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Not to be circulated outside the investment review committee
Post Office Ltd Annual Review — 29 November 2011
ATTENDEES
Anthony Odgers Susannah Storey
Tim Martin Mike Whitehead
Craig Lester Jane Hoy
Nathan Philips Peter Batten
Will Gibson Katie Wake
Adrian Martin (Minutes)
ISSUES DISCUSSED
e Developing the network. The POL team noted the importance of the
network improvement plan to the entire POL strategy. In particular, the
team highlighted improvements to services (Mail, Government and
Financial services) including, for mail, key changes to the current
customer experience: (i) reducing of queue times; (ii) extension of opening
hours; and (iii) improving the in-branch experience of customers. These
will all be key to supporting an improved packets offering in the context of
declining traditional mail.
Changes to the current cost model were also discussed. A main aspect of
the costs reduction drivers relates to new agent contacts, which will
remove fixed pay for agents and replace it with variable agency pay linked
directly to the level of business experienced by those agents.
It was discussed whether in the long term a “bidding” process / positive
franchise fee could be considered for agents whose branch is located in
a high business area in order to capture (carefully) the currently untapped
value of POL franchises (noting that current policy does not allow for this).
Additionally, the panel questioned why pay costs were projected to
increase in spite of moving to a variable model. It was noted that a
political decision had been made recognising this potential value leakage.
However, there was also a more complicated cost message than headline
numbers suggested (see actions).
e Developing pipeline of new products. POL has identified opportunities to
develop new propositions. In particular, management are targeting
opportunities for Government entailing a face-to-face transaction, either
for those who cannot access services online or where a face-to-face
element is still required (e.g. capturing a digital photos). These
opportunities include; (i) UK Border Agency; (ii) DVLA; and (iii) the IPS.
Other, less clear, opportunities have also been flagged, including; (i) ID
Services working with the Cabinet Office; and (ii) support of universal
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credit with DWP. The support of universal credit is seen as a major new
proposition as it could offer future, significant revenue growth. However,
the universal credit plans have not been clearly defined by DWP. POL is
also exploring expanding financial services revenues, a key part of which
will be renegotiating the existing joint venture contract with the Bank of
Ireland.
It was highlighted that POL may currently have an ‘attitude of expectation’
with regards to new work / development of new products. POL will have to
learn how to market its services in order to remain competitive and look
into possibly partnering with innovative private sector companies. The
panel noted that the case study of FSS highlights how incumbent
government businesses do not always make the required transition.
e Further information on Post Office Ltd financial information. The panel
raised a number of questions on the POL financials, specifically on the
underlying profitability of the model and how this evolves going forward. A
number of additional items/revisions were requested - see action points
below.
e Separation of Post Office Ltd and Royal Mail is underway and currently
approaching finalisation of commercial terms. A chair’s letter is currently
being drafted.
e Mutualisation. The team outlined current thinking on POL becoming
mutual over time (no direct Government stake and self funding from its
own commercial activities). The panel noted challenges in achieving
financial stability and delivering the current business strategy to support
this. There was recognition of the balance of incentives against any
negative effects (such as the alienation of the current management).
These would need to be taken into account when considering the
mutualisation.
e ShEx resourcing was discussed, noting that the team will look to add a G6
from a financial background
ACTIONS
e The Post Office Ltd team to consider the following areas:
- “bidding” process / franchise fee should be considered for agents
whose branch is located in a high business area.
- Case study of Forensic Science Service, which demonstrates that
private firms can provide competition to Government-owned
companies.
e The Post Office Ltd team to update the review materials for the following:
- Further Revenue information (p.14-15);
* Split contribution and cost between Agent and Crown (sub-
postmaster pay and contribution).
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* Revenue / Operating profit figure excluding all Government
funding and subsidy;
- Further information on costs and agency pay (p.15);
* Provide allocation / granularity of costs over time against planned
performance.
* Delivery and geographical issues related to variable agency pay,
* Detail and explain why agency pay has increased overall as a %
of revenue (P.15);
- Further detail on negative EBIT (pre-exceptionals) for Financial
Services and Government Services in 2011A figures (P.14):
* Provide details on projected future figures;
- Show contribution margin for each business pillar (Mail, Financial,
and Government services) as a proportion of revenue (P.14);
- Operating performance: cash flow (P.16):
*Match the trade actuals to the statutory accounts (i.e. explain the
accounting policies used by POL),
* Further details on components of capital expenditure (e.g.
funding for modernisation), reserves, provisions and exceptionals —
and how this links to P&L projections;
- Detail of Borrowings (P.22):
* Show Net Debt against forecast Net Debt (annual basis),
* Link the Net Debt position to mutualisation and how the
future, potential mutual would be funded;
Provide details on the management incentive plan when it becomes
available to HMG after separation from Royal Mail, linking “golden thread”
of key drivers, incentives and remuneration / bonuses of management.
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