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@® Shareholder
Executive
HM Government
Post Office Limited
Strategy discussion with Shareholder Executive team
March 2014
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Contents
@ Fomard look
@ Project Sparrow
(3) Network expansion and competitor networks
@ Mutualisation
@ 2014-15 Budget
Cs) Network and Crown transformation
Shareholder
Executive
HM Gow
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© Forward look
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Public Purpose and mutualisation
milestones timeline publish
2,000" NT branch opening
* State Aid notification
Possible Crown pay deal submitted
First Crown VR leavers
New Passport products
NFSP Annual
Conference
accounts
PEX(ER) (12")
Local elections
Shareholder
Executive
HM Government
Publication of annual report and
Publication of annual network report
New insurance product launched
‘Soft’ launch on mobile product
Current Account extension
Expected new deal with
eBay for parcel returns
(joint with Royal Mail)
Expansion of deal with
Amazon (jointly with
Royal Mail)
Two year anniversary of NT (Oct)
National rollout of mobile product (Oct)
Withdrawal of paper car tax discs (Oct)
Crown Transformation completed (Nov)
Mid year results (Nov)
POCA decision due
Anniversary of the
Horizon Working
Group creation
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Project Sparrow
A small but vocal
minority of ex-SPMs
have consistently
raised concerns
about the integrity of
POL’s accounting
software...
...an independent
review in 2013 found
“no systemic issues”
but areas for
improvement in
training...
..-POL has established
a mediation scheme
for aggrieved ex-
SPMs, overseen bya
working group. But
the working group is
currently paralysed
and POL is keen to
break the deadlock
Shareholder
Executive
HM Government
* Asmall minority of ex-SPMs, represented by the Justice for Subpostmasters Alliance (JFSA) had historically raised
concerns about the integrity of POL’s accounting software, Horizon
— POL appointed independent forensic accountants, Second Sight, to investigate the claims. Their report, published in July
2013 found there were no systemic issues, but proposed a number of measures about subpostmaster support and training
= POL established a Working Group, independently chaired by Sir Anthony Hooper, comprising POL, Second Sight & JFSA
to consider cases put forward by ex-SPMs
— The Working Group received 147 submissions from ex-SPMs
— Itis the role of the Working Group to consider the applications, and to decide whether the cases merit mediation
— The Working Group is not a judicial body, and cannot overturn court judgements
* The Working Group is not working
— The Working Group was established in September 2013, and the deadline for applications was November 2013
- So far the Working Group has yet to consider a case
-— Second Sight appear unable to process and prepare cases quickly enough, or to a sufficiently high standard. They have
also admitted to POL that they have become emotionally involved in specific cases, and their independence and objectivity
is almost certainly compromised
— Itis imperative that a suitably professional organisation is introduced to the process to enable cases to be considered in an
appropriately timely manner.
- However, attempts to replace Second Sight would be likely to be seen as POL interference and could see the JFSA walk
away from the process. Retaining JFSA involvement is important in giving credibility to the process
« Legal advice from Linklaters is clear that POL does not have the same duty of care towards subpostmasters as
compared to employees, and that it is not obliged to pay ex-SPMs for their human error in processing transactions
— Despite this, there is a concern that claimants expectations’ are rising, and POL will need to respond quickly to ensure the
Working Group begins processing cases.
* You will need to consider your involvement and any public support for POL
— The Horizon system and the training and support provided to SPMs is an operational matter, and Ministers have
maintained an appropriate distance. However, if POL is unable to break the deadlock they may look to you to provide
support for their position.
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Network Expansion and competitor networks (CONFIDENTIAL)
As part of last year’s
negotiations, POL
agreed to grow the
network to 12,000
outlets by 2015...
..the company is
exploring a number
of possible models,
specifically designed
to address gaps in
the market...
... this is not an
ideological move.
POL’s competitors
networks for the first
time outnumber
POLs network, and
the POL must
respond to protect
its revenue base
Shareholder
Executive
HM Government
= Competitors have aggressively expanded their networks
— For the first time in POL’s history, its retail mail competitors networks are in aggregate larger than POLs. This growth has
been fuelled by the rapid increase in home shopping returns, which is forecast to continue to grow strongly
2010 July 2013 December 2013 % increase since 2010
Post Office Ltd 11,905 11,726 11,719 -1.6%
Competitor networks c.3,500 c.10,000 c.15,050 +330%
* POL’s 2020 strategy and funding plan stated
— “Network expansion will be necessary to maximise the mails market opportunity and resist competitive expansion, it must be
balanced with a commitment that we will not cannibalise our subpostmasters’ businesses. Our strategy therefore include a
commitment to increase our physical reach through the development of access points rather than full service post offices.”
