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POLB05(6™)
POLB 05/91 — 05/115
Post Office Limited
(company no. 2154540)
Minutes of the meeting of the Board
held at 80-86 Old Street, London
on October 19" 2005
Present:
Sir Michael Non-executive Chairman
Hodgkinson
David Mills Chief Executive (for POLB0S/92 — POLB05/106)
lan Anderson Human Resources Director
Alan Cook Non-Executive Director
Peter Corbett Finance Director
Ric Francis Operations Director
Brian Goggin Non-Executive Director
Graham Banking & Financial Services Director
Halliday
Allan Leighton Chairman, Royal Mail Holdings (for POLB05/92 —
David Miller POLB05/106)
Gordon Steele Chief Operating Officer
Marketing & Direct Sales Director
In attendance:
Jonathan Company Secretary
Evans Commercial Director (for POLBO5/104)
lan O'Driscoll Notes
Neil Owen Category Manager (for POLB05/114)
Derek Rocholl IT Delivery Director (for POLB05/104)
David Smith
Apologies: None
POLBO05/91 MINUTES OF PREVIOUS MEETINGS POLB(05)6™
(a) The Board approved the minutes of the Board meetings of 17"
August 2005.
POLB05/92 STATUS REPORT POLB(05)75
(a) The Board noted the report, and in addition:
(b) Legal advice concerning Network Access: Gordon Steele
reported that a legal view from Group had been requested,
concerning Postcomm’s preference to open up the branch
network to competition. A response was expected shortly from
Stephen Agar. Postcomm had been advised by their own
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POLB05/93
POLB05/94
(c)
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experts that this was within their authority;
High Value Mails Products: Ric Francis underlined that it would
be crucial for Post Office Ltd to be involved in delivering this.
Gordon Steele assured the Board that the appropriate steps
had been taken with Alex Batchelor, Royal Mail marketing
director.
CHAIRMAN’S BUSINESS — POLB(05)76
(a)
Mike Hodgkinson reported that he would raise issues for
discussion under the Business Performance Review.
CHIEF EXECUTIVE’S BUSINESS — POLB(05)77
(a)
(b)
(c)
(d)
(e)
(9)
(h)
David Mills reported the following matters to the Board:
Credit Card Launch: The launch had gone well with coverage
had been given on Channel 4 News, BBC News 24, BBC 2
Working lunch. Interviews had been given with Rose Murray
West and Christine Buckley, but no specific articles had
appeared as a result;
Quarterly Shareholder Meeting: A meeting had taken place
with Mark Higson and Stephen Lovegrove which has now led
to the introduction of due diligence meetings for the funding
discussions -— initial meetings took place on 11" and 12"
October;
Roy Keenan: A formal meeting had taken place with Roy
Keenan, who had expressed concern at the rate of franchising
and sales volumes;
Camelot Board: Peter Middleton was proving his worth and had
helped arrange meetings with Tony Blair and Gordon Brown.
Lord Coe had expressed concern that the Olympics could lose
£750m if the lottery franchise changed;
CMA/CWU Strategic Involvement: Meetings had taken place
with Andy Furey, lan Ward, and Norman Candy from the CWU.
A further meeting had taken place with Tony Harris, Phil Pinnel
and Bobby Irvine from the CMA;
RADAR Conference AGM: RADAR had been nominated for
the ‘People of the Year Award’;
Project Rainbow:
(i) Director Recruitment: Four candidates had been
considered for Project Rainbow and a favourite had
emerged. Tony McCarthy and the Remuneration Committee
would need to approve the candidate chosen;
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POLBO5/95
POLBO5/96
(i)
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(ii) Programme Progress: The streams had been refined
and this would result in Sue Huggins taking responsibility for
channel strategy as well as network design;
(iii) Plans: A presentation would be made to the Post Office
Ltd Executive Committee on 7" November to outline the
latest status. A further presentation would be made to the
Board on 5"" December.
the Post Office of the Year Awards would be taking place on
Friday 21*' October 2005.
PR REPORT POLB(05)78
(a)
The Board noted the report.
