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To Edward Davey
From Post Office Network Team
Date 244 October 2011
Meeting with Alice Perkins, Chair - Post Office Ltd
12:45-13:30 Thursday 27 October 2011
Purpose
To formally meet Alice Perkins, Chair of Post Office Ltd (POL) in her capacity as newly
appointed Chair; to discuss the Government's strategic goals; and to explore her initial
impressions of the company.
Attendees
Alice Perkins (POL), Will Gibson (ShEx)
Your objectives
* To emphasise to Alice the priority with which the Department views the Post Office.
* To gain an initial impression from Alice, of how she views the challenges and
opportunities of the new role.
* To make clear (in the context of the Postal Services Act) the importance of there
being an orderly separation of POL from Royal Mail; and the role of a strong,
independent POL Board in achieving that; and to understand the progress Alice is
making in establishing that Board.
* To stress how important it is the importance-that POL reduces its long-term reliance
on subsidy, through the successful implementation of its commercial strategy.
* If raised, to make clear the importance that ShEx has a presence on the POL Board
following operational separation from Royal Mail.
Alice Perkins’ objectives
* Alice formally became Chair on 22 September and is holding bilateral meetings with
the BIS Senior team. She will be looking to gain a clear understanding of the
Department's priorities (Alice met Martin Donnelly on 27 September and Vince
Cable on 3 October).
Background
Alice’s appointment as Chair was approved in July, and is first step in establishing the
new, separate and robust governance arrangements that are necessary for POL to be
successfully separated from Royal Mail.
Alice will need to demonstrate clear and strong leadership to ensure that the interests of
POL, often perceived to date as the junior partner to Royal Mail, are best reflected in the
separation process. This involves negotiating key contracts with Royal Mail around shared
services and the distribution by POL of Royal Mail products (historically c40% of POL
revenues). Separation negotiations have been progressing in recent months, and
agreement is expected during Novemberby the-end-of October, with the businesses
becoming operationally separate when the pension deficit solution is implemented
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(expected March 2012). Separation proposals are due to be put to the POL Board on 10
November and Alice will be able to update you on progress in negotiations.
Alice’s role will also involve building an independent Board for the company; supporting
POL executives in the delivery of the company’s strategy to reduce its long-term reliance
‘on Govemment subsidy; and positioning the company for a possible future move to a
mutual structure. To achieve this, Alice has stated her intention to conduct a review of
POL’s Board to ensure that there is an appropriate mix of skills and experience to meet
the challenges that the business faces in transforming its network; implementing its
commercial strategy: developing new services and winning contracts; and eliminating
Crown losses.
You willshould be aware that we have been clear to Alice that it is your and Vince Cable’s
view that the Shareholder Executive should be part of that board (consistent with the
arrangements on the majority of their other portfolio companies) after separation next
March. Alice voiced some reservations about this in her introductory meetings with the
Sarelry of ote and Martin Donnelly. that prior toe ti ith th
sf he this & ch The Secretary of State
was fim with alice that ShEx should take a Board seat, and after further discussions with
you last week the Secretary of State has sent.we- — + bat 2 letter to Alice issue
th taryof Stat to-Thursd: 7
ae to end discussion on the matter. fame rary nie may also wish to
test her views with you. As you are aware, we think it is very important to hold the line
given the level of financial commitment the Government is making to the Post Office and
the priority with which it is viewed. (Further background on this issue is set out in the
Annex. along with a copy of the Secretary of State's letter).
Over the course of the spending review period, POL’s strategy encompasses the
introduction of new network models to 6,000 post offices (c4,000 “Main” post offices
and c2,000 “Post Office Locals”). These will have longer opening hours, greater
automation and therefore address queuing issues. They will also introduce a greater level
of variability to POL’s cost base. Over the same period, POL also proposes to eliminate
the losses made by its 373 Crown post offices, which currently lose c£55m pa.
This will involve both cost reduction (principally staff costs) and growing revenues. The
principal target for revenue growth is Government services, where POL’s ambition is to
become the “Front Office for Government”. POL has pitched this as providing more face-
to-face services on Govemment's behalf, helping Government to make savings and move
towards digital delivery by outsourcing these transactions. POL has secured some small
contract wins — some through being a prime bidder and some by partnering. However,
they lost the DWP contract for the cheque replacement service, and there have been
some reservations on their ability to manage the tender process. Recently, UKBA has
given their intent to award their biometric residency permit enrolment service to POL, and
the day of your meeting with Alice is the last day of the stand-still period, during which
other bidders can challenge the award. Alice is also meeting Jeremy Heywood on 27
October, immediately before her meeting with you.
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presentation to PEX(ER), Stephen Lovegrove has written to the commercial directors of
OGDs to encourage them to engage with POL, on a without prejudice basis, and we are in
the process of setting up key meetings (including with HMRC, DWP and DH), in
result. Senior POL and Shex teams are meeting at the end of November to agree strategic
comms for GS.
