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To Jo Swinson
From Post Office Team
Date 17 September 2012
Meeting with the Chair and CEO of Post Office Ltd
(Tuesday 18" September 2012, 10:30-11:00)
Purpose
This is your first meeting with Alice Perkins and Paula Vennells (Chair and CEO of Post
Office Ltd respectively).
Attendees
Alice Perkins and Paula Vennells (Chair and CEO, Post Office Ltd)
Roger Lowe and Jane Hoy (ShEx Post Office team)
Your objectives
* To communicate that this is a priority area within your portfolio.
¢ To understand Alice and Paula’s priorities for the business.
¢ To stress that it is vital for Post Office Ltd to deliver against all elements its strategic
plan, and seek Alice and Paula’s views on how POL is positioned to deliver on each
of these.
¢ To set out your commitment to making progress towards mutualisation.
Alice and Paula’s objectives
¢ To set out her vision for the business, progress POL is making against plan, and
any key areas of concern.
¢ To underline the importance of new revenue and government work in securing a
viable future for the network. Alice and Paula are likely to seek your support in this
area.
Annexes
Annex A:__ POL background
Annex B: Further information on Network Transformation
Annex C: Short biography of Alice Perkins and Paula Vennells.
CC: Cable MPST; Perm Sec MPST; SpAd MPST; ShEx Post Office Team
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Speaking Notes / Questions to ask:
« I am delighted to have the opportunity to build on the good work of
my predecessor.
¢ This is an exciting time for the Post Office; recent separation and
Government investment presents an opportunity for positive and
Opening lasting change.
remarks
« Post Office Ltd must deliver its commercial strategy — so successfully
rolling out new network models and growing new revenues is crucial.
I stand ready to support you where I am able to deliver these
priorities.
I understand that the Network Transformation programme is due to
formally rollout on 1 Oct, with a plan to convert 1,200 branches by 31
March 2013 and a further 4,800 in the following 2 years.
e Are you confident that you will achieve this target?
Network I understand that existing subpostmasters who are considering
Transformation leaving will be incentivised to do so through the programme. What
provision to continue service is being made for cases where the
existing subpostmaster retires outside of the programme and there is
no alternative subpostmaster is available?
What is the plan for the remainder (c.4,000 branches) of the network
who do not convert under Network Transformation?
I am pleased that POL has made some early progress but there is
some way to go to reach forecast revenues from new services.
Clearly the current DVLA contract will be crucial — how confident are
you of winning this?
More broadly, how do you feel the Company is set up to deliver its
GS ambitions in the life of the plan — what are the barriers within the
Company to delivery, if any?
Government If pushed to ‘give’ work to POL:
Services e I understand that all legal advice suggests that Post Office Ltd must
compete for work — so it will be important that POL develops a clear,
compelling GS offer.
e All Departments are facing spending pressure — so will be looking to
save costs.
I want to engage, coordinating with your efforts, to ensure that
people are clear of our policy for the network, the positive changes
underway, and the options the post office can offer to support
delivery.
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e First, can I say how delighted I am to see agreement between HSBC.
and POL to allow access to current accounts at the post office — this
is great news.
e Also pleased to note conclusion of the Bank or Ireland renegotiation
— believe this is key for expansion of personal FS, which will be an
Financial important part of POL’s response to the introduction of Universal
Services Credit.
e¢ Iam keen to keep abreast of Post Office Ltd’s work towards
developing transactional accounts.
e What are your thoughts on POL’s future direction for financial
services? How are you thinking about replacing POCA revenue in
the longer term as it continues to decline?
« Iam pleased that the POL stakeholder forum is being established
and is scheduled to meet for the first time in October — this is an
important milestone in POL’s mutualisation process.
e How do you envisage the mutualisation process developing following
this first meeting, both in terms of the structure of the process and its
timing?
¢ In what ways could other areas of POL impact on mutualisation,
such as Network Transformation and your revenue growth plans?
e What other challenges have you identified that pose risks to
mutualisation, and how do you expect to be able to navigate these?
Mutualisation
I am committed to supporting POL in making progress towards
mutualisation. I am also conscious that no process will be possible
without a commercially and financially stable business - it is therefore
important to me that POL continues to work to deliver its plan.