« The principles behind network expansion are
- To challenge competitors networks, which are aggressively expanding to meet market demand for innovative and
accessible services (such as parcel collection and return)
- Toenhance the Post Office brand, and to complement the services provided by existing branches
- To protect POL revenue from competitors — there is a need to respond to the changing market
— Tomove quickly. From a standing start today, POL is targeting 400 new outlets by 2015, and 2,000 by 2020
« Network Expansion won’t be without its critics
~— The NFSP opposed the concept of expansion during last year’s negotiations, fearing that an expansion of access points
could cannibalise their members revenue streams.
~ POL and BIS need to demonstrate that not responding to the expansion of competitors networks will see POL lose market
share, and this will weaken both the company and subpostmasters. Expansion is crucial to maintaining POL market share
« POL will trial new concepts this year
— Automated access point — an unmanned self-service kiosk providing access for postage and letter / small parcel drop off.
This could be operated by a local subpostmaster, with them deriving additional, or protecting existing revenue
~— Post and parcel shop — a self-service and manned counter service, co-located with selected retailers to provide basic mails
and other core services.
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Mutualisation
Mutualisation of POL
will be the largest
and most complex
transaction of its
type ever
undertaken...
. although slow,
progress is being
made — from a
standing start in
2010 POL has
sought to work
collaboratively with
stakeholders in
ways neither side
are used to...
..the company is
Preparing to publish
it “Public Purpose”
following the work of
the Stakeholder
Forum
Shareholder
Executive
HM Government
« In its response to the public consultation, Government stated it wants “clear progress to have been made towards
mutualisation of POL by the end of this parliament”. But identified four key targets to be met before mutualisation:
— (i) a mutual needs to be both financially and commercially sustainable, minimising the need for Government intervention in the
event of financial distress
— (ii) the right culture needs to be developed, encouraging stakeholder engagement and marking a move away from the
established “top-down” style of management
- (iii) POL’s strategic plan needs to be delivered successfully — this plays a role in making POL sustainable and viable
- (iv) Government must endorse a mutualisation (which represents VfM), and Parliament must vote for an ownership transfer
« POL established the “Stakeholder Forum” to define the company’s Public Purpose. POL is preparing to publish the
Public Purpose imminently. The Public Purpose reads
The Post Once Is unique. a commercial DusIess Set apart Dy I'S PuDIc Purpose.
We are driven by a belief in the importance of connecting communities and enhancing the powerful role they play in all
our lives.
We will stay true to this commitment by delivering key products and outstanding customer service through our unrivalled
local presence across the UK.
To deliver our public purpose we run our organisation by the following four principles:
+ Keep customers at the heart of everything we do
+ Build relationships based on trust
+ Treat everybody with fairness and honesty, responding to each individual's specific needs
+ Make a positive social and economic contribution to all the communities in which we work.
As an organisation we pledge to.
+ Maintain ethical attitudes in all our behaviours
+ Invest in the organisation to secure the business for the future
+ Listen with care to the views of customers, colleagues and others with an interest in the Post Office, and support their
development distress
= POL has recently established te Post Ollice Advisory Council (POAC) with te purpose of engaging start,
subpostmasters, customers and other relevant parties on matters of mutual interest. It is a forum where new ideas can
be generated and discussed, feedback received and a means of beginning to embed mutual behaviours. This will include
understanding how the Post Office can retain its public purpose while becoming and operating more commercially.
- The POAC held its first meeting on Wednesday 19 March. It is made up of 25 members covering a broad spectrum of
interests and skills, and representing a wide variety of stakeholders. The NFSP, CWU, and Consumer Futures are all
represented.
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@ I 2014-15 Budget
POL is forecasting 2012-13 2013-14 I 2013-143 I2014-15 strat] 2014-15 I 201415 I 2014-15
Pillars Budget vs Budget v
growth across all key Outturn Budget forecast Plan Budget I Storie I 13/4408
revenue pillars in Mails and retail 404.0 414.6 397.9 430.0 423.9 (6.1) 26.0
2014/15, meeting the
. Financial Services 279.6 2774 277.4 295.0 295.2 0.2 17.8
strategic plan target...
Government Services 133.2 115.9 114.5 117.0 117.0 0.0 2.5
key drivers are in Telephony 45.0 50.4 50.7 60.0 61.8 1.8 11.4
mails and financial Other 40.7 36.7 390.1 38.0 36.5 (1.5) (2.6)
services, with Income contingency 0.0 5.0 0.0 (15.0) @4) 5.6 (4)
government services
Total Net Income 902.5 900.0 879.6 925.0 925.0 0.0 45.4
revenue expected to
be broadly flat...
_..however this is 1. The Budget is stretching and ambitious.
dependent on the 2. As 2013-14 has not delivered expected revenues, there is greater pressure on POL to deliver higher growth to meet 2014-15
successful launch
and growth of new
products to counter 3. Poor 2013-14 mails performance due to Royal Mail pricing policy is addressed by the introduction of the shoebox product. 2014-
budget. There is minimal contingency held against the plan (c.1%)
the decline in 15 growth of 6.5% forecast, key dependency on working with Royal Mail to launch a successful home shopping returns product.
traditional services 4. Falling staff costs linked to Crown staff VR programme, and introduction of automation across the Crown estate will realise
savings
5. Network Transformation will continue to deliver savings, but momentum must be maintained to realise these. The new branch
operating models will more closely align POL agent costs with income.
