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Post Office Limited (“POL”)
Annual Review
10" January 2014
Attendees:
Richard Callard Roger Lowe
Tim McInnes Patrick Magee
Peter Batten Craig Lester
Ceri Smith Rajesh Kedia
Rachel James Emma Sharp (minutes)
Actions
e Undertake a confidential and internal review to assess the suitability of
POL’s current CEO (e.g. deliver POL’s strategy, lead the organisation)
e Work with POL to understand the financial, strategic and stakeholder
impact of key contract renewals and renegotiations
e Establish procedures / documents in order to formalise the relationship
between the POL and Royal Mail teams within ShEx.
Issues discussed:
The Review Team noted the various achievements of the ShEx POL Team,
including the completion of the funding agreement.
POL Strategy
The Review Team agreed that the principle strengths of the POL are the
brand value and the established network. It was agreed that there is a political
imperative to maintain the POL network, in order to meet the access criteria,
and that POL has a political, social purpose as well as commercial objectives.
The strategy of POL has shifted from a network-focused business towards a
product-driven model, with the aim to minimise the government subsidy
required to operate and meet government's objectives. POL will provide new
services (such as the new ‘Drop and Go’ service targeted at SMEs) and build
upon their existing services by moving up product value chains, in order to
generate a higher profit margin and better control the product offer and
product development. It was noted that there could be a significant
opportunity to create further SME-targeted products. The British Business
Bank now has PRA approval to provide guarantees, to reduce capital
constraints, which could be rolled out through the POL.
By owning their products, POL will be able to own and collate customer data
which can be used to inform strategy. In addition, POL has introduced a new
IT system which allows them to analyse customer behaviours and provide a
more personalised offer to customers. Furthermore, the new centralised
financial services team are in the process of ‘up-skilling’ the financial services
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advisors so that they better understand the needs of their customers and can
meet regulatory and compliance requirements.
POL is also looking to replace many of the incumbent sub-postmasters with
more entrepreneurial employees as part of Network Transformation — of the
8,500 branches expected to convert as part of the strategy up to 3,000-4,000
branches are likely to take the form of one of these “offsite” conversions. By
moving subpostmasters from fixed pay contracts to variable pay, selling-
behaviours will be better incentivised, leading to higher planned top line
performance (i.e. both in individual branches and in aggregate across the
network).
A third of POL’s estate is believed to be made up of “unviable” branches that
are only kept open in order for POL to meet government's commitment to
maintain a network of at least 11,500 branches. These “Community” branches
are expected to be in receipt of subsidy after the new funding agreement
comes to an end in 2017/18. It will be important for incentives to be in place to
ensure that POL minimises this remaining funding in the long term.
The POL Board have endorsed this strategy. The majority of the strategy now
has clear plans to support its proposals, with clear ownership over the
different strategic areas. There is currently no detailed delivery plan to support
the proposed cost reduction challenge but POL are looking to procure a
consultant to analyse how costs will be reduced.
Business Plan
The Review Team questioned whether the POL Business Plan was too
aggressive, and if the proposed revenue growth was feasible. It was noted
that buying into the value chains will lead to increased revenue but also
increased costs and therefore there may not be a substantive increase in
profit. As a result, it was noted that there needs to be flexibility in the cost
base (or sufficient headroom) so that POL is not forced to ask for a bigger
subsidy in the event targets are missed.
The ShEx POL Team outlined that they set parameters, within which POL
formulated the Business Plan and strategy. The Business Plan was initially
more aggressive when first presented but the ShEx POL Team tasked POL.
moderate it in certain areas due to concerns expressed by Ministers.
The ShEx POL Team also highlighted that not all proposed growth will be led
by financial services as there will also be growth through other services,
although this will be offset to a degree by declining revenues from more
traditional services.
However, if POL did not achieve its objectives, it is likely that government
might be expected to step in to provide support to ensure POL and its network
could be maintained (i.e. an implicit level of support that applies under a
possible mutualisation scenario as well). Nonetheless, the Review Team
noted that as these targets have been agreed within ShEx, there is a
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reputational risk if POL is unsuccessful in reducing the government subsidy
(or if it fails to meet other government objectives for POL and its network).
POL Management
The ShEx POL Team outlined that certain key vacancies have been filled over
the course of the past year and a more appropriate management structure
has been implemented. Yet, vacancies have also arisen. Sue Barton was
brought in as Head of Strategy and is recognised as being highly valuable.
She is leaving at the end of January on a 12 month career break.
The Review Team also discussed the suitability of the current management
team (i.e. capability and capacity) and in particular whether Paula Vennells
was the right person to hold the CEO position long term. Questions were
raised and it was agreed that a confidential and internal review would be
undertaken to assess her suitability.
Mutualisation
The Review Team noted that mutualisation of such a large, complex business
will be a complicated process and will require a bespoke model. Nevertheless,
there has been progress towards mutualisation. A PO Advisory Council has
been established, and the Stakeholder Forum will soon publish a statement of
the public purpose of the POL. This will be announced alongside a timeline
detailing key milestones. ShEx will set the parameters of the public purpose
but it is important that the purpose is formulated through a ‘bottom-up’
process. Engagement with stakeholders, including employees, unions and
Crowns, has been more open and collaborative.
POL and its stakeholders (including government) are in the process of setting
up consultative bodies which are expected to be a useful guide to possible
governance structures of a mutual organisation (e.g. stakeholder
communications board).
However, the Review Team noted that financial stability (proven by track
record, break-even and flexibility of the business to downsize without
government interference) was an important pre-requisite for mutualisation.
The Review Team also noted that POL cannot have the genuine features of a
mutual organisation until it is able to borrow externally.
Contract Concentration
POL is currently reliant on 5/6 contracts which generate a material proportion
of its revenue — management are looking to diversify this in order to de-risk
the business's operations. The Review Team noted the importance of creating
contingency plans in case certain contracts are not renewed or are
renegotiated on materially less favourable terms.
It was noted that POL are conscious that ShEx also looks after Royal Mail.
The Review Team noted that certain procedures/documents need to be
established to formalise the relationship between the POL and Royal Mail
teams within ShEx.
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Top Priorities
The main priorities for the ShEx Team include;
1. Transformation of POL and new strategy implementation including
management, state aid and contracts
2. Continued progress towards mutualisation
3. Continual monitoring and resolution of policy and stakeholder issues,
including overcoming obstacles with government contracts