——[Formatted: Inert Lett Com J
Preparing the company for possible mutualisation (assuming the successful
implementation of the commercial strategy) will also be a key role. We have now
published our consultation document on developing a mutual ownership model for POL.
(on 19 September) and are grateful to Alice and the wider POL team for their input to date.
POL is-net planning to-submit.a formal instead. ing-te-continue-t
not pl PORE ‘proposing. gag
ith d-official informal basis (ie through p: -meetings-and-call
that business requirements are fully understood and incorporated.Alice has voiced some
concem to officials that POL is under-resourced to engage effectively in the process to
develop mutualisation proposals, given other priorities (eq separation and the
implementation of the commercial strategy). POL is considering how best to input into the
current consultation; deciding whether to submit a formal response or instead continuing
to engage with you and officials on a more informal basis (ie through papers, meetings
and calls) so that business requirements are fully understood and incorporated.
You met Alice prior to her appointment.
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AGENDA FOR MEETING — ISSUES TO RAISE AND POINTS TO MAKE
Separation and
stablishment
f the Board
commercial
trategy:
General
¢ It was good to meet you prior to your appointment and I
am very glad that you are now in position in the
important role of POL Chair.
« I am also pleased that Neil McCausland has joined your
Board as Senior Independent Director.
I'm keen to hear more about your plans to develop the
Board and ensure the right balance of skills and
expertise is present.
« I understand that you are interviewing possible
candidates to Chair the Audit and Risk Committee. Are
you in a position to provide an update on progress?
© Separation will allow POL to focus on the challenges and
opportunities that it faces. But POL and Royal Mail will
remain reliant on one another.
I understand that negotiations on the Master Services
Agreement and Mail Distribution Agreement are
progressing. Getting these right will be critical for the
future of POL. How are negotiations progressing?
¢ To ensure the right commercial contracts are in place,
POL clearly needs an independent and robust Board to
represent its interests in the negotiations and that is why
your appointment is so important.
¢ [If raised_and the letter has issued] I understand the
Secretary of State wrote to you this week to confirm that
a Shareholder Executive official will join the POL Board
on separation from Royal Mail next spring.
e [If raised] Given Government's ongoing 100%
ownership of POL, and in light of the £1.34 billion
investment, it is important that the Shareholder
Executive joins the Board.
¢ [If raised]This is consistent with the governance
arrangements for other businesses in which the
Government has made a significant investment, and is
something that I must insist upon.
« The Commercial Strategy was instrumental in securing
such a large and-genereus-SR settlement. Its successful
implementation is a key Ministerial priority of mine, anda
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necessary precondition to future mutualisation.
« Implementing this Commercial Strategy will be critical in
making the business more sustainable and reducing its
long-term reliance on subsidy, and will require strong
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Board support and oversight.
Commercial
itrategy:
¢ Government services form a key part of the Commercial
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+—-[ Formatted: Bullets and Numbering )
Strategy — UKBA is good news, but there is still a long
way to go.
¢ It is fundamentally important that POL offers a
compelling commercial offer to win Government
contracts. The DWP Green Giro (SMOTs) contract
experience shows that Government cannot simply award
contracts to POL.
e Very important that you as Chair are clear that POL has
the skills and resources to enable them to deliver on the
Government Services growth they put forward to us in
the commercial strategy.
¢ I understand you met Jeremy Heywood earlier today to
discuss this — how did the meeting go?
If POL’s procurement status is raised:
¢ Previous legal advice suggests that POL would not
+ — (Formatted: lets and Namberig )
qualify for direct award of contracts through a crown-to-
crown exemption, largely because the bulk of POL’s
revenue is from private sources.
My officials are revisiting this issue as a matter of good
practice, and will engage with POL as part of this.
However, the current expectation is that POL’s status will
remain unchanged.
As competition Minister I also clearly have an interest in
ensuring the benefits of procurement — innovation
service quality and VfM for the tax payer — are met.
Commercial
Strategy:
Network
ransformation
The next year is particularly important for the network as
+ (Formatted: Bullets and Numbering )
new operating models are developed and implemented.
By 2015, over half the network will have moved to new
operating models. POL has a good track record of
successfully conducting large scale network changes,
but we must not be complacent.
Mutualisation
We have now begun our consultation on developing a
+ (Formatted: Bullets and Numbering )
mutual ownership model for POL.
I appreciate that mutualisation can only happen once
POL has successfully separated from Royal Mail and
implemented its commercial strategy and these are
clearly the key immediate priorities.
But it is critical that any mutual structure and any
transitional arrangements strike the balance between
developing the mutual culture of engagement among
stakeholders and ensuring that management can get on
with running the business to deliver success.