If dispute between POL and NSFP on number of seats the NSFP have
on the stakeholder forum is raised:
e It is important that the structure (including the Governance
structure) of a mutual is developed collaboratively between POL
and its stakeholders.
e This is the same message I would give to George is he raises this
question with me when we meet later today.
e I thank your team’s engagement on this with my officials to date —
would encourage this to continue.
IF raised « I hear what you are saying, and it will of course be important to
Remuneration consider this within the wider context of an intense focus on pay in
Government and Government-owned institutions.
e Would encourage you to continue to work with officials on this issue.
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Annex A: POL Background
Network Transformation (NT)
POL will shortly move to full implementation of their modernisation programme, which will
see the conversion of 6,000 branches to new models (4,000 ‘Mains’ and 2,000 ‘Locals’ by
end March 2015). It is crucial that POL delivers on these NT targets. Annex B gives more
detail on Network Transformation.
Crown branches
Under the terms of the £1.34bn funding package agreed in 2010, POL is required to
eliminate the losses of the directly managed Crown post office network (373 branches) by
March 2015. The Crown network has been making heavy losses for many years (peaking
at c £70m) primarily as a function of high staff (CWU negotiated pay rates now well above
market levels) and property (city/town centre) costs. Previous attempts to address these
losses have had limited success. Crown network losses for 2011-12 were £46m.
In recent months POL has been revising and refining its strategy to reach Crown network
breakeven progressively over the three financial years to 2014-15 and now has Board
approval for its programme to achieve this.
Government services (GS)
POL has forecast significant growth in GS income, accelerating throughout its commercial
plan, which will be a challenge as it is against a backdrop of declining revenues from
‘traditional’ GS. POL wishes to develop a ‘new generation’ of GS which will support
Government's plans to move more services online. This would be through services such
as identity assurance, applications where POL captures digital data as part of the
application process, and by providing ‘assisted digital’ services, supporting people who are
not able to access online services independently.
POL has yet to fully define its offer in some areas, and needs to continue to focus on this.
Some potential future services — such as the current DVLA contract — are well defined, but
others are less clear. POL needs to focus on better defining its offer, working with
Government to grow its pipeline of business. We should and do support POL as far as
possible, but it is important that POL is clear that they are responsible for winning work in
line with EU procurement regulations.
Post office has strengthened its GS team and they're approach seems to be improving but
there is a long way to go to win new business to meet revenue forecasts. POL will also
need to develop its plans to react to anticipated reductions in POCA revenues as
Universal Credit is introduced.
POL may push for more support for GS — we should be clear that we will support
wherever possible, but that POL must deliver quality, cost-effective services and be clear
of what it can offer Government in order to win business.
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Financial services (FS)
POL’s FS ambitions in its commercial plan were relatively un-ambitious. Since then they
have employed a new Head of Financial Services who has taken a fresh look at the
business and plans to develop the brand, sales model, and product offering in the coming
years for personal FS. This includes piloting of transactional accounts, including a
budgeting and current account, due in November (commercially sensitive). Most recently,
POL have successfully renegotiated their relationship with their banking partner, Bank of
Ireland. Amongst other things this sees better rates for POL, resulting in C£1.2 million
increased revenues per month, a better platform to build the business from, and a 3 year
extension of the contract out to 2023.
It’s worth noting that Post Office Ltd’s overall FS revenue is driven by a number of different
products and services. Key examples include; bill payment; travel services; banking
services (such as ATM services, and arrangements that allow people to access accounts
in branch); NS&I products; and a range of personal financial services through a Joint
Venture with the Bank of Ireland. They have recently announced new arrangements to
allow HSBC current account holders to access current accounts in branch — C 9million
customers.
Mutualisation
We published the Government's response to the “Building a Mutual Post Office”
consultation document in July. Responses were cautiously positive and highlighted the
need for protection of the public benefit purpose of POL, which is required in any case
under the Postal Services Act 2011, and for a mutual POL to be financially and
commercially sustainable. This is broadly in line with our thinking on the development of
this policy.
A number of mutualisation work streams, including Cultural Change, Finance, and
Governance, have now been initiated as well as a stakeholder forum to establish the
definition of the public benefit purpose. POL is leading these work streams but it is
important that Government is very close to their direction, and is enfranchised in decision
making both as shareholder and a broader stakeholder.
POL and the NSFP have currently reached an impasse on NSFP’s belief that they should
have 2 seats on the stakeholder forum, which POL does not agree with. Paula/Alice may
raise this with you — we do not think it would be desirable for Government to intervene at
this point, and we should encourage POL and the NSFP to resolve this issue in a
constructive way which supports the objectives of the forum.
