaken.
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Issues: Depreciation impact of the new contract
Decision: Approved the paper for submission to the August 2nd RMH board subject to
resolution of the above - which will be incorporated in the final board paper.
I Action: © Confirmation of the depreciation impact of Peter Corbett 0607- 08
Metin approving HNGX
Action: Break down of the year-by-year impact of the Peter Corbett I 0607-09
: new contract in above and below the line terms. Completed
i Summarise the non-cancellable commitments
up until March 2007 and 2010. Hl
Action: Clear articulation of the benefits of the new deal I fan O'Driscoll 0607- 10
G for Fujitsu a Completed _
[ "Action: Clear explanation of the options available to. —_—*«I’ Peter Corbett 0607-11
RMG and highlight the ability of the Board to I Completed
revert to the old contract should Government I
i funding not be secured by February 2005. i I
I Action: "I Review of the contract by Doug Evans and Peter Corbett I 0607-12
I Ninian Wilson. & 2 I Completed
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Minutes of the Investment Committee
Dated 18" July 2006
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Action:
Ee
Sensitivity on the implications of changing the lan O'Driscoll 0607- 13
_I POL branch network by 5,000. Completed
5.5 GIA200607/07 Project Genesis
David Wakefield
Commercial Finance Director
Discussion:
David Wakefield joined the meeting and outlined to the Committee the goals of
the project; save money; test and confirm CSC’s capability; improved
Information System delivery; and the avoidance of litigation.
The Committee noted that CSC had recently brought in a more capable team
that it had begun to work more positively with RMG. The IC queried whether
the benefits could be delivered without investment. David Wakefield responded
that although technically some of the benefits did not need investment, under
the terms of the contract CSC were not obliged to Pass on the savings. As the
current contract is unprofitable for CSC it would be almost impossible to
extract further cost savings from the current contract.
David Wakefield informed the Committee that under the terms of the existing
contract CSC were contractually entitled to make an 8% margin and, should
returns fall below this level, were contractually entitled to a remedy.
The IC queried the confidence of the team in delivering £5m of savings in the
current Financial Year. The Group Technology Director informed the
Committee that the savings for 2006/07 had already been agreed and noted
the importance of the projects to CSC to give them a greater level of flexibility
and enable them to return the contract to profitability. The Committee noted
that c.80% of the costs could be viewed as business as usual with the
remaining costs being used to enable future developments and projects.
Whilst discussing the nature of the spend, David Wakefield informed the
Committee that all projects would, individually, be subject to the normal
Investment Appraisal and, although a number generated a return in their own
right, should be viewed as enablers for the future strategy and application
portfolio reviews.
David Wakefield outlined the options available to RMG:
¢ Do nothing — CSC exit at the end of the contract
¢ Use other panellists — could increase costs and would still need to use
CSC
« Exit— costly option and the same problems would still require resolving
The Committee noted that the costs represented current best estimate and
part of the project included two external recruits to aid in the procurement and
project management processes.
Whilst discussing the current contract the IC noted that it contained options to
break in 2008 and 2010 by giving notice in 2007 and 2009 respectively. The
Committee queried whether there was an alternative if both sides were
unhappy with the contract re-negotiation. In response David Wakefield
informed the Committee that this was being currently worked up. The Group
Technology Director noted that the current exit costs were high, and that the
Genesis investment should remove some of the issues that need to be re-
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negotiated.
The Committee agreed with the aims of the project and requested that further
clarification be provided on the exact nature of the spend, what is true spend
and what is re-allocating internal resources.
Issues:
Decision:
Agreed and requested that the project be classified as business as usual
expenditure as the project benefits should out weigh the costs in the current
year.
_I Present an update on the contract renegotiation I David Wakefield/ I 0607-14
I investment decisions on the re-investment of the
and the alternatives to CSC. David Burden
I The Investment Committee should agree all David Burden 0607-15
delivered savings > £1m.
Further analysis of the gross savings and what David Wakefield 0607-16
proportion is being given to CSC and what is
being re-invested.
a
Further clarification be provided on the exact David Wakefield 0607-17
nature of spend, analysis of the elements are Completed
truly incremental and a list of the Prove Projects.
5.6 GIA200607/0
Project Emily
Tony McCarthy Group Human Resources Director
Steve N Taylor Group IT
Discussion: Steve Taylor and Tony McCarthy joined the meeting and outlined to the
Committee that the project would enable the broadcast to every office in the
network simultaneously.