6. POL is not progressing the home energy proposition, this is partially offset by increased expectations for the mobile product
7. The network subsidy payment in 2014-15 falls to £160m (out of total funding of £330m), in line with 2010 funding agreement
Shareholder
Executive
HM Government
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Network Transformation
Network Transformation
is seeing the
widespread
restructuring of POL’s
estate, changing how
customers interact
with branches and
how POL interacts
with its network...
...while POL has
experience of
delivering large
transformation
programmes, the scale
of the current strategy
is unprecedented...
...Since November 2013
POL has modernised
branches more
quickly, but this pace
of change must be
maintained
Shareholder
Executive
HM Government
* Network Transformation was developed in 2010/11 as a 5 year strategy to transform and modernise the agency network
— increases the viability of branches operated by subpostmasters, improves the customer and in-branch experience, delivers
financial benefits and flexibility to POL and ensures a reduced reliance of POL and the network on HMG funding
* The voluntary programme rolled out in October 2012, with an expectation that POL would meet interim targets towards
6,000 modernised branches by March 2015
March 2013 March 2014 March 2015
Anticipated conversions 1,200 3,600 6,000
Actual conversions (contract) 1,450 c.3,200 c.4,400
Actual conversions (open) 507 c.2,100 ¢.3,350
« However soon after rollout of the strategy the rate of conversions started to fall behind expectations. POL has
addressed this in its new strategy, which is supported by the NFSP. There a number of changes to accelerate
conversions
- More funding has been secured to incentivise the right behaviours among subpostmasters (e.g. increased compensation
and investment) and the timeline has also been extended by one year — completion is now expected by March 2018
- Although SPMs retain an element of choice, the profile of conversions has also changed. Fewer than 6,000 branches are
now expected to convert by March 2015, but the overall target to convert all branches that can be viably converted remains
— Anew “Community” designation has also been introduced that will ensure that where branches should not convert (e.g. due
to the impact on their viability) they will not be forced to do so. Service provision among this population will be protected
* Eollowing these changes_POl_is more confident that the programme is deliverable and can meet the following targets
March 13 March 14 March 15 March 16 March 17 March 18
Worst case 1,450 ¢.3,200 .4,150 ¢.5,350 c.7,600 c.8,300
Contracts
Best case 1,450 c.3,200 c.4,800 c.6,350 c.8,150 c.8,300
Worst case 507 ¢.2,100 c.3,250 c.4,580 c.6,000 c.7,800
Openings
Best case 507 ¢.2,100 ¢.3,700 c.5,350 c.7,900 c.8,300
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Crown Transformation
The Crown
Transformation
Programme is in full
roll out with overa
third of retained
branches
modernised...
...the programme is due
to complete in
November 2014, but
it is expected that a
small number of
branches will not be
franchised...
... the key risk affecting
POL’s ability to meet
the core objective of
run-rate breakeven
by March 2015 is
revenue growth
Shareholder
Executive
HM Government
* 2014-15 is a critical year for the transformation programme. Delivery against the plan is dependant on the successful
execution of
c.300 branch modernisations and 70 branch franchising
The voluntary redundancy programme that will remove between 500 and 600 FTEs
New automation (rollout of NCR self service kiosks)
Growth in revenues
Industrial relations, reaching a pay agreement and ending the strike action that has been occurring since March 2013
* Transformation is running broadly to plan
POL has successfully transformed around 120 branches, and remains on course to complete the programme by November
22 (out of 70) branches are franchised but five branches will not be franchised, POL is working to develop alternate strategy
« The voluntary redundancy programme is supported by the unions and is oversubscribed
POL and the CWU management are confident of meeting the savings targets identified under the VR programme. The
programme was oversubscribed by a factor of 2 to 1. The first tranche of 100 staff leave in April.
POL and CWU negotiations have turned to performance management of staff who are not suitable for the future role of
counter staff. Work continues towards a joint strategy to help these staff leave the network, rather than be managed out
* Pay negotiations with the CWU are at an advanced stage, but risks remain
POL has resisted offering a consolidated pay increase, as it would undermine the ability to meet break-even in 2015. They
have offered non-consolidated cash bonuses worth £3,300 over three years linked to meeting performance targets.
This position was rejected by the CWU, and there were 26 days of strike action between March and December 2013.
In December the CWU accepted that our consolidated pay rise must be entirely self-funded and consistent with the
breakeven position. Since then both parties have been intensively engaged to reach a solution.
POL believes it is close to reaching agreement on a consolidated pay offer, but believes this must be agreed before the
CWU conference in late April, as that risks hardening the CWU position.