Alice may set out that the process towards mutualisation has potential to interfere with
delivery of POL’s commercial strategy. It would be helpful to address these concerns with
a reassuring, but firm steer: we agree that it is important that mutualisation is not taken
forward in a way that harms the business; that there are clear business benefits in
developing a more positively engaged relationship between POL and its stakeholders; and
that continuing positive progress on engagement with staff and cultural change will be an
important theme in the mutualisation process, and help to drive business performance.
Overall Company performance
2011/12: In a challenging economic environment, POL delivered a strong performance in
2011/12 - compared both to its own Budget and its performance in 2010/11. In particular it
showed year-on-year growth in revenues for the first time since 2004/5 (of C. £17m). This
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growth was delivered from Mails and Retail, Government Services and in selected
Financial Services activities (e.g. ATM and bill payments).
Tight control over the cost base resulted in operating costs which were £10m below
budget. These factors provided management with the confidence to release additional
capital to accelerate the Network Transformation programme. Due to these increased
project costs POL’s operating profit, before taking into account the £30m increase in
Government subsidy, was £4m lower than in 2010/11. Including the increased Network
Payment, POL’s Operating Profit was £26m higher than 2010/11.
2011/12 performance provides a solid foundation for POL to grow, however pressures on
management are likely to increase in 2012/13. The business needs to manage its
transition to independence while at the same time deliver growth in new revenues, roll out
the Network Transformation programme and continue down its path to mutualisation.
Year to date: POL recently presented us with July results, and a 2012/13 budget
reforecast based on current year performance. So far, POL has performed well overall
with sales and operating profit slightly above budget.
Governance
POL now has a full Board, with 3 appointments following Alice Perkins as Chair: Neil McCausland
(Senior Independent Director), Virginia Holmes, and Tim Franklin (Non-Executive
Directors). Susannah Storey represents Shareholder Executive on the Board.
Remuneration
Shortly after her appointment, Alice raised some concerns that the pay package for Paula
Vennells was low as compared to her peers and flagging up that separation from Royal
Mail group would see Paula taking on new responsibilities. Since separation, we have
been working with POL to agree pay for the 2 members of the Executive Team on the
Board — Paula Vennells and Chris Day (FD), which will need to be approved internally in
BIS, with HMT and Ministers.
Given that Paula will also be at this meeting we think it unlikely that Alice will raise this
point so have provided a point to make in case it is raised only.
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Annex B: Network Transformation
Network Transformation is a Post Office Ltd programme that will see £585m of public
money used to modernise 6,000 branches (about half of the existing network) by March
2015. The modernised branches will operate under two new operating models, known as
‘Main’ and ‘Local’, which provide subpostmasters with commission only remuneration. This
is a departure from the traditional sub post office operating model where subpostmasters
receive a fixed payment (known as the ‘core tier payment’). The programme is completely
voluntary and no subpostmaster is being forced to convert.
2. The current network of 11,800 branches comprises":
Crown Franchise (ex I Sub Post Outreach & Local Main
Crown) Office Satellite
373 410 9,820 1,000 200 (pilots) I 30 (pilots)
3. After Network Transformation, the network in
March 2015 is expected to comprise:
Crown / Franchise (ex I Sub Post Outreach & Local Main
Premier Crown) Office Satellite
300 500 4,000 1,000 2,000 4,000
4. The new models have been extensively piloted, and national rollout of Network
Transformation will begin on 1 October 2012. Post Office Ltd has targets to achieve 1,200
conversions by 31 March 2013, and 4,800 conversions over the following two years. The
following table shows the expected profile of conversions:
Model 2012/13 2013/14 2014/15
Local 400 800 800
Main 800 1,600 1,600
5. In November 2011, Post Office Ltd held a series of events for subpostmasters across the
country to explain the new models to subpostmasters. Subpostmasters were then invited
to participate in a non-binding survey, where they were asked to express their preference
for three options:
a. Convert to one of the new models
b. Exit the network, with compensation
c. Stay on their existing contract
Around 6,000 subpostmasters have expressed a preference. Over 2,000 are interested in
conversion; 1,200 wish to exit the network; the remainder indicating initial preference to
remain on their existing contractual terms. The survey will be rerun annually.