BUSINESS PERFORMANCE POLB(05)79
(a)
(b)
(c)
(d)
(e)
Peter Corbett provided the Board with a presentation on Period
6 business performance, and in addition circulated 2 handouts
detailing Financial Services product income and Focus Product
Income. The Board noted the presentations, and in particular
that:
Period 6 Year To Date Profit after Group Allocation and
Pensions costs was a loss of £57.2 million. This was £10.9
million better than plan and £1.3m lower than the previous
year;
income was £1.4m worse than budget due to lower than
planned sales of Telephony, Bill Payments, NS&l, Financial
Products and Retail offset by a better than plan performance
on Direct Payments, Mails and Motoring. The share of
operating loss in POFS was adverse to plan due to the sales
performance of POFS products. The share of Operating Profit
in FRTS was favourable due to better margins;
staff costs were £1.0 m higher than plan due to higher than
anticipated pay award settlements. Agents’ costs were £2.5m
lower than budget due to the impact of lower sales and the
sales mix. Non-staff costs were £1.1m under budget due to
reductions in spending across a number of headings
(consultancy, marketing, computers, consumables, and staff
related). Lower losses than plan were offset by higher EDS
costs and Home Phone costs of sales (both sales volume
related). Group allocations were lower than plan because of a
large credit item (which will disappear by year end) in line with
the change to International Accounting Standards;
half year profit before tax was a loss of £75.6 million, £27.8
million favourable to budget and £24.4 million higher than the
previous year. The variance against prior year was due to
exceptional items, mainly severance (£2.0m) and impairment
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(f)
(9)
(h)
(i)
()
(k)
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costs (£7.5m), £6.6m lower profits from assets sales and
higher interest expense (£9.5m);
the cash flow year to date was an outflow of £54m. This was
£23m better than plan, due to the reduction in the network
cash balances and capital expenditure;
the Focus Products were £4.4m below plan year to date, with a
full year forecast of £12.3m variance against plan. A recovery
plan is in place to mitigate the full year contribution impact;
the Financial Services product analysis showed a shortfall
against the full year budgeted income of £15m. Furthermore
the POFS forecast for 2006/07 was well below the level
required by the Strategic Plan. It was agreed that continued
pressure would be put on POFS to increase forecasts to
acceptable levels. Plans would also be aligned with Post Office
Ltd and the Bank of Ireland;
Mike Hodgkinson stated that it would be essential for credibility
of the Board to demonstrate that it could achieve stretching
retail targets, rather than process large numbers of benefits
transactions. The Board agreed that Gordon Steele would
develop some marketing ideas to help ensure sales targets
were met, and report back to the December Board. These
plans would include both measures to ensure the success of
financial services product renewals, and measures to increase
the penetration of products within the colleague community,
particularly in mail centres;
Mike Hodgkinson suggested that the implementation of dual
currency cash machines could transform the way in which the
public bought much of their foreign currency, and further
improve Post Office Ltd’s standing a key player in this market.
However, Brian Goggin reported that there was no spare
capacity within Bank of Ireland to help Post Office Ltd trial dual
currency cash machines, and that their own target of rolling out
1,000 such cash machines was proving to be extremely
stretching;
the Board further considered the reasons for financial services
products not achieving their targets, and measures that could
be taken to improve the situation. David Mills reported that
POFS needed to re-engineer the customer journey to improve
the overall customer experience, as poor experience
accounted for a significant number of failed sales. This has
been identified by POFS, but would require hard work to
correct;
Gordon Steele reported that several offers were being
considered for colleagues including a ‘Never Knowingly
Undersold Guarantee’ and ‘Buy 12 months, get 14 months’
offers. Allan Leighton stated that most colleagues would react
best to straightforward offers on price. Alan Cook stated that at
a former employer of his, discounts on insurance products
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(m)
Action:
Gordon Steele
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actually formed part of the terms and conditions on offer in the
annual pay round to unions/staff representatives;
Gordon Steele further reported that Direct Sales efforts were
being hampered by problems with the web site, which ran on
the same infrastructure as the rest of Royal Mail Group. The
Board agreed that David Burden would be invited to the POL
Board in December to explain how this situation was being
corrected.