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¢ Itis therefore vital that we have sufficient input from POL
into the mutualisation consultation — whether through a
formal response or otherwise — to ensure we achieve
that balance.
¢ We will continue actively engaging with you and the POL
team as we develop our response to the issues raised by
the consultation and as the policy develops thereafter.
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CC list CableDavey MPST; Perm Sec MPST; SPAD MPST; Stephen —{Formatted: Font: 14 pt )
Lovegrove; Susannah Storey; ShEx POL team; Josh Coe. ‘Formatted: Font: 14 pt ]
(Formatted Fort ot }
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Annex — background on Shareholder Executive Board seats and implications for
Post Office
ShEx practice is to take Board seats in its portfolio assets unless there are
compelling reasons not to.
We sit on the Boards of the majority of our portfolio businesses. For example,
ShEx officials sit on the Boards of Eurostar, Urenco, The Royal Mint, Scottish
Water, Ordnance Survey, the Met Office and the Land Registry, among others.
This is also standard practice in other areas where shareholders own a significant
proportion of a business (for example private equity financed businesses).
The decision for ShEx to take a Board seat was originally made by you and the
Secretary of State this spring, and was reconfirmed by you earlier this month.
Alice is aware of our intention, but in her meeting with Martin Donnelly indicated
some concerns about this.
Alice’s concerns were relayed to you after that meeting and you again reiterated
your strong feeling that ShEx should take a Board seat.
Stephen Lovegrove spoke to Alice in advance of her meeting with the Secretary of
State, to pass on your views.
So that you are aware, Alice raised three concems about ShEx Board membership in
her meeting with Martin:
1. Her first concern was that ShEx joining the Board was inconsistent with the
vision for a mutual where Government's relationship with POL is purely
contractual.
ShEx position: We do not agree with that position because between now and
mutualisation POL must successfully implement its commercial strategy, which is
something in which the Government has an intrinsic interest and a ShEx Board
seat is therefore important for the reasons set out above.
2. Her second concern was that ShEx joining the Board would in some way prevent
Government insulation from the impact of operational decisions.
ShEx position: in reality, the impacts of many operational issues in POL already
lead to pressure on the Department, at both official and Ministerial level. We do
not see that a ShEx Board member would materially change the position.
3. Her third concern was that one Board member had indicated they would be
reluctant to serve on a Board where a ShEx appointee was also a director.
ShEx position: This is concerning in that if a POL non-executive is reluctant to
‘serve on a Board with a representative of the shareholder who has approved his
appointment, then that does raise questions of why they are serving on the
Board.
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Department for Business
Innovation & Skills
‘The Rt Hon Vince Cable MP
Alice Perkins
Chair
Post Office Limited
148 Old Street
Eciv ena. 2S October 2011
Vee
Post Office Limited Board Composition
it was a pleasure to meet you on 3 October and to hear your thoughts about
your new role as Chair of Post Office Ltd. As you rightly pointed out at that
meeting, much progress is already being made but there continue to be major
issues for the business to focus upon over coming months. Separation from
Royal Mail, building up the Front Office for Government offering and rolling out
the network transformation programme are perhaps just the three most
prominent.
I am therefore very pleased that the Post Office senior team have you to.
support them in those endeavours. To the same end I am also delighted at
the swift progress you have been making in making further appointments to
the board. From our discussions I could tell that you have clearly hit the
ground running over your first few weeks and I would like to thank you for it.
At our meeting you raised the issue of whether it was best for an official from
the Shareholder Executive to join the Post Office board from the point of
separation from Royal Mail next spring. Since then I have reflected further on
your views but I have concluded that I should confirm to you my initial
decision. This practice embeds constructive, candid and open relationships
between the Shareholder Executive and the boards of its portfolio businesses,
and the vast majority of portfolio businesses now have a Shareholder
Executive board representative. I firmly believe that the already extremely
positive relationship that exists between Post Office management and the
Shareholder Executive team would therefore be further enhanced by this
move. Importantly, such an appointment would also ensure necessary
Government accountability for the investment it is making in the business over
the spending review period.
1 Vctca Sto, London SW1H OET
wormibia. gov.uk
Enquiries I
Contact us www.bis gov.uklcantactus
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I would also like to reassure you that any Shareholder Executive appointee
would be subject to the full range of legal duties applicable to other directors.
‘So there would be no risk that such an appointment would lead to any
diminution of the arm's length relationship between Government and the
business.
I will write to you in more detail in a few weeks’ time to set out in more detail
my objectives for the Post Office over the next few years. However, given its
relevance to your ongoing work to form the Post Office board, I thought you
would appreciate clarity on this one issue at an early stage. Stephen
Lovegrove will be discussing with you the identity of the individual the
department nominates in the coming days.
VINCE CABLE
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