Around 3,000 branches are operated by multiple operators — i.e. The Co-op, Tesco,
McColls. Post Office Ltd has relationships with the company, rather than individual store
managers, and the future of these branches was not considered by the subpostmaster
survey. The multiple partners have expressed a strong interest in the new models, and
Post Office Ltd expects a significant number to convert over the duration of the Network
Transformation programme.
' Please note, numbers have been rounded.
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8. Conversions are categorised as either ‘on-site’ or ‘off-site’:
On-site Off-site
Conversion takes place within the existing Relocation of Post Office services to a
premises, with either the existing nearby premises, and nearly always a new
subpostmaster moving to the new contract, subpostmaster. Post Office Ltd will hold a
or being replaced by a new subpostmaster public consultation for each off-site
who operates the new model. conversion (agreed with Consumer Focus).
9. The following process will be followed where a subpostmaster has expressed their
preference for conversion:
a. Subpostmaster survey: incumbent expresses preference for conversion in non
binding survey.
b. First visit: Post Office Ltd visit branch and discuss suitability for conversion.
c. Second visit and business plan: more detailed discussed about logistics of
conversion (counter size etc). Subpostmaster required to submit a business plan to
demonstrate that they can sustainably provide Post Office services under the new
model. Still non-binding at this stage.
d. Public engagement: in a process agreed with Consumer Focus, Post Office Ltd will
publicly consult where there is to be an off-site conversion, and communicate with
customers where the conversion is on-site.
e. Contract signing and implementation: subject to the satisfactory completion of the
business plan, the subpostmaster will sign a new contract, and the branch will be
converted.
10. The process for exiting the network is broadly similar. The incoming subpostmaster will be
required to complete a business plan prior to conversion, and if the transfer involves the
branch relocating then there will be a public consultation. Requiring subpostmasters to
demonstrate financially viability through the business plan ensures public money is only
invested in appropriate branches, and should prevent unplanned closures.
11. By March 2013, Post Office Ltd expects to have converted around 1,200 branches. The
following table sets out how they expect to achieve this:
Type Plan I Comments
Live branches 230 These are the existing pilot branches that are already
operational.
Multiple partners I 270 110 branches have scheduled conversion dates. 160 are
awaiting a date, and can be flexibly deployed. These will all be
on-site conversions.
Service issues 40 These will be off-site conversions where the existing premises is
withdrawn following, for example, the retirement of the SPM.
Independents 950 These are cases that are planned following the preference
exercise, and the majority are expected to be on-site
conversions.
Total 1,490 I Post Office Ltd is factoring in a ‘drop out’ rate following the first
visit, but aims to meet the expected 1,200 conversions by March
2013.
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Annex C: Biographies
Alice Perkins
Alice Perkins was a civil servant between 1971 and 2005,
spending time in the DHSS, Treasury, Department of
Health and as Director General of the Corporate
Development Group in the Cabinet Office (where she
was head of civil service HR, reporting directly to two
Cabinet Secretaries). R
Since leaving the civil service she has worked as a
professional coach, coaching both the current and
previous Managing Directors of POL to prepare them for
their interactions with government. She was a non
executive director on the BAA board 2006-8 (up to the
takeover by Ferrovial) and on the Taylor Nelson Sofres
board 2005-8 (up to the takeover by WPP), under the
chairmanship of Donald Brydon.
At TNS Alice chaired the remuneration committee. She is one of three external members
of the Oxford University Council (the University’s governing body) and a member of the
Said Business School’s Business Advisory Council.
Alice is married to Jack Straw and her son Will is editor of the blog Left Foot Forward.
Paula Vennells, Managing Director, Post Office Ltd
Paula joined Post Office Ltd as Network Director in
December 2006 and was appointed Managing Director
in October 2010.
Paula played a key role in developing the Post Office’s
new business strategy which underpinned the
Government's policy statement on post offices,
published in November 2010.
Prior to joining the Post Office, Paula spent 5 years with ;
Whitbread plc as Group Commercial Director, part of H
the team that turned around the business from declining I
brewer to successful leisure operator.
In 2005, Paula was ordained a Church of England priest in the Diocese of St Albans and is
currently ministering as a non-stipendiary priest in three parishes in Bedfordshire.
She is a trustee and non-executive director of Hymns Ancient and Modern; and supports
Toybox (a charity supporting and rehabilitating street children in South America);
Barnardos; and Christian Aid.