POLB05/97 STRATEGIC PLAN POLB(05)80
(a)
(b)
(c)
(d)
(e)
Action:
Graham
Halliday
Peter Corbett provided the Board with a presentation on the
Post Office Ltd Strategic Plan. It was explained that this
presentation would be used in subsequent discussions with the
Shareholder Executive;
the Board discussed the macro economic factors that had
influenced the results. Mike Hodgkinson explained that the
disappointing sales were partly the result of a general
economic slowdown and an increase in bad debts. This had
affected a number of other key high street retailers, as
evidenced by their reported financial results. The Board agreed
that it would be imprudent to ignore these retail trends, and the
£160m PBIT target should therefore be adjusted to a more
suitable level to take into account these external factors. Allan
Leighton stated that any adjustment could not result in the
Working Capital Loan being exceeded under any
circumstances, and clarified that this was more important from
the Group perspective than achieving a 15% return on capital
employed.
In the light of the shortfall in POFS activity and the need to
present a credible plan to secure the necessary levels of
funding, it was proposed that the 5 year plan profit target be
adjusted downwards to more realistic levels - £85m PBIT rather
than £160m,
the Board discussed the proposed amended level for the Year
5 PBIT figure. It was pointed out that any significant downward
adjustment would result in a proportionately negative effect on
profit for the early years. Peter Corbett suggested that there
were measures that could be taken to lessen the effect on
cash requirements and ROCE such as reducing network cash,
and adjusting the dividend policy with FRTS. After some
discussion, the Board agreed that the £160m PBIT figure for
Year 5 of the strategic plan would be adjusted to £85m;
the Board agreed that the success of Banking and the Card
Account launch would be further emphasised in the historical
achievement section of the plan. Graham Halliday would
provide Peter Corbett with the required words to create a page
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Peter Corbett
POLB05/98
POLB05/99
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on its own. An additional page would be created to distinguish
between the gross and net sales numbers, to show new
income streams on a comparable basis with existing ones,
notwithstanding that the presented numbers represent the way
in which the figures will flow into the accounts (ie: with a much
higher ‘cost of goods sold’ impact)
TRANSFORMATION PROGRAMME POLB(05)80
(a)
Peter Corbett provided an brief update on the Transformation
Programme.
SOLVENCY POLB(05)80
(a)
(b)
(c)
(d)
(e)
(f)
Peter Corbett reported that the key issues in relation to
solvency continued to be to ensure:
(i) profit and cashflow were at least in line with budget;
(ii) the ‘route map process’ proceeded in line with the
agreed timetable.
Post Office Ltd continued modestly to exceed its profit target
and more clearly to exceed its cash target;
sustained solvency would be dependent on refinancing
agreement being reached, as set out in the interim funding
agreement signed at the previous year end;
discussions with the DTI and the Treasury were underway in
conjunction with Royal Mail Group. The target was to complete
due diligence by mid November, to agree in principle on a new
financing package by early December, and to execute formal
contracts before the end of the current financial year.
Notwithstanding that the original target date was September
30", the Board agreed to the new timetable on the
understanding that this was consistent with the Group funding
discussions. On this basis the Board agreed that the company
was a going concern for the purpose of the half year accounts.
The Board agreed that:
(i) having sought reassurance from the Shareholder
Executive it expected the £300m of rural funding to
receive state aid clearance and therefore become
available;
(ii) it expected the company to meet its revenue and
expenditure targets;
(iii) on the basis of a recent discussion with Government it
expected a satisfactory new package to be put in place
in accordance with the revised timetable which would
provide the necessary funding to return the business to
6
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POLBO05/100
POLBO5/101
(9)
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(iv) profitability and meet its funding and cash
requirements.
On this basis, and having regard also to the additional capital
already provided to the company to meet its short term funding
requirements through to March 2007, the Board agreed that
the company was a going concern for the purpose of the half
year accounts.
ISA ROLL-OUT POLB(05)81
(a)
(b)
(c)
(d)
(e)
Peter Corbett provided the Board with an update concerning
the financing of ISA. The Board noted that
The existing rollout plans were progressing satisfactorily;
work was currently underway with subpostmasters to constitute
the range of products that would be offered. Prioritisation of
the subpostmasters would follow;
two business cases were currently being prepared in relation to
ISA. The first business case proposed an increase in
investment of £400,000. This was to take into account the
increase in property costs that had resulted from unexpected
problems such as asbestos removal. The second business
case concerned the addition of 21 offices to the roll-out and
amounted to £384,000.
