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RMH(06)09
ROYAL MAIL HOLDINGS pic BOARD
EXTENSION OF HORIZON SERVICES CONTRACT INCLUDING SYSTEM
SENSES ES RUN TRACT INCLUDING SYSTEM
REPLACEMENT
Background
1 Itis essential that Post Office Limited achieves significant reductions in IT costs if it is to
return the business to sustainable profitability. The major opportunity to do this resides with
the Horizon system that is provided by Fujitsu Services under a contract that runs through to
March 2010.
2 Fujitsu Services proposed a major investment in application, branch and data centre
hardware which would simplify the solution enabling significant reductions in recurring
Operating costs on the basis that the term of the existing contract was extended to March
2015. However, this proposition gave a gentle upw
ard increase in operating costs once the
benefits of the upfront investment had been realised.
3 Post Office Limited concluded that if it was to achieve a contract that delivered year on
year cost reductions then it would need to contra
ict on a radically different basis. Post Office
Limited has negotiated the basis of a deal with Fujitsu that closely mirrors what it believes
would be achievable by going to open market.
The proposition
4 Is to extend the contract with Fujitsu Services through to March 2015 but on radically
changed terms. Under the Proposed new contract
Savings will be generated of over £0.5billion compare to the existing terms once the
initial period of investment has concluded. This is underpinned by both parties
agreeing to “strive” to achieve year on year cost reductions through out the contract
period.
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e Existing assets are “sweated” in order to minimise investment in line with normal retail
Practices. Together with earlier realisation of some benefits this means that during
the investment period as much as £100m less cash outflow will be involved than
under Fujitsu's original proposal
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Royal Mail-Strictly Confidential
* Post Office gains control of architectural direction and high level design ensuring that
direction is driven by Post Office service and cost reduction as opposed to Fujitsu
revenue generation and margin protection.
e Gives improved service availability in branches
¢ The service will be unbundled into a number of components each of which can be
tested in the open market. This will typically involved benchmarking giving Fujitsu the
Option to match the benchmark or go to open competition.
* Creates a Systems Integration Partnership under which Fujitsu will embed skilled
resource at cost into the Post Office IT team. Fujitsu will be rewarded on the basis of
achieved benefits and the embedded staff personal bonuses will be aligned to Post
Office Limited IT performance
Options
5 There are a number of options which include do nothing and wait to compete the contract
at the end of the current term. None of these options generate the savings required within
the necessary timescale.
6 Termination of the existing contract, at a cost of circa £80m, would enable disaggregation
of the services in order to procure from best of breed. This might deliver lower Steady state
costs. However, this would be at considerably increased risk and take longer to deliver.
7 The Gartner Group have benchmarked Proposals from Fujitsu which has enabled Post
Office Limited to form a view of what it might expect to achieve by going to the market. Post
Office Limited firmly believe that the Speculative additional savings that might be achieved
through open competition do not justify the increased risk.
Risk
8 As with any major IT investment there are risks around time, cost and quality. Post Office
Limited and Fujitsu Services have now delivered ten major releases of software to time cost
and quality. Cost reduction will Frequire investment and doing this through the existing
relationship presents the least risk route. Additionally a series of caps and collars are in
place that limits Post Office Limited’s exposure to cost over runs.
9 The risk that Post Office would achieve greater savings through open competition is
mitigated through Post Office Limited tight to market test unbundled components of the
contract. This market testing could enable the Post Office to compete all of the existing
contract over a period of time.
Current Position
10 All the major principle areas necessary for a deal have been agreed with Fujitsu and
these have been endorsed at Chief Executive level. Detailed terms will be in place by March
Recommendation
11 The Board is asked to note the progress made by Post Office Limited in pursuit of
significant IT cost reduction.
David Miller
January 2006
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