The IC queried the equipment each office would receive and the costs of the
project. In response, Steve Taylor outlined that each unit would receive a wall
mounted plasma or LCD screen, CPU box and Broadband connection. David
Burden noted that the system would enable one way high quality video and two
way responses.
The IC noted that the system would go into the RMG network of offices
including the 500 Directly Managed Branches of Post Office Limited.
Whilst discussing the scope of the project expenditure, the IC noted that the
project costs excluded content and noted the £2.4m p.a. ongoing running
costs.
The IC discussed the roll out of the project and the Group Technology Director
noted that the key risk to delivery was the physical installation into 1,200 sites
with secure wall mountings and Broadband access. Steve Taylor informed the
Committee that the site survey costs were c.£348 per site, excluding power
and cabling, with ROMEC being the preferred supplier.
The Committee queried the supplier tendering process, in response Steve
Taylor noted that Fujitsu would be the preferred supplier given their track
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record with Horizon and noted that Group Procurement were reviewing other
potential suppliers. The Committee noted that the costs of £3,000 per site were
too high and requested that additional negotiations be completed.
The Committee query the policy regarding third party access to the channel,
Tony McCarthy stated that the channel was purely a management tool and no
third party access would be granted. The Committee debated the issues
surrounding the ability of the Group to control the content in individual sites if
local management had the ability to add content. The Committee requested
that the ability to add local content is removed and the network is used a
central communications channel only.
Whilst discussing the other Companies which use such systems the
Committee requested that we liase with British Airways so that we can learn
from their experiences.
The Committee requested that the proof of concept was developed before any
mass roll out was completed.
The Committee stated that the screens should be located in common areas
such as canteens or work group areas. Steve Taylor highlighted that there are
options to provide toughened screens and multiple screens for the larger units.
The Group Technology Director highlighted the issues around the roll out of
the programme and the importance of authorising sufficient capital to enable
the site surveys to be completed. The Committee agreed to the importance of
completing the site surveys and requested that in parallel further negotiations
are completed.
Issues: Additional negotiations to further substantiate the costings of the system.
Decision: Agreed to authorise £1m (exc. VAT) to enable the completion of the proof of
concept and sites surveys. Update to brought to the Group Executive Team
Remove the ability for local operators to add Steve Taylor 0607-18
_I content. Completed
Increase the robustness of the system and Steve Taylor 0607-19
project costings.
I Action:
Open discussions with other Companies who Steve Taylor 0607-20
use such systems the so that we can learn from
their experiences.
5.7. GIA200607/09 GLS Austria — Villach Depot Replacement
Discussion:
The Investment Director outlined to the Committee that lease on GLS Austria's
depot in Villach, Southern Austria was about to expiry and they wished to build
a replacement depot in Finkenstein. The Committee noted that the costs of the
new depot would equal the EBITDA in 2006/07 for GLS Austria and the
importance of the depot should GLS wish to operate in Southern Austria.
Issues:
None
Decision:
Agreed. ¥
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5.8 GIA200607/05 Chippenham and Corsham Delivery Office Replacement
Discussion: The Committee noted that two Delivery Offices were being disposed of for £1m
and a new one being purchased for c.£2m. The Committee queried the overall
strategy for the region and whether the scheme as presented represented the
best long-term strategy for the area.
The IC requested that the ETE policy revision be presented to the Committee.
The IC noted that the trend for replacing buildings with more expensive ones
was contra to the Group's strategy and requested that Property Holdings and
the Operations team review the specifications and requirements.
Issues: None
Decision: Not agreed.
Revise the ETE policy and present the findings lan Bond 0607-21 @
back to the IC.
I Review the long-term strategy for the Property Holdings I 0607-22
Chippenham area and assess the ability to Alan Smith-Hill
amalgamate further DO's into the unit.
Review the specification of the new building Property Holdings I 0607-23
I Alan Smith-Hill
6 Other Items of Discussion
6.1 Balance Sheet Re-structuring
Discussion: Martin Gafsen introduced the paper and the Committee noted the contents.
Issues:
Decision: Agreed
(Action: II ] @
6.2 Group Investment Quarter 1 Report
Discussion: Martin Gafsen introduced the paper and the Committee noted the contents.
Issues:
Decision: Agreed
Action: ] as I I ]
6.3 Group Investment Quarter 1 Report
[ Discussion: [ The Committee requested that the paper be re-presented to the next meeting. I
re Meeting Closed — 10.30 am
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