Graham Halliday suggested that the roll-out of ATMs had
experienced similar property issues, and Peter Corbett
confirmed that the activities would be co-ordinated where
possible to save money;
The Board agreed that delegated authority would be provided
to Peter Corbett and David Mills to finalise and authorise both
business cases.
RURAL STRATEGY UPDATE POLB(05)81b
(a)
(b)
(c)
David Miller presented a Rural Strategy Update paper to the
Board. The Board noted that:
the paper outlined the broad approach that would be taken in
the December report to Government covering ‘new and
innovative ways of providing Post Office services in rural
areas’, and explored the ‘political presentation’ that
Government would need to take in order to agree network
change;
the outreach system had been successfully piloted, and there
had been few objections to the changes in the service levels
that had resulted;
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Action:
David Miller
POLB05/102
POLBO05/103
(d)
(e)
(f)
(9)
(h)
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a need existed to ensure that Government was properly
briefed on the complex issues involved, well in advance of the
Parliamentary statement in 5 month’s time;
In addition to rural branches, Post Office Ltd also had some
urban, urban deprived and Directly Managed branches which it
managed at a loss. Additional funding would be sought from
Government to cover these losses;
David Mills reported that Barry Gardiner had appeared to push
this matter in the direction of DEFRA. Allan Leighton clarified
that Mark Higson at the DTI was the only key contact
concerning this issue, and the focus of influencing activity
should remain clearly with the DTI;
the issue of rural strategy would feature on the next Royal Mail
Holdings Board agenda;
the Board agreed that the paper provided a very good starting
point, and that David Miller and Mike Granville would compose
a letter to Mark Higson on behalf of Mike Hodgkinson, to
outline what would be required to reduce the Social Network
Payment requirement from £150m to £75m;
DIVERSITY STRATEGY POLB(05)82
(a)
lan Anderson presented the Diversity Strategy paper to the
Board. The Board agreed the paper, subject to a minor
amendment suggested by Jonathan Evans on the final page.
IR STRATEGY POLB(05)83
(a)
(b)
(c)
(d)
(e)
lan Anderson provided a presentation on IR strategy in relation
to cash centres. The Board noted the presentation, and in
particular that:
external cash in transit work was high risk, provided no reward
and was not part of Post Office Ltd’s core activity;
CWU acceptance of change had been dependent on Cash
Services putting financial incentives in place. The CWU had
tended to drive an oppositional approach to management;
any industrial action at Cash In Transit sites had the potential
to spill over to Royal Mail Group, and would need to be very
carefully managed;
a programme of active engagement of employees would
commence on 23 September. This would be challenging
given the quality of local management was patchy in some
areas. The CWU would continue to be consulted, and any
8
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Action:
Peter Corbett
POLBO05/104
(f)
(9)
(h)
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counter-proposals would be examined;
stretching targets had been set for measuring and improving
leadership, direction, people communication and performance
by quarter 2 of 2007. This would be achieved with a
combination of increased dialogue, senior management
visibility, a shift manager review and development programme,
‘change champions’, career counselling, recognition
programme for change, flagship depots and a review of the
communications channels;
Allan Leighton acknowledged that this would be difficult to
manage and the Have Your Say results from the staff had
been very mixed. Ric Francis underlined that the key to
success in this area would be to successfully listen and
engage with the staff, and this would remain the priority. Cash
in transit activity within Post Office Ltd would never be
profitable until day to day dynamic scheduling flexibility had
been agreed;
the Board noted the presentation and agreed that the roll-out
should commence in accordance to the planned timetable. The
Board further agreed that Peter Corbett would prepare a
financial analysis showing the loss/profitability on a marginal
basis and after allocated costs.
HORIZON PROPOSITION POLB(05)84
(a)
(b)
(c)
(d)
(e)
Ric Francis introduced Dave Smith and lan O'Driscoll. A
presentation was provided on Horizon Next Generation. The
Board noted that:
the current proposal would almost halve the cost of Horizon
and then reduce ongoing costs year on year. The original
Fujitsu proposal had not met this objective, and the new
proposal had been achieved after hard negotiation;
the original proposal would have resulted in a front-end spend
of £150m, in addition to a fair amount of risk. The current
proposal had removed £140m of cost by ‘sweating’ the existing
assets within the operation for a long as possible. This would
remove the need to have such a large initial capital outlay, but
would still result in the rolling out to all 14,500 branches;
the proposal would still required a £50m front-end cost to pay
for a shared data centre and a ‘lights out’ facility. However, it
would not result in a penalty payment for breach of contract;
the current proposal resulted in an acceptable and achievable
cost profile, and an agreement had been reached in principle
with Fujitsu of new ways of working. The alternative would be
to buy out the existing contract at a cost of £80m, disaggregate
the services, and select an SI partner to manage the
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Action:
Ric Francis
POLBO05/105
POLB05/106
Action:
Neil Owen
POLBO05/107
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development and integration. This could deliver lower cost but
would result in a significantly higher risk and a longer delivery
time;
(f) The other key features of the new proposal were:
(i) improved availability;
(ii) cost effective service management;
(iii) significant network savings;
(iv) SI Partnership;
(v) the duration of the contract would be until 2015.
(g) David Burden had been briefed on the proposals;
(h) the Board noted the progress that had been achieved, and
agreed to the approach and to £6m investment that would be
required to cover the period to full authorisation. Peter Corbett
stated that this investment would be capitalised and impaired.
The Board further agreed that a strategy paper would be
written for noting at the Royal Mail Holdings Board in
December 2005, and that the proposal would return for full
authorisation to the Royal Mail Holdings Board in April 2006.
RISK AND COMPLIANCE COMMITTEE POLB(05)85
(a) The Board agreed the Risk and Compliance Committee terms
of reference
(b) The Board noted the Audit Recommendations, Risk and
Compliance Committee Minutes and the Audit Report.
ASSOCIATE COMPANY ITEMS FOR NOTING POLB(05)86
(a) There were no further approved POFS minutes available for
noting.
(b) The FRTS Ltd minutes of 28" April 2005 and FRTS Holdings
Ltd minutes of 28" April 2005 were noted.
(c) The Board agreed that in the interests being provided with the
most recent updates on POFS and FRTS activities, the
minutes that had not been formally approved would be made
available for noting at future Post Office Ltd Boards.
FUNCTIONAL REPORTS
FINANCE FUNCTIONAL REPORT POLB(05)87
(a) The Board noted the report.
(b) There were no further issues raised given Business
Performance, Solvency and the Impact Programme had
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already been discussed in some detail.
POLBO05/108 SALES & SERVICE REPORT POLB(05)88
(a)
(b)
(c)
(d)
(e)
(9)
The Board noted the report, and also noted that:
Sales Capability Training: Sales Capability managers were
now in place in the Directly Managed network. Recruitment had
begun to place 20 Financial Services Specialists into selected
branches;
Service: Feedback from the Customer Satisfaction
questionnaire showed an overall satisfaction level of 84% in
respect of agency branches and a satisfaction level of 62% in
respect of Directly Managed Branches. Key improvement
opportunities have been identified and action plans developed;
Network Compliance and Conformance: A half-day training
programme had taken place for the Sales Team to emphasise
the need to 'Drive Compliant Sales';
Crown Strategy: 14 Directly Managed branches had been
franchised year to date, and another 13 were either in
consultation or about to go into consultation. The year-end
forecast was in the 40-45 range. 18 ‘high value’ sites had now
been identified for sale, with a total target number of 24. The
preferred option was to franchise off-site and to sell the
freehold;
Restrictions: On the basis of a review of the new restrictions
policy (deployed within the network 21st — 23rd September),
the OFT have provisionally decided to close their case file on
the ACS complaint;
Agents Pay Round 2005:
(i) agreement had been reached with the NFSP at the
beginning of September. The consolidated increase would
be 3.1%, although the headline rate was 3.4%. The latest
projection from Finance confirmed a likely outturn of around
the £525m for year end in accordance with original plan;
(ii) the new Share in Success for Subpostmasters had
replaced the proposed bonus tier for this year (part of the
original PRAG agreement) but the NFSP have stressed they
would wish to open negotiations on this tier again should the
Share in Success not continue in future years.
POLBO05/109 MARKETING & DIRECT SALES POLB(05)89
(a)
The Board noted the report and in addition that:
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(b)
(c)
(d)
(e)
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PayStation™: Negotiations continued with Barclays Bank;
Mails:
(i) further work has been undertaken to build a partnership
relationship with Royal Mail, rather than the account
management structure that currently existed. Additional
resources had been deployed in the Rainbow programme to
focus on growing the profit from joint mails products and to
support packets strategy. This work could lead to an
increase in Group profit but a decrease in POL income;
(ii) a special delivery campaign targeted at SME customers
would shortly be deployed. Proposals to run a joint
Christmas post campaign were rejected by Royal Mail
Letters because the margins could not support the plan.
This would be the first festive season without a consumer
campaign, and risked possible adverse statements from
Postwatch. These would be monitored but could impact on
the 1st and 2nd class stamp mix.
HomePhone: Progress continued with around 250,000
customer signups since the January launch, of which 110,00
were now live an making calls. This was faster than any other
new entrant to the market, but short of the plan for this year. A
significant uplift would be required from the sales team to
achieve target. This would be addressed through the use of
field sales agents;
Other Product Development:
(i) Pre-Paid Debit Cards: Work on pre-paid debit cards
continued with a travel funds card on schedule for pilot in
the new year and roll out to hit the 2006 summer travel
peak;
(ii) Gift Vouchers: Gift vouchers had been launched across
the network in time for Christmas. Customers would be able
to buy vouchers (paper for the majority, plastic for
Debenhams) from any of over forty high street retailers from
their local Post Office branch;
(iii) ID Cards: A decision had been taken by the Executive
Committee not to bid for the first stage of the Government's
ID card work. This would have required the establishment of
a physical network of offices to facilitate interviews for new
passport applicants. The terms around this tender were
prescriptive and uncommercial. Further tenders were
expected in the New Year.
(iv) Paystation™: Centrica, and Scottish Power had agreed
to go live with the new Paystation™. There had been no
progress with Transport for London.
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POLB05/110
POLBO5/111
POLB05/112
POLBO05/113
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BANKING & FINANCIAL SERVICES POLB(05)90
(a)
(b)
The Board noted the report and in addition that:
LINK: Post Office Ltd was now an active member of the OFT
payments systems’ Task Force, LINK Access Working Group,
and LINK membership was being pursued for manned counter
terminals. This group would report by the end of this year, and
a key step towards this would be a working group meeting on
28th October when recommendations would be formulated.
Feedback had indicated the banks and LINK were increasingly
uneasy with our input and Post Office Ltd had recently been
accused of abusing its position. The case for membership
would still be heard, and the suggestion was (based on
feeback from the banks) that if the OFT and Government
wanted a deal to take place then most of the Banks should
agree, although there may still be some notable dissent and
potentially a legal challenge;
OPERATIONS REPORT POLB(05)91
(a)
The Board noted the report. There were no further issues
raised given the Horizon Next Generation project and the Cash
In Transit IR strategy had already been discussed in detail.
HUMAN RESOURCES REPORT POLB(05)92
(a)
(b)
(c)
The Board noted the report and in addition that:
Have Your Say: There had been slight improvement this month
with the September ‘I enjoy working here’ score up 64%
compared to 58% last year. The year to date score was 62%
compared to 64% last year, but up from last month’s 61%.
Have your say remained a key area of focus for the rest of the
year with monthly updates to the Executive Committee.
Working parties which would focus on improvements had been
set up in NSS and Retail Sales, which were the areas that
required the most attention;
Headcount: Headcount reduction was ahead of plan at 298.
Staff expenditure was £1.0m above budget, but plans were in
place to correct this by year end. The focus continued to be on
resolving transitionals which were currently running at 66.
SEALINGS POLB(05)93
(a)
The Directors approved the affixing of the common seal of the
company to the documents set out against item number 137/05
and 183/05 inclusive in the seal register.
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POLB05/114
POLBO05/114
POLBO05/115
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RECOGNITION POLB(05)94
(a) Gordon Steele presented Derek Rocholl to the Board. Derek
Rocholl explained that he would be leaving the business after
17 years of service to pursue charitable interests. The Board
expressed their appreciation for the excellent work Derek had
undertaken as Category Manager, and wished him every
success for the future.
ANY OTHER BUSINESS
(a) Jonathan Evans reported that the Royal Mail Holdings Board
had delegated authority to the Post Office Ltd Board to
approve investment cases up to the value of £20m, from its
current value of £10m.
CLOSE
(a) There being no further business, the meeting